2017 Ruling 2016-0675881R3 - Paragraph 55(3)(a) Internal Reorganization

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: Did the proposed internal reorganization qualify for the exemption in paragraph 55(3)(a) from the application of subsection 55(2)?

Position: Yes.

Reasons: Meets the statutory requirements and our prior positions and rulings on paragraph 55(3)(a) reorganizations.

XXXXXXXXXX						2016-067588

XXXXXXXXXX, 2017

Dear XXXXXXXXXX

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in subsequent letters, e-mails and telephone discussions (XXXXXXXXXX). The information that you provided in such correspondence and in the telephone discussions form part of this letter only to the extent described herein.

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 person related to the taxpayers;

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

(iii) under objection by the taxpayers or a person related to the taxpayers;

(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.

Unless otherwise expressly stated, every reference herein to the “Act” or to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter, and the Income Tax Regulations thereunder are referred to as the “Regulations.”

Unless otherwise noted, all references herein to a currency are references to Canadian dollars.

I. DEFINITIONS

1. In this letter, the following terms have the meanings specified and, where the circumstances so require, the singular should be read as plural and vice versa:

(a) “XXXXXXXXXX Amalgamation” means the amalgamation between Predecessor 1 and Predecessor 2 on XXXXXXXXXX to form Canco;

(b) “ACB” means adjusted cost base, as defined in section 54;

(c) “agreed amount” means the amount agreed on by the transferor and transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1);

(d) “BCA” means the XXXXXXXXXX;

(e) “Building 1” means the residential apartment building located at XXXXXXXXXX, in the City of XXXXXXXXXX, and all equipment and furniture related thereto or situated thereon;

(f) “Building 2” means the residential apartment building located at XXXXXXXXXX, in the City of XXXXXXXXXX, and all equipment and furniture related thereto or situated thereon;

(g) “Building 3” means the residential apartment building located at XXXXXXXXXX, in the City of XXXXXXXXXX, and all equipment and furniture related thereto or situated thereon;

(h) “Building 4” means the residential apartment building located at XXXXXXXXXX, in the City of XXXXXXXXXX, and all equipment and furniture related thereto or situated thereon;

(i) “Canco” means XXXXXXXXXX;

(j) “Canco 1 Note” means the promissory note to be issued to Newco 1 by Canco, as more particularly described in Paragraph 30;

(k) “Canco 2 Note” means the promissory note to be issued to Newco 2 by Canco, as more particularly described in Paragraph 30;

(l) “Canco Ordinary Shares” means the issued and outstanding common shares, Class A preferred shares and Class B preferred shares in the capital of Canco;

(m) “Canco Super-Voting Shares” means the super-voting shares in the capital of Canco, as described in Paragraph 20;

(n) “capital property” has the meaning assigned by section 54;

(o) “CCPC” means Canadian-controlled private corporation, which has the meaning assigned by subsection 125(7);

(p) “CDA” or “capital dividend account” has the meaning assigned by subsection 89(1);

(q) “Child 1” means XXXXXXXXXX, the son of Mr. A and Mrs. A as well as the brother of Child 2, and a resident of Canada for purposes of the Act;

(r) “Child 2” means XXXXXXXXXX, the daughter of Mr. A and Mrs. A as well as the sister of Child 1, and a resident of Canada for purposes of the Act;

(s) “CRA” means the Canada Revenue Agency;

(t) “eligible property” has the meaning assigned by subsection 85(1.1);

(u) “Equalization Amount” means the amount of $XXXXXXXXXX, the purpose of which is to equalize the net value of the assets received by each of Newco 1 and Newco 2 from Canco (the Equalization Amount will effectively compensate Newco 2 for the excess value received by Newco 1);

(v) “FMV” means fair market value, being the highest price expressed in terms of money or money’s worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm’s length, neither party being under any compulsion to transact;

(w) “Holdco 1” means XXXXXXXXXX;

(x) “Holdco 2” means XXXXXXXXXX;

(y) “Holdco 3” means XXXXXXXXXX;

(z) “Investment Portfolio” means the cash and other cash equivalent assets held by Canco, which consist of receivables, prepayments and investment accounts at XXXXXXXXXX and XXXXXXXXXX (such accounts hold cash, short-term deposits and marketable securities);

(aa) “Joint Venture” means the joint venture that carries on a rental real estate business the assets of which are held by XXXXXXXXXX, as nominee and bare trustee for the joint venturers, which include Canco with a XXXXXXXXXX% ownership interest therein; the primary asset held by the Joint Venture is a rental building located in the City of XXXXXXXXXX (the building has XXXXXXXXXX municipal addresses: XXXXXXXXXX for the commercial portion of the building and XXXXXXXXXX for the residential portion), and all equipment and furniture related thereto or situated thereon;

(bb) “Mr. A” means XXXXXXXXXX, who is the spouse of Mrs. A and a resident of Canada for purposes of the Act;

(cc) “Mrs. A” means XXXXXXXXXX, who is the spouse of Mr. A and a resident of Canada for purposes of the Act;

(dd) “Newco 1” means a new corporation to be incorporated and governed by the laws of the Province of XXXXXXXXXX, as described in Paragraph 18;

(ee) “Newco 1 Class A Preferred Shares” means the Class A preferred shares in the capital of Newco 1, as described in Paragraph 18;

(ff) “Newco 1 Class B Preferred Shares” means the Class B preferred shares in the capital of Newco 1, as described in Paragraph 18;

(gg) “Newco 1 Common Shares” means the common shares in the capital of Newco 1, as described in Paragraph 18;

(hh) “Newco 1 Note” means the promissory note to be issued to Canco by Newco 1, as more particularly described in Paragraph 28;

(ii) “Newco 1 Super-Voting Shares” means the super-voting shares in the capital of Newco 1, as described in Paragraph 18;

(jj) “Newco 2” means a new corporation to be incorporated and governed by the laws of the Province of XXXXXXXXXX, as described in Paragraph 19;

(kk) “Newco 2 Class A Preferred Shares” means the Class A preferred shares in the capital of Newco 2, as described in Paragraph 19;

(ll) “Newco 2 Class B Preferred Shares” means the Class B preferred shares in the capital of Newco 2, as described in Paragraph 19;

(mm) “Newco 2 Common Shares” means the common shares in the capital of Newco 1, as described in Paragraph 19;

(nn) “Newco 2 Note” means the promissory note to be issued to Canco by Newco 2, as more particularly described in Paragraph 29;

(oo) “Newco 2 Super-Voting Shares” means the super-voting shares in the capital of Newco 2, as described in Paragraph 19;

(pp) “Paragraph” means a numbered paragraph in this letter;

(qq) “Parcel One” means a notional parcel of properties owned by Canco, consisting of two buildings, being Building 2 and Building 4, as well as a XXXXXXXXXX% interest in the Joint Venture and XXXXXXXXXX% of the assets held in the Investment Portfolio, less the Equalization Amount, for an aggregate FMV of $XXXXXXXXXX (excluding liabilities);

(rr) “Parcel Two” means a second notional parcel of properties owned by Canco, consisting of two buildings, being Building 1 and Building 3, as well as a XXXXXXXXXX% interest in the Joint Venture and XXXXXXXXXX% of the assets held in the Investment Portfolio, plus the Equalization Amount, for an aggregate FMV of $XXXXXXXXXX (excluding liabilities);

(ss) “Predecessor 1” means XXXXXXXXXX;

(tt) “Predecessor 2” means XXXXXXXXXX;

(uu) “Predecessor 3” means XXXXXXXXXX;

(vv) “Predecessor 4” means XXXXXXXXXX;

(ww) “principal amount” has the meaning assigned by subsection 248(1);

(xx) “proceeds of disposition” has the meaning assigned by section 54;

(yy) “Proposed Transactions” means the transactions described in Paragraphs 18 to 31;

(zz) “PUC” or “paid-up capital” has the meaning assigned by subsection 89(1);

(aaa) “related persons” means, in relation to a particular person, another person who is related to the particular person by virtue of subsection 251(2), as modified for the purposes of section 55 by paragraph 55(5)(e);

(bbb) “restricted financial institution” has the meaning assigned by subsection 248(1);

(ccc) “RDTOH” means refundable dividend tax on hand, within the meaning of subsection 129(3);

(ddd) “series of transactions or events” includes the transactions or events referred to in subsection 248(10);

(eee) “specified financial institution” has the meaning assigned by subsection 248(1);

(fff) “stated capital” in respect of the share capital of a corporation, has the meaning assigned by the statute by which the corporation is governed;

(ggg) “taxable Canadian corporation” has the meaning assigned by subsection 89(1);

(hhh) “taxable dividend” has the meaning assigned by subsection 89(1); and

(iii) “taxation year” has the meaning assigned by subsection 249(1).

II. FACTS

2. Canco is a taxable Canadian corporation and a CCPC. It was formed under the BCA on XXXXXXXXXX by the amalgamation of Predecessor 1 and Predecessor 2. Canco’s taxation year-end is XXXXXXXXXX and its business number is XXXXXXXXXX. Canco is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre.

3. All of the issued and outstanding shares in the capital of Canco are held by Holdco 1, Holdco 2 and Holdco 3 as follows:

Shareholder		Number of shares	Redemption amount		Voting %

			XXXXX Class A	$XXXXX per share		XXXXX%
Holdco 1		preferred		(redemption amount)	(one vote per
			XXXXX Class B	$XXXXX per share		share)
			preferred		(redemption amount)

Holdco 2		XXXXX common	-				XXXXX%
										(one vote per
										share)

Holdco 3		XXXXX common	-				XXXXX%
										(one vote per
										share)

4. Canco carries on the business of holding and managing rental real estate.

5. Canco’s main asset consists of four apartment rental buildings, being Building 1, Building 2, Building 3 and Building 4. Each building is held by Canco as capital property.

6. Canco also owns, inter alia, the Investment Portfolio and a XXXXXXXXXX% interest in the Joint Venture. Each asset comprised in the Investment Portfolio and the interest in the Joint Venture are held by Canco as capital property.

7. As at XXXXXXXXXX, the FMV of each asset held by Canco (excluding any indebtedness attaching to or secured on such asset) was estimated to be as follows:

	Building 1					$XXXXXXXXXX
	Building 2					$XXXXXXXXXX
	Building 3					$XXXXXXXXXX
	Building 4					$XXXXXXXXXX
	XXXXX% interest in Joint Venture	$XXXXXXXXXX
	Investment Portfolio			$XXXXXXXXXX

8. As at XXXXXXXXXX, the mortgages secured on each of the real estate properties and the current liabilities of Canco (such as accounts payable, accrued liabilities and tenant deposits) were as follows:

	Building 1					$XXXXXXXXXX
	Building 2					$XXXXXXXXXX
	Building 3					$XXXXXXXXXX
	Building 4					$XXXXXXXXXX
	XXXXX% interest in Joint Venture	$XXXXXXXXXX
	Current liabilities			$XXXXXXXXXX

9. Thus, the net FMV of the assets owned by Canco as at XXXXXXXXXX was estimated to be as follows:

	Building 1					$XXXXXXXXXX
	Building 2					$XXXXXXXXXX
	Building 3					$XXXXXXXXXX
	Building 4					$XXXXXXXXXX
	XXXXX% interest in Joint Venture	$XXXXXXXXXX
	Investment Portfolio			$XXXXXXXXXX

10. There is an outstanding shareholder loan owing by Canco to Holdco 1. As at XXXXXXXXXX, the amount of the loan was $XXXXXXXXXX.

11. Holdco 1 is a taxable Canadian corporation and a CCPC. It was formed under the BCA on XXXXXXXXXX by the amalgamation of Predecessor 3 and Predecessor 4. Holdco 1’s taxation year-end is XXXXXXXXXX and its business number is XXXXXXXXXX. Holdco 1 is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre. Predecessor 3 was controlled at all relevant times by Mrs. A. Predecessor 4 was controlled at all relevant times by Mr. A.

12. The current shareholders of Holdco 1 are Mr. A and Mrs. A, who hold the following number of shares:

Shareholder		Number of shares	Redemption amount		Voting %

			XXXXX common					XXXXX%
Mr. A			XXXXX Class A	$XXXXX per share		(one vote
			preferred		(redemption amount)	 per share)

			XXXXX common					XXXXX%
Mrs. A		XXXXX Class B	$XXXXX per share		(one vote
			preferred		(redemption amount)	 per share)

13. Holdco 2 is a taxable Canadian corporation and a CCPC. It was incorporated under the BCA on XXXXXXXXXX. Holdco 2’s taxation year-end is XXXXXXXXXX and its business number is XXXXXXXXXX. Holdco 2 is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre.

14. All of the issued and outstanding shares of Holdco 2 are owned by Child 1.

15. Holdco 3 is a taxable Canadian corporation and a CCPC. It was incorporated under the BCA on XXXXXXXXXX. Holdco 3’s taxation year-end is XXXXXXXXXX and its business number is XXXXXXXXXX. Holdco 3 is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre.

16. All of the issued and outstanding shares of Holdco 3 are owned by Child 2.

17. Canco does not have a material balance of CDA or RDTOH.

III. PROPOSED TRANSACTIONS

18. Incorporation of Newco 1: Holdco 1 will incorporate Newco 1 under the BCA. Newco 1 will be a taxable Canadian corporation and a CCPC. The authorized share capital of Newco 1 will consist of XXXXXXXXXX super-voting shares (“Newco 1 Super-Voting Shares”), an unlimited number of common shares having one vote per share (“Newco 1 Common Shares”), an unlimited number of non-voting, redeemable and retractable Class A preferred shares (“Newco 1 Class A Preferred Shares”) and an unlimited number of non-voting, redeemable and retractable Class B preferred shares (“Newco 1 Class B Preferred Shares”).

Immediately following the incorporation of Newco 1, Holdco 1 will subscribe for XXXXXXXXXX Newco 1 Super-Voting Shares for $XXXXXXXXXX in aggregate or $XXXXXXXXXX per share. The Newco 1 Super-Voting Shares will have the following attributes:

(a) Each share will confer on the holder thereof the right to XXXXXXXXXX votes at meetings of shareholders of Newco 1 except as may otherwise be provided under the BCA.

(b) Each share will be redeemable, subject to applicable law, at any time at the option of Newco 1 at a redemption amount equal to the stated capital of the share.

(c) Each share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the stated capital of the share.

(d) The holder of each share will not be entitled to receive any dividends.

(e) The holder of each share will not be entitled to receive any amount upon the liquidation, dissolution or winding-up of Newco 1, except for the stated capital of the share.

After the share subscription, and at all relevant times thereafter, Holdco 1 will own all of the issued and outstanding Newco 1 Super-Voting Shares.

19. Incorporation of Newco 2: Holdco 1 will incorporate Newco 2 under the BCA. Newco 2 will be a taxable Canadian corporation and a CCPC. The authorized share capital of Newco 2 will consist of XXXXXXXXXX super-voting shares (“Newco 2 Super-Voting Shares”), an unlimited number of common shares having one vote per share (“Newco 2 Common Shares”), an unlimited number of non-voting, redeemable and retractable Class A preferred shares (“Newco 2 Class A Preferred Shares”) and an unlimited number of non-voting, redeemable and retractable Class B preferred shares (“Newco 2 Class B Preferred Shares”).

Immediately following the incorporation of Newco 2, Holdco 1 will subscribe for XXXXXXXXXX Newco 2 Super-Voting Shares for $XXXXXXXXXX in aggregate or $XXXXXXXXXX per share. The Newco 2 Super-Voting Shares will have the following attributes:

(a) Each share will confer on the holder thereof the right to XXXXXXXXXX votes at meetings of shareholders of Newco 2 except as may otherwise be provided under the BCA.

(b) Each share will be redeemable, subject to applicable law, at any time at the option of Newco 2 at a redemption amount equal to the stated capital of the share.

(c) Each share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the stated capital of the share.

(d) The holder of each share will not be entitled to receive any dividends.

(e) The holder of each share will not be entitled to receive any amount upon the liquidation, dissolution or winding-up of Newco 2, except for the stated capital of the share.

After the share subscription, and at all relevant times thereafter, Holdco 1 will own all of the issued and outstanding Newco 2 Super-Voting Shares.

20. Amendment to Canco’s Articles of Amalgamation: The articles of Canco will be amended to create and authorize the issuance of XXXXXXXXXX super-voting shares (the “Canco Super-Voting Shares”). The Canco Super-Voting Shares will have the following attributes:

(a) Each share will confer on the holder thereof the right to XXXXXXXXXX votes at meetings of shareholders of Canco except as may otherwise be provided under the BCA.

(b) Each share will be redeemable, subject to applicable law, at any time at the option of Canco at a redemption amount equal to the stated capital of the share.

(c) Each share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the stated capital of the share.

(d) The holder of each share will not be entitled to receive any dividends.

(e) The holder of each share will not be entitled to receive any amount upon the liquidation, dissolution or winding-up of Canco, except for the stated capital of the share.

21. Share Subscription in Canco: Holdco 1 will subscribe for XXXXXXXXXX Canco Super-Voting Shares for $XXXXXXXXXX in aggregate or $XXXXXXXXXX per share. After the share subscription, and at all relevant times thereafter, Holdco 1 will own all of the issued and outstanding Canco Super-Voting Shares.

22. Transfer of XXXXXXXXXX% of Canco preferred shares to Newco 1: Holdco 1 will transfer XXXXXXXXXX% of each class of its Canco preferred shares to Newco 1, being XXXXXXXXXX Class A preferred shares and XXXXXXXXXX Class B preferred shares. As consideration for the transfer, Newco 1 will issue XXXXXXXXXX Newco 1 Class A Preferred Shares to Holdco 1 which will be redeemable and retractable for an aggregate redemption amount equal to the aggregate FMV of the Canco preferred shares transferred, being $XXXXXXXXXX.

Holdco 1 and Newco 1 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 of XXXXXXXXXX% of the Canco preferred shares to Newco 1. The agreed amount in respect of the transfer will be equal to the ACB of the Canco preferred shares transferred, being $XXXXXXXXXX for the Class A preferred shares and $XXXXXXXXXX for the Class B preferred shares.

The amount added to the stated capital of the Newco 1 Class A Preferred Shares issued to Canco will be equal to the aggregate agreed amount, which is the maximum amount permitted to be added to the PUC of the shares having regard to subsection 85(2.1).

23. Transfer of XXXXXXXXXX% of Canco preferred shares to Newco 2: Holdco 1 will transfer the remaining XXXXXXXXXX% of each class of its Canco preferred shares to Newco 2, being XXXXXXXXXX Class A preferred shares and XXXXXXXXXX Class B preferred shares. As consideration for the transfer, Newco 2 will issue XXXXXXXXXX Newco 2 Class A Preferred Shares to Holdco 1 which will be redeemable and retractable for an aggregate redemption amount equal to the aggregate FMV of the Canco preferred shares transferred, being $XXXXXXXXXX.

Holdco 1 and Newco 2 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 of XXXXXXXXXX% of the Canco preferred shares to Newco 2. The agreed amount in respect of the transfer will be equal to the ACB of the Canco preferred shares transferred, being $XXXXXXXXXX for the Class A preferred shares and $XXXXXXXXXX for the Class B preferred shares.

The amount added to the stated capital of the Newco 2 Class A Preferred Shares issued to Canco will be equal to the aggregate agreed amounts, which is the maximum amount permitted to be added to the PUC of the shares having regard to subsection 85(2.1).

24. Transfer of Canco common shares by Holdco 2 to Newco 1: Holdco 2 will transfer all of its Canco common shares to Newco 1 in exchange for the issuance of XXXXXXXXXX Newco 1 Common Shares.

Holdco 2 and Newco 1 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 of the Canco common shares to Newco 1. The agreed amount in respect of the transfer will be equal to the ACB of the Canco common shares transferred, being $XXXXXXXXXX.

The amount added to the stated capital of the Newco 1 Common Shares issued to Holdco 2 will be equal to the agreed amount, which is the maximum amount permitted to be added to the PUC of the shares having regard to subsection 85(2.1).

25. Transfer of Canco common shares by Holdco 3 to Newco 2: Holdco 3 will transfer all of its Canco common shares to Newco 2 in exchange for the issuance of XXXXXXXXXX Newco 2 Common Shares.

Holdco 3 and Newco 2 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 of the Canco common shares to Newco 2. The agreed amount in respect of the transfer will be equal to the ACB of the Canco common shares transferred, being $XXXXXXXXXX.

The amount added to the stated capital of the Newco 2 Common Shares issued to Holdco 3 will be equal to the agreed amount, which is the maximum amount permitted to be added to the PUC of the shares having regard to subsection 85(2.1).

26. Transfer of Parcel One to Newco 1: Canco will transfer the assets included in Parcel One to Newco 1. As consideration for the transfer, Newco 1 will assume XXXXXXXXXX% of the liabilities owing by Canco (which will include the mortgages on the real estate properties comprising Parcel One) and will issue XXXXXXXXXX Newco 1 Class B Preferred Shares to Canco which will be redeemable and retractable for an aggregate redemption amount equal to the net FMV of the assets received, being $XXXXXXXXXX.

Canco and Newco 1 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 of the properties comprising Parcel One to Newco 1. The agreed amount in respect of each property transferred will not:

(a) in the case of depreciable property of a prescribed class, be less than the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii);

(b) in the case of property described in paragraph 85(1)(c.1), be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii); and

(c) in the case of eligible capital property, be less than the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii).

In each case, the agreed amounts in respect of a property transferred will not exceed the FMV of the property, nor will it be less than the amount permitted under paragraph 85(1)(b).

The amount added to the stated capital of the Newco 1 Class B Preferred Shares issued to Canco will be equal to the sum of the agreed amounts in respect of each property transferred, less the aggregate amount of the liabilities assumed by Newco 1, which is the maximum amount permitted to be added to the PUC of the shares having regard to subsection 85(2.1).

27. Transfer of Parcel Two to Newco 2: Canco will transfer the assets included in Parcel Two to Newco 2. As consideration for the transfer, Newco 2 will assume XXXXXXXXXX% of the liabilities owing by Canco (which will include the mortgages on the real estate properties comprising Parcel Two) and will issue XXXXXXXXXX Newco 2 Class B Preferred Shares to Canco which will be redeemable and retractable for an aggregate redemption amount equal to the net FMV of the assets received, being $XXXXXXXXXX.

Canco and Newco 2 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 of the properties comprising Parcel Two to Newco 2. The agreed amount in respect of each property transferred will not:

(a) in the case of depreciable property of a prescribed class, be less than the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii);

(b) in the case of property described in paragraph 85(1)(c.1), be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii); and

(c) in the case of eligible capital property, be less than the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii).

In each case, the agreed amount in respect of a property transferred will not exceed the FMV of the property, nor will it be less than the amount permitted under paragraph 85(1)(b).

The amount added to the stated capital of the Newco 2 Class B Preferred Shares issued to Canco will be equal to the sum of the agreed amounts in respect of each property transferred, less the aggregate amount of the liabilities assumed by Newco 2, which is the maximum amount permitted to be added to the PUC of the shares having regard to subsection 85(2.1).

28. Redemption of Newco 1 Class B Preferred Shares: Newco 1 will redeem all of the Newco 1 Class B Preferred Shares held by Canco in consideration for an amount equal to the aggregate redemption amount of the Newco 1 Class B Preferred Shares, being $XXXXXXXXXX. In full payment of the redemption amount, Newco 1 will issue to Canco the Newco 1 Note, which will be a demand, non-interest bearing, Canadian dollar denominated promissory note having a principal amount and FMV equal to the aggregate redemption amount of the Newco 1 Class B Preferred Shares.

29. Redemption of Newco 2 Class B Preferred Shares: Newco 2 will redeem all of the Newco 2 Class B Preferred Shares held by Canco in consideration for an amount equal to the aggregate redemption amount of the Newco 2 Class B Preferred Shares, being $XXXXXXXXXX. In full payment of the redemption amount, Newco 2 will issue to Canco the Newco 2 Note, which will be a demand, non-interest bearing, Canadian dollar denominated promissory note having a principal amount and FMV equal to the aggregate redemption amount of the Newco 2 Class B Preferred Shares.

30. Redemption or repurchase of Canco Ordinary Shares: Canco will redeem or purchase for cancellation (as the case may be) all of the Canco Ordinary Shares held by Newco 1 and Newco 2, being a total of XXXXXXXXXX common shares, XXXXXXXXXX Class A preferred shares and XXXXXXXXXX Class B preferred shares, in consideration for an amount equal to the sum of:

(a) the aggregate redemption amount of the Canco preferred shares, being $XXXXXXXXXX in aggregate (or $XXXXXXXXXX to be paid to each of Newco 1 and Newco 2); and

(b) the FMV of the Canco common shares, being $XXXXXXXXXX in aggregate (or $XXXXXXXXXX to be paid to each of Newco 1 and Newco 2)

In full payment of the redemption amount or purchase price (as the case may be) for the Canco Ordinary Shares, Canco will issue the Canco 1 Note to Newco 1 and the Canco 2 Note to Newco 2. Each note will be a demand, non-interest bearing, Canadian dollar denominated promissory note having a principal amount and FMV equal to the sum of the aggregate redemption amount of the Canco preferred shares redeemed and the FMV of the Canco common shares repurchased, being a total of $XXXXXXXXXX for each of Newco 1 and Newco 2.

31. Set off of promissory notes: The Newco 1 Note and the Canco 1 Note will be set off against each other and then cancelled in full payment of their respective principal amounts. Similarly, the Newco 2 Note and the Canco 2 Note will be set off against each other and then cancelled in full payment of their respective principal amounts.

32. [Reserved].

IV. ADDITIONAL INFORMATION

33. The Proposed Transactions described herein will occur in the order presented unless otherwise indicated, with the exception of the filing of the applicable election forms described in Paragraphs 22, 23, 24, 25, 26, and 27, which will be filed by the applicable due date following completion of the Proposed Transactions.

34. The incorporation of, and initial share subscription in, Newco 1 described in Paragraph 18 will occur simultaneously with the incorporation of, and initial share subscription in, Newco 2 described in Paragraph 19.

35. The redemptions and purchases for cancellation described in Paragraphs 28, 29 and 30 will occur simultaneously.

36. None of the Newco 1 Class B Preferred Shares, Newco 2 Class B Preferred Shares and Canco Ordinary Shares will be at any time during a series of events or transactions that includes the Proposed Transactions:

(a) the subject of any undertaking or agreement that is a “guarantee agreement”, within the meaning referred to in subsection 112(2.2);

(b) the subject of a “dividend rental arrangement” referred to in subsection 112(2.3), as that term is defined in subsection 248(1);

(c) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a);

(d) issued for consideration that is or includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

(ii) any right of the type described in subparagraph 112(2.4)(b)(ii); or

(e) issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

37. None of Newco 1, Newco 2 and Canco will be, at any time during a series of transactions that includes the Proposed Transactions, a “restricted financial institution”, a “specified financial institution”, or a corporation described in any of paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1).

38. As part of the series of transactions or events that includes any of the Proposed Transactions, there will not be:

(a) a disposition of property described in subparagraphs 55(3)(a)(i), (iii) or (iv); or

(b) a significant increase described in subparagraphs 55(3)(a)(ii) or (v).

39. References to a transfer of property described in the Proposed Transactions are references to a transfer of beneficial ownership. It is intended that legal title to the properties that will be beneficially owned by Newco 1 and Newco 2 will continue to be held by Canco as nominee and bare trustee for Newco 1 and Newco 2.

40. Predecessor 1, Predecessor 2, Predecessor 3, Predecessor 4, Mr. A, Mrs. A, Holdco 3 and Child 1 were related to each other for purposes of section 55 immediately before the XXXXXXXXXX Amalgamation.

41. The reason that Holdco 1 will acquire super-voting shares and redeemable, preferred shares of Newco 1 and Newco 2 as part of the Proposed Transactions is to preserve Holdco 1’s economic interest in the underlying assets as it was before the Proposed Transactions.

42. Mrs. A has not and will not assign, transfer, delegate, encumber or otherwise restrict her entitlement to exercise the voting rights attached to the Class B preferred shares of Holdco 1.

43. Holdco 1 will not assign, transfer, delegate, encumber or otherwise restrict its entitlement to exercise the voting rights attached to the Newco 1 Class A Preferred Shares and Newco 2 Class A Preferred Shares.

44. Mr A and Mrs. A do not expect to dispose of any of their shares of Holdco 1 and Holdco 1 does not expect to dispose of any its shares of Newco 1 or Newco 2 other than by way of redemption or purchase for cancellation which may occur from time to time in such manner and in such amounts as is consistent with historical practice since the XXXXXXXXXX Amalgamation.

V. PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to effect a division and transfer of Canco’s main assets into two separate companies as part of a business succession plan for Mr. A and Mrs. A and allow each of Child 1 and Child 2 (through their respective holding companies) to inherit an equal interest in the underlying assets.

VI. RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. Provided that the requisite joint elections are filed in prescribed form and manner within the prescribed time specified in subsection 85(6), the provisions of subsection 85(1) will apply to the transfer of Canco preferred shares by Holdco 1 to Newco 1 and Newco 2 as described in Paragraphs 22 and 23, such that the agreed amount in respect of the shares transferred will be deemed to be the transferor’s proceeds of disposition and the transferee’s cost of the shares pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to this transfer.

B. Provided that the requisite joint election is filed in prescribed form and manner within the prescribed time specified in subsection 85(6), the provisions of subsection 85(1) will apply to the transfer of Canco common shares by Holdco 2 to Newco 1 as described in Paragraph 24, such that the agreed amount in respect of the shares transferred will be deemed to be the transferor’s proceeds of disposition and the transferee’s cost of the shares pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to this transfer.

C. Provided that the requisite joint election is filed in prescribed form and manner within the prescribed time specified in subsection 85(6), the provisions of subsection 85(1) will apply to the transfer of Canco common shares by Holdco 3 to Newco 2 as described in Paragraph 25, such that the agreed amount in respect of the shares transferred will be deemed to be the transferor’s proceeds of disposition and the transferee’s cost of the shares pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to this transfer.

D. Provided that the requisite joint elections are filed in prescribed form and manner within the prescribed time specified in subsection 85(6), the provisions of subsection 85(1) will apply to the transfer by Canco of Parcel One to Newco 1 and the transfer of Parcel Two to Newco 2 as described in Paragraphs 26 and 27, such that the agreed amount in respect of each property transferred will be deemed to be the transferor’s proceeds of disposition and the transferee’s cost of the property pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to these transfers.

For the purposes of the joint elections in respect of depreciable property of a prescribed class, the reference to “the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition” in subparagraph 85(1)(e)(i) will be read to mean the proportion of the undepreciated capital cost to Canco of all the property of that class that the capital cost of the property so transferred before the disposition is of the capital cost of all property of that class immediately before the disposition.

E. Subsection 84(3) will apply to the redemption by Newco 1 of the Newco 1 Class B Preferred Shares as described in Paragraph 28 such that Newco 1 will be deemed to pay, and Canco will be deemed to receive, a taxable dividend on such shares equal to the amount by which the aggregate redemption amount of the Newco 1 Class B preferred shares exceeds the aggregate PUC of such shares immediately before such redemption.

F. Subsection 84(3) will apply to the redemption by Newco 2 of the Newco 2 Class B Preferred Shares as described in Paragraph 29 such that Newco 2 will be deemed to pay, and Canco will be deemed to receive, a taxable dividend on such shares equal to the amount by which the aggregate redemption amount of the Newco 2 Class B Preferred Shares exceeds the aggregate PUC of such shares immediately before such redemption.

G. Subsection 84(3) will apply to the redemption or purchase for cancellation (as the case may be) of Canco Ordinary Shares as described in Paragraph 30 such that Canco will be deemed to pay, and Newco 1 and Newco 2 will be deemed to receive, a taxable dividend on such shares equal to the amount by which the aggregate amount paid by Canco on the redemption or purchase for cancellation, as the case may be, of the Canco Ordinary Shares exceeds the aggregate PUC of such shares immediately before such redemption or purchase for cancellation.

H. The taxable dividends described in Rulings E, F and G above:

(a) will be included in computing the income of the corporation deemed to have received such a dividend pursuant to subsection 82(1) and paragraph 12(1)(j);

(b) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which such a dividend is deemed to have been received, and, for greater certainty, such deduction will not be prohibited by subsections 112(2.1), (2.2), (2.3) or (2.4);

(c) will be excluded in determining the recipient’s proceeds of disposition of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54;

(d) will, by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received;

(e) will not be subject to tax under Part IV.1 or Part VI.1; and

(f) will not be subject to tax under Part IV, except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend.

I. By virtue of paragraph 55(3)(a), subsection 55(2) will not apply to the deemed dividends referred to in Rulings E, F and G above, provided that as part of a series of transactions or events that includes any of the Proposed Transactions there is no disposition or significant increase in interest as described in subparagraphs 55(3)(a)(i) to (v). For greater certainty, the Proposed Transactions, in and of themselves, will not be considered to result in any disposition or significant increase in interest described in subparagraphs 55(3)(a)(i) to (v).

J. The settlement of the Newco 1 Note, Newco 2 Note, Canco 1 Note and Canco 2 Note will not give rise to a “forgiven amount” within the meaning of subsections 80(1) and 80.01(1). In addition, none of Newco 1, Newco 2 and Canco will otherwise realize any gain or loss as a result of the settlement of the Newco 1 Note, Newco 2 Note, Canco 1 Note and Canco 2 Note (as applicable).

K. [Reserved].

L. Subsection 245(2) will not apply as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences in the rulings given above.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R7 issued on April 22, 2016, 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

Unless otherwise expressively confirmed, nothing in this ruling should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:

a) the FMV or ACB of any property referred to herein or the PUC in respect of any share referred to herein;

b) the outstanding balance of various tax accounts such as RDTOH, GRIP, non-capital losses, or CDA for any of the corporate entities described herein;

c) any provincial tax consequences of the Proposed Transactions or any other tax consequence relating to the facts, proposed transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

To the extent that Canco has a balance in its RDTOH at its year-end immediately following the redemptions and purchases for cancellation of its shares described in Paragraph 30, such redemptions and purchase for cancellation by Canco of its shares owned by Newco 1 and Newco 2 could give rise to what is referred to as a “circular” calculation of RDTOH. Consequently, we must inform you that, in our view, this could result in each of Newco 1, Newco 2 and Canco being subject to Part IV tax under paragraph 186(1)(b). It is also our view that the circularity problem causes uncertainty as to which corporation is ultimately entitled to a dividend refund and which corporation is ultimately liable for Part IV tax. Since the problem will affect the assessment of the income tax returns of Canco, Newco 1 and Newco 2, the district taxation office at which each of the corporations files its T2 income tax return will have to be consulted in order to determine which corporation will receive the dividend refund and which corporation will be subject to the Part IV tax liability under paragraph 186(1)(b) described in these comments.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer or issuance of shares. Furthermore, none of the rulings given in this letter are intended to apply to, or in the event of, the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses, dated March 28, 2013.

Yours truly,

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