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: Post Mortem Planning.
Position: Favourable rulings provided.
Reasons: Meets the requirements of the law and in accordance with previous positions.
XXXXXXXXXX 2012-045622
XXXXXXXXXX, 2012
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling 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 by XXXXXXXXXX in the e-mails of XXXXXXXXXX, and during various telephone conversations in connection with your ruling request (XXXXXXXXXX).
We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues described 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 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.
Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.
Throughout this letter, except in Paragraph 45, the corporate and individual taxpayers will be referred to as follows:
(a) "Amalco" means a company formed on the amalgamation of Holdco and Newco 1, and is more particularly described at Paragraph 37 hereof;
(b) "Holdco" means XXXXXXXXXX, a corporation incorporated under the Canada Business Corporations Act;
(c) XXXXXXXXXX;
(d) "Newco 1" means XXXXXXXXXX, an unlimited liability company incorporated under the Companies Act (XXXXXXXXXX);
(e) "Newco 2" means XXXXXXXXXX, an unlimited liability company incorporated under the Companies Act (XXXXXXXXXX);
(f) "Trust" means the XXXXXXXXXX.
DEFINITIONS
In this letter, unless otherwise noted, the following terms have the meaning specified herein:
(a) "ACB" has the meaning assigned to the expression "adjusted cost base" in section 54;
(b) "Act" means the Income Tax Act (Canada), 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 to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act;
(c) "agreed amount" has the meaning assigned by subsection 85(1);
(d) "CCPC" has the meaning assigned to the expression "Canadian-controlled private corporation" in subsection 125(7);
(e) "CDA" has the meaning assigned to the expression "capital dividend account" in subsection 89(1);
(f) "CRA" means the Canada Revenue Agency;
(g) "dividend refund" has the meaning assigned to that expression in subsection 129(1);
(h) "eligible dividend" has the meaning assigned by subsection 89(1);
(i) "FMV" means fair market value;
(j) "GRIP" has the meaning assigned to the expression "general rate income pool" in subsection 89(1);
(k) "Paragraph" refers to a numbered paragraph in this letter;
(l) "Proposed Transactions" means the transactions described in Paragraphs 21 to 44;
(m) "PUC" has the meaning assigned to the expression "paid-up capital" in subsection 89(1);
(n) "RDTOH" means "refundable dividend tax on hand" within the meaning assigned by subsection 129(3);
(o) "V-Day basis" means the amount determined under paragraph 84.1(2)(a.1) for the purposes of "B" of paragraph 84.1(1)(a).
FACTS
1. The Trust was created under the Last Will and Testament of XXXXXXXXXX executed on XXXXXXXXXX for the benefit of XXXXXXXXXX, and has a year end of XXXXXXXXXX.
2. The Trust is a spousal trust that satisfied the requirements of subsection 70(6) and is a testamentary trust as defined in subsection 108(1).
3. The Trust is a resident of XXXXXXXXXX.
4. Following XXXXXXXXXX's death, the assets of the Trust are to be held for the benefit of XXXXXXXXXX's XXXXXXXXXX children, XXXXXXXXXX of whom are residents of the U.S. (the "U.S. Beneficiaries") and the remaining beneficiary is a resident of Canada (the "Cdn Beneficiary").
5. XXXXXXXXXX died on XXXXXXXXXX.
6. For legal purposes, the Trust still exists after XXXXXXXXXX's death and will continue to exist for the period required to carry out the Proposed Transactions described herein.
7. As of XXXXXXXXXX, the Trust had approximately $XXXXXXXXXX in capital losses carried forward.
8. On XXXXXXXXXX's death, the Trust's main asset was XXXXXXXXXX common shares of the capital stock of Holdco, representing XXXXXXXXXX% of the issued and outstanding shares.
9. Holdco is a taxable Canadian corporation that is a CCPC, and has a year end of XXXXXXXXXX.
10. Immediately prior to XXXXXXXXXX's death, the Trust's shares of the capital stock of Holdco had a PUC of $XXXXXXXXXX and an ACB of $XXXXXXXXXX. Forming part of the $XXXXXXXXXX of ACB is $XXXXXXXXXX of V-Day basis.
11. As a result of XXXXXXXXXX's death, the Trust was deemed to dispose of its shares of the capital stock of Holdco for proceeds equal to FMV on the date of death and reacquire such shares at an ACB equal to such FMV pursuant to paragraph 104(4)(a). Accordingly, the ACB of the Trust's shares of the capital stock of Holdco increased to equal the FMV of Holdco as at XXXXXXXXXX. This amount has been estimated to be $XXXXXXXXXX (which included an RDTOH balance of $XXXXXXXXXX).
12. As at XXXXXXXXXX, the FMV of the Trust's shares of the capital stock of Holdco was estimated to be $XXXXXXXXXX (which includes an RDTOH balance of $XXXXXXXXXX).
13. As at XXXXXXXXXX, Holdco had the following tax attributes:
CDA: XXXXXXXXXX approximately XXXXXXXXXX.
GRIP: approximately XXXXXXXXXX.
14. As at XXXXXXXXXX, Holdco had approximately $XXXXXXXXXX and $XXXXXXXXXX in capital losses and non-capital losses carried forward, respectively.
15. Holdco has appealed the recent assessment by the CRA regarding the application of XXXXXXXXXX to Holdco's XXXXXXXXXX and XXXXXXXXXX taxation years.
16. Holdco is an investment company the assets of which consist primarily of equities and bonds (the "Investments") having a FMV as at XXXXXXXXXX of $XXXXXXXXXX and an ACB of $XXXXXXXXXX. An investment committee meets regularly to XXXXXXXXXX. In the past XXXXXXXXXX years, any activities of Holdco and its subsidiaries (i.e. XXXXXXXXXX) were solely investment activities.
17. Newco 1 is a taxable Canadian corporation that is a CCPC, and has a year end of XXXXXXXXXX. Newco 1 was incorporated on XXXXXXXXXX as a wholly-owned subsidiary of the Trust. Following such incorporation, the issued and outstanding capital of Newco 1 consisted of XXXXXXXXXX common shares. Newco 1 was incorporated as an unlimited liability company in order for any transactions involving Newco 1 and the Trust to be ignored for U.S. income tax purposes.
18. On XXXXXXXXXX, the Trust transferred XXXXXXXXXX of its XXXXXXXXXX common shares of the capital stock of Holdco to Newco 1 in exchange for XXXXXXXXXX common shares of the capital stock of Newco 1 having a FMV of $XXXXXXXXXX.
The Trust and Newco 1 will elect, jointly, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to such transfer so that the amount agreed upon in such election will be equal to the lesser of the ACB and the FMV of such property to the Trust immediately before the transfer. If the ACB is greater than the FMV at the time of this transfer, the capital loss arising on the disposition will be suspended under subsection 40(3.4).
The increase to the stated capital of the XXXXXXXXXX common shares issued by Newco 1 will not exceed the maximum amount that could be added to the PUC of such shares, having regard to paragraph 84.1(1)(a).
19. From XXXXXXXXXX to early XXXXXXXXXX it is expected that Holdco will have approximately $XXXXXXXXXX invested in assets managed in the manner described in Paragraph 16. After the Proposed Transaction described in Paragraph 26, Holdco should have approximately $XXXXXXXXXX of assets to be invested and a dividend refund receivable of $XXXXXXXXXX which will be invested once received. All of these above funds will be invested by Holdco until the Proposed Transactions described in Paragraphs 37 to 40 are implemented. After the Proposed Transaction described in Paragraph 31, Holdco will have a $XXXXXXXXXX receivable from Newco 1 and Newco 1 will be investing approximately $XXXXXXXXXX of these funds until XXXXXXXXXX. Throughout the period from XXXXXXXXXX to the Proposed Transaction described in Paragraph 37, Holdco and Newco 1 will have funds invested in a manner consistent with the guidelines of the investment committee.
20. Newco 2 is a taxable Canadian corporation that is a CCPC, and has a year end of XXXXXXXXXX. Newco 2 was incorporated on XXXXXXXXXX as a wholly-owned subsidiary of the Trust. The issued and outstanding capital of Newco 2 consists of XXXXXXXXXX common shares. Newco 2 was incorporated as an unlimited liability company in order for any transactions involving Newco 2 and the Trust to be ignored for U.S. income tax purposes.
PROPOSED TRANSACTIONS
21. On or before XXXXXXXXXX, and prior to any of the subsequent Proposed Transactions set out herein, Holdco will adopt a "Plan of Liquidation" encompassing all of the Proposed Transactions set out herein. Provided all distributions made directly or indirectly from Holdco are made pursuant to the Plan of Liquidation, such distributions should be taxed as capital proceeds for U.S. income tax purposes to the U.S. Beneficiaries, which receive capital gain treatment in the United States, rather than as dividends, which may be taxed at a higher rate in the United States.
22. The Plan of Liquidation may be modified or amended by the directors of Holdco. In addition, notwithstanding the Plan of Liquidation, each of the Proposed Transactions described herein will require separate approval by the directors and/or shareholders of Holdco under the Canada Business Corporations Act.
23. On or before XXXXXXXXXX, the PUC of Holdco's common shares will be reduced from $XXXXXXXXXX to nil. $XXXXXXXXXX of such PUC reduction will be distributed to Newco 1, and $XXXXXXXXXX of such PUC reduction will be distributed to the Trust.
24. Immediately thereafter, the PUC of the Newco 1 shares held by the Trust will be reduced by $XXXXXXXXXX.
25. Following the PUC reductions and on or before XXXXXXXXXX, the Trust will transfer the proportion of its common shares of the capital stock of Holdco having a total FMV of approximately $XXXXXXXXXX to Newco 2 in exchange for XXXXXXXXXX common shares of the capital stock of Newco 2.
The Trust and Newco 2 will elect, jointly, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to such transfer so that the amount agreed upon in such election will be equal to the lesser of the ACB or the FMV of the shares of such property to the Trust immediately before the transfer. If the ACB is greater than the FMV at the time of this transfer, the capital loss arising on the disposition will be suspended under subsection 40(3.4).
Newco 2 will credit to its capital account maintained or deemed to be maintained for the common shares of its share capital a nominal amount, in accordance with subsection XXXXXXXXXX of the Companies Act (XXXXXXXXXX).
26. Immediately after the preceding Proposed Transaction and on or before XXXXXXXXXX, Holdco will purchase for cancellation all of its common shares held by Newco 2 for an amount equal to their FMV payable in cash to Newco 2. Investments of Holdco will be sold to fund this purchase for cancellation.
The purchase for cancellation by Holdco of the shares of its capital held by Newco 2 will give rise to a taxable deemed dividend pursuant to subsection 84(3). This deemed dividend will be deducted by Newco 2 under subsection 112(1), and subsection 112(3) will apply to reduce Newco 2's loss on the disposition of the Holdco shares to nil. Holdco will not make an eligible dividend designation in respect of such dividend under subsection 89(14).
The deemed dividend will give rise to a dividend refund to Holdco pursuant to subsection 129(1) equal to the lesser of one-third of the taxable dividend and Holdco's RDTOH at the end of the year (i.e., XXXXXXXXXX). Such dividend refund will be refunded following the filing of its income tax return as described in Paragraph 34 below.
27. Immediately after the purchase for cancellation by Holdco of the shares of its capital held by Newco 2 and on or before XXXXXXXXXX, Newco 2 will enter into a winding-up agreement with the Trust whereby it will distribute to the Trust the cash received on the purchase for cancellation of the shares by Holdco. Pursuant to the winding-up agreement (a) the debts, obligations and liabilities of Newco 2 will be extinguished or provided for; and (b) after the interests of all of the creditors have been satisfied, all of the remaining property of Newco 2 will be distributed to its shareholder.
On the winding-up of Newco 2, a dividend will be deemed to be paid by Newco 2 to the Trust pursuant to subsection 84(2). This deemed dividend will give rise to a dividend refund to Newco 2 pursuant to paragraph 129(1)(a), which will offset any Part IV tax liability of Newco 2 pursuant to paragraph 186(1)(b) triggered on the deemed dividend from Holdco to Newco 2 discussed in Paragraph 26 above.
Newco 2 will be dissolved within a short period of time after the winding-up resolution is passed. Newco 2 will file articles of dissolution with the appropriate Corporate Registry after the winding-up resolution is passed. Upon receipt of the articles of dissolution, a certificate of dissolution will be issued. Newco 2 will cease to exist on the date shown on the certificate of dissolution.
28. Subject to the application of subsection 112(3.2), the capital loss to the Trust on the disposition of the shares of the capital stock of Newco 2 on its winding-up will reduce the capital gain realized by the Trust on the deemed disposition of the shares of the capital stock of Holdco described in Paragraph 11.
29. The trustees of the Trust will pass a resolution to distribute the deemed dividend received by the Trust to the U.S. Beneficiaries equally on or before XXXXXXXXXX, and will be subject to a 25% withholding tax under paragraph 212(1)(c), which is reduced to 15% pursuant to Article XXII(2) of the Canada U.S. Income Tax Convention (the "Treaty"). This withholding tax will be due XXXXXXXXXX. The amount distributed by the Trust to the U.S. Beneficiaries will be deducted in computing the Trust's income under subsection 104(6).
30. The trustees of the Trust will pass a resolution to distribute its cash on hand arising from the tax withheld in the immediately preceding Proposed Transaction and the $XXXXXXXXXX received as a result of the PUC reduction described above in Paragraphs 23 and 24 to the Cdn Beneficiary on or before XXXXXXXXXX.
31. On or about XXXXXXXXXX, Holdco will loan $XXXXXXXXXX to Newco 1 (the "Holdco Note"). The Holdco Note will bear interest at a commercial rate until at least XXXXXXXXXX. The terms of the Holdco Note will include that it is due XXXXXXXXXX days after demand but otherwise becomes due on XXXXXXXXXX. At XXXXXXXXXX (but not before) Holdco and Newco 1 may renegotiate the terms of the Holdco Note such that the Holdco Note is no longer interest bearing after that date. If this occurs, any unpaid and accrued interest will be capitalized thereto.
32. On or about XXXXXXXXXX, Newco 1 will loan approximately $XXXXXXXXXX to the Trust (the "Newco 1 Note"). The Newco 1 Note will bear interest at a commercial rate similar to the Holdco Note. The interest incurred by the Trust on the Newco 1 Note will not be deducted by the Trust. The Trust will use a portion of the Newco 1 Note to pay the withholding tax liability referred to in Paragraph 29 above on or before XXXXXXXXXX. The Trust will use the remainder of the Newco 1 Note to make a distribution to the Cdn Beneficiary in order to equalize the total distribution to the Cdn Beneficiary with the gross amount distributed by the Trust to each of the U.S. Beneficiaries. Newco 1 will continue to invest the remainder of the funds received from Holdco in the same manner as described in Paragraph 35.
33. On or about XXXXXXXXXX, Newco 1 will loan approximately $XXXXXXXXXX to the Trust (the "Tax Liability Note", which together with the Newco 1 Note is herein referred to as the "Newco 1 Indebtedness"). The Tax Liability Note will bear interest at a commercial rate similar to the Holdco Note. The interest incurred by the Trust on the Tax Liability Note will not be deducted by the Trust. The Trust will use the funds received to fund its income tax liability resulting from the deemed disposition of the Holdco shares (after application of the capital loss described in Paragraph 28 above).
34. On or before XXXXXXXXXX, Holdco will file its income tax return for its year ending XXXXXXXXXX.
35. Until the time of its amalgamation described in Paragraph 37, Holdco will continue to invest the majority of its investment assets according to the guidelines developed by the investment committee. The investment committee will continue during such time to meet regularly to XXXXXXXXXX. Throughout the period from XXXXXXXXXX to the time of its amalgamation, Holdco will hold between $XXXXXXXXXX and $XXXXXXXXXX of portfolio investments (subject to market fluctuations). A portion of its investments will be represented by the Holdco Note, as well as dividend refunds receivable upon the filing of its XXXXXXXXXX tax return in Paragraph 34 (approximately $XXXXXXXXXX). When funds are received from the dividend refund, those funds will be invested in the same manner as described above.
36. On or about XXXXXXXXXX, Newco 1 will reduce the PUC of its shares held by the Trust by $XXXXXXXXXX payable by way of a distribution of $XXXXXXXXXX of the Newco 1 Indebtedness, which will result in the reduction of the Newco 1 Indebtedness by the same amount.
On or about XXXXXXXXXX, Newco 1 will reduce the PUC of its shares held by the Trust by $XXXXXXXXXX payable by way of a distribution of $XXXXXXXXXX of the Newco 1 Indebtedness, which will result in the reduction of the Newco 1 Indebtedness by the same amount.
On or about XXXXXXXXXX, Newco 1 or Amalco, as the case may be, will reduce the PUC of its shares held by the Trust by $XXXXXXXXXX payable by way of a distribution of $XXXXXXXXXX of the Newco 1 Indebtedness, which will result in the reduction of the Newco 1 Indebtedness by the same amount.
After the PUC reductions and the related reductions in the Newco 1 Indebtedness, the balance of the Newco 1 Indebtedness will be $XXXXXXXXXX.
37. After XXXXXXXXXX and on or before XXXXXXXXXX, Newco 1 and Holdco will be amalgamated to form Amalco. This amalgamation will take place shortly after receipt of a final clearance certificate or comfort letter regarding Holdco and the Trust from the CRA with respect to distributions referred to in Paragraphs 38, 42, and 43. Prior to the amalgamation, Holdco will be continued under the laws of the Province of XXXXXXXXXX. Amalco may select an earlier taxation year end in order to facilitate the filing for a dividend refund on the winding-up described in Paragraph 38 below. Subsection 80.01(3) will apply to the amalgamation of Newco 1 and Holdco with respect to the Holdco Note.
38. Immediately after the amalgamation, Amalco will resolve to wind up and will distribute its assets to the Trust. Pursuant to the winding-up agreement (a) the debts, obligations and liabilities of Amalco will be extinguished or provided for; and (b) after the interests of all of the creditors have been satisfied, all of the remaining property of Amalco will be distributed to its shareholder.
On the winding-up of Amalco, a dividend will be deemed to be paid by Amalco to the Trust pursuant to subsection 84(2). Amalco may make an eligible dividend designation in respect of a portion of such dividend under subsection 89(14). This deemed dividend will give rise to a dividend refund at Amalco's level pursuant to subsection 129(1).
39. As part of the winding-up process, the Newco 1 Indebtedness will be settled for consideration equal to the amount of the Newco 1 Indebtedness.
40. In due course, Amalco will file tax returns, and, after the receipt of any dividend refund or other tax related refunds, Amalco will file articles of dissolution with the appropriate Corporate Registry within a short period of time after the receipt of any dividend refund or other tax related refunds. Upon receipt of the articles of dissolution, a certificate of dissolution will be issued. Amalco will cease to exist on the date shown on the certificate of dissolution.
41. Subject to the application of subsection 112(3.3), the capital loss (including any losses that will be "unsuspended") to the Trust on the disposition of the shares of the capital stock of Amalco on its winding-up and dissolution will be carried back under paragraph 111(1)(b) by the Trust to reduce the capital gain realized by the Trust on the deemed disposition of the shares of the capital stock of Holdco described in Paragraph 11 above by such amount. Such loss carryback will give rise to an income tax refund to the Trust.
42. The trustees of the Trust will pass a resolution to distribute the deemed dividend received by the Trust on the winding-up of Amalco to the U.S. Beneficiaries net of 25% withholding tax pursuant to paragraph 212(1)(c) which is reduced to 15% under Article XXII(2) of the Treaty. Accordingly, the Trust will withhold tax from such payment, which withholding tax will be on the 15th of the month following the month the funds are distributed to the U.S. Beneficiaries. The amount distributed by the Trust to the U.S. Beneficiaries will be deducted in computing the Trust's income under subsection 104(6).
43. The trustees of the Trust will pass a resolution to distribute the balance of the assets distributed to the Trust on the winding-up of Amalco to the Cdn Beneficiary in satisfaction of the Cdn Beneficiary's capital interest in the Trust. To the extent that a portion of the Cdn Beneficiary's capital interest to be distributed can reasonably be considered to relate to a deemed taxable dividend received by the Trust (whether an eligible dividend or non eligible dividend), the trustees will pass a resolution for all or a portion of the balance to be distributed as an eligible dividend to the extent of eligible dividends received by the Trust in Paragraph 38 and as a non-eligible dividend for any remainder. A designation will be made pursuant to subsection 104(19) with respect to any eligible or non-eligible dividend such that any such dividends will be deemed to be received by the Cdn Beneficiary.
44. Any capital gains realized by Amalco on the deemed disposition of its assets on the winding-up will be offset by loss carry-forwards in Holdco. To the extent there is any positive balance in the CDA account, same may be distributed to the Cdn Beneficiary.
45. The federal business number of the parties referred to herein, the location of the tax services office and taxation centre where their returns are filed, and the address of their head office are as follows:
XXXXXXXXXX:
Business Number: XXXXXXXXXX
Tax Services Office: XXXXXXXXXX
Tax Centre: XXXXXXXXXX
Address : XXXXXXXXXX
XXXXXXXXXX:
Business Number: XXXXXXXXXX
Tax Services Office: XXXXXXXXXX
Tax Centre: XXXXXXXXXX
Address: XXXXXXXXXX
XXXXXXXXXX:
Business Number: XXXXXXXXXX
Tax Services Office: XXXXXXXXXX
Tax Centre: XXXXXXXXXX
Address: XXXXXXXXXX
XXXXXXXXXX:
Trust Account Number: XXXXXXXXXX
XXXXXXXXXX
Tax Services Office: XXXXXXXXXX
Tax Centre: XXXXXXXXXX
Address: XXXXXXXXXX
PURPOSES OF THE PROPOSED TRANSACTIONS
The purpose of the transaction implemented in Paragraph 18 and the Proposed Transactions described in Paragraphs 31 to 33, 36, 37 and 39 (the "Newco 1 Transactions") is to create a "pipeline" in order to allow for the distribution of funds from Holdco to the Trust and thereafter to the Cdn Beneficiary (over and above the return of PUC described in Paragraph 30).
The purpose of the Proposed Transactions set out in Paragraphs 25 to 29 above (the "Newco 2 Transactions") is to create a capital loss with respect to funds distributed to the U.S. Beneficiaries, which will reduce the capital gains tax payable by the Trust on the death of XXXXXXXXXX pursuant to paragraph 104(4)(a), as well as to trigger refunds of RDTOH.
The purpose of the Proposed Transactions set out in Paragraphs 38 and 41 above is to create a capital loss which will reduce the capital gains tax payable by the Trust on the death of XXXXXXXXXX pursuant to paragraph 104(4)(a), as well as to trigger refunds of RDTOH.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant Facts, Proposed Transactions, Additional Information and the Purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:
A. Subsection 84(2) will not apply to deem the Trust to have received a dividend from Holdco or Amalco as a result of the transaction described in Paragraph 18 and the Proposed Transactions described in paragraphs 31 to 33, 36, 37 and 39.
B. The provisions of subsection 69(5) will be applicable to the winding-up of Newco 2.
C. A disposition of the Trust's shares of the capital stock of Newco 2 will occur in the Trust's period ended XXXXXXXXXX by virtue of the winding-up of Newco 2 as described in Paragraph 27 notwithstanding the fact that articles of dissolution will not have been received on or before XXXXXXXXXX.
D. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not apply as a result of the Proposed Transactions described herein, in and by themselves.
E. As a result of the Proposed Transactions, in and by themselves, subsection 245(2) will not be applied to re-determine the tax consequences confirmed in the rulings given.
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 are completed before XXXXXXXXXX.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.
The Notice of Ways and Means Motion to amend the Income Tax Act, the Excise Tax Act and related legislation dated October 24, 2012, which was incorporated in Bill C-48, An Act to amend the Income Tax Act, the Excise Tax Act, the Federal-Provincial Fiscal Arrangements Act, the First Nations Goods and Services Tax Act and related legislation, reintroduced legislation to change the definition of testamentary trust in subsection 108(1). Subject to certain limited exceptions, if enacted as proposed under new paragraph (d) of the definition, a trust ceases to be testamentary if, at any time after December 20, 2002 and before the end of the trust's taxation year it incurs an obligation to a "specified party" or if the specified party guarantees any obligation of the trust. A "specified party" is any beneficiary of the trust or any person or partnership not dealing at arm's length with such beneficiary. Where such a non-arm's length obligation is incurred by a trust, proposed subsection 249(6) provides that the taxation year of the trust or estate that would otherwise have included the particular time at which the obligation was incurred, will be deemed to have ended immediately before that particular time. Except where paragraph 251(1)(a) or (b) applies, it is a question of fact whether two entities are dealing with each other at arm's length at a particular time. The CRA has not confirmed whether any of the relationships among the parties to this ruling are at arm's length for purposes of determining whether or not the loans proposed in Paragraphs 32 and 33 would have any effect on the status of the Trust as a testamentary trust. Note however that, as paragraph 24 of IT-419R2 "Meaning of Arm's Length" indicates, "even when there are two distinct parties (or minds) to a transaction, but these parties act in a highly interdependent manner (in respect of a transaction of mutual interest), then it can be assumed that the parties are acting in concert and therefore are not dealing with each other at arm's length." Given that all corporations named in the Proposed Transactions are closely held and all transactions are being undertaken for the benefit of the beneficiaries of the Trust, it is possible that Newco1, Amalco, and the beneficiaries are not dealing with each other at arm's length. Therefore, provided the draft legislation is enacted as proposed, the Trust may cease to be a testamentary trust as a result of the loans proposed in Paragraphs 32 and 33.
Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed:
a) the determination of the FMV or ACB of any property referred to herein or the PUC in respect of any share referred to herein;
b) the determination of the outstanding balance of various tax accounts such as GRIP, RDTOH and CDA for any of the corporate entities described herein;
c) the amount of any non-capital loss or net capital loss of any entities referred to herein; or
d) any provincial tax consequences of the Proposed Transactions.
Furthermore, except as expressly stated, the rulings provided herein do not imply acceptance, approval or confirmation of any other income tax implications of facts or Proposed Transactions described herein. For greater certainty, the CRA has not agreed to or ruled on the determination of whether any relationships among the parties referred to herein are at arm's length.
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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