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: A co-ownership agreement will be entered into by the transferees in respect of some of the butterflied property.
Position: The representative made a representation that the transferees will not enter into a partnership in respect of the butterflied property. As long as that statement is accurate, the entering into a co-ownership agreement in itself does not taint the butterfly.
Reasons: 55(3.1)(c) does not apply.
XXXXXXXXXX 2010-035706
XXXXXXXXXX , 2010
Dear XXXXXXXXXX :
Subject: XXXXXXXXXX
We are writing in response to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge receipt of your emails. The documents submitted as part of your request are only part of this document to the extent described herein.
None of the issues involved in this ruling request are:
(i) in an earlier return of any 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 any of the taxpayers or a related person;
(iii) under objection by any of 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.
The taxpayer also represents that the proposed transactions described herein will not result in any of the taxpayers described herein being unable to pay its existing outstanding tax liabilities.
In this letter, all references to monetary amounts are in Canadian dollars and the following terms or expressions have the meaning specified in the following section:
DEFINITIONS
"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.
"ACB" has the meaning assigned by section 54.
"agreed amount" means the amount agreed on in respect of a property in an election filed pursuant to subsection 85(1).
"arm's length" has the meaning assigned by subsection 251(1).
"BCA" means the Business Corporations Act (XXXXXXXXXX ).
"XXXXXXXXXX Property" means the XXXXXXXXXX percent (XXXXXXXXXX %) joint venture interest that DC owns in land inventory located at XXXXXXXXXX .
"capital dividend account" ("CDA") has the meaning assigned by subsection 89(1).
"capital property" has the meaning assigned by section 54.
"CCPC" means "Canadian-controlled private corporation" as defined by subsection 125(7).
"cost amount" has the meaning assigned by subsection 248(1).
"CRA" means the Canada Revenue Agency.
"Deceased" means XXXXXXXXXX who died on XXXXXXXXXX .
"depreciable property" has the meaning assigned by subsection 13(21).
"distribution" has the meaning assigned by subsection 55(1).
"dividend refund" has the meaning assigned by subsection 129(1).
"dividend rental arrangement" has the meaning assigned by subsection 248(1).
"eligible capital property" has the meaning assigned by section 54.
"eligible dividend" has the meaning assigned by subsection 89(1).
"eligible property" has the meaning assigned by subsection 85(1.1).
"XXXXXXXXXX Property" means the land and building wholly-owned by DC, XXXXXXXXXX .
"fair market value" ("FMV") means the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm's length and with no compulsion to act, expressed in terms of cash.
"forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1).
"general rate income pool" ("GRIP") has the meaning assigned by subsection 89(1).
"XXXXXXXXXX Property" means the land and building wholly-owned by DC, XXXXXXXXXX .
"XXXXXXXXXX Property" means the land and building wholly-owned by DC, XXXXXXXXXX .
"PUC" means "paid-up capital" as defined by subsection 89(1).
"Paragraph" refers to a numbered paragraph in this advance income tax ruling.
"pre-1972 CSOH" means "pre-1972 capital surplus on hand" as that expression is defined in subsection 88(2.1).
"proceeds of disposition" has the meaning assigned by section 54.
"Proposed Transactions" means the transactions described in the proposed transactions section of this letter.
"RDTOH" means "refundable dividend tax on hand" as defined by subsection 129(3).
"Regulations" means the Income Tax Regulations promulgated under the Act.
"related person" has the meaning assigned by section 251.
"series of transactions or events" includes the transactions or events referred to in subsection 248(10).
"Share Exchange" means the exchange by each of Sib1, Sib2 and the Spousal Trust of all of their common shares of the capital stock of DC for one DC Special Share and XXXXXXXXXX New Common Shares as further described in paragraph 28.
"significant influence" has the meaning assigned by section 3050 of the CICA Handbook.
"SIN" means Social Insurance Number.
"specified class" has the meaning assigned to that term by subsection 55(1).
"specified investment business" has the meaning assigned by subsection 125(7).
"stated capital" has the meaning assigned by the BCA.
"taxable Canadian corporation" has the meaning assigned by subsection 89(1).
"taxable dividend" has the meaning assigned by subsection 89(1).
"TC1 Note" means the non-interest bearing demand promissory note to be issued by TC1, as described in Paragraph 40.
"TC2 Note" means the non-interest bearing demand promissory note to be issued by TC2, as described in Paragraph 40.
"TC3 Note" means the non-interest bearing demand promissory note to be issued by TC3, as described in Paragraph 40.
"TC1 Transfer Proportion" means the proportion that the FMV of all the shares in the capital of DC owned by TC1 immediately before the transfers of property described in Paragraph 39 is of the FMV of all the shares in the capital of DC immediately before the transfers of property described in Paragraph 39.
"TC2 Transfer Proportion" means the proportion that the FMV of all the shares in the capital of DC owned by TC2 immediately before the transfers of property described in Paragraph 39 is of the FMV of all the shares in the capital of DC immediately before the transfers of property described in Paragraph 39.
"TC3 Transfer Proportion" means the proportion that the FMV of all the shares in the capital of DC owned by TC3 immediately before the transfers of property described in Paragraph 39 is of the FMV of all the shares in the capital of DC immediately before the transfers of property described in Paragraph 39.
In addition, the following individuals, corporations and entities will be referred to as follows:
"DC" means XXXXXXXXXX , a corporation formed by articles of amalgamation on XXXXXXXXXX under the provisions of the BCA. The predecessor corporations on the amalgamation were XXXXXXXXXX . The taxation year of DC ends on XXXXXXXXXX . The registered office of DC is located at XXXXXXXXXX .
"Nomineeco1" means XXXXXXXXXX , a taxable Canadian corporation wholly-owned by DC that holds registered title to the real property owned by Subco 1.
"Nomineeco2" means XXXXXXXXXX , a taxable Canadian corporation owned by Sib1, Sib2 and the Spousal Trust, each to a one-third (1/3rd) interest, that holds registered title to the XXXXXXXXXX Property, XXXXXXXXXX Property and XXXXXXXXXX Property as bare trustee for DC.
"Sib1" means XXXXXXXXXX , an individual who resides in Canada for the purposes of the Act.
"Sib2" means XXXXXXXXXX , an individual who resides in Canada for the purposes of the Act.
"Spousal Trust" means the spousal trust created under paragraph XXXXXXXXXX of the last private will and testament of the Deceased dated XXXXXXXXXX and naming XXXXXXXXXX , all individuals who reside in Canada for the purposes of the Act, as estate trustees and trustees of the Spousal Trust. The Spousal Trust is serviced by the XXXXXXXXXX TSO.
"Subco1" means XXXXXXXXXX , a taxable Canadian corporation.
"Subco2" means XXXXXXXXXX , a taxable Canadian Corporation.
"Subco3" means XXXXXXXXXX , a taxable Canadian corporation.
"Subco4" means XXXXXXXXXX , a taxable Canadian corporation wholly-owned by DC.
"Subco5" means XXXXXXXXXX , a taxable Canadian corporation.
"TC1" XXXXXXXXXX , a taxable Canadian corporation incorporated under the BCA.
"TC2" means XXXXXXXXXX , a taxable Canadian corporation incorporated under the BCA.
"TC3" means XXXXXXXXXX , a taxable Canadian corporation incorporated under the BCA.
FACTS
1. Sib1 and Sib2 are adult siblings. Sib1 and Sib2 are residents of Canada for the purposes of the Act.
2. The trustees of the Spousal Trust are authorized to enter into the Proposed Transactions. The Spousal Trust files its tax return with the XXXXXXXXXX TSO.
3. DC is a CCPC and a taxable Canadian corporation.
4. The authorized share capital of DC consists of an unlimited number of ordinary voting common shares and Class A preferred shares.
(a) The common shares entitle the holder to one vote per share; entitle the holder to receive such dividends in any financial year as the board of directors may by resolution determine; entitle the holder to receive, subject to the prior rights of the holders of the Class A preferred shares, all of the remaining property and assets of DC in the event of the liquidation, dissolution or winding up of DC; and may be purchased by DC at any time.
(b) The Class A preferred shares are non-voting shares; entitle the holder to preferential, non-cumulative dividends as and when declared by the board of directors of DC on each share at a rate of interest per annum calculated on the initial issue price per share as the board of directors may in its absolute discretion determine from time to time; entitle the holder to receive an amount equal to the initial issue price per share, together with all declared and unpaid dividends in the event of the liquidation, dissolution or winding up of DC; are redeemable and retractable for an amount equal to the initial issue price per share; and may be purchased by DC upon payment of an amount not exceeding the Class A redemption price, being an amount equal to the initial issue price per share.
5. Sib 1, Sib 2 and the Spousal Trust each own XXXXXXXXXX common shares, the aggregate of the shares held by the three of them being the entire issued and outstanding shares of DC.
The aggregate ACB and PUC of the XXXXXXXXXX common shares held by Sib1 are $XXXXXXXXXX and $XXXXXXXXXX respectively. The aggregate ACB and PUC of the XXXXXXXXXX common shares held by Sib2 are $XXXXXXXXXX and $XXXXXXXXXX , respectively. The aggregate ACB and PUC of the XXXXXXXXXX common shares held by the Spousal Trust are $XXXXXXXXXX and $XXXXXXXXXX , respectively. The Spousal Trust will be requesting pursuant to subsection 220(3.2), that the Minister allow the Spousal Trust to make an election under subsection 70(6.2) such that the ACB of the XXXXXXXXXX common shares held by the Spousal Trust would be $XXXXXXXXXX . The PUC of the XXXXXXXXXX common shares held by the Spousal Trust would continue to be the aggregate of $XXXXXXXXXX .
6. Each of Sib1, Sib2 and the Spousal Trust hold their respective shares in the capital of DC as capital property.
7. DC owns XXXXXXXXXX of the XXXXXXXXXX issued and outstanding common shares of Subco1. Subco1 is a real estate company that owns an interest in real property located in XXXXXXXXXX . The other shareholders of Subco1 do not deal at arm's length with each other or DC.
8. DC owns XXXXXXXXXX of the XXXXXXXXXX issued and outstanding common shares of Subco2. Subco2 is a real estate company that owns an interest in real property located in XXXXXXXXXX . The other shareholder(s) of Subco2 deal at arm's length with DC.
9. DC owns XXXXXXXXXX of the XXXXXXXXXX issued and outstanding common shares of Subco3. Subco3 is a real estate company that owns an interest in real property located in XXXXXXXXXX. The other shareholder(s) of Subco3 deal at arm's length with DC.
10. The issued and outstanding share capital of Subco4 is XXXXXXXXXX common shares. DC owns all of the issued and outstanding shares of Subco4. The major asset of Subco4 is a loan receivable from DC.
11. DC owns XXXXXXXXXX % of the issued and outstanding shares of Subco5. The other shareholders of Subco5 deal at arm's length with DC. Subco5 does not have any assets or liabilities.
12. The issued and outstanding share capital of Nomineeco1 is XXXXXXXXXX common shares. DC owns all of the issue and outstanding shares of Nomineeco1.
13. DC is a real estate company and in addition to its ownership interests in Subco1, Subco2, Subco3, Subco4 and Subco5, DC owns the XXXXXXXXXX Property, and it also owns the XXXXXXXXXX Property, XXXXXXXXXX Property and XXXXXXXXXX Property.
14. The XXXXXXXXXX Property, XXXXXXXXXX Property and XXXXXXXXXX Property are revenue-producing commercial real property. The XXXXXXXXXX Property is land held for future development and is considered land inventory. For greater certainty, the land inventory will not be subject to the section 85 election as described in Paragraph 39.
15. The XXXXXXXXXX Property is a XXXXXXXXXX leased by DC to XXXXXXXXXX , a related party.
16. The XXXXXXXXXX Property is a XXXXXXXXXX leased by DC to unrelated third parties.
17. The XXXXXXXXXX Property is a XXXXXXXXXX leased by DC to Longo XXXXXXXXXX , a related party.
18. The liabilities of DC consist of amounts due to related corporations, accounts payable and income taxes payable.
19. DC has, or is expected to have, at the time the Proposed Transactions are carried out, a nil balance in its capital dividend and nominal RDTOH accounts and a GRIP balance of approximately $XXXXXXXXXX ; a nominal amount of both net capital and non-capital losses for purposes of the Act and for provincial income tax purposes.
20. Sib1 and Sib2 actively manage the business and operations of DC, including acting as executive manager of all administrative, development, investment and finance activities of DC.
21. Other than DC's interest in Subco1, which it owns with non-arm's length parties, DC is unrelated to the co-owners of any real property in which it has a co-ownership interest. In certain cases where land is held in co-ownership with other parties, legal title to the land is held by a separate nominee company, as trustee, on behalf of the co-owners.
22. Sib1 has incorporated TC1. Sib2 has incorporated TC2. The Spousal Trust has incorporated TC3. Each of TC1, TC2 and TC3 have the following classes of authorized share capital:
(a) an unlimited number of Class A common shares entitled to XXXXXXXXXX votes per share; and
(b) an unlimited number of Class B common shares entitled to 1 vote per share.
The Class A common shares and Class B common shares will have identical share attributes except of the voting entitlements as described above. Each of Sib1, Sib2 and the Spousal Trust will subscribe for 1 Class A common share in TC1, TC2 and TC3, respectively, for the payment of $XXXXXXXXXX .
23. TC1 will resolve to have a year-end for financial and income tax purposes on the day that is immediately preceding the wind-up of DC as described in
paragraph 45.
24. It is expected that at the end of TC1's taxation year in which the Proposed Transactions are implemented, TC1 will not have a balance of RDTOH.
25. TC2 will resolve to have a year-end for financial and income tax purposes on the day that is immediately preceding the wind-up of DC as described in paragraph 45. It is expected that at the end of TC2's taxation year in which the Proposed Transactions are implemented, TC2 will not have a balance of RDTOH.
26. TC3 will resolve to have a year-end for financial and income tax purposes on the day that is immediately preceding the wind-up of DC as described in paragraph 45. It is expected that at the end of TC3's taxation year in which the Proposed Transactions are implemented, TC3 will not have a balance of RDTOH.
PROPOSED TRANSACTIONS
Articles of Amendment filed for DC.
27. DC will file Articles of Amendment pursuant to which the following classes of shares will be created:
(a) the DC New Common Shares having the same attributes as the existing common shares of DC subject to the DC New Commons Shares having XXXXXXXXXX votes per share; and
(b) the DC Special Shares that will be non-voting, and entitled to a non-cumulative dividend at a rate of three percent (XXXXXXXXXX %) of the redemption amount. Each DC Special Share will be redeemable at the option of DC and retractable at the option of the holder for an amount equal to the aggregate of $XXXXXXXXXX per share plus an amount that is determined by the formula of XXXXXXXXXX of:
(i) DC's GRIP balance at the end of the taxation year in which the Share Exchanges take place,
less
(ii) any dividend in respect of which a designation was made under subsection 89(14) paid by DC during its taxation year in which the DC Special Shares are redeemed.
Prior to the redemption of the DC Special Shares, the Board of Directors of DC will pass a resolution confirming the DC Special Share redemption amount.
28. Each of Sib1, Sib2 and the Spousal Trust will exchange all of their common shares of the capital stock of DC for one DC Special Share and XXXXXXXXXX DC New Common Shares. The old common shares of the capital stock of DC will be cancelled.
29. The aggregate FMV of the DC Special Share and the XXXXXXXXXX DC New Common Shares that each of Sib1, Sib2 and the Spousal Trust will receive as described above will be equal to the aggregate FMV of the old common shares of DC that each of Sib1, Sib2 and the Spousal Trust so exchanged.
30. No election under subsection 85(1) will be made with respect to the Share Exchange.
31. The aggregate amount that will be added to the stated capital account of the DC Special Share issued by DC to each of Sib1, Sib2 and the Spousal Trust as described in Paragraph 28 will be $XXXXXXXXXX , for an aggregate amount of $XXXXXXXXXX . In addition, the aggregate amount that will be added to the stated capital account of the DC New Common Shares issued to Sib1, Sib2 and the Spousal Trust will be equal to the PUC of the old common shares of DC so exchanged by each of Sib1, Sib2 and the Spousal Trust as described in Paragraph 28 less $XXXXXXXXXX .
Nominee Agreement:
32. In order to avoid fractional shares and as the matter of convenience, prior to the distribution of the shares of Subco1, Subco2, Subco3, Subco4, Subco5 and Nomineeco1 from DC to each of TC1, TC2 and TC3 as described in Paragraph 39, DC will transfer registered title to all of the issued and outstanding shares of Subco1, Subco2, Subco3, Subco4, Subco5 and Nomineeco1 to Nomineeco2. Nomineeco2 will hold registered title to those shares as bare trustee/nominee for the beneficial owner, DC. Nomineeco2 and DC will enter into a nominee agreement to evidence this relationship.
Transfers to TC1, TC2 and TC3
33. The following share transfer will occur contemporaneously:
(a) Sib1 will transfer his DC Special Share and all of his DC New Common Shares to TC1 in exchange for XXXXXXXXXX Class A common shares of TC1. The directors of TC1 will resolve, pursuant to the provisions of the BCA, to add to the stated capital of the Class A common shares so issued an amount equal to the aggregate of the PUC of the DC Special Share and the DC New Common Shares transferred to TC1.
(b) Sib2 will transfer his DC Special Share and all of his DC New Common Shares to TC2 in exchange for XXXXXXXXXX Class A common shares of TC2. The directors of TC2 will resolve, pursuant to the provisions of the BCA, to add to the stated capital of the Class A common shares so issued an amount equal to the aggregate of the PUC of the DC Special Share and the DC New Common Shares transferred to TC2.
(c) The Spousal Trust will transfer its DC Special Share and all of its DC New Common Shares to TC3 in exchange for XXXXXXXXXX Class A common shares of TC3. The directors of TC3 will resolve, pursuant to the provisions of the BCA, to add to the stated capital of the Class A common shares so issued an amount equal to the aggregate of the PUC of the DC Special Share and the DC New Common Shares transferred to TC3.
34. Sib1 and TC1 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 described in Paragraph 33. The agreed amount specified in the election will be an amount not less than the aggregate ACB of the DC Special Share and the DC New Common Shares transferred as described in Paragraph 33(a) above, which amount will be less than the FMV of such shares at the time of transfer.
35. Sib2 and TC2 will jointly elect, in prescribed form and within the time limits referred to subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer described in Paragraph 33. The agreed amount specified in the election will be an amount not less than the aggregate ACB of the DC Special Share and the DC New Common Shares transferred as described in Paragraph 33(b) above, which amount will be less than the FMV of such shares at the time of transfer.
36. The Spousal Trust and TC3 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 described in Paragraph 33. The agreed amount specified in the election will be an amount not less than the aggregate ACB of the DC Special Share and the DC New Common Shares transferred as described in Paragraph 33(c) above, which amount will be less than the FMV of such shares at the time of transfer.
Types of Property
37. Immediately before the transfers of property described in Paragraph 39, the property of DC will be classified into three types of property for purposes of distribution, as follows:
(a) cash or near-cash property, consisting of all the current assets of DC;
(b) investment property, comprising all of the assets of DC, other than any cash or near-cash property, any income which would, for purposes of the Act, be income from property or income from an specified investment business; and
(c) business property, comprising all of the assets of DC, other than cash or near-cash property, any income which would, for purposes of the Act, be income from a business (other than a specified investment business).
In addition, for the purposes of determining the net FMV of the types of property of DC:
(a) any tax accounts, such as CDA, pre-1972 CSOH, RDTOH, GRIP, deferred taxes or balances of any capital losses of DC, or of any other entity over which DC has significant influence, will not be considered property or a liability, as the case may be;
(b) no amount will be considered to be a liability unless such amount represents a true legal liability which is capable of quantification;
(c) income and other taxes payable will be classified as a current liability.
38. For the purpose of determining the net FMV of DC's three types of property immediately before the transfer of property described in Paragraph 39, any liabilities of DC will be allocated to, and be deducted in the calculation of, the net FMV of each type of property of DC in the following manner:
(a) current liabilities of DC (including the current portion of the long-term debt, loans from shareholders, to the extent these are not already paid by DC) will be allocated to the cash or near-cash property of DC in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by DC and the amount of current liabilities allocated as described herein will not exceed the aggregate FMV of the cash or near cash property of DC;
(b) following the allocation of current liabilities to cash or near cash property of DC as described in (a) any remaining net FMV of accounts receivable, rent receivables in the normal course of business and prepaid expenses may be reclassified as business property and excluded from the net FMV of DC's cash or near cash property, to the extent that such property will relate to a business that is carried on by DC and will be carried on by TC1, TC2 and TC3 and that will be collected or consumed in the ordinary course of that business;
(c) 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. The total of any excess of such liabilities over the FMV of a particular property and of 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;
(d) if any liabilities remain after the allocations described in (a) and (c) are made, such excess liabilities will be allocated to the cash or near cash property, investment property and business property, if any, of DC based on the relative net FMV of each type of property prior to the allocation of such excess liabilities.
Distribution
39. DC will transfer at FMV the TC1 Transfer Proportion of each type of property of DC to TC1, the TC2 Transfer Proportion of each type of property of DC to TC2 and the TC3 Transfer Proportion of each type of property of DC to TC3, as determined in accordance with Paragraphs 37 and 38, such that immediately following such transfers, the net FMV of each type of property so transferred to each of TC1, TC2 and TC3, as the case may be, will for greater certainty, approximate that proportion of the net FMV of all property of DC of that type determined immediately before such transfer that
(a) the aggregate FMV, immediately before the transfer, of all of the shares of DC owned by TC1, TC2 or TC3, as the case may be, at that time;
is of
(b) the aggregate FMV, immediately before the transfer, of all of 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 net FMV of each type of property which TC1, TC2 or TC3, as the case may be, will receive as compared to what TC1, TC2 and TC3, as the case may be, would have received had such corporation received its appropriate pro-rata share of the net FMV of that type of property.
As consideration for the property transferred by DC:
- TC1 will assume the TC1 Transfer Proportion, TC2 will assume the TC2 Transfer Proportion and TC3 will assume the TC3 Transfer Proportion, of the aggregate liabilities of DC; and
- Each of TC1, TC2 and TC3, will issue to DC, XXXXXXXXXX Class B common shares having a FMV equal to the amount by which the aggregate FMV of the particular properties so transferred to such corporation, exceeds the pro-rata share of DC's liabilities so assumed by such corporation.
DC and each of TC1, TC2 and TC3, 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 such corporation as described in this Paragraph. The agreed amount in respect of each eligible property so transferred will be as follows:
(i) in the case of capital property (other than depreciable property of a prescribed class) and inventory (other than land inventory), an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(ii) 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); and
(iii) in the case of eligible capital property, an amount not less than the least of the amounts described in subparagraphs 85(1)(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.
For the purposes of the joint elections described in this Paragraph, the reference to the "undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition" in subparagraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to DC of all the property of that class that the capital cost of the asset immediately before the disposition is of the capital cost of all the property of that class immediately before the disposition.
The directors of each of TC1, TC2 and TC3 will resolve, pursuant to the provisions of the BCA, to add to the stated capital of the Class B common shares so issued by such corporation in respect of properties for which an election under subsection 85(1) is made, an amount equal to the aggregate agreed amounts, less the amount of the liabilities assumed by TC1, TC2 or TC3, as the case may be, and in any other case, the FMV of such property so transferred less the amount of the liabilities assumed by TC1, TC2 or TC3 in respect of such transfer.
With respect to the shares of Subco1, Subco2, Subco3, Subco4, Subco5 and Nomineeco1, each of TC1, TC2, TC3 and Nomineeco2 will enter into a nominee agreement evidencing the fact that Nomineeco2 holds registered title to the shares on behalf of the beneficial owners, each of TC1, TC2 and TC3.
Purchase for Cancellation of Shares
40. TC1, TC2 and TC3 will each purchase for cancellation all of their respective Class B common shares held by DC for an amount equal to the FMV of such shares, such amount being equal to XXXXXXXXXX of the FMV of DC. This amount represents fifty percent (XXXXXXXXXX %) of the FMV of TC1, TC2 and TC3 as the case may be. In consideration, TC1, TC2 and TC3 will each issue a non-interest bearing demand promissory note to DC (the "TC1 Note", "TC2 Note" and "TC3 Note", respectively) with a principal amount and FMV equal to the FMV of the Class B common shares that were purchased for cancellation. DC will accept the TC1 Note, TC2 Note and TC3 Note as full payment for the Class B common shares that were purchased for cancellation.
41. TC1, TC2 and TC3 will each cause its first taxation year to end at the end of the day on which its Class B Common Shares are purchased for cancellation. . This will occur at least one day prior to the transactions described in Paragraphs 42 and 45.
Redemption of DC Special Shares
42. DC will redeem all of its DC Special Shares for an aggregate redemption amount equal to DC's GRIP balance at the end of the taxation year in which the Share Exchange takes place less any other eligible dividend paid by DC during the taxation year in which the DC Special Shares are redeemed, as further resolved by the Board of Directors of DC as described in Paragraph 27.
43. In consideration, DC will issue a non-interest bearing demand promissory note to each of TC1, TC2 and TC3 (the "DC1 Note", "DC2 Note" and "DC3 Note", respectively) with a principal amount equal to the redemption amount of the DC Special Shares so redeemed.
44. DC will designate the dividend that it is deemed by subsection 84(2) to have paid on the DC Special Shares to TC1, TC2 and TC3 to be an eligible dividend by notifying in writing at that time each of TC1, TC2 and TC3 that the dividend is an eligible dividend, pursuant to subsection 89(14).
Wind-up of DC
45. TC1, TC2 and TC3 will, by special resolution, resolve to liquidate and dissolve DC pursuant to the provisions of the BCA.
46. In connection with the winding-up of DC, DC will distribute all of its assets and liabilities, and in particular, DC will assign and distribute the TC1 Note to TC1, the TC2 Note to TC2 and the TC3 Note to TC3 and TC1 will assume the DC1 Note, TC2 will assume the DC2 Note and TC3 will assume the DC3 Note.
47. The DC1 Note, DC2 Note and DC3 Note will be offset by each of TC1, TC2 and TC3, respectively, against the TC1 Note, TC2 Note and TC3 Note.
48. In due course, DC will file tax returns, and, after the receipt of any dividend refund or other tax related refunds, file articles of dissolution. Upon receipt of the Certificate of Dissolution, DC will be formally dissolved.
49. An agreement will be entered by TC1, TC2 and TC3 whereby each will agree that all assets or liabilities, if any, not known at the date of the wind-up of DC, will be subsequently shared equally among TC1, TC2 and TC3.
50. Pursuant to the agreement described in Paragraph 45, each of TC1, TC2 and TC3 will agree to indemnify the other parties for losses occasioned by misrepresentations made by, or actions taken by, the particular party of their respective affiliates or successors, that adversely affect the application of the rulings provided herein.
51. In connection with the distribution of property described in Paragraph 39, TC1, TC2 and TC3 will enter into a co-ownership agreement with respect to their interests in the XXXXXXXXXX Property, the XXXXXXXXXX Property, the XXXXXXXXXX Property and the XXXXXXXXXX Property.
The co-ownership agreement will indicate that: (i) the co-owners do not intend to create a partnership; (ii) no co-owners can act on behalf of another co-owner without obtaining prior consent from that co-owner; (iii) each co-owner has a well-defined separation of interests in and ownership of the properties subject to the co-ownership agreement; (iv) a co-owner cannot charge and/or grant security over the co-owned properties as a whole (i.e., the other co-owner's interest) as each co-owner only has the right to deal with its own interest in the co-owned properties; (v) profit and loss is calculated by each co-owner individually and there is no mechanism in the agreement that deals with the allocation of profit or loss; and (vi) the liability of the co-owners is limited to their own expenses.
52. Each of TC1, TC2 and TC3 will be incorporated as a numbered company. Following the Proposed Transactions, it is possible that each of TC1, TC2 and TC3 will change their name to adopt some form of other name.
53. It is likely that the first taxation year-end of TC1, TC2 and TC3 as described in Paragraph 41, will not coincide with the taxation year-end of other corporations owned by Sib1, Sib2 and the Spousal Trust. Accordingly, TC1, TC2 and the Spousal Trust may apply to the CRA to change its taxation year-end to a year-end that coincides with the year-ends of other corporations owned by Sib1, Sib2 and the Spousal Trust.
54. No property has or will become property of DC or any corporation controlled by DC in contemplation of and before the distribution described in Paragraph 39, except as described herein, or in the ordinary course of business, and no liabilities have been, or will be, incurred or discharged by DC or any corporation controlled by DC in contemplation of and before the distribution described in Paragraph 39, except as described herein or in the ordinary course of business. Moreover, except as specifically outlined herein, there is no expectation or intention of any of DC, TC1, TC2, TC3, or any corporation controlled by DC, TC1, TC2 or TC3 to dispose of any property owned by it as part of the series of transactions or events that includes the Proposed Transactions, other than in the ordinary course of business.
55. None of DC, TC1, TC2 or TC3 is or will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1). None of DC, TC1, TC2 or TC3 is or will be a "specified financial institution" as defined in subsection 248(1) prior to the completion of the Proposed Transactions.
56. None of the shares in the capital of DC, TC1, TC2 or TC3 will be at any time during the implementation of the Proposed Transactions:
(a) the subject of any undertaking or agreement that is referred to in subsection 112(2.2) as a "guarantee agreement";
(b) issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or
(c) the subject of a "dividend rental arrangement".
57. It is intended that the shareholders of TC1, TC2 and TC3 will receive amounts from their respective corporations, either by way of dividends or reductions in PUC. These transactions will not be part of the series of transactions or events that includes the Proposed Transactions.
58. Each of DC, TC1, TC2 and TC3 will have the financial capacity to honor upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.
PURPOSE OF THE PROPOSED TRANSACTIONS
The purpose of the Proposed Transactions is to permit the shareholders of DC to separate their respective interests in DC, subject to the co-ownership agreement described in Paragraph 51, in order to enable Sib1, Sib2 and the Spousal Trust to own their various property interests independently from each other.
RULINGS
Provided that the above statements of facts, Proposed Transactions and purpose of the proposed transactions thereof are accurate and constitute complete disclosure of all relevant facts and Proposed Transactions, our rulings are as follows:
A. The provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, in respect of the Share Exchange.
B. Provided that the requisite elections are made in the prescribed form and within the prescribed time period, and provided that the property transferred is an eligible property, subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfer:
(a) by Sib1 of the DC Special Share and the DC New Common Shares of DC to TC1, as described in Paragraph 33;
(b) by Sib2 of the DC Special Share and the DC New Common Shares of DC to TC2, as described in Paragraph 33;
(c) by the Spousal Trust of the DC Special Share and the DC New Common Shares of DC to TC3, as described in Paragraph 33; and
(d) by DC of each eligible property to TC1, TC2 and TC3, as the case may be, as described in Paragraph 39;
such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor's proceeds of disposition of the particular property and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.
C. Provided an existing property that is owned by DC constitutes a capital property, depreciable property or inventory, as the case may be, to DC immediately prior to the commencement of the Proposed Transactions, where such property is acquired by TC1, TC2 or TC3, as the case may be, as described in Paragraph 39, such acquisition will not, in and by itself, cause such property to cease to be a capital property, depreciable property or inventory, as the case may be, to the particular acquiror immediately following such acquisition.
D. As a result of the purchase for cancellation by each of TC1, TC2 and TC3 of its Class B common shares held by DC, as described in Paragraph 40, by virtue of paragraphs 84(3)(a) and 84(3)(b), each of TC1, TC2 and TC3 will be deemed to have paid, and DC will be deemed to have received, respectively, a taxable dividend on the Class B common shares of TC1, TC2 and TC3, as the case may be, equal to the amount, if any, by which the aggregate amount paid on the purchase for cancellation exceeds the aggregate PUC in respect of such Class B common shares immediately before the purchase for cancellation;
E. As a result of the redemption by DC its DC Special Shares held by TC1, TC2 and TC3, as described in Paragraph 42, by virtue of paragraphs 84(3)(a) and 84(3)(b), DC will be deemed to have paid, and each of TC1, TC2 and TC3 will be deemed to have received, respectively, a taxable dividend on the DC Special Shares equal to the amount, if any, by which the aggregate amount paid on the redemption exceeds the PUC in respect of such DC Special Shares immediately before the redemption;
F. Provided that DC designated the dividend described in Paragraph 42 to be an eligible dividend in prescribed manner and within the time referred to in subsection 89(14), the portion of that dividend that each of TC1, TC2 and TC3 received will be added to the GRIP account of each of TC1, TC2 and TC3 under paragraph G(a) of the definition of GRIP in subsection 89(1) in the taxation year in which each received that portion from DC.
G. In the course of the winding-up of DC described in paragraph 45, by virtue of subsection 84(2), DC will be deemed to have paid and each of TC1, TC2 and TC3 to have received, a dividend on the DC New Common Shares held by each of TC1, TC2 and TC3 equal to the proportion of amount by which the aggregate FMV of the property distributed by DC in respect of the DC New Common Shares on the winding up exceeds the amount by which the PUC of such shares is reduced as a result of the distribution, that the number of shares of such class held by each TC1, TC2 and TC3, as the case may be, is of the number of issued shares of such class outstanding immediately before the distribution.
H. The taxable dividends described in Rulings D, E and G 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 the proceeds of disposition to the holder of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;
(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 such 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 by virtue of paragraph (b) or (c) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1).
I. Provided that as part of the series of transactions or events that includes the Proposed Transactions, there is not:
(a) an acquisition of property in circumstances described in paragraph 55(3.1)(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(3.1)(b)(iii); or
(e) an acquisition of property in the circumstances described in subparagraph 55(3.1)(c) or (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 Ruling D, E and G above, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
J. The assignment, offsetting and cancellation of the obligations represented by the TC1 Note, TC2 Note, TC3 Note, DC1 Note, DC2 Note and DC3 Note as described in Paragraph 45 to 47, will not give rise to a forgiven amount, and none of DC, TC1, TC2 or TC3 will realize any gain or incur any loss as a result of the assignment, offsetting and cancellation of these obligations and notes.
K. The provisions of subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to any of the transactions described in Paragraphs 27 to 49, in and by themselves.
L. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions described herein, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.
The 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 no later than six months of the date of this letter. The 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 PUC of any share or the ACB or FMV of any property referred to herein and the outcome of any request described herein;
(b) the balance of CDA, RDTOH, or GRIP of any corporation;
(c) any tax consequences relating to the possibility that after the Proposed Transactions are completed the shareholders of TC1, TC2 and TC3 may receive amounts from their respective corporations, either by way of dividends or reductions in PUC as described in Paragraph 57 ;
(d) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place, prior to, during, 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; and
(e) the legal relationship between the parties referred to herein.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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