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: no new issues
Position:
Reasons:
XXXXXXXXXX
XXXXXXXXXX 2000-001578
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling. We also acknowledge receipt of a letter from XXXXXXXXXX in respect of the ruling request.
Unless otherwise stated all references to a statute herein are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c. 1, as amended.
Definitions
1. "DC" means XXXXXXXXXX.
2. "Realty" means XXXXXXXXXX.
3. "Canco" means XXXXXXXXXX.
4. "Newco" means a corporation to be incorporated as described in paragraph 8 below.
5. "Real Estate" means certain real estate properties owned by Realty in the Provinces of XXXXXXXXXX.
6. "Adjusted cost base" ("ACB") has the meaning assigned by section 54.
7. "Capital property" has the meaning assigned by section 54.
8. "Paid-up capital" ("PUC") has the meaning assigned by subsection 89(1).
9. "Public corporation" has the meaning assigned by subsection 89(1).
10. "Taxable Canadian corporation" ("TCC") has the meaning assigned by subsection 89(1).
Facts
1. DC was incorporated on XXXXXXXXXX under the laws of Canada and is resident in Canada. It is a public corporation and a TCC. DC is not a "subject corporation" within the meaning of subsection 186(3). DC currently has XXXXXXXXXX issued and outstanding common shares which are listed on the XXXXXXXXXX Stock Exchange and approximately XXXXXXXXXX shareholders, none of whom is related to DC within the meaning of subsection 251(2). DC has a fiscal period which ends on XXXXXXXXXX.
2. Realty was incorporated under the laws of Canada on XXXXXXXXXX under the name of XXXXXXXXXX. The name was changed to its present name on XXXXXXXXXX. Realty is a TCC. Realty currently has XXXXXXXXXX issued and outstanding XXXXXXXXXX common shares and XXXXXXXXXX issued and outstanding XXXXXXXXXX preferred shares. All of the issued and outstanding shares of Realty are owned by DC and represent capital property to DC. Realty has a fiscal period which ends on XXXXXXXXXX.
3. Canco was incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX and is currently operating under the laws of Canada. Canco has XXXXXXXXXX issued and outstanding common shares (the "Canco shares") which are all owned by Realty and represent capital property to Realty. Canco operates a XXXXXXXXXX.
4. Realty owns all of the Real Estate. The land and buildings which comprise the Real Estate are capital property to Realty. Realty invests and manages commercial real estate. Realty is also the lessee of XXXXXXXXXX real estate properties in XXXXXXXXXX.
5. As at XXXXXXXXXX DC had approximately $XXXXXXXXXX net capital loss carryovers and $XXXXXXXXXX non-capital loss carryovers (of which $XXXXXXXXXX expire in XXXXXXXXXX and $XXXXXXXXXX expire in XXXXXXXXXX).
6. As at XXXXXXXXXX Realty had approximately $XXXXXXXXXX net capital loss carryovers and $XXXXXXXXXX non-capital loss carryovers.
7. Realty is indebted to DC in the amount of $XXXXXXXXXX (the "Realty Debt").
Proposed Transactions
8. DC will incorporate Newco under the laws of Canada and will subscribe for common shares for nominal consideration. Newco will be a TCC.
9. Realty will transfer, at fair market value, some or all of the Real Estate and all of the Canco shares to Newco. As consideration, Newco will issue to Realty XXXXXXXXXX preferred shares in the capital of Newco which will have a redemption amount and a fair market value equal to that of the property transferred to it. Each of the Newco preferred shares will: be non-voting; be redeemable and retractable for a redemption amount that is XXXXXXXXXX of the amount which is equal to the aggregate of the fair market value of the transferred property immediately before the transfer; be entitled to non-cumulative dividends at a rate reasonably determined to be a market dividend rate; and entitle its holder to the redemption amount on the windup or dissolution of Newco in priority to any return to the holders of the common shares.
10. Except where subsection 13(21.2) applies, Newco and Realty will, in respect of the transfer described in paragraph 9 above, jointly elect pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), to transfer each property that is an eligible property, within the meaning of subsection 85(1.1), at an agreed amount which will be equal to:
(a) in the case of capital property (other than depreciable property of a prescribed class) included in the Real Estate being transferred, the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(b) in the case of depreciable property of a prescribed class, the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
(c) in the case of the Canco shares, the ACB of those shares (which will be less than the fair market value of those shares),
except that Newco and Realty may elect at a greater amount in respect of some of the transferred properties (but in no case at an amount greater than the fair market value of the property) in order to realize capital gains or income in Realty and offset them with Realty's capital and non-capital loss carryovers. Newco will add an amount to the stated capital account in respect of its preferred shares issued on the transfers described above, an amount equal to the aggregate of the agreed amounts determined herein.
11. Newco will then redeem all of its preferred shares owned by Realty and will agree to pay to Realty on demand a principal amount equal to the fair market value of the preferred shares so redeemed (the "Newco Debt"). The Newco Debt will not be interest-bearing except in the event of default. The amount of the Newco Debt will be less than the amount of the Realty Debt.
12. Newco will either be amalgamated with DC in a vertical short-form amalgamation or wound up into DC such that all of the common shares of Newco owned by DC will be cancelled and, in the event of an amalgamation, the amalgamated corporation will issue no new shares out of treasury. DC will assume all liability under the Newco Debt. The purpose of this transaction is to have the eventual dispositions of the real estate and the Canco shares occur in DC in order that the resulting income and/or capital gains would be offset by the net capital and non-capital loss carryovers.
13. Immediately following the amalgamation of Newco with DC or the windup of Newco into DC, Realty will assign the Newco Debt to DC in part payment of the Realty Debt and the balance of the Realty Debt will remain outstanding. The Newco Debt will be extinguished on such assignment to DC.
Other Transactions
14. It is contemplated that some of the loss carryovers described in paragraphs 5 and 6 above may be utilized by DC or Realty to offset income and capital gains realized in their XXXXXXXXXX fiscal periods from property sales. Each of the sales would be a sale described in clause 55(3)(a)(i)(B).
15. No liabilities will be incurred and no property will be acquired or disposed of, by DC, Realty or Canco in contemplation of and before the proposed transactions described above.
16. There are no significant transactions which were contemplated prior to the time of the ruling request and there are no transactions contemplated after completion of the proposed transactions described above which are part of the series of transactions or events that includes the proposed transactions described herein.
17. None of DC, Realty or Canco is or will be at the time of the proposed transactions described above, a specified financial institution as defined in subsection 248(1).
18. None of the shares of DC, Realty or Canco has been, or will be, at any time during the implementation of the proposed transactions described herein:
(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";
(b) a share that is issued or acquired as part of a transaction or event or a series of transactions or events of the type described in subsection 112(2.5); or
(c) the subject of a dividend rental arrangement as that term is defined in subsection 248(1).
19. DC, Realty and Canco file their federal tax returns at the XXXXXXXXXX Taxation Centre. Their business numbers are XXXXXXXXXX, Realty - XXXXXXXXXX, and Canco - XXXXXXXXXX.
Purpose of Proposed Transactions
In addition to its shareholdings in Realty, DC has other investments, chiefly in XXXXXXXXXX. DC is pursuing initiatives to dispose of Canco. In the past, the investment of real estate properties through Realty provided cash flow to support the cash flow requirements of DC. However, with the pending significant cash flow to be received from its investment in XXXXXXXXXX the real estate properties no longer fit in DC's long-term strategy, and some or all of these properties have been or will be put up for sale.
XXXXXXXXXX
The sale of Canco and the real estate properties will result in income and/or capital gains and it is desired to offset such income and gains with the significant loss carryovers which DC has. DC does not want to have Realty wind up into or amalgamate with DC since this would expose the other assets of DC to the potential ongoing obligations of Realty under its leases.
Rulings Provided
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts and proposed transactions and the purposes of the proposed transactions, we confirm the following:
A. Provided that Newco and Realty jointly file an election pursuant to subsection 85(1), in the prescribed form and within the prescribed time, in respect of the transfers of property described in paragraph 9 above, the provisions of subsection 85(1) will apply to the transfer of each eligible property such that the agreed amount in respect of each such transfer will be deemed to be the proceeds of disposition to transferor and the cost thereof to transferee pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply in respect of the transfers described herein.
B. As a result of the redemption by Newco of its preferred shares held by Realty as described in paragraph 11 above, the amount, if any, by which the amount paid on the redemption exceeds the PUC of such shares immediately before the redemption will be deemed, by virtue of paragraphs 84(3)(a) and 84(3)(b), to be a dividend paid by Newco and a dividend received by Realty. Such dividend, to the extent that it is a taxable dividend, will be deductible by Realty pursuant to subsection 112(1) in computing its taxable income for the year in which the dividend is deemed to have been received and, for greater certainty, such deduction will not be denied by any of subsections 112(2.1) to (2.4) and the provisions of subsection 112(3) will apply to reduce any loss which may otherwise arise to Realty as a result of the redemption.
C. The dividend described in Ruling B above will not be subject to tax under Parts IV.1 and VI.1 by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) because Realty will have a substantial interest, within the meaning of subsection 191(2), in Newco.
D. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the dividend deemed to be received by Realty as described in Ruling B above, provided that as part of the series of transactions or events as part of which the dividend is received, there is no event described in subparagraphs 55(3)(a)(i) to (v) which is part of the series of transactions or events, determined with reference to subsection 248(10), that includes the proposed transactions described herein. For greater certainty, the proposed transactions described herein, in and by themselves, will not be considered to result in a disposition or increase in interest described in subparagraphs 55(3)(a)(i) to (v) with respect to the dividends deemed to be received by Realty.
E. The extinguishment of part or all of the Newco Debt as a result of the assignment described in paragraph 13 above, will not give rise to a "forgiven amount" within the meaning of subsections 80(1) and 80.01(1).
F. The provisions of subsections 15(1), 56(2), and 246(1) will not apply as a result of the proposed transactions described herein, in and by themselves.
G. Subsection 245(2) will not be applied as a result of the proposed transaction, in and by themselves, to redetermine the tax consequences confirmed herein.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act.
The above 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 on the Canada Customs and Revenue Agency ("the CCRA"), provided the proposed transactions described herein are completed by XXXXXXXXXX.
1. Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed the determination of the ACB or fair market value of any property or the redemption amount or the PUC of any shares referred to herein.
2. Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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