2009 Ruling 2009-0346361R3 - Internal Reorganization - 55(3)(a) - Suppl. Ruling

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: Additional transactions following the spin-off of business assets from a corporation to another, within a related group.

Position: Favourable rulings provided.

Reasons: In compliance with the law and previous positions.

XXXXXXXXXX 								2009-034636

XXXXXXXXXX , 2009

Dear Sirs:

Re: Advance Income Tax Ruling

XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in your letter of XXXXXXXXXX , and during our various telephone conversations in connection with your ruling request (XXXXXXXXXX ).

We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues described herein is:

(i) dealt with in an earlier return of the taxpayers or a related person,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person,
(iii) under objection by the taxpayers or a related person,
(iv) before the courts or if a judgment has been issued, the time limit for appeal to a higher court has expired, or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate (other than the Original Ruling).

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.Throughout this letter, except in Paragraph 17, the corporate and individual taxpayers will be referred to as follows:

(a) "Child I" means XXXXXXXXXX ;

(b) "Child II" means XXXXXXXXXX ;

(c) "Childco I" means XXXXXXXXXX ., a corporation incorporated under the XXXXXXXXXX which is wholly-owned by Child I;

(d) "Childco II" means XXXXXXXXXX ., a corporation incorporated under the XXXXXXXXXX which is wholly-owned by Child II;

(e) "Children" means Child I and Child II, the children of Parent I and Parent II;

(f) "Eligible Charity I" means XXXXXXXXXX , a Registered Charity;

(g) "Eligible Charity II" means XXXXXXXXXX , a Registered Charity;

(h) "Holdco" means XXXXXXXXXX ., a corporation continued under the XXXXXXXXXX ;

(i) "Listed Persons" means persons that can be added as beneficiaries of the XXXXXXXXXX Trust or the XXXXXXXXXX Trust, pursuant to subparagraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed or the XXXXXXXXXX Trust Deed;

(j) "Newco" means XXXXXXXXXX ., a corporation incorporated under the laws of XXXXXXXXXX , the shareholding of which is described in Paragraph 3;

(k) "Parent I" means XXXXXXXXXX ;

(l) "Parent II" means XXXXXXXXXX , the spouse of Parent I;

(m) "Subco I" means XXXXXXXXXX , a corporation incorporated under the laws of the province of XXXXXXXXXX , the shareholding of which is described in Paragraph 5;

(n) "Subco II" means XXXXXXXXXX ., a corporation incorporated under the laws of the province of XXXXXXXXXX which is a subsidiary wholly-owned corporation of Subco I;

(o) "Subco IV" means XXXXXXXXXX ., a corporation incorporated under the laws of the province of XXXXXXXXXX which is a subsidiary wholly-owned corporation of Subco II;

(p) "Trustees" has the meaning assigned by the XXXXXXXXXX Trust Deed and the XXXXXXXXXX Trust Deed, as the context requires;

(q) "XXXXXXXXXX Trust" means the trust established under the laws of the province of XXXXXXXXXX pursuant to the XXXXXXXXXX Trust Deed for the benefit of the XXXXXXXXXX Trust Beneficiaries;

(r) "XXXXXXXXXX Trust Beneficiaries" means Eligible Charity I, Eligible Charity II, Newco, Parent I, Parent II and their issue. The Children are the only current issue;

(s) "XXXXXXXXXX Trust" means the XXXXXXXXXX , a trust resident in Canada established under the laws of the province of XXXXXXXXXX pursuant to the XXXXXXXXXX Trust Deed for the benefit of the XXXXXXXXXX Trust Beneficiaries, as part of the XXXXXXXXXX Transactions;

(t) "XXXXXXXXXX Trust Beneficiaries" mean Eligible Charity I, Eligible Charity II, Parent I, Parent II and their issue. The Children are the only current issue. As described in Paragraph 8, Childco I and Childco II will be added as beneficiaries of the XXXXXXXXXX Trust pursuant to subparagraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified.

(a) "ACB" has the meaning assigned to the expression "adjusted cost base" in section 54;

(b) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph, clause or subclause is a reference to the relevant provision of the Act;

(c) XXXXXXXXXX

(d) "CCPC" has the meaning assigned to the expression "Canadian-controlled private corporation" in subsection 125(7);

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

(f) "Eligible Dividend" has the meaning assigned by subsection 89(1);

(g) "FMV" means fair market value;

(h) "GRIP" has the meaning assigned to the expression "general rate income pool" in subsection 89(1);

(i) "Holdco Old Common Shares" means the XXXXXXXXXX common share of the capital stock of Holdco that were held by the XXXXXXXXXX Trust immediately before the commencement of the XXXXXXXXXX Transactions;

(j) "Newco Deemed Eligible Dividend I" means the Taxable Dividend that will be deemed to have been received by Childco I from Newco pursuant to subsection 104(19), as described in Paragraph 11;

(k) "Newco Deemed Eligible Dividend II" means the Taxable Dividend that will be deemed to have been received by Childco II from Newco pursuant to subsection 104(19), as described in Paragraph 11;

(l) "Newco Eligible Dividend" means the Taxable Dividend to be paid by Newco, as described in Paragraph 9;

(m) "Newco Participating Shares" means the XXXXXXXXXX Class C non-voting participating shares issued from the capital stock of Newco to the XXXXXXXXXX Trust as part of the XXXXXXXXXX Transactions;

(n) "Newco Voting Shares" means the XXXXXXXXXX Class A voting non-participating shares issued from the capital stock of Newco to Parent I in the course of the XXXXXXXXXX Transactions;

(o) "Original Ruling" means the advance income tax ruling no. 2007-025596, which was issued to Holdco et al. on XXXXXXXXXX , 2008;

(p) "Paragraph" refers to a numbered paragraph in this letter;

(q) "Proposed Transactions" means the transactions described in Paragraphs 8 to 12 herein;

(r) "PUC" means "paid-up capital" within the meaning assigned by subsection 89(1);

(s) "RDTOH" means "refundable dividend tax on hand" within the meaning assigned by subsection 129(3);

(t) "Registered Charity" has the meaning assigned by subsection 248(1);

(u) "Short-term Preferred Share" has the meaning assigned by subsection 248(1);

(v) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

(w) "taxable Canadian corporation" has the meaning assigned in subsection 89(1);

(x) "Taxable Preferred Share" has the meaning assigned by subsection 248(1)

(y) "Taxable Dividend" has the meaning assigned by subsection 89(1);

(z) "Trustees Undertakings" means the undertakings that were given by the Trustees of the XXXXXXXXXX Trust and which are described in paragraphs 28 and 29 of the Original Ruling;

(aa) "XXXXXXXXXX Trust Deed" means the deed of settlement that was signed on XXXXXXXXXX on the establishment of the XXXXXXXXXX Trust;

(bb) "XXXXXXXXXX Transactions" means the proposed transactions described in paragraphs 12 to 24 of the Original Ruling that have been carried out as of the date hereof;

(cc) "XXXXXXXXXX Trust Deed" means the deed of settlement that was signed on XXXXXXXXXX on the establishment of the XXXXXXXXXX Trust, as part of the XXXXXXXXXX Transactions.

FACTS

1. All the XXXXXXXXXX Transactions described in the Original Ruling have been carried out as of the date hereof.

2. Newco is and will be, at any relevant time and for all purposes of the Act, a taxable Canadian corporation and a CCPC. Newco is a holding company. Newco's most significant asset is an interest in Subco I.

3. The shareholding of Newco is currently as follows:

Shareholder
Class of shares
Number of shares
ACB
PUC
Parent I
Newco Voting Shares
XXXXXX
XXXXX
XXXXX
XXXXX Trust
Newco Participating Shares
XXXXXX
XXXXX
XXXXX

The Newco Voting Shares are voting non-participating shares with no dividend entitlement. The Newco Participating Shares are non-voting participating shares with a dividend entitlement. The Newco Participating Shares do not constitute Short-Term Preferred Shares or Taxable Preferred Shares.

Parent I has had de jure control of Newco since its incorporation.

4. During its XXXXXXXXXX taxation year, Newco received Taxable Dividends totalling $XXXXXXXXXX from Subco I which were designated pursuant to subsection 89(14) to be Eligible Dividends.

Newco's RDTOH and GRIP as at XXXXXXXXXX amounts to $XXXXXXXXXX and $XXXXXXXXXX , respectively.

5. The shareholding of Subco I is currently as follows:

Shareholder
Class of shares
Number of shares
ACB
PUC
Newco
Class B common shares, voting
XXXXXXX
XXXXXX
XXXXXX
Newco
Class D common shares, voting
XXXXXXX
XXXXXX
XXXXXX
Subco IV
Class C common shares, voting
XXXXXXX
XXXXXX
XXXXXX
Subco IV
Class D common shares, voting
XXXXXXX
XXXXXX
XXXXXX
Subco IV
Class E common shares, non-voting
XXXXXXX
XXXXXX
XXXXXX
Subco IV
Class B series One preferred, non-voting
XXXXXXX
XXXXXX
XXXXXX
Subco IV
Class B series Three preferred, non-voting
XXXXXXX
XXXXXX
XXXXXX
Non-resident individuals
Class C common shares, voting
XXXXXXX
XXXXXX
XXXXXX
Other
Class D common shares, voting
XXXXXXX
XXXXXX
XXXXXX
Senior Management
Class B series One preferred shares, non-voting
XXXXXXX
XXXXXX
XXXXXX
Senior Management
Class E common shares, non-voting
XXXXXXX
XXXXXX
XXXXXX
Eligible Charity I
Class A preferred, non-voting
XXXXXXX
XXXXXX
XXXXXX

The shares of the capital stock of Subco I held by Newco were acquired from Holdco on XXXXXXXXXX . Before that time, these shares were continuously held by Holdco from the date the XXXXXXXXXX Trust acquired the Holdco Old Common Shares (i.e., on XXXXXXXXXX ) to XXXXXXXXXX .

Subco I is and will be, at any relevant time and for all purposes of the Act, a taxable Canadian corporation and a CCPC. Newco has de jure control of Subco I since it acquired the XXXXXXXXXX Class B and XXXXXXXXXX Class D common shares of the capital stock of Subco I as part of the XXXXXXXXXX Transactions.

6. The safe income on hand generated prior to the XXXXXXXXXX Transactions and that is currently attributable to the shares of the capital stock of Subco I held by Newco amounts to at least $XXXXXXXXXX . Therefore, the safe income on hand generated prior to the XXXXXXXXXX Transactions and that is currently attributable to the shares of the capital stock of Subco I held by Newco, which is also currently reflected in the safe income on hand attributable to the Newco Participating Shares held by the XXXXXXXXXX Trust, is significantly in excess of the amount of the Newco Eligible Dividend.

7. The sole permanent establishment of each of Childco I and Childco II is in the province of XXXXXXXXXX . Therefore, 100% of the XXXXXXXXXX taxable income of each of Childco I and Childco II will be deemed by virtue of subsection 402(1) of the Income Tax Regulations to have been earned in the province of XXXXXXXXXX .

PROPOSED TRANSACTIONS

8. Pursuant to subparagraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed, the Trustees will add Childco I and Childco II as beneficiaries of the XXXXXXXXXX Trust.

9. Before XXXXXXXXXX , Newco will pay a taxable dividend in cash of up to $XXXXXXXXXX (the "Newco Eligible Dividend") to the XXXXXXXXXX Trust, which will be designated pursuant to subsection 89(14) to be an Eligible Dividend.

10. Pursuant to paragraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed, the Trustees will pay the Newco Eligible Dividend received from Newco equally to each of Childco I and Childco II in XXXXXXXXXX .

The XXXXXXXXXX Trust will deduct pursuant to subsection 104(6) the amount of the Newco Eligible Dividend paid to Childco I and Childco II in computing its income for its taxation year ending XXXXXXXXXX .

11. The XXXXXXXXXX Trust will make a designation under subsection 104(19) in respect of the amount of the Newco Eligible Dividend paid to Childco I and Childco II such that the said amount will be deemed not to have been received by the XXXXXXXXXX Trust but to have been received by Childco I and Childco II from Newco (the "Newco Deemed Eligible Dividend I" and the "Newco Deemed Eligible Dividend II" as the case may be).

12. Each of Childco I and Childco II will include the amount of the Newco Deemed Eligible Dividend I or Newco Deemed Eligible Dividend II, as the case may be, in computing its income and will deduct a corresponding amount pursuant to subsection 112(1) in computing its taxable income.

The amount of the Newco Deemed Eligible Dividend I will be included in Childco I's GRIP. The amount of the Newco Deemed Eligible Dividend II will be included in Childco II's GRIP.

Newco will be connected to ChildcoI and Childco II by virtue of subsection 186(2) and paragraph 186(4)(a). Each of Childco I and Childco II will be subject to Part IV tax in respect of the Newco Deemed Eligible Dividend I or Newco Deemed Eligible Dividend II received, as the case may be, as determined under paragraph 186(1)(b).

ADDITIONAL INFORMATION

13. As part of the Original Ruling, the Trustees of the XXXXXXXXXX Trust gave undertakings (as described in paragraphs 28 and 29 of the Original Ruling (the "Trustees Undertakings")), with respect to the addition of beneficiaries to the XXXXXXXXXX Trust. The Trustees Undertaking will be modified in order to permit the addition of Childco I and Childco II as beneficiaries of the XXXXXXXXXX Trust, as described in Paragraph 8. Except for these additions of Childco I and Childco II as beneficiaries of the XXXXXXXXXX Trust, the Trustees of the XXXXXXXXXX Trust hereby reaffirm the Trustees Undertakings as of the date hereof.

14. Neither the XXXXXXXXXX Trust nor any other person has the intention to sell, or to cause the selling of the shares of the capital stock of Newco.

15. Neither Child I nor Child II has the intention to sell, or to cause the selling of the shares of the capital stock of Childco I or Childco II, as the case may be. Furthermore, there is no intention of issuing in the future additional shares of the capital stock of Childco I to any person other than Child I. Similarly, there is no intention of issuing in the future additional shares of the capital stock of Childco II to any person other than Child II.

16. None of the Listed Persons are considered beneficiaries of the XXXXXXXXXX Trust or XXXXXXXXXX Trust at law until such time as the Trustees have exercised the power of appointment granted in subparagraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed or XXXXXXXXXX Trust Deed.

None of the Listed Persons is a person described in paragraph 248(25)(a).

Each of the XXXXXXXXXX Trust and the XXXXXXXXXX Trust has never acquired property, directly or indirectly in any manner whatever, from any of the Listed Persons or a person with whom any of the Listed Persons does not deal at arm's length. Each of Newco and Holdco is dealing at arm's length with any of the Listed Persons. None of the Listed Persons (or a person with whom any of the Listed Persons does not deal at arm's length) has ever given a guarantee on behalf of the XXXXXXXXXX Trust or the XXXXXXXXXX Trust or provided any other financial assistance whatever to the XXXXXXXXXX Trust or the XXXXXXXXXX Trust. Consequently, none of the Listed Persons is a person described in subparagraph 248(25)(b)(iii).

17. The federal business number of the parties referred to herein, the location of the tax services office and taxation centre where their returns are filed, and the address of their head office are as follows:

      XXXXXXXXXX
      -  Business Number: 		XXXXXXXXXX
      -  Tax Services Office:  	XXXXXXXXXX
      -  Taxation Centre:  		XXXXXXXXXX
-  Address:	XXXXXXXXXX 

      XXXXXXXXXX
      -  Business Number: 		XXXXXXXXXX
      -  Tax Services Office:  	XXXXXXXXXX
      -  Taxation Centre:  		XXXXXXXXXX
-  Address:	XXXXXXXXXX 

      XXXXXXXXXX
      -  Business Number: 		XXXXXXXXXX
      -  Tax Services Office:  	XXXXXXXXXX
      -  Taxation Centre:  		XXXXXXXXXX
-  Address:	XXXXXXXXXX

      XXXXXXXXXX
      -  Business Number: 		XXXXXXXXXX
      -  Tax Services Office:  	XXXXXXXXXX
      -  Taxation Centre:  		XXXXXXXXXX
-  Address:	XXXXXXXXXX 

      XXXXXXXXXX
      -  Business Number: 		XXXXXXXXXX
      -  Tax Services Office:  	XXXXXXXXXX
      -  Taxation Centre:  		XXXXXXXXXX
-  Address:	XXXXXXXXXX 

      XXXXXXXXXX
      -  Business Number: 		XXXXXXXXXX
      -  Tax Services Office:  	XXXXXXXXXX
      -  Taxation Centre:  		XXXXXXXXXX
-  Address:	XXXXXXXXXX 

      XXXXXXXXXX
      -  Business Number: 		XXXXXXXXXX
      -  Tax Services Office:  	XXXXXXXXXX
      -  Taxation Centre:  		XXXXXXXXXX
-  Address:	XXXXXXXXXX 

XXXXXXXXXX  Trust
      -  Business Number: 		XXXXXXXXXX
      -  Tax Services Office:  	XXXXXXXXXX
      -  Taxation Centre:  		XXXXXXXXXX
-  Address:	XXXXXXXXXX 

      XXXXXXXXXX
      -  Business Number: 		XXXXXXXXXX
      -  Tax Services Office:  	XXXXXXXXXX
      -  Taxation Centre:  		XXXXXXXXXX
-  Address:	XXXXXXXXXX 

PURPOSE OF THE PROPOSED TRANSACTIONS

18. The sole purpose of the Proposed Transactions is to allow Child I and Child II to have independence and control in respect to some of the funds to be received by the XXXXXXXXXX Trust.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant Facts, Proposed Transactions, Additional Information and the Purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. Subject to the conditions, limitations, qualifications and comments set out in the Original Ruling and this letter, the Proposed Transactions will not affect the rulings given in the Original Ruling.

B. Subsection 55(2) will not apply to deem the Newco Deemed Eligible Dividend I to be a gain of Childco I from the disposition of capital property, provided that the amount of such dividend does not exceed the amount of safe income on hand that is attributable to the Newco Participating Shares held by the XXXXXXXXXX Trust before the safe-income determination time for the series of transactions that includes the Newco Deemed Eligible Dividend I.

C. Subsection 55(2) will not apply to deem the Newco Deemed Eligible Dividend II to be a gain of Childco II from the disposition of capital property, provided that the amount of such dividend does not exceed the amount of safe income on hand that is attributable to the Newco Participating Shares held by the XXXXXXXXXX Trust before the safe-income determination time for the series of transactions that includes the Newco Deemed Eligible Dividend II.

D. The XXXXXXXXXX Trust Beneficiaries will not be considered to have received any proceeds of disposition for the purposes of the Act as a result of the Trustees adding Childco I and Childco II as beneficiaries the XXXXXXXXXX Trust.

E. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

F. The provisions of subsection 245(2) will not be applied as a result of the Facts or 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 forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX .

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

COMMENTS

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

(a) the determination of the FMV or ACB of any property referred to herein, the PUC in respect of any share referred to herein, or the outstanding balance of various tax accounts such as GRIP and RDTOH for any of the corporate entities described herein;
(b) any provincial tax consequences of the proposed transactions; or
(c) any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically confirmed in the rulings given above.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch