1999 Ruling 9901463 - GUARANTEE AGREEMENT, 112(2.2)

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.

Principal Issues: 112(2.2) issue (Supplemental Ruling to Ruling 982586-3)

Position: (See Statement of Principal Issues attached with the Supplemental Ruling)

Reasons: (See Statement of Principal Issues attached with the Supplemental Ruling)

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Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling 982586 dated XXXXXXXXXX, 1998

We are writing in response to your letter of XXXXXXXXXX wherein you advised us of additional information relating to the facts and proposed transactions described in advance income tax ruling 982586 which was issued on XXXXXXXXXX, 1998 (the "Ruling Letter"). You also requested additional rulings relating to the proposed dissolution of DC and an extension of the deadline for the completion of the proposed transactions described in the Ruling Letter as it is now proposed that DC will retain some property to provide for DC's liabilities until a clearance certificate is obtained from Revenue Canada. We also acknowledge the information provided during our telephone conversations (XXXXXXXXXX)

As requested the following amendments are hereby made to the Ruling Letter:

1. Paragraph 12 of the Ruling Letter is replaced by:

Subsequent to the distribution of the property of the Trust as described in paragraph 11 above, Settlor A, Settlor B, NewcoA and NewcoB, being all of the shareholders of DC, will pass a shareholders' resolution to wind-up DC pursuant to the provisions of the BCA. DC will, pursuant to subsection 88(2) of the Act, then distribute all or substantially all of its assets to Settlor A, Settlor B, NewcoA and NewcoB according to their respective share interest in DC. In this regard, the shareholders of DC would like DC to retain certain property (representing not more than 10% of the fair market value of all of the property of DC immediately before the distribution referred to herein) to provide for any potential liabilities of DC.

Prior to the distribution of its property as described above, DC will elect, pursuant to subsection 83(2) of the Act, in prescribed manner and prescribed form that the full amount of any resulting dividend referred to in subparagraph 88(2)(b)(i) of the Act be deemed to be a capital dividend.

Upon receipt of any tax refunds to which DC may subsequently become entitled, DC will distribute such amounts to Settlor A, Settlor B, NewcoA and NewcoB according to their respective share interest in DC. Upon receipt of a clearance certificate pursuant to subsection 159(2) of the Act, DC will distribute any remaining property which it holds to Settlor A, Settlor B, NewcoA and NewcoB according to their respective share interest in DC and Articles of Dissolution of DC will be filed with the XXXXXXXXXX

Corporate Registry and DC will be dissolved pursuant to the provisions of the BCA.

2. The following additional information is added under the heading "ADDITIONAL INFORMATION" immediately following paragraph 12 of the Ruling Letter:

12.1 Settlor A and Settlor B entered into a contribution agreement dated XXXXXXXXXX (the "Contribution Agreement") whereby:

(a) Settlor A and Settlor B agreed to share the cost of settling any claim or action by a third party against DC equally; and

(b) in the event that Settlor A or any corporation controlled by Settlor A, or Settlor B or any corporation controlled by Settlor B, is required to return to DC or to pay directly to a third party to settle its claim against DC, Settlor A and Settlor B agree to indemnify each other to the extent of their respective share of the cost of settling the third party's claim.

In your view such Contribution Agreement does not constitute a guarantee agreement as stipulated by subsection 112(2.2) of the Act.

Except as disclosed herein, there are not, and will not be at any time prior to the completion of the proposed transactions described herein, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any of the XXXXXXXXXX non-voting shares of DC held by NewcoA and NewcoB.

12.2.Neither NewcoA nor NewcoB has, or will have, entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the shares to be cancelled as part of the proposed transactions described in paragraph 12 above.

12.3 None of the XXXXXXXXXX non-voting shares of DC were issued or acquired as part of a series of transactions or events of the type described in subsection 112(2.5) of the Act.

2. The following ruling is added as Ruling F:

F.(i)The taxable dividends described in Ruling B(iv) above will, pursuant to subsection 112(1) of the Act, be deductible in computing the taxable income of NewcoA and NewcoB for the year in which such dividends are deemed to have been received by such corporation. For greater certainty, such deduction will not be denied by any of subsections 112(2.1), (2.2), (2.3) or (2.4) of the Act; and

(ii)by virtue of subsection 156(4) of the Act, DC will be connected with each of NewcoA and NewcoB. Consequently NewcoA and NewcoB will not be subject to tax under Part IV of the Act in respect of the taxable dividends referred to in Ruling B(iv) above, except as provided in paragraph 186(1)(b) of the Act.

Notwithstanding the amendments described herein, we confirm that, subject to the conditions set out in the Ruling Letter, Rulings B, C, D(c), E and F given in the Ruling Letter, as hereby amended, will continue to be binding on Revenue Canada in accordance with the practice outlined in Information Circular 706R3, dated December 30, 1996, provided that the proposed transactions are completed in the manner described in the Ruling Letter, as amended herein, by XXXXXXXXXX.

Yours truly,

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