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: Application of bump denial rules and stop loss rules to property ultimately distributed to the beneficiary of the deceased's estate. Application of subsection 164(6) to the capital loss on the redemption of certain shares owned by the estate of the deceased.
Position: Favourable rulings given.
Reasons: In accordance with tax policy and the law.
XXXXXXXXXX 2001-009336
October 25, 2001
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling Request
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 advised that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request:
(a) is in an earlier return of the taxpayers or a related person,
(b) is being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayers or a related person,
(c) is under objection by the taxpayers or a related person,
(d) is before the courts, or
(e) is the subject of a ruling previously considered by the Income Tax Rulings Directorate.
Entity Definitions
In this letter, unless otherwise indicated:
(a) "Amalco" means a company to be formed on the amalgamation of Opco and Holdco under the BCA, and is more particularly described at paragraph 14 hereof;
(b) "CCRA" means the Canada Customs and Revenue Agency;
(c) "Estate" means the estate of the late XXXXXXXXXX;
(d) "Holdco" means a company to be incorporated under XXXXXXXXXX the BCA, and is more particularly described at paragraph 10 hereof;
(e) "J" means the late XXXXXXXXXX;
(f) "Newco" means a company to be incorporated under the BCA, and is more particularly described at paragraph 10 hereof;
(g) "Opco" means XXXXXXXXXX, a company incorporated under XXXXXXXXXX the BCA, and is more particularly described at paragraph 2 hereof; and
(h) "R" means XXXXXXXXXX, the adult child of J.
Other Definitions
In this letter, unless otherwise indicated, all dollar amounts referred to herein are in Canadian dollars and the following terms have the meanings specified:
(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th supp.) c.1, as amended from time to time and consolidated to the date of this letter and unless otherwise expressly stated, every reference to a part, section or subsection, paragraph or subparagraph and clause or subclause, is a reference to the relevant provision of the Act;
(b) "adjusted cost base" has the meaning assigned by subsection 248(1);
(c) "agreed amount" has the meaning assigned by subsection 85(1);
(d) "arm's length" has the meaning assigned by subsection 251(1);
(e) "BCA" means the XXXXXXXXXX Companies Act;
(f) "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);
(g) "cost amount" has the meaning assigned by subsection 248(1);
(h) "ineligible property" has the meaning assigned by paragraph 88(1)(c);
(i) "private corporation" has the meaning assigned by subsection 89(1);
(j) "proceeds of disposition" has the meaning assigned by subsection 248(1);
(k) "paid-up capital" has the meaning assigned by subsection 89(1);
(l) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);
(m) "series of transactions or events" includes the related transactions or events described in subsection 248(10);
(n) "stated capital" has the meaning of the term "issued and paid-up share capital" as assigned by the BCA;
(o) "specified person" has the meaning assigned by paragraph 88(1)(c.2);
(p) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);
(q) "substituted property" includes the meanings assigned by subsection 248(5) and paragraph 88(1)(c.3); and
(r) "taxable dividend" has the meaning assigned by subsection 89(1).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. J was a resident of Canada who died on XXXXXXXXXX.
2. Opco is a Canadian-controlled private corporation incorporated under XXXXXXXXXX the BCA on XXXXXXXXXX and continued under XXXXXXXXXX the BCA on XXXXXXXXXX. Opco deals with the XXXXXXXXXX Tax Service Office and its CCRA business number is XXXXXXXXXX.
3. Opco carries on an investment business and owns certain non-depreciable capital property, consisting of XXXXXXXXXX parcels of land and marketable securities. The XXXXXXXXXX parcels of land had an aggregate adjusted cost base of $XXXXXXXXXX and an estimated aggregate fair market value of $XXXXXXXXXX at the time of J's death and have been owned continuously by Opco from that time. The marketable securities had an aggregate adjusted cost base of $XXXXXXXXXX and an aggregate fair market value at the time of J's death of $XXXXXXXXXX. Opco has owned these marketable securities continuously from the time of J's death.
4. Pursuant to J's last will and testament dated XXXXXXXXXX (the "Will") all of the assets owned by J at the time of her death, including all the issued and outstanding Class A and C shares of Opco described in paragraph 7 below, were bequeathed to R.
5. R is a resident of Canada and is the sole executor and beneficiary of the Estate.
6. Opco's authorized share capital consists of an unlimited number of voting class A common shares; an unlimited number of non-voting class B common shares; an unlimited number of voting class A preferred shares; an unlimited number of non-voting class B preferred shares; XXXXXXXXXX voting class C preferred shares; and an unlimited number of non-voting class D preferred shares. The current number of issued and outstanding shares of Opco and their terms are as follows:
(i) XXXXXXXXXX class A common shares ("Opco Common Shares") with a stated capital and paid-up capital of $XXXXXXXXXX per share;
(ii) XXXXXXXXXX class A preferred shares ("Opco Class A Shares") with a stated capital and paid-up capital of $XXXXXXXXXX per share. The Opco Class A Shares are redeemable for their redemption amount of $XXXXXXXXXX per share; and
(iii) XXXXXXXXXX class C preferred shares ("Opco Class C Shares") with a stated capital and paid-up capital of $XXXXXXXXXX per share. The Opco Class C Shares are redeemable for their redemption amount of $XXXXXXXXXX per share.
The voting rights attached to each class of voting shares entitle the holder to only one vote per share.
7. At the time of J's death, all the issued and outstanding Opco Class A Shares and Opco Class C Shares were held by J as capital property. At the time of J's death, the aggregate adjusted cost base of her XXXXXXXXXX Opco Class A Shares and XXXXXXXXXX Opco Class C Shares was $XXXXXXXXXX and $XXXXXXXXXX, respectively. J had claimed a capital gains deduction on the XXXXXXXXXX Opco Class C shares on February 22, 1994. The fair market value of the Opco Class A Shares and Opco Class C Shares at the time of J's death was equal to the redemption amount of each particular class of shares. The capital gain on the deemed disposition of J's Opco shares at the time of death was $XXXXXXXXXX and the aggregate adjusted cost base to the Estate of the XXXXXXXXXX Opco Class A Shares and XXXXXXXXXX Opco Class C Shares acquired by it is $XXXXXXXXXX and $XXXXXXXXXX respectively.
8. The XXXXXXXXXX Opco Common Shares are held by R as capital property and their aggregate adjusted cost base to R is $XXXXXXXXXX. R acquired her XXXXXXXXXX Opco Common Shares directly from Opco as part of an estate freeze which took place on XXXXXXXXXX
9. Opco's taxation year-end is XXXXXXXXXX and at the end of Opco's XXXXXXXXXX taxation year Opco had an RDTOH account balance of $XXXXXXXXXX, which was generated through rental income paid to Opco.
Proposed Transactions
10. Prior to XXXXXXXXXX, two new corporations will be incorporated under XXXXXXXXXX the BCA (referred to as "Holdco" and "Newco" respectively) with the authorized capital stock of each corporation consisting of several classes of shares listed as follows:
(i) an unlimited number of voting class A common shares;
(ii) an unlimited number of non-voting class B common shares;
(iii) an unlimited number of voting class A preferred shares;
(iv) an unlimited number of non-voting class B preferred shares;
(v) an unlimited number of voting class C preferred shares; and
(vi) an unlimited number of non-voting class D preferred shares.
The above classes of shares will have terms and conditions similar to those of the shares of Opco that bear the same name and class type as described in paragraph 6 above. No shares of Holdco or Newco will be issued at the time each corporation is incorporated.
11. On XXXXXXXXXX, R will transfer her XXXXXXXXXX Opco Common Shares to Holdco and receive as sole consideration therefor XXXXXXXXXX class A common shares of Holdco ("Holdco Common Shares") having a fair market value equal to the fair market value of the XXXXXXXXXX Opco Common Shares. R and Holdco will elect jointly, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer.
The agreed amount in the election will be equal to the adjusted cost base of such shares to R immediately before the transfer and for greater certainty, such amount will not be less than the lesser of the two amounts described in subparagraphs 85(1)(c.1)(i) and (ii).
The amount to be added to the stated capital account maintained for the Holdco Common Shares issued as consideration for the Opco Common Shares, under the BCA, will be an amount equal to the aggregate paid-up capital of the Opco Common Shares and, for greater certainty, will not be greater than the amount determined as B for the purposes of paragraph 84.1(1)(a).
12. Concurrent with the transfer of the Opco Common Shares by R to Holdco, as described in paragraph 11 above, the Estate will transfer its XXXXXXXXXX Opco Class A Shares and XXXXXXXXXX Opco Class C Shares to Holdco and receive, as sole consideration therefor, XXXXXXXXXX class A preferred shares of Holdco ("Holdco Class A Shares") and XXXXXXXXXX class C preferred shares of Holdco ("Holdco Class C Shares") respectively. The Holdco Class A Shares and Holdco Class C Shares will have an aggregate fair market value equal to the aggregate fair market value of the particular class of Opco shares for which they were exchanged. The Estate and Holdco will elect jointly, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to each of these transfers. The agreed amount in such election for each such transfer will be equal to the adjusted cost base of the particular class of Opco shares to the Estate immediately before such transfer and for greater certainty, such amount will not be less than the lesser of the two amounts described in subparagraphs 85(1)(c.1)(i) and (ii). Opco will henceforth be a subsidiary wholly-owned corporation of Holdco.
The amount to be added to the respective stated capital accounts maintained for the Holdco Class A Shares and the Holdco Class C Shares under the BCA will be equal to the amount of the aggregate paid-up capital of the Opco Class A Shares and Opco Class C Shares, respectively, and, for greater certainty, each such amount will not be greater than the amount determined as B for the purposes of paragraph 84.1(1)(a).
13. On XXXXXXXXXX, the Estate will transfer its XXXXXXXXXX Holdco Class A Shares and XXXXXXXXXX of its XXXXXXXXXX Holdco Class C Shares to Newco and receive as sole consideration therefor XXXXXXXXXX class A preferred shares of Newco ("Newco Class A Shares") and XXXXXXXXXX class C preferred shares ("Newco Class C Shares") of Newco respectively. The Newco Class A Shares and Newco Class C Shares will have an aggregate fair market value equal to the aggregate fair market value of the particular class of Holdco shares for which they were exchanged. The Estate and Newco will elect, jointly, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to each of these transfers. The agreed amount in such election for each such transfer will be equal to the adjusted cost base of the particular class of Holdco shares to the Estate immediately before the transfer and for greater certainty, such amount will not be less than the lesser of the two amounts described in subparagraphs 85(1)(c.1)(i) and (ii).
The amount to be added to the respective stated capital accounts maintained for the Newco Class A Shares and the Newco Class C Shares under the BCA will be equal to the amount of the aggregate paid-up capital of the Holdco Class A Shares and the aggregate paid-up capital attributable to the XXXXXXXXXX Holdco Class C Shares, respectively, and, for greater certainty, each such amount will not be greater than the amount determined as B for the purposes of paragraph 84.1(1)(a).
14. The first taxation year of Holdco will end on XXXXXXXXXX. On XXXXXXXXXX, Holdco and Opco will amalgamate in accordance with subsection 87(1) to form Amalco. Pursuant to the amalgamation agreement, all of the assets and liabilities of Holdco and Opco will become the assets and liabilities of Amalco and all the shares of Opco will be cancelled. No shares of Amalco will be issued on the amalgamation such that the issued and outstanding shares of Holdco will become the shares of Amalco. The certificate of amalgamation will be dated XXXXXXXXXX and will not indicate a specific time. The first taxation year of Amalco will end on XXXXXXXXXX.
15. In connection with the amalgamation of Holdco and Opco to form Amalco, as described in paragraph 14 above, a designation will be made by Amalco under the provisions of subsection 87(11) and paragraph 88(1)(d) to increase, within the limits described in paragraphs 88(1)(d), the adjusted cost base of certain capital property (other than "ineligible property" as defined in paragraph 88(1)(c)) owned by Opco immediately before the amalgamation.
In particular, Amalco will seek to increase the adjusted cost base of the two parcels of land and the marketable securities (with accrued but unrealized gains and that have been owned continuously by Opco from the time of J's death), described in paragraph 3 above, to the extent permitted by subsection 87(11) and paragraph 88(1)(d).
16. On XXXXXXXXXX, Amalco will redeem its XXXXXXXXXX Amalco Class A Shares and XXXXXXXXXX Amalco Class C Shares held by Newco for an amount equal to the aggregate fair market value and aggregate redemption amount of each such class of shares, being $XXXXXXXXXX and $XXXXXXXXXX, respectively. The aggregate amount of funds required for such redemptions, being $XXXXXXXXXX, will be paid by Amalco in cash, using funds borrowed by Amalco from an arm's-length third party.
17. On XXXXXXXXXX Newco will enter into a winding-up agreement with the Estate whereby Newco will be wound-up under subsection 88(2) and distribute all of its assets, including any cash it will receive from Amalco on the redemption of the Amalco Class A and Class C Shares, as described in paragraph 16 above, to its only shareholder at that time, being the Estate. The Estate will loan, to Amalco, the full amount it will receive on the wind-up dividend from Newco in exchange for a promissory note from Amalco (the "Note") with a principal amount and fair market value equal to the amount so loaned. Amalco will use the loan proceeds to repay its loan owing to the arm's-length third party lender. Upon receipt of the expected dividend refund by Amalco following its XXXXXXXXXX taxation year-end, Amalco will pay the amount of such refund to the Estate in partial satisfaction of the principal amount owing under the Note.
18. It is anticipated that the capital loss to the Estate on the disposition of the Newco Class A Shares and Newco Class C Shares when Newco is wound-up will be $XXXXXXXXXX. R, in the course of her administration of the Estate in the first year after J's death shall elect in prescribed manner and within the prescribed time pursuant to paragraph 164(6)(c) to deem the full amount of such loss to be a capital loss of J from the disposition of the shares of Newco in the taxation year in which she died and not a capital loss of the Estate from the disposition of such property. R shall also elect pursuant to paragraph 164(6)(c) to deem any other capital losses realized by the Estate in the first year after J's death to be a capital loss of J from the disposition of such property and not be a capital loss of the Estate from the disposition of such property. These capital losses will be applied against any other capital gains that may have been realized by J from the disposition or deemed disposition of any capital assets held by J in the year of her death, including the deemed disposition of her Opco shares, and reported on her final income tax return.
19. The remaining XXXXXXXXXX Amalco Class C Shares held by the Estate and the principal amount owing by Amalco to the Estate under the Note will form part of the residue of the Estate. In accordance with the terms of J's Will such property will be transferred by the Estate to R.
Purpose of the Proposed Transactions
The purpose of the proposed transactions described in paragraphs 11 to 15 above, and the incorporation of Holdco referred to in paragraph 10 above, is to obtain an increase in the adjusted cost base of any non-depreciable capital property owned by Opco at the time of J's death, in accordance with paragraphs 88(1)(c) and (d), on the vertical amalgamation of Holdco and Opco.
The purpose of the proposed transactions described in paragraphs 16 to 19 above, is to utilize subsection 164(6) in order to offset any capital gains realized by J in the year of death against any capital losses realized by the Estate in its first taxation year. The purpose of the incorporation of Newco described in paragraph 10 above, is to ensure that subsection 40(3.6) will not apply to deny the capital loss of the Estate so as to facilitate the application of subsection 164(6). A further purpose of the proposed transactions is to ensure receipt by Amalco of a dividend refund.
RULINGS REQUESTED
Provided the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we confirm the following:
A. On the vertical amalgamation of Opco and Holdco to form Amalco, as described in paragraph 14 above, provided that no property acquired by Amalco on such amalgamation or "any other property acquired by any person in substitution therefor" (within the meaning of that phrase for the purposes of clause 88(1)(c)(vi)(B)) is acquired by any person described in any of subclauses 88(1)(c)(vi)(B)(I), (II) or (III) (on the assumption that the "subsidiary" referred to in those subclauses is Opco and the "parent" is Holdco or Amalco, as the context requires) as part of the series of transactions or events that includes the proposed transactions described herein, the cost to Amalco of each property owned by Opco at the time Holdco acquired control of Opco and that became property of Amalco pursuant to the amalgamation will be deemed by paragraph 88(1)(c) to be the cost amount of such property plus, on the assumption that such property is capital property, but not depreciable, property, the amount designated by Amalco under paragraph 88(1)(d) in respect of the property as described in paragraph 15 above.
For greater certainty, the acquisition by R of property described in paragraphs 11 and 19 will not, in and of itself, cause such property to be ineligible property.
B. As a result of the application of paragraph 88(1)(d.2) and paragraph 88(1)(d.3), for the purposes of Ruling A, Holdco/Amalco will be deemed to have last acquired control of Opco at the time immediately after the death of J from an arm's-length person.
C. Subsection 69(5) will be applicable to the winding-up of Newco, as described in paragraph 17 above.
D. Subsection 40(3.6) will not apply to deem any capital loss arising on the disposition of the Newco shares by the Estate, on the wind up of Newco, as described in paragraphs 17 and 18 above, to be nil.
E. To the extent that a capital loss is realized by the Estate on the disposition of the Newco shares, as described in Ruling D, within the first taxation year of the Estate, such capital loss, or portion thereof, will be deemed, except for the purposes of subsection 112(3) and paragraph 164(6)(c), to be a capital loss of J from the disposition of the shares of Newco in her last taxation year and not to be a capital loss of the Estate from the disposition of such property provided that the legal representative of the Estate elects in prescribed manner and within the prescribed time pursuant to paragraph 164(6)(c).
F. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not apply as a result of the proposed transactions described herein, in and of themselves.
G. Subsection 245(2) will not be applied, as a result of the proposed transactions, in and of themselves, to re-determine the tax consequences described in the rulings given.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 and are binding on the CCRA provided that the proposed transactions are completed by XXXXXXXXXX. The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this ruling should be construed as implying that the CCRA has reviewed or is making a determination in respect of:
(a) the fair market value or adjusted cost base of any particular asset or the paid-up capital of any share or class of shares referred to herein;
(b) any tax consequences relating to the facts and proposed transactions described herein, other than those specifically described in the rulings given above;
(c) any tax consequences relating to a subsequent disposition of any shares or property by any person referred to herein, and nothing in this ruling should be construed as implying that any subsequent transaction will not be considered to be part of the series of transactions or events described herein.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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