2002 Ruling 2002-0123843 - Distrib. shares - trust under XXXXXXXXXX

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: Does 75(2) apply to the property held by the trust such that 107(2) will not apply when the property is distributed to the beneficiaries?

Position: 75(2) does not apply.

Reasons: The corporate settlor settled the trust with shares of the settlor to be held for distribution to persons to be determined by the trustees prior to the wind up of the trust in accordance with certain XXXXXXXXXX . On the wind-up of the trust, the trustees will distribute shares of the corporate settlor to those beneficiaries who have met the contractual requirements necessary to obtain such shares and the balance of shares will be distributed to such person as is determined jointly by the XXXXXXXXXX who provided funding to the corporate settlor. While the trustees are also directors of the corporate settlor, the corporate settlor is not a beneficiary of the trust nor is it able to add beneficiaries or direct the disposition of the trust property in its own right.

XXXXXXXXXX 2002-012384

Attention: XXXXXXXXXX

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling in respect of the income tax consequences arising from the proposed transactions described below. We also acknowledge your correspondence of XXXXXXXXXX. We understand that, to the best of your knowledge, and that of the taxpayers on whose behalf this ruling is requested, none of the issues contained in this advance income tax ruling are:

i) contained in earlier returns of the taxpayers or a related person;

ii) being considered by a tax service office and/or a tax centre in connection with a tax return previously filed by the taxpayers or a related person;

iii) under objection by the taxpayers or related person;

iv) before the courts; or

v) the subject of a ruling previously issued by the Directorate to the taxpayers or a related person.

Definitions

In this letter, unless otherwise indicated, all statute references are to the Income Tax Act (R.S.C. 1985, 5th supplement, c.1 as amended) (the "Act"), and the following terms have the meaning specified:

"ACo" means XXXXXXXXXX whose business number is XXXXXXXXXX; it was incorporated on XXXXXXXXXX, under the provisions of the XXXXXXXXXX;

"Agreement" means the agreement between ACo and the Trustees dated XXXXXXXXXX, that governs the holding and distribution of shares of ACo in accordance with the terms and conditions set out in the agreement between ACo and XXXXXXXXXX in respect of the transfer of property described in paragraph 2 below;

"Agreement2" means the agreement between ACo and the Trustees dated XXXXXXXXXX, under which the Agreement was modified as a condition imposed by one of the Organizations in consideration for the funding of ACo;

"BCo" means XXXXXXXXXX, a corporation incorporated under the provisions of the XXXXXXXXXX; the corporation has been inactive since its incorporation and has not filed any income tax returns;

"CCo" means XXXXXXXXXX, a publicly traded company based out of XXXXXXXXXX; additionally, CCo is the successor, by amalgamation, of XXXXXXXXXX, and the term "CCo" includes XXXXXXXXXX;

"Entity-1" means XXXXXXXXXX;

"Mr. M" means XXXXXXXXXX, a former management employee of ACo;

"Mr. N" means XXXXXXXXXX, a former management employee of ACo;

"Organizations" means the XXXXXXXXXX and XXXXXXXXXX (formerly known as the XXXXXXXXXX), collectively;

"Provincial Court" means the Supreme Court of XXXXXXXXXX;

"Trust" means the XXXXXXXXXX; and

"Trustees" mean the current trustees of the Trust collectively, at a particular time; the original trustees of the Trust were XXXXXXXXXX subsequently resigned and was replaced by XXXXXXXXXX.

Facts

1. ACo is a "private corporation" and a "taxable Canadian corporation" as those terms are defined in subsection 89(1) of the Act. It has an authorized capital of XXXXXXXXXX common shares, all of which are issued from treasury at this time.

2. The existence of ACo and the Trust arose as a result of the announcement by the XXXXXXXXXX. The announcement had the potential to have a devastating economic impact on the site of Entity-1 and the surrounding area because of the XXXXXXXXXX associated therewith. The XXXXXXXXXX agreed to transfer the ownership of the property and related assets of Entity-1 to ACo for nominal consideration, to allow economic business activity to be generated on the property and related assets of Entity-1. As a result of the transfer, the cost of the assets so acquired by ACo for tax purposes is nominal.

3. As part of the transitioning process, it was considered advisable to attract tenants to the former site of Entity-1 who would become shareholders in ACo provided they met certain XXXXXXXXXX targets. The XXXXXXXXXX was concerned that a tenant who was entitled to shares could sell such rights or, in conjunction with other tenants entitled to shares, could exercise their shareholder rights to force the sale of the assets of ACo for short-term monetary gain and thus, would not have any incentive to maintain the XXXXXXXXXX which had been agreed upon. In order to provide assurance to the XXXXXXXXXX that any such action would not occur, the Agreement provides that the shares would be held by the Trust to guarantee that the tenants would XXXXXXXXXX and would not be able to enter into any contracts or agreements in respect of the assets of ACo that were not consistent with the terms of the Trust or any existing shareholders' agreement. The Trustees, in conjunction with ACo, are directed to seek out and negotiate agreements with existing or prospective tenants to participate in this share ownership incentive (the "program"). As a result, shares of ACo would only be distributed to a tenant under the program when the tenant had XXXXXXXXXX for at least the period of time specified in the specific agreement with each tenant.

4. The bylaws of ACo ensure that:

? all Trustees are directors of ACo and have the right to appoint additional directors;

? one of the Trustees will act as Chairman of any shareholders' meeting and a meeting will not be duly constituted unless at least two of the three Trustees are present;

? while the Trust is in existence, the Trustees cannot be removed as directors and will hold all share certificates;

? no transfer of shares or declaration of dividends will be permitted until the Trust has been wound up;

? the Board of Directors will not approve any transfer of shares where the transfer of such shares is restricted by an agreement, including the Agreement as modified by Agreement2, without proof that conditions under which such a transfer may take place have been adhered to; and

? except for "fundamental business matters" as that term is defined in the bylaws, the shareholders or persons to whom shares have been allocated may only exercise their voting entitlements in accordance with the Agreement as modified by Agreement2 and any shareholder agreement with ACo to which they are a party.

5. The current Board of Directors of ACo consists of eight members, including the three Trustees.

6. The Trust is an inter vivos trust and a personal trust as defined in subsection 248(1) of the Act. Each of the Trustees is a resident of Canada for purposes of the Act.

7. The Trust was established under the terms of the Agreement. The Trust was settled by ACo with a contribution of $XXXXXXXXXX and XXXXXXXXXX common shares issued from treasury. No other person has transferred or loaned property, either directly or indirectly, to the Trust. Under the terms of the Agreement, the beneficiaries of the Trust included BCo and those persons, either natural or corporate, with whom the Trustees reach an agreement with respect to XXXXXXXXXX. The Trustees entered into such an agreement with CCo on XXXXXXXXXX. The Agreement does not permit the Trustees to distribute any of the common shares of ACo to the beneficiaries before XXXXXXXXXX.

8. Mr. N and Mr. M were granted a conditional right to shares of ACo pursuant to their respective employment contracts dated XXXXXXXXXX and XXXXXXXXXX, respectively.

9. On XXXXXXXXXX, ACo received all of the property and related assets of Entity-1 for consideration of $XXXXXXXXXX. Such assets consisted XXXXXXXXXX.

10. The terms of the Trust were modified in accordance with Agreement2 to:

? permit the Trustees to allocate shares to Mr. M and Mr. N pursuant to their respective employment contracts with ACo, and

? alter the manner in which any shares not allocated as of XXXXXXXXXX, under the principles set out in the Agreement are to be distributed at the expiry of the Agreement; specifically, the Trustees will be directed to distribute any shares which have not been allocated according to the terms of the Agreement to such person or persons as determined by the Organizations, and not to BCo.

These modifications were approved by the Provincial Court, as required under the provincial XXXXXXXXXX Act. As a result of this variation, BCo ceased to be a beneficiary of the Trust.

11. ACo entered into two agreements on XXXXXXXXXX with the Trustees and all persons to whom shares of ACo had been allocated at that time. One agreement governs the shares to be distributed by the Trust to CCo as a result of its participation in the program and the other governs the shares to be distributed by the Trust to Mr. N and Mr. M under their respective employment contracts.

12. These agreements impose certain constraints on the Trustees as the shareholders and directors of ACo and ensure that:

? unanimous consent of all shareholders and all persons who have been allocated shares is required in order to make any material change to the duties or remuneration of officers or directors of ACo or to make any change in the corporate structure of ACo, including its authorized capital or capital structure;

? the shares of ACo remain unencumbered;

? no dividends are declared on the shares of ACo before XXXXXXXXXX;

? the proceeds from the sale of any assets are used for XXXXXXXXXX purposes; and

? the bylaws of ACo are respected.

13. The current beneficiaries of the Trust include CCo, Mr. M and Mr. N (who have been allocated XXXXXXXXXX common shares respectively). Thus, there are XXXXXXXXXX common shares held by the Trustees that are not allocated to any specific beneficiary as of XXXXXXXXXX.

14. The Trust has never carried on any income-earning activities and has never filed a T3 Trust Income Tax and Information Return. It is not intended that the Trust will realize any taxable income in the future. If it were to do so, the relevant taxation centre would be XXXXXXXXXX, and the tax services office would be XXXXXXXXXX.

15. The only assets currently held by the Trustees are the common shares of ACo, being all of the issued and outstanding shares, which have an aggregate paid-up capital and adjusted cost base of $XXXXXXXXXX. While a formal valuation of the common shares has not been undertaken, it is known that the underlying assets of ACo have been assessed XXXXXXXXXX in excess of $XXXXXXXXXX.

Proposed Transactions

16. One or both of the Organizations will cause a new corporation to be incorporated in Canada for the purpose of holding any shares of ACo that have not been allocated to a tenant or former employee as of XXXXXXXXXX. All the share capital of the new corporation will be owned by one or both of the Organizations and the Trustees will all be on the Board of Directors of the new corporation. The new corporation will be resident in Canada and will hold the shares of ACo under substantially the same terms and conditions as currently apply to the shares held by the Trust. Upon the wind-up of the Trust, the Organizations will direct the Trustees to distribute any unallocated shares to the new corporation.

17. The Trustees propose to distribute the common shares of ACo to the beneficiaries identified on the share certificates in satisfaction of their respective capital interests in the Trust. Any remaining shares will be distributed to the new corporation created by one or both of the Organizations in satisfaction of its capital interest in the Trust. The Trustees will not make an election under subsection 107(2.001) in respect of the distribution of any of the shares.

Purpose of the Proposed Transactions

18. The purpose of the proposed transactions is to wind-up the Trust and to transfer ownership of the common shares of ACo to:

? those persons who have been allocated shares under the terms of a shareholders' agreement who have met their respective XXXXXXXXXX,

? Mr. N and Mr. M pursuant to their respective employment contracts, and

? such person, being the new corporation described in paragraph 16, as directed by the Organizations.

Ruling Given

Provided that the preceding statements are accurate and constitute complete disclosure of all relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as herein described, our advance income tax ruling is as follows:

A. Subsection 107(2) will apply to the distribution by the Trust of the shares of ACo in satisfaction of a capital interest in the Trust to a beneficiary who is resident in Canada at the time of the distribution.

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R4, Advance Income Tax Rulings, and is binding on the Canada Customs and Revenue Agency provided the proposed transactions are completed within six months of the date of this letter. Except as expressly provided in this ruling, nothing in this ruling should be taken to confirm or imply any other tax consequence that may arise as a result of any agreement described in this ruling or as a result of any future distribution of the shares of ACo by any entity other than the Trust.

Yours truly,

XXXXXXXXXX
Manager
Trusts Section
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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