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: Whether control of a corporation controlled by a group of three corporate trustees is acquired when the sole shareholder of one of the corporate trustees transfers all the shares of that corporate trustee to a related person.
Position: No.
Reasons: 256(7)(a) deems control not to be acquired.
XXXXXXXXXX
2010-036092
XXXXXXXXXX, 2011
Dear XXXXXXXXXX:
Re: 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 fax of XXXXXXXXXX and your emails of XXXXXXXXXX.
We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues involved 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 taxpayer 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.
Except as otherwise stated, a reference in this ruling to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act.
DEFINITIONS
In this ruling, the following terms have the meanings specified and, where the circumstances so require, the singular should be read as the plural and vice versa:
"Act" means the Income Tax Act, RSC 1985 (5th supp.), c.1, as amended to the date hereof;
"arm's length" has the meaning assigned by subsection 251(1);
"First Act" means the Canada Business Corporations Act, and, where applicable, its predecessor statutes;
"Mr. A" means XXXXXXXXXX;
"Mr. B" means XXXXXXXXXX, who XXXXXXXXXX;
"Mrs. A" means XXXXXXXXXX, the wife of Mr. A and the mother of Mr. B;
"Newco 1" means a corporation to be incorporated under the XXXXXXXXXX Business Corporations Act;
"Newco 2" means a corporation to be incorporated under the XXXXXXXXXX Business Corporations Act;
"Newco 3" means a corporation to be incorporated under the XXXXXXXXXX Business Corporations Act;
"Net Capital Loss" has the meaning assigned by subsection 111(8);
"Non-Capital Loss" has the meaning assigned by subsection 111(8);
"Opco" means XXXXXXXXXX and is more fully described in paragraph 1.1 hereof;
"private corporation" has the meaning assigned by subsection 89(1);
"Protector" means XXXXXXXXXX;
"related" refers to a person with which a person is related within the meaning assigned by subsection 251(2);
"taxable Canadian corporation" has the meaning assigned by subsection 89(1);
"taxation year" has the meaning assigned by subsection 249(1);
"Trust" shall mean the XXXXXXXXXX, a trust formed under the laws of XXXXXXXXXX which continues to be governed by XXXXXXXXXX law;
"Trustee" means the trustees of the Trust, namely Trustee 1, Trustee 2 and Trustee 3;
"Trustee 1" means XXXXXXXXXX;
"Trustee 2" means XXXXXXXXXX; and
"Trustee 3" means Mr. B.
Unless otherwise indicated in this ruling, all dollar amounts referred to herein are in Canadian dollars.
Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows:
I FACTS
1.1 Opco is a private corporation incorporated under the First Act on XXXXXXXXXX and is a taxable Canadian corporation. Opco's taxation year ends on XXXXXXXXXX. Its share capital consists of an unlimited number of class A and B common shares, and an unlimited number of class A, B, C and D preferred shares. The class A common shares and the class A preferred shares and C preferred shares are voting, while the other classes are non-voting. There are XXXXXXXXXX class B common shares and XXXXXXXXXX class A preferred shares of Opco currently outstanding, which are held as follows:
Shareholders Shares
Trust XXXXXXXXXX% class A preferred shares
Mr. A XXXXXXXXXX% class B common shares
Mr. B XXXXXXXXXX% class B common shares
1.2 The Trust has controlled Opco since the organization thereof. All of the shareholders of Opco hold their shares as capital property within the meaning of the Act.
1.3 As of XXXXXXXXXX, Opco had net capital losses of approximately $XXXXXXXXXX and non-capital losses of approximately $XXXXXXXXXX and an accrued capital loss of approximately $XXXXXXXXXX.
1.4 The Trust is an inter vivos trust created on the XXXXXXXXXX. The settlor of the Trust was Mrs. A. Each of the Trustees is a resident of Canada within the meaning of the Act. The beneficiary of the Trust is Mr. B. None of the Trustees are related to one another and each of the Trustees deal with the others at arm's length.
1.5 The taxation year of the Trust is XXXXXXXXXX.
1.6 The principal asset of the Trust is the XXXXXXXXXX class A preferred shares of Opco which conveys control thereof.
1.7 The decisions of the Trust are made by a simple majority of the Trustees.
1.8 The terms of the Trust permit the Protector to name a replacement trustee in the event of death, resignation or incapacity of a Trustee, the whole as set forth in Section 17 of the Deed of Trust under which the Trust was created.
II PURPOSE OF THE PROPOSED TRANSACTIONS
2.1 The purpose of the proposed transactions is to provide the Trustees with limited liability and not trigger an inadvertent acquisition of control of Opco upon the death of one or more of the Trustees.
III PROPOSED TRANSACTIONS
3.1 Trustee 1 will incorporate Newco 1 and be its sole shareholder.
3.2 Trustee 2 will incorporate Newco 2 and be its sole shareholder.
3.3 Trustee 3 will incorporate Newco 3 and be its sole shareholder
3.4 Each of Newco 1, Newco 2 and Newco 3 will have the capacity to act as a trustee of the Trust.
3.5 Trustee 1 will tender his resignation as a trustee of the Trust, contingent on the appointment of his replacement being Newco 1. The said notice will be sent to the Protector which will concurrently appoint Newco 1 as the replacement trustee.
3.6 Thereafter, Trustee 2 will tender his resignation as a trustee, contingent on the appointment of his replacement being Newco 2. The said notice will be sent to the Protector which will concurrently appoint Newco 2 as the replacement trustee.
3.7 Trustee 3 will then tender his resignation as a trustee, contingent on the appointment of his replacement being Newco 3. The said notice will be sent to the Protector which will concurrently appoint Newco 3 as the replacement trustee.
3.8 Each of Trustee 1, Trustee 2 and Trustee 3 will bequeath their respective shares of Newco 1, Newco 2 and Newco 3 to a related person in their respective wills and that such transfer will occur upon their respective deaths.
IV RULINGS PROVIDED
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the purpose of the proposed transactions and the additional information, and that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. Pursuant to clause 256(7)(a)(i)(A), control of Opco will be deemed not to have been acquired, for the purposes of the provisions enumerated in subsection 256(7), solely because of the events described in paragraphs 3.5, 3.6 and 3.7.
B. Pursuant to clauses 256(7)(a)(i)(C) and (D), control of Opco will be deemed not to have been acquired, for the purposes of the provisions enumerated in subsection 256(7), solely because of:
a) the death of Trustee 1, provided he bequeaths all the shares of Newco 1 outright and in absolute ownership to a person to whom he was related;
b) the death of Trustee 2, provided he bequeaths all the shares of Newco 2 outright and in absolute ownership to a person to whom he was related; or
c) the death of Trustee 3, provided he bequeaths all the shares of Newco 3 outright and in absolute ownership to a person to whom he was related.
C. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and of themselves, to re-determine the tax consequences confirmed in the above rulings.
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 (other than the proposed transaction in paragraph 3.8) are completed within six months of the date of this ruling letter and that the bequests described in paragraph 3.8 of the proposed transactions are fulfilled.
As the transfer described in paragraph 3.8 of 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 its 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.
Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed:
(a) any tax consequences relating to the facts and proposed transactions described herein other than those specifically confirmed in the rulings given above;
(b) the determination of the fair market value or adjusted cost base of any property referred to herein; or
(c) the relevant laws of XXXXXXXXXX. The rulings provided apply only to the extent that the relevant XXXXXXXXXX laws do not differ from Canadian law.
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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