Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Standard butterfly
Position: Rulings given
Reasons: Complies with 55(3)(b).
XXXXXXXXXX 2006-019557
XXXXXXXXXX, 2007
Dear XXXXXXXXXX:
Subject: XXXXXXXXXX - Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-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 is:
(i) in an earlier return of the taxpayers or any related person;
(ii) being considered by a tax services office ("TSO") or taxation centre ("TC") in connection with a tax return previously filed by the taxpayers or any related person;
(iii) under objection by the taxpayers or any related person;
(iv) before the courts; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
The taxpayers have also represented that the proposed transactions described herein will not result in the taxpayers or any related person described herein being unable to pay its existing outstanding tax liabilities.
DEFINITIONS
In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:
"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 statutory provision is a reference to a provision of the Act, and the Income Tax Act Regulations thereunder are referred to as the "Regulations";
"adjusted cost base" ("ACB") has the meaning assigned by section 54;
"agreed amount" means the amount agreed on by the transferor and transferee in respect of an eligible property in an election filed pursuant to subsection 85(1);
"BCA" means the Business Corporations Act (XXXXXXXXXX) or any of its predecessor statutes;
"BN" means the tax identification number assigned by the CRA to the particular entity;
"Butterfly Transfers" means the transfers of property by DC described in Paragraph 11;
"Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);
"capital property" has the meaning assigned by section 54;
"CRA" means the Canada Revenue Agency;
"DC" means XXXXXXXXXX (BN XXXXXXXXXX);
"DC Common Shares" means the issued common shares in the capital stock of DC;
"depreciable property" has the meaning assigned in subsection 248(1);
"distribution" has the meaning assigned by subsection 55(1);
"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;
"forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);
"paid-up capital" ("PUC") has the meaning assigned by subsection 89(1);
"Paragraph" refers to a numbered paragraph in this advance income tax ruling;
"private corporation" has the meaning assigned by subsection 89(1);
"Proposed Transactions" means the proposed transactions described in Paragraphs 5 to 15;
"series of transactions or events" includes the transactions or events has the extended meaning given to it in subsection 248(10);
"Sibling1" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;
"Sibling2" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;
"Sibling3" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;
"Siblings" means Sibling1, Sibling2 and Sibling 3, collectively;
"specified investment business" has the meaning assigned by subsection 89(1);
"stated capital" means stated capital as that expression is used in the BCA;
"taxable Canadian corporation" has the meaning assigned in subsection 89(1);
"TC1" means XXXXXXXXXX as described in Paragraph 5;
"TC2" means XXXXXXXXXX as described in Paragraph 5;
"TC3" means XXXXXXXXXX as described in Paragraph 5; and
"TCs" means TC1, TC2 and TC3, collectively.
FACTS
1. DC was incorporated on XXXXXXXXXX under the BCA. DC deals with the XXXXXXXXXX TSO and files its returns at the XXXXXXXXXX TC.
2. DC is a CCPC and a taxable Canadian corporation. The only shares of DC that are issued and outstanding are XXXXXXXXXX DC Common Shares that are held equally by Sibling1, Sibling2 and Sibling3, as capital property. The DC Common Shares owned by each of the Siblings have a total paid-up capital of $XXXXXXXXXX and adjusted cost base of $XXXXXXXXXX. DC carries on a XXXXXXXXXX farming business.
3. The assets of DC consist primarily of cash, receivables, farm equipment, XXXXXXXXXX , farmland and buildings.
4. All of DC's liabilities are current liabilities.
PROPOSED TRANSACTIONS
5. Sibling1 will incorporate TC1 under the BCA. Sibling2 will incorporate TC2 under the BCA. Sibling3 will incorporate TC3 under the BCA. Each of the TCs will be a private corporation and a taxable Canadian corporation.
6. The authorized capital of each of the TCs will consist of: an unlimited number of voting common shares, an unlimited number of non-cumulative, non-voting, redeemable and retractable Class "A" special shares ("TC Class A Shares"); and an unlimited number of non-cumulative, non-voting, redeemable and retractable Class "B" special shares ("TC Class B Shares").
On incorporation of TC1, Sibling1 will subscribe for XXXXXXXXXX common shares of TC1 for $XXXXXXXXXX. On incorporation of TC2, Sibling2 will subscribe for XXXXXXXXXX common shares of TC2 for $XXXXXXXXXX. On incorporation of TC3, Sibling3 will subscribe for XXXXXXXXXX common shares of TC3 for $XXXXXXXXXX.
7. Sibling1 will transfer his XXXXXXXXXX DC Common Shares to TC1. As consideration therefor, TC1 will issue to Sibling1 a number of TC Class A Shares having an aggregate redemption amount and FMV equal to the fair market value of the XXXXXXXXXX DC Common Shares transferred to TC1.
TC1 and Sibling1 will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of Sibling1's DC Common Shares to TC1. The agreed amount specified in the election will be an amount that is equal to the aggregate ACB of the XXXXXXXXXX DC Common Shares to Sibling1 immediately before such transfer. For greater certainty, the agreed amount will not be less than the least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the aggregate FMV of the DC Common Shares so transferred to TC1.
For the purposes of the Act, the increase to the PUC of the TC Class A Shares that are issued as consideration for the XXXXXXXXXX DC Common Shares transferred to TC1, will be $XXXXXXXXXX.
8. Sibling2 will transfer his XXXXXXXXXX DC Common Shares to TC2. As consideration therefor, TC2 will issue to Sibling2 a number of TC Class A Shares having an aggregate redemption amount and FMV equal to the fair market value of the XXXXXXXXXX DC Common Shares transferred to TC2.
TC2 and Sibling2 will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of Sibling2's DC Common Shares to TC2. The agreed amount specified in the election will be an amount that is equal to the aggregate ACB of the XXXXXXXXXX DC Common Shares to Sibling2 immediately before such transfer. For greater certainty, the agreed amount will not be less than the least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the aggregate FMV of the DC Common Shares so transferred to TC2.
For the purposes of the Act, the increase to the PUC of the TC Class A Shares that are issued as consideration for the XXXXXXXXXX DC Common Shares transferred to TC2, will be $XXXXXXXXXX.
9. Sibling3 will transfer his XXXXXXXXXX DC Common Shares to TC3. As consideration therefor, TC3 will issue to Sibling3 a number of TC Class A Shares having an aggregate redemption amount and FMV equal to the fair market value of the XXXXXXXXXX DC Common Shares transferred to TC3.
TC3 and Sibling3 will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of Sibling3's DC Common Shares to TC3. The agreed amount specified in the election will be an amount that is equal to the aggregate ACB of the XXXXXXXXXX DC Common Shares to Sibling3 immediately before such transfer. For greater certainty, the agreed amount will not be less than the least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the aggregate FMV of the DC Common Shares so transferred to TC3.
For the purposes of the Act, the increase to the PUC of the TC Class A Shares that are issued as consideration for the XXXXXXXXXX DC Common Shares transferred to TC3, will be $XXXXXXXXXX.
10. Immediately before the Butterfly Transfers, the property owned by DC will be classified into the following three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:
(a) cash or near-cash property, comprising all of the current assets of DC;
(b) investment property, comprising all of the assets of DC, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or from a specified investment business; and
(c) business property, comprising all of the assets of DC, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from an active business carried on by DC (other than a specified investment business) including any goodwill.
Based on the types of property classifications described above, it is anticipated that DC will only have cash or near-cash property and business property at the time of the Butterfly Transfers.
11. DC will transfer one third of each of the three types of property of DC to TC1, TC2 and TC3, to the extent it owns property of that type, as determined in accordance with Paragraph 10. As consideration for the property transferred by DC, each of the TCs may assume an appropriate amount of DC's existing liabilities and each of the TCs will issue to DC a number of its TC 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 that TC exceeds the amount of DC's liabilities assumed by that TC, if any.
12. DC and each of the TCs, 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 the TCs as described in Paragraph 11. The agreed amount in respect of each eligible property so transferred will be as follows:
(a) in the case of capital property (other than depreciable property of a prescribed class), an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(b) in the case of depreciable property of a prescribed class, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
(c) 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 Act, the increase to the PUC of the TC Class B Shares issued to DC as consideration for the property transferred by DC to a TC will not exceed the aggregate cost of such property to that TC, as determined pursuant to subsection 85(1) where applicable, less the aggregate amount of DC's liabilities assumed by that TC for such property.
13. Each of the TCs will redeem its TC Class B Shares, that were issued to DC as described in Paragraph 12, for their FMV. Each of the TCs will pay the aggregate redemption price for these TC Class B Shares by issuing to DC a non-interest- bearing demand promissory note (the "TC Notes") having a principal amount and FMV equal to the aggregate FMV of the TC Class B Shares so redeemed and DC will accept the TC Notes as full payment of the purchase price of such shares.
14. Each of the TCs will, by special resolution, resolve to liquidate and dissolve DC pursuant to the provisions of the BCA after the purchases for cancellation of its shares described in this Paragraph. DC will purchase for cancellation its XXXXXXXXXX DC Common Shares held by each of the TCs for their FMV. DC will pay the aggregate purchase price for these DC Common Shares by issuing to each of the TCs a non-interest-bearing demand promissory note (the "DC Notes") having a principal amount and FMV equal to the aggregate FMV of the DC Common Shares so purchased for cancellation and the TCs will accept the DC Notes as full payment of the purchase price of such shares.
15. The principal amount owing by the TCs to DC under the TC Notes will be set off against the principal amount owing by DC to the TCs under the DC Notes such that each such note will be cancelled in full satisfaction of the obligations under each such note.
16. In due course, DC will file tax returns, and, after the receipt of any tax refunds, and attending to other administrative matters, file articles of dissolution. Upon receipt of the Certificate of Dissolution, DC will be formally dissolved.
17. No property has been acquired by DC or will become property of DC in contemplation of and before the Proposed Transactions. Neither DC nor any of the TCs has any specific intentions of disposing of any property, the fair market value of which, at any time after the distribution, represented more than 10% of the property owned by such corporation, as part of a series of transactions or events that includes the Proposed Transactions.
18. Except as otherwise described herein, none of the Siblings will dispose of any shares of any corporation described herein as part of a series of transactions or events that includes the Proposed Transactions.
19. Each of the TCs and DC will have the financial capacity to honour, upon presentation for payment, the amount payable under its promissory note as described in Paragraphs 13 and 14, as the case may be.
PURPOSE OF THE PROPOSED TRANSACTIONS
The purpose of the Proposed Transactions is to permit the Siblings to separate their respective interests in DC to the extent possible, in order to enable them to own the various assets of DC and to engage in estate planning independently from each other.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.
A. Subject to the application of subsection 69(11), provided that the appropriate joint elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6) and provided that each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1) will apply to:
(a) the transfers by the Siblings of DC Common Shares to the TCs described in Paragraphs 7, 8 and 9; and
(b) the transfer of each eligible property by DC to the TCs as described in Paragraph 11
such that the agreed amount in respect of each such transfer will be deemed to be the transferor's proceeds of disposition and the transferee's cost amount thereof pursuant to paragraph 85(1)(a).
B. As a result of the redemption by each of the TCs of the TC Class B Shares described in Paragraph 13 and the purchases for cancellation by DC of the DC Common Shares described in Paragraph 14, by virtue of subsection 84(3):
(a) each of the TCs will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by each of the TCs in respect of its redemption of the TC Class B Shares owned by DC exceeds the paid-up capital of such class of shares immediately before the redemption; and
(b) DC will be deemed to have paid, and each of the TCs will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC in respect of the purchase for cancellation of the DC Common Shares owned by each of the TCs exceeds the paid-up capital attributable to such DC Common Shares immediately before the purchase for cancellation; and
(c) the taxable dividends described in 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 corporation 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 dividend is deemed to have been received;
(iii) will be excluded in determining the proceeds of disposition to the recipient of the shares so redeemed or purchased for cancellation pursuant to paragraph (j) of the definition "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.
C. Provided that, as part of a series of transactions or events that includes the Proposed Transactions described above, there is not:
(a) an acquisition of property in circumstances described in paragraph 55(3.1)(a);
(b) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(c) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(d) an acquisition of a share in the circumstances described in subparagraph 55(3.1)(b)(iii); or
(e) an acquisition of property in the circumstances described in subparagraph 55(3.1)(c) or 55(3.1)(d);
which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling C and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
D. The set-off and cancellation of the principal amounts owing by the TCs on the TC Notes with the principal amounts owing by DC to the TCs on the DC Notes as described in Paragraph 15 will not result in a forgiven amount.
E. The provisions of subsections 15(1), 69(4) and 246(1) will not apply to any of the Proposed Transactions, in and by themselves.
F. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.
The above 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 above 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, 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; or
(b) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions 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.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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