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 the proposed transactions qualify for the butterfly exemption found in paragraph 55(3)(b)?
Position: Yes
Reasons: The proposed transactions meet the requirements found in paragraph 55(3)(b) and are not subject to any of the butterfly exemption denial rules found in section 55(3.1).
XXXXXXXXXX
2013-051321
XXXXXXXXXX, 2014
Dear XXXXXXXXXX:
Re: XXXXXXXXXX (BN# XXXXXXXXXX, XXXXXXXXXX Taxation Centre, XXXXXXXXXX Tax Services Office)
XXXXXXXXXX (BN# XXXXXXXXXX, XXXXXXXXXX Taxation Centre, XXXXXXXXXX Tax Services Office)
Advance Income Tax Ruling Request
This is in reply to your letter in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in correspondence and telephone conversations concerning your request. You have advised that to the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein are:
a) in an earlier tax return of the taxpayer or a related person;
b) being considered by a Tax Services Office or Taxation Centre in connection with any tax return previously filed by the taxpayer or a related person;
c) under objection or appeal by the taxpayer or a related person;
d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
e) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
DEFINITIONS
In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:
"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 the Income Tax Regulations thereunder are referred to as the "Regulations", and unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act;
"Act1" means the Canada Business Corporations Act, RSC 1985, c C-44;
"adjusted cost base" has the meaning assigned by section 54;
"agreed amount" means the amount agreed on by the transferor and the transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1);
"arm's length" has the meaning assigned by subsection 251(1);
"BN" means the business number assigned to the particular entity by the CRA;
"Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);
"capital dividend" means a dividend to which subsection 83(2) applies;
"capital dividend account" has the meaning assigned by subsection 89(1);
"capital property" has the meaning assigned by section 54;
"cost amount" has the meaning assigned by subsection 248(1);
"CRA" means the Canada Revenue Agency;
"DC1" means XXXXXXXXXX, a corporation described in Paragraphs 1 to 5;
"DC2" means XXXXXXXXXX, a corporation described in Paragraphs 6 to 10;
"DC Amalco" means a corporation to be formed by articles of amalgamation as described in Paragraph 19;
"disposition" has the meaning assigned by subsection 248(1);
"distribution" has the meaning assigned by subsection 55(1);
"dividend refund" has the meaning assigned by subsection 129(1);
"eligible property" has the meaning assigned by subsection 85(1.1);
"fair market value" means the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm's length and under no compulsion to act, expressed in terms of cash;
"forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);
"general rate income pool" has the meaning assigned by subsection 89(1);
"Holdco1" means XXXXXXXXXX;
"Holdco2" means XXXXXXXXXX;
"Holdco3" means XXXXXXXXXX;
"paid-up capital" has the meaning assigned by subsection 89(1);
"Paragraph" refers to a numbered paragraph in this letter;
"Predecessor1" means XXXXXXXXXX, a corporation formed by articles of amalgamation under the provisions of the Act1, dated XXXXXXXXXX by amalgamating XXXXXXXXXX and XXXXXXXXXX;
"Predecessor2" means XXXXXXXXXX;
"private corporation" has the meaning assigned by subsection 89(1);
"private holding corporation" has the meaning assigned by subsection 191(1);
"proceeds of disposition" has the meaning assigned by section 54;
"Proposed Transactions" means the transactions described in the Proposed Transactions section of this letter;
"refundable dividend tax on hand" has the meaning assigned by subsection 129(3);
"related person" has the meaning assigned by subsection 251(2);
"restricted financial institution" has the meaning assigned by subsection 248(1);
"series of transactions or events" includes the transactions or events referred to in subsection 248(10);
"specified financial institution" has the meaning assigned by subsection 248(1);
"specified investment business" has the meaning assigned by subsection 125(7);
"stated capital" has, in relation to a corporation that exists under the Act1, the meaning assigned by the Act1;
"Subco1" means the new corporation incorporated by TC1, as described in Paragraph 17;
"Subco2" means the new corporation incorporated by TC2, as described in Paragraph 17;
"Subco3" means the new corporation incorporated by TC3, as described in Paragraph 17;
"taxable Canadian corporation" has the meaning assigned by subsection 89(1);
"taxable dividend" has the meaning assigned by subsection 89(1);
"TC1" means the new corporation incorporated by Holdco1 and Trust1, as described in Paragraph 13;
"TC2" means the new corporation incorporated by Holdco2 and Trust2, as described in Paragraph 14;
"TC3" means the new corporation incorporated by Holdco 3 and Trust3, as described in Paragraph 15;
"Trust1" means XXXXXXXXXX, an inter vivos trust resident in Canada and established by a trust agreement dated XXXXXXXXXX;
"Trust2" means XXXXXXXXXX an inter vivos trust resident in Canada and established by a trust agreement dated XXXXXXXXXX;
"Trust3" means XXXXXXXXXX an inter vivos trust resident in Canada and established by a trust agreement dated XXXXXXXXXX; and
"Winding-up Dividend" means a dividend described in subsection 84(2) in respect of the winding-up of DC Amalco described in Paragraph 37.
FACTS
1. DC1 is a Canadian-controlled private corporation, a taxable Canadian corporation and a private holding corporation. DC1 was incorporated under Act1 on XXXXXXXXXX.
2. DC1's authorized share capital is as follows:
a. an unlimited number of "Actions ordinaires de catégorie A";
b. an unlimited number of "Actions ordinaires de catégorie B";
c. an unlimited number of "Actions privilégiées de catégorie C";
d. an unlimited number of "Actions privilégiées de catégorie D";
e. an unlimited number of "Actions privilégiées de catégorie E";
f. an unlimited number of "Actions privilégiées de catégorie F";
g. an unlimited number of "Actions privilégiées de catégorie G";
h. an unlimited number of "Actions privilégiées de catégorie H";
i. an unlimited number of "Actions privilégiées de catégorie I"; and
j. an unlimited number of "Actions privilégiées de catégorie J".
3. The issued and outstanding share capital of DC1 consists of XXXXXXXXXX "Actions ordinaires de catégorie A" which are owned equally by Holdco1, Holdco2 and Holdco3 (herein sometimes individually referred to as "Holdco" and collectively as "Holdcos") and XXXXXXXXXX "Actions privilégiées de catégorie J" which are owned equally by Trust1, Trust2 and Trust3 (herein sometimes individually referred to as the "Trust" and collectively as the "Trusts").
4. Holdco1, Holdco2, Holdco3, Trust1, Trust2 and Trust3, are resident in Canada. None of the shares of DC1 were acquired in contemplation of the Proposed Transactions. All of the issued and outstanding shares of DC1 are capital property to each of the shareholders of DC1.
5. DC's refundable dividend tax on hand, capital dividend account and general rate income pool is nil.
6. DC2 is a Canadian-controlled private corporation, a taxable Canadian corporation and a private holding corporation. DC2 was formed by articles of amalgamation under the provisions of Act1, dated XXXXXXXXXX. The predecessor corporations are Predecessor1 and Predecessor2.
7. DC2's authorized share capital is as follows:
a. an unlimited number of "Actions ordinaires de catégorie A";
b. an unlimited number of "Actions ordinaires de catégorie B";
c. an unlimited number of "Actions privilégiées de catégorie C";
d. an un1imited number of "Actions privilégiées de catégorie D";
e. an unlimited number of "Actions privilégiées de catégorie E";
f. an unlimited number of "Actions privilégiées de catégorie F";
g. an unlimited number of "Actions privilégiées de catégorie G";
h. an unlimited number of "Actions privilégiées de catégorie H"; and
i. an unlimited number of "Actions privilégiées de catégorie I".
8. The issued and outstanding share capital of DC2 consists of XXXXXXXXXX "Actions ordinaires de catégorie A" and XXXXXXXXXX "Actions privilégiées de catégorie E" which are owned equally by Holdco1, Holdco2 and Holdco3.
9. None of the shares of DC2 were acquired in contemplation of the Proposed Transactions. All of the issued and outstanding shares of DC2 are capital property to each of the shareholders of DC2.
10. DC2 has historically paid dividends to obtain a full refund of refundable dividend tax on hand. In XXXXXXXXXX DC2 paid a capital dividend of $XXXXXXXXXX triggering a refund of refundable dividend tax on hand of $XXXXXXXXXX.
11. DC2 has refundable dividend tax on hand of $XXXXXXXXXX, a capital dividend account of $XXXXXXXXXX and a general rate income pool of $XXXXXXXXXX.
12. Each of Holdco1, Holdco2 and Holdco3 has always acted jointly and in concert with the other Holdcos in respect of all important business and financial decisions regarding DC1 and DC2.
PROPOSED TRANSACTIONS
13. Holdco1 and Trust1 will incorporate a new corporation, TC1, pursuant to the provisions of Act1. TC1 will be a Canadian-controlled private corporation and taxable Canadian corporation. No shares will be issued on incorporation of TC1.
14. Holdco2 and Trust2 will incorporate a new corporation, TC2, pursuant to the provisions of Act1. TC2 will be a Canadian-controlled private corporation and taxable Canadian corporation. No shares will be issued on incorporation of TC2.
15. Holdco3 and Trust3 will incorporate a new corporation, TC3, pursuant to the provisions of Act1. TC3 will be a Canadian-controlled private corporation and taxable Canadian corporation. No shares will be issued on incorporation of TC3.
16. The authorized share capital of each of TC1, TC2 and TC3 (herein sometimes individually referred to as "TC" and collectively as "TCs") will be identical and consist of an unlimited number of:
a. Class A voting common shares;
b. Class B non-voting common shares;
c. Class A preferred shares;
d. Class B preferred shares;
e. Class C preferred shares;
f. Class D preferred shares; and
g. Class E preferred shares.
The Class A, Class B, Class D and Class E preferred shares are: a) non-voting; b) redeemable and retractable at an amount equal to the fair market value of the consideration received for their respective issuance; c) entitled to an annual non-cumulative dividend not to exceed XXXXXXXXXX%, respectively, per annum of the redemption amount, to be paid at the discretion of the directors of the particular TC; and d) subject to a price adjustment clause. The Class C preferred shares have the same terms as the other preferred shares except that the owners of the Class C preferred shares will be entitled to a monthly non-cumulative dividend not to exceed XXXXXXXXXX% per month of the redemption amount, to be paid at the discretion of the directors of the particular TC, in preference to all other classes of preferred shares.
17. Each of TC1, TC2, and TC3 will incorporate a new corporation, being Subco1, Subco2, and Subco3, respectively (herein sometimes referred to individually as "Subco" and collectively as "Subcos"), pursuant to the provisions of Act1. Each such Subco will be a Canadian-controlled private corporation and a taxable Canadian corporation. The share capital of each Subco will be identical to the share capital of each TC.
18. Each TC will subscribe for one Class A voting common share of its respective Subco for cash consideration of $XXXXXXXXXX.
19. DC1 will amalgamate with DC2 pursuant to subsection 87(1) to form DC Amalco. DC Amalco will be a Canadian controlled private corporation and a taxable Canadian corporation. DC Amalco's authorized share capital will be identical to the share capital of each TC.
20. Upon the amalgamation, DC Amalco will issue: a) XXXXXXXXXX Class A voting common shares, XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares and XXXXXXXXXX Class C preferred shares to each Holdco; and b) XXXXXXXXXX Class B non-voting common shares and XXXXXXXXXX Class D preferred shares to each Trust. The fair market value of the DC Amalco shares issued to each Holdco and each Trust will equal the fair market value of the shares of DC1 and/or DC2 that such entity owned in DC1 and/or DC2.
21. The shares of DC Amalco will be capital property to each Holdco and Trust.
22. Holdco1 will transfer to TC1 all of its shares of DC Amalco. As sole consideration therefor, TC1 will issue to Holdco1 XXXXXXXXXX Class A voting common shares, XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares and XXXXXXXXXX Class C preferred shares having an aggregate fair market value equal to the aggregate fair market value, at the time of the transfer, of the DC Amalco shares transferred by Holdco1 to TC1.
Holdco1 and TC1 will file a joint election in the prescribed form and within the time referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer described in this Paragraph. The agreed amount in respect of each share so transferred will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1), nor will such amount exceed the fair market value of such share transferred by Holdco1 to TC1.
The increase to the paid-up capital of the XXXXXXXXXX Class A voting common shares, XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares and XXXXXXXXXX Class C preferred shares of TC1 will not exceed the paid-up capital respectively attributable to the XXXXXXXXXX Class A voting common shares, XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares and XXXXXXXXXX Class C preferred shares of DC Amalco for which they were issued. For greater certainty, the increase to the paid-up capital of the XXXXXXXXXX Class A voting common shares XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares and XXXXXXXXXX Class C preferred shares of TC1 will not exceed the maximum amount that could be added to the paid-up capital of such shares without resulting in a reduction under subsection 85(2.1).
23. Trust1 will transfer to TC1 all of its shares of DC Amalco. As sole consideration therefor, TC1 will issue to Trust1 XXXXXXXXXX Class B non-voting common shares and XXXXXXXXXX Class D preferred shares having an aggregate fair market value equal to the aggregate fair market value, at the time of the transfer, of the DC Amalco shares transferred by Trust1 to TC1.
Trust1 and TC1 will file a joint election in the prescribed form and within the time referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer described in this Paragraph. The agreed amount in respect of each share so transferred will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1), nor will such amount exceed the fair market value of such share transferred by Trust 1 to TC1.
The increase to the paid-up capital of the XXXXXXXXXX Class B non-voting common shares and XXXXXXXXXX Class D preferred shares of TC1 will not exceed the paid-up capital respectively attributable to the XXXXXXXXXX Class B non-voting common shares and XXXXXXXXXX Class D preferred shares of DC Amalco for which they were issued. For greater certainty, the increase to the paid-up capital of the XXXXXXXXXX Class B non-voting common shares and XXXXXXXXXX Class D preferred shares of TC1 will not exceed the maximum amount that could be added to the paid-up capital of such shares without resulting in a reduction to the paid-up capital under paragraph 84.1(1)(a).
24. Holdco2 will transfer to TC2 all of its shares of DC Amalco. As sole consideration therefor, TC2 will issue to Holdco2 XXXXXXXXXX Class A voting common shares, XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares and XXXXXXXXXX Class C preferred shares having an aggregate fair market value equal to the aggregate fair market value, at the time of the transfer, of the DC Amalco shares transferred by Holdco2 to TC2.
Holdco2 and TC2 will file a joint election in the prescribed form and within the time referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer described in this Paragraph. The agreed amount in respect of each share so transferred will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1), nor will such amount exceed the fair market value of such share transferred by Holdco2 to TC2.
The increase to the paid-up capital of the XXXXXXXXXX Class A voting common shares, XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares and XXXXXXXXXX Class C preferred shares of TC2 will not exceed the paid-up capital respectively attributable to the XXXXXXXXXX Class A voting common shares, XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares and XXXXXXXXXX Class C preferred shares of DC Amalco for which they were issued. For greater certainty, the increase to the paid-up capital of the XXXXXXXXXX Class A voting common shares, XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares and XXXXXXXXXX Class C preferred shares of TC2 will not exceed the maximum amount that could be added to the paid-up capital of such shares without resulting in a reduction under subsection 85(2.1).
25. Trust2 will transfer to TC2 all of its shares of DC Amalco. As sole consideration therefor, TC2 will issue to Trust 2 XXXXXXXXXX Class B non-voting common shares and XXXXXXXXXX Class D preferred shares having an aggregate fair market value equal to the aggregate fair market value, at the time of the transfer, of the DC Amalco shares transferred by Trust2 to TC2.
Trust2 and TC2 will file a joint election in the prescribed form and within the time referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer described in this Paragraph. The agreed amount in respect of each share so transferred for purposes of such election will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1), nor will such amount exceed the fair market value of such share transferred by Trust 2 to TC2.
The increase to the paid-up capital of the XXXXXXXXXX Class B non-voting common shares and XXXXXXXXXX Class D preferred shares of TC2 will not exceed the paid-up capital respectively attributable to the XXXXXXXXXX Class B non-voting common shares and XXXXXXXXXX Class D preferred shares of DC Amalco for which they were issued. For greater certainty, the increase to the paid-up capital of the XXXXXXXXXX Class B non-voting common shares and XXXXXXXXXX Class D preferred shares of TC2 will not exceed the maximum amount that could be added to the paid-up capital of such shares without resulting in a reduction to the paid-up capital under paragraph 84.1(1)(a).
26. Holdco3 will transfer to TC3 all of its shares of DC Amalco. As sole consideration therefor, TC3 will issue to Holdco3 XXXXXXXXXX Class A voting common shares, XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares and XXXXXXXXXX Class C preferred shares having an aggregate fair market value equal to the aggregate fair market value of the DC Amalco shares transferred by Holdco 3 to TC3.
Holdco3 and TC3 will file a joint election in the prescribed form and within the time referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer described in this Paragraph. The agreed amount in respect of each share so transferred will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1), nor will such amount exceed the fair market value of such share transferred by Holdco3 to TC3.
The increase to the paid-up capital of the XXXXXXXXXX Class A voting common shares XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares and XXXXXXXXXX Class C preferred shares of TC3 will not exceed the paid-up capital respectively attributable to the XXXXXXXXXX Class A voting common shares XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares and XXXXXXXXXX Class C preferred shares of DC Amalco for which they were issued. For greater certainty, the increase to the paid-up capital of the XXXXXXXXXX Class A voting common shares XXXXXXXXXX Class A preferred shares, XXXXXXXXXX Class B preferred shares and XXXXXXXXXX Class C preferred shares of TC3 will not exceed the maximum amount that could be added to the paid-up capital of such shares without resulting in a reduction under subsection 85(2.1).
27. Trust3 will transfer to TC3 all of its shares of DC Amalco. As sole consideration therefor, TC3 will issue to Trust3 XXXXXXXXXX Class B non-voting common shares and XXXXXXXXXX Class D preferred shares having an aggregate fair market value equal to the aggregate fair market value, at the time of the transfer, of the DC Amalco shares transferred by Trust3 to TC3.
Trust3 and TC3 will file a joint election in the prescribed form and within the time referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer described in this Paragraph. The agreed amount in respect of each share so transferred will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1), nor will such amount exceed the fair market value of such share transferred by Trust 3 to TC3.
The increase to the paid-up capital of the XXXXXXXXXX Class B non-voting common shares and XXXXXXXXXX Class D preferred shares of TC3 will not exceed the paid-up capital respectively attributable to the XXXXXXXXXX Class B non-voting common shares and XXXXXXXXXX Class D preferred shares of DC Amalco for which they were issued. For greater certainty, the increase to the paid-up capital of the XXXXXXXXXX Class B non-voting common shares and XXXXXXXXXX Class D preferred shares of TC3 will not exceed the maximum amount that could be added to the paid-up capital of such shares without resulting in a reduction to the paid-up capital under paragraph 84.1(1)(a).
28. Immediately before the transfer of property described in Paragraph 30, the property owned by DC Amalco will be classified into the following three types of property for the purposes of the definition of distribution:
a. cash or near cash property, comprising all of the current assets of DC Amalco, including cash, and accounts receivable;
b. investment property, comprising all of the assets of DC Amalco other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or from a specified investment business; and
c. business property, comprising all of the assets of DC Amalco, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from an active business carried on by DC Amalco (other than a specified investment business).
d. for greater certainty, for the purposes of this distribution:
i. tax accounts or other tax related amounts of DC Amalco, such as the balance of non-capital losses, net capital losses, refundable dividend tax on hand and/or capital dividend account, if any, will not be considered property, as the case may be;
ii. no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and
iii. the amount of any deferred tax will not be considered to be a property or a liability, as the case may be, for the purposes of the Proposed Transactions.
29. In determining the net fair market value immediately before the transfer, described in Paragraph 30, of DC Amalco's cash or near cash property, investment property and business property, the liabilities of DC Amalco will be allocated in the following manner:
a. Current liabilities will be allocated to cash or near cash property (including any cash, accounts receivable and prepaid expenses) in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property. The allocation of current liabilities as described herein will not exceed the aggregate fair market value of all cash or near cash property.
b. Liabilities, other than current liabilities, that relate to a particular property, will be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its fair market value. Liabilities that pertain to a type of property, but not to a particular property, will be allocated to that type of property, but not in excess of the net fair market value of such type of property after the allocation of liabilities to a particular property, as described herein.
c. If any liabilities remain after the allocations described in steps a. and b. are made, such liabilities, will be allocated to the cash or near cash property, investment property, and business property based on the relative net fair market value of each type of property prior to the allocation of such liabilities.
30. Immediately following the classification of its property into the three types of property as described in Paragraph 28, DC Amalco will transfer to each Subco a pro rata portion of the net fair market value of each type of property owned by DC Amalco, as determined in accordance with Paragraphs 28 and 29, such that immediately following such property transfers and any corresponding liability assumptions, the net fair market value of each of the three types of property of DC Amalco so transferred to each Subco will, for greater certainty, approximate that proportion determined by the formula:
A x B/C
where:
A is the net fair market value, immediately before the transfer, of all property of that type owned at that time by DC Amalco;
B is the fair market value, immediately before the transfer, of all of the shares of the capital stock of DC Amalco owned, at that time, by TC1 (in the case of Subco1), TC2 (in the case of Subco2) or TC3(in the case of Subco3), as the case may be; and
C is the fair market value, immediately before the transfer, of all the issued and outstanding shares of the capital stock of DC Amalco at that time.
For the purposes of this Paragraph, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, will not exceed XXXXXXXXXX percent (XXXXXXXXXX%), determined as a percentage of the net fair market value of each type of property that each Subco will receive as compared to what it would have received had it received its appropriate pro rata share of the net fair market value of that type of property of DC Amalco.
31. As consideration for the property transferred by DC Amalco to each Subco, each Subco will:
a. assume an appropriate amount of liabilities of DC Amalco (so that on a net basis the Subco will receive its pro rata share of each type of property owned by DC Amalco); and
b. issue to DC Amalco a number of Class A preferred shares having an aggregate redemption amount and aggregate fair market value equal to the aggregate fair market value of the property received by the Subco less the amount of the liabilities of DC Amalco assumed by the Subco as described in a. above.
32. DC Amalco and each Subco will file a joint election in the 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 each eligible property that is transferred by DC Amalco to the Subco as described in Paragraph 30. The agreed amount in respect of each eligible property so transferred will not be greater than the fair market value of such property nor will it be less than the amount permitted under paragraph 85(1)(b). For greater certainty, the agreed amount in respect of each such transferred property will be within the limits prescribed as follows:
a. in the case of capital property (other than depreciable property of a prescribed class), an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
b. in the case of depreciable property of a prescribed class, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
c. in the case of eligible capital property, an amount not less than the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).
For greater certainty, the aggregate of such elected amounts will be greater than the aggregate amount of DC Amalco's liabilities assumed by the Subco, as described in Paragraph 31 a.
33. The increase to the paid-up capital of the Class A preferred shares issued by a Subco to DC Amalco, as consideration for the property transferred by DC Amalco to the Subco, will not exceed the aggregate cost amount of such property to the Subco as determined pursuant to subsection 85(1) where applicable, less the aggregate amount of DC Amalco's liabilities assumed by the Subco for such property as described in Paragraph 31 a. For greater certainty, the increase to the paid-up capital of the Class A preferred shares so issued by the Subco will not exceed the maximum amount that could be added to the paid-up capital of such shares, without resulting in an adjustment under subsection 85(2.1).
34. Immediately following the transfer of property described in Paragraph 30, each Subco will redeem all of the Class A preferred shares that were issued to DC Amalco as described in Paragraph 31 b. and will issue to DC Amalco in consideration therefore, a demand non-interest bearing promissory note having a principal amount and fair market value equal to the aggregate redemption amount and fair market value of the Class A preferred shares (herein referred to as the "Subco1 Redemption Note", "Subco2 Redemption Note" and Subco3 Redemption Note" and individually sometimes referred to as a "Subco Redemption Note" and collectively as the "Subco Redemption Notes") so redeemed. DC Amalco will accept each such Subco Redemption Note as full payment for the aggregate redemption amount of the Class A preferred shares so redeemed.
35. At the end of the day in which the Class A preferred shares of the Subcos owned by DC Amalco are redeemed as described in Paragraph 34, Subco1, Subco2 and Subco3 will be wound up into TC1, TC2 and TC3, respectively, pursuant to the applicable provision of Act1. On the winding-up of each such Subco, all of the property of such Subco will be distributed by such Subco to its respective TC, and all of the liabilities of such Subco, including its Subco Redemption Note, will be assumed by its parent.
36. TC1, TC2 and TC3 will, by special resolution, resolve to liquidate and dissolve DC Amalco pursuant to the provisions of Act1.
37. In connection with the winding-up of DC Amalco, DC Amalco will assign and distribute the Subco1 Redemption Note to TC1, the Subco2 Redemption Note to TC2 and the Subco3 Redemption Note to TC3. As a result of the distribution of the Subco1 Redemption Note, the Subco2 Redemption Note and the Subco3 Redemption Note by DC Amalco, the obligation of each of TC1, TC2 and TC3 under the Subco1 Redemption Note, Subco2 Redemption Note and the Subco3 Redemption Note, as the case may be, will be extinguished and such notes will be cancelled.
38. DC Amalco will elect, pursuant to subsection 83(2), to treat the portion of the Winding-up Dividend referred to in subparagraph 88(2)(b)(i) as a separate capital dividend paid on the Class A voting common shares, Class B non-voting common shares, Class A preferred shares, Class B preferred shares, Class C preferred shares and/or the Class D preferred shares. Pursuant to subparagraph 88(2)(b)(iv), each of TC1, TC2 and TC3 will be deemed to have received a proportionate capital dividend from DC Amalco.
39. DC Amalco will designate, pursuant to subsection 89(14), a portion of the Winding-up Dividend referred to in subsection 88(2)(b)(iii), which is deemed to be a separate dividend, to be an eligible dividend by notifying each of the relevant TCs in writing, in a timely manner, that the dividend is an eligible dividend.
40. Immediately after the transfer as described in Paragraph 30, but before the formal dissolution of DC Amalco, DC Amalco will not own or acquire any property or carry on any activity or undertaking.
41. Following receipt of the dividend refund to which DC Amalco will become entitled as a result of the Proposed Transactions, DC Amalco will immediately transfer the cash received in the form of a dividend (under the terms of the agreement governing the winding-up of DC Amalco) to each of TC1, TC2 and TC3 in the same proportions as described in Paragraph 30.
42. Within a reasonable time following the transfer of such dividend refund, articles of dissolution will be filed by DC Amalco with the appropriate Corporate Registry and upon receipt of a certificate of dissolution, DC Amalco will be dissolved.
43. The Proposed Transactions described herein will occur in the order presented unless otherwise indicated, with the exception of the filing of the applicable election forms described in Paragraphs 22, 23, 24, 25, 26, 27 and 32, which will be filed by the applicable due date following completion of the Proposed Transactions.
44. No property has or will become property of DC Amalco in contemplation of and before the transfer described in Paragraph 30, except in the ordinary course of DC Amalco's, business or as otherwise described herein.
45. Except as specifically described in the Proposed Transactions, there is no expectation or intention that DC Amalco or any of the TCs will dispose of any property as part of a series of transactions or events that includes the Proposed Transactions, other than in the ordinary course of such corporation's business.
46. None of the shares of DC Amalco nor any of the shares of any TC is or will be at any time during a series of transactions or events that includes the Proposed Transactions:
a. the subject of a guarantee agreement;
b. a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or
c. the subject of a dividend rental agreement.
47. The main purpose for the acquisition of the shares of DC Amalco by TC1, TC2 and TC3 will be to facilitate a tax-free divisive reorganization of DC Amalco amongst the DC Amalco shareholders for purposes of permitting the shareholders to independently pursue their investment objectives. For greater certainty, at no time will one of the main purposes of the acquisition of the shares of DC Amalco be to receive a capital dividend.
48. Each Subco will have the financial capacity to honour, upon presentation for payment, the amount payable under the Subco Redemption Note issued by it as part of the Proposed Transactions.
49. None of DC Amalco, the TCs and the Subcos is or will be, at any time during a series of transactions or events that includes the Proposed Transactions, a restricted financial institution or a specified financial institution.
50. None of the parties is contemplating a disposition of any of the shares of DC Amalco or the TCs, other than as described herein.
51. None of the parties is contemplating an acquisition of control of DC Amalco or any of the TCs, other than as described herein.
52. The purpose of the incorporation of Subco1, Subco2 and Subco3 is to avoid circularity in the calculation of DC Amalco's refundable dividend tax on hand and Part IV tax, that would otherwise occur if the transfer of property described in Paragraph 30 were made directly to each TC by DC Amalco.
PURPOSES OF THE PROPOSED TRANSACTIONS
53. The purpose of the Proposed Transactions is to transfer to the shareholders of DC Amalco their proportionate share of DC Amalco's property in order that each such shareholder will be able to independently set the future investment policies regarding the distributed property without being bound by or influenced by the investment policies considered most appropriate by the other shareholders.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.
A. Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfers as described in Paragraphs 22 to 27, such that the agreed amount in respect of such transfers will be deemed to be Holdco1's, Trust1's, Holdco2's, Trust2's, Holdco3's and Trust3's, as the case may be, proceeds of disposition and each TC's, as the case may be, cost of acquisition. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.
B. Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfers of eligible property by DC Amalco to the Subcos as described in Paragraph 30, such that the agreed amount in respect of each such transfer will be deemed to be DC Amalco's proceeds of disposition and the respective Subco's cost of such property. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.
For the purposes of the joint elections described herein, the reference to the "undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition, that the fair market value at that time of the property that is transferred is of the fair market value at that time of all property of that class.
C. As a result of the redemption by each Subco of the Class A preferred shares described in Paragraph 34, by virtue of subsection 84(3), each Subco will be deemed to have paid, and DC Amalco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by each Subco in respect of its redemption of the Class A preferred shares owned by DC Amalco exceeds the paid-up capital of such class of shares immediately before the redemption.
D. Subsection 84(2) and paragraph 88(2)(b) will apply to the transfers by DC Amalco described in Paragraph 37 and 41 such that:
(a) subject to (b), (c) and (d) herein, DC Amalco will be deemed to have paid a Winding-up Dividend on the Class A voting common shares, Class B non-voting common shares, Class A preferred shares, Class B preferred shares, Class C preferred shares and/or the Class D preferred shares, as the case may be, equal to the amount by which:
(i) the amount or value of the funds or property distributed, as the case may be,
exceeds
(ii) the amount, if any, by which the paid-up capital in respect of the Class A voting common shares, Class B non-voting common shares, Class A preferred shares, Class B preferred shares, Class C preferred shares and/or the Class D preferred shares, as the case may be, is reduced on the transfer
and each of the TCs will be deemed to have received a taxable dividend equal to that proportion of the amount of the excess that the number of the Class A voting common shares, Class B non-voting common shares, Class A preferred shares, Class B preferred shares, Class C preferred shares and/or the Class D preferred shares, as the case may be, held by the recipient is of the number of Class A voting common shares, Class B non-voting common shares, Class A preferred shares, Class B preferred shares, Class C preferred shares and/or the Class D preferred shares, as the case may be, outstanding before the distribution;
(b) pursuant to subparagraph 88(2)(b)(i), the portion of a Winding-up Dividend which arises from the transfers described in Paragraph 37 and 41 as does not exceed DC Amalco's capital dividend account determined immediately before the payment of the Winding-up Dividend will be deemed, for the purposes of the subsection 83(2) election referred to in Paragraph 38, to be the full amount of a separate dividend which will be referred to as the "capital dividend";
(c) pursuant to subparagraph 88(2)(b)(iii), the Winding-up Dividend arising from the transfer described in Paragraph 37, to the extent that it exceeds the amount of the capital dividend, will be deemed to be a separate dividend that is a taxable dividend; and
(d) pursuant to subparagraph 88(2)(b)(iv), each of the TCs will be deemed to have received its proportional share of the dividends described in (b) and (c) herein.
E. The taxable dividends received by DC Amalco, TC1, TC2, and TC3 as described in Rulings C and D:
(a) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the person deemed to have received such dividend;
(b) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income in the year in which such a dividend is deemed to have been received, and, for greater certainty, will not be prohibited by subsections 112(2.1), (2.2), (2.3), or (2.4);
(c) will be excluded in determining the proceeds of disposition to the recipient of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of proceeds of disposition;
(d) will, by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received;
(e) will not give rise to tax under Part IV except as provided in paragraph 186(1)(b);
(f) will not be subject to tax under Part IV.1 or VI.1; and
(g) will, provided such a dividend or a portion of such a dividend is designated to be an eligible dividend in the prescribed manner and within the time referred to in subsection 89(14), be added to the general rate income pool accounts of TC1, TC2, and TC3 to the extent of the portion of the dividend that each respective TC received, in the taxation year in which it received that portion from DC Amalco, pursuant to variable E(a) of the definition of general rate income pool.
F. The capital dividend described in Ruling D above:
(a) will not be included in the income of TC1, TC2, and TC3 pursuant to paragraph 83(2)(b);
(b) will be added to the capital dividend account of TC1, TC2 and TC3 pursuant to paragraph (b) of the definition of capital dividend account; and
(c) will be excluded in determining the proceeds of disposition of the Class A voting common shares, Class B non-voting common shares, Class A preferred shares, Class B preferred shares, Class C preferred shares and/or the Class D preferred shares, as the case may be, owned by TC1, TC2 and TC3 pursuant to paragraph (j) of the definition of proceeds of disposition.
G. Provided that, as part of a series of transactions or events that includes the Proposed Transactions there is not:
(a) an acquisition of property in circumstances described in paragraph 55(3.l)(a);
(b) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(c) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(d) an acquisition of shares in the circumstances described in subparagraph 55(3.l)(b)(iii); or
(e) an acquisition of property in the circumstances described in subparagraph 55(3.l)(c) or 55(3.1)(d);
which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings C and D above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
H. The provisions of subsections 15(1), 56(2), and 246(1) will not apply to any of the Proposed Transactions, in and by themselves.
I. The extinguishment of the Subco1 Redemption Note, Subco2 Redemption Note and Subco3 Redemption Note owing by TC1, TC2 and TC3, respectively, as described in Paragraph 35, will not, in and of itself, result in a forgiven amount.
J. Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed herein.
The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014 and are binding on CRA provided that the Proposed Transactions (other than the filing of articles of dissolution of DC Amalco, as described in Paragraph 42) are completed within 6 months of the date of this letter. 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 into law, could have an effect on the rulings provided herein.
Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:
a. the paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;
b. the balance of the capital dividend account, general rate income pool, or refundable dividend tax on hand 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, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.
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 fair market value 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. In addition, any subsequent adjustment could affect Ruling G above. Furthermore, none of the rulings given in this letter are intended to apply to 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 Price Adjustment Clauses. 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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