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: Sequential split-up butterflies
Position: Meets the requirements of the law
Reasons: Meets the requirements of the law
XXXXXXXXXX 2001-008479
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Business No./ Tax Service Office/
Taxpayer's Name Social Insurance Number Taxation Centre
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 to the best of their knowledge, none of the issues involved in this ruling, as they apply specifically to such parties:
- is in an earlier return;
- is being considered by a tax services office or taxation centre in connection with a previously filed tax return;
- is under objection;
- is before the courts; or
- is the subject of a previously issued ruling.
DEFINITIONS
In this letter, the following terms have the meaning specified:
Unless otherwise indicated, all references to a statute are to the Income Tax Act, R.S.C. 1985, c.l (5th Supp.), as amended to the date hereof (the "Act"), and all monetary amounts are expressed in Canadian dollars;
"Aco" has the meaning assigned by paragraph 4 below;
"Aco XXXXXXXXXX Shares" has the meaning assigned by paragraph 38 below;
"Aco XXXXXXXXXX Redemption Amount" has the meaning assigned by paragraph 38 below;
"adjusted cost base" has the meaning assigned by section 54;
"agreed amount" in respect of a property means the amount that the transferor and transferee of the property have agreed upon in an election under subsection 85(1);
"arm's length" has the meaning assigned by section 251;
"Bco" has the meaning assigned by paragraph 6 below;
"Bco XXXXXXXXXX Shares" has the meaning assigned by paragraph 38 below;
"Bco XXXXXXXXXX Redemption Amount" has the meaning assigned by paragraph 38 below;
"Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);
"capital dividend" has the meaning assigned by subsection 83(2);
"capital dividend account" has the meaning assigned by subsection 89(1);
"capital property" has the meaning assigned by section 54;
"Cco" has the meaning assigned by paragraph 8 below;
"Cco XXXXXXXXXX Shares" has the meaning assigned by paragraph 9 below;
"Cco Common Shares" has the meaning assigned by paragraph 9 below;
"Cco Distribution Date" means the date on which the distribution by Cco, as described in paragraph 45 below, will occur other than the distribution of cash and near-cash property;
"connected" has the meaning assigned by subsection 186(4);
"Corporations Act" means the Business Corporations Act (XXXXXXXXXX);
"Dco" has the meaning assigned by paragraph 10 below;
"Dco XXXXXXXXXX Shares" has the meaning assigned by paragraph 12 below;
"Dco XXXXXXXXXX Shares" has the meaning assigned by paragraph 12 below;
"Dco Common Shares" has the meaning assigned by paragraph 12 below;
"depreciable property" has the meaning assigned by subsection 13(21);
"distribution" has the meaning assigned by subsection 55(1);
"dividend refund" has the meaning assigned by subsection 129(1);
"dividend rental arrangement" has the meaning assigned by subsection 248(1);
"DN Partnership" has the meaning assigned by paragraph 18 below;
"Eco" has the meaning assigned by paragraph 11 below;
"eligible capital property" has the meaning assigned by section 54;
"eligible property" has the meaning assigned by subsection 85(1.1);
"excepted dividend" has the meaning assigned by section 187.1;
"excluded dividend" has the meaning assigned by subsection 191(1);
"fair market value" means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length;
"Fco" has the meaning assigned by paragraph 11 below;
"financial intermediary corporation" has the meaning assigned by subsection 191(1);
"forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);
"Gco" has the meaning assigned by paragraph 11 below;
"guarantee agreement" has the meaning assigned by subsection 112(2.2);
"Hco" has the meaning assigned by paragraph 11 below;
"Ico" has the meaning assigned by paragraph 13 below;
"Ico Common Shares" has the meaning assigned by paragraph 13 below;
"Ico XXXXXXXXXX Shares" has the meaning assigned by paragraph 13 below;
"inventory" has the meaning assigned by subsection 248(1);
"Jco" has the meaning assigned by paragraph 13 below;
"Kco" has the meaning assigned by paragraph 13 below;
"Lco" has the meaning assigned by paragraph 14 below;
"Lco XXXXXXXXXX Shares" has the meaning assigned by paragraph 14 below;
"Lco Common Shares" has the meaning assigned by paragraph 14 below;
"XXXXXXXXXX property" has the meaning assigned by paragraph 18 below;
"Mco" has the meaning assigned by paragraph 16 below;
"Mco Common Shares" has the meaning assigned by paragraph 17 below;
"Mr. A" has the meaning assigned by paragraph 1 below;
"Mr. B" has the meaning assigned by paragraph 1 below;
"Mr. C" has the meaning assigned by paragraph 1 below;
"Ms. D" has the meaning assigned by paragraph 1 below;
"Mr. E" has the meaning assigned by paragraph 1 below;
"Ms. F" has the meaning assigned by paragraph 1 below;
"Mr. G" has the meaning assigned by paragraph 1 below;
"Nco" has the meaning assigned by paragraph 18 below;
"net capital loss" has the meaning assigned by subsection 111(8);
"non-capital loss" has the meaning assigned by subsection 111(8);
"Oco" has the meaning assigned by paragraph 21 below;
"Oco XXXXXXXXXX Shares" has the meaning assigned by paragraph 22 below;
"Oco XXXXXXXXXX Shares" has the meaning assigned by paragraph 22 below;
"Oco Common Shares" has the meaning assigned by paragraph 22 below;
"Oco Distribution Date" means the date on which the distribution by Oco, as described in paragraph 32 below, will occur other than the distribution of cash and near-cash property;
"Oco Redemption Note" has the meaning assigned by paragraph 36 below;
"paid-up capital" has the meaning assigned by subsection 89(1);
"prepaid expenses" means the rights arising out of the prepayment of expenses;
"Pco" has the meaning assigned by paragraph 25 below;
"Pco XXXXXXXXXX Shares" has the meaning assigned by paragraph 25 below;
"Pco Common Shares" has the meaning assigned by paragraph 25 below;
"Pco XXXXXXXXXX Redemption Amount" has the meaning assigned by paragraph 25 below;
"Pco Redemption Note" has the meaning assigned by paragraph 34 below;
"predecessor corporation" has the meaning assigned by paragraph 21 below;
"pre-1972 capital surplus on hand" has the meaning assigned by subsection 88(2.1);
"principal amount" has the meaning assigned by subsection 248(1);
"Qco" has the meaning assigned by paragraph 26 below;
"Qco XXXXXXXXXX Shares" has the meaning assigned by paragraph 26 below;
"Qco XXXXXXXXXX Shares" has the meaning assigned by paragraph 26 below;
"Qco Common Shares" has the meaning assigned by paragraph 26 below;
"Rco" has the meaning assigned by paragraph 42 below;
"Rco XXXXXXXXXX Shares" has the meaning assigned by paragraph 42 below;
"Rco XXXXXXXXXX Redemption Amount" has the meaning assigned by paragraph 42 below;
"Rco Common Shares" has the meaning assigned by paragraph 42 below;
"Rco Redemption Note" has the meaning assigned by paragraph 47 below;
"refundable dividend tax on hand" has the meaning assigned by subsection 129(3);
"Regulations" mean the Income Tax Regulations;
"Sco" has the meaning assigned by paragraph 42 below;
"Sco XXXXXXXXXX Shares" has the meaning assigned by paragraph 42 below;
"Sco XXXXXXXXXX Redemption Amount" has the meaning assigned by paragraph 42 below;
"Sco Common Shares" has the meaning assigned by paragraph 42 below;
"Sco Redemption Note" has the meaning assigned by paragraph 47 below;
"short-term preferred share" has the meaning assigned by subsection 248(1);
"significant influence" has the meaning set out in section 3050 of the CICA Handbook ;
"specified financial institution" has the meaning assigned by subsection 248(1);
"specified investment business" has the meaning assigned by subsection 125(7);
"stated capital account" has the meaning assigned by section 24 of the Corporations Act;
"subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);
"substantial interest" has the meaning assigned by subsection 191(2);
"taxable Canadian corporation" has the meaning assigned by subsection 89(1);
"taxable dividend" has the meaning assigned by subsection 89(1);
"taxable preferred share" has the meaning assigned by subsection 248(1);
"Tco" has the meaning assigned by paragraph 40 below;
"Tco Common Shares" has the meaning assigned by paragraph 40 below;
"Trust A" has the meaning assigned by paragraph 2 below;
"Trust B" has the meaning assigned by paragraph 3 below;
"Uco" has the meaning assigned by paragraph 40 below;
"Uco Common Shares" has the meaning assigned by paragraph 40 below; and
"winding-up dividend" has the meaning assigned by paragraph 88(2)(b).
Our understanding of the facts, purposes of the proposed transactions and proposed transactions is as follows:
FACTS
1. Each of XXXXXXXXXX ("Mr. A"), XXXXXXXXXX ("Mr. B"), XXXXXXXXXX ("Mr. C"), XXXXXXXXXX ("Ms. D"), XXXXXXXXXX ("Mr. E"), and XXXXXXXXXX ("Ms. F") is an individual resident in Canada for purposes of the Act. XXXXXXXXXX ("Mr. G") is an individual who is resident in China and is not resident in Canada for purposes of the Act.
Mr. A and Mr. B are brothers.
Mr. A is the father of Mr. C, Ms. D and Mr. G.
Mr. B is the father of Mr. E and Ms. F.
2. The XXXXXXXXXX ("Trust A") was settled on XXXXXXXXXX. The trustees of Trust A are Mr. A, Mr. C, Ms. D and Mr. G. The beneficiaries of Trust A are Mr. C, Ms. D and Mr. G.
3. The XXXXXXXXXX ("Trust B") was settled on XXXXXXXXXX. The trustees of Trust B are Mr. B, Ms. F and Mr. E. The beneficiaries of Trust B are Mr. E and Ms. F.
4. XXXXXXXXXX ("Aco") is a Canadian-controlled private corporation and a taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Aco was incorporated under the Corporations Act on XXXXXXXXXX.
Aco owns XXXXXXXXXX% of the Cco Common Shares and has made advances to Cco.
5. Aco has authorized share capital consisting of XXXXXXXXXX shares, an unlimited number of XXXXXXXXXX shares and XXXXXXXXXX common shares.
The XXXXXXXXXX shares are entitled to one vote per share and are redeemable and retractable at $XXXXXXXXXX per share. The XXXXXXXXXX shares are non-voting and are redeemable and retractable at $XXXXXXXXXX per share. The common shares are participating and are entitled to one vote per share.
The issued and outstanding share capital of Aco consists of XXXXXXXXXX shares, XXXXXXXXXX shares and XXXXXXXXXX common shares owned as follows:
Shareholder Number Class
Mr. A XXXXXXXXXX
Mr. A XXXXXXXXXX
Trust A XXXXXXXXXX
6. XXXXXXXXXX ("Bco") is a Canadian-controlled private corporation and a taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Bco was incorporated under the Corporations Act on XXXXXXXXXX.
Bco owns XXXXXXXXXX% of the Cco Common Shares and has made advances to Cco.
7. Bco has authorized share capital consisting of XXXXXXXXXX shares, an unlimited number of XXXXXXXXXX shares and XXXXXXXXXX common shares.
The XXXXXXXXXX shares are entitled to one vote per share and are redeemable and retractable at $XXXXXXXXXX per share. The XXXXXXXXXX shares are non-voting and are redeemable and retractable at $XXXXXXXXXX per share. The common shares are participating and are entitled to one vote per share.
The issued and outstanding share capital of Bco consists of XXXXXXXXXX shares, XXXXXXXXXX shares and XXXXXXXXXX common shares owned as follows:
Shareholder Number Class
Mr. B XXXXXXXXXX
Mr. B XXXXXXXXXX
Trust B XXXXXXXXXX
8. XXXXXXXXXX ("Cco") is a Canadian-controlled private corporation and a taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Cco was incorporated under the Corporations Act on XXXXXXXXXX.
Cco is in the business of XXXXXXXXXX. Cco does not employ more than 5 full-time employees and could not reasonably be expected to require more than 5 full-time employees in carrying on its business of XXXXXXXXXX.
Cco's assets consist of accounts receivable, a XXXXXXXXXX property, shares of Dco, Ico and Lco and amounts receivable from Dco arising from interest-bearing advances made to Dco.
The XXXXXXXXXX property consists of land, building, and parking area. The building is depreciable property included in Class 1 of Schedule II to the Regulations and the parking area is depreciable property included in Class 17 of Schedule II to the Regulations.
Cco's liabilities include bank indebtedness, accounts payable, mortgages payable, deferred income taxes and amounts owing to related persons.
All amounts owing by or to related persons, including the amounts receivable from Dco, have no specific terms of repayment.
9. Cco has authorized share capital consisting of an unlimited number of XXXXXXXXXX shares (the "Cco XXXXXXXXXX Shares") and an unlimited number of common shares (the "Cco Common Shares"). The Cco XXXXXXXXXX Shares are non-voting and are redeemable and retractable at $XXXXXXXXXX per share.
The issued and outstanding share capital of Cco consists of XXXXXXXXXX Cco Common Shares and XXXXXXXXXX Shares owned as follows:
Shareholder Number Class
Aco XXXXXXXXXX Cco Common Shares
Bco XXXXXXXXXX Cco Common Shares
Mr. A XXXXXXXXXX Cco XXXXXXXXXX Shares
Mr. B XXXXXXXXXX Cco XXXXXXXXXX Shares
10. XXXXXXXXXX ("Dco") is a Canadian-controlled private corporation and a taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX.
Dco carries on the businesses of XXXXXXXXXX. Dco employs approximately XXXXXXXXXX full-time employees in carrying on its XXXXXXXXXX business.
Dco's assets consist of cash, marketable securities, accounts receivable, XXXXXXXXXX loans receivable, advances to related companies, prepaid expenses, housing inventories (including land inventories, development costs and construction costs), XXXXXXXXXX properties, shares of Ico, Lco and Mco, office furniture and equipment and an interest in a partnership described in paragraph 18 below.
Housing inventories (XXXXXXXXXX) are inventory.
XXXXXXXXXX
Dco's liabilities include bank indebtedness, accounts payable, XXXXXXXXXX deposits, deposits on housing sales, mortgages payable, advances from related persons, advances from the DN Partnership and deferred income taxes.
All amounts owing by or to related persons and the advances from the DN Partnership have no specific terms of repayment.
11. Dco was formed on the amalgamation of XXXXXXXXXX ("Eco") and XXXXXXXXXX ("Fco") under the provisions of the Corporations Act on XXXXXXXXXX.
Eco was formed on the amalgamation of XXXXXXXXXX ("Gco") and XXXXXXXXXX ("Hco") under the provisions of the Corporations Act on XXXXXXXXXX. Hco was a wholly-owned subsidiary of Gco immediately prior to the amalgamation.
Fco was incorporated under the Corporations Act on XXXXXXXXXX.
Prior to the amalgamation of Eco and Fco, the shareholders of Eco were:
Shareholder Number Class
Cco XXXXXXXXXX common shares
Mr. A XXXXXXXXXX XXXXXXXXXX preference
Mr. B XXXXXXXXXX XXXXXXXXXX C preference
Mr. E XXXXXXXXXX XXXXXXXXXX preference
Ms. F XXXXXXXXXX XXXXXXXXXX preference
Mr. C XXXXXXXXXX XXXXXXXXXX preference
Ms. D XXXXXXXXXX XXXXXXXXXX preference
Mr. G XXXXXXXXXX XXXXXXXXXX preference
Prior to the amalgamation of Eco and Fco, the shareholders of Fco were:
Shareholder Number Class
Cco XXXXXXXXXX common shares
Eco XXXXXXXXXX common shares
Eco XXXXXXXXXX XXXXXXXXXX preference shares
12. As a result of the amalgamation of Eco and Fco to form Dco, the authorized share capital of Dco consists of an unlimited number of XXXXXXXXXX preference shares, which are voting, redeemable and retractable at $XXXXXXXXXX per share; an unlimited number of XXXXXXXXXX preference shares (the "Dco XXXXXXXXXX Shares"), which are non-voting, redeemable and retractable at $XXXXXXXXXX per share; an unlimited number of XXXXXXXXXX preference shares (the "Dco XXXXXXXXXX Shares"), which are non-voting, redeemable and retractable at $XXXXXXXXXX per share; and an unlimited number of common shares (the "Dco Common Shares"). The XXXXXXXXXX preference shares are entitled to payment of dividends in priority to the Dco XXXXXXXXXX Shares and Dco XXXXXXXXXX Shares. The Dco XXXXXXXXXX Shares are entitled to payment of dividends in priority to the Dco XXXXXXXXXX Shares.
The issued and outstanding share capital of Dco consists of XXXXXXXXXX Dco XXXXXXXXXX Shares, XXXXXXXXXX Dco XXXXXXXXXX Shares and XXXXXXXXXX Dco Common Shares owned as follows:
Shareholder Number Class
Cco XXXXXXXXXX Dco Common Shares
Mr. E XXXXXXXXXX Dco XXXXXXXXXX Shares
Ms. F XXXXXXXXXX Dco XXXXXXXXXX Shares
Mr. C XXXXXXXXXX Dco XXXXXXXXXX Shares
Ms. D XXXXXXXXXX Dco XXXXXXXXXX Shares
Mr. G XXXXXXXXXX Dco XXXXXXXXXX Shares
Mr. A XXXXXXXXXX Dco XXXXXXXXXX Shares
Mr. B XXXXXXXXXX Dco XXXXXXXXXX Shares
13. XXXXXXXXXX ("Ico") is a Canadian-controlled private corporation and a taxable Canadian corporation, which was formed on the amalgamation of XXXXXXXXXX ("Jco") and XXXXXXXXXX ("Kco") on XXXXXXXXXX under the provisions of the Corporations Act.
Jco was a Canadian-controlled private corporation and taxable Canadian corporation which was incorporated on XXXXXXXXXX (Business Number XXXXXXXXXX). The issued share capital of Jco consisted of XXXXXXXXXX preference shares which were owned by Dco and XXXXXXXXXX common shares which were owned by Cco.
Kco was a Canadian-controlled private corporation and taxable Canadian corporation which was incorporated on XXXXXXXXXX (Business Number XXXXXXXXXX). The issued share capital of Kco consisted of XXXXXXXXXX preference shares which were owned by Dco and XXXXXXXXXX common shares which were owned by Cco.
The first taxation year of Ico ended on XXXXXXXXXX.
The authorized share capital of Ico consists of an unlimited number of common shares (the "Ico Common Shares") and an unlimited number of XXXXXXXXXX shares (the "Ico XXXXXXXXXX Shares").
On the amalgamation of Jco and Kco to form Ico, XXXXXXXXXX Ico Common Shares were issued to Cco and XXXXXXXXXX Ico XXXXXXXXXX Shares were issued to Dco.
Ico carries on the businesses of XXXXXXXXXX.
Ico does not employ more than 5 full-time employees and could not reasonably be expected to require more than 5 full-time employees in carrying on its business of XXXXXXXXXX.
Ico's assets consist of accounts receivable, housing inventories (including land inventories, development costs, and construction costs), commercial or industrial land held for development and a commercial rental property.
Housing inventories (including land inventories, development costs, and construction costs) are inventory.
The commercial or industrial land held for development is capital property.
The XXXXXXXXXX property consists of land and a building. The building is depreciable property included in Class 1 of Schedule II to the Regulations.
Ico's liabilities include bank indebtedness, accounts payable, XXXXXXXXXX deposits, deposits on housing sales, mortgages payable, advances from related persons and deferred income taxes.
All amounts owing to related persons have no specific terms of repayment.
14. XXXXXXXXXX ("Lco") is a Canadian-controlled private corporation and a taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Lco was incorporated under the Corporations Act on XXXXXXXXXX.
Lco's business consists of XXXXXXXXXX.
Lco does not employ more than 5 full-time employees and could not reasonably be expected to require more than 5 full-time employees in carrying on its business.
Lco's assets consist of cash, accounts receivable, prepaid expenses, advances to a related company and land held as a XXXXXXXXXX property (parking lot).
The land held as a XXXXXXXXXX property (parking lot) is a capital property.
Lco's liabilities include accounts payable, XXXXXXXXXX deposits and advances from related companies.
All amounts owing by or to related persons have no specific terms of repayment.
Lco has authorized share capital consisting of an unlimited number of XXXXXXXXXX% non-cumulative, non-voting, redeemable and retractable ($XXXXXXXXXX per share) XXXXXXXXXX preference shares (the "Lco XXXXXXXXXX Shares"); an unlimited number of XXXXXXXXXX% non-cumulative, voting, redeemable XXXXXXXXXX preference shares; and an unlimited number of common shares (the "Lco Common Shares").
15. The issued and outstanding share capital of Lco consists of XXXXXXXXXX Lco Common Shares and XXXXXXXXXX Lco XXXXXXXXXX Shares owned as follows:
Shareholder Number Class
Cco XXXXXXXXXX Lco Common Shares
Dco XXXXXXXXXX Lco XXXXXXXXXX Shares
16. XXXXXXXXXX ("Mco) is a Canadian-controlled private corporation and a taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Mco was incorporated under the Corporations Act on XXXXXXXXXX.
17. Mco is authorized to issue an unlimited number of common shares (the "Mco Common Shares").
The issued and outstanding share capital of Mco consists of XXXXXXXXXX Mco Common Shares which Dco acquired for cash on XXXXXXXXXX.
Mco's assets consists of cash or term deposits or a combination thereof.
18. XXXXXXXXXX ("Nco") is a Canadian-controlled private corporation and a taxable Canadian corporation.
Dco owned land inventory in XXXXXXXXXX (the "XXXXXXXXXX property"). Dco and Nco formed a partnership under the name XXXXXXXXXX (the "DN Partnership"), the business of which is the XXXXXXXXXX and to which the XXXXXXXXXX property was transferred by Dco on XXXXXXXXXX in consideration for a capital interest in the DN Partnership. Dco and Nco jointly elected to have the provisions of subsection 97(2) apply to the transfer.
The assets of the DN Partnership consist of advances to Dco and Nco which have no specific terms of repayment and housing inventories (including land inventories, development costs and construction costs), which are held as inventory.
The liabilities of the DN Partnership include bank indebtedness, accounts payable and deposits on housing sales.
TRANSACTIONS TO BE IMPLEMENTED PRIOR TO THE PROPOSED TRANSACTIONS
19. Mco will reduce the stated capital of the Mco Common Shares under the provisions of the Corporations Act by the amount of $XXXXXXXXXX, the amount of which it will pay to its shareholder Dco on that reduction.
20. As described in paragraph 10 above, Dco owns, among other properties, XXXXXXXXXX properties. Included in the XXXXXXXXXX properties owned by Dco are two properties in each of which Dco owns a XXXXXXXXXX% interest. The XXXXXXXXXX% interest in each of these two properties is owned by a person who deals at arm's length with Dco. Dco and the arm's length person intend to sell both of these properties to another arm's length person (or persons) and both properties are subject to a listing agreement for sale. On a sale of either of the properties, Dco may receive cash or indebtedness or a combination thereof in consideration for its XXXXXXXXXX% interest in such property.
PROPOSED TRANSACTIONS
The following transactions will occur in the order presented below (unless otherwise indicated).
Amalgamation of Dco, Ico, Lco and Mco
21. Dco, Ico, Lco and Mco, each of which will be a predecessor corporation, will amalgamate under the provisions of the Corporations Act to form "Oco" whereby:
(a) all of the property (except any amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become property of Oco by virtue of the amalgamation;
(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of Oco by virtue of the amalgamation; and
(c) all of the shareholders (except any predecessor corporation) who owned shares of the capital stock of any predecessor corporation immediately before the amalgamation will receive shares of the capital stock of Oco because of the amalgamation.
The fair market value of the shares of Oco received by each shareholder will be equal to the fair market value of the shares held by the particular shareholder in the predecessor corporation. Oco will be a Canadian-controlled private corporation and a taxable Canadian corporation and will be governed by the provisions of the Corporations Act.
22. Oco will be authorized to issue an unlimited number of XXXXXXXXXX preference shares (the "Oco XXXXXXXXXX Shares"), an unlimited number of XXXXXXXXXX preference shares (the "Oco XXXXXXXXXX Shares") and an unlimited number of common shares (the "Oco Common Shares"). The Oco XXXXXXXXXX Shares and the Oco XXXXXXXXXX Shares both will be non-voting and redeemable and retractable at $XXXXXXXXXX per share. The Oco XXXXXXXXXX Shares will be entitled to payment of dividends in priority to the Oco XXXXXXXXXX Shares.
23. The XXXXXXXXXX issued Dco Common Shares held by Cco will be converted into XXXXXXXXXX Oco Common Shares, on the basis of XXXXXXXXXX Oco Common Shares for 1 Dco Common Share.
The XXXXXXXXXX issued Dco XXXXXXXXXX Shares will be converted into XXXXXXXXXX Oco XXXXXXXXXX Shares, on the basis of XXXXXXXXXX Oco XXXXXXXXXX Shares for 1 Dco XXXXXXXXXX Share.
The XXXXXXXXXX issued Dco XXXXXXXXXX Shares will be converted into XXXXXXXXXX Oco XXXXXXXXXX Shares, on the basis of XXXXXXXXXX Oco XXXXXXXXXX Shares for 1 Dco XXXXXXXXXX Share.
The XXXXXXXXXX issued Ico Common Shares held by Cco will be converted into XXXXXXXXXX Oco Common Shares, on the basis of XXXXXXXXXX Oco Common Shares for 1 Ico Common Share.
The XXXXXXXXXX issued Lco Common Shares held by Cco will be converted into XXXXXXXXXX Oco Common Shares, on the basis of XXXXXXXXXX Oco Common Shares for 1 Lco Common Share.
All of the shares of Mco, the XXXXXXXXXX Ico XXXXXXXXXX Shares and the XXXXXXXXXX Lco XXXXXXXXXX Shares will be cancelled without any repayment of capital in respect thereof.
24. Oco will add to the stated capital account maintained for the Oco Common Shares an amount equal to the aggregate of the paid-up capital, immediately before the amalgamation, of the XXXXXXXXXX Dco Common Shares, the XXXXXXXXXX Ico Common Shares, and the XXXXXXXXXX Lco Common Shares.
Oco will add to the stated capital account maintained for the Oco XXXXXXXXXX Shares an amount equal to the paid-up capital, immediately before the amalgamation, of the XXXXXXXXXX Dco XXXXXXXXXX Shares.
Oco will add to the stated capital account maintained for the Oco XXXXXXXXXX Shares an amount equal to the paid-up capital, immediately before the amalgamation, of the XXXXXXXXXX Dco XXXXXXXXXX Shares.
Single-Wing Butterfly Reorganization of Oco
Incorporation of Pco
25. A new corporation ("Pco") will be incorporated under the Corporations Act, which will be a Canadian-controlled private corporation and a taxable Canadian corporation.
Pco will be authorized to issue an unlimited number of XXXXXXXXXX preference shares (the "Pco XXXXXXXXXX Shares") and an unlimited number of common shares (the "Pco Common Shares").
The Pco XXXXXXXXXX Shares will be non-voting and redeemable and retractable at an amount per share (the "Pco XXXXXXXXXX Redemption Amount") equal to the result obtained when the fair market value of the property transferred to Pco on the date of issuance of the Pco XXXXXXXXXX Shares less the amount of the non-share consideration, if any, paid, assumed, or delivered by Pco for the acquisition of such property is divided by the number of Pco XXXXXXXXXX Shares issued as consideration therefor.
The Pco Common Shares will be entitled to one vote per share and will be fully participating.
On the incorporation of Pco, Cco will acquire XXXXXXXXXX Pco Common Shares for $XXXXXXXXXX .
Incorporation of Qco
26. A new corporation ("Qco") will be incorporated under the Corporations Act. Qco will be a Canadian-controlled private corporation and a taxable Canadian corporation.
Qco will be authorized to issue an unlimited number of XXXXXXXXXX preference shares (the "Qco XXXXXXXXXX Shares"), an unlimited number of XXXXXXXXXX preference shares (the "Qco XXXXXXXXXX Shares"), and an unlimited number of common shares (the "Qco Common Shares"). The Qco XXXXXXXXXX Shares and the Qco Class C Shares will have the same attributes as those of the Oco XXXXXXXXXX Shares and the Oco XXXXXXXXXX Shares, respectively. No shares will be issued on incorporation.
Transfer of Shares of Oco to Qco
27. As described in paragraph 32 below, Oco will distribute property to Pco. Prior thereto, each holder of Oco XXXXXXXXXX Shares or Oco XXXXXXXXXX Shares, as the case may be, will transfer to Qco a proportion of his or her shares of Oco, determined as described in paragraph 29 below, in consideration for Qco XXXXXXXXXX Shares or Qco XXXXXXXXXX Shares, as the case may be, having a fair market value equal to the fair market value of the Oco shares so transferred. Cco will transfer to Qco a proportion of its Oco Common Shares, determined as described in paragraph 29 below, in consideration for Qco Common Shares having a fair market value equal to the fair market value of the Oco Common Shares so transferred.
28. Qco will elect jointly with each shareholder of Oco, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer described in paragraph 27 above. The agreed amount in respect of the transfer will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii). The agreed amount will not exceed the fair market value of the shares transferred to Qco.
Qco will add to the stated capital account maintained for the Qco XXXXXXXXXX Shares an amount not to exceed the paid-up capital of the Oco XXXXXXXXXX Shares transferred to Qco in consideration for Qco XXXXXXXXXX Shares.
Qco will add to the stated capital account maintained for the Qco XXXXXXXXXX Shares an amount not to exceed the paid-up capital of the Oco XXXXXXXXXX Shares transferred to Qco in consideration for Qco XXXXXXXXXX Shares.
Qco will add to the stated capital account maintained for the Qco Common Shares an amount not to exceed the paid-up capital of the Oco Common Shares transferred to Qco in consideration for Qco Common Shares.
29. The number of shares of Oco that will be transferred, as described in paragraph 27 above, by each shareholder of Oco will be determined so that:
I. (a) the proportion that
(i) the fair market value (immediately after the transfers described in paragraph 27 above and immediately before the transfer described in paragraph 32 below) of the shares of Oco retained by Cco
is of
(ii) the fair market value (immediately after the transfers described in paragraph 27 above and immediately before the transfer described in paragraph 32 below) of all the shares of Oco
is equal to
(b) the proportion that
(i) the aggregate of the net fair market value (immediately before the transfer described in paragraph 32 below) of the assets to be transferred to Pco and Cco (including the payment to be made by Oco to Cco in consideration for Cco assuming certain obligations of Oco) (as described in paragraph 32 below)
is of
(ii) the net fair market value (immediately before the transfer described in paragraph 32) of all the assets of Oco; and
II. the fair market value, immediately before the transfer described in paragraph 32, of each shareholder's shares of Qco will be equal to the product obtained when
(a) the fair market value (immediately before the transfer described in paragraph 32) of all the shares of Qco
is multiplied by
(b) the fair market value of the shares of Oco owned by such shareholder (immediately before the transfer described in paragraph 27 above) divided by the fair market value of all the shares of Oco (immediately before the transfer described in paragraph 27).
Types of Property Analysis
30. Immediately before the transfer of property described in paragraph 32 below, the property of Oco will be determined on a consolidated basis by including the appropriate pro-rata share of the assets of any corporation over which Oco has the ability to exercise significant influence (Oco and such corporations being referred to in this paragraph and paragraph 31 below as the "Oco Group"), which assets will be classified into three types of property for the purposes of the definition "distribution" in subsection 55(1) as follows:
(a) cash or near-cash property, consisting of all of the current assets of the Oco Group, including any cash, marketable securities, accounts receivable, and prepaid expenses;
(b) business property, consisting of all of the assets of the Oco Group, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from a business (other than a specified investment business), including housing inventory; and
(c) investment property, consisting of all of the assets of the Oco Group, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or a specified investment business.
For greater certainty, any tax accounts, such as any non-capital loss, net capital loss, the balance of any refundable dividend tax on hand or capital dividend account of the Oco Group, will not be considered property for purposes of the proposed transactions described herein.
For greater certainty, for the purposes of the proposed transactions: (i) any mortgages or notes receivable, other than any current portion thereof, received as consideration on the sale of XXXXXXXXXX inventory will be considered business property, the current portion thereof being considered cash or near-cash property; (ii) XXXXXXXXXX loans receivable, other than the current portion thereof, will be considered business property, the current portion thereof being considered cash or near-cash property; (iii) XXXXXXXXXX will be considered business property; and (iv) XXXXXXXXXX land held for development will be considered business property.
After the amalgamation described in paragraph 21 above and before the transfer of property described in paragraph 32 below, Oco will own the XXXXXXXXXX properties which were owned immediately before the amalgamation by Dco, Ico, and Lco, including, for greater certainty, the XXXXXXXXXX property previously owned by Ico and the XXXXXXXXXX previously owned by Lco. After the amalgamation described in paragraph 21 above and before the transfer of property described in paragraph 32 below, Oco will employ approximately XXXXXXXXXX full-time employees in carrying on a XXXXXXXXXX business. Accordingly, all of the XXXXXXXXXX properties owned by Oco will be considered to be business property for purposes of the distribution described in paragraph 32 below on the assumption that Oco will employ more than 5 full-time employees up to the time of distribution so that its XXXXXXXXXX business will be considered an "active business carried on by a corporation", within the meaning of that expression as used in subsection 125(7).
The fair market value of the interest in the DN Partnership and any indebtedness receivable by Oco from the DN Partnership will be allocated among the three types of property described above by multiplying the fair market value of the interest in the DN Partnership or amount of indebtedness receivable from the DN Partnership, as the case may be, by the proportion that the net fair market value of each type of property owned by the DN Partnership is of the net fair market value of all the property owned by the DN Partnership. The advances receivable by the DN Partnership from Oco and Nco will be considered cash or near-cash property to the DN Partnership. The housing inventory of the DN Partnership will be considered business property to it.
Advances to related persons will be considered cash or near-cash property, except any amounts receivable from any corporation over which Oco has the ability to exercise significant influence.
For the purposes of this paragraph and paragraph 31 below, Oco will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation or if Oco in combination with corporations over which it has significant influence have significant influence over that corporation.
For greater certainty, the fair market value of the shares of any corporation over which Oco has the ability to exercise significance influence and of any indebtedness receivable by Oco from such a corporation will be allocated among the three types of property described above by multiplying the fair market value of the shares of such corporation or amount of indebtedness receivable therefrom, as the case may be, by the proportion that the net fair market value of each type of property owned by the particular corporation (determined in this paragraph and paragraph 31 below) is of the net fair market value of all the property owned by such corporation.
No amount will be considered a liability unless it represents a true legal liability capable of quantification. For greater certainty, current liabilities would include amounts normally classified as current liabilities including accounts payable, bonuses payable, the current portion of mortgages payable (being the principal amount due within 12 months). For greater certainty, the amount of any deferred income tax in the financial statements will not be considered a liability for purposes of the proposed transactions described herein.
Amounts owing to related persons and the DN Partnership will be considered current liabilities.
As a result of the classification of Oco's property as described in this paragraph 30, Oco will have cash and near-cash property and business property and Oco will have no investment property subject to the consideration which may be received by Dco on the proposed sale of XXXXXXXXXX properties described in paragraph 20 above.
31. In determining, on a consolidated basis, the net fair market value of each type of property of Oco immediately before the transfer described in paragraph 32 below, the liabilities of Oco and any corporation over which Oco exercises significant influence will be allocated to, and will be deducted in the calculation of the net fair market value of, each such type of property of Oco or such corporation, as the case may be, in the following manner:
(a) in determining the net fair market value of each type of property of a corporation over which Oco exercises significant influence immediately before the transfer described in paragraph 32 below, the liabilities of that corporation (other than any amount owing by such corporation to Oco) will be allocated to, and deducted in the calculation of, the net fair market value of each type of property of that particular corporation in the following manner:
(i) current liabilities of such corporation will be allocated to the cash or near-cash property (including cash, marketable securities, accounts receivable, the current portion of any mortgages or notes receivable received as consideration on the sale of XXXXXXXXXX inventory, the current portion of XXXXXXXXXX loans receivable and prepaid expenses, if any) of such corporation 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 owned by such corporation. To the extent that the allocation of current liabilities as described herein exceeds the fair market value of all the cash or near-cash property of such corporation, such corporation will be considered to have a negative amount of cash or near-cash property;
(ii) following the allocation of current liabilities to each cash or near-cash property in (a) (i) above, any remaining net fair market value of any accounts receivable, the current portion of any mortgages or notes receivable received as consideration on the sale of XXXXXXXXXX inventory, the current portion of any tenant loans receivable and prepaid expenses of such corporation will be reclassified as business property and excluded from cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of the business to which such property relates;
(iii) liabilities, other than current liabilities, of such corporation that relate to a particular property, will then be allocated to the particular property (and 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. To the extent that the allocation of liabilities that pertain to a particular type of property, as described herein, exceeds the fair market value of all property of that type of such corporation, such corporation will be considered to have a negative amount of that type of property;
(iv) any liabilities, other than current liabilities, of such corporation which do not relate to a particular type of property will be allocated to the cash or near-cash property, investment property and business property of such corporation on the basis of the relative net fair market value of each type of property before the allocation of such liabilities but after the allocation of the liabilities described in subparagraphs (a) (i) and (iii) above and the reallocation of amounts described in subparagraph (a) (ii) above; and
(b) in determining, on a consolidated basis, the net fair market value of each type of property of Oco immediately before the transfer of property described in paragraph 32 below, Oco will include the appropriate pro-rata share of the net fair market value of each type of property of any corporation over which Oco exercises significant influence, as described in paragraph (a) above, and any liabilities of Oco will be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of Oco in the following manner:
(i) current liabilities of Oco will be allocated to the cash or near-cash property (including cash, marketable securities, accounts receivable, the current portion of any mortgages or notes receivable received as consideration on the sale of XXXXXXXXXX inventory, the current portion of XXXXXXXXXX loans receivable and prepaid expenses, if any) of Oco 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 of Oco. The allocation of current liabilities as described herein will not exceed the fair market value of all the cash or near-cash property of Oco;
(ii) following the allocation of current liabilities to each cash or near-cash property in (b)(i) above, any remaining net fair market value of any accounts receivable, the current portion of any mortgages or notes receivable received as consideration on the sale of XXXXXXXXXX inventory, the current portion of any XXXXXXXXXX loans receivable and prepaid expenses of Oco will be reclassified as business property and excluded from the cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of the business to which such property relates;
(iii) liabilities of Oco, other than current liabilities, that relate to a particular property will be allocated to the particular property (and to the type of property to which such property belongs) to the extent of its fair market value. The liabilities that pertain to a type of property but not to a particular property will be allocated to that type, but not in excess of the net fair market value of such type after the allocation of liabilities to a particular property as described herein; and
(iv) the excess, if any, of liabilities remaining after the allocations described in subparagraphs (b)(i) and (iii) above are made will be allocated to the cash or near-cash property, investment property and business property, if any, of Oco, on the basis of the relative net fair market value of each type of property prior to the allocation of such excess.
Oco Distribution
32. Oco will transfer to Pco property so that, immediately after the transfer, the net fair market value of the cash or near-cash property, the business property and investment property, if any, of Oco, calculated as described in paragraphs 30 and 31 above, which is transferred to Pco and Cco (including the payment to be made by Oco to Cco in consideration for Cco assuming certain obligations of Oco), as described herein, will approximate that proportion of the net fair market value of that type of property of Oco, determined immediately before the transfer, that
(a) the fair market value of the Oco shares owned by Cco immediately before the transfer
is of
(b) the fair market value of all the issued and outstanding shares of Oco immediately before the transfers described in this paragraph.
For the purposes of this paragraph, the expression "approximates that proportion" means the discrepancy from that proportion, if any, that would not exceed XXXXXXXXXX determined as a percentage of the net FMV of the property that Pco has received compared to what it would have received had it received its appropriate pro-rata share of Oco's property.
The transfer of cash and near-cash property, if any, by Oco to Pco as part of the distribution will take place on a day that is no later than 45 days after the Oco Distribution Date.
The property transferred by Oco to Pco will include XXXXXXXXXX land held for development, XXXXXXXXXX properties and related assets and a pro- rata amount of any cash and near-cash property. XXXXXXXXXX inventory and the interest in the DN Partnership will not be transferred to Pco.
As fair-market-value consideration for the transfer of property described herein, Pco will:
(a) assume some of the liabilities of Oco, so that:
(i) the amount of liabilities allocated to such properties as will be the subjects of the joint elections under subsection 85(1) described in paragraph 33 below, will not exceed the aggregate of the agreed amounts under the elections; and
(ii) the amount of liabilities allocated to each such property as will not be the subject of a joint election under subsection 85(1) described in paragraph 33 below will not exceed the fair market value of such property; and
(b) issue to Oco XXXXXXXXXX Pco XXXXXXXXXX Shares each having a redemption amount and fair market value equal to the Pco XXXXXXXXXX Redemption Amount.
The Pco XXXXXXXXXX Shares will be capital property to Oco.
Paragraph 87(2)(j) will deem Oco to be the same corporation as, and a continuation of, each predecessor corporation of Oco for the purposes of paragraph 20(1)(m) and subsection 20(24). Oco will make a payment to Cco (by transferring property to Cco) in consideration for Cco assuming undertakings of Oco in respect of amounts included in computing Oco's income under paragraph 12(1)(a). The payment made by Oco to Cco will be considered to be part of the distribution, as further described in this paragraph, made by Oco to Cco. For the purposes of paragraph 20(24)(b), Cco will receive the amount in the course of business.
With respect to the assumption of the undertakings of Oco, if any, to which paragraph 12(1)(a) applies and which are assumed by Cco, Oco will jointly elect with Cco under subsection 20(24) in the manner and within the time referred to in subsection 20(25).
33. Oco and Pco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of all eligible property of Oco so that the agreed amount in each joint election will not be less than:
(a) the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii), in the case of eligible capital property;
(b) the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii), in the case of depreciable property of a prescribed class; and
(c) the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), in the case of property described in paragraph 85(1)(c.1).
In each case, the agreed amount will not exceed the fair market value of the property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b).
For purposes of each election described in this paragraph, no portion of Oco's liabilities assumed by Pco will be treated as being assumed in consideration for the transfer of a particular property by Oco to Pco to the extent that the principal amount of the liabilities exceeds the agreed amount under subsection 85(1) in respect of that transfer.
The amount added to the stated capital account maintained for the Pco XXXXXXXXXX Shares will equal the amount by which the aggregate cost to Pco (determined pursuant to subsection 85(1), where relevant) of the properties transferred to Pco (as described in paragraph 32 above) exceeds the aggregate amount of liabilities assumed by Pco as described in 32 above.
Redemption of Pco XXXXXXXXXX Shares
34. Pco will redeem its Pco XXXXXXXXXX Shares held by Oco for an amount equal to their fair market value, being the product obtained when the Pco XXXXXXXXXX Redemption Amount is multiplied by the number of Pco XXXXXXXXXX Shares so redeemed. Pco will satisfy the redemption price by issuing and delivering to Oco a non-interest-bearing note (the "Pco Redemption Note") payable on demand having a principal amount and fair market value equal to the redemption price. Oco will accept such note as full payment of the redemption price.
Wind-Up of Pco
35. Pco will be wound up into Cco under the provisions of the Corporations Act and will distribute all of its assets, rights and properties to Cco and all the liabilities and obligations of Pco will be assumed by Cco, including the liability of Pco under the Pco Redemption Note.
Purchase for Cancellation of Oco Common Shares
36. Oco will purchase for cancellation all of the Oco Common Shares held by Cco. Oco will satisfy the purchase price by issuing and delivering to Cco a non-interest-bearing note (the "Oco Redemption Note") payable on demand having a principal amount and fair market value equal to the fair market value of the Oco shares purchased from Cco. Cco will accept such note as full payment of the purchase price of the Oco Common Shares purchased for cancellation.
Notes Set Off
37. The Pco Redemption Note and the Oco Redemption Note will be set off against each other in full satisfaction of the respective obligation thereunder (although the principal amount of one of the notes may be different from the other) and will be cancelled.
Butterfly Reorganization of Cco
Amendment of Articles of Aco and Bco
38. The articles of Aco will be amended to create a new class of preference shares (the "Aco XXXXXXXXXX Shares") which will be redeemable and retractable at an amount (the "Aco XXXXXXXXXX Redemption Amount") equal to the result obtained when the fair market value of the property transferred to Aco on the date of issuance of the Aco XXXXXXXXXX Shares less the amount of the non-share consideration, if any, paid, assumed or delivered by Aco for the acquisition of such property is divided by the number of Aco XXXXXXXXXX Shares issued as consideration therefor.
The articles of Bco will be amended to create a new class of preference shares (the "Bco XXXXXXXXXX Shares") which will be redeemable and retractable at an amount (the "Bco XXXXXXXXXX Redemption Amount") equal to the result obtained when the fair market value of the property transferred to Bco on the date of issuance of the Bco XXXXXXXXXX Shares less the amount of the non-share consideration, if any, paid, assumed or delivered by Bco for the acquisition of such property is divided by the number of Bco XXXXXXXXXX Shares issued as consideration therefor.
Transfer of Cco XXXXXXXXXX Shares to Aco and Bco
39. Mr. A will transfer to Aco his XXXXXXXXXX Cco XXXXXXXXXX Shares in consideration for XXXXXXXXXX Aco XXXXXXXXXX Shares.
Mr. A and Aco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of XXXXXXXXXX Cco XXXXXXXXXX Shares to Aco. The agreed amount in respect of the election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the fair market value of the shares transferred to Aco.
Aco will add to the stated capital account maintained for the Aco XXXXXXXXXX Shares an amount not to exceed the paid-up capital of the Cco XXXXXXXXXX Shares so transferred.
Mr. B will transfer to Bco his XXXXXXXXXX Cco XXXXXXXXXX Shares in consideration for XXXXXXXXXX Bco XXXXXXXXXX Shares.
Mr. B and Bco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of XXXXXXXXXX Cco XXXXXXXXXX Shares to Bco. The agreed amount in respect of the election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the fair market value of the shares transferred to Bco.
Bco will add to the stated capital account maintained for the Bco XXXXXXXXXX Shares an amount not to exceed the paid-up capital of the Cco XXXXXXXXXX Shares so transferred.
Incorporation of Tco and Uco
40. A new corporation ("Tco") will be incorporated under the Corporations Act. Tco will be a Canadian-controlled private corporation and a taxable Canadian corporation.
Tco will be authorized to issue an unlimited number of common shares (the "Tco Common Shares"), none of which will be issued on incorporation.
A new corporation ("Uco") will be incorporated under the Corporations Act. Uco will be a Canadian-controlled private corporation and a taxable Canadian corporation.
Uco will be authorized to issue an unlimited number of common shares (the "Uco Common Shares"), none of which will be issued on incorporation.
Transfer of Cco Shares to Tco and Uco
41. Aco will transfer to Tco all the shares it owns in Cco in consideration for XXXXXXXXXX Tco Common Shares. Aco and Tco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the transfer will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the fair market value of the shares transferred to Tco. Tco will add to the stated capital account maintained for the Tco Common Shares an amount not to exceed the paid-up capital of the Cco shares so transferred.
Bco will transfer to Uco all its shares of Cco in consideration for XXXXXXXXXX Uco Common Shares. Bco and Uco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the transfer will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the fair market value of the shares transferred to Uco. Uco will add to the stated capital account maintained for the Uco Common Shares an amount not to exceed the paid-up capital of the Cco shares so transferred.
Incorporation of Rco and Sco
42. A new corporation ("Rco") will be incorporated under the Corporations Act. Rco will be a Canadian-controlled private corporation and a taxable Canadian corporation.
Rco will be authorized to issue an unlimited number of common shares (the "Rco Common Shares") and an unlimited number of XXXXXXXXXX preference shares (the "Rco XXXXXXXXXX shares") which will be redeemable and retractable at an amount (the "Rco XXXXXXXXXX Redemption Amount") equal to the result obtained when the fair market value of the property transferred to Rco on the date of issuance of the Rco XXXXXXXXXX Shares less the amount of the non-share consideration, if any, paid, assumed or delivered by Rco for the acquisition of such property is divided by the number of Rco XXXXXXXXXX Shares issued as consideration therefor.
On incorporation, Tco will acquire XXXXXXXXXX Rco Common Shares for $XXXXXXXXXX.
A new corporation ("Sco") will be incorporated under the Corporations Act. Sco will be a Canadian-controlled private corporation and a taxable Canadian corporation.
Sco will be authorized to issue an unlimited number of common shares (the "Sco Common Shares") and an unlimited number of XXXXXXXXXX preference shares (the "Sco XXXXXXXXXX shares") which will be redeemable and retractable at an amount (the "Sco XXXXXXXXXX Redemption Amount") equal to the result obtained when the fair market value of the property transferred to Sco on the date of issuance of the Sco XXXXXXXXXX Shares less the amount of the non-share consideration, if any, paid, assumed or delivered by Sco for the acquisition of such property is divided by the number of Sco XXXXXXXXXX Shares issued as consideration therefor.
On incorporation, Uco will acquire XXXXXXXXXX Sco Common Shares for $XXXXXXXXXX.
Types of Property Analysis
43. Immediately before the transfer of property described in paragraph 45 below, the property of Cco will be determined on a consolidated basis by including the appropriate pro-rata share of the assets of any corporation over which Cco has the ability to exercise significant influence (Cco and such corporations being referred to in this paragraph and paragraph 44 below as the "Cco Group"), which assets will be classified into three types of property for the purposes of the definition "distribution" in subsection 55(1), as follows:
(a) cash or near-cash property, consisting of all of the current assets of the Cco Group, including any cash, marketable securities, accounts receivable, and prepaid expenses;
(b) business property, consisting of all of the assets of the Cco Group, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from a business (other than a specified investment business), including XXXXXXXXXX inventory; and
(c) investment property, consisting of all of the assets of the Cco Group, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or a specified investment business.
For greater certainty, any tax accounts, such as any non-capital loss, net capital loss, the balance of any refundable dividend tax on hand or capital dividend account of the Cco Group, will not be considered property for purposes of the proposed transactions described herein.
For greater certainty, for the purposes of the proposed transactions: (i) any mortgages or notes receivable, other than any current portion thereof, received as consideration (by any of Dco, Ico, Oco or Cco) on the sale of XXXXXXXXXX inventory will be considered business property, the current portion thereof being considered cash or near-cash property; (ii) tenant loans receivable, other than the current portion thereof, will be considered business property, the current portion thereof being considered cash or near-cash property; and (iii) XXXXXXXXXX inventory (including land inventories, XXXXXXXXXX) will be considered business property; and (iv) XXXXXXXXXX land held for development will be considered business property.
After the distribution by Oco described in paragraph 32 above and before the distribution described in paragraph 45 below, Cco will own the XXXXXXXXXX properties which were owned by Oco immediately before the distribution by Oco as well as the XXXXXXXXXX property already owned by Cco. After the distribution by Oco and before the distribution by Cco, Cco will employ approximately XXXXXXXXXX full-time employees in carrying on a XXXXXXXXXX business. Accordingly, the XXXXXXXXXX property owned by Cco will be considered to be business property for purposes of the distribution described in paragraph 45 below on the assumption that Cco will employ more than 5 full-time employees after the distribution by Oco and up to the time of distribution by Cco so that its XXXXXXXXXX business will be considered an "active business carried on by a corporation", within the meaning of that expression as used in subsection 125(7).
For the purposes of determining the types of property of Oco (and hence of Qco and Cco), the fair market value of the interest in the DN Partnership and any indebtedness receivable by Oco from the DN Partnership will be allocated among the three types of property described above by multiplying the fair market value of the interest in the DN Partnership or amount of indebtedness receivable from the DN Partnership, as the case may be, by the proportion that the net fair market value of each type of property owned by the DN Partnership is of the net fair market value of all the property owned by the DN Partnership. The advances receivable by the DN Partnership from Oco and Nco will be considered cash or near-cash property to the DN Partnership. The XXXXXXXXXX inventory of the DN Partnership will be considered business property to it. The advances owing by Oco to the DN Partnership will be considered a current liability of Oco.
Advances to related persons will be considered cash or near-cash property, except any amounts owing by any corporation over which Cco has the ability to exercise significant influence.
For the purposes of this paragraph and paragraph 44 below, Cco will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation or if Cco in combination with corporations over which it has significant influence have significant influence over that corporation.
For greater certainty, the fair market value of the shares of any corporation over which Cco has the ability to exercise significance influence and of any indebtedness receivable by Cco from such a corporation will be allocated among the three types of property described above by multiplying the fair market value of the shares of such corporation or amount of indebtedness receivable therefrom, as the case may be, by the proportion that the net fair market value of each type of property owned by the particular corporation (as determined in this paragraph and paragraph 44 below) is of the net fair market value of all the property owned by such corporation.
No amount will be considered to be a liability unless it represents a true legal liability capable of quantification. For greater certainty, current liabilities would include amounts normally classified as current liabilities including accounts payable, bonuses payable, the current portion of mortgages payable (being the principal amount due within 12 months). For greater certainty, the amount of any deferred income tax in the financial statements will not be considered a liability for purposes of the proposed transactions described herein.
Amounts owing to related persons will be considered current liabilities.
As a result of the classification of Cco's property as described in this paragraph 43, Cco will have cash and near-cash property and business property and Cco will have no investment property subject to the consideration which may be received by Dco on the proposed sale of XXXXXXXXXX properties described in paragraph 20 above.
44. In determining, on a consolidated basis, the net fair market value of each type of property of Cco immediately before the transfer described in paragraph 45 below, the liabilities of Cco and any corporation over which Cco exercises significant influence will be allocated to, and will be deducted in the calculation of the net fair market value of, each such type of property of Cco or such corporation, as the case may be, in the following manner:
(a) in determining the net fair market value of each type of property of a corporation over which Cco exercises significant influence, immediately before the transfer described in paragraph 45 below, the liabilities of that corporation (other than any amount owing by such corporation to Cco) will be allocated to, and deducted in the calculation of, the net fair market value of each type of property of that particular corporation in the following manner:
(i) current liabilities of such corporation will be allocated to the cash or near-cash property (including cash, marketable securities, accounts receivable, the current portion of any mortgages or notes receivable received as consideration on the sale of XXXXXXXXXX inventory, the current portion of XXXXXXXXXX loans receivable and prepaid expenses, if any) of such corporation 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 owned by such corporation. To the extent that the allocation of current liabilities as described herein exceeds the fair market value of all the cash or near-cash property of such corporation, such corporation will be considered to have a negative amount of cash or near-cash property;
(ii) following the allocation of current liabilities to each cash or near-cash property in (a)(i) above, any remaining net fair market value of any accounts receivable, the current portion of any mortgages or notes receivable received as consideration on the sale of XXXXXXXXXX inventory, the current portion of any XXXXXXXXXX loans receivable and prepaid expenses of such corporation will be reclassified as business property and excluded from cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of the business to which such property relates;
(iii) liabilities, other than current liabilities, of such corporation that relate to a particular property, will be allocated to the particular property (and to the type of property to which such 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 be allocated to that type of property. To the extent that the allocation of liabilities that pertain to a particular type of property, as described herein, exceeds the fair market value of all property of that type of such corporation, such corporation will be considered to have a negative amount of that type of property; and
(iv) any liabilities, other than current liabilities, of such corporation which do not relate to a particular type of property will be allocated to the cash or near-cash property, investment property and business property of such corporation on the basis of the relative net fair market value of each type of property before the allocation of such liabilities but after the allocation of the liabilities described in subparagraphs (a)(i) and (iii) above and the reallocation of amounts described in subparagraph (a)(ii) above; and
(b) in determining, on a consolidated basis, the net fair market value of each type of property of Cco immediately before the transfer of property described in paragraph 45 below, Cco will include the appropriate pro-rata share of the net fair market value of each type of property of any corporation over which Cco exercises significant influence, as described in subparagraph 44(a) herein, and any liabilities of Cco will be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of Cco in the following manner:
(i) current liabilities of Cco will be allocated to the cash or near-cash property (including cash, marketable securities, accounts receivable, the current portion of any mortgages or notes receivable received as consideration on the sale of XXXXXXXXXX inventory, the current portion of XXXXXXXXXX loans receivable and prepaid expenses, if any) of Cco 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 of Cco. The allocation of current liabilities as described herein will not exceed the fair market value of all the cash or near-cash property of Cco;
(ii) following the allocation of current liabilities to each cash or near-cash property in (b)(i) above, any remaining net fair market value of any accounts receivable, the current portion of any mortgages or notes receivable received as consideration on the sale of XXXXXXXXXX inventory, the current portion of any XXXXXXXXXX loans receivable and prepaid expenses of Cco will be reclassified as business property and excluded from the cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of the business to which such property relates;
(iii) liabilities of Cco, other than current liabilities, that relate to a particular property will be allocated to the particular property (and to the type of property to which such property belongs) to the extent of its fair market value. The liabilities that pertain to a type of property but not to a particular property will be allocated to that type, but not in excess of the net fair market value of such type after the allocation of liabilities to a particular property as described herein;
(iv) the excess, if any, of liabilities remaining after the allocations described in subparagraphs 44(b)(i) and (iii) above are made will be allocated to the cash or near-cash property, investment property and business property, if any, of Cco, on the basis of the relative net fair market value of each type of property prior to the allocation of such excess.
Cco Distribution
45. Cco will transfer to Rco and Sco its property (i.e., property held by Cco before the Oco distribution, property received by Cco on the Oco distribution and shares of Qco) so that, immediately after the transfer, the net fair market value of the cash or near-cash property, the business property and investment property, if any, of Cco, calculated as described in paragraphs 43 and 44 above, which is transferred to Rco and Tco or Sco and Uco, as the case may be, (including the payments made by Cco to Tco and Uco in consideration for Tco and Uco assuming certain obligations of Cco) as described herein, will approximate that proportion of the net fair market value of that type of property of Cco, determined immediately before the transfer described in this paragraph, that
(a) the fair market value of the Cco Common Shares and Cco XXXXXXXXXX Shares owned by Tco or Uco, as the case may be, immediately before the transfers described in this paragraph
is of
(b) the aggregate fair market value of all the issued and outstanding shares of Cco immediately before the transfers described in this paragraph.
For the purposes of this paragraph, the expression "approximates that proportion" means the discrepancy from that proportion, if any, that would not exceed one percent (1%) determined as a percentage of the net FMV of the property that Rco and Sco, as the case may be, has received compared to what Rco and Sco, as the case may be, would have received had it received its appropriate pro-rata share of Cco's property.
The transfer of cash and near-cash property, if any, by Cco to Rco and Sco as part of the distribution will take place on a day that is no later than XXXXXXXXXX days after the Cco Distribution Date.
As fair-market-value consideration for the transfers of property described herein, each of Rco and Sco will:
(a) assume some of the liabilities of Cco, so that:
(i) the amount of liabilities to be allocated to such properties as will be the subjects of the joint elections under subsection 85(1) described in paragraph 46 below will not exceed the aggregate of the agreed amounts under the elections; and
(ii) the amount of liabilities to be allocated to each such property as will not be the subject of a joint election under subsection 85(1) described in paragraph 46 below will not exceed the fair market value of such property; and
(b) issue to Cco XXXXXXXXXX Rco XXXXXXXXXX Shares or Sco XXXXXXXXXX Shares, as the case may be, each having a redemption amount and fair market value equal to the Rco XXXXXXXXXX Redemption Amount or the Sco XXXXXXXXXX Redemption Amount, as the case may be.
The Rco XXXXXXXXXX Shares and the Sco XXXXXXXXXX Shares will be capital property to Cco.
Cco will make a payment to each of Tco and Uco (by transferring property to each of Tco and Uco) in consideration for Tco and Uco assuming certain undertakings of Cco in respect of amounts included in computing Cco's income under paragraph 12(1)(a). The payments made by Cco to each of Tco and Uco will be considered to be part of the distribution, as further described in this paragraph, made by Cco to Tco and Uco. For the purposes of paragraph 20(24)(b), Tco and Uco will receive the amounts in the course of business.
With respect to the assumption of the undertakings of Cco, if any, to which paragraph 12(1)(a) applies and which are assumed by Tco or Uco, as the case may be, Cco will jointly elect with each of Tco and Uco, as the case may be, under subsection 20(24), in the manner and within the time referred to in subsection 20(25).
46. Cco will jointly elect with each of Rco and Sco, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of all eligible property of Cco so that the agreed amount in each joint election will not be less than:
(a) the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii), in the case of eligible capital property;
(b) the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii), in the case of depreciable property of a prescribed class; and
(c) the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), in the case of property described in paragraph 85(1)(c.1).
In each case, the agreed amount will not exceed the fair market value of the property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b).
For purposes of each election described in this paragraph, no portion of Cco's liabilities assumed by Rco or Sco, as the case may be, will be treated as being assumed in consideration for the transfer of a particular property by Cco to Rco or Sco, as the case may be, to the extent that the principal amount of the liabilities exceeds the agreed amount under subsection 85(1) in respect of that transfer.
The amount added to the stated capital account maintained for the Rco XXXXXXXXXX Shares or the Sco XXXXXXXXXX Shares, as the case may be, will equal the amount by which the aggregate cost to Rco or Sco, as the case may be, (determined pursuant to subsection 85(1), where relevant) of the properties transferred by Cco (as described in paragraph 45 above) exceeds the aggregate amount of liabilities assumed by Rco or Sco, as the case may be, as described in paragraph 45 above.
Redemption of Rco and Sco XXXXXXXXXX Shares
47. Rco will redeem its Rco XXXXXXXXXX Shares held by Cco for an amount equal to their fair market value, being the product obtained when the aggregate of the Rco XXXXXXXXXX Redemption Amount is multiplied by the number of Rco XXXXXXXXXX Shares so redeemed. Rco will satisfy the redemption price by issuing and delivering to Cco a non-interest- bearing note (the "Rco Redemption Note") payable on demand having a principal amount and fair market value equal to the redemption price of the Rco XXXXXXXXXX Shares so redeemed. Cco will accept such note as full payment of the redemption price.
Sco will redeem its Sco XXXXXXXXXX Shares held by Cco for an amount equal to their fair market value, being the product obtained when the Sco XXXXXXXXXX Redemption Amount is multiplied by the number of Sco XXXXXXXXXX Shares so redeemed. Sco will satisfy the redemption price by issuing and delivering to Cco a non-interest-bearing note (the "Sco Redemption Note") payable on demand having a principal amount and fair market value equal to the redemption price. Cco will accept such note as full payment of the redemption price.
Wind-Up of Rco and Sco
48. Rco will be wound up into Tco under the provisions of the Corporations Act and will distribute all of its assets, rights and properties to Tco, and all the liabilities and obligations of Rco will be assumed by Tco, including the liability of Rco under the Rco Redemption Note.
Sco will be wound up into Uco under the provisions of the Corporations Act and will distribute all of its assets, rights and properties to Uco, and all the liabilities and obligations of Sco will be assumed by Uco, including the liability of Sco under the Sco Redemption Note.
Wind-Up of Cco
49. Cco will be wound up under the provisions of the Corporations Act and will distribute thereon to Tco and Uco the Rco Redemption Note and the Sco Redemption Note, respectively.
Before the distribution of such notes, Cco will elect, in prescribed manner and prescribed form, under subsection 83(2), that the full amount of any resulting dividend referred to in subparagraph 88(2)(b)(i) be deemed to be a capital dividend.
As a result of the distribution of the Rco Redemption Note and the Sco Redemption Note, the obligation under the notes will be cancelled.
Following receipt of the dividend refund to which Cco will become entitled as a result of the proposed transactions described herein, Cco will distribute one-half of the amount thereof to each of Tco and Uco. The refund will not arise until after the end of the fiscal period in which the dividend will be paid or will be deemed to have been paid.
All properties and liabilities of Cco will be distributed or discharged, as the case may be. All of the shares of Cco will be cancelled and Cco will be dissolved.
50. No property has or will become property of Oco or of a predecessor corporation of Oco and no liabilities have been or will be incurred by Oco or by a predecessor corporation of Oco in contemplation of and before the transfer described in paragraph 32 above, otherwise than as described herein. Oco will not dispose of any of its assets that will be owned by it immediately before the distribution described in paragraph 32 above, and not disposed of by it on the distribution, to an unrelated person as part of a series of transactions which includes the proposed transactions otherwise than as described herein or as a result of a disposition in the ordinary course of business. Neither Pco nor Cco will dispose of any of its assets as part of a series of transactions which includes the proposed transactions, otherwise than as described herein or as a result of a disposition in the ordinary course of business.
51. No property has or will become property of Cco or a corporation controlled by Cco or by a predecessor thereof and no liabilities have been or will be incurred by any such corporation in contemplation of and before the transfer described in paragraph 45 above, otherwise than as described herein. None of Rco, Sco, Tco, or Uco will dispose of any of its assets as part of a series of transactions which includes the proposed transactions otherwise than as described herein or as a result of a disposition in the ordinary course of business.
52. None of the shares of Aco, Bco, Cco, Dco, Ico, Lco, Mco, Oco, Pco, Qco, Rco, Sco, Tco, Uco 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.
53. None of Aco, Bco, Cco, Dco, Ico, Lco, Mco, Oco, Pco, Qco, Rco, Sco, Tco, Uco will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1). None of Aco, Bco, Cco, Dco, Ico, Lco, Mco, Oco, Pco, Qco, Rco, Sco, Tco, Uco is or will be a specified financial institution prior to the completion of the proposed transactions.
54. Legal title to particular items of XXXXXXXXXX property beneficially owned by Dco, Ico, Lco, Cco and, after the amalgamation described in paragraph 21 above, Oco, is held by other corporations as nominees or bare trustees for the beneficial owners. References to transfers of property are references to transfers of beneficial interests only.
PURPOSE OF THE PROPOSED TRANSACTIONS
55. The purpose of the proposed transactions is to effect a "split-up" of the XXXXXXXXXX business of Cco, Dco, Ico and Lco, with Mr. A and his children owning certain of the XXXXXXXXXX properties through Tco and Mr. B and his children owning certain of the XXXXXXXXXX properties through Uco. The XXXXXXXXXX families will continue owning the business of XXXXXXXXXX inventory jointly through Qco and Oco because the inventory XXXXXXXXXX cannot be divided on a "tax deferred" basis under section 85 and in any event will be sold in the ordinary course of business.
RULINGS
Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, we rule as follows:
Amalgamation
A. On the amalgamation of Dco, Ico, Lco and Mco, as described in paragraph 21 above,
(a) the provisions of subsection 87(1) will apply; and
(b) the provisions of subsection 87(4), other than paragraphs (c), (d) and (e) thereof, will apply, so that:
(i) each shareholder (other than any predecessor corporation) of each predecessor corporation, will be deemed by paragraph 87(4)(a) to have disposed of such shareholder's shares for proceeds of disposition equal to the shareholder's adjusted cost base of such shares immediately prior to the amalgamation; and
(ii) each such shareholder will be deemed by paragraph 87(4)(b) to have acquired the shares of Oco at a cost equal to the proceeds described in paragraph 87(4)(a).
B. By virtue of subsection 1102(14) of the Regulations, each property which immediately before the amalgamation described in paragraph 21 above, is depreciable property of a prescribed class or separate prescribed class of any of Dco, Ico, or Lco and which is acquired by Oco on the amalgamation described in paragraph 21 above, will be depreciable property of the same prescribed class or separate prescribed class, as the case may be, of Oco.
C. Provided that the condition specified in paragraph 1100(2.2)(f) or (g) of the Regulations is satisfied, paragraph 1100(2.2)(h) of the Regulations will apply so that no amount will be included by Oco under paragraph 1100(2)(a) of the Regulations in respect of depreciable property of a prescribed class that is property acquired by Oco from Dco, or Ico, or Lco on the amalgamation described in paragraph 21 above.
Butterfly Reorganization of Oco
Transfer of Shares of Oco to Qco
D. The provisions of subsection 85(1) will apply to the transfer of Oco shares to Qco by each shareholder of Oco as described in paragraphs 27 to 29 above, such that the agreed amount in respect of the transfer will be deemed to be such shareholder's proceeds of disposition and Qco's cost thereof pursuant to paragraph 85(1)(a).
For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfers described in paragraphs 27 to 29 above.
Oco Distribution
E. The provisions of subsection 85(1) will apply to the transfer by Oco to Pco, as described in paragraph 32 above, of each eligible property which is the subject of an election described in paragraph 33 above, so that the agreed amount in respect of such transfer will be deemed to be Oco's proceeds of disposition and Pco's cost thereof by virtue of paragraph 85(1)(a).
For greater certainty, paragraph 85(1)(e.2) will not apply to such transfer.
For purposes of a joint election in respect of depreciable property of a prescribed class, as described in paragraph 33 above, the reference to "the undepreciated capital cost to the taxpayer of all the property of the class immediately before the disposition . . ." in subparagraph 85(1)(e)(i) will be read to mean the proportion of the undepreciated capital cost to Oco of all the property of that class that the capital cost of the property so transferred immediately before the disposition is of the capital cost of all property of that class immediately before the disposition.
F. By virtue of subsection 20(24), Oco will be entitled to deduct in computing its income for the taxation year in which the assumption occurs, the fair market value of the undertakings of Oco to which paragraph 12(1)(a) applies that are assumed by Cco, as described in paragraph 32 above and will be deemed to be an amount described in paragraph 12(1)(a) in respect of Cco.
Redemption of Pco XXXXXXXXXX Shares and Purchase for Cancellation of Oco Shares
G. Subsection 84(3) will apply on the redemption of the Pco XXXXXXXXXX Shares, as described in paragraph 34 above, to deem Pco to have paid and Oco to have received a dividend equal to the amount, if any, by which the aggregate amount paid thereon exceeds the paid-up capital in respect of such shares immediately prior thereto, and such dividend
(a) will be included in computing the income of Oco pursuant to subsection 82(1) and paragraph 12(1)(j);
(b) will be deductible by Oco pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is 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 to Oco of the shares so redeemed pursuant to paragraph (j) of the definition "proceeds of disposition" in section 54;
(d) will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b), as Pco will be connected with Oco by virtue of subsection 186(2) and paragraph 186(4)(a); and
(e) will not be subject to tax under Parts IV.1 and VI.1 by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) because Oco and Pco will be related and Oco will have a substantial interest, within the meaning assigned by paragraph 191(2)(a), in Pco immediately before such redemption.
H. Subsection 84(3) will apply on the purchase for cancellation by Oco of its shares held by Cco, as described in paragraph 36 above, to deem Oco to have paid and Cco to have received a dividend equal to the amount, if any, by which the amount paid for the purchase of such shares exceeds the paid-up capital thereof immediately before the purchase, and such dividend:
(a) will be included in computing the income of Cco pursuant to subsection 82(1) and paragraph 12(1)(j);
(b) will be deductible by Cco pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is 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 to Cco of the shares pursuant to paragraph (j) of the definition "proceeds of disposition" in section 54;
(d) will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b), as Oco will be connected with Cco by virtue of paragraph 186(4)(b); and
(e) will not be subject to tax under Parts IV.1 and VI.1 by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) because Cco will have a substantial interest, within the meaning assigned by paragraph 191(2)(a), in Oco immediately before the purchase of such shares.
I. Provided that, as part of the series of transactions or events that includes these proposed transactions, there is not:
(i) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(ii) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(iii) an acquisition of any shares of a distributing corporation in the circumstances described in subparagraph 55(3.1)(b)(iii);
(iv) an acquisition of property in the circumstances described in paragraph 55(3.1)(c);
or
(v) an acquisition of property in the circumstances described in paragraph 55(3.1)(d);
which has not been described herein, by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings G and H above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
Wind-Up of Pco
J. The provisions of subsection 88(1) will apply on the winding-up of Pco into Cco as described in paragraph 35 above, and for greater certainty:
(a) each property of Pco distributed to Cco on the winding-up will be deemed by paragraph 88(1)(a) to have been disposed of by Pco for proceeds of disposition determined under that paragraph;
(b) the shares in the capital stock of Pco held by Cco immediately before the winding-up will be deemed by paragraph 88(1)(b) to have been disposed of by Cco for proceeds of disposition determined under that paragraph; and
(c) each property of Pco distributed to Cco on the winding-up will be deemed to have been acquired by Cco for an amount equal to the amount deemed by paragraph 88(1)(a) to be Pco's proceeds of disposition of the property.
Notes Set-off
K. The set-off and cancellation of the Pco Redemption Note against the Oco Redemption Note, described in paragraph 37 above, will not give rise to a "forgiven amount" within the meaning thereof in subsections 80(1) or 80.01(1), and neither Cco nor Oco will realize any gain or sustain any loss as a result of such set-off and cancellation.
L. By virtue of subsection 1102(14) of the Regulations, each property which immediately before the transfer described in paragraph 32 above, is depreciable property of a prescribed class or separate prescribed class of Oco and which is acquired by Pco on the transfer described in paragraph 32 above, and by Cco on the winding-up of Pco, as described in paragraph 35 above, will be depreciable property of the same prescribed class or separate prescribed class, as the case may be, of Cco.
M. Provided that the condition specified in paragraph 1100(2.2)(g) of the Regulations is satisfied, paragraph 1100(2.2)(h) of the Regulations will apply so that no amount will be included by Cco under paragraph 1100(2)(a) of the Regulations in respect of depreciable property of a prescribed class that is property acquired by Pco from Oco, on the transfer described in paragraph 32 above, and then by Cco from Pco, on the winding-up of Pco, as described in paragraph 35 above.
Cco Butterfly
Transfer of Cco XXXXXXXXXX Shares to Aco and Bco
N. The provisions of subsection 85(1) will apply to the transfer of Cco XXXXXXXXXX Shares to Aco and Bco, by Mr. A and Mr. B, respectively, as described in paragraph 39 above, so that the agreed amount in respect of the transfer will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof under paragraph 85(1)(a).
For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfers described in paragraph 39 above.
Transfer of Cco Shares to Tco and Uco
O. The provisions of subsection 85(1) will apply to the transfer of Cco Common Shares and Cco XXXXXXXXXX Shares to Tco and Uco, by Aco and Bco, respectively, as described in paragraph 41 above, so that the agreed amount in respect of the transfer will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof under paragraph 85(1)(a).
For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfers described in paragraph 41 above.
Cco Distribution
P. The provisions of subsection 85(1) will apply to the transfers by Cco to each of Rco and Sco as described in paragraph 45 above, of each eligible property which is the subject of an election described in paragraph 46 above, so that the agreed amount in respect of such transfer will be deemed to be the transferor's proceeds of disposition and the transferee's cost of the property transferred under paragraph 85(1)(a).
For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.
For the purposes of a joint election in respect of depreciable property of a prescribed class, as described in paragraph 46 above, the reference to "the undepreciated capital cost to the taxpayer of all the property of the class immediately before the disposition . . ." in subparagraph 85(1)(e)(i) will be read to mean the proportion of the undepreciated capital cost to Cco of all the property of that class that the capital cost of the property so transferred immediately before the disposition is of the capital cost of all property of that class immediately before the disposition.
Q. By virtue of subsection 20(24), Cco will be entitled to deduct in computing its income for the taxation year in which the assumption occurs, the fair market value of the undertakings of Cco to which paragraph 12(1)(a) applies that are assumed by Tco or Uco, as the case may be, as described in paragraph 45 above, and will be deemed to be an amount described in paragraph 12(1)(a) in respect of Tco or Uco, as the case may be.
Redemptions and Wind-ups
R. Subsection 84(3) will apply on the redemption of the Rco XXXXXXXXXX Shares and Sco XXXXXXXXXX Shares, as described in paragraph 47 above, to deem Rco and Sco, as the case may be, to have paid and Cco to have received a dividend equal to the amount, if any, by which the aggregate amount paid thereon exceeds the paid-up capital in respect of such shares immediately before such redemption, and each such dividend:
(a) will be included in computing the income of Cco pursuant to subsection 82(1) and paragraph 12(1)(j);
(b) will be deductible by Cco pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is 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 to Cco of the shares so redeemed pursuant to paragraph (j) of the definition "proceeds of disposition" in section 54;
(d) will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b), as Rco and Sco will be connected with Cco by virtue of subsection 186(2) and paragraph 186(4)(a); and
(e) will not be subject to tax under Parts IV.1 and VI.1, by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) because Cco will be related to each of Rco and Sco and will have a substantial interest, within the meaning assigned by paragraph 191(2)(a), in each of Rco and Sco immediately before the redemption of such shares.
S. The provisions of subsection 88(1) will apply on the winding-up of Rco and Sco into Tco and Uco, respectively, as described in paragraph 48 above so that:
(a) each property of Rco and Sco distributed to Tco or Uco, as the case may be, on the winding-up will be deemed by paragraph 88(1)(a) to have been disposed of by Rco and Sco for proceeds of disposition determined under that paragraph;
(b) the shares in the capital stock of Rco and Sco held by Tco or Uco, as the case may be, immediately before the winding-up, will be deemed by paragraph 88(1)(b) to have been disposed of by the holder for proceeds of disposition determined under that paragraph; and
(c) each property of Rco and Sco distributed to Tco or Uco, as the case may be, on the winding-up will be deemed to have been acquired by Tco or Uco for an amount equal to the amount deemed by paragraph 88(1)(a) to be Rco's or Sco's proceeds of disposition of the property.
T. As a result of the distributions by Cco in the course of its winding-up, as described in paragraph 49 above:
(a) by virtue of paragraph 88(2)(b) and subsection 84(2), but subject to subparagraphs (b) to (d) below, Cco will be deemed to have paid and each of Tco and Uco will be deemed to have received a dividend (the "winding-up dividend") on each class of the shares of Cco equal to the proportion of the amount by which the fair market value of the property of Cco distributed by Cco to Tco and Uco on a particular class on its winding-up as consideration for the cancellation of such shares exceeds the paid-up capital thereof, that the number of shares of such class held by Tco or Uco, as the case may be, is of the number of all such shares cancelled:
(b) by virtue of subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in subparagraph (a) as does not exceed Cco's capital dividend account determined immediately before the payment of the winding-up dividend will be deemed, for purposes of the subsection 83(2) election referred to in paragraph 49 above, to be the full amount of a separate dividend;
(c) by virtue of subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to the lesser of:
(i) Cco's pre-1972 capital surplus on hand as determined immediately before the payment of the winding-up dividend; and
(ii) the amount by which the winding-up dividend exceeds the portion thereof in respect of which Cco will elect under subsection 83(2)
will be deemed not to be a dividend; and
(d) by virtue of subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in subparagraph (b) above that is deemed to be a separate dividend and the portion referred to in subparagraph (c) above that is deemed not to be a dividend will be deemed to be a separate dividend that is a taxable dividend.
U. By virtue of paragraph 186(4)(b), Cco will be connected with each of Tco and Uco. Consequently, each of Tco and Uco will be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which Cco will become entitled for its taxation year in which the dividends referred to in Ruling T above, are paid, that the amount of each such dividend received by Tco and Uco is of the aggregate of all taxable dividends paid by Cco in its taxation year in which such dividends are paid.
V. Cco will not be subject to tax under Parts IV.1 and VI.1 on the winding-up dividend referred to in Ruling T above, by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) because each of Tco and Uco will have a substantial interest, within the meaning assigned by paragraph 191(2)(a), in Cco immediately before the cancellation of such shares.
W. The extinguishments of the debt obligations as a result of the cancellation of the Rco Redemption Note and the Sco Redemption Note, as described in paragraph 49 above, will not give rise to a "forgiven amount", within the meaning thereof in subsections 80(1) or 80.01(1), and none of Cco, Tco or Uco will realize any gain or sustain any loss upon the extinguishment of the debt obligations as a result of the cancellation of the Rco Redemption Note and the Sco Redemption Note, as described in paragraph 49 above.
X. Provided that, as part of the series of transactions or events that includes these proposed transaction, there is not:
(i) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(ii) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(iii) an acquisition of any shares of a distributing corporation in the circumstances described in subparagraph 55(3.1)(b)(iii);
(iv) an acquisition of property in the circumstances described in paragraph 55(3.1)(c);
or
(v) an acquisition of property in the circumstances described in paragraph 55(3.1)(d);
which has not been described herein, by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings R and T above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
Y. By virtue of subsection 1102(14) of the Regulations, each property which immediately before the transfer described in paragraph 45 above, is depreciable property of a prescribed class or separate prescribed class of Cco and which is acquired by Rco or Sco, as the case may be, on the transfer described in paragraph 45 above, and by Tco on the winding-up of Rco, as described in paragraph 48 above, or by Uco on the winding-up of Sco, as described in paragraph 48 above, as the case may be, will be depreciable property of the same prescribed class or separate prescribed class, as the case may be, of Tco or Uco, as the case may be.
Z. Provided that the condition specified in paragraph 1100(2.2)(g) of the Regulations is satisfied, paragraph 1100(2.2)(h) of the Regulations will apply so that no amount will be included by Tco or Uco under paragraph 1100(2)(a) of the Regulations in respect of depreciable property of a prescribed class that is property acquired by Rco or Sco, as the case may be, on the transfer described in paragraph 45 above, and by Tco on the winding-up of Rco, as described in paragraph 48 above, or by Uco on the winding-up of Sco, as described in paragraph 48 above, as the case may be.
AA. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not apply to any of the proposed transactions, in and of themselves.
BB. Subsection 245(2) will not be applied as a result of the proposed transactions, in and of themselves, to redetermine the tax consequences as confirmed in the rulings given.
CC. Provided Oco continues to use the property acquired from Dco, Ico and Lco (the "predecessors") on the amalgamation described in paragraph 21, above, for the purpose of gaining or producing income therefrom, and provided that interest on the liabilities of the predecessors which become liabilities of Oco on the amalgamation was deductible in computing the income of the respective predecessor before the amalgamation, Oco will be entitled to deduct, in computing its income, pursuant to paragraph 20(1)(c), an amount, not in excess of a reasonable amount, payable as interest in respect of a year, pursuant to a legal obligation to pay the interest on any such liabilities.
DD. Provided Cco continues to use the property acquired as a result of the transfer of property described in paragraph 32 above and the winding-up of Pco as described in paragraph 35 above for the purpose of gaining or producing income therefrom, and provided that the interest on the liabilities assumed by Pco as described in paragraph 32 above was deductible in computing the income of Oco, Cco will be entitled to deduct in computing its income, pursuant to paragraph 20(1)(c), an amount, not in excess of a reasonable amount, payable as interest in respect of a year, pursuant to a legal obligation to pay interest on any such liabilities.
EE. Provided Tco continues to use the property acquired as a result of the transfer of property described in paragraph 45 above and the winding-up of Rco as described in paragraph 48 above for the purpose of gaining or producing income therefrom, and provided that the interest on the liabilities assumed by Tco as described in paragraph 45 above was deductible in computing the income of Rco, Tco will be entitled to deduct in computing its income, pursuant to paragraph 20(1)(c), an amount, not in excess of a reasonable amount, payable as interest in respect of a year, pursuant to a legal obligation to pay interest on any such liabilities.
FF. Provided Uco continues to use the property acquired as a result of the transfer of property described in paragraph 45 above and the winding-up of Sco as described in paragraph 48 above for the purpose of gaining or producing income therefrom, and provided that the interest on the liabilities assumed by Uco as described in paragraph 45 above was deductible in computing the income of Sco, Uco will be entitled to deduct in computing its income, pursuant to paragraph 20(1)(c), an amount, not in excess of a reasonable amount, payable as interest in respect of a year, pursuant to a legal obligation to pay interest on any such liabilities.
These rulings are given subject to the qualifications and limitations set forth in Information Circular 70-6R4 issued on January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions described herein are completed before XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account any amendments thereto which if enacted could have an effect on the rulings provided herein.
Nothing in this letter should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:
(a) the determination of the ACB, PUC or FMV of any shares referred to herein; or
(b) any tax consequences relating to the facts and proposed transactions other than those specifically described in the rulings given.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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