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: Split-up Butterfly - Various issues.
Position: Favourable Ruling issued.
Reasons: Proposed transactions comply with the law.
XXXXXXXXXX 2005-012120
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: XXXXXXXXXX - Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX, as modified by your subsequent correspondence, wherein you requested an advance income tax ruling on behalf of the-noted taxpayer. 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 any of the taxpayers 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 any of the taxpayers or a related person;
(iii) under objection by any of 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 expired; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
The taxpayer has also represented that the proposed transactions described herein will not result in any of the taxpayers described herein being unable to pay its existing outstanding tax liabilities.
DEFINITIONS
In this letter, all references to monetary amounts are in Canadian dollars and the following terms or expressions have the meaning specified:
(a) "Act" means the Income Tax Act, 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, and the Income Tax Regulations thereunder are referred to as the "Regulations";
(b) "adjusted cost base" ("ACB") has the meaning assigned by section 54;
(c) "agreed amount" means the amount agreed on in respect of a property in an election filed pursuant to subsection 85(1);
(d) "arm's length" has the meaning assigned by subsection 251(1);
(e) "BCA" means the Business Corporations Act (XXXXXXXXXX);
(f) "BN" means the tax identification number assigned by CRA to the particular entity;
(g) "capital dividend account" ("CDA") has the meaning assigned by subsection 89(1);
(h) "capital property" has the meaning assigned by section 54;
(i) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);
(j) "CRA" means the Canada Revenue Agency;
(k) "depreciable property" has the meaning assigned by subsection 13(21);
(l) "distribution" has the meaning assigned by subsection 55(1);
(m) "dividend refund" has the meaning assigned by subsection 129(1);
(n) "dividend rental arrangement" has the meaning assigned by subsection 248(1);
(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 with no compulsion to act, expressed in terms of cash;
(q) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);
(r) "paid-up capital" ("PUC") has the meaning assigned by subsection 89(1);
(s) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;
(t) "pre-1972 CSOH" means "pre-1972 capital surplus on hand" as that expression is defined in subsection 88(2.1);
(u) "proceeds of disposition" ("POD") has the meaning assigned by section 54;
(v) "Proposed Transactions" means the transactions described in Paragraphs 24 to 42;
(w) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);
(x) "related person" has the meaning assigned by section 251;
(y) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);
(z) "significant influence" has the meaning assigned by section 3050 of the CICA Handbook;
(aa) "SIN" means Social Insurance Number;
(bb) "specified class" has the meaning assigned to that term by subsection 55(1);
(cc) "specified investment business" has the meaning assigned by subsection 125(7);
(dd) "stated capital" has the meaning assigned by the BCA;
(ee) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);
(ff) "taxable dividend" has the meaning assigned by subsection 89(1);
(gg) "TC1 Note" means the non-interest bearing demand promissory note to be issued by TC1, as described in Paragraph 37;
(hh) "TC2 Note" means the non-interest bearing demand promissory note to be issued by TC2, as described in Paragraph 37;
(ii) "TC1 Transfer Proportion" means the proportion that the FMV of all the shares in the capital of DC owned by TC1 immediately before the transfers of property described in Paragraph 35 is of the FMV of all the shares in the capital of DC immediately before the transfers of property described in Paragraph 35; and
(jj) TC2 Transfer Proportion" means the proportion that the FMV of all the shares in the capital of DC owned by TC2 immediately before the transfers of property described in Paragraph 35 is of the FMV of all the shares in the capital of DC immediately before the transfers of property described in Paragraph 35.
In addition, the following individuals, corporations and entities will be referred to as follows:
(i) "Aco" means XXXXXXXXXX;
(ii) "Bco" means XXXXXXXXXX;
(iii) "Cco" means XXXXXXXXXX;
(iv) "Child1" means XXXXXXXXXX;
(v) "Child2" means XXXXXXXXXX;
(vi) "Child3" means XXXXXXXXXX;
(vii) "Child4" means XXXXXXXXXX;
(viii) "Child5" means XXXXXXXXXX;
(ix) "DC" means XXXXXXXXXX;
(x) "Partnership" means XXXXXXXXXX;
(xi) "Sib1" means XXXXXXXXXX;
(xii) "Sib2" means XXXXXXXXXX;
(xiii) "Subco1" means the taxable Canadian corporation to be incorporated by DC, as described in Paragraph 22;
(xiv) "Subco2" means the taxable Canadian corporation to be incorporated by DC, as described in Paragraph 22;
(xv) "TC1" means the taxable Canadian corporation to be incorporated by Sib1, as described in Paragraph 23;
(xvi) "TC2" means the taxable Canadian corporation to be incorporated by Sib2, as described in Paragraph 23;
(xvii) "Trust1" means the XXXXXXXXXX; and
(xviii) "Trust2" means the XXXXXXXXXX.
FACTS
1. Sib1 and Sib2 are adult siblings. Child1, Child2 and Child3 are the adult children of Sib1. Child4 and Child5 are the adult children of Sib2. Each of these individuals is a resident of Canada for the purposes of the Act.
2. Trust1 is an irrevocable inter vivos trust that was settled by Sib2 under the laws of XXXXXXXXXX pursuant to a trust indenture dated XXXXXXXXXX. The beneficiaries of Trust1 include all the children, grandchildren and more remote issue of Sib1 and his spouse who is also a resident of Canada for purposes of the Act, and in the case of income beneficiaries such, "qualified donees", as defined in subsection 149.1(1), as the trustee may determine. No specific qualified donees have ever been named in the trust indenture. The trustee of Trust1 is Sib1. The trustee of Trust1 has complete discretion over income and capital distributions to the beneficiaries of Trust1. Trust1 deals with the XXXXXXXXXX TSO and files its tax returns with the XXXXXXXXXX.
3. Trust2 is an irrevocable inter vivos trust that was settled by Sib1 under the laws of XXXXXXXXXX pursuant to a trust indenture dated XXXXXXXXXX. The beneficiaries of Trust2 include all the children, grandchildren and more remote issue of Sib2 and her former spouse (now deceased), and in the case of income beneficiaries such, "qualified donees", as defined in subsection 149.1(1), as the trustee may determine. No specific qualified donees have ever been named in the trust indenture. The trustee of Trust2 is Sib2. The trustee of Trust2 has complete discretion over income and capital distributions to the beneficiaries of Trust2. Trust2 deals with the XXXXXXXXXX TSO and it files its tax returns with the XXXXXXXXXX.
4. DC was formed in XXXXXXXXXX under the provisions of the BCA on the amalgamation of XXXXXXXXXX. The amalgamation was undertaken in order to simplify the existing corporate structure. DC is a CCPC and a taxable Canadian corporation. The taxation year of DC ends on XXXXXXXXXX. The registered office of DC is located at XXXXXXXXXX deals with the XXXXXXXXXX TSO and it files its tax returns with the XXXXXXXXXX TC.
5. DC's predecessor corporation, XXXXXXXXXX, was incorporated under the laws of XXXXXXXXXX. The shareholders of XXXXXXXXXX were Sib1, Sib2, Trust1, Trust2 and Child1, Child2 and Child3, jointly. In particular, each of Sib2 and the group comprising Child1, Child2 and Child3, jointly, owned XXXXXXXXXX Class B shares in the capital of XXXXXXXXXX having an ACB, PUC and FMV of $XXXXXXXXXX and which were non-voting. DC's other predecessor corporations, XXXXXXXXXX, were incorporated under the provisions of the BCA on XXXXXXXXXX. XXXXXXXXXX was incorporated under the provisions of the BCA on XXXXXXXXXX. Each of Trust1 and Trust2 owned XXXXXXXXXX% of the issued and outstanding shares in the capital of XXXXXXXXXX and XXXXXXXXXX owned one revenue-producing real property prior to the amalgamation. Prior to the amalgamation described in Paragraph 4, each of Sib1 and Sib2, as shareholders of XXXXXXXXXX, and each of Trust1 and Trust2, as shareholders of XXXXXXXXXX, co-operated in the decision making process of each such predecessor corporation such that the decision making process of each such predecessor corporation was not deadlocked.
6. The authorized share capital of DC consists of an unlimited number of ordinary voting common shares ("Common Shares") and XXXXXXXXXX Class A shares ("Class A Shares") and XXXXXXXXXX Class B shares ("Class B Shares"). The Class A Shares and Class B Shares have the following attributes:
(a) the Class A Shares; entitle the holder to one vote per share, fixed non-cumulative dividends as and when declared by the board of directors at a rate equal to XXXXXXXXXX% per year of the redemption amount per Class A Share; are retractable for an amount equal to the consideration for which they were issued plus all declared and unpaid dividends, may be purchased for cancellation by DC at the lowest price obtainable but not exceeding the redemption amount per Class A Share, and on dissolution, entitle the holder to receive the redemption amount per Class A Share plus all declared and unpaid dividends; and
(b) the Class B Shares are non-voting, entitle the holder to fixed non-cumulative dividends as and when declared by the board of directors at a rate equal to XXXXXXXXXX% per year of the stated capital per Class B Share, are redeemable and retractable for their stated capital plus all declared and unpaid dividends, may be purchased for cancellation by DC at the lowest price obtainable but not exceeding the stated capital per Class B Share, and on dissolution, entitle the holder to receive the stated capital per Class B Share plus all declared and unpaid dividends.
7. The issued and outstanding shares of DC are held as follows. Trust1 and Trust2 each own XXXXXXXXXX Common Shares with an aggregate ACB and PUC of $XXXXXXXXXX to each such holder. The Common Shares have a FMV in excess of their ACB and PUC. Sib1 and Sib2 each own XXXXXXXXXX Class A Shares with an aggregate ACB, PUC and FMV of XXXXXXXXXX, respectively, to each such holder. Each of Sib 2 and the group comprising Child1, Child2 and Child3, jointly, own XXXXXXXXXX Class B Shares with an aggregate ACB, PUC and FMV of $XXXXXXXXXX. The Class B Shares are shares of a specified class.
Each of Trust1, Trust2, Sib1, Sib2, Child1, Child2 and Child3 hold their respective shares in the capital of DC as capital property.
8. DC is a real estate company that owns interests in several real properties located in XXXXXXXXXX, either directly or indirectly through various unincorporated joint ventures or tenancy in common arrangements or through its interest in the Partnership. DC has more than five full-time employees and does not carry on a specified investment business. DC does not have any deferred employee compensation plans.
9. The Partnership is a limited partnership that was formed under the laws of XXXXXXXXXX by a partnership agreement dated XXXXXXXXXX, as amended on XXXXXXXXXX. The general partner of the Partnership is XXXXXXXXXX, a taxable Canadian corporation. DC's lawyer, and a lawyer of the XXXXXXXXXX, which is not related to, and which deals at arm's length with, DC and DC's shareholders, each own XXXXXXXXXX% of the shares of XXXXXXXXXX. on behalf of each of DC and the XXXXXXXXXX, respectively.
DC owns a XXXXXXXXXX% limited partnership interest in the Partnership and Sib1 owns a XXXXXXXXXX% limited partnership interest in the Partnership. DC holds the limited partnership interest in the Partnership as capital property and the FMV of its limited partnership interest exceeds the ACB of such interest. The remaining XXXXXXXXXX% limited partnership interest in the Partnership is owned by the XXXXXXXXXX, which is not related to, and which deals at arm's length with, DC and DC's shareholders. The Partnership was formed to own and develop, and sell or lease, certain real property and its principal assets consist of land under development and revenue-producing real property located in XXXXXXXXXX. Legal title to this real property is held in the name of XXXXXXXXXX, as general partner. The fiscal year-end of the Partnership is XXXXXXXXXX.
10. The main assets of DC, other than real estate assets, consist of cash, accounts receivable, prepaid expenses, unamortized tenant inducements, furniture and equipment, computer equipment, and various loans and mortgages receivable. DC's real estate assets include revenue-producing real property under construction, revenue-producing commercial real property, revenue-producing residential property, land under development and land held for future development.
11. The revenue-producing residential property of DC includes an XXXXXXXXXX% undivided interest in the land and building known as the "XXXXXXXXXX" located at XXXXXXXXXX (referred to as "Property1"). The land under development of DC includes a XXXXXXXXXX% interest in XXXXXXXXXX land located in XXXXXXXXXX (referred to as "Property2"). Prior to the transactions described in Paragraph 47, DC's land held for future development consisted of a XXXXXXXXXX% interest in XXXXXXXXXX land located in XXXXXXXXXX, owned indirectly through DC's interest in the Partnership(referred to as "Property3") and a XXXXXXXXXX% interest in XXXXXXXXXX land located in XXXXXXXXXX (referred to as "Property4").
12. The liabilities of DC consist of accounts payable and accrued liabilities, amounts due to co-owner of land under development, various deposits, including tenants' last month rent deposits, income taxes payable, several mortgages on revenue producing real estate, inter-company loans payable and shareholders advances.
13. DC has, or is expected to have, at the time the Proposed Transactions are carried out, a balance of CDA; RDTOH of nil; a balance of pre-1972 CSOH; and capital losses for purposes of the Act and for provincial income tax purposes.
14. Sib1 actively manages the business and operations of DC, including acting as executive manager of all administrative, development, investment and finance activities of DC. Except in her role as a director of DC, Sib2 is not actively involved in the management of DC.
15. In XXXXXXXXXX, DC declared and paid a cash dividend on its Common Shares in the amount of $XXXXXXXXXX and a cash dividend on its Class A Shares in the amount of $XXXXXXXXXX. The dividends were paid to eliminate the balance of DC's RDTOH account before the end of DC's XXXXXXXXXX taxation year.
16. Aco is a CCPC and a taxable Canadian corporation. XXXXXXXXXX, a taxable Canadian corporation that is wholly-owned by Trust1, owns XXXXXXXXXX common shares in the capital of Aco. Sib1 owns XXXXXXXXXX special voting shares in the capital of Aco. There are no other shareholders of Aco. Aco owns, among other things, real property that is situated adjacent to Property4.
17. Bco is a CCPC and a taxable Canadian corporation. Sib2 is the sole shareholder of Bco. Bco owns, among other things, a XXXXXXXXXX% undivided interest in Property1. The remaining XXXXXXXXXX% undivided interest in Property1 is owned by Sib1.
18. Except for Bco, DC is unrelated to the co-owners of any real property properties in which it has a co-ownership interest. In certain cases where land is held in co-ownership with other parties, legal title to the land is held by a separate nominee company, as trustee, on behalf of the co-owners. The relevant potion of shares of such nominee companies are beneficially owned by DC.
19. XXXXXXXXXX.
20. DC has incorporated Subco1 and Subco2 under the provisions of the BCA. The authorized capital of each of Subco1 and Subco2 consists of an unlimited number of common shares. DC subscribed for one common share in the capital of each of Subco1 and Subco2 for $XXXXXXXXXX immediately after the incorporation of Subco1 and Subco2.
21. Sib1 has incorporated TC1 under the provisions of the BCA. Sib2 has incorporated TC2 under the provisions of the BCA. Each of TC1 and TC2 have the following classes of authorized share capital:
(a) an unlimited number of common shares;
(b) an unlimited number of Class A shares entitling the holder to one vote per share, entitling the holder to fixed non-cumulative dividends as and when declared by the board of directors in an amount equal to XXXXXXXXXX% per year of the redemption amount, which will be redeemable and retractable for an amount equal to the consideration for which they are issued plus all declared and unpaid dividends, which may be purchased by TC1 or TC2, as the case may be, at the lowest price obtainable but not exceeding the redemption amount per Class A share, and on dissolution, entitling the holder to receive the redemption amount per Class A share plus all declared and unpaid dividends; and
(c) an unlimited number of Class B shares entitling the holder to one vote per share, entitling the holder to fixed non-cumulative dividends as and when declared by the board of directors at a rate equal to XXXXXXXXXX% per year of the redemption amount per Class B share, which will be redeemable and retractable for an amount equal to the consideration for which they are issued plus all declared and unpaid dividends, and on dissolution, entitling the holder to receive the redemption amount per Class B share plus all declared and unpaid dividends.
No shares of TC1 or TC2 were issued on incorporation. TC1 will resolve to have a XXXXXXXXXX year-end for financial and income tax purposes. It is expected that for TC1's taxation year in which the Proposed Transactions are implemented, TC1 will not have a balance of RDTOH.
22. Reserved.
23. Reserved.
PROPOSED TRANSACTIONS
24. DC will redeem all of its Class B shares held by Sib2 and by Child1, Child2 and Child3, jointly, for an amount equal to the aggregate redemption amount of such shares. As consideration therefor, DC will pay $XXXXXXXXXX to Sib2 and $XXXXXXXXXX to the group comprising Child1, Child2 and Child3, jointly.
Transfers to TCs
25. Contemporaneously with the share transfers described in Paragraph 26:
(a) Sib1 will transfer all of his Class A Shares of DC to TC1 in exchange for XXXXXXXXXX Class A shares of TC1 having an aggregate FMV and redemption amount equal to the aggregate FMV of the Class A Shares of DC so transferred. The directors of TC1 will resolve, pursuant to the provisions of the BCA, to add to the stated capital of the Class A shares so issued an amount equal to the aggregate FMV of the Class A shares of DC, and for greater certainty, such amount will not exceed "B" of the formula in paragraph 84.1(1)(a) in respect of the shares.
(b) Sib2 will transfer all of her Class A Shares of DC to TC2 in exchange for XXXXXXXXXX Class A shares of TC2 having an aggregate FMV and redemption amount equal to the aggregate FMV of the Class A Shares of DC so transferred. The directors of TC2 will resolve, pursuant to the provisions of the BCA, to add to the stated capital of the Class A shares so issued an amount equal to the aggregate FMV of the Class A Shares of DC, and for greater certainty, such amount will not exceed "B" of the formula in paragraph 84.1(1)(a) in respect of the shares.
26. Contemporaneously with the share transfers described in Paragraph 25:
(a) Trust1 will transfer all of its Common Shares of DC to TC1 in exchange for XXXXXXXXXX common shares of TC1 having an aggregate FMV equal to the aggregate FMV of the Common Shares of DC so transferred. The directors of TC1 will resolve, pursuant to the provisions of the BCA, to add to the stated capital of the common shares so issued an amount equal to the aggregate ACB of the Common Shares of DC, and for greater certainty, such amount will not exceed "B" of the formula in paragraph 84.1(1)(a) in respect of the shares.
Trust1 and TC1 will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer described . The agreed amount specified in the election will be an amount not less than the aggregate ACB of the common shares in the capital of DC, which amount will be less than the FMV of such shares at the time of transfer.
(b) Trust2 will transfer all of its Common Shares of DC to TC2 in exchange for XXXXXXXXXX common shares of TC2 having an aggregate FMV equal to the aggregate FMV of the Common Shares of DC so transferred. The directors of TC2 will resolve, pursuant to the provisions of the BCA, to add to the stated capital of the common shares so issued an amount equal to the aggregate ACB of the Common Shares of DC and for greater certainty, such amount will not exceed "B" of the formula in paragraph 84.1(1)(a) in respect of the shares.
Trust2 and TC2 will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer described . The agreed amount specified in the election will be an amount not less than the aggregate ACB of the common shares in the capital of DC, which amount will be less than the FMV of such shares at the time of transfer.
Transfers of Land Inventory
27. DC will transfer its XXXXXXXXXX% interest in Property2 to Sib1 (or a corporation controlled by Sib1, other than TC1) for FMV consideration, payable by a cash payment in the amount of not less than XXXXXXXXXX% of the purchase price, with the balance, if any, payable by means of an interest-bearing promissory note on commercial terms, secured by a mortgage on the property. The interest-bearing promissory note issued as consideration for this transfer will not be convertible into any other property. DC and the particular transferee will not file a section 85 election in respect of this transfer.
28. DC will transfer its XXXXXXXXXX% interest in Property4 to Aco (or another corporation controlled by Sib1, other than TC1) for FMV consideration, payable by a cash payment in the amount of not less than XXXXXXXXXX% of the purchase price, with the balance, if any, payable by means of an interest-bearing promissory note on commercial terms, secured by a mortgage on the property. The interest-bearing promissory note issued as consideration for this transfer will not be convertible into any other property. DC and the particular transferee will not file a section 85 election in respect of this transfer.
Transfers of Legal Title
29. DC and each of Subco1 and Subco2 will enter into a nominee agreement whereby each of Subco1 and Subco2 will agree to hold legal title of DC's real property on behalf of the beneficial owner of such property solely as nominee, agent and bare trustee (other than legal title to real properties that are already held by a separate nominee company as described in Paragraph 18). DC will effect the following transactions:
(a) after the incorporation of Subco1 but prior to the determination of the types of property described in Paragraphs 33 and 34, DC will transfer to Subco1, over one or more days, legal title to the real property that will be distributed to TC1 as described in Paragraph 35 in exchange for $XXXXXXXXXX. Subco1 will hold legal title to such real property as nominee, agent and bare trustee for the sole benefit and account of DC, or TC1, as the case may be, and for greater certainty, DC (or TC1) will be the only beneficiary of such bare trust arrangement and will remain the beneficial owner of such property. Subco1 will deal with the such real property exclusively as directed by DC at all times.
(b) after the incorporation of Subco2 but prior to the determination of the types of property described in Paragraphs 33 and 34, DC will transfer to Subco2, over one or more days, legal title to the real property to be distributed to TC2 as described in Paragraph 35 in exchange for $XXXXXXXXXX. Subco2 will hold legal title to such real property as nominee, agent and bare trustee for the sole benefit and account of DC or TC2, as the case may be, and for greater certainty, DC (or TC2) will be the only beneficiary of such bare trust arrangement and will remain the beneficial owner of such property. Subco2 will deal with the such real property exclusively as directed by DC at all times.
You have advised that each of Subco1 and Subco2 will have no purpose or activity other than to acquire legal and hold title (but not beneficial title) to the particular real property acquired by it from DC, and to hold such title to such property as nominee, agent and bare trustee for the beneficial owner of such property. In the subsequent transfer of the one share of Subco1 to TC1 and the one share of Subco2 to TC2, as contemplated by the Proposed Transactions described in Paragraphs 35, DC will assign the nominee agreement between Subco1 and DC to TC1 and the nominee agreement between Subco2 and DC to TC2 such that TC1 or TC2, as the case may be, will become the principal under such agreement.
30. In connection with the Proposed Transactions, and following the transfers of legal title described in Paragraph 29, DC and its shareholders will enter into an agreement regarding various issues relating to the Proposed Transactions, including:
XXXXXXXXXX.
31. Reserved.
Employee Issues
32. After the incorporation of TC1, but prior to the determination of the types of property of DC, as described in Paragraphs 33 and 34, TC1 will make offers of employment to all or some of the employees of DC, other than Sib2, which, if accepted, will be effective at the time of the transfers of property described in Paragraph 35. DC will satisfy any severance obligations in respect of employees, other than Sib2, who do not receive or accept TC1's offer of employment.
Types of Property
33. Immediately before the transfers of property described in Paragraph 35, the property of DC will be determined on a consolidated basis by including the appropriate pro-rata share of the assets of any corporation or partnership over which DC has the ability to exercise significant influence (DC and such corporations and partnerships will be referred to as the "DC Group") and such assets will be classified into three types of property for purposes of the definition of "distribution" in subsection 55(1), as follows:
(a) cash or near-cash property, consisting of all the current assets of the DC Group;
(b) investment property, comprising all of the assets of the DC Group, other than any cash or near-cash property, any income which would, for purposes of the Act, be income from property or income from an specified investment business; and
(c) business property, comprising all of the assets of the DC Group, other than cash or near-cash property, any income which would, for purposes of the Act, be income from a business (other than a specified investment business).
For the purposes of this Paragraph, a corporation will be considered to have significant influence over a corporation or partnership if it has significant influence over that corporation or partnership or over any other corporation or partnership that has significant influence over that corporation or partnership. For greater certainty, DC will not have significant influence over any corporations or entity other than Subco1, Subco2 (which only holder registered title to DC's real property which will all be classified as business property as described below) and the Partnership. While DC has significance influence over Subco1 and Subco2 and the Partnership, such that DC would be required to use the consolidated look-through method for determining the appropriate proportion of each of the three types of property that its shares of Subco1, Subco2 and the limited partnership interest of the Partnership would represent, since TC1 and TC2 will each receive its pro-rata share of the limited partnership interest of the Partnership held by DC, and since Subco1 and Subco2 only hold legal title to certain real property as bare trustee, the consolidated look-through method will not actually be undertaken for the purposes of this proposed distribution.
In addition, for the purposes of determining the net fair market value of the types of property of DC:
(d) any tax accounts, such as CDA, pre-1972 CSOH, RDTOH, deferred taxes or balances of any capital losses of DC, or of any other entity over which DC has significant influence, will not be considered property or a liability, as the case may be;
(e) no amount will be considered to be a liability unless such amount represents a true legal liability which is capable of quantification;
(f) all revenue-producing real property and land inventory of DC will be classified as business property;
(g) the one common share of each of Subco1 and Subco2 will be allocated to business property and the one common share of Subco1 will be transferred to TC1 and the one common share of Subco2 will be transferred to TC2 on the transfer of DC's property to each of TC1 and TC2 as described in Paragraph 35;
(h) the share of any income or loss of the Partnership for its taxation year ending XXXXXXXXXX, that relates to the XXXXXXXXXX% limited partnership interest in the Partnership acquired from DC by TC1 and TC2, as contemplated in Paragraph 35, will be allocated on a pro rata basis solely to TC1 and TC2. For greater certainty, no portion of such income or loss of the Partnership will be allocated to DC; and
(i) income and other taxes payable will be classified as a current liability.
34. For the purpose of determining, on a consolidated basis, the net FMV of DC's three types of property immediately before the transfer of property described in Paragraph 35, any liabilities of DC will be allocated to, and be deducted in the calculation of, the net FMV of each type of property of DC in the following manner:
(a) current liabilities of DC (including the current portion of the long-term debt, loans from shareholders and severance obligations, to the extent these are not already paid by 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 and the amount of current liabilities allocated as described herein will not exceed the aggregate FMV of the cash or near cash property of DC;
(b) following the allocation of current liabilities to cash or near cash property of DC as described in (a) any remaining net FMV of accounts receivable and prepaid expenses may be reclassified as business property and excluded from the net FMV of DC's cash or near cash property, to the extent that such property will relate to a business that is carried on by DC and will be carried on by TC1 or TC2 and that will be collected or consumed in the ordinary course of that business;
(c) liabilities of DC, other than current liabilities, that relate to a particular property will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property and liabilities that pertain 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;
(d) if any liabilities remain after the allocations described in (a) and (c) are made ("excess DC unallocated liabilities"), such excess DC unallocated liabilities will then be allocated to the cash or near cash property, investment 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 excess DC unallocated liabilities.
Based on the above, it is anticipated that DC will only have cash or near cash property and business property at the time of the transfer of property described in Paragraph 35.
Distribution
35. DC will transfer at FMV, the TC1 Transfer Proportion of each type of property of DC to TC1, and the TC2 Transfer Proportion of each type of property of DC to TC2, as determined in accordance with Paragraphs 33 and 34, such that immediately following such transfers, the net FMV of each type of property so transferred to each of TC1 and TC2, as the case may be, will for greater certainty, 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 transfer, of all of the shares of DC owned by TC1 or TC2, as the case may be, at that time;
is of
(b) the aggregate FMV, immediately before the transfer, of all of the issued and outstanding shares of DC at that time.
For the purposes of this Paragraph the expression "approximate that proportion" means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net fair market value of each type of property which TC1 or TC2, as the case may be, will receive as compared to what TC1 and TC2, as the case may be, would have received had such corporation received its appropriate pro-rata share of the net fair market value of that type of property.
It is anticipated that these transfers of property will take place on or after XXXXXXXXXX but before XXXXXXXXXX.
For greater certainty, DC will transfer the one common share of Subco1 to TC1 and the one common share of Subco2 to TC2 and DC will transfer only beneficial ownership of each parcel of real property to TC1 and TC2 on the distribution. As indicated in Paragraph 29, the nominee agreement between DC and Subco1 will be assigned by DC to TC1 such that TC1 will become the principal under that agreement and Subco1 will hold legal title to the real property transferred by DC to TC1 as nominee of TC1. The nominee agreement between DC and Subco2 will be assigned by DC to TC2 such that TC2 will become the principal under that agreement and Subco2 will hold legal title to the real property transferred by DC to TC2 as nominee of TC2.
As consideration for the property transferred by DC:
? TC1 will assume the TC1 Transfer Proportion, and TC2 will assume the TC2 Transfer Proportion, of the aggregate liabilities of DC, including any mortgages payable; and
? Each of TC1 and TC2, will issue to DC XXXXXXXXXX Class B shares having an aggregate redemption amount and aggregate FMV equal to the amount by which the aggregate FMV of the particular properties so transferred to such corporation, exceeds the pro-rata share of DC's liabilities so assumed by such corporation.
DC and each of TC1 and TC2, will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property transferred by DC to such corporation as described in this Paragraph. The agreed amount in respect of each eligible property so transferred will be as follows:
(i) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(ii) in the case of depreciable property of a prescribed class, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
(iii) in the case of eligible capital property, an amount not less than the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).
In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b). The amount of liabilities to be allocated to the property that is the subject of an election under subsection 85(1) will not exceed the total of the agreed amounts elected for that property. The amount of liabilities to be allocated to the property that is not the subject of an election under subsection 85(1) will not exceed the FMV of any such property.
For the purposes of the joint elections described in this Paragraph, the reference to the "undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition" in subparagraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to DC of all the property of that class that the capital cost of the asset immediately before the disposition is of the capital cost of all the property of that class immediately before the disposition.
The directors of each of TC1 and TC2 will resolve, pursuant to the provisions of the BCA, to add to the stated capital of the Class B shares so issued by such corporation in respect of properties for which an election under subsection 85(1) is made, an amount equal to the aggregate agreed amounts, less the amount of the liabilities assumed by TC1 or TC2, as the case may be, and in any other case, the FMV of such property so transferred less the amount of the liabilities assumed by TC1 or TC2 in respect of such transfer.
36. TC1 will enter into a transitional services agreement with TC2 under which TC1 will provide property management services to TC2 for a fee, based on market rates, for a period of six months following the Proposed Transactions. TC2 will have the right, on 30 days notice, to terminate the transitional services agreement.
Redemption of Shares
37. TC1 and TC2 will each redeem all of its Class B shares held by DC for an amount equal to the aggregate redemption amount and FMV of such shares. In consideration, TC1 and TC2 will each issue a non-interest bearing demand promissory note to DC (the "TC1 Note" and "TC2 Note", respectively) with a principal amount and FMV equal to the aggregate redemption amount and FMV of the Class B shares so redeemed. DC will accept the TC1 Note and TC2 Note as full payment of the redemption amount of the Class B shares so redeemed.
38. TC2 will each cause its first taxation year to end at the end of the day on which its Class B shares are redeemed. This will occur at least one day prior to the transaction described in Paragraph 39.
Wind-up of DC
39. TC1 and TC2 will, by special resolution, resolve to liquidate and dissolve DC pursuant to the provisions of the BCA. In connection with the winding-up of DC, DC will assign and distribute the TC1 Note to TC1 and the TC2 Note to TC2. As a result of the assignment and distribution of the TC1 Note and TC2 Note by DC, the obligation of each of TC1 and TC2 under their respective notes will be cancelled.
For the purposes of the Act, in particular subsection 84(2), the FMV of the TC1 Note received by TC1 and the TC2 Note received by TC2, will be allocated among the classes of shares of DC held by TC1 or TC2, as the case may be, based on the relative aggregate FMV of the shares of each class of DC held by TC1 (i.e. Class A Shares and Common Shares) and by TC2 (i.e. Class A Shares and Common Shares).
Prior to the distribution of the TC1 Note and the TC2 Note, DC will elect, pursuant to subsection 83(2), an amount not exceeding the balance in DC's CDA account at that time, in prescribed manner and prescribed form, to treat the portion of the winding-up dividend referred to in subparagraph 88(2)(b)(i) on the Common Shares as a separate capital dividend. Each of TC1 and TC2 will receive a proportionate capital dividend from DC.
In due course, DC will file tax returns, and, after the receipt of any dividend refund or other tax related refunds, file articles of dissolution. Upon receipt of the Certificate of Dissolution, DC will be formally dissolved. However, DC will continue to exist and not be formally dissolved until at least some time after XXXXXXXXXX but before XXXXXXXXXX.
40. An agreement will be entered by TC1 and TC2 whereby each will agree that all assets or liabilities, if any, not known at the date of the wind-up of DC, will be subsequently shared equally among TC1 and TC2.
41. Pursuant to the agreement described in Paragraph 30, TC1 will agree to indemnify TC2, and TC2 will agree to indemnify TC1, for losses occasioned by misrepresentations made by, or actions taken by, the particular party of their respective affiliates or successors, that adversely affect the application of the rulings provided herein.
Post-Distribution Transactions
42. It is anticipated that either TC1 or TC2 will receive DC's entire XXXXXXXXXX% undivided interest in Property1 as a result of the distribution described in Paragraph 35. In order to consolidate the holding of Property1:
(a) if TC1 acquires DC's XXXXXXXXXX% undivided interest in Property1, Bco will transfer its XXXXXXXXXX% undivided interest in Property1 to TC1 for FMV consideration; and
(b) if TC2 acquires DC's XXXXXXXXXX% undivided interest in Property1, Sib1 will transfer his XXXXXXXXXX% undivided interest in Property1 to TC2 for FMV consideration.
In either case, none of the parties involved will file an election under section 85 in respect of such transfer.
In addition, if (a) occurs, Sib1 may also transfer his XXXXXXXXXX% undivided interest in Property1 to TC1 for FMV consideration, that may include shares of TC1. If (b) occurs, Bco may transfer its XXXXXXXXXX% undivided interest in Property1 to TC2 for FMV consideration, that may include shares of TC2. It is possible that the parties to these transactions will file an election under section 85 in respect of these transfers.
43. Prior to the Proposed Transactions, DC leased its office space from Aco. TC1 may continue to lease this office space from Aco following the Proposed Transactions.
44. Each of TC1 and TC2 was incorporated as a numbered company. Following the Proposed Transactions, it is possible that TC1 will change its name to adopt some form of the name "XXXXXXXXXX".
45. It is likely that the first taxation year-end of TC2, as described in Paragraph 38 , will not coincide with the taxation year-end of other corporations owned by Sib2. Accordingly, TC2 may apply to the CRA to change its taxation year-end to a year-end that coincides with the year-ends of other corporations owned by Sib2.
46. The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of the transactions described in Paragraphs 27 and 28, which will occur in any order and at any time before the transaction described in Paragraph 33, and the filing of the applicable election forms described in Paragraphs 26, 35 and 42, which will be filed before the applicable due date following the completion of the Proposed Transactions.
47. Following DC's XXXXXXXXXX year-end, DC purchased XXXXXXXXXX lots of Property3 from the Partnership at their FMV. XXXXXXXXXX The purchase price was satisfied with cash and a non-interest bearing mortgage that is due in one year. This acquisition would have occurred regardless of whether the Proposed Transactions are carried out and was not undertaken in contemplation of the Proposed Transactions and the Proposed Transactions would have taken place in the same manner regardless of whether the above-mentioned acquisitions actually occurred.
It is also possible that after the Proposed Transactions are completed, that TC1 and or TC2 may acquire additional lots of Property3 from the Partnership, or that one or more of the partners may buy the partnership interest of the other. If such acquisitions do occur, it is your view that these acquisitions will occur regardless of whether the Proposed Transactions are carried out. You maintain that the Proposed Transactions will take place in the same manner regardless of whether the above-mentioned acquisitions actually occur.
48. Prior to XXXXXXXXXX, DC will declare a management salary payable to each of Sib1 and Sib2 in respect of its XXXXXXXXXX taxation year. In addition, after XXXXXXXXXX, but before the transfers of property described in Paragraph 35 take place, DC will declare a management salary payable to each of Sib1 and Sib2 in respect of its XXXXXXXXXX taxation year. DC has declared such management salaries to each of Sib1 and Sib2 on an annual basis. The aggregate quantum of the foregoing management salaries to be declared is expected to be in excess of $XXXXXXXXXX. The liability for the bonuses payable to Sib1 will be assumed by TC1 and the liability for the bonuses payable to Sib2 will be assumed by TC2 as part of the transfers of property described in Paragraph 35, and each of TC1 and TC2 will pay the assumed liability on the respective bonuses within XXXXXXXXXX days of the applicable taxation year of DC in which the particular bonus was declared. It is your view that the declaration of a management salary payable in DC's XXXXXXXXXX taxation years would have occurred regardless of whether the Proposed Transactions are carried out and was not be undertaken in contemplation of the Proposed Transactions. In addition, you maintain that the Proposed Transactions would have taken place in the same manner regardless of whether the management salary was actually declared.
49. DC is required to refinance any mortgages payable that are currently owing by it where such mortgages become due and, DC has on such occasions, increased the principal amount when such mortgages are refinanced and use the proceeds from such refinancing for ordinary business purposes. On XXXXXXXXXX, one of DC's mortgages payable (in respect of a real property located at XXXXXXXXXX) did become due and payable and DC increased the principal amount at the time this mortgage was refinanced by $XXXXXXXXXX. DC used the additional proceeds from this mortgage refinancing for ordinary business purposes. There are no other mortgages owing by DC that will become due and payable prior to the transfers of property and assumption of debts that are anticipated to take place between XXXXXXXXXX, as described in Paragraph 35. You maintain that the refinancing and increase in the principal amount owing of the above described mortgage payable would have occurred in the same manner regardless of whether the Proposed Transactions are carried out and the Proposed Transactions will be carried out regardless of whether such refinancing has occurred.
50. No property has or will become property of DC or any corporation controlled by DC in contemplation of and before the distribution described in Paragraph 35, except as described herein, or in the ordinary course of business, and no liabilities have been, or will be, incurred or discharged by DC, the Partnership or any corporation controlled by DC in contemplation of and before the distribution described in Paragraph 35, except as described herein or in the ordinary course of business. Moreover, except as specifically outlined herein, there is no expectation or intention of any of DC, TC1, TC2, the Partnership or any corporation controlled by DC, TC1, TC2, to dispose of any property owned by it as part of the series of transactions or events that includes the Proposed Transactions, other than in the ordinary course of business.
51. None of DC, TC1 or TC2 is or will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1). None of DC, TC1 or TC2 is or will be a "specified financial institution" as defined in subsection 248(1) prior to the completion of the Proposed Transactions.
52. None of the shares in the capital of DC, TC1 or TC2 will be at any time during the implementation of the Proposed Transactions:
(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".
53. It is intended that the shareholders of TC1 and TC2 will receive amounts from their respective corporations, either by way of dividends or reductions in PUC. These transactions will not be part of the series of transactions or events that includes the Proposed Transactions.
PURPOSE OF THE PROPOSED TRANSACTIONS
54. The purpose of the Proposed Transactions is to permit the shareholders of DC to separate their respective interests in DC to the extent possible, in order to enable Sib1 and Trust1, on the one hand, and Sib2 and Trust2, on the other hand, to own their various property interests independently from each other.
56. XXXXXXXXXX.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described, our rulings are as set forth below.
A. Paragraph 40(2)(g) will apply, to deem any capital loss realized by:
(a) Sib1 on the disposition of the Class A Shares of DC to TC1, as described in Paragraph 25(a); and
(b) Sib2 on the disposition of the Class A Shares of DC to TC2, as described in Paragraph 25(b);
to be nil and pursuant to paragraph 53(1)(f), the amount of such superficial loss realized by Sib1 and Sib2, subject to the application of subsection 112(3), will be added in computing the adjusted cost base to TC1 and TC2, respectively, of the Class A Shares of DC acquired by such corporation.
B. The transfer by DC of legal title to certain real property to Subco1, as described in Paragraph 29(a), and the transfer by DC of legal title to certain real property to Subco2, as described in Paragraph 29(b), will not constitute a disposition for the purposes of the Act provided Subco1 and Subco2, as the case may be, can reasonably be considered to act as agent for all beneficiaries with respect to all dealings with all such property.
C. Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to:
(a) The transfer by Trust1 of the Common Shares of DC to TC1, as described in Paragraph 26(a);
(b) The transfer by Trust2 of the Common Shares of DC to TC2, as described in Paragraph 26(b); and
(c) The transfer by DC of each eligible property to TC1 and TC2, as the case may be, as described in Paragraph 35;
such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor's proceeds of disposition of the particular property and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.
D. Provided that the issued and outstanding shares of DC, as described in Paragraph 7, constitute capital property to the particular holder immediately prior to the commencement of the Proposed Transactions, the acquisition of shares of TC1 or TC2 by such holder, as the case may be, as consideration for such holder's shares of DC under the Proposed Transactions, will not, in and by themselves, cause such holder's TC1 or TC2 shares, as the case may be, to not be capital property to that holder.
E. Provided an existing property that is owned by DC constitutes a capital property, depreciable property or inventory, as the case may be, to DC immediately prior to the commencement of the Proposed Transactions, where such property is acquired by TC1 or TC2, as the case may be, as described in Paragraph 35, such acquisition will not, in and by itself, cause such property to cease to be a capital property, depreciable property or inventory, as the case may be, to the particular acquiror immediately following such acquisition.
F. As a result of the redemption by each of TC1 and TC2 of its Class B shares held by DC, as described in Paragraph 37, and as a result of the distributions by DC in the course of its winding-up, as described in Paragraph 39:
(a) by virtue of paragraphs 84(3)(a) and 84(3)(b), each of TC1 and TC2 will be deemed to have paid, and DC will be deemed to have received, respectively, a taxable dividend on the Class B shares of TC1 and TC2, as the case may be, equal to the amount, if any, by which the aggregate amount paid on such redemption exceeds the aggregate PUC in respect of such Class B shares immediately before the redemption;
(b) by virtue of paragraph 88(2)(b) and subsection 84(2), but subject to (b)(i) to (iii) below, DC will be deemed to have paid, and each of TC1 and TC2 will be deemed to have received, a dividend (the "winding-up dividend") on the Class A Shares and Common Shares, equal to the proportion of the amount by which the aggregate FMV of the property of DC distributed to each of TC1 and TC2 on the winding-up and allocated to a particular class of shares as described in Paragraph 39, exceeds the amount by which the PUC of the Class A Shares or Common Shares of DC, as the case may be, is reduced as a result of the distribution, that the number of Class A Shares or Common Shares of DC held by TC1 or TC2, as the case may be, is of the number of such shares outstanding immediately before that time, and
(i) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (b) as does not exceed DC's CDA determined immediately before the payment of the winding-up dividend will be deemed, for purposes of the subsection 83(2) election referred to in Paragraph 39, to be the full amount of a separate dividend;
(ii) pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend referred to in (b) that is equal to the lesser of:
(a) DC's pre-1972 CSOH, as determined immediately before the payment of the winding-up dividend; and
(b) the amount by which the winding-up dividend exceeds the portion of thereof in respect of which DC will elect under subsection 83(2);
will be deemed not to be a dividend; and
(iii) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in (i) that is deemed to be a separate dividend and the portion thereof referred to in (ii) that is deemed not to be a dividend, will be deemed to be a separate dividend that is a taxable dividend; and
(c) the taxable dividends described in (a) and (b) above:
(i) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the person deemed to have received such dividend;
(ii) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income in the year in which such a dividend is deemed to have been received, and, for greater certainty, will not be prohibited by subsections 112(2.1), (2.2), (2.3) or (2.4);
(iii) will be excluded in determining the POD to the recipient of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;
(iv) will, by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received;
(v) will not be subject to tax under Part IV except to the extent that such payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend; and
(vi) will not be subject to tax under Part IV.1 or VI.1.
G. 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 shares in the circumstances described in subparagraph 55(3.1)(b)(iii); or
(d) an acquisition of property in the circumstances described in subparagraph 55(3.1)(c) or (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 F and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
H. Pursuant to subsection 69(5), but subject to the application of subsection 112(3), subsections 40(3.4) and (3.6) will not apply to deem any capital loss realized by:
(a) TC1 on the disposition of the Class A Shares of DC on the winding-up of DC, as described in Paragraph 39; and
(b) TC2 on the disposition of the Class A Shares of DC on the winding-up of DC, as described in Paragraph 39;
to be nil. For greater certainty, each of TC1 and TC2 will not be considered to have realized such capital loss until such time that the articles of dissolution are filed for DC and DC has been formally dissolved.
I. The assignment and cancellation of the obligations represented by the TC1 Note and TC2 Note, as described in Paragraph 39, will not give rise to a forgiven amount, and none of DC, TC1 or TC2 will realize any gain or incur any loss as a result of the assignment and cancellation of these obligations and notes.
J. Provided that TC1 and TC2, as the case may be, continues to use the property that it acquired from DC, as described in Paragraph 35, for the purpose of gaining or producing income from such property (other than income which is exempt from taxation), and provided that TC1 and TC2, as the case may be, has a legal obligation to pay interest in respect of any mortgage (other than any mortgages in respect of which DC was not entitled to deduct interest under paragraph 20(1)(c)) that such corporation assumed from DC as consideration for such property, as described in Paragraph 35, any such interest paid in the year or payable in respect of the year (depending on the method regularly followed by such corporation in computing its income for the purposes of the Act) by TC1 and TC2, as the case may be, in respect of such mortgages, not in excess of a reasonable amount, will be deductible in computing such corporation's income under paragraph 20(1)(c).
K. The provisions of subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to any of the Proposed Transactions described herein, in and by themselves.
L. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions described herein, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.
The Rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA provided that the Proposed Transactions are completed by XXXXXXXXXX. The rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.
Unless otherwise confirmed in the above rulings, 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) any tax consequences relating to the possibility that after the Proposed Transactions are completed the shareholders of TC1 and TC2 may receive amounts from their respective corporations, either by way of dividends or reductions in PUC as described in Paragraph 53, or that TC1 and/or TC2 may acquire additional lots of Property3 from the Partnership, or that one or more of the partners may buy the partnership interest of the other as described in Paragraph 47, including whether any such transaction would cause paragraph 55(3.1);
c) to apply to deem any of the dividends received by TC1 or TC2, as the case may be, to be treated as a capital gain or proceeds of disposition of such shares for the purposes of subsection 55(2), or whether any of these transactions would also be included in the same series of transactions or events that includes the Proposed Transactions; and
(c) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place, prior to, during, or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that include other transactions or events that are not described in this letter.
OPINION
Provided DC ceases to be a member of the Partnership at the point in time when DC transfers its limited partnership interest in the Partnership to TC1 and TC2 (the "Partnership Interest Disposition"), as described in Paragraph 35, it is our opinion that subsection 96(1.01), if enacted as proposed in the draft legislation released by the Department of Finance on February 27, 2004, would apply to the Partnership Interest Disposition such that, inter alia
(a) for the purposes of subsection 96(1), paragraph 96(1.01)(a) would deem DC to be a member of the Partnership at the end of the Partnership's XXXXXXXXXX fiscal period on XXXXXXXXXX. However, as described in Paragraph 33(h), since the Partnership will not be allocating to DC any portion of the Partnership's income or loss for its fiscal year ending XXXXXXXXXX, DC's share of the Partnership's income or loss for that taxation year will be nil, and
(b) for purposes of the application of subparagraphs 53(1)(e)(i) and 53(2)(c)(i) to DC, paragraph 96(1.01)(b) would deem the Partnership's XXXXXXXXXX fiscal period to end immediately before the time that is immediately before the time DC ceased to be a member of the Partnership. However, as described in Paragraph 33(h), since the Partnership will not be allocating to DC any portion of the Partnership's income or loss for its fiscal year ending XXXXXXXXXX, DC's share of the Partnership's income or loss for that taxation year will be nil, and consequently, in computing DC's adjusted cost base of its limited partnership interest in the Partnership immediately before the Partnership Interest Disposition, the addition or reduction in respect of DC's share of any income or loss of the Partnership for the Partnership's fiscal period ending XXXXXXXXXX, pursuant to and in accordance with subparagraph 53(1)(e)(i) or subparagraph 53(2)(c)(i), as the case may be, would be nil.
As indicated in paragraph 22 of Information Circular 70-6R5, an expression of opinion is not an advance income tax ruling and, accordingly, is not binding on CRA.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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