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. Does the assignment of assets, capital and retained earnings on a foreign divisive reorganization where there is inadequate consideration result in benefits under 15(1), 56(2) or 246(1)? 2. What is the adjusted cost base of shares received on a reduction of paid-up capital? 3. What is the cost of assigned to property for which shares were issued? 4. Does 53(2)(b)(ii) apply where the shareholder receives property from a corporation that does not undergo the paid-up capital reduction?
Position: 1. No. 2. Cost equals amount of paid-up capital reduction. 3. Cost equals proportion of paid-up capital of shares issued that the fair market value of the assigned property is of the aggregate fair market value of all property assigned. 4. Yes.
Reasons: 1. Position in 2002-016667, case law re: benefits (see below), reorganization exclusion in 15(1)(a), failure to meet conditions in 56(2) and 246(1).
2. and 3. Rationale in Tuxedo Holding and Teleglobe. 4. XXXXXXXXXX
XXXXXXXXXX 2002-017470
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: XXXXXXXXXX ("Aco")
XXXXXXXXXX
Advance Income Tax Ruling Request
We are writing in response to your request for an advance income tax ruling on behalf of Aco dated XXXXXXXXXX. We also acknowledge your facsimile transmissions of XXXXXXXXXX.
To the best of your knowledge and that of Aco, none of the issues involved in this request for an advance income tax ruling:
(a) is being considered by a tax services office or taxation centre in connection with a previously filed return of Aco or a person related to Aco;
(b) is under objection by Aco or a person related to Aco; or
(c) is before the courts or if, a judgment has been issued, the time limit for appeal to a higher court has not expired.
Unless otherwise stated, all references to a statute herein are to the Income Tax Act (Canada), R.S.C. 1985 (5th supp.), c. 1, as amended (the "Act"). Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows.
Definitions
1. The terms "excluded property", "foreign accrual property income", "foreign affiliate", "investment business", "income from an active business" and "surplus entitlement percentage" have the meanings assigned by subsection 95(1).
2. The terms "adjusted cost base", "capital property", "corporation", "cost amount", "XXXXXXXXXX", "paid-up capital", "property", "public corporation", "subsidiary wholly-owned corporation" and "taxable Canadian corporation", have the meanings assigned by subsection 248(1).
3. The terms "exempt earnings", "exempt deficit", "exempt loss", "exempt surplus", "net surplus", "taxable earnings", "taxable loss" and "taxable surplus" have the meanings assigned by subsection 5907(1) of the Income Tax Regulations (the "Regulations").
Facts
4. Aco is a corporation that exists under the Canada Business Corporations Act (the "CBCA"). Aco is a taxable Canadian corporation and a public corporation. The common shares of Aco are posted for trading on the XXXXXXXXXX stock exchanges. XXXXXXXXXX Aco's tax account number is XXXXXXXXXX. Aco deals with the XXXXXXXXXX Tax Services Office and files its federal tax returns with the XXXXXXXXXX Taxation Centre.
5. XXXXXXXXXX ("Bco") is a subsidiary wholly-owned corporation of Aco. Bco is a corporation that exists under the CBCA. Bco is a taxable Canadian corporation.
6. XXXXXXXXXX ("Cco") is a corporation that exists under XXXXXXXXXX corporate law. Cco is a subsidiary wholly-owned corporation of Bco.
7. XXXXXXXXXX ("Dco") is a corporation that exists under XXXXXXXXXX corporate law. Dco is a subsidiary wholly-owned corporation of Cco. XXXXXXXXXX.
8. XXXXXXXXXX ("Eco") is a XXXXXXXXXX that exists under XXXXXXXXXX corporate law. Dco owns XXXXXXXXXX% of the ownership interest ("quota") of Eco. XXXXXXXXXX ("Fco"), a member of the Aco group of companies, owns XXXXXXXXXX % of the ownership interest of Eco. XXXXXXXXXX.
9. Fco exists under XXXXXXXXXX corporate law and is a controlled foreign affiliate of Aco and Bco. Aco and Bco own about XXXXXXXXXX% and XXXXXXXXXX%, respectively, of the outstanding XXXXXXXXXX shares of XXXXXXXXXX ("Gco"). XXXXXXXXXX . Gco is a capital stock corporation that exists under the laws of the XXXXXXXXXX. Gco is a controlled foreign affiliate of Aco and Bco XXXXXXXXXX . All of the outstanding common shares of Fco are held by Hco, a company described in paragraph 10 below. The outstanding XXXXXXXXXX shares of Fco are held by Eco (XXXXXXXXXX %) and XXXXXXXXXX ("Ico") (XXXXXXXXXX%). Dco holds XXXXXXXXXX% of the outstanding quota (ownership rights) of Ico. The remaining XXXXXXXXXX% of the quota is held by a subsidiary of Dco. XXXXXXXXXX.
10. Gco owns all the outstanding common shares of XXXXXXXXXX ("Hco"). XXXXXXXXXX. Hco is a capital stock corporation that exists under the laws of XXXXXXXXXX. Hco is a controlled foreign affiliate of Aco and Bco. XXXXXXXXXX.
11. The outstanding XXXXXXXXXX shares of Fco are excluded property XXXXXXXXXX.
12. Eco owns two main types of property: XXXXXXXXXX and the XXXXXXXXXX shares of Fco.
The estimated fair market value of the XXXXXXXXXX equals its book value. The XXXXXXXXXX comprise of wholly owned properties and partially owned (XXXXXXXXXX) properties.
The Aco group is in the business of XXXXXXXXXX.
Eco owns XXXXXXXXXX shares of Fco having an aggregate subscription price and paid-up capital of XXXXXXXXXX; an aggregate adjusted cost base of XXXXXXXXXX and an aggregate fair market value of XXXXXXXXXX.
The remaining assets of Eco do not have a material aggregate book value and fair market value.
13. The outstanding quota of Eco held by Dco is currently, and will be at the time of the divisive reorganization described below, excluded property because substantially all of the assets of Eco are, and will be, XXXXXXXXXX % of the outstanding XXXXXXXXXX shares of Fco (that is, excluded property as described in paragraph 11 above) and XXXXXXXXXX that are used or held principally for the purpose of gaining or producing income from an active business (that is, excluded property as described in paragraph 12 above).
The quota of Eco owned by Dco has an aggregate subscription price and
paid-up capital of XXXXXXXXXX and an aggregate adjusted cost base of XXXXXXXXXX. The quota of Eco held by Fco has a nominal aggregate subscription price and paid-up capital; a nominal aggregate adjusted cost base and a nominal fair market value.
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Proposed Transactions
14. The two quota holders (owners) of Eco wish to carry out a divisive reorganization of the company under XXXXXXXXXX corporate law. Eco will present a deed of divisive reorganization (the "Deed") to the owners of Eco for approval and signature. Eco has agreed to approve the divisive reorganization plan.
15. The divisive reorganization will be legally executed upon the unanimous approval of its quota holders. This will be expressed in a notarized deed, an abstract of which will be published in XXXXXXXXXX Official Gazette and registered with the appropriate Registry of Commerce.
16. The Deed will also be submitted to the XXXXXXXXXX tax authority for registration of Jco as taxpayer.
17. Pursuant to the divisive reorganization, a new XXXXXXXXXX corporation to be called XXXXXXXXXX ("Jco") will be created. The deed of formation of Jco will limit the personal liability of each of the quota holders to the amounts of the respective capital contribution.
18. Upon the incorporation of Jco, XXXXXXXXXX Eco will assign to Jco, a portion of each of Eco's main types of property: the XXXXXXXXXX and the XXXXXXXXXX shares of Fco. The portion to be assigned is determined in the Deed described in paragraph 14 above. Through the Deed, the quota holders will agree on the assets and liabilities to be assigned to Jco and the assets and liabilities to be retained by Eco along with their carrying values. The equity proportions retained by Eco and assigned to Jco will also reflect the carrying values of the assets and liabilities retained by Eco and assigned to Jco. In order to qualify as a divisive reorganization under the rules and principles of XXXXXXXXXX corporate law 1 , Eco is not permitted to receive any consideration for the assignment of property. Jco will not assume any liabilities of Eco.
The wholly owned XXXXXXXXXX to be assigned to Jco represent about XXXXXXXXXX% of the total US$ XXXXXXXXXX worth of XXXXXXXXXX properties owned by Eco at the time of the divisive reorganization. The Fco shares to be assigned to Jco represent about XXXXXXXXXX% of the total US$ XXXXXXXXXX worth of Fco shares owned by Eco at the time of the divisive event. The Fco shares held by Jco after the divisive reorganization remain a source of funding for XXXXXXXXXX. The funding source can be obtained by cash dividends derived from the Fco shares held, by redemption of the Fco shares for cash, or a combination of both.
19. Contemporaneously with the creation of Jco and the assignment of property by Eco to Jco, the capital account and retained earnings of Eco will be reduced and added to the capital and retained earnings of Jco. The amounts to be reduced and added will be the proportion of the capital account and retained earnings of Eco that the net tax basis of the property assigned to Jco is of the total net tax basis of all property owned by Eco at the time of the assignment of property. The reduction in the capital account of Eco will not result in the cancellation of any outstanding ownership rights of the quota owners of Eco under XXXXXXXXXX corporate law. Dco and Fco will each receive the same percentage of quota in Jco that they own in the quota of Eco at the time of the divisive reorganization. Net tax basis refers to the carrying tax values of the assets net of liabilities. The net tax basis of the property assigned to Jco will not be reduced by any liabilities since no liabilities will be assigned by Eco to Jco.
20. Financial statements of Eco, the dividing corporation, and Jco, the newly created corporation, will be prepared as of the time of the divisive reorganization.
21. Under the XXXXXXXXXX corporate law, the divisive reorganization is a legal division or separation of Eco into two legal entities. Upon approval of the division, the quota holders of the existing corporation become the quota holders of the newly created corporation by operation of law.
22. No income or profit, as computed under XXXXXXXXXX tax law will arise as a consequence of the assignment of assets from Eco to Jco nor will such law impose income tax on the reduction of the capital account and retained earnings of Eco. Under XXXXXXXXXX tax law, Eco will not have a deemed year end and will not be required to file tax returns.
23. XXXXXXXXXX tax law will treat the tax basis of the Eco property assigned to Jco as being equal to the tax basis of the property to Eco at the time of the assignment of property.
24. The XXXXXXXXXX tax authority will deem the taxable income (or loss) of Eco for the period commencing on XXXXXXXXXX to the time of the divisive reorganization to be partially earned by Jco, in proportion to the capital account and retained earnings that is allocated to Jco by Eco. It is expected that Eco will earn no income during the year.
25. The XXXXXXXXXX tax authority will deem the XXXXXXXXXX tax attributes of the Eco retained earnings to be allocated between Eco and Jco in proportion to the capital account and retained earnings that is allocated to Jco by Eco.
26. The fair market value of the Eco quota held by Dco will exceed its adjusted cost base to Dco, for Canadian tax purposes, at the time of the divisive reorganization.
27. There is no contemplated sale after the divisive reorganization of any assets of Eco or Jco or of any quota of Eco or Jco to a person that is not related to any member of the Aco group of companies.
Purpose of the Proposed Transactions
Substantially all of Eco's assets consist of XXXXXXXXXX and the Fco preferred shares. The XXXXXXXXXX include those that are wholly owned and those that are partially owned. The balances of the partially owned properties are owned by persons that are not related to Aco or any of the other corporations described above. The proposed transactions are being undertaken to separate the wholly owned and partially owned properties into two separate corporations for purposes of ongoing development of those properties. It is no longer desirable to develop and manage partially owned properties in the same legal entity as the wholly owned properties. It is intended that the partially owned properties will remain in Eco because third party approvals would be needed in order to transfer them to Jco. The proportion of Fco shares that will be assigned to Jco and retained by Eco is based on the priority funding needs of XXXXXXXXXX held by Eco and Jco.
Rulings Given
Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, we confirm the following:
A. The reduction in the capital account and retained earnings of Eco will not result in a "disposition" as that term is defined in subsection 248(1) by Dco of any portion of the Eco quota held by Dco at the time of the divisive reorganization.
B. Subparagraph 53(2)(b)(ii) will apply to reduce the adjusted cost base of the Eco quota held by Dco after the divisive reorganization by an amount equal to the fair market value of the Jco quota received by Dco as described in paragraph 19 above.
C. The aggregate paid-up capital of the Eco quotas outstanding immediately after the divisive reorganization will equal the paid-up capital of the Eco quotas immediately before the divisive reorganization less the amount of the reduction to Eco's capital account as described in paragraph 19 above.
D. The adjusted cost base of the Jco quota held by Dco immediately after the time of the divisive reorganization will equal the reduction in the Eco capital account as described in paragraph 19 above multiplied by the percentage of the Eco quota owned by Dco at that time.
E. The aggregate paid-up capital of the Jco quotas outstanding immediately after the divisive reorganization will be equal to the amount added to the Jco capital account as described in paragraph 19 above.
F. Subsections 15(1), 56(2) and 246(1) will not apply to the proposed transactions described herein, in and by themselves.
G. Provided that each XXXXXXXXXX assigned by Eco to Jco as described in paragraph 18 above, is, immediately before such assignment, used or held by Eco principally for the purpose of gaining or producing income from an active business carried on by it, no foreign accrual property income will arise on the assignment thereof. By virtue of subparagraph 5907(2)(f)(ii) of the Regulations the earnings of Eco as defined in subsection 5907(1) of the Regulations will not be adjusted to include any amount in respect of the assignment of XXXXXXXXXX as described in paragraph 18 above.
H. On the assignment of the Fco shares by Eco to Jco as described in paragraph 18 above, Eco will be deemed by paragraph 69(1)(b) to have received proceeds of disposition equal to the fair market value thereof. Provided the Fco shares are excluded property, no foreign accrual property income will result and 50% of the difference (expressed in XXXXXXXXXX currency) between the fair market value of the Fco shares and their adjusted cost base to Eco at the time of their assignment to Jco will be included in the exempt and taxable earnings or loss of Eco respectively for the taxation year during which the assignment occurs.
I. The adjusted cost base to Jco of the Fco shares assigned to Jco by Eco as described in paragraph 18 above, will be equal to the proportion of the aggregate paid-up capital of the Jco quota that the fair market value of the Fco shares assigned to Jco at the time of the divisive reorganization is of the aggregate fair market value of all the property assigned to Jco.
J. The taxation year, as that term is defined in subsection 95(1), of Eco will not end as a consequence of the proposed transactions in and by themselves.
These rulings are given subject to the limitations and qualifications set out in Information Circular IC 70-6R5("IC 70-6R5") issued by the Canada Customs and Revenue Agency (the "CCRA") on May 17, 2002 and are binding on the CCRA provided the proposed transactions are completed by XXXXXXXXXX. These rulings are provided based on the Act as it currently reads and do not take into account any proposed amendments.
Opinions Provided
1. Provided that the proposed amendments to the definition of "disposition" in subsection 248(1) are enacted in substantially the same form as set out in the draft legislation issued by the Department of Finance on December 20, 2002, it is our view that there will not be a disposition, for the purposes of the definition of disposition as amended, of the Eco quota by Dco as a result of the divisive reorganization herein described.
2. Provided that paragraphs 93(1.4)(a) and (b) are enacted in substantially the same form as set out in the draft legislation issued by the Department of Finance on December 20, 2002, it is our view that proposed paragraph 93(1.4)(a) will apply to deem the Fco shares assigned to Jco by Eco not to be excluded property of Eco. Any capital gain or capital loss realized by Eco on the assignment of the Fco shares to Jco by Eco because of a fluctuation in the value of the U.S. dollar relative to the value of the Canadian dollar will be deemed to be nil for purposes of calculating Aco's foreign accrual property income by virtue of subparagraph 95(2)(g)(iii). It is further our view that proposed paragraph 93(1.4)(b) will apply to deem the cost amount to Jco of the Fco shares assigned to Jco to be equal to the proceeds of disposition of the Fco shares to Eco.
3. Provided that property is excluded property and that subsection 5907(5.1) is enacted in substantially the same form as set out in the draft legislation issued by the Department of Finance on December 20, 2002, it is our view that proposed paragraph 5907(5.1)(a) will apply for the purposes of section 5907 of the Regulations to deem Eco's proceeds of disposition of the XXXXXXXXXX transferred as described in paragraph 18 above to be equal to the total cost amount to Eco of the property immediately before the disposition and of any outlays or expenses to the extent they were made or incurred by Eco for the purpose of making the disposition and proposed paragraph 5907(5.1)(b) will apply to deem the cost to Jco of the property so acquired to be equal to the proceeds of disposition thereof to Eco as determined under proposed paragraph 5907(5.1)(a).
These comments are provided in accordance with the guidelines set out in paragraph 22 of IC 70-6R5 and are not considered binding on the CCRA.
Nothing in this ruling should be construed as implying that the CCRA has reviewed, accepted or otherwise agreed to:
(a) the classification of any property described herein as excluded property;
(b) the amount of the adjusted cost base of any property referred to herein;
(c) the fair market value of any property referred to herein;
(d) the surplus balances of foreign affiliates referred to herein;
(e) the residence of the foreign affiliates referred to herein;
(f) the nature of any business or the character of the income of any of the foreign affiliates referred to herein; or
(g) any other tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
Yours truly,
XXXXXXXXXX
Section Manager
for Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
ENDNOTES
1 XXXXXXXXXX
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