2000 Income Tax Severed Letter 2000-0043091 - Internal reorganization

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 the proposed transactions involving the redemption of outstanding preferred shares will negate the ruling given regarding 55(3)(a)?

Position: NO.

Reasons: The tests in paragraph 55(3)(a) are met.

XXXXXXXXXX 2000-004309

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, wherein you requested an amendment to the advance income tax ruling issued on XXXXXXXXXX , 1999 ( our reference 990852) as amended by the letter issued on XXXXXXXXXX, 1999 (our reference 993081) ( collectively the "Amended Ruling").

All capitalized terms have the meaning assigned in the Amended Ruling.

ADDITIONAL PROPOSED TRANSACTION

The parties will enter into the following additional transaction in lieu of paragraphs (a) and (b) of the Additional Proposed Transaction of the Amended Ruling. Certain of these transactions are also subject to additional regulatory approvals.

Paragraphs (a) and (b) of the Additional Proposed Transaction described in the Amended Ruling will be deleted and replaced with the following:

(a) Distributing will declare a dividend of up to $XXXXXXXXXX on its common shares.

(b) Parent has incorporated "XXXXXXXXXX", a wholly-owned Canadian resident general purpose subsidiary corporation. Parent will subscribe for common shares for consideration of up to $XXXXXXXXXX.

(c) XXXXXXXXXX will arrange a line of credit of up to $XXXXXXXXXX with one or more Canadian banks.

(d) Parent will guarantee XXXXXXXXXX line of credit in consideration of a reasonable fee.

(e) XXXXXXXXXX.

(f) It is expected that XXXXXXXXXX after completion of the proposed transactions described in paragraphs (b) through (e) above, Distributing and/or Parent will raise capital XXXXXXXXXX. The transactions to effect this are dependent upon certain matters XXXXXXXXXX. The three proposals for achieving this are described below in subparagraphs (i), (ii) and (iii). These three proposals are not alternatives but are specific courses of action dependent on external conditions and are as follows:

(i) XXXXXXXXXX.

(ii) XXXXXXXXXX.

(iii) XXXXXXXXXX.

PURPOSE OF ADDITIONAL PROPOSED TRANSACTION

XXXXXXXXXX.

RULINGS

Provided that the above statements together with the statements of facts, purposes of proposed transactions and the proposed transactions contained in the Amended Ruling constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, we confirm as follows:

1. The Additional Proposed Transaction will not result in a change in ruling (h) in the Amended Ruling.

2. The proposed transactions will not, in and of themselves, cause the XXXXXXXXXX Shares to not be capital property to XXXXXXXXXX.

3. Subsection 84(3) will apply on:

(i) the redemption of the XXXXXXXXXX Shares described in paragraph (f)(i) above, to deem Distributing to have paid and XXXXXXXXXX to have received; and

(ii) the repurchase of the XXXXXXXXXX Shares by Distributing from XXXXXXXXXX described in paragraph (f)(iii) above, to deem Distributing to have paid and XXXXXXXXXX to have received;

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption or repurchase exceeds the aggregate paid-up capital in respect of such shares immediately before such redemption or repurchase, and any such dividend

(iii) will be included in computing the income, pursuant to subsection 82(1) and
paragraph 12(1)(j), of XXXXXXXXXX;

(iv) will result in a deduction by XXXXXXXXXX pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received in an amount equal to the amount of such dividend, and such deduction will not be prohibited by subsections 112(2.1) or 112(2.2); and

(v) will not be subject to tax under Parts VI.1.

4. If the proposed transaction described in paragraph (f)(i) is undertaken, the addition of a right of redemption to the XXXXXXXXXX Shares in favor of Distributing will not result in a disposition of the XXXXXXXXXX Shares.

5. If the proposed transaction described in paragraph (f)(ii) is undertaken, subparagraph 88(l)(a)(iii) will apply to deem XXXXXXXXXX to have disposed of its XXXXXXXXXX Shares for proceeds equal to the cost amount to XXXXXXXXXX .

6. If the proposed transaction described in paragraph (f)(ii) is undertaken, subsection 84(3) will not apply to deem XXXXXXXXXX to have received a dividend by virtue of the cancellation of the XXXXXXXXXX Shares.

The above rulings and the rulings given in the Amended Ruling are subject to the limitations and qualifications set forth in Information Circular 70-6R3 issued on December 30, 1996, and are binding provided that the proposed transactions are completed before XXXXXXXXXX.

Yours truly,

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