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: standard split up butterfly - no new issues
Position:
Reasons:
XXXXXXXXXX 2000-004195
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: Advance income tax ruling
XXXXXXXXXX ("Aco")
We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the above taxpayer. We also acknowledge your letter of XXXXXXXXXX.
To the best of your knowledge, and that of the parties to this ruling, none of the issues contained in this advance income tax ruling:
1. is in an earlier return of the taxpayer or a related person;
2. is being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
3. is under objection by the taxpayer or a related person;
4. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
5. is the subject of a ruling previously issued by this Directorate.
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, (the "Act").
Facts
1. Aco is a taxable Canadian corporation and a Canadian-controlled private corporation which was incorporated under the Canada Corporations Act on XXXXXXXXXX and continued under the Canada Business Corporations Act (the "CBCA") on XXXXXXXXXX. The terms "taxable Canadian corporation" ("TCC") and "Canadian-controlled private corporation" ("CCPC"), as used here and subsequently, have the meanings assigned by subsections 89(1) and 125(7), respectively.
2. The authorized share capital of Aco is an unlimited number of common shares, XXXXXXXXXX preferred shares, without nominal or par value which can be described as follows:
Common shares are voting, participating shares.
XXXXXXXXXX preferred shares are voting; non-participating; entitled to a discretionary, fixed, non-cumulative dividend in the amount of XXXXXXXXXX% per quarter of the fair market value of the consideration for which such shares were issued; and redeemable at the option of the corporation and retractable at the option of the holder thereof for the fair market value of the consideration for which such shares were issued.
XXXXXXXXXX
3. Aco's issued share capital consists of XXXXXXXXXX common shares as follows:
Number Adjusted Paid-Up
of Cost Base Capital
Shareholder Shares ("ACB") ("PUC")
XXXXXXXXXX ("Bco") XXXXXXXXXX
XXXXXXXXXX ("Cco") XXXXXXXXXX
Bco and Cco hold their shares as capital property which, as used here and subsequently, has the meaning assigned by section 54. Each of the shares of Aco is not a taxable preferred share which, as used here and subsequently, has the meaning assigned by subsection 248(1). The terms "ACB" and "PUC", as used here and subsequently, have the meanings assigned by section 54 and subsection 89(1), respectively.
4. Bco is a TCC and a CCPC which was incorporated under the CBCA on XXXXXXXXXX. Bco is controlled by XXXXXXXXXX ("B").
5. Cco is a TCC and a CCPC which was incorporated under the CBCA on XXXXXXXXXX. Cco is controlled by XXXXXXXXXX ("C").
6. B and C are brothers.
7. Bco and Cco are connected with Aco within the meaning of paragraph 186(4)(a).
8. As of XXXXXXXXXX Aco has a balance of $XXXXXXXXXX in its capital dividend account (the "CDA") and it had no refundable dividend tax on hand ("RDTOH"). The terms CDA and RDTOH, as used here, have the meanings assigned by subsection 89(1) and 129(3), respectively.
9. Aco is a XXXXXXXXXX. As at XXXXXXXXXX Aco's assets consisted of cash, accounts receivable, inventory, computers, office furniture and equipment, and goodwill and its liabilities consisted of bank indebtedness, accounts payable, accrued compensation and other liabilities, and income taxes payable.
10. As of XXXXXXXXXX Aco did not have any unutilized net capital losses or non-capital losses. The terms "net capital loss" and "non-capital loss" have the meanings assigned by subsection 111(8).
11. All of the assets of Aco were acquired after 1971.
12. On XXXXXXXXXX Bco incorporated a new corporation, XXXXXXXXXX ("Holdco B"), under the CBCA. Holdco B is a TCC and a CCPC.
13. The authorized share capital of Holdco B consists of an unlimited number of the following shares:
XXXXXXXXXX common shares which are voting.
XXXXXXXXXX common shares which are non-voting.
XXXXXXXXXX
14. The issued and outstanding share capital of Holdco B consists of one XXXXXXXXXX preferred share which is held as capital property by Bco and has an ACB and PUC of $XXXXXXXXXX.
15. On XXXXXXXXXX Cco incorporated a new corporation, XXXXXXXXXX ("Holdco C"), under the CBCA. Holdco C is a TCC and a CCPC.
16. The authorized share capital of Holdco C consists of an unlimited number of the following shares:
XXXXXXXXXX common shares which are voting.
XXXXXXXXXX common shares which are non-voting.
XXXXXXXXXX
17. The issued and outstanding share capital of Holdco C consists of one XXXXXXXXXX preferred share which is held as capital property by Cco and has an ACB and PUC of $XXXXXXXXXX.
Proposed Transactions
18. Each of Bco and Cco will transfer, at fair market value, all of its shares of Aco to Holdco B and Holdco C, respectively. As sole consideration, Holdco B and Holdco C will each issue XXXXXXXXXX shares having a fair market value immediately after the transfer equal to the fair market value immediately before the transfer of the Aco shares to Bco and Cco, respectively. In respect of the transfer, Bco and Holdco B and Cco and Holdco C will jointly elect pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), to transfer the shares of Aco at an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) to the transferor, which amount will not exceed the aggregate fair market value of the shares so transferred.
19. Each of Holdco B and Holdco C will add to the stated capital account in respect of its XXXXXXXXXX shares issued on the transfer of Aco shares as described in paragraph 18 above, an amount which will not exceed the greater of the PUC of the Aco shares so received on the transfer and the ACB to the transferor of such Aco shares, as determined under subsection 85(1).
20. Each of Holdco B and Holdco C will incorporate a new corporation under the CBCA ("Newco B" and "Newco C", respectively). Each of Newco B and Newco C will be a TCC and a CCPC.
21. The authorized share capital of Newco B and Newco C will each consist of an unlimited number of the following shares:
XXXXXXXXXX common shares which will be voting.
XXXXXXXXXX common shares which will be non-voting.
XXXXXXXXXX
22. The issued and outstanding share capital of Newco B will consist of one XXXXXXXXXX preferred share which will be held as capital property by Bco and will have an ACB and PUC of $XXXXXXXXXX.
23. The issued and outstanding share capital of Newco C will consist of one XXXXXXXXXX preferred share which will be held as capital property by Cco and will have an ACB and PUC of $XXXXXXXXXX.
24. Immediately before the transfers of property described in paragraph 26 below, the assets of Aco will be determined and will be classified into three types of property for purposes of paragraph 55(3)(b) as follows:
(a) cash or near cash property, being the current assets of Aco including cash, accounts receivable, inventory, rights arising from the prepayment of certain expenses, and income and other taxes recoverable;
(b) investment property, being all the assets of Aco, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property or a specified investment business; and
(c) business property, being all the assets of Aco, other than cash or near-cash property and investment property, any income from which would, for the purposes of the Act, be income from a business other than a specified investment business.
It is not expected that at the time of the transfer described in paragraph 26 below Aco will have any investment property. The term "specified investment business" has the meaning assigned by subsection 125(7).
25. In determining the net fair market value of each type of property of Aco immediately before the transfers described in paragraph 26 below, the liabilities of Aco will be allocated to, and will be deducted in the calculation of the net fair market value of each type of property of Aco as follows:
(a) Current liabilities (including the current portion of long-term debt) will be allocated to each cash or near cash property in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property, to the extent of the fair market value of each such property. To the extent that the allocation of current liabilities described herein exceeds the aggregate fair market value of the cash or near cash property, Aco will be considered to have a negative amount of cash or near cash property.
(b) Liabilities, other than current liabilities, that relate to a particular property, will be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its fair market value. Liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property. To the extent that the allocation of liabilities that pertain to a particular property as described herein exceeds the aggregate fair market value of all that type of property of Aco, Aco will be considered to have a negative amount of that type of property.
(c) Any liabilities of Aco ("excess unallocated liabilities) that remain after the allocations described in steps (a) and (b) above are made will then be allocated to the cash or near cash, investment and business property on a pro rata basis, based on the relative net fair market value of each type of property determined after the allocation of liabilities in accordance with the rules described in steps (a) and (b) above and prior to the allocation of such excess unallocated liabilities.
26. Aco will transfer, at fair market value, 50% of its cash or near cash and investment property to each of Newco B and Newco C. As consideration therefor, each of Newco B and Newco C will assume liabilities of Aco and, as additional consideration, Newco B and Newco C will issue XXXXXXXXXX shares of Newco B and Newco C having a fair market value and redemption amount equal to the amount by which the aggregate fair market value of the properties received by the respective transferee exceeds the fair market value of the liabilities assumed by that transferee.
27. Each of Newco B and Newco C will add to the stated capital account in respect of its XXXXXXXXXX shares issued on the transfers of property described in paragraph 26 above, an amount which will be equal to the amount by which the aggregate fair market value of the properties received by that transferee exceeds the aggregate fair market value of the liabilities assumed by that transferee.
28. Contemporaneously with the transfers of property described in paragraph 26 above, Aco will transfer, at fair market value, 50% of its business property to each of Newco B and Newco C. Upon the transfer of each business property, the liabilities relating to that property will not exceed the cost amount of that property and, accordingly, upon the transfer of each such business property, the transferee will assume all of the liabilities related thereto and issue XXXXXXXXXX shares having a fair market value and redemption amount equal to the difference between the fair market value of the transferred property and the amount of liabilities assumed in relation thereto. The term "cost amount", as used here and subsequently, has the meaning assigned by subsection 248(1).
29. In respect of the transfer described in paragraph 28 above, Aco and each of Newco B and Newco C will 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 and whose fair market value exceeds its cost amount, 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), an amount equal to 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, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
(c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).
In each case, the agreed amount will neither exceed the fair market value of the particular property transferred nor be less than the amount of any liabilities assumed by the transferee as consideration for the transfer of such property. The terms "eligible property" as used here and subsequently, "depreciable property", and "eligible capital property" have the meanings assigned by subsection 85(1.1), subsection 13(21) and section 54, respectively.
30. The amount that will be added to the stated capital account of the XXXXXXXXXX shares of Newco B and Newco C as a result of the transfers described in paragraph 28 above will equal:
(a) in the case of assets transferred pursuant to subsection 85(1), the difference between the amounts agreed upon as described in paragraph 29 above and the liabilities assumed on the transfers by Newco B and Newco C, respectively; and
(b) in the case of assets not transferred pursuant to subsection 85(1), the difference between the fair market value of the asset so transferred and the liabilities assumed on the transfers by Newco B and Newco C, respectively.
31. Newco B and Newco C will each redeem all of its XXXXXXXXXX shares held by Aco at their redemption amount and, as payment, each will issue a non-interest-bearing demand promissory note having a principal amount equal to the redemption amount of the shares so redeemed (the "Newco B Note" and the "Newco C Note", respectively).
32. The shareholders of Aco will, pursuant to the provisions of the CBCA, sign a special resolution consenting to the dissolution of Aco. No agreement or resolution relating to the winding-up of Aco or the distribution of its property will provide for the cancellation of any shares of Aco. Aco will then purchase for cancellation, at fair market value, all of its shares owned by Holdco B and Holdco C. Aco will pay the purchase price by transferring the Newco B Note to Holdco B and the Newco C Note to Holdco C. Each of Holdco B and Holdco C will accept such notes in full payment of the purchase price of its Aco shares. The repurchases from Holdco B and Holdco C will occur simultaneously.
33. Holdco B and Holdco C will take steps to authorize and complete the dissolution of Newco B and Newco C, as the case may be, under the applicable provisions of the CBCA. All of the property of Newco B, which will consist of its proportionate share of all the property of Aco immediately before the transfer described in paragraph 26 above, will be distributed to Holdco B and all of the property of Newco C, which will consist of its proportionate share of all the property of Aco immediately before the transfer described in paragraph 26 above, will be distributed to Holdco C.
34. To the extent that the obligations under the Newco B Note and the Newco C Note are not fully extinguished as a result of the confusion of liabilities which will occur as a result of the windings-up of Newco B and Newco C, Holdco B and Holdco C will elect in prescribed form under subsection 80.01(4) on or before the day on or before which each of them is required to file a return of income pursuant to section 150 for the taxation year in which the obligations under the Newco B Note and the Newco C Note will be settled or extinguished.
35. On the windings-up of Newco B and Newco C, Holdco B will assume the liabilities of Newco B and Holdco C will assume the liabilities of Newco C. The fair market value of the assets acquired by each of Holdco B and Holdco C on the windings-up of Newco B and Newco C will not be less than the amount of the liabilities assumed. Neither Holdco B nor Holdco C will claim any deduction from income or any capital losses as a consequence of the windings-up.
36. Steps will be undertaken to complete the dissolution of Aco under the provisions of the CBCA.
37. Except as set out in paragraphs 14 and 17 above, no property has, or will, become property of Aco, Bco, Cco, Holdco B, Holdco C, Newco B or Newco C and no liabilities have been, or will be, incurred by Aco, Bco, Cco, Holdco B, Holdco C, Newco B or Newco C in contemplation of and before the proposed transactions described above, except as described herein.
38. Except as described herein, none of the parties will dispose of any property to a partnership or an unrelated person as part of a series of transactions that includes the proposed transactions.
39. None of the parties is contemplating an acquisition of control of any corporation referred to above except as described herein.
40. None of the shares of Aco, Bco, Cco, Holdco B, Holdco C, Newco B or Newco C 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, event or 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).
41. None of Aco, Bco, Cco, Holdco B, Holdco C, Newco B or Newco C is, or will be at the time of the proposed transactions, a "specified financial institution" within the meaning of subsection 248(1).
42. The federal tax account numbers of Aco, Bco and Cco are as follows:XXXXXXXXXX, respectively. All such companies deal with the XXXXXXXXXX Tax Services Office.
43. None of the taxpayers referred to herein has any outstanding tax liabilities that could be affected by the proposed transactions described herein.
Purpose of the Proposed Transactions
Difficulties have arisen between B and C concerning the operation of Aco. The purpose of the proposed transactions is to divide the assets of Aco in order to separate the business of Aco between B and C.
Rulings Provided
Provided that the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we confirm the following:
A. Provided that Bco and Holdco B and Cco and Holdco C jointly file an election pursuant to subsection 85(1), in prescribed form and within the prescribed time, in respect of the transfers of Aco shares described in paragraph 18 above, the provisions of subsection 85(1) will apply to the transfer of property such that the agreed amount in respect of each such transfer will be deemed to be the proceeds of disposition to the transferor and the cost thereof to the 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. Provided that Aco and each of Newco B and Newco C 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 28 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.
C. As a result of the redemption by Newco B and Newco C of their XXXXXXXXXX shares held by Aco, as described in paragraph 31 above, and the purchase for cancellation by Aco of the Aco Shares held by Holdco B and Holdco C as described in paragraph 32 above, the amount, if any, by which the amount paid on the redemption or purchase for cancellation exceeds the PUC of such shares immediately before the purchase or redemption will be deemed, by virtue of paragraphs 84(3)(a) and 84(3)(b), to be a dividend paid by Aco, Newco B and Newco C, as the case may be, and a dividend received by Aco, Holdco B and Holdco C, as the case may be.
D. To the extent that a dividend that is deemed to be received by Aco, Holdco B and Holdco C as described in ruling C above is a taxable dividend, such dividend will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividend is deemed to have been received and, for greater certainty, the provisions of subsections 112(2.1) to (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividends and the provisions of subsection 112(3) will apply to reduce any loss which may otherwise arise to the recipient as a result of the purchase for cancellation or redemption.
E. The dividends that are deemed to be received by Aco, Holdco B and Holdco C, as described in ruling C above, will not be subject to tax under Part IV except as provided in paragraph 186(1)(b).
F. The dividends described in ruling C that are deemed to be paid by Newco B and Newco C to Aco on the redemption of the XXXXXXXXXX shares will not be subject to tax under Parts IV.1 and VI.1 by virtue of paragraph (c) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) because Aco will have a substantial interest, within the meaning of subsection 191(2), in Holdco B and Holdco C.
G. The Aco shares will not, as a result of the implementation of the proposed transactions described above, in and by themselves, be taxable preferred shares.
H. By virtue of the provisions of paragraph 55(3)(b), the provisions of subsection 55(2) will not apply to the dividends that are deemed to be received by Aco, Holdco B and Holdco C as described in ruling C above, provided that, as part of the series of transactions or events that includes the proposed transactions described herein, there is no:
(i) disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(ii) acquisition of property in the circumstances described in subparagraph 55(3.1)(b)(ii);
(iii) acquisition of property in the circumstances described in subparagraph 55(3.1)(c); or
(iv) acquisition of property in the circumstances described in subparagraph 55(3.1)(d),
which has not been described herein and, for greater certainty, subsection 55(3.1) will not apply to deny the application of paragraph 55(3)(b).
I. No acquisition of control of Newco B and Newco C will arise upon the redemption of the XXXXXXXXXX shares by Newco B and Newco C as described in paragraph 31 above by virtue of subsection 256(7).
J. The provisions of subsection 88(1) will apply to the windings-up of Newco B into Holdco B and Newco C into Holdco C as described in paragraph 33 above.
K. 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.
L. Subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed herein.
M. Provided that the properties acquired by Holdco B and Holdco C on the windings-up of Newco B and Newco C as described in paragraph 33 above, continue to be used by Holdco B and Holdco C for the purpose of gaining or producing income, and provided that interest on the liabilities assumed by Newco B and Newco C on the transfers of properties by Aco to Newco B and Newco C as described in paragraphs 26 and 28 above which are subsequently assumed by Holdco B and Holdco C on the windings-up of Newco B and Newco C described in paragraph 35 above, was deductible in computing the income of Aco before the assumptions described in paragraphs 26 and 28 above, an amount paid or payable by Holdco B or Holdco C (depending on the method regularly followed by each transferee in computing its income), not in excess of a reasonable amount, in respect of a year pursuant to a legal obligation to pay interest on the liabilities to be assumed by Holdco B and Holdco C will be deductible in computing the income of Holdco B or Holdco C for tax purposes in that year in accordance with the provisions of paragraph 20(1)(c).
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 ("IC 70-6R3") 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:
(a) the determination of the ACB or fair market value of any property referred to herein or the PUC of any shares referred to herein;
(b) the determination of any of the balances of the CDA or RDTOH referred to herein; and
(c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
2. As indicated in subparagraph 15(g) of IC 70-6R3, we are unable to provide rulings on tax-related calculations (3.2 and 3.4 of your letter).
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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