2008 Ruling 2008-0297811R3 - Shareholder Benefits

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. Whether a distribution that is a reduction of a corporation's paid-up capital gives rise to a subsection 15(1) benefit to the shareholder. 2. Whether the distribution reduces the ACB of the shares of DC held by Parent.

Position: 1. No. 2. Yes.

Reasons: 1. Paragraph 15(1)(a) applies to exclude the distribution from the application of subsection 15(1). 2. Paragraph 53(2)(b)(ii) applies to reduce the ACB.

XXXXXXXXXX 							2008-029781

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above. We acknowledge receipt of the additional information provided to us in your XXXXXXXXXX e-mails and our various telephone conversations (XXXXXXXXXX ).

Unless otherwise stated, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c.1, (5th Supplement) (the "Act"), as amended to the date of this advance income tax ruling.

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

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

(a) "adjusted cost base" ("ACB") has the meaning assigned by section 54 of the Act;

(b) "Articles" means the articles of association of DC;

(c) "Canadian tax results" has the meaning assigned by subsection 261(1) of the Act;

(d) "CBCA" means the Canada Business Corporations Act;

(e) "controlled foreign affiliate" has the meaning assigned by subsection 95(1) of the Act;

(f) "corporation" has the meaning assigned by subsection 248(1) of the Act;

(g) "CRA" means the Canada Revenue Agency;

(h) "DC" means XXXXXXXXXX .;

(i) "Foreignco" means XXXXXXXXXX ;

(j) "Foreign Country" means XXXXXXXXXX ;

(k) "functional currency" has the meaning assigned by subsection 261(1) of the Act;

(l) "Legislation" means the XXXXXXXXXX ;

(m) "Parent" means XXXXXXXXXX .;

(n) "public corporation" has the meaning assigned by subsection 89(1) of the Act;

(o) "related persons" has the meaning assigned by subsection 251(2) of the Act;

(p) "share" has the meaning assigned by subsection 248(1) of the Act;

(q) "Subco" means XXXXXXXXXX .;

(r) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act; and

(s) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.

Facts

1. Parent is a public corporation and a taxable Canadian corporation. Parent carries on an active business in Canada and outside of Canada through directly and indirectly owned subsidiaries and affiliates. The business of Parent is comprised of XXXXXXXXXX . Parent's tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre under Business Number XXXXXXXXXX .

2. Subco is a company incorporated pursuant to the CBCA. Subco is a subsidiary wholly-owned corporation of Parent and a taxable Canadian corporation.

3. Parent formed Foreignco pursuant to the provisions of the Foreign Country's Legislation. Foreignco is a corporation for purposes of the Act. Foreignco is resident in the Foreign Country for the purposes of the Act, the Foreign Country's domestic income tax law and the Treaty. Foreignco is a controlled foreign affiliate of Parent.

4. Parent and Subco formed DC as a cooperative pursuant to the provisions of the Foreign Country's Legislation. DC is a legal entity that exists separate and apart from Parent and Subco and is a corporation for purposes of the Act. Parent's and Subco's membership interests in DC are considered to be shares of a class of the capital stock of DC for purposes of the Act.

5. The Articles of DC provide that each of its members must make capital contributions to DC as unanimously agreed upon in writing by all members. Parent's and Subco's initial capital contribution to DC was XXXXXXXXXX . In accordance with the provisions of Article XXXXXXXXXX of the Articles, these contributions were registered and credited to the respective capital accounts of Parent and Subco.

6. As part of a corporate reorganization in XXXXXXXXXX , Parent contributed all of the issued and outstanding shares of Foreignco to DC for consideration that consisted solely of additional membership interests in DC. In accordance with the provisions XXXXXXXXXX of the Articles, the capital account of Parent was increased by XXXXXXXXXX , being the fair market value of the shares of Foreignco contributed to DC.

7. Parent has elected to report its Canadian tax results for its XXXXXXXXXX taxation year using its functional currency. Parent's ACB of the shares of DC, as determined in its functional currency, is approximately US$XXXXXXXXXX .

8. To the best of your knowledge and that of Parent and Subco, none of the issues involved in this ruling letter:

(i) is in an earlier return of Parent or Subco or any related persons of Parent or Subco,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of Parent or Subco or any related persons of Parent and Subco,

(iii) is under objection by Parent or Subco or any related persons of Parent or Subco, or

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

Proposed Transactions

9. Pursuant to XXXXXXXXXX the Articles, Parent and Subco will, pursuant to a General Meeting of the Members, unanimously agree to have DC make a partial distribution out of Parent's capital account. Upon receipt of such unanimous agreement, Parent will receive XXXXXXXXXX from DC on a reduction of the paid-up capital of the shares of DC held by Parent.

Purpose of the Proposed Transactions

10. The purpose of the proposed transaction is to enable Parent to transfer financial resources XXXXXXXXXX .

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 further that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. Subsection 15(1) of the Act will not apply to the XXXXXXXXXX that Parent will receive from DC as a reduction of its paid-up capital.

B. Subparagraph 53(2)(b)(ii) of the Act will apply to reduce the ACB of the shares of DC held by Parent. The amount of the reduction will be determined by applying section 261 of the Act to the amount referred to in Ruling A.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5, issued by the CRA on May 17, 2002, and are binding on the CRA provided that the proposed transactions are entered into before XXXXXXXXXX .

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein. For greater certainty, the CRA has not:

(a) made any determination as to whether Foreignco is in fact a corporation for purposes of the Act;

(b) reviewed the capital account balances of Parent or Subco;

(c) reviewed the ACB of the shares of DC held by Parent; or

(d) made any determination as to whether existing subsections 261(3) to (10) of the Act apply to Parent or whether the legislative proposals relating to functional currency tax reporting released by the Department of Finance on November 10, 2008 will apply to Parent.

The above-noted 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.

Yours truly,

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