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 split-up butterfly meets the legislative and administrative requirements.
Position: Yes
Reasons: Proposed transactions meet the legislative and administrative requirements.
XXXXXXXXXX 2015-057979
XXXXXXXXXX, 2015
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letters dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided by your letters dated XXXXXXXXXX and other correspondence and telephone discussions (XXXXXXXXXX). The information that you provided in such letters and correspondence and in the telephone discussions form part of this letter but, only to the extent described herein.
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 stated, all statutory references are to 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, all statutory reference are to the relevant provisions of the Act.
Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.
DEFINITIONS
In this ruling, unless otherwise noted, the following terms have the meaning specified herein. All references in the singular include the plural.
“ACB” means ‘adjusted cost base’ as that expression is defined in section 54;
“agreed amount” in respect of a property means the amount that the transferor and the transferee of the asset agree upon in the joint election under subsection 85(1) in respect of a transfer of eligible property;
“arm’s length” has the meaning assigned by subsection 251(1);
“BCA” means the Business Corporation Act XXXXXXXXXX, as amended;
“CCPC” means ‘Canadian-controlled private corporation’ as that term is defined in subsection 125(7);
“capital property” has the meaning assigned by section 54;
“Capital Trust 1” means the XXXXXXXXXX, a trust created pursuant to the laws of the province of XXXXXXXXXX on XXXXXXXXXX. The trustees of Capital Trust 1 are Child 1, the spouse of Child 1 and the Independent Trustee. The beneficiaries of Capital Trust 1 are: (i) during the lifetime of Child 1: (a) Child 1, (b) the issue of Child 1 and the spouse of Child 1 provided that such issue are over the age of eighteen, and (c) any corporation controlled by or for the benefit of one or more of such beneficiaries and designated by the trustees in writing as a beneficiary; and (ii) after the death of Child 1: (a) the spouse of Child 1, (b) the issue of Child 1 and the spouse of Child 1, and (c) any corporation controlled by or for the benefit of one or more of such beneficiaries and designated by the trustees in writing as a beneficiary;
“Capital Trust 2” means the XXXXXXXXXX, a trust created pursuant to the laws of the province of XXXXXXXXXX on XXXXXXXXXX. The trustees of Capital Trust 2 are Child 2, the spouse of Child 2 and Child 1. The beneficiaries of Capital Trust 2 are: (i) during the lifetime of Child 2: (a) Child 2, (b) the issue of Child 2 and the spouse of Child 2 provided that such issue are over the age of eighteen, and (c) any corporation controlled by or for the benefit of one or more of such beneficiaries and designated by the trustees in writing as a beneficiary; and (ii) after the death of Child 2: (a) the spouse of Child 2, (b) the issue of Child 2 and the spouse of Child 2, and (c) any corporation controlled by or for the benefit of one or more of such beneficiaries and designated by the trustees in writing as a beneficiary;
“CRA” means the Canada Revenue Agency;
“CDA” means ‘capital dividend account’ and has the meaning assigned by subsection 89(1);
“Child 1” refers to XXXXXXXXXX, a child of Mr. B;
“Child 2” refers to XXXXXXXXXX, a child of Mr. B;
“cost amount” has the meaning assigned by section 248(1);
“DC” refers to XXXXXXXXXX;
“DC Class A Common Share” means one of the authorized Class A common shares in the capital of DC. A DC Class A common share entitles its holder to (i) one (1) vote; (ii) to receive dividends if, as and when declared at the discretion of the DC directors; and (iii) to share equally (as a class) with the Class B common shares in the capital of DC the remaining property of DC subject to the rights of the DC Class B Special Shares, the DC Class C Special Shares and the DC Class D Special Shares;
“DC Class A Repurchase Note” means the demand promissory note described in Paragraph 65;
“DC Class B Redemption Note” means the demand promissory note described in Paragraph 63;
“DC Class B Special Share” means one of the authorized Class B special shares in the capital of DC. A DC Class B Special Share is redeemable and retractable for a redemption amount equal to $XXXXXXXXXX per share and entitles its holder to (i) one (1) vote; (ii) to receive dividends if, as and when declared at the discretion of the DC directors; and (iii) to receive an amount equal to the redemption amount of $XXXXXXXXXX plus any accrued but unpaid dividends in the event of a liquidation, dissolution or winding-up of DC.
“DC Class C Redemption Note” means the demand promissory note described in Paragraph 64;
“DC Class C Special Share” means one of the authorized Class C special shares in the capital of DC. A DC Class C Special Share is non-voting, is redeemable and retractable for a redemption amount equal to the amount paid-up per share and entitles its holder to receive (i) dividends if, as and when declared at the discretion of the DC directors; and (ii) an amount equal to the redemption amount plus any accrued but unpaid dividends in the event of a liquidation, dissolution or winding-up of DC subject to the rights of the DC Class B Special Shares;
“DC Class D Redemption Note” means the demand promissory note described at Paragraph 62;
“DC Class D Special Share” means one of the authorized Class D special shares in the capital of DC. A DC Class D Special Share is non-voting, is redeemable and retractable for a redemption amount equal to the FMV of the property transferred to DC in consideration for the first issuance of the DC Class D Special Shares and entitles its holder to receive (i) dividends if, as and when declared at the discretion of the DC directors; and (ii) an amount equal to the redemption amount plus any accrued but unpaid dividends in the event of a liquidation, dissolution or winding-up of DC subject to the rights of the DC Class B Special Shares and the DC Class C Special Shares.
“DC Freeze” means the transactions described in Paragraphs 24 to 29;
“DC Redemption Notes” means, collectively, the DC Class A Repurchase Note, DC Class B Redemption Note, DC Class C Redemption Note and the DC Class D Redemption Note;
“depreciable property” has the meaning assigned by subsection 13(21);
“distribution” has the meaning assigned by subsection 55(1);
“dividend refund” has the meaning assigned by subsection 129(1);
“dividend rental arrangement” has the meaning assigned by subsection 248(1);
“eligible capital property” has the meaning assigned by section 54;
“eligible property” has the meaning assigned by subsection 85(1.1);
“Family Trust 1” means the XXXXXXXXXX, a trust created pursuant to the laws of the province of XXXXXXXXXX. The trustees of Family Trust 1 are Child 1, the spouse of Child 1 and the Independent Trustee. The beneficiaries of Family Trust 1 are: (i) Child 1; (ii) the spouse of Child 1; (iii) the issue of Child 1 and the spouse of Child 1; and (iv) any corporation controlled by or for the benefit of one or more such beneficiaries and designated by the trustees in writing as a beneficiary;
“Family Trust 2” means the XXXXXXXXXX, a trust created pursuant to the laws of the province of XXXXXXXXXX. The trustees of Family Trust 2 are Child 1, Child 2, and the spouse of Child 2. The beneficiaries of Family Trust 2 are: (i) Child 2; (ii) the spouse of Child 2; (iii) the issue of Child 2 and the spouse of Child 2; and (iv) any corporation controlled by or for the benefit of one or more such beneficiaries and designated by the trustees in writing as a beneficiary;
“Family Trust 3” means the XXXXXXXXXX, a trust created pursuant to the laws of the province of XXXXXXXXXX. The trustees of Family Trust 3 are Child 1, Child 2 and the Independent Trustee. The beneficiaries of Family Trust 3 are: (i) Child 1; (ii) the spouse of Child 1; (iii) the issue of Child 1; (iv) Family Trust 1; (v) Child 2; (vi) the spouse of Child 2; (vii) the issue of Child 2; (viii) Family Trust 2; and (ix) any corporation controlled by or for the benefit of one or more such beneficiaries and designated by the trustees in writing as a beneficiary;
“financial intermediary corporation” has the meaning assigned by subsection 191(1);
“FMV” means ‘fair market value’, which refers to the amount, expressed in money terms, that is the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm’s length and under no compulsion to act;
“GRIP” means ‘general rate income pool’ and has the meaning assigned by subsection 89(1);
“Independent Trustee” means the individual first referred to in Paragraph 21. The Independent Trustee and each of the Settlor Friend, Mr. B, Child 1, Child 2, DC, Y Ltd., Z Corp., and any beneficiary of Family Trust 1, Family Trust 2, Family Trust 3, Capital Trust 1 or Capital Trust 2 are not related persons;
“Mr. B” refers to XXXXXXXXXX;
“Paragraph” means a numbered paragraph in this letter;
“PUC” means ‘paid-up capital’ and has the meaning assigned by subsection 89(1);
“principal amount” has the meaning assigned by subsection 248(1);
“private corporation” has the meaning assigned by subsection 89(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;
“Property 1” means the co-tenancy interest owned by DC located at XXXXXXXXXX;
“Property 2” means the co-tenancy interest owned by DC located at XXXXXXXXXX;
“RDTOH” means ‘refundable dividend tax on hand’ as that expression is defined in subsection 129(3);
“related persons” has the meaning assigned by section 251 as modified for the purposes of section 55 by paragraph 55(5)(e);
“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);
“Settlor Friend” is the individual first referred to in Paragraph 23. Settlor Friend and each of: the Independent Trustee, Mr. B, Child 1, Child 2, DC, Y Ltd., Z Corp., and any beneficiary of Family Trust 1, Family Trust 2, Family Trust 3, Capital Trust 1 or Capital Trust 2 are not related persons;
“significant influence” has the meaning assigned by section 3051.04 of the Accounting Standards for Private Enterprises;
“SIN” means Social Insurance Number;
“specified financial institution” has the meaning assigned by subsection 248(1);
“specified investment business” has the meaning assigned by subsection 125(7) and 248(1);
“stated capital” means the amount included in the stated capital account attributable to a share;
“stated capital account” has the meaning assigned by the BCA;
“Subco” means the corporation to be incorporated under the BCA referred to in Paragraph 48;
“Subco Class A Common Share” means one of the authorized Class A common shares in the capital of Subco. A Subco Class A Common Share entitles its holder to (i) one (1) vote; (ii) to receive dividends if, as and when declared at the discretion of the Subco directors; and (iii) to share equally (as a class) with the Class B common shares in the capital of Subco in the remaining property of Subco subject to the rights of the Class A special shares, Class B special shares, Class C special shares and Class D special shares in the capital of Subco;
“Subject Transactions” means the completed transactions described in Paragraphs 11 to 47;
“taxable dividend” has the meaning assigned by subsection 89(1);
“TC” refers to XXXXXXXXXX;
“TCC” means ‘taxable Canadian corporation’ and has the meaning assigned by subsection 89(1);
“TC Class A Common Share” means one of the authorized Class A common shares in the capital of TC. A TC Class A Common Share entitles its holder to (i) one (1) vote; (ii) to receive dividends if, as and when declared at the discretion of the TC directors; and (iii) to share equally (as a class) with the Class B common shares and Class C common shares in the capital of TC the remaining property of TC subject to the rights of the TC Class A Special Shares, Class B special shares, Class C special shares and the TC Class D Special Shares in the capital of TC and after payment of the stated capital amount plus any declared and unpaid dividends on the TC Class A Common Shares and the Class B common shares and Class C common shares in the capital of TC, in priority;
“TC Class A Redemption Note” means the demand promissory note described at Paragraph 68;
“TC Class A Special Share” means one of the authorized Class A special shares in the capital of TC referred to in Paragraph 50;
“TC Class B Special Share” means one of the authorized Class B special shares in the capital of TC referred to in Paragraph 50;
“TC Class C Special Share” means one of the authorized Class C special shares in the capital of TC referred to in Paragraph 50;
“TC Class D Special Share” means one of the authorized Class D special shares in the capital of TC referred to in Paragraph 50;
“Transfer” refers to the transfers of property described in Paragraph 59;
“UCC” means ‘undepreciated capital cost’ and has the meaning assigned by subsection 13(21);
“V Inc.” refers to XXXXXXXXXX;
“V Inc. Class A Common Share” means one of the authorized Class A common shares in the capital of V Inc. A V Inc. Class A Common Share entitles its holder to (i) one (1) vote; (ii) to receive dividends if, as and when declared at the discretion of the V Inc. directors; and (iii) to share equally (as a class) with the Class B common shares and Class C common shares in the capital of V Inc. the remaining property of V Inc. subject to the rights of the V Inc. Class A Special Shares, the Class B special shares, Class C special shares and Class D special shares in the capital of V Inc. and after payment of the stated capital amount plus any declared and unpaid dividends on the V Inc. Class A Common Shares and the Class B common shares and Class C common shares in the capital of V Inc., in priority;
“V Inc. Class A Special Share” means one of the authorized Class A special shares in the capital of V Inc. A V Inc. Class A Special Share is redeemable and retractable for a redemption amount equal to the FMV of the property transferred to V Inc. in consideration for the first issuance of the V Inc. Class A Special Shares and entitles its holder to (i) one (1) vote; (ii) receive dividends if, as and when declared at the discretion of the V Inc. directors; and (iii) receive an amount equal to the redemption amount plus any accrued but unpaid dividends in the event of a liquidation, dissolution or winding-up of V Inc.;
“Y Ltd.” refers to XXXXXXXXXX;
“Y Ltd. Class A Common Share” means one of the authorized Class A common shares in the capital of Y Ltd. A Y Ltd. Class A Common Share entitles its holder to (i) one (1) vote; (ii) receive dividends if, as and when declared at the discretion of the Y Ltd. directors; and (iii) share equally (as a class) with the Class B common shares in the capital of Y Ltd. the remaining property of Y Ltd. subject to the rights of the Y Ltd. Class B Special Shares, the Y Ltd. Class C Special Shares, and the Y Ltd. Class D Special Shares in the capital of Y Ltd.;
“Y Ltd. Class B Special Share” means one of the authorized Class B special shares in the capital of Y Ltd. A Y Ltd. Class B Special Share is redeemable and retractable for a redemption amount equal to $XXXXXXXXXX per share and entitles its holder to (i) one (1) vote; (ii) receive dividends if, as and when declared at the discretion of the Y Ltd. directors; and (iii) receive an amount equal to the redemption amount plus any accrued but unpaid dividends in the event of a liquidation, dissolution or winding-up of Y Ltd.;
“Y Ltd. Class C Special Share” means one of the authorized Class C special shares in the capital of Y Ltd. A Y Ltd. Class C Special Share is non-voting and is redeemable and retractable for a redemption amount equal to the price paid per share and entitles its holder to receive (i) dividends if, as and when declared at the discretion of the Y Ltd. directors; and (ii) an amount equal to the redemption amount plus any accrued but unpaid dividends in the event of a liquidation, dissolution or winding-up of Y Ltd. subject to the rights of the Y Ltd. Class B Special Shares;
“Y Ltd. Class D Special Share” means one of the authorized Class D special shares in the capital of Y Ltd. A Y Ltd. Class D Special Share is not entitled to vote, is redeemable and retractable for a redemption amount equal to the FMV of the property transferred to Y Ltd. in consideration for the first issuance of the Y Ltd. Class D Special Shares; and entitles its holder to receive (i) dividends if, as and when declared at the discretion of the Y Ltd. directors; and (ii) an amount equal to the redemption amount plus any accrued but unpaid dividends in the event of a liquidation, dissolution or wind-up of Y Ltd. subject to the rights of the Y Ltd. Class B Special Shares and Y Ltd. Class C Special Shares;
“Y Ltd. Freeze” refers to the transactions described in Paragraphs 17 to 23;
“Z Corp.” refers to XXXXXXXXXX;
“Z Corp. Class A Common Share” means one of the authorized Class A common shares in the capital of Z Corp. A Z Corp. Class A Common Share entitles its holder to (i) one (1) vote; (ii) receive dividends if, as and when declared at the discretion of the Z Corp. directors; and (iii) share equally (as a class) with the Class B common shares and Class C common shares in the capital of Z Corp. the remaining property of Z Corp. subject to the rights of the Z Corp. Class A Special Shares, Class B special shares, Class C special shares and Class D special shares in the capital of Z Corp. and after payment of the stated capital amount plus any declared and unpaid dividends on the Class A Common Shares, the Class B common shares and Class C common shares in the capital of Z Corp., in priority; and
“Z Corp. Class A Special Share” means one of the authorized Class A special shares in the capital of Z Corp. A Z Corp. Class A Special Share is not entitled to vote; is redeemable and retractable for a redemption amount equal to the FMV of the property transferred to Z Corp. as consideration for the first issuance of the Z Corp. Class A Special Shares, and entitles its holder to receive (i) dividends if, as and when declared at the discretion of the Z Corp. directors; and (ii) an amount equal to the redemption amount plus any accrued but unpaid dividends in the event of a liquidation, dissolution or winding-up of Z Corp.
FACTS
1. DC is a TCC and a CCPC incorporated under the BCA on XXXXXXXXXX. DC files its tax returns with the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office.
2. The authorized share capital of DC consists of an unlimited number of DC Class B Special Shares, an unlimited number of DC Class C Special Shares, an unlimited number of DC Class D Special Shares, an unlimited number of Class A Common Shares and an unlimited number of DC Class B Common Shares.
3. DC owns real estate as investment properties and carries on a specified investment business. These properties are held by DC as capital property. DC has a taxation year ending XXXXXXXXXX.
4. The issued and outstanding shares of DC are held as follows:
Shareholder Number/Class ACB Paid-up
Capital
Mr. B XXXX DC Class B Special Shares $XXXX $XXXX
Mr. B XXXX DC Class C Special Shares $XXXX $XXXX
Child 1 XXXX DC Class D Special Shares $XXXX $XXXX
Child 2 XXXX DC Class D Special Shares $XXXX $XXXX
Capital Trust 1 XXXX DC Class A Common Shares $XXXX $XXXX
Capital Trust 2 XXXX DC Class A Common Shares $XXXX $XXXX
Each of Mr. B, Child 1, Child 2, Capital Trust 1 and Capital Trust 2 holds their shares of DC as capital property.
5. Other than cash, DC’s assets consist of:
i) Current assets, including accounts receivable and prepaid expenses;
ii) Loans receivable from related parties;
iii) Loans receivable from third parties;
iv) Minority investments in several taxable Canadian corporations which are private corporations; and
v) Real estate rental properties.
6. As of XXXXXXXXXX, DC had a RDTOH balance of $XXXXXXXXXX, a CDA balance of $XXXXXXXXXX and XXXXXXXXXX for GRIP, net capital loss carry-overs and non-capital loss carryovers.
7. Y Ltd. is a TCC and a CCPC incorporated under the BCA on XXXXXXXXXX. Y Ltd. files its tax return with the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office.
8. The authorized share capital of Y Ltd. consists of an unlimited number of Y Ltd. Class B Special Shares, an unlimited number of Y Ltd. Class C Special Shares, an unlimited number of Y Ltd. Class D Special Shares, an unlimited number of Y Ltd. Class A Common Shares and an unlimited number of Class B common shares.
9. Y Ltd. carries on business as XXXXXXXXXX. Y Ltd. has a taxation year ending on XXXXXXXXXX. Y Ltd. has XXXXXXXXXX of RDTOH, CDA, GRIP, net capital loss carryovers and non-capital loss carryovers.
10. The issued and outstanding shares of Y Ltd. are held as follows:
Shareholder Number/Class ACB Paid-up
Capital
Mr. B XXXX Y Ltd. Class B Special Shares $XXXX $XXXX
DC XXXXY Ltd. Class C Special Shares $XXXX $XXXX
V Inc. XXXXY Ltd. Class D Special Shares $XXXX $XXXX
Family Trust 1 XXXXY Ltd. Class A Common Shares $XXXX $XXXX
Each of Mr. B, DC, V Inc. and Family Trust 1 hold their shares of Y Ltd. as capital property.
I. RECENTLY COMPLETED TRANSACTIONS
Reorganization of Y Ltd. and DC
11. In XXXXXXXXXX, Mr. B, Child 1 and Child 2 began to discuss succession planning amongst themselves. As part of this planning, Child 1 and Child 2 undertook estate freezes of their corporate interests, including an estate freeze for both DC and Y Ltd. which resulted in family trusts owning the common shares of each company. Business valuations were obtained prior to the reorganization, and the agreements entered into by the parties included price adjustment clauses, where applicable. In order to implement the estate freeze of DC and Y Ltd., the following steps were taken.
Settlement of Trusts
12. Family Trust 1 was settled on XXXXXXXXXX.
13. Capital Trust 1 was settled on XXXXXXXXXX.
14. Family Trust 2 was settled on XXXXXXXXXX.
15. Capital Trust 2 was settled on XXXXXXXXXX.
16. Family Trust 3 was settled on XXXXXXXXXX.
XXXXXXXXXX Freeze of Y Ltd.
17. On XXXXXXXXXX, articles of amendment were filed for Y Ltd. which created Y Ltd. Class B Common Shares, deleted certain unused classes of shares and restated the provisions of the Y Ltd. Class A Common Shares, Y Ltd. Class B Special Shares, Y Ltd. Class C Special Shares and Y Ltd. Class D Special Shares.
18. On XXXXXXXXXX, Child 1 exchanged his XXXXXXXXXX Y Ltd. Class A Common Shares for XXXXXXXXXX Y Ltd. Class D Special Shares pursuant to subsection 86(1).
19. On XXXXXXXXXX, Child 2 exchanged XXXXXXXXXX Y Ltd. Class A Common Shares for XXXXXXXXXX Y Ltd. Class D Special Shares pursuant to subsection 86(1).
20. On XXXXXXXXXX, Family Trust 1 subscribed for XXXXXXXXXX Y Ltd. Class A Common Shares.
21. On XXXXXXXXXX, the Independent Trustee subscribed for XXXXXXXXXX Y Ltd. Class A Common Shares to hold as bare trustee for the benefit of Settlor Friend.
22. On XXXXXXXXXX, Independent Trustee transferred the XXXXXXXXXX Y Ltd. Class A Common Shares and XXXXXXXXXX DC Class A Common Shares to Settlor Friend.
23. On XXXXXXXXXX, Settlor Friend settled Family Trust 2 with the XXXXXXXXXX Y Ltd. Class A Common Shares.
XXXXXXXXXX Freeze of DC
24. On XXXXXXXXXX, articles of amendment were filed for DC to rename the company, reclassify the existing common shares in the capital of DC as DC Class A Common Shares, create the DC Class B Common Shares, amend the rights attaching to the DC Class B Special Shares, DC Class C Special Shares and DC Class D Special Shares, and delete certain unused classes of shares.
25. On XXXXXXXXXX, Child 1 exchanged XXXXXXXXXX DC Class A Common Shares for XXXXXXXXXX DC Class D Special Shares pursuant to subsection 86(1).
26. On XXXXXXXXXX, Child 2 exchanged XXXXXXXXXX DC Class A Common Shares for XXXXXXXXXX DC Class D Special Shares pursuant to subsection 86(1).
27. On XXXXXXXXXX, Capital Trust 1 subscribed for XXXXXXXXXX DC Class A Common Shares.
28. On XXXXXXXXXX, the Independent Trustee subscribed for XXXXXXXXXX DC Class A Common Shares to hold as bare trustee for the benefit of Settlor Friend.
29. On XXXXXXXXXX, Settlor Friend settled Capital Trust 2 with the XXXXXXXXXX DC Class A Common Shares.
XXXXXXXXXX Reorganization of Y Ltd.
30. Child 1 has spent significant time and effort growing the business of Y Ltd. as a whole, while Child 2 has generally focused on the XXXXXXXXXX division of Y Ltd. As a result, both parties agreed that Child 1 should own Y Ltd. going forward (except for the XXXXXXXXXX division), while the XXXXXXXXXX division should be transferred from Y Ltd. to a new corporation.
31. Prior to XXXXXXXXXX, Child 2 held Y Ltd. Class B Special Shares. From XXXXXXXXXX, the Y Ltd. Class B Special Shares held by Child 2 were redeemed by Y Ltd. out of operating profits such that as of XXXXXXXXXX, Child 2 no longer held any Y Ltd. Class B Special Shares. Child 2 will report the resulting deemed dividends on his personal tax return for the affected years and will pay any resulting income tax.
32. Z Corp. was incorporated under the BCA on XXXXXXXXXX. Z Corp. is a TCC and a CCPC. Z Corp. files its tax returns at the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office. Z Corp. was incorporated to carry on the XXXXXXXXXX business previously carried on by Y Ltd.
33. The authorized share capital of Z Corp. consists of an unlimited number of Z Corp. Class A Special Shares, an unlimited number of Class B special shares, an unlimited number of Class C special shares, an unlimited number of Class D special shares, an unlimited number of Z Corp Class A Common Shares, an unlimited number Class B common shares, and an unlimited number of C common shares.
34. On XXXXXXXXXX, Family Trust 3 subscribed for XXXXXXXXXX Z Corp. Class A Common Shares.
35. On XXXXXXXXXX, Y Ltd. transferred assets relating to the XXXXXXXXXX division of its business, XXXXXXXXXX, to Z Corp. in exchange for XXXXXXXXXXZ Corp. Class A Special Shares. The XXXXXXXXXX Z Class A Special Shares issued to Y Ltd. had a FMV equal to the FMV of the assets of the XXXXXXXXXX division transferred. Y Ltd. and Z Corp. will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer at an agreed amount for each property transferred by Y Ltd. to Z Corp. that is an eligible property the FMV of which, at the time of the transfer, exceeds or may exceed the cost amount thereof to Y Ltd. The amount added to stated capital of the XXXXXXXXXX Z Corp Class A Special Shares did not exceed the agreed amount.
36. On XXXXXXXXXX, Y Ltd. purchased for cancellation XXXXXXXXXX Y Ltd. Class A Common Shares held by Family Trust 2 in exchange for Y Ltd. (a) transferring XXXXXXXXXX Z Corp. Class A Special Shares and (b) issuing a promissory note in the amount of $XXXXXXXXXX to Family Trust 2, which shares and promissory note the parties agreed were equal in value to the FMV of the XXXXXXXXXX Y Ltd. Class A Common Shares.
37. On XXXXXXXXXX, Y Ltd. redeemed XXXXXXXXXXY Ltd. Class D Special Shares held by Child 2 in exchange for Y Ltd. (a) transferring XXXXXXXXXXZ Corp. Class A Special Shares and (b) issuing a promissory note in the amount of $XXXXXXXXXX to Child 2, which shares and promissory note the parties agreed were equal in value to the FMV of the XXXXXXXXXX Y Ltd. Class D Special Shares.
38. A portion of the deemed dividend realized by Child 2 on the redemption of the XXXXXXXXXX Y Ltd. Class D Special Shares as outlined in Paragraph 37 was paid out of Y Ltd.’s CDA account. An election was filed by Y Ltd. with respect to this capital dividend in XXXXXXXXXX, and Y Ltd. paid the late-filing penalty associated with this late filed election.
39. On XXXXXXXXXX, Y Ltd. declared a capital dividend on the Y Ltd. Class A Common Shares held by Family Trust 1.
40. After filing the capital dividend election with respect to the XXXXXXXXXX dividend, an error was identified in the calculation of the capital dividend account and as a result, the capital dividend declared on XXXXXXXXXX was in excess of the balance of the capital dividend account. Y Ltd. has filed the necessary documents with the CRA to elect to treat the excess as a taxable dividend.
41. As part of Child 1’s estate planning, V Inc. was incorporated under the BCA on XXXXXXXXXX to hold his shares in Y Ltd.
42. The authorized share capital of V Inc. consists of an unlimited number of V Inc. Class A Special Shares, an unlimited number of Class B special shares, an unlimited number of Class C special shares, an unlimited number of Class D special shares, an unlimited number of V Inc. Class A Common Shares, an unlimited number of Class B common shares and an unlimited number of Class C common shares.
43. On XXXXXXXXXX, Capital Trust 1 subscribed for XXXXXXXXXX V Inc. Class A Common Shares for aggregate subscription proceeds of $XXXXXXXXXX.
44. On XXXXXXXXXX, Child 1 transferred the XXXXXXXXXX Y Ltd. Class D Special Shares held by Child 1 to V Inc. in exchange for V Inc. issuing to Child 1 XXXXXXXXXX V Inc. Class A Special Shares. The XXXXXXXXXX V Inc. Class A Special Shares issued to Child 1 had a FMV equal to the FMV of the XXXXXXXXXXY Ltd. Class D Special Shares transferred. V Inc. and Child jointly elected in the prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer at an agreed amount equal to the ACB of the XXXXXXXXXXY Ltd. Class D Special Shares. The amount added to stated capital of the V Inc. Class A Special Shares did not exceed the greater of the paid-up capital and ACB of the XXXXXXXXXX Y Ltd. Class D Special Shares as determined under section 84.1.
Incorporation of TC
45. In contemplation of the distribution of assets by DC, TC was incorporated under the BCA on XXXXXXXXXX. TC is a TCC and a CCPC. TC files its income tax returns at the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office.
46. The authorized share capital of TC consists of an unlimited number of TC Class A Special Shares, an unlimited number of TC Class B Special Shares, an unlimited number of TC Class C Special Shares, an unlimited number of TC Class D Special Shares, an unlimited number of TC Class A Common Shares, and an unlimited number of Class B common shares and an unlimited number of Class C common shares.
47. On XXXXXXXXXX, Capital Trust 2 subscribed for XXXXXXXXXX TC Class A Common Shares for aggregate subscription price of $XXXXXXXXXX.
II. PROPOSED TRANSACTIONS
Reorganization of DC
48. Subco will be incorporated under the BCA.
49. The authorized share capital of Subco will be: an unlimited number of Class A special shares, an unlimited number of Class B special shares, an unlimited number of Class C special shares, an unlimited number of Class D special shares, an unlimited number of Subco Class A Common Shares and an unlimited number of Class B common shares.
50. Articles of amendment will be filed for TC to:
(a) amend the provisions of the TC Class A Special Shares so that the TC Class A Special Shares will be redeemable and retractable for a redemption amount equal to the FMV of the property transferred to TC in consideration for the first issuance of the TC Class A Special Shares and entitle the holders of the TC Class A Special Shares, as a class, to (i) XXXXXXXXXX% of the total votes of all of the issued and outstanding voting shares; (ii) receive dividends if, as and when declared at the discretion of the TC directors; and (iii) receive an amount equal to the redemption amount plus any accrued but unpaid dividends in the event of a liquidation, dissolution or winding-up of TC.
For the purposes of subsection 191(4), the terms and conditions of the TC Class A Special Shares will, at the time of their issuance, specify an amount in respect of each such share, for which the share is to be redeemed, acquired or cancelled.
The amount to be specified in respect of each of such shares:
(i) will be pursuant to a resolution of the board of directors of TC;
(ii) will be expressed as a dollar amount;
(iii) will not be determined by a formula;
(iv) will not exceed the FMV of the consideration for which such TC Class A Special Share is issued; and
(v) will not be subject to change thereafter.
(b) amend the provisions of the TC Class B Special Shares so that a TC Class B Special Share will be redeemable and retractable for a redemption amount equal to $XXXXXXXXXX and entitle its holder to (i) one (1) vote; (ii) receive dividends if, as and when declared at the discretion of the TC directors; and (iii) receive an amount equal to the redemption amount plus any accrued but unpaid dividends in the event of a liquidation, dissolution or wind-up of TC subject to the rights of the TC Class A Special Shares;
(c) amend the provisions of the TC Class C Special Shares so that a TC Class C Special Share will be non-voting and redeemable and retractable by the Corporation for $XXXXXXXXXX and entitle its holder to receive (i) dividends if, as and when declared at the discretion of the TC directors; and (ii) an amount equal to the redemption amount plus any accrued but unpaid dividends in the event of a liquidation, dissolution or wind-up of TC subject to the rights of the TC Class A Special Shares and TC Class B Special Shares; and
(d) amend the provisions of the TC Class D Special Shares so that an TC Class D Special Share will be non-voting, redeemable and retractable for the FMV of the property transferred to TC in consideration for the first issuance of the TC Class D Special Share and entitle its holder to receive (i) dividends if, as and when declared at the discretion of the TC directors; and (ii) an amount equal to the redemption amount plus any accrued but unpaid dividends in the event of a liquidation, dissolution or wind-up of TC subject to the rights of the TC Class B Special Shares and the TC Class C Special Shares.
51. DC will transfer its interest in Property 1 and Property 2 to Subco in exchange for Subco assuming DC’s share of the mortgages on Property 1 and Property 2 and Subco issuing XXXXXXXXXX Subco Class A Common Shares to DC. The XXXXXXXXXX Subco Class A Common Shares issued to DC will have a FMV equal to the aggregate FMV of Property 1 and Property 2 less the amount of the mortgages assumed. DC and Subco will jointly elect in prescribed form and within the time limits referred to in subsection 85(6) to have the rules in subsection 85(1) apply to the transfer at an agreed amount equal to the greater of the cost amount for each of Property 1 and Property 2 and the value of the mortgages assumed by Subco. The amount added to the stated capital of the XXXXXXXXXX Subco Class A Common Shares will not exceed the greater of (i) the agreed amount less the amount of the mortgages assumed; and (ii) $XXXXXXXXXX.
52. Y Ltd. will redeem the XXXXXXXXXX Y Ltd. Class C Special Shares held by DC for aggregate consideration of $XXXXXXXXXX which will be paid by cash or cheque to DC.
53. Child 2 will transfer the XXXXXXXXXX DC Class D Special Shares he holds to TC in exchange for TC issuing Child 2 XXXXXXXXXX TC Class D Special Shares. The XXXXXXXXXX TC Class D Special Shares issued to Child 2 will have a FMV equal to the FMV of the XXXXXXXXXX DC Class D Special Shares transferred. Child 2 and TC will jointly elect in prescribed form and within the time limits referred to in subsection 85(6) to have the rules in subsection 85(1) apply to the transfer at an agreed amount equal to the cost amount of the XXXXXXXXXX DC Class D Special Shares. The amount added to the stated capital of the TC Class D Special Shares will not exceed the greater of the PUC and the ACB of the XXXXXXXXXX DC Class D Special Shares as determined under paragraphs 84.1(2)(a) or (a.1).
54. Capital Trust 2 will transfer the XXXXXXXXXX DC Class A Common Shares it holds to TC in exchange for TC issuing Capital Trust 2 XXXXXXXXXX TC Class A Common Shares. The XXXXXXXXXX TC Class A Common Shares issued to Capital Trust 2 will have a FMV equal to the FMV of the XXXXXXXXXX DC Class A Common Shares transferred. Capital Trust 2 and TC will jointly elect in prescribed form and within the time limits referred to in subsection 85(6) to have the rules in subsection 85(1) apply to the transfer at an agreed amount equal to the cost amount of the XXXXXXXXXX DC Class A Common Shares. The amount added to the stated capital of the TC Class A Common Shares will not exceed the greater of the PUC and the ACB of the XXXXXXXXXX DC Class A Common Shares as determined under paragraphs 84.1(2)(a) or (a.1).
55. Mr. B will transfer all of his XXXXXXXXXX DC Class B Special Shares and XXXXXXXXXX DC Class C Special Shares to TC in exchange for TC issuing XXXXXXXXXX TC Class B Special Shares and XXXXXXXXXX TC Class C Special Shares. The XXXXXXXXXX TC Class B Special Shares and XXXXXXXXXX TC Class Special Shares issued to Mr. B on each transfer will have a FMV equal to the FMV of the XXXXXXXXXX DC Class B Special Shares or the XXXXXXXXXX DC Class C Special Shares transferred. Mr. B and TC will jointly elect in prescribed form and within the time limits referred to in subsection 85(6) to have the rules in subsection 85(1) apply to each transfer at an agreed amount equal to the cost amount of the XXXXXXXXXX DC Class B Special Shares and XXXXXXXXXX DC Class C Special Shares, as the case may be. The amount added to the stated capital of the TC Class B Special Shares or the TC Class C Special Shares will, in each case, not exceed the greater of the PUC and ACB of the XXXXXXXXXX DC Class B Special Shares or the XXXXXXXXXX DC Class C Special Shares as determined under paragraphs 84.1(2)(a) or (a.1).
56. Immediately prior to the Transfer, the property of DC will be determined on a consolidated basis by including the appropriate pro rata share of the assets of any corporation over which DC has the ability to exercise significant influence. Such assets will be classified into the following three types of property for the purposes of the definition of distribution as follows:
(a) cash or near-cash property, comprising all of the current assets of DC, including cash, marketable securities, accounts receivable, trade receivables, inventory and prepaid expenses;
(b) business property, comprising all of the assets of DC, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from an active business (other than a specified investment business) including goodwill; and
(c) investment property, comprising all of the assets of DC, 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.
For greater certainty, for purposes of this distribution:
(a) any tax accounts, such as the balance of any non-capital losses of DC or the balance of any RDTOH or CDA of DC, if any, will not be considered property;
(b) advances that have a term of less than 12 months or are due on demand (other than advances owing to DC which are described in (d) below) are considered cash or near-cash property;
(c) DC is considered to have significant influence over a corporation if DC has significant influence over that corporation or over any other corporation that has significant influence over that corporation, or if DC, in combination with corporations over which it has significant influence, has significant influence over that corporation; and
(d) the FMV of the shares in the capital of any corporation over which DC has the ability to exercise significant influence, and of any indebtedness receivable by DC from such a corporation, will be allocated among the three types of property described above by multiplying the FMV of the shares in the capital of such corporations or the amount of indebtedness receivable therefrom, as the case may be, by the proportion that the net FMV of each type of property owned by the particular corporation (determined in accordance herewith) is of the net FMV of all property owned by such corporation.
57. In determining, on a consolidated basis, the net FMV of each of the three types of property of DC immediately before the Transfer, the liabilities of DC and any corporation over which DC exercised significant influence will be allocated to, and will be deducted in the calculation of the net FMV of, each type of property of DC or such corporation, as the case may be, in the following manner:
(a) in determining the net FMV of each type of property of a corporation over which DC exercises significant influence immediately before the Transfer, the liabilities of that corporation (other than any amount owing by such corporation to DC) will be allocated to, and be deducted in the calculation of the net FMV of, each type of property of that particular corporation in the following manner:
(i) current liabilities of that particular corporation will be allocated to each cash or near-cash property of the corporation in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by that particular corporation. To the extent that the total amount of current liabilities to be allocated to the cash or near-cash property exceeds the total FMV of all of the cash or near-cash property, that particular corporation will be considered to have a negative amount of cash or near-cash property;
(ii) liabilities, other than current liabilities, of that particular corporation that relate to a particular property will be allocated to that particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property and liabilities that pertains to a particular type of property, but not to a particular property, will be allocated to that particular type of property. To the extent that the total amount of liabilities allocated to a particular type of property as described herein exceeds the total FMV of that type of property, that particular corporation will be considered to have a negative amount of that type of property; and
(iii) any liabilities that remain after the allocations described in Paragraphs 57(a)(i) and (ii) are made, will then be allocated to the cash or near-cash property, investment property and business property of that particular corporation, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities. However, where that particular corporation is considered to have a negative amount of a type of property because of Paragraph 57(a)(i) or (ii), for the purposes of allocating those remaining liabilities, the net FMV of that type of property will be deemed to be nil, resulting in none of those remaining liabilities being allocated to that type of property.
(b) in determining, on a consolidated basis, the net FMV of each type of property of DC immediately before the Transfer, DC will include the appropriate pro rata share of the net FMV of each type of property of any corporation over which DC exercises significant influence, and, for greater certainty, the appropriate negative amount of such type of property of any such corporation, and any liabilities of DC will be allocated to, and deducted in the calculation of the net FMV of, each such type of property of DC in the following manner:
(i) current liabilities of DC will be allocated to the cash or near-cash property of DC in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property of DC. The total amount of DC’s current liabilities to be allocated to DC’s cash or near cash property will not exceed the FMV of all of DC’s cash or near-cash property;
(ii) liabilities of DC, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. The 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 FMV of such type after the allocation of liabilities to a particular property, as described herein; and
(iii) any liabilities that remain after the allocations described in Paragraphs 57(b)(i) and (ii) are made, will then be allocated to the cash or near-cash property, investment property and business property of DC, on the basis of the relative net FMV of each type of property immediately prior to the allocation of such excess, but after the allocation of liabilities as described in Paragraphs 57(b)(i) and (ii).
For greater certainty, for purposes of the determination described in this Paragraph 57:
(a) the amount of any deferred income tax will not be considered a liability because such amount does not represent a legal obligation;
(b) amounts owing that have a term of less than 12 months or are due on demand are considered current liabilities;
(c) current liabilities include amounts normally classified as current liabilities, including accounts payable, bonuses payable, and the current portion of any long term debt; and
(d) no amount will be considered to be a liability unless it represents a true legal liability that is capable of quantification.
58. Intentionally deleted.
59. DC will transfer to TC its pro rata portion of each type of property that DC owns immediately before the transfer for proceeds of disposition equal to the FMV of those assets. The property transferred by DC to TC will include XXXXXXXXXX% of the Subco Class A Common Shares acquired by DC in consideration for the transfers of Property 1 and Property 2 by DC to Subco.
Immediately following the transfers, the FMV of the cash or near-cash property, business property and investment property transferred by DC to TC will approximate the proportion of the FMV of all the assets of DC of a corresponding type of property determined immediately before such transfer that:
i) the aggregate FMV, immediately before the transfers, of the shares of DC owned by TC at that time
is of
ii) the aggregate FMV, immediately before the transfers, of all the issued and outstanding shares of DC at that time.
The cash to be transferred to TC will be determined within XXXXXXXXXX days of the transfer of the property and an adjustment will be made as required to the cash transferred such that TC receives its pro rata portion of cash or near cash property as determined in accordance with Paragraphs 56 and 57 above immediately following the transfers.
For the purpose of this Paragraph, the expression “approximate” means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the net FMV of each type of property which TC has received as compared to what TC would have received had it received its appropriate pro rata share of the net FMV of that type of property.
60. As consideration for the property so transferred, TC will:
(a) assume an appropriate portion of the liabilities of DC so that on a net basis, TC will receive its pro rata share of each type of property owned by DC; and
(b) issue to DC such number of TC Class A Special Shares that have an aggregate FMV equal to the FMV of property transferred less the amount of the liabilities assumed by TC under (a) above. TC will add to the stated capital account of the TC Class A Special Shares an amount not exceeding the cost amount to TC (as determined under section 85, where relevant) of the property transferred to it less any liabilities assumed by it.
61. DC and TC will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer at an agreed amount of each property transferred by DC to TC as described in Paragraph 59 that is an eligible property the FMV of which, at the time of the transfer, exceeds or may exceed the cost amount thereof to DC.
The agreed amount in respect of each eligible property transferred by DC to TC as described in Paragraph 59 will not be greater than the FMV 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 as follows:
(a) In the case of property described in paragraph 85(1)(c.1), an amount equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii);
(b) In the case of eligible capital property, an amount equal to the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii); and
(c) In the case of depreciable property of a prescribed class, an amount equal to the least of the amounts specified in subparagraph 85(1)(e).
62. DC will redeem the XXXXXXXXXX DC Class D Special Shares held by TC for an amount equal to their aggregate redemption amount and FMV. DC will pay the redemption amount by issuing to TC a promissory note with a principal amount equal to the aggregate redemption amount and FMV of the DC Class D Special Shares redeemed (the “DC Class D Redemption Note”). TC will accept the DC Class D Redemption Note as full payment for the redemption amount of the DC Class D Special Shares so redeemed.
63. DC will redeem the XXXXXXXXXX DC Class B Special Shares held by TC for an amount equal to their aggregate redemption amount and FMV. DC will pay the redemption amount by issuing to TC a promissory note with a principal amount equal to the aggregate redemption amount and FMV of the DC Class B Special Shares redeemed (the “DC Class B Redemption Note”). TC will accept the DC Class B Redemption Note as full payment for the redemption amount of the DC Class B Special Shares so redeemed.
64. DC will redeem the XXXXXXXXXX DC Class C Special Shares held by TC for an amount equal to their aggregate redemption amount and FMV. DC will pay the redemption amount by issuing to TC a promissory note with a principal amount equal to the aggregate redemption amount and FMV of the DC Class C Special Shares redeemed (the “DC Class C Redemption Note”). TC will accept the DC Class C Redemption Note as full payment for the redemption amount of the DC Class C Special Shares so redeemed.
65. DC will purchase for cancellation the XXXXXXXXXX DC Class A Common Shares held by TC for an amount equal to their FMV. DC will pay the purchase price by issuing to TC a promissory note with a principal amount equal to the FMV of the DC Class A Common Shares purchased (the “DC Class A Repurchase Note”). TC will accept the DC Class A Repurchase Note as full payment for the purchase price of the DC Class A Common Shares so purchased.
66. The purchase for cancellation of the DC Class A Common Shares in Paragraph 65 will result in an acquisition of control of DC. Pursuant to subsection 256(9), DC will elect in its income tax return for the taxation year immediately before the acquisition of control to not have that provision apply and to have such acquisition of control occur at the time during the day immediately before the repurchase of such DC Class A Common Shares.
67. The redemptions described in Paragraphs 62 to 64 and the purchase for cancellation described in paragraph 65 will take place concurrently.
68. Immediately after the end of the taxation year of DC that commences on the acquisition of control resulting from the purchase for cancellation of the DC Class A Common Shares described in Paragraph 65, TC will redeem the TC Class A Special Shares held by DC at their aggregate redemption amount and FMV. TC will pay the redemption amount by issuing the TC Class A Redemption Note. DC will accept the TC Class A Redemption Note as full payment for the redemption amount of the TC Class A Special Shares so redeemed.
69. TC and DC will set-off the DC Redemption Notes against the TC Class A Redemption Note, and they will all be cancelled by set-off.
70. Child 1 XXXXXXXXXX which caused Child 1 to re-examine his estate plan and led to the decision by Mr. B, Child 1 and Child 2 to divide their jointly owned property.
71. Except as described in this letter, no property has been or will be acquired, and no liabilities have been or will be incurred or paid by DC in contemplation of and before the Proposed Transactions, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).
72. Other than the transfers which form part of the Proposed Transactions or transfers in the ordinary course of business, neither DC nor TC expects or intends to dispose of any property owned by them as part of the series of transactions or events that includes the Proposed Transactions to a person unrelated to DC or TC, as the case may be, or to a partnership as described in paragraphs 55(3.1)(c) or (d).
73. There has not been and will not be, as part of the series of transactions or events that include the Proposed Transactions, any disposition or acquisition of property in circumstances described in subparagraph 55(3.1)(b)(i) or (iii), or an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii).
74. The DC Freeze and the Y Ltd. Freeze are not part of the same series of transactions or events that includes the Proposed Transactions. The Proposed Transactions and each of the DC Freeze and the Y Ltd. Freeze were not completed in contemplation of each other. The DC Freeze and the Y Ltd Freeze would have been completed whether or not the Proposed Transactions were completed. The Proposed Transactions would be completed whether or not the DC Freeze and the Y Ltd. Freeze were completed.
75. Neither DC nor TC is or will be, at any time during a series of transactions or events that includes the Proposed Transactions, a specified financial institution, a restricted financial institution or a corporation described in any of the paragraphs (a) to (f) of the definition of financial intermediary corporation.
76. During the implementation of the Proposed Transactions, neither the shares of DC nor the shares of TC will be:
(a) the subject of any undertaking or agreement that is referred to in subsection 112(2.2) as a “guarantee agreement”;
(b) issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5);
(c) the subject of a “dividend rental arrangement” as that term is defined in subsection 248(1);
(d) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or
(e) issued for consideration that is or includes:
(i) an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or
(ii) any right of the type described in subparagraph 112(2.4)(b)(ii).
77. Immediately before the redemption of the TC Class A Special Shares held by DC described in Paragraph 68, DC will be connected with TC pursuant to paragraph 186(4)(a) and subsection 186(2).
78. Immediately before the redemption of the (i) DC Class D Special Shares described in Paragraph 62; (ii) DC Class B Special Shares described in Paragraph 63; (iii) DC Class C Special Shares described in Paragraph 64; and (iv) purchase for cancellation of DC Class A Common Shares described in Paragraph 65, TC will be connected with DC pursuant to paragraph 186(4)(a) and subsection 186(2) and will have a substantial interest in DC as determined under paragraph 191(2)(b).
79. The principal purpose for TC acquiring DC Class B Special Shares, DC Class C Special Shares, DC Class D Special Shares and DC Class A Common Shares was not to avoid or limit the application of Part I, Part IV.1 or Part VI.1.
80. The FMV of the DC Class D Redemption Note acquired by TC as described in Paragraph 62 will be equal to its principal amount at all times.
81. The FMV of the DC Class B Redemption Note acquired by TC as described in Paragraph 63 will be equal to its principal amount at all times.
82. The FMV of the DC Class C Redemption Note acquired by TC as described in Paragraph 64 will be equal to its principal amount at all times.
83. The FMV of the DC Class A Repurchase Note acquired by TC as described in Paragraph 65 will be equal to its principal amount at all times.
84. Each of DC and TC will have the financial capacity to honour, upon presentation for payment, the amount payable under any promissory note issued as part of the Proposed Transactions.
85. Each of Child 1, Child 2, Mr. B Capital Trust 1, Capital Trust 2, Family Trust 1, Family Trust 2 and Family Trust 3 is a resident of Canada for purposes of the Act.
86. The Proposed Transactions will not result in DC or a related person being unable to pay its existing tax liabilities.
IV. PURPOSE OF THE PROPOSED TRANSACTIONS
87. The purpose of the reorganization of DC is to divide the holdings of the family into companies controlled by Child 1 and Child 2. This will allow each of Child 1 and Child 2 to deal with the properties independent of the other. For example, this will allow each of them to borrow against their properties to finance other activities and achieve estate planning and succession planning objectives.
88. The Proposed Transactions will also allow each of Child 1 and Child 2 to simplify their personal holdings and allow each of Child 1 and Child 2 to develop their own succession and estate plans to meet their differing objectives with a goal to providing a smooth transition to the next generation while attempting to minimize future conflict.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant Facts, proposed transactions, Additional Information and Purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:
A. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6) and provided that each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, subsection 85(1) will apply to:
(a) the transfer of the XXXXXXXXXX DC Class B Special Shares, XXXXXXXXXX Class C Special Shares, XXXXXXXXXX DC Class D Special Shares and XXXXXXXXXX DC Class A Common Shares of DC by Mr. B, Child 2 and Capital Trust 2 to TC described in Paragraphs 53 to 55; and
(b) the transfer of each property owned by DC to TC described in Paragraph 59;
such that the agreed amount in respect of each such transfer will be deemed to be the transferor’s proceeds of disposition of the particular property and the transferee’s cost amount thereof, and the transferor’s cost amount of the shares received as consideration for such disposition.
For purposes of this ruling A, when determining the agreed amount of depreciable property in the course of the transfers described in Paragraph 59, the reference to the undepreciated capital cost to the taxpayer of all of the property of that class immediately before the disposition in subparagraph 85(1)(e)(i) shall mean that portion of the undepreciated capital cost to the taxpayer of all the property of that class that the FMV of the assets of that class transferred to TC is of the FMV of all assets of that class owned by DC immediately before the transfer.
For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.
B. On the redemption by TC of the TC Class A Special Shares owned by DC, as described in Paragraph 68, by virtue of paragraphs 84(3)(a) and 84(3)(b), TC will be deemed to have paid, and DC will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the TC Class A Special Shares issued by TC exceeds the PUC of such shares immediately before the redemption.
C. On the redemption by DC of the DC Class B Special Shares and DC Class C Special Shares and DC Class D Special Shares owned by TC, as described in Paragraphs 62 to 64; and the purchase for cancellation of the DC Class A Common Shares owned by TC, as described in Paragraph 65, by virtue of paragraphs 84(3)(a) and 84(3)(b), DC will be deemed to have paid, and TC will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption or the purchases for cancellation of the DC Class B Special Shares, DC Class C Special Shares, DC Class D Special Shares and DC Class A Common Shares issued by DC exceeds the PUC of such class of shares immediately before the redemption or purchase for cancellation.
D. The taxable dividends described in rulings B and C above:
(a) will be included in computing the income of the person deemed to have received such a dividend pursuant to subsection 82 (1) and paragraph 12(1)(j);
(b) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which such a dividend is deemed to have been received, and, for greater certainty, such deduction will not be prohibited by subsections 112(2.1), (2.2), (2.3) or (2.4);
(c) will be excluded in determining the recipient’s proceeds of disposition of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54;
(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 be subject to tax under Part IV.1;
(f) will not be subject to tax under Part VI.1; and
(g) will not be subject to tax under Part IV except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend, which, for greater certainty, will include the taxable dividends described in rulings B and C above.
E. Provided that, as part of the series of transactions or events that includes the Proposed Transactions, there is not:
(a) an acquisition of property in the circumstances described in paragraph 55(3.1)(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 property in the circumstances described in subparagraph 55(3.1)(b)(iii) or;
(e) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or 55(3.1)(d);
which has not been described in the Facts, the Additional Information and the Proposed Transactions, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in rulings B and C above, and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
F. The extinguishment of the DC Redemption Notes and the TC Class A Redemption Note by set-off will not give rise to a “forgiven amount” within the meaning of subsections 80(1) or 80.01(1). In addition, neither DC nor TC will otherwise realize any gain or loss as a result of the extinguishment of any of the DC Redemption Notes and the TC Class A Redemption Note, as the case may be.
G. Subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not apply to the Proposed Transactions.
H. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R6 issued on August 29, 2014, 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, including but not limited to the legislative proposal announced by the Department of Finance on July 31, 2015.
Unless otherwise expressively confirmed, nothing in this ruling should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:
a) the FMV or ACB of any property referred to herein or the PUC in respect of any share referred to herein;
b) the outstanding balance of various tax accounts such as 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;
d) the tax consequences of any of the Subject Transactions including, but not limited to, the application of subsection 55(2) or any of the attribution rules under sections 74.1, 74.2, 74.3 and 74.4;
e) whether any transactions would be considered part of the same series of transactions or events that include the Proposed Transactions;
f) any provincial tax consequences of the Proposed Transactions or 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 FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer or issuance of shares. 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
Manager
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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