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: Whether safe income on hand which is attributable to one class of shares can be combined with the nominal safe income on hand which is attributable to another class of shares where the two classes of shares are exchanged for one class of new shares under a tax-deferred exchange.
Position: Yes.
Reasons: Consistent with the position taken in question 25 at the 2001 APFF and the "Robertson rules".
XXXXXXXXXX 2005-012269
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, and your e-mails of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.
To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:
? dealt with in an earlier return of the taxpayers or a related person;
? being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;
? under objection by the taxpayers or a related person;
? before the courts; or
? the subject of a ruling previously considered by the Income Tax Rulings Directorate.
DEFINITIONS
In this letter, unless otherwise noted: (i) all statutory references are to the Income Tax Act, (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended (the "Act"), and (ii) all references to monetary amounts are in Canadian dollars.
In this letter, the following terms have the meanings specified:
"Aco" means XXXXXXXXXX;
"adjusted cost base" has the meaning assigned by section 54;
"agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in their election under subsection 85(1) in respect of the property;
"Canadian corporation" has the meaning assigned by subsection 89(1);
"Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);
"capital property" has the meaning assigned by section 54;
"HOLDCO" means XXXXXXXXXX;
"disposition" has the meaning assigned by subsection 248(1);
"paid-up capital" or "PUC" has the meaning assigned by subsection 89(1);
"private corporation" has the meaning assigned by subsection 89(1);
"proceeds of disposition" has the meaning assigned by section 54;
"safe-income determination time" has the meaning assigned by subsection 55(1);
"safe income on hand" in respect of a particular share of a corporation at a particular time means the portion of the unrealized gain inherent in such share of the corporation at that time that cannot reasonably be considered to be attributable to anything other than income earned or realized (as determined pursuant to subsection 55(5)), to the extent that it is on hand, by any corporation after 1971 and before the safe-income determination time for the transaction, event or series of transactions or events that includes the proposed transactions as described herein;
"series of transactions or events" has the meaning assigned by subsection 248(10);
"taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
"taxable dividend" has the meaning assigned by subsection 89(1).
"Trust 1" means XXXXXXXXXX;
"Trust 2" means XXXXXXXXXX;
Our understanding of the facts, proposed transactions and the purposes of the proposed transactions is as follows:
FACTS
1. HOLDCO and Aco are both Canadian corporations, Canadian-controlled private corporations, private corporations, and taxable Canadian corporations.
2. XXXXXXXXXX ("Sib 1")and XXXXXXXXXX ("Sib 2") are brothers who are adults and are resident in Canada.
3. HOLDCO is a corporation incorporated under the laws of XXXXXXXXXX. HOLDCO was formed by Certificate of Amalgamation dated XXXXXXXXXX upon the amalgamation of XXXXXXXXXX . Its authorized share capital consists of an unlimited number of Class A common shares (the "HA shares"), an unlimited number of non-cumulative, voting Class B shares (the "HB shares") redeemable for $XXXXXXXXXX per share, and an unlimited number of non-cumulative, non-voting Class C shares (the "HC shares") redeemable and retractable at $XXXXXXXXXX per share. The issued and outstanding share capital of HOLDCO consists of:
Shareholder HA shares HB shares HC shares
Trust 1 XXXXXXX
Trust 2 XXXXXXX
Sib 1 XXXXXXX XXXXXXX
Sib 2 XXXXXXX
XXXXXXX XXXXXXX XXXXXXX
4. Aco was incorporated as XXXXXXXXXX and continued as XXXXXXXXXX under the Canada Business Corporations Act on XXXXXXXXXX and changed its name to XXXXXXXXXX. Aco was originally in the business of XXXXXXXXXX. Its authorized share capital consists of an unlimited number of voting Class A shares (the "AA shares"), an unlimited number of voting, non-cumulative Class B shares (the "AB shares") redeemable for $XXXXXXXXXX per share, an unlimited number of non-voting, non-cumulative Class C preferred shares (the "AC shares"), redeemable and retractable for $XXXXXXXXXX per share, and an unlimited number of non-voting, non-cumulative Class D preferred shares, redeemable for $XXXXXXXXXX per share. The issued and outstanding share capital of Aco consists of:
Shareholder AA shares AB shares AC shares
Trust 1 XXXXXXX
Trust 2 XXXXXXX
Sib 1 XXXXXXX
HOLDCO ____ XXXXXXX
XXXXXXX XXXXXXX XXXXXXX
5. All of the issued and outstanding shares of HOLDCO have nominal paid-up capital (being less than $XXXXXXXXXX in aggregate). All of the issued and outstanding shares of Aco have nominal paid-up capital (being less than $XXXXXXXXXX in aggregate). Sib 1 controls both HOLDCO and Aco.
6. The AC shares were issued to HOLDCO on XXXXXXXXXX, in exchange for XXXXXXXXXX Class A shares of Aco (then known as XXXXXXXXXX) owned by HOLDCO, pursuant to section 86. The fair market value of Aco was high in XXXXXXXXXX due to XXXXXXXXXX and the redemption value of the AC shares reflected this value. The Class A shares of Aco had no or nominal safe income on hand attributable to them at the time as a dividend representing substantially all of the safe income on hand with respect to the shares had been paid to HOLDCO on XXXXXXXXXX. Consequently, the AC shares have a nominal entitlement to the safe income on hand of Aco.
7. Aco sold its business on XXXXXXXXXX and, after payment of the related income taxes, invested the proceeds in marketable securities. The net realizable value of Aco in XXXXXXXXXX was considerably lower than the value in XXXXXXXXXX since XXXXXXXXXX. The sale of the business resulted in net assets in the amount of approximately $XXXXXXXXXX to $XXXXXXXXXX. Aco is currently an investment holding corporation.
8. Since XXXXXXXXXX, Aco has income earned or realized in the amount of approximately $XXXXXXXXXX. It is anticipated that, immediately prior to the payment of the dividend described in paragraph 15 below, Aco will not have any unrealized gains in its assets.
9. The current fair market value of the AA shares is estimated to be nominal since the redemption value of the AC shares exceeds the net realizable value of Aco.
10. It is represented that the safe income on hand in respect of the AA shares has contributed to any gain on the AC shares.
PROPOSED TRANSACTIONS
11. Trust 1 will transfer its XXXXXXXXXX AA shares to HOLDCO at fair market value. As sole consideration, HOLDCO will issue to Trust 1 HC shares having a fair market value equal to the fair market value at that time of the AA shares so transferred. Trust 1 and HOLDCO 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. The agreed amount in respect of the shares so transferred will be $XXXXXXXXXX which will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The aggregate addition to the stated capital account of the HC shares will be equal to the aggregate PUC of the shares transferred.
12. Trust 2 will transfer its XXXXXXXXXX AA shares to HOLDCO at fair market value. As sole consideration, HOLDCO will issue to Trust 2 HC shares having a fair market value equal to the fair market value at that time of the AA shares so transferred. Trust 2 and HOLDCO 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. The agreed amount in respect of the shares so transferred will be $XXXXXXXXXX which will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The aggregate addition to the stated capital account of the HC shares will be equal to the aggregate PUC of the shares transferred.
13. Articles of Amendment will be filed for Aco to create a new class of non-voting Class E common shares of Aco.
14. HOLDCO will exchange the AA and AC shares of Aco for non-voting Class E common shares of Aco having a fair market value equal to the fair market value of the shares exchanged.
15. Aco will pay a taxable dividend on the Class E common shares of Aco to HOLDCO. The amount of the taxable dividend will not exceed the safe income on hand in respect of the AA shares immediately before the transaction described in paragraph 11 above.
PURPOSE OF THE PROPOSED TRANSACTIONS
Aco would like to pay out a substantial amount of its net assets to HOLDCO for XXXXXXXXXX on a tax-efficient basis. XXXXXXXXXX. The taxpayers would like to access the safe income on hand of Aco which is currently in respect of the AA shares. Aco is unable to pay a dividend on the AA shares because it would contravene the solvency requirement under the Canada Business Corporations Act. By using tax-deferred exchanges, the taxpayers propose to flow-through the safe income entitlement of the AA shares into the new Class E shares of Aco.
RULINGS
Provided that the above statements constitute a complete and accurate disclosure of all the facts, purposes of the proposed transactions and the proposed transactions, we rule as follows:
A. The safe income on hand in respect of the AA shares owned by HOLDCO immediately after the transfers described in paragraphs 11 and 12 above will be equal to the safe income on hand in respect of the AA shares owned by Trust 1 and Trust 2 immediately before the transfers described in paragraphs 11 and 12, respectively.
B. The safe income on hand in respect of the Class E shares of Aco owned by HOLDCO immediately after the exchange described in paragraph 14 above will be equal to the aggregate safe income on hand in respect of the AA and AC shares owned by HOLDCO immediately before the exchange described in paragraph 14 above.
C. Subsection 55(2) will not apply to the portion of the taxable dividend described in paragraph 15 above received by HOLDCO which does not exceed the safe income on hand that is in respect of the Class E shares of Aco.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.
1. Paragraphs 55(5)(b), (c) and (d) of the Act define the income earned or realized by a particular type of corporation. However, these paragraphs do not provide that the amount so computed represents an amount of income earned or realized that could reasonably be considered to contribute to the capital gain on a particular share.
2. Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:
(a) the determination of the fair market value or adjusted cost base of any particular share or the PUC of any shares referred to herein or the computation of safe income on hand attributable to the shares of any corporation. In particular, we are not providing any comment on whether the AA shares have a nominal fair market value or that there is any amount of safe income on hand in respect of the AA shares; or
(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
Yours truly,
XXXXXXXXXX
Manager
Corporate Reorganizations Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2005
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2005
Email this Content