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 Canco is entitled to a "bump" under paragraph 88(1)(d) in a series of transactions involving the extraction of safe income?
Position: Yes
Reasons: Meets the requirements of the law.
XXXXXXXXXX 2002-013631
XXXXXXXXXX, 2002
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
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 been advised that, to the best of the knowledge of the above-mentioned taxpayers, none of the issues involved in this ruling:
(i) is being considered by a tax services office or a taxation centre in connection with a tax return already filed;
(ii) is under objection;
(iii) is before the courts; or
(iv) is the subject of a previously issued ruling.
STATUTORY DEFINITIONS
In this letter, the following terms have the meanings specified:
- unless otherwise indicated, all references to a statute are to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof (the "Act");
- "adjusted cost base" has the meaning assigned by section 54;
- "agreed amount" in respect of a property means the amount that the transferor and transferee of the property have agreed upon in an election under subsection 85(1);
- "capital property" has the meaning assigned by section 54;
- "CBCA" means the Canada Business Corporations Act;
- "CCPC" or "Canadian-controlled private corporation" has the meaning assigned by subsection 248(1);
- "ineligible property" has the meaning assigned by paragraph 88(1)(c);
- "paid-up capital" has the meaning assigned by subsection 89(1);
- "proceeds of disposition" has the meaning assigned by section 54;
- "public corporation" has the meaning assigned by subsection 89(1);
- "related persons" has the meaning assigned by subsection 251(2);
- "Safe Income on Hand" in respect of particular shares at a particular time means the portion of the unrealized gain inherent in the shares at that time that cannot reasonably be considered to be attributable to anything other than income earned or realized (as defined in paragraph 55(5)(b), (c) or (d) depending on the circumstances) by Pubco and its subsidiaries after 1971 and before the safe-income determination time for the series of transactions that includes the dividends;
- "safe-income determination time" has the meaning assigned by subsection 55(1);
- "specified financial institution" has the meaning assigned by subsection 248(1);
- "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);
- "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
- "taxable dividend" has the meaning assigned by subsection 89(1).
NON-STATUTORY DEFINITIONS
- "Pubco" means XXXXXXXXXX;
- "Holdco" means XXXXXXXXXX, a corporation incorporated under the CBCA by certificate of incorporation dated XXXXXXXXXX; and
- "Holdings" means XXXXXXXXXX, a corporation incorporated under the CBCA by certificate of incorporation dated XXXXXXXXXX.
Our understanding of the facts, proposed transactions and purposes of the proposed transactions is as follows:
Facts
1. Pubco is a public corporation, all of whose outstanding common shares are listed for trading on the XXXXXXXXXX Stock Exchange.
2. There are currently outstanding approximately XXXXXXXXXX of Pubco.
3. Holdco is a CCPC and a taxable Canadian corporation.
4. XXXXXXXXXX ("Newco") was incorporated under the CBCA on XXXXXXXXXX. Newco is a CCPC and a taxable Canadian corporation. The authorized share capital of Newco consists of:
(a) an unlimited number of class A common shares (the "Newco Class A Common Shares") which are voting, have a dividend entitlement and are participating;
(b) an unlimited number of class B common shares which are non-voting, have a dividend entitlement and are participating;
(c) an unlimited number of class A preferred shares which are voting, ranking in priority to the class A common shares and to the class B common shares and to the class B, C and D preferred shares with a fixed non-cumulative dividend entitlement of XXXXXXXXXX% per month, are non-participating, redeemable and can be purchased for cancellation;
(d) an unlimited number of class B preferred shares (the "Newco Class B Preferred Shares") which are non-voting, ranking in priority to the class A common shares and the class B common shares and to the class C and D preferred shares, but ranking behind the class A preferred shares, have a fixed non-cumulative dividend entitlement of XXXXXXXXXX% per month, are non-participating, redeemable and can be purchased for cancellation;
(e) an unlimited number of class C preferred shares, which are voting, ranking in priority to the class A common shares and the class B common shares, to the class D preferred shares but ranking behind the class A and B preferred shares, have a non-cumulative dividend entitlement of XXXXXXXXXX% per month, which are non-participating, redeemable, retractable and can be purchased for cancellation; and
(f) an unlimited number of class D preferred shares, which are non-voting, ranking in priority to the class A common shares and the class B common shares, but ranking behind the class A, B and C preferred shares, which have a non-cumulative dividend entitlement of XXXXXXXXXX% per month, which are non-participating, redeemable, retractable and can be purchased for cancellation.
5. Holdco owns the one (1) outstanding Newco Class A Common Share.
6. Holdco owns XXXXXXXXXX common shares of Pubco, which constitute capital property.
7. Holdco is both a CCPC and a taxable Canadian corporation.
8. The shareholders of Holdco and the number of shares held are as follows:
XXXXXXXXXX.
Holdings is a CCPC and a taxable Canadian corporation which is controlled by the XXXXXXXXXX ("XXXXXXXXXX Trust"). XXXXXXXXXX is a CCPC and a taxable Canadian corporation which is controlled directly or indirectly by the XXXXXXXXXX ("XXXXXXXXXX Trust"), XXXXXXXXXX ("XXXXXXXXXX Trust"), XXXXXXXXXX ("XXXXXXXXXX Trust") and XXXXXXXXXX ("XXXXXXXXXX Trust"). XXXXXXXXXX and her children are the beneficiaries of the XXXXXXXXXX Trust, while XXXXXXXXXX is the beneficiary of the XXXXXXXXXX Trust, XXXXXXXXXX is the beneficiary of the XXXXXXXXXX Trust, XXXXXXXXXX is the beneficiary of the XXXXXXXXXX Trust and XXXXXXXXXX is the beneficiary of the XXXXXXXXXX Trust. XXXXXXXXXX is the aunt of XXXXXXXXXX are individuals who are resident in Canada.
9. XXXXXXXXXX ("Canco") is a taxable Canadian corporation and is not a specified financial institution. Further, it is represented that Canco does not act as an agent for any specified financial institution. Canco is owned directly or indirectly by members of the XXXXXXXXXX family, each of whom deals at arm's length with each of XXXXXXXXXX. Canco and Holdco are not related persons.
Proposed Transactions
10. Holdco will sell XXXXXXXXXX common shares of Pubco to Newco in exchange for XXXXXXXXXX Newco Class A Common Shares.
11. In respect of the transfer described in paragraph 10 above, Holdco will jointly elect with Newco, pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), to transfer the common shares of Pubco at an amount equal to the adjusted cost base thereof to Holdco XXXXXXXXXX, which will be substantially less than the fair market value thereof at the time of the transfer. The amount to be added to the stated capital of the Newco Class A Common Shares so issued will be an amount equal to the aggregate adjusted cost base of the common shares of Pubco so transferred (the "Transferred Shares").
12. Newco will declare and pay a series of sequential stock dividends on the Newco Class A Common Shares, to be satisfied by the issuance of Newco Class B Preferred Shares. It is intended that the stated capital and the value of the Newco Class B Preferred Shares will not exceed the Safe Income on Hand of Pubco in respect of the Transferred Shares. For this purpose, it is your view that all of the Safe Income on Hand of Pubco that is attributable to the common shares of Pubco transferred by Holdco to Newco will, immediately after such transaction, be attributed to the Newco Class A Common Shares. The aggregate amount by which the stated capital of Newco will be increased in respect of the issue of the preferred shares will be equal to their aggregate redemption values.
13. Holdco will then sell for cash, at a price to be negotiated on an arm's length basis, all of the outstanding shares of Newco to Canco.
14. Newco will then be wound up into Canco under the relevant corporate law and, accordingly, all the shares of Pubco owned by Newco will be transferred and assigned to Canco.
15. Canco will designate in respect of the Transferred Shares in its return of income for the taxation year in which Newco is wound up an amount pursuant to paragraph 88(1)(d), equal to the difference between:
(a) the purchase price paid by Canco for the shares of Newco, as described in paragraph 13 above; and
(b) the adjusted cost base to Newco of the Transferred Shares as a result of the transaction described in paragraph 10 above.
16. Canco will, immediately or soon after the distribution of the Transferred Shares to it by Newco, sell some or all of the shares so acquired for an aggregate sale price that will probably be slightly in excess of the purchase price paid by it for the shares of Newco, as described in paragraph 13 above. None of the Pubco shares will be sold to a person described in subclause 88(1)(c)(vi)(B)(I), (II) or (III) in relation to Newco.
17. The purchase and sale agreement between Holdco and Canco pursuant to which Holdco will sell the Newco shares to Canco will include usual representations and warranties, including a representation by Holdco that the facts disclosed in this ruling relating to Holdco and Pubco are true and complete and that no person described in subclause 88(1)(c)(vi)(I), (II) or (III) in relation to Newco will purchase any Pubco shares from Canco or as part of the series of transactions that include the winding up of Newco. The purchase agreement will also include indemnities for any losses incurred by a party as a result of a breach of representation or warranty by the other party and for any taxes, interest or penalties incurred by Canco as a result of the cost of the Transferred Shares acquired by Canco on the winding up of Newco being less than the amount described in ruling (G) below. However, Canco will not be indemnified against commercial risks and will be subject to market considerations subsequent to its acquisition of Newco shares and the proposed resale of the Pubco shares.
SUBSEQUENT TRANSACTION
18. Holdco proposes to use the funds received from the sale of the Newco shares, as described in paragraph 13 above, to purchase for cancellation a portion of its shares owned by Holdings.
19. Purpose of the Proposed Transaction
The purpose of the proposed transactions is to allow Holdco to recover, on a tax-deferred basis, the Safe Income on Hand of Pubco in respect of the Transferred Shares held by Holdco. Since Pubco is a public corporation, Holdco is unable to cause Pubco to declare a dividend. Accordingly, it must transfer its shares in Pubco which are to be sold to a corporate third party in order to be able to realize on a tax-deferred basis the Safe Income on Hand of Pubco attributable to its Pubco common shares (i.e. the Transferred Shares). In order to also realize the corresponding increase in adjusted cost base of the shares of Newco held by Holdco on a tax-deferred basis, it is necessary for Holdco to dispose of its Newco shares. Consequently, Canco will acquire the shares of Newco and will wind-up Newco such that there will be an increase in the adjusted cost base relating to the Transferred Shares distributed to it by Newco.
Rulings
Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, purposes of the proposed transactions and proposed transactions, we rule as follows:
(A) The provisions of subsections 15(1), 56(2) and 246(1) will not apply to the proposed transactions described in paragraphs 10 to 16 above, in and of themselves.
(B) Immediately after the transfer described in paragraph 10 above, the Safe Income on Hand of Pubco in respect of the Newco Class A Common Shares will include the Safe Income on Hand of Pubco in respect of the Transferred Shares.
(C) Newco will be considered to have paid dividends on the Newco Class A Common Shares in an amount equal to the paid-up capital of the Newco Class B Preferred Shares issued in respect of the stock dividends paid in paragraph 12 above and each such dividend received by the recipient will:
(1) be deductible by the recipient, to the extent that it is a taxable dividend, in computing its taxable income for the taxation year in which such dividend is deemed to be received, pursuant to subsection 112(1);
(2) not be subject to tax under Part IV of the Act except as provided in paragraph 186(1)(b); and
(3) be an "excluded dividend" within the meaning of subsection 191(1) and an "excepted dividend" within the meaning of section 187.1.
(D) The provisions of subsection 55(2) will not apply to a dividend described in ruling C above, provided that the full amount of the dividend does not exceed the Safe Income on Hand of Pubco in respect of the Newco Class A Common Shares immediately before the time of the dividend.
(E) The provisions of paragraph 52(3)(a) will apply in determining the adjusted cost base to Holdco of its Newco Class B Preferred Shares received in respect of the dividends paid as described in paragraph 12 above.
(F) The provisions of subsection 88(1) will apply in respect of the winding-up of Newco into Canco as described in paragraph 14 above with the result that:
(1) Newco will, pursuant to subparagraph 88(1)(a)(iii), be deemed to have disposed of the Transferred Shares for proceeds of disposition equal to their cost amount to Newco immediately before the winding-up, and
(2) Canco will, pursuant to paragraph 88(1)(b), be deemed to have disposed of its shares of Newco for proceeds equal to the greater of the amounts described in subparagraphs 88(1)(b)(i) and (ii).
(G) Pursuant to paragraphs 88(1)(c) and 88(1)(d), provided that no property acquired by Canco on the winding-up as described in paragraph 14 above, or "any other property acquired by any person in substitution therefor" (within the meaning of the 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) the cost to Canco of the Transferred Shares acquired by it on the winding-up described in paragraph 14 above will be deemed to be the amount deemed by paragraph 88(1)(a) to be the proceeds of disposition of the Transferred Shares to Newco plus, subject to the provisions of subparagraph 88(1)(d)(ii) and (iii), such portion of the amount, if any, by which:
(1) the aggregate of the adjusted cost base to Canco of its shares of Newco immediately before the winding-up of Newco
exceeds
(2) the aggregate of the amounts determined under subparagraphs 88(1)(d)(i) and (i.1) (which will not include any dividends deemed to be received by Holdco by reason of the sequential dividends as described in paragraph 12 hereof)
as is designated by Canco in respect of the Transferred Shares in its return of income under Part I of the Act for its taxation year in which Newco is wound up, as described in paragraph 15 above.
H. 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.
The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R4 issued on January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.
Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:
(a) the determination of the adjusted cost base, the paid-up capital or the fair market value of any shares referred to herein; or
(b) any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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