2000 Ruling 2000-0022943 - shares of credit union

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 shares of a credit union are considered as shares for purposes of the Act.

Position: Yes.

Reasons: It is represented that they are equity shares.

XXXXXXXXXX 								2000-002294

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letters of XXXXXXXXXX, and further to the information received on XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.

To the best of your knowledge and that of the taxpayer involved, none of the issues involved in this advance ruling request is being considered by a Tax Services Office or Taxation Centre in connection with a tax return already filed and none of these issues is under objection or appeal.

DEFINITIONS

In this letter, the following terms have the meanings specified:

"Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

"adjusted cost base" has the meaning assigned by section 54;

"credit union" has the meaning assigned by subsection 137(6);

"paid-up capital" has the meaning assigned by subsection 89(1);

"private corporation" has the meaning assigned by subsection 89(1);

and

"taxable Canadian corporation" has the meaning assigned by subsection 89(1).

Our understanding of the facts, proposed transactions and purposes of proposed transactions is as follows:

FACTS

1. XXXXXXXXXX.

2. XXXXXXXXXX.

3. XXXXXXXXXX authorized capital consists of an unlimited number of membership shares with a minimum par value of $XXXXXXXXXX each. As at XXXXXXXXXX, there were approximately XXXXXXXXXX membership shares issued and outstanding. It is represented that these membership shares are equity shares.

4. XXXXXXXXXX.

5. In XXXXXXXXXX, a new service was developed which involved administering the XXXXXXXXXX program for various credit unions throughout Canada. A new subsidiary, XXXXXXXXXX was incorporated on XXXXXXXXXX to carry on such services.

5A.XXXXXXXXXX authorized capital consists of an unlimited number of common shares. XXXXXXXXXX has issued XXXXXXXXXX common shares to XXXXXXXXXX for total consideration of $XXXXXXXXXX.

PROPOSED TRANSACTIONS

Regulatory approval from XXXXXXXXXX and the Registrar of Credit Unions is currently being sought for the proposed transactions. The "Transaction Date" will be a date subsequent to the date of these approvals.

6. A new credit union ( the "XXXXXXXXXX") will be incorporated under XXXXXXXXXX will be a taxable Canadian corporation. XXXXXXXXXX will have authorized capital comprising of shares as prescribed by XXXXXXXXXX These membership shares will have a $XXXXXXXXXX par value, will only be issued to members and will confer on their holders equal rights to:

• receive dividends declared on membership shares; and
• where provided by the articles, receive the remaining property of the credit union on dissolution.

7. On Transaction Date, each shareholder of XXXXXXXXXX will be entitled to dissent in respect of the XXXXXXXXXX described in paragraph 8 below. A shareholder who dissents is deemed to have given notice of intent to withdraw from the credit union. Each such dissenting shareholder will be entitled to be paid the fair value of the XXXXXXXXXX shares in respect of which the right of dissent is exercised.

8. XXXXXXXXXX.

9. XXXXXXXXXX.

10. XXXXXXXXXX will acquire the shares of XXXXXXXXXX from XXXXXXXXXX at their fair market value.

11. XXXXXXXXXX will establish a new wholly-owned subsidiary ("Sub") under XXXXXXXXXX to provide wealth management and financial planning services to members. Sub will be considered an "investment counselling and portfolio management corporation" under the regulations of XXXXXXXXXX. Sub will have independent impartial portfolio managers who will provide investment and wealth management advice on a fee for service basis as opposed to a commission. The authorized and issued outstanding capital of Sub will consist of one class of voting common shares. All of the issued and outstanding shares of Sub will be owned by XXXXXXXXXX.

12. XXXXXXXXXX will establish a wholly-owned subsidiary ("EmployeeCo") under XXXXXXXXXX to provide employee support to the other three subsidiaries. These services will be provided on a cost recovery basis. The authorized and issued outstanding capital of EmployeeCo will consist of one class of voting common shares. All of the issued and outstanding shares of EmployeeCo will be owned by XXXXXXXXXX.

ADDITIONAL INFORMATION

13. XXXXXXXXXX will be wound up into XXXXXXXXXX at some later date.

PURPOSE OF THE PROPOSED TRANSACTION

The overriding purpose of the proposed transactions, in general terms, is to facilitate a restructuring of the credit union to carry on its business in a manner allowed by the incoming legislation and to isolate risks arising from prior business. XXXXXXXXXX has been operating all divisions of its business substantially through one legal entity partly because of the restrictions under the former legislation. Different services provided by the credit union have different levels of risk. However, to remain competitive in the marketplace, financial services were expanded beyond traditional areas within the same legal entity.

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, purposes of the proposed transactions and proposed transactions, we confirm the following:

A. Provided that a shareholder of XXXXXXXXXX:

(i) holds his or her membership shares of XXXXXXXXXX (the "Designated Shares") as capital property;

(ii) deals at arm's length with XXXXXXXXXX immediately before the XXXXXXXXXX described in XXXXXXXXXX;

(iii) does not include any portion of the gain or loss otherwise determined, from the disposition of the Designated Shares in computing his or her income for the taxation year in which the exchange takes place;

(iv) does not file an election under subsection 85(1) or 85(2) with respect to the Designated Shares; and

(v) does not receive any consideration other than the shares of XXXXXXXXXX in exchange for the Designated Shares;

and further provided that, immediately after the exchange,

(vi) no such holder or any person or persons with whom he or she does not deal at arm's length, and no such holder together with any person or persons with whom he or she does not deal at arm's length, will

(a) control XXXXXXXXXX directly or indirectly in any manner whatever, or

(b) will beneficially own shares of XXXXXXXXXX having a fair market value of more than 50% of the fair market value of all of the issued and outstanding shares of the capital stock of XXXXXXXXXX

then, pursuant to paragraph 85.1(1)(a), such shareholder will be deemed

(A) to have disposed of the Designated Shares for proceeds of disposition equal to the adjusted cost base to him or her thereof immediately before the Exchange, and

(B) to have acquired the shares of XXXXXXXXXX at a cost equal to him or her equal to the adjusted cost base to him or her of the Designated Shares held by him or her immediately before the Exchange.

B. Provided that XXXXXXXXXX is a corporation incorporated as a credit union under the laws of the Province of XXXXXXXXXX and provided that at the time of its incorporation and at all times after that time it derives all or substantially all of its revenue from the sources described in subparagraphs (a)(i) to (vii) of the definition "credit union" in subsection 137(6), we confirm that XXXXXXXXXX will be a credit union as defined in subsection 137(6).

C. Subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R3 issued on December 30, 1996 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has reviewed, accepted or otherwise agreed to:

(a) the determination of the adjusted cost base, the fair market value or the paid-up capital of any shares referred to herein;

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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