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: (i) Whether the cost amount of land assigned to the parent corporation on the winding-up of the subsidiary can be bumped to the extent of the limitations found in paragraph 88(1)(d); (ii) Whether the proposed transaction may be subject to the back-door butterfly rule found in subparagraph 88(1)(c)(vi)
Position: (i) Yes, (ii) No
Reasons: (i) all the statutory requirements and limitations governing the increase in the cost amount of the capital property held by Subco prior to the wind-up have been satisfied and complied with (ii) None of the assets distributed to Parentco or property acquired in substitution therefor were acquired by a person or a corporation described in subclauses 88(1)(c)(vi)(B)(I), (II) and (III)
XXXXXXXXXX 2011-042392
XXXXXXXXXX , 2012
Dear XXXXXXXXXX
Re: Advance Income Tax Ruling
XXXXXXXXXX , XXXXXXXXXX TSO
We are writing in response to your request for an income tax ruling ("Ruling Request") dated XXXXXXXXXX . We also considered the factual clarification you provided to us in subsequent emails.
PRELIMINARY MATTERS
To the best of your knowledge, none of the issues involved in this letter:
(a) is in an earlier return of Parentco, or a Related Person;
(b) is being considered by a TSO or a taxation centre in connection with a previously filed tax return of Parentco or a Related Person;
(c) is under objection by Parentco or a Related Person;
(d) is before the Courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; and
(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Parentco has confirmed that the proposed transactions described herein will not affect its ability to pay any of its outstanding tax liabilities.
In this letter, unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended (hereinafter the "Act") and all references to monetary amounts are in Canadian dollars.
DEFINITIONS
In this letter, unless the context otherwise requires, the following terms have the meanings specified below:
"A" means XXXXXXXXXX who is an individual resident in Canada XXXXXXXXXX ;
"Arm's length" has the meaning assigned by section 251;
"ACB" means adjusted cost base as that term is defined in subsection 54(1);
"B" means XXXXXXXXXX who is an individual resident in Canada;
"Board" means the board of directors of Subco;
"C" means XXXXXXXXXX , a Canadian resident who is a child of Shareholder 1 and A;
"CCPC" means Canadian-controlled private corporation as this term is defined subsection 125(7);
"Capital Property" has the meaning assigned by subsection 54(1);
"Cost amount" has the meaning assigned by subsection 248(1);
"CRA" means the Canada Revenue Agency;
"D" means XXXXXXXXXX , a Canadian resident who is a child of Shareholder 1 and A;
"Depreciable Property" has the meaning assigned by subsection 248(1);
"E" means XXXXXXXXXX , a Canadian resident who is a child of Shareholder 1 and A;
"F" means XXXXXXXXXX , a Canadian resident who is a child of Shareholder 1 and A;
"FMV" means fair market value, which refers to the highest price available in an open and unrestricted market between informed and prudent parties acting at arm's length and under no compulsion to act, expressed in terms of cash;
"Holdco" means XXXXXXXXXX ;
"Long-term Debt" means the long term debt of $XXXXXXXXXX owing by Subco as of XXXXXXXXXX ;
"Parentco" means XXXXXXXXXX ;
"Proposed Transactions" means the transactions described in the Proposed Transactions section of this letter;
"PUC" means paid-up capital as defined in subsection 89(1);
"Related Person" has the meaning assigned by subsection 251(2);
"Shareholder 1" means XXXXXXXXXX , who is an individual resident in Canada;
"Subco" means XXXXXXXXXX ;
"Target Assets" means the land on which is located a building and a parking lot that are used to operate Subco's XXXXXXXXXX ;
"Taxable Canadian Corporation" has the meaning assigned by subsection 89(1);
"Taxable Dividend" has the meaning assigned by subsection 89(1);
"Trust" means a trust whose trustees are Shareholder 1, A and B and whose beneficiaries are A, C, D, E and F;
"TSO" means Tax Services Office;
"UCC" means undepreciated capital cost as that term is defined in subsection 13(21);
"Unwanted Assets" means the XXXXXXXXXX having an approximate FMV of $XXXXXXXXXX .
FACTS
Subco
General
1) Subco is a Taxable Canadian Corporation and a CCPC that has a XXXXXXXXXX taxation year-end.
2) Subco operates XXXXXXXXXX .
3) Subco intends to operate XXXXXXXXXX until the occurrence of the Proposed Transactions.
Current assets
4) The cost amount of Subco's current assets was equal to $XXXXXXXXXX on XXXXXXXXXX .
Property and equipment
5) Subco owns the Target Assets.
6) Subco's intention has always been to use the Target Assets in the operation of XXXXXXXXXX .
7) The land held by Subco has an ACB of $XXXXXXXXXX . Each of the building and the parking lot located on the land is a Depreciable Property whose UCC is respectively equal to $XXXXXXXXXX and $XXXXXXXXXX .
8) Subco will use the Target Assets in operating XXXXXXXXXX until the occurrence of the Proposed Transactions.
9) Subco also owns the Unwanted Assets.
Short-term liabilities
10) The cost amount of Subco's short-term liabilities was equal to $XXXXXXXXXX on XXXXXXXXXX .
Long-term debt
11) Subco owes the Long-term Debt.
Subco's shareholding and accumulated deficit before the Proposed Transactions
12) Shareholder 1 and the Trust are Subco's only shareholders.
13) Shareholder 1 holds XXXXXXXXXX Class A common shares, XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class C preferred shares, XXXXXXXXXX Class D preferred shares and XXXXXXXXXX Class E preferred shares in Subco. The aggregate PUC, ACB and FMV of all the shares of Subco held by Shareholder 1 is respectively equal to $XXXXXXXXXX , $XXXXXXXXXX and $XXXXXXXXXX
14) The Trust holds XXXXXXXXXX Class B common shares, XXXXXXXXXX Class B preferred shares and XXXXXXXXXX Class D preferred shares. The aggregate PUC, ACB and FMV of all the shares of Subco held by the Trust is respectively equal to $XXXXXXXXXX , $XXXXXXXXXX and $XXXXXXXXXX .
15) The aggregate FMV of the Subco shares held by Shareholder 1 and the Trust is approximately equal to $XXXXXXXXXX .
16) [Reserved]
Holdco
17) Shareholder 1 owns all the issued and outstanding shares of Holdco.
Parentco
18) Parentco is a Taxable Canadian Corporation and a CCPC that has a XXXXXXXXXX taxation year-end, and whose principal business activity is to XXXXXXXXXX .
19) Parentco intends to acquire the land held by Subco for XXXXXXXXXX .
20) Parentco deals at Arm's Length with Subco, Shareholder 1 and the Trust.
Transactions undertaken prior to the Proposed Transactions
21) Prior to the Proposed Transactions, Subco transferred the Unwanted Assets to Holdco at their FMV in consideration for cash, which will all be used immediately after it is received to repay some of Subco's liabilities including a shareholder loan owed to Shareholder 1.
22) Holdco will use the Unwanted Assets to operate its business.
23) Immediately before the Proposed Transactions, Shareholder 1 will personally assume the Long-term Debt in exchange for XXXXXXXXXX Class E preferred shares in Subco having a redemption price equal to the outstanding balance of the Long-term Debt.
Proposed Transactions
24) Shareholder 1 and the Trust will transfer all the shares that they hold in Subco to Parentco at FMV in consideration for cash.
25) The Purchase and Sale Agreement governing the sale of the issued and outstanding shares in Subco to Parentco will not include a price adjustment clause.
26) The purchase price to be paid by Parentco will be greater than the lesser of the PUC of the Subco shares and the cost amount of Subco's assets immediately before the Proposed Transactions.
27) Soon afterwards, Parentco will cause Subco to be wound-up. Subco will then be dissolved.
28) In filing its income tax return for the taxation year in which Subco is wound-up, Parentco will designate an amount in respect of the Eligible Property that it received upon Subco's winding-up.
The designated amount will not be greater than: (i) the amount by which the FMV of the Eligible Property exceeds the Cost Amount of the Eligible Property immediately before the Proposed Transactions, and (ii) the amount by which Parentco's ACB of the Subco shares exceeds the sum of the amounts described in subparagraphs 88(1)(d)(i) and (i.1).
Purpose of the Proposed Transactions
The purpose of the Proposed Transactions is to allow Parentco to acquire, indirectly through its acquisition of the Subco shares, the Eligible Property held by Subco for XXXXXXXXXX purposes, and to increase the cost amount of that Eligible Property further to the winding-up of Subco to the extent of the limitations found in paragraph 88(1)(d).
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the Proposed Transactions and the purpose of the Proposed Transactions, and that the proposed transactions herein described are completed in the manner contemplated above, our rulings are as follows:
A. Subject to subsection 69(11), the provisions of subsection 88(1) will apply to the Proposed Transactions such that:
a) pursuant to subparagraph 88(1)(a)(iii), each property of Subco that will be distributed to Parentco on the winding-up of Subco will be deemed to have been disposed for proceeds equal to the cost amount of the property to Subco immediately before the winding-up;
b) Parentco will be deemed to have disposed of all its shares in Subco on the winding-up for proceeds equal to the greater of the amounts described in subparagraphs 88(1)(b)(i) and (ii);
c) pursuant to paragraphs 88(1)(c) and (d), the cost to Parentco of each property distributed by Subco to Parentco on the winding-up of Subco shall be deemed to be equal to the amount deemed to be the proceeds of disposition of that property to Subco pursuant to subparagraph 88(1)(a)(iii) plus, subject to the limitations found in subparagraphs 88(1)(d)(ii) and (iii), such portion of the amount, if any, by which:
i) the aggregate of the ACB to Parentco of its shares of Subco immediately before the winding-up
exceeds
ii) the aggregate of the amounts determined under subparagraphs 88(1)(d)(i) and (i.1)
as is designated by Parentco in respect of that property in its return of income under Part I for the taxation year in which Subco is wound-up.
B. The Proposed Transactions, in and of themselves, will not result in the application of subsection 245(2) to redetermine the tax consequences confirmed in Ruling A.
These Rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the 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.
Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of:
(a) The PUC of any shares or the FMV or the ACB of any particular asset referred herein, or
(b) Any other tax consequences relating to the Facts, Proposed Transactions or any event taking place either prior to or subsequent to the Proposed Transactions whether described in this letter or not other than those specifically described in the above Rulings.
Nothing is this letter should be construed as a confirmation, express or implied, that, for the purpose of any of the Rulings listed above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer or issuance of shares.
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 Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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