1999 Ruling 9831593 - DIVISIVE 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.

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 3-983159
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings. We also acknowledge your letters of XXXXXXXXXX and our various telephone conversations.

We understand that to the best of your knowledge and that of the taxpayers, none of the issues involved in this ruling request:

(a) is in an earlier return of any of the taxpayers or a related person;

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

(c) is under objection by the taxpayers or a related person;

(d) is before the courts; or

(e) is the subject of a ruling previously issued by the Directorate.

It is not anticipated that the proposed transactions, which are the subject of this ruling request, will have any impact on any outstanding tax liabilities of the taxpayers.

THE TAXPAYERS

The taxpayers to which this advance income tax ruling request relates are as follows:

Name of Taxpayer

Account Number

Referred to as

Mailing Address
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

All of the taxpayers file tax returns at the XXXXXXXXXX Taxation Centre.

DEFINITIONS

In this letter unless otherwise stated:

(a) “Act” means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended to the dated hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph and subparagraph is a reference to the relevant provision in the Act.

(b) “accumulated profits” means retained earnings computed in accordance with Canadian generally accepted accounting principles except that the computation:

(i) is made on an unconsolidated basis with investments computed on a cost basis; and

(ii) does not include any appraisal surplus or profits resulting from non-arm’s-length transactions which transform appraisal surplus into profits on a non-taxable or tax-deferred basis;

(c) “ACB” means “adjusted cost base” as that expression is defined in section 54.

(d) “Canadian-controlled private corporation” has the meaning assigned by subsection 125(7);

(e) XXXXXXXXXX;

(f) XXXXXXXXXX;

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

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

(i) “taxable dividend” has the meaning assigned by subsection 89(1).

FACTS

XXXXXXXXXX

1.

XXXXXXXXXX

2. XXXXXXXXXX carries on the business of the manufacture and sale ofXXXXXXXXXX also owns the following:

XXXXXXXXXX

XXXXXXXXXX and its wholly-owned subsidiaries had consolidated retained earnings of approximately $XXXXXXXXXX interest in XXXXXXXXXX is not included in the consolidated retained earnings of XXXXXXXXXX.

3. XXXXXXXXXX is a taxable Canadian corporation and a Canadian-controlled private corporation.

4. XXXXXXXXXX is owned by the following shareholders:

Name

Number of Shares

Type of Shares

XXXXXXXXXX Holdco

XXXXXXXXXX

Common

XXXXXXXXXX Holdco

XXXXXXXXXX

Common

The Articles of Amendment effective XXXXXXXXXX provide that each holder of common shares of XXXXXXXXXX shall be entitled to one (1) vote for each common share held.

The paid-up capital of the XXXXXXXXXX common shares is $XXXXXXXXXX and the ACB to XXXXXXXXXX Holdco of its XXXXXXXXXX common shares is $XXXXXXXXXX and the ACB to XXXXXXXXXX Holdco of its XXXXXXXXXX common shares is $XXXXXXXXXX.

5.

XXXXXXXXXX

6. There is a death buy-sell agreement in effect among XXXXXXXXXX Holdco, XXXXXXXXXX Holdco, XXXXXXXXXX. Such agreement provides that upon XXXXXXXXXX death, XXXXXXXXXX Holdco would sell its shares of XXXXXXXXXX to XXXXXXXXXX. There is no other agreement between the shareholders respecting the shares of XXXXXXXXXX.

XXXXXXXXXX

7. XXXXXXXXXX Holdco was incorporatedXXXXXXXXXX.

8. XXXXXXXXXX Holdco owns approximately XXXXXXXXXX% of the issued shares of XXXXXXXXXX.

9. XXXXXXXXXX Holdco is a taxable Canadian corporation and a Canadian-controlled private corporation.

10. XXXXXXXXXX Holdco is owned by the following shareholders:

Name

Number of Shares

Type of Shares
XXXXXXXXXX
XXXXXXXXXX

Common
XXXXXXXXXX
XXXXXXXXXX

Common
XXXXXXXXXX
XXXXXXXXXX

Common
XXXXXXXXXX
XXXXXXXXXX

Common
XXXXXXXXXX
XXXXXXXXXX

Common
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Common
Preferred

The Letters Patent of Incorporation dated XXXXXXXXXX provide that each holder of common shares and each holder of preferred shares shall be entitled to one (1) vote for each common share or preferred share held.

11. The Shareholders of XXXXXXXXXX Holdco have not entered into a Unanimous Shareholders Agreement.

XXXXXXXXXX

12. XXXXXXXXXX Holdco was incorporated XXXXXXXXXX.

13. XXXXXXXXXX Holdco owns approximately XXXXXXXXXX% of the issued shares of XXXXXXXXXX.

14. XXXXXXXXXX Holdco is a taxable Canadian corporation and a Canadian-controlled private corporation.

15. XXXXXXXXXX Holdco is owned by the following shareholder:

Name

Number of Shares

Type of Shares
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Common
Class A Preference

The Articles of Amendment dated XXXXXXXXXX, provide that every holder of common shares and Class A Preference Shares shall be entitled to one (1) vote for each common share or Class A Preference Share held.

16. The Shareholders of XXXXXXXXXX Holdco have not entered into a Unanimous Shareholders Agreement.

XXXXXXXXXX

17. XXXXXXXXXX Holdco was incorporated under the XXXXXXXXXX.

18. XXXXXXXXXX Holdco is owed approximately $XXXXXXXXXX by XXXXXXXXXX. It also owns some mutual fund investments. It has no other business or undertaking.

19. XXXXXXXXXX Holdco is a taxable Canadian corporation and a Canadian-controlled private corporation.

20. XXXXXXXXXX Holdco is owned by the following shareholders:

Name

Number of Shares

Type of Shares
XXXXXXXXXX
XXXXXXXXXX

Common
XXXXXXXXXX
XXXXXXXXXX

Common
XXXXXXXXXX
XXXXXXXXXX

Common
XXXXXXXXXX
XXXXXXXXXX

Common
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Common
Class B preference
Class A preference

Pursuant to the Articles of Incorporation dated XXXXXXXXXX, the holders of common shares are entitled to one (1) vote for each common share and the holders of Class A preference shares are entitled to XXXXXXXXXX votes per Class A preference share. The Class B preference shares are non-voting.

21. The Shareholders of XXXXXXXXXX Holdco have not entered into a Unanimous Shareholders Agreement.

Relationship of Individuals

22.

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

PROPOSED TRANSACTIONS

23. On a date subsequent to the date of this letter, (the “Effective Date”), XXXXXXXXXX will declare and pay a dividend to its shareholders, XXXXXXXXXX Holdco and XXXXXXXXXX Holdco, on its common shares in an amount equal to the approximate amount of the consolidated retained earnings of XXXXXXXXXX at that time (the “Dividend”). XXXXXXXXXX will borrow such funds as it may require from an arm’s-length financial institution to pay the Dividend in cash to its shareholders.

24. Immediately after the receipt of the cash in payment of the Dividend, XXXXXXXXXX Holdco and XXXXXXXXXX Holdco will loan their respective portion of the amount of the Dividend back to XXXXXXXXXX, other than approximately $XXXXXXXXXX of XXXXXXXXXX Holdco’s portion of the Dividend (the “Retained Funds”). XXXXXXXXXX will issue to each of XXXXXXXXXX Holdco and XXXXXXXXXX Holdco, in respect of their loans, a non-interest-bearing note secured by debentures granting them a security interest in the assets of XXXXXXXXXX.

XXXXXXXXXX will use the proceeds of the loans from XXXXXXXXXX Holdco and XXXXXXXXXX Holdco to repay its loan to the arm’s-length financial institution.

25. XXXXXXXXXX Holdco will then loan all or a portion of the Retained Funds to XXXXXXXXXX by way of an interest-bearing note with an interest rate equal to the prime lending rate of XXXXXXXXXX banker.

26. Subsequent to the payment of the Dividend, XXXXXXXXXX Holdco will purchase, at fair market value, from XXXXXXXXXX Holdco approximately XXXXXXXXXX of the common shares held by XXXXXXXXXX Holdco in XXXXXXXXXX. As consideration, XXXXXXXXXX Holdco will either pay cash or issue a note that is not convertible into other property.

PURPOSES OF THE PROPOSED TRANSACTIONS

27. The main purposes of the proposed transactions are:

(i) to allow XXXXXXXXXX Holdco and XXXXXXXXXX Holdco to secure their investment in XXXXXXXXXX by the payment of the Dividend; and

(ii) to allow XXXXXXXXXX to increase his indirect interest in XXXXXXXXXX to reflect his contribution and role in the operations of XXXXXXXXXX.

RULINGS

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

A. Provided that XXXXXXXXXX has a legal obligation to pay interest on the funds borrowed from the arm’s-length financial institution, as described in paragraph 23 above, XXXXXXXXXX may deduct the interest paid or payable (depending on the method regularly followed by XXXXXXXXXX in computing its income for purposes of the Act) or a reasonable amount in respect of the year on such borrowings, whichever is lesser, pursuant to paragraph 20(1)(c), on the amount borrowed to pay the Dividend that does not exceed the amount of XXXXXXXXXX accumulated profits at the time of the borrowing.

B. We confirm that:

(i) XXXXXXXXXX is related to XXXXXXXXXX pursuant to paragraph 251(2)(a) and paragraph 251(6)(a);

(ii) XXXXXXXXXX is related to XXXXXXXXXX pursuant to paragraph 251(2)(a) and paragraph 251(6)(b);

(iii) XXXXXXXXXX Holdco is related to XXXXXXXXXX Holdco pursuant to subparagraph 251(2)(c)(ii);

(iv) XXXXXXXXXX Holdco is related to XXXXXXXXXX Holdco pursuant to subparagraph 251(2)(c)(ii);

(v) XXXXXXXXXX Holdco is related to XXXXXXXXXX Holdco by virtue of both being related to XXXXXXXXXX Holdco, pursuant to subsection 251(3); and

(vi) XXXXXXXXXX is related to XXXXXXXXXX Holdco by pursuant to subparagraph 251(2)(b)(iii).

C. The respective portion of the Dividend received by each of XXXXXXXXXX Holdco and XXXXXXXXXX Holdco, as described in paragraph 23 above, will be a taxable dividend, that will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividend is received.

D. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the respective portion of the Dividend received by each of XXXXXXXXXX Holdco and XXXXXXXXXX Holdco on their common shares of XXXXXXXXXX, as described in paragraph 23 above, provided that as part of the series of transactions or events as part of which the Dividend was received, there is no disposition or significant increase in interest described in subparagraphs 55(3)(a)(i) to (v) which has not been described herein as a proposed transaction.

E. No taxes in respect of Part IV will be payable by either of XXXXXXXXXX Holdco or XXXXXXXXXX Holdco on the receipt of their respective portion of the Dividend, as described in paragraph 23 above, except as provided in paragraph 186(1)(b).

F. Part IV.1 will not apply to the respective portion of the Dividend received by XXXXXXXXXX Holdco and XXXXXXXXXX Holdco, as described in paragraph 23 above, because the dividends will be excepted dividends pursuant to paragraph (b) of the definition of “excepted divided” in section 187.1.

G. Part VI.1 will not apply to the Dividend paid by XXXXXXXXXX, as described in paragraph 23 above, because the dividend will be an excluded dividend pursuant to paragraph (a) of the definition of “excluded dividend” in paragraph 191(1)(a).

H. Provided that XXXXXXXXXX has a legal obligation to pay interest on the amount of Retained Funds borrowed from XXXXXXXXXX Holdco and XXXXXXXXXX uses the borrowed funds for the purpose of earning income from a business or property (other than income that would be exempt or to acquire a life insurance policy), XXXXXXXXXX may deduct the interest paid or payable (depending on the method regularly followed by XXXXXXXXXX in computing its income for purposes of the Act) or a reasonable amount in respect of the year on such borrowing, whichever is lesser, pursuant to paragraph 20(1)(c).

I. The provisions of subsections 15(1), 56(2) and 246(1) will not be applied to the proposed transactions described herein, in and by themselves.

J. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences in the rulings given.

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

These rulings are based on the Act as it reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

Yours truly,

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

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