Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether an inter-corporate dividend offends 55(3)(a).
Position: No. However, explicit comments were added to the ruling.
Reasons: There is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events that includes payment of the dividend. However, nothing in this ruling should be construed as implying that the CCRA has confirmed that a subsequent disposition of property or increase interest described in subparagraphs 55(3)(a)(i) to (v) will not be part of the series of transactions or events that includes the payment of the dividend.
2003-000148
XXXXXXXXXX T. Lanzer
(613) 957-2129
June 11, 2003
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers (collectively called the "Applicants"). We also acknowledge receipt of your facsimiles and emails as well as the information provided in various telephone conversations.
Throughout this letter, the corporate and individual taxpayers will be referred to as follows:
XXXXXXXXXX Transferee
XXXXXXXXXX Distributorco
XXXXXXXXXX Shareholder 1
XXXXXXXXXX Shareholder 2
XXXXXXXXXX Shareholder 3
XXXXXXXXXX Shareholder 4
All of the individual and corporate taxpayers file their income tax returns at the XXXXXXXXXX Taxation Centre and their tax affairs are administered by the XXXXXXXXXX Tax Services Office.
All of the individual and corporate taxpayers are resident in Canada for purposes of the Act.
To the best of your knowledge and that of the Applicants, none of the issues involved in this ruling request is:
(i) in an earlier return of any of the Applicants or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of any of the Applicants or a related person;
(iii) under objection by any of the Applicants or a related person;
(iv) before the courts; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
The Applicants have represented that the transactions described herein will not affect their ability to pay any of their outstanding tax liabilities.
DEFINITIONS
In this letter, unless otherwise expressly stated, the following terms have the meanings specified:
(a) XXXXXXXXXX;
(b) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
(c) "adjusted cost base" ("ACB") has the meaning assigned by section 54;
(d) "Applicants" means Transferee, Distributorco, Shareholder 1, Shareholder 2, Shareholder 3 and Shareholder 4;
(e) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);
(f) "capital dividend account" ("CDA") has the meaning assigned by subsection 89(1);
(g) "capital property" has the meaning assigned by section 54;
(h) "CCRA" means the Canada Customs and Revenue Agency;
(i) "cost amount" has the meaning assigned by subsection 248(1);
(j) "depreciable property" has the meaning assigned by subsection 13(21);
(k) "distribution" has the meaning assigned by subsection 55(1);
(l) "dividend rental arrangement" has the meaning assigned by subsection 248(1);
(m) "FMV" means fair market value;
(n) "guarantee agreement" has the meaning assigned by subsection 112(2.2);
(o) "net capital loss" has the meaning assigned by subsection 111(8);
(p) "non-capital loss" has the meaning assigned by subsection 111(8);
(q) "paid-up capital" ("PUC") has the meaning assigned by subsection 89(1);
(r) "Paragraph" refers to a numbered paragraph in this letter;
(s) "private corporation" has the meaning assigned by subsection 89(1);
(t) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);
(u) "restricted financial institution" has the meaning assigned by subsection 248(1);
(v) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);
(w) "specified financial institution" has the meaning assigned by subsection 248(1);
(x) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);
(y) "stated capital" has the meaning assigned by XXXXXXXXXX; and
(z) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
FACTS
Distributorco
1. Distributorco is a Canadian-controlled private corporation and a taxable Canadian corporation. Distributorco was incorporated on XXXXXXXXXX and was continued under the XXXXXXXXXX. Distributorco carries on the business of XXXXXXXXXX. The taxation year of Distributorco ends on XXXXXXXXXX.
2. The only issued and outstanding shares of Distributorco are XXXXXXXXXX voting common shares ("Common Shares") all of which are held by Transferee as capital property. Distributorco is a subsidiary wholly-owned corporation of Transferee.
3. The PUC of the XXXXXXXXXX Common Shares is $XXXXXXXXXX. Transferee owned XXXXXXXXXX Common Shares of Distributorco when it was continued under the XXXXXXXXXX, and purchased another XXXXXXXXXX Common Shares on XXXXXXXXXX and an additional XXXXXXXXXX Common Shares on XXXXXXXXXX . Both purchase transactions involved a combination of arm's-length and non-arm's-length vendors.
4. Distributorco currently has a nil balance in its capital dividend account and does not have, and will not have before the proposed transactions described below are carried out, any unutilized losses or deductions for tax purposes.
5. It is anticipated that there may be RDTOH, before payment of any fiscal XXXXXXXXXX dividends, with a reported carry forward from XXXXXXXXXX of $XXXXXXXXXX.
Transferee
6. Transferee is a Canadian-controlled private corporation and a taxable Canadian corporation. Transferee was incorporated on XXXXXXXXXX and was continued under the XXXXXXXXXX. Transferee is a holding company for the shares and monetary advances of Distributorco and does not carry on any active business operations. The taxation year of Transferee ends on XXXXXXXXXX.
7. The only issued and outstanding shares of Transferee are XXXXXXXXXX Class A voting shares, XXXXXXXXXX Class B non-voting shares and XXXXXXXXXX Class E non-voting shares. The holders of the outstanding shares are as follows:
ACB PUC
Shareholder 1 XXXXXXX Class A voting shares XXXXXXXXXX
Shareholder 2 XXXXXXX Class A voting shares XXXXXXXXXX
Shareholder 3 XXXXXXX Class A voting share XXXXXXXXXX
XXXXXXX Class E non-voting shares XXXXXXXXXX
Shareholder 4 XXXXXXX Class A voting share XXXXXXXXXX
XXXXXXX Class B non-voting shares XXXXXXXXXX
The authorized shares of Transferee are not distinguished as "common" or "preferred" shares in the articles of incorporation. The Class A shares are redeemable retractable voting shares that carry a non-cumulative discretionary dividend not exceeding XXXXXXXXXX% per annum. Furthermore, the Class A shares are entitled to their nominal redemption value on liquidation, dissolution or windup of the company, in preference to any other class of shares.
The Class B and Class E shares are equity shares with no voting entitlement. The shares are entitled to annual discretionary dividends and to receive the remaining property of the company upon the liquidation, dissolution or windup of the company.
8. The fair market value of the outstanding shares of Transferee is estimated to be as follows:
Per share Aggregate
Class A shares $ XXXXXXXXXX $ XXXXXXXXXX
Class B shares XXXXXXXXXX XXXXXXXXXX
Class E shares XXXXXXXXXX XXXXXXXXXX
9. There has been no change in the shareholdings described in Paragraph 7 above since XXXXXXXXXX . In addition, there have been no share transactions involving other taxpayers since XXXXXXXXXX when XXXXXXXXXX holding companies were redeemed out of Transferee at fair market value.
10. Transferee and Distributorco are related to one another for purposes of the Act, pursuant to subsection 251(2).
Shareholders
11. Shareholder 1 and Shareholder 2 are the parents of both Shareholder 3 and Shareholder 4. Shareholder 3 and Shareholder 4 are brothers. The shareholders are all related to one another for purposes of the Act with the exception of section 55, pursuant to which Shareholder 3 and Shareholder 4 are deemed not to be related to each other.
12. Shareholder 3 and Shareholder 4 are active in the day-to-day operations of Distributorco, while Shareholder 1 and Shareholder 2 have taken passive roles.
PROPOSED TRANSACTIONS
Payment of Dividends on Distributorco Common Shares
13. Distributorco will pay a series of XXXXXXXXXX dividends on its common shares with an aggregate FMV equal to the FMV of the common shares at that time. All XXXXXXXXXX dividends will be paid on the same day. Distributorco will satisfy the payment of these dividends by issuing to Transferee as consideration XXXXXXXXXX separate demand promissory notes, each bearing interest not exceeding the prime rate of borrowing plus XXXXXXXXXX% only after demand is made. The XXXXXXXXXX promissory notes will have an aggregate principal amount and FMV equal to the aggregate FMV of the common share dividends paid by Distributorco. Transferee will accept each of the XXXXXXXXXX promissory notes in full satisfaction of the respective dividend paid on the Distributorco common shares. After the payment of the series of XXXXXXXXXX dividends is concluded, all of the XXXXXXXXXX separate promissory notes will be combined into one promissory note (the "Distributorco Note") owing from Distributorco to Transferee. The Distributorco Note will have the same terms, conditions and interest rate as each of the XXXXXXXXXX separate promissory notes.
14. The dividends paid on the common shares of Distributorco will be subject to an adjustment clause that ensures the amount of the dividends is equal to the fair market value of the common shares at that time.
15. Distributorco has the financial capacity to honour, upon presentation for payment, the amount payable under the Distributorco Note.
Redemption of Transferee Preferred Shares
16. The day after the payment of the common share dividends, described in Paragraph 13 above, Transferee will redeem the XXXXXXXXXX Class A voting shares owned by Shareholder 1 and the XXXXXXXXXX Class A voting shares owned by Shareholder 2 for cash consideration of $XXXXXXXXXX and $XXXXXXXXXX respectively, equal to the fair market value of the shares. The sales agreement will be subject to a price adjustment clause that ensures the redemption occurs at fair market value. The redemption of these Class A shares will fully remove Shareholder 1 and Shareholder 2 from having an ownership interest in Transferee.
PURPOSE OF THE PROPOSED TRANSACTIONS
17. Shareholder 3 and Shareholder 4 wish to creditor-protect the business operations of Distributorco, via a fully secured promissory note (Distributorco Note), to isolate the significant equity they have accumulated in Distributorco. The purpose of the series of XXXXXXXXXX dividends is to provide some protection from any creditor attempting to set aside a single dividend based upon solvency or liquidity tests.
18. Shareholder 1 and Shareholder 2 wish to be fully removed as shareholders of Transferee and to give full legal control of the company to Shareholder 3 and Shareholder 4. Shareholder 3 and Shareholder 4 wish to obtain de jure control of Transferee, with the concurrence of Shareholder 1 and Shareholder 2.
19. Shareholder 1 and Shareholder 2 no longer have a personal requirement to maintain de jure control of Transferee, as substantially all of their prior investment in Transferee has been returned to them.
20. None of the corporations referred to herein is, or will be, a specified financial institution.
21. Shareholder 3 and Shareholder 4 will not dispose of their shares of Transferee as part of the series of proposed transactions, and neither has any intention of disposing of such shares in the future.
22. Shareholder 1 and Shareholder 2 will have all of their shares redeemed for fair market value, as indicated above.
23. None of the shares referred to herein is or will be subject to a guarantee agreement.
24. None of the corporations referred to herein has or will have entered into a dividend rental arrangement in respect of any dividends received as part of the proposed transactions.
25. None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) have been or will be issued or acquired as part of a transaction or event or a series of transactions or events of the type described in subsection 112(2.5).
26. None of the corporations referred to herein will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).
27. Distributorco and Transferee will each have the financial capacity to honour, upon presentation for payment, any amount payable under a promissory note issued by it as part of the proposed transactions.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. With respect to the payment of taxable dividends by Distributorco to Transferee, as described in Paragraph 13 above:
(a) the full amount of the taxable dividends will be included in Transferee's income pursuant to paragraph 12(1)(j) and will be deductible in computing Transferee's taxable income for the taxation year in which such dividends are received pursuant to subsection 112(1). For greater certainty, subsections 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the application of the subsection 112(1) deduction in respect of such dividends;
(b) Transferee will not be subject to Part IV tax under subsection 186(1), except to the extent that Distributorco is entitled to a dividend refund in respect of its taxation year in which it pays such dividends, pursuant to paragraph 186(1)(b);
(c) Transferee will not be subject to Part IV.1 tax under section 187.2; and
(d) Distributorco will not be subject to Part VI.1 tax under section 191.1.
B. Provided that there is no disposition of property or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events that includes payment of the taxable dividends described in Ruling A above, then, by virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to those dividends. For greater certainty, the proposed transactions described herein, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).
C. Subsection 245(2) will not apply to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
1. Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed:
(a) the determination of the fair market value or ACB of any particular asset or the paid-up capital of any shares referred to herein; or
(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
2. Nothing in this ruling should be construed as implying that the CCRA has confirmed that a subsequent disposition of property or increase in interest described in subparagraphs 55(3)(a)(i) to (v) will not be part of the series of transactions or events that includes the payment of the dividends referred to in Paragraph 13 above.
3. You have informed us that the dividends paid on the common shares of Distributorco, described in Paragraph 14 above, and the redemption price of the Class A voting shares, described in Paragraph 16 above, will each be subject to an adjustment clause. Nothing in this letter should be construed as confirmation, express or implied, that any adjustment to the fair market value of the dividends paid or to the redemption price of the Class A voting shares will be effective retroactively. Furthermore, the rulings in this letter are not intended to apply to the operation of a price adjustment clause, since its coming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated.
4, Interest payable on any of the XXXXXXXXXX separate promissory notes or on the Distributorco Note, as described in Paragraph 13 above, will not be deductible by Distributorco in computing its income for tax purposes. Interest receivable on any of the XXXXXXXXXX separate promissory notes or on the Distributorco Note will be required to be included by Transferee in computing its income for tax purposes.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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