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. Whether subsection 84(2) applies to the proposed transactions?
2. Whether section 212.1 applies to the proposed transactions?
3. Whether GAAR applies?
Position:
No.
No.
No.
Reasons:
1. Holdco is not a special purpose corporation and has been an investment holding company since the 1970's. Holdco is making a cash payment for the Assets. Holdco proposes to hold the Assets in its business and any sales will be in the ordinary course of its business. Therefore it cannot be said that Holdco is an instrumentality designed to facilitate these proposed transactions.
2. It is represented that the parties deal at arm's length.
3. The main purpose of the proposed transactions is not to obtain a "tax benefit".
XXXXXXXXXX 2002-018027
XXXXXXXXXX, 2003
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.
To the best of your knowledge and that of the above-mentioned taxpayers:
(a) none of the issues involved in the requested rulings is being considered by a tax services office or a taxation centre in connection with a tax return already filed; and
(b) none of the issues involved in the requested rulings is the subject of any Notice of Objection or is under appeal.
DEFINITIONS
In this letter, the following terms have the meanings specified:
- "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof (the "Act"), and unless otherwise indicated, all references herein to a statute are references to the Act;
- "adjusted cost base" has the meaning assigned by section 54;
- "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 125(7) and subsection 248(1);
- "depreciable property" has the meaning assigned by subsection 13(21);
- "ineligible property" has the meaning assigned by paragraph 88(1)(c);
- "paid-up capital" has the meaning assigned by subsection 89(1);
- "private corporation" has the meaning assigned by subsection 89(1);
- "specified financial institution" has the meaning assigned by subsection 248(1);
- "series of transactions or events" includes the related transactions or events described in subsection 248(10);
- "substituted property" includes the meanings assigned by subsection 248(5) and paragraph 88(1)(c.3); and
- "taxable Canadian corporation" has the meaning assigned by subsection 89(1).
Our understanding of the facts, purposes of the proposed transactions and proposed transactions is as follows:
Facts
1. XXXXXXXXXX ("Canco") is a CCPC and a taxable Canadian corporation formed pursuant to the CBCA.
2. Canco is an investment company and its assets consist of marketable securities (the "Assets"). The Assets are held as investments by Canco and, accordingly, are held as capital property within the meaning of the Act.
3. The authorized share capital of Canco is as follows:
(a) an unlimited number of Class A shares. The Class A shares are common shares ;
(b) an unlimited number of Class B shares. The Class B shares are voting and are entitled to receive a dividend and are redeemable for an amount equal to the paid-up capital; and
(c) an unlimited number of Class C shares. The Class C shares are non-voting, are entitled to receive a dividend and are redeemable for an amount equal to the paid-up capital.
4. The shareholders of Canco and the number of shares held respectively are as follows:
SHAREHOLDER
NUMBER AND SHARES HELD
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX ("VendorJ"), XXXXXXXXXX ("VendorA"), XXXXXXXXXX ("VendorM") and XXXXXXXXXX ("VendorE") are hereinafter collectively referred to as the Vendors. VendorJ, VendorA and VendorM are residents of the United States and are not residents of Canada for purposes of the Act. VendorE is a resident of Canada. The income beneficiary of VendorE is a resident of Canada.
5. XXXXXXXXXX ("Holdco") is a CCPC and a taxable Canadian corporation. Holdco is XXXXXXXXXX personal holding company and is controlled by XXXXXXXXXX ("MR. X"). Canco is not related to Holdco. Holdco is not a specified financial institution. Further it is represented that Holdco does not act as an agent for any specified financial institution. MR. X is an individual resident in Canada. He acquired the shares of Canco in XXXXXXXXXX for approximately $XXXXXXXXXX. MR. X deals at arm's length with each of VendorJ, VendorA, VendorM and VendorE.
6. Canco will pay certain dividends on its Class A shares, its Class B shares and its Class C shares prior to the commencement of the proposed transactions.
PROPOSED TRANSACTIONS
7. The Vendors will sell the XXXXXXXXXX Class A shares and the XXXXXXXXXX Class B shares (the "Purchased Shares") to Holdco for a purchase price to be negotiated on an arm's length basis. Holdco will pay cash for the Purchased Shares in an amount equal to the purchase price less $XXXXXXXXXX which will be used within the following XXXXXXXXXX months to satisfy any claims in respect of breach of representations and warranties referred to in paragraph 12 below. The Class A shares of Canco are "taxable Canadian property" as that term is defined under subsection 248(1).
8. Canco will redeem the XXXXXXXXXX Class C shares held by MR. X for an aggregate redemption price equal to the paid-up capital thereon plus any declared and unpaid dividends.
9. Canco will then be wound-up into Holdco under the relevant corporate law and, accordingly, all the Assets owned by Canco will be transferred and assigned to Holdco.
10. Holdco will designate in respect of each of the Assets that is a capital property and not an ineligible property in its income tax return of income for the taxation year in which Canco is wound-up an amount pursuant to paragraph 88(1)(d). The aggregate of such amount will be equal to the difference between:
(a) the purchase price paid by Holdco for the Purchased Shares, as described in paragraph 7; and
(b) the aggregate adjusted cost base to Canco of the Assets.
11. Holdco may, immediately or soon after the sale described in paragraph 7 and the wind-up described in paragraph 9, sell a portion of the Assets so acquired upon the winding-up of Canco for the fair market value of such Assets, probably in the open market. However, none of the Assets will be sold to a person described in subclauses 88(1)(c)(vi)(B)(I), (II) or (III) of the Act in relation to Canco. It is the intention of Holdco to continue to own the Assets in its business and any sale of Assets will be effected by Holdco after a review of its investments in the ordinary course of its business.
12. The purchase and sale agreement between the Vendors and Holdco pursuant to which the Vendors will sell the Purchased Shares to Holdco will include usual representations and warranties, including a representation by the Vendors that the facts disclosed in this ruling relating to Canco and the Vendors are true and complete and that no person described in subclauses 88(1)(c)(vi)(B)(I), (II) or (III) of the Act in relation to Canco will purchase any of the Assets from Holdco or as part of the series of transactions that include the winding-up of Canco. 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 Holdco as a result of the cost of the Assets acquired by Holdco on the winding-up of Canco being less than the amount described in ruling B below.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to sell all the Assets owned by Canco to an arm's-length party, Holdco, in a tax efficient manner. Due to the taxation of passive income in the U.S., it is fiscally disadvantageous for U.S. persons to hold investment assets through Canadian holding companies. The proposed transactions will permit the U.S. shareholders to crystallize their investment and to make investments henceforth other than through foreign holding companies. The amount of the dividends referred to in paragraph 6 above will be based upon the amount that would otherwise have been subject to tax to the shareholders under the U.S. passive investment holding company regime.
The main purpose of implementing the proposed transactions is not to obtain a "tax benefit" as that term is defined in subsection 245(1). The potential savings of U.S. taxes resulting from the implementation of the proposed transactions significantly outweigh any savings of Canadian tax.
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:
1. The provisions of subsection 88(1) will apply in respect of the winding-up of Canco into Holdco as described in paragraph 9 above with the result that:
a. Canco will, pursuant to subparagraph 88(1)(a)(iii), be deemed to have disposed of each of the Assets for proceeds of disposition equal to their cost amount to Canco immediately before the winding-up, and
b. Holdco will, pursuant to paragraph 88(1)(b), be deemed to have disposed of the Purchased Shares for proceeds equal to the greater of the amounts described in subparagraphs 88(1)(b)(i) and (ii).
2. Provided that no property acquired by Holdco on the winding-up as described in paragraph 9 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) as part of the series of transactions or events that includes the proposed transactions, the cost to Holdco of each property will be deemed by paragraph 88(1)(c) to be the cost amount of each property plus, on the assumption that such property is capital property, but not depreciable property, the amount designated by Holdco under paragraph 88(1)(d) in respect of the property as described in paragraph 10 above.
3. Subsection 84(2) and section 212.1 will not be applicable to the proposed transactions.
4. Subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Customs and Revenue Agency provided that the above 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, paid-up capital or 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
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