1998 Ruling 9823003 - ROUTINE SPLIT-UP BUTTERFLY

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

XXXXXXXXXX
XXXXXXXXXX 982300
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the requested ruling is being considered by a district tax services office or a taxation centre in connection with a tax return already filed by any of the taxpayers or related persons; nor under objection or appeal by any of the taxpayers or related persons; nor reported in an earlier return of any of the taxpayers or related persons; nor before the courts; nor the subject of a ruling previously issued to any of the taxpayers by the directorate.

DEFINITIONS

In this letter unless otherwise expressly stated:

a) XXXXXXXXXX

and

b) "Applicants" means XXXXXXXXXX.

STATUTORY TERMS

In this letter unless otherwise expressly stated:

a) "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 or subparagraph is a reference to the relevant provision of the Act, unless otherwise noted;

b) "ACB" means "adjusted cost base" as that expression is defined in section 54 and subsection 248(1);

c) "capital dividend account" has the meaning assigned by subsection 89(1);

d) "capital property" has the meaning assigned by section 54;

e) "cost amount" has the meaning assigned by subsection 248(1);

f) "distribution" has the meaning assigned by subsection 55(1);

g) "paid-up capital" has the meaning assigned by subsection 89(1);

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

i) "RDTOH" means "refundable dividend tax on hand" which has the meaning assigned by subsection 129(3);

j) "series of transactions or events" has the meaning assigned by subsection 248(10);

k) "stated capital" has the meaning assigned in XXXXXXXXXX;

and

l) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).

Our understanding of the facts and the proposed transactions is as follows:

FACTS

1. XXXXXXXXXX is a Canadian-controlled private corporation, incorporated and operating pursuant to the laws of the Province of XXXXXXXXXX with a fiscal year end of XXXXXXXXXX.

2. The authorized capital of XXXXXXXXXX is XXXXXXXXXX common shares all of which are issued and outstanding and owned by:

XXXXXXXXXX
XXXXXXXXXX

The paid-up capital of the XXXXXXXXXX common shares is $XXXXXXXXXX.

3. XXXXXXXXXX carries on business at two locations under the following business styles:

XXXXXXXXXX

XXXXXXXXXX

4. The properties of XXXXXXXXXX consist of cash, term deposits, accounts receivable, inventory, computer hardware, furniture, fixtures, leasehold improvements and goodwill.

5. The liabilities of XXXXXXXXXX consist only of current accounts payable.

6. XXXXXXXXXX does not anticipate any change to its RDTOH or its capital dividend account at the time of the transfer of properties described in paragraph 24 below (the "Butterfly Transfer").

7. XXXXXXXXXX was incorporated under the laws of the Province of XXXXXXXXXX on XXXXXXXXXX and is a Canadian-controlled private corporation having its fiscal year-end at XXXXXXXXXX.

8. The authorized capital of XXXXXXXXXX consists of an unlimited number of voting Class A Preference Shares and an unlimited number of Common Shares of which XXXXXXXXXX Common Shares are issued and outstanding and owned by XXXXXXXXXX. The paid-up capital of the XXXXXXXXXX Common Shares is $XXXXXXXXXX. The XXXXXXXXXX Common Shares of XXXXXXXXXX are capital property to XXXXXXXXXX.

9. XXXXXXXXXX was incorporated under the laws of the Province of XXXXXXXXXX on XXXXXXXXXX and is a Canadian-controlled private corporation having its fiscal year end at XXXXXXXXXX.

10. The authorized capital of XXXXXXXXXX consists of an unlimited number of voting Class A Preference Shares and an unlimited number of Common Shares of which XXXXXXXXXX Common Shares are issued and outstanding and owned by XXXXXXXXXX. The paid-up capital of the XXXXXXXXXX Common Shares is $XXXXXXXXXX. The XXXXXXXXXX Common Shares of XXXXXXXXXX are capital property to XXXXXXXXXX.

11. XXXXXXXXXX is a resident of Canada and is not related to XXXXXXXXXX is actively engaged in managing the XXXXXXXXXX Business. XXXXXXXXXX is a director and executive officer in each of XXXXXXXXXX and XXXXXXXXXX, and has influence over the decisions concerning the use of funds and management for XXXXXXXXXX and XXXXXXXXXX and specifically the XXXXXXXXXX Business.

12. XXXXXXXXXX is a resident of Canada and is not related to XXXXXXXXXX is actively engaged in managing the XXXXXXXXXX Business. XXXXXXXXXX is a director and executive officer in each of XXXXXXXXXX and XXXXXXXXXX, and has influence over the decisions concerning the use of funds and management for XXXXXXXXXX and XXXXXXXXXX and specifically the XXXXXXXXXX Business.

13. The types of property for the purposes of a distribution pursuant to subsection 55(1), of XXXXXXXXXX, immediately before the Butterfly Transfer, will be properties of the following types

- cash or near-cash property, inventory comprising of all of the current assets of XXXXXXXXXX including any cash, deposits, accounts receivable, inventory, material and supplies and rights arising from prepaid expenses;

- business property, comprising of all of the assets of XXXXXXXXXX, 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 property or from a specified investment business, leases of premises.

For greater certainty, any tax accounts, such as the balance of any RDTOH, of XXXXXXXXXX, as the case may be, will not be considered property for purposes of the proposed transactions described herein.

14. XXXXXXXXXX does not have any investment property.

15. It is anticipated that all of the liabilities of XXXXXXXXXX at the time of the transfer described in paragraph 24 below, will be current liabilities and such liabilities will not exceed the fair market value of the cash and near-cash properties. In determining the net fair market value of each type of property owned by XXXXXXXXXX immediately before the transfer, the total current liabilities will be allocated against the aggregate value of the cash or near-cash properties.

In the event that liabilities, other than current liabilities exist at the time of the transfer, or the current liabilities exceed the fair market value of the cash or near-cash properties, in determining the net fair market value of each type of property owned by XXXXXXXXXX immediately before the transfers described below, the liabilities of XXXXXXXXXX will be allocated to, and be deducted in the calculation of the net fair market value of each type of property of XXXXXXXXXX as follows:

a) current liabilities will be allocated against the aggregate value of the cash or near-cash properties to the extent of the aggregate fair market value of such properties;

b) liabilities, other than current liabilities, if any, will be first allocated to the specific properties to which they are related, if any, and then to other properties of the same type, to the extent of the net fair market value of that particular type of property; and

c) excess unallocated liabilities, if any, will then be allocated to the cash or near-cash and business property of XXXXXXXXXX on a pro rata basis, based on the relative net fair market value of each type of property resulting after the allocation of liabilities in accordance with the rules described in (a) and (b) above and prior to the allocation of each excess liability.

For the purpose of calculating the net fair market value of the types of property of XXXXXXXXXX:

d) deferred taxes will not be considered; and

e) deferred revenue will be considered to be a liability to the extent that the amount of such deferred revenue gives rise to a legal obligation to repay such amount should the services not be provided or goods not be delivered.

As a result of the determination described herein, XXXXXXXXXX will have two types of property for purposes of the Butterfly Transfer, cash or near-cash property and business property.

16. Except as described herein, no debts have been or will be incurred or paid, and no property has been or will be acquired by XXXXXXXXXX in contemplation of the proposed transactions described below.

17. None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) is or will be subject to a guarantee agreement, within the meaning referred to in subsection 112(2.2).

18. None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions has been or will be 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).

19. None of XXXXXXXXXX is or will be a "specified financial institution" as defined in subsection 248(1.)

20. None of the dividends in this ruling request will be received on a share of the capital stock of a corporation as part of a dividend rental arrangement of the particular corporation. The expression "dividend rental arrangement" has the meaning assigned by subsection 248(1).

21. The Common Shares of XXXXXXXXXX owned by XXXXXXXXXX have a fair market value of XXXXXXXXXX% or more of the fair market value of all the Common Shares and a fair market value of XXXXXXXXXX% or more of all the issued shares of the capital stock of XXXXXXXXXX.

22. The Common Shares of XXXXXXXXXX owned by XXXXXXXXXX have a fair market value of XXXXXXXXXX% or more of the fair market value of all the Common Shares and a fair market value of XXXXXXXXXX% or more of all the issued shares of the capital stock of XXXXXXXXXX.

PROPOSED TRANSACTIONS

23. XXXXXXXXXX will divide its property into two groups, the XXXXXXXXXX Group and the XXXXXXXXXX Group. Each group will be comprised of one half of the fair market value of each type of property owned by XXXXXXXXXX.

24. XXXXXXXXXX will transfer, at fair market value, the properties of the XXXXXXXXXX to XXXXXXXXXX and the properties of the XXXXXXXXXX to XXXXXXXXXX. As a result of such transfers, the aggregate of the fair market value of each type of property received by XXXXXXXXXX and XXXXXXXXXX, as the case may be, will be equal to the proportion of the fair market value of all properties of the particular type owned by XXXXXXXXXX immediately before the transfer that:

a) the aggregate of the fair market value immediately before the transfer of all the shares of the capital stock of XXXXXXXXXX held by XXXXXXXXXX or XXXXXXXXXX, as the case may be, at that time

is of

b) the fair market value, immediately before the transfer, of all of the issued shares of the capital stock of XXXXXXXXXX at that time.

25. In consideration of such transfer, XXXXXXXXXX will assume one half of the liabilities of XXXXXXXXXX and issue XXXXXXXXXX Class A Preference Shares having an aggregate redemption and retraction amount and fair market value equal to the amount by which the fair market value of the transferred properties that will be received by XXXXXXXXXX exceeds the aggregate amount of the liabilities assumed by XXXXXXXXXX. The Class A Preference Shares will have a fair market value of XXXXXXXXXX% or more of all the issued shares of the capital stock of XXXXXXXXXX.

26. In consideration of such transfer, XXXXXXXXXX will assume one half of the liabilities of XXXXXXXXXX and issue XXXXXXXXXX Class A Preference Shares having an aggregate redemption and retraction amount and fair market value equal to the amount by which the fair market value of the transferred properties that will be received by XXXXXXXXXX exceeds the aggregate amount of the liabilities assumed by XXXXXXXXXX. The Class A Preference Shares will have a fair market value of XXXXXXXXXX% or more or all the issued shares of the capital stock of XXXXXXXXXX.

27. In respect of the transfers referred to in paragraph 24 above, XXXXXXXXXX and each of XXXXXXXXXX will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of XXXXXXXXXX that is an eligible property transferred to XXXXXXXXXX or XXXXXXXXXX, as the case may be. The agreed amount for the purposes of subsection 85(1) in respect of such property will be as follows:

a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

b) in the case of 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

c) 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).

28. The amount of the assumed liabilities allocated to any asset transferred, pursuant to the election under subsection 85(1), will not exceed the agreed amount in respect of that asset.

29. XXXXXXXXXX will add to their respective stated capital accounts in respect of the Class A Preference Shares so issued, an amount equal to the aggregate of the cost amounts of the property transferred from XXXXXXXXXX to XXXXXXXXXX or XXXXXXXXXX, as the case may be, less the principal amount of the liabilities of XXXXXXXXXX assumed by each of XXXXXXXXXX.

30. Immediately after the transfer of the assets to XXXXXXXXXX will redeem its XXXXXXXXXX Class A Preference Shares owned by XXXXXXXXXX and XXXXXXXXXX will issue to XXXXXXXXXX a non-interest-bearing demand promissory note ("Note 1") having a principal amount and fair market value equal to the redemption price of the Class A Preference Shares.

31. Immediately after the transfer of the assets to XXXXXXXXXX will redeem its XXXXXXXXXX Class A Preference Shares owned by XXXXXXXXXX and XXXXXXXXXX will issue to XXXXXXXXXX a non-interest-bearing demand promissory note ("Note 2") having a principal amount and fair market value equal to the redemption price of the Class A Preference Shares.

32. XXXXXXXXXX will purchase for cancellation the XXXXXXXXXX Common Shares owned by XXXXXXXXXX and XXXXXXXXXX. In consideration, XXXXXXXXXX will issue to each of XXXXXXXXXX a non-interest-bearing demand promissory note ("Notes 3 and 4") having a principal amount equal to the fair market value of the XXXXXXXXXX Common Shares so purchased.

33. Notes 1 and 2 will be set off against Notes 3 and 4 and the Notes will be cancelled.

34. XXXXXXXXXX will be dissolved.

PURPOSE OF THE PROPOSED TRANSACTIONS

35. The purpose of the proposed transactions is to provide for the division of assets of XXXXXXXXXX to its shareholders in proportion to their respective shareholdings in XXXXXXXXXX, i.e. equally. XXXXXXXXXX wish to carry on the businesses of XXXXXXXXXX operating as XXXXXXXXXX as separate businesses independent of each other.

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:

A. Provided that joint elections are filed pursuant to subsection 85(1), in the prescribed form within the prescribed time, the provisions of subsection 85(1) will apply, to the transfer by XXXXXXXXXX of its properties that are eligible properties to XXXXXXXXXX and XXXXXXXXXX described in paragraph 24 above such that, the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a).

B. On the redemption of the Class A Preference Shares of XXXXXXXXXX held by XXXXXXXXXX and on the redemption of the Class A Preference Shares of XXXXXXXXXX held by XXXXXXXXXX as described in paragraphs 30 and 31 above, the amount, if any, by which the amount paid to redeem the particular shares exceeds the paid-up capital of the particular shares immediately before the redemption:

(i) will be deemed pursuant to paragraph 84(3)(a) to be a dividend paid by the issuer of such shares; and

(ii) will be deemed pursuant to paragraph 84(3)(b) to be a dividend received by the holder of such shares.

C. On the purchase for cancellation of the shares of XXXXXXXXXX held by XXXXXXXXXX and XXXXXXXXXX described in paragraph 32 above, the amount, if any, by which the amount paid to purchase the particular shares exceeds paid-up capital of the particular shares immediately before the purchase for cancellation:

(i) will be deemed pursuant to paragraph 84(3)(a) to be a dividend paid by the issuer of such shares; and

(ii) will be deemed pursuant to paragraph 84(3)(b) to be a dividend received by the holder of such shares.

D. The dividends referred to in Rulings B and C above:

(i) will be deductible by each recipient pursuant to subsection 112(1) and the provisions of subsections 112(2.1) to 112(2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividends.

(ii) by virtue of the application of paragraph (j) of the definition "proceeds of disposition" in section 54, the amount of a deemed dividend described in Rulings B and C above, will be excluded from the proceeds of disposition of the shares, and any loss arising from the disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3);

(iii) no taxes under Part IV.1 will be payable by a holder in respect of a dividend referred to in Rulings B and C above, as each such dividend will be an excepted dividend by virtue of paragraph (b) of the definition thereof in section 187. 1;

(iv) no taxes under Part VI.I will be payable by an issuer of the preferred shares in respect of a dividend referred to Rulings B and C above, as each such dividend will be an excluded dividend by virtue of paragraph (a) of the definition thereof in subsection 191(1); and

(v) no taxes under Part IV will be payable in respect of a dividend referred to in Rulings B and C above, except to the extent provided in paragraph 186(l)(b) .

E. The provisions of subsection 55(2) will not apply to the dividends described in Rulings B and C above, by virtue of the application of paragraph 55(3)(b) provided that, as part of the series of transactions that includes the proposed transactions described herein, there is no:

a) disposition of property in the circumstances described in subparagraph 55(3.1) (b)(i);

b) acquisition of control in the circumstances described in subparagraph 55(3.l)(b)(ii);

c) acquisition of property in the circumstances described in paragraph 55(3.l)(c); or

d) acquisition of property in the circumstances described in paragraph 55(3.l)(d)

which has not been described herein.

F. The extinguishment of Notes 1, 2, 3 and 4 described in paragraph 33 above will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

G. The provisions of subsections 15(1), 56(2), 56(4) and 246(1) will not apply to the proposed transactions, 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.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on Revenue Canada provided that the proposed transactions are completed before XXXXXXXXXX.

These 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 given.

COMMENTS

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

(a) the determination of the fair market value or ACB of any property referred to herein, or the PUC of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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