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:
a) Whether all or substantially all of the fair market value of assets (which in this case consists substantially of cash) of a Canadian corporation is attributable to assets that are used principally in an active business for purposes of definition of "small business corporation" in subsection 248(1) of the Act and qualified investment described in paragraph 4900(12)(a) of the Regulations.
b) Whether an annuitant of an RRSP trust will be a "connected shareholder" as defined in subsection 4901(2) of the Regulations by virtue of subsection 4901(2.2) of the Regulations and each shareholder's "right of first refusal" in the unanimous shareholders' agreement.
c) If fractions of a share are qualified investments for purposes of paragraph 4900(12)(a) where the complete share would be qualified, how is the percentage ownership of shares calculated to determine if a particular RRSP trust and non-arm's-length persons hold 10% or more of the shares thereby causing the annuitant to be a "connected shareholder".
d) Does the phrase "owns, directly or indirectly" in the definition of "specified shareholder" contemplate a proportionate "look-through" of shares held through a company, shares of which are held as an arm's length investment?
Position:
a) Yes
b) No
c) A fractional interest in a share can be a qualified investment, and the fraction constitutes a percentage interest relative to the total shares of the corporation.
d) No
Reasons:
a) At the time immediately after acquisition by the RRSP based on the historical and projected use of cash which is supported by the described operations and the early stages of their business.
b) We have said in IT-419 that a "right of first refusal" does not confer a right to acquire a share, but rather an option to acquire a right. Subsection 4901(2.2) does not apply unless it is clear that the right of first refusal is being used to disguise a true 10% or greater ownership.
c) Definition of "share" in subsection 248(1) includes a fraction of a share and each fractional interest is valued on its own and is not viewed as ownership of an undivided whole.
d) Could find no previous interpretation of this issue, but concluded that the better view is, since the concept of "ownership" is stricter than the concept of "control" and there is no legislation similar to 256(1.2)(d), the proportionate look-through rule should not be applied.
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XXXXXXXXXX 1999-000953
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Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
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This is in reply to your letter of XXXXXXXXXX, in which you ask for an advance income tax ruling on behalf of the above-named taxpayers, and further to your subsequent submissions and our numerous telephone calls (XXXXXXXXXX).
DEFINITIONS
For purposes of this letter, the following terms have the meaning ascribed:
(a) "Act" shall mean the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1. as amended to the date hereof.
(b) "Annuitants" (or "Annuitant" where applicable) shall mean
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c) "Company" shall mean
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Our understanding of the facts and proposed transaction is as follows:
FACTS
1. The Company is a Canadian corporation (as that term is defined in subsection 89(1) of the Act) and was incorporated in XXXXXXXXXX. The Company is not controlled, directly or indirectly in any manner whatever, by one or more non-resident persons. The Company is not related to any other corporation.
2. The Company was formed for the purpose of XXXXXXXXXX. The Company has a permanent establishment in Canada, XXXXXXXXXX.
3. The fiscal year end is XXXXXXXXXX. During the period from the date of incorporation to the first fiscal year end, the Company reported sales XXXXXXXXXX of $XXXXXXXXXX. For the period from XXXXXXXXXX, the Company reported sales XXXXXXXXXX of $XXXXXXXXXX.
4. On the following dates, the Company reported the following assets:
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5. The Company has entered into contracts with XXXXXXXXXX.
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6.
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7. The Company issued one share on incorporation to XXXXXXXXXX persons so that each person had ownership of XXXXXXXXXX of the share. Since that date XXXXXXXXXX more shares have been issued and the total XXXXXXXXXX shares of the Company as at XXXXXXXXXX are held as follows (Annuitants are identified in bold):
Shareholders
Fraction of Share Owned
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8. A share held in fractions is not held as a partnership asset or in partnership with any of the other persons holding a fraction of the same share.
9. Each of the Annuitants deals with each of the Company's shareholders at arm's length and each of the Annuitants deals at arm's length with each Annuitant that is not his or her spouse.
10. The shareholders have signed a Unanimous Shareholders' Agreement which requires that a "selling shareholder" offer his or her respective Shares to the remaining shareholders in priority to new shareholders ("right of first refusal").
PROPOSED TRANSACTION
11. The Company intends to issue XXXXXXXXXX additional Shares on XXXXXXXXXX as follows:
Shareholders
Fraction of Share Owned
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12. Immediately after the Shares are issued under the proposed transaction, Annuitants will own (and will be deemed to own by virtue of the definition of "specified shareholder" in subsection 248(1), paragraphs (a) and (b)) Shares as follows:
RRSP Shareholders
Fraction of Share Owned
% Company Owned
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PURPOSE OF THE PROPOSED TRANSACTION
13. The Company intends to issue up to a maximum of XXXXXXXXXX Class XXXXXXXXXX shares with a purchase price of $XXXXXXXXXX each. As the purchase price is high, shareholders may hold a fraction of a share. Some of the individuals are seeking to utilize RRSP funds to purchase these fractional shares.
14. To the best of your knowledge, none of the issues involved in this ruling request are:
a) in an earlier return of the Company or a related person or an Annuitant or a related person,
b) being considered by any tax services office or tax centre in connection with a previously filed tax return of the Company or a related person or an Annuitant or a related person,
c) the subject matter of any notice of objection filed pursuant to the Act by the Company or a related person or an Annuitant or a related person,
d) before the courts, or
e) the subject of a ruling previously issued by this Directorate.
RULING GIVEN
Provided that the statement of facts and the description of the proposed transaction are correct and constitute a complete disclosure of all the relevant facts and terms of the proposed transaction, that the proposed transaction is completed in the manner described above, and that at the time the Shares described in 11 are issued, the XXXXXXXXXX acquisitions essentially as described in 5 and 6 above are completed or still anticipated and the assets held at that time are essentially as described in 4 above or have been used in the acquisition of XXXXXXXXXX as set out in 5 and 6 above, we rule as follows:
A Share of the Company acquired by a trust governed by a registered retirement savings plan of an Annuitant will, immediately after it is acquired, be a "qualified investment" as prescribed in paragraph 4900(12)(a) of the Regulations for purposes of paragraph (d) of the definition of "qualified investment" in subsection 146(1) of the Act.
The above advance income tax ruling is given subject to the limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, issued by the Canada Customs and Revenue Agency (the "CCRA") and are binding on the CCRA provided the XXXXXXXXXX Shares are acquired by the RRSPs on or before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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© Her Majesty the Queen in Right of Canada, 2000
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