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: Sequential butterfly transaction
Position: Favourable rulings given
Reasons: Meets the requirements of 55(3)(b)
XXXXXXXXXX 2007-023736
XXXXXXXXXX , 2008
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling Request - XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX , and your other correspondence, in which you requested an advance income tax ruling on behalf of the above-captioned taxpayers. You have advised that to the best of your knowledge, and that of the responsible officers of each of the taxpayers, none of the issues involved in this ruling is
(a) in an earlier tax return of one of the taxpayers or any related person;
(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of one of the taxpayers or a related person;
(c) under objection by one of the taxpayers 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 not expired; or
(e) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
You have also advised that to the best of your knowledge, and that of the responsible officers of each of the taxpayers, that the proposed transactions will not result in any of 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:
a) "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 part, section or subsection, paragraph or subparagraph and clause or subclause, is a reference to the relevant provision of the Act, and the Income Tax Regulations thereunder are referred to as the Regulations;
b) "adjusted cost base" ("ACB") has the meaning assigned by subsection 248(1);
c) "agreed amount" means the amount agreed on by the transferor and the transferee in respect of an eligible property in an election filed pursuant to subsection 85(1);
d) "arm's length" has the meaning assigned by subsection 251(1);
e) "Aunt" means XXXXXXXXXX , an individual resident of Canada;
f) "BN" means the tax identification number assigned by the CRA to the particular entity as defined in subsection 248(1);
g) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);
h) "capital dividend account" ("CDA") has the meaning assigned by subsection 89(1);
i) "capital property" has the meaning assigned by section 54;
j) "Cousin 1" means XXXXXXXXXX , an individual resident of Canada;
k) "Cousin 1 Family Trust" means the "XXXXXXXXXX " which was established for the benefit of Cousin 1, his descendants in the first or second degree and the XXXXXXXXXX (a registered charity). The trustees are Cousin 1, XXXXXXXXXX (an unrelated third party), and Cousin 3;
l) "Cousin 3" means XXXXXXXXXX , an individual resident of Canada;
m) "Cousin 3 Family Trust" means the XXXXXXXXXX which was established for the benefit of Cousin 3, his descendants in the first or second degree, and the XXXXXXXXXX (a registered charity). The trustees are Cousin 3, XXXXXXXXXX , and Cousin 1;
n) "Cousin 4" means XXXXXXXXXX , an individual resident of Canada;
o) "Cousin 4 Family Trust" means the XXXXXXXXXX which was established for the benefit of Cousin 4, his descendants in the first or second degree, and the XXXXXXXXXX (a registered charity). The trustees are Cousin 4, XXXXXXXXXX , and XXXXXXXXXX (spouse of Cousin 4);
p) "Cousincol" means XXXXXXXXXX ., a corporation incorporated under the Canada Business Corporations Act;
q) "Cousinco2" means XXXXXXXXXX ., a corporation incorporated under the Canada Business Corporations Act;
r) "Cousinco3" means XXXXXXXXXX ., a corporation incorporated under the Canada Business Corporations Act;
s) "Cousinco4" means XXXXXXXXXX ., a company incorporated under XXXXXXXXXX ;
t) "CRA" means the Canada Revenue Agency;
u) "Daughter Family Trust" means the XXXXXXXXXX which was established for the benefit of XXXXXXXXXX , her descendants in the first or second degree, and the XXXXXXXXXX (a registered charity). The trustees are XXXXXXXXXX (daughter of Cousin 4), XXXXXXXXXX , and Cousin 4;
v) "DC" means XXXXXXXXXX ., a company continued under XXXXXXXXXX ;
w) "disposition" has the meaning assigned by subsection 248(1);
x) "dividend refund" has the meaning assigned by subsection 129(1);
y) "eligible dividend" has the meaning assigned by subsection 89(1);
z) "eligible property" has the meaning assigned by subsection 85(1.1);
aa) "fair market value" ("FMV") means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length (within the meaning assigned by subsection 251(1)) under no compulsion to act and contracting for a taxable purchase and sale;
bb) "XXXXXXXXXX Family Trust" means the XXXXXXXXXX which was established for the benefit of XXXXXXXXXX , his descendants in the first or second degree, and any trust of which one or more of the beneficiaries of the XXXXXXXXXX Family Trust are beneficiaries or a corporation all the participating shares of which are held by or for the benefit of one or more of the beneficiaries of the XXXXXXXXXX Family Trust. The trustees are XXXXXXXXXX (son of Cousin 4), XXXXXXXXXX , and Cousin 4.
cc) "general rate income pool" ("GRIP") has the meaning assigned by subsection 89(1);
dd) "income earned or realized" has the meaning assigned by paragraph 55(5)(c);
ee) "Investco" means XXXXXXXXXX ., a corporation incorporated under the Canada Business Corporations Act;
ff) "Newco" means a new corporation incorporated for the purposes of the Proposed Transactions under the Canada Business Corporations Act;
gg) "Opco" means XXXXXXXXXX , a corporation incorporated under the Canada Business Corporations Act;
hh) "paid-up capital" or "PUC" has the meaning assigned by subsection 89(1);
ii) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;
jj) "private corporation" has the meaning assigned by subsection 89(1);
kk) "proceeds of disposition" or "POD" has the meaning assigned by section 54;
ll) "Proposed Transactions" means the proposed transactions described in Paragraphs 39.1 to 77;
mm) "Realco" means a new corporation incorporated for the purposes of the Proposed Transactions under the Canada Business Corporations Act;
nn) "Real Properties" means XXXXXXXXXX ;
oo) "refundable dividend tax on hand" or "RDTOH" has the meaning assigned by subsection 129(3);
pp) "related person" has the meaning assigned by section 251;
qq) "safe-income determination time" has the meaning assigned by subsection 55(1);
rr) "safe income on hand" in respect of a particular share of a corporation at a particular time, means the portion of the unrealized gain inherent in such share of the corporation at that time that cannot reasonably be considered to be attributable to anything other than income earned or realized (as determined pursuant to subsection 55(5)), to the extent that it is on hand, by any corporation after 1971 and before the safe-income determination time for the transaction, event or series of transactions or events that includes the Proposed Transactions;
ss) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);
tt) "significant influence" has the meaning assigned by section 3051.04 (formerly 3050.04) of the CICA Handbook;
uu) "Son Family Trust" means the XXXXXXXXXX which was established for the benefit of XXXXXXXXXX , his descendants in the first or second degree and the XXXXXXXXXX (a registered charity). The trustees are XXXXXXXXXX (an unrelated third party), and Cousin 4.
vv) "specified financial institution" has the meaning assigned by subsection 248(1);
ww) "specified investment business" has the meaning assigned by subsection 125(7);
xx) "stated capital" means the amount of capital determined in respect of a class or series of shares in accordance with the Canada Business Corporations Act;
yy) "Subco" means XXXXXXXXXX ., a corporation incorporated under the Canada Business Corporations Act;
zz) "SubTC1" means a new corporation incorporated for the purposes of the Proposed Transactions under the Canada Business Corporations Act;
aaa) "SubTC2" means a new corporation incorporated for the purposes of the Proposed Transactions under the Canada Business Corporations Act;
bbb) "taxable Canadian corporation" or "TCC" has the meaning assigned by subsection 89(1);
ccc) "taxable dividend" has the meaning assigned by subsection 89(1);
ddd) "TC1" means XXXXXXXXXX ., a company incorporated under XXXXXXXXXX ;
eee) "TC2" means XXXXXXXXXX ., a corporation incorporated under the Canada Business Corporations Act;
The relevant facts, proposed transactions and the purpose of the Proposed Transactions are as follows:
FACTS
1. Cousin 4, Cousin 1, and Cousin 3 are cousins.
2. Aunt is Cousin 1's mother and is the aunt of Cousin 4 and Cousin 3.
3. Cousin 4 controls Cousinco4. Cousin 1 controls Cousincol and Cousinco2. Cousin 3 controls Cousinco3.
4. Cousinco1 is a CCPC and TCC. Counsinco1 was formed on XXXXXXXXXX . Cousinco1's BN is XXXXXXXXXX . Cousinco1's fiscal period and taxation year ends on XXXXXXXXXX . Cousinco1's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporation tax returns are filed at the XXXXXXXXXX Taxation Centre. Cousinco1 is a holding company whose main assets consist of shares of TC2. The corporation also owns portfolio investments. The shareholders of Cousinco1 are Cousin 1 and the Cousin 1 Family Trust.
4.1 Cousinco2 is a CCPC and a TCC. Counsinco2 was formed on XXXXXXXXXX . Counsinco2's BN is XXXXXXXXXX . Cousinco2's fiscal period and taxation year ends on XXXXXXXXXX . Cousinco2's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporation tax returns are filed at the XXXXXXXXXX Taxation Centre. Cousinco2 is a holding company whose main assets consist of shares of TC1. The corporation also owns portfolio investments. The shareholders of Cousinco2 are Cousinco1, Cousin 1, and a Spousal Trust for Aunt. On XXXXXXXXXX , subsequent to the filing of the rulings request, XXXXXXXXXX passed away. Under the terms of his will his shares of Cousinco2 were transferred to a Spousal Trust for Aunt and Cousin 1. As a result of the transfer, Cousin 1 obtained voting control of Cousinco2. The Proposed Transactions were not contemplated, planned or implemented in connection with XXXXXXXXXX death.
4.2 Cousinco 3 is a CCPC and a TCC. Cousinco3 was formed on XXXXXXXXXX . Cousinco3's BN is XXXXXXXXXX . Cousinco3's fiscal period and taxation year ends on XXXXXXXXXX . Cousinco3's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre. Cousinco3 is a holding company whose main assets consist of shares of TC1 and TC2. The corporation also owns portfolio investments. The shareholders of Cousinco3 are Cousin 3 and the Cousin 3 Family Trust.
4.3 Cousinco4 is a CCPC and a TCC. Cousinco4's BN is XXXXXXXXXX . Cousinco4 is a holding corporation whose main assets consist of shares which give it control of TC1 and TC2 and, ultimately, DC. Cousinco4 also holds portfolio investments. The shareholders of Cousinco4 are the XXXXXXXXXX Family Trust, Son Family Trust, Daughter Family Trust, XXXXXXXXXX Family Trust, and Cousin 4.
5. The single most important asset of DC is its minority interest in Opco which consists of XXXXXXXXXX Class B common, XXXXXXXXXX Class C preferred and XXXXXXXXXX Class B preferred shares of Opco. Opco carries on the business of XXXXXXXXXX . The remaining issued and outstanding shares of Opco, which constitute a majority interest, are owned by a party that deals at arm's length with Cousin 4, Cousin 1, Aunt, and Cousin 3.
Facts Relating to DC
6. DC is a CCPC and a TCC. DC was formed on XXXXXXXXXX pursuant to the amalgamation of its predecessor corporations. DC's BN is XXXXXXXXXX . DC's fiscal period and taxation year ends on XXXXXXXXXX . DC's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.
7. The authorized capital of DC consists of an unlimited number of class A common, class B common, class A preferred, class B preferred, class C preferred and class D preferred shares.
8. The only shares of DC that are issued and outstanding are the following:
a) XXXXXXXXXX class A common shares (voting, participating) owned by TC1; and
b) XXXXXXXXXX class D preferred shares (non-voting, redeemable, and retractable) owned by TC2.
9. The aggregate PUC of the DC class A common shares is approximately $XXXXXXXXXX . The aggregate PUC of the DC class D preferred shares is approximately $XXXXXXXXXX .
10. TC1 acquired its XXXXXXXXXX class A common shares of DC on XXXXXXXXXX on a conversion of DC's former common shares which were acquired by TC1 on XXXXXXXXXX . The ACB of the class A common shares of DC to TCl is approximately $XXXXXXXXXX . The class A common shares of DC are held by TC1 as capital property and were not acquired in contemplation of the Proposed Transactions.
11. TC2 acquired its XXXXXXXXXX class D preferred shares of DC on XXXXXXXXXX in consideration for transferring to DC XXXXXXXXXX Common and XXXXXXXXXX Class B preferred shares of Opco. Section 85 of the Act applied to this transfer. The ACB of the class D preferred shares of DC to TC2 is approximately $XXXXXXXXXX . The class D preferred shares of DC are held by TC2 as capital property and were not acquired in contemplation of the Proposed Transactions.
12. DC is an investment holding corporation. DC's assets consist of cash, accounts receivable, loans receivable, prepaid expenses, real estate holdings, investments in shares of and advances to Investco and an investment in shares of Opco. Investco is a CCPC and a TCC. Investco was formed on XXXXXXXXXX . Investco's BN is XXXXXXXXXX . Investco's fiscal period and taxation year ends on XXXXXXXXXX . Investco's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Tax Centre. Investco is a real estate holding company. The shares of Investco are owned as follows:
Shares DC Cousinco 4 XXXXXXX XXXXXXX Cousin 3
Common XXXXXX XXXXXXX XXXXXXX
Class B XXXXXXX
Class C XXXXXX XXXXXXX XXXXXXX
Class D XXXXXXX
Class E XXXXXX
Immediately prior to the Proposed Transactions, DC's main assets will consist of the following:
a) XXXXXXXXXX Class B common, XXXXXXXXXX Class C preferred and XXXXXXXXXX Class B preferred shares of Opco;
b) loan receivable from Investco;
c) XXXXXXXXXX D shares and XXXXXXXXXX B shares of Investco; and
d) the Real Properties.
13. The liabilities of DC consist of current liabilities in the aggregate amount of approximately $XXXXXXXXXX as at XXXXXXXXXX .
14. As at XXXXXXXXXX , the balance in DC's CDA was $XXXXXXXXXX . As at XXXXXXXXXX , the balance in DC's RDTOH account was nil. As at XXXXXXXXXX , the balance of DC's GRIP was approximately $XXXXXXXXXX .
15. DC exercises significant influence over Opco. DC does not control and does not exercise significant influence over any other corporation.
Facts Relating to TC1
16. TC1 is a CCPC and a TCC. TC1 was formed on XXXXXXXXXX . TC1's BN is XXXXXXXXXX . TC1's fiscal period and taxation year ends on XXXXXXXXXX . TC1's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.
17. The authorized capital of TC1 consists of an unlimited number of common shares, Class A shares, Class B shares, Class C shares, Class D shares, Class E shares.
18. The only shares of TC1 that are issued and outstanding are XXXXXXXXXX common shares (voting, participating), XXXXXXXXXX Class B shares (non-voting, non-participating, redeemable), XXXXXXXXXX Class C shares (non-voting, non-participating, redeemable) and XXXXXXXXXX Class D shares (non-voting, non-participating, redeemable), which are owned as follows:
Shares Subco Cousinco2 Cousinco3
Common XXXXXXXX XXXXXXXX XXXXXXXX
Class B XXXXXXXX
Class C XXXXXXXX XXXXXXXX
Class D XXXXXXXX
% of value XXXXXXX % XXXXXXX % XXXXXXX %
19. The aggregate PUC of the TC1 Common shares is approximately $XXXXXXXXXX . The aggregate PUC of the TC1 Class B shares is approximately $XXXXXXXXXX . The aggregate PUC of the TC1 Class C shares is approximately $XXXXXXXXXX . The aggregate PUC of the TC1 Class D preferred shares is approximately $XXXXXXXXXX .
20. Cousinco4 acquired its XXXXXXXXXX Common and XXXXXXXXXX Class B shares of TCl on XXXXXXXXXX , in consideration for transferring to TC1 XXXXXXXXXX Common and XXXXXXXXXX Preferred shares of DC pursuant to section 85 of the Act. The ACB of the XXXXXXXXXX Common shares of TCl to Cousinco4 is approximately $XXXXXXXXXX . The ACB of the XXXXXXXXXX Class B shares of TC1 to Cousinco4 is approximately $XXXXXXXXXX . The shares of TCl are held by Cousinco4 as capital property and were not acquired in contemplation of the Proposed Transactions.
21. Cousinco2 acquired its XXXXXXXXXX Common shares of TCl on XXXXXXXXXX in consideration for transferring to TC1 XXXXXXXXXX Common shares in the capital stock of DC pursuant to section 85 of the Act. The ACB of the XXXXXXXXXX Common shares of TC1 to Cousinco2 is approximately $XXXXXXXXXX . Cousinco2 acquired the XXXXXXXXXX Class C shares of TCl on XXXXXXXXXX in consideration for $XXXXXXXXXX . The shares of TCl are held by Cousinco2 as capital property and were not acquired in contemplation of the Proposed Transactions.
22. Cousinco3 acquired XXXXXXXXXX Common shares and XXXXXXXXXX Class D shares of TCl from Cousin 3 on XXXXXXXXXX in consideration for issuing XXXXXXXXXX common shares and XXXXXXXXXX B shares to Cousin 3. Section 85 of the Act applied to this transfer. The ACB of the XXXXXXXXXX Common shares of TC1 to Cousinco3 is approximately $XXXXXXXXXX . The ACB of the XXXXXXXXXX Class D shares of TC1 to Cousinco3 is approximately $XXXXXXXXXX . Cousinco3 acquired XXXXXXXXXX additional Common share of TC1 on XXXXXXXXXX in consideration for $XXXXXXXXXX . Cousinco3 acquired its XXXXXXXXXX Class C shares of TCl on XXXXXXXXXX in consideration for $XXXXXXXXXX . The shares of TC1 are held by Cousinco3 as capital property and were not acquired in contemplation of the Proposed Transactions.
23. TC1 is an investment holding corporation. TC1's assets consist of cash, marketable securities, loans receivable, tax assets, an investment in shares of DC and an investment in partnership interests of a public limited partnership, XXXXXXXXXX . Immediately prior to the Proposed Transactions, TCl's main assets will consist of the following:
a) XXXXXXXXXX class A common shares in the capital of DC; and
b) marketable securities.
24. TC1 did not have any material liabilities as at XXXXXXXXXX .
25. As at XXXXXXXXXX the balance in TC1's CDA was nil. As at XXXXXXXXXX , the balance in TC1's RDTOH account was nil. As at XXXXXXXXXX , the balance of TC1's GRIP was approximately $XXXXXXXXXX .
26. TC1 controls and exercises significant influence over DC. TCl does not control and does not exercise significant influence over any other corporation.
Facts Relating to TC2
27. TC2 is a CCPC and a TCC. TC2 was formed on XXXXXXXXXX . TC2's BN is XXXXXXXXXX . TC2's fiscal period and taxation year ends on XXXXXXXXXX . TC2's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.
28. The authorized capital of TC2 consists of an unlimited number of Class A common shares, Class B common shares, Class A preferred shares, Class B preferred shares, Class C Preferred shares and Class D preferred shares.
29. The only shares of TC2 that are issued and outstanding are XXXXXXXXXX Class A common shares (voting, participating) which are owned as follows:
Shares Subco Cousinco1 Cousinco3
Class A Common XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
30. The aggregate PUC of the TC2 Class A common shares is approximately $XXXXXXXXXX .
31. Cousinco4 acquired its XXXXXXXXXX Class A common shares of TC2 on XXXXXXXXXX in consideration for $XXXXXXXXXX .
32. Cousincol acquired its XXXXXXXXXX Class A common shares of TC2 on XXXXXXXXXX in consideration for $XXXXXXXXXX .
33. Cousinco3 acquired its XXXXXXXXXX Class A common shares of TC2 on XXXXXXXXXX in consideration for $XXXXXXXXXX .
34. The Class A common shares of TC2 are held by Cousinco4, Cousincol and Cousinco3 as capital property and were not acquired in contemplation of the Proposed Transactions.
35. TC2 is an investment holding corporation. TC2's assets consist of cash and XXXXXXXXXX Class D preferred shares of DC.
36. The liabilities of TC2 consist of current liabilities in the aggregate amount of approximately $XXXXXXXXXX as at XXXXXXXXXX .
37. As at XXXXXXXXXX the balance in TC2's CDA was $XXXXXXXXXX . As at XXXXXXXXXX , the balance in TC2's RDTOH account was nil. As at XXXXXXXXXX , the balance of TC2's GRIP was approximately $XXXXXXXXXX .
38. TC2 does not control and does not exercise significant influence over any corporation.
Significant Transactions
39. The following are all significant transactions which were completed prior to the implementation of the Proposed Transactions:
a) On XXXXXXXXXX , the XXXXXXXXXX (a trust created for the benefit of the issue of Cousin 4) exchanged, under section 51, its class E shares (non-voting, participating) in the capital of Cousinco4 for a certain number of non-voting preferred shares of Cousinco4 redeemable and retractable for the FMV of the class E shares at the time of the exchange. After this exchange, the XXXXXXXXXX distributed a certain number of its non-voting preferred shares in the capital of Cousinco 4 to XXXXXXXXXX in satisfaction of part of XXXXXXXXXX capital interest in the XXXXXXXXXX . Concurrently with this exchange, new class E shares of Cousinco4 were subscribed for by and issued to three new trusts. The Son Family Trust subscribed for XXXXXXXXXX Class E shares, the Daughter Family Trust subscribed for XXXXXXXXXX Class E shares, and the XXXXXXXXXX Family Trust subscribed for XXXXXXXXXX Class E shares. After these transactions, Cousin 4 continued to own XXXXXXXXXX Class A shares of Cousinco4 (voting, non-participating) and therefore, continued to control Cousinco4.
b) On XXXXXXXXXX , Cousinco4 transferred, under section 85, its XXXXXXXXXX Common shares and XXXXXXXXXX Class B shares of TCl and its XXXXXXXXXX Class A common shares of TC2 to Subco, a newly-formed corporation, in consideration for the issuance to Cousinco4 of a certain number of non-voting preferred shares of Subco that are redeemable and retractable for the FMV of Cousinco4's shares of TCl and TC2 at the time of the transfer. Concurrently with this exchange, non-voting participating Class B shares of Subco were subscribed for by and issued to three new trusts. The Son Family Trust subscribed for XXXXXXXXXX Class B shares, the Daughter Family Trust subscribed for XXXXXXXXXX Class B shares, and the Cousin 4 Family Trust subscribed for XXXXXXXXXX Class B shares. Concurrently with the above exchange and upon the organisation of Subco, Cousin 4 subscribed for and was issued voting non-participating preferred shares. After these transactions, Cousin 4 controlled Subco.
c) On XXXXXXXXXX , Cousin 1 exchanged, under section 51, all of his XXXXXXXXXX common shares in Cousinco1 for Class B non-voting, redeemable, retractable preferred shares with a redemption value equal to the fair market value of his common shares of Cousinco1 at the time of the exchange. Concurrently, the Cousin 1 Family Trust subscribed for XXXXXXXXXX Class E non-voting growth shares in the capital of Cousinco1 for cash. Concurrently, Cousin 1 subscribed for XXXXXXXXXX Class C voting non-growth shares in the capital of Cousinco1 for cash, to ensure that Cousin 1 retains control over Cousinco1.
d) On XXXXXXXXXX , Cousin 3 exchanged, under section 51, all of his XXXXXXXXXX common shares in Cousinco3 for non-voting, redeemable, retractable preferred shares with a redemption value equal to the fair market value of his common shares of Cousinco3 at the time of the exchange. Concurrently, the Cousin 3 Family Trust subscribed for XXXXXXXXXX non-voting growth shares in the capital of Cousinco3 for cash. Concurrently, Cousin 3 subscribed for XXXXXXXXXX voting non-growth shares in the capital of Cousinco3 for cash, to ensure that he retains control over Cousinco3.
PROPOSED TRANSACTIONS
39.1 On the day preceding the transactions beginning in paragraph 40, TC1 will increase the PUC in respect of its common shares by an amount not less than XXXXXXXXXX times TC1's RDTOH balance at the time of the increase. The amount of this increase will not exceed the amount of safe income on hand that is attributable to the common shares at the safe-income determination time.
This increase of PUC will not be by way of one of the transactions or events described in paragraphs 84(1)(a) to (c.3) and specifically will not be as a result of the conversion of contributed surplus into PUC.
Full double-wing split-up butterfly of DC's assets
40. Prior to the transfers of property described in paragraphs 50 and 51, TC1 will incorporate SubTCl. SubTCl will be a CCPC and a TCC. The authorized share capital of SubTC1 will include:
a) an unlimited number of common shares without par value which will be voting, entitled to dividends in the discretion of the directors, and which will participate in all surplus on a winding up; and
b) an unlimited number of preferred shares without par value which will be non-voting, conditionally entitled to dividends, entitled to a preference on liquidation and which will be redeemable and retractable at an amount equal to the aggregate FMV of the consideration for which such shares were issued (plus any declared but unpaid dividends) (the "SubTCl Special Shares").
41. Prior to the transfers of property described in paragraphs 50 and 51, TC2 will incorporate SubTC2. SubTC2 will be a CCPC and a TCC. The authorized share capital of SubTC2 will include:
a) an unlimited number of common shares without par value which will be voting, entitled to dividends in the discretion of the directors and which will participate in all surplus on a winding up; and
b) an unlimited number of preferred shares without par value which will be non-voting, conditionally entitled to dividends, entitled to a preference on liquidation and which will be redeemable and retractable at an amount equal to the aggregate FMV of the consideration for which such shares were issued (plus any declared but unpaid dividends) (the "SubTC2 Special Shares").
42. Reserved.
43. Prior to the transfers of property described in paragraphs 50 and 51, DC will incorporate Realco. Realco will be a CCPC and a TCC. The authorized share capital of Realco will include an unlimited number of common shares without par value which will be voting, entitled to dividends in the discretion of the directors and which will participate in all surplus on a winding up (the "Realco Common Shares"). DC will subscribe for 1 Realco Common Share in consideration for $XXXXXXXXXX .
44. Prior to the transfers of property described in paragraphs 50 and 51, DC will transfer the Real Properties to Realco in exchange for Realco Common Shares. Immediately before, at the time of, and immediately after, the transfer described in this paragraph, DC will own all of the Realco Common Shares and thus will control Realco.
45. DC and Realco 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 the Real Properties by DC to Realco. The agreed amount in respect of each such 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(l)(c.l)(i) and (ii); and
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).
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(l)(b).
46. The amount to be added to the corporate stated capital account maintained for the Realco Common Shares issued by Realco as consideration for the Real Properties transferred by DC, will be equal to the amount by which the aggregate cost of the properties acquired by it (determined pursuant to subsection 85(1) where relevant) exceeds the aggregate amount of the liabilities, if any, assumed by Realco. For greater certainty, the addition to the stated capital will not exceed the maximum amount that could be added to the PUC of the shares, having regard to subsection 85(2.1).
47. Immediately prior to the transfers of property described in paragraphs 50 and 51, the property of DC will be determined and will be classified into 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 of all the current assets of DC, including any cash, deposits, marketable securities, accounts receivable and prepaid expenses;
b) investment property, comprising of all of the assets of DC, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property or a specified investment business; and
c) business property, comprising all of the assets of DC, other than property described in a) and b) above, any income from which would, for the purposes of the Act, be income from a business (other than a specified investment business).
For greater certainty, for purposes of this distribution:
d) any tax accounts or other tax-related amounts, such as balances of any capital losses, non-capital losses, investment tax credits, CDA and RDTOH, will not be considered to be property or a liability, as the case may be;
e) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and
f) deferred income taxes will not be considered to be a property or liability, as the case may be;
48. DC has significant influence over Opco and Realco. Consequently, DC would normally be required to use the consolidated look-through method for determining the appropriate proportion of each of the three types of property (cash or near cash, business and investment property) that the shares of Opco and Realco would represent. However, since TC1 and TC2 will each receive its pro rata portion of the shares of Opco and Realco owned by DC, the determination using the consolidated look-through method will not actually be undertaken for the purposes of the Proposed Transactions.
49. In determining the net FMV of its cash or near cash property, investment property and business property immediately before the transfers described in paragraphs 50 and 51, liabilities of DC will be allocated to, and be deducted in the calculation of, the net FMV of each such type of property of DC in the following manner:
a) current liabilities of DC will be allocated to cash or near cash property (including any cash, accounts receivable and prepaid expenses) in the proportion that the FMV of each such property is of the FMV of all cash or near cash property. The allocation of current liabilities as described herein will not exceed the aggregate FMV of all cash or near cash property of DC;
b) liabilities of DC, other than current liabilities, that relate to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. Liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein;
c) if any liabilities (hereinafter referred to as "excess unallocated liabilities") remain after the allocations described in steps a) and b) are made, such excess unallocated liabilities (including any excess current liabilities, if any), will then be allocated to the cash or near cash property and investment property of DC based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.
50. Immediately following the classification of DC's three types of property, DC will transfer a pro rata portion of each of the three types of property of DC to SubTC1, to the extent it owns property of that type. For greater certainty, DC will transfer a pro rata share of the loan receivable from Investco, the shares of Opco, the shares of Investco and the shares of Realco. As consideration for the property transferred by DC, SubTCl will assume a pro rata amount of DC's existing liabilities and SubTC1 will issue, to DC, SubTC1 Special Shares having a redemption amount equal to the net FMV of the transferred assets.
51. Concurrently with the transfer described in paragraph 50, DC will transfer a pro rata portion of each of the three types of property of DC to SubTC2, to the extent it owns property of that type. For greater certainty, DC will transfer a pro rata share of the loan receivable from Investco, the shares of Opco, the shares of Investco and the shares of Realco. As consideration for the property transferred by DC, SubTC2 will assume a pro rata amount of DC's existing liabilities and SubTC2 will issue to DC SubTC2 Special Shares having a redemption amount equal to the net FMV of the transferred assets.
52. Immediately following the transfers described in paragraphs 50 and 51, the net FMV of each type of property received by each of SubTCl and SubTC2, as the case may be, will be equal to or will approximate that proportion of the net FMV of that particular type of property of DC immediately before such transfers of property described herein that:
a) the aggregate FMV, immediately before the transfer, of all of the DC shares owned by each of TCl and TC2 at that time, as the case may be, is of
b) the aggregate FMV, immediately before the transfer, of all the issued and outstanding shares of DC at that time.
For the purposes of this paragraph, the expression "approximate that proportion" means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the FMV of each type of property which each of SubTC1 and SubTC2 will receive as compared to what each such recipient corporation would have received had each such corporation received its appropriate pro rata share of the FMV of that type of property.
53. Each of DC and SubTCl and DC and SubTC2, as the case may be, 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 SubTC1 and SubTC2, respectively. 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) and inventory, 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(l)(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(l)(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.
54. The amount to be added to the respective corporate stated capital accounts maintained for the preferred shares issued by SubTC1 and SubTC2, as the case may be, as consideration for the property transferred by DC, will be equal to the amount by which the aggregate cost of the properties acquired by it (determined pursuant to subsection 85(1) where relevant) exceeds the aggregate amount of the liabilities, if any, assumed by SubTC1 and SubTC2, as the case may be. For greater certainty, the addition to the stated capital will not exceed the maximum amount that could be added to the PUC of the shares, having regard to subsection 85(2.1).
55. SubTCl and SubTC2 will redeem the SubTCl Special Shares and SubTC2 Special Shares held by DC, respectively, and will each issue to DC, in full payment of the aggregate redemption price payable therefor, a demand, non-interest bearing, Canadian dollar denominated, promissory note having a principal amount and FMV equal to the redemption amount of the preferred shares so redeemed. (the "SubTCl Note" and the "SubTC2 Note", respectively)
56. SubTCl will be wound up into its parent corporation, TCl. As a consequence, SubTCl's assets will be transferred to TCl and TC1 will assume SubTCl's liabilities, including the SubTCl Note.
57. SubTC2 will be wound up into its parent corporation, TC2. As a consequence, SubTC2's assets will be transferred to TC2 and TC2 will assume SubTC2's liabilities, including the SubTC2 Note.
57.1 In the event that DC has a balance in its GRIP at that time, DC will redeem such number of the XXXXXXXXXX class D preferred shares owned by TC2, in consideration for a proportionate share of the SubTC2 Note, so that the resulting deemed dividend is equal to DC's GRIP and DC will designate, pursuant to subsection 89(14), by notifying TC2 in writing, that the entire dividend be an eligible dividend.
58. TCl and TC2 will resolve to wind up and dissolve DC. In the course of the winding up, DC will
a) distribute to TC1 and TC2 their respective share of the assets of DC, being the SubTCl Note and the SubTC2 Note, respectively; and
b) cancel the XXXXXXXXXX class A common shares owned by TCl and the portion of XXXXXXXXXX class D preferred shares, remaining after the redemption described in paragraph 57.1, owned by TC2.
59. The SubTCl Note will be extinguished by virtue of its distribution by DC to TC1 and such note will be cancelled.
60. The SubTC2 Note will be extinguished by virtue of its distribution by DC to TC2 and such note will be cancelled.
61. In the event that DC has a balance in its CDA at the time of the winding-up, DC will elect pursuant to subsection 83(2) of the Act, in prescribed manner and prescribed form, that the full amount of any resulting dividend referred to in subparagraph 88(2)(b)(i) be deemed to be a capital dividend.
Split-up butterfly of TC1's and TC2's assets
62. Prior to the transfers of property described below, Subco will incorporate Newco. Newco will be a CCPC and a TCC. The authorized share structure of Newco will include:
a) an unlimited number of common shares without par value which will be voting, entitled to dividends in the discretion of the directors and which will participate in all surplus on a winding up; and
b) an unlimited number of one class of preferred shares without par value which will be non-voting, conditionally entitled to dividends, entitled to a preference on liquidation and which will be redeemable and retractable at an amount equal to the aggregate FMV of the consideration for which such shares were issued (plus any declared but unpaid dividends) (the "Newco TCl Special Shares").
c) an unlimited number of another class of preferred shares without par value which will be non-voting, conditionally entitled to dividends, entitled to a preference on liquidation and which will be redeemable and retractable at an amount equal to the aggregate FMV of the consideration for which such shares were issued (plus any declared but unpaid dividends) (the "Newco TC2 Special Shares").
63. Reserved.
64. Subsequent to the transactions described in paragraphs 40 to 61 and immediately prior to the transfers of property described in paragraph 67, the property of each TC1 and TC2 will be determined and will be classified into 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 of all the current assets of TC1 and TC2, respectively;
b) investment property, comprising of all of the assets of TC1 and TC2, respectively, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property or a specified investment business; and
c) business property, comprising all of the assets of TCl and TC2, respectively, other than property described in a) and b) above, any income from which would, for the purposes of the Act, be income from a business (other than a specified investment business).
For greater certainty, for purposes of this distribution:
d) any tax accounts or other tax-related amounts, such as balances of any capital losses, non-capital losses, investment tax credits, CDA and RDTOH, will not be considered to be property or a liability, as the case may be;
e) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and
f) deferred income taxes will not be considered to be a property or liability, as the case may be;
65. TC1 will have significant influence over Opco and Realco. Consequently, TC1 would normally be required to use the consolidated look-through method for determining the appropriate proportion of each of the three types of property (cash or near cash, business and investment property) that the shares of Opco and Realco would represent. However, since Subco will receive its pro rata share of the shares of Opco and Realco owned by each TC1 and TC2, the determination using the consolidated look-through method will not actually be undertaken for the purposes of the proposed transactions.
66. In determining the net FMV of the cash or near cash property, investment property and business property of TC1 and TC2 immediately before the transfers described in paragraph 67, liabilities of TC1 and TC2 will be allocated to, and be deducted in the calculation of, the net FMV of each such type of property of TC1 and TC2 in the following manner:
a) current liabilities of TC1 and TC2 will be allocated to cash or near cash property (including any cash, accounts receivable and prepaid expenses) of TC1 and TC2, respectively, in the proportion that the FMV of each such property is of the FMV of all cash or near cash property. The allocation of current liabilities as described herein will not exceed the aggregate FMV of all cash or near cash property of TCl and TC2, respectively;
b) liabilities of TCl and TC2, other than current liabilities, that relate to a particular property of TC1 and TC2, respectively, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. Liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein;
c) if any liabilities (hereinafter referred to as "excess unallocated liabilities") remain after the allocations described in steps a) and b) are made, such excess unallocated liabilities (including any excess current liabilities, if any), will then be allocated to the cash or near cash property and investment property of TC1 and TC2, respectively, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.
67. Immediately following the classification of TC1's and TC2's three types of property, each of TC1 and TC2 will transfer a pro rata portion of each of its three types of property to Newco, to the extent it owns property of that type. For greater certainty, each of TC1 and TC2 will transfer a pro rata share of its loan receivable from Investco, the shares of Opco, the shares of Investco and the shares of Realco. In exchange,
a) Newco will assume a pro rata amount of TC1's existing liabilities and Newco will issue to TCl Newco TC1 Special Shares in its capital having a redemption amount equal to the FMV of the transferred properties received from TC1; and
b) Newco will assume a pro rata amount of TC2's existing liabilities and Newco will issue to TC2 Newco TC2 Special Shares in its capital having a redemption amount equal to the FMV of the transferred properties received from TC2.
68. Immediately following the transfers described in paragraph 67, the net FMV of each type of property received by Newco will be equal to or will approximate that proportion of the net FMV of that particular type of property of TC1 and TC2 immediately before such transfers of property described herein that:
a) the aggregate FMV, immediately before the transfer, of all of the TC1 and TC2 shares owned by Subco, is of
b) the aggregate FMV, immediately before the transfer, of all the issued and outstanding shares of TC1 and TC2 at that time.
For the purposes of this paragraph, the expression "approximate that proportion" means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the FMV of each type of property which Newco will receive as compared to what Newco would have received had such corporation received its appropriate pro rata share of the FMV of that type of property.
69. Each of Newco and TC1 and Newco and TC2, as the case may be, 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 TC1 to Newco and by TC2 to Newco, respectively. 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) and inventory, an amount not less than the lesser of the amounts described in subparagraphs 85(l)(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(l)(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(l)(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.
70. The amount to be added to the respective corporate stated capital accounts maintained for the preferred shares issued by Newco, as the case may be, as consideration for the property transferred by TC1 and TC2, will be equal to the amount by which the aggregate cost of the properties acquired by it (determined pursuant to subsection 85(1) where relevant) exceeds the aggregate amount of the liabilities, if any, assumed by Newco. For greater certainty, the addition to the stated capital will not exceed the maximum amount that could be added to the PUC of the shares, having regard to subsection 85(2.1) of the Act.
71. Newco will redeem the Newco TC1 Special Shares and Newco TC2 Special Shares held respectively by TC1 and TC2 and will issue to each of TC1 and TC2, in full payment of the aggregate redemption price payable therefor, a demand, non-interest bearing, Canadian dollar denominated, promissory note having a principal amount and FMV equal to the redemption amount of the Newco TC1 Special Shares and Newco TC2 Special Shares so redeemed.
72. Newco will be wound up into its parent corporation, Subco. As a consequence, Newco's assets will be transferred to Subco and Subco will assume Newco's liabilities, including the notes issued to TC1 and TC2.
73. TCl will purchase for cancellation the XXXXXXXXXX Common shares owned by Subco, and will redeem the XXXXXXXXXX Class B shares owned by Subco. TCl will issue to Subco, in full payment therefor, a demand, non-interest bearing, Canadian dollar denominated promissory note having a principal amount and FMV equal to the FMV of the XXXXXXXXXX Common shares and the XXXXXXXXXX Class B shares so purchased or redeemed. In the event that TC1 has a balance in its CDA at the time of the purchase for cancellation and the redemption, TC1 may purchase for cancellation or may redeem a number of its shares in separate tranches so that TC1 may elect, pursuant to subsection 83(2), in the prescribed manner and prescribed form, that the full amount of one of the resulting dividends, as will not exceed TC1's CDA, be deemed to be a capital dividend. In the event that TC1 has a balance in its GRIP at the time of the purchase for cancellation and the redemption, TC1 may purchase for cancellation or may redeem a number of its shares in separate tranches so that TC1 may designate, pursuant to subsection 89(14), by notifying Subco in writing, that the full amount of the resulting dividend, as will not exceed TC1's GRIP, be deemed to be an eligible dividend. After the redemption and purchase for cancellation, Cousin 1 and Cousin 3, through their ownership of Cousinco2 and Cousinco3, respectively, will act in concert to control TC1. For its taxation year commencing at the time of the acquisition of control, TC1 shall establish a fiscal period ending at the end of the day when control of TC1 was acquired.
74. TC2 will purchase for cancellation the XXXXXXXXXX Class A common shares owned by Subco. TC2 will issue to Subco, in full payment therefor, a demand, non-interest bearing, Canadian dollar denominated promissory note having a principal amount and FMV equal to the FMV of the XXXXXXXXXX Class A common shares so purchased. In the event that TC2 has a balance in its CDA at the time of the purchase for cancellation, TC2 may purchase for cancellation in separate tranches a number of its shares so that TC2 may elect, pursuant to subsection 83(2), in the prescribed manner and prescribed form, that the full amount of one of the resulting dividends, as will not exceed TC2's CDA, be deemed to be a capital dividend. In the event that TC2 has a balance in its GRIP at the time of the purchase for cancellation, TC2 may purchase for cancellation a number of its shares in separate tranches so that TC2 may designate, pursuant to subsection 89(14), by notifying Subco in writing, that the full amount of the resulting dividend, as will not exceed TC2's GRIP, be deemed to be an eligible dividend. After the redemption and purchase for cancellation, Cousin 1 and Cousin 3, through their ownership of Cousinco1 and Cousinco3, respectively, will act in concert to control TC2. For its taxation year commencing at the time of the acquisition of control, TC2 shall establish a fiscal period ending at the end of the day when control of TC2 was acquired.
75. The obligations of Subco and TC1 to each other under the promissory notes issued on the share redemptions and repurchases will be set off against each other as payment in full of such notes and the notes will be cancelled.
76. The obligations of Subco and TC2 to each other under the promissory notes issued on the share redemptions and repurchases will be set off against each other as payment in full of such notes and the notes will be cancelled.
Increase in Paid up Capital of Subco Preferred Shares
77. Subsequent to the transactions described above, Subco will increase the paid-up capital in respect of the class of non-voting preferred shares owned by Cousinco4 by an amount not exceeding the cash and near cash property received by Subco on the transfers described above. The amount of this increase will not exceed the amount of safe income on hand that is attributable to the preferred shares of Subco held by Cousinco4 at the safe-income determination time. This increase of paid-up capital will not be by way of one of the transactions or events described in paragraphs 84(1)(a) to (c.3) and specifically will not be as a result of the conversion of contributed surplus into paid-up capital. Immediately thereafter, Subco will reduce the paid-up capital in respect of this class of shares by an amount equivalent to the increase of paid-up capital described above and will pay the same amount to Cousinco4 in cash.
78. The share provisions relating to the SubTCl Special Shares, the Newco TC1 Special Shares and Newco TC2 Special Shares will provide that in the event that it is subsequently held or determined by a final decision of any competent authority or by a negotiated settlement with any revenue authority that the aggregate net FMV of any property that is relevant to the determination of the redemption price of such shares is different than the FMV assigned thereto, the redemption amounts of such shares shall be automatically adjusted retroactively, nunc pro tunc, to reflect the aggregate net FMV so held or determined.
79. Except as described in this letter, no liabilities have been or will be incurred by, and no assets have been or will be acquired by or disposed of by DC, TC1 and TC2 in contemplation of or before the Proposed Transactions.
80. Except as described in this letter, no property transferred to any corporation in the course of the reorganization contemplated herein will, thereafter, be transferred directly or indirectly, in the course of that reorganization to an unrelated person.
81. None of the shares of DC or SubTC1, SubTC2, TC1, TC2, Newco or Subco has been, or will be, at any time during the implementation of the proposed transactions described herein:
a) the subject of any undertaking that is referred to in subsection 112(2.2) as a guarantee agreement;
b) a share that is issued or acquired as part of a transaction or event or a series of transactions or event of the type described in subsection 112(2.5); or
c) the subject of a dividend rental arrangement.
82. None of the relevant parties is, or will be at the time of the Proposed Transactions described herein, a specified financial institution.
83. Reserved
PURPOSE OF THE PROPOSED TRANSACTIONS
84. The purpose of the Proposed Transactions is to allow Cousin 4 to separate his economic interest in the assets of DC, TC1 and TC2 from those of his cousins and aunt in order to pursue independent investment strategies and be more independent from his cousins and aunt.
85. The purpose of incorporating SubTCl and SubTC2 is to use these corporations to receive the property of the distributing corporation, DC, prior to the acquisition of such property by TC1 and TC2, respectively. This is necessary as DC is a controlled subsidiary of TC1 and, under corporate law, DC may not acquire shares of its parent, TC1. To avoid this problem, a wholly-owned subsidiary must initially acquire TC1's portion of DC's assets which would then be wound up into TC1. The use of SubTCl and SubTC2 also avoids the possible circular calculation of Part IV tax on the dividends that will be deemed to be paid and received as a result of the reorganization.
86. The purpose of incorporating Realco is that it is simpler and more efficient to transfer shares of Realco rather than to transfer the Real Properties in the course of the Proposed Transactions.
87. The purpose of incorporating Newco is to use this corporation to receive the property of the distributing corporations, TCl and TC2, prior to the acquisition of such property by the shareholder of TCl and TC2, Subco. This is necessary as TCl and TC2 will be controlled subsidiaries of Subco and, under corporate law, TCl and TC2 may not acquire shares of their parent, Subco. To avoid this problem, a wholly-owned subsidiary, Newco, must initially acquire Subco's portion of TC1's and TC2's assets and Newco would then be wound up into Subco. The use of Subco also avoids the possible circular calculation of Part IV tax on the dividends that will be deemed to be paid and received as a result of the reorganization.
88. The purpose of the transactions described in Paragraph 77 is to ensure that the cash received by Subco on the distribution will be managed using the management style of Cousinco4.
A cash dividend could not be paid on the preferred shares due to restrictions in the articles of the corporation. A portion of the preferred shares could not be redeemed as there would be insufficient safe income on hand. As a result, the paid up capital of the shares of Subco held by Cousinco4 will be increased and subsequently decreased by an equivalent amount.
89. The purpose of the PUC increase, as described in paragraph 39.1, is to move the RDTOH balance in TC1 on a proportionate basis to its shareholders. There will be a year end between the payment of the dividend and the butterfly transactions as a result of the acquisition of control of TC1 as the operation of subsection 256(9) will deem its year end to begin at the beginning of the day that the butterfly transactions are undertaken.
90. The purpose of the one day fiscal period of TC1 and TC2 is to ensure that only minimal RDTOH will accumulate in TC1 and TC2 in the taxation year in which each is deemed to pay a dividend to Subco, such that any potential Part IV tax liability of Subco is minimized.
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. The provisions of subsection 85(1) will apply to:
(a) the transfer of assets of DC to Realco as described in paragraph 44;
(b) the transfer of assets of DC to SubTCl as described in paragraph 50;
(c) the transfer of assets of DC to SubTC2 as described in paragraph 51;
(d) the transfer of assets of TCl to Newco as described in paragraph 67; and
(e) the transfer of assets of TC2 to Newco as described in paragraph 67;
such that the agreed amount in respect of each transfer of eligible property shall be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to the transfers referred to herein.
B. As a result of the redemption by SubTC1 of the SubTCl Special Shares described in paragraph 55 and the redemption by SubTC2 of its SubTC2 Special Shares described in paragraph 55, by virtue of subsection 84(3),
(a) SubTCl 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 SubTC1 in respect of the redemption of the SubTC1 Special Shares owned by DC exceeds the PUC of such SubTC1 Special Shares immediately before the redemption; and
(b) SubTC2 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 SubTC2 in respect of the redemption of its SubTC2 Special Shares owned by DC exceeds the PUC of such SubTC2 Special Shares immediately before the redemption.
B.1 As a result of the redemption described in paragraph 57.1, by virtue of subsection 84(3), DC will be deemed to have paid and TC2 will be deemed to have received a taxable dividend equal to the amount by which the amount paid by DC in respect of the redemption exceeds the PUC of the redeemed class D preferred shares immediately before the redemption.
C. In the course of the winding-up of DC described in paragraph 58,
(a) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (b) to (d) herein, DC will be deemed to have paid, and each of TC1 and TC2 to have received, a dividend (the "winding-up dividend") on its class A common and class D preferred shares, as the case may be, equal to the proportion of amount by which the amount of the funds or property distributed by DC to each TC1 and TC2 in respect of the class A common and class D preferred shares, as the case may be, on the winding-up exceeds the amount by which the PUC of the class A common and class D preferred shares, as the case may be, is reduced as a result of the distribution, that the number of shares of such class held by each TC1 and TC2, as the case may be, is of the number of issued shares of such class outstanding immediately before the distribution;
(b) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (a) herein as does not exceed DC's CDA determined immediately before the payment of the winding-up dividend will be deemed, for purposes of the subsection 83(2) election referred to in paragraph 61, to be the full amount of a separate dividend;
(c) pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to the lesser of:
(A) DC's pre-1972 CSOH as determined immediately before the payment of the winding-up dividend and,
(B) the amount by which the winding-up dividend exceeds the portion thereof in respect of which DC will elect under subsection 83(2)
will be deemed not to be a dividend; and
(d) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in (b) herein that is deemed to be a separate dividend and the portion referred to in (c) herein that is deemed not to be a dividend, will be deemed to be a separate dividend that is a taxable dividend.
D. As a result of the redemption by Newco of the Newco TC1 Special Shares described in paragraph 71 and the purchase for cancellation by TC1 of its XXXXXXXXXX Common shares and the redemption by TCl of its XXXXXXXXXX Class B shares described in paragraph 73, by virtue of subsection 84(3),
(a) Newco will be deemed to have paid, and TCl will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by Newco in respect of the redemption of the Newco TCl Special Shares owned by TC1 exceeds the PUC of such Newco TCl Special Shares immediately before the redemption; and
(b) TC1 will be deemed to have paid, and Subco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by TCl in respect of the purchase for cancellation by TCl of its Common shares and the redemption by TCl of its Class B preferred shares owned by Subco exceeds the PUC attributable to such shares immediately before the purchase for cancellation and redemption unless TC1 has elected, pursuant to subsection 83(2) in the prescribed manner and prescribed form, that the full amount of a separate dividend be deemed to be a capital dividend, then such portion of the separate dividend as does not exceed TC1's CDA, determined immediately before the payment of the dividend, will be deemed to be a capital dividend.
E. As a result of the redemption by Newco of the Newco TC2 Special Shares described in paragraph 71 and the purchase for cancellation by TC2 of its XXXXXXXXXX Class A common shares described in paragraph 74, by virtue of subsection 84(3),
(a) Newco will be deemed to have paid, and TC2 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by Newco in respect of the redemption of the Newco TC2 Special Shares owned by TC2 exceeds the PUC of such Newco TC2 Special Shares immediately before the redemption; and
(b) TC2 will be deemed to have paid, and Subco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by TC2 in respect of the purchase for cancellation by TC2 of its Class A common shares owned by Subco exceeds the PUC attributable to such shares immediately before the purchase for cancellation unless TC2 has elected, pursuant to subsection 83(2), in the prescribed manner and prescribed form, that the full amount of a separate dividend be deemed to be a capital dividend, then such portion of the separate dividend as does not exceed TC2's CDA, determined immediately before the payment of the dividend, will be deemed to be a capital dividend.
F. As a result of the transactions described in paragraph 77:
(a) Pursuant to subsection 84(1), as a result of the increase by Subco of the paid-up capital in respect of the class of non-voting preferred shares owned by Cousinco4, Subco will be deemed to have paid on the class of non-voting preferred shares owned by Cousinco4 and Cousinco4 will be deemed to have received, a taxable dividend equal to the amount of the increase of the paid-up capital in respect of that class of shares;
(b) Pursuant to paragraph 53(1)(b), the amount of this taxable dividend will be added to the adjusted cost base to Cousinco4 of its non-voting preferred shares in the capital of Subco;
(c) The reduction of the paid-up capital in respect of the class of preferred shares owned by Cousinco4, will not result in any amount being deemed by subsection 84(4) to be a taxable dividend received by Cousinco4; and
(d) Pursuant to subparagraph 53(2)(a)(ii), the full amount received by Cousinco4 on the reduction of paid-up capital described above will reduce the adjusted cost base to Cousinco4 of its non-voting preferred shares in the capital of Subco.
F.1 As a result of the transactions described in paragraph 39.1:
(a) Pursuant to subsection 84(1), as a result of the increase by TC1 of the paid-up capital in respect its common shares, TC1 will be deemed to have paid a taxable dividend on those shares equal to the amount of the increase of the paid-up capital;
(b) Pursuant to paragraph 53(1)(b), the amount of this taxable dividend will be added to the adjusted cost base of the recipients' common shares;
G. The taxable dividends described in Rulings B, B.1, C, D, and E above:
(a) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the person deemed to have received such dividend;
(b) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income in the year in which such a dividend is deemed to have been received, and, for greater certainty, will not be prohibited by subsections 112(2.1), (2.2), (2.3) or (2.4);
(c) will be excluded in determining POD to the recipient of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of POD in section 54 of the Act;
(d) 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;
(e) will not be subject to tax under Part IV except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend; and
(f) will not be subject to tax under Part IV.1 or VI.1.
H. The taxable dividends described in Ruling F and F.1:
(a) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the person deemed to have received such dividend;
(b) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income in the year in which such a dividend is deemed to have been received, and, for greater certainty, will not be prohibited by subsections 112(2.1), (2.2), (2.3) or (2.4);
(c) will not be subject to tax under Part IV except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend; and
(d) will not be subject to tax under Part IV.1 or VI.1.
I. Provided that, as part of the 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.l)(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 shares in the circumstances described in subparagraph 55(3.l)(b)(iii); or
(e) an acquisition of property in the circumstances described in subparagraph 55(3.l)(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 Rulings B, B.1, C, D, and E above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
J. Subsection 55(2) will not apply to the taxable dividend referred to in Ruling F provided that the amount of the taxable dividend does not exceed the amount of safe income on hand that is attributable to the preferred shares of Subco held by Cousinco4 at the safe-income determination time for the series of transactions that includes the taxable dividend.
J.1 Subsection 55(2) will not apply to the taxable dividend referred to in Ruling F.1 provided that the amount of the taxable dividend does not exceed the amount of safe income on hand that is attributable to the common shares of TC1 held by at the safe-income determination time for the series of transactions that includes the taxable dividend.
K. Upon the purchases for cancellation described in paragraphs 73 and 74, control of TC1 will be acquired by Cousinco2 and Cousinco3 and control of TC2 will be acquired by Cousinco1 and Cousinco3. Furthermore, subsection 249(4) will apply to, inter alia, deem the taxation years of TC1 and TC2 to have ended immediately before the time of acquisition of control and to deem a new taxation year to have commenced at that time. Provided no election is made for it not to apply, subsection 256(9) will apply to deem control to have been acquired at the commencement of that day and not at the particular time.
L. The cancellation of promissory notes described in paragraphs 59, 60, 75 and 76 will not give rise to a "forgiven amount" within the meaning of subsections 80(1) and 80.01(1) of the Act.
M. The provisions of subsection 88(1) will apply to the windings-up of SubTCl, SubTC2, and Newco, as described in 56, 57 and 72, respectively.
N. Provided that the condition specified in paragraph 1100(2.2)(f) of the Regulations is satisfied, the relevant provisions of paragraphs 1100(2.2)(h) to (k) of the Regulations shall apply in respect of the acquisition of depreciable property of a prescribed class to be transferred by DC to Realco, as described in paragraph 44.
O. Provided that any rental property (within the meaning of subsection 1100(14) of the Regulations) of DC that is included in the depreciable property to be acquired by Realco will constitute rental property to Realco and provided that each such property was included in a prescribed class of DC other than a separate class prescribed under subsection 1101(lac) of the Regulations, then pursuant to subsection 1101(lad) of the Regulations, each such property shall be deemed not to be property of a separate class prescribed under subsection 1101(1ac) of the Regulations to Realco.
P. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to any of the transactions described in Paragraphs 40 to 76.
Q. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed herein.
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 into law, 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;
(b) the balance of CDA, GRIP, or RDTOH of any corporation; or
(c) 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.
(d) In Paragraph 78, you have indicated that the share provisions related to the SubTC1 Special Shares, the Newco TC1 Special Shares, and the Newco TC2 Special Shares will include a price adjustment clause. Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred and the redemption amount of the shares issued as consideration, will be effective retroactively to the time of the transfer and issuance of shares. In addition, any such adjustment could affect the ruling given in Ruling H above. Furthermore, none of the rulings given in this letter are intended to apply to the operation of a price adjustment clause, since its coming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Interpretation Bulletin IT-169.
Yours truly,
XXXXXXXXXX
Manager
Corporate Reorganizations Section II
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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