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: (1) What is the amount of the stock dividend declared and paid to members of a credit union and (2) whether Part VI.1 tax is exigible?
Position: (1) The amount of the stock dividend is the amount by which the paid-up capital of the XXXXXXXXXX Shares is increased by reason of the payment of the stock dividend which is calculated in reference to the par value of each Share. (2) Part VI.1 tax does not apply.
Reasons: (1) Pursuant to paragraph (c) of the definition "amount" in subsection 248(1) and provisions of governing federal legislation. (2) By virtue of the operation of subsections 137(4.1) and (4.2) the amount of the stock dividend is deemed to be interest and deemed not to be dividend, notwithstanding any other provision of the Act.
XXXXXXXXXX 2007- 024156
XXXXXXXXXX , 2007
Re: Advance Income Tax Ruling XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge our various telephone conversations (XXXXXXXXXX) in furtherance of this matter.
To the best of your knowledge and that of the taxpayer involved, none of the issues contained in this ruling request are:
(i) dealt with in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or taxation centre of the Canada Revenue Agency ("CRA") in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate to the taxpayer or a related person; nor
(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.
Unless otherwise stated, statutory references in this letter are to the Income Tax Act, R.S.C. 1985 (5th Suppl.) c. 1, as amended to the date hereof (the "Act"). Our understanding of the facts and proposed transactions is as follows:
Facts
1. XXXXXXXXXX ("ACo") is a central credit union for the province of XXXXXXXXXX and a XXXXXXXXXX corporation governed by, inter alia, the XXXXXXXXXX. ACo is also subject to the provisions of the XXXXXXXXXX The XXXXXXXXXX Tax Services Office and XXXXXXXXXX Tax Centre serve ACo. ACo is not a public corporation. ACo's primary financial responsibilities to its member credit unions are to manage the province's liquidity reserves, deliver central and investment banking services, provide payment and clearing services, and facilitate electronic transaction services through the development and delivery of online technology.
2. The members of ACo that have full voting rights are corporations, associations or federations incorporated as credit unions or cooperative credit societies that derive all or substantially all of their revenues from sources described in paragraph (a) of the definition of "credit union" in subsection 137(6) of the Act. Accordingly, ACo qualifies as a "credit union" within the meaning of subparagraph 137(6)(b)(i) of the Act.
3. ACo's authorized Share capital consists of an unlimited number of XXXXXXXXXX Shares with par value of $XXXXXXXXXX each (collectively, the "Shares", each a "Share"), of which XXXXXXXXXX are issued and outstanding. No XXXXXXXXXX Shares have been issued. Each holder of XXXXXXXXXX Shares is considered a member of ACo within the meaning of subsection 137(4.1) of the Act. The Shares have not been listed on a prescribed stock exchange within the meaning of section 3200 of the Income Tax Regulations. The Shares have, inter alia, the following rights and restrictions:
a. the Shares are not retractable and may only be redeemed with the consent of ACo's directors;
b. members who have withdrawn from membership and whose Shares are entitled to redemption are entitled to the value of their Shares which is not to exceed the par value plus any declared and unpaid dividends on such Shares;
c. the directors may authorize the redemption of the Shares provided that the total number of members does not fall below XXXXXXXXXX;
d. the Shares are transferable under certain conditions;
e. in the event of the liquidation, dissolution or winding-up of ACo, any surplus, profits or assets of ACO are to be distributed rateably and proportionately among all Shareholders regardless of the class of Shares held by the Shareholders;
f. the Shares entitle the holder thereof to receive dividends if, as, and when declared by the board of directors; and
g. holders of XXXXXXXXXX Shares are entitled to one vote per Share.
4. Under the Constitution, each credit union member is required to hold the number of XXXXXXXXXX Shares in proportion to that credit union's assets in relation to the total system assets of ACo. Pursuant to the Constitution and Rules of ACo (the "Constitution"), restrictions concerning membership in ACo include the following:
a. XXXXXXXXXX Shares may only be held by members of ACo that are credit unions incorporated under either the XXXXXXXXXX or predecessor legislation;
b. XXXXXXXXXX Shares may only be held by co-operatives incorporated under the XXXXXXXXXX or are corporations that conduct their operations on a co-operative basis and that are designated as a co-operative association by the directors of ACo for the purposes of membership in ACo;
c. XXXXXXXXXX Shares may only be held by members of ACo whose application for membership in ACo is otherwise approved; and
d. XXXXXXXXXX Shares may only be held by members of ACo that hold XXXXXXXXXX Shares.
5. The Shares do not have rights of retraction and, under their terms and conditions, ACo cannot be required to redeem, acquire or cancel the Shares. The Shares are each not a "short-term preferred Share" or "term preferred Share" within the meaning of subsection 248(1) of the Act. Under the terms and conditions of the Shares, the amount that Shareholders are entitled to receive on the redemption of each Share is limited to a maximum. Accordingly, each Share constitutes a "taxable preferred Share" or "taxable RFI Share" within the meaning of subsection 248(1) of the Act.
6. None of the Shares has been at any time:
a. the subject of any undertaking that is a guarantee agreement;
b. a Share that is issued or acquired as part of a transaction or series of transactions or events of the type described in subsection 112(2.5); or
c. the subject of a dividend rental arrangement.
Accordingly, none of the provisions of subsection 112(2.1), 112(2.2), 112(2.3) and 112(2.4) of the Act have applied to deny the subsection 112(1) deduction in respect of any taxable dividend received in respect of a Share.
7. XXXXXXXXXX ("BCo") is a central credit union for the province of XXXXXXXXXX BCo is not a public corporation. BCo's primary financial responsibilities to its member credit unions are to manage the province's liquidity reserves, deliver central and investment banking services, provide payment and clearing services, and facilitate electronic transaction services through the delivery of online technology.
8. In XXXXXXXXXX, ACo entered into negotiations with BCo for the merger of ACo and BCo (the "Combination") and on XXXXXXXXXX, the terms of the Combination were provided in an agreement between ACo and BCo (the "Agreement"). Under the terms of the Agreement, ACo will buy and BCo will sell, substantially all of the assets of BCo in exchange for the assumption by ACo of liabilities, cash and the issuance of Shares, as described in 12 below. The business reasons for the Combination include streamlining governance processes and increasing effective decision-making, expediting large-scale investments in critical infrastructure, consolidating liquidity pools and increasing the level of geographic diversification and creating a strong national wholesale financial services organization. On XXXXXXXXXX, ACo and BCo each held a special general meeting and the members voted in favour of the Combination.
9. The aggregate net asset value of ACo and BCo combined is about $XXXXXXXXXX (the "Combined System Assets") of which approximately XXXXXXXXXX% pertains to ACo (the "XXXXXXXXXX System Assets"), and the remainder XXXXXXXXXX% pertains to BCo (the "XXXXXXXXXX System Assets").
Proposed Transactions
10. The proposed transactions described below ("Proposed Transactions") will follow sequentially.
11. The provisions of the XXXXXXXXXX authorize ACo to declare dividends on the Shares and pay the dividends as declared. In particular, XXXXXXXXXX authorizes ACo to pay a dividend by issuing fully paid Shares. If Shares are issued in payment of a dividend, XXXXXXXXXX states that ACo shall record in the stated capital account maintained for the Shares of the class or series issued in payment of the dividend, the declared amount of the dividend as an amount of money.
12. Pursuant to the terms of the Agreement, ACo will pay for BCo's assets by, inter alia, the issuance of about XXXXXXXXXX Shares. By limiting the number of XXXXXXXXXX Shares issued to BCo, ACo can achieve appropriate proportional governance as voting rights are attached to the XXXXXXXXXX Shares only. Accordingly, to pay the balance of the purchase price, after the assumption of BCo's liabilities and a cash payment of about $XXXXXXXXXX , approximately XXXXXXXXXX Shares will be issued to BCo. As XXXXXXXXXX Shares will be issued to BCo as part of the purchase price under the Agreement, in order that ACo members will collectively receive a percentage of XXXXXXXXXX Shares that represents the percentage of the XXXXXXXXXX System Assets to the Combined System Assets without the need for significant capital contribution by the current Shareholders of ACo, ACo will amend the Constitution as described in 13 below and issue a stock dividend of XXXXXXXXXX Shares to XXXXXXXXXX Shareholders on the basis of one XXXXXXXXXX Share per fixed number of XXXXXXXXXX Shares held, as predetermined by a formula (the "Stock Dividend").
13. Prior to the issuance of the Stock Dividend described above, ACo will amend the Constitution such that XXXXXXXXXX Shares will have the following characteristics:
a. par value of $XXXXXXXXXX each;
b. entitle the holder to a non-cumulative dividend as and when declared by the board of directors of ACo from time to time;
c. be redeemable at the option of the holder for a redemption amount of $XXXXXXXXXX per Share; and
d. on the liquidation, dissolution or winding-up of ACo, entitle the holder to receive a redemption amount of $XXXXXXXXXX per Share.
Additionally, the Constitution will be amended to allow credit unions from outside of the province of XXXXXXXXXX to be XXXXXXXXXX Shareholders.
14. In reference to the Stock Dividend, XXXXXXXXXX, ACo shall record in the stated capital account maintained for XXXXXXXXXX Shares issued, a declared amount of the Stock Dividend as determined by reference to the par value of each XXXXXXXXXX Share, namely $XXXXXXXXXX per Share, of approximately $XXXXXXXXXX.
15. No XXXXXXXXXX Shareholder in receipt of the Stock Dividend is a "specified Shareholder" within the meaning of subsection 248(1) of the Act.
16. In addition to the Proposed Transactions, XXXXXXXXXX Shareholders will each receive a cash dividend prior to the Combination.
Purpose of the Proposed Transactions
17. The Stock Dividend is required to avoid significant capital contribution by Shareholders of ACo and maintain appropriate proportional governance, as described in 12 above.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all 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. The Stock Dividend will be a "stock dividend" as defined by subsection 248(1), the amount of which, pursuant to the definition of "amount" in subsection 248(1), will be the amount by which the paid-up capital of the XXXXXXXXXX Shares is increased by reason of the payment of the Stock Dividend, as described in 14 above.
B. By virtue of subsections 137(4.1) and (4.2), which deem an amount paid or payable by a credit union to a member in respect of a Share of the credit union to be paid or payable as interest and not as a dividend, Part VI.1 will not apply upon the payment of the Stock Dividend.
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 CRA provided the proposed transactions are completed on or before XXXXXXXXXX.
The ruling is based on the Act in its present form and does 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 reviewed or is making a determination or ruling in respect of:
a) the determination of the adjusted cost base, paid-up capital or fair market value of any Shares referred to herein;
b) the application of subsection 15(1.1) of the Act to the Proposed Transactions;
c) any tax consequences in respect of the Combination; nor
d) any tax consequences in relation to any facts or proposed transactions referred to herein other than those specifically described in the rulings given.
Yours truly,
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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