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:
1. Whether the internal reorganization is subject to the provisions of paragraph 55(3)(a)?
2. Whether the PUC reduction is subject to the provisions of subsection 84(2)?
Position:
1. Yes.
2. Yes.
Reasons:
1. It meets the test in paragraph 55(3)(a).
2. The proposed transactions constitute a reorganization of A Co's business.
XXXXXXXXXX 2000-002973
Attention: XXXXXXXXXX
XXXXXXXXXX , 2000
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letters of XXXXXXXXXX, and further to our telephone conversation of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.
To the best of your knowledge, and that of the taxpayers involved, none of the issues
involved in this ruling request:
(i) is in an earlier return of the taxpayers or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;
(iii) is under objection by the taxpayers or a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
(v) is the subject of a ruling previously issued by the Directorate.
DEFINITIONS
Unless otherwise stated, where the following terms are used in this letter, they have the meanings specified below:
"A Co." means XXXXXXXXXX;
"Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.l, 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;
"B Co." means XXXXXXXXXX;
"C Co." means XXXXXXXXXX;
XXXXXXXXXX;
"capital property" has the meaning assigned by section 54;
XXXXXXXXXX;
"cost amount" has the meaning assigned by subsection 248(1);
"D Co." means XXXXXXXXXX;
"depreciable property" has the meaning assigned by subsection 13(21);
"dividend rental arrangement" has the meaning assigned by subsection 248(1);
"E Co." means XXXXXXXXXX;
"eligible property" has the meaning assigned by subsection 85(1.1);
"F Co." means XXXXXXXXXX;
"First Preferred Note" has the meaning assigned in paragraph 20 of this letter;
"First Preferred Shares" means the preference shares, described in paragraph 18 of this letter, to be issued by B Co. to A Co. upon the transfer of assets to B Co., as described in paragraph 18, in furtherance of the reorganization of A Co.'s business;
"ITAR" refers to the Income Tax Application Rules, R.S.C. 1985 (5th Supp.), c.2;
XXXXXXXXXX;
"paid-up capital" has the meaning assigned by subsection 89(1);
"principal amount" has the meaning assigned by subsection 248(1);
"private corporation" has the meaning assigned by subsection 89(1);
"proceeds of disposition" has the meaning assigned by section 54;
"public corporation" has the meaning assigned by subsection 89(1);
"Regulations" means the Income Tax Regulations, Consolidated Regulations of Canada, 1978, c.945, as amended;
XXXXXXXXXX;
"related persons" has the meaning assigned by subsection 251(2);
"restricted financial institution" has the meaning assigned by subsection 248(1);
"specified financial institution" has the meaning assigned by subsection 248(1);
"subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);
"taxable Canadian corporation" has the meaning assigned by subsection 89(1);
"taxable dividend" has the meaning assigned by subsection 89(1);
"term preferred share" has the meaning assigned by subsection 248(1);
"UCC" means "undepreciated capital cost" within the meaning assigned to that expression by subsection 13(21);
and
"unrelated person" has the meaning assigned by paragraph 55(3.0l)(a).
Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows:
FACTS
1. A Co. is a taxable Canadian corporation and a public corporation. A Co. was incorporated in XXXXXXXXXX.
XXXXXXXXXX.
A. Co. has a XXXXXXXXXX fiscal year end.
2. The authorized share capital of A Co. consists of:
XXXXXXXXXX.
3. XXXXXXXXXX.
All of the issued common shares of A Co. are owned by C Co. and are held by it as capital property. The aggregate adjusted cost base of the common shares of A Co. owned by C Co. is, approximately, $XXXXXXXXXX.
XXXXXXXXXX.
4. B Co. is a taxable Canadian corporation and is neither a private corporation nor a public corporation for purposes of the Act. It was incorporated in XXXXXXXXXX under the Canada Business Corporations Act. The address of its head office is
XXXXXXXXXX.
B Co.'s business activities include the XXXXXXXXXX to A Co. and other corporations in the group.
B Co. has a XXXXXXXXXX fiscal year end.
5. The authorized share capital of B Co. consists of:
(a) an unlimited number of common shares without nominal or par value; and
(b) an unlimited number of First Preferred Shares, issuable in series with rights, privileges, restrictions and conditions largely at the discretion of B Co.'s board of directors;
The issued and outstanding share capital of B. Co. consists of XXXXXXXXXX common shares.
All of the issued common shares of B Co. are owned by D Co. and are held by it as capital property. The aggregate adjusted cost base of the common shares of B Co. owned by D Co. is $XXXXXXXXXX.
6. C Co. is a taxable Canadian corporation and is neither a private corporation nor a public corporation for purposes of the Act. C Co. was incorporated under the XXXXXXXXXX. The address of its head office is XXXXXXXXXX.
XXXXXXXXXX.
C Co. has a XXXXXXXXXX fiscal year end.
7. The authorized share capital of C Co. consists of an unlimited number of Cumulative Redeemable Retractable preference shares and an unlimited number of common shares.
XXXXXXXXXX.
Each of D Co., E Co. and F Co. is a taxable Canadian corporation. XXXXXXXXXX.
8.
XXXXXXXXXX
9. XXXXXXXXXX
10. XXXXXXXXXX.
11. The stated capital, as well as the paid-up capital, of the issued common shares of A Co. is approximately $XXXXXXXXXX.
XXXXXXXXXX
12. The stated capital, as well as the paid-up capital, of the issued common shares of B Co. is $XXXXXXXXXX.
The stated capital of the common shares of B Co. is attributable to a single issuance of those shares for cash to D Co.
13. A Co., B Co., and C Co. are all specified financial institutions because they are all related to one or more corporations that are specified financial institutions. None of A Co., B Co. or C Co. is, or will be at any time before the completion of the proposed transactions described below, a restricted financial institution or a corporation described in any of paragraphs (a) to (1) of the definition "financial intermediary corporation" in subsection 191(1) .
14. None of the First Preferred Shares is or will be subject to a guarantee agreement, within the meaning referred to in subsection 112(2.2) .
15. None of the First Preferred Shares is or will be subject to a dividend rental arrangement.
16. None of the First Preferred Shares will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5) .
PROPOSED TRANSACTIONS
17. XXXXXXXXXX.
18.
XXXXXXXXXX
19. A Co. and B Co. will jointly elect under subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), with respect to the transfer of any eligible property included in the XXXXXXXXXX transferred from A Co. to B Co. as described in paragraph 18 above. The agreed amount in respect of each such property in the joint election will not exceed the fair market value, at the time of transfer, of the respective property nor will it be less than the amount permitted under paragraph 85(1)(b).
Specifically, the agreed amount for each such property in the joint election will not be less than:
(A) in the case of capital property (other than depreciable property of a prescribed class) and inventory, the lesser of the amounts described in subparagraphs 85(l)(c. l)(i) and (ii);
(B) in the case of eligible capital property, the least of the amounts described in subparagraphs 85(l)(d)(i), (ii) and (iii); and
(C) in the case of depreciable property of a prescribed class, the least of the amounts described in subparagraphs 85(l)(e)(i), (ii) and (iii).
20. The day following the transfer of the XXXXXXXXXX as described in paragraph 18 above, B Co. will redeem all of its First Preferred Shares held by A Co. and will issue to A Co. a non-interest-bearing demand promissory note (the "First Preferred Note") having a principal amount and fair market value equal to the aggregate redemption price of such First Preferred Shares.
21. B Co. will then pay to A Co. an amount of cash equal to the estimated principal amount of the First Preferred Note. XXXXXXXXXX. When the principal amount of the First Preferred Note is known, any balance owing on the First Preferred Note will be paid in full in cash by B Co. If at that time B Co. has overpaid on the First Preferred Note, A Co. will pay the amount of such overpayment back to B Co. in cash. The First Preferred Note will then be cancelled.
22. The directors of A Co. will pass a resolution authorizing a reduction of the stated capital of the common shares of A Co. by the amount of $XXXXXXXXXX and the payment of such an amount to C Co. as a return of capital.
Pursuant to the directors' resolution, A Co. will reduce the paid-up capital of its common shares by $XXXXXXXXXX and pay to C Co. in respect of such reduction of paid-up capital, $XXXXXXXXXX in cash. The fair market value of the common shares of A Co. exceeds, and will exceed at the time of the reduction of paid-up capital, the amount that will be paid to C Co. on the reduction of paid-up capital.
XXXXXXXXXX.
23. XXXXXXXXXX.
24.
XXXXXXXXXX
25. None of the parties involved in the above proposed transactions intend, as part of a series of transactions or events which includes the redemption of the First Preferred Shares described in paragraph 20 above, to dispose of any property to, or to increase any interest in any corporation of any person or partnership that is an unrelated person to A Co. immediately prior to the redemption of the First Preferred Shares, in any of the ways described in subparagraphs 55(3)(a)(i) to (v) .
PURPOSE OF THE PROPOSED TRANSACTIONS
26. XXXXXXXXXX.
RULINGS
Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, purposes of the proposed transactions and the proposed transactions we confirm the following:
A. Provided that the requisite elections are filed under subsection 85(1) within the prescribed time period, the provisions of subsection 85(1) will apply, subject to the application of paragraph 88(2.2)(b) and of subsections 20(1.2) and 26(5) of the ITAR, to the transfer by A Co., of its properties that are eligible properties, to B Co., as described in paragraph 19 above, such that the agreed amount in respect of each transfer of such property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(l)(a) and in respect of depreciable property, the transferee's capital cost of each such property will be determined in accordance with subsection 85(5) .
For greater certainty, paragraph 85(l)(e.2) will not apply to the transfer.
B. On the redemption of all of the First Preferred Shares held by A Co. as described in paragraph 20 above, the amount, if any, by which the amount paid to redeem those shares exceeds the paid-up capital of those shares immediately before the redemption:
(i) will be deemed by paragraph 84(3)(a) to be a dividend paid by B Co,;
(ii) will be deemed by paragraph 84(3)(b) to be a dividend received by ACo.;
(iii) will be included in A Co.'s income pursuant to paragraph 12(l)(1);
(iv) to the extent that a deemed dividend in (ii) above is a taxable dividend, such dividend will, pursuant to subsection 112(1), be deductible in computing the taxable income of A Co. for the year in which the dividend is deemed to have been received, and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), (2.2), (2.3) or (2.4); and
(v) by virtue of the application of paragraph (j) of the definition "proceeds of disposition" in section 54, the amount of a deemed dividend described in (ii) above will be excluded from the proceeds of disposition of the share.
C. Part VI.1 will not apply to the deemed dividend described in ruling B above, deemed to be paid as a result of the redemption of the First Preferred Shares, because the dividend will be an excluded dividend pursuant to paragraph (a) of the definition "excluded dividend" in subsection 191(1) .
D. Part IV.1 will not apply to the deemed dividend described in ruling B above, deemed to be paid as a result of the redemption of the First Preferred Shares, because the dividend will be an excepted dividend pursuant to paragraph (b) of the definition "excepted dividend" in section 187.1 .
E. Provided that as part of the series of transactions or events that includes the proposed transaction described herein, there is no disposition of property, or increase of a person or partnership's interest in a corporation, described in any of subparagraphs 55(3)(a)(i) to (v), then, by virtue of paragraph 55(3)(a) of the Act, the provisions of subsection 55(2) will not apply to the taxable dividend referred to in ruling B. For greater certainty, the proposed transactions described in paragraphs 17 to 23 herein, in and by themselves, will not be considered to result in any disposition of property, or any increase of a person or partnership's interest in a corporation, described in any of subparagraphs 55(3)(a)(i) to (v).
F. Subsection 84(2) will apply to the amount paid by A Co. to its shareholder C Co. on the reduction of the paid-up capital of the common shares of A Co., as described in paragraph 22 above; however A Co. will not be deemed under subsection 84(2) to have paid a dividend on those shares provided that the amount paid does not exceed the amount of the reduction to the paid-up capital in respect of A Co.'s common shares.
G. Subsection 84(4.1) will not apply to deem any amount paid by A Co. to C Co. on the reduction of the paid-up capital of the common shares of A Co., as described in paragraph 22 above, to be a dividend.
H. The amount received by C Co. on the reduction of the paid-up capital of the common shares of A Co., as described in paragraph 22 above, will, by virtue of subparagraph 53(2)(a)(ii), be deducted in calculating the adjusted cost base of the common shares of A Co. to C Co.
I. The provisions of subsections 15(1), 56(2), 56(4) and 246(1) will not be applied as a result of the proposed transactions, in and by themselves.
J. Section 245 will not be applied as a result of the proposed transactions, in and of 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.
1. Nothing in these rulings should be construed as implying that the Canada Customs and Revenue Agency has reviewed, accepted or otherwise agreed:
(a) to the determination of the adjusted cost base, the fair market value, or the paid-up capital of any shares referred to herein;
or
(b) to any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
2. You have advised in paragraph 18 above, that the redemption/retraction amount of the First Preferred Shares will be subject to a price adjustment clause.
Nothing in this letter should be construed as confirming that, for the purposes of any of the rulings given herein, any adjustment to the fair market value of the properties transferred and redemption amount of the shares issued as consideration, will be effective retroactively to the time of the transfer and issuance of the shares. Furthermore, the rulings in this letter are not intended to apply to the operation of a price adjustment clause, since its coming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the Canada Customs and Revenue Agency with respect to price adjustment clauses is as stated in Interpretation Bulletin IT-169.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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