2007 Ruling 2007-0226091R3 - Estate freeze of non-resident corporations

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: 1. Will provisions of subsection 85.1(3) of the Act apply to the transfer of shares held by Opco to non-resident corporations?

2. Immediately after the issuance of shares of the capital stock of XXXXXXXXXX Holdco #1, XXXXXXXXXX Holdco #2 and XXXXXXXXXX Holdco #3 to XXXXXXXXXX Family Holdcos, will XXXXXXXXXX Holdco #1, XXXXXXXXXX Holdco #2 and XXXXXXXXXX Holdco #3 be foreign affiliates of each of the Family Trusts?

Position: 1. Provided the shares transferred are capital properties of Opco, 85.1(3) will apply.

2. Yes

Reasons: 1. The corporations the shares of which will be transferred are foreign affiliates of Opco, the purchaser will be a foreign affiliate of Opco immediately after the transfer, the consideration paid will include shares of the capital stock of the acquiring affiliate. Subsection 85.1(4) will not apply.

2. The equity percentage of each Family Trust 1 will be XXXXXXXXXX % because it will hold XXXXXXXXXX % of a specific class of a XXXXXXXXXX Family Holdco which will hold XXXXXXXXXX % of a specific class of shares of each of those corporations. The equity percentage of each Family Trust 2 will be XXXXXXXXXX % because it will hold XXXXXXXXXX % of a specific class of a XXXXXXXXXX Family Holdco which hold XXXXXXXXXX % of a specific class of shares of each of those corporations.

XXXXXXXXXX 								2007-022609

XXXXXXXXXX, 2007

Dear Sir:

Re: Advance Income Tax Ruling
XXXXXXXXXX - Tax Number BN XXXXXXXXXX (XXXXXXXXXX Tax Services Office, XXXXXXXXXX Taxation Centre)

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayer.

We understand that to the best of your knowledge, and that of the taxpayer involved, none of the matters considered in this ruling request are:

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

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

c) under objection by the taxpayer or a related person;

d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; and

e) the subject of a ruling previously issued by this Directorate.

In this document, unless otherwise indicated, all statute references are to the Income Tax Act (R.S.C. 1985, 5th Supplement, c.1, as amended, the "Act")

Definitions

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

"A XXXXXXXXXX Family Holdco" means XXXXXXXXXX Family Holdco;

"A Family Trust # 1 and # 2" means XXXXXXXXXX Family Trust # 1 and # 2;

"Act" means the Income Tax Act;

"H XXXXXXXXXX Family Holdco" means XXXXXXXXXX Family Holdco;

"H Family Trust # 1 and # 2" means XXXXXXXXXX Trust # 1 and # 2;

"Holdco A" means XXXXXXXXXX;

"Holdco H" means XXXXXXXXXX;

"Holdco J" means XXXXXXXXXX;

"Holdco L" means XXXXXXXXXX;

"J XXXXXXXXXX Family Holdco" means XXXXXXXXXX Family Holdco;

"J Family Trust # 1 and # 2" means XXXXXXXXXX Trust # 1 and # 2;

"L XXXXXXXXXX Family Holdco" means XXXXXXXXXX Family Holdco;

"L Family Trust # 1 and # 2" means XXXXXXXXXX Trust # 1 and # 2;

"New XXXXXXXXXX Companies" means XXXXXXXXXX;

"Opco" means XXXXXXXXXX;

"Sub1" means XXXXXXXXXX;

"Sub2" means XXXXXXXXXX;

"Sub3" means XXXXXXXXXX;

"Sub4" means XXXXXXXXXX;

"Sub5" means XXXXXXXXXX;

"Sub6" means XXXXXXXXXX;

"Sub7" means XXXXXXXXXX;

"Sub8" means XXXXXXXXXX;

Facts

1. Opco is a Canadian controlled private corporation within the meaning of the Act. Opco is located at XXXXXXXXXX.

2. The shareholders of Opco and their shareholdings are as follows:

a) Holdco H holds XXXXXXXXXX Class "A" and XXXXXXXXXX Class "E" shares; the sole shareholder of Holdco H is XXXXXXXXXX;

b) Holdco L holds XXXXXXXXXX Class "A" and XXXXXXXXXX Class "E" shares; the sole shareholder of Holdco L is XXXXXXXXXX;

c) Holdco J holds XXXXXXXXXX Class "A" and XXXXXXXXXX Class "E" shares; the sole shareholder of Holdco J is XXXXXXXXXX;

d) Holdco A holds XXXXXXXXXX Class "A" shares; the sole shareholder of Holdco A is XXXXXXXXXX;

(Holdco A, Holdco H, Holdco J and Holdco L are hereinafter collectively referred to as the "Canadian Holdcos");

e) XXXXXXXXXX holds XXXXXXXXXX Class "D" shares of Opco. The Canadian Holdcos control XXXXXXXXXX.

3. The Class "A" shares are common shares and the Class "E" and Class "D" shares are preferred shares with a fixed value.

4. Each of XXXXXXXXXX (hereinafter collectively referred to as the "Shareholders") is a resident of Canada within the meaning of the Act.

5. Each of the Canadian Holdcos is a CCPC within the meaning of the Act.

6. Opco owns XXXXXXXXXX % of the shares of Sub1. XXXXXXXXXX.

7. Opco also holds shares of the following corporations in the following proportions:

a) XXXXXXXXXX% of the shares of Sub2 which is constituted in XXXXXXXXXX;

b) XXXXXXXXXX% of the shares of Sub3 which is constituted in XXXXXXXXXX;

c) XXXXXXXXXX% of the shares of Sub4 which is constituted in XXXXXXXXXX;

d) XXXXXXXXXX% of the shares of Sub5, which is constituted in XXXXXXXXXX;

e) XXXXXXXXXX% of the shares of Sub6, which is constituted in XXXXXXXXXX;

f) XXXXXXXXXX% of the shares of Sub7, which is constituted in XXXXXXXXXX;

g) XXXXXXXXXX% of the shares of Sub8, which is constituted in XXXXXXXXXX;

h) XXXXXXXXXX% of the shares of the XXXXXXXXXX Companies, XXXXXXXXXX new companies which are constituted in XXXXXXXXXX;

XXXXXXXXXX

8. The property of Sub1 and of each of the XXXXXXXXXX Companies constitutes "excluded property" within the meaning of subsection 95(1) of the Act.

9. Each of the XXXXXXXXXX Companies is incorporated in XXXXXXXXXX in order to take advantage of the XXXXXXXXXX laws of these countries.

Proposed Transactions

10. The Shareholders wish to proceed with an estate freeze in favour of their families, which will require the following reorganization:

11. Two (2) new companies will be incorporated pursuant to the laws of XXXXXXXXXX ("XXXXXXXXXX Holdco #2 " and "XXXXXXXXXX Holdco #3") and one (1) new company will be incorporated as an XXXXXXXXXX corporation under the laws of XXXXXXXXXX ("XXXXXXXXXX Holdco #1").

12. Opco will transfer:

a) XXXXXXXXXX% of the shares it owns in the capital stock of Sub1 (XXXXXXXXXX common shares) to XXXXXXXXXX Holdco #1;

b) XXXXXXXXXX% of the shares it owns in Sub2, Sub3, Sub4 and the New XXXXXXXXXX Companies to XXXXXXXXXX Holdco #2; and

c) XXXXXXXXXX% of the shares it owns in Sub5, Sub6, Sub7 and Sub8 to XXXXXXXXXX Holdco #3.

d) In these transfers, Opco will receive voting redeemable preferred shares of XXXXXXXXXX Holdco #1, XXXXXXXXXX Holdco #2 and XXXXXXXXXX Holdco #3, respectively, with a redemption value equal to the fair market value of the shares so transferred. These transfers will be effected on a tax deferred basis pursuant to subsection 85.1(3) of the Act.

e) XXXXXXXXXX Holdco #2 and XXXXXXXXXX Holdco #3 will be non-residents of Canada for the purpose of the Act. XXXXXXXXXX Holdco #1 will be a non-resident of Canada for the purpose of the Act.

13. Two (2) inter vivos discretionary trusts will be formed pursuant to the XXXXXXXXXX for the families of each of the Shareholders, namely the H Family Trust # 1 and # 2, L Family Trust # 1 and # 2, J Family Trust # 1 and # 2 and A Family Trust # 1 and # 2, and the beneficiaries of each new trust will be the spouse, children, grand-children, siblings and/or nieces and nephews of each Shareholder (collectively the "Family Trusts", and individually, a "Family Trust"). Each Shareholder shall be the sole initial trustee of his Family Trust which shall be a Canadian resident trust. Each Family Trust shall provide that while such Shareholder is the sole trustee, such trust may distribute the income or capital of the trust among the beneficiaries in whatever amounts and whatever proportions such trustee decides. The Family Trusts will be "personal trusts" within the meaning of section 248 of the Act. XXXXXXXXXX.

14. Four (4) new corporations will be constituted under XXXXXXXXXX law, namely the H XXXXXXXXXX Family Holdco, L XXXXXXXXXX Family Holdco, J XXXXXXXXXX Family Holdco and the A XXXXXXXXXX Family Holdco (collectively the "XXXXXXXXXX Family Holdcos" and individually a "XXXXXXXXXX Family Holdco"). The XXXXXXXXXX Family Holdcos will be non-residents of Canada for purposes of the Act.

15. Each Family Trust # 1 and # 2 will subscribe for all of the common shares of the capital stock of one XXXXXXXXXX Family Holdco, as follows:

a) The H Family Trust # 1 and # 2 will subscribe for, respectively, XXXXXXXXXX% and XXXXXXXXXX% of the common shares of the H XXXXXXXXXX Family Holdco;

b) The L Family Trust # 1 and # 2 will subscribe for, respectively, XXXXXXXXXX% and XXXXXXXXXX% of the common shares of the L XXXXXXXXXX Family Holdco;

c) The J Family Trust # 1 and # 2 will subscribe for, respectively, XXXXXXXXXX% and XXXXXXXXXX% of the common shares of the J XXXXXXXXXX Family Holdco; and

d) The A Family Trust # 1 and # 2 will subscribe for, respectively, XXXXXXXXXX% and XXXXXXXXXX% of the common shares of the A XXXXXXXXXX Family Holdco.

16. Each of the XXXXXXXXXX Family Holdcos will subscribe for a separate class of common shares in each of XXXXXXXXXX Holdco #1, XXXXXXXXXX Holdco #2 and XXXXXXXXXX Holdco #3 as follows:

a) H XXXXXXXXXX Family Holdco: XXXXXXXXXX Class "A" common shares;

b) L XXXXXXXXXX Family Holdco: XXXXXXXXXX Class "B" common shares;

c) J XXXXXXXXXX Family Holdco: XXXXXXXXXX Class "C" common shares; and

d) A XXXXXXXXXX Family Holdco: XXXXXXXXXX Class "D" common shares.

17. Each of the Class "A", "B", "C" and "D" common shares will be voting and participating shares. However, Opco will remain the controlling shareholder of XXXXXXXXXX Holdco #1, XXXXXXXXXX Holdco #2 and XXXXXXXXXX Holdco #3.

18. One or more shareholders agreements will be entered into among the Shareholders, the Canadian Holdcos, XXXXXXXXXX Holdco #1, XXXXXXXXXX Holdco #2, XXXXXXXXXX Holdco #3, the XXXXXXXXXX Family Holdcos and the Family Trusts (the "Shareholders Agreements"), which will provide, inter alia, that upon the retirement or death of certain Shareholders,

a) the shares held by the XXXXXXXXXX Family Holdco (which bears the retiring or deceased Shareholder's name) in XXXXXXXXXX Holdco #1, XXXXXXXXXX Holdco #2 and XXXXXXXXXX Holdco #3 may be purchased either by Opco or by some or all of the remaining XXXXXXXXXX Family Holdcos for a price to be determined in, or by a formula set forth in, the Shareholders Agreements; and

b) the shares held by the retiring or deceased shareholder's Canadian Holdco in Opco may be purchased by some or all of the remaining Canadian Holdcos.

c) In the case where XXXXXXXXXX is the retiring or deceased Shareholder, his Shareholders Agreement will provide that the shares held by his Canadian Holdco in Opco may be purchased by some or all of the remaining Canadian Holdcos and the shares held by his XXXXXXXXXX Family Holdco in XXXXXXXXXX Holdco #1, XXXXXXXXXX Holdco #2 and XXXXXXXXXX Holdco #3 may be purchased by either Opco or by some or all of the remaining XXXXXXXXXX Family Holdcos.

Purpose of the proposed transactions

The purpose of the proposed reorganization is to implement an estate freeze in Opco so that all future growth in the value of the common shares of XXXXXXXXXX Holdco #1, XXXXXXXXXX Holdco #2 and XXXXXXXXXX Holdco #3 shall accrue to the Family Trusts set up for the benefit of the families of the Shareholders.

Rulings

Provided the above statements of facts, proposed transactions and purpose thereof are accurate and constitute complete disclosure of all relevant facts and proposed transactions, our rulings are as follows:

A. Provided the shares transferred by Opco are capital properties of Opco, the provisions of subsection 85.1(3) of the Act will apply to the transfer of shares of Sub1 to XXXXXXXXXX Holdco #1 and to the transfers of shares of the XXXXXXXXXX Companies to XXXXXXXXXX Holdco #2 and XXXXXXXXXX Holdco #3, as described in paragraph 12 above.

B. Immediately after the issuance of shares described in paragraph 16, each of XXXXXXXXXX Holdco #1, XXXXXXXXXX Holdco #2 and XXXXXXXXXX Holdco #3 will be a foreign affiliate within the meaning of subsection 95(1) of the Act, in respect of each of the Family Trusts.

C. XXXXXXXXXX.

The rulings given herein are based solely on the facts, proposed transactions and purpose of the proposed transactions described above. Facts and proposed transactions in the documents submitted with your request not described above do not form part of the facts and proposed transactions on which these rulings are based and any reference to these documents is provided solely for the convenience of the reader.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act. Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those 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.

As indicated in Information Circular 70-6R5, we do not rule on matters involving the determination of the fair market value of property.

Opinion

On the assumption that the shares held by the XXXXXXXXXX Family Holdcos in the capital stock of XXXXXXXXXX Holdco #1, XXXXXXXXXX Holdco #2 and XXXXXXXXXX Holdco #3 are capital properties of the XXXXXXXXXX Family Holdcos, a sale of any or all of the shares held by a XXXXXXXXXX Family Holdco would result in a capital gain or a capital loss, if any. Assuming that a capital gain results from the sale of shares held by a XXXXXXXXXX Family Holdco, the question is whether the taxable capital gain will be a part of the "foreign accrual property income", within the meaning of subsection 95(1), as that subsection is proposed to be amended by subsection 133(3) of the Legislative Proposals and Draft Regulations relating to Income Tax Act published in February 2004 (hereinafter the "Proposed Amendments") and more specifically, whether the taxable capital gain is described in B of the formula provided for in the definition of foreign accrual property income. According to subsection 133(3) of the Proposed Amendments, the taxable capital gain of a foreign affiliate that can be considered to have accrued after its 1975 taxation year from the disposition of property other than dispositions of excluded property, from dispositions of excluded property to which any of paragraphs 95(2)(c), (c.2), (d), (d.1), (e), (e.1), (e.3) to (e.5) and (f.4) and 88(3)(a) applies or arising because of a gain under subsection 40(3) in respect of a share because of a dividend on the share referred to in subparagraph (2)(e.3)(iv) or (e.4)(v), is included in B of the formula. The taxable capital gain from dispositions that is not described in B of the formula is not a part of the foreign accrual property income.

Paragraphs 95(2)(c), (c.2), (d), (d.1), (e), (e.1), (e.3) to (e.5) and (f.4) and 88(3)(a), as those paragraphs are proposed to be amended (as the case may be), do not apply to your situation. Therefore, provided the shares of XXXXXXXXXX Holdco #1, XXXXXXXXXX Holdco #2 or XXXXXXXXXX Holdco #3, respectively, are excluded property at the time of a sale within the meaning of subsection 95(1), as that subsection is proposed to be amended by the Proposed Amendments, it is our opinion that the taxable capital gain resulting from the sale will not constitute foreign accrual property income within the meaning of

subsection 95(1), as that subsection is proposed to be amended by the Proposed Amendments. For that purpose, provided that all or substantially all of the property of XXXXXXXXXX Holdco #1, XXXXXXXXXX Holdco #2 or XXXXXXXXXX Holdco #3 is excluded property, then the issued and outstanding shares of XXXXXXXXXX Holdco #1, XXXXXXXXXX Holdco #2 or XXXXXXXXXX Holdco #3 shall constitute excluded property of A XXXXXXXXXX Family Holdco, H XXXXXXXXXX Family Holdco, J XXXXXXXXXX Family Holdco or L XXXXXXXXXX Family Holdco, as the case may be.

Yours truly,

XXXXXXXXXX
for the Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch