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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Application of the attribution rules in sections 74.1 to 74.4
Position: Subsection 74.4(2) may apply if certain conditions exist
Reasons:
XXXXXXXXXX 2000-003281
XXXXXXXXXX , 2001
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the Partnership and its partners (referred to individually as the "Partner" and collectively as the "Partners"). We also acknowledge your letters of XXXXXXXXXX and our telephone conversations in connection herewith.
Throughout this letter, the partnerships will be referred to as follows:
XXXXXXXXXX the Partnership
XXXXXXXXXX AAA
We understand that, to the best of your knowledge, and that of the taxpayers involved, none of the issues contained in this advance income tax ruling:
(a) is in an earlier return of the taxpayers or a related person;
(b) is being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the taxpayers or a related person;
(c) is under objection by the taxpayers or related person;
(d) is before the courts; or
(e) is the subject of a ruling previously issued by the Directorate.
You advised that the proposed transactions described herein, will have no impact on outstanding tax liabilities of the Partnership, the Partners or a related person.
DEFINITIONS
In this letter unless otherwise expressly stated:
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.), 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 provisions of the Act;
(b) "adjusted cost base" has the meaning assigned by section 54 and subsection 248(1);
(c) "agreed amount" in respect of a property means the amount that the transferor and transferee of the property have agreed upon in their election under subsection 85(1) in respect of the property;
(d) "CCRA" means, on or after November 1, 1999, the Canada Customs and Revenue Agency, and before November 1, 1999, Revenue Canada, Taxation;
(e) "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);
(f) "Canadian partnership" has the meaning assigned by subsection 102(1);
(g) "capital property" has the meaning assigned by section 54;
(h) "designated person" has the meaning assigned by subsection 74.5(5);
(i) "eligible property" has the meaning assigned by subsection 85(1.1);
(j) "Family Trust" means a discretionary trust set up by a relative or close friend of an AAA Partner who owns all of the shares of a Corporate Partner directly or an AAA Partner who controls a Corporate Partner through a Holdco, as the context dictates;
(k) "Holdco" means a holding company owned by an AAA Partner;
(l) "limited partner" has the meaning assigned by subsection 96(2.4);
(m) "paid-up capital" has the meaning assigned by subsection 89(1);
(n) "Paragraph" means a numbered paragraph in this letter;
(o) "private corporation" has the meaning assigned by subsection 89(1);
(p) "QCA" means the Quebec Companies Act;
(q) "Quebeco" means a new corporation to be set up under the QCA by a Family Trust as described in Paragraphs II.2 and II.8;
(r) "AAA Partner" means an individual who is a partner of AAA;
(s) "small business corporation" has the meaning assigned by subsection 248(1); and
(t) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).
I - FACTS
1. The Partnership is a Canadian partnership established under the laws of Quebec by virtue of a declaration of registration.
The Partnership is in the business of XXXXXXXXXX. The Partnership carries on business through its office situated in XXXXXXXXXX.
2. None of the Partners of the Partnership is a limited partner. The name of each Partner and the authorized signing officer for the particular Partner are as follows:
Name of Corporate Partner Authorized signing officer
XXXXXXXXXX
All the Partners of the Partnership are taxable Canadian corporations and private corporations (referred to individually as a "Corporate Partner" and collectively as the "Corporate Partners").
3. AAA is a professional partnership and is in the business of XXXXXXXXXX.
4. Each Corporate Partner is owned either directly by an individual who is an AAA Partner or by a Holdco all of the shares of which are owned by the particular AAA Partner. A Corporate Partner may hold other assets of significant value in addition to its investment in the Partnership. Holdco will generally have investment assets of significant value in addition to its investment in the Corporate Partner.
5. Participation in the Partnership is accomplished through the issuance of partnership units for cash. The Partnership has issued in aggregate XXXXXXXXXX units to the Corporate Partners. Each unit of the Partnership shares equally in the profits of the Partnership.
II - PROPOSED TRANSACTIONS
For AAA Partners who own the Corporate Partner directly
1. In each case, a Family Trust will be settled by a relative or friend of the AAA Partner (the "settlor") for a $XXXXXXXXXX in cash. The beneficiaries of the Family Trust will be the AAA Partner's spouse, children and the respective Corporate Partner. The sole trustee of the Family Trust will be the respective AAA Partner. The agreement of trust will provide for:
(a) the resignation of the AAA Partner as a trustee in the event of his bankruptcy, death or incapacity to act; and
(b) the replacement of the AAA Partner as sole trustee by XXXXXXXXXX trustees, XXXXXXXXXX of whom will be arm's length parties. The AAA Partner will be replaced as sole trustee by XXXXXXXXXX other individuals who will have been named by the settlor as replacement trustees at the time the Family Trust is established. In order to provide for unforeseen eventualities, replacement trustees for the original individuals will also be named in the trust document. In the event that, due to subsequent deaths of the replacement trustees, only XXXXXXXXXX trustees remain, those XXXXXXXXXX trustees shall select the XXXXXXXXXX trustee. If only one trustee or no trustees remain, replacement trustees shall be determined by the courts.
The trustees will have full discretion regarding the capital and income distributions and allocations from the Family Trust.
No property held by the Family Trust or any property substituted therefor or any other property forming part of the Family Trust shall, in any manner or in any circumstance whatsoever, revert to or be applied for the benefit of the settlor or any other person from whom the property or property for which it was substituted was received by the Family Trust. Neither the settlor nor such other person will make any determination or give direction as to the person to whom shall be distributed, or as to the disposal of, the property or property for which it was substituted that was received by the Family Trust from the settlor or such other person.
2. The Family Trust will incorporate a new corporation ("Quebeco") under the QCA. The authorized share capital of Quebeco will include the following classes of shares:
(a) an unlimited number of voting, fully participating common shares (the "Class "A" common shares");
(b) an unlimited number of non-voting, fully participating common shares (the "Class "B" common shares");
(c) an unlimited number of non-voting Class "A" preferred shares, entitled to a non-cumulative dividend at the rate of XXXXXXXXXX% per month of the redemption amount, and redeemable and retractable for an amount equal to the fair market value of the property received by the corporation on the issuance of such preferred shares;
(d) an unlimited number of non-voting Class "B" preferred shares, entitled to a non-cumulative dividend at the rate of XXXXXXXXXX% per month of the redemption amount, and redeemable and retractable for an amount equal to the fair market value of the property received by the corporation on issuance of such preferred shares;
(e) an unlimited number of voting Class "C" preferred shares, entitled to a non-cumulative dividend at the rate of XXXXXXXXXX% per annum of the redemption amount, redeemable for an amount equal to the fair market value of the property received by the corporation on issuance of such preferred shares and losing their voting rights in the case of a change of ownership or in the event of the bankruptcy of the AAA Partner; and
(f) an unlimited number of non-voting Class "D" preferred shares, entitled to a non-cumulative dividend rate of XXXXXXXXXX% per month of the redemption amount of $XXXXXXXXXX per share, and redeemable and retractable at their redemption amount.
All classes of shares of Quebeco that are entitled to dividends, will have rights and restrictions attached thereto that will ensure that dividends cannot be paid on the shares if to do so would reduce the value of the net assets of the company to less than the aggregate of the redemption amounts of all the issued Class "A" preferred shares.
3. The Family Trust will subscribe for XXXXXXXXXX Class "B" common shares of Quebeco for $XXXXXXXXXX. The Family Trust will obtain the $XXXXXXXXXX by way of an overdraft advance from a Canadian chartered bank. The advance will not be subject to any guarantee by a person, natural or otherwise.
4. The Corporate Partner will transfer, at fair market value, to Quebeco all of its assets including its interest in the Partnership. In consideration for such transfers, Quebeco will issue to the Corporate Partner Class "A" preferred shares with a redemption amount equal to the fair market value of the properties at the time of the transfer less the amount of the liabilities assumed. The liabilities assumed by Quebeco, in respect of eligible properties transferred, will not exceed the aggregate of the agreed amounts in respect of such property.
The sale agreement with respect to the transfer of the assets of the Corporate Partner to Quebeco will contain a price adjustment clause which will reflect the parties' intent to carry out the transfer for fair market value consideration.
Quebeco will add to the stated capital account maintained for its Class "A" preferred shares an amount not to exceed the amount by which the aggregate of the cost amounts, in the case of eligible properties, and the fair market value, in the case of other properties, of the properties transferred to Quebeco exceeds the liabilities assumed by Quebeco.
5. In respect of the transfers of property described in Paragraph II.4, the Corporate Partner and Quebeco will jointly elect, within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer to Quebeco of each property that is an eligible property. The agreed amount for the purposes of subsection 85(1) in respect of such property will be:
(a) where the particular property is inventory or capital property (other than depreciable property of a prescribed class), the lesser of the cost amount of the property to the Corporate Partner immediately before the transfer and the fair market value of such property; and
(b) where the particular property is depreciable property of a prescribed class, the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii).
The agreed amount in respect of each of the properties so transferred will be less than or equal to its fair market value at the time of the transfer.
6. The AAA Partner will acquire XXXXXXXXXX Class "C" preferred shares of Quebeco for $XXXXXXXXXX cash.
For AAA Partners who own the Corporate Partner through Holdco
7. In each case, a Family Trust will be settled by a relative or friend of the AAA Partner (the "person") for a $XXXXXXXXXX in cash. The beneficiaries of the Family Trust will be the AAA Partner's spouse, children and the respective Holdco. The sole trustee of the Family Trust will be the respective AAA Partner. The agreement of trust will provide for:
(a) the resignation of the AAA Partner as a trustee in the event of his bankruptcy, death or incapacity to act; and
(b) the replacement of the AAA Partner as sole trustee by XXXXXXXXXX trustees, XXXXXXXXXX of whom will be arm's length parties. The AAA Partner will be replaced as sole trustee by XXXXXXXXXX other individuals who will have been named by the settlor as replacement trustees at the time the Family Trust is established. In order to provide for unforeseen eventualities, replacement trustees for the original individuals will also be named in the trust document. In the event that, due to subsequent deaths of the replacement trustees, only XXXXXXXXXX trustees remain, those XXXXXXXXXX trustees shall select the XXXXXXXXXX trustee. If only one trustee or no trustees remain, replacement trustees shall be determined by the courts.
The trustees will have full discretion regarding the capital and income distributions and allocations from the Family Trust.
No property held by the Family Trust or any property substituted therefor or any other property forming part of the Family Trust shall, in any manner or in any circumstance whatsoever, revert to or be applied for the benefit of the settlor or any other person from whom the property or property for which it was substituted was received by the Family Trust. Neither the settlor nor such other person will make any determination or give direction as to the person to whom shall be distributed, or as to the disposal of, the property or property for which it was substituted that was received by the Family Trust from the settlor or such other person.
8. The Family Trust will incorporate a new corporation ("Quebeco") under the QCA. The authorized share capital of Quebeco will include the following classes of shares:
(a) an unlimited number of voting, fully participating common shares (the "Class "A" common shares");
(b) an unlimited number of non-voting, fully participating common shares (the "Class "B" common shares");
(c) an unlimited number of non-voting Class "A" preferred shares, entitled to a non-cumulative dividend at the rate of XXXXXXXXXX% per month of the redemption amount, and redeemable and retractable for an amount equal to the fair market value of the property received by the corporation on the issuance of such preferred shares;
(d) an unlimited number of non-voting Class "B" preferred shares, entitled to a non-cumulative dividend at the rate of XXXXXXXXXX% per month of the redemption amount, and redeemable and retractable for an amount equal to the fair market value of the property received by the corporation on issuance of such preferred shares;
(e) an unlimited number of voting Class "C" preferred shares, entitled to a non-cumulative dividend at the rate of XXXXXXXXXX% per annum of the redemption amount, redeemable for an amount equal to the fair market value of the property received by the corporation on issuance of such preferred shares and losing their voting rights in the case of a change of ownership or in the event of the bankruptcy of the AAA Partner; and
(f) an unlimited number of non-voting Class "D" preferred shares, entitled to a non-cumulative dividend rate of XXXXXXXXXX% per month of the redemption amount of $XXXXXXXXXX per share, and redeemable and retractable at their redemption amount.
All classes of shares of Quebeco that are entitled to dividends, will have rights and restrictions attached thereto that will ensure that dividends cannot be paid on the shares if to do so would reduce the value of the net assets of the company to less than the aggregate of the redemption amounts of all the issued Class "A" preferred shares.
9. The Family Trust will subscribe for XXXXXXXXXX Class "B" common shares of Quebeco for $XXXXXXXXXX. The Family Trust will obtain the $XXXXXXXXXX by way of an overdraft advance from a Canadian chartered bank. The advance will not be subject to any guarantee by a person, natural or otherwise.
10. Holdco will transfer, at fair market value, to Quebeco all of its assets including its shares in the respective Corporate Partner. In consideration for such transfers, Quebeco will issue to Holdco Class "A" preferred shares with a redemption amount equal to the fair market value of the properties at the time of the transfer less the amount of the liabilities assumed. The liabilities assumed by Quebeco, in respect of eligible properties transferred, will not exceed the aggregate of the agreed amounts in respect of such property.
The sale agreement with respect to the transfer of the assets of Holdco to Quebeco will contain a price adjustment clause which will reflect the parties' intent to carry out the transfer for fair market value consideration.
Quebeco will add to the stated capital account maintained for its Class "A" preferred shares an amount not to exceed the amount by which the aggregate of the cost amounts, in the case of eligible properties, and the fair market value, in the case of other properties, of the properties transferred to Quebeco exceeds the liabilities assumed by Quebeco.
11. In respect of the transfers of property described in Paragraph II.10, Holdco and Quebeco will jointly elect, within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer to Quebeco of each property that is an eligible property. The agreed amount for the purposes of subsection 85(1) in respect of such property will be:
(a) where the particular property is inventory or capital property (other than depreciable property of a prescribed class), the lesser of the cost amount of the property to Holdco immediately before the transfer and the fair market value of such property; and
(b) where the particular property is depreciable property of a prescribed class, the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii).
The agreed amount in respect of each of the properties so transferred will be less than or equal to its fair market value at the time of the transfer.
12. Holdco will acquire XXXXXXXXXX Class "C" preferred shares of Quebeco for $XXXXXXXXXX cash.
III - PURPOSES OF THE PROPOSED TRANSACTIONS
1. The purposes of the proposed transactions are to:
(a) protect the assets of the AAA Partner and his family from creditor claims; and
(b) ensure that future growth in the current assets of the Corporate Partner will accrue solely to the benefit of the Family Trust and indirectly to the benefit of the AAA Partner's spouse and children.
IV - RULINGS
Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:
A. The provisions of subsection 85(1) will apply to the transfer:
(i) by each Corporate Partner of its eligible property to Quebeco described in Paragraph II.4;
(ii) by each Holdco of its eligible property to Quebeco described in Paragraph II.10;
such that, the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a).
For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.
B. The provisions of sections 74.1, 74.2 and 74.3 will not apply to the transfer:
(i) by each Corporate Partner of all of its assets to Quebeco described in Paragraph II.4; and
(ii) by each Holdco of all its assets to Quebeco described in Paragraph II.10.
C. The provisions of subsection 74.4(2) will apply in computing the income of each AAA Partner as a result of the acquisition by a Quebeco that is not a small business corporation of property, as described in Paragraphs II.4 and II.10, where a designated person in respect of the particular AAA Partner would be a specified shareholder of that Quebeco if the definition "specified shareholder" in subsection 248(1) were read without reference to paragraphs (a) and (d) of that definition and if the reference therein to "any other corporation that is related to the corporation" were read as a reference to "any other corporation (other than a small business corporation) that is related to the corporation".
D. Subsection 245(2) will not be applied to 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 out in Information Circular 70-6R4 dated January 29, 2001 issued by the CCRA and are binding provided that the proposed transactions are completed before XXXXXXXXXX.
These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.
Nothing in this ruling should be construed as confirmation, express or implied:
(a) of the determination of the fair market value or adjusted cost base of any property referred to herein, or the paid-up capital of any shares;
(b) of any tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given; or
(c) that, for the purpose of any of the rulings given above, any adjustment to the fair market value of the properties transferred will be effective retroactively to the time of the transfer.
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 CCRA with respect to price adjustment clauses is as stated in Interpretation Bulletin IT-169.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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