2006 Ruling 2006-0168701R3 - sale of assets; shareholder/key employee bonuses

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 the proceeds from the sale of eligible capital property can be paid to shareholder/managers as a deductible bonus.

Position: Yes

Reasons: The company is a CCPC paying bonuses to active shareholder/key employees who are residents of Canada to reduce the CCPC's income from the Business and the asset sale to a nominal amount.

XXXXXXXXXX 							2006-016870

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling - XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling in respect the above taxpayer.

To the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling request are:

(i) dealt with in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

DEFINITIONS

In this letter, the following terms have the following meanings:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof. All statutory references in this letter are to the Act, unless stated otherwise;

(b) "active business carried on by a corporation" has the meaning assigned by subsection 125(7);

(c) "Assets" means all the assets of the Business, including goodwill;

(d) "Bonus" means, in total, approximately $XXXXXXXXXX and

- with respect to Key Employee A, approximately $XXXXXXXXXX,

- with respect to Key Employee B, approximately $XXXXXXXXXX,

- with respect to Key Employee C, approximately $XXXXXXXXXX;

(e) "Business" means the XXXXXXXXXX;

(f) "Canadian Partnership" has the meaning assigned by subsection 102(1);

(g) "Canco" means XXXXXXXXXX. Canco's principal place of business and head office is XXXXXXXXXX and its business number is #XXXXXXXXXX;

(h) "CCPC" or "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);

(i) "CRA" means Canada Revenue Agency;

(j) "Employee A Co" means XXXXXXXXXX. The address of Employee A Co is XXXXXXXXXX and its business number is #XXXXXXXXXX;

(k) "Employee B Co" means XXXXXXXXXX. The address of Employee B Co is XXXXXXXXXX and its business number is #XXXXXXXXXX;

(l) "Employee C Co" means XXXXXXXXXX. The address of Employee C Co is XXXXXXXXXX and its business number is #XXXXXXXXXX;

(m) "Individual A" means XXXXXXXXXX;

(n) "Individual B" means XXXXXXXXXX;

(o) "Individual Ca" means XXXXXXXXXX;

(p) "Individual Cb" means XXXXXXXXXX;

(q) "Key Employee(s)" means Key Employee A, Key Employee B, and Key Employee C, either singularly or collectively;

(r) "Key Employee A" means XXXXXXXXXX. The address of Key Employee A is XXXXXXXXXX and his SIN is #XXXXXXXXXX;

(s) "Key Employee B" means XXXXXXXXXX. The address of Key Employee B is XXXXXXXXXX and his SIN is #XXXXXXXXXX;

(t) "Key Employee C' means XXXXXXXXXX. The address of Key Employee C is XXXXXXXXXX and his SIN is #XXXXXXXXXX;

(u) "Limited Partnership" means XXXXXXXXXX limited partnership;

(v) "Paragraph" means a numbered paragraph in this letter;

(w) "Proposed Transactions" means the transactions described in Paragraphs 13 and 14;

(x) "SIN" means social insurance number;

(y) "taxation year" has the meaning assigned by subsection 249(1);

(z) "TC" means Taxation Centre; and

(aa) "TSO" means Tax Services Office.

Our understanding of the Facts and Proposed Transactions is as follows:

FACTS

1. Each of Canco, Employee A Co, Employee B Co, and Employee C Co, is a CCPC. Since incorporation in XXXXXXXXXX, Canco has carried on the Business, which is an active business carried on by a corporation exclusively in Canada.

Canco commenced business operations upon incorporation. Through prior business relationships and industry contacts, the Key Employees, with their combined XXXXXXXXXX years of experience, began XXXXXXXXXX business XXXXXXXXXX.

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

2. Each Key Employee is resident in XXXXXXXXXX, Canada. Each corporation referred to in this advance income tax ruling and each Key Employee is served by the XXXXXXXXXX TSO and the XXXXXXXXXX TC.

3. At the commencement of the Proposed Transactions, the shareholders of Canco and their shareholdings will be as follows:

Employee A Co		- XXXXXXXXXX  Class "A" Common Shares;
Employee B Co		- XXXXXXXXXX  Class "B" Common Shares;
Employee C Co		- XXXXXXXXXX  Class "C" Common Shares;

4. The shareholders of Employee A Co and their shareholdings are as follows:

Key Employee A XXXXXXXXXX Class "A" Common Shares; and

Individual A XXXXXXXXXX Class "D" Preferred Shares.

5. The shareholders of Employee B and their shareholdings are as follows:

Key Employee B XXXXXXXXXX Class "A" Common Shares; and

Individual B XXXXXXXXXX Class "D" Preferred Shares.

6. The shareholders of Employee C and their shareholdings are as follows:

Key Employee C XXXXXXXXXX Class "A" Common Shares; and

Individual Ca XXXXXXXXXX Class "B" Common Shares.

Individual Cb XXXXXXXXXX Class "D" Preferred Shares.

7. Each of the Key Employees has an employment agreement with Canco under which he is entitled to be paid remuneration including compensation in the form of additional compensation or so-called "bonuses".

8. Each of the Key Employees is an employee of Canco and has been active in and fundamental to the success of the Business. In particular, each Key Employee has been a director and officer of Canco and the only executive management of Canco.

Since inception, the Key Employees have had the primary responsibility of starting and developing the Business to its current successful level, including without limitation:

- development of sound and effective business strategies in order to achieve strong financial results based on a value-added business model;

- development of proprietary technologies;

- XXXXXXXXXX while minimizing costs;

- development of a strong client base XXXXXXXXXX;

- development of a specialized base of employees including XXXXXXXXXX;

- development of strong business ties to suppliers in a competitive environment; and

- successful leveraging of technology, expertise and relationships.

Through active participation and leadership in strategic and in day-to-day operations, each of the Key Employees has made a significant contribution to the overall success of Canco.

9. The Key Employees are negotiating a sale of the Assets comprising the Business on behalf of Canco. The purchaser of the Business will be the Limited Partnership, which will be a Canadian Partnership. The purchase price will be equal to the fair market value of the Business as negotiated by the parties to such transaction. The purchase price will be approximately $XXXXXXXXXX, with the consideration of cash in the amount of approximately $XXXXXXXXXX and units of the Limited Partnership having a fair market value of approximately $XXXXXXXXXX.

10. It is anticipated that the sale of the Assets will occur within the XXXXXXXXXX. Canco is of the view that this will result in an inclusion of business income to Canco under subsection 14(1) in the amount of approximately $XXXXXXXXXX.

11. Canco and the partners of the Limited Partnership will make a joint election under subsection 97(2) of the Act with respect to the sale of the Assets referred to in Paragraphs 9 and 10, with an aggregate elected amount of approximately $XXXXXXXXXX.

12. For its current taxation year, Canco anticipates its earned net income attributable to the Business and the sale of the Assets will be approximately $XXXXXXXXXX, before payment of any bonuses to the Key Employees. The current taxation year of Canco will end on XXXXXXXXXX.

PROPOSED TRANSACTIONS

13. The board of directors of Canco will declare the Bonus payable to each Key Employee before the end of the current taxation year, such that Canco will, at that time, have a legal obligation to pay the Bonus. Canco is of the view that the Bonus will be sufficient to reduce Canco's net income attributable to the Business and the sale of the Assets to a nominal amount.

14. Canco will pay the Bonus to each Key Employee no later than XXXXXXXXXX.

PURPOSE OF PROPOSED TRANSACTIONS

15. The Purpose of the Proposed Transactions is to remunerate the Key Employees in a tax efficient manner for their contributions to the success of the Business and Canco.

RULINGS

Provided that

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, Proposed Transactions and purpose of the proposed transactions,

(b) the Proposed Transactions are completed in the manner described above,

(c) there are no other transactions which may be relevant to the rulings requested,

(d) Canco withholds source deductions from the amount of the Bonus in accordance with the prescribed rules and remits the source deductions to the Receiver General within the prescribed time,

our rulings are as set forth below:

A. Paragraph 18(1)(a), section 67 and subsection 78(4) will not apply to prohibit Canco from deducting the amount of the Bonus in computing its income from a business for the taxation year that will end on XXXXXXXXXX.

B. Pursuant to subsection 5(1), the amount of the Bonus paid to each Key Employee must be included in calculating his respective employment income in the taxation year in which it is received.

CAVEATS

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding provided that the Proposed Transactions take place on or before XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:

(i) the accuracy of any amounts referred to in this letter;

(ii) the GST implications of any of the Proposed Transactions;

(iii) any other tax consequences of the Proposed Transactions or of related
transactions,

and without restricting the generality of the foregoing, in no way implies acceptance by the CRA of the allocation of the proceeds from the sale of the Assets described in Paragraphs 9 and 10.

Finally, since the CRA does not administer the XXXXXXXXXX, we are not providing any assurance that the bonus will be deductible for the purposes of that act.

Yours truly,

XXXXXXXXXX
For Director
Business and Partnerships Division
Income Tax Rulings Directorate