2001 2001-0107241 - Supplemental ruling

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:

1.Where a corporation is wound up under subsection 88(1) but is not dissolved due to an on-going litigation matter, whether we would consider the corporation to exist for the purposes of subsection 40(3.3)?

2. Where a person does not have a de jure control over a corporation, whether the person is affiliated with the corporation for the purposes of subsection 40(3.3)?

3. Where a corporation creates a capital gain in order to offset it against its anticipated capital loss, whether the payment of a capital dividend by the corporation, that represents the non-taxable portion of the capital gain in anticipation of the realization of the corporation's anticipated capital loss, is abusive?

4.Where after a butterfly reorganization, a transferee makes a cash contribution into a broker joint account with another transferee, whether such cash contribution affects the butterfly?

Position:

1.Yes.

2.It is a question of fact as to whether the person has de facto control over the corporation. IT-64R4 sets out the factors that CCRA normally considers.

3.Yes.

4. no.

Reasons:

1.Because it is not dissolved and it still legally exists.

2.As stated above.

3.It circumvents the CDA's role in the integration of corporate and shareholder levels of tax for private corporations.

4.Money is exempt under paragraph 55(3.1)(c).

XXXXXXXXXX 							2001-010724

XXXXXXXXXX , 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling 2001-007056 dated XXXXXXXXXX, 2001

We are writing in response to the letter of XXXXXXXXXX wherein he advised us of certain amendments to the facts and proposed transactions described in advance income tax ruling 2001-007056 which was issued on XXXXXXXXXX, 2001 (the "Ruling Letter") and requested an extension XXXXXXXXXX to complete the proposed transactions described in the Ruling Letter. In your letters of XXXXXXXXXX you provided additional information concerning the amendments described in the letter of XXXXXXXXXX. We also acknowledge the information provided during our telephone conversations (XXXXXXXXXX).

As requested, the following amendments are hereby made to the Ruling Letter:

1. The following terms are added to the definitions section of the Ruling Letter:

(c.1) "capital dividend account" ("CDA") has the meaning assigned by subsection 89(1);

(c.2) "capital loss" has the meaning assigned by subsection 39(1);

(j.1) "portfolio investments" has the meaning assigned by section 3050 of the CICA Handbook;

2. The following paragraph is added as paragraph 1.1 of the Ruling Letter:

Certain investments of DC1 which include some of the portfolio investments of DC1 currently have accrued capital losses (the "DC1 Loss Properties"). The financial downturn experienced by the economy has caused the fair market value of many of DC1's investments to be lower than their cost amount. DC1 currently has a negative balance in its CDA and it is not expected that such negative balance will be positive at the time of the proposed transactions described herein.

3 The following paragraph is added as paragraph 2.1 of the Ruling Letter:

Certain investments of DC2 which include some of the portfolio investments of DC2 currently have accrued capital losses (the "DC2 Loss Properties"). The financial downturn experienced by the economy has caused the fair market value of many of DC2's investments to be lower than their cost amount. On or about XXXXXXXXXX, DC2 disposed of some of its Pubco2 shares at fair market value for cash consideration only and realized a capital gain. The disposition of such Pubco2 shares was strictly commercially motivated and was not part of the series of transactions that includes the proposed transactions described below. As a result of such disposition, DC2 currently has a positive balance in its CDA.

4. The following paragraph is added as the last paragraph of paragraph 10 of the Ruling Letter:

The property of DC2 that will be transferred to each of Subco1 and Subco2 as described herein will include the DC2 Loss Properties (the portions of the DC2 Loss Properties that will be transferred to each of Subco1 and Subco2 are referred hereafter as the "DC2 Loss Properties I" and the "DC2 Loss Properties II", respectively);

5. The following paragraph is added as paragraph 10.1 of the Ruling Letter:

10.1 The following transactions will be completed within the same XXXXXXXXXX period:

(a) the transfers by DC2 of its properties which include the DC2 Loss Properties to Subco1 and Subco2 described in paragraph 10 above;

(b) the wind-up of DC2 (other than the filing of the Articles of Dissolution) described in paragraph 14 below;

(c) the transfers by DC1 of its properties which include the DC1 Loss Properties to Tempco1 and Tempco2 described in paragraphs 16 and 17 below; and

(d) the wind-up of DC1 described in paragraph 21 below.

6. The following paragraph is added as the last paragraph of paragraph 12 of the Ruling Letter:

DC2 will incur capital losses from the disposition of the DC2 Loss Properties to Subco1 and Subco2 as described in paragraph 10 above.

7. Subparagraph (b) of paragraph 16 of the Ruling Letter is replaced by:

(b) a proportionate share of its cash or near cash property, its business property, if any, and its investment property (which proportionate share will include a proportionate share of the DC1 Loss Properties);

8. Subparagraph (b) of paragraph 17 of the Ruling Letter is replaced by:

(b) a proportionate share of its cash or near cash property, its business property, if any, and its investment property (which proportionate share will include a proportionate share of the DC1 Loss Properties);

9. The following paragraph is added as the last paragraph of paragraph 18 of the Ruling Letter:

DC1 will incur capital losses from the disposition of the DC1 Loss Properties to Tempco1 and Tempco2 as described in paragraphs 16 and 17 above.

10. In paragraph 24 of the Ruling Letter,

(a) the reference to "all property of Subco1, including the Pubco1 shares and the Pubco2 shares, will be distributed to TC1" is replaced by a reference to "all property of Subco1, including the Pubco1 shares, the Pubco2 shares and the DC2 Loss Properties I, will be distributed to TC1"; and

(b) the reference to "all property of Subco2, including the Pubco1 shares and the Pubco2 shares, will be distributed to TC2" is replaced by a reference to "all property of Subco2, including the Pubco1 shares, the Pubco2 shares and the DC2 Loss Properties II, will be distributed to TC2".

11. The following paragraph is added as paragraph 24.1 of the Ruling Letter:

24. 1 Following the transactions described above, TC1 and TC2 will open a joint account with a brokerage firm (the "Joint Account") and each will own an undivided one-half (1/2) interest in the Joint Account. From time to time, TC1 and TC2 each will contribute an equal amount of cash into the Joint Account. The purpose of the Joint Account is to allow TC1 and TC2 to make investments jointly at reduced brokerage fees and administration costs. TC1 and TC2 will covenant with one another that each will not withdraw more than its proportionate share of the investment funds in the Joint Account.

12. The following ruling is added as Ruling H:

H. Subsections 40(3.3) and (3.4) will apply to deem any capital losses (the "Suspended Losses"), incurred by DC2 from the disposition of the DC2 Loss Properties I to Subco1 as described in paragraph 10 above, to be nil and such Suspended Losses described herein will, by the combined application of paragraphs 88(1)(e.2) and 87(2)(g.3), be available to DC1 at the commencement of its winding-up pursuant to subparagraph 40(3.4)(b)(v) of the Act.

13. The following ruling is added as Ruling I:

I. Provided that at the end of the period that begins XXXXXXXXXX before and ends XXXXXXXXXX after the disposition by DC2 of the DC2 Loss Properties II to Subco2, as described in paragraph 10 above, DC2 or a person affiliated with DC2 does not own the DC2 Loss Properties II or properties identical thereto, any capital losses incurred by DC2 from the disposition of the DC2 Loss Properties II to Subco2, as described in paragraph 10 above, will not be denied by subsection 40(3.4), as the requirement in paragraph 40(3.3)(c) will not be met.

14. Paragraph 1 of the comments section of the Ruling Letter is replaced by:

1. Nothing in this ruling should be construed as implying that CCRA has agreed to or reviewed:

(a) the determination of the fair market value or the cost amount of any particular asset 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. For greater certainty, our rulings should not be construed as providing

(i) comments on any tax consequences relating to the transactions described in paragraphs 2.1 and 5 above; and

(ii) comfort that neither TC2 nor Tempco2 is or will be affiliated with DC1 or DC2 at any particular time which includes the proposed transactions described above.

Notwithstanding the amendments described herein, we confirm that, subject to the conditions set out in the Ruling Letter, the rulings given in the Ruling Letter, as hereby amended, will continue to be binding on CCRA in accordance with the practice outlined in Information Circular 70-6R4, dated January 29, 2001, provided that the proposed transactions, other than the filings of the Articles of Dissolution of DC2 and DC1 as described in paragraphs 14 and 22 above, are completed in the manner described in the Ruling Letter, as amended herein, by XXXXXXXXXX.

Yours truly,

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

??