2004 Ruling 2003-0050601R3 - Redemption of Shares

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: Characterization of amounts paid XXXXXXXXXX to purchase shares for cancellation XXXXXXXXXX .

Position: Amounts are to be included in calculation of amount paid to the shareholders under s. 84(3) with the exception of XXXXXXXXXX .

Reasons: Wording of provision. Under the particular circumstances, XXXXXXXXXX .

XXXXXXXXXX 2003-005060

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

We are writing in response to your letters of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. In this regard, we acknowledge your written submissions of XXXXXXXXXX made in connection with your request and our numerous telephone conversations with respect thereto (XXXXXXXXXX). You have advised us 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 the taxpayer or a related person;

(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(c) under objection by the taxpayer or a related person;

(d) the subject of a ruling previously issued by the Income Tax Rulings Directorate; or

(e) before the Courts (other than as described herein).

Our understanding of the facts, proposed transaction and the purpose of the proposed transaction is as follows:

DEFINITIONS

(a) "ACO" means XXXXXXXXXX;

(b) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(c) "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);

(d) XXXXXXXXXX;

(e) "CDA" means "capital dividend account" which has the meaning assigned by subsection 89 (1);

(f) "Common Shares" has the meaning referred to in paragraph 2;

(g) "First Preferred Shares" has the meaning referred to in paragraph 2;

(h) "Fourth Preferred Shares" has the meaning referred to in paragraph 2;

(i) "Individual A" means XXXXXXXXXX;

(j) "Individual B" means XXXXXXXXXX;

(k) "Individual C" means XXXXXXXXXX;

(l) "PUC" means "paid-up capital" which has the meaning assigned by subsection 89(1);

(m) "RDTOH" means "refundable dividend tax on hand" which has the meaning assigned by subsection 129(3);

(n) "Second Preferred Shares" has the meaning referred to in paragraph 2;

(o) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(p) "taxable dividend" has the meaning assigned by subsection 89(1); and

(q) "Third Preferred Shares" has the meaning referred to in paragraph 2.

All monetary references contained herein are to Canadian dollars.

FACTS

1. ACO was incorporated on XXXXXXXXXX, was later continued under the XXXXXXXXXX and is presently governed by that legislation. ACO is a taxable Canadian corporation and a Canadian-controlled private corporation. ACO was set up and organized XXXXXXXXXX. ACO owns marketable securities, term deposits and similar instruments.

2. The authorized share capital of ACO consists of an unlimited number of first preferred shares ("First Preferred Shares"), second preferred shares ("Second Preferred Shares"), third preferred shares ("Third Preferred Shares"), fourth preferred shares ("Fourth Preferred Shares") and common shares ("Common Shares"). Holders of First Preferred Shares, Second Preferred Shares and Third Preferred Shares are entitled to receive non-cumulative dividends at a rate of $XXXXXXXXXX per share per annum; such holders may redeem such shares at $XXXXXXXXXX per share. Holders of Fourth Preferred Shares are entitled to receive non-cumulative dividends at a rate of $XXXXXXXXXX per share per annum. Holders of Fourth Preferred Shares may redeem such shares at $XXXXXXXXXX per share. All holders of Common Shares and Fourth Preferred Shares have voting privileges at all times of XXXXXXXXXX votes per share. The holders of First and Second Preferred Shares are entitled to 1 vote per share as a consequence of amendments to the Articles of Incorporation of ACO in XXXXXXXXXX, which were made because dividends had not been paid on such classes of shares for XXXXXXXXXX consecutive years.

3. The issued and outstanding shares of ACO are owned by Individual A, Individual B and Individual C as follows:

Shareholder
Class of shares
Number of shares
Individual A
First Preferred
XXXXXXXXXX
Individual A
Second Preferred
XXXXXXXXXX
Individual A
Third Preferred
XXXXXXXXXX
Individual A
Fourth Preferred
XXXXXXXXXX
Individual A
Common
XXXXXXXXXX

Individual B
Third Preferred
XXXXXXXXXX
Individual B
Fourth Preferred
XXXXXXXXXX
Individual B
Common
XXXXXXXXXX

Individual C
Third Preferred
XXXXXXXXXX
Individual C
Fourth Preferred
XXXXXXXXXX
Individual C
Common
XXXXXXXXXX

4. Individual A, Individual B and Individual C are residents of Canada for purposes of the Act. XXXXXXXXXX .

5. The aggregate PUC of the various classes of shares is as follows:

Class of shares
Number of shares
Aggregate PUC of Class
First Preferred
XXXXXXXXXX
XXXXXXXXXX
Second Preferred
XXXXXXXXXX
XXXXXXXXXX
Third Preferred
XXXXXXXXXX
XXXXXXXXXX
Fourth Preferred
XXXXXXXXXX
XXXXXXXXXX
Common Shares
XXXXXXXXXX
XXXXXXXXXX

6. The assets and liabilities of ACO as at XXXXXXXXXX were as described in the financial statements of ACO for the period ending XXXXXXXXXX.

7. As at XXXXXXXXXX ACO had a balance in its RDTOH account of $XXXXXXXXXX.

8. XXXXXXXXXX.

9. XXXXXXXXXX.

10. On XXXXXXXXXX, ACO paid a dividend to Individual A, Individual B and Individual C in the amount of $XXXXXXXXXX, and elected in respect of the full amount of the dividend to be a capital dividend pursuant to subsection 83(2) to the extent of ACO's CDA immediately before that time, thereby reducing ACO's CDA by the full amount of the dividend.

11. XXXXXXXXXX.

12. XXXXXXXXXX.

13. XXXXXXXXXX.

14. XXXXXXXXXX

15. XXXXXXXXXX.

PROPOSED TRANSACTION

16. As a consequence of the foregoing, ACO will purchase the Common Shares held by Individual B and Individual C pursuant to the XXXXXXXXXX. ACO will, XXXXXXXXXX, make payments to Individual B and Individual C in consideration for the purchase for cancellation of the Common Shares of ACO held by Individual B and Individual C.

PURPOSE OF THE PROPOSED TRANSACTION

The purpose of the proposed transactions is to XXXXXXXXXX.

RULINGS GIVEN

A. The provisions of subsection 84(3) will apply to the purchase for cancellation by ACO of the Common Shares held by Individual B and Individual C, as described in paragraph 16 above.

B. In applying paragraph 84(3)(a) to ACO, the amount paid by ACO on the purchase for cancellation of the Common Shares held by Individual B and Individual C described in paragraph 16 above will be the total amount paid to Individual B and Individual C XXXXXXXXXX by ACO XXXXXXXXXX will be amounts paid on the purchase for cancellation of the Common Shares of ACO pursuant to that provision.

C. The dividend that ACO is deemed to have paid to Individual B and Individual C pursuant to paragraph 84(3)(a) of the Act on the purchase for cancellation of the Common Shares will be a taxable dividend provided that ACO has not elected in accordance with subsection 83(2) with respect to the dividend.

D. Provided that ACO has not elected in accordance with subsection 83(2) with respect to the dividend that ACO is deemed to have paid to Individual B and Individual C pursuant to paragraph 84(3)(a) on the purchase for cancellation of the Common Shares, the amount of such dividend will be included in "all taxable dividends paid by the corporation on shares of its capital stock in the year" for purposes of the dividend refund under subparagraph 129(1)(a)(i), such that ACO will be entitled to a dividend refund equal to the lesser of one-third of all taxable dividends paid by it while it is a private corporation on shares of its capital stock in the taxation year in which the dividend is deemed to be paid, and its RDTOH at the end of such taxation year.

E. Subsection 245(2) will not apply to the proposed transaction, in and by itself, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the Canada Customs and Revenue Agency on May 17, 2002 and are binding provided that the proposed transactions are completed before XXXXXXXXXX. The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this ruling should be construed as implying that the Canada Revenue Agency has reviewed, accepted or otherwise agreed to:

(a) the determination of the paid-up capital of any share or class of shares or the CDA or RDTOH of the corporation referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above, and, in this regard, while it is our view that XXXXXXXXXX.

Yours truly,

for Division Director
Resources and Reorganizations Division
Income Tax Rulings Directorate
Policy and Legislation Branch