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: Split up butterfly transactions.
Position: Standard butterfly. Minor issues in relation to (i) acquisition of control of DC occurring upon permitted redemption of DC shares and (ii) whether transferee corporations connected to DC. Favourable rulings given.
Reasons:
XXXXXXXXXX 2003-002239
XXXXXXXXXX, 2003
Dear Sir:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
This is in response to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers listed above. We acknowledge our telephone conversations (XXXXXXXXXX) and facsimile correspondence of XXXXXXXXXX. You have advised that to the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:
(a) in an earlier return of any of the taxpayers or a related person;
(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of any of the taxpayers or a related person;
(c) under objection by any of the taxpayers or a related person;
(d) the subject of a ruling previously issued by the Income Tax Rulings Directorate; or
(e) before the Courts.
Unless otherwise indicated, all statutory references are to the Income Tax Act R.S.C. 1985 (5th Supp.), c. 1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
DEFINITIONS
(a) "ACB" means "adjusted cost base" as that expression is defined in section 54 and subsection 248(1);
(b) "agreed amount" has the meaning assigned by subsection 85(1);
(c) "BCA" means the Business Corporations Act XXXXXXXXXX;
(d) "capital property" has the meaning assigned by section 54;
(e) "CCPC" means "Canadian-controlled private corporation" and has the meaning assigned by subsection 125(7);
(f) "CDA" means "capital dividend account" and has the meaning assigned by subsection 89(1);
(g) "cost amount" has the meaning assigned by subsection 248(1);
(h) "dividend refund" has the meaning assigned by subsection 129(1);
(i) "DC" refers to XXXXXXXXXX;
(j) "eligible property" has the meaning assigned by subsection 85(1.1);
(k) "guarantee agreement" has the meaning assigned by subsection 112(2.2);
(l) "Mr. A" refers to XXXXXXXXXX;
(m) "Mr. B" refers to XXXXXXXXXX;
(n) "Mr. C" refers to XXXXXXXXXX;
(o) "Mr. D" refers to XXXXXXXXXX;
(p) "Mr. E" refers to XXXXXXXXXX;
(q) "paid-up capital" (also referred to as "PUC") has the meaning assigned by subsection 89(1);
(r) "private corporation" has the meaning assigned by subsection 89(1);
(s) "proceeds of disposition" has the meaning assigned by section 54;
(t) "RDTOH" means "refundable dividend tax on hand" as that expression is defined in subsection 129(3);
(u) "restricted financial institution" has the meaning assigned by subsection 248(1);
(v) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);
(w) "significant influence" has the meaning assigned by section 3050 of the CICA Handbook;
(x) "specified financial institution" (also referred to as "SFI") has the meaning assigned by subsection 248(1);
(y) "specified investment business" ("SIB") has the meaning assigned by the definition in subsection 125(7) and subsection 248(1);
(z) "stated capital" has the meaning assigned by the BCA;
(aa) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
(bb) "taxable dividend" has the meaning assigned by subsection 89(1).
FACTS
1. Mr. A, Mr B, Mr. C, Mr. D, and Mr. E are each older than 17 years of age and are residents of Canada. None of these individuals is related to any other.
2. DC is a CCPC and a taxable Canadian corporation. DC was incorporated under the laws of XXXXXXXXXX.
3. The authorized share capital of DC consists of an unlimited number of Class "A" shares, unlimited number of Class "B" shares, and an unlimited number of Class "C" shares.
4. The issued and outstanding shares of DC are held as follows:
Shareholder Class ACB PUC
Mr. A XXXXXXXX Class A $XXXXXXX $XXXXXXXXX
Mr. B XXXXXXXX Class A $XXXXXXX $XXXXXXXXX
Mr. C XXXXXXXX Class A $XXXXXXX $XXXXXXXXX
Mr. D XXXXXXXX Class A $XXXXXXX $XXXXXXXXX
Mr. E XXXXXXXX Class A $XXXXXXX $XXXXXXXXX
5. None of the shares of DC were acquired in contemplation of the proposed transactions set forth below.
6. The assets of DC include cash, rights arising from the prepayment of certain expenses ("prepaid expenses") and capital assets. The capital assets consist mainly of a XXXXXXXXXX building, in which XXXXXXXXXX.
7. As at XXXXXXXXXX, DC had a balance of $XXXXXXXXXX in its RDTOH account and does not have a balance in its CDA.
8. Mr. A currently is the sole shareholder and sole director of XXXXXXXXXX ("Transferee1") under the BCA. Transferee1 is a taxable Canadian corporation and a private corporation. The authorized share capital of Transferee1 is:
(a) an unlimited number of Class A voting common shares; and
(b) an unlimited number of Class B non-voting common shares.
9. The issued and outstanding shares of Transferee1 are held as follows:
Shareholder Class ACB PUC
Mr. A XXXXXXX Class A $XXXXXXXX $XXXXXXXX
No other shares of Transferee1 will be issued prior to the transactions described in paragraph 23 below.
10. Mr. B currently is the sole shareholder and sole director of XXXXXXXXXX ("Transferee2") under the BCA. Transferee2 is a taxable Canadian corporation and a private corporation. The authorized share capital of Transferee2 is:
(a) an unlimited number of Class A voting common shares; and
(b) an unlimited number of Class B non-voting common shares.
11. The issued and outstanding shares of Transferee2 are held as follows:
Shareholder Class ACB PUC
Mr. B XXXXXXXX Class A $XXXXXXXX $XXXXXXXX
Mr. B XXXXXXXX Class B $XXXXXXXX $XXXXXXXX
No other shares of Transferee2 will be issued prior to the transactions described in paragraph 24 below.
12. Mr. C currently is the sole shareholder and sole director of XXXXXXXXXX ("Transferee3") under the BCA. Transferee3 is a taxable Canadian corporation and a private corporation. The authorized share capital of Transferee3 is:
(a) an unlimited number of Class A voting common shares; and
(b) an unlimited number of Class B non-voting common shares.
13. The issued and outstanding shares of Transferee3 are held as follows:
Shareholder Class ACB PUC
Mr. C XXXXXXXX Class A $XXXXXXXX $XXXXXXXX
No other shares of Transferee3 will be issued prior to the transactions described in paragraph 25 below.
14. Mr. D currently is the sole shareholder and sole director of XXXXXXXXXX ("Transferee4") under the BCA. Transferee4 is a taxable Canadian corporation and a private corporation. The authorized share capital of Transferee4 is:
(a) an unlimited number of Class A voting common shares;
(b) an unlimited number of Class B non-voting common shares;
(c) an unlimited number of Class C voting redeemable preferred shares; and
(d) an unlimited number of Class D redeemable, non-voting preferred shares.
15. The issued and outstanding shares of Transferee4 are held as follows:
Shareholder Class ACB PUC
Mr. D XXXXXXXX Class B $XXXXXXXX $XXXXXXXX
Mr. D XXXXXXXX Class C $XXXXXXXX $XXXXXXXX
No other shares of Transferee4 will be issued prior to the transactions described in paragraph 26 below.
16. Mr. E currently is the sole shareholder and sole director of XXXXXXXXXX ("Transferee5") under the BCA. Transferee5 is a taxable Canadian corporation and a private corporation. The authorized share capital of Transferee5 is:
(a) an unlimited number of Class A voting common shares;
(b) an unlimited number of Class B non-voting common shares;
(c) an unlimited number of Class C voting redeemable preferred shares; and
(d) an unlimited number of Class D redeemable, non-voting preferred shares.
17. The issued and outstanding shares of Transferee5 are held as follows:
Shareholder Class ACB PUC
Mr. E XXXXXXXX Class B $XXXXXXXX $XXXXXXXX
Mr. E XXXXXXXX Class C $XXXXXXXX $XXXXXXXX
No other shares of Transferee5 will be issued prior to the transactions described in paragraph 27 below.
18. DC, Mr. A, Mr. B, Mr. C, Mr. D, Mr. E, Transferee1, Transferee 2, Transferee3, Transferee4 and Transferee 5 file their Canadian federal income tax returns with the XXXXXXXXXX Tax Centre and deal with the XXXXXXXXXX Tax Services Office.
PROPOSED TRANSACTIONS
19. Articles of Amendment will be filed on behalf of Transferee1, Transferee2, Tranferee3, Transferee4 and Transferee5 under the BCA to create Class "E" shares and to divide the Class "E" shares into:
(a) an unlimited number of Class "E" Series I, redeemable, retractable, voting preferred shares (the "Series I Preferred Shares") with a redemption and retraction amount of $XXXXXXXXXX per share, which can be issued in fractions; and
(b) an unlimited number of Class "E" Series II, redeemable, retractable, non-voting preferred shares (the "Series II Preferred Shares") with a redemption and retraction amount of $XXXXXXXXXX per share.
Each Series I Preferred Share and Series II Preferred Share will entitle the holder thereof to an annual non-cumulative dividend, equal to the redemption amount of the particular share multiplied by 4/5 of the rate prescribed from time to time by regulation 4301(c) of the Act, calculated in respect of the year on a daily basis.
20. For the purposes of subsection 191(4) of the Act, the terms and conditions of the Series I Preferred Shares of Transferee1, Transferee2, Tranferee3, Transferee4 and Transferee5 will specify an amount in respect of each such share for which the share is to be redeemed, acquired or cancelled. The amount shall be designated pursuant to the resolution of the directors of Transferee1, Transferee2, Tranferee3, Transferee4 and Transferee5, as the case may be, made in connection with the issuance of such share. The amount specified in respect of such share, at the time of the issuance thereof, will be expressed as a fixed dollar amount that will not be determined by formula or subject to change thereafter and will not exceed the fair market value of the consideration for which the share is issued.
21. In addition to the amendments to the Articles of Incorporation of Transferee1, Transferee2 and Transferee3 described in paragraph 19 above, the Articles of Incorporation of each corporation will be amended to split the current issued and outstanding Class A voting shares into XXXXXXXXXX issued and outstanding Class A voting shares.
22. There will be no change in either the total capital of Transferee1, Transferee2 and Transferee3 or the interest, rights or privileges of the shareholders of each corporation as a consequence of the amendments described in paragraph 21 above. Furthermore, there will be no concurrent changes in the capital structure of the corporation other than the creation of Series I Preferred Shares and Series II Preferred Shares that is contemplated by the foregoing amendments.
23. Mr. A will transfer his Class "A" common shares in DC to Transferee1 in exchange for Series II Preferred Shares of Transferee1 having an aggregate fair market value equal to the fair market value of the shares of DC transferred to Transferee1.
Mr. A and Transferee1 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the DC shares as described herein to Transferee1. The agreed amount specified in the election will be equal to the ACB of the transferred shares, which amount will be less than their fair market value at the time of the transfer.
The amount to be added to the stated capital of the Series II Preferred Shares of Transferee1 to be issued as described herein will not exceed the adjusted cost base of the shares of DC to Mr. A immediately before the transfer.
24. Mr. B will transfer his Class "A" common shares in DC to Transferee2 in exchange for Series II Preferred Shares of Transferee2 having an aggregate fair market value equal to the fair market value of the shares of DC transferred to Transferee2.
Mr. B and Transferee2 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the DC shares as described herein to Transferee2. The agreed amount specified in the election will be equal to the ACB of the transferred shares, which amount will be less than their fair market value at the time of the transfer.
The amount to be added to the stated capital of the Series II Preferred Shares of Transferee2 to be issued as described herein will not exceed the adjusted cost base of the shares of DC to Mr. B immediately before the transfer.
25. Mr. C will transfer his Class "A" common shares in DC to Transferee3 in exchange for Series II Preferred Shares of Transferee3 having an aggregate fair market value equal to the fair market value of the shares of DC transferred to Transferee3.
Mr. C and Transferee3 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the DC shares as described herein to Transferee3. The agreed amount specified in the election will be equal to the ACB of the transferred shares, which amount will be less than their fair market value at the time of the transfer.
The amount to be added to the stated capital of the Series II Preferred Shares of Transferee3 to be issued as described herein will not exceed the adjusted cost base of the shares of DC to Mr. C immediately before the transfer.
26. Mr. D will transfer his Class "A" common shares in DC to Transferee4 in exchange for Series II Preferred Shares of Transferee4 having an aggregate fair market value equal to the fair market value of the shares of DC transferred to Transferee4.
Mr. D and Transferee4 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the DC shares as described herein to Transferee4. The agreed amount specified in the election will be equal to the ACB of the transferred shares, which amount will be less than their fair market value at the time of the transfer.
The amount to be added to the stated capital of the Series II Preferred Shares of Transferee4 to be issued as described herein will not exceed the adjusted cost base of the shares of DC to Mr. D immediately before the transfer.
27. Mr. E will transfer his Class "A" common shares in DC to Transferee5 in exchange for Series II Preferred Shares of Transferee5 having an aggregate fair market value equal to the fair market value of the shares of DC transferred to Transferee5.
Mr. E and Transferee5 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the DC shares as described herein to Transferee5. The agreed amount specified in the election will be equal to the ACB of the transferred shares, which amount will be less than their fair market value at the time of the transfer.
The amount to be added to the stated capital of the Series II Preferred Shares of Transferee5 to be issued as described herein will not exceed the adjusted cost base of the shares of DC to Mr. E immediately before the transfer.
28. Immediately before the transfers of property described in paragraphs 30 to 34 below, the property owned by DC will be classified into the following three different types of property for the purposes of the definition of "distribution" in subsection 55(1) and paragraph 55(3)(b):
(a) cash or near cash property, comprising all of the current assets of DC. This category will include cash, accounts receivable, prepaid expenses, inventory and advances to related corporations;
(b) investment property, comprising all of the assets of DC, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from property or from a SIB; and
(c) business property, comprising all of the assets of DC, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from a business (other than a SIB).
For the purpose of calculating the fair market value of each type of property, as described above, DC will not have significant influence over any corporation.
Any tax accounts of DC, such as the amount of refundable dividend tax on hand, the balance of any capital dividend account, or any deferred income tax debit balance will not be considered property for purposes of the classification described herein.
29. In determining the net fair market value of each type of property of DC immediately before the transfers of property described in paragraphs 30 to 34 below, the liabilities of DC will be allocated to, and deducted in the calculation of the net fair market value of each type of property of DC as follows:
(a) current liabilities of DC will be allocated to the cash or near-cash property of DC in the proportion that the fair market value of each such property is of the fair market value of all cash or near-cash property owned by DC. The allocation of current liabilities as described herein will not, however, exceed the total fair market value of the cash or near cash property of DC.
(b) any accounts receivable (this would not include the advances to related corporations), inventory, and prepaid expenses of DC, that are initially classified in accordance with paragraph (a) as cash or near-cash property, that will relate to a business that will be carried on by DC or Transferee and that will be collected, sold, or consumed by such corporation in the ordinary course of that business, will then be reclassified as business property and the net fair market value thereof, determined after the allocation of current liabilities as described in (a) herein, will be included in the net fair market value of business property and will not be included in the net fair market value of cash or near-cash property;
(c) liabilities, other than current liabilities, of DC that relate to a particular property will then be allocated to the particular property (and effectively to the type of property to which the property belongs) to the extent of its fair market value. The liabilities pertaining to a type of property but not to a particular property will then be allocated to that type of property, but not in excess of the net fair market value of such type of property after the allocation of liabilities to a particular property as described herein; and
(d) if any liabilities ("excess DC unallocated liabilities") that remain after the allocations described in steps (a) and (c) above are made, such excess DC unallocated liabilities will then be allocated to the cash or near cash property, investment property and business property, if any, of DC based on the relative net fair market value of each type of property prior to the allocation of such remaining liabilities, but after the allocation of the liabilities described in clauses (a) and (c) above.
30. Immediately following the determination of the net fair market value of its cash or near cash property, its business property and its investment property as described in paragraphs 28 and 29 above, DC will transfer at fair market value a portion of each type of property owned by it at that time to Transferee1 such that immediately following the transfers, the net fair market value of each type of property so transferred by DC to Transferee1, determined in accordance with the guidelines described in paragraphs 28 and 29 above, will approximate that proportion of the net fair market value of all property of DC of that type determined immediately before such transfer that:
(a) the aggregate fair market value, immediately before the transfers, of all of the shares of DC owned by Transferee1 at that time
is of
(b) the aggregate fair market value, immediately before the transfers, of all the issued and outstanding shares of DC at that time.
For the purpose of this paragraph, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX%, determined as a percentage of the net fair market value of each type of property which Transferee1 has received as compared to what Transferee1 would have received had it received its appropriate pro rata share of the net fair market value of that type of property; however, the aggregate net fair market value of all property of DC transferred to Transferee1 as described herein will be equal to that proportion determined by (a) and (b) above of the aggregate net fair market value of all property of DC immediately before the transfers.
As consideration for the property so transferred, Transferee1 will:
(c) assume a portion of the liabilities of DC (not to exceed the cost to Transferee1, as determined under section 85, where relevant, of the property transferred to Transferee1) such that the net fair market value of each type of property of DC transferred to Transferee1 as described herein will approximate its proportionate share, as determined by the formula described in (a) and (b) above, of the total net fair market value of that type of property owned by DC immediately before such transfers, and
(d) issue to DC Series I Preferred Shares of its capital stock having an aggregate fair market value and redemption amount equal to the amount by which the aggregate fair market value of the property transferred to Transferee1 exceeds the amount of the liabilities assumed by Transferee1 as described in (c) above.
Transferee1 will add to the stated capital account in respect of the Series I Preferred Shares it issues an amount not exceeding the cost to Transferee1 (as determined under section 85, where relevant) of the property transferred to it less any liabilities assumed by it.
31. Immediately following the determination of the net fair market value of its cash or near cash property, its business property and its investment property as described in paragraphs 28 and 29 above, DC will transfer at fair market value a portion of each type of property owned by it at that time to Transferee2 such that immediately following the transfers, the net fair market value of each type of property so transferred by DC to Transferee2, determined in accordance with the guidelines described in paragraphs 28 and 29 above, will approximate that proportion of the net fair market value of all property of DC of that type determined immediately before such transfer that:
(a) the aggregate fair market value, immediately before the transfers, of all of the shares of DC owned by Transferee2 at that time
is of
(b) the aggregate fair market value, immediately before the transfers, of all the issued and outstanding shares of DC at that time.
For the purpose of this paragraph, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX%, determined as a percentage of the net fair market value of each type of property which Transferee2 has received as compared to what Transferee2 would have received had it received its appropriate pro rata share of the net fair market value of that type of property; however, the aggregate net fair market value of all property of DC transferred to Transferee2 as described herein will be equal to that proportion determined by (a) and (b) above of the aggregate net fair market value of all property of DC immediately before the transfers.
As consideration for the property so transferred, Transferee2 will:
(c) assume a portion of the liabilities of DC (not to exceed the cost to Transferee2, as determined under section 85, where relevant, of the property transferred to Transferee2) such that the net fair market value of each type of property of DC transferred to Transferee2 as described herein will approximate its proportionate share, as determined by the formula described in (a) and (b) above, of the total net fair market value of that type of property owned by DC immediately before such transfers, and
(d) issue to DC Series I Preferred Shares of its capital stock having an aggregate fair market value and redemption amount equal to the amount by which the aggregate fair market value of the property transferred to Transferee2 exceeds the amount of the liabilities assumed by Transferee2 as described in (c) above.
Transferee2 will add to the stated capital account in respect of the Series I Preferred Shares it issues an amount not exceeding the cost to Transferee2 (as determined under section 85, where relevant) of the property transferred to it less any liabilities assumed by it.
32. Immediately following the determination of the net fair market value of its cash or near cash property, its business property and its investment property as described in paragraphs 28 and 29 above, DC will transfer at fair market value a portion of each type of property owned by it at that time to Transferee3 such that immediately following the transfers, the net fair market value of each type of property so transferred by DC to Transferee3, determined in accordance with the guidelines described in paragraphs 28 and 29 above, will approximate that proportion of the net fair market value of all property of DC of that type determined immediately before such transfer that:
(a) the aggregate fair market value, immediately before the transfers, of all of the shares of DC owned by Transferee3 at that time
is of
(b) the aggregate fair market value, immediately before the transfers, of all the issued and outstanding shares of DC at that time.
For the purpose of this paragraph, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX%, determined as a percentage of the net fair market value of each type of property which Transferee3 has received as compared to what Transferee3 would have received had it received its appropriate pro rata share of the net fair market value of that type of property; however, the aggregate net fair market value of all property of DC transferred to Transferee3 as described herein will be equal to that proportion determined by (a) and (b) above of the aggregate net fair market value of all property of DC immediately before the transfers.
As consideration for the property so transferred, Transferee3 will:
(c) assume a portion of the liabilities of DC (not to exceed the cost to Transferee3, as determined under section 85, where relevant, of the property transferred to Transferee3) such that the net fair market value of each type of property of DC transferred to Transferee3 as described herein will approximate its proportionate share, as determined by the formula described in (a) and (b) above, of the total net fair market value of that type of property owned by DC immediately before such transfers, and
(d) issue to DC Series I Preferred Shares of its capital stock having an aggregate fair market value and redemption amount equal to the amount by which the aggregate fair market value of the property transferred to Transferee3 exceeds the amount of the liabilities assumed by Transferee3 as described in (c) above.
Transferee3 will add to the stated capital account in respect of the Series I Preferred Shares it issues an amount not exceeding the cost to Transferee3 (as determined under section 85, where relevant) of the property transferred to it less any liabilities assumed by it.
33. Immediately following the determination of the net fair market value of its cash or near cash property, its business property and its investment property as described in paragraphs 28 and 29 above, DC will transfer at fair market value a portion of each type of property owned by it at that time to Transferee4 such that immediately following the transfers, the net fair market value of each type of property so transferred by DC to Transferee4, determined in accordance with the guidelines described in paragraphs 28 and 29 above, will approximate that proportion of the net fair market value of all property of DC of that type determined immediately before such transfer that:
(a) the aggregate fair market value, immediately before the transfers, of all of the shares of DC owned by Transferee4 at that time
is of
(b) the aggregate fair market value, immediately before the transfers, of all the issued and outstanding shares of DC at that time.
For the purpose of this paragraph, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX%, determined as a percentage of the net fair market value of each type of property which Transferee4 has received as compared to what Transferee4 would have received had it received its appropriate pro rata share of the net fair market value of that type of property; however, the aggregate net fair market value of all property of DC transferred to Transferee4 as described herein will be equal to that proportion determined by (a) and (b) above of the aggregate net fair market value of all property of DC immediately before the transfers.
As consideration for the property so transferred, Transferee4 will:
(c) assume a portion of the liabilities of DC (not to exceed the cost to Transferee4, as determined under section 85, where relevant, of the property transferred to Transferee4) such that the net fair market value of each type of property of DC transferred to Transferee4 as described herein will approximate its proportionate share, as determined by the formula described in (a) and (b) above, of the total net fair market value of that type of property owned by DC immediately before such transfers, and
(d) issue to DC Series I Preferred Shares of its capital stock having an aggregate fair market value and redemption amount equal to the amount by which the aggregate fair market value of the property transferred to Transferee4 exceeds the amount of the liabilities assumed by Transferee4 as described in (c) above.
Transferee4 will add to the stated capital account in respect of the Series I Preferred Shares it issues an amount not exceeding the cost to Transferee4 (as determined under section 85, where relevant) of the property transferred to it less any liabilities assumed by it.
34. Immediately following the determination of the net fair market value of its cash or near cash property, its business property and its investment property as described in paragraphs 28 and 29 above, DC will transfer at fair market value a portion of each type of property owned by it at that time to Transferee5 such that immediately following the transfers, the net fair market value of each type of property so transferred by DC to Transferee5, determined in accordance with the guidelines described in paragraphs 28 and 29 above, will approximate that proportion of the net fair market value of all property of DC of that type determined immediately before such transfer that:
(a) the aggregate fair market value, immediately before the transfers, of all of the shares of DC owned by Transferee5 at that time
is of
(b) the aggregate fair market value, immediately before the transfers, of all the issued and outstanding shares of DC at that time.
For the purpose of this paragraph, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX%, determined as a percentage of the net fair market value of each type of property which Transferee5 has received as compared to what Transferee5 would have received had it received its appropriate pro rata share of the net fair market value of that type of property; however, the aggregate net fair market value of all property of DC transferred to Transferee5 as described herein will be equal to that proportion determined by (a) and (b) above of the aggregate net fair market value of all property of DC immediately before the transfers.
As consideration for the property so transferred, Transferee5 will:
(c) assume a portion of the liabilities of DC (not to exceed the cost to Transferee5, as determined under section 85, where relevant, of the property transferred to Transferee5) such that the net fair market value of each type of property of DC transferred to Transferee5 as described herein will approximate its proportionate share, as determined by the formula described in (a) and (b) above, of the total net fair market value of that type of property owned by DC immediately before such transfers, and
(d) issue to DC Series I Preferred Shares of its capital stock having an aggregate fair market value and redemption amount equal to the amount by which the aggregate fair market value of the property transferred to Transferee5 exceeds the amount of the liabilities assumed by Transferee5 as described in (c) above.
Transferee5 will add to the stated capital account in respect of the Series I Preferred Shares it issues an amount not exceeding the cost to Transferee5 (as determined under section 85, where relevant) of the property transferred to it less any liabilities assumed by it.
35. In respect of the transfers described in paragraphs 30 above, DC and Transferee1 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each property transferred by DC to Transferee1, as described in paragraph 30 above that is an eligible property the fair market value of which at the time of the transfer exceeds or may exceed the cost amount thereof to DC. The agreed amount in each such election in respect of a particular eligible property so transferred will not be less than:
(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);
(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); and
(d) in the case of inventory, the amount described in paragraph 85(1)(c.1).
In each case, the agreed amount will not exceed the fair market value of the respective property, nor will it be less than the amount of any liabilities assumed by Transferee1 as consideration for the transfer of such property.
For the purposes of the joint election described herein, the reference to "the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all of the property of that class that the fair market value of the asset immediately before the disposition is of the fair market value of all property of that class immediately before the disposition.
36. In respect of the transfers described in paragraphs 31 above, DC and Transferee2 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each property transferred by DC to Transferee2, as described in paragraph 31 above that is an eligible property the fair market value of which at the time of the transfer exceeds or may exceed the cost amount thereof to DC. The agreed amount in each such election in respect of a particular eligible property so transferred will not be less than:
(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);
(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); and
(d) in the case of inventory, the amount described in paragraph 85(1)(c.1).
In each case, the agreed amount will not exceed the fair market value of the respective property, nor will it be less than the amount of any liabilities assumed by Transferee2 as consideration for the transfer of such property.
For the purposes of the joint election described herein, the reference to "the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all of the property of that class that the fair market value of the asset immediately before the disposition is of the fair market value of all property of that class immediately before the disposition.
37. In respect of the transfers described in paragraphs 32 above, DC and Transferee3 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each property transferred by DC to Transferee3, as described in paragraph 32 above that is an eligible property the fair market value of which at the time of the transfer exceeds or may exceed the cost amount thereof to DC. The agreed amount in each such election in respect of a particular eligible property so transferred will not be less than:
(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);
(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); and
(d) in the case of inventory, the amount described in paragraph 85(1)(c.1).
In each case, the agreed amount will not exceed the fair market value of the respective property, nor will it be less than the amount of any liabilities assumed by Transferee3 as consideration for the transfer of such property.
For the purposes of the joint election described herein, the reference to "the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all of the property of that class that the fair market value of the asset immediately before the disposition is of the fair market value of all property of that class immediately before the disposition.
38. In respect of the transfers described in paragraphs 33 above, DC and Transferee4 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each property transferred by DC to Transferee4, as described in paragraph 33 above that is an eligible property the fair market value of which at the time of the transfer exceeds or may exceed the cost amount thereof to DC. The agreed amount in each such election in respect of a particular eligible property so transferred will not be less than:
(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);
(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); and
(d) in the case of inventory, the amount described in paragraph 85(1)(c.1).
In each case, the agreed amount will not exceed the fair market value of the respective property, nor will it be less than the amount of any liabilities assumed by Transferee4 as consideration for the transfer of such property.
For the purposes of the joint election described herein, the reference to "the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all of the property of that class that the fair market value of the asset immediately before the disposition is of the fair market value of all property of that class immediately before the disposition.
39. In respect of the transfers described in paragraphs 34 above, DC and Transferee5 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each property transferred by DC to Transferee5, as described in paragraph 34 above that is an eligible property the fair market value of which at the time of the transfer exceeds or may exceed the cost amount thereof to DC. The agreed amount in each such election in respect of a particular eligible property so transferred will not be less than:
(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);
(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); and
(d) in the case of inventory, the amount described in paragraph 85(1)(c.1).
In each case, the agreed amount will not exceed the fair market value of the respective property, nor will it be less than the amount of any liabilities assumed by Transferee5 as consideration for the transfer of such property.
For the purposes of the joint election described herein, the reference to "the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all of the property of that class that the fair market value of the asset immediately before the disposition is of the fair market value of all property of that class immediately before the disposition.
40. Transferee1 will then redeem the Series I Preferred Shares held by DC at their aggregate redemption amount and fair market value and will pay the redemption amount by issuing to DC a demand promissory note (the "Series I Redemption Note") having a principal amount and fair market value equal to the redemption amount of the Series Preferred Shares. DC will accept the Series I Redemption Note as full payment for the redemption amount of the Series I Preferred Shares so redeemed.
41. Transferee2 will then redeem the Series I Preferred Shares held by DC at their aggregate redemption amount and fair market value and will pay the redemption amount by issuing to DC a demand promissory note (the "Series I Redemption Note") having a principal amount and fair market value equal to the redemption amount of the Series I Preferred Shares. DC will accept the Series I Redemption Note as full payment for the redemption amount of the Series I Preferred Shares so redeemed.
42. Transferee3 will then redeem the Series I Preferred Shares held by DC at their aggregate redemption amount and fair market value and will pay the redemption amount by issuing to DC a demand promissory note (the "Series I Redemption Note") having a principal amount and fair market value equal to the redemption amount of the Series I Preferred Shares. DC will accept the Series I Redemption Note as full payment for the redemption amount of the Series I Preferred Shares so redeemed.
43. Transferee4 will then redeem the Series I Preferred Shares held by DC at their aggregate redemption amount and fair market value and will pay the redemption amount by issuing to DC a demand promissory note (the "Series I Redemption Note") having a principal amount and fair market value equal to the redemption amount of the Series I Preferred Shares. DC will accept the Series I Redemption Note as full payment for the redemption amount of the Series I Preferred Shares so redeemed.
44. Transferee5 will then redeem the Series I Preferred Shares held by DC at their aggregate redemption amount and fair market value and will pay the redemption amount by issuing to DC a demand promissory note (the "Series I Redemption Note") having a principal amount and fair market value equal to the redemption amount of the Series I Preferred Shares. DC will accept the Series I Redemption Note as full payment for the redemption amount of the Series I Preferred Shares so redeemed.
45. DC will purchase for cancellation all of the DC common shares of its capital stock owned by Transferee1 for fair market value consideration. DC will pay the purchase price for such shares by issuing to Transferee1 a demand promissory note (the "DC Note1") having a principal amount and fair market value equal to the aggregate fair market value of the shares so purchased. Transferee1 will accept the DC Note1 in full payment of the purchase price of the shares.
46. DC will purchase for cancellation all of the DC common shares of its capital stock owned by Transferee2 for fair market value consideration. DC will pay the purchase price for such shares by issuing to Transferee2 a demand promissory note (the "DC Note2") having a principal amount and fair market value equal to the aggregate fair market value of the shares so purchased. Transferee2 will accept the DC Note2 in full payment of the purchase price of the shares.
47. DC will purchase for cancellation all of the DC common shares of its capital stock owned by Transferee3 for fair market value consideration. DC will pay the purchase price for such shares by issuing to Transferee3 a demand promissory note (the "DC Note3") having a principal amount and fair market value equal to the aggregate fair market value of the shares so purchased. Transferee3 will accept the DC Note3 in full payment of the purchase price of the shares.
48. DC will purchase for cancellation all of the DC common shares of its capital stock owned by Transferee4 for fair market value consideration. DC will pay the purchase price for such shares by issuing to Transferee4 a demand promissory note (the "DC Note4") having a principal amount and fair market value equal to the aggregate fair market value of the shares so purchased. Transferee4 will accept the DC Note4 in full payment of the purchase price of the shares.
49. DC will purchase for cancellation all of the DC common shares of its capital stock owned by Transferee5 for fair market value consideration. DC will pay the purchase price for such shares by issuing to Transferee5 a demand promissory note (the "DC Note5") having a principal amount and fair market value equal to the aggregate fair market value of the shares so purchased. Transferee5 will accept the DC Note5 in full payment of the purchase price of the shares.
50. DC and Transferee1 will then set-off the principal amount of their mutual debt obligations (i.e., the DC Note1 and the Series I Redemption Note). Each obligation will then be cancelled.
51. DC and Transferee2 will then set-off the principal amount of their mutual debt obligations (i.e., the DC Note2 and the Series I Redemption Note). Each obligation will then be cancelled.
52. DC and Transferee3 will then set-off the principal amount of their mutual debt obligations (i.e., the DC Note3 and the Series I Redemption Note). Each obligation will then be cancelled.
53. DC and Transferee4 will then set-off the principal amount of their mutual debt obligations (i.e., the DC Note4 and the Series I Redemption Note). Each obligation will then be cancelled.
54. DC and Transferee5 will then set-off the principal amount of their mutual debt obligations (i.e., the DC Note5 and the Series I Redemption Note). Each obligation will then be cancelled.
55. Immediately following the proposed transactions described above, DC will be dissolved, having no assets and no liabilities.
56. None of the transactions or events described in the facts of this letter occurred as part of the same series of transactions or events as the proposed transactions described in this letter.
57. No liabilities have been incurred by, and no assets have been acquired by or disposed of by DC or any predecessor thereof in contemplation of the proposed transactions described herein. Except as described in this letter, no liabilities will be incurred by, and no assets will be acquired by or disposed of by DC or any predecessor thereof in contemplation of the proposed transactions described herein. No property of DC that is transferred pursuant to the proposed transactions described herein will be transferred to any other person as part of a series of transactions that includes the proposed transactions described herein.
58. None of DC, Transferee1, Transferee2, Transferee3, Transferee4 or Transferee5 will, at the time the proposed transactions described herein are implemented, be an SFI or a restricted financial institution.
59. None of the shares of DC, Transferee1, Transferee2, Transferee3, Transferee4 and Transferee5 will be, at any time during the implementation of the proposed transactions described herein:
(a) the subject of any undertaking or agreement that is referred to in subsection 112(2.2) as a "guarantee agreement";
(b) issued or acquired as part of a transaction, event or series of
transactions or events of the type described in subsection 112(2.5); or
(c) the subject of a "dividend rental arrangement" as that term is defined in subsection 248(1).
60. None of the Series I Preferred Shares of Transferee1, Transferee2, Transferee3, Transferee4 and Transferee5 will be issued for consideration that includes a taxable preferred share.
61. Upon completion of the transfers described in paragraphs 30 to 34 above, each of Transferee1, Transferee2, Transferee3, Transferee4 and Transferee5 will be connected with DC pursuant to paragraph 186(4)(b) of the Act.
62. The fair market value of the Series I Redemption Notes of Transferee1, Transferee2, Transferee3, Transferee4 and Transferee5 acquired by DC as described in paragraphs 40 to 44 above will be equal to their respective principal amounts at all times.
PURPOSE OF THE PROPOSED TRANSACTIONS:
The purpose of the proposed transactions is to distribute a proportionate share of the assets of DC to the respective professional corporations in order to separate the interests of the various shareholders of DC such that the interest in the building is held directly in the respective professional corporations. From the perspective of such shareholders, holding the interests in the building through DC serves no business purpose. In essence, the proposed series of transactions is a split up of the existing assets of DC that will permit the shareholders of DC to deal with their proportionate share in the building as required.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. Subject to the application of subsections 13(21.2) and 69(11), subsection 85(1) will apply to each transfer of eligible property by DC to Transferee1, Transferee2, Transferee3, Transferee4 and Transferee5 described in paragraphs 30 to 34 above that is the subject of an election described in paragraphs 35 to 39 above such that the agreed amount pursuant to paragraph 85(1)(a) in respect of each such transfer will be deemed to be the proceeds of disposition of such property to DC and the cost of such property to Transferee1, Transferee2, Transferee3, Transferee4 and Transferee5, as the case may be.
B. On the redemption of the Series I Preferred Shares by Transferee1 described in paragraph 40 above, and on the purchase for cancellation of the all of the DC shares owned by Transferee1, as described in paragraph 45 above:
(a) pursuant to paragraphs 84(3)(a) and 84(3)(b):
(i) Transferee1 will be deemed to have paid, and DC will be deemed to have received taxable dividends at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the Series I Preferred Shares exceeds the PUC of those shares immediately before the redemption;
(ii) DC will be deemed to have paid, and Transferee1 will be deemed to have received, taxable dividends at that time equal to the amount, if any, by which the amount paid in respect of the purchase for cancellation of all of the DC shares owned by Transferee1 exceeds the PUC of those shares immediately before the purchase;
(b) the taxable dividends deemed to have been received by each of DC and Transferee1 in (a) above will be:
(i) included in the recipient's income pursuant to section 82 and paragraph 12(1)(j);
(ii) deductible in computing the taxable income of the recipient for the year in which the dividends are deemed to have been received pursuant to subsection 112(1) and such deductions will not be denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4);
(c) the taxable deemed dividends referred to in (a) above will not be subject to tax under Part IV.1 of the Act on the basis that such dividends will be "excepted dividends" pursuant to subsection 187.1(c);
(d) the taxable deemed dividends referred to in (a)(i) above will not be subject to tax under Part VI.1 of the Act on the basis that such dividends will be deemed to be excluded dividends pursuant to subsection 191(4), but only to the extent that the amount paid to DC on the redemption of each Series I Preferred Share does not exceed the amount specified in respect of the share for the purposes of subsection 191(4);
(e) Transferee1 will be connected with DC and DC will be connected with Transferee1 pursuant to paragraph 186(4)(b) of the Act. Consequently:
(i) provided that Transferee1 is not entitled to a dividend refund (within the meaning of subsection 129(1) of the Act) in respect of its taxation year in which it is deemed to pay the dividends referred to in (a)(i) above, DC will not be subject to Part IV tax in respect of such dividends, and
(ii) Transferee1 will, pursuant to paragraph 186(1)(b), be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which DC will become entitled for its taxation year in which the dividends referred to in (a)(ii) above, are paid, that the amount of such dividends received by Transferee1 is of the aggregate of all taxable dividends paid by DC in its taxation year in which such dividends are paid.
C. On the redemption by Transferee2 of the Series I Preferred Shares described in paragraph 41 above, and on the purchase for cancellation of the all of the DC shares owned by Transferee2, as described in paragraph 46 above:
(a) pursuant to paragraphs 84(3)(a) and 84(3)(b):
(i) Transferee2 will be deemed to have paid, and DC will be deemed to have received taxable dividends at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the Series I Preferred Shares exceeds the PUC of those shares immediately before the redemption;
(ii) DC will be deemed to have paid, and Transferee2 will be deemed to have received, taxable dividends at that time equal to the amount, if any, by which the amount paid in respect of the purchase for cancellation of all of the DC shares owned by Transferee1 exceeds the PUC of those shares immediately before the purchase;
(b) the taxable dividends deemed to have been received by each of DC and Transferee2 in (a) above will be:
(i) included in the recipient's income pursuant to section 82 and paragraph 12(1)(j);
(ii) deductible in computing the taxable income of the recipient for the year in which the dividends are deemed to have been received pursuant to subsection 112(1) and such deductions will not be denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4);
(c) the taxable deemed dividends referred to in (a) above will not be subject to tax under Part IV.1 of the Act on the basis that such dividends will be "excepted dividends" pursuant to subsection 187.1(c);
(d) the taxable deemed dividends referred to in (a)(i) above will not be subject to tax under Part VI.1 of the Act on the basis that such dividends will be deemed to be excluded dividends pursuant to subsection 191(4), but only to the extent that the amount paid to DC on the redemption of each Series I Preferred Share does not exceed the amount specified in respect of the share for the purposes of subsection 191(4);
(e) Transferee2 will be connected with DC and DC will be connected with Transferee2 pursuant to paragraph 186(4)(b) of the Act. Consequently:
(i) provided that Transferee2 is not entitled to a dividend refund (within the meaning of subsection 129(1) of the Act) in respect of its taxation year in which it is deemed to pay the dividends referred to in (a)(i) above, DC will not be subject to Part IV tax in respect of such dividends, and
(ii) Transferee2 will, pursuant to paragraph 186(1)(b), be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which DC will become entitled for its taxation year in which the dividends referred to in (a)(ii) above, are paid, that the amount of such dividends received by Transferee2 is of the aggregate of all taxable dividends paid by DC in its taxation year in which such dividends are paid.
D. On the redemption by Transferee3 of the Series I Preferred Shares described in paragraph 42 above, and on the purchase for cancellation of the all of the DC shares owned by Transferee3, as described in paragraph 47 above:
(a) pursuant to paragraphs 84(3)(a) and 84(3)(b):
(i) Transferee3 will be deemed to have paid, and DC will be deemed to have received taxable dividends at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the Series I Preferred Shares exceeds the PUC of those shares immediately before the redemption;
(ii) DC will be deemed to have paid, and Transferee3 will be deemed to have received, taxable dividends at that time equal to the amount, if any, by which the amount paid in respect of the purchase for cancellation of all of the DC shares owned by Transferee3 exceeds the PUC of those shares immediately before the purchase;
(b) the taxable dividends deemed to have been received by each of DC and Transferee3 in (a) above will be:
(i) included in the recipient's income pursuant to section 82 and paragraph 12(1)(j);
(ii) deductible in computing the taxable income of the recipient for the year in which the dividends are deemed to have been received pursuant to subsection 112(1) and such deductions will not be denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4);
(c) the taxable deemed dividends referred to in (a) above will not be subject to tax under Part IV.1 of the Act on the basis that such dividends will be "excepted dividends" pursuant to subsection 187.1(c);
(d) the taxable deemed dividends referred to in (a)(i) above will not be subject to tax under Part VI.1 of the Act on the basis that such dividends will be deemed to be excluded dividends pursuant to subsection 191(4), but only to the extent that the amount paid to DC on the redemption of each Series I Preferred Share does not exceed the amount specified in respect of the share for the purposes of subsection 191(4);
(e) Transferee3 will be connected with DC and DC will be connected with Transferee3 pursuant to paragraph 186(4)(b) of the Act. Consequently:
(j) provided that Transferee3 is not entitled to a dividend refund (within the meaning of subsection 129(1) of the Act) in respect of its taxation year in which it is deemed to pay the dividends referred to in (a)(i) above, DC will not be subject to Part IV tax in respect of such dividends, and
(ii) Transferee3 will, pursuant to paragraph 186(1)(b), be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which DC will become entitled for its taxation year in which the dividends referred to in (a)(ii) above, are paid, that the amount of such dividends received by Transferee3 is of the aggregate of all taxable dividends paid by DC in its taxation year in which such dividends are paid.
E. On the redemption by Transferee4 of the Series I Preferred Shares described in paragraph 43 above, and on the purchase for cancellation of the all of the DC shares owned by Transferee4, as described in paragraph 48 above:
(a) pursuant to paragraphs 84(3)(a) and 84(3)(b):
(i) Transferee4 will be deemed to have paid, and DC will be deemed to have received taxable dividends at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the Series I Preferred Shares exceeds the PUC of those shares immediately before the redemption;
(ii) DC will be deemed to have paid, and Transferee4 will be deemed to have received, taxable dividends at that time equal to the amount, if any, by which the amount paid in respect of the purchase for cancellation of all of the DC shares owned by Transferee4 exceeds the PUC of those shares immediately before the purchase;
(b) the taxable dividends deemed to have been received by each of DC and Transferee4 in (a) above will be:
(i) included in the recipient's income pursuant to section 82 and paragraph 12(1)(j);
(ii) deductible in computing the taxable income of the recipient for the year in which the dividends are deemed to have been received pursuant to subsection 112(1) and such deductions will not be denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4);
(c) the taxable deemed dividends referred to in (a) above will not be subject to tax under Part IV.1 of the Act on the basis that such dividends will be "excepted dividends" pursuant to subsection 187.1(c);
(d) the taxable deemed dividends referred to in (a)(i) above will not be subject to tax under Part VI.1 of the Act on the basis that such dividends will be deemed to be excluded dividends pursuant to subsection 191(4), but only to the extent that the amount paid to DC on the redemption of each Series I Preferred Share does not exceed the amount specified in respect of the share for the purposes of subsection 191(4);
(e) Transferee4 will be connected with DC and DC will be connected with Transferee4 pursuant to paragraph 186(4)(b) of the Act. Consequently:
(i) provided that Transferee4 is not entitled to a dividend refund (within the meaning of subsection 129(1) of the Act) in respect of its taxation year in which it is deemed to pay the dividends referred to in (a)(i) above, DC will not be subject to Part IV tax in respect of such dividends; and
(ii) Transferee4 will, pursuant to paragraph 186(1)(b), be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which DC will become entitled for its taxation year in which the dividends referred to in (a)(ii) above, are paid, that the amount of such dividends received by Transferee4 is of the aggregate of all taxable dividends paid by DC in its taxation year in which such dividends are paid.
F. On the redemption by Transferee5 of the Series I Preferred Shares described in paragraph 44 above, and on the purchase for cancellation of the all of the DC shares owned by Transferee5, as described in paragraph 49 above:
(a) pursuant to paragraphs 84(3)(a) and 84(3)(b):
(i) Transferee5 will be deemed to have paid, and DC will be deemed to have received taxable dividends at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the Series I Preferred Shares exceeds the PUC of those shares immediately before the redemption;
(ii) DC will be deemed to have paid, and Transferee5 will be deemed to have received, taxable dividends at that time equal to the amount, if any, by which the amount paid in respect of the purchase for cancellation of all of the DC shares owned by Transferee5 exceeds the PUC of those shares immediately before the purchase;
(b) the taxable dividends deemed to have been received by each of DC and Transferee5 in (a) above will be:
(i) included in the recipient's income pursuant to section 82 and paragraph 12(1)(j);
(ii) deductible in computing the taxable income of the recipient for the year in which the dividends are deemed to have been received pursuant to subsection 112(1) and such deductions will not be denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4);
(c) the taxable deemed dividends referred to in (a) above will not be subject to tax under Part IV.1 of the Act on the basis that such dividends will be "excepted dividends" pursuant to subsection 187.1(c);
(d) the taxable deemed dividends referred to in (a)(i) above will not be subject to tax under Part VI.1 of the Act on the basis that such dividends will be deemed to be excluded dividends pursuant to subsection 191(4), but only to the extent that the amount paid to DC on the redemption of each Series I Preferred Share does not exceed the amount specified in respect of the share for the purposes of subsection 191(4);
(e) Transferee5 will be connected with DC and DC will be connected with Transferee5 pursuant to paragraph 186(4)(b) of the Act. Consequently:
(i) provided that Transferee5 is not entitled to a dividend refund (within the meaning of subsection 129(1) of the Act) in respect of its taxation year in which it is deemed to pay the dividends referred to in (a)(i) above, DC will not be subject to Part IV tax in respect of such dividends, and
(ii) Transferee5 will, pursuant to paragraph 186(1)(b), be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which DC will become entitled for its taxation year in which the dividends referred to in (a)(ii) above, are paid, that the amount of such dividends received by Transferee5 is of the aggregate of all taxable dividends paid by DC in its taxation year in which such dividends are paid.
G. The extinguishments of:
(a) the DC Note1, the DC Note2, the DC Note 3, the DC Note 4 and the DC Note 5 by DC; and
(b) the Series I Redemption Notes by Transferee1, Transferee2, Transferee3, Transferee4 and Transferee5,
as described in paragraphs 50 to 54 above, will not, in and of themselves, result in a forgiven amount within the meaning of either subsection 80(1) or section 80.01. In addition, DC, Transferee1, Transferee2, Transferee3, Transferee4 and Transferee5 will not otherwise realize any gain or incur any loss as a result of such extinguishments.
H. Provided that as part of the series of transactions or events that includes the proposed transactions, there is not:
(a) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(b) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(c) an acquisition of the capital stock in the circumstances described in subparagraph 55(3.1)(b)(iii);
(d) an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or
(e) an acquisition of property in the circumstances described in paragraph 55(3.1)(d),
which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling B, C, D, E and F above, and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
I. The provisions of subsections 15(1) and 56(2) will not apply as a result of the proposed transactions described herein, in and by themselves.
J. As a result of the proposed transactions described herein, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given.
The Rulings given are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
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 or other property 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.
You have informed us that the consideration given by Transferee1, Transferee2, Transferee3, Transferee4 and Transferee5 for the property of DC, as described in paragraph 30 to 34 above, will be subject to a price adjustment clause. Nothing in this letter should be construed as confirmation, express or implied, that any adjustment to the consideration given for the property of DC by Transferee1, Transferee2, Transferee3, Transferee4 and Transferee5 in paragraphs 30 to 34 above will be effective retroactively. Furthermore, the rulings in this letter are not intended to apply to the operation of a price adjustment clause, since its coming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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