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 transfer of control block shares of Opco by estate to a new Holdco that is wholly-owned by the estate will result in receipt of a dividend by the estate pursuant to section 84.1.
Position: No.
Reasons: FMV of non-share consideration taken back by estate on the transfer will not exceed the value determined for "E" in paragraph 84.1(1).
XXXXXXXXXX 2006-019856
XXXXXXXXXX, 2006
Dear Sir:
Re: XXXXXXXXXX (the "Estate")
Advance Income Tax Ruling Request
We are writing in response to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided in subsequent correspondence and various telephone conversations. 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 XXXXXXXXXX (the "Deceased") or persons who were related to the Deceased immediately before the time of her death;
(ii) being considered by a tax services office ("TSO") or taxation centre ("TC") in connection with a previously filed tax return of the Deceased or persons who were related to the Deceased immediately before the time of her death;
(iii) under objection by the Estate or persons who were related to the Deceased immediately before the time of her death;
(iv) before the Courts; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Unless otherwise noted, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (hereinafter referred to as the "Act").
DEFINITIONS
In this letter, unless otherwise specified, all monetary amounts are expressed in Canadian dollars and the following terms have the meanings specified:
(a) "adjusted cost base" has the meaning assigned by section 54;
(b) "BCCA" means the Business Corporations Act, S.B.C. 2002, c. 57, as amended;
(c) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);
(d) "Opco" means XXXXXXXXXX;
(e) "paid-up capital" has the meaning assigned by subsection 89(1);
(f) "Paragraph" means a numbered paragraph in this letter;
(g) "private corporation" has the meaning assigned by subsection 89(1);
(h) "qualified small business corporation share" has the meaning assigned by subsection 110.6(1); and
(i) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).
FACTS
1. The Deceased passed away on XXXXXXXXXX. The Deceased was predeceased by XXXXXXXXXX.
2. The Deceased filed her tax returns with the XXXXXXXXXX TC and her tax affairs were administered by the XXXXXXXXXX TSO. The Deceased's Social Insurance Number was XXXXXXXXXX. The Estate will file its tax returns with the XXXXXXXXXX. Its tax affairs are administered by the XXXXXXXXXX TSO.
3. The Deceased's Last Will and Testament of XXXXXXXXXX (the "Will") provides that the residue of the Estate be divided equally amongst the surviving children of the Deceased, except that if any child of the Deceased died before the Deceased and one or more children of that child were alive at the time of the Deceased's death, an equal share will be created for the child of the Deceased, which will be divided equally among the children of that child of the Deceased who were alive at the time of the Deceased's death.
4. The Will also provides that the co-executors of the Estate are XXXXXXXXXX ("Executor 1") and XXXXXXXXXX ("Executor 2"), each of whom is a child of the Deceased.
5. Executor 2 is considered to be a resident of Canada for the purposes of the Act while Executor 1 is not considered to be a resident of Canada for the purposes of the Act.
6. Executor 1 and Executor 2 must act jointly in carrying out the administration of the Estate and with respect to the exercise of any power accorded to them under the Will.
7. Executor 1 has not participated in any matters pertaining to the Estate while outside of Canada and has not carried out any duties in the capacity as co-executor of the Estate while outside of Canada. Executor 1's involvement in the administration of matters pertaining to the Estate has been minimal, with the exception of his attendance at a meeting that took place in XXXXXXXXXX. Executor 1 will return to Canada when there are decisions to be made with respect to the Estate and when meetings are required to take place in connection with Estate matters.
8. All of the property of the Estate is situated in Canada.
9. Opco was incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX. Opco is governed under the BCCA at the present time. Opco is a private corporation and a taxable Canadian corporation. Opco files its tax returns with the XXXXXXXXXX TC. Its tax matters are administered by the XXXXXXXXXX TSO. Its business number is XXXXXXXXXX.
10. Since its incorporation, Opco has carried on a XXXXXXXXXX business. XXXXXXXXXX Opco has been managed by XXXXXXXXXX, another child of the Deceased, who is also the sole director of Opco.
11. At the time of the Deceased's death, Opco's authorized share capital consisted of (i) XXXXXXXXXX Class A shares, (ii) XXXXXXXXXX Class B shares and (iii) XXXXXXXXXX Preferred shares, of which there were XXXXXXXXXX Class A shares issued and outstanding.
12. At the time of the Deceased's death, the Deceased held XXXXXXXXXX Class A shares in the capital stock of Opco (the "Opco Shares"). Executor 1 (in his personal capacity) and XXXXXXXXXX, another child of the Deceased, each held 1 Class A share.
13. The Deceased acquired the Opco Shares as follows:
(a) XXXXXXXXXX of the Opco Shares were inherited from her late husband XXXXXXXXXX, which he had originally purchased from treasury for nominal consideration on XXXXXXXXXX;
(b) XXXXXXXXXX of the Opco Shares were purchased from treasury by the Deceased for nominal consideration on XXXXXXXXXX; and
(c) the remaining Opco Share was issued to the Deceased on XXXXXXXXXX.
14. The Deceased and Opco jointly elected under subsection 85(1) with respect to the transfer of assets described in Paragraph 13(c) within the time limits prescribed by subsection 85(6).
15. At the time immediately before the death of the Deceased, the adjusted cost base of the Opco Shares to the Deceased was $XXXXXXXXXX, as was the paid-up capital of the Opco Shares. The fair market value of the Opco Shares at that time is estimated to have been $XXXXXXXXXX.
16. The Opco Shares were capital property to the Deceased.
17. As a consequence of the death of the Deceased, the Opco Shares passed to the Estate and are part of the residue of the Estate. Pursuant to subsection 70(5)(a), the Deceased was deemed to have disposed of the Opco Shares at the time that was immediately before the time of the death of the Deceased for proceeds of disposition equal to their fair market value at that time. As a result, a capital gain of $XXXXXXXXXX was reported on Schedule 3 of the Deceased's return of income for the XXXXXXXXXX taxation year. In computing the Deceased's taxable income for that taxation year, no amount was claimed as a deduction under section 110.6 in respect of the deemed disposition of the Opco Shares, as none of the Opco Shares was a qualified small business corporation share at the time immediately before the death of the Deceased.
18. As a consequence of the death of the Deceased, the Estate was deemed by subsection 70(5)(b) to have acquired the Opco Shares at a cost equal to the fair market value of the Opco Shares at the time immediately before the death of the Deceased, which is estimated to have been $XXXXXXXXXX.
19. The Estate has continued to hold the Opco Shares since the death of the Deceased. For greater certainty, the Estate has not disposed of and has not been deemed to have disposed of the Opco Shares.
PROPOSED TRANSACTIONS
20. Executor 1 and Executor 2 will, in their capacity as co-executors of the Estate, incorporate a new corporation under the BCCA ("Newco"). Newco will be a taxable Canadian corporation.
21. Newco's authorized share capital will include a class of redeemable, retractable, non-voting preferred shares ("Newco Preferred Shares") and a class of voting common shares ("Newco Common Shares").
22. In conjunction with the incorporation of Newco, the Estate will subscribe for Newco Common Shares for nominal consideration.
23. The Estate will transfer the Opco Shares to Newco in exchange for a demand, non-interest-bearing promissory note of Newco with a principal amount equal to the lesser of (i) $XXXXXXXXXX and (ii) the fair market value of the Opco Shares at the time of the transfer (the "Newco Note") and Newco Preferred Shares having a redemption value equal to the amount, if any, by which the fair market value of the Opco Shares exceeds the adjusted cost base of the Opco Shares to the Estate at the time of the transfer.
24. The Estate and Newco 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 Opco Shares described in Paragraph 23 (the "Opco Share Transfer"). For the purposes of such election, the agreed amount in respect of each Opco Share so transferred will be an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). In addition, the agreed amount in respect of each Opco Share will not exceed its fair market value, nor will the agreed amount be less than the amount permitted under paragraph 85(1)(b).
25. The Newco Note, Newco Common Shares and Newco Preferred Shares will then be distributed to the beneficiaries of the Estate in accordance with the Will.
26. It is expected that the fair market value of the Opco Shares at the time of the Opco Share Transfer will only nominally exceed their fair market value as of the time immediately before the time of the death of the Deceased.
27. The beneficiaries of the Estate wish to see Opco operate as a going concern, and do not wish for it to be sold, wound-up or liquidated. Therefore, Opco will continue to carry on its business activities after the proposed transactions have been completed. Opco is expected to declare and pay dividends to Newco on the Opco Shares, so that over time, Newco can repay the amount owing on the Newco Note.
28. The balance of Opco's "general-rate income pool", as defined in Clause 5 in the Legislative Proposals and Explanatory Notes Relating to Income Tax with respect to Dividend Taxation published by the Department of Finance on June 29, 2006 (the "Legislative Proposals"), would be nil if the Legislative Proposals are enacted in their current form with effect for the period the includes the time at which the proposed transactions will occur.
PURPOSE OF THE PROPOSED TRANSACTIONS
The primary purpose of the proposed transactions is to provide the shareholders of Opco with a structure that will permit surplus earnings of Opco, on an ongoing basis, to be paid to Newco in the form of tax-free intercorporate dividends.
In addition, the Opco Share Transfer will allow such earnings to be returned to the individual shareholders of Newco as a repayment of the principal amount owing on the Newco Note, which will avoid the incidence of shareholder-level tax. In this regard, the principal amount of the Newco Note to be issued on the Opco Share Transfer will be limited to the amount described in Paragraph 23 so that the Estate will not be deemed to receive a dividend pursuant to subsection 84.1(1). If the principal amount of the Newco Note was not limited in this manner and such a dividend were to arise, the Estate would be liable to tax on the dividend and would also realize a capital loss on the disposition of the Opco Shares. In such circumstances, the co-executors of the Estate would elect under paragraph 164(6)(c) to deem the Estate's capital loss on such transfer to be a capital loss of the Deceased that arose in the Deceased's final taxation year, which would offset the capital gain realized by the Deceased on the disposition of the Opco Shares that was deemed occur immediately before the death of the Deceased. However, this would result in an overall higher tax liability since the effective rate of tax on dividends received by the Estate exceeds the effective rate of tax on the capital gain that was realized by the Deceased in respect of the Opco Shares.
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. Provided that at the time of the Opco Share Transfer, the fair market value of the Newco Note does not exceed the greater of (i) the paid-up capital of the Opco Shares and (ii) the adjusted cost base of the Opco Shares as determined for the purposes of section 84.1, the Estate will not be deemed to have received a dividend from Newco pursuant to paragraph 84.1(1)(b) as a consequence of the Opco Share Transfer.
B. In determining the adjusted cost base of the Opco Shares for the purposes of section 84.1 with respect to the Opco Share Transfer, the adjusted cost base of the Opco Shares will not be reduced under subparagraphs 84.1(2)(a.1)(i) and (ii).
C. Subsection 245(2) will not be applied, as a result of the proposed transactions, in and of themselves, to re-determine the tax consequences described in the rulings given.
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.
In addition, nothing in this letter should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:
(a) the determination of the adjusted cost base, paid-up capital or fair market value of any shares or other property referred to herein; and
(b) any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above.
Yours truly,
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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