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.
Principal Issues: Application of the exception from subsection 55(2) provided by paragraph 55(3)(a).
Position: Favourable Rulings given.
Reasons: The law.
XXXXXXXXXX 2003-004791
XXXXXXXXXX, 2004
Re: XXXXXXXXXX ("Holdco"), et al.
Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX, as amended by your other correspondence, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. You have advised us that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request are:
(i) in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office ("TSO") or taxation centre ("TC") in connection with a previously filed tax return of the taxpayers or a related person;
(iii) under objection by the taxpayers or a related person;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
The taxpayers have also represented that the proposed transactions described herein will not result in any taxpayer described herein being unable to pay its existing outstanding tax liabilities.
DEFINITIONS
In this letter all monetary amounts are expressed in Canadian dollars and the following terms have the meanings specified:
(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act, and the Income Tax Regulations thereunder are referred to as the "Regulations";
(b) "adjusted cost base" has the meaning assigned by section 54;
(c) "agreed amount" in respect of a property means the amount that the transferor and transferee of the property have agreed upon in an election under subsection 85(1);
(d) "BCA" means the XXXXXXXXXX Company Act, and, where applicable, its predecessor statutes;
(e) "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);
(f) "capital property" has the meaning assigned by section 54;
(g) "CBCA" mean the Canada Business Corporations Act, as amended;
(h) "cost amount" has the meaning assigned by subsection 248(1);
(i) "CRA" means the Canada Revenue Agency;
(j) "depreciable property" has the meaning assigned by subsection 13(21);
(k) "eligible property" has the meaning assigned by subsection 85(1.1);
(l) "fair market value" means the highest price available in an open and unrestricted market between informed, prudent parties acting at arm's length and under no compulsion to act;
(m) "Holdco" means XXXXXXXXXX;
(n) "Individual A" means XXXXXXXXXX;
(o) "Leasing" means XXXXXXXXX;
(p) XXXXXXXXXX;
(q) "Opco 1" means XXXXXXXXXX;
(r) "Opco 1 Assets" means XXXXXXXXXX inventory that are depreciable property of a prescribed class;
(s) "Opco 2" means XXXXXXXXXX;
(t) "Opco 3" means XXXXXXXXXX;
(u) "Opco 4" means XXXXXXXXXX;
(v) "paid-up capital" has the meaning assigned by subsection 89(1);
(w) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;
(x) "proceeds of disposition" has the meaning assigned to that term by section 54; and
(y) "Proposed Transactions" means the transactions described in Paragraphs 13 to 27;
(z) "series of transactions or events" includes the related transactions or events referred to in subsection 248(10); and
(aa) "taxable dividend" has the meaning assigned by subsection 89(1);
FACTS
1. Individual A is a Canadian resident individual for income tax purposes. Individual A owns XXXXXXXXXX% of the issued and outstanding shares of Holdco and Opco 4 as capital property.
2 Holdco owns all the issued and outstanding shares of Opco 1, Opco 2, and Opco 3 as capital property. Holdco also owns XXXXXXXXXX% of the issued and outstanding shares of Leasing, as described in Paragraph 10 below, as capital property.
3. Holdco, Opco 1, Opco 2, and Opco 3 are each corporations subsisting under the laws of XXXXXXXXXX. Opco 4 is a corporation subsisting under the laws of XXXXXXXXXX. Each of Holdco, Opco 1, Opco 2, and Opco 3 and Opco 4 (collectively referred to as the "Opco Group") are Canadian-controlled private corporations, each having a fiscal year-end of XXXXXXXXXX. Each of the above corporations deals with the XXXXXXXXXX TSO and files its respective corporate income tax returns at the XXXXXXXXXX TC.
4. The corporations included in the Opco Group are in the XXXXXXXXXX business. Specifically, Holdco is a holding corporation for the Opco Group and Holdco also owns a significant share investment in XXXXXXXXXX as well as having other portfolio investments. Opco 1 runs an XXXXXXXXXX businessXXXXXXXXXX. Opco 2 provides XXXXXXXXXX to other corporations in the Opco Group and to third parties while Opco 3's major business activity is XXXXXXXXXX. Opco 4 provides XXXXXXXXXX to other corporations in the Opco Group.
5. The authorized share capital of Opco 1 consist of six classes of shares, as follows:
? XXXXXXXXXX Class A voting, common shares with a par value of $XXXXXXXXXX each;
? XXXXXXXXXX Class B non-voting, redeemable, retractable preferred shares with no par value, redeemable at $XXXXXXXXXX each;
? XXXXXXXXXX Class C non-voting, redeemable, retractable preferred shares with a par value of $XXXXXXXXXX each;
? XXXXXXXXXX Class D non-voting, redeemable, retractable preferred shares with a par value of $XXXXXXXXXX per share, redeemable at $XXXXXXXXXX each;
? XXXXXXXXXX Class E non-voting, redeemable, retractable, preferred shares with no par value, redeemable at $XXXXXXXXXX each; and
? XXXXXXXXXX Class F non-voting, redeemable, retractable, preferred shares with a par value of $XXXXXXXXXX per share, redeemable at their par value.
The issued and outstanding shares of Opco 1 consist of: XXXXXXXXXX Class A shares that have an aggregate paid-up capital of $XXXXXXXXXX; XXXXXXXXXX Class E shares that have an aggregate paid-up capital of $XXXXXXXXXX; and XXXXXXXXXX Class F shares that have an aggregate paid-up capital of $XXXXXXXXXX. As noted above, all the issued and outstanding shares of each class of Opco 1 are owned by Holdco and have an aggregate adjusted cost base to Holdco of $XXXXXXXXXX, $XXXXXXXXXX and $XXXXXXXXXX, respectively.
6. The authorized share capital of Opco 4 consists of one class of an unlimited number of voting common shares. Currently, only XXXXXXXXXX common shares of Opco 4 are issued and outstanding having an aggregate paid-up capital of $XXXXXXXXXX. As noted above, the XXXXXXXXXX common shares of Opco 4 are owned by Individual A and have an aggregate adjusted cost base of $XXXXXXXXXX.
7. The authorized share capital of Holdco consists of one class of voting common shares and one class of non-voting, redeemable, retractable preferred shares, with a par value of $XXXXXXXXXX per share. Currently, only XXXXXXXXXX common shares of Holdco are issued and outstanding having an aggregate paid-up capital of $XXXXXXXXXX. As noted above, the XXXXXXXXXX common shares of Holdco are owned by Individual A and have an aggregate adjusted cost base of $XXXXXXXXXX.
8. Individual A is owed a substantial amount of money by corporations included in the Opco Group. In addition, there are various inter-corporate loans between the corporations included in the Opco Group.
Transactions Implemented Prior to the Proposed Transactions
9. Leasing was incorporated in XXXXXXXXXX under the laws of Canada and is a Canadian-controlled private corporation. Leasing was created for the purpose of owning the Opco 1 Assets for creditor protection purposes. It is expected that Leasing will choose XXXXXXXXXX to be its normal fiscal period and as such its first taxation year would end on XXXXXXXXXX.
The authorized share capital of Leasing consists of seven classes of shares as follows:
? XXXXXXXXXX Class A voting, non-participating common shares without par value;
? XXXXXXXXXX Class B non-voting, fully-participating common shares without par value;
? XXXXXXXXXX Class C non-voting, common shares without par value;
? XXXXXXXXXX Class D non-voting, common shares without par value;
? XXXXXXXXXX Class E non-voting, redeemable, retractable preferred shares without par value;
? XXXXXXXXXX Class F non-voting, redeemable, retractable preferred shares without par value; and
? XXXXXXXXXX Class G non-voting, redeemable, retractable preferred shares without par value.
The Class A common shares of Leasing have a limited liquidation entitlement and have no dividend entitlement. The Class B, C and D common shares of Leasing are not restricted as to dividends and share equally in the residual assets of Leasing on liquidation, after redeeming the preferred shares.
The respective redemption amount for each of the Class E, F, and G preferred shares will be determined by the directors at the time such shares are issued and will be based on the fair market value of the property acquired by Leasing less any non-share consideration paid by Leasing at that time. Further, the respective redemption amount for each of the Class E, F, and G preferred shares will be subject to a price adjustment clause.
The issued and outstanding shares of Leasing consist of 1 Class A share issued to Holdco for $XXXXXXXXXX.
Transactions to be Implemented Prior to the Proposed Transactions
10. A family trust ("the Growth Share Family Trust") will be created with the following key elements:
? The Growth Share Family Trust will be irrevocable.
? The Growth Share Family Trust will be settled with a nominal gift made by a family member or a personal friend of Individual A who will not participate in the Trust.
? The initial Trustees of the Growth Share Family Trust will be Individual A and XXXXXXXXXX personal friends of Individual A.
? The beneficiaries of the Growth Share Family Trust will be Individual A's spouse, XXXXXXXXXX, and their XXXXXXXXXX children. It is anticipated that the terms of the Growth Share Family Trust will allow for the addition and removal of beneficiaries.
? If Individual A has no living issue or spouse on the date of distribution, then the Trustees are to distribute the trust property to Individual A's personal representative to be administered as part of his estate.
? The terms of the Growth Share Family Trust will contain the restrictions described in subsection 74.4(4).
The Growth Share Family Trust will hold the "New Holdco Growth Shares" (i.e. the new participating shares) to be issued by Holdco as described in Paragraph 25 below.
11. A second family trust, ("the Voting Share Family Trust"), will be created with the following key elements:
? The Voting Share Family Trust will be irrevocable.
? The Voting Share Family Trust will be settled with a nominal gift made by a family member or a personal friend of Individual A who will not participate in the Trust.
? The only Trustee of the Voting Share Family Trust will be Individual A during his lifetime.
? The beneficiaries of the Voting Share Family Trust will be Individual A's spouse and their XXXXXXXXXX children. It is anticipated that the terms of the Voting Share Family Trust will allow for the addition and removal of beneficiaries.
? If Individual A has no living issue or spouse on the date of distribution, then the Trustees are to distribute the trust property to Individual A's personal representative to be administered as part of his estate.
? The terms of the of the Voting Share Family Trust will contain the restrictions described in subsection 74.4(4).
The Voting Share Family Trust will hold the "New Holdco Voting Shares" to be issued by Holdco as described in Paragraph 25 below.
12. Each of the beneficiaries of the above mentioned trusts and the XXXXXXXXXX personal friends of Individual A who are trustees of the Growth Share Family Trust are resident in Canada. At this time only one of Individual A's children is a minor.
PROPOSED TRANSACTIONS
The following transactions will occur in the following order unless otherwise indicated.
13. Holdco will subscribe for 1 Class B common share in Leasing for a nominal amount.
14. Opco 1 will transfer the Opco 1 Assets to Leasing for their respective fair market value. As sole consideration therefor, Leasing will issue XXXXXXXXXX Class C shares to Opco 1 having an aggregate fair market value equal to the aggregate fair market value of the Opco 1 Assets. Opco 1 and Leasing will jointly elect in prescribed form, within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each such transfer where the particular asset included in the Opco 1 Assets so transferred is an eligible property. The agreed amount in respect of each such transfer will be equal to the cost amount of the particular asset so transferred, and for greater certainty, in each case such elected amount will not exceed the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii).
For the purposes of the joint election described herein, the reference to the undepreciated capital cost to Opco 1 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 Opco 1 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.
The amount Leasing will add to the stated capital account maintained for the XXXXXXXXXX Class C shares under the CBCA will be equal the aggregate fair market value of the Opco 1 Assets Leasing received from Opco 1.
Leasing will enter into a lease agreement with Opco 1 such that Leasing will lease the Opco 1 Assets back to Opco 1 on fair market value terms.
15. Leasing will purchase for cancellation its XXXXXXXXXX Class C shares owned by Opco 1 for a purchase price equal to the aggregate fair market value of such shares. As consideration therefor, Leasing will issue to Opco 1 a demand non-interest bearing promissory note (the "Leasing Note") with a principal amount and fair market value equal to the purchase price of the XXXXXXXXXX Class C shares. Opco 1 will accept the Leasing Note as payment in full for the purchase price of the XXXXXXXXXX Class C shares.
16. The share capital of Opco 1 will be reorganized to add two new classes of shares to its authorized share capital. The first new class of shares will be XXXXXXXXXX voting, fully participating common shares (the "New Opco 1 Common Shares"). The New Opco 1 Common Shares will have a par value of $XXXXXXXXXX per share. The second new class of shares will be XXXXXXXXXX non-voting, redeemable, retractable preferred shares (the "New Opco 1 Preferred Shares"). The New Opco 1 Preferred Shares will have a par value of $XXXXXXXXXX per share and an aggregate redemption amount equal to the fair market value of the Leasing Note issued to Opco 1 as described in Paragraph 15.
17. As part of a reorganization of the capital of Opco 1, Holdco will transfer to Opco 1 its XXXXXXXXXX Class A shares of Opco 1 for consideration consisting of XXXXXXXXXX New Opco 1 Common Shares and XXXXXXXXXX New Opco 1 Preferred Shares having an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX Class A shares of Opco 1. For greater certainty, the XXXXXXXXXX Class A shares of Opco 1 will have an aggregate fair market value immediately before such transfer at least equal to the fair market value of the Leasing Note. The XXXXXXXXXX Class A shares of Opco 1 will be cancelled by Opco 1.
The amount Opco 1 will add to the stated capital account maintained for the XXXXXXXXXX New Opco 1 Preferred Shares under the BCA will equal the par value of such shares, being $XXXXXXXXXX in the aggregate. The amount Opco 1 will add to the stated capital account maintained for the XXXXXXXXXX New Opco 1 Common Shares under the BCA will equal the par value of such shares, being $XXXXXXXXXX in the aggregate. For greater certainty, the sum of the amounts added to the respective stated capital accounts maintained for the XXXXXXXXXX New Opco 1 Preferred Shares and XXXXXXXXXX New Opco 1 Common Shares will not exceed the aggregate paid-up capital of the XXXXXXXXXX Class A shares of Opco 1.
18. Holdco will transfer the XXXXXXXXXX New Opco 1 Preferred Shares to Leasing. As sole consideration therefor, Leasing will issue XXXXXXXXXX Class E Shares to Holdco having an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX New Opco 1 Preferred Shares. Holdco and Leasing will jointly elect in prescribed form, within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to such transfer. The agreed amount will be equal to the adjusted cost base of the XXXXXXXXXX New Opco 1 Preferred Shares so transferred, consistent with the limitations set out in subsection 85(1) and for greater certainty, the agreed amount will not be less than the lesser of the two amounts referred to in paragraph 85(1)(c.1).
The amount Leasing will add to the stated capital account maintained for the XXXXXXXXXX Class E Shares under the CBCA will equal the aggregate fair market value of the XXXXXXXXXX New Opco 1 Preferred Shares it received from Holdco as described above.
19. Opco 1 will redeem the XXXXXXXXXX New Opco 1 Preferred Shares owned by Leasing for their fair market value which will equal the redemption amount of such shares. As consideration therefor, Opco 1 will issue to Leasing a demand non-interest bearing promissory note (the "Opco 1 Note") with a principal amount and fair market value equal to the redemption amount. Leasing will accept the Opco 1 Note as payment in full for the redemption amount.
20. The principal amount owing by Leasing to Opco 1 on the Leasing Note and the principal amount owing by Opco 1 to Leasing under the Opco 1 Note will then be will be set-off against each other and cancelled in full satisfaction of the obligations under each such note.
21. Leasing will redeem the XXXXXXXXXX Leasing Class E shares owned by Holdco for their fair market value. As consideration therefor, Leasing will issue Holdco a demand non-interest bearing promissory note with a principal amount and fair market value equal to the redemption amount of the XXXXXXXXXX Leasing Class E shares so redeemed. Holdco will lend any proceeds it may receive from Leasing in respect of a repayment of such promissory note, as needed, back to Leasing under a secured loan agreement registered under the appropriate provincial legislation.
22. The share capital of Holdco will be amended to add several new classes (each class consisting of XXXXXXXXXX shares) of non-voting, redeemable, retractable preferred shares including a class of such shares referred to as the "New Holdco Preferred Shares 1" and a class of such shares referred to as the "New Holdco Preferred Shares 2". The New Holdco Preferred Shares 1 and New Holdco Preferred Shares 2 will each have a par value of $XXXXXXXXXX per share and will each have a redemption amount equal to the fair market value of the consideration received by Holdco for the issue of such shares and will contain a price adjustment clause. In addition, the share capital of Holdco will be amended to add several new classes of common shares including a class of such shares referred to as the "New Holdco Growth Shares" and a class of such shares referred to as the "New Holdco Voting Shares". The New Holdco Growth Shares will consist of XXXXXXXXXX non-voting, fully participating common shares and will have a par value of $XXXXXXXXXX per share. The New Holdco Voting Shares will consist of XXXXXXXXXX voting, non-participating common shares and will have a par value of $XXXXXXXXXX per share.
23. Individual A will transfer his XXXXXXXXXX issued and outstanding common shares of Opco 4 to Holdco in exchange for XXXXXXXXXX New Holdco Preferred Shares 1 having an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX common shares of Opco 4 so transferred. The purpose of this transfer is to make Opco 4 a wholly-owned subsidiary of Holdco. Individual A and Holdco will jointly elect in prescribed form, within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to such transfer. The agreed amount will be equal to the adjusted cost base of the XXXXXXXXXX common shares of Opco 4 so transferred, consistent with the limitations set out in subsection 85(1). For greater certainty, the XXXXXXXXXX common shares of Opco 4 will have an aggregate fair market value immediately before such transfer at least equal to their aggregate adjusted cost base at that time.
The amount that Holdco will add to the stated capital account of the XXXXXXXXXX New Holdco Preferred Shares 1 under the BCA will equal the aggregate par value of such shares being, $XXXXXXXXXX. For greater certainty, the addition to the stated capital account of the XXXXXXXXXX New Holdco Preferred Shares 1 under the BCA will not exceed the paid-up capital of the XXXXXXXXXX Opco 4 common shares Holdco received from Individual A as described above.
24. As part of a reorganization of the capital of Holdco, Individual A will transfer his XXXXXXXXXX common shares of Holdco for XXXXXXXXXX New Holdco Preferred Shares 2 having an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX common shares of Holdco, 1 New Holdco Voting Share and 1 New Holdco Growth Share each having a nominal fair market value. The XXXXXXXXXX common shares of Holdco will be cancelled.
The amount that Holdco will add to the stated capital account maintained for the XXXXXXXXXX New Holdco Preferred Shares 2 under the BCA will equal the aggregate par value of such shares being, $XXXXXXXXXX. The amount that Holdco will add to the respective stated capital account maintained for the 1 New Holdco Voting Share and the 1 New Holdco Growth Share under the BCA will equal the aggregate par value of such class of shares being, $XXXXXXXXXX each. For greater certainty, the sum of these stated capital account additions, being $XXXXXXXXXX, will not exceed the paid-up capital of the XXXXXXXXXX common shares of Holdco received from Individual A as described above.
25. Immediately after the share exchange described in Paragraph 24, the Growth Share Family Trust will subscribe for XXXXXXXXXX New Holdco Growth Shares of Holdco at their par value. Following that share subscription, the Voting Share Family Trust will subscribe for XXXXXXXXXX New Holdco Voting Shares of Holdco at their par value of $XXXXXXXXXX per share. Following these share subscriptions, Holdco will then repurchase for cancellation the 1 New Holdco Voting Share and 1 New Holdco Growth Share issued to Individual A, as described in Paragraph 24 above, for each share's par value of $XXXXXXXXXX, which for greater certainty, will equal the fair market value of each such share.
26. Individual A, Holdco and Leasing, as the case may be, will take the necessary steps to secure any shareholder loan and/or inter-corporate loan such person may have advanced to another member of the Opco Group by registering the appropriate security agreements under the appropriate provincial legislation.
27. Opco 1 and Opco 2 will declare dividends to Holdco of $XXXXXXXXXX and $XXXXXXXXXX, respectively, to be paid in cash and/or by issuance of a demand promissory note by the particular dividend payer. Holdco will lend any cash proceeds it may receive from such dividends back to the particular dividend payer on an as needed basis under a secured loan agreement registered under the appropriate provincial legislation.
28. There have been no significant transactions, other than those described above, that have been completed prior to the date of this letter nor are there any other significant transactions, proposed or contemplated, other than those described above, that will take place as part of the series of transactions or events that includes the Proposed Transactions. Except as described in this letter, there is no intention by any shareholder of any of the corporations referred to herein to dispose of any shares of such corporation.
29. None of the corporations referred to in this letter is or will be, at any time during the series of transactions herein described, a "specified financial institution" or a "restricted financial institution" as those terms are defined in subsection 248(1).
30. There will not be at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions).
31. None of the corporations referred to in this letter will have entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions).
32. None of the issued shares referred to in this letter (including the shares to be issued as described in the Proposed Transactions) will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).
33. None of the corporations referred to in this letter is or will be, at any time before the completion of the Proposed Transactions described above, a corporation described in any of paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1).
PURPOSE OF THE PROPOSED TRANSACTIONS
34. The purpose of the Proposed Transactions is to reorganize the business structure of the Opco Group to provide a level of creditor protection given the risky nature of the business carried on by certain members of the Opco Group. A secondary objective includes estate planning for Individual A. The purpose of using the Voting Share Family Trust to hold the New Holdco Voting Shares and the Growth Share Family Trust to hold the New Holdco Growth Shares is to provide better creditor proofing protection and protection against any possible future matrimonial claims by the spouse of any of Individual A's children while allowing Individual A to continue to control the Opco Group without the interference of any other trustees during Individual A's lifetime. The purpose for issuing the 1 New Holdco Voting Share and 1 New Holdco Growth Share to Individual A on the reorganization of capital of Holdco , as described in Paragraph 24, and then having Holdco repurchase such shares after the share subscriptions described in Paragraph 25 is to ensure that Holdco will always have at least 1 voting share and 1 participating share issued and outstanding at all times. The purpose of the dividends described in Paragraph 27 is to secure cash used in the Opco Group operations by way of secured inter-company loans.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.
A. Provided that the each respective transferor and transferee jointly file an election pursuant to subsection 85(1) in the prescribed form and manner and within the time specified in subsection 85(6), the provisions of subsection 85(1), other than paragraph 85(1)(e.2), will apply to:
(a) the transfer of the Opco 1 Assets to Leasing by Opco 1, as described in Paragraph 14, such that the agreed amount in respect of each such property will be deemed to be Opco 1's proceeds of disposition and Leasing's cost of such property pursuant to section 85;
(b) the transfer of the XXXXXXXXXX New Opco 1 Preferred Shares to Leasing by Holdco, as described in Paragraph 18, such that the agreed amount in respect of such shares will be deemed to be Opco 1's proceeds of disposition and Leasing's cost of the property pursuant to section 85;
(c) the transfer of the XXXXXXXXXX common shares of Opco 4 to Holdco by Individual A, as described in Paragraph 23, such that the agreed amount in respect of such shares will be deemed to be Individual A's proceeds of disposition and Holdco's cost of the property pursuant to section 85.
For greater certainty, in respect of the each of the transfers described in (a) and (b) above, subsection 85(2.1) will apply to reduce the paid-up capital of any new shares issued by the particular transferee corporation on such transfer, and in respect of the share transfer described in (c) above paragraph 84.1(a) will apply to reduce the paid-up capital of the shares issued by Holdco on such transfer. In addition, for greater certainty, neither section 84 nor paragraph 84.1(b), as the case may be, will apply to cause any deemed dividend to arise solely as a result of any share transfer described above.
B. The provisions of subsection 84(3) will apply to:
(a) the purchase for cancellation of the XXXXXXXXXX Class C shares owned by Opco 1 as described in Paragraph 15 such that Leasing will be deemed to have paid and Opco 1 will be deemed to have received a dividend at that time on such shares equal to the amount, if any, by which the amount paid on the redemption exceeds the paid-up capital of such shares immediately before the purchase.
(b) the redemption of the XXXXXXXXXX New Opco 1 Preferred Shares owned by Leasing as described in Paragraph 19 such that Opco 1 will be deemed to have paid and Leasing will be deemed to have received a dividend at that time on such shares equal to the amount, if any, by which the amount paid on the redemption exceeds the paid-up capital of such shares immediately before the redemption.
(c) the redemption of the XXXXXXXXXX Leasing Class E shares owned by Holdco as described in Paragraph 21 such that Leasing will be deemed to have paid and Holdco will be deemed to have received a dividend at that time on such shares equal to the amount, if any, by which the amount paid on the redemption exceeds the paid-up capital of such shares immediately before the redemption.
C. To the extent that the dividends referred to in Ruling B above, and the dividends paid by Opco 1 and Opco 2, as the case may be, as described in Paragraph 27, are taxable dividends that will be included in computing the particular recipient corporation's income pursuant to paragraph 12(1)(j) such dividends will:
(a) be deductible by the respective recipient corporation in calculating their taxable income pursuant to subsection 112(1) and for greater certainty such deduction will not be prohibited by any of subsections 112(2.2), (2.3), and (2.4);
(b) be excluded from the determination of proceeds of disposition of the shares redeemed or purchased for cancellation pursuant to paragraph 54(j);
(c) not be subject to tax under subsection 186(1), except to the extent that the payer corporation is entitled to a "dividend refund" (within the meaning of subsection 129(1)) for its taxation year in which it paid such dividend; and
(d) not be subject to tax under Part IV.1 and Part VI.1 because each dividend will be an "excepted dividend" (within the meaning of section 187.1) and an "excluded dividend" (within the meaning of subsection 191(1)).
D. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends referred to in ruling C above, provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events that includes the Proposed Transactions described herein. For greater certainty, the Proposed Transactions described herein, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).
E. The set-off of the Leasing Note with the Opco 1 Note as described in Paragraph 20 will not give rise to a "forgiven amount" and the provisions of subsections 80(2) nor 80.01(2) will not apply to the set-off.
F. Provided that the conditions of subsection 74.4(4) are met the Proposed Transactions will not, in and by themselves, be considered to benefit, either directly or indirectly, a designated person for the purposes of subsection 74.4(2).
G. The provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the share exchange:
(a) by Holdco of its XXXXXXXXXX Class A shares of Opco 1 for XXXXXXXXXX New Opco 1 Common Shares and XXXXXXXXXX New Opco 1 Preferred Shares described in Paragraph 17 above; and
(b) by Individual A of his XXXXXXXXXX common shares of Holdco for XXXXXXXXXX New Holdco Preferred Shares 2, 1 New Holdco Voting Share and 1 New Holdco Growth Share as described in Paragraph 24 above;
such that:
(c) the aggregate cost to Holdco of the XXXXXXXXXX New Opco 1 Common Shares and XXXXXXXXXX New Opco 1 Preferred Shares received on the share exchange described in (a) above shall be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the aggregate ACB to Holdco, immediately before the share exchange, of the XXXXXXXXXX Class A shares, that
(i) the FMV, immediately after the share exchange, of the XXXXXXXXXX New Opco 1 Common Shares and XXXXXXXXXX New Opco 1 Preferred Shares, as the case may be,
is of
(ii) the FMV, immediately after the share exchange, of all the shares of Opco 1 received by Holdco for the XXXXXXXXXX Class A shares;
(d) pursuant to paragraph 86(1)(c), Holdco shall be deemed to have disposed of the XXXXXXXXXX Class A shares for aggregate proceeds of disposition equal to the aggregate cost to Holdco of the XXXXXXXXXX New Opco 1 Common Shares and XXXXXXXXXX New Opco 1 Preferred Shares determined in (c) above;
(e) the aggregate cost to Individual A of the XXXXXXXXXX New Holdco Preferred Shares 2, 1 New Holdco Voting Share and 1 New Holdco Growth Share received on the share exchange described in (b) above shall be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the aggregate ACB to Individual A, immediately before the share exchange, of the XXXXXXXXXX common shares of Holdco, that
(i) the FMV, immediately after the share exchange, of the XXXXXXXXXX New Holdco Preferred Shares 2, 1 New Holdco Voting Share and 1 New Holdco Growth Share, as the case may be,
is of
(ii) the FMV, immediately after the share exchange, of all the shares of Holdco received by Individual A for the XXXXXXXXXX common shares of Holdco;
(f) pursuant to paragraph 86(1)(c), Individual A shall be deemed to have disposed of the XXXXXXXXXX common shares of Holdco for aggregate proceeds of disposition equal to the aggregate cost to Individual A of the XXXXXXXXXX New Holdco Preferred Shares 2, 1 New Holdco Voting Share and 1 New Holdco Growth Share determined in (e) above; and
(g) subsection 86(2.1) will apply to reduce the paid-up capital of the XXXXXXXXXX New Opco 1 Common Shares and XXXXXXXXXX New Opco 1 Preferred Shares acquired by Holdco described in (a) and the XXXXXXXXXX New Holdco Preferred Shares 2 acquired by Individual A described in (b).
H. The provisions of subsection 15(1), 56(2), 56(4) and 246(1) will not apply to any of the Proposed Transactions, in and by themselves.
I. Subsection 245(2) will not apply to any of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
The above rulings are given subject to the limitations and qualifications set out in IC 70-6R5 and are binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX. These rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:
(a) the paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;
(b) the amount of any non-capital loss or any other amount of any person referred to herein; or
(c) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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