2001 Ruling 2000-0054923 - 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.

XXXXXXXXXX                          2000-005492

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

You have been advised by your clients that none of the issues contained herein is:

(i) in an earlier return of the taxpayer or related person;

(ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed return of the taxpayer or related persons;

(iii) under objection by the taxpayer or related persons;

(iv) before the courts; or

(v) the subject of a ruling previously issued by the Directorate.

DEFINITIONS

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to date. All statutory references contained herein are to the provisions of the Act unless otherwise specified;

(b) "adjusted cost base" has the meaning assigned by section 54;

(c) XXXXXXXXXX;

(d) "capital property" has the meaning assigned by section 54;

(e) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

(f) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);

(f.1) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(g) [reserved];

(h) [reserved];

(i) "paid-up capital" has the meaning assigned by subsection 89(1);

(j) "private corporation" has the meaning assigned by subsection 89(1);

(k) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);

(l) "restricted financial institution" has the meaning assigned by subsection 248(1);

(m) "series of transactions or events" has the meaning provided in subsection 248(10);

(n) "specified financial institution" has the meaning assigned by subsection 248(1);

(o) "specified person" has the meaning assigned by subsection 112(2.2);

(p) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(q) "taxable dividend" has the meaning assigned by subsection 89(1);

(r) "taxable preferred share" has the meaning assigned by subsection 248(1); and

(s) "Treaty" means the XXXXXXXXXX.

Our understanding of the facts, proposed transactions and purposes of the proposed transactions is as follows:

FACTS

1. XXXXXXXXXX ("Parent") is a corporation formed under the laws of XXXXXXXXXX. Its shares are listed on the XXXXXXXXXX stock exchanges. Parent holds the shares XXXXXXXXXX.

2. XXXXXXXXXX.

3. Parent owns all of the issued shares of XXXXXXXXXX ("Foreignco"). Foreignco is a corporation formed under the laws of XXXXXXXXXX and carries on a XXXXXXXXXX business in XXXXXXXXXX. Foreignco is a non-resident of Canada for the purposes of the Act and a resident of XXXXXXXXXX for the purposes of the Treaty.

4. Foreignco, in turn, owns all of the issued shares of XXXXXXXXXX ("Canco"). Canco is a XXXXXXXXXX. Canco carries on a XXXXXXXXXX business in Canada.

5. Canco's issued shares consist of XXXXXXXXXX common shares with a stated capital of $XXXXXXXXXX and a paid-up capital of $XXXXXXXXXX. The shares of Canco are capital property of Foreignco.

6. The fair market value of the shares of Canco is not derived principally (i.e. more than XXXXXXXXXX%) from immovable property (as that term is defined in XXXXXXXXXX the Treaty) situated in Canada and Foreignco does not hold the shares of Canco through a permanent establishment in Canada for the purposes of the Treaty.

7. Canco owns all of the issued shares of XXXXXXXXXX ("Subco"), a corporation formed under the laws of XXXXXXXXXX. Subco carries on business in Canada as a XXXXXXXXXX.

8. Subco's issued shares consist of XXXXXXXXXX Class A shares with a stated capital and paid-up capital of $XXXXXXXXXX and XXXXXXXXXX Class B shares with a stated capital and paid-up capital of $XXXXXXXXXX. The shares of Subco are capital property of Canco.

9. Each of Canco and Subco is a taxable Canadian corporation, a private corporation, XXXXXXXXXX.

10. XXXXXXXXXX.

11. Before the commencement of the Proposed Transactions described below, Foreignco will form a new corporation under the laws of XXXXXXXXXX ("Newco"). Foreignco will then subscribe for one common share of Newco for $XXXXXXXXXX. Newco will be a taxable Canadian corporation.

12. Newco's authorized share capital will consist of an unlimited number of common shares and XXXXXXXXXX preferred shares (the "Newco Preferred Shares").

13. The Newco Preferred Shares will be non-voting, entitled to discretionary dividends, and redeemable and retractable for an amount (the "Newco Redemption Amount") equal to the fair market value of the shares of Subco (the "Subco Shares") on the Closing Date plus any declared and unpaid dividends on the Newco Preferred Shares.

PROPOSED TRANSACTIONS

The proposed transactions described in paragraphs 14 through 18 will occur on a single day (the "Closing Date").

14. Foreignco will transfer to Newco that number of Canco common shares having a fair market value equal to the fair market value of the Subco Shares on the Closing Date (the "Canco Common Shares"). In consideration for the Canco Common Shares, Newco will issue to Foreignco, XXXXXXXXXX common shares (the "Newco Common Shares") with a stated capital and paid-up capital equal to the paid-up capital of the Canco Common Shares. Foreignco and Newco will jointly elect under subsection 85(1) to transfer the Canco Common Shares to Newco at their fair market value on the Closing Date.

15. Canco will transfer the Subco Shares to Newco in consideration for Newco issuing to Canco the Newco Preferred Shares. The Newco Preferred Shares will have a stated capital and paid-up capital equal to the adjusted cost base to Canco of the Subco Shares. Canco and Newco will jointly elect under subsection 85(1) to transfer the Subco Shares to Newco at their adjusted cost base to Canco, which adjusted cost base will not exceed the fair market value of such shares.

16. Newco will redeem the Newco Preferred Shares (held by Canco) for an amount equal to the Newco Redemption Amount. Newco will satisfy the Newco Redemption Amount by issuing a demand, non-interest-bearing promissory note (the "Newco Note") to Canco with a principal amount equal to the Newco Redemption Amount.

17. Canco will repurchase the Canco Common Shares (held by Newco) for an amount equal to the Newco Redemption Amount. Canco will satisfy the purchase price by issuing a demand, non-interest-bearing promissory note (the "Canco Note") to Newco with a principal amount equal to the Newco Redemption Amount.

18. The Newco Note and the Canco Note will be set-off against each other and cancelled.

SUBSEQUENT TRANSACTION

19. XXXXXXXXXX.

20. Newco may amalgamate with Subco to form a new corporation.

PURPOSE OF PROPOSED TRANSACTIONS

21. The purpose of the proposed transactions is to transfer the Subco Shares to a newly-formed Canadian subsidiary of Foreignco (i.e. Newco) on a tax-deferred basis, XXXXXXXXXX:

(a) XXXXXXXXXX

(b) XXXXXXXXXX.

OTHER INFORMATION

22. The Newco Preferred Shares and the Canco Common Shares are not and will not be the subject of a guarantee agreement or a dividend rental arrangement.

23. The Newco Preferred Shares and the Canco Common Shares have not been and will not 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).

24. Neither Canco nor Newco will be, at any time before the completion of the proposed transactions, a corporation described in paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1).

25. The Newco Preferred Shares and the Canco Common Shares will not be shares to which paragraph (g) of the definition "taxable preferred share" in subsection 248(1), or paragraph (e) of the definition "taxable RFI shares" in subsection 248(1), will apply to deem the shares to be taxable preferred shares or taxable RFI shares, respectively.

26. Canco will not have any RDTOH at any time during the proposed transactions.

RULINGS

Provided that the above statements are accurate and constitute a complete and accurate disclosure of all of the relevant facts, purposes of the proposed transactions and proposed transactions, we confirm the following:

A. XXXXXXXXXX the Treaty will apply to exempt from tax under the Act the gain realized by Foreignco on the transfer of the Canco Common Shares to Newco described in paragraph 14 above. The cost to Foreignco of the Newco Common Shares and the cost to Newco of the Canco Common Shares will be equal to the fair market value of the Canco Common Shares on the Closing Date.

B. Provided that the requisite elections are filed in the prescribed form and within the prescribed time period, the provisions of subsection 85(1) will apply to the transfer by Canco of the Subco Shares to Newco as described in paragraph 15 above such that the elected amounts in respect of the transfer will be deemed to be Canco's proceeds of disposition and Newco's cost thereof pursuant to paragraph 85(1)(a).

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfer.

C. The provisions of subsection 84(3) will apply:

(a) as a result of the redemption of the Newco Preferred Shares as described in paragraph 16 above, to deem Newco to have paid and Canco to have received a taxable dividend equal to the amount by which the Newco Redemption Amount exceeds the paid-up capital of those shares immediately before the redemption; and

(b) as a result of the repurchase of the Canco Common Shares as described in paragraph 17 above, to deem Canco to have paid and Newco to have received a taxable dividend equal to the amount by which the Newco Redemption Amount exceeds the paid-up capital of those shares immediately before the repurchase.

D. The taxable dividends referred to in rulings C will:

(a) be included in the income of Canco and Newco, respectively, under paragraphs 12(1)(j) and 82(1)(a);

(b) be deductible by Canco and Newco, respectively, under subsection 112(1) in calculating their taxable income for the year in which such dividends are deemed to have been received and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4);

(c) will be excluded in determining the proceeds of disposition on the redemption and repurchase of the relevant shares under paragraph (j) of the definition "proceeds of disposition" in section 54;

(d) will reduce any loss arising from the redemption or repurchase of the shares under subsection 112(3);

(e) will not be subject to tax under Part IV except as provided under paragraph 186(1)(b); and

(f) will not be subject to tax under Part IV.1 or Part VI.1.

E. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v), then by virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends referred to in ruling C above. For greater certainty the proposed transactions described herein, in and by themselves, will not be considered to result in any disposition to or increase in the interest of an unrelated person as described in subparagraphs 55(3)(a)(i) to (v).

F. The set-off and cancellation of the Newco Note and the Canco Note described in paragraph 18 will not give rise to a forgiven amount for the purposes of sections 80 to 80.04.

G. The provisions of subsections 15(1), 56(2), 69(11) and 246(1) will not apply to any of the proposed transactions.

H. Subsection 245(2) will not apply 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 70-6R4 issued on January 29, 2000, 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 given.

COMMENTS

Nothing in this letter should be construed as implying that the Canada Customs and Revenue Agency has reviewed, accepted or otherwise agreed to:

(a) the determination of the adjusted cost base, the fair market value or the paid-up capital of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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