2007 Ruling 2007-0230761R3 - 55(3)(a) - stock dividend - sale to non-resident

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) Whether it is appropriate in this case to create the shares that will be cross-redeemed in a transaction that qualifies for the exception in paragraph 55(3)(a) by way of a stock dividend. 2) Whether it is appropriate for a related group to use the exception in paragraph 55(3)(a) to transfer shares of a subsidiary to a sister of the distributing corporation where the shares of the transferee corporation are subsequently transferred to an offshore entity and the resulting capital gain is not taxable in Canada as a result of the application of an income tax treaty.

Position: 1) Legal constraints appear to make the creation of another class of shares difficult in this case. We consider that it is not inappropriate to create shares of the distributing corporation that will be cross-redeemed through a stock dividend for an amount equal to the FMV of the assets that will subsequently be distributed where the paid-up capital is increased only by $1 because: (i) the parent of the distributing corporation would not be taxable in Canada on an eventual disposition of the shares of the distributing corporation due to be application of the applicable income tax treaty between Canada and its country of residence, which makes the lack of ACB adjustment on its other shares academic; (ii) the fair market value of the assets left in the distributing corporation after the distribution of its subsidiary is greater than the ACB and PUC of its shares after distribution; (iii) the rate of withholding that would apply on a dividend paid to the parent of the distributing corporation as adjusted by the applicable income tax treaty is low; (iv) The distributing corporation represents that it will not distribute capital in excess of what would have been the adjusted ACB within the next two years. 2) No GAAR ruling was asked for, but in this particular case there seems to be no clear impediment to issue this letter.

XXXXXXXXXX 							2007-023076

XXXXXXXXXX , 2007

Dear XXXXXXXXXX ,

Re: Advance Income Tax Ruling regarding XXXXXXXXXX (B.N.: XXXXXXXXXX, XXXXXXXXXX TSO, XXXXXXXXXX Taxation Centre)

We are writing in response to your letters of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge receipt of your emails as well as our telephone conversations. The documents submitted with your request are only part of this document to the extent described herein.

To the best of your knowledge and that of the above-referenced taxpayer, none of the issues involved in this ruling request is:

(i) in an earlier return of the above-referenced 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 above-referenced taxpayer or a related person;

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

(iv) before the courts; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The above-referenced taxpayer has confirmed that the proposed transactions described herein will not affect its ability to pay any of its outstanding tax liabilities. All statutory references herein are to provisions of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended to the date hereof and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

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

"ACB" means "adjusted cost base" as that expression is defined in section 54;

"Agency" means the Canada Revenue Agency;

"agreed amount" has the meaning assigned by subsection 85(1);

"Amalgamated SubcoA" refers to XXXXXXXXXX, the corporation resulting from the amalgamation of SubcoA and Spinco;

XXXXXXXXXX

"Business A" means the registered offering of investment management services in XXXXXXXXXX;

"Company" means XXXXXXXXXX. The principal business address of the Company is XXXXXXXXXX. Its taxation year-end is XXXXXXXXXX;

"Company Series 1 Shares" refers to Company Series 1 Shares, each such share having the following terms: (i) non-voting; (ii) entitled to non-cumulative dividends of XXXXXXXXXX% per annum; (iii) entitled to an amount equal to the aggregate FMV of the SubcoA common shares divided by the number of issued Company Series 1 Shares, plus any declared but unpaid dividends on the date fixed for liquidation, dissolution or winding-up, such amount being payable on the Company Series 1 Shares in priority to the common shares on a liquidation, dissolution or winding-up of the Company; (iv) redeemable and retractable at an amount equal to the aggregate FMV of the SubcoA common shares, divided by the number of issued Company Series 1 Shares, plus the amount of any declared but unpaid dividends on the date fixed for redemption or retraction, payable by way of cash or the issuance of a non-interest-bearing promissory note; and (v) no dividends may be paid on any class of shares if the net assets after the payment of the dividends would be less than the aggregate redemption value of the Company Series 1 Shares;

"Company Note" means a non-interest-bearing demand promissory note issued by the Company to Spinco;

"disposition" has the meaning assigned by subsection 248(1);

"dividend rental arrangement" has the meaning assigned by subsection 248(1);

"eligible property" has the meaning assigned by subsection 85(1.1);

"First Act" means the Canada Business Corporations Act;

"FMV" means fair market value;

"guarantee agreement" has the meaning assigned by subsection 112(2.2);

"Holdco1" means XXXXXXXXXX , a U.S. resident corporation for U.S. income tax purposes and for the purposes of the Canada-U.S. Income Tax Convention. The principal business address of Holdco1 is XXXXXXXXXX;

"Holdco2" means a U.S. resident corporation for U.S. income tax purposes and for the purposes of the Canada-U.S. Income Tax Convention, all of the issued shares of which will be owned by Holdco 1;

XXXXXXXXXX

"Minister" has the meaning assigned by subsection 248(1);

XXXXXXXXXX

"Paragraph" means a numbered paragraph in this letter;

"private corporation" has the meaning assigned by subsection 89(1);

"proceeds of disposition" has the meaning assigned to that expression in section 54;

"Proposed Transactions" means the transactions described in Paragraphs 15 to 21;

"PUC" means "paid-up capital" as defined in subsection 89(1);

"related" has the meaning assigned by section 251;

"Reorganization" means a reorganization of Tierco A's worldwide operations, including having SubcoA providing certain operational support services to TiercoA affiliates. TiercoA carries on in the United States business operations that are of the same nature as Business A. Currently, certain operational support services are provided by TiercoA to its affiliates worldwide in relation to Business A type of operations. SubcoA also provides certain operational support services on a lower scale to support its own portfolio management functions. TiercoA is in the process of having SubcoA expand the functions it currently performs in order to provide these support services to TiercoA affiliates. XXXXXXXXXX;

XXXXXXXXXX

"series of transactions or events" has the meaning assigned to that expression for the purposes of the Act, including the extended meaning assigned by subsection 248(10);

XXXXXXXXXX

"Spinco" refers to XXXXXXXXXX , a corporation incorporated under the First Act on XXXXXXXXXX;

"Spinco Class A Shares" refers to Spinco Class A Shares, each such share having the following terms: (i) non-voting; (ii) entitled to non-cumulative dividends of XXXXXXXXXX % per annum; (iii) entitled to an amount equal to the aggregate FMV of the SubcoA common shares to be transferred by the Company to Spinco, divided by the number of issued Spinco Class A Shares, plus the amount of any declared but unpaid dividends on the date fixed for liquidation, dissolution or winding-up, such amount being payable on the Spinco Class A Shares in priority to the common shares, on a liquidation, dissolution or winding-up of Spinco; (iv) redeemable and retractable at an amount equal to the aggregate FMV of the SubcoA common shares to be transferred by the Company to Spinco, divided by the number of issued Spinco Class A Shares, plus the amount of any declared but unpaid dividends on the date fixed for redemption or retraction, payable by way of payment of cash or the issuance of a non-interest bearing promissory note; and (v) no dividends may be paid on any class of shares if the value of the net assets after the payment of the dividends would be less than the aggregate redemption value of the Spinco Class A Shares;

"Spinco Note" refers to the non-interest-bearing demand promissory note issued by Spinco to the Company;

"stated capital" has the meaning assigned to that expression under the First Act;

"SubcoA" means XXXXXXXXXX, a corporation incorporated under the First Act. The principal business address of SubcoA is XXXXXXXXXX . Its taxation year-end is XXXXXXXXXX. Its business number is XXXXXXXXXX , its tax services office is the XXXXXXXXXX Tax Services Office and its tax filing office is the XXXXXXXXXX Taxation Centre;

XXXXXXXXXX

"taxable Canadian corporation" has the meaning assigned by subsection 89(1);

"taxable dividend" has the meaning assigned by subsection 89(1);

"TiercoA" means XXXXXXXXXX, a U.S. resident corporation for U.S. income tax purposes and for the purposes of the Canada-U.S. Income Tax Convention. The principal business address of TiercoA is XXXXXXXXXX;

"TiercoB" means XXXXXXXXXX;

"TiercoB group" means entities related to TiercoB and carrying on similar business activities to TiercoB;

"TopcoA" means XXXXXXXXXX, a U.S. resident corporation for U.S. income tax purposes and for the purposes of the Canada-U.S. Income Tax Convention. The principal business address of TopcoA is XXXXXXXXXX. TopcoA is a publicly listed corporation which trades on the XXXXXXXXXX Stock Exchange;

"TopcoA Group" refers collectively to TopcoA and all of its directly and indirectly owned subsidiaries; and

"TopcoB" means XXXXXXXXXX , a U.S. resident corporation for U.S. income tax purposes and for the purposes of the Canada-U.S. Income Tax Convention.

FACTS

1. The shares of TopcoA are publicly listed.

2. TopcoA owns all of the issued shares of TiercoA and of TiercoB.

3. TiercoA owns all of the issued shares of Holdco1.

4. Holdco1 owns all of the issued shares of the Company. The authorized share capital of the Company includes an unlimited number of common shares. The Company is a private corporation, a taxable Canadian corporation XXXXXXXXXX.

5. The Company owns all the issued shares of SubcoA. The authorized share capital of SubcoA consists of an unlimited number of common shares. SubcoA carries on Business A. SubcoA is a private corporation, a taxable Canadian corporation XXXXXXXXXX.

6. Each current owner acquired the shares of TiercoA, Holdco1, the Company and SubcoA outside of the ordinary course of its business and holds them as capital property.

7. TiercoA is currently undergoing the Reorganization.

8. On XXXXXXXXXX, a new bylaw of the Company was adopted to create a new class of preference shares that can be issued in series, with terms and conditions to be determined at the time of the creation of the particular series by the Board of Directors of the Company.

9. At any time throughout the series of transactions that includes the Proposed Transactions, none of the shares of the Company, SubcoA and Spinco are or will be:

(a) the subject of a dividend rental arrangement;

(b) the subject of a guarantee agreement;

(c) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a);

(d) issued for consideration that is or includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

(ii) any right of the type described in subparagraph 112(2.4)(b)(ii); or

(e) issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

10. XXXXXXXXXX

11. XXXXXXXXXX

12 Holdco1 incorporated Spinco and subscribed for the initial common share of Spinco for XXXXXXXXXX dollar. Spinco is a taxable Canadian corporation XXXXXXXXXX. The authorized capital of Spinco consists of an unlimited number of common shares and of Spinco Class A Shares.

13. On XXXXXXXXXX, the directors of the Company passed a resolution to create the Company Series 1 Shares with a total authorized number of shares in the series of XXXXXXXXXX shares.

14. On XXXXXXXXXX, the Company declared a stock dividend on its common shares, payable in the form of XXXXXXXXXX Company Series 1 Shares.

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the order in which they are set out below commencing on a date agreed to by the parties.

15. The Company will issue XXXXXXXXXX Company Series 1 Shares in payment of the stock dividend described above. XXXXXXXXXX dollar will be added to the stated capital account of the Company Series 1 Shares upon their issuance.

16. Holdco1 will transfer the Company Series 1 Shares to Spinco and will make an election jointly with Spinco under subsection 85(1) in respect of the transfer. As consideration for the transfer, Spinco will issue XXXXXXXXXX common shares. The stated capital of the common shares issued in respect of the transfer will not exceed the PUC of the Company Series 1 Shares transferred by Holdco1 to Spinco. The agreed amount specified in the election in respect of the transferred property will be equal to the FMV of the property. Holdco1 will send to the Minister a notice setting out the information described in subsection 116(3).

17. The Company will transfer all of the issued common shares of SubcoA to Spinco and will make an election jointly with Spinco under subsection 85(1) in respect of the transfer. As consideration for the transfer, Spinco will issue XXXXXXXXXX Spinco Class A Shares. The stated capital of the Spinco Class A Shares issued in respect of the transfer will not exceed the ACB of the SubcoA common shares transferred by the Company to Spinco. The agreed amount specified in the election in respect of the transferred property will be equal to the ACB of the property and that amount will be less than the fair market value of the common shares of SubcoA.

18. Spinco will retract all of the Company Series 1 Shares. As consideration for the retraction, the Company will issue the Company Note with a principal amount, stated by formula, equal to the aggregate FMV of the SubcoA common shares. Spinco will accept the Company Note as absolute payment for the retraction of the Company Series 1 Shares.

19. Spinco will redeem all of the Spinco Class A Shares. As consideration for the redemption, Spinco will issue the Spinco Note with a principal amount, stated by formula, equal to the aggregate FMV of the SubcoA common shares. The Company will accept the Spinco Note as absolute payment for the redemption of the Spinco Class A Shares.

20. The Company Note and the Spinco Note will be set-off and cancelled simultaneously. Immediately after this step, the FMV of the assets of the Company will be greater than the amount of the ACB and PUC of its issued and outstanding shares.

21. Spinco and SubcoA will amalgamate to form Amalgamated SubcoA.

SUBSEQUENT TRANSACTIONS

22. Subsequent to the implementation of the Proposed Transactions, Holdco1 intends to incorporate Holdco2 and transfer all of the shares of Amalgamated SubcoA and of other non-U.S. entities to Holdco2 for common shares having a FMV equal to the fair market value of all of the transferred shares.

23. Holdco1 intends to transfer all of the shares of Holdco2 to TiercoB for cash consideration equal to the FMV of the shares of Holdco2.

24. Holdco2 may transfer all of the shares of Amalgamated SubcoA to a newly-formed holding company in which no unrelated person, as defined in subsection 55(3.01) in respect of the Company and Spinco as dividend recipients, will own an interest and that will be incorporated and resident outside of Canada and the U.S. The newly-formed holding company will be related to the Company and to Amalgamated SubcoA. TopcoA group intends to continue to carry on Business A and does not contemplate divesting Business A.

25. XXXXXXXXXX

26. Over the XXXXXXXXXX years following the date of this letter, the aggregate amount payable by the Company on the redemption of its shares or as a distribution of capital will not exceed $XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

SubcoA was established as a subsidiary of the Company XXXXXXXXXX the Proposed Transactions result in SubcoA becoming a "sister" company of the Company. This restructuring will achieve the following purposes:

(a) XXXXXXXXXX.

(b) XXXXXXXXXX.

(c) The Proposed Transactions will remove the oversight of the operations of SubcoA from the responsibilities of the Board of Directors of the Company. XXXXXXXXXX.

(d) The companies have no common employees and the management of the Company exercises little management responsibility or oversight over Business A. There is also a perception from certain client segments serviced by the Company that SubcoA is their competitor and they desire that there be greater separation between the two companies.

(e) Currently, TopcoA's investment management business operates in multiple legal entities that are organized along geographic lines. XXXXXXXXXX

RULINGS

Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we rule as follows:

A. The amount of the dividend received by Holdco1 in Paragraph 15 will be determined, pursuant to paragraph (c) of the definition of "amount" in subsection 248(1), as the amount by which the PUC of the Company is increased by reason of the payment of the dividend.

B. Provided that the appropriate joint elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6), the provisions of subsection 85(1) will apply to:

(a) the transfer by Holdco1 of the Company Series 1 Shares to Spinco as described in Paragraph 16; and

(b) the transfer by the Company of all of the issued common shares of SubcoA to Spinco as described in Paragraph 17;

such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor's proceeds of disposition of the particular property and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfer.

For greater certainty, provided that Holdco1 holds its Company Series 1 Shares and that the Company holds the issued common shares of SubcoA as capital property immediately before the share transfers described in Paragraphs 16 and 17 respectively, those transfers will not, in and of themselves, cause the common shares and the Spinco Class A Shares of Spinco to be received and held respectively by Holdco1 and the Company not to be capital property.

C. Neither subsection 212.1(1) nor subsection 85(2.1) will apply to reduce the PUC of the common shares of Spinco issued to Holdco1 as described in Paragraph 16 above.

D. Subsection 85(2.1) will not apply to reduce the PUC of the Spinco Class A Shares issued to the Company as described in Paragraph 17 above.

E. Subsection 84(3) will apply:

(a) on the retraction, as described in Paragraph 18 above, of the Company Series 1 Shares held by Spinco to deem the Company to have paid and Spinco to have received; and

(b) on the redemption, as described in paragraph 19 above, of the Spinco Class A Shares held by the Company to deem Spinco to have paid and the Company to have received:

a dividend on such class of shares equal to the amount, if any, by which the aggregate amount paid upon such respective retraction or redemption exceeds the aggregate PUC in respect of such shares immediately before such respective retraction or redemption, and the amount of such dividend;

(c) will be included, pursuant to subsection 82(1) and paragraph 12(1)(j), in computing the income of the corporation which was deemed to have received such dividend;

(d) will be deductible by each recipient of such dividend in computing its respective taxable income pursuant to subsection 112(1);

(e) will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) or (2.4) apply to deny the subsection 112(1) deduction described in (d) above;

(f) will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining the proceeds of disposition to the recipient corporation of the shares which are retracted or redeemed; and

(g) will not be subject to tax under Part IV.1 or VI.1.

F. By virtue of paragraph 55(3)(a), subsection 55(2) will not apply to the taxable dividends described in Ruling E above, provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions including the transactions described herein. For greater certainty, the Proposed Transactions, in and by themselves, will not be considered to result in any disposition or increase in interest described in subparagraphs 55(3)(a)(i) to (v).

G. The provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not apply to the Proposed Transactions described in Paragraphs 16 to 20, in and by themselves.

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 Agency provided that the Proposed Transactions are completed within six months from the date of this letter.

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.

COMMENTS

Nothing in this ruling should be construed as implying that that the Agency has agreed to or reviewed:

(a) the determination of the ACB, PUC or FMV of any shares referred to herein;

(b) any tax consequences relating to the facts described herein and the Proposed Transactions other than those described in the rulings given above;

(c) the potential application of application of section 245 to the dividend described in Paragraphs 14 and 15; or

(d) any tax consequence relating to the subsequent transaction described in Paragraph 24.

Yours truly,

XXXXXXXXXX
Manager
Corporate Reorganizations Section
Reorganizations and Resources Division
Income Tax Rulings Directorate