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: (a) whether an amount is included in computing income under paragraph 12(1)(x) of the Act.
(b) whether the taxpayer may make an election pursuant to subsection 53(2.1) of the Act to reduce the cost of shares acquired by the 12(1)(x) amount thereby reducing the adjusted cost base of the property pursuant to paragraph 53(2)(s).
Position: (a) Yes
(b) Yes
Reasons: (a) The amount received is considered to be an inducement for purposes of paragraph 12(1)(x).
(b) The amount that would, but for subsection 53(2.1), be included in the taxpayer's income under paragraph 12(1)(x) was received in respect of the cost of a property acquired by the taxpayer in the year.
XXXXXXXXXX 2004-010828
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
This is in response to your letter dated XXXXXXXXXX, wherein you requested advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge the information provided in subsequent correspondence and during various telephone conversations in connection with your request (XXXXXXXXXX).
We understand that to the best of your knowledge and that of the taxpayer involved none of the issues involved in the requested ruling is:
(i) in an earlier return of a taxpayer identified in this document or of a related person,
(ii) being considered by any Tax Services Office or Taxation Centre of the Canada Revenue Agency ("CRA") in connection with a tax return already filed,
(iii) under objection by a taxpayer identified in this document or by a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
(v) is the subject of a previously issued ruling.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts and proposed transactions is as follows:
Facts
1. XXXXXXXXXX. ("Strategico") is the continuing corporation resulting from the XXXXXXXXXX amalgamation under the Canada Business Corporations Act ("CBCA") of XXXXXXXXXX. On XXXXXXXXXX Strategico amalgamated with its wholly owned subsidiary, XXXXXXXXXX. Strategico is a public corporation and a taxable Canadian corporation. The shares of Strategico are listed on the XXXXXXXXXX. Strategico's taxation year-end is XXXXXXXXXX. Strategico's head office is located at XXXXXXXXXX.
Strategico is a XXXXXXXXXX company with worldwide operations.
2. XXXXXXXXXX ( "S Subco") was incorporated under the laws of the XXXXXXXXXX on XXXXXXXXXX. S Subco does not carry on business in Canada, is not resident in Canada for purposes of the Act and has no permanent establishment in Canada. S Subco is a resident of the XXXXXXXXXX with its head office located at XXXXXXXXXX. The issued and outstanding shares of S Subco is comprised of XXXXXXXXXX common shares. All the issued shares of S Subco are owned indirectly by Strategico and were acquired during the period commencing in XXXXXXXXXX and ending in XXXXXXXXXX. The aggregate cost of the S Subco shares held indirectly by Strategico is US $XXXXXXXXXX.
S Subco's business consists of holding of investments.
3. XXXXXXXXXX ("B Co") was incorporated under the laws of the province of XXXXXXXXXX on XXXXXXXXXX. B Co is a public corporation and a taxable Canadian corporation. The shares of B Co are listed on the XXXXXXXXXX. Strategico owns XXXXXXXXXX common shares representing XXXXXXXXXX% of the issued and outstanding shares of B Co which it acquired at an aggregate cost of Cdn $XXXXXXXXXX on XXXXXXXXXX. A Co owns XXXXXXXXXX common shares representing XXXXXXXXXX% of the issued and outstanding shares of B Co. which it acquired at an aggregate cost of Cdn $XXXXXXXXXX on XXXXXXXXXX. B Co's taxation year-end is XXXXXXXXXX. B Co's head office is located at XXXXXXXXXX.
B Co is a XXXXXXXXXX company with worldwide operations.
4. XXXXXXXXXX., ( "B Subco") was incorporated under the laws of XXXXXXXXXX on XXXXXXXXXX. B Subco does not carry on business in Canada, is not resident in Canada for purposes of the Act and has no permanent establishment in Canada. B Subco is a resident of XXXXXXXXXX with its head office located at XXXXXXXXXX The issued and outstanding share capital of B Subco is comprised of XXXXXXXXXX common shares. All of the issued and outstanding shares of B Subco are owned by B Co and were acquired as follows:
(a) XXXXXXXXXX shares acquired on XXXXXXXXXX;
(b) XXXXXXXXXX shares acquired on XXXXXXXXXX; and
(c) XXXXXXXXXX shares acquired on XXXXXXXXXX.
The aggregate adjusted cost base ("ACB") of B Co's shares of B Subco is Cdn.$XXXXXXXXXX.
B Subco is an investment holding company.
5. XXXXXXXXXX., ("A Co") was incorporated under laws of the province of XXXXXXXXXX on XXXXXXXXXX. A Co is a public corporation and a taxable Canadian corporation. The shares of A Co are traded on the XXXXXXXXXX. Strategico owns XXXXXXXXXX common shares representing XXXXXXXXXX% of the issued and outstanding shares of A Co, which it acquired at an aggregate cost of Cdn $XXXXXXXXXX on XXXXXXXXXX. Additionally, B Co owns XXXXXXXXXX shares of A Co representing XXXXXXXXXX % of the issued and outstanding shares of A Co which it acquired during the period commencing in XXXXXXXXXX and ending in XXXXXXXXXX. The ACB of the shares of A Co held by B Co is Cdn $XXXXXXXXXX per share. A Co's taxation year-end is XXXXXXXXXX. A Co's head office is located at XXXXXXXXXX
A Co is a XXXXXXXXXX company with XXXXXXXXXX operations in XXXXXXXXXX.
B Co deals at arm's length with A Co and Strategico. Each company has a separate management group.
6. XXXXXXXXXX., (hereinafter "A Subco") was incorporated under the laws of XXXXXXXXXX on XXXXXXXXXX. A Subco does not carry on business in Canada, is not resident in Canada for purposes of the Act and has no permanent establishment in Canada. A Subco is a resident of XXXXXXXXXX with its head office at XXXXXXXXXX. The issued and outstanding share capital of A Subco is comprised of XXXXXXXXXX common shares. All of the issued and outstanding shares of A Subco are owned by A Co and were acquired as follows:
(a) XXXXXXXXXX shares acquired on XXXXXXXXXX;
(b) XXXXXXXXXX shares acquired on XXXXXXXXXX;
(c) XXXXXXXXXX shares acquired on XXXXXXXXXX;
(d) XXXXXXXXXX shares acquired on XXXXXXXXXX; and
(e) XXXXXXXXXX shares acquired on XXXXXXXXXX.
The aggregate adjusted cost base ("ACB") of A Co's shares of A Subco is Cdn$XXXXXXXXXX.
A Subco is an investment holding company.
7. XXXXXXXXXX ("Exploreco") was incorporated under the laws of the XXXXXXXXXX on XXXXXXXXXX. Exploreco does not carry on business in Canada, is not resident in Canada for purposes of the Act and has no permanent establishment in Canada. Exploreco is a resident of XXXXXXXXXX with its head office located at XXXXXXXXXX. Exploreco's issued and outstanding share capital consists of XXXXXXXXXX no par value Series A shares and XXXXXXXXXX no par value Series B shares. The Series A Shares and the Series B Shares have identical attributes except that the Series A Shares appoint a majority of the Board. The issued and outstanding shares of Exploreco are held as follows:
S Subco - XXXXXXXXXX Series A Shares;
A Subco - XXXXXXXXXX Series B Shares; and
B Subco - XXXXXXXXXX Series B Shares.
All the outstanding shares of Exploreco were issued in XXXXXXXXXX.
Exploreco's business consists of the XXXXXXXXXX.
Exploreco is the legal and beneficial owner of the XXXXXXXXXX (the "Property"). XXXXXXXXXX.
8. On XXXXXXXXXX, A Co, B Co and Strategico entered into an agreement (the "Agreement") regarding the development and operation of the Property (the "Project"). It was agreed that Strategico would become the strategic partner in regards to the development and operation of the Property. Under the terms of the Agreement, Strategico immediately acquired indirect control (XXXXXXXXXX% of the issued shares of Exploreco) through its wholly owned subsidiary, S Subco. Additionally, under the terms of the Agreement, Strategico subscribed for and purchased the XXXXXXXXXX common shares of A Co as described in paragraph 5 above and the XXXXXXXXXX common shares of B Co as described in paragraph 3 above in order to assist A Co and B Co to meet their required financial commitment with respect to the Project by subscribing for shares in A Subco and B Subco, respectively, which companies own shares of Exploreco.
Under the terms of the Agreement and a Reorganization Plan (as defined in the Agreement) Strategico is, inter alia, committed to XXXXXXXXXX and arrange financing for the Project. A XXXXXXXXXX study on the Property concluded the Project was not economically viable at that time. The study has since been updated and Strategico is expected to make a decision on whether to proceed XXXXXXXXXX
9. Pursuant to paragraph XXXXXXXXXX of the Reorganization Plan, Strategico is obligated to directly or indirectly contribute an additional US$XXXXXXXXXX of capital to Exploreco if it decides to proceed with the Project. In this regard, under the terms of the Reorganization Plan:
(a) Strategico will indirectly subscribe and pay US$XXXXXXXXXX for shares of S Subco. S Subco will in turn subscribe and pay US$XXXXXXXXXX for additional Series A shares of Exploreco;
(b) Strategico will pay US$XXXXXXXXXX and US$XXXXXXXXXX to A Co and B Co, respectively, to assist A Co and B Co to make, indirectly through A Subco and B Subco, capital contributions to Exploreco in amounts equal to the amounts paid to A Co and B Co by Strategico; and
(c) A Co and B Co will subscribe and pay US$XXXXXXXXXX and US$XXXXXXXXXX to A Subco and B Subco, respectively, for additional shares. A Subco and B Subco will in turn subscribe and pay US$XXXXXXXXXX and US$XXXXXXXXXX, respectively, for additional Series B shares of Exploreco.
10. Paragraph XXXXXXXXXX of the Reorganization Plan states: "XXXXXXXXXX."
11. Exploration decisions regarding the Project are now being evaluated by Strategico with a view to having Exploreco develop and carry on an active XXXXXXXXXX business based on the Property and in this regard, in its most recent report on XXXXXXXXXX Strategico states: "XXXXXXXXXX."
Proposed Transactions
12. Strategico will provide funds to S Subco to enable S Subco to make a contribution of capital to Exploreco.
13. S Subco will use the proceeds resulting from the capital contribution from Strategico, as described in paragraph 12 above, to subscribe for additional Class A Shares of Exploreco having an aggregate fair market value equal to the aggregate consideration paid of US$XXXXXXXXXX.
14. Strategico will, pursuant to its obligation under the Agreement, as described in paragraph 9 above, make the following payments through contributions of capital to A Co and B Co.
To $ Amount
B Co $XXXXXXXXXX
A Co $XXXXXXXXXX
15. B Co will use the monies received from Strategico as described in paragraph 14 above to subscribe for additional B Subco common shares and having an aggregate fair market value equal to the aggregate consideration paid of US$XXXXXXXXXX.
16. B Subco will use the proceeds resulting from the issuance of the additional common shares to B Co, as described in paragraph 15 above, to subscribe for additional Class B Shares of Exploreco having an aggregate fair market value equal to the aggregate consideration paid of US$XXXXXXXXXX.
17. A Co will use the monies received from Strategico as described in paragraph 14 above to subscribe for additional A Subco common shares having an aggregate fair market value equal to the aggregate consideration paid of US$XXXXXXXXXX.
18. A Subco will use the proceeds resulting from the issuance of the additional common shares to A Co, as described in paragraph 17 above, to subscribe for additional Class B Shares of Exploreco having an aggregate fair market value equal to the aggregate consideration paid of US$XXXXXXXXXX.
19. Exploreco will use the aggregate $XXXXXXXXXX of share subscription proceeds from A Subco (US$XXXXXXXXXX), B Subco (US$XXXXXXXXXX) and S Subco (US$XXXXXXXXXX) to fund the Project.
20. The US$XXXXXXXXXX and the US$XXXXXXXXXX payments received by A Co and B Co, respectively, from Strategico as described in paragraph 14 above, constitute an inducement or contribution as described in subparagraphs 12(1)(x)(iii) and (iv) of the Act, respectively. As a consequence, the Canadian dollar equivalent of the US$XXXXXXXXXX received by A Co and the US$XXXXXXXXXX received by B Co will, but for an election by A Co and B Co, as the case may be, under subsection 53(2.1) of the Act, be included in computing A Co's and B Co's income pursuant to paragraph 12(1)(x) for the taxation year in which the US$XXXXXXXXXX and the US$XXXXXXXXXX is received by A Co and B Co, respectively.
21. A Co will file an election under subsection 53(2.1) of the Act and within the time referred to in the said subsection with respect to the US$XXXXXXXXXX payment received from Strategico, as described in paragraph 14 above. The elected amount in respect of the US$XXXXXXXXXX payment received will not exceed the least of:
(a) the adjusted cost base, determined without reference to paragraph 53(2)(s) of the Act, at the time the shares of A Subco were acquired;
(b) the Canadian dollar equivalent of the US$XXXXXXXXXX received by A Co from Strategico; and
(c) where A Co has disposed of the shares of A Subco before the year, nil.
22. B Co will file an election under subsection 53(2.1) of the Act and within the time referred to in the said subsection with respect to the US$XXXXXXXXXX payment received from Strategico, as described in paragraph 14 above. The elected amount in respect of the US$XXXXXXXXXX payment received will not exceed the least of:
(a) the adjusted cost base, determined without reference to paragraph 53(2)(s) of the Act, at the time the shares of B Subco were acquired;
(b) the Canadian dollar equivalent of the US$XXXXXXXXXX received by B Co from Strategico; and
(c) where B Co has disposed of the shares of B Subco before the year, nil.
Purpose of Proposed Transactions
23. The purpose of the proposed transactions is to provide US$XXXXXXXXXX to Exploreco to develop the Property. In XXXXXXXXXX, B Co, A Co, and Strategico agreed that Strategico would become the strategic partner to help develop and operate the Property. The Agreement resulted in Strategico indirectly owning and controlling XXXXXXXXXX% of the share capital of Exploreco. Exploreco requires significant initial equity capital to develop the Property. Strategico has agreed to fund the US$XXXXXXXXXX; however, the equity capital must come from Strategico, A Co and B Co. Therefore, Strategico has agreed to provide A Co and B Co with US$XXXXXXXXXX so that A Co and B Co can indirectly provide the funding to Exploreco so that Exploreco can develop, finance and operate the Property as an active XXXXXXXXXX business.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. The US$XXXXXXXXXX contribution, described in paragraph 14, by Strategico to A Co will be an inducement for purposes of paragraph 12(1)(x). As a result, the Canadian dollar equivalent of US$XXXXXXXXXX will, but for an election by A Co under subsection 53(2.1), be included in computing A Co's income under paragraph 12(1)(x) for that particular taxation year.
B. Provided A Co makes an election pursuant to subsection 53(2.1) to reduce the cost of the A Co's shares in A Subco by the Canadian dollar equivalent of US$XXXXXXXXXX for purposes of paragraph 53(2)(s) by A Co under subsection 53(2.1), no amount will be included in computing A Co's income under paragraph 12(1)(x) in respect of the inducement referred to in Ruling A.
C. The US$XXXXXXXXXX contribution, described in paragraph 14, by Strategico to B Co will be an inducement for purposes of paragraph 12(1)(x). As a result, the Canadian dollar equivalent of US$XXXXXXXXXX will, but for an election by B Co under subsection 53(2.1), be included in computing B Co's income under paragraph 12(1)(x) for that particular taxation year.
D. Provided B Co makes an election pursuant to subsection 53(2.1) to reduce the cost of the B Co's shares in B Subco by the Canadian dollar equivalent of US$XXXXXXXXXX for purposes of paragraph 53(2)(s), no amount will be included in computing B Co's income under paragraph 12(1)(x) in respect of the inducement referred to in Ruling C.
The above rulings are provided subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding upon the CRA provided that the proposed transactions are completed on or before XXXXXXXXXX. The rulings are based on the Income Tax Act and Regulations in their present form and do not take into account the effects of any proposed amendments thereto.
Nothing in these rulings should be construed as confirmation, express or implied, of:
(a) the determination of the fair market value of any shares; or
(b) any tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given.
Yours truly,
XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch
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