2002 Ruling 2002-0122743 - Vertical Amalgamation and Bump

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 Department.

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

Principal Issues: Vertical amalgamation and bump

Position: Favourable rulings provided

Reasons: In accordance with prior positions

XXXXXXXXXX 2002-012274

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above named taxpayers. We acknowledge your letters of XXXXXXXXXX and the information provided during our various telephone conversations in connection with your request.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

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

(v) is the subject of a ruling previously issued by the Income Tax Rulings Directorate to the taxpayer or a related person.

DEFINITIONS

In this letter, unless otherwise noted, all statutory references are to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (the "Act").

In this letter:

(a) "ACB" means "adjusted cost base" which has the meaning assigned by section 54 and subsection 248(1);

(b) "Agency" means the Canada Customs and Revenue Agency;

(c) "agreed amount" in respect of an asset means the amount that the transferor and the transferee of the asset agree upon in their election under subsection 85(1) in respect of that asset;

(d) "arm's length" has the meaning assigned by subsection 251(1);

(e) XXXXXXXXXX;

(f) "capital property" has the meaning assigned by section 54;

(g) "cost amount" has the meaning assigned by subsection 248(1);

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

(i) "FMV" means "fair market value";

(j) "ineligible property" has the meaning assigned by paragraph 88(1)(c);

(k) "POD" means "proceeds of disposition" which has the meaning assigned by section 54;

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

(m) "PUC" means "paid-up capital" which has the meaning assigned by subsection 89(1);

(n) "related person" has the meaning assigned by section 251;

(o) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);

(p) "taxable Canadian corporation" has the meaning assigned in subsection 89(1); and

(q) "taxable dividend" has the meaning assigned by subsection 89(1).

In addition, the following entities/persons will be referred to as follows:

(a) "Amalco" means the corporation to be formed on the amalgamation of Opco and Newco under the XXXXXXXXXX, as described in paragraph 15 below;

(b) "Newco" means the corporation to be incorporated under the provisions of the XXXXXXXXXX, as described in paragraph 13 below;

(c) "Opco" means XXXXXXXXXX, as described in paragraph 4 below;

(d) "Parent" means the late XXXXXXXXXX;

(e) "Sib1" means XXXXXXXXXX;

(f) "Sib2" means XXXXXXXXXX; and

(g) "Sib3" means the late XXXXXXXXXX.

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

FACTS

1. Sib1, Sib2 and Sib3 are/were adult siblings and the children of Parent.

2. Sib1 is a resident of Canada for the purposes of the Act. Sib1 resides at XXXXXXXXXX. Sib1's social insurance number is XXXXXXXXXX. Sib1 deals with the XXXXXXXXXX Tax Services Office and files her returns with the XXXXXXXXXX Taxation Centre.

3. Sib2 is a resident of Canada for the purposes of the Act. Sib2 resides at XXXXXXXXXX. Sib2's social insurance number is XXXXXXXXXX. Sib2 deals with the XXXXXXXXXX Tax Services Office and files her returns with the XXXXXXXXXX Taxation Centre.

4. Opco was incorporated on XXXXXXXXXX pursuant to the laws of the Province of XXXXXXXXXX. Opco is a taxable Canadian corporation with a XXXXXXXXXX year-end. Opco's head office is located at XXXXXXXXXX, and it deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Taxation Centre. Opco's business number is XXXXXXXXXX. Opco's authorized share capital consists of XXXXXXXXXX common shares without par value.

5. In or around XXXXXXXXXX, Opco acquired real property from sellers with whom Opco transacted at arm's length. The real property is comprised of XXXXXXXXXX parcels of land (collectively, the "Land"), on separate titles, upon which XXXXXXXXXX (collectively, the "Buildings"). Opco purchased the Land and Buildings on account of capital and has held the Land continuously since its acquisition and continues to hold the Land as capital property.

6. Opco currently has XXXXXXXXXX issued and outstanding common shares. Sib1 owns XXXXXXXXXX shares and Sib2 owns XXXXXXXXXX shares. Sib1 and Sib2 hold these shares as capital property.

7. Parent died on XXXXXXXXXX. Prior to Parent's death and the transfers described in paragraph 9 below, Opco had XXXXXXXXXX issued and outstanding common shares, of which XXXXXXXXXX were owned by Parent, XXXXXXXXXX by Sib1, XXXXXXXXXX by Sib2 and the remaining XXXXXXXXXX by Sib3.

8. Parent's last will and testament provided that upon his death, the Opco shares that he owned would be distributed equally to Sib1 and Sib2.

9. In XXXXXXXXXX, Sib1 received a Power of Attorney from Parent. Shortly before Parent's death, and with his consent, Sib1 transferred XXXXXXXXXX Opco shares registered in Parent's name to herself and transferred the remaining XXXXXXXXXX shares to Sib2. The purpose of these transfers was to avoid probate fees.

10. On XXXXXXXXXX, Sib3 died intestate. The beneficiaries of Sib3's estate were Sib1 and Sib2. Sib1 and Sib2 obtained a grant of administration for Sib3's estate. On XXXXXXXXXX, Opco purchased for cancellation XXXXXXXXXX of the XXXXXXXXXX Opco shares owned by Sib3's estate. On the same day, Sib3's estate transferred (without consideration) XXXXXXXXXX Opco shares to each of Sib1 and Sib2 in satisfaction of all or part of their respective capital interests in Sib3's estate.

11. A dispute has been ongoing between Sib1 and Sib2 regarding the affairs and operation of Opco. In order to settle this dispute, Sib1 and Sib2 entered into a settlement agreement, made as of XXXXXXXXXX (the "Settlement Agreement"), which proposed various courses of action. In one alternative, Sib1 has the right to acquire the Opco shares owned by Sib2 at their FMV.

PROPOSED TRANSACTIONS

12. Pursuant to the Settlement Agreement, Sib2 will sell the XXXXXXXXXX common shares of Opco that she owns to Sib1 in exchange for cash. The purchase price for the shares of Opco will be equal to their FMV at the time of transfer.

13. Sib1 will incorporate Newco, a taxable Canadian corporation, under the provisions of the XXXXXXXXXX. Newco's authorized share capital will consist of XXXXXXXXXX common shares with a par value of $XXXXXXXXXX each. Newco will issue a nominal number of common shares to Sib1 on incorporation for nominal cash consideration.

14. Sib1 will transfer the XXXXXXXXXX common shares of Opco to Newco for a purchase price equal to their FMV. As consideration for the transfer, Newco will issue a promissory note and XXXXXXXXXX common shares to Sib1. The principal amount of the promissory note will be equal to the lesser of: (i) Sib1's ACB of the XXXXXXXXXX common shares of Opco, as computed for the purposes of section 84.1, and (ii) the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

Sib1 and Newco will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer to Newco of the Opco shares. The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). For greater certainty, the agreed amount will not exceed the FMV of the Opco shares, nor will it be less than the amount permitted under paragraph 85(1)(b).

15. After the transfer described in paragraph 14 above, Newco and Opco (referred to in this paragraph as "predecessor corporations") will amalgamate pursuant to the XXXXXXXXXX to form Amalco in such a manner that:

a) all of the property (except the shares of any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become property of Amalco by virtue of the merger;

b) all of the liabilities of the predecessor corporations immediately before the amalgamation will become liabilities of Amalco by virtue of the merger; and

c) all the shares of Opco will be cancelled on the amalgamation and no shares of Amalco will be issued by Amalco in connection with the amalgamation.

16. In its tax return for the taxation year commencing at the time of the amalgamation, a designation will made by Amalco under the provisions of subsection 87(11) and paragraph 88(1)(d) to increase, within the limits described in paragraph 88(1)(d), the ACB of the Land owned by Opco immediately before the amalgamation.

ADDITIONAL INFORMATION

17. The FMV of the Land exceeded the ACB of the Land to Opco at the time of Sib3's death.

18. Sib1 does not have any specific intention of disposing of the shares of Amalco following the proposed transactions.

PURPOSE OF TRANSACTIONS

The purpose of the proposed transactions is to separate the financial interests of Sib1 and Sib2.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transactions, and the purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our rulings are as follows:

A. By virtue of paragraphs 88(1)(d.2) and 88(1)(d.3), for the purposes of Ruling B, Newco will be deemed to have last acquired control of Opco at the time immediately after the death of Sib3 from an arm's length person.

B. Provided that no property acquired by Amalco on the amalgamation described in paragraph 15 above, or any other property acquired by any person in substitution therefor (within the meaning of that phrase for the purpose 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 Newco 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 Newco last acquired control of Opco and that became property of Amalco pursuant to the amalgamation described in paragraph 15 above, 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 16 above.

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

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 issued on January 29, 2001 and are binding on the Agency provided that the proposed transactions are completed before XXXXXXXXXX.

COMMENTS

Nothing in this letter should be construed as implying that the Agency has reviewed, accepted or otherwise agreed to:

a) the determination of the ACB or FMV of any assets referred to herein;

b) the determination of the PUC of any shares referred to herein; or

c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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