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.
XXXXXXXXXX 2004-007523
XXXXXXXXXX , 2004
Dear XXXXXXXXXX:
Re: XXXXXXXXXX ("DC")
XXXXXXXXXX ("Transferee")
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 taxpayers. We also acknowledge the information provided in various telephone conversations and subsequent correspondence. 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, unless otherwise specified, all monetary amounts are expressed in Canadian dollars and the following terms have the meanings specified:
(a) "Aco" means XXXXXXXXXX;
(b) "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";
(c) "adjusted cost base" ("ACB") has the meaning assigned by section 54 and subsection 248(1);
(d) "agreed amount" has the meaning assigned by subsection 85(1);
(e) "BCA" means the Business Corporations Act (XXXXXXXXXX);
(f) "Canadian-controlled private corporation"("CCPC") has the meaning assigned by subsection 125(7);
(g) "capital dividend account" ("CDA") has the meaning assigned by subsection 89(1);
(h) "capital property" has the meaning assigned by section 54;
(i) "cost amount" has the meaning assigned by subsection 248(1);
(j) "depreciable property" has the meaning assigned by subsection 13(21);
(k) "disposition" has the meaning assigned by subsection 248(1);
(l) "distribution" has the meaning assigned by subsection 55(1);
(m) "dividend refund" has the meaning assigned by subsection 129(1);
(n) "eligible capital property" has the meaning assigned by section 54;
(o) "eligible property" has the meaning assigned by subsection 85(1.1);
(p) "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;
(q) "paid-up capital" ("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) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);
(u) "related persons" has the meaning assigned by section 251;
(v) "restricted financial institution" has the meaning assigned by subsection 248(1);
(w) "series of transactions or events" includes the related transactions or events referred to in subsection 248(10);
(x) "specified financial institution" ("SFI") has the meaning assigned by subsection 248(1);
(y) "stated capital" has the meaning assigned by the BCA;
(z) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
(aa) "taxable dividend" has the meaning assigned by subsection 89(1).
FACTS
1. DC is a private corportion and a taxable Canadian corporation. DC was incorporated under the laws of Canada on XXXXXXXXXX. The head office of DC is located at XXXXXXXXXX. DC files its income tax returns in the XXXXXXXXXX TC and deals with the XXXXXXXXXX TSO. DC's business consists of XXXXXXXXXX.
2. The assets of DC, all of which are used in its active business, include cash and near cash, accounts receivable, XXXXXXXXXX. DC generally treats its XXXXXXXXXX as inventory for tax purposes while XXXXXXXXXX are treated as capital assets. Certain XXXXXXXXXX are, however, treated as capital property by virtue of a rental history related to the particular XXXXXXXXXX.
3. Transferee is a private corporation and a taxable Canadian corporation incorporated under the laws of the province of XXXXXXXXXX. Transferee's head office is located at the same address as DC and it also files its income tax returns in the XXXXXXXXXX TC and deals with the XXXXXXXXXX TSO. Transferee is a holding company for the XXXXXXXXXX group of companies. Transferee owns shares of a number of corporations and certain real estate assets, which are leased to other members in the XXXXXXXXXX group.
4. Transferee was created by Articles of Amalgamation on XXXXXXXXXX. The predecessor companies were XXXXXXXXXX ("Predecessor X"), a taxable Canadian corporation incorporated under the laws of the province of XXXXXXXXXX on XXXXXXXXXX and XXXXXXXXXX ("Predecessor Y"), a taxable Canadian corporation. Predecessor X was originally owned by various individual shareholders. These shareholders sought to sell their interests to XXXXXXXXXX ("XXXXXXXXXX"), a corporation resident in XXXXXXXXXX dealing at that time at arm's-length with Predecessor X and its shareholders. Predecessor Y, a wholly-owned subsidiary of XXXXXXXXXX, was incorporated for this purpose and was eventually amalgamated with Predecessor X. The amalgamation was undertaken to allow XXXXXXXXXX to obtain direct control of Transferee by exchanging its shares of Predecessor Y for shares of the amalgamated entity, Transferee, upon the amalgamation and was not undertaken in contemplation of or as part of a series of transactions which include the proposed transactions described below.
5. Transferee's authorized capital consists of an unlimited number of common shares. All XXXXXXXXXX issued and outstanding common shares are owned by XXXXXXXXXX.
6. Aco is private corporation and a taxable Canadian corporation and is not related to any corporation in the XXXXXXXXXX group.
7. The authorized capital of DC consists of an unlimited number of common shares. Transferee owns XXXXXXXXXX of the XXXXXXXXXX issued and outstanding common shares of DC. Aco owns the remaining XXXXXXXXXX issued and outstanding common shares of DC. The common shares of DC have a PUC and ACB of $XXXXXXXXXX per share. None of the shares of DC were acquired by Transferee or Aco in contemplation of the proposed transactions set forth below.
8. As of XXXXXXXXXX, DC had a nil RDTOH balance and a CDA of approximately $XXXXXXXXXX. These amounts will not be substantially different at the time of the transfers of property described in paragraph 12 below.
PROPOSED TRANSACTIONS
9. Transferee will file articles of amendment under the BCA to create a new class of preferred shares ("Class A Preferred Shares"). The terms and conditions of the Class A Preferred Shares will provide that each share will be: entitled to one vote each; redeemable and retractable for an amount equal to the FMV of the consideration received by Transferee for the issuance of such share; and entitled, in priority to other shareholders, to an amount equal to the redemption amount on the wind-up or liquidation of Transferee. The holders of the Class A Preferred Shares will not be entitled to receive any dividends on the shares. For the purposes of subsection 191(4) of the Act, the terms and conditions of the Class A Preferred Shares will specify an amount in respect of each such share for which the share is to be redeemed, acquired or cancelled. 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. None of the Class A Preferred Shares of Transferee will be issued for consideration that includes a taxable preferred share.
10. Immediately before the transfers of property described in paragraph 12 below, the property owned by DC will be classified into the following three 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 and inventory;
(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 (other than a specified investment business) carried on by DC; and
(c) investment property, comprising all of the assets of DC, other than cash or near cash property, any income from which would, for purposes of the Act, be income from property or a specified investment business.
For greater certainty, any tax accounts of DC, such as deferred tax balances, will not be considered property for the purposes of the proposed transactions.
11. In determining the net FMV of each type of property of DC immediately before the transfers of property described in paragraph 12 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 and inventories of DC, that are initially classified in accordance with paragraph (a) as cash or near-cash property, that will relate to the business that will be carried on by 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.
As a result of the foregoing determinations it is expected that DC will only have business property and cash or near-cash property immediately before the proposed distribution.
12. Immediately following the determination of the net FMV of DC's three types of property as described in paragraphs 10 and 11 above, DC will transfer at FMV a portion of each type of property owned by it at that time to Transferee such that immediately following the transfers, the net FMV of each type of property so transferred by DC to Transferee, 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 Transferee 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 1%, determined as a percentage of the net FMV of each type of property which Transferee has received as compared to what Transferee would have received had it received its appropriate pro rata share of the net FMV of that type of property.
13. As consideration for the transfers of property described above in paragraph 12, Transferee will issue to DC a number of its Class A Preferred Shares having an aggregate FMV and redemption amount equal to the aggregate FMV of the property transferred to Transferee. Transferee will add to the stated capital account in respect of the Class A Preferred Shares it issues an amount not exceeding the cost to Transferee (as determined under section 85, where relevant) of the property transferred to it. Immediately following the issuance of the Class A Preferred Shares, Transferee will be connected to DC pursuant to paragraph 186(4)(b).
14. In respect of the transfers of property described in paragraph 12 above, DC and 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 Transferee, as described in paragraph 12 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.
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 FMV of the asset immediately before the disposition is of the FMV of all property of that class immediately before the disposition.
15. The Class A Preferred Shares will be redeemed for a non-interest bearing demand promissory note (the "Transferee Note") payable to DC having a principal amount and FMV equal to the aggregate FMV of the Class A Preferred Shares. DC will accept the Transferee Note as full payment for the redemption amount of the Class A Preferred Shares.
16. All of the common shares of DC held by Transferee will be purchased for cancellation for FMV consideration. The purchase price will be satisfied by DC issuing a non-interest bearing demand promissory note (the "DC Note") to Transferee having a principal amount and FMV equal to the aggregate FMV of the common shares of DC purchased for cancellation. Transferee will accept the DC Note as full payment of the purchase price of the common shares of DC.
17. The Transferee Note and the DC Note will be set off against each other and cancelled.
18. 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.
19. 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.
20. Except as described in this letter, no liabilities will be incurred by, and no property will be acquired by or disposed of by DC in contemplation of the proposed transactions described herein. No property of DC that is transferred to Transferee 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.
21. None of the shares of DC or Transferee 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"; or
(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).
22. The FMV of the Transferee Note acquired by DC and the DC Note acquired by Transferee as described in paragraphs 15 and 16 above will be equal to their principal amounts at all times.
PURPOSE OF PROPOSED TRANSACTIONS
23. The purpose of the proposed transactions is to distribute a pro-rata portion of the assets of DC to Transferee so that Aco and Transferee can operate the DC business independently.
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 Transferee described in paragraph 12 above that is the subject of an election described in paragraph 13 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 Transferee.
For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.
B. On the redemption of the Class A Preferred Shares by Transferee, described in paragraph 15 above, and on the purchase for cancellation of all of the common shares of DC owned by Transferee, as described in paragraph 16 above:
(a) pursuant to paragraphs 84(3)(a) and 84(3)(b):
(i)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 Transferee in respect of the redemption of the Class A Preferred Shares exceeds the PUC of those shares immediately before the redemption; and
(ii)DC will be deemed to have paid and Transferee will be deemed to have received a taxable dividend 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 the Transferee exceeds the PUC of those shares immediately before the purchase;
(b) the taxable dividends deemed to have been received by DC and Transferee, as the case may be, in (a) above will be:
(i)included in the particular recipient's income pursuant to section 82 and paragraph 12(1)(j);
(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(2.2) or (2.4); and
(iii)pursuant to the provisions of paragraph (j) of the definition of "proceeds of disposition" in section 54, be excluded in computing the proceeds of disposition to DC or Transferee, as the case may be, of the shares so redeemed or repurchased;
(c) since Transferee and DC will be connected with each other pursuant to paragraph 186(4)(b), Transferee and DC will not be subject to tax under Part IV in respect of the dividends referred to in (a) above except as provided in paragraph 186(1)(b);
(d) the taxable 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 dividend referred to in (a)(i) above will not be subject to tax under Part VI.1 on the basis that the dividend will be deemed to be an excluded dividend pursuant to subsection 191(4), but only to the extent that the amount paid to DC on the redemption the Class A Preferred Shares does not exceed the amount specified in respect of the shares for the purposes of subsection 191(4).
C. The extinguishments of the promissory notes as described in paragraph 17 above, will not, in and of themselves, result in a forgiven amount within the meaning of either subsection 80(1) or section 80.01.
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(a) 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 are given 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. 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 Canada Revenue Agency has confirmed, reviewed or has made any determination in respect of:
(a) the PUC of any share or the ACB or FMV of any 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,
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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