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: Standard butterfly. Minor issue regarding previous amalgamation
XXXXXXXXXX
2004-007013
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling Request
We are writing in response to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in subsequent correspondence and various telephone conversations. 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 taxpayers or related persons;
(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 related persons;
(iii) under objection by the taxpayers or related persons;
(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.
DEFINITIONS
In this letter 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" ("ACB") has the meaning assigned by section 54 and subsection 248(1);
(c) "agreed amount" has the meaning assigned by subsection 85(1);
(d) "BCA" means the Business Corporations Act (XXXXXXXXXX);
(e) "Canadian-controlled private corporation"("CCPC") has the meaning assigned by subsection 125(7);
(f) "capital dividend account" ("CDA") has the meaning assigned by subsection 89(1);
(g) "capital property" has the meaning assigned by section 54;
(h) "cost amount" has the meaning assigned by subsection 248(1);
(i) "depreciable property" has the meaning assigned by subsection 13(21);
(j) "disposition" has the meaning assigned by subsection 248(1);
(k) "distribution" has the meaning assigned by subsection 55(1);
(l) "dividend refund" has the meaning assigned by subsection 129(1);
(m) "eligible capital property" has the meaning assigned by section 54;
(n) "eligible property" has the meaning assigned by subsection 85(1.1);
(o) "fair market value" ("FMV") 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, expressed in terms of cash;
(p) "paid-up capital" ("PUC") has the meaning assigned by subsection 89(1);
(q) "private corporation" has the meaning assigned by subsection 89(1);
(r) "proceeds of disposition" has the meaning assigned by section 54;
(s) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);
(t) "related persons" has the meaning assigned by section 251
(u) "restricted financial institution" has the meaning assigned by subsection 248(1);
(v) "series of transactions or events" includes the related transactions or events referred to in subsection 248(10);
(w) "short-term preferred share" has the meaning assigned by subsection 248(1);
(x) "significant influence" has the meaning assigned by section 3050 of the CICA Handbook;
(y) "specified financial institution" ("SFI") has the meaning assigned by 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);
(bb) "taxable dividend" has the meaning assigned by subsection 89(1);
(cc) "taxable preferred share" has the meaning assigned by subsection 248(1); and
(dd) "TrustA" is XXXXXXXXXX which is a trust for the benefit of A and all of the issue of A.
FACTS
1. A,B,C,D, and E are each older than 17 years of age and are residents of Canada. A and B are brothers. D and E are married to each other. C is not related to any of A, B, D, or E. A and B are not related to D or E.
2. DC is a CCPC and a taxable Canadian corporation. DC was incorporated under the laws of Ontario. The head office of DC is located at XXXXXXXXXX. It files its income tax returns in the XXXXXXXXXX TC and deals with the XXXXXXXXXX TSO.
3. DC carries on the business of operating XXXXXXXXXX in several locations. The assets of DC, all of which are used in its active business, include cash, and near cash, accounts receivable, prepaid expenses, XXXXXXXXXX equipment, leases for equipment, computer equipment, premises leases, leasehold improvements, goodwill and licenses. Each of A, B, C, and D are responsible for the operations of particular XXXXXXXXXX.
4. DC was created by Articles of Amalgamation on XXXXXXXXXX. The predecessor companies were XXXXXXXXXX ("Predecessor X") and XXXXXXXXXX ("Predecessor Y"), both of which were controlled by the same group of persons. The Class A shares of DC, described below in paragraph 5, were issued to the shareholders of Predecessor Y on the amalgamation. This amalgamation was undertaken because there was no longer any business purpose in maintaining the separate existence of Predecessor Y and was not undertaken in contemplation of or as part of a series of transactions which include the proposed transactions described below.
5. Predecessor X was formed by amalgamation on XXXXXXXXXX. That amalgamation combined several companies each operating a separate division but all of which were owned beneficially by the same shareholders, who at that time included XXXXXXXXXX arm's length companies in addition to the current shareholders of DC.
6. The authorized share capital of DC consists of an unlimited number of Class A shares, an unlimited number of Class B shares, an unlimited number of Class C shares and an unlimited number of common shares. The Class A shares are non-voting, redeemable and retractable for a fixed amount equal to their PUC, which is the FMV of the shares of Predecessor Y immediately before the amalgamation, and are entitled to a XXXXXXXXXX dividend in an amount to be determined at the discretion of the directors of between XXXXXXXXXX and XXXXXXXXXX percent per XXXXXXXXXX. None of the Class B shares have been issued.
7. The Class C shares are voting and fully participating, sharing equally with the common shares without preference or distinction. The Class C shares were issued by Predecessor X in XXXXXXXXXX to those shareholders who contributed capital to the company to fund the purchase of shares owned by XXXXXXXXXX former arm's length shareholders. That purchase of shares was not undertaken in contemplation of or as part of a series of transactions that include the proposed transactions. Other than as set out herein, there will not be any agreement in respect of the common and Class C shares of DC in respect of any matters referred to in any of subparagraphs (b)(i) to (iv) of the definition of taxable preferred share or in any of paragraphs (a), (b), (f) or (h) of the definition of short-term preferred share in subsection 248(1).
8. The issued and outstanding shares of DC are held as follows:
Shareholder Name:
Class A
Common
Class C shares
HoldcoA
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
HoldcoB
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
HoldcoC
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
HoldcoD
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
D
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
E
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
C
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
TOTAL
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
9. The issued shares of HoldcoA are owned by TrustA, A and XXXXXXXXXX, the XXXXXXXXXX of A. HoldcoB is wholly-owned by B. All of the issued shares of HoldcoC are owned by XXXXXXXXXX, the XXXXXXXXXX of C. The issued shares of HoldcoD are divided equally between D and E.
10. None of the shares of DC were acquired in contemplation of the proposed transactions set forth below. The Class A and Class C shares were acquired under the circumstances described above in paragraphs 4 and 7 while the common shares have been held by their current owners for more than XXXXXXXXXX years.
11. As of XXXXXXXXXX, DC did not have a balance in either its RDTOH account or its CDA.
PROPOSED TRANSACTIONS
12. HoldcoA will incorporate a new company ("TransfereeA") under the BCA. TransfereeA will be a taxable Canadian corporation and a private corporation. The authorized share capital of TransfereeA will be:
(a) an unlimited number of common shares;
(b) an unlimited number of Class A voting special shares;
(c) an unlimited number of Class B voting special shares; and
(d) an unlimited number of Class C non-voting special shares.
13. HoldcoB will incorporate a new company ("TransfereeB") under the BCA. TransfereeB will be a taxable Canadian corporation and a private corporation. The authorized share capital of TransfereeB will be:
(a) an unlimited number of common shares;
(b) an unlimited number of Class A voting special shares;
(c) an unlimited number of Class B voting special shares; and
(d) an unlimited number of Class C non-voting special shares.
14. HoldcoC will incorporate a new company ("TransfereeC") under the BCA. TransfereeC will be a taxable Canadian corporation and a private corporation. The authorized share capital of TransfereeC will be:
(a) an unlimited number of common shares;
(b) an unlimited number of Class A voting special shares;
(c) an unlimited number of Class B voting special shares;
(d) an unlimited number of Class C voting special shares; and
(e) an unlimited number of Class D non-voting special shares.
15. HoldcoD will incorporate a new company ("TransfereeD") under the BCA. TransfereeD will be a taxable Canadian corporation and a private corporation. The authorized share capital of TransfereeD will be:
(a) an unlimited number of common shares;
(b) an unlimited number of Class A voting special shares;
(c) an unlimited number of Class B voting special shares;
(d) an unlimited number of Class C voting special shares:
(e) an unlimited number of Class D voting special shares and
(f) an unlimited number of Class E non-voting special shares.
16. Each of the Class A, Class B, Class C, and Class D voting special shares, as the case may be, of TransfereeA, TransfereeB, TranfereeC, and TransfereeD (collectively referred to as the "Transferees" and individually as a "Transferee") will entitle the holder thereof to an annual non-cumulative dividend, equal to the redemption amount of the particular share multiplied by XXXXXXXXXX of the rate prescribed from time to time by subsection 4301(c) of the Regulations, calculated in respect of the year on a daily basis.
17. For the purposes of subsection 191(4) of the Act, the terms and conditions of the Class B voting special shares of each of the Transferees 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 each of the Transferees 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 FMV of the consideration for which the share is issued.
18. Each of HoldcoA, HoldcoB, HoldcoC, and HoldcoD (collectively referred to as "the Holdcos") will transfer all of its shares in DC to the particular Transferee it incorporated, as described in paragraphs 12 to 15, in exchange for Class A shares of that Transferee having an aggregate FMV equal to the FMV of the shares of DC transferred to the Transferee.
The Holdcos and the Transferees will jointly elect, 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 the Transferees. The agreed amount specified in the election will be equal to the ACB of the transferred shares, which amount will be less than their FMV at the time of the transfer.
The amount to be added to the stated capital of each Transferee's Class A shares will be equal to the ACB, immediately before the transfer, of the DC shares transferred to that particular Transferee.
19. C will transfer all of his shares in DC to TransfereeC in exchange for Class C shares of TransfereeC having an aggregate FMV equal to the FMV of the shares of DC transferred by C to TransfereeC.
C and TransfereeC will jointly elect, 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 by C to TransfereeC. The agreed amount specified in the election will be equal to the ACB of the transferred shares, which amount will be less than their FMV at the time of the transfer.
The amount to be added to the stated capital of TransfereeC's Class C shares will be equal to the ACB, immediately before the transfer, of the DC shares transferred to TransfereeC. For greater certainty, the amount will not exceed amount B of the formula in paragraph 84.1(1)(a) in respect of the shares.
20. D will transfer his common shares in DC to TransfereeD in exchange for Class C shares of TransfereeD having an aggregate FMV equal to the FMV of the shares of DC transferred by D to TransfereeD.
D and TransfereeD will jointly elect, 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 by D as described herein to TransfereeD. The agreed amount specified in the election will be equal to the ACB of the transferred shares, which amount will be less than their FMV at the time of the transfer.
The amount to be added to the stated capital of TransfereeD's Class C shares will be equal to the ACB, immediately before the transfer, of the DC shares transferred to TransfereeD. For greater certainty, the amount will not exceed amount B of the formula in paragraph 84.1(1)(a) in respect of the shares.
21. E will transfer all of her shares in DC to TransfereeD in exchange for Class D shares of TransfereeD having an aggregate FMV equal to the FMV of the shares of DC transferred by E to TransfereeD by D.
E and TransfereeD will jointly elect, 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 by E as described herein to TransfereeD. The agreed amount specified in the election will be equal to the ACB of the transferred shares, which amount will be less than their FMV at the time of the transfer.
The amount to be added to the stated capital of TransfereeD's Class D shares will be equal to the ACB, immediately before the transfer, of the DC shares transferred to TransfereeD by E. For greater certainty, the amount will not exceed amount B of the formula in paragraph 84.1(1)(a) in respect of the shares.
22. Immediately before the transfers of property described in paragraph 25 below, the property owned by DC will be classified into the following two 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; and
(b) 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.
23. The FMV of the assets of DC will be determined by an independent qualified appraiser in accordance with the shareholders' agreement. In addition,
(a) for the purpose of calculating the FMV of each type of property, as described above, DC will not have significant influence over any corporation; and
(b) any tax accounts of DC, such as the amount of RDTOH account, the balance of any CDA, or any deferred income tax debit balance will not be considered property for purposes of the classification described herein.
24. In determining the net FMV of each type of property of DC immediately before the transfers of property described in paragraph 25 below, the liabilities of DC will be allocated to, and deducted in the calculation of the net FMV 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 FMV of each such property is of the FMV of all cash or near-cash property owned by DC. The allocation of current liabilities as described herein will not, however, exceed the total FMV of the cash or near cash property of DC;
(b) any accounts receivable (which 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 a 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 FMV thereof, determined after the allocation of current liabilities as described in (a) herein, will be included in the net FMV of business property and will not be included in the net FMV 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 FMV. 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 FMV 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") 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 and business property, if any, of DC based on the relative net FMV 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.
25. Immediately following the determination of the net FMV of its cash or near cash property and its business property as described in paragraphs 23 and 24 above, DC will transfer at FMV a portion of each type of property owned by it at that time to the Transferees such that immediately following the transfers, the net FMV of each type of property so transferred by DC to the Transferees, determined in accordance with the guidelines described in paragraphs 23 and 24 above, will approximate that proportion of the net FMV of all property of DC of that type determined immediately before such transfer that:
(a) the aggregate FMV, immediately before the transfers, of all of the shares of DC owned by each of the Transferees, respectively, at that time
is of
(b) the aggregate FMV, 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 FMV of each type of property which the Transferees have received as compared to what the Transferees would have received had they received their appropriate pro rata share of the net FMV of that type of property.
As consideration for the property so transferred, the Transferees will each:
(c) assume a portion of the liabilities of DC (not to exceed the cost to the Transferees, as determined under section 85, where relevant, of the property transferred to each of the Transferees) such that the net FMV of each type of property of DC transferred to the Transferees as described herein will approximate its proportionate share, as determined by the formula described in (a) and (b) above, of the total net FMV of that type of property owned by DC immediately before such transfers, and
(d) issue to DC Class B shares of its capital stock having an aggregate FMV and redemption amount equal to the amount by which the aggregate FMV of the property transferred to the Transferees exceeds the amount of the liabilities assumed by the Transferees, respectively, as described in (c) above.
The Transferees will add to the stated capital accounts in respect of the Class B shares they issue an amount not exceeding the cost to the Transferees (as determined under section 85, where relevant) of the property transferred to them less any liabilities assumed by them.
26. In respect of the transfers described in paragraph 25 above, DC and each Transferee 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 that particular Transferee, as described in paragraph 25 above that is an eligible property the FMV of which at the time of the transfers 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 FMV of the respective property, nor will it be less than the amount of any liabilities assumed by the Transferees as consideration for the transfer of such property.
For the purposes of the joint elections 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 FMV of the asset immediately before the disposition is of the FMV of all property of that class immediately before the disposition.
27. Each Transferee will then redeem its Class B shares held by DC at their aggregate redemption amount and FMV and will pay the redemption amount by each issuing to DC a demand promissory note (the "Class B Redemption Notes") having a principal amount and FMV equal to the redemption amount of the Class B shares. DC will accept the Class B Redemption Notes as full payment for the redemption amount of the Class B special shares so redeemed.
28. DC will purchase for cancellation all of the DC common, Class A and Class C shares of its capital stock owned by the Transferees for FMV consideration. DC will pay the purchase price for such shares by issuing to each of the Transferees a demand promissory note (the "DC Notes") having a principal amount and FMV equal to the aggregate FMV of the shares so purchased. The Transferees will each accept the DC Notes in full payment of the purchase price of the shares.
29. DC and each of the Transferees will then set-off the principal amount of their mutual debt obligations (i.e., the DC Notes and the Class B Redemption Notes). Each obligation will then be cancelled.
30. Following the proposed transactions described above, DC will be dissolved, having no assets and no liabilities.
31. None of the transactions or events described in the facts of this letter has occurred as part of the same series of transactions or events as the proposed transactions described in this letter.
32. None of the proposed transactions will have any impact on outstanding tax liabilities, if any, of any of the taxpayers referred to in this ruling request.
33. 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 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.
34. None of DC or the Transferees will, at the time the proposed transactions described herein are implemented, be an SFI or a restricted financial institution.
35. None of the shares of DC or the Transferees 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).
36. None of the Class B shares of the Transferees will be issued for consideration that includes a taxable preferred share.
37. Upon completion of the transfers described in paragraphs 18 to 21 above, each of the Transferees will be connected with DC pursuant to paragraph 186(4)(b) of the Act.
38. The FMV of the Class B Redemption Notes of the Transferees acquired by DC as described in paragraph 27 above will be equal to their respective principal amounts at all times.
PURPOSE OF PROPOSED TRANSACTIONS
The purpose of the proposed transactions is to distribute a proportionate share of the assets of DC to the corporations controlled by the current shareholders of DC in order to separate the interests of such shareholders and to allow each of such shareholders to carry on their separate businesses independently of each other. This series of transactions will permit each of the XXXXXXXXXX to operate as a separate business and will allow the shareholders of DC to pursue their own separate business transactions. A, B, C, and D have XXXXXXXXXX which the parties have determined to resolve, by dividing the assets of DC among the shareholders as described herein.
RULINGS
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 the Transferees described in paragraph 25 above that is the subject of an election described in paragraph 26 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 the Transferees, as the case may be.
B. On the redemption of the Class B special shares by each of the Transferees, described in paragraph 27 above, and on the purchase for cancellation of all of the DC shares owned by the Transferees, as described in paragraph 28 above:
(a) pursuant to paragraphs 84(3)(a) and 84(3)(b):
(i) each Transferee will be deemed to have paid, and DC will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid by the particular Transferee in respect of the redemption of the Class B special shares exceeds the PUC of those shares immediately before the redemption; and
(ii) DC will be deemed to have paid, and each Transferee 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 each Transferee exceeds the PUC of those shares immediately before the purchase;
(b) the taxable dividends deemed to have been received by DC and each Transferee in (a) above will be:
(i) included in the particular recipient's income pursuant to section 82 and paragraph 12(1)(j); and
(ii) deductible in computing the taxable income of the particular 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) since each Transferee and DC will be connected with each other pursuant to paragraph 186(4)(b) of the Act:
(i) provided that each Transferee 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 dividend referred to in (a)(i) above, DC will not be subject to Part IV tax in respect of such dividends; and
(ii) each Transferee 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 each of the Transferees is of the aggregate of all taxable dividends paid by DC in its taxation year in which such dividends are paid;
(d) 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); and
(e) 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 Class B special share does not exceed the amount specified in respect of the share for the purposes of subsection 191(4).
C. The extinguishments of:
(a) the DC Notes by DC, and
(b) the Class B Redemption Notes by the Transferees,
as described in paragraph 29 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 and the Transferees will not otherwise realize any gain or incur any loss as a result of such extinguishments.
D. 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 above, and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
E. 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.
F. 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 Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
Nothing in this ruling should be construed as implying that the Canada 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.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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