2001 Ruling 2001-0091383 - internal reorganization

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether an internal reorganization is subject to the exemption under paragraph 55(3)(a)?

Position: Yes

Reasons: There are no triggering events as described in subparagraphs 55(3)(a)(i) to (v).

XXXXXXXXXX 							2001-009138

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

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

You have advised that to the best of your knowledge, and that of the taxpayers named herein, none of the issues involved in this advance income tax ruling is under objection or appeal or is being considered by any tax services office or taxation centre in connection with any income tax return already filed.

DEFINITIONS

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

"ACB" means "adjusted cost base" as that expression is defined in section 54;

"Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, and all references to a statute are to the Act, unless otherwise indicated;

"agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon or are deemed by paragraphs 85(1)(b) to (e.4) to have agreed upon, in their election under subsection 85(1) in respect of the property;

"CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended;

"CCRA" means Canada Customs and Revenue Agency;

"disposition" has the meaning assigned by section 54;

"eligible property" has the meaning assigned by subsection 85(1.1);

"PUC" means "paid-up capital" as that expression is defined in subsection 89(1);

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

"series of transactions or events" has the meaning assigned by subsection 248(10);

"stated capital" has the meaning assigned by section 26 of the CBCA; and

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

In addition, certain corporations will be referred to as follows:

"DC" means XXXXXXXXXX, a taxable Canadian corporation;

"DC Shareholder" means XXXXXXXXXX;

"Holdco1" means XXXXXXXXXX, a taxable Canadian corporation;

"Holdco2" means XXXXXXXXXX, a taxable Canadian corporation;

"JV Corp" means a new corporation organized under the laws of XXXXXXXXXX;

"Parentco" means XXXXXXXXXX;

"Qco" means XXXXXXXXXX, a taxable Canadian corporation;

XXXXXXXXXX; and

"Subco" means XXXXXXXXXX, a corporation organized under the laws of Canada.

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

FACTS

1. Parentco is a XXXXXXXXXX.

2. DC Shareholder is a corporation subsisting under the laws of XXXXXXXXXX, all the shares of which are owned by Parentco.

3. Holdco1 is a corporation subsisting under the laws of Canada, all the shares of which are owned by Parentco. Holdco1 is a private corporation and a taxable Canadian corporation. Holdco1 has XXXXXXXXXX common shares outstanding which have an ACB and PUC of $XXXXXXXXXX. Holdco1's only assets consist of shares of Holdco2.

4. Holdco2 is a corporation subsisting under the laws of Canada, all the shares of which are owned by Holdco1. Holdco2 is a private corporation and a taxable Canadian corporation. Holdco2's only assets consist of XXXXXXXXXX preferred shares of DC.

5. DC is an indirect wholly-owned subsidiary of Parentco subsisting under the laws of Canada. DC was formed on XXXXXXXXXX on the amalgamation of XXXXXXXXXX pursuant to the provisions of the CBCA. DC is a private corporation and a taxable Canadian corporation. DC's principal address is XXXXXXXXXX, its taxation year ends on XXXXXXXXXX, its business number is XXXXXXXXXX and its tax services office is the XXXXXXXXXX Tax Services Office.

6. The authorized share capital of DC consists of an unlimited number of common shares and XXXXXXXXXX preferred shares. The issued and outstanding shares of DC are as follows:

Common					Preferred

Owner	DC Shareholder			Holdoco2

Number		XXXXXXXXXX 			XXXXXXXXXX 

ACB		$XXXXXXXXXX 			$XXXXXXXXXX 

PUC		$XXXXXXXXXX 			$XXXXXXXXXX 

FMV		greater than ACB			$XXXXXXXXXX 

6.1 Qco is a corporation subsisting under the laws of XXXXXXXXXX . Qco is a private corporation and a taxable Canadian corporation. The share capital of Qco consists of XXXXXXXXXX common shares (the "Qco Common Shares") with a PUC of $XXXXXXXXXX, all of which are owned by XXXXXXXXXX. Qco is an inactive corporation with nominal assets. Qco has been related to Parentco since XXXXXXXXXX.

6.2 XXXXXXXXXX is an indirect wholly-owned subsidiary of Parentco.

7. DC provides XXXXXXXXXX.

8. XXXXXXXXXX ("Mco") and XXXXXXXXXX ("Investmentco"), a subsidiary of Mco, are XXXXXXXXXX corporations which are not related to Parentco. Prior to the transactions described below, they owned all the shares of XXXXXXXXXX ("Aco") which is also a XXXXXXXXXX corporation. Aco XXXXXXXXXX, including a XXXXXXXXXX business owned through XXXXXXXXXX ("Vco"), a wholly-owned subsidiary of Aco. Vco does not carry on business in Canada. Aco, Mco and Vco are resident in XXXXXXXXXX and, prior to the transactions described herein, were not related to Parentco.

9. XXXXXXXXXX ("Bco") is a XXXXXXXXXX corporation which is not related to Parentco.

10. XXXXXXXXXX.

RELATED TRANSACTIONS

11. XXXXXXXXXX:

(i) Parentco purchased all the shares of Aco owned by XXXXXXXXXX. This transaction was undertaken on XXXXXXXXXX, for cash consideration equal to the fair market value of the shares;

(ii) XXXXXXXXXX;

(iii) Parentco has the right to acquire, XXXXXXXXXX shares of Aco on or after XXXXXXXXXX;

(iv) XXXXXXXXXX.

12. XXXXXXXXXX.

13. XXXXXXXXXX. It is proposed that the XXXXXXXXXX businesses of Parentco and Aco be owned, directly or indirectly, by XXXXXXXXXX, a new corporation XXXXXXXXXX.

14. The Proposed Transactions below involve the transfer of DC's XXXXXXXXXX business so that it is indirectly owned by XXXXXXXXXX.

PRELIMINARY TRANSACTIONS

15. In XXXXXXXXXX, Subco was incorporated pursuant to the CBCA. Upon incorporation, Subco issued 1 common share to DC in consideration of $XXXXXXXXXX.

16. On XXXXXXXXXX, DC transferred the assets of its XXXXXXXXXX to Subco. In consideration, Subco assumed liabilities of DC relating to the XXXXXXXXXX and issued XXXXXXXXXX common shares to DC.

Subco added to the stated capital account maintained for its common shares an amount equal to the ACB of such shares.

17. DC and Subco will jointly elect pursuant to subsection 85(1) of the Act, in the prescribed form and within the time referred to in subsection 85(6) of the Act, with respect to the transfer of certain eligible property of DC referred to in paragraph 16 above. The agreed amount in respect of each such property will not be less than:

(a) the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii), in the case of property referred to in paragraph 85(1)(c.1);

(b) the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii), in the case of property referred to in paragraph 85(1)(d); and

(c) the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii), in the case of property referred to in paragraph 85(1)(e).

In each case, the agreed amount will not exceed the fair market value of the property and will not be less than the liabilities assumed.

18. XXXXXXXXXX.

PROPOSED TRANSACTIONS

19. DC will file articles of amendment to authorize:

(a) an unlimited number of preferred shares (the "DC Preferred Shares") which will be without par value, non-voting, entitled to a fixed, preferential non-cumulative dividend at the rate of XXXXXXXXXX% of the redemption amount of such shares and redeemable and retractable each for an amount, stated as a formula, equal to the quotient obtained when the fair market value of all the issued and outstanding shares of Subco at the time the DC Preferred Shares are first issued is divided by the number of DC Preferred Shares first issued;

and

(b) an unlimited number of new common shares ("DC New Common Shares").

20. Each common share in the capital of DC will be exchanged for one DC New Common Share and one DC Preferred Share (the "Share Exchange"). No other consideration will be received by DC Shareholder in respect of the Share Exchange. The exchanged common shares of DC will be cancelled on the Share Exchange and no election under subsection 85(1) will be filed in respect of the Share Exchange. DC Shareholder will apply to the CCRA for a clearance certificate pursuant to section 116 in respect of such exchange.

For purposes of the CBCA, the aggregate amount to be added to the stated capital of the DC New Common Shares and the DC Preferred Shares will not exceed the aggregate PUC of the exchanged common shares of DC owned by DC Shareholder immediately before the Share Exchange and such aggregate stated capital will be allocated to the DC New Common Shares and the DC Preferred Shares in proportion to their estimated respective fair market values.

21. Qco will file articles of amendment to authorize XXXXXXXXXX preferred shares (the "Qco Preferred Shares") which will be without par value, non-voting, entitled to a fixed, preferential non-cumulative dividend at the rate of XXXXXXXXXX% of the redemption amount of such shares and redeemable and retractable for an amount, stated as a formula, equal to the fair market value of the property received for the issuance of the shares.

21.1 XXXXXXXXXX.

22. DC Shareholder will transfer the XXXXXXXXXX DC Preferred Shares to Qco. As sole consideration for such transfer, Qco will issue XXXXXXXXXX additional Qco Common Shares to DC Shareholder. DC Shareholder will apply to the CCRA for a clearance certificate pursuant to section 116 in respect of the disposition of the DC Preferred Shares.

In accordance with the XXXXXXXXXX Qco will add to the paid-up share capital of the Qco Common Shares an amount equal to the aggregate PUC of the DC Preferred Shares.

23. DC Shareholder and Qco will jointly elect pursuant to subsection 85(1) of the Act, in the prescribed form and within the time referred to in subsection 85(6) of the Act, with respect to the transfer of the DC Preferred Shares to Qco referred to in paragraph 22.

XXXXXXXXXX

24. DC will transfer all the shares of Subco to Qco. As sole consideration for such transfer, Qco will issue XXXXXXXXXX Qco Preferred Shares to DC.

In accordance with the XXXXXXXXXX Qco will add to the paid-up share capital in respect of the Qco Preferred Shares an amount not greater than the aggregate ACB of such shares.

25. DC and Qco will jointly elect pursuant to subsection 85(1) of the Act, in the prescribed form and within the time referred to in subsection 85(6) of the Act, with respect to the transfer of the shares of Subco referred to in paragraph 24 above. The agreed amount will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii) and will not exceed the fair market value of the property.

26. DC will redeem the XXXXXXXXXX DC Preferred Shares for an amount equal to their fair market value, being the aggregate redemption amount of the DC Preferred Shares, and will issue to Qco in consideration therefor a demand non-interest-bearing promissory note with a principal amount, stated as a formula, equal to the aggregate of such redemption amount (the "DC Redemption Note").

Qco will redeem the XXXXXXXXXX Qco Preferred Shares for an amount equal to their fair market value, being the aggregate redemption amount of the Qco Preferred Shares, and will issue to DC in consideration therefor a demand non-interest-bearing promissory note with a principal amount, stated as a formula, equal to the aggregate of such redemption amount (the "Qco Redemption Note").

DC will pay the principal amount of the DC Redemption Note by transferring to Qco the Qco Redemption Note which will be accepted by Qco in full payment of DC's obligation. The DC Redemption Note and the Qco Redemption Note will thereupon be marked paid in full and cancelled.

26.1 A corporation ("Newco") will be incorporated under the CBCA and will be a taxable Canadian corporation. Newco will issue 1 common share to DC Shareholder in consideration of $XXXXXXXXXX.

26.2 DC Shareholder will transfer the XXXXXXXXXX issued and outstanding Qco Common Shares to Newco. As sole consideration for such transfer, Newco will issue XXXXXXXXXX common shares to DC Shareholder. DC Shareholder will apply for a clearance certificate pursuant to section 116 in respect of such disposition.

Newco will add to the stated capital in respect of the common shares an amount equal to the aggregate PUC of the Qco Common Shares.

26.3 DC Shareholder and Newco will jointly elect pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), with respect to the transfer of the XXXXXXXXXX Qco Common Shares to Newco referred to in paragraph 26.2. XXXXXXXXXX

26.4 The paid-up share capital account maintained for the Qco Common Shares will be reduced to $XXXXXXXXXX without any payment being made therefor. Qco will be dissolved pursuant to the provisions of the XXXXXXXXXX and in the course of the dissolution, Qco will transfer all of its property to Newco, including the shares of Subco, and Newco will assume any liabilities of Qco.

27. The stated capital account maintained for the common shares of Subco will be reduced to $XXXXXXXXXX without any payment being made therefor. Newco and Subco will amalgamate in such a manner that:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of Newco and Subco immediately before the merger will become property of the amalgamated entity ("Amalco") by virtue of the merger;

(b) all of the liabilities (except amounts payable to any predecessor corporation) of Newco and Subco immediately before the merger will become liabilities of Amalco by virtue of the merger; and

(c) each share of Newco will be converted into one common share of Amalco by virtue of the merger.

The stated capital of Amalco will not exceed the stated capital of Newco immediately before the merger.

28. [Reserved].

29. XXXXXXXXXX.

ADDITIONAL INFORMATION

30. The Proposed Transactions will occur in the following order:

(a) the transactions set out in paragraphs 19, 21 and 26.1 will occur in any order before the other proposed transactions outlined in paragraph (b) below; and

(b) the transactions set out in paragraphs 20, 21.1, 22, 24, 26, 26.2, 26.4, 27 and 29 will occur in the order in which they are set out above and the transaction described in paragraph 29 will occur after the transactions described in clauses 11(i) and (ii) and paragraph 13.

31. There are not, and will not be at any time prior to the completion of the proposed transactions, any agreements or undertakings which constitute or include a "guarantee agreement," as defined in subsection 112(2.2), in respect of any share of DC or Qco.

32. Neither DC nor Qco has, or will have, entered into a "dividend rental arrangement," as defined in subsection 248(1), in respect of any of the shares to be redeemed as part of the proposed transactions.

33. None of the shares of DC or Qco will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).

34. Neither DC nor Qco will be a corporation described in any of paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1).

PURPOSE OF THE PROPOSED TRANSACTIONS

35. The principal purpose of the proposed transactions is to transfer DC's XXXXXXXXXX business to a XXXXXXXXXX corporation which will be controlled by Parentco XXXXXXXXXX.

RULINGS

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

A. Provided that DC Shareholder holds its common shares in the capital of DC as capital property, the provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the Share Exchange described in paragraph 20 above, such that:

(a) the cost of the DC New Common Shares and the DC Preferred Shares received on the Share Exchange will be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the aggregate ACB to DC Shareholder, immediately before the Share Exchange, of the common shares, that:

(i) the fair market value, immediately after the Share Exchange, of the DC New Common Shares or the DC Preferred Shares, as the case may be,

is of

(ii) the fair market value, immediately after the Share Exchange, of all of the shares of DC received by DC Shareholder for the exchanged common shares; and

(b) pursuant to paragraph 86(1)(c), DC Shareholder will be deemed to have disposed of the exchanged common shares for aggregate proceeds of disposition equal to the aggregate cost to DC Shareholder of the DC New Common Shares and the DC Preferred Shares determined in (a) above.

B. No dividend will be deemed to arise pursuant to subsections 84(1) or (3) with respect to the Share Exchange described in paragraph 20 above.

C. The provisions of paragraph 212.1(1)(a) will not apply to the transfer of the DC Preferred Shares from DC Shareholder to Qco, as described in paragraph 22 above and, for greater certainty, the provisions of paragraph 212.1(1)(b) will not apply to reduce the PUC of the common shares issued by Qco.

D. Provided that the requisite elections are filed under subsection 85(1) within the prescribed time period, the provisions of subsection 85(1) will apply to the transfer of the DC Preferred Shares from DC Shareholder to Qco, as described in paragraph 22 and to the transfer of the Subco shares by DC to Qco, as described in paragraph 24, such that the agreed amount in respect of each such property will be deemed to be the transferors' proceeds of disposition and the transferees' cost thereof pursuant to paragraph 85(1)(a).

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

E. Subsection 84(3) will apply on:

(a) the redemption, as described in paragraph 26 above, of the XXXXXXXXXX DC Preferred Shares held by Qco, to deem DC to have paid and Qco to have received; and

(b) the redemption, as described in paragraph 26 above, of the XXXXXXXXXX Qco Preferred Shares held by DC, to deem Qco to have paid and DC to have received;

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon each such redemption exceeds the aggregate PUC in respect of such shares immediately before each such redemption, and any such dividend:

(i) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the person deemed to have received such dividend;

(ii) will be deductible by the recipient 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);

(iii) will be excluded in determining the proceeds of disposition to the recipient of the shares so redeemed, pursuant to paragraph (j) of the definition "proceeds of disposition" in section 54;

(iv) will, by virtue of the provisions of subsection 112(3), apply to reduce any loss arising from the redemptions to DC and Qco which would otherwise be determined;

(v) will not be subject to tax under Part IV of the Act, except as provided in paragraph 186(1)(b) as DC and Qco will be connected to each other by virtue of subsection 186(4); and

(vi) will not be subject to tax under Parts IV.1 and VI.1 of the Act because they will be "excluded dividends" as defined in subsection 191(1) and "excepted dividends" as defined in section 187.1.

F. The repayment of the Qco Redemption Note held by DC and the DC Redemption Note held by Qco as described in paragraph 26 above will not give rise to a "forgiven amount" within the meaning of subsections 80(1) or 80.01(1). Neither DC nor Qco will realize any gain or incur any loss as a result of the repayment and resultant cancellation of the Qco Redemption Note and the DC Redemption Note, as the case may be, as described in paragraph 26 above.

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

H. The provisions of subsection 87(1) will apply with respect to the amalgamation of Newco and Subco described in paragraph 27 above.

I. The provisions of subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to any of the proposed transactions described in paragraphs 19 through 29 above, in and of themselves.

J. Subsection 245(2) will not be applied, as a result of the proposed transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given above.

The above rulings are given subject to the 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 are completed before XXXXXXXXXX. These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not to the Act.

COMMENTS

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

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

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular, we are not commenting on any tax consequences resulting from the transactions described in paragraphs 11 through 18 above.

Yours truly,

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