2005 Ruling 2005-0147881R3 - Taxable Preferred Shares

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.

Principal Issues: Does a Put agreement cause the shares to be taxable preferred Shares

Position: No

Reasons: FMV option

XXXXXXXXXX 								2005-014788

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling in respect of the above named taxpayers. We also acknowledge your letter of XXXXXXXXXX.

To the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling request are:

(i) dealt with in an earlier return of the taxpayers or related persons;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or related persons;

(iii) under objection by the taxpayers or related persons;

(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.

DEFINITIONS:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof. All statutory references in this letter are to the Act, unless stated otherwise;

(b) "A Co" means XXXXXXXXXX.;

(c) "B Co" means XXXXXXXXXX.

(d) "C Co" means the corporation referred to in paragraphs 10 and 11;

(e) "CRA" means the Canada Revenue Agency;

(f) "FMV" means "fair market value" which further means the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm's length and with no compulsion to act, expressed in terms of cash;

(g) "public corporation" has the meaning assigned by subsection 89(1) of the Act;

(h) "private corporation" has the meaning assigned by subsection 89(1) of the Act;

(i) "qualified investment" has the meaning assigned by subsection 146(1) of the Act in respect of an RRSP, by subsection 146.1(1) of the Act in respect of an RESP, by subsection 146.3(1) of the Act in respect of an RRIF, or by section 204 of the Act in respect of an DPSP, as the case may be;

(j) "Regulations" means the Income Tax Regulations;

(k) "short-term preferred share" has the meaning assigned by subsection 248(1)of the Act;

(l) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(m) "taxable preferred share" has the meaning assigned by subsection 248(1) of the Act;

(n) "TSO" means Tax Services Office; and

(o) "X" means certain members of the XXXXXXXXXX family.

FACTS:

1. A Co is a taxable Canadian corporation and a private corporation.

2. B Co is a taxable Canadian corporation and a private corporation.

3. X and a personal trust, the beneficiaries of which include X hold the shares of A Co directly and indirectly.

4. The shares of B Co are held indirectly by another personal trust, the beneficiaries of which include X (although such class of beneficiaries is not identical to the class of beneficiaries referred to in paragraph 3 above).

5. A Co is in the business of acquiring land and syndicating that land to third party investors. A Co uses its expertise, skill and capital to acquire quality land, market that land to investors, interface with city officials, and assist investors with exit or exploitation strategies to maximize the returns on investors' investments in the land.

6. B Co was established to offer put options to investors in certain circumstances, such as those set forth in the Proposed Transactions below.

7. Each of A Co and B Co is resident in Canada for purposes of the Act.

8. Each of A Co and B Co was amalgamated and incorporated, respectively, under the Business Corporations Act (XXXXXXXXXX).

9. A Co is located at XXXXXXXXXX. A Co is serviced by the XXXXXXXXXX TSO and files its tax return at the XXXXXXXXXX Taxation Centre.

PROPOSED TRANSACTIONS:

10. A Co will incorporate a corporation pursuant to the Business Corporations Act (XXXXXXXXXX) ("C Co").

11. The share capital of C Co will consist of Class A Voting Shares that have no entitlement to dividends or liquidation proceeds, and Class B Non-Voting Shares that will not have voting rights, but will be fully participating with respect to dividends, if as and when declared by the directors of C Co, and any proceeds from the voluntary or involuntary liquidation of C Co.

12. A Co will subscribe for XXXXXXXXXX Class A Voting Shares of C Co for $XXXXXXXXXX.

13. An offering of Class B Non-Voting Shares of C Co (the "Shares") will be made by Offering Memorandum filed with appropriate regulatory authorities in Canada. The Shares will not be offered for sale outside of Canada.

14. C Co will be neither a mortgage investment corporation nor a labour-sponsored venture capital corporation as those terms are defined in the Act.

15. The Shares will be sold to a minimum of XXXXXXXXXX investors, each of which is expected to be a registered retirement savings plan or registered retirement income fund and will not be an "insider of a corporation" as that term is defined in subsection 4803(1) of the Regulations, and each of which will acquire at least one "block of shares" within the meaning of subsection 4803(1) of the Regulations.

16. C Co will elect to be a public corporation by filing a form T2073 after the minimum subscription referred to above has been received by C Co, and also will elect in its first tax return to be a public corporation from the first day of its taxation year pursuant to the post-amble of subsection 89(1) of the Act.

17. As part of the Share offering, a tri-party Put Option Agreement among the subscriber, B Co and A Co (the "Put Option Agreement") will be entered into pursuant to which the purchaser of a Share will be entitled to exercise its Put Option to sell the purchased Share to B Co for consideration equal to the lesser of (a) the original purchase price of the Share, less any distributions received in respect of the Share, and (b) the FMV thereof at the time of exercise thereof, at the following times:

(a) upon the death of the purchaser of the Share, provided such death occurs during the first XXXXXXXXXX months following acquisition of the Share; and

(b) at any time between the period that is between end of the XXXXXXXXXX month and the XXXXXXXXXX month following acquisition of the Share,

after the later of which times, the Put Option will expire.

18. Only the initial subscriber, or his or her estate, may exercise the Put Option as the Put Option Agreement only applies to the initial subscriber.

19. Pursuant to the Put Option Agreement, A Co will pay XXXXXXXXXX% of the total Share subscription price to B Co in consideration for B Co's granting of the Put Option.

20. In the opinion of management of A Co and B Co, the FMV of the Put Options to subscribers is nominal.

21. C Co will use the proceeds received from sale of the Shares as follows:

(a) to pay certain costs of issuance of the Shares;

(b) to establish an expense reserve to fund certain ongoing expenses of C Co; and

(c) to use the balance of funds to acquire an undivided interest between XXXXXXXXXX% and XXXXXXXXXX% in certain undeveloped real property currently XXXXXXXXXX% owned by A Co (the "Property").

22. In general, it will be the intention of A Co and C Co, pursuant to a Co-Ownership Agreement, to hold the Property for approximately XXXXXXXXXX years and resell it for a profit. In this respect, it is anticipated that the exit strategy will be:

(a) to sell the Property to developers;

(b) to enter into a joint venture with developers to develop the Property; or

(c) if option (a) or (b) is not available or appropriate, to develop the Property themselves.

PURPOSE OF THE PROPOSED TRANSACTIONS:

23. The purpose of transferring the Property to C Co and the sale of Shares is to permit the syndication of the Property in compliance with applicable securities laws.

24. The purpose of the Put Option is to provide holders of Shares an increased ability to dispose of their Shares in certain circumstances, and thereby to assist in marketing the Shares for sale and thereby the syndication of the Property and to give the shareholder some liquidity in being able to sell the share at selected times. The reason for selecting the beginning of the Put Period to measure FMV was to minimize the cost and administrative burden to B Co as compared to the alternative of having to secure multiple valuations within the Put Period.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the 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 forth below:

A. Provided that C Co elects in prescribed form and within the time prescribed in the Act to be a public corporation from the first day of its first taxation year, the Shares will be qualified investments for a plan governed by a registered retirement savings plan, a registered retirement income fund, a registered education savings plan or a deferred profit sharing plan (collectively, "Deferred Plans") pursuant to paragraph 4900(1)(b) of the Regulations.

B. Provided the Shares are qualified investments, the Put Option Agreement described in paragraphs 17 and 18 will not, in and by itself, cause the annuitants or beneficiaries of Deferred Plans that acquire the Shares pursuant to the offering to be subject to any income inclusion under subsection 146(10) of the Act.

C. The Put Option Agreement, as described in paragraphs 17 and 18, will not in and by itself, result in the Shares being considered taxable preferred shares or short-term preferred shares as those terms are defined in subsection 248(1) of the Act.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and is binding provided the proposed transactions are completed by XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:

(i) the GST implications of any of the Proposed Transactions;

(ii) any other tax consequences of the Proposed Transactions or of related transactions or events that are not described herein.

Yours truly,

XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch