2002 Ruling 2001-0095503 - PARTITIONING OF SHARES

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 the partitioning of preferred shares will give rise to a disposition.

Position: No.

Reasons: The partitioning (of each share) complies with subsection 248(21).

XXXXXXXXXX 2001-009550

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of XXXXXXXXXX (the "Partnership") and its partners, XXXXXXXXXX ("Partner A") and XXXXXXXXXX ("Partner B") (and collectively the "Partners").

You advise that to the best of your knowledge and that of the Partners, none of the issues contained herein is

a) in an earlier return of the Partners or a related person;

b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Partners or a related person;

c) under objection by the Partners or a related person;

d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

e) the subject of a ruling previously issued by the Canada Customs and Revenue Agency.

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

FACTS

1. Partner A is an individual residing at the following address: XXXXXXXXXX. Partner A's social insurance number is XXXXXXXXXX. Partner A is a resident of Canada and files income tax returns with the XXXXXXXXXX Taxation Centre.

2. Partner B is an individual residing at the following address: XXXXXXXXXX. Partner B's social insurance number is XXXXXXXXXX. Partner B is a resident of Canada and files income tax returns with the XXXXXXXXXX Taxation Centre.

3. The Partnership was formed on XXXXXXXXXX under the laws of the Province of XXXXXXXXXX with nominal contributions by each of the Partners, each of whom has a fifty percent interest in the Partnership. The Partners are, and will be at the time the proposed transactions described below take place, the sole members of the Partnership.

The Partnership is a general partnership and a "Canadian partnership" as defined in subsection 102(1) of the Income Tax Act (the "Act"). Its business address is XXXXXXXXXX Until the transfer of its assets described in 6 below, the Partnership carried on the business of XXXXXXXXXX.

4. XXXXXXXXXX (the "Corporation") is a corporation incorporated on XXXXXXXXXX under the Business Corporations Act (XXXXXXXXXX). The Corporation is a "taxable Canadian corporation" as defined in subsection 89(1) of the Act and a "Canadian-controlled private corporation" as defined in subsection 125(7) of the Act.

The Corporation carries on an XXXXXXXXXX business primarily in XXXXXXXXXX. The Corporation's business address is XXXXXXXXXX, its tax account number is XXXXXXXXXX and it files tax returns with the XXXXXXXXXX Tax Services Office.

5. Except for the preferred shares issued to and currently held by the Partnership as described in 6 below, the Partners are, and have always been, the sole shareholders of the Corporation, each having initially subscribed for, and presently holding, XXXXXXXXXX Class A common shares of the Corporation.

6. On XXXXXXXXXX, all of the assets of the Partnership were transferred to the Corporation in exchange for redeemable retractable preferred shares of the Corporation (the "Preferred Shares"). The only assets of the Partnership at the present time are the Preferred Shares.

7. In XXXXXXXXX , after the formation of the Corporation and the transfer of the Partnership's assets as described in 4 and 6 above respectively, the Partners had understood from their legal counsel at the time that the Partnership would then be wound-up and the Partners would own the Preferred Shares directly pursuant to the provisions of subsection 85(3) of the Act. It is your understanding that this did not occur. You advise there were two different law firms involved at that time and that there seems to have been a misunderstanding as to which firm was responsible for completing the relevant documents. The Partners intended that the wind-up occur and were unaware that it had not been done until the minute book was reviewed in XXXXXXXXXX when it was determined that the Preferred Shares were still in the name of the Partnership.

PROPOSED TRANSACTIONS

8. The Partnership will be dissolved and all its property, consisting of the Preferred Shares, will be distributed to the Partners so that, immediately after the Partnership ceases to exist, each Partner will have an undivided one-half interest in each Preferred Share.

9. Pursuant to subsection 98(3) of the Act, each Partner will jointly elect in respect of the Preferred Shares, in prescribed form and within the time referred to in subsection 96(4) of the Act, that each such Partner's proceeds of disposition of her interest in the Partnership, the cost to each such Partner of her undivided interest in the Preferred Shares and the Partnership's proceeds of disposition of the Preferred Shares shall be determined in accordance with the rules in subsection 98(3) of the Act.

10. Following the dissolution of the Partnership, the Partners will request that the Corporation partition each of the Preferred Shares and as a consequence thereof:

(a) each Partner's respective undivided one-half interest in any particular Preferred Share will become a divided one-half interest (the "Divided Interest") in such particular Preferred Share, and

(b) each Partner's Divided Interest in such particular Preferred Share will have a fair market value which immediately after the partition, expressed as a percentage of the fair market value of all the Divided Interests in such particular Preferred Share immediately after the partition, will be equal to the fair market value of such Partner's undivided interest in such particular Preferred Share immediately before the partition, expressed as a percentage of the fair market value of all the undivided interests in such particular Preferred Share immediately before the partition (the "Partition").

Fractional shares, and a certificate in respect thereof, will be issued to the Partners to the extent necessary to reflect the Partition.

11. You advise that the Business Corporations Act (XXXXXXXXXX) provides for the partitioning of shares into fractional shares.

12. It is intended that each of the Partners will transfer their respective Class A common shares of the Corporation and their Divided Interests in the Preferred Shares into their respective holding companies. Such transfer is not the subject of this advance income tax ruling.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to complete the intended wind-up of the Partnership so that the Partners may each deal with their shares in the Corporation separately and more particularly, so that they can receive dividends and determine independently how the surplus funds from the Corporation should be invested.

RULINGS GIVEN

Provided that: (a) the facts, proposed transactions and their purposes have been fully disclosed and, as summarized above, are accurate; and (b) the proposed transactions are carried out as described above, we confirm the following.

A. Provided the Partnership is a Canadian partnership, as defined in subsection 102(1) of the Act, at the time it ceases to exist as described in 8 above, the provisions of subsection 98(3) of the Act will apply to the dissolution (as described in 8 above) to determine the amount of each Partner's proceeds of disposition of her interest in the Partnership, the cost to each Partner of her undivided interest in each property of the Partnership, including the Preferred Shares, and the Partnership's proceeds of disposition of the Preferred Shares.

B. Subsection 248(21) of the Act will apply to the Partition as described in 10 above such that subsection 248(20) of the Act will not apply with respect thereto and each Partner's Divided Interest in a particular Preferred Share will be deemed to be a continuation of each such Partner's undivided interest in such Preferred Share immediately before its partition.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R4 dated January 29, 2001 and are binding on the Canada Customs and Revenue Agency provided the proposed transactions are implemented on or before XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments thereto. Except as expressly stated, these rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.

Yours truly

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate