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: Application of 40(3.6)) and GAAR to transactions designed to create a loss in an estate and carry that loss back to the deceased's terminal year.
Position: 40(3.6) and GAAR N/A
Reasons: GAAR Committee has confirmed in previous similar cases that no misuse or abuse. 40(3.6) n/a because corporation is not controlled by estate after loss is created.
XXXXXXXXXX 3-992291
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Madam:
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 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 rulings is being considered by a taxation services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.
Prior to her death, XXXXXXXXXX Tax Services Office was in XXXXXXXXXX and her Taxation Centre was in XXXXXXXXXX. The Estate's Tax Services Office will be in XXXXXXXXXX and the two Newcos' Tax Services Office is (or will be for the Newcos) XXXXXXXXXX. Their corporate tax returns are (or will be) filed at the XXXXXXXXXX Taxation Centre.
All statutory references herein, unless otherwise indicated, are references to the Income Tax Act (Canada), referred to as the "Act". The term "Paragraph" refers to a "numbered paragraph" in this letter.
Facts
1. XXXXXXXXXX died on XXXXXXXXXX.
2. XXXXXXXXXX was survived by two adult children, XXXXXXXXXX.
3. XXXXXXXXXX last will is dated XXXXXXXXXX, with a codicil dated XXXXXXXXXX.
4. The Executors appointed under the will are XXXXXXXXXX son, and XXXXXXXXXX, solicitor for the deceased and a Canadian resident who is unrelated to the deceased and her surviving children.
5. At the time of her death, XXXXXXXXXX was a resident of Canada and immediately following her death, her children were, and still are, residents of Canada.
6. Each of XXXXXXXXXX is, and each of XXXXXXXXXX Newco and XXXXXXXXXX Newco will be, a "private corporation" and a "taxable Canadian corporation" as defined in subsection 89(1).
7. XXXXXXXXXX was the registered owner of XXXXXXXXXX common shares of XXXXXXXXXX and XXXXXXXXXX common shares of XXXXXXXXXX at the time of her death. These shares represented XXXXXXXXXX % of the issued and outstanding share capital of XXXXXXXXXX, respectively.
7.1 XXXXXXXXXX.
7.2 XXXXXXXXXX.
7.3 XXXXXXXXXX.
7.4 XXXXXXXXXX.
8. At the date of XXXXXXXXXX death, the authorized share capital of each of XXXXXXXXXX consisted of XXXXXXXXXX common shares at par value of $XXXXXXXXXX each. The only issued and outstanding shares of these corporations are the common shares owned by XXXXXXXXXX as outlined above.
9. The fair market value of all the issued and outstanding XXXXXXXXXX shares was $XXXXXXXXXX at the time of XXXXXXXXXX death.
10. The fair market value of all the issued and outstanding XXXXXXXXXX shares was $XXXXXXXXXX at the time of XXXXXXXXXX death.
11. There was no insurance on the life of XXXXXXXXXX owned by XXXXXXXXXX.
12. The last will of XXXXXXXXXX provides, in general terms, that the executors of the estate have the right to incorporate a limited company for the purpose of acquiring any or all of the assets of her estate, and to consent to the reorganization of any corporation in which XXXXXXXXXX or her estate holds shares. The will also provides that XXXXXXXXXX should control XXXXXXXXXX, directly and/or indirectly through XXXXXXXXXX or otherwise. Further, XXXXXXXXXX share of the residue of XXXXXXXXXX estate is to be held in a testamentary trust for the benefit of XXXXXXXXXX.
13. XXXXXXXXXX Newco's authorized share capital will consist of:
- XXXXXXXXXX voting common shares having a par value of $XXXXXXXXXX per share;
- XXXXXXXXXX non-voting Class A preferred shares, having a par value of $XXXXXXXXXX per share; these shares will be redeemable and retractable at $XXXXXXXXXX per share, and will be entitled to a non-cumulative quarterly dividend of $XXXXXXXXXX per share;
- XXXXXXXXXX non-voting Class B preferred shares having a par value of $XXXXXXXXXX per share; these shares will be redeemable and retractable at $XXXXXXXXXX per share, and will be entitled to a non-cumulative quarterly dividend of $XXXXXXXXXX per share; and
- XXXXXXXXXX non-voting Class C preferred shares, having no par value; these shares will be redeemable, but not retractable, at $XXXXXXXXXX per share, and will be entitled to a cumulative annual dividend of $XXXXXXXXXX per share.
14. XXXXXXXXXX Newco's authorized share capital will consist of :
- XXXXXXXXXX voting Class V preferred shares, having a par value of $XXXXXXXXXX per share;
- One non-voting common share, having a par value of $XXXXXXXXXX per share;
- XXXXXXXXXX non-voting Class A preferred shares, having a par value of $XXXXXXXXXX per share; the shares will be redeemable and retractable at $XXXXXXXXXX per share, and will be entitled to a non-cumulative quarterly dividend of $XXXXXXXXXX per share;
- XXXXXXXXXX non-voting Class B preferred shares, having a par value of $XXXXXXXXXX per share; these shares will be redeemable and retractable at $XXXXXXXXXX per share, and will be entitled to a non-cumulative quarterly dividend of $XXXXXXXXXX per share; and
- XXXXXXXXXX non-voting Class C preferred shares, having no par value; these shares will be redeemable, but not retractable, at $XXXXXXXXXX per share, and will be entitled to a cumulative annual dividend of $XXXXXXXXXX per share.
Proposed Transactions
15. An inter vivos trust, the XXXXXXXXXX ("XXXXXXXXXX Trust"), will be established for XXXXXXXXXX the terms of which will mirror the terms of the testamentary trust created by XXXXXXXXXX will. XXXXXXXXXX will be the sole trustee of this trust.
16. Two new corporations,XXXXXXXXXX ("XXXXXXXXXX Newco") and XXXXXXXXXX ("XXXXXXXXXX Newco"), will be incorporated. The Estate will subscribe for one common share of XXXXXXXXXX Newco for $XXXXXXXXXX and the XXXXXXXXXX Trust will subscribe for XXXXXXXXXX voting Class V preferred shares of XXXXXXXXXX Newco for $XXXXXXXXXX.
17. The Estate will transfer all of its shares in XXXXXXXXXX to XXXXXXXXXX Newco pursuant to subsection 85(1), within the time limits provided by subsection 85(6). The Estate and XXXXXXXXXX Newco will elect under subsection 85(1) that the proceeds of disposition of the common shares be equal to their ACB of $XXXXXXXXXX. The Estate will receive as consideration the following shares:
a) XXXXXXXXXX Newco Class A preferred shares with an aggregate PUC of $XXXXXXXXXX, and
b) XXXXXXXXXX Newco Class B preferred shares with an aggregate PUC of $XXXXXXXXXX.
c) One common share, having a PUC of $XXXXXXXXXX.
18. The Estate will transfer all of its shares in XXXXXXXXXX to XXXXXXXXXX Newco pursuant to subsection 85(1), within the time limits provided by subsection 85(6). The Estate and XXXXXXXXXX Newco will elect under subsection 85(1) that the proceeds of disposition of the common shares be equal to their ACB of $XXXXXXXXXX. The Estate will receive as consideration the following shares:
a) XXXXXXXXXX Newco Class A preferred shares with an aggregate PUC of $XXXXXXXXXX, and
b) XXXXXXXXXX Newco Class B preferred shares with an aggregate PUC of $XXXXXXXXXX.
c) One non-voting common share, having a PUC of $XXXXXXXXXX.
19. The Estate will distribute the common and Class A preferred shares of XXXXXXXXXX Newco to XXXXXXXXXX, and will hold the non-voting common and Class A preferred shares of XXXXXXXXXX Newco in the testamentary trust established for XXXXXXXXXX.
20. XXXXXXXXXX will use its available cash to repay loans owing to XXXXXXXXXX will pay a dividend of $XXXXXXXXXX to XXXXXXXXXX Newco and XXXXXXXXXX will pay a dividend of $XXXXXXXXXX to XXXXXXXXXX Newco.
21. On or before XXXXXXXXXX Newco will redeem the XXXXXXXXXX Class B preferred shares held by the Estate for their fair market value of $XXXXXXXXXX, for which the Estate will receive a promissory note with a principal amount of $XXXXXXXXXX, and cash of $XXXXXXXXXX. A capital loss and deemed dividend of $XXXXXXXXXX will be realized by the Estate on the redemption of the Class B preferred shares. The promissory note will bear a market rate of interest, will be payable over XXXXXXXXXX years (but repayable at any time by XXXXXXXXXX Newco), and will be convertible into Class C preferred shares of XXXXXXXXXX Newco at the option of either XXXXXXXXXX Newco or the holder.
22. The Executors will make a timely election under subsection 164(6) in order that the capital loss realized on the Class B preferred shares of XXXXXXXXXX Newco can be offset against the capital gains reported on the terminal income tax return of XXXXXXXXXX.
23. On or before XXXXXXXXXX Newco will redeem the XXXXXXXXXX Class B preferred shares held by the Estate for their fair market value of $XXXXXXXXXX, for which the Estate will receive a promissory note with a principal amount of $XXXXXXXXXX, and cash of $XXXXXXXXXX. A capital loss and deemed dividend of $XXXXXXXXXX will be realized by the Estate on the redemption of the Class B preferred shares. The promissory note will bear a market rate of interest, will be payable over XXXXXXXXXX years (but repayable at any time by XXXXXXXXXX Newco), and will be convertible into Class C preferred shares of XXXXXXXXXX Newco at the option of either XXXXXXXXXX Newco or the holder.
24. The Executors will make a timely election under subsection 164(6) in order that the capital loss realized on the Class B preferred shares of XXXXXXXXXX Newco can be offset against the capital gains reported on the terminal income tax return of XXXXXXXXXX.
25. The Estate will distribute the promissory note payable by XXXXXXXXXX Newco to XXXXXXXXXX.
26. After XXXXXXXXXX, it is anticipated that XXXXXXXXXX will take action to convert all or part of the promissory note of XXXXXXXXXX Newco into Class C preferred shares of XXXXXXXXXX Newco. Similarly, it is anticipated that the Estate will cause all or part of the promissory note of XXXXXXXXXX Newco to be converted into Class C preferred shares of XXXXXXXXXX Newco.
27. The Estate will hold the promissory note or the Class C preferred shares of XXXXXXXXXX Newco, as the case may be, in the testamentary trust established for XXXXXXXXXX.
28. At some point in the future, an amalgamation of XXXXXXXXXX Newco, XXXXXXXXXX may take place. Similarly, there may be a future amalgamation of XXXXXXXXXX Newco and XXXXXXXXXX.
Purposes of Proposed Transactions
The primary assets owned by XXXXXXXXXX at the time of her death were XXXXXXXXXX common shares of XXXXXXXXXX and XXXXXXXXXX common shares of XXXXXXXXXX. The deemed disposition of these shares on her death gives rise to a combined capital gain of $XXXXXXXXXX with an associated significant tax liability. The planning for payment of this tax liability and avoidance of future double taxation are the main reasons for the proposed reorganization. In general, the objectives of the proposed series of transactions are:
- to enable the Estate to extract from XXXXXXXXXX the funds required to pay the taxes due on death without double taxation, and
- to avoid double taxation at the shareholder level on future distributions of values that will have been already taxed in XXXXXXXXXX terminal tax return.
With the above objectives in mind, there are a number of specific purposes associated with the proposed transactions:
1. It is intended that voting control and future growth of XXXXXXXXXX, through XXXXXXXXXX Newco, will be transferred from the Estate to XXXXXXXXXX; the future growth of XXXXXXXXXX, through XXXXXXXXXX Newco, will remain with the Estate in the testamentary trust for XXXXXXXXXX, and the voting control of XXXXXXXXXX, through XXXXXXXXXX Newco, will be held in a trust for XXXXXXXXXX.
2. The Executors wish to utilize the provisions of subsection 164(6) to the extent contemplated, and allowed, by the Act. Accordingly, included in the proposed transactions is the redemption of Class B preferred shares issued by two corporations, XXXXXXXXXX Newco and XXXXXXXXXX Newco, in order that the resulting capital loss can be offset against the capital gains reported in XXXXXXXXXX terminal tax return.
3. It is intended that the interest-bearing promissory notes issued to the Estate by XXXXXXXXXX Newco and XXXXXXXXXX Newco, representing part of the consideration paid on the redemption of the Class B preferred shares of XXXXXXXXXX Newco and XXXXXXXXXX Newco, be converted at a subsequent date into Class C preferred shares issued by XXXXXXXXXX Newco and XXXXXXXXXX Newco, since these two corporations will not likely have income against which their interest expense can be absorbed.
4. The reason a convertible promissory note is being issued on the redemption of Class B preferred shares, rather than issuing Class C preferred shares, is to avoid an inappropriate result under subsections 84(5) and 86(2.1).
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the proposed transactions, our rulings are as follows:
A. The provisions of subsection 26(5) of the Income Tax Application Rules, 1971 ("ITAR") will not be applicable for the purposes of computing the ACB of:
(i) the XXXXXXXXXX shares at the time of their transfer by the Estate to XXXXXXXXXX Newco as described in Paragraph 17;
(ii) the XXXXXXXXXX Class B preferred shares of XXXXXXXXXX Newco owned by the Estate at the time of their redemption by XXXXXXXXXX Newco described in Paragraph 21;
(iii) the XXXXXXXXXX shares at the time of their transfer by the Estate to XXXXXXXXXX Newco as described in Paragraph 18; and
(iv) the XXXXXXXXXX Class B preferred shares of XXXXXXXXXX Newco owned by the Estate at the time of their redemption by XXXXXXXXXX Newco described in Paragraph 23.
B. Subsection 40(3.6) will not apply to deny the capital loss realized by the Estate on the redemption of the Class B preferred shares of XXXXXXXXXX Newco and of the Class B preferred shares of XXXXXXXXXX Newco described in Paragraphs 21 and 23.
C. Subsection 245(2) will not be applied as a result of the proposed transactions, to redetermine the tax consequences of the proposed transactions described herein.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding provided that the Proposed Transactions (other than those described in Paragraphs 26 and 28) are completed before XXXXXXXXXX.
These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.
Nothing in this letter should be construed as confirmation of the tax consequences of any of the transactions described in this letter including, in particular, the application of subsection 55(2) to the dividend described in Paragraph 20, or confirmation of the ACB, fair market value or PUC of any property.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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