Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: (1) Will subsection 73(1) apply to the contribution of the Existing Aco Shares and the Existing Bco Shares to the AE Trust? (2) Will the transmission of the shares of Trustco from Individual A to the executors of the estate of Individual A result in an acquisition of control of Trustco, Aco or Bco? (3) As a consequence of the transactions contemplated in the Aco Share Exchange Agreement and the Bco Share Exchange Agreement, and pursuant to subsection 84(3), will the AE trust be deemed to receive a dividend? (4) Is a capital loss realized when the AE trust makes a gift of shares of capital property to the Foundation pursuant to provisions in the trust's indenture that gives its trustees the discretion to do so? (5) Will the gifts of property by the AE Trust to the Foundation be included in the trust's total charitable gifts?
Position: (1) Yes. (2) No. (3) Yes. (4) Yes. (5) Yes.
Reasons: (1) Legislative requirements are satisfied. (2) Clause 256(7)(a)(i)(C). (3) Plain reading of subsection 84(3). (4) The AE Trust will wind-up, at which point any suspended capital losses will be realized under paragraph 40(3.4(b)(i) for it will not be possible for the AE Trust to be affiliated with any person or partnership upon winding-up. (5) The trustee has absolute discretion as to whether to make the gift and the possibility exists that all the property could be gifted to an entity that is not a qualified donee.
XXXXXXXXXX 2009-030861
XXXXXXXXXX , 2009
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX , requesting an advance income tax ruling on behalf of the above-named taxpayers. We also acknowledge the additional information provided in your subsequent correspondence dated XXXXXXXXXX
We understand that, to the best of your knowledge and that of the taxpayers, none of the issues involved in the ruling request is:
a) in an earlier tax return of the taxpayers or of any related persons;
b) being considered by a tax services office or a tax centre in connection with a tax return already filed by the taxpayers or by any related persons;
c) under objection by the taxpayers or any related persons;
d) before the courts or,
e) the subject of a ruling previously issued by the Directorate to the taxpayers or to any related persons.
This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions, and any references thereto are otherwise provided solely for the convenience of the reader.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended to the date of this letter (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.
DEFINITIONS
"Aco" means XXXXXXXXXX .;
"Aco Share Exchange" means the transaction whereby the AE Trust exchanges the Subject Aco Shares for the New Aco Shares;
"Aco Share Exchange Agreement" means the agreement whereby the AE Trust will exchange the Subject Aco Shares for the New Aco Shares;
"AE Trust" means the XXXXXXXXXX ;
"Bco" means XXXXXXXXXX .;
"Bco Share Exchange" means the transaction whereby the AE Trust exchanges the Subject Bco Shares for the New Bco Shares;
"Bco Share Exchange Agreement" means the agreement whereby the AE Trust will exchange the Subject Bco Shares for the New Bco Shares;
"Designated Entities" under the terms of the AE Trust means:
(i) the Foundation;
(ii) such other registered Canadian charities as the Trustee may add to the list of Designated Entities prior to the Material Date;
(iii) such societies incorporated under the XXXXXXXXXX (that are not registered charities) as the Trustee may select;
"Existing Aco Shares" means the following shares of A Co:
(i) XXXXXXXXXX Class A Common;
(ii) XXXXXXXXXX Class B Common; and
(iii) XXXXXXXXXX Class C Preferred;
"Existing Bco Shares" means XXXXXXXXXX Class A Common shares of Bco;
"Final Distribution Date" under the terms of the AE Trust, means such date as the Trustee shall select that is after the Material Date but prior to the final day of the XXXXXXXXXX taxation year of the AE Trust to end after the death of Individual A;
"Foundation" means the XXXXXXXXXX ;
"Individual A" means XXXXXXXXXX ;
"Individual A's Will" means the will of Individual A;
"Material Date" under the terms of the AE Trust, means the date of death of Individual A;
"New Aco Shares" means XXXXXXXXXX Class A Preferred shares in Aco that will be created and then issued to the AE Trust pursuant to the Aco Share Exchange Agreement;
"New Bco Shares" means XXXXXXXXXX Class A Preferred shares in Bco that will be created and then issued to the AE Trust pursuant to the Bco Share Exchange Agreement;
"Subject Aco Shares" means all of the shares of Aco that will be owned by the AE Trust immediately before the time of the Aco Share Exchange, except for the following shares of Aco:
(i) 1 Class A Common;
(ii) 1 Class B Common; and
(iii) 1 Class C Preferred;
"Subject Bco Shares" means all of the shares of Bco that will be owned by the AE Trust immediately before the time of the Bco Share Exchange, except for 1 Class A Common share of Bco;
"Terminal Year" means the taxation year of the AE Trust in which the death of Individual A occurs;
"Trustee" means Trustco or any replacement trustee appointed for the AE Trust; and
"Trustco" means XXXXXXXXXX .
FACTS
1. Individual A was born on XXXXXXXXXX and is a resident of XXXXXXXXXX . Her principal residence is located at XXXXXXXXXX . Individual A files her tax returns with the XXXXXXXXXX Tax Centre and her tax affairs are administered by the XXXXXXXXXX Tax Services Office.
2. Aco is a corporation governed by the XXXXXXXXXX Business Corporations Act. Aco has a registered office at XXXXXXXXXX . Aco files its tax return with the XXXXXXXXXX Tax Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.
3. Individual A owns the Existing Aco Shares, which constitute all of the issued shares of Aco.
4. Bco is a corporation governed by the XXXXXXXXXX Business Corporations Act. Bco has a registered office at XXXXXXXXXX . Bco files its tax return with the XXXXXXXXXX Tax Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office. Bco has diverse assets, including publicly traded shares, private company shares and real estate.
5. Individual A owns the Existing Bco Shares, which constitute all of the issued shares of Bco, except for preferred shares of Bco which are owned by Aco.
6. Trustco is a corporation incorporated under the XXXXXXXXXX Business Corporations Act. Trustco has a registered office at XXXXXXXXXX . The sole purpose of Trustco is to serve as trustee of the AE Trust. Individual A owns XXXXXXXXXX Common shares of Trustco which constitute all of the issued shares of Trustco. Trustco will earn no income. Trustco will file its tax return with the XXXXXXXXXX Tax Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.
7. The Foundation is a statutory corporation created by the XXXXXXXXXX . The Foundation is a registered charity (registration number XXXXXXXXXX ) and is designated as a public foundation. The address of the Foundation is XXXXXXXXXX . The Foundation files its annual information return with the XXXXXXXXXX Tax Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.
PROPOSED TRANSACTIONS
8. The AE Trust will be established by Individual A, as settlor, and Trustco, as trustee. The address of the AE Trust will be XXXXXXXXXX . The AE Trust will file its tax return with the XXXXXXXXXX Tax Centre and its tax affairs will be administered by the XXXXXXXXXX Tax Service Office.
9. The terms of the AE Trust will provide as follows:
(a) prior to the Material Date, the income of the AE Trust will be paid to Individual A;
(b) prior to the Material Date, the trustee shall have the discretion to encroach on capital for the benefit of Individual A;
(c) prior to the Material Date, no person other than Individual A shall have any use or derive any benefit from the trust property;
(d) after the Material date, but prior to the Final Distribution Date, the Trustees shall have the power to make a gift of the whole or any part or parts of the trust property and/or the net income derived therefrom to one or more of the Designated Entities; and
(e) upon the Final Distribution Date, any property which has not been gifted to the Designated Entities shall be distributed to such registered Canadian charities or societies incorporated under the XXXXXXXXXX as the Trustee shall select; provided that under no circumstances shall such property be distributed to the Foundation or any other registered Canadian charity that is one of the Designated Entities on the Material Date.
10. No election will be made by the AE Trust under subparagraph 104(4)(a)(ii.1).
11. Individual A will gift the Existing Aco Shares and the Existing Bco Shares to the AE Trust.
12. On the death of Individual A, the shares in Trustco will be transferred to the executors of Individual A's Will.
13. After the death of Individual A, the share capital of Aco will be altered to create the New Aco Shares. The rights and restrictions attached to the New Aco Shares will provide that:
(a) the shares will be redeemable and retractable preferred shares, without par value;
(b) the aggregate redemption price of such shares shall be equal to the fair market value of any consideration received by Aco in consideration for the issuance of such shares; and
(c) upon the issuance of such shares, the directors of Aco shall add such amount as they shall determine to the stated capital account, provided that such amount shall equal but not exceed the fair market value of the consideration received for the issuance of such shares.
14. After the death of Individual A, the share capital of Bco will be altered to create the New Bco Shares. The rights and restrictions attached to the New Bco Shares will provide that:
(a) the shares will be redeemable and retractable preferred shares, without par value;
(b) the aggregate redemption price of such shares shall be equal to the fair market value of any consideration received by Bco in consideration for the issuance of such shares; and
(c) upon the issuance of such shares, the directors of Bco shall add such amount as they shall determine to the stated capital account, provided that such amount shall equal but not exceed the fair market value of the consideration received for the issuance of such shares.
15. After the death of Individual A, the AE Trust and Aco will enter into the Aco Share Exchange Agreement whereby the AE Trust will exchange the Subject Aco Shares for the New Aco Shares and cash of $XXXXXXXXXX .
16. The Directors of Aco shall determine that the amount to be added to the stated capital account of Aco with respect to the issuance of the New Aco Shares will be the fair market value of the Subject Aco Shares less $XXXXXXXXXX .
17. After the death of Individual A, the AE Trust and Bco will enter into the Bco Share Exchange Agreement whereby the AE Trust will exchange the Subject Bco Shares for the New Bco Shares and cash of $XXXXXXXXXX .
18. The Directors of Bco shall determine that the amount to be added to the stated capital account of Bco with respect to the issuance of the New Bco Shares will be the fair market value of the Subject Bco Shares less $XXXXXXXXXX .
19. Prior to the Final Distribution Date, the Trustee will exercise its discretion and cause the AE Trust to make a gift to the Foundation of all the remaining property of the AE Trust and such gift will be substantially all comprised of:
(a) the New Aco Shares;
(b) the Existing Aco Shares that remains after the transactions described in 15 above;
(c) the New Bco Shares; and
(d) the Existing Bco Share that remains after the transaction described in 17 above.
20. After the gift to the Foundation has been implemented, on or after the Final Distribution Date, and, in accordance with paragraph XXXXXXXXXX of the AE Trust's indenture, the AE Trust will be wound-up within XXXXXXXXXX years of the Material Date.
21. Individual A holds the Existing Aco Shares and the Existing Bco Shares as capital property and the AE Trust will hold the Existing Aco Shares and the Existing Bco Shares as capital property.
22. No unanimous shareholders agreements or similar arrangements will be in force among the shareholders of Trustco or Aco or Bco that:
(a) restrict, in whole or in part, the powers of the directors of Trustco or Aco or Bco to manage the business and affairs of each respective corporation; or
(b) affect the power of any shareholder of Trustco or Aco or Bco to control the election of the board of directors for the respective corporations.
23. No New Aco Shares or New Bco Shares will be disposed of by the AE Trust in transactions other than those described in 19 above.
24. There will be no advantage in respect of the gift of property described in 19.
PURPOSES OF THE PROPOSED TRANSACTIONS
25. Individual A will establish the AE Trust as the vehicle by which to make postmortem distributions of Individual A's assets (as opposed to Individual A's Will) in order to protect Individual A's privacy and to avoid the imposition of probate filing fees with respect to such assets.
26. Upon the death of Individual A, the AE Trust will be deemed to dispose of the Existing Aco Shares and the Existing Bco Shares for proceeds of disposition equal to the fair market value pursuant to subsection 104(4). As a consequence, it is expected that the AE Trust will realize significant capital gains, the taxable portion of which will be included in the income of the AE Trust for the Terminal Year. It is Individual A's desire to provide the Trustee of the AE Trust with the discretionary power, but not the legal obligation, to donate a large portion of Individual A's wealth (which will be held by the AE Trust) to the Foundation so that the capital gains arising on the disposition of the Existing Aco Shares and the Existing Bco Shares may be fully sheltered from tax by claiming a charitable donation tax credit in respect of any donation.
27. The proposed transactions above, are intended to provide the Trustee of the AE Trust with the discretion to make a charitable donation to registered charities that would indirectly offset the entire amount of the tax liability pertaining to the capital gains realized by the AE Trust as a consequence of Individual A's death, thereby replicating the tax result that Individual A could have achieved by allowing Individual A's holdings to devolve to Individual A's estate. This would be accomplished by causing the deemed payment of dividends by Aco and Bco to the AE Trust on the exchange of the Subject Aco Shares under the Aco Share Exchange Agreement and the Subject Bco Shares under the Bco Share Exchange Agreement. The amount of the dividends would be included, along with the "gross-up" amounts to be determined in respect of the dividends pursuant to subsection 82(1), in computing the total gifts to the Foundation from the AE Trust for the taxation year in which the AE Trust receives the dividends and makes a gift to the Foundation. The inclusion of the dividends and the gross-up amounts in the AE Trust's income for the purpose of computing the "total gifts" of the AE Trust as defined in subsection 118.1(1) for that taxation year would increase the amount of charitable donation tax credit that the AE Trust can claim in that year as a deduction against its taxes otherwise payable. The exchanges of shares of Aco and Bco would also give rise to a denied capital loss that would be added to the adjusted cost base of the shares of Aco and Bco held by the AE Trust immediately after the exchange, thereby creating latent capital losses in the shares of the corporations. Because the 75% donation limit will apply to the grossed-up amount of the deemed dividends (rather than the taxable capital gains), tax that would otherwise be payable by the AE Trust is expected to be fully offset by the dividend tax credit and the charitable donation tax credit that the AE Trust will receive from the gift to the Foundation.
28. The purposes of any gift to the Foundation would be:
(a) to provide the Foundation with economic resources that would be applied in furtherance of the Foundation's charitable purposes;
(b) to allow the AE Trust to claim a charitable donation tax credit; and
(c) to allow the AE Trust to realize a capital loss on the disposition of the shares of Aco and Bco held by the AE Trust so that those losses may be used to offset the capital gains (whether as a deduction of an allowable capital loss in computing the AE Trust's capital gains in the Terminal Year or as a carry-back of a net capital loss as a deduction in computing the AE Trust's taxable capital gains in the Terminal Year) realized by the AE Trust in respect of the Existing Aco Shares and Existing Bco Shares pursuant to subsection 104(4).
29. The Aco Share Exchange Agreement will provide that only the Subject Aco Shares will be exchanged, which means that the AE Trust will continue to hold one share of each class of the Existing Aco Shares. The purpose for retaining one share is to prevent section 86 from applying to the exchange contemplated under the Aco Share Exchange Agreement which would preclude the AE Trust from being deemed to have received a dividend from Aco by reducing the paid-up capital of the New Aco Shares in accordance with subsection 86(2.1). In addition, the Aco Share Exchange Agreement will provide that cash consideration will be received by the AE Trust in exchange for the Subject Aco Shares in order to prevent section 51 from applying to the exchange, which would otherwise preclude the AE Trust from being deemed to have received a dividend from Aco by virtue of the reduction to the paid-up capital of the New Aco Shares that would be made under subsection 51(3). The same purposes apply to the Bco Share Exchange Agreement.
30. The purpose for adding the amounts described in paragraph 16 above, to the stated capital accounts maintained in respect of the New Aco Shares is to maximize the amount of the dividend pursuant to subsections 84(3) and 84(5) on completing the exchange contemplated by the Aco Share Exchange Agreement. The same purpose applies to adding the amounts described in 18 to the stated capital accounts maintained in respect of the New Bco Shares.
31. The purpose of the transaction contemplated in the Aco Share Exchange Agreement is to create a capital loss by converting the proceeds of disposition of the Subject Aco Shares into a deemed dividend. While such loss is denied and added to the New Aco Shares it will later be triggered and become available to offset the capital gain that will arise in the AE Trust upon the death of Individual A. The same purpose applies to the transaction contemplated in the Bco Share Exchange Agreement.
32. The purpose of the gift to the Foundation is to obtain a charitable donation tax credit for the AE Trust.
RULINGS
Provided that preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, the proposed transactions are completed in the manner described above and there are no other transactions that may be relevant to the rulings given, we confirm that:
A. Subsection 73(1) will apply to the contribution of the Existing Aco Shares and the Existing Bco Shares by Individual A to the AE Trust described in 11, above, such that Individual A will be deemed to have disposed of each such Existing Aco Share and each such Existing Bco Share for proceeds of disposition equal to its adjusted cost base, thereof determined as of the time immediately before the contribution of that Existing Aco Share or Existing Bco Share;
B. For the purposes of the provisions of the Act enumerated in subsection 256(7), the transmission of shares of Trustco from Individual A to the executors of her estate upon the death of Individual A will not, in and of itself, result in an acquisition of control of Trustco and will not, in and of itself, result in an acquisition of control of Aco or Bco;
C. Pursuant to paragraph 84(3)(b), the AE Trust will be deemed to have received a dividend as a consequence of the transaction contemplated in the Aco Share Exchange Agreement described in 15, above, in an amount equal to the paid-up capital value of the New Aco Shares plus $XXXXXXXXXX , less the paid-up capital of the Subject Aco Shares;
D. Pursuant to paragraph 84(3)(b), the AE Trust will be deemed to have received a dividend as a consequence of the transaction contemplated in the Bco Share Exchange Agreement described in 17, above, in an amount equal to the paid-up capital value of the New Bco Shares plus $XXXXXXXXXX , less the paid-up capital of the Subject Bco Shares;
E. As a consequence of the Aco Share Exchange Agreement and the addition to the stated capital account described in 15 and 16, above, the paid-up capital of the New Aco Shares will be equal to the fair market value of the Subject Aco Shares determined at the time of the share exchange, less $XXXXXXXXXX ;
F. As a consequence of the Bco Share Exchange Agreement and the addition to the stated capital account described in 17 and 18, above, the paid-up capital of the New Bco Shares will be equal to the fair market value of the Subject Bco Shares determined at the time of the share exchange, less $XXXXXXXXXX ;
G. Provided that the fair market value of the consideration given by Aco to the AE Trust for each Subject Aco Share is, at the time of its disposition on the Aco Share Exchange Agreement, equal to the fair market value of the Subject Aco Share, but for subsection 40(3.6), the AE Trust will realize a capital loss, on the disposition of the Subject Aco Shares as contemplated in the Aco Share Exchange Agreement, equal to the amount by which the total of the adjusted cost base of the Subject Aco Shares and the amount of any costs incurred by the AE Trust for the purpose of disposing of the Subject Aco Shares exceeds the paid-up capital of the Subject Aco Share (which will be nominal);
H. Provided that the fair market value of the consideration given by Bco to the AE Trust for each Subject Bco Share is, at the time of its disposition on the Bco Share Exchange Agreement, equal to the fair market value of the Subject Bco Share, but for subsection 40(3.6), the AE Trust will realize a capital loss, on the disposition of the Subject Bco Shares as contemplated in the Bco Share Exchange Agreement, equal to the amount by which the total of the adjusted cost base of the Subject Bco Shares and the amount of any costs incurred by the AE Trust for the purpose of disposing of the Subject Bco Shares exceeds the paid-up capital of the Subject Bco Share (which will be nominal);
I. Pursuant to paragraphs 40(3.6)(a) and (b) and paragraph 53(1)(f.2), the capital loss from the disposition of the Subject Aco Shares resulting from the Aco Share Exchange will be deemed to be nil and, in computing the adjusted cost base of each New Aco Share and the remaining Existing Aco Shares, there shall be added the proportion of the amount of the capital loss of the AE Trust from the disposition of the Subject Aco Shares on the Aco Share Exchange, determined without reference to subsection 40(3.6), that
(a) the fair market value, determined immediately after the Aco Share Exchange, of the particular New Aco Share or Existing Aco Share, as the case may be,
is of
(b) the aggregate fair market value, determined immediately after the Aco Share Exchange, of all the New Aco Shares and the Existing Aco Shares owned by the AE Trust;
J. Pursuant to paragraphs 40(3.6)(a) and (b) and paragraph 53(1)(f.2), the capital loss from the disposition of the Subject Bco Shares resulting from the Bco Share Exchange will be deemed to be nil and, in computing the adjusted cost base of each New Bco Share and the remaining Existing Bco Share, there shall be added the proportion of the amount of the capital loss of the AE Trust from the disposition of the Subject Bco Shares on the Bco Share Exchange; determined without reference to subsection 40(3.6), that
(a) the fair market value, determined immediately after the Bco Share Exchange, of the particular New Bco Share or Existing Bco Share, as the case may be,
is of
(b) the aggregate fair market value, determined immediately after the Bco Share Exchange, of all the New Bco Shares and the Existing Bco Share owned by the AE Trust;
K. Provided that the AE Trust winds-up on or before the Final Distribution Date, the AE Trust will realize, at a time that is prior to the end of the final day of the third taxation year of the AE Trust to end after the death of Individual A, from the disposition of each New Aco Share described in 19, above, a capital loss equal to the amount, if any, by which the adjusted cost base of the New Aco Share and the amount of any costs incurred by the AE Trust for the purpose of disposing of the New Aco Share exceeds its fair market value, determined at the time of the disposition of the New Aco Shares;
L. Provided that the AE Trust winds-up on or before the Final Distribution Date, the AE Trust will realize, at a time that is prior to the end of the final day of the third taxation year of the AE Trust to end after the death of Individual A, from the disposition of each New Bco Share described in 19, above, a capital loss equal to the amount, if any, by which the adjusted cost base of the New Bco Share and the amount of any costs incurred by the AE Trust for the purpose of disposing of the New Bco Share exceeds its fair market value, determined at the time of the disposition of the New Bco Shares;
M. Where Trustco in its capacity of Trustee of the AE Trust, exercises its discretion to make a gift of property described in 19 to the Foundation and provided the Foundation is a qualified donee, as defined in subsection 149.1(1), at the time of the gift described in 19 above, and the AE Trust does not make a designation in respect of the gift or distribution pursuant to subsection 118.1(6), and subject to paragraph 2 of the COMMENTS below, the AE Trust may include in its total charitable gifts, as defined in subsection 118.1(1), for the taxation year in which the gift or distribution is made, an amount equal to the fair market value of the property gifted by the AE Trust, determined at the time the gift or distribution is made; and
N. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed by the rulings given in paragraphs A to M above.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the CRA provided that the undertakings described in paragraph 3 of the COMMENTS below are fulfilled.
As the proposed transactions may not be carried out for several years, we wish to emphasize the limitations on the validity of the above rulings that are explained in paragraph 14 of Information Circular 70-6R5. In particular, the above rulings are based on the law in it present form and do not take into account any statutory amendments (whether currently proposed or not) that are enacted after the date of this letter, or any court decisions rendered after the date of this letter.
1. Nothing in this letter should be construed as implying that the CRA has agreed to or reviewed:
(a) the determination of the adjusted cost base, paid-up capital or fair market value of any shares or other property referred to herein;
(b) whether the designation of any dividends described in ruling C or D above, as eligible dividends will result in an excessive eligible dividend designation; and
(c) any tax consequences relating to the facts and proposed transactions described herein, 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 described in the rulings given above.
2. Although ruling M, above, provides that the AE Trust may include the fair market value of the property that will be gifted or distributed by the AE Trust as described in 19, above, in its total charitable gifts for the taxation year of the AE Trust in which such gifts or distributions are made, we are not providing any comment as to whether the gifts of the Existing Aco Shares, the New Aco Shares, the Existing Bco Share, or the New Bco Shares would constitute a gift of non-qualifying securities by the AE Trust. The determination of whether the AE Trust will deal at arm's length with Aco or with Bco at any particular time is ultimately a question of fact that can only be determined upon reviewing the facts and circumstances in existence at that time. If it is determined that the AE Trust does not deal at arm's length with any such corporation immediately after the time that it makes a gift or distribution of a share or obligation of the corporation as described in 19, above, the AE Trust will be deemed by subsection 118.1(13) not to have made any charitable gift, which could preclude the AE Trust from including the fair market value of the property in the AE Trust's total charitable gifts for the taxation year of the AE Trust in which it is deemed to receive a dividend from Aco or Bco as described in rulings C and D, above.
3. Although paragraph XXXXXXXXXX of the AE Trust's indenture provides that all property is to be distributed prior to the end of the third taxation year of the Trust that ends after the death of Individual A, it is anticipated that the proposed transactions will be completed in the Terminal Year, in which case the amount of any capital losses realized by the AE Trust would be offset against the capital gains that will be realized by the AE Trust in the Terminal Year in respect of the disposition of the Existing Aco Shares, pursuant to subsection 104(4). However, if Individual A dies late in the Terminal Year, there may not be sufficient time to complete the transactions contemplated by the Share Exchange Agreement and to make the gift described in 19 by the end of the Terminal Year. Such transactions would then occur in the following taxation year of the AE Trust. Under these circumstances, the gains realized by the AE Trust in respect of the disposition of the Existing Aco Shares and the Existing Bco Shares, pursuant to subsection 104(4) would likely give rise to a substantial amount of tax that will become payable by the AE Trust 90 days after the end of the Terminal Year. It is anticipated that the amount of such gains will be offset in full by deducting the net capital losses of the AE Trust for the taxation year of the AE Trust for the following taxation year. Nonetheless, for some period of time, taxes will be owed by the AE Trust under such circumstances and, if left unpaid interest would accrue and become owing by the AE Trust in respect of such taxes. In the event that the transactions contemplated by the Share Exchange Agreement and those described in 19 do not occur in the Terminal Year, a number of undertakings have been proposed by the Taxpayers, which must be fulfilled in order for the rulings contained herein to be binding on the CRA. In the event that any of the undertakings set out below are not honored, the above rulings are void and will not be binding on the CRA. The undertakings are as follows:
(a) the return of income for the AE Trust for the Terminal Year will be filed within 90 days after the end of the Terminal Year;
(b) a written acknowledgment of the taxes payable by the AE Trust for the Terminal Year will be submitted in conjunction with the filing of its return of income for the Terminal Year, which will also indicate that such liability will be reduced upon deducting the AE Trust's net capital losses that will arise in a subsequent taxation year of the AE Trust;
(c) the AE Trust will, if required by the CRA, provide security to defer collection of the taxes payable by the AE Trust for the Terminal Year, which may entail providing a letter of credit, a pledge of corporate shares or a cash payment to the CRA;
(d) arrangements will be made with the CRA for the payment of any interest that may accrue on the amount of any taxes payable by the AE Trust for the Terminal Year;
(e) an objection to the assessment of income of the AE Trust for the Terminal Year will not be made solely for the purpose of prohibiting the Minister from carrying out any act of collecting the taxes payable by the AE Trust for the Terminal Year, including the actions described in paragraphs (a) to (g) of subsection 225.1(1);
(f) the Trustee of the AE Trust will take all reasonable steps to ensure that the proposed transactions are completed in the taxation year of the AE Trust immediately following the Terminal Year and that the return of income for such taxation year will be filed and the request to deduct the net capital losses of the AE Trust for such taxation year in computing the taxable income of the AE Trust for the Terminal Year will be made prior to the end of such taxation year;
(g) in the event that the proposed transactions are not completed prior to the end of the taxation year of the AE Trust immediately following the Terminal Year, the Trustee of the AE Trust will take all reasonable steps to ensure that the proposed transactions and related tax filings occur forthwith; and
(h) the Trustee or other legal representatives of the AE Trust will make an application for a certificate pursuant to subsection 159(2) prior to distributing the property of the AE Trust as contemplated in the proposed transactions.
Yours truly,
XXXXXXXXXX
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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