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: See below.
XXXXXXXXXX 2016-067468
XXXXXXXXXX, 2017
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (Business Number XXXXXXXXXX), XXXXXXXXXX (Business Number XXXXXXXXXX), XXXXXXXXXX (Business Number XXXXXXXXXX), XXXXXXXXXX (Business Number XXXXXXXXXX), XXXXXXXXXX (Business Number XXXXXXXXXX), individually sometimes referred to as the “Taxpayer” and collectively referred to as the “Taxpayers” all of which report to the XXXXXXXXXX TSO and XXXXXXXXXX Taxation Centre)
We are writing in response to your request for an advance income tax ruling. We also acknowledge the additional information provided in your letters and in various email correspondence, as well as information provided during our telephone conversations (XXXXXXXXXX).
PRELIMINARY MATTERS
To the best of your knowledge and that of the responsible officers of the above-mentioned taxpayers, none of the issues raised in this ruling request are:
(a) dealt with in a previously filed return of one of the Taxpayers or a related person;
(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of one of the Taxpayers or a related person;
(c) under objection by one of the Taxpayers or a related person;
(d) the subject of a current or completed court process involving one of the Taxpayers or a related person; or
(e) the subject of a ruling previously considered by the Income Tax Rulings Directorate.
Unless otherwise stated, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (the “Act”) as amended, or the Income Tax Regulations, C.R.C., c.945, as appropriate and all references to monetary amounts are in Canadian dollars.
DEFINITIONS
In this letter, the following terms and expressions have the meanings specified:
“ACB” means “adjusted cost base” as that expression is defined in section 54 and subsection 248(1);
“Act1” means the XXXXXXXXXX;
“Act2” means the XXXXXXXXXX;
“Amalco” means a corporation to be formed as a result of the amalgamation of DC2 and TC3;
“Amalco Note” means the promissory note issued by Amalco to Mr. B upon the reduction of the PUC of Mr. B’s shares in Amalco;
“agreed amount” means the amount that a transferor and transferee have agreed on in a joint election under subsection 85(1) in respect of a transfer of eligible property;
“CCPC” means a “Canadian-controlled private corporation” as that expression is defined in subsection 125(7);
“CDA” means “capital dividend account” as that expression is defined in subsection 89(1);
“DC1” means XXXXXXXXXX, an unlimited liability company incorporated and existing under Act1 and the amalgamated entity resulting from the amalgamation of XXXXXXXXXX and Securitiesco described in this letter;
“DC2” means XXXXXXXXXX, a corporation amalgamated and existing under Act2;
“eligible dividend” has the meaning assigned by subsection 89(1);
“eligible property” has the meaning assigned by subsection 85(1.1);
“FMV” means the highest price available in an open and unrestricted market, between informed prudent parties, acting at arm's length and with no compulsion to act, expressed in terms of cash;
“GRIP” means “general rate income pool” as that expression is defined in subsection 89(1);
XXXXXXXXXX;
“Limited Partnership Interest” means the minority partnership interest of DC1 in XXXXXXXXXX which holds XXXXXXXXXX investments in XXXXXXXXXX;
“Mr. A” means XXXXXXXXXX, an individual resident of Canada;
“Mr. B” means XXXXXXXXXX, an individual resident of XXXXXXXXXX;
“Ms. X” means XXXXXXXXXX, an individual resident of Canada;
“Ms. X Note” means the promissory note in the amount of $XXXXXXXXXX issued by DC2 to Ms. X in respect of the redemption of XXXXXXXXXX Class B preferred shares and the XXXXXXXXXX Class D preferred shares of DC2 held by Ms. X;
“Paragraph” refers to a numbered paragraph in this advance income tax ruling request;
“POD” means “proceeds of disposition” as that expression is defined in section 54;
“Proposed Transactions” means the proposed transactions described in the Proposed Transactions section of this letter;
“PUC” means “paid-up capital” as that expression is defined in subsection 89(1);
“RDTOH” means “refundable dividend tax on hand” as that expression is defined in subsection 129(3);
“safe income determination time” has the meaning assigned to that phrase by subsection 55(1);
“safe income on hand” in respect of a particular share of a corporation at a particular time means the portion of the unrealized gain inherent in such share of the corporation at that time that cannot reasonably be considered to be attributable to anything other than income earned or realized (as determined pursuant to subsection 55(5)), to the extent that it is on hand, by any corporation after 1971 and before the safe income determination time for a transaction, event or series of transactions or events;
“Securitiesco” means an unlimited liability company to be incorporated under Act1;
“SubDC2” means a corporation to be incorporated under Act2;
“SubDC2 Note” means the demand, non-interest bearing, Canadian dollar denominated promissory note issued by SubDC2 to DC1 on the redemption of the SubDC2 Special Shares having a principal amount and FMV equal to the redemption amount of the SubDC2 Special Shares so redeemed;
“SubDC2 Special Shares” means the preferred shares of SubDC2 with the following attributes: no par value, non-voting, conditionally entitled to dividends, entitled to a preference on liquidation and redeemable and retractable at an amount equal to the aggregate FMV of the consideration for which such shares were issued (plus any declared but unpaid dividends);
“SubTC1A” means a corporation to be incorporated under Act2;
“SubTC1A Note” means the demand, non-interest bearing, Canadian dollar denominated promissory note issued by SubTC1A to DC1 on the redemption of the SubTC1A Special Shares having a principal amount and FMV equal to the redemption amount of the SubTC1A Special Shares so redeemed;
“SubTC1A Special Shares” means the preferred shares of SubTC1A with the following attributes: no par value, non-voting, conditionally entitled to dividends, entitled to a preference on liquidation and redeemable and retractable at an amount equal to the aggregate FMV of the consideration for which such shares were issued (plus any declared but unpaid dividends);
“SubTC1B” means a corporation to be incorporated under Act2;
“SubTC1B Note” means the demand, non-interest bearing, Canadian dollar denominated, promissory note issued by SubTC1B to DC2 on the redemption of the SubTC1B Special Shares having a principal amount and FMV equal to the redemption amount of the SubTC1B Special Shares so redeemed;
“SubTC1B Special Shares” means the preferred shares of SubTC1B with the following attributes: no par value, non-voting, conditionally entitled to dividends, entitled to a preference on liquidation and redeemable and retractable at an amount equal to the aggregate FMV of the consideration for which such shares were issued (plus any declared but unpaid dividends);
“SubTC2” means an unlimited liability company to be incorporated under Act1;
“SubTC2 Note” means the demand, non-interest bearing, Canadian dollar denominated promissory note issued by SubTC2 to DC1 on the redemption of the SubTC2 Special Shares having a principal amount and FMV equal to the redemption amount of the SubTC2 Special Shares so redeemed;
“SubTC2 Special Shares” means the preferred shares of SubTC2 with the following attributes: no par value, non-voting, conditionally entitled to dividends, entitled to a preference on liquidation and redeemable and retractable at an amount equal to the aggregate FMV of the consideration for which such shares were issued (plus any declared but unpaid dividends);
“Target Securities” means certain marketable securities having an aggregate fair market value of approximately $XXXXXXXXXX and having a low aggregate ACB;
“TCP” means “taxable Canadian property” as that expression is defined in subsection 248(1);
“TC1” means XXXXXXXXXX (Business Number XXXXXXXXXX), a corporation incorporated and existing under Act2, whose tax affairs are administered by the XXXXXXXXXX Tax Services Office and whose corporate tax returns are filed at XXXXXXXXXX Taxation Centre;
“TC1 Note” means the promissory note issued by DC2 to TC1 on the purchase for cancellation of all the shares in DC2’s capital owned by TC1;
“TC2” means XXXXXXXXXX, an unlimited liability company incorporated under Act1;
“TC3” means XXXXXXXXXX, an unlimited liability company incorporated under Act1;
“TCC” means “taxable Canadian corporation” as that expression is defined in subsection 89(1);
“ULC” means an unlimited liability corporation; and
“winding-up dividend” means the dividend arising on the wind-up of DC1, by virtue of subsection 84(2) and paragraph 88(2)(b), as described in Paragraph 67.
FACTS
1. Mr. A and Mr. B are siblings.
2. Ms. X is the mother of Mr. A and Mr. B.
3. Currently, the economic interests of Ms. X, Mr. A and Mr. B converge in DC2 and, indirectly, in DC1.
4. Prior to the implementation of the Proposed Transactions, Ms. X, Mr. A, Mr. B, TC1, DC1 and DC2 will enter into a contract pursuant to which they will agree to enter into the Proposed Transactions substantially in the manner set out herein.
Facts Relating to DC1
5. DC1 is a CCPC and a TCC. DC1 was incorporated on XXXXXXXXXX. DC1’s fiscal period and taxation year ends on XXXXXXXXXX. XXXXXXXXXX.
6. The authorized capital of DC1 consists of XXXXXXXXXX common shares, XXXXXXXXXX Class A shares, XXXXXXXXXX Class B shares, XXXXXXXXXX Class C shares and XXXXXXXXXX Class D shares.
7. The only shares of DC1 that are issued and outstanding are the following:
a) XXXXXXXXXX common shares (voting, participating) owned in equal parts (XXXXXXXXXX common shares each) by Mr. B and TC1;
b) XXXXXXXXXX Class A shares (voting, preferred, and carrying a XXXXXXXXXX% per annum non-cumulative dividend) owned by DC2; and
c) XXXXXXXXXX Class C shares (non-voting, preferred, and carrying a XXXXXXXXXX% per annum non-cumulative dividend) owned by DC2.
8. The aggregate PUC of the DC1 common shares shares is $XXXXXXXXXX. The ACB of the common shares of DC1 to each of Mr. B and TC1 is $XXXXXXXXXX. The common shares of DC1 are held by each of Mr. B and TC1 as capital property and were not acquired in contemplation of the Proposed Transactions.
9. The aggregate PUC of the DC1 Class A shares is $XXXXXXXXXX, and each Class A share has a redemption value of $XXXXXXXXXX per share. The ACB of the Class A shares of DC1 to DC2 is $XXXXXXXXXX. The Class A shares of DC1 are held by DC2 as capital property and were not acquired in contemplation of the Proposed Transactions.
10. The aggregate PUC of the DC1 Class C shares is $XXXXXXXXXX, and each Class C share has a redemption value of $XXXXXXXXXX per share, or $XXXXXXXXXX in the aggregate. The ACB of the Class C shares of DC1 to DC2 is $XXXXXXXXXX. The Class C shares of DC1 are held by DC2 as capital property and were not acquired in contemplation of the Proposed Transactions.
11. Since XXXXXXXXXX, DC1 has declared annual taxable dividends to DC2 on the Class A and the Class C shares held by DC2 in an aggregate amount equal to the lesser of the maximum dividend entitlements thereunder and the taxable income of DC1.
12. DC1 is an investment holding company. DC1’s assets consist of cash, units in various money market funds, investments in marketable securities, units in an investment fund (which will be sold prior to the Proposed Transactions), and the Limited Partnership Interest. The aggregate FMV of DC1’s assets, as at XXXXXXXXXX, was approximately $XXXXXXXXXX. Immediately prior to the Proposed Transactions, DC1’s main assets will consist of the following:
a) cash and cash-like assets (such as units in money market funds or GICs);
b) marketable securities, including shares of XXXXXXXXXX, a public corporation; and
c) the Limited Partnership Interest.
13. The liabilities of DC1 consist of a shareholder loan payable on demand, the outstanding amount of which was approximately $XXXXXXXXXX as at XXXXXXXXXX as well as accounts payable of $XXXXXXXXXX and income taxes payable of $XXXXXXXXXX. As at that date, the FMV shareholder’s equity of DC1 was approximately $XXXXXXXXXX.
14. As at XXXXXXXXXX, the balance in DC1’s CDA was approximately $XXXXXXXXXX and the balance in DC1’s RDTOH account was $XXXXXXXXXX.
15. Historically, DC1 has always reported the income from its Limited Partnership Interest as income from property. Accordingly, DC1 considers the Limited Partnership Interests owned by it to be investment property for the purposes of the distributions contemplated as part of the Proposed Transactions.
Facts Relating to DC2
16. DC2 is a CCPC and a TCC. DC2 was formed on XXXXXXXXXX as a result of the amalgamation of XXXXXXXXXX (pre-amalgamation) with XXXXXXXXXX DC2’s fiscal period and taxation year ends on XXXXXXXXXX.
17. The authorized capital of DC2 consists of an unlimited number of Class A common shares, Class B common shares, Class A preferred shares, Class B preferred shares, Class C preferred shares and Class D preferred shares.
18. The only shares of DC2 that are issued and outstanding are the following:
a) XXXXXXXXXX Class A common shares (common, voting, participating) held by Mr. A;
b) XXXXXXXXXX Class B common shares (common, non-voting, participating) of which XXXXXXXXXX are held by Mr. A and XXXXXXXXXX are held by Mr. B;
c) XXXXXXXXXX Class B preferred shares (preferred, non-voting, redeemable and retractable) held by Ms. X; and
d) XXXXXXXXXX Class D preferred shares (preferred, voting, redeemable and retractable) held by Ms. X.
19. The aggregate PUC of the DC2 Class A common shares is $XXXXXXXXXX. The Class A common shares of DC2 are held by Mr. A as capital property and were not acquired in contemplation of the Proposed Transactions.
20. The aggregate PUC of the DC2 Class B common shares is $XXXXXXXXXX. The ACB of the Class B common shares of DC2 to Mr. A is $XXXXXXXXXX, and the ACB of the Class B common shares of DC2 to Mr. B is $XXXXXXXXXX. The Class B common shares of DC2 are held by Mr. A and by Mr. B as capital property and were not acquired in contemplation of the Proposed Transactions.
21. The aggregate PUC of the DC2 Class B preferred shares is $XXXXXXXXXX, and they have a redemption value of $XXXXXXXXXX per share, or $XXXXXXXXXX in the aggregate. The ACB of the Class B preferred shares of DC2 to Ms. X is $XXXXXXXXXX. The Class B preferred shares of DC2 are held by Ms. X as capital property and were not acquired in contemplation of the Proposed Transactions.
22. The aggregate PUC of the DC2 Class D preferred shares is $XXXXXXXXXX, and they have a redemption value of $XXXXXXXXXX per share, or $XXXXXXXXXX in the aggregate. The ACB of the Class D preferred shares of DC2 to Ms. X is $XXXXXXXXXX. The Class D preferred shares of DC2 are held by Ms. X as capital property and were not acquired in contemplation of the Proposed Transactions. The Class D preferred shares give Ms. X voting control of DC2.
23. DC2 is an investment holding company. DC2’s assets consist primarily of its shares in DC1 as well as advances receivable from DC1 in the aggregate amount, as at XXXXXXXXXX, of $XXXXXXXXXX, payable on demand, and advances receivable from Ms. X in the aggregate amount, as at XXXXXXXXXX, of $XXXXXXXXXX and cash of $XXXXXXXXXX. Immediately prior to the Proposed Transactions, DC2’s main assets will consist of the following:
a) its shares of DC1; and
b) its advances receivable from DC1.
24. The liabilities of DC2 consist of a loan payable to Mr. A in the amount of approximately $XXXXXXXXXX payable on demand. As at XXXXXXXXXX, the shareholder’s equity of DC2 was approximately $XXXXXXXXXX.
25. As at XXXXXXXXXX, the balance in DC2’s CDA was $XXXXXXXXXX. As at XXXXXXXXXX, the balance in DC2’s RDTOH account was $XXXXXXXXXX.
Facts Relating to TC1
26. TC1 is a CCPC and a TCC. TC1 was incorporated on XXXXXXXXXX. TC1’s fiscal period and taxation year ends on XXXXXXXXXX.
27. The authorized capital of TC1 consists of an unlimited number of common shares and an unlimited number of Class A shares.
28. The only shares of TC1 that are issued and outstanding are XXXXXXXXXX common shares held by Mr. A with a PUC of $XXXXXXXXXX. The ACB of the Common shares of TC1 to Mr. A is $XXXXXXXXXX. The common shares of TC1 are held by Mr. A as capital property and were not acquired in contemplation of the Proposed Transactions.
29. TC1 is an investment holding corporation. TC1’s assets include an investment in shares of DC1.
Significant Transactions
30. The following are all significant transactions which have been completed or which are intended to be completed prior to the completion of the Proposed Transactions and independently from the Proposed Transactions:
a) In XXXXXXXXXX, DC1 sold its Limited Partnership Interest for cash POD of approximately US$XXXXXXXXXX by way of redemption. A portion of the cash is still due. DC1 had originally acquired its interest therein on XXXXXXXXXX for $XXXXXXXXXX.
b) On XXXXXXXXXX, DC1 declared a capital dividend to DC2 on the Class A and the Class C shares held by DC2 in an aggregate amount of $XXXXXXXXXX. DC1 elected that such dividends be paid out of its CDA.
c) On XXXXXXXXXX, DC2 redeemed XXXXXXXXXX Class B preferred shares held by Ms. X for $XXXXXXXXXX, payable by way of promissory note. This promissory note was used to offset the receivable owing to DC2 by Ms. X. In accordance with subsection 83(2), DC2 elected that the deemed dividend arising as a result of this redemption of shares be paid out of its CDA. Such Class B preferred shares were cancelled immediately upon their redemption by operation of law.
d) On XXXXXXXXXX, Mr. B incorporated TC2. The authorized capital of TC2 consists, inter alia, of an unlimited number of common shares. Mr. B subscribed for XXXXXXXXXX common shares of TC2 for $XXXXXXXXXX in the aggregate, which he will hold as capital property. TC2’s fiscal period and taxation year will end on XXXXXXXXXX.
e) On XXXXXXXXXX, Mr. B incorporated TC3. The authorized capital of TC3 consists, inter alia, of an unlimited number of common shares. Mr. B subscribed for XXXXXXXXXX common shares of TC3 for $XXXXXXXXXX in the aggregate, which he will hold as capital property. TC3’s fiscal period and taxation year will end on XXXXXXXXXX. XXXXXXXXXX.
f) On XXXXXXXXXX, DC1 borrowed approximately $XXXXXXXXXX against its brokerage account at XXXXXXXXXX on a short term basis in order to fund its income taxes.
g) DC1 owns less than XXXXXXXXXX% of the issued and outstanding shares of XXXXXXXXXX, a public corporation, as one of its investments, and their value represents less than XXXXXXXXXX% of DC1’s investments. On XXXXXXXXXX, XXXXXXXXXX announced a takeover. On XXXXXXXXXX, pursuant to plan of arrangement between XXXXXXXXXX and XXXXXXXXXX, DC1 elected to receive shares of XXXXXXXXXX in exchange for the shares of XXXXXXXXXX.
h) Prior to transfers of property described in Paragraphs 57, 58, 59 and 72 below, DC1 may dispose of its units in money market funds for cash and use the POD to acquire other similar short-term near-cash investments of the same type of property, such as GICs.
i) Prior to the transfers of property described in Paragraphs 57, 58, 59 and 72 below, DC1 will dispose of its units in the investment fund described at Paragraph 12 for cash POD equal to the FMV of such units at that time. DC1 may reinvest some or all of the POD in marketable securities or other investment property of the same property as the units disposed of.
PROPOSED TRANSACTIONS
The following transactions will be implemented in the order presented unless otherwise indicated.
Incorporation of Securitiesco
31. DC1 will incorporate Securitiesco. The authorized capital of Securitiesco will consist, inter alia, of an unlimited number of common shares. DC1 will initially subscribe for XXXXXXXXXX common shares of Securitiesco, which it will hold as capital property. Securitiesco’s fiscal period and taxation year will end on XXXXXXXXXX. XXXXXXXXXX.
Transfer of Shares of DC1 and DC2
32. Mr. A will transfer his XXXXXXXXXX Class A common and XXXXXXXXXX Class B common shares of DC2 to TC1 in exchange for XXXXXXXXXX Class A shares of TC1. Immediately before, at the time of, and immediately after, the transfer described in this paragraph, Mr. A will own all of the issued and outstanding shares of TC1 and thus will control TC1. Following such transfer, Mr. A will not own any shares of DC2.
33. Mr. A and TC1 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX Class A common and XXXXXXXXXX Class B common shares of DC2 transferred by Mr. A to TC1. The agreed amount in respect of the shares so transferred will be an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the FMV thereof.
34. The amount to be added to the corporate stated capital account maintained for the Class A shares in the capital of TC1 as a result of the transfer described in Paragraph 32 will not exceed the maximum amount that could be added to the PUC of the shares, having regard to paragraph 84.1(1)(a).
35. Mr. B will transfer his XXXXXXXXXX common shares of DC1 to TC2 in exchange for XXXXXXXXXX common shares of TC2. Immediately before, at the time of, and immediately after, the transfer described in this paragraph, Mr. B will own all of the issued and outstanding shares of TC2 and thus will control TC2. Following such transfer, Mr. B will not own any shares of DC1.
36. Mr. B and TC2 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX common shares of DC1 transferred by Mr. B to TC2. The agreed amount in respect of the shares so transferred will be an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the FMV thereof.
37. The amount to be added to the corporate stated capital account maintained for the common shares in the capital of TC2 as a result of the transfer described in Paragraph 35 will not exceed the maximum amount that could be added to the PUC of the shares, having regard to paragraph 84.1(1)(a).
38. Mr. B will transfer his XXXXXXXXXX Class B common shares of DC2 to TC3 in exchange for XXXXXXXXXX common shares of TC3. Immediately before, at the time of, and immediately after, the transfer described in this paragraph, Mr. B will own all of the issued and outstanding shares of TC3 and thus will control TC3. Following such transfer, Mr. B will not own any shares of DC2.
39. Mr. B and TC3 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX Class B common shares of DC2 transferred by Mr. B to TC3. The agreed amount in respect of the shares so transferred will be an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the FMV thereof.
40. The amount to be added to the corporate stated capital account maintained for the common shares in the capital of TC3 as a result of the transfer described in Paragraph 38 will not exceed the maximum amount that could be added to the PUC of the shares, having regard to paragraph 84.1(1)(a).
41. [Reserved]
Transfer of Target Securities to Securitiesco
42. DC1 will transfer to Securitiesco the Target Securities in exchange for XXXXXXXXXX additional common shares of Securitiesco. No election under section 85 will be filed in respect of this transfer. Immediately before, at the time of, and immediately after, the transfer described in this paragraph, DC1 will own all of the issued and outstanding shares of Securitiesco and will thus control Securitiesco.
Amalgamation of DC1 and Securitiesco
43. DC1 and Securitiesco will amalgamate. Following the amalgamation, the amalgamated entity will continue to use the DC1 name.
44. Post-amalgamation, DC1’s fiscal period and taxation year end will be XXXXXXXXXX. On the amalgamation, all property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become property of DC1. All liabilities (except amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of DC1.
45. The amalgamated entity will maintain DC1’s previous share capital and structure.
46. For greater certainty, none of the activities of DC1 will be interrupted by, before or after this amalgamation.
Increases of PUC on shares of DC1 and DC2
47. DC1 will increase the PUC in respect of its Class C shares by an amount approximating its CDA balance at that time, currently expected to be approximately $XXXXXXXXXX. DC1 will elect in prescribed manner and prescribed form and within the time referred to in subsection 83(2) that the deemed dividend arising as a result of this increase of PUC be paid out of its CDA.
48. DC2 will increase the PUC in respect of its Class B preferred shares by an amount approximating its CDA balance at that time, currently expected to be approximately $XXXXXXXXXX. DC2 will elect in prescribed manner and prescribed form and within the time referred to in subsection 83(2) that the deemed dividend arising as a result of this increase of PUC be paid out of its CDA.
Redemption of DC2 Class B shares and Class D Preferred Shares
49. DC2 will redeem the remaining XXXXXXXXXX Class B preferred shares and the XXXXXXXXXX Class D preferred shares held by Ms. X for the Ms. X Note. Such Class B preferred shares and Class D shares shall be cancelled immediately upon their redemption by operation of law.
Incorporation of SubDC2, SubTC1A, SubTC1B and SubTC2
50. DC2 will incorporate SubDC2. SubDC2 will be a CCPC and a TCC. The authorized share capital of SubDC2 will include:
a) an unlimited number of common shares without par value which will be voting, entitled to dividends in the discretion of the directors and which will participate in all surplus on a winding up; and
b) an unlimited number of SubDC2 Special Shares. The SubDC2 Special Shares will provide that in the event that it is subsequently held or determined by a final decision of any competent authority or by a negotiated settlement with any revenue authority that the aggregate net FMV of any property that is relevant to the determination of the redemption price of such shares is different than the FMV assigned thereto, the redemption amounts of such shares shall be automatically adjusted retroactively, nunc pro tunc, to reflect the aggregate net FMV so held or determined.
51. TC1 will incorporate SubTC1A. SubTC1A will be a CCPC and a TCC. The authorized share capital of SubTC1A will include:
a) an unlimited number of common shares without par value which will be voting, entitled to dividends in the discretion of the directors and which will participate in all surplus on a winding up; and
b) an unlimited number of SubTC1A Special Shares. The SubTC1A Special Shares will provide that in the event that it is subsequently held or determined by a final decision of any competent authority or by a negotiated settlement with any revenue authority that the aggregate net FMV of any property that is relevant to the determination of the redemption price of such shares is different than the FMV assigned thereto, the redemption amounts of such shares shall be automatically adjusted retroactively, nunc pro tunc, to reflect the aggregate net FMV so held or determined.
52. TC1 will incorporate SubTC1B. SubTC1B will be a CCPC and a TCC. The authorized share capital of SubTC1B will include:
a) an unlimited number of common shares without par value which will be voting, entitled to dividends in the discretion of the directors and which will participate in all surplus on a winding up; and
b) an unlimited number of SubTC1B Special Shares. The SubTC1B Special Shares will provide that in the event that it is subsequently held or determined by a final decision of any competent authority or by a negotiated settlement with any revenue authority that the aggregate net FMV of any property that is relevant to the determination of the redemption price of such shares is different than the FMV assigned thereto, the redemption amounts of such shares shall be automatically adjusted retroactively, nunc pro tunc, to reflect the aggregate net FMV so held or determined.
53. TC2 will incorporate SubTC2. SubTC2 will be a TCC. The authorized share capital of SubTC2 will include:
a) an unlimited number of common shares without par value which will be voting, entitled to dividends in the discretion of the directors and which will participate in all surplus on a winding up; and
b) an unlimited number of SubTC2 Special Shares. The SubTC2 Special Shares will provide that in the event that it is subsequently held or determined by a final decision of any competent authority or by a negotiated settlement with any revenue authority that the aggregate net FMV of any property that is relevant to the determination of the redemption price of such shares is different than the FMV assigned thereto, the redemption amounts of such shares shall be automatically adjusted retroactively, nunc pro tunc, to reflect the aggregate net FMV so held or determined.
54. SubTC1A and SubTC2 will have an initial year-end ending immediately following the redemption of shares described in Paragraph 63. SubTC1B will have an initial year-end ending immediately following the redemption of shares described in Paragraph 76.
Butterfly Split-up of DC1’s Assets
55. The property of DC1 will be determined and will be classified into three types of property for the purposes of the definition of “distribution” in subsection 55(1), as follows:
a) cash or near-cash property, comprising all of the current assets of DC1, including any cash, term or other deposits, accounts receivable and prepaid expenses;
b) investment property, comprising of all of the assets of DC1, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property or a specified investment business, including for greater certainty, DC1’s portfolio of marketable securities and the Limited Partnership Investment; and
c) business property, comprising all of the assets of DC1, other than property described in a) and b) above, any income from which would, for the purposes of the Act, be income from a business (other than a specified investment business).
For greater certainty,
d) tax accounts and other related amounts, such as the balance of non-capital losses, net capital losses, CDA, GRIP and RDTOH will not be considered property;
e) advances that are payable on demand or that are due within the next 12 months will be considered cash or near-cash property;
f) no amount will be considered a liability unless it represents a true legal liability capable of quantification;
g) the amount of any deferred tax will not be considered to be a property or a liability, as the case may be; and
h) any amount in respect of refunds of taxes, and interest thereon, actually receivable will be treated as cash or near-cash property and any potential refunds of taxes and interest thereon will, due to their contingent nature, be ignored.
56. In determining the net FMV of its cash or near cash property, investment property and business property immediately before the transfers described in paragraphs 57, 58 and 59 below, liabilities of DC1 will be allocated to, and be deducted in the calculation of, the net FMV of each such type of property of DC1 in the following manner:
a) current liabilities of DC1 (including the liability to DC2) will be allocated to cash or near cash property distributed to a particular person (including any cash, accounts receivable and prepaid expenses) in the proportion that the FMV of each such property is of the aggregate FMV of all cash or near cash property. The total amount of DC1’s current liabilities to be allocated to DC1’s cash or near cash property herein will not exceed the aggregate FMV of all cash or near cash property of DC1;
b) liabilities of DC1, other than current liabilities, that relate to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. Liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and
c) any liabilities that remain after the allocations described in Paragraph 56(a) and (b) are made will then be allocated to the cash or near-cash property, business property and investment property of DC1 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 the liabilities as described in Paragraphs 56(a) and (b).
57. Immediately following the classification of DC1’s three types of property, DC1 will transfer a pro rata portion of each of the three types of property of DC1 to SubDC2, to the extent DC1 owns property of that type. As consideration for the property transferred by DC1, SubDC2 will assume an amount of DC1’s existing liabilities and SubDC2 will issue to DC1 SubDC2 Special Shares having a redemption amount equal to the excess of the net FMV of the transferred assets over the amount of the liabilities assumed.
58. Concurrently with the transfer described in Paragraph 57 above, DC1 will transfer a pro rata portion of each of the three types of property of DC1 to SubTC1A, to the extent DC1 owns property of that type. As consideration for the property transferred by DC1, SubTC1A may assume an amount of DC1’s existing liabilities and SubTC1A will issue to DC1 SubTC1A Special Shares having a redemption amount equal to the excess of the net FMV of the transferred assets over the amount of the liabilities assumed.
59. Concurrently with the transfer described in Paragraph 57 above, DC1 will transfer a pro rata portion of each of the three types of property of DC1 to SubTC2, to the extent it owns property of that type. As consideration for the property transferred by DC1, SubTC2 may assume an amount of DC1’s existing liabilities and SubTC2 will issue to DC1 SubTC2 Special Shares having a redemption amount equal to the excess of the net FMV of the transferred assets over the amount of the liabilities assumed.
60. Immediately following the transfers described in paragraphs 57, 58 and 59, above,
a) the net FMV of each type of property received by each of SubDC2, SubTC1A, and SubTC2 as the case may be, will be equal to or will approximate that proportion of the net FMV of that particular type of property of DC1 immediately before such transfers of property described herein that:
i. the aggregate FMV, immediately before the transfer, of all of the DC1 shares owned by each of SubDC2, SubTC1A, and TC2 at that time, as the case may be, is of
ii. the aggregate FMV, immediately before the transfer, of all the issued and outstanding shares of DC1 at that time.
For the purposes of this paragraph, the expression “approximate that proportion” means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the FMV of each type of property which each of SubDC2, SubTC1A, and SubTC2 will receive as compared to what each such recipient corporation would have received had each such corporation received its exact pro rata share of the FMV of that type of property.
61. Each of DC1 and SubDC2, DC1 and SubTC1A, and DC1 and SubTC2, as the case may be, will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property transferred by DC1 to SubDC2, SubTC1A and SubTC2, respectively. The agreed amount in respect of each eligible property so transferred will be 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).
In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b). The amount of liabilities to be allocated to the property that is the subject of an election under subsection 85(1) will not exceed the total of the agreed amounts elected for that property. The amount of liabilities to be allocated to the property that is not the subject of an election under subsection 85(1) will not exceed the FMV of any such property.
62. The amount to be added to the respective corporate stated capital accounts maintained in respect of the SubDC2 Special Shares, the SubTC1A Special Shares, and the SubTC2 Special Shares, as the case may be, will not exceed the maximum amount that could be added to the PUC of the shares, having regard to subsection 85(2.1).
63. SubDC2, SubTC1A and SubTC2 will redeem the SubDC2 Special Shares, the SubTC1A Special Shares, and the SubTC2 Special Shares held by DC1, respectively, and will each issue to DC1, in full payment of the aggregate redemption price payable therefor the SubDC2 Note, the SubTC1A Note and the SubTC2 Note, respectively.
64. SubDC2 will be wound up into its parent corporation, DC2. As a consequence, SubDC2’s assets will be transferred to DC2 and DC2 will assume SubDC2’s liabilities, including the SubDC2 Note.
65. SubTC1A will be wound up into its parent corporation, TC1. As a consequence, SubTC1’s assets will be transferred to TC1 and TC1 will assume SubTC1A’s liabilities, including the SubTC1A Note.
66. SubTC2 will be wound up into its parent corporation, TC2. As a consequence, SubTC2’s assets will be transferred to TC2 and TC2 will assume SubTC2’s liabilities, including the SubTC2 Note.
67. Immediately thereafter, the shareholders of DC1 (being DC2, TC1 and TC2) will resolve to wind-up and dissolve DC1. Under the terms of the agreement governing the winding-up of DC1, the SubDC2 Note, the SubTC1A Note and the SubTC2 Note will be assigned and distributed to DC2, TC1 and TC2, respectively. As a result of the assignment and distribution of the SubDC2 Note, the SubTC1A Note and the SubTC2 Note by DC1, the obligation of each of DC2, TC1 and TC2 under the respective notes will be cancelled.
68. Immediately prior to the distribution of the SubDC2 Note, SubTC1A Note and SubTC2 Note to DC2, TC1 and TC2, respectively, as described in Paragraph 67:
a) DC1 will elect, in prescribed manner and prescribed form and within the time referred to in subsection 83(2), to treat the portion of one or more of the winding-up dividends, determined pursuant to subparagraph 88(2)(b)(i), as a separate capital dividend paid on one or more classes of DC1 shares and pursuant to subparagraph 88(2)(b)(iv), each shareholder of the respective class of shares of DC1 will be deemed to receive a proportionate capital dividend; and
b) DC1 will designate to the extent of its GRIP balance, to treat all or a portion of such winding-up dividends that are deemed by subparagraph 88(2)(b)(iii) to be a separate dividend that is a taxable dividend, to be an eligible dividend by notifying each recipient in writing, within the time limit prescribed in subsection 89(14), that such dividend, or the portion of such dividend, is an eligible dividend.
Increase of PUC in respect of DC2 Shares
69. XXXXXXXXXX, DC2 will increase the PUC in respect of its Class A common shares and its Class B common shares by an aggregate amount sufficient to trigger a refund of DC2’s RDTOH balance at that time, estimated to be approximately $XXXXXXXXXX (accordingly the PUC increase will be approximately $XXXXXXXXXX). Thus, the PUC in respect of the Class A common shares will be increased by an amount of approximately $XXXXXXXXXX, and the PUC in respect of the Class B common shares will be increased by an amount of approximately $XXXXXXXXXX. The PUC increase will not exceed the safe income on hand attributable to the Class A and Class B common shares at that time.
Request for Change in Fiscal Period of DC2
69.1 Upon receipt of this Rulings letter in respect of the Proposed Transactions, if not earlier, DC2 will submit a request to the relevant Tax Services Office of the CRA to have a change of year-end. All proposed steps described in Paragraph 70 onwards will occur in the next taxation year of DC2.
Single-Wing Butterfly Split-up of DC2’s Assets
70. Immediately prior to the transfers of property described in Paragraph 72 below, the property of DC2 will be classified into three types of property for the purposes of the definition of “distribution” in subsection 55(1), as follows:
a) cash or near-cash property, comprising of all the current assets of DC2, including any cash, term or other deposits, accounts receivable and prepaid expenses;
b) investment property, comprising of all of the assets of DC2, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property or a specified investment business, including for greater certainty, DC2’s portfolio of marketable securities and the Limited Partnership Investment; and
c) business property, comprising all of the assets of DC2, other than property described in a) and b) above, any income from which would, for the purposes of the Act, be income from a business (other than a specified investment business).
71. In determining the net FMV of its cash or near cash property, investment property and business property immediately before the transfers described in Paragraph 72, liabilities of DC2 will be allocated to, and be deducted in the calculation of, the net FMV of each such type of property of DC2 in the following manner:
a) current liabilities of DC2 will be allocated to cash or near cash property distributed to a particular person (including any cash, accounts receivable and prepaid expenses) in the proportion that the FMV of each such property is of the aggregate FMV of all cash or near cash property. The allocation of current liabilities as described herein will not exceed the aggregate FMV of all cash or near cash property of DC2;
b) liabilities of DC2, other than current liabilities, that relate to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. Liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and
c) any liabilities that remain after the allocations described in Paragraphs 71(a) and (b) are made will then be allocated to the cash or near-cash property, business property and investment property of DC2 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 the liabilities as described in Paragraphs 71(a) and (b).
72. Immediately following the classification of DC2’s three types of property, DC2 will transfer a pro rata portion of each of the three types of property of DC2 to SubTC1B, to the extent DC2 owns property of that type. As consideration for the property transferred by DC2, SubTC1B may assume an amount of DC2’s existing liabilities and SubTC1B will issue to DC2 SubTC1B Special Shares having a redemption amount equal to the excess of the net FMV of the transferred assets over the amount of the liabilities assumed. For greater certainty, the First Felicia Note (or a portion thereof) will not be assumed by SubTC1B.
73. Immediately following the transfers described in Paragraph 72, the net fair market value of each type of property retained by DC2, determined in the manner described in Paragraph 71, will approximate the proportion of the net FMV of all property of DC2 of that type (after allocating and deducting liabilities, in the manner described in Paragraph 71), determined immediately before the transfer described in Paragraph 72, that:
a) the aggregate FMV, immediately before the transfer described in Paragraph 72, of all the shares in the capital stock of DC2 owned by all shareholders of DC2 other than TC1, is of
b) the aggregate FMV, immediately before the transfer described in Paragraph 72, of all the issued and outstanding shares of DC2 at that time.
For the purposes of this paragraph, the expression “approximate that proportion” means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the FMV of each type of property retained by DC2 compared to what DC2 would have retained if it retained its exact pro rata share of the FMV of that type of property.
74. DC2 and SubTC1B will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property transferred by DC2 to SubTC1B. The agreed amount in respect of each eligible property so transferred will be 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).
In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b). The amount of liabilities to be allocated to the property that is the subject of an election under subsection 85(1) will not exceed the total of the agreed amounts elected for that property. The amount of liabilities to be allocated to the property that is not the subject of an election under subsection 85(1) will not exceed the FMV of any such property.
75. The amount to be added to the corporate stated capital accounts maintained in respect of the SubTC1B Special Shares will not exceed the maximum amount that could be added to the PUC of the shares, having regard to subsection 85(2.1).
76. SubTC1B will redeem the SubTC1B Special Shares held by DC2, and will issue to DC2, in full payment of the aggregate redemption price payable therefor, the SubTC1B Note.
77. SubTC1B will be wound up into its parent corporation, TC1. As a consequence, SubTC1B’s assets will be transferred to TC1 and TC1 will assume SubTC1B’s liabilities, including the SubTC1B Note.
78. DC2 will enter into an agreement with TC1 whereby
a) DC2 will purchase for cancellation all shares in its capital owned by TC1 in exchange for the TC1 Note; and
b) the SubTC1B Note and the TC1 Note will be set-off.
79. With respect to any deemed dividend arising from the purchase for cancellation described in Paragraph 77:
a) DC2 will elect, in prescribed manner and prescribed form and within the time referred to in subsection 83(2), to the extent that DC2 has a balance in its CDA to deem all or a portion of the deemed dividend to be a capital dividend; and
b) DC1 will designate to the extent of its GRIP balance, to treat all or a portion of such deemed dividends to be an eligible dividend by notifying each recipient in writing, within the time limit prescribed in subsection 89(14), that such dividend, or the portion of such dividend, is an eligible dividend.
Subscription of Class D preferred shares of DC2 by Ms. X
79.1 Ms. X will subscribe for XXXXXXXXXX Class D preferred shares of DC2 for $XXXXXXXXXX.
Continuation of DC2 as a ULC and Amalgamation of DC2 and TC3
80. DC2 will be continued under the Act1 as a ULC. XXXXXXXXXX.
81. DC2 and TC3 will thereafter amalgamate to form Amalco. XXXXXXXXXX.
82. Amalco’s fiscal period and taxation year end will be XXXXXXXXXX. On the amalgamation, all property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become property of Amalco. All liabilities (except amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of Amalco.
83. The authorized capital of Amalco will consist, inter alia, of an unlimited number of class A common shares, class B common shares, class A preferred shares, class B preferred shares, class C preferred shares and class D preferred shares.
84. The shares held by the former shareholders of DC2 and TC3 in such entities will be converted into shares of Amalco upon the amalgamation as follows:
Shareholder Shares of DC2 or TC3 Shares of Amalco
Mr. B XX common shares of TC3 XX class B common shares
Ms. X XX Class D preferred shares of DC2 XX class D preferred shares
85. The class B common shares of Amalco will be non-voting common shares without par value, entitled to dividends in the discretion of the directors and which will participate in all surplus on a winding up.
86. The class D preferred shares of Amalco will have rights attached thereto that are substantially similar to the rights attached to the Class D preferred shares of DC2.
87. For greater certainty, none of the activities of DC2 or TC3 will be interrupted by, before or after this amalgamation.
88. XXXXXXXXXX
88.1 XXXXXXXXXX
Increase and decrease in paid-up capital of Amalco shares
89. Amalco will increase the corporate stated capital of the Class B common shares. The paid up capital of Mr. B’s shares will then be decreased and such reduction will be payable by way of cash and/or the Amalco Note. The Amalco Note will be repaid by Amalco by distributing cash or non-convertible debt held by Amalco.
90. Mr. B’s shares of Amalco will thereafter be redeemed. Mr. B has represented that the shares of Amalco held by Mr. B are not TCP.
91. Except as described in this letter, no liabilities have been or will be incurred by, and no assets have been or will be acquired by or disposed of by any of DC1, DC2, TC1, TC2, TC3 or Securitiesco in contemplation of or before the Proposed Transactions. For greater certainty, TC1 may dispose of securities in its portfolio and acquire additional securities.
92. Except as described in this letter, no property transferred to any corporation in the course of the reorganization contemplated herein will, thereafter, be transferred directly or indirectly, in the course of that reorganization to an unrelated person.
93. None of the shares of DC1, Securitiesco, DC2, Amalco, TC1, TC2 and TC3 has been, or will be, at any time during the implementation of the proposed transactions described herein:
a) the subject of any undertaking that is referred to in subsection 112(2.2) as a guarantee agreement;
b) a share that is issued or acquired as part of a transaction or event or a series of transactions or event of the type described in subsection 112(2.5); or
c) the subject of a dividend rental arrangement.
94. None of the relevant parties is, or will be at the time of the Proposed Transactions, a specified financial institution.
94.1 XXXXXXXXXX
PURPOSES OF THE PROPOSED TRANSACTIONS
95. The purpose of the Proposed Transactions is to allow Mr. A, Mr. B and Ms. X to separate their respective indirect economic interests in the assets of DC1 and DC2 from those of one another in order to own such assets through TC1, TC2 and Amalco (as the case may be). The Proposed Transactions herein are not being undertaken in contemplation of any sale to an unrelated person.
96. The redemption of the XXXXXXXXXX Class B preferred shares of DC2 held by Ms. X, which occurred on XXXXXXXXXX, was completed to set off a loan made by DC2 to Ms. X and would have been completed regardless of whether the Proposed Transactions described above are completed. The timing of the repayment of the loan was to ensure that the exception in subsection 15(2.6) would apply such that the amount of the loan would not have to be included in Ms. X’s income under subsection 15(2).
97. XXXXXXXXXX
97.1 The transfer described in Paragraph 42 will create the necessary CDA that will be used to facilitate the redemption of Ms. X’s XXXXXXXXXX Class B shares and to mitigate any tax consequences to Ms. X resulting from the redemption. In addition, redeeming the Class B preferred shares held by Ms. X crystallizes the additional RDTOH so that it is an asset for the purposes of the butterfly, which allows for a more equitable distribution of assets on the single-wing butterfly of DC2’s assets.
98. XXXXXXXXXX
99. XXXXXXXXXX
RULINGS GIVEN
Provided that the above statements of Facts, Proposed Transactions, Additional Information and Purposes of Proposed Transactions are accurate and constitute complete disclosure of all relevant information, our rulings are as follows:
A. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the prescribed time specified in subsection 85(6) and provided each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1) will apply to
(a) the transfer of shares of DC2 to TC1 described in Paragraph 32;
(b) the transfer of shares of DC1 to TC2 described in Paragraph 35;
(c) the transfer of shares of DC2 to TC3 described in Paragraph 38;
(d) the transfer of assets of DC1 to SubDC2 as described in Paragraph 57;
(e) the transfer of assets of DC1 to SubTC1A as described in Paragraph 58;
(f) the transfer of assets of DC1 to SubTC2 as described in Paragraph 59; and
(g) the transfer of assets of DC2 to SubTC1B as described in Paragraph 72;
such that the agreed amount in respect of each such transfer will be deemed pursuant to paragraph 85(1)(a) to be the transferor’s proceeds of disposition of the particular property and the transferee’s cost thereof.
For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.
B. Subject to subsection 69(11), the provisions of subsection 88(1) will apply to the windings-up of SubDC2, SubTC1A, SubTC2 and SubTC1B, as described in Paragraphs 64, 65, 66 and 77, respectively.
C. The amalgamations described in Paragraphs 43 and 81 will constitute amalgamations for the purposes of subsection 87(1) and will be governed by the provisions of section 87. In particular, paragraph 87(2)(a) will apply to deem the first taxation year of the amalgamated corporation to commence at the time of the amalgamation and the tax years of the predecessor corporations to terminate immediately before the amalgamation.
D. As a result of the redemption by SubDC2 of its SubDC2 Special Shares, the redemption by SubTC1A of its SubTC1A Special Shares and the redemption by SubTC2 of its SubTC2 Special Shares, each described in Paragraph 63, and as a result of the redemption by SubTC1B of its SubTC1B Special Shares as described in Paragraph 76, by virtue of subsection 84(3),
(a) SubDC2 will be deemed to have paid, and DC1 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by SubDC2 in respect of the redemption of the SubDC2 Special Shares owned by DC1 exceeds the PUC of such SubDC2 Special Shares immediately before the redemption;
(b) SubTC1A will be deemed to have paid, and DC1 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by SubTC1A in respect of the redemption of its SubTC1A Special Shares owned by DC1 exceeds the PUC of such SubTC1A Special Shares immediately before the redemption;
(c) SubTC2 will be deemed to have paid, and DC1 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by SubTC2 in respect of the redemption of its SubTC2 Special Shares owned by DC1 exceeds the PUC of such SubTC2 Special Shares immediately before the redemption; and
(d) SubTC1B will be deemed to have paid, and DC2 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by SubTC1B in respect of the redemption of its SubTC1B Special Shares owned by DC1 exceeds the PUC of such SubTC1B Special Shares immediately before the redemption.
E. As a result of the winding-up of DC1 into DC2, TC1 and TC2, as described in Paragraph 67, and as a result of the purchase for cancellation by DC2 of the shares in its capital held by TC1, as described in Paragraph 77, by virtue of subsection 84(3),
(a) DC1 will be deemed to have paid, and DC2 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC1 in respect of the purchase for cancellation of the shares in the capital of DC1 owned by DC2 exceeds the PUC of such shares immediately before such purchase for cancellation;
(b) DC1 will be deemed to have paid, and TC1 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC1 in respect of the purchase for cancellation of the shares in the capital of DC1 owned by TC1 exceeds the PUC of such shares immediately before such purchase for cancellation;
(c) DC1 will be deemed to have paid, and TC2 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC1 in respect of the purchase for cancellation of the shares in the capital of DC1 owned by TC2 exceeds the PUC of such shares immediately before such purchase for cancellation; and
(d) DC2 will be deemed to have paid, and TC1 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC2 in respect of the purchase for cancellation of the shares in the capital of DC2 owned by TC1 exceeds the PUC of such shares immediately before such purchase for cancellation.
F. The portion of the dividends described in Rulings D and E above that constitute taxable dividends:
(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, such deductions will not be prohibited by subsections 112(2.1), (2.2), (2.3) or (2.4);
(c) will be excluded in determining POD to the recipient of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of POD 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 except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend; and
(f) will not be subject to tax under Part IV.1 or VI.1.
G. Provided that, as part of the series of transactions or events that includes the Proposed Transactions described above, there is not:
(a) an acquisition of property in 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 shares in the circumstances described in subparagraph 55(3.1)(b)(iii); or
(e) an acquisition of property in the circumstances described in subparagraph 55(3.1)(c) or 55(3.1)(d);
which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) and 55(2.1) will not apply to the taxable dividends referred to in Rulings C and E above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
H. The cancellation of promissory notes described in Paragraphs 67 and 78.b) will not give rise to a “forgiven amount” within the meaning of subsections 80(1) and 80.01(1).
I. The PUC increases described in Paragraphs 47, 48 and 69 will result in deemed dividends, within the meaning of subsection 84(1), to the holders of the classes of shares in respect of which the PUC is increased. Moreover,
(a) with respect to the PUC increase described in Paragraph 69, the resulting deemed dividend under subsection 84(1) will be a taxable dividend and will therefore result in a dividend refund to DC2 of all of its RDTOH. As each of TC1 and TC3 will, at the time of the deemed dividend, be connected to DC2, each should be liable to Part IV tax on the dividends deemed received equal to its proportionate share of DC2’s refund in respect of such dividends. Subsections 55(2) and 55(2.1) should not apply to deem such deemed dividends to be capital gains, provided that such deemed dividends do not exceed the safe income on hand that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at FMV, immediately before the dividend, of the Class A and Class B common shares of DC2 held by each of TC1 and TC3 at the safe income determination time for the series of transactions that includes the payment of the deemed dividends.
(b) with respect to the PUC increases described in Paragraphs 47 and 48, provided that DC1 and DC2, respectively, elect in prescribed manner and in prescribed form at or before a dividend becomes payable or the first day on which any part of the such dividends are deemed to be paid, subsection 83(2) will apply to allow the CDA balance, if any, of DC1 to be added to the CDA of DC2 pursuant to subsection 89(1), from which DC2 can pay a capital dividend to Ms. X, and subsection 83(2.1) will not apply. Moreover, as a result of the election to treat such deemed dividends as capital dividends and not as taxable dividends, subsections 55(2) and 55(2.1) should not apply to such deemed dividends.
J. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to any of the Proposed Transactions described in Paragraphs 32-41, 49-69 and 70-79, in and by themselves.
K. Subsection 245(2) will not apply to the Proposed Transactions described in Paragraphs 32-41, 49-69 and 70-79, in and by themselves, to re-determine the tax consequences confirmed herein.
These rulings are subject to the limitations and qualifications set out in Information Circular 70-6R7 dated April 22, 2016 and are binding on the CRA provided that the Proposed Transactions are completed no later than six months after the date of this letter. The above rulings are based on the law as it reads at the date of this letter 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 PUC of any share or the ACB or FMV of any property referred to herein;
b. The balance of CDA, GRIP, RDTOH or safe income on hand of any corporation;
c. The rate of withholding tax applicable to the deemed dividend resulting from the increase in PUC described in Paragraph 89; or
d. 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 purposes 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 I above. 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 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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