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: Will the shares of a corporation that is financing its XXXXXXXXXX % interest in a CCPC that will build and operate a XXXXXXXXXX be qualified investments for an RRSP under 4900(12)(a) of the Regulations?
Position: Yes.
Reasons: The shares are being offered by a company that has and will only invest in shares and debts of a connected small business corporation which is currently building a plant to operate its business. The shares will satisfy 4900(12) because the business operations of the connected small business corporation have commenced.
XXXXXXXXXX 2001-007223
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Company") (XXXXXXXXXX)
This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. The Company was incorporated under the Business Corporations Act (XXXXXXXXXX) on XXXXXXXXXX. The Company was incorporated as XXXXXXXXXX and it will change its name to XXXXXXXXXX. The Company is a Canadian-controlled private corporation and a taxable Canadian corporation. The expression "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7) of the Income Tax Act (the "Act") and the expression "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.
The Company's address is XXXXXXXXXX. The Company files its tax returns with the XXXXXXXXXX Taxation Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.
2. The Company was incorporated for XXXXXXXXXX.
3. The Company's authorized share capital consists of the following:
(a) an unlimited number of voting XXXXXXXXXX Common Shares (the "Shares");
(b) an unlimited number of voting XXXXXXXXXX Common Shares;
(c) an unlimited number of non-voting XXXXXXXXXX Common Shares;
(d) an unlimited number of non-voting XXXXXXXXXX Common Shares;
(e) an unlimited number of voting XXXXXXXXXX Preferred Shares; and
(f) an unlimited number of non-voting XXXXXXXXXX Preferred Shares.
4. As of XXXXXXXXXX, the Company has issued XXXXXXXXXX Shares. The Shares are widely held by residents of the Province of XXXXXXXXXX. As of XXXXXXXXXX, no shareholder or related group of shareholders owns, directly or indirectly, 10% or more of the issued Shares of the Company.
5. The Company owns XXXXXXXXXX% of the issued common shares of XXXXXXXXXX ("Company A"). The Company also owns XXXXXXXXXX of the XXXXXXXXXX issued XXXXXXXXXX preferred shares of Company A which are redeemable for $XXXXXXXXXX each. The Company is connected with Company A pursuant to subsection 186(4) of the Act. All of the Company's assets consist of its investment in the shares of Company A and cash that will be invested in additional shares of Company A or in shareholder loans to Company A. This will also be the case when the proposed transactions described in 11 below are carried out.
6. Company A was incorporated under the Business Corporations Act (XXXXXXXXXX) on XXXXXXXXXX. Company A is a Canadian-controlled private corporation and a taxable Canadian corporation. XXXXXXXXXX. On XXXXXXXXXX, the shareholders of Company A entered into a unanimous shareholder agreement with respect to the ownership, the financing and make-up of the Board of Directors of Company A.
7. Company A was incorporated for the purpose of constructing and operating a XXXXXXXXXX (the "Plant"). The Plant's production will be primarily for export sale. It is anticipated that the total cost of building the Plant will be approximately $XXXXXXXXXX. Company A currently has two full time employees, a Project Implementation Manager and a Manager of Administration.
8. Company A has executed legally binding contracts with the following companies:
(a) XXXXXXXXXX is the project manager for the construction of the Plant and will be paid a fee of approximately $XXXXXXXXXX (approximately XXXXXXXXXX% of the original estimated Plant construction costs).
(b) XXXXXXXXXX are the consulting engineers for the construction of the Plant. They have been paid approximately $XXXXXXXXXX and will be paid a further $XXXXXXXXXX as the various stages of the Plant construction are completed.
(c) XXXXXXXXXX has agreed to provide XXXXXXXXXX for the Plant for a fee of $XXXXXXXXXX.
9. The construction of the Plant commenced on XXXXXXXXXX and by XXXXXXXXXX the site preparation work was completed at a cost of approximately $XXXXXXXXXX. The Plant is expected to be operational by XXXXXXXXXX and it is expected to create employment for up to XXXXXXXXXX people in the XXXXXXXXXX area.
10. The Province of XXXXXXXXXX has agreed to pay $XXXXXXXXXX to Company A as a non-repayable infrastructure grant. These funds will be advanced to Company A as various stages of the construction of the Plant are completed. The XXXXXXXXXX has agreed to lend $XXXXXXXXXX to Company A at a XXXXXXXXXX% annual rate of interest for a XXXXXXXXXX year term. The proceeds of this loan will be released to Company A commencing XXXXXXXXXX and at subsequent dates as various stages of the construction of the Plant are completed.
Proposed Transactions
11. At the end of XXXXXXXXXX, the Company will try to raise $XXXXXXXXXX by issuing an additional Shares to XXXXXXXXXX area investors. Each prospective investor will be provided with an offering memorandum, as required by the applicable securities law, setting out in considerable detail the business plan and objectives for the Company and Company A. It is expected that Shares of the Company will be sold to registered retirement savings plans ("RRSPs"). However, a Share of the Company will not be issued to an RRSP if the annuitant under the RRSP is a connected shareholder within the meaning assigned by subsection 4901(2) of the Income Tax Regulations (the "Regulations").
Within the meaning assigned by subsection 4901(2) of the Regulations, a connected shareholder is a person who does not deal at arm's length with the Company or a person that directly or indirectly holds 10% or more of the shares of any class of shares of the Company or of any corporations related to the Company. Where a person owns 10% or more but less than 50% of the shares of any class of shares of the Company or of any corporations related to the Company, the person may be exempted from being a connected shareholder if the aggregate of the cost amounts to the person and related person(s) of all of the shares of the Company or related corporation totals less than $25,000. For purposes of determining whether a person would be a connected shareholder, the person is deemed to own the shares owned by non-arm's length persons (including his or her RRSPs ).
12. All of the Company's cash, including the proceeds from the XXXXXXXXXX offering described in 11 above will be invested in shares or loaned to Company A to finance the construction of the Plant. It is anticipated that Company A's cash availability will be exhausted by XXXXXXXXXX and Company A will obtain the balance of the required financing for the Plant of approximately $XXXXXXXXXX from an institutional lender.
Purpose of the Proposed Transactions
13. The purpose of the proposed transactions is to help the Company attract investors, including RRSPs, to help finance its portion of the costs of the development of the Plant by Company A.
14. To the best of your knowledge and the knowledge of the Company, none of the issues involved in this request for an advance income tax ruling:
(a) is in an earlier return of the Company or of a person related to the Company;
(b) is being considered by a tax services office or tax centre in connection with a previously-filed return of the Company or of a person related to the Company;
(c) is under objection by the Company or by a person related to the Company;
(d) is before the courts; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate to the Company.
Ruling Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions and provided that the proposed transactions are carried out as described above, we rule as follows:
A. Provided that the annuitant of an RRSP is not a connected shareholder and provided that, at the time the shares described in 11 above are issued, the assets of the Company are essentially as described in 5 above, a Share of the Company acquired by the RRSP will, immediately after it is acquired, be a "qualified investment" as prescribed in paragraph 4900(12)(a) of the Regulations for purposes of paragraph (d) of the definition of "qualified investment" in subsection 146(1) of the Act.
The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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