2000 2000-003204A - Supplementary ruling letter

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: Additional facts provided along with a request for additional rulings and a time extension.

Position: Requested amendments made.

Reasons: Amendments requested were clarifying in nature and proposed transactions had not commenced.

XXXXXXXXXX
XXXXXXXXXX 2000-003204
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Supplementary Advance Income Tax Ruling
XXXXXXXXXX

Further to your letters of XXXXXXXXXX, as well as our various telephone conversations concerning advance income tax ruling #1999-001295 dated XXXXXXXXXX, 2000 (the "Ruling"), the following amendments are hereby made to the Ruling:

i) The following definition is added, alphabetically, to the list of terms provided at the beginning of the Ruling:

"dividend refund" has the meaning assigned by subsection 129(1);

ii) Paragraph 1 will be amended by adding the following to the list of taxpayers provided therein:

XXXXXXXXXX ("Dco")

iii) Paragraph 33 is replaced by the following like-numbered paragraph:

Opco's assets consist primarily of rental properties #1, 2, 3, 5 and 6. Properties #2, 3, 5 and 6 are registered in the name of Dco which holds legal title to such properties as a nominee or agent for Opco.

Dco is a CCPC and a taxable Canadian corporation. Dco was incorporated in XXXXXXXXXX pursuant to the laws of the province of XXXXXXXXXX. The issued and outstanding shares of Dco are as follows:

Aco XXXXXXXXXX common shares

Bco XXXXXXXXXX common shares

Pre-Cco XXXXXXXXXX common shares

Dco does not have any liabilities and does not have any assets, nor carry on any activities, other than as described above.

iv) The following paragraph is added immediately after paragraph 57:

57A. Bco will cause a new corporation ("Trusteeco") to be incorporated under the XXXXXXXXXX. Trusteeco will be a taxable Canadian corporation and a private corporation. The purpose of the incorporation of Trusteeco is to minimize the imposition of XXXXXXXXXX land transfer taxes on the transfer of property #1 as part of the transfers described in paragraph 63 below.

Bco will subscribe for one common share of Trusteeco on incorporation for a nominal amount.

Opco will transfer legal title (but not beneficial ownership) for property #1 to Trusteeco. Trusteeco will execute a declaration of trust that it is holding legal title to property #1 as a bare trustee for Opco. Trusteeco's only function will be to hold legal title to property #1 and it will not be able to carry out any actions with regard to that property without instructions from the beneficial owner thereof.

v) Paragraph 63 is amended by adding the following thereto:

Trusteeco will execute a new declaration of trust that it is holding property #1 as a bare trustee for Bsub. Trusteeco's only function will continue to be to hold legal title to property #1 and it will remain unable to carry out any actions with regard to that property without instructions from the beneficial owner thereof.

Dco will execute new declarations of trust that it is holding property #2 as a bare trustee for Asub; it is holding property #3 as a bare trustee for Bsub; and it is holding properties #5 and 6 as a bare trustee for Csub.

Dco's only function will be to hold legal title to the properties specified in the preceding sentence as bare trustee for the relevant beneficial owner and it will not be able to carry out any actions with regard to that property without instructions from the beneficial owner thereof.

vi) The reference to "paragraphs 60, 61 and 62" in the first line to paragraph 64 is deleted and replaced by a reference to "paragraphs 58 and 63".

vii) The second sentence to paragraph 67 is deleted and replaced by the following sentence:

Each of the Holdco Notes will have a principal amount and fair market value which will be equal to the aggregate redemption amount of the Class B Preferred shares so redeemed.

In addition, the following paragraph is added immediately after the first paragraph to paragraph 67 of the Ruling:

Each of Asub, Bsub and Csub will select the day on which all of the Class B Preferred shares are redeemed and the Holdco Notes are issued, as described above, to be the end of its first taxation year.

viii) Paragraph 68 is amended by adding, immediately after the first paragraph thereto, the following paragraph:

Prior to the distribution described above in this paragraph, Opco will elect, pursuant to subsection 83(2), in prescribed manner and prescribed form, that the full amount of any dividend referred to in subparagraph 88(2)(b)(i) be deemed to be a capital dividend. The resolution approving payment of the capital dividend will provide that to the extent that the amount of the capital dividend payable exceeds the balance of Opco's CDA at the time the dividend becomes payable, the directors of Opco will elect to treat the excess as a separate dividend that is a taxable dividend that became payable at that time.

ix) Paragraph 69 is amended by adding, immediately after the first paragraph thereto, the following paragraph:

Following receipt of the dividend refund to which Opco will become entitled as a result of the proposed transactions described herein, Opco will distribute one-third of such amount to each of Asub, Bsub and Csub. The refund will not arise until after the end of the fiscal period in which the proposed transactions described above are completed.

x) Paragraph 80 is amended by deleting the words "and no RDTOH" and by adding the following sentence:

At the end of its taxation year on XXXXXXXXXX Opco had, and will have immediately before the above reorganization, an RDTOH balance of $XXXXXXXXXX.

xi) Ruling A, is deleted and replaced by the following amended ruling:

A. As a result of the redemption by each of the Transferee Corporations of their Class B shares held by Opco as described in paragraph 67 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 Asub, Bsub and Csub and a dividend received by Opco.

xii) The following rulings are added immediately after ruling A:

A1. As a result of the distributions by Opco in the course of its winding-up described in paragraph 68 above:

(a) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (b) to (d) herein, Opco will be deemed to have paid, and each of Asub, Bsub and Csub to have received, a dividend (the "winding-up dividend") on the Class A Preferred shares, Class B Preferred shares, Class C Preferred shares and common shares of Opco, as the case may be, equal to the proportion of amount by which the amount of the funds or property distributed by Opco to each of Asub, Bsub and Csub in respect of the Class A Preferred shares, Class B Preferred shares, Class C Preferred shares and common shares, as the case may be, on the winding-up exceeds the amount by which the PUC of the Class A Preferred shares, Class B Preferred shares, Class C Preferred shares and common shares of Opco, as the case may be, is reduced as a result of the distribution, that the number of shares of such class held by each of Asub, Bsub and Csub, as the case may be, is of the number of issued shares of such class outstanding immediately before the distribution;

(b) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (a) herein as does not exceed Opco's CDA determined immediately before the payment of the winding-up dividend will be deemed, for purposes of the subsection 83(2) election referred to in paragraph 68 above, to be the full amount of a separate dividend;

(c) pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to the lesser of:

(A) Opco's pre-1972 CSOH as determined immediately before the payment of the winding-up dividend; and

(B) the amount by which the winding-up dividend exceeds the portion thereof, if any, in respect of which Opco will elect under subsection 83(2);

will be deemed not to be a dividend, and

(d) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in (b) herein that is deemed to be a separate dividend and the portion referred to in (c) herein that is deemed not to be a dividend, will be deemed to be a separate dividend that is a taxable dividend. To the extent that the amount elected for the purposes of subsection 83(2) exceeds Opco's CDA balance at the time that the dividend becomes payable, the excess will be deemed, by reason of subsection 184(3), to be a separate dividend that is a taxable dividend payable at that time, provided that Opco files an election under subsection 184(3), in the prescribed form and within the prescribed time, in respect of such excess.

A2. The deemed dividends referred to in rulings A and A1(a), to the extent they are taxable dividends, will

(a) be included in the income of the recipient corporation pursuant to paragraph 12(1)(j) and will be deductible in computing the taxable income of the recipient corporation for the year in which the dividends are deemed to have been received pursuant to subsection 112(1) and such deduction will not be denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4); and

(b) be excluded from the proceeds of disposition of the relevant shares and any loss arising from such disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3).

xiii) The references in the third line of ruling B(a) and the fourth line of ruling B(b) to "Ruling A(a)" are both deleted and replaced, in the first case, by a reference to "Ruling A" and, in the second case, by a reference to "Ruling A1(a)".

xiv) Ruling C is deleted and replaced by the following ruling:

C. The dividends described in rulings A and A1(a) 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 each of the dividend recipients will have a substantial interest, within the meaning of subsection 191(2), in the particular payor corporations.

xv) The reference in the post-amble of ruling E to "Ruling A" is deleted and replace by a reference to "Ruling A and Ruling A1(a)".

Notwithstanding the above amendments, the Ruling will remain applicable subject to the limitations and qualifications set out in the Ruling except that the date for completion of the proposed transactions (as provided in the paragraph immediately following ruling G) is hereby changed from XXXXXXXXXX to XXXXXXXXXX.

Yours truly,
for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
...cont'd