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 84(2) of the Act apply to the proposed transactions such that subsection 84(4.1) will not apply? 2. Will subsection 40(3) and subparagraph 53(2)(a)(ii) apply to the shareholders of the Corporation?
Position: 1. Yes 2. Yes
Reasons: 1. Based on past rulings given. 2. Based on past rulings given.
XXXXXXXXXX , 2012
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge your subsequent submission of XXXXXXXXXX .
We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:
(i) in an earlier return of the taxpayer 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 taxpayer or a related person,
(iii) under objection by the taxpayer or a related person,
(iv) before the courts, or
(v) the subject of a ruling previously considered by the Directorate involving the taxpayer or a related person.
In this letter, the following terms have the meanings specified:
“Act” means the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter;
“ACB” means the adjusted cost base and has the meaning assigned to this term by section 54 of the Act;
“Agreement” means the purchase agreement entered into between the Corporation and PurchaseCo dated XXXXXXXXXX ;
“CCDE” means cumulative Canadian development expense and has the meaning assigned to this term by subsection 66.2(5) of the Act;
“CCEE” means cumulative Canadian exploration expense and has the meaning assigned to this term by subsection 66.1(6) of the Act;
“Corporation” means XXXXXXXXXX ;
“flow-through share” has the meaning assigned to this term by subsection 66(15) of the Act;
“mineral resource” has the meaning assigned to this term by subsection 248(1) of the Act;
“Newco” means a corporation incorporated under the laws of Canada and described in paragraph 7 below;
“public corporation” has the meaning assigned to this term by subsection 89(1) of the Act;
“PUC” means paid-up capital and has the meaning assigned to this term by subsection 89(1) of the Act;
“Properties” means Canadian XXXXXXXXXX property located in XXXXXXXXXX and owned by the Corporation;
“PurchaseCo” means XXXXXXXXXX , a corporation incorporated under the laws of XXXXXXXXXX and described in paragraph 6 below;
“Qualifying Transaction” has the meaning assigned to this term by XXXXXXXXXX; and
“taxable Canadian corporation” has the meaning assigned to this term by subsection 89(1) of the Act.
Our understanding of the facts, the proposed transactions and the purpose of the proposed transactions is as follows:
1. The Corporation was incorporated under the Canada Business Corporations Act and is both a taxable Canadian corporation as well as a public corporation. The Corporation is a XXXXXXXXXX company XXXXXXXXXX . The Corporation’s registered office is located at XXXXXXXXXX . The Corporation’s business number is XXXXXXXXXX . It is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.
2. The Corporation’s share capital consists of approximately XXXXXXXXXX issued and outstanding common shares as of XXXXXXXXXX . The PUC of the common shares was $ XXXXXXXXXX as of XXXXXXXXXX . XXXXXXXXXX.
3. The business operations of the Corporation in XXXXXXXXXX involve the XXXXXXXXXX . The Corporation’s XXXXXXXXXX operations focus on XXXXXXXXXX .
4. The Properties represent all or substantially all of the assets of the Corporation used in its active business involving XXXXXXXXXX carried on in XXXXXXXXXX . The Properties have a fair market value of $XXXXXXXXXX .
6. PurchaseCo is a corporation established under the laws of XXXXXXXXXX , having its registered office at XXXXXXXXXX . It is a capital pool company and a public corporation with its common shares listed on the XXXXXXXXXX .
7. The Corporation incorporated a wholly-owned subsidiary under the Canada Business Corporations Act (“Newco”). The authorized share capital of Newco consists of an unlimited number of common shares.
8. The Corporation transferred the Properties to Newco and received, as consideration, common shares of Newco.
In respect of the transfers of the Properties, the Corporation and Newco jointly elected, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply. XXXXXXXXXX. The agreed amount did not exceed the FMV of the Properties and it was not less than the amount permitted under paragraph 85(1)(b).
9. On XXXXXXXXXX , the Corporation sold the common shares of Newco to PurchaseCo at fair market value and, as consideration, PurchaseCo issued XXXXXXXXXX common shares and XXXXXXXXXX special warrants to the Corporation.
10. The Corporation will hold an annual general meeting at which time its shareholders will be asked to approve a reduction of the stated capital of its common shares in accordance with the Canada Business Corporations Act, consideration for which will be paid by way of distribution of XXXXXXXXXX common shares of PurchaseCo (pro-rata to the shareholdings of the Corporation).
11. In XXXXXXXXXX , as part of its overall plan for reorganizing its business, the Corporation will distribute to its shareholders XXXXXXXXXX common shares of PurchaseCo.
PURPOSE OF PROPOSED TRANSACTIONS
12. The Corporation wishes to separate its XXXXXXXXXX operations by selling its XXXXXXXXXX Properties located in XXXXXXXXXX to PurchaseCo as a Qualifying Transaction in exchange for shares of the capital stock of PurchaseCo.
13. The issuance of the warrants is required to ensure that PurchaseCo complies at all times with the requirements of XXXXXXXXXX .
14. The distribution of shares will occur in XXXXXXXXXX because of certain securities regulation restrictions, including the requirement that the Corporation’s shareholders vote on the proposed distribution at a shareholder’s meeting.
15. The amount of the distribution will not exceed the PUC of the common shares of the Corporation that is in respect of share issuances for cash only.
16. The proposed reduction in the issued and paid-up share capital of the Corporation’s common shares has not been preceded by an increase in the PUC of that class that has resulted in a dividend in respect of which the Corporation elected to treat as having been paid out of the Corporation’s XXXXXXXXXX capital surplus on hand.
17. The reduction of its issued and paid-up capital share account and the distribution by the Corporation is a one-time transaction, and is not being made in lieu of ordinary course dividends.
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions we rule as follows:
A. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to the distribution made by the Corporation in respect of the reduction in the PUC of its common shares, such that the Corporation will only be deemed to have paid, and each of the holders of the Corporation’s common shares will be deemed to have received, a dividend only to the extent, if any, that the amount so distributed by the Corporation to each particular holder on the reduction exceeds the amount by which the PUC in respect of such shares is reduced on the distribution.
B. Where a taxpayer holds the Corporation’s common shares as capital property, the amount received by the taxpayer on the reduction of the PUC of the common shares held by the taxpayer, will be deducted in computing the ACB of the common shares held by that taxpayer by virtue of subparagraph 53(2)(a)(ii) to the extent that the amount received or such portion thereof is not otherwise deemed by subsection 84(2) to be a dividend received by such taxpayer. To the extent that the amount received by the taxpayer exceeds the ACB of the Corporation’s common shares held by the taxpayer, the taxpayer will be deemed to have a capital gain pursuant to subsection 40(3).
The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX .
Except as expressly stated, these rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming either expressly or implicitly:
a. the reasonableness of any amount;
b. whether the Properties that were transferred are Canadian resource property;
c. the balance of the CCDE;
d. that a valid election under subsection 85(1) has been made or has been accepted by the Canada Revenue Agency;
e. the tax consequences of the transaction described in paragraph 9 above;
f. the PUC of any share or the ACB or FMV of any property referred to herein; or
g. any other tax consequences relating to the facts or proposed transactions other than those specifically described in the rulings given above.
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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