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 Pipeline Planning
Position: Favourable rulings provided.
Reasons: In accordance with the provisions of the Act and our previous positions.
XXXXXXXXXX
2013-050361
XXXXXXXXXX, 2014
Dear Sir,
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 XXXXXXXXXX (hereinafter "Spousal Trust"). We also acknowledge the information provided in your numerous emails and during our various telephone conversations (XXXXXXXXXX).
We understand that to the best of your knowledge and that of Spousal Trust and the taxpayers involved, none of the issues described herein:
(i) is in an earlier return of Spousal Trust or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of Spousal Trust or a related person;
(iii) is under objection by Spousal Trust or a related person;
(iv) is before the courts or, if a judgement has been issued, the time limit for the appeal to a higher court has expired; and
(v) is the subject of a ruling previously considered by the Income Tax Rulings Directorate.
Unless otherwise noted, all references herein to sections or components thereof are references to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, or the Income Tax Regulations, C.R.C., c. 945, as appropriate, and all references to monetary amounts are in Canadian dollars.
Throughout this letter, except in Paragraph 41, the entities mentioned in this letter will be referred to as follows:
"A" refers to XXXXXXXXXX;
"Amalco" refers to the corporation formed on the amalgamation of Holdco and Newco;
"B" refers to XXXXXXXXXX, wife of A;
"C" refers to XXXXXXXXXX, son of A and B; and brother of D;
"D" refers to XXXXXXXXXX, daughter of A and B; and sister of C;
"E" refers to the XXXXXXXXXX;
"F" refers to XXXXXXXXXX;
"Holdco" refers to XXXXXXXXXX;
"Newco" refers to XXXXXXXXXX;
"Spousal Trust" refers to the testamentary trust created under the last will and testament of A for the exclusive benefit of B that complied with the requirements of paragraph 70(6)(b);
"Trust C" refers to an inter vivos trust created for the benefit of C, his issue and any corporation controlled by a person at that time when he or she is a beneficiary but shall not include any individual while he or she is under the age of XXXXXXXXXX. C and F are the trustees of Trust C;
"Trust D" refers to an inter vivos trust created for the benefit of D, her issue and any corporation controlled by a person at that time when he or she is a beneficiary but shall not include any individual while he or she is under the age of XXXXXXXXXX. C and F are the trustees of Trust D;
"Trustees" means the trustees of Spousal Trust, being C and E.
DEFINITIONS
Unless otherwise noted, the following terms have the meanings ascribed to them below:
(a) "Adjusted cost base"or "ACB" has the meaning assigned to that term in section 54;
(b) "Agreed amount" means the amount agreed on by the transferor and transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1);
(c) "Canadian-controlled private corporation" or "CCPC" has the meaning assigned to that term in subsection 125(7);
(d) "Capital dividend account" or "CDA" has the meaning assigned to that term in subsection 89(1);
(e) "Capital property" has the meaning assigned to that term in section 54;
(f) "Class "A" Shares" means the Class A preferred shares of the capital stock of Holdco, which are non-voting, non-participating, entitling the holder to discretionary non-cumulative dividends, with a redemption value of $XXXXXXXXXX per share. The Class "A" Shares are both redeemable and retractable;
(g) "Class "B" Shares" means Class B preferred shares of the capital stock of Holdco, which are voting, non-participating, entitling the holder to discretionary non-cumulative dividends, with a redemption value equal to the amount paid thereon. The Class "B" Shares are both redeemable and retractable;
(h) "Cost amount" has the meaning assigned to that term in subsection 248(1);
(i) "CRA" means the Canada Revenue Agency;
(j) "Fair market value" or "FMV" means the highest price expressed in terms of money or money's worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact;
(k) "General rate income pool" or "GRIP" has the meaning assigned to that term in subsection 89(1);
(l) "Holdco Debt" means the non-interest-bearing obligation of Holdco to Spousal Trust as described in Paragraph 17;
(m) "Marketable Securities" means the diversified portfolio of investment property held by Holdco that includes cash and cash equivalents, shares of public corporations and units in mutual fund trusts;
(n) "Newco Note" means the non-interest-bearing and no set terms of repayment promissory note of Newco to Spousal Trust as described in Paragraph 31;
(o) XXXXXXXXXX;
(p) "Paid-up capital" or "PUC" has the meaning assigned to that term in subsection 89(1);
(q) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;
(r) "Proposed Transactions" means the proposed transactions which are described in Paragraphs 28 to 40 inclusively;
(s) "Qualified small business corporation shares" has the meaning assigned to that term in subsection 110.6(1);
(t) "Refundable dividend tax on hand" or "RDTOH" has the meaning assigned to that term in subsection 129(3);
(u) "Taxable Canadian corporation" or "TCC" has the meaning assigned to that term in subsection 89(1);
FACTS
A
1. Prior to his death, A held one common share of the capital stock of Holdco being Holdco's only outstanding share. A held de jure control of Holdco prior to his death.
The above-mentioned common share, together with a note had been issued to A by Holdco shortly before his death in consideration for the transfer by A of marketable securities to which the rules in subsection 85(1) applied to such transfer.
2. A passed away on XXXXXXXXXX.
3. Under the last will and testament of A executed on XXXXXXXXXX, the residue of A's estate (which included the common share of the capital stock of Holdco and the note referred to in Paragraph 1) was to be held by Spousal Trust.
4. A was deemed, pursuant to paragraph 70(6)(d), to have disposed of his common share of the capital stock of Holdco immediately before his death and to have received proceeds of disposition equal to the ACB to him of such share, being $XXXXXXXXXX, immediately before his death.
Spousal Trust
5. Spousal Trust was deemed, pursuant to paragraph 70(6)(d) to have acquired the common share of the capital stock of Holdco for an amount equal to the proceeds of disposition stated in Paragraph 4.
6. Spousal Trust's year-end is XXXXXXXXXX.
7. Following B's death, the assets of Spousal Trust are to be divided equally between C and a testamentary trust for the benefit of D.
8. For legal purposes, it is assumed that Spousal Trust will still exist after B's death and will continue to exist for the period required to carry out the Proposed Transactions described herein.
Holdco
9. Holdco was incorporated on XXXXXXXXXX under the XXXXXXXXXX and was at all relevant times and for all purposes of the Act a TCC and a CCPC. Holdco has a XXXXXXXXXX year-end.
10. Holdco is a holding corporation whose only activity is to hold the Marketable Securities.
11. On XXXXXXXXXX, in the course of a reorganization of the capital of Holdco to which the provisions of subsection 86(1) applied (hereinafter the "Estate Freeze"), Spousal Trust received XXXXXXXXXX Class "A" Shares in exchange for the common share of the capital stock of Holdco.
Spousal Trust subscribed for XXXXXXXXXX Class "B" Shares for a consideration of $XXXXXXXXXX.
Each of Trust C and Trust D subscribed for one new voting and participating common share of the capital stock of Holdco for a consideration of $XXXXXXXXXX.
12. On XXXXXXXXXX, a XXXXXXXXXX:XXXXXXXXXX stock split of the Class "A" Shares was accomplished after the Estate Freeze described in the preceding Paragraph.
13. On XXXXXXXXXX, XXXXXXXXXX Class "A" Shares were redeemed.
14. On XXXXXXXXXX, XXXXXXXXXX Class "A" Shares were redeemed, leaving Spousal Trust holding XXXXXXXXXX Class "A" Shares.
15. As at XXXXXXXXXX, Holdco's assets consist of, cash, accounts receivable, income tax receivable and the Marketable Securities.
As at XXXXXXXXXX, Holdco's liabilities consist of accounts payable and accruals and amounts due to related parties (which include the Holdco Debt).
Moreover, there will not be any material change in the composition of Holdco's assets or liabilities from the date of your letter of XXXXXXXXXX until the date the Proposed Transactions described herein are completed.
16. As at XXXXXXXXXX, the book value and FMV of Holdco's Marketable Securities is, respectively, $XXXXXXXXXX and $XXXXXXXXXX.
17. As at XXXXXXXXXX, the principal amount of the Holdco Debt is $XXXXXXXXXX.
18. Holdco has the following amounts in its tax accounts (estimated as of XXXXXXXXXX):
RDTOH -$XXXXXXXXXX;
GRIP $XXXXXXXXXX;
CDA - XXXXXXXXXX
The tax consequences resulting from B's death
19. Immediately prior to B's death, Spousal Trust held the Class "A" Shares, the Class "B" Shares and the Holdco Debt.
20. B passed away on XXXXXXXXXX.
21. As a result of B's death, Spousal Trust was deemed to dispose of its shares of the capital stock of Holdco for proceeds equal to FMV, being $XXXXXXXXXX and $XXXXXXXXXX, respectively, for the Class "A" Shares and the Class "B" Shares, on the date of B's death resulting in a capital gain of $XXXXXXXXXX and reacquire such shares at an amount equal to such FMV pursuant to paragraph 104(4)(a). Accordingly, the ACB to Spousal Trust of the Class "A" Shares and the Class "B" Shares increased to equal their FMV as at XXXXXXXXXX.
22. Holdco paid the income tax payable by Spousal Trust as a result of the deemed disposition mentioned in the preceding paragraph. The Holdco Debt was then reduced by the same amount.
23. As of the date hereof, the issued and outstanding shares of the capital stock of Holdco are as follows:
Shareholder Class Number of ACB PUC Redemption
of shares shares held $ $ value$
Spousal Trust Class “A” XXX XXX XXX XXX
Spousal Trust Class “B” XXX XXX XXX XXX
Trust C Common XXX XXX XXX N/A
Trust D Common XXX XXX XXX N/ANewco
24. Newco was incorporated on XXXXXXXXXX under the XXXXXXXXXX and is at all relevant times and for all purposes of the Act a TCC and a CCPC. Newco has a XXXXXXXXXX year-end.
25. Newco is inactive.
26. Newco's authorized share capital consists of voting and participating common shares.
27. Trust C owns 1 common share of the capital stock of Newco which has been subscribed for a consideration of $XXXXXXXXXX.
PROPOSED TRANSACTIONS
28. Trust D will subscribe for 1 common share of the capital stock of Newco for a consideration of $XXXXXXXXXX.
29. Newco will obtain articles of amendment to modify its share capital to authorize the issuance of XXXXXXXXXX preferred shares (hereinafter the "Newco Preferred Shares"). The Newco Preferred Shares will be voting, non-participating, entitling the holder to discretionary non-cumulative dividends, with a redemption value equal to the amount paid thereon. The Newco Preferred Shares will be both redeemable and retractable.
30. Spousal Trust will transfer the Class "B" Shares to Newco. Spousal Trust will receive as consideration the Newco Preferred Shares which will have a redemption value equal to the FMV of the Class "B" Shares transferred (being $XXXXXXXXXX).
Spousal Trust and Newco will each 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 the Class "B" Shares held by Spousal Trust to Newco. The Agreed amount in respect of the transfer will be equal to the ACB of the Class "B" Shares to Spousal Trust immediately before the transfer (being $XXXXXXXXXX). For greater certainty, the Agreed amount will not be less than the least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), being respectively the FMV of the Class "B" Shares immediately before the transfer and their ACB to Spousal Trust immediately before the transfer ($XXXXXXXXXX in each case).
Newco will add to the stated capital of the Newco Preferred Shares a nominal amount which, for greater certainty, will not exceed the PUC, immediately before the disposition, of Trust's Class "B" Shares (being $XXXXXXXXXX).
31. Spousal Trust will transfer its Class "A" Shares to Newco. Spousal Trust will receive as consideration the Newco Note issued by Newco having a principal amount equal to the FMV of the Class "A" shares as at the date of B's death (being $XXXXXXXXXX).
32. Trust C will transfer its common share of the capital stock of Holdco to Newco. Trust C will receive as consideration one common share of the capital stock of Newco with a FMV equal to the FMV of the common share of the capital stock of Holdco held at the date of transfer.
Trust C and Newco 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 the common share of the capital stock of Holdco held by Trust C to Newco. The Agreed amount in respect of the transfer will be equal to the ACB of the common share of the capital stock of Holdco to Trust C, immediately before the transfer (being $XXXXXXXXXX). For greater certainty, the Agreed amount will not be less than the least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), being respectively the FMV of the common share immediately before the transfer and its ACB to Trust C immediately before the transfer (being $XXXXXXXXXX).
Newco will add to the stated capital of the common share of the capital stock of Newco a nominal amount which, for greater certainty, will not exceed the PUC, immediately before the disposition, of Trust C's common share of the capital stock of Holdco (being $XXXXXXXXXX).
33. Trust D will transfer its common share of the capital stock of Holdco to Newco. Trust D will receive as consideration one common share of the capital stock of Newco with a FMV equal to the FMV of the common share of the capital stock of Holdco held at the date of transfer.
Trust D and Newco 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 the common share of the capital stock of Holdco held by Trust D to Newco. The Agreed amount in respect of the transfer will be equal to the ACB of the common share of the capital stock of Holdco to Trust D, immediately before the transfer (being $XXXXXXXXXX). For greater certainty, the Agreed amount will not be less than the least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), being respectively the FMV of the common share immediately before the transfer and its ACB to Trust C immediately before the transfer (being $XXXXXXXXXX).
Newco will add to the stated capital of the common share of the capital stock of Newco a nominal amount which, for greater certainty, will not exceed the PUC, immediately before the disposition, of Trust D's common share of the capital stock of Holdco (being $XXXXXXXXXX).
34. Holdco will not be amalgamated with or wound-up into Newco for a period of at least one year following the transfers of the shares of the capital stock of Holdco to Newco. During that year, Holdco's operations and business activities will continue in the same manner as before the death of B.
Also, during that year, Holdco and Newco may pay taxable dividends from the current year's earnings of either one or both of Holdco and Newco and, for greater certainty, these dividends would not be funded through a disposition of corporate assets or investments. Holdco and Newco may pay part or all of any debt (apart from the Newco Note) owing by them.
35. After at least one year has elapsed since the transfer of the shares of the capital stock of Holdco to Newco, Holdco and Newco will amalgamate pursuant to XXXXXXXXXX to form Amalco.
36. In accordance with subsection 87(1), all the property and all the liabilities of the predecessor corporations immediately before the amalgamation will become the property and liabilities of Amalco. In addition, all of the shareholders (except Newco) who owned shares of the capital stock of any predecessor corporation immediately before the amalgamation will receive shares in Amalco.
37. The authorized share capital of Amalco will be the same as Newco's authorized share capital.
38. Pursuant to subsection 87(11) and paragraph 88(1)(d) and within the limits of this provision, Amalco will designate an amount to increase the Cost amount of some or all of the Marketable Securities. The shares of the capital stock of Holdco will not be acquired by a person described in subclauses 88(1)(c)(vi)(B)(I), (II) or (III) as part of the series of transactions or events that includes the amalgamation of Holdco with Newco.
39. The Newco Note will be gradually repaid over a period of at least one year after the amalgamation date, but the amount of the repayments in any given quarter of that year will not exceed XXXXXXXXXX% of the principal amount of the Newco Note when it was issued.
While Amalco may sell some of the Marketable Securities in order to enable it to make the above-mentioned repayments of the Newco Note, it intends to continue carrying on its investment business with the remaining Marketable Securities left.
40. Once all debts and liabilities of Spousal Trust have been ascertained and settled, the Trustees will complete the administration of Spousal Trust and distribute the residue of its assets in accordance with the terms of X's will.
41. 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
PURPOSE OF THE PROPOSED TRANSACTIONS
42. The purpose of the Proposed Transactions is to return to Spousal Trust, an amount equal to the value of the Class "A" Shares immediately before B's death, while minimizing the inherent double tax exposure that can result from the application of paragraph 104(4)(a) which applied in these particular circumstances.
RULINGS GIVEN
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 and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:
A. Section 84.1 will not apply to deem Spousal Trust to have received a dividend from Newco, on the transfer of the Class "A" Shares held by Spousal Trust to Newco as described in Paragraph 31 provided that the Newco Note is issued for an amount not to exceed the FMV of the Class "A" Shares as at the date of B's death.
B. Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem Holdco to have paid, and Spousal Trust to have received, a dividend on the Class "A" Shares held by Spousal Trust.
C. The provisions of subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences stated in the rulings given above.
The above rulings are given 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, other than those described in Paragraphs 34 to 40, are completed before XXXXXXXXXX.
The above 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, could have an effect on the rulings provided herein.
Unless otherwise confirmed, nothing in this letter should be construed as implying that CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:
(a) the PUC of any share or the ACB or FMV of any property referred to herein;
(b) the balance of CDA, GRIP and RDTOH of any corporation; or
(c) any other tax consequence relating to the Facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above.
Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given 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 and issuance of shares. Furthermore, none of the rulings given in this letter are intended to apply to or in the event of the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, dated March 28, 2013.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
Yours truly,
XXXXXXXXXX
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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