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: Spin-off of business assets from a corporation to another, within a related group.
Position: Favourable rulings provided.
Reasons: In compliance with the law and previous positions.
XXXXXXXXXX 2007-025596
and
XXXXXXXXXX
XXXXXXXXXX , 2008
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in your letters and e-mails of XXXXXXXXXX , and during our various telephone conversations in connection with your ruling request (XXXXXXXXXX ).
We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues described herein is:
(i) dealt with in an earlier return of the taxpayers 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 taxpayers or a related person,
(iii) under objection by the taxpayers or a related person,
(iv) before the courts or if a judgment has been issued, the time limit for appeal to a higher court has expired, or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.
Throughout this letter, except in Paragraph 33, the corporate and individual taxpayers will be referred to as follows:
(a) "Child I" means XXXXXXXXXX ;
(b) "Child II" means XXXXXXXXXX ;
(c) "Children" means Child I and Child II, the children of Parent I and Parent II;
(d) "Eligible Charity I" means XXXXXXXXXX , a Registered Charity;
(e) "Eligible Charity II" means a corporation to be incorporated under Canadian law, which will reside in Canada and apply to the Minister of National Revenue to be registered as a Private Foundation; Eligible Charity II will qualify as a Registered Charity;
(f) "Executive" means XXXXXXXXXX executive of Subco III;
(g) "Executiveco" means XXXXXXXXXX ., a corporation incorporated by Executive;
(h) "Familyco" means XXXXXXXXXX ., a corporation incorporated under the XXXXXXXXXX , the shareholding of which is described in Paragraph 6;
(i) "Holdco" means XXXXXXXXXX ., a corporation continued under the XXXXXXXXXX , the shareholding of which is described in Paragraph 2;
(j) "Investmentco I" means XXXXXXXXXX , a corporation incorporated under the laws of the province of XXXXXXXXXX . Holdco owns XXXXXXXXXX Class A preferred shares and XXXXXXXXXX Class B preferred shares in the capital stock of Investmentco I;
(k) "Investmentco II" means XXXXXXXXXX ., a corporation incorporated under the XXXXXXXXXX which is a subsidiary wholly-owned corporation of Holdco;
(l) "Investmentco III" means XXXXXXXXXX ., a corporation incorporated under the XXXXXXXXXX which is a subsidiary wholly-owned corporation of Holdco;
(m) "Newco" means a corporation to be incorporated under the laws of XXXXXXXXXX , as described in Paragraph 12;
(n) "Parent I" means XXXXXXXXXX ;
(o) "Parent II" means XXXXXXXXXX , the spouse of Parent I;
(p) "Person(s) Entitled to Appoint Trustees" has the meaning assigned in XXXXXXXXXX of the XXXXXXXXXX Trust Deed or of the XXXXXXXXXX Trust Deed, as the case may be;
(q) "Subco Group" means Subco I, Subco III and Subco III's subsidiaries;
(r) "Subco I" means XXXXXXXXXX , a corporation incorporated under the laws of the province of XXXXXXXXXX , the shareholding of which is described in Paragraph 4;
(s) "Subco II" means XXXXXXXXXX ., a corporation incorporated under the laws of the province of XXXXXXXXXX which is a subsidiary wholly-owned corporation of Subco I;
(t) "Subco III" means XXXXXXXXXX , a corporation incorporated under the XXXXXXXXXX which is a subsidiary wholly-owned corporation of Subco II;
(u) "Subco IV" means XXXXXXXXXX ., a corporation incorporated under the laws of the province of XXXXXXXXXX which is a subsidiary wholly-owned corporation of Subco II;
(v) "Subco V" means XXXXXXXXXX ., a corporation incorporated under the laws of the province of XXXXXXXXXX which is a subsidiary wholly-owned corporation of Subco IV;
(w) "Subco VI" means XXXXXXXXXX ., a corporation incorporated and resident in XXXXXXXXXX , and an indirect wholly-owned subsidiary of Subco III;
(x) "Trustees" has the meaning assigned by the XXXXXXXXXX Trust Deed and the XXXXXXXXXX Trust Deed, as the context requires;
(y) "XXXXXXXXXX Trust" means the trust established under the laws of the province of XXXXXXXXXX pursuant to the XXXXXXXXXX Trust Deed;
(z) "XXXXXXXXXX Trust Beneficiaries" means Eligible Charity I, Parent I, Parent II and their issue. The Children are the only current issue. As described in Paragraphs 14 and 15, Newco and Eligible Charity II will be added as beneficiaries pursuant to subparagraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed;
(aa) "XXXXXXXXXX Trust" means a trust to be established under the laws of the province of XXXXXXXXXX , as described in Paragraph 16;
(bb) "XXXXXXXXXX Trust Beneficiaries" means the same beneficiaries as the XXXXXXXXXX Trust Beneficiaries, except that Newco will not be added as a beneficiary of the XXXXXXXXXX Trust. As described in Paragraph 17, Eligible Charity II will be added as a beneficiary pursuant to subparagraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed.
DEFINITIONS
In this letter, unless otherwise expressly stated, the following terms have the meanings specified.
(a) "ACB" has the meaning assigned to the expression "adjusted cost base" in section 54;
(b) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph, clause or subclause is a reference to the relevant provision of the Act;
(c) "Agreed Amount" has the meaning assigned by subsection 85(1);
(d) "Arm's Length" has the meaning assigned by subsection 251(1);
(e) XXXXXXXXXX
(f) "CCPC" has the meaning assigned to the expression "Canadian-controlled private corporation" in subsection 125(7);
(g) "CDA" has the meaning assigned to the expression "capital dividend account" in subsection 89(1);
(h) "CRA" means the Canada Revenue Agency;
(i) "Eligible Dividend" has the meaning assigned by subsection 89(1);
(j) "ESOP" means the new employee stock option plan established by Subco I and Subco III and effective XXXXXXXXXX , as described in Paragraph 32;
(k) "Exchange Properties" means the common shares of the capital stock of Holdco that the XXXXXXXXXX Trust will exchange in the course of a reorganization of the share capital of Holdco, as described in Paragraph 19;
(l) "Executive Series" means a series of transactions that includes the disposition of the shares of the capital stock of Subco I described in Paragraph 8;
(m) "FMV" means fair market value;
(n) "GRIP" has the meaning assigned to the expression "general rate income pool" in subsection 89(1);
(o) "Holdco Dividend" means the deemed dividend that will result from the redemption of the Holdco Special Shares, as described in Paragraph 22;
(p) "Holdco New Common Shares" means new common shares to be issued from the capital stock of Holdco in the course of the Proposed Transaction described in Paragraph 19;
(q) "Holdco Note" means the demand promissory note to be issued by Holdco in payment of the redemption price of the Holdco Special Shares, as described in Paragraph 22;
(r) "Holdco Special Shares" means a new class of non-voting preferred shares to be issued from the capital stock of Holdco in the course of the Proposed Transaction described in Paragraph 19;
(s) "Newco Dividend" means the deemed dividend that will result from the redemption of the Newco Rollover Shares, as described in Paragraph 23;
(t) "Newco Note" means the demand promissory note to be issued by Newco in payment of the redemption price of the Newco Rollover Shares, as described in Paragraph 23;
(u) "Newco Participating Shares" means non-voting participating shares authorized to be issued from the capital stock of Newco;
(v) "Newco Preferred Shares" means so called high-low rollover non-voting preferred shares authorized to be issued from the capital stock of Newco;
(w) "Newco Rollover Shares" means the Newco Preferred Shares to be issued to Holdco in the course of the Proposed Transaction described in Paragraph 21;
(x) "Newco Voting Shares" means voting non-participating shares authorized to be issued from the capital stock of Newco;
(y) "Paragraph" refers to a numbered paragraph in this letter;
(z) "Participants" means the key employees of Subco III and its subsidiaries that participate in the ESOP established by Subco I and Subco III;
(aa) "Personal Trust" has the meaning assigned by subsection 248(1);
(bb) "Private Foundation" has the meaning assigned by subsection 149.1(1);
(cc) "Proposed Transactions" means the transactions described in Paragraphs 12 to 24 herein;
(dd) "PUC" means "paid-up capital" within the meaning assigned by subsection 89(1);
(ee) "RDTOH" means "refundable dividend tax on hand" within the meaning assigned by subsection 129(3);
(ff) "Registered Charity" has the meaning assigned by subsection 248(1);
(gg) "Spin-off Series" means the transactions described in Paragraphs 12 to 24 herein;
(hh) "Spin-off Shares" means the XXXXXXXXXX Class B common shares, voting, and XXXXXXXXXX Class D common shares, voting, of the capital stock of Subco I that are held by Holdco immediately before the commencement of the Spin-off Series;
(ii) "stated capital account" has the meaning assigned by XXXXXXXXXX ;
(jj) "Stock Option Transaction" means the potential granting and/or exercise or disposition of the Subco I stock options by officers and key employees of Subco III and its subsidiaries that could take place before, during or after the implementation of the Spin-off Series. For greater certainty, it also includes the disposition of the Subco I shares that were acquired by officers and key employees under the Subco I stock option plan;
(kk) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);
(ll) "taxable Canadian corporation" has the meaning assigned in subsection 89(1);
(mm) "Taxable Dividend" has the meaning assigned by subsection 89(1);
(nn) "XXXXXXXXXX Trust Deed" means the deed of settlement that was signed on XXXXXXXXXX between Executive (as settlor) and Parent I, Parent II and XXXXXXXXXX (as trustees) on the establishment of the XXXXXXXXXX Trust;
(oo) "XXXXXXXXXX Notes" means non-interest bearing promissory notes issued by Subco V to Executiveco, in payment of a series of dividends, as described in Paragraph 8;
(pp) "XXXXXXXXXX Subco I Shares" means the XXXXXXXXXX Class D Common Shares (representing XXXXXXXXXX % of Executive's interest in Subco I) of the capital stock of Subco I initially held by Executive prior to the transfers described in Paragraph 8;
(qq) "XXXXXXXXXX Trust Deed" means the deed of settlement to be executed to establish the XXXXXXXXXX Trust.
FACTS
1. Holdco is and will be, at any relevant time and for all purposes of the Act, a taxable Canadian corporation and a CCPC. Holdco is a holding company which holds the following assets:
- The Spin-off Shares;
- Various XXXXXXXXXX and XXXXXXXXXX ; and
- All the issued and outstanding shares of the capital stock of Investmentco I, Investmentco II and Investmentco III.
2. The shareholding of Holdco is currently as follows:
Shareholder
Class of shares
Number of shares
ACB
PUC
Parent I
Class A, voting
XXXXXXXXXX
XXXXXX
XXXXXXX
Familyco
Class D, non-voting
XXXXXXXXXX
XXXXXX
XXXXXXX
XXXX Trust
Common shares, voting
XXXXXXXXXX
XXXXXX
XXXXXXX
Parent I has had de jure control of Holdco since XXXXXXXXXX . The FMV of the Class D, non-voting shares of the capital stock of Holdco held by Familyco is approximately $XXXXXXXXXX . If one disregards Holdco's interest in Subco I, the net book value of Holdco on an unconsolidated basis at XXXXXXXXXX was $XXXXXXXXXX and is estimated by Holdco's management to amount to approximately $XXXXXXXXXX at XXXXXXXXXX . It is the view of Holdco's management that the FMV of Holdco is greater than its book value.
3. Holdco's management estimates that the RDTOH balance of Holdco at the end of its taxation year ended XXXXXXXXXX was $XXXXXXXXXX and confirms that no taxable dividend was paid by Holdco during that taxation year and no taxable dividend will be paid by Holdco during its XXXXXXXXXX taxation year other than the Holdco Dividend, as described in Paragraph 22. Since XXXXXXXXXX , Holdco received taxable dividends from arm's length corporations. Holdco also received a taxable dividend of $XXXXXXXXXX from Subco I in XXXXXXXXXX . In addition, during its XXXXXXXXXX taxation year, Holdco will receive the Newco Dividend, as described in Paragraph 23, and may receive from Subco I another significant taxable dividend which could amount to $XXXXXXXXXX or more if such dividend is paid before the Proposed Transactions are carried out. Also, Holdco's management estimates that the corporation's CDA and GRIP balances as at XXXXXXXXXX were $XXXXXXXXXX and $XXXXXXXXXX , respectively. Finally, Holdco's management confirms that no election under subsection 83(2) will be made in the course of the Spin-off Series to treat any dividend payable as a capital dividend.
4. The shareholding of Subco I is currently as follows:
Shareholder
Class of shares
Number of shares
ACB
PUC
Holdco
Class B common shares, voting
XXXXXXXXXX
XXXXXXX
XXXXXX
Holdco
Class D common shares, voting
XXXXXXXXXX
XXXXXXX
XXXXXX
Subco IV
Class C common shares, voting
XXXXXXXXXX
XXXXXXX
XXXXXX
Subco IV
Class D common shares, voting
XXXXXXXXXX
XXXXXXX
XXXXXX
Subco IV
Class E common shares, non-voting
XXXXXXXXXX
XXXXXXX
XXXXXX
Subco IV
Class B series One preferred, non-voting
XXXXXXXXXX
XXXXXXX
XXXXXX
Executive
Class D common shares, voting
XXXXXXXXXX
XXXXXXX
XXXXXX
Subco V
Class D common shares, voting
XXXXXXXXXX
XXXXXXX
XXXXXX
Non-resident individuals
Class C common shares, voting
XXXXXXXXXX
XXXXXXX
XXXXXX
Other
Class D common shares, voting
XXXXXXXXXX
XXXXXXX
XXXXXX
Other
Class B series One preferred shares, non-voting
XXXXXXXXXX
XXXXXXX
XXXXXX
Senior Management
Class XXXXXXXXXX common shares, non-voting
XXXXXXXXXX
XXXXXXX
XXXXXX
Eligible Charity
Class A preferred, non-voting
XXXXXXXXXX
XXXXXXX
XXXXXX
Subco I is a taxable Canadian corporation which qualifies as a CCPC. Through its ownership of the Spin-off Shares, Holdco has de jure control of Subco I as it owns approximately XXXXXXXXXX % of the issued and outstanding voting shares of the capital stock of Subco I.
5. At XXXXXXXXXX , the consolidated net book value of Subco I amounts to approximately US$XXXXXXXXXX . Subco I's management estimates that the consolidated net book value of Subco I as at XXXXXXXXXX was approximately US$XXXXXXXXXX . It is the view of Holdco's management that the FMV of the Spin-off Shares would be greater than book value, if the Spin-off Shares were valued using a multiple of earnings approach.
6. The shareholding of Familyco is currently as follows:
Shareholder
Class of shares
Number of
shares
ACB
PUC
Parent I
Class C preferred, voting
XXXXXXXX
XXXXXXX
XXXXXX
Parent II
Class C preferred, voting
XXXXXXXX
XXXXXXX
XXXXXX
Child I
Class A common shares, voting
XXXXXXXX
XXXXXXX
XXXXXX
Child II
Class B common shares, voting
XXXXXXXX
XXXXXXX
XXXXXX
Child I
Class E preferred, non-voting
XXXXXXXX
XXXXXXX
XXXXXX
Child II
Class D preferred, non-voting
XXXXXXXX
XXXXXXX
XXXXXX
Parent I and Parent II have always had, as a group, de jure control of Familyco.
7. Subco III, directly and through subsidiaries, operates XXXXXXXXXX .
8. Executive XXXXXXXXXX with Subco III. By virtue of a "XXXXXXXXXX Agreement" dated XXXXXXXXXX , Executive and Subco I agreed that Executive would sell his interest in Subco I in XXXXXXXXXX and XXXXXXXXXX , in two equal tranches. The shareholders' agreement entered into by Executive in XXXXXXXXXX (as amended from time to time) also contained provisions relating to the mandatory sale of the shares of the capital stock of Subco I upon, inter alia, XXXXXXXXXX . The first tranche of Executive's interest in Subco I was disposed of on XXXXXXXXXX . In order to benefit from his share of the safe income of Subco I, Executive entered into a series of transactions, the details of which are outlined below
XXXXXXXXXX Transactions
On XXXXXXXXXX , Executive transferred, on a rollover basis, XXXXXXXXXX Class D Common Shares (representing XXXXXXXXXX % of Executive's interest in Subco I) of the capital stock of Subco I (the "XXXXXXXXXX Subco I Shares") to a newly incorporated corporation, Executiveco, in consideration for the issuance by Executiveco of shares of its capital stock and a promissory note. The transfer of the XXXXXXXXXX Subco I Shares to Executiveco triggered a stock option benefit to Executive pursuant to paragraph 7(1)(a), as modified by subsection 7(1.1). Immediately following the transfer of the XXXXXXXXXX Subco I Shares to Executiveco, Executiveco incorporated a new corporation, Subco V, and transferred to the latter the XXXXXXXXXX Subco I Shares on a rollover basis, in consideration for the issuance by Subco V of shares of its capital stock. Following the transfer of the XXXXXXXXXX Subco I shares to Subco V, Subco V declared a series of dividends, payable with non-interest bearing promissory notes (the "XXXXXXXXXX Notes") for an aggregate amount equal to the safe income on hand attributable to the XXXXXXXXXX Subco I Shares. The XXXXXXXXXX Notes were subsequently contributed by Executiveco to Subco V, in exchange for the issuance by Subco V of additional common shares of its capital stock. This transaction resulted in an increase of the ACB and PUC of the shares of the capital stock of Subco V held by Executiveco. Finally, Subco IV acquired all the shares of the capital stock of Subco V from Executiveco in consideration for US$ XXXXXXXXXX .
XXXXXXXXXX Transactions
Pursuant to the XXXXXXXXXX Agreement, Executive will dispose of his remaining XXXXXXXXXX % interest in Subco I in XXXXXXXXXX . The disposition should take place between the date of this letter and XXXXXXXXXX .
9. The XXXXXXXXXX Trust qualifies as a Personal Trust.
10. The XXXXXXXXXX Trust Beneficiaries are not beneficiaries of any other trust, except for the fact that: (i) Parent II has a Registered Retirement Income Fund with an Arm's Length financial institution of which she is the annuitant and Parent I the sole beneficiary; and (ii) Child I has a Registered Retirement Savings Plan with an Arm's Length financial institution of which he is the annuitant and Child II the sole beneficiary.
11. No changes to the shareholding of Subco I are contemplated before the date of the commencement of the Spin-off Series, with the exception of changes which may result from the Executive Series and/or the Stock Option Transaction.
PROPOSED TRANSACTIONS
12. Newco will be incorporated to act as a holding company. Parent I will act as the incorporator of Newco and no shares will be issued on the incorporation of Newco. The share capital of Newco will be comprised of the following classes of shares:
(i) Newco Voting Shares;
(ii) Newco Participating Shares; and
(iii) Newco Preferred Shares.
Newco will be, at any relevant time and for all purposes of the Act, a taxable Canadian corporation and a CCPC. No taxable dividend will be paid by Newco during Newco's XXXXXXXXXX taxation year other than the Newco Dividend, as described in Paragraph 23. As described in Paragraph 22, Newco will receive the Holdco Dividend. Newco may also receive during its XXXXXXXXXX taxation year another taxable dividend from Subco I, which could amount to $XXXXXXXXXX , or more if such dividend is paid after the Proposed Transactions are carried out.
13. After the incorporation of Newco, Parent I will subscribe for XXXXXXXXXX Newco Voting Shares in consideration for $XXXXXXXXXX .
14. Pursuant to subparagraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed, the Trustees will add Newco as a beneficiary of the XXXXXXXXXX Trust by way of a declaration made in writing that will be attached to the XXXXXXXXXX Trust Deed.
15. Once Eligible Charity II qualifies as a Registered Charity for the purposes of the Act, the Trustees will add Eligible Charity II as a beneficiary of the XXXXXXXXXX Trust by way of a declaration made in writing that will be attached to the XXXXXXXXXX Trust Deed, the whole pursuant to subparagraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed.
16. The XXXXXXXXXX Trust will be established for the benefit of the XXXXXXXXXX Trust Beneficiaries. The XXXXXXXXXX Trust will qualify as a Personal Trust.
The XXXXXXXXXX Trust Beneficiaries will not be beneficiaries of any other trust, except for the fact that: (i) Parent II has a Registered Retirement Income Fund with an Arm's Length financial institution of which she is the annuitant and Parent I the sole beneficiary; and (ii) Child I has a Registered Retirement Savings Plan with an Arm's Length financial institution of which he is the annuitant and Child II the sole beneficiary.
17. Once Eligible Charity II qualifies as a Registered Charity for the purposes of the Act, the Trustees will add Eligible Charity II as a beneficiary of the XXXXXXXXXX Trust by way of a declaration made in writing that will be attached to the XXXXXXXXXX Trust Deed, the whole pursuant to subparagraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed.
18. The XXXXXXXXXX Trust will subscribe for XXXXXXXXXX Newco Participating Shares in consideration for $XXXXXXXXXX .
19. Holdco will carry out a reorganization of its share capital whereby the XXXXXXXXXX Trust will exchange all its common shares (XXXXXXXXXX) of the capital stock of Holdco (the "Exchange Properties") in consideration for Holdco Special Shares and Holdco New Common Shares having an aggregate FMV equal to that of the Exchange Properties. The Holdco Special Shares will be redeemable and retractable for an amount equal to the FMV of the Spin-off Shares whereas the Holdco New Common Shares' FMV will be equal to the excess of the FMV of the Exchange Properties over the FMV of the Holdco Special Shares.
The aggregate ACB to the XXXXXXXXXX Trust of the Holdco Special Shares and Holdco New Common Shares will equal the ACB of the Exchange Properties. More specifically, the ACB to the XXXXXXXXXX Trust of the Holdco Special Shares will be equal to the proportion of the ACB to the XXXXXXXXXX Trust of the Exchange Properties that the FMV, immediately after the exchange, of the Holdco Special Shares is of the FMV, immediately after the exchange, of all the Holdco Special Shares and Holdco New Common Shares. Furthermore, the ACB to the XXXXXXXXXX Trust of the Holdco New Common Shares will be equal to the proportion of the ACB to the XXXXXXXXXX Trust of the Exchange Properties that the FMV, immediately after the exchange, of the Holdco New Common Shares is of the FMV, immediately after the exchange, of all the Holdco Special Shares and Holdco New Common Shares.
The amount added to the stated capital account with respect to the issuance of the Holdco Special Shares and the PUC will be equal to $XXXXXXXXXX . As for the Holdco New Common Shares, the amount added to the stated capital account and the PUC will be an amount equal to that proportion of the PUC attributable to the Exchange Properties, immediately before the exchange, that (i) the FMV of the Holdco New Common Shares is of (ii) the FMV of the Holdco New Common Shares and the Holdco Special Shares.
20. Pursuant to subparagraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed, the XXXXXXXXXX Trust will make a capital distribution of the Holdco Special Shares to Newco.
21. Holdco will transfer the Spin-off Shares to Newco in consideration for the issuance by Newco of the Newco Rollover Shares. The Newco Rollover Shares will be redeemable and retractable for an amount equal to the FMV of the Spin-off Shares.
Holdco and Newco will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the Spin-off Shares. The Agreed Amount for the transfer of the Spin-off Shares will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).
The amount added to the stated capital account of Newco upon the issuance of the Newco Rollover Shares and the PUC attributable to these shares will be equal to $XXXXXXXXXX .
22. Holdco will redeem, for immediate cancellation, all of its Holdco Special Shares held by Newco at their FMV, being an amount equal to the redemption price of the Holdco Special Shares. The redemption price will be paid in full by Holdco by the issuance in favour of Newco of a non-interest bearing promissory note payable on demand (the "Holdco Note") having a principal amount and FMV equal to the redemption price of the Holdco Special Shares. Newco will accept the Holdco Note as full payment for the redemption price of the Holdco Special Shares.
By virtue of paragraphs 84(3)(a) and 84(3)(b), Holdco will be deemed to have paid, and Newco will be deemed to have received, a Taxable Dividend equal to the amount by which the amount paid to redeem the Holdco Special Shares exceeds the PUC thereof, immediately before such redemption (the "Holdco Dividend").
Holdco will not designate the Holdco Dividend to be an Eligible Dividend pursuant to subsection 89(14).
At the time Holdco will redeem the Holdco Special Shares held by Newco, Holdco will be connected to Newco by virtue of paragraph 186(4)(a) and subsection 186(2).
23. Newco will redeem, for immediate cancellation, all of its Newco Rollover Shares held by Holdco at their FMV, being an amount equal to the redemption price of the Newco Rollover Shares. The redemption price will be paid in full by Newco by the issuance in favour of Newco of a non-interest bearing promissory note payable on demand (the "Newco Note") having a principal amount and FMV equal to the redemption price of the Newco Rollover Shares. Holdco will accept the Newco Note as full payment for the redemption price of the Newco Rollover Shares.
By virtue of paragraphs 84(3)(a) and 84(3)(b), Newco will be deemed to have paid, and Holdco will be deemed to have received, a Taxable Dividend equal to the amount by which the amount paid to redeem the Newco Rollover Shares exceeds the PUC thereof, immediately before such redemption (the "Newco Dividend").
Newco will not designate the Newco Dividend to be an Eligible Dividend pursuant to subsection 89(14).
At the time Newco will redeem the Newco Rollover Shares held by Holdco, Newco will be connected to Holdco by virtue of paragraph 186(4)(a) and subsection 186(2).
24. Holdco and Newco will set-off the Holdco Note and the Newco Note.
25. As indicated above, Parent I has de jure control of Holdco. Parent I is also the XXXXXXXXXX of Holdco and Subco III. Parent I and Parent II, as a group, have de jure control of Familyco. Parent I is currently the Person Entitled to Appoint Trustees of the XXXXXXXXXX Trust.
After the Proposed Transactions, Parent I will have de jure control of Newco and will be the Person Entitled to Appoint Trustees of the XXXXXXXXXX Trust.
Parent I is XXXXXXXXXX years old. It is Parent I's clear intent to continue to control the Subco Group following the Proposed Transactions, as Parent I has no immediate plans to retire. In particular, Parent I has no intention of ceasing to control the Subco Group before at least XXXXXXXXXX years from the date of this letter, unless because of death or incapacity, for the following reasons:
- Parent I is in excellent health and continues to be fully involved in the day to day management of Subco III as XXXXXXXXXX in his role as XXXXXXXXXX and XXXXXXXXXX of the Subco Group.
- It is expected that Child I and Child II will both play a key role in the conduct of the Subco Group's business and in the decision making process once Parent I decides to pass on the control over to them. However, it has not yet been decided which one of Parent I's sons will become the XXXXXXXXXX of the Subco Group (or for that matter, whether they become XXXXXXXXXX ), given the remoteness of the transfer of control. It should be noted that Child I and Child II have been with the Subco Group for XXXXXXXXXX . In fact, Child I and Child II have been Subco Group's employees since XXXXXXXXXX and XXXXXXXXXX , respectively. Child I was born in XXXXXXXXXX and is currently XXXXXXXXXX years old. He is an XXXXXXXXXX of Subco III and XXXXXXXXXX of Subco VI. In his role, Child I oversees the XXXXXXXXXX operations of Subco VI, including XXXXXXXXXX . As for Child II, he was born in XXXXXXXXXX and is currently XXXXXXXXXX years old. Child II is also an XXXXXXXXXX of Subco III. In his role, Child II oversees the XXXXXXXXXX operations of Subco III and their XXXXXXXXXX operations. Child II also oversees XXXXXXXXXX for areas other than those handled by Subco VI.
Given that Child I and Child II have been with the Subco Group for XXXXXXXXXX Parent I's desire is for them to continue to be trained in various aspects of the business, before ultimately passing control over to them.
Moreover, in the context of a family owned business, it is common for the founder of the family business (i.e., Parent I in the present situation) to maintain control of the business following a reorganization, in order to ensure that the family's overall wealth is kept intact and protected from adverse changes that could otherwise happen on an immediate transfer of control to the next generation. Also, Parent I will continue to have an indirect interest in Subco I via the XXXXXXXXXX Trust, in the same way that he now has an indirect interest in Holdco and Subco I via the XXXXXXXXXX Trust.
Finally, none of the purposes of any of the Proposed Transactions is to cause two or more persons to be related to each other or to cause a corporation to control another corporation in order to avoid the application of subsection 55(2) with respect to the Newco Dividend or Holdco Dividend.
26. The Trustees of the XXXXXXXXXX Trust undertake, for a period of XXXXXXXXXX years from the date of this letter, not to exercise the power of appointment in XXXXXXXXXX of the XXXXXXXXXX Trust Deed. In particular, the Trustees of the XXXXXXXXXX Trust undertake, for a period of XXXXXXXXXX years from the date of this letter, not to appoint all or part of the trust fund to a trust having as a beneficiary a person who is not a beneficiary of the XXXXXXXXXX Trust.
27. The Trustees of the XXXXXXXXXX Trust undertake, for a period of XXXXXXXXXX years from the date of this letter, not to add as a beneficiary any of the persons described in subparagraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed, except for Newco and Eligible Charity II which will be added in the course of the Proposed Transactions, as described in Paragraphs 14 and 15, respectively.
28. The persons to be appointed as Trustees of the XXXXXXXXXX Trust will undertake, for a period of XXXXXXXXXX years from the date of this letter, not to exercise the power of appointment in XXXXXXXXXX of the XXXXXXXXXX Trust Deed. In particular, the Trustees of the XXXXXXXXXX Trust will undertake, for a period of XXXXXXXXXX years from the date of this letter, not to appoint all or part of the trust fund to a trust having as a beneficiary a person who is not a beneficiary of the XXXXXXXXXX Trust.
29. The persons to be appointed as Trustees of the XXXXXXXXXX Trust will undertake, for a period of XXXXXXXXXX years from the date of this letter, not to add as a beneficiary any of the persons described in subparagraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed, except for Eligible Charity II which will be added in the course of the Proposed Transactions, as described in Paragraph 17.
30. None of the persons who could be added as a beneficiary to the XXXXXXXXXX Trust pursuant to subparagraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed are considered beneficiaries of the XXXXXXXXXX Trust at law until such time as the Trustees have exercised the power of appointment granted in subparagraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed and have documented such exercise in the manner required by the terms of the XXXXXXXXXX Trust.
31. None of the persons who could be added as a beneficiary to the XXXXXXXXXX Trust pursuant to subparagraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed are considered beneficiaries of the XXXXXXXXXX Trust at law until such time as the Trustees have exercised the power of appointment granted in subparagraph XXXXXXXXXX of the XXXXXXXXXX Trust Deed and have documented such exercise in the manner required by the terms of the XXXXXXXXXX Trust.
32. Effective XXXXXXXXXX , Subco I and Subco III established a new employee stock option plan ("ESOP"). The general purpose of the ESOP is to encourage and reward the services and loyalty of key employees of Subco III and its subsidiaries ("Participants"), and to attract new key persons to serve in such positions. The Participants deal at Arm's Length with Subco I and Subco III. The Participants that have the option of participating in the ESOP are determined by the board of directors of Subco III. The board of directors of Subco III also decides on the number of shares subject to the option, the option price and the option period. Under the ESOP, Participants are granted an option to acquire a certain number of Class XXXXXXXXXX common shares of the capital stock of Subco I at a price equal to $XXXXXXXXXX per share, upon the terms and conditions set out in the ESOP.
Under individual shareholders' agreements, the Class XXXXXXXXXX common shares of the capital stock of Subco I issued pursuant to the exercise of stock options under the ESOP must be sold to Subco IV, inter alia, upon retirement (as defined) of the holder. Further, the holder can require Subco IV to purchase such shares should the holder reach age XXXXXXXXXX and have held the shares for a minimum XXXXXXXXXX -year period. The amount payable to the holder will be based on the net book value of the shares in question, and is generally equal to the increase in the adjusted shareholders' equity (as defined) that is attributable to the holder since XXXXXXXXXX of the year preceding the granting of the options in question.
Since XXXXXXXXXX , Subco I has granted options to acquire a total of XXXXXXXXXX Class XXXXXXXXXX common shares of the capital stock of Subco I. All of these options were exercised by the Participants. To date, a total of XXXXXXXXXX Class XXXXXXXXXX common shares of the capital stock of Subco I, in respect of XXXXXXXXXX Participants, have either been acquired from the Participants by Subco IV or exchanged for other shares of the capital stock of Subco I, for total consideration of approximately $ XXXXXXXXXX .
33. The federal business number of the parties referred to herein, the location of the tax services office and taxation centre where their returns are filed, and the address of their head office are as follows:
XXXXXXXXXX .
- Business Number: XXXXXXXXXX
- Tax Services Office: XXXXXXXXXX
- Taxation Centre: XXXXXXXXXX
- Address: XXXXXXXXXX
Newco
- Business Number: N/A
- Tax Services Office: XXXXXXXXXX
- Taxation Centre: XXXXXXXXXX
- Address: XXXXXXXXXX
PURPOSES OF THE PROPOSED TRANSACTIONS
34. The sole purpose of the Proposed Transactions is to allow the separation of the operating assets (XXXXXXXXXX business) from the other assets held, directly or indirectly, by the XXXXXXXXXX Trust. The establishment of two distinct holding structures will facilitate the succession by the Children at Subco III upon Parent I's retirement or death and ensure the financial independence of Parent I and Parent II. Further, the main reason for the creation of the XXXXXXXXXX Trust is to have two holding structures in order to separate the XXXXXXXXXX assets from the other assets of the family. The XXXXXXXXXX Trust will hold the XXXXXXXXXX assets while the XXXXXXXXXX Trust will hold the other assets. After Parent I's death or incapacity, the Children will have the power to appoint the trustees of the XXXXXXXXXX Trust and Parent II will have the power to appoint trustees of the XXXXXXXXXX Trust. This double-head structure will prevent the commingling of the two types of assets (thereby limiting cross-exposure) and allow each structure to pursue its own goals and activities independently. Parent I considers that this separation will safeguard family harmony and avoid friction following his death or incapacity.
Finally, as mentioned earlier, none of the purposes of any of the Proposed Transactions is to cause two or more persons to be related to each other or to cause a corporation to control another corporation in order to avoid the application of subsection 55(2) with respect to the Newco Dividend or Holdco Dividend.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant Facts, Proposed Transactions and the Purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:
A. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the Holdco Dividend or the Newco Dividend, 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 as part of which those dividends were received.
For greater certainty, the Proposed Transactions, in and by themselves, will not be considered to result in a disposition or increase in interest described in subparagraphs 55(3)(a)(i) to (v) with respect to the Holdco Dividend and the Newco Dividend.
B. The Holdco Dividend and the Newco Dividend will not be subject to tax under Part VI.1 on the basis that each such dividend will be an "excluded dividend" by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1).
C. Provided that no other dividends are paid by either Newco or Holdco in the taxation year in which the Holdco Dividend and the Newco Dividend are received, Part IV tax payable by Newco on the redemption of the Holdco Special Shares will be equal to the dividend refund to which Newco will be entitled pursuant to paragraph 129(1)(a) for its taxation year ending in the taxation year in which the Holdco Dividend will be received.
D. Provided that no other dividends are paid by either Newco or Holdco in the taxation year in which the Holdco Dividend and the Newco Dividend are received, Part IV tax payable by Holdco on the redemption of Newco Rollover Shares will be equal to the dividend refund to which Holdco will be entitled pursuant to paragraph 129(1)(a) for its taxation year ending in the taxation year in which the Newco Dividend will be received.
E. The XXXXXXXXXX Trust Beneficiaries will not be considered to have received any proceeds of disposition for the purposes of the Act as a result of the Trustees' exercise of their power of appointment to add Newco and Eligible Charity II as beneficiaries of the XXXXXXXXXX Trust, as described in Paragraphs 14 and 15.
F. The proceeds of disposition of the Holdco Special Shares disposed of by the XXXXXXXXXX Trust and the cost of the Holdco Special Shares acquired by Newco will be determined under subsection 107(2) such that the XXXXXXXXXX Trust will not realize either a capital gain or a capital loss in respect of the disposition of the Holdco Special Shares and Newco will acquire the Holdco Special Shares at the cost of the Holdco Special Shares to the XXXXXXXXXX Trust.
G. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to the Proposed Transactions, in and by themselves.
H. The provisions of subsection 245(2) will not be applied as a result of the Facts or Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.
The above 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 CRA provided that the Proposed Transactions are completed before XXXXXXXXXX .
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.
Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed:
(a) the determination of the FMV or ACB of any property referred to herein, or the PUC in respect of any share referred to herein;
(b) any provincial tax consequences of the proposed transactions; or
(c) any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically confirmed in the rulings given above.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
Yours truly,
XXXXXXXXXX
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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