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: Standard rulings provided on this butterfly transaction.
XXXXXXXXXX 2007-025168
XXXXXXXXXX , 2008
Dear XXXXXXXXXX ,
Re: XXXXXXXXXX (tax account number XXXXXXXXXX Tax Services Office, XXXXXXXXXX Centre)
We are writing in response to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge receipt of your emails as well as our telephone conversations.
To the best of your knowledge and that of the above-referenced taxpayer, none of the issues involved in this ruling is:
(a) in an earlier return of the above-referenced taxpayer or a related person;
(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the above-referenced taxpayer or a related person;
(c) under objection by the above-referenced taxpayer or a related person;
(d) before the courts; or
(e) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
The above-referenced taxpayer has confirmed that the proposed transactions described herein will not affect its ability to pay any of its outstanding tax liabilities.
All statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c. 1, as amended to the date hereof (the "Act") and all references to monetary amounts are in Canadian dollars.
DEFINITIONS
In this letter, the following terms have the meanings specified:
"ACB" means "adjusted cost base" as that expression is defined in section 54 and subsection 248(1);
"agreed amount" in respect of an asset means the amount that the transferor and the transferee of the asset agree upon in their election under subsection 85(1) in respect of that asset. The agreed amount for the purposes of each election will be equal to:
in the case of capital property (other than depreciable property of a prescribed class), an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
in the case of a depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii);
In each case, the agreed amount will not exceed the fair market value of the respective property, nor will it be less than the amount of any non-share consideration given as consideration for the transfer of such property;
"Business Property" of an entity means all of the assets of the entity, other than Cash or Near-Cash Property, any income from which would, for the purposes of the Act, be income from a business (other than a specified investment business). The inventory of an entity, including both land inventory and inventory in respect of condominiums under construction, will be considered to be business assets (prior to reclassification of certain cash or near cash property as business assets) to the extent that its disposition gives rise to business income. Likewise, the XXXXXXXXXX of an entity will be considered to be business assets provided the income derived from them is income from an active business as defined in subsection 125(7). In determining the net fair market value of the Business Property of an entity, immediately before the transfers described in Paragraphs 41 and 53, trade accounts receivable and prepaid expenses that relate to a business that is carried on by the entity or an entity over which it has significant influence and that will be collected or consumed in the ordinary course of that business, net of the allocated liabilities will be reclassified as Business Property. A liability will be allocated to the particular Business Property of the entity to which it relates to the extent of its fair market value. Liabilities of the entity that pertain to Business Property but not to a particular property will be allocated to Business Property. To the extent that the allocation of liabilities to a type of property as described herein exceeds the total fair market value of the Business Property, the entity will be considered to have a negative amount of that type of property;
"capital property" has the meaning assigned by section 54;
"Cash or Near-Cash Property" of an entity means the cash, accounts receivable, income taxes recoverable and prepaid expenses of the entity. It includes deposits and advances to related persons, shareholders or persons related to the shareholders of the entity that are due within the next 12 months or those with no fixed term of repayment. In determining the net fair market value of the Cash or Near-Cash Property of the entity, immediately before the transfers described in Paragraphs 41 and 53, current liabilities will be allocated to the Cash or Near-Cash Property of the entity in the proportion that the net fair market value of each such property is of the fair market value of all its Cash or Near-Cash Property. Current liabilities will include accounts payable, accrued liabilities, amounts owing to shareholders and income taxes payable. The current liabilities of the entity will not exceed the fair market value of the Cash or Near-Cash Property;
"Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);
"CDA" means "capital dividend account" and has the meaning assigned by subsection 89(1);
"Child" refers to a Child of Mr. A and Mrs. A, collectively referred to as their "Children", namely:
(a) XXXXXXXXXX , referred to herein as "Child 1";
(b) XXXXXXXXXX , referred to herein as "Child 2";
(c) XXXXXXXXXX , referred to herein as "Child 3"; and
(d) XXXXXXXXXX referred to herein as "Child 4";
"Children's Inter-Vivos Trusts" refers collectively to four new inter-vivos trusts that will be created;
"Children's Trusts" refers collectively to the four testamentary trusts for the benefit of the Children and settled on the death of Mr. A. The Children's Trusts are entitled to XXXXXXXXXX of the aggregate value of the Estate assets. According to Mr. A's will, each Child is entitled to receive the income earned by his or her respective Children's Trust but the trustee has no right to encroach on the capital of the trust except to purchase a residence or recreational property to be used by that Child. On the death of a Child, the assets of the Children's Trust of which he or she is a beneficiary will be divided equally per stirpes among the Grandchildren that are his or her issue. If a Grandchild is under the age of XXXXXXXXXX , that Grandchild's portion will be held in a separate new trust for that Grandchild. The income and capital of that trust may be used for the benefit of that Grandchild. The capital of the trust will be distributed upon the Grandchild attaining the age of XXXXXXXXXX . The trustees of each Children's Trust are Mrs. A, Mr. B and the particular Child who is a beneficiary of that trust. On Mrs. A's death, each Child will become sole trustee of his/her trust;
"Class A Redemption Note" means a demand promissory note having a principal amount and fair market value equal to the redemption amount of the Transferee A Class A Preferred shares which is issued on their redemption;
"Class A Special share" means a non-voting share of the capital of Newco 1. A Class A Special Share entitles its holder to receive dividends if, as and when declared at the discretion of DC directors and is redeemable and retractable for $XXXXXXXXXX ;
"Class DE Redemption Note" means a demand promissory note having a principal amount and fair market value equal to the aggregate of the redemption amounts of all the DC Class D Special shares and DC Class E Special shares for which it is issued on their redemption;
"Condo 1" means a condominium property;
"Consolidated Group" means the group formed by DC, XXXXXXXXXX (a limited partnership);
"cost amount" has the meaning assigned by subsection 248(1);
"DC" refers to XXXXXXXXXX , a corporation incorporated under the First Act on XXXXXXXXXX . The authorized share capital of DC consists of XXXXXXXXXX Class D common shares, an unlimited number of Class E common shares, an unlimited number of Non-Voting common shares, XXXXXXXXXX Class A Special shares, XXXXXXXXXX Class B Special shares, and XXXXXXXXXX Class C Special shares. Its address is XXXXXXXXXX
"DC Class D Special Share" means one of the authorized XXXXXXXXXX Class D non-voting Special shares of the capital of DC created as described in the Proposed Transactions. A DC Class D Special Share entitles its holder to receive dividends if, as and when declared at the discretion of DC directors at a rate not to exceed XXXXXXXXXX % of its redemption amount per annum. A DC Class D Special Share is redeemable and retractable. The redemption amount of a DC Class D Special Share is equal to XXXXXXXXXX % of the proportion of the fair market value of all issued and outstanding shares of DC represented by the aggregate fair market value of the property transferred to Transferee A by DC as described in Paragraph 41 (net of the amount of the liabilities assumed by Transferee A as described in Paragraph 42) over the aggregate fair market value of the property of DC (net of the amount of its liabilities);
"DC Class E Special Share" means one of the authorized XXXXXXXXXX Class E voting Special shares of the capital of DC created as described in the Proposed Transactions. A DC Class E Special Share entitles its holder to (i) one vote; and (ii) to receive dividends if, as and when declared at the discretion of DC directors at a rate not to exceed XXXXXXXXXX % of its redemption amount per annum. A DC Class E Special Share is redeemable and retractable. The redemption amount of a DC Class E Special Share is equal to XXXXXXXXXX % of the proportion of the fair market value of all issued and outstanding shares of DC represented by the aggregate fair market value of the property transferred to Transferee A by DC under Paragraph 41 (net of the amount of the liabilities assumed by Transferee A as described in Paragraph 42) over the aggregate fair market value of the property of DC (net of the amount of its liabilities);
"DC Class F Special share" means a non-voting share of the capital of DC created as described in the Proposed Transactions. A DC Class F Special Share entitles its holder to receive dividends if, as and when declared at the discretion of DC directors at a rate not to exceed XXXXXXXXXX % of its redemption amount per annum. A DC Class F Special share is redeemable and retractable for an amount equal to the fair market value of a DC Class G common share immediately before the issuance of the DC Class F Special share for which it is exchanged;
"DC Class F common share" means one of the authorized Class F common shares of the capital of DC. A DC Class F common share entitles its holder (i) to XXXXXXXXXX votes; (ii) to receive dividends if, as and when declared at the discretion of DC directors; and (iii) to receive the remaining property of DC upon its winding-up or dissolution;
"DC Class G common share" means one of the authorized Class G common shares of the capital of DC. A DC Class G common share is non-voting and entitles its holder (i) to receive dividends if, as and when declared at the discretion of DC directors; and (ii) to receive the remaining property of DC upon its winding-up or dissolution;
"depreciable property" has the meaning assigned by subsection 248(1);
"dividend refund" has the meaning assigned by subsection 129(1);
"eligible capital property" has the meaning assigned by subsection 248(1);
"eligible property" has the meaning assigned by subsection 85(1.1);
"Executors" means XXXXXXXXXX
"Estate" means the estate created on the death of Mr. A and administered by the Executors. The tax account number of the Estate is XXXXXXXXXX;
"First Act" means the Business Corporations Act, XXXXXXXXXX;
"First Pool" means a pool of assets comprised of assets representing XXXXXXXXXX of the value of the assets held by the Estate. Where relevant, the composition of the First Pool includes XXXXXXXXXX Class E common shares in DC, a co-tenancy interest in respect of Condo 1 and the XXXXXXXXXX condominiums in which Mrs. A lives, XXXXXXXXXX voting common shares of Transferee A. Some of the assets of the First Pool will be substituted for other assets as part of the Proposed Transactions;
"Grandchild", collectively referred to as "Grandchildren", refers to a Grandchild of Mr. and Mrs. A, namely:
XXXXXXXXXX
"Grandchildren's Inter-Vivos Trusts" refers collectively to the two new inter-vivos trusts that will be created, as described in Paragraph 65(c);
"Grandchildren's Trusts" refers collectively to all XXXXXXXXXX testamentary trusts created on the death of Mr. A for the benefit of each Grandchild. The Grandchildren's Trusts are entitled to XXXXXXXXXX of the aggregate value of the Estate assets. The trustee of each Grandchildren's Trust is the Child who is the parent of the Grandchild for the benefit of whom that trust was settled. According to Mr. A's will, the trustee of each of the Grandchildren's Trusts has the power to use the trust income and capital for the benefit of the Grandchild who is a beneficiary. The balance of any unused capital and income will be distributed to the Grandchild who is a beneficiary of the trust when he or she attains the age of thirty;
"Investment Property" of an entity means all of the assets other than Cash or Near-Cash Property, any income from which would, for the purposes of the Act, be income from property or from a specified investment business of that entity. In determining the net fair market value of the Investment Property of the entity, immediately before the transfers described in Paragraphs 41 and 53, any liabilities of that entity other than current liabilities or liabilities allocated to Business Property will be allocated to the Cash or Near-cash Property, Investment Property and Business Property of that entity, based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities but after the allocation of the other liabilities;
"Mr. A" refers to the late XXXXXXXXXX , as represented by the Executors;
"Mr. B" refers to XXXXXXXXXX
"Mrs. A" refers to XXXXXXXXXX , the widow of Mr. A;
"Mrs. A Inter-Vivos Trusts" refers collectively to the four new inter-vivos trusts that will be created, as described in Paragraph 65(a);
"Mrs. A Trust" is a trust created under the terms of Mr. A's will. Mrs. A is entitled to receive all the income that arises in the Mrs. A Trust before the moment of her death and until that moment, no other person will be entitled to receive or otherwise obtain the use of any of the income or capital of the Mrs. A Trust. The trustees of the Mrs. A Trust have the power to encroach on the capital for the benefit of Mrs. A as they deem necessary or desirable. Upon Mrs. A's death, XXXXXXXXXX of the assets held by the Mrs. A Trust will be added to the Children's Trusts and XXXXXXXXXX of the assets will be added to the Grandchildren's Trusts;
"Newco 1" refers to XXXXXXXXXX ., a corporation incorporated under the First Act on XXXXXXXXXX . The address of Newco 1 is XXXXXXXXXX , business number XXXXXXXXXX . The authorized share capital of Newco 1 includes (i) an unlimited number of Class A common shares; (ii) an unlimited number of Class B common shares; (iii) an unlimited number of Class A Special shares; (iv) XXXXXXXXXX Class B Special shares; (v) XXXXXXXXXX Class C Special shares; and (vi) an unlimited number of Class D Special shares. The Class A common shares are convertible into Class B common shares of Newco 1 and the Class B common shares are convertible into Class A common shares of Newco 1. A Class A Special Share is non-voting, redeemable and retractable for $XXXXXXXXXX and is entitled to dividends at the discretion of the board of directors. A Class B Special share and a Class C Special share is non-voting, entitles its holder to receive dividends if, as and when declared at the discretion of Newco 1 directors and is redeemable and retractable for the fair market value of the consideration for which it was issued. A Class D Special share is not retractable;
"Newco 1 Note" means a demand promissory note in the amount of $XXXXXXXXXX ;
"Newco 2" refers to XXXXXXXXXX , a corporation incorporated under the
Canada Business Corporations Act on XXXXXXXXXX . The authorized share capital of Newco 2 provides for an unlimited number of common shares;
"Newco 3" refers to a corporation to be incorporated under the First Act. The authorized share capital of Newco 3 will be: (i) an unlimited number of class A common shares; (ii) an unlimited number of class B common shares; (iii) an unlimited number of class C common shares; (iv) an unlimited number of class A preferred shares; (v) an unlimited number of class B preferred shares; and (vi) an unlimited number of class C preferred shares. A class A common share will be non-voting and convertible to class B or C common shares on a XXXXXXXXXX basis. A class B common share will be non-voting and convertible to a class A or C common share on a XXXXXXXXXX basis. A class C common share will be non-voting and convertible to a class A or B common share on a XXXXXXXXXX basis. A class A preferred share will give right to one vote per share, will be retractable for $XXXXXXXXXX and will rank after the class B and class C preferred shares on liquidation. A class B preferred share will (i) be non-voting; (ii) be redeemable and retractable for the fair market value of the consideration for which it is issued; (iii) be entitled to dividends at the discretion of the board of directors; and (iv) have priority on liquidation. A class C preferred share will (i) be non-voting; (ii) be redeemable and retractable for the fair market value of the consideration for which it was issued; (iii) be entitled to dividends at the discretion of the board of directors; (iv) rank after a class B preferred share on liquidation;
"Newco 4" refers to a corporation to be incorporated under the First Act. The authorized share capital of Newco 4 will be an unlimited number of class A common shares and an unlimited number of class B common shares. A class A common share will be convertible into a class B common share on a XXXXXXXXXX basis and vice versa;
"Newco 5" refers to a corporation to be incorporated under the First Act. The authorized share capital of Newco 5 will be an unlimited number of class A common shares and an unlimited number of class B common shares. A class A common share will be convertible into a class B common share on a XXXXXXXXXX basis;
"Note C" means a demand promissory note having a principal amount and fair market value equal to the aggregate of the fair market value of the XXXXXXXXXX voting common shares and XXXXXXXXXX Non-Voting common shares of Transferee A that are sold by Transferee C and cancelled;
"paid-up capital" has the meaning assigned by subsection 89(1);
"Paragraph" means a numbered paragraph of this letter;
"Pre-1972 CSOH" means "pre-1972 capital surplus on hand" as that expression is defined in subsection 88(2.1);
"private corporation" has the meaning assigned by subsection 89(1);
"proceeds of disposition" has the meaning assigned by section 54;
"Proposed Transactions" means the transactions described in the proposed transactions section of this letter;
"RDTOH" means "refundable dividend tax on hand" as that expression is defined in subsection 129(3);
"Receivables" refers to the amounts receivable by the Estate as follows:
Debtor Amount
Child 1 $XXXXXXXXXX ;
Child 2 $XXXXXXXXXX ;
Child 3 $XXXXXXXXXX ;
"Redemption Note C" means a demand promissory note issued on the redemption of the Transferee C Class A Preferred Shares and having a principal amount and fair market value equal to the aggregate of the redemption amounts of all the redeemed Transferee C Class A Preferred Shares;
"related persons" has the meaning assigned by section 251;
"restricted financial institution" has the meaning assigned by subsection 248(1);
"Second Pool" means a pool of assets comprised of assets representing XXXXXXXXXX of the value of the assets held by the Estate. Those assets include loans receivable from DC and Y Inc., certain portfolio investments, co-tenancy rights in respect of the condominiums (including Condo 1) that are not part of the First Pool (the extent of those rights will depend on the relative value of the condominiums which are part of the First Pool), common shares of Newco 1 and cash;
"series of transactions or events" includes the transactions or events referred to in subsection 248(10);
"SFI" means "specified financial institution" as that expression is defined in subsection 248(1);
"SIN" means Social Insurance Number;
"significant influence" has the meaning assigned by section 3050 of the CICA Handbook;
"specified investment business" means "specified investment business" as that expression is defined in subsections 125(7) and 248(1);
"stated capital" has the meaning assigned by the First Act;
"taxable Canadian corporation" has the meaning assigned by subsection 89(1);
"taxable dividend" has the meaning assigned by subsection 89(1);
"Transferee A" means a corporation that will be incorporated under the First Act. Transferee A will be a taxable Canadian corporation and a private corporation. The authorized share capital of Transferee A will consist of (i) an unlimited number of non-voting common shares; (ii) an unlimited number of voting common shares, one vote per share, and (iii) an unlimited number of Transferee A Class A Preferred Shares;
"Transferee A Class A Preferred Share" means a Class A preferred share of Transferee A that entitles its holder (i) to one vote; (ii) to receive dividends if, as and when declared at the discretion of the Transferee A directors at a rate not to exceed XXXXXXXXXX % of its redemption amount per annum. A Transferee A Class A Preferred Share is redeemable and retractable for an amount equal to the fair market value of the consideration for which it was issued;
"Transferee C" means a corporation that will be incorporated under the First Act. Transferee C will be a taxable Canadian corporation and a private corporation. The authorized share capital of Transferee C will consist of: (i) an unlimited number of voting common shares, and (ii) an unlimited number of Transferee C Class A Preferred shares;
"Transferee C Class A Preferred Share" means a Class A preferred share of Transferee C which entitles the holder to (i) one vote; (ii) receive dividends if, as and when declared at the discretion of Transferee C directors at a rate not to exceed XXXXXXXXXX % of its redemption amount per annum. A Transferee C Class A Preferred Share is redeemable and retractable for a specified amount equal to the fair market value of the consideration for which it was issued;
"X Inc." refers to XXXXXXXXXX ., a corporation formed under the First Act;
"Y Inc." refers to XXXXXXXXXX , a corporation incorporated under the First Act;
"Y Inc. Note" means a promissory note in the amount of $XXXXXXXXXX issued by the Estate to Y Inc.; and
"21 year rule" refers to the deemed disposition of assets held by a trust on its 21st anniversary pursuant to paragraph 104(4)(b).
FACTS
Terms of the Estate
1. Mr. A died on XXXXXXXXXX . On his death, his assets (including shares of DC,
X Inc. and Y Inc.) became property of the Estate. The Estate's taxation year ends on XXXXXXXXXX of each year. The Estate has lent $XXXXXXXXXX to Mrs. A.
2. The terms of Mr. A's will provide that, after satisfying specific bequests and debts of the Estate, the property held by the Estate will be distributed to:
various charitable organizations;
Mrs. A;
the Mrs. A Trust;
the Children's Trusts; and
the Grandchildren's Trusts.
3. All of the Children are adults and each is the sibling of the other.
4. The Children, the Grandchildren and Mrs. A all reside in Canada.
Particulars of DC
5. DC is a Canadian-controlled private corporation and a taxable Canadian corporation. All shareholders of DC are residents of Canada. Its taxation year ends on XXXXXXXXXX of each year.
6. The shares of DC are held as follows:
Shareholder Number/Class ACB PUC
Estate XXXX Class E common $XXXXXXX $XXXXXX
Newco 1 XXXX Non-Voting common $XXXXXXX $XXXXXX
Mr. B XXXX Class E common $XXXXXXX $XXXXXX
Mr. B XXXX Non-Voting common $XXXXXXX $XXXXXX
7. Mr. A was not related to Mr. B at any time before his death.
8. Other than cash, DC's assets consist of:
Current assets, including accounts receivable and prepaid expenses;
Income taxes recoverable;
Land held for development;
Mortgage receivable;
Portfolio investments;
Investment in XXXXXXXXXX ., a corporation over which it exercises significant influence;
Investment in approximately XXXXXXXXXX of the limited interests in XXXXXXXXXX (a limited partnership) which carries on a land development business (the remaining XXXXXXXXXX is held by an arm's length party);
Real estate XXXXXXXXXX ; and
Computer equipment.
9. The tax attributes of DC as at XXXXXXXXXX include:
an RDTOH balance of $XXXXXXXXXX ;
a CDA balance of $XXXXXXXXXX ;
no non-capital loss carryforwards for federal or provincial purposes; and
to the best of DC's knowledge, no Pre-1972 CSOH.
Particulars of Newco 1
10. Newco 1 is a Canadian-controlled private corporation and a taxable Canadian corporation. Its taxation year ends on XXXXXXXXXX of each year.
11. After the share issuances described in Paragraphs 18 and 23, the stated capital increase described in Paragraph 28 and the redemption described in Paragraph 31, the shares of Newco 1 are held as follows:
Shareholder Number/Class ACB PUC Redemption
Amount
Estate XXXXX Class A Special $XXXXX $XXXX $XXXXX
Estate XXXXX Class A common $XXXXX $XXXX n/a
12. No shares in the capital of DC and Newco 1 were acquired in contemplation of the Proposed Transactions.
13. The articles of incorporation of DC were amended to create an unlimited number of non-voting common shares.
14. Mr. B and the Estate each exchanged XXXXXXXXXX common shares of DC for XXXXXXXXXX non-voting common shares.
15. DC paid a capital dividend on its non-voting common shares in the amount of $XXXXXXXXXX .
16. The Estate distributed $XXXXXXXXXX to Mrs. A and she used the funds to repay $XXXXXXXXXX of the $XXXXXXXXXX advanced to her by the Estate as described in Paragraph 1.
17. The Estate advanced $XXXXXXXXXX to DC and Mr. B advanced $XXXXXXXXXX to DC.
18. The Estate transferred its XXXXXXXXXX non-voting common shares of DC to Newco 1. The Estate and Newco 1 jointly elected within the time limits referred to in subsection 85(6) to have the rules in subsection 85(1) apply to the transfer. The consideration on the rollover was XXXXXXXXXX Class A Special shares and XXXXXXXXXX class A common shares of Newco 1. The addition to stated capital for the XXXXXXXXXX Class A Special shares was $XXXXXXXXXX and the addition to the stated capital of the XXXXXXXXXX class A common shares was $XXXXXXXXXX.
19. The articles of Y Inc. were amended to create a class of non-voting common shares.
20. The Estate exchanged XXXXXXXXXX common shares of Y Inc. for XXXXXXXXXX non-voting common shares.
21. Y Inc. paid to the Estate a capital dividend in the amount of $XXXXXXXXXX on its non-voting common shares.
22. The Estate distributed $XXXXXXXXXX to Mrs. A and she used these funds to repay the balance previously advanced to her by the Estate as described in Paragraph 1.
23. The Estate transferred the non-voting common shares of Y Inc. to Newco 1 in exchange for XXXXXXXXXX Class A Special shares and XXXXXXXXXX class A common shares of Newco 1. The Estate and Newco 1 jointly elected within the time limits referred to in subsection 85(6) to have the rules in subsection 85(1) apply to the transfer. The addition to the stated capital of the XXXXXXXXXX Class A Special shares was $XXXXXXXXXX and the addition to the stated capital of the XXXXXXXXXX Class A common shares was $XXXXXXXXXX .
24. On XXXXXXXXXX , Y Inc. increased the stated capital of the non-voting common shares held by Newco 1 by $XXXXXXXXXX .
25. On XXXXXXXXXX , DC increased the stated capital of the non-voting common shares by $XXXXXXXXXX .
Subsection 164(6) loss carryback
26. The Estate incorporated Newco 2.
27. The Estate transferred its XXXXXXXXXX Class A Special shares of Newco 1 to Newco 2 in exchange for XXXXXXXXXX common shares of Newco 2. The addition to the stated capital was $XXXXXXXXXX .
28. On XXXXXXXXXX , Newco 1 increased the stated capital of the Class A Special shares held by Newco 2 by $XXXXXXXXXX .
29. On XXXXXXXXXX , Newco 2 was wound up.
30. On XXXXXXXXXX , the Estate filed its income tax return for the year ended XXXXXXXXXX and all income taxes owing were paid at that time. The capital loss resulting from the wind-up of Newco 2 was reported as being carried back to Mr. A's terminal income tax return pursuant to subsection 164(6) to reduce his taxation on death. The Estate obtained part of the funds required to meet its tax obligations through the issuance of the Y Inc. Note to Y Inc.
31. On XXXXXXXXXX , Newco 1 redeemed XXXXXXXXXX Class A Special shares held by the Estate for the Newco 1 Note.
32. On XXXXXXXXXX , the Estate assigned the Newco 1 Note to Y Inc. in partial satisfaction of the Y Inc. Note. The $XXXXXXXXXX balance of the Y Inc. Note was repaid in XXXXXXXXXX by the Estate.
RECENTLY COMPLETED TRANSACTIONS
33. On XXXXXXXXXX , DC loaned $XXXXXXXXXX to Y Inc., which in turn advanced a portion of that amount to the Estate. The Estate lent $XXXXXXXXXX to Mrs. A and $XXXXXXXXXX to the Children and Grandchildren. On XXXXXXXXXX , DC also loaned $XXXXXXXXXX to a corporation wholly owned by Mr. B. Those loans were not made in contemplation of the Proposed Transactions.
Mrs. A Trust
34. The assets of the Estate were split into the First Pool and the Second Pool.
35. The Estate transferred the assets comprising the First Pool to the Mrs. A Trust.
PROPOSED TRANSACTIONS
The Proposed Transactions will be completed in the sequence described below.
First Butterfly (reorganization of DC)
36. The Mrs. A Trust, Newco 1 and Mr. B will incorporate Transferee A. No shares of Transferee A will be issued on its incorporation.
37. The articles of DC will be amended to add the following classes of shares:
(a) the DC Class D Special shares;
(b) the DC Class E Special shares;
(c) the DC Class F common shares; and
(d) the DC Class G common shares.
38. The following exchanges will occur simultaneously:
(a) Newco 1 will exchange its XXXXXXXXXX non-voting common shares in DC for XXXXXXXXXX DC Class D Special Shares and XXXXXXXXXX DC Class G common shares. The amount to be added to the stated capital of the DC Class D Special shares and DC Class G common shares will not exceed, in total, the paid-up capital of the XXXXXXXXXX Non-Voting common shares immediately before the exchange, and such paid-up capital will be allocated between its two classes of shares in proportion to their relative fair market value.
(b) The Mrs. A Trust will exchange its XXXXXXXXXX class E common shares in DC for XXXXXXXXXX DC Class E Special shares and XXXXXXXXXX DC Class F common shares. The amount to be added to the stated capital of the DC Class E Special shares and DC Class F common shares will not exceed, in total, the paid-up capital of the XXXXXXXXXX class E common shares of DC immediately before the exchange, and such paid-up capital will be allocated between its two classes of shares in proportion to their relative fair market value.
(c) Mr. B will exchange his XXXXXXXXXX class E common shares in DC for XXXXXXXXXX DC Class E Special shares and XXXXXXXXXX DC Class F common shares. The amount to be added to the stated capital of the DC Class E Special shares and DC Class F common shares will not exceed, in total, the paid-up capital of the XXXXXXXXXX class E common shares of DC immediately before the exchange, and such paid-up capital will be allocated between its two classes of shares in proportion to their relative fair market value.
(d) Mr. B will exchange his XXXXXXXXXX non-voting common shares in DC for XXXXXXXXXX DC Class D Special shares and XXXXXXXXXX DC Class G common shares. The amount to be added to the stated capital of the DC Class D Special shares and DC Class G common shares will not exceed, in total, the paid-up capital of the XXXXXXXXXX non-voting common shares immediately before the exchange, and such paid-up capital will be allocated between its two classes of shares in proportion to their relative fair market value.
All the exchanged non-voting common shares and class E common shares will be cancelled by DC.
39. The following transfers will be made to Transferee A and the transferor and Transferee A will elect jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer for an agreed amount:
(a) Newco 1 will transfer its XXXXXXXXXX DC Class D Special shares in exchange for XXXXXXXXXX non-voting common shares of Transferee A. The amount to be added to the stated capital of the XXXXXXXXXX non-voting common shares will not exceed the agreed amount;
(b) The Mrs. A Trust will transfer its XXXXXXXXXX DC Class E Special shares in exchange for XXXXXXXXXX voting common shares of Transferee A. The amount to be added to the stated capital of the XXXXXXXXXX common shares will not exceed the greater of the ACB and the paid-up capital of the XXXXXXXXXX DC Class E Special shares of DC, immediately before the transfer, as determined under section 84.1; and
(c) Mr. B will transfer his XXXXXXXXXX DC Class D Special shares and XXXXXXXXXX DC Class E Special shares of DC in exchange for XXXXXXXXXX non-voting common shares and XXXXXXXXXX voting common shares of Transferee A. The amount to be added to the stated capital of the XXXXXXXXXX non-voting common shares and XXXXXXXXXX common shares will not exceed the greater of the ACB and the paid-up capital of the XXXXXXXXXX DC Class D Special shares and the XXXXXXXXXX DC Class E Special shares immediately before the transfer, as determined under section 84.1.
40. Immediately before the transfers of property described in Paragraph 41, the property owned by DC will be classified into three different types of property for the purposes of the definition of "distribution" in subsection 55(1) and for the purposes of paragraph 55(3)(b):
Cash or Near-Cash Property held by DC, plus the proportion of the fair market value of shares or interest in an entity of the Consolidated Group held by DC that the fair market value of the Cash or Near-Cash Property of that entity is of the total fair market value of all the property owned by that entity;
Investment Property held by DC, plus the proportion of the fair market value of shares or interest in an entity of the Consolidated Group held by DC that the fair market value of the Investment Property of that entity is of the total fair market value of all the property owned by that entity;
Business Property held by DC, plus the proportion of the fair market value of shares or interest in an entity of the Consolidated Group held by DC that the fair market value of the Business Property of that entity is of the total fair market value of all the property owned by that entity;
Tax accounts like the RDTOH balance, the CDA balance or any deferred tax debit balance of an entity that is part of the Consolidated Group will not be considered property for purposes of the classification described herein.
41. DC will transfer to Transferee A some assets of each type of property that it will own at that moment for proceeds of disposition equal to the fair market value of those assets. Immediately following the transfers, the fair market value of the Cash or Near-Cash Property, Business Property and Investment Property transferred to Transferee A will approximate the proportion of the fair market value of all the assets of DC of a corresponding type of property determined immediately before such transfer that:
(a) the aggregate fair market value, immediately before the transfers, of the shares of DC owned by Transferee A at that time
is of
(b) the aggregate fair market value, immediately before the transfers, of all the issued and outstanding shares of DC at that time.
The cash to be transferred to Transferee A will be determined within XXXXXXXXXX days of the transfer of the property and an adjustment will be made as required to the cash transferred.
For the purpose of this Paragraph, the expression "approximate" means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the net fair market value of each type of property which Transferee A has received as compared to what Transferee A would have received had it received its appropriate pro rata share of the net fair market value of that type of property.
42. As consideration for the property so transferred, Transferee A will:
(a) assume a portion of the liabilities of DC; and
(b) issue to DC XXXXXXXXXX Transferee A Class A Preferred shares. Transferee A will add to the stated capital account of that class an amount not exceeding the cost to Transferee A (as determined under section 85, where relevant) of the property transferred to it less any liabilities assumed by it.
43. DC and Transferee A will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer at an agreed amount of each property transferred by DC to Transferee A as described in Paragraph 41 that is an eligible property the fair market value of which, at the time of the transfer, exceeds or may exceed the cost amount thereof to DC.
44. DC will redeem all the DC Class D Special shares and all the DC Class E Special shares held by Transferee A at their aggregate redemption amount and fair market value. DC will pay the redemption amount by issuing the Class DE Redemption Note to Transferee A. Transferee A will accept the Class DE Redemption Note as full payment for the redemption amount of the DC Class D Special shares and DC Class E Special shares so redeemed. The redeemed shares have an aggregate fair market value of more than 10% of the fair market value of all the issued shares of the capital stock of DC.
45. DC will request a change to its taxation year under subsection 249.1(7).
46. Transferee A will redeem the Transferee A Class A Preferred Shares held by DC at their aggregate redemption amount and fair market value. Transferee A will pay the redemption amount by issuing to DC the Class A Redemption Note. DC will accept the Class A Redemption Note as full payment for the redemption amount of the Transferee A Class A Preferred Shares so redeemed. The redeemed shares have a fair market value of more than 10% of the fair market value of all the issued shares of the capital stock of Transferee A.
47. Transferee A's taxation year will end.
48. At the beginning of the new taxation year of Transferee A, DC and Transferee A will set-off the Class A Redemption Note and the Class DE Redemption Note, and both will be cancelled by set-off.
Second Butterfly (reorganization of Transferee A)
49. Mr. B will incorporate Transferee C.
50. No shares of Transferee C will be issued prior to the transactions described in Paragraph 51.
51. Mr. B will transfer his XXXXXXXXXX voting common shares and XXXXXXXXXX non-voting common shares of Transferee A to Transferee C in exchange for XXXXXXXXXX common shares of Transferee C. Mr. B and Transferee C will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer exchange for the agreed amount. The amount to be added to the stated capital of the XXXXXXXXXX voting common shares will not exceed the greater of the ACB and the paid-up capital of the XXXXXXXXXX voting common shares and XXXXXXXXXX non-voting common shares of Transferee A, immediately before the transfer, as determined under section 84.1.
52. Immediately before the transactions described in Paragraph 53, the property owned by Transferee A will consist of the following property received as described in Paragraph 41:
The Cash or Near-Cash Property received;
The Investment Property received; and
The Business Property received.
The RDTOH balance and CDA balance of Transferee A will not be considered property for purposes of the classification described herein. Other tax accounts, such as any deferred tax debit balance will not be considered property for these purposes.
53. Transferee A will transfer at fair market value to Transferee C a portion of each type of property owned by it at that time such that immediately following the transfers, the net fair market value of each type of property so transferred will approximate that proportion of the net fair market value of all property of Transferee A of that type determined immediately before such transfer that:
(a) the aggregate fair market value, immediately before the transfers, of the shares of Transferee A owned by Transferee C at that time
is of
(b) the aggregate fair market value, immediately before the transfers, of all the issued and outstanding shares of Transferee A at that time.
The amount of cash to be transferred to Transferee C will be determined within XXXXXXXXXX days of the transfer of the property and an adjustment will be made as required in the amount of cash transferred.
For the purpose of this Paragraph, the expression "approximate" means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the net fair market value of each type of property which Transferee C has received as compared to what Transferee C would have received had it received its appropriate pro rata share of the net fair market value of that type of property.
54. As consideration for the property so transferred, Transferee C will:
(a) assume a portion of the liabilities of Transferee A; and
(b) issue XXXXXXXXXX Transferee C Class A Preferred Shares to Transferee A.
Transferee C will add to the stated capital account in respect of the Transferee C Class A Preferred Shares an amount not exceeding the cost (as determined under section 85, where relevant) of the property transferred to it less any liabilities assumed by it.
55. In respect of the transfers described in Paragraph 53, Transferee A and Transferee C will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each property transferred by Transferee A to Transferee C as described in Paragraph 53 that is an eligible property the fair market value of which at the time of the transfer exceeds or may exceed the cost amount thereof to Transferee A.
56. Transferee C will redeem the Transferee C Class A Preferred Shares held by Transferee A at their aggregate redemption amount and fair market value and will pay the redemption amount by issuing Redemption Note C to Transferee A. Transferee A will accept Redemption Note C as full payment for the redemption amount of the Transferee C Class A Preferred Shares so redeemed.
57. Transferee A will purchase for cancellation the XXXXXXXXXX voting common shares and XXXXXXXXXX non-voting common shares held by Transferee C at their aggregate fair market value and will pay by issuing Note C to Transferee C. Transferee C will accept Note C as full payment for the fair market value of the XXXXXXXXXX voting common shares and XXXXXXXXXX non-voting common shares so purchased.
58. Redemption Note C and Note C will be cancelled by set-off.
59(a). Transferee C will advance substantially all the cash that it received in Paragraph 53 to DC. Transferee A will advance substantially all of its cash to DC. The advances will be non-interest-bearing and will be repaid as determined by the board of directors as DC generates excess cash in its business.
59(b). As at XXXXXXXXXX DC owed approximately $XXXXXXXXXX to each of Y Inc. and a corporation wholly owned by Mr. B. These balances have been included as current payables as there are no specific terms of repayment. DC will repay $XXXXXXXXXX to each of Y Inc. and the corporation wholly owned by Mr. B.
Estate Freeze and Distribution Transactions
The following transactions will take place at or around the time that the transactions described in the Proposed Transactions take place and are part of the same series of transactions or events.
60. Newco 3 will be incorporated. Newco 3 will be a taxable Canadian corporation and a private corporation. The Mrs. A Trust will subscribe for XXXXXXXXXX Class A Preferred Shares of Newco 3 on incorporation for $XXXXXXXXXX .
61. DC will pay a cash dividend in the amount of $XXXXXXXXXX on the DC Class F common shares held by the Mrs. A Trust and Mr. B. DC will file an election in respect of the full amount of the dividend, in the prescribed manner and form referred to in subsection 83(2) and section 2101 of the Regulations. The Mrs. A Trust will distribute to Mrs. A, from capital, the $XXXXXXXXXX it received from DC. Mrs. A will use $XXXXXXXXXX to repay the amount previously advanced to her by the Estate.
62. Mrs. A will gift $XXXXXXXXXX to each Child and $XXXXXXXXXX to each Grandchild. The Children and Grandchildren will use the funds they received from Mrs. A to repay the amounts previously advanced to them by the Estate.
63. The Estate will repay the $XXXXXXXXXX advance to Y Inc. and Y Inc. will repay the $XXXXXXXXXX that it owes to DC as described in Paragraph 33. The corporation wholly owned by Mr. B that received the loan proceeds described in Paragraph 33 will also repay the $XXXXXXXXXX advance to it by DC.
64. The Mrs. A Trust will transfer the First Pool to Newco 3, excluding:
the interest in the XXXXXXXXXX condominiums in which Mrs. A lives, which will remain in the Mrs. A Trust for her benefit; and
a co-tenancy interest in Condo 1.
As sole consideration for the property so transferred, Newco 3 will issue to the Mrs. A Trust XXXXXXXXXX class A preferred shares and XXXXXXXXXX class B preferred shares.
Newco 3 will add $XXXXXXXXXX to the stated capital account in respect of the class A preferred shares and an amount equal to the cost to Newco 3 of the property transferred to it less $XXXXXXXXXX to the stated capital account in respect of the class B preferred shares.
The Mrs. A Trust and Newco 3 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer for an agreed amount of each property transferred by the Mrs. A Trust to Newco 3 that is an eligible property the fair market value of which at the time of the transfer exceeds or may exceed the cost amount thereof to the Mrs. A Trust.
65. The following inter-vivos trusts will be created:
(a) One Mrs. A Inter-Vivos Trust for each Child will be settled with $XXXXXXXXXX . The terms of each Mrs. A Inter-Vivos Trust will essentially mirror the terms of Mr. A's will in respect of the Mrs. A Trust. The trustees of each Mrs. A Inter-Vivos Trust will be the same trustees as those of the Mrs. A Trust during Mrs. A's lifetime and after her death, the trustee of each Mrs. A Inter-Vivos Trust will be the Child who is the beneficiary of that trust. During Mrs. A's lifetime, she will be entitled to all the income of each Mrs. A Inter-Vivos Trust. The trustees of a Mrs. A Inter-Vivos Trust will have the power to encroach upon the capital of the trust for the benefit of Mrs. A as they deem necessary or desirable. Before any distribution by a Mrs. A Inter-Vivos Trust to a beneficiary other than Mrs. A, its assets will be divided into XXXXXXXXXX equal shares. During Mrs. A's lifetime, a Child can transfer his XXXXXXXXXX share of the assets to his/her children with Mrs. A's consent or alternatively, a XXXXXXXXXX share of the assets may be distributed to the Grandchildren with the consent of Mrs. A and the Child who is their parent. Subsequent to Mrs. A's death, the interests in a Mrs. A Inter-Vivos Trust will be as follows:
(i) a XXXXXXXXXX share of the assets will be set aside for the particular Child who is the beneficiary of the trust;
(ii) the Child who is the beneficiary of the trust will be entitled to XXXXXXXXXX of the income but will only be entitled to encroach on the capital to buy assets such as a residence or recreational property;
(iii) the Child who is the beneficiary of the trust can transfer his XXXXXXXXXX share of the assets to his or her children; and
(iv) XXXXXXXXXX of the assets will be distributed to the Grandchildren if they are at least XXXXXXXXXX years of age or an older entitlement age, determined by their parents, that cannot exceed the age of XXXXXXXXXX .
One Children's Inter-Vivos Trust for each Child will be settled with $XXXXXXXXXX . The trustees of a Children's Inter-Vivos Trust will be the same individuals as the trustees of the Children's Trust which has the same Child as a beneficiary. After the lifetime of a Child, the Grandchildren who are the issue of that Child will become the beneficiaries of the Children's Inter-Vivos Trust of which the Child was a beneficiary. The applicable portion of each Children Inter-Vivos Trust assets will be distributed to the Grandchildren who have reached the age of XXXXXXXXXX or an extended age up to XXXXXXXXXX as dictated by the Child. An earlier distribution may be made to avoid the tax that would otherwise be triggered on the application of the 21 year rule.
One Grandchildren's Inter-Vivos Trust for each Grandchild who had not reached the age of XXXXXXXXXX at the date of Mr. A's death will be settled. The terms of these trusts will be the same as those of the Grandchildren's Trusts, subject to an option for the Grandchild's parent to consent to the distribution of the assets to his or her child prior to attaining the age of XXXXXXXXXX in order to avoid the tax that would otherwise be triggered on the application of the 21 year rule.
66. The trusts referred to in Paragraph 65 will acquire the following property:
(a) Each Mrs. A Inter-Vivos Trust will subscribe for XXXXXXXXXX Class A common shares of Newco 3 at a total subscription price of $XXXXXXXXXX .
(b) Each Children's Inter-Vivos Trusts will subscribe for XXXXXXXXXX Class B common shares of Newco 3 at a total subscription price of $XXXXXXXXXX .
(c) Each of the Grandchildren's Trusts will subscribe for XXXXXXXXXX Class C common shares of Newco 3 at a total subscription price of $XXXXXXXXXX . The subscription price for the shares will be provided by way of loans from Y Inc. The loans will be interest-bearing at a rate of XXXXXXXXXX %. The loans and interest will be repaid prior to XXXXXXXXXX days after the taxation year of each particular Grandchildren's Trust.
(d) Each of the Grandchildren's Inter-Vivos Trusts will subscribe for XXXXXXXXXX Class C common shares of Newco 3 at a total subscription price of $XXXXXXXXXX . The subscription price for the shares will be provided by way of loans from Y Inc. The loans will be interest bearing at a rate of XXXXXXXXXX %. The loans and interest will be repaid prior to XXXXXXXXXX days after the taxation year of each particular Grandchildren's Inter-Vivos Trust.
67. Two taxable Canadian corporations and private corporations, Newco 4 and Newco 5, will be incorporated and the following transfers will be made:
(a) The Estate will transfer the Second Pool to Newco 4, but will keep $XXXXXXXXXX cash, the Receivables, its Newco 1 shares and its interest in the condominiums that are not used by Mrs. A and in Condo 1. As sole consideration for the property so transferred, Newco 4 will issue to the Estate XXXXXXXXXX Class A common shares and XXXXXXXXXX Class B common shares. Newco 4 will add to the stated capital of the Class A common and Class B common shares an amount equal to the cost to Newco 4 of the property transferred to it. The Estate and Newco 4 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer for an agreed amount of each property transferred by the Estate to Newco 4 that is an eligible property the fair market value of which at the time of the transfer exceeds or may exceed the cost amount thereof to the Estate.
(b) The Mrs. A Trust will transfer to Newco 5 its XXXXXXXXXX class A preferred shares and its XXXXXXXXXX class B preferred shares of Newco 3. As sole consideration for the shares so transferred, Newco 5 will issue to the Mrs. A Trust XXXXXXXXXX class A common shares. The amount to be added to the stated capital of the XXXXXXXXXX Class A common shares will not exceed the greater of the ACB and the PUC of the XXXXXXXXXX Class A preferred shares and the XXXXXXXXXX class B preferred shares of Newco 3, immediately before the transfer, as determined under section 84.1. The Mrs. A Trust and Newco 5 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer. The agreed amount specified in the election will be equal to the total ACB of the class A and B preferred shares, which amount will be less than or equal to their total fair market value at the time of the transfer.
68. The articles of incorporation of Newco 1 will be amended to create the Class D Special shares, which will have the same attributes as the Class A Special shares but will have no retraction rights.
69. Newco 1 will exchange the XXXXXXXXXX Class A Special shares held by the Estate for XXXXXXXXXX non-retractable Class D Special shares.
70. The Estate will transfer to the Children's Trusts and to the Grandchildren's Trusts the Class D Special shares of Newco 1, co-tenancy rights in the condominiums that are not used by Mrs. A, co-tenancy rights in Condo 1, cash of $XXXXXXXXXX and the shares in Newco 4. The Receivable payable by each Child will be transferred to the Children's Trust of which he or she is beneficiary. The number of Class D Special shares of Newco 1 that each Children's Trust will receive will be reduced by the balance of the Receivable owing by each of Child 1, Child 2 and Child 3 to the Children's Trust of which he or she is a beneficiary and such respective trust will use the proceeds of its Receivable to invest in additional Class D Special shares of Newco 1.
71. Newco 4 will transfer its assets to Newco 3. As consideration, Newco 3 will issue to Newco XXXXXXXXXX class A preferred shares and XXXXXXXXXX class C preferred shares.
Newco 4 and Newco 3 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer for an agreed amount of each property transferred by Newco 4 to Newco 3 that is an eligible property the fair market value of which at the time of the transfer exceeds or may exceed the cost amount thereof to the Estate.
Newco 3 will add $XXXXXXXXXX to the stated capital account of the class A preferred shares and will add an amount equal to the cost to Newco 3 of the property transferred to it, less $XXXXXXXXXX , to the stated capital account of the class C preferred shares.
72. The share capital of DC will be reorganized to create XXXXXXXXXX DC Class F Special Shares and:
Newco 1 will exchange its XXXXXXXXXX DC Class G common shares for XXXXXXXXXX DC Class F Special shares. The amount added to the stated capital of the DC Class F Special shares will equal the stated capital of the DC Class G common shares.
Mr. B will exchange his XXXXXXXXXX DC Class G common shares for XXXXXXXXXX DC Class F Special shares. The amount added to the stated capital of the DC Class F Special shares will equal the stated capital of the DC Class G common shares.
73. Neither DC nor any predecessor thereof has incurred any liability or acquired or disposed of any asset in contemplation of the Proposed Transactions described herein.
74. None of DC, Transferee A or Transferee C will be an SFI or restricted financial institution at the time the Proposed Transactions are implemented.
75. During the implementation of the Proposed Transactions, the shares of DC, Transferee A and Transferee C will not be:
(a) the subject of any undertaking or agreement that is referred to in subsection 112(2.2) as a "guarantee agreement";
(b) issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5);
the subject of a "dividend rental arrangement" as that term is defined in subsection 248(1); or
the subject of any secured undertaking of the type described in paragraph 112(2.4)(a)
76. None of the following shares will be issued for consideration that includes a taxable preferred share:
(a) Transferee A Class A Preferred Shares and Transferee C Class A Preferred Shares; and
(b) DC Class D Special shares and DC Class E Special shares.
77. Immediately prior to the redemptions, described in Paragraph 46, of the Transferee A Class A Preferred Shares held by DC, Transferee A will be connected with DC pursuant to paragraph 186(4)(b).
78. Immediately prior to the redemptions, described in Paragraph 44, of the DC Class D Special shares and DC Class E Special shares held by Transferee A, DC will be connected with Transferee A pursuant to paragraph 186(4)(b).
79. Immediately prior to the redemption, described in Paragraph 56, of the Transferee C Class A Preferred shares held by Transferee A, Transferee C will be connected with Transferee A pursuant to paragraph 186(4)(b).
80. Immediately prior to the purchase for cancellation, described in Paragraph 57, of the XXXXXXXXXX voting common shares and XXXXXXXXXX non-voting common shares in the capital of Transferee A held by Transferee C, Transferee A will be connected with Transferee C pursuant to paragraph 186(4)(b).
81. The fair market value of the Class A Redemption Note acquired by DC as described in Paragraph 46 will be equal to its principal amount at all times.
82. The fair market value of the Class DE Redemption Note acquired by Transferee A as described in Paragraph 44 will be equal to its principal amount at all times.
83. The fair market value of Note C acquired by Transferee C as described in Paragraph 57 will be equal to its principal amount at all times.
84. The fair market value of the Redemption Note C acquired by Transferee A as described in Paragraph 56 will be equal to its principal amount at all times.
85. Subject to the transfers which are part of the Proposed Transactions, none of DC, Transferee A and Transferee C expect or intend to dispose of any property owned by them as part of the series of transactions or events that includes the Proposed Transactions, other than in the ordinary course of such corporation's business.
86. The Executors and the trustees of the Children's Trusts, the Grandchildren's Trusts, the Mrs. A Inter-Vivos Trusts, the Children's Inter-Vivos Trusts, and the Grandchildren's Inter-Vivos Trusts are all residents of Canada.
87. No shares in the capital of DC were acquired in contemplation of the Proposed Transactions.
88. Mr. B deals at arm's length with the Estate, the Mrs. A Trust, the Children's Trusts, the Grandchildren's Trusts, the Mrs. A Inter-Vivos Trusts, the Children's Inter-Vivos Trusts, the Grandchildren's Inter-Vivos Trusts, Mrs. A, the Children and the Grandchildren.
PURPOSE OF THE PROPOSED TRANSACTIONS
The transactions described in Paragraphs 13 to 29 were carried out in XXXXXXXXXX , as part of post mortem tax planning to avoid the potential double tax which might otherwise have arisen on the death of an individual. At the time that these transactions were carried out it was not contemplated that the assets of DC would be distributed to its shareholders in a butterfly transaction. Further, these transactions did not facilitate the Proposed Transactions in any way.
The Proposed Transactions are designed to achieve the following objectives:
To spin off the XXXXXXXXXX and a proportionate share of the other net assets of DC into Transferee A through the first butterfly.
To split up the XXXXXXXXXX and other types of properties such that ultimately the Estate's proportionate share of the XXXXXXXXXX and other properties of DC will be held in Transferee A and Mr. B's share in such properties will be held in Transferee C, such that the Estate and Mr. B can independently control their separate XXXXXXXXXX . This is achieved through the second butterfly.
To distribute the present value of the First Pool to the Mrs. A Trust.
To enable the pooling of the assets of the Estate into Newco 3 in order to simplify the distribution of the assets held at Mr. A's death amongst the testamentary trusts for Mrs. A, Mr. A's Children and Grandchildren in the proportion stipulated by Mr. A in his will, with the exception of:
The Receivables as they can more practically be dealt with by way of reducing the number of Class D Special shares in Newco 1 distributed to the relevant Children's Trusts.
The XXXXXXXXXX condominiums occupied by Mrs. A, which will be held by the Mrs. A Trust and the remaining condominiums, which will be held as a co-tenancy by all the testamentary trusts, because the XXXXXXXXXX distribution ratio would otherwise be impractical (the proportionate co-tenancy interest held by the Mrs. A Trust for the benefit of Mrs. A will be adjusted to reflect the fact that it already holds the condominiums occupied by Mrs. A).
The shares of Newco 1, which are distributed directly to the Children's Trusts and the Grandchildren's Trusts who are the beneficiaries of the Estate to ensure that there is no acquisition of the shares of Newco 1 by another corporation, which would result in subparagraph 55(3.1)(b)(i) denying the paragraph 55(3)(b) exception to the rules under subsection 55(2).
To remove the retraction powers of the testamentary trusts pursuant to the wishes of the Estate trustees. This is achieved through the conversion of the Class A Special shares of Newco 1 into Class D Special shares. Newco 4 and Newco 5 are incorporated for that purpose.
To allow future growth in the First Pool and Second Pool to accrue to the Mrs. A Inter-Vivos Trusts, the Children's Inter-Vivos Trusts and the Grandchildren Inter-Vivos Trusts. This is desired in order to reduce the income tax on Mrs. A's death and at the time the 21 year rule becomes applicable to the testamentary trusts. The new inter-vivos trusts allow for the distribution of the assets prior to the 21st anniversary of the trusts, whereas the terms of the testamentary trusts do not allow the distribution of assets to the beneficiaries in anticipation of the 21 year rule.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, recently completed transactions, Proposed Transactions, additional information and purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above:
A. As a result of:
the redemption of the Transferee A Class A Preferred shares described in Paragraph 46 and the redemption of the DC Class D Special Shares and of the DC Class E Special Shares owned by Transferee A, as described in Paragraph 44; and
the redemption of the Transferee C Class A Preferred shares, as described in Paragraph 56;
the corporation that redeems the shares as described in paragraphs (a) and (b) will be deemed by paragraph 84(3)(a) to have paid a dividend equal to the amount by which the amount paid on such redemption exceeds the paid-up capital of the shares that were redeemed and the owner of those shares will be deemed by paragraph 84(3)(b) to have received a dividend of an equal amount, and the amount of each dividend described above will:
be included pursuant to subsection 82(1) and paragraph 12(1)(j) in computing the income of the corporation deemed to have received such dividend (the "recipient");
be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income in the year in which such dividend is deemed to have been received and none of subsections 112(2.1), (2.2), (2.3) or (2.4) will apply;
not be subject to tax under Part IV.1 or VI.1; and
not be subject to tax under Part IV except to the extent that such payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend.
B. The set-off and cancellation of:
(a) the Class DE Redemption Note by DC; and
(b) the Class A Redemption Note by Transferee A;
as described in Paragraph 48 will not, in and of itself, result in a forgiven amount within the meaning of either subsection 80(1) or section 80.01. In addition, DC and Transferee A will not otherwise realize any gain or incur any loss as a result of such set-off and cancellation.
As a result of the purchase for cancellation of the XXXXXXXXXX voting common shares and the XXXXXXXXXX non-voting common shares by Transferee A described in Paragraph 57:
(a) Transferee A will be deemed by paragraph 84(3)(a) to have paid a dividend equal to the amount by which the amount paid on such purchase exceeds the paid-up capital of the shares that were purchased from the owner of those shares, and the owner of those shares will be deemed by paragraph 84(3)(b) to have received a dividend of an equal amount and the amount of each dividend described above will:
(b) be included pursuant to subsection 82(1) and paragraph 12(1)(j) in computing the income of the corporation deemed to have received such dividend (the "recipient");
be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income in the year in which such dividend is deemed to have been received and none of subsections 112(2.1), (2.2), (2.3) or (2.4) will apply;
not be subject to tax under Part IV.1 or VI.1; and
not be subject to tax under Part IV except to the extent that such payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend.
D. The set-off and cancellation of:
(a) Note C; and
(b) Redemption Note C,
as described in Paragraph 58 will not, in and of itself, result in a forgiven amount within the meaning of either subsection 80(1) or section 80.01. In addition, Transferee A and Transferee C will not otherwise realize any gain or incur any loss as a result of such set-off and cancellation.
E. Provided that as part of the series of transactions or events that includes the Proposed Transactions, there is not:
(a) an acquisition of property in the circumstances described in paragraph 55(3.1)(a);
(b) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(c) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(d) an acquisition of any shares of a distributing corporation in the circumstances described in subparagraph 55(3.1)(b)(iii); and
(e) an acquisition of property in the circumstances described in paragraph 55(3.1)(c) or (d);
which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings A and C, and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
F. Subject to the concurrence of the Minister to the year end change request described in Paragraph 45, DC will not have a year end as a result of any of the Proposed Transactions.
G. The provisions of subsections 15(1), 56(2), 69(4) and section 246 will not apply as a result of the transactions described in Paragraphs 36 to 59(a), in and by themselves.
H. Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.
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 Revenue Agency provided that the Proposed Transactions are completed within 6 months of the date of this letter.
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.
Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed:
the determination of the fair market value, adjusted cost base or paid-up capital of any shares referred to herein;
any tax consequences relating to the facts and Proposed Transactions described herein, other than those specifically described in the rulings given above; or
the characterization as capital or inventory of the assets owned by one of the entities listed herein.
Without restricting the generality of the foregoing, nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed ant tax consequences relating to the transactions described in Paragraphs 13 to 33 or in Paragraphs 60 to 72.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2008
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2008
Email this Content