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: whether 55(5)(e)(ii) applies
Position: yes
Reasons: meets wording of provision
XXXXXXXXXX 1999-000926
D. Yuen
Attention: XXXXXXXXXX
February 10, 2000
Dear Sirs:
Re: Subparagraph 55(5)(e)(ii) of the Income Tax Act
We are writing in response to your letter of December 8, 1998 wherein you requested our comments on the following hypothetical situation. All legislative references are to provisions of the Income Tax Act R.S.C. 1985 (5th Supp.) c. 1, as amended (the "Act").
Situation
1. A Canadian-controlled private corporation ("Opco") has one shareholder, Mr. A who owns 100% of its common shares (the only issued class).
2. Mr. A dies. The terms of the will provide for the common shares of Opco to pass to a spouse trust, as described in subsection 70(6) (the "Trust"). The Trust has 3 trustees, Mrs. A (the widow of Mr. A) and 2 of Mr. A's sons, Son A and Son B.
3. Mr. A and Mrs. A also have 2 additional sons, Son C and Son D. The terms of the Trust are that, upon Mrs. A's death, the common shares of Opco are to be distributed among the remaining living children (Sons A, B, C and D).
4. The trustees wish to "freeze" the Trust's interest in Opco by exchanging the common shares of Opco for fixed value preferred shares and issuing new common shares to each of Sons A, B, C and D.
5. The trustees further wish to reorganize Opco pursuant to paragraph 55(3)(a) such that 4 new corporations (referred to collectively as the Newcos) are created with the Trust owning preferred shares in each of the Newcos and each son owning the common shares of his company. During the course of the reorganization, Opco will be wound up. The trustees wish to avoid meeting the prorata test required pursuant to paragraph 55(3)(b).
Since each of Sons A, B, C and D is related to Mrs. A (the only beneficiary of the Trust) and there are no other beneficiaries of the Trust while Mrs. A is alive, it is your view that A, B, C and D are related to the Trust pursuant to subparagraph 55(5)(e)(ii). This would permit a reorganization pursuant to paragraph 55(3)(a).
The situation described in your letter would appear to involve actual proposed transactions or contemplated transactions involving identifiable taxpayers. Assurance as to the tax consequences of such transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada ("IC 70-6R3"). However, we will provide the following comments.
1. It is our view that while Mrs. A is alive subparagraph 55(5)(e)(ii) will apply to deem each of the sons to be related to the Trust since each of them is related to Mrs. A, the only beneficiary of the Trust who is or may (otherwise than by reason of Mrs. A's death) be entitled to share in the income or capital of the Trust.
2. We are unable to comment on whether the provisions of paragraph 55(3)(a) and other provisions of the Act will be applicable in the described situation as we are unable to determine all the relevant facts and circumstances of the particular situation such as whether there will be a disposition of property or an increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) which is part of the series of transactions or events that includes the transactions or events described above.
These comments are provided in accordance with the guidelines set out in paragraph 22 of IC 70-6R3 and are not considered binding on the Canada Customs and Revenue Agency.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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