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 subsection 55(2) applies to dividends paid by Newco 55(2) to the partnership ?
Position: No.
Reasons: With respect to the partners with whom Newco is connected, they will pay Part IV tax on the dividends. The dividends will therefore be exempt from the application of subsection 55(2).
With respect to the other partners, the dividends will be paid out of safe income.
XXXXXXXXXX 2003-001685
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 taxpayer.
To the best of your knowledge and that of the taxpayer involved, none of the issues raised in this ruling:
1. was identified in an earlier return of the taxpayer or any related persons;
2. is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or any related persons;
3. is before the courts; or
4. is the subject of a ruling previously issued by the Canada Customs and Revenue Agency.
DEFINITIONS
Unless otherwise noted, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c.1 (5th Sup.), as amended (hereinafter referred to as 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 the transferee of the property have agreed upon in their election under subsection 85(2) in respect of the property;
"CCPC" means "Canadian-controlled private corporation" as that term is defined in subsection 125(7);
"Canadian partnership" has the meaning assigned by subsection 102(1);
"capital property" has the meaning assigned by section 54;
"depreciable property" has the meaning assigned by subsection 13(21);
"eligible property" has the meaning assigned by subsection 85(1.1);
"FMV" means fair market value;
"PUC" means "paid-up capital" as that expression is defined in subsection 89(1);
"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 Newco 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);
"taxable Canadian corporation" has the meaning assigned by subsection 89(1);
"taxable dividend" has the meaning assigned by subsection 89(1); and
"taxable preferred share" has the meaning assigned by subsection 248(1).
Our understanding of the facts, purposes of the proposed transactions and the proposed transactions is as follows:
FACTS
1. XXXXXXXXXX (the "Partnership") is a Canadian partnership with 10 corporate partners (the "Partners"). Partnership was formed in XXXXXXXXXX and has a XXXXXXXXXX year-end. XXXXXXXXXX (the "Principal").
2. The Partners of Partnership are as follows:
Name % interest of Partnership
XXXXXXXXXX ("Partner A") XXXXXXXXXX %
Partner A is a CCPC and a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX . The outstanding shares are owned as follows: XXXXXXXXXX % by XXXXXXXXXX who is a Principal ("Principal A") and XXXXXXXXXX % by XXXXXXXXXX .
XXXXXXXXXX ("Partner B") XXXXXXXXXX %Partner B is a CCPC and a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX . The outstanding shares are owned as follows: XXXXXXXXXX % by XXXXXXXXXX who is a Principal ("Principal B") and XXXXXXXXXX % by XXXXXXXXXX .
XXXXXXXXXX ("Partner C") XXXXXXXXXX %Partner C is a CCPC and a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX . All of the outstanding shares are owned by XXXXXXXXXX who is a Principal ("Principal C").
XXXXXXXXXX ("Partner D") XXXXXXXXXX %Partner D is a CCPC and a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX . All of the outstanding shares are owned by XXXXXXXXXX who is a Principal ("Principal D").
XXXXXXXXXX ("Partner E") XXXXXXXXXX %Partner E is a CCPC and a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX . All of the outstanding shares are owned by XXXXXXXXXX who is a Principal ("Principal E").
XXXXXXXXXX ("Partner F") XXXXXXXXXX %Partner F is a CCPC and a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX . The outstanding shares are held as follows: XXXXXXXXXX % by XXXXXXXXXX who is a Principal ("Principal F") and XXXXXXXXXX % by XXXXXXXXXX .
XXXXXXXXXX ("Partner G") XXXXXXXXXX %Partner G is a CCPC and a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX . The outstanding shares are held as follows: XXXXXXXXXX % by XXXXXXXXXX who is a Principal ("Principal G") and XXXXXXXXXX % by XXXXXXXXXX .
XXXXXXXXXX ("Partner H") XXXXXXXXXX %Partner H is a CCPC and a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX . All of the outstanding shares are owned by XXXXXXXXXX who is a Principal ("Principal H").
XXXXXXXXXX . ("Partner I") XXXXXXXXXX %Partner I is a CCPC and a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX . All of the outstanding shares are owned by XXXXXXXXXX who is a Principal ("Principal I").
XXXXXXXXXX ("Partner J") XXXXXXXXXX %Partner J is a CCPC and a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX . All of the outstanding shares are owned by XXXXXXXXXX who is a Principal ("Principal J").
3. All of the Partners and their individual shareholders deal with each other at arm's length. All of the individuals are resident in Canada.
4. XXXXXXXXXX.
5. A written partnership agreement governs partnership (the "partnership Agreement"). The most recent version was signed on XXXXXXXXXX. The major terms of the partnership Agreement are as follows:
(a) a valuation mechanism is contained which provides for the admission and withdrawal of the Partners .
(b) provision for the exchange of partnership interests between existing Partners .
(c) details outlining the nature of services to be provided by the Principals. Each Partner makes the services of its Principal available to Partnership who in turn provides the services to the clients.
6. Partnership 's assets consist of cash, accounts receivables, prepaid expenses, furniture and fixtures, office equipment and computer equipment and an XXXXXXXXXX agreement to provide services to the Funds. Partnership also owns XXXXXXXXXX% of the common shares of XXXXXXXXXX, an inactive company which was incorporated under the laws of XXXXXXXXXX on XXXXXXXXXX.
7. Partnership's assets also include leasehold improvements, customer lists, licenses, and XXXXXXXXXX agreements with XXXXXXXXXX clients.
8. Partnership's liabilities consist of accounts payable and accrued liabilities.
9. Partnership has received payments from certain of its clients in respect of XXXXXXXXXX services to be rendered in future periods ("Deferred Revenue").
PROPOSED TRANSACTIONS
10. A new corporation ("Newco") will be incorporated under the laws of XXXXXXXXXX. The authorized capital of Newco will consist of voting common shares (the "Newco Common Shares"), non-voting common shares and preferred shares (the "Newco Preferred Shares").
The Newco Preferred Shares will have the following terms:
- voting;
- no par value;
- redeemable at any time by Newco at its option or retractable at the option of the holder at the redemption amount;
- rank ahead of the Newco Common Shares on liquidation;
- have dividend rights attached to them that would allow the directors of Newco to determine an annual dividend to be paid on the shares. However, the dividend rate will not exceed a rate which is commercially reasonable. No dividends may be declared on the Newco Common Shares if doing so would reduce the value of the net assets of the company to an amount which is less than the aggregate of the redemption amount of the Newco Preferred Share;
- the redemption amount per share will be equal to a specified amount which will not exceed the FMV of the consideration for which the share was issued.
8. The Principals will subscribe for the Newco Common Shares as follows:
Principal Number of common shares
Principal A XXXXXXXXXX
Principal B XXXXXXXXXX
Principal C XXXXXXXXXX
Principal D XXXXXXXXXX
Principal E XXXXXXXXXX
Principal F XXXXXXXXXX
Principal G XXXXXXXXXX
Principal H XXXXXXXXXX
Principal I XXXXXXXXXX
Principal J XXXXXXXXXX
12. Partnership will transfer all of its assets and business undertakings including an assignment of its interest in and responsibilities under the XXXXXXXXXX agreements it has with its clients to Newco at FMV. As consideration therefor, Newco will assume all of Partnership's liabilities and will issue redeemable and retractable Newco Preferred Shares with an aggregate redemption value equal to the difference between the FMV of the assets transferred and the amount of the liabilities assumed.
13. Newco and all of the Partners will jointly elect pursuant to subsection 85(2) in prescribed form and within the time period permitted by subsection 85(6) in respect of each asset of Partnership which is an eligible property ("Eligible Property"). The agreed amount in respect of each of the Eligible Properties so transferred will be equal to:
(a) in the case of capital property (other than depreciable property of a prescribed class) an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
(c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).
For greater certainty, the agreed amount in respect of any Eligible Property included in the subsection 85(2) elections referred to herein will not exceed the FMV of such property and will not be less that the amount of any liabilities assumed by Newco as consideration for the transfer of such property.
The addition to the PUC of the Newco Preferred Shares will not exceed the amount by which the aggregate agreed amounts under subsection 85(2) in respect of the Eligible Properties exceeds the liabilities assumed by Newco.
14. Partnership will pay a reasonable amount to Newco as consideration for Newco's assumption of the obligations to provide services with respect to the Deferred Revenue. Newco and Partnership will jointly elect pursuant to subsection 20(24), within the time period referred to in subsection 20(25).
15. Partnership will enter into a management contract (the "Management Contract") with Newco to provide XXXXXXXXXX services to Newco which will enable Newco to fulfill its obligations under the XXXXXXXXXX agreements that it acquired. Partnership will charge a fee based on the fair market value of the services provided.
16. Newco may declare and pay annual dividends on the Newco Preferred Shares.
PURPOSE OF THE PROPOSED TRANSACTIONS
XXXXXXXXXX.
RULINGS
Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, we rule as follows:
A. The provisions of subsection 85(2) will apply to the transfer of each Eligible Property by Partnership to Newco as described in paragraph 12 above, such that the agreed amounts in respect of each such transfer will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.
B. Provided that Partnership has included an amount in respect of the Deferred Revenue in computing its income from its business pursuant to paragraph 12(1)(a) for the taxation year ending before the time of the transfer of property described in paragraph 12 above, to the extent that the payment is reasonable, the payment made by Partnership to Newco in consideration for the assumption by Newco of the undertaking to provide services:
(a) will be deducted in computing the income of Partnership, pursuant to paragraph 20(24)(a) for its fiscal period in which the payment is made; and
(b) will, pursuant to paragraph 20(24)(b), be deemed to be an amount described in paragraph 12(1)(a) in respect of Newco.
B. The annual dividends paid by Newco on the Newco Preferred Shares will be taxable dividends and:
a. will be included in the income of each Partner in proportion to that Partner's share in Partnership, pursuant to paragraphs 96(1)(c) and (f);
b. will, pursuant to subsection 112(1), be deductible in computing the taxable income of the Partner in proportion to that Partner's share in Partnership;
c. will be subject to tax under Part IV with respect to the portion of the dividends included in the income of Partner E, Partner F, Partner G, Partner H, Partner I and Partner J;
d. will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b), with respect to the portion of the dividends included in the income of Partner A, Partner B, Partner C and Partner D;
e. will be deemed to have been received by each Partner in proportion to that Partner's share in Partnership for the purposes of Part IV.1, pursuant to paragraph 187.4(a); and
f. will not be subject to Part IV.1 tax because the dividends will be "excepted dividends" as defined under paragraph 187.1(c).
B. Subsection 55(2) will not apply to the portion of the dividends included in the income of Partner E, Partner F, Partner G, Partner H, Partner I and Partner J.
C. Subsection 55(2) will not apply to the portion of the dividends included in the income of Partner A, Partner B, Partner C and Partner D to the extent that they are paid out of the safe income on hand of Newco in respect of the Newco Preferred Shares.
D. The Newco Preferred Shares will be taxable preferred shares. Accordingly, a tax under Part VI.I will be payable by Newco on taxable dividends paid by Newco on the Newco Preferred Shares to the extent that the amount of dividends paid in the year exceeds the dividend allowance for the year as that term is defined under subsection 191.1(2).
E. The proposed transactions will not result in the application of subsections 15(1), 56(2) or 69(11).
F. Subsection 245(2) will not be applied, as a result of the proposed transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given above.
The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued by the Canada Customs and Revenue Agency on May 17, 2002, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendment to the Act.
A direction in accordance with subsection 256(2.1) is based on the facts on a year-to-year basis, and therefore we are not able to rule that this provision will not be applied.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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