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 transactions described in the Ruling meet legislative and administrative requirements.
Position: Transactions meet requirements.
Reasons: Consistent with law and administrative requirements.
XXXXXXXXXX 2017-068145
XXXXXXXXXX, 2017
Dear Sir:
Re: Advance Income Tax Ruling Request
Taxpayer: XXXXXXXXXX (BN: XXXXXXXXXX)
This is in reply to your letters of XXXXXXXXXX in which you requested certain advance income tax rulings regarding the proposed transactions described herein.
To the best of your knowledge and of the knowledge of the taxpayers involved in the Proposed Transactions, none of the issues described in this ruling is:
(a) in an earlier tax return of a taxpayer involved or a related person;
(b) being considered by a tax services office or taxation centre in connection with any tax return previously filed by a taxpayer involved or a related person;
(c) under objection or appeal by a taxpayer involved or a related person;
(d) before the courts in any Canadian jurisdiction and no judgment has been issued which may be under appeal; or
(e) the subject of a ruling previously issued to a taxpayer involved or a related person.
To the best of your knowledge and of the knowledge of the taxpayers involved, the Proposed Transactions will not impact the ability of the taxpayers involved to pay their existing tax liabilities.
The tax account numbers, Tax Services Offices and the Tax Centres of the taxpayers involved are:
Name Tax Account Mailing Address Tax Service Office/
Number / SIN Taxation Centre
XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
DEFINED TERMS
In this letter, unless otherwise indicated, all statutory references are to the Act and the following terms have the meanings specified:
“Aco” means XXXXXXXXXX described starting at paragraph 63 below;
“Act” means the Income Tax Act (Canada);
“adjusted cost base” has the meaning assigned by section 54;
“agreed amount” in respect of a property means the amount that the transferor and transferee of the property have agreed upon in an election under subsection 85(1);
“arm’s length” has the meaning assigned by section 251;
“Bco” means XXXXXXXXXX described starting at paragraph 70 below;
“Canadian-controlled private corporation” has the meaning assigned by subsection 125(7);
“capital dividend” has the meaning assigned by subsection 83(2);
“capital dividend account” has the meaning assigned by subsection 89(1);
“capital property” has the meaning assigned by section 54;
“Cco” means XXXXXXXXXX described starting at paragraph 76 below;
“connected” has the meaning assigned by subsection 186(4);
“Corporations Act 1” means the XXXXXXXXXX;
“Corporations Act 2” means the XXXXXXXXXX;
“Corporations Act 3” means the XXXXXXXXXX;
“Dco” means XXXXXXXXXX described starting at paragraph 91 below;
“DC” has the meaning assigned by paragraph 105 below;
“DC Amalco” has the meaning assigned by paragraph 132 below;
“DC Class A Shares” has the meaning assigned by paragraph 106 below;
“DC Common Shares” has the meaning assigned by paragraph 106 below;
“DC Note” has the meaning assigned by paragraph 130 below;
“dividend refund” has the meaning assigned by subsection 129(1);
“dividend rental arrangement” has the meaning assigned by subsection 248(1);
“Eco” means XXXXXXXXXX described starting at paragraph 10 below;
“eligible dividend” has the meaning assigned by subsection 89(1);
“eligible property” has the meaning assigned by subsection 85(1.1);
“Estate” means the XXXXXXXXXX described in paragraph 8 below;
“Estate2” means the XXXXXXXXXX described in paragraph 9 below;
“excepted dividend” has the meaning assigned by section 187.1;
“excluded dividend” has the meaning assigned by subsection 191(1);
“fair market value” means the highest price available in an open and unrestricted market between informed prudent parties acting at arm’s length;
“Fco” means XXXXXXXXXX described starting at paragraph 48 below;
“financial intermediary corporation” has the meaning assigned by subsection 191(1);
“forgiven amount” has the meaning assigned by subsection 80(1) or 80.01(1);
“Gco” means XXXXXXXXXX described starting at paragraph 17 below;
“Gco-Hco Subco” has the meaning assigned by paragraph 101 below;
“Gco-Hco Subco Common Shares” has the meaning assigned by paragraph 101 below;
“general rate income pool” has the meaning assigned by subsection 89(1);
“guarantee agreement” has the meaning assigned by subsection 112(2.2);
“Hco” means XXXXXXXXXX described starting at paragraph 23 below;
“Ico” means XXXXXXXXXX described starting at paragraph 30 below;
“Jco” means XXXXXXXXXX described starting at paragraph 52;
“XXXXXXXXXX A” means XXXXXXXXXX as described in paragraph 1 below;
“XXXXXXXXXX A” means XXXXXXXXXX as described in paragraph 1 below;
“XXXXXXXXXX B” means XXXXXXXXXX as described in paragraph 2 below;
“XXXXXXXXXX B” means XXXXXXXXXX as described in paragraph 2 below;
“XXXXXXXXXX I” means XXXXXXXXXX as described in paragraph 3 below;
“XXXXXXXXXX I” means XXXXXXXXXX as described in paragraph 3 below;
“XXXXXXXXXX K” means XXXXXXXXXX as described in paragraph 5 below;
“XXXXXXXXXX K” means XXXXXXXXXX as described in paragraph 5 below;
“XXXXXXXXXX L” means XXXXXXXXXX as described in paragraph 4 below;
“XXXXXXXXXX M” means XXXXXXXXXX as described in paragraph 4 below;
“XXXXXXXXXX N” means XXXXXXXXXX as described in paragraph 7 below;
“XXXXXXXXXX O” means XXXXXXXXXX as described in paragraph 7 below;
“XXXXXXXXXX P” means XXXXXXXXXX as described in paragraph 7 below;
“XXXXXXXXXX Q” means XXXXXXXXXX as described in paragraph 6 below;
“XXXXXXXXXX R” means XXXXXXXXXX as described in paragraph 6 below;
“XXXXXXXXXX S” means XXXXXXXXXX as described in paragraph 6 below;
“paid-up capital” has the meaning assigned by subsection 89(1);
“principal amount” has the meaning assigned by subsection 248(1);
“Proposed Transactions” means the Proposed Transactions described in paragraphs 98 to 135 below;
XXXXXXXXXX;
XXXXXXXXXX;
XXXXXXXXXX;
XXXXXXXXXX;
“Qco” means XXXXXXXXXX described in paragraph 38 below;
“Rco” means XXXXXXXXXX described in paragraph 37 below;
“refundable dividend tax on hand” (“RDTOH”) has the meaning assigned by subsection 129(3);
“Sco” means XXXXXXXXXX as described in paragraph 39 below;
“specified financial institution” has the meaning assigned by subsection 248(1);
“specified investment business” has the meaning assigned by subsection 125(7);
“stated capital account” has the meaning assigned by XXXXXXXXXX of Corporations Act 1 and XXXXXXXXXX of Corporations Act 2;
“substantial interest” has the meaning assigned by subsection 191(2);
“taxable Canadian corporation” has the meaning assigned by subsection 89(1);
“taxable dividend” has the meaning assigned by subsection 89(1);
“Tco” means XXXXXXXXXX described starting at paragraph 40 below;
“TC” has the meaning assigned by paragraph 99 below;
“TC Amalco” has the meaning assigned by paragraph 134 below;
“TC Class A Shares” has the meaning assigned by paragraph 99 below;
“TC Common Shares” has the meaning assigned by paragraph 99 below;
“TC Subco” has the meaning assigned by paragraph 102 below;
“TC Subco Common Shares” has the meaning assigned by paragraph 102 below;
“TC Tempco” has the meaning assigned by paragraph 100 below;
“TC Tempco Common Shares” has the meaning assigned by paragraph 100 below;
“TC Tempco Note” has the meaning assigned by paragraph 127 below;
“Trust” means the XXXXXXXXXX as described in paragraph 32 below;
“Trust2” means the XXXXXXXXXX as described in paragraph 56 below;
“Will” means the primary and secondary last wills and testaments of XXXXXXXXXX;
“Will2” means the primary and secondary last wills and testaments of XXXXXXXXXX;
“Xco” means XXXXXXXXXX as described in paragraph 42 below;
“Yco” has the meaning assigned by paragraph 108 below;
“Zco” means XXXXXXXXXX described in paragraph 27 below;
FACTS
Individuals and Estates
1. XXXXXXXXXX A is an individual resident in Canada for purposes of the Act. XXXXXXXXXX A was the spouse of XXXXXXXXXX A. XXXXXXXXXX A passed away on XXXXXXXXXX.
2. XXXXXXXXXX B was the XXXXXXXXXX of XXXXXXXXXX and XXXXXXXXXX A. XXXXXXXXXX B passed away on XXXXXXXXXX. XXXXXXXXXX B was married to XXXXXXXXXX B. XXXXXXXXXX B passed away on XXXXXXXXXX.
3. XXXXXXXXXX I was the XXXXXXXXXX of XXXXXXXXXX and XXXXXXXXXX A. XXXXXXXXXX I passed away on XXXXXXXXXX. XXXXXXXXXX I was married to XXXXXXXXXX I.
4. XXXXXXXXXX L and XXXXXXXXXX M are all individuals resident in Canada for purposes of the Act. They are siblings and are the children of XXXXXXXXXX B and XXXXXXXXXX B.
5. XXXXXXXXXX K was the XXXXXXXXXX of XXXXXXXXXX B and XXXXXXXXXX B. XXXXXXXXXX K passed away on XXXXXXXXXX. XXXXXXXXXX K was married to XXXXXXXXXX K. XXXXXXXXXX K was a sibling of XXXXXXXXXX L and XXXXXXXXXX M.
6. XXXXXXXXXX Q, XXXXXXXXXX R, and XXXXXXXXXX S are all individuals resident in Canada for purposes of the Act. They are siblings and are the children of XXXXXXXXXX K and XXXXXXXXXX K.
7. XXXXXXXXXX N, XXXXXXXXXX O, and XXXXXXXXXX P are all individuals resident in Canada for purposes of the Act. They are siblings and are the children of XXXXXXXXXX I and XXXXXXXXXX I.
8. The terms of the Will established the Estate. The Estate is a spousal trust where XXXXXXXXXX A is the sole income and capital beneficiary during XXXXXXXXXX lifetime. XXXXXXXXXX Q, XXXXXXXXXX R, XXXXXXXXXX S, XXXXXXXXXX L, XXXXXXXXXX M, XXXXXXXXXX N, XXXXXXXXXX O and XXXXXXXXXX P are income and capital beneficiaries of the Estate following the death of XXXXXXXXXX A. The trustees of the Estate have the authority to extend the Estate up to XXXXXXXXXX following the death of XXXXXXXXXX A to effect the distribution of the remaining assets of the Estate to the remaining beneficiaries. The trustees of the Estate are XXXXXXXXXX A and XXXXXXXXXX arm’s length individuals.
9. The terms of Will2 established Estate2. Estate2 was a spousal trust where XXXXXXXXXX B was the sole income and capital beneficiary of Estate2 during XXXXXXXXXX lifetime. XXXXXXXXXX Q, XXXXXXXXXX R, XXXXXXXXXX S, XXXXXXXXXX L, and XXXXXXXXXX M are income and capital beneficiaries of Estate2 following the death of XXXXXXXXXX B. The Trustees of Estate2 are XXXXXXXXXX K and an arm’s length individual.
Eco
10. Eco is a Canadian-controlled private corporation and taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Eco was incorporated under the Corporations Act 1 on XXXXXXXXXX.
11. The issued and outstanding share capital of Eco consists of XXXXXXXXXX voting common shares owned as follows:
Shareholder Number Class
XXXXXXXXXX A XXXXXXXXXX common
Estate XXXXXXXXXX common
Eco is related to Gco and was always related to it.
12. Eco was established by XXXXXXXXXX A and XXXXXXXXXX A to hold XXXXXXXXXX% of their shares of Jco. It was the intent at the time of establishing Eco that upon the latter death of XXXXXXXXXX A and XXXXXXXXXX A the shares of Eco would pass to XXXXXXXXXX I and then to XXXXXXXXXX children XXXXXXXXXX N, XXXXXXXXXX O and XXXXXXXXXX P.
13. During Eco’s XXXXXXXXXX taxation year, Jco purchased for cancellation significantly all of the shares of the capital stock of Jco held by Eco. Immediately subsequent to Jco’s repurchase of its shares, Eco repurchased an equivalent amount of its shares held by XXXXXXXXXX A and XXXXXXXXXX A.
14. In XXXXXXXXXX, Eco invested in XXXXXXXXXX% of the shares of Fco upon incorporation of Fco.
15. At XXXXXXXXXX, Eco’s assets included shares of the capital stock of Fco and shares of the capital stock of Jco. At XXXXXXXXXX, Eco’s liabilities included loans from Jco, loans from Aco and loans from Cco.
16. The loans from Jco, the loans from Aco and the loans from Cco are non-interest bearing and have no specified terms of repayment.
Gco
17. Gco is a Canadian-controlled private corporation and taxable Canadian corporation and has a taxation year ending XXXXXXXXXX. Gco was incorporated under the Corporations Act 1 on XXXXXXXXXX.
18. The issued and outstanding share capital of Gco consists of XXXXXXXXXX voting common shares owned as follows:
Shareholder Number Class
XXXXXXXXXX A XXXXXXXXXX common
Estate XXXXXXXXXX common
Gco is related to Eco and was always related to it.
19. Gco was established by XXXXXXXXXX A and XXXXXXXXXX A to hold XXXXXXXXXX% of their shares of Jco. It was the intent at the time of establishing Gco that upon the latter death of XXXXXXXXXX A and XXXXXXXXXX A, the shares of the capital stock of Gco would pass to XXXXXXXXXX B and then to XXXXXXXXXX children XXXXXXXXXX K, XXXXXXXXXX L and XXXXXXXXXX M to collectively own a XXXXXXXXXX% interest in Jco.
20. During Gco’s XXXXXXXXXX taxation year, Jco purchased for cancellation significantly all of the shares of the capital stock of Jco held by Gco. Immediately subsequent to Jco’s repurchase of its shares, Gco purchased for cancellation an equivalent amount of its shares held by XXXXXXXXXX A and XXXXXXXXXX A.
21. In XXXXXXXXXX, Gco invested in XXXXXXXXXX% of the shares of the capital stock of Fco upon incorporation of Fco.
22. At XXXXXXXXXX, Gco’s assets included shares of the capital stock of Fco and shares of the capital stock of Jco. At XXXXXXXXXX, Gco’s liabilities included loans from Aco, loans from Jco and loans from Cco which are non-interest bearing and have no specified terms of repayment.
Hco
23. Hco is a Canadian-controlled private corporation and taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Hco was incorporated under the Corporations Act 1 on XXXXXXXXXX.
24. The issued and outstanding share capital of Hco consists of XXXXXXXXXX class “A” non-voting fixed-value preference shares, XXXXXXXXXX class “C” non-voting fixed-value preference shares and XXXXXXXXXX class “D” voting, participating shares owned as follows:
Shareholder Number Class
Estate2 XXXXXXXXXX Class “C”
Estate of XXXXXXXXXX B XXXXXXXXXX Class “C”
Zco XXXXXXXXXX Class “A”
Zco XXXXXXXXXX Class “D”
XXXXXXXXXX L XXXXXXXXXX Class “A”
XXXXXXXXXX L XXXXXXXXXX Class “D”
XXXXXXXXXX M XXXXXXXXXX Class “A”
XXXXXXXXXX M
XXXXXXXXXX
Class “D”
25. Hco was established to hold XXXXXXXXXX B’s, XXXXXXXXXX K’s, XXXXXXXXXX L’s and XXXXXXXXXX M’s holdings in Jco.
26. Upon the death of XXXXXXXXXX B, XXXXXXXXXX shares of the capital stock of Hco passed to Estate2.
27. Upon XXXXXXXXXX K’s death in XXXXXXXXXX, XXXXXXXXXX shares of the capital stock of Hco transferred to XXXXXXXXXX K. Subsequently, in XXXXXXXXXX, XXXXXXXXXX K transferred XXXXXXXXXX shares of the capital stock of Hco to Zco, a corporation controlled by XXXXXXXXXX K, in exchange for preferred shares of the capital stock of Zco, as part of an estate freeze transaction under which nominal value common shares of the capital stock of Zco were subscribed for by an arm’s length settlor and which were settled on a trust, the beneficiaries of which are XXXXXXXXXX K, XXXXXXXXXX issue over the age of 18 years and any corporation, the shares of which are owned by one or more of the beneficiaries as appointed by the Trustee and any trust for the benefit of the beneficiaries.
28. Prior to implementation of the Proposed Transactions, XXXXXXXXXX, it is anticipated that the Class “C” shares of the capital stock of Hco held by Estate2 and by the Estate of XXXXXXXXXX B will be distributed to XXXXXXXXXX L, XXXXXXXXXX M, XXXXXXXXXX Q, XXXXXXXXXX R and XXXXXXXXXX S. Estate2 also holds XXXXXXXXXX managed marketable securities portfolios. XXXXXXXXXX, to ease the administration and wind-up of the Estate2 and the Estate of XXXXXXXXXX B, the portfolios are to be transferred to Hco in exchange for class “B” non-voting, fixed-value preferred shares and for class “C” non-voting, fixed-value preferred shares that have an aggregate FMV equal to the FMV of the transferred portfolios. On the wind-up of the Estate2, the class “B” and “C” shares can be distributed rather than portfolio assets.
29. At XXXXXXXXXX, Hco’s assets included shares of the capital stock of Jco.
Ico
30. Ico is a Canadian-controlled private corporation and taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Ico was incorporated under the Corporations Act 1 on XXXXXXXXXX.
31. The issued and outstanding share capital of Ico consists of XXXXXXXXXX class A non-voting, fixed-value shares, XXXXXXXXXX class B voting, fixed-value shares and XXXXXXXXXX voting, participating common shares owned as follows:
Shareholder Number Class
XXXXXXXXXX I XXXXXXXXXX Class A
XXXXXXXXXX I XXXXXXXXXX Class B
XXXXXXXXXX N XXXXXXXXXX Common
XXXXXXXXXX O XXXXXXXXXX Common
XXXXXXXXXX P XXXXXXXXXX Common
32. The Trust was established for the benefit of XXXXXXXXXX N, XXXXXXXXXX O and XXXXXXXXXX P. XXXXXXXXXX I was the sole trustee of the Trust.
33. The Trust acquired XXXXXXXXXX% of the issued and outstanding shares, being XXXXXXXXXX common shares, of the capital stock of Ico in XXXXXXXXXX. The Trust was dissolved in XXXXXXXXXX with the common shares being distributed equally to XXXXXXXXXX N, XXXXXXXXXX O and XXXXXXXXXX P as a capital distribution.
34. In XXXXXXXXXX, XXXXXXXXXX I transferred XXXXXXXXXX ownership interest in Jco to Ico in exchange for XXXXXXXXXX non-voting Class A shares. XXXXXXXXXX I inherited these shares upon the death of XXXXXXXXXX I.
35. Prior to the dissolution of the Trust, XXXXXXXXXX I subscribed for XXXXXXXXXX Class B voting shares of the capital stock of Ico for cash consideration. XXXXXXXXXX N, XXXXXXXXXX O and XXXXXXXXXX P collectively hold an option to purchase the class B shares from XXXXXXXXXX I at XXXXXXXXXX cost at any time on or after XXXXXXXXXX.
36. At XXXXXXXXXX, Ico’s assets included shares of the capital stock of Jco.
Rco
37. Rco is a holding company XXXXXXXXXX% owned by XXXXXXXXXX O.
Qco
38. Qco is a holding company XXXXXXXXXX% owned by XXXXXXXXXX N.
Sco
39. Sco is a holding company XXXXXXXXXX% owned by XXXXXXXXXX P.
Tco
40. Tco is a Canadian-controlled private corporation and taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Tco was incorporated under the Corporations Act 2 on XXXXXXXXXX.
41. The issued and outstanding share capital of Tco consists of XXXXXXXXXX common shares owned as follows:
Shareholder Number Class
XXXXXXXXXX N XXXXXXXXXX Common
XXXXXXXXXX O XXXXXXXXXX Common
XXXXXXXXXX P XXXXXXXXXX Common
Xco
42. Xco is a Canadian-controlled private corporation and taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Xco was incorporated under the Corporations Act 3 on XXXXXXXXXX.
43. The issued and outstanding share capital of Xco consists of XXXXXXXXXX class A common shares owned as follows:
Shareholder Number Class
Qco XXXXXXXXXX Class A common
Rco XXXXXXXXXX Class A common
Sco XXXXXXXXXX Class A common
44. XXXXXXXXXX O transferred XXXXXXXXXX ownership interest in Jco to Xco on XXXXXXXXXX. XXXXXXXXXX O then transferred XXXXXXXXXX ownership interest in Xco to Rco. These transfers were not part of the series of transactions or events that includes the Proposed Transactions.
45. XXXXXXXXXX N transferred XXXXXXXXXX ownership interest in Jco to Xco on XXXXXXXXXX. XXXXXXXXXX N then transferred XXXXXXXXXX ownership interest in Xco to Qco. These transfers were not part of the series of transactions or events that includes the Proposed Transactions.
46. XXXXXXXXXX P transferred XXXXXXXXXX ownership interest in Jco to Xco on XXXXXXXXXX. XXXXXXXXXX P then transferred XXXXXXXXXX ownership interest in Xco to Sco. These transfers were not part of the series of transactions or events that includes the Proposed Transactions.
47. As at XXXXXXXXXX, Xco’s assets included shares of the capital stock of Jco.
Fco
48. Fco is a Canadian-controlled private corporation and taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Fco was incorporated under the Corporations Act 1 on XXXXXXXXXX.
49. The issued and outstanding share capital of Fco consists of XXXXXXXXXX common shares owned as follows:
Shareholder Number Class
Eco XXXXXXXXXX Common
Gco XXXXXXXXXX Common
50. At XXXXXXXXXX, Fco’s assets included loans to Jco. At XXXXXXXXXX, Fco’s liabilities included loans from Cco and loans from Aco.
51. The loans to Jco, loans from Cco and loans from Aco are non-interest bearing and have no specified terms of repayment.
Jco
52. Jco is a Canadian-controlled private corporation and taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Jco was incorporated under the Corporations Act 1 on XXXXXXXXXX. Articles of amendment were filed on XXXXXXXXXX.
53. Jco has authorized share capital consisting of XXXXXXXXXX Class A shares, XXXXXXXXXX Class B shares, XXXXXXXXXX Class C shares and XXXXXXXXXX common shares.
54. The common shares of the capital stock of Jco are voting and participating. The Class A shares of the capital stock of Jco are non-voting and participating.
55. The issued and outstanding share capital of Jco consists of XXXXXXXXXX Class A shares and XXXXXXXXXX common shares owned as follows:
Shareholder Number Class
Eco XXXXXXXXXX Common
Gco XXXXXXXXXX Common
Hco XXXXXXXXXX Class A
Ico XXXXXXXXXX Class A
Xco XXXXXXXXXX Class A
56. Trust2 was established for the benefit of XXXXXXXXXX N, XXXXXXXXXX O and XXXXXXXXXX P. Until the Trust2 was dissolved in XXXXXXXXXX, the Trust2 held XXXXXXXXXX Class A shares of the capital stock of Jco. The shares of the capital stock of Jco were distributed equally to XXXXXXXXXX N, XXXXXXXXXX O and XXXXXXXXXX P upon dissolution of the Trust2 as a capital distribution. The shares of the capital stock of Jco were transferred by XXXXXXXXXX N, XXXXXXXXXX O and XXXXXXXXXX P as described in paragraphs 45, 44 and 46.
57. Jco was established as a holding company of a number operating companies in the XXXXXXXXXX businesses.
58. Jco presently operates as XXXXXXXXXX company. Jco owns XXXXXXXXXX% of the shares of the capital stock of Aco, Cco and Bco as described below and common shares of the capital stock of XXXXXXXXXX.
59. XXXXXXXXXX. The shares of the capital stock of XXXXXXXXXX continue to be held by Jco.
60. At XXXXXXXXXX, Jco’s assets consisted of cash, accounts receivable, income taxes receivable, shares of the capital stock of Aco, shares of the capital stock of Bco, shares of the capital stock of Cco, loans to Aco, loans to Bco, loans to Cco, loans to Eco, loans to Gco and shares of the capital stock of XXXXXXXXXX. At XXXXXXXXXX, Jco’s liabilities consisted of accrued liabilities, loans from XXXXXXXXXX A, loans from Estate, loans from Fco and loans from Dco.
61. Loans to Aco, loans to Bco, loans to Cco, loans from XXXXXXXXXX A, loans from Estate, loans from Fco and loans from Dco are all non-interest bearing with no specified terms of repayment.
62. Jco’s refundable dividend tax on hand as of XXXXXXXXXX was $XXXXXXXXXX. At XXXXXXXXXX, Jco’s capital dividend account balance was $XXXXXXXXXX. Subsequent to XXXXXXXXXX, Jco earned investment income, received taxable dividends (described below) from Aco, and paid taxable dividends. Jco will earn additional investment income, and will pay and/or earn taxable and/or capital dividends prior to the implementation of the Proposed Transactions that may change the refundable dividend tax on hand and/or capital dividend account balance. For example, excess cash or cash from dividends received on the shares of the capital stock of XXXXXXXXXX and dividend refunds received by Jco will be distributed by Jco to its shareholders. Jco’s general rate income pool as of XXXXXXXXXX was $XXXXXXXXXX.
Aco
63. Aco is a Canadian-controlled private corporation and taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Aco was incorporated under the Corporations Act 1 on XXXXXXXXXX.
64. Aco’s sole shareholder is Jco.
65. Aco is XXXXXXXXXX company that was established to purchase shares of the capital stock of XXXXXXXXXX. Between the date of incorporation and XXXXXXXXXX, Aco acquired shares of the capital stock of XXXXXXXXXX.
66. XXXXXXXXXX, the shares of the capital stock of XXXXXXXXXX held by Aco were liquidated on an orderly basis. The net proceeds realized on the sale of the shares were invested in a portfolio of publicly traded securities (the “Portfolio”). Substantially all of these investments have been liquidated in XXXXXXXXXX and XXXXXXXXXX. Significant taxable and capital dividends were paid from the proceeds of the Portfolio. Any remaining investments will be liquidated prior to implementation of the proposed transactions described below.
67. At XXXXXXXXXX, Aco’s assets consisted of cash, income taxes receivable, loans to Cco, loans to Fco, loans to Eco and loans to Gco. At XXXXXXXXXX, Aco’s liabilities consisted of accrued liabilities, loans from Jco and loans from Bco.
68. The loans to Cco, loans to Fco, loans to Eco, loans to Gco, loans from Jco and loans from Bco are non-interest bearing and have no specified terms of repayment.
69. Aco’s refundable dividend tax on hand as of XXXXXXXXXX was $XXXXXXXXXX. Aco’s capital dividend account balance as at XXXXXXXXXX was $XXXXXXXXXX. Subsequent to XXXXXXXXXX, Aco earned minimal investment income, paid taxable dividends and may pay further taxable dividends prior to the implementation of the Proposed Transactions that may further change the refundable dividend tax on hand balance. Aco’s general rate income pool as of XXXXXXXXXX was $XXXXXXXXXX.
Bco
70. Bco is a Canadian-controlled private corporation and taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Bco was incorporated under the Corporations Act 2 on XXXXXXXXXX.
71. Bco’s sole shareholder is Jco.
72. Bco is XXXXXXXXXX company established to XXXXXXXXXX. The shares of the capital stock of XXXXXXXXXX continue to be held by Bco.
73. At XXXXXXXXXX, Bco’s assets consisted of accrued dividends receivable, income taxes recoverable, loans to Cco, loans to Aco and shares of the capital stock of XXXXXXXXXX. At XXXXXXXXXX, Bco’s liabilities consisted of accrued liabilities and loans from Jco.
74. The loans to Cco, the loans to Aco and the loans from Jco are non-interest bearing and have no specified terms of repayment.
75. Bco’s refundable dividend tax on hand as of XXXXXXXXXX was $XXXXXXXXXX. Bco’s capital dividend account balance is $XXXXXXXXXX as of XXXXXXXXXX. Bco will earn investment income and will pay and/or earn taxable and/or capital dividends prior to the implementation of the Proposed Transactions. For example, excess cash or cash from dividends received on the shares of the capital stock of XXXXXXXXXX and dividend refunds received by Bco will be distributed by Bco to its shareholder (Jco). Bco’s general rate income pool as of XXXXXXXXXX was $XXXXXXXXXX.
Cco
76. Cco is a Canadian-controlled private corporation and taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Cco was formed under articles of amalgamation under the Corporations Act 1 on XXXXXXXXXX.
77. Cco has an unlimited number of common shares authorized. XXXXXXXXXX common shares are issued and outstanding and are all owned by Jco.
78. Prior to XXXXXXXXXX, Cco carried on a XXXXXXXXXX business. In XXXXXXXXXX, a decision was made to sell the XXXXXXXXXX business of Cco to XXXXXXXXXX and preliminary planning was undertaken to effect this sale. In XXXXXXXXXX, the plan was completed and executed.
79. XXXXXXXXXX. The shares of the capital stock of XXXXXXXXXX continue to be held by Cco.
80. At XXXXXXXXXX, Cco’s assets consisted of cash, accounts receivable, income taxes recoverable, XXXXXXXXXX, investments in marketable securities, prepaid expenses, real estate, equipment, XXXXXXXXXX, loans to Dco, loans to Fco, loans to Eco, loans to Gco, shares of the capital stock of Dco and shares of the capital stock of XXXXXXXXXX. At XXXXXXXXXX, Cco’s liabilities consisted of income taxes payable, accounts payable, accrued liabilities, loans from XXXXXXXXXX A, loans from the Estate, loans from Jco, loans from Bco and loans from Aco.
81. The loans to Dco, loans to Fco, loans to Eco, loans to Gco, loans from XXXXXXXXXX A, loans from the Estate, loans from Jco, loans from Bco and loans from Aco are non-interest bearing and have no specified terms of repayment.
82. Cco’s real estate consists of XXXXXXXXXX.
83. The XXXXXXXXXX were purchased during the XXXXXXXXXX and have been held for investment purposes since that time.
84. Most of XXXXXXXXXX was purchased during the XXXXXXXXXX. An XXXXXXXXXX that XXXXXXXXXX was purchased in XXXXXXXXXX. Soon after purchase of XXXXXXXXXX, Cco developed a XXXXXXXXXX on XXXXXXXXXX. Expansions of the XXXXXXXXXX were undertaken in XXXXXXXXXX and XXXXXXXXXX. As well, a XXXXXXXXXX operation was undertaken and has operated on XXXXXXXXXX since shortly after the purchase of XXXXXXXXXX. From XXXXXXXXXX through XXXXXXXXXX, Cco undertook a capital project to expand XXXXXXXXXX. The Estate holds a XXXXXXXXXX over a portion of XXXXXXXXXX where XXXXXXXXXX.
85. The XXXXXXXXXX operation on XXXXXXXXXX is XXXXXXXXXX to the operations of Cco.
86. The equipment is used to maintain XXXXXXXXXX as well as the XXXXXXXXXX and XXXXXXXXXX operations of Cco.
87. Included in prepaid expenses is XXXXXXXXXX that was paid prior to XXXXXXXXXX for the purchase of XXXXXXXXXX located XXXXXXXXXX. The purchase has not been completed at this time due to XXXXXXXXXX.
88. The Estate holds an option to purchase the XXXXXXXXXX. If the option is not exercised prior to XXXXXXXXXX, the option transfers to XXXXXXXXXX P as a capital distribution of the Estate.
89. The XXXXXXXXXX is operated by Tco under a long-term XXXXXXXXXX agreement. Cco also leases access to the XXXXXXXXXX near the XXXXXXXXXX to arm’s length XXXXXXXXXX operations.
90. Cco’s refundable dividend tax on hand as of XXXXXXXXXX was $XXXXXXXXXX. Cco’s capital dividend account balance as of XXXXXXXXXX was $XXXXXXXXXX. Subsequent to XXXXXXXXXX, Cco earned investment income and realized capital gains and losses. Further Cco may earn additional investment income, may realize additional capital gains and losses and may pay and/or earn taxable and/or capital dividends prior to the implementation of the Proposed Transactions that may further change the refundable dividend tax on hand and/or capital dividend account balance. Cco’s general rate income pool as of XXXXXXXXXX was $XXXXXXXXXX.
Dco
91. Dco is a Canadian-controlled private corporation and taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Dco was incorporated under the Corporations Act 1 on XXXXXXXXXX. Articles of amendment were filed on XXXXXXXXXX.
92. Dco has unlimited common shares and XXXXXXXXXX preference shares authorized. XXXXXXXXXX common shares and XXXXXXXXXX preferences shares are issued and outstanding and are all owned by Cco.
93. Dco was originally established to perform XXXXXXXXXX services related to Cco’s operating businesses. Dco ceased to provide XXXXXXXXXX services for Cco in XXXXXXXXXX.
94. XXXXXXXXXX. The shares of the capital stock of XXXXXXXXXX continue to be held by Dco.
95. At XXXXXXXXXX, Dco’s assets consisted of accrued dividends receivable, income taxes recoverable, loans to Jco and shares of the capital stock of XXXXXXXXXX. At XXXXXXXXXX, Dco’s liabilities consisted of accrued liabilities and loans from Cco.
96. The loans to Jco and loans from Cco are non-interest bearing and have no specified terms or repayment.
97. Dco’s refundable dividend tax on hand as of XXXXXXXXXX was $XXXXXXXXXX. Dco’s capital dividend account balance is $XXXXXXXXXX as of XXXXXXXXXX. Dco will earn investment income and may pay and/or earn taxable and/or capital dividends prior to the implementation of the Proposed Transactions that may change the refundable dividend tax on hand and/or capital dividend account balance. Dco’s general rate income pool as of XXXXXXXXXX was $XXXXXXXXXX.
PROPOSED TRANSACTIONS
The following transactions will generally be implemented in the order presented below unless otherwise noted.
Continuation of Bco
98. Bco will be continued from the jurisdiction of Corporations Act 2 to Corporations Act 1.
Incorporation of Transferee Corporation
Incorporation of TC and TC Tempco
99. Eco will cause the incorporation of a new corporation pursuant to the Corporations Act 1 (“TC”). The authorized capital of TC will include common shares (“TC Common Shares”) and Class A shares (“TC Class A Shares”). No shares of TC will be issued on incorporation. The TC Common Shares will be voting and participating. The TC Class A Shares will be non-voting and participating.
100. Eco will cause the incorporation of a new corporation pursuant to the Corporations Act 1 (“TC Tempco”). The authorized capital of TC Tempco will include common shares (“TC Tempco Common Shares”). The TC Tempco Common Shares will be voting and participating. No shares of the capital stock of TC Tempco will be issued on incorporation.
Incorporation of Subcos
101. Jco will cause the incorporation of a new corporation pursuant to the Corporations Act 1 (“Gco-Hco Subco”). The authorized capital of Gco-Hco Subco will include common shares (“Gco-Hco Subco Common Shares”). The Gco-Hco Subco Common Shares will be voting and participating. No shares of the capital stock of Gco-Hco Subco will be issued on incorporation.
102. Jco will cause the incorporation of a new corporation pursuant to the Corporations Act 1 (“TC Subco”). The authorized capital of TC Subco will include common shares (“TC Subco Common Shares”). The TC Subco Common Shares will be voting and participating. No shares of the capital stock of TC Subco will be issued on incorporation.
Dividend Payments
103. Bco will pay a cash dividend to Jco in an amount equal to Bco’s refundable dividend tax on hand divided by XXXXXXXXXX. Bco will designate, pursuant to subsection 89(14), by notifying Jco in writing, that a portion of the dividend will be an eligible dividend in an amount to not exceed the general rate income pool of Bco, if any.
104. Jco will proportionately increase the stated capital of its common shares and Class A shares in an aggregate amount equal to Jco’s refundable dividend tax on hand divided by XXXXXXXXXX. Jco will designate, pursuant to subsection 89(14), by notifying the recipients of the deemed dividend arising under subsection 84(1), in writing, that a portion of the dividend will be an eligible dividend in an amount to not exceed the general rate income pool of Jco, if any.
105. Jco and Bco, each of which will be a predecessor corporation, will amalgamate under the provisions of the Corporations Act 1 to form “DC” whereby:
(a) all of the property (except any 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 DC by virtue of the amalgamation;
(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of DC by virtue of the amalgamation; and
(c) all of the shareholders (except any predecessor corporation) who owned shares of the capital stock of any predecessor corporation immediately before the amalgamation will receive shares of the capital stock of DC because of the amalgamation.
DC will be a Canadian-controlled private corporation and a taxable Canadian corporation and will be governed by the provisions of the Corporations Act 1.
106. The share capital of DC (being the “DC Class A Shares” and the “DC Common Shares”) will be the same as the share capital of Jco and the same shares will be held by each shareholder with no change in stated capital and paid-up capital.
Capital Dividend Payment
107. DC will proportionately increase the stated capital of its common shares and Class A shares in an aggregate amount equal to the amount of DC’s capital dividend account. DC will elect, pursuant to subsection 83(2) of the Act, in prescribed manner and prescribed form that the full amount of any resulting deemed dividend be deemed to be a capital dividend.
Amalgamation of Aco, Cco and Dco
108. Aco, Cco and Dco, each of which will be a predecessor corporation, will amalgamate under the provisions of the Corporations Act 1 to form “Yco” whereby
(a) all of the property (except any 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 Yco by virtue of the amalgamation;
(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of Yco by virtue of the amalgamation; and
(c) all of the shareholders (except any predecessor corporation) who owned shares of the capital stock of any predecessor corporation immediately before the amalgamation will receive shares of the capital stock of Yco because of the amalgamation.
Yco will be a Canadian-controlled private corporation and a taxable Canadian corporation and will be governed by the provisions of the Corporations Act 1.
109. The share capital of Yco will consist of common shares all of which will be held by DC.
Transfer of Property to Subcos
110. DC will transfer XXXXXXXXXX% of the shares of the capital stock of XXXXXXXXXX held by it and XXXXXXXXXX% of any other property held by DC (other than the shares of the capital stock of Yco) to Gco-Hco Subco. As fair-market-value consideration for the transfer of property, Gco-Hco Subco will assume XXXXXXXXXX% of the liabilities of DC and will issue XXXXXXXXXX Gco-Hco Subco Common Shares.
111. DC and Gco-Hco Subco will elect, jointly, and 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, as described in paragraph 110, of all eligible property of DC. The amount agreed upon in such elections in respect of each capital property so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act. The agreed amount will not exceed the fair market value of the property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b). For purposes of the election described in this paragraph, no portion of DC liabilities assumed by Gco-Hco Subco shall be treated as being assumed in consideration for the transfer of a particular property, to the extent that the principal amount of the liabilities exceeds the agreed amount under subsection 85(1) in respect of that transfer. The amount added to the stated capital account maintained for the Gco-Hco Subco Common Shares will equal the amount by which the aggregate cost to Gco-Hco Subco, and to be determined pursuant to subsection 85(1), where relevant, of the properties transferred by DC (as described in paragraph 110) exceeds the aggregate amount of liabilities assumed by Gco-Hco Subco.
112. DC will transfer XXXXXXXXXX% of the shares of the capital stock of XXXXXXXXXX held by it and XXXXXXXXXX% of any other property held by DC (other than the shares of the capital stock of Yco) to TC Subco. As fair-market-value consideration for the transfer of property, TC Subco will assume XXXXXXXXXX% of the liabilities of DC and will issue XXXXXXXXXX TC Subco Common Shares.
113. DC and TC Subco will elect, jointly, and 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, as described in paragraph 112, of all eligible property of DC. The amount agreed upon in such elections in respect of each capital property so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act. The agreed amount will not exceed the fair market value of the property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b). For purposes of the election described in this paragraph, no portion of DC liabilities assumed by TC Subco shall be treated as being assumed in consideration for the transfer of a particular property, to the extent that the principal amount of the liabilities exceeds the agreed amount under subsection 85(1) in respect of that transfer. The amount added to the stated capital account maintained for the TC Subco Common Shares will equal the amount by which the aggregate cost to TC Subco, and to be determined pursuant to subsection 85(1), where relevant, of the properties transferred by DC (as described in paragraph 112) exceeds the aggregate amount of liabilities assumed by TC Subco.
Transfer of DC Shares to TC
114. Eco, Ico and Xco will each transfer to TC all of their shares of DC in consideration for XXXXXXXXXX TC Common Shares, XXXXXXXXXX TC Class A Shares and XXXXXXXXXX TC Class A Shares, respectively.
115. Eco and TC 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 DC Common Shares to TC. The agreed amount in respect of the election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the fair market value of the shares transferred to TC.
116. TC will add to the stated capital account maintained for the TC Common Shares an amount not to exceed the paid-up capital of the DC Common Shares so transferred.
117. Ico and TC 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 DC Class A Shares to TC. The agreed amount in respect of the election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the fair market value of the shares transferred to TC.
118. TC will add to the stated capital account maintained for the TC Class A Shares an amount not to exceed the paid-up capital of the DC Class A Shares so transferred.
119. Xco and TC 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 DC Class A Shares to TC. The agreed amount in respect of the election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the fair market value of the shares transferred to TC.
120. TC will add to the stated capital account maintained for the TC Class A Shares an amount not to exceed the paid-up capital of the DC Class A Shares so transferred.
Share Subscriptions in TC Tempco
121. Eco will make a capital contribution of $XXXXXXXXXX to TC.
122. TC will subscribe for XXXXXXXXXX TC Tempco Common Share for $XXXXXXXXXX.
DC Types of Property Analysis
123.
a. Immediately before the transfer of property described in paragraph 125 below, except for the shares in Gco-Hco Subco, TC Subco and Yco, DC will not own any shares in any other corporation or interests in partnerships or trusts over which it exercises significant influence. As described in paragraph 125 below, XXXXXXXXXX% of the shares of Yco will be transferred by DC to TC Tempco and DC will retain XXXXXXXXXX% of the shares of Yco. Therefore, the shares of Yco will be excluded from the determination of the net fair market value of each type of property of DC.
b. The property of DC, excluding the shares of Yco, will be determined on a consolidated basis by including the appropriate pro rata share of the assets of Gco-Hco Subco and TC Subco (DC and such corporations being referred to in this paragraph as the “DC Group”), and will be classified into three types of property for the purposes of the definition of “distribution” in subsection 55(1) as follows:
(i) cash or near-cash property, consisting of all of the current assets of DC Group, including any cash and cash equivalents, prepaid expenses and income tax receivable, if any;
(ii) business property, consisting of all of the assets of DC Group, other than cash or near-cash property and the shares of Yco, any income from which would, for purposes of the Act, be income from a business (other than a specified investment business); and
(iii) investment property, consisting of all of the assets of DC Group, other than cash or near-cash property and the shares of Yco, any income from which would, for purposes of the Act, be income from property or a specified investment business.
(iv) For greater certainty, any tax accounts, such as any non-capital loss, net capital loss, the balance of any cumulative eligible capital deduction, refundable dividend tax on hand, general rate income pool or capital dividend account of the DC Group, will not be considered property for purposes of the Proposed Transactions described herein.
(v) For greater certainty, for the purposes of the Proposed Transactions as described herein, the loans receivable balances described in paragraphs 60, 61, 67, 68, 73, 74, 80, 81, 95 and 96 will be considered cash or near-cash property.
(vi) The shares of the capital stock of XXXXXXXXXX will be considered investment property.
c. As a result of the classification of DC’s property as described in this paragraph, DC will have cash and near-cash property, if any, and investment property and DC will have no business property.
124. In determining, on a consolidated basis, the net fair market value of each type of property of DC immediately before the transfer described in paragraph 125 below, the liabilities of DC, Gco-Hco Subco and TC Subco will be allocated to, and will be deducted in the calculation of the net fair market value of each such type of property of such corporation, in the following manner:
(a) in determining the net fair market value of each type of property of a corporation (other than Yco) over which DC exercises significant influence (being Gco-Hco Subco and TC Subco), immediately before the transfer described in paragraph 125, the liabilities of that corporation (other than any amount owing by such corporation to DC) will be allocated to, and deducted in the calculation of, the net fair market value of each type of property of that particular corporation in the following manner:
(i) current liabilities of such corporation will be allocated to the cash or near-cash property of such corporation in the proportion that the fair market value of each such property is of the fair market value of all cash or near-cash property owned by such corporation. To the extent that the allocation of current liabilities as described herein exceeds the fair market value of all the cash or near-cash property of such corporation, such corporation will be considered to have a negative amount of cash or near-cash property;
(ii) following the allocation of current liabilities to each cash or near-cash property in (a)(i) above, any remaining net fair market value of any cash or near-cash property of such corporation will be reclassified as business property and excluded from cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of the business to which such property relates;
(iii) liabilities, other than current liabilities, of such corporation that relate to a particular property, will be allocated to the particular property (and to the type of property to which such property belongs) to the extent of its fair market value. Liabilities that pertain to a type of property but not to a particular property will be allocated to that type of property. To the extent that the allocation of liabilities that pertain to a particular type of property, as described herein, exceeds the fair market value of all property of that type of such corporation, such corporation will be considered to have a negative amount of that type of property; and
(iv) any liabilities, other than current liabilities, of such corporation which do not relate to a particular type of property will be allocated to the cash or near-cash property, investment property and business property of such corporation on the basis of the relative net fair market value of each type of property before the allocation of such liabilities but after the allocation of the liabilities described in subparagraphs (a)(i) and (iii) above and the reallocation of amounts described in subparagraph (a)(ii) above; and
(b) in determining, on a consolidated basis, the net fair market value of each type property of DC immediately before the transfer of property described in paragraph 125, DC will include the appropriate pro rata share of the net fair market value of each type of property of any corporation (other than Yco) over which DC exercises significant influence (being Gco-Hco Subco and TC Subco), and any liabilities of DC will be allocated to, and be deducted in the calculation of the net fair market value of each type 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 fair market value of each such property is of the fair market value of all cash or near-cash property of DC. The allocation of current liabilities as described herein shall not exceed the fair market value of all the cash or near-cash property of DC;
(ii) following the allocation of current liabilities to each cash or near-cash property in (b)(i) above, any remaining net fair market value of cash or near-cash property will be reclassified as business property and excluded from the cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of the business to which such property relates;
(iii) liabilities of DC, other than current liabilities, that relate to a particular property will be allocated to the particular property (and to the type of property to which such property belongs) to the extent of its fair market value. The liabilities that pertain to a type of property but not to a particular property will be allocated to that type, but not in excess of the net fair market value of such type after the allocation of liabilities to a particular property as described herein;
(iv) the excess, if any, of liabilities remaining after the allocations described above are made will be allocated to the cash or near-cash property, investment property and business property, if any, of DC, on the basis of the relative net fair market value of each type of property prior to the allocation of such excess.
(v) The loans payable described in paragraphs 60, 61, 67, 68, 73, 74, 80, 81, 95 and 96 will be considered current liabilities.
Butterfly Distribution
125.
(a) DC will transfer XXXXXXXXXX% of the shares of the capital stock of Yco and all of the shares of the capital stock of TC Subco to TC Tempco so that, immediately after the transfer, the net fair market value of the cash or near-cash property, if any, and the investment property of DC, calculated as described in paragraphs 123 and 124 above, which is transferred to TC Subco will approximate that proportion of the net fair market value of that type of property of DC, determined immediately before the transfer described in this paragraph, that:
i. the fair market value of the DC shares owned by TC immediately before the transfers described in this paragraph
is of
ii. the aggregate fair market value of all the issued and outstanding shares of DC immediately before the transfers described in this paragraph.
(b) For greater certainty, the cash to be transferred, if any, will be determined within XXXXXXXXXX days of the transfer of the property described herein and adjustments will be made as required to the cash transferred.
(c) As fair market value consideration for the transfer of property described herein, TC Tempco will issue to DC, XXXXXXXXXX TC Tempco Common Shares.
126.
(a) DC and TC Tempco will elect, jointly, and 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, as described in paragraph 125, of all eligible property of DC. The amount agreed upon in such elections in respect of each capital property so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act.
(b) The agreed amount will not exceed the fair market value of the property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b).
(c) The amount added to the stated capital account maintained for the TC Tempco Common Shares will equal the aggregate cost to TC Tempco, and to be determined pursuant to subsection 85(1), where relevant, of the properties transferred by DC (as described in paragraph 125).
Purchase for Cancellation of TC Tempco Common Shares
127. TC Tempco will purchase for cancellation its TC Tempco Common Shares held by DC. TC Tempco will satisfy the purchase price by issuing and delivering to DC a non-interest bearing note (the “TC Tempco Note”) payable on demand having a principal amount and fair market value equal to the redemption price of the shares so purchased. DC will accept the note as full payment of the purchase price.
Wind-Up of TC Tempco
128. TC Tempco will be wound up into TC under the provisions of the Corporations Act 1 and will distribute all of its assets, rights and properties to TC, and all the liabilities and obligations of TC Tempco will be assumed by TC, including the liability of TC Tempco under the TC Tempco Note.
DC Purchase for Cancellation
129. [Reserved]
130. DC will purchase for cancellation all of the DC Class A Shares and DC Common Shares held by TC at an amount equal to the fair market value of such shares. DC will satisfy the purchase amount by issuing and delivering to TC a non-interest bearing note (“DC Note”) payable on demand and having a principal amount and fair market value equal to the fair market value of the shares purchased. DC will designate, pursuant to subsection 89(14), by notifying TC in writing, that a portion of the deemed dividend arising on the purchase for cancellation of the DC Class A Shares will be an eligible dividend in an amount to not exceed XXXXXXXXXX% of the general rate income pool of DC, if any.
Cancellation of Notes
131. The DC Note will be set off against the TC Tempco Note in full satisfaction of the respective obligations thereunder (although the principal amount of the DC Note may be different from that of the TC Tempco Note) and each such note will be cancelled.
Amalgamations
132. DC and Gco-Hco Subco, each of which will be a predecessor corporation, will amalgamate under the provisions of the Corporations Act 1 to form “DC Amalco” whereby
(a) all of the property (except any 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 DC Amalco by virtue of the amalgamation;
(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of DC Amalco by virtue of the amalgamation; and
(c) all of the shareholders (except any predecessor corporation) who owned shares of the capital stock of any predecessor corporation immediately before the amalgamation will receive shares of the capital stock of DC Amalco because of the amalgamation.
DC Amalco will be a Canadian-controlled private corporation and a taxable Canadian corporation and will be governed by the provisions of the Corporations Act 1.
133. The share capital of DC Amalco will be the same as the share capital of DC and the same shares will be held by each shareholder with no change in stated capital and paid-up capital.
134. TC and TC Subco, each of which will be a predecessor corporation, will amalgamate under the provisions of the Corporations Act 1 to form “TC Amalco” whereby
(a) all of the property (except any 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 TC Amalco by virtue of the amalgamation;
(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of TC Amalco by virtue of the amalgamation; and
(c) all of the shareholders (except any predecessor corporation) who owned shares of the capital stock of any predecessor corporation immediately before the amalgamation will receive shares of the capital stock of TC Amalco because of the amalgamation.
135. The share capital of TC Amalco will be the same as the share capital of TC and the same shares will be held by each shareholder with no change in stated capital and paid-up capital.
136. No property has or will become property of DC or Yco or of a predecessor corporation of DC or Yco and no liabilities have been or will be incurred by DC or Yco or by a predecessor corporation of DC or Yco in contemplation of and before the distribution described in paragraph 125, otherwise than as described herein.
137. None of the shares of Aco, Bco, Cco, Dco, Jco, DC, TC, TC Subco, and TC Tempco have 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, event or series of transactions or events of the type described in subsection 112(2.5), or
(c) the subject of a dividend rental arrangement.
138. None of Aco, Bco, Cco, Dco, Jco, DC, TC, TC Subco, and TC Tempco will be a corporation described in any of paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1). None of Aco, Bco, Cco, Dco, Jco, DC, TC, TC Subco, and TC Tempco is or will be a specified financial institution prior to the completion of the Proposed Transactions.
PURPOSES OF THE PROPOSED TRANSACTIONS
139. The purpose of the Proposed Transactions is to effect a “split-up” of the assets of Jco and Bco while the two groups will continue to own the real estate (and other assets) held by Cco and Dco jointly. The shares of the capital stock of XXXXXXXXXX owned by Cco and Dco (and Yco, after the amalgamation) represent approximately only XXXXXXXXXX% of the holding in XXXXXXXXXX. The dividends received from XXXXXXXXXX will provide funds to Yco for its operations. The split-up of the assets of Jco and Bco will allow each group to potentially use the shares of the capital stock of XXXXXXXXXX as collateral to finance their separate business and investment interests XXXXXXXXXX. Further, the split-up will allow each group to independently determine the timing, and use of, distributions of the funds received as dividends on the shares of the capital stock of XXXXXXXXXX.
140. The purpose of the dividends described in paragraphs 103 and 104 are to eliminate any RDTOH balance of DC to avoid circular Part IV and RDTOH calculations and to proportionately allocate the existing RDTOH balance.
141. The purpose of the dividend described in paragraph 107 is to proportionately allocate the existing CDA balance.
142. The purpose of the amalgamations described in paragraphs 105 and 108 are to simplify the “distribution” and the corporate structure.
143. The purpose of the transfer of DC’s property to Gco-Hco Subco and TC Subco, as described in paragraphs 110, 111, 112 and 113 is to prevent DC and TC from creating RDTOH in their taxation years that include the “distribution” to prevent circular and non-proportional Part IV liabilities.
144. The purpose of the amalgamations described in paragraphs 132, 133, 134 and 135 are to simplify the final corporate structure.
RULINGS GIVEN
Provided that the preceding statements constitute complete and accurate disclosure of all the 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, our rulings are as follows:
Amalgamation of Jco and Bco
A. On the amalgamation of Jco and Bco, as described in paragraph 105,
(a) the provisions of subsection 87(1) will apply; and
(b) the provisions of subsection 87(4), other than paragraphs (c), (d) and (e) thereof, will apply, so that:
(i) each shareholder (other than any predecessor corporation) of each predecessor corporation will be deemed by paragraph 87(4)(a) to have disposed of such shareholder’s shares for proceeds of disposition equal to the shareholder’s adjusted cost base of such shares immediately prior to the amalgamation; and
(ii) each such shareholder will be deemed by paragraph 87(4)(b) to have acquired the shares of the capital stock of DC at a cost equal to the proceeds described in paragraph 87(4)(a).
Amalgamation of Aco, Cco and Dco
B. On the amalgamation of Aco, Cco and Dco, as described in paragraph 108,
(a) the provisions of subsection 87(1) will apply; and
(b) the provisions of subsection 87(4), other than paragraphs (c), (d) and (e) thereof, will apply, so that:
(i) each shareholder (other than any predecessor corporation) of each predecessor corporation will be deemed by paragraph 87(4)(a) to have disposed of its shares for proceeds of disposition equal to the shareholder’s adjusted cost base of such shares immediately prior to the amalgamation; and
(ii) each such shareholder will be deemed by paragraph 87(4)(b) to have acquired the shares of the capital stock of Yco at a cost equal to the proceeds described in paragraph 87(4)(a).
Transfer of Property to Subcos
C. The provisions of subsection 85(1) will apply to the transfer of DC’s property to Gco-Hco Subco, by DC, as described in paragraphs 110 and 111, so that the agreed amount in respect of the transfer will be deemed to be the transferor’s proceeds of disposition and the transferee’s cost thereof under paragraph 85(1)(a). The provisions of paragraph 85(1)(e.2) will not apply to the transfers described in paragraphs 110 and 111.
D. The provisions of subsection 85(1) will apply to the transfer of DC’s property to TC Subco, by DC, as described in paragraphs 112 and 113, so that the agreed amount in respect of the transfer will be deemed to be the transferor’s proceeds of disposition and the transferee’s cost thereof under paragraph 85(1)(a). The provisions of paragraph 85(1)(e.2) will not apply to the transfers described in paragraphs 112 and 113.
Transfer of DC Shares to TC
E. The provisions of subsection 85(1) will apply to the transfer of DC shares to TC, by Eco, Ico and Xco, as described in paragraphs 114, 115, 116, 117, 118, 119 and 120, so that the agreed amount in respect of the transfer will be deemed to be the transferor’s proceeds of disposition and the transferee’s cost thereof under paragraph 85(1)(a).
The provisions of paragraph 85(1)(e.2) will not apply to the transfers described in paragraphs 114, 115, 116, 117, 118, 119 and 120.
DC Distribution
F. The provisions of subsection 85(1) will apply to the transfer by DC to TC Subco, as described in paragraph 125, of each eligible property which is the subject of an election described in paragraph 126, so that the agreed amount in respect of such transfer will be deemed to be the transferor’s proceeds of disposition and the transferee’s cost of the property transferred under paragraph 85(1)(a). Paragraph 85(1)(e.2) will not apply to the transfers referred to herein.
TC Tempco Share Cancellation
G. Subsection 84(3) will apply on the purchase for cancellation of the TC Tempco Common shares, as described in paragraph 127, to deem TC Subco to have paid and DC to have received a dividend equal to the amount, if any, by which the aggregate amount paid thereon exceeds the paid-up capital in respect of such shares immediately before such redemption, and the dividend
(a) will be included in computing the income of DC pursuant to subsection 82(1) and paragraph 12(1)(j);
(b) will be deductible by DC pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4);
(c) will be excluded in determining the proceeds of disposition to DC of the shares so redeemed pursuant to paragraph (j) of the definition “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, except as provided in paragraph 186(1)(b), as TC Tempco will be connected with DC by virtue of paragraph 186(4)(b);
(f) will not be subject to tax under Part IV.1 by virtue of paragraph (c) of the definition of “excepted dividend” in section 187.1 because DC is a private corporation; and
(g) will not be subject to tax under Part VI.1.
TC Tempco Wind-Up
H. The provisions of subsection 88(1) will apply on the winding-up of TC Tempco into TC, as described in paragraph 128, so that
(a) each property of TC Tempco distributed to TC on the winding-up will be deemed by paragraph 88(1)(a) to have been disposed of by TC Tempco for proceeds of disposition determined under that paragraph;
(b) the shares in the capital stock of TC Tempco held by TC immediately before the winding-up, will be deemed by paragraph 88(1)(b) to have been disposed of by TC for proceeds of disposition determined under that paragraph; and
(c) each property of TC Tempco distributed to TC on the winding-up will be deemed to have been acquired by TC for an amount equal to the amount deemed by paragraph 88(1)(a) to be TC Tempco’s proceeds of disposition of the property.
DC Purchase for Cancellation
I. Subsection 84(3) will apply on the purchase for cancellation of the DC Class A Shares and DC Common shares, as the case may be, as described in paragraph 130, to deem DC to have paid and TC to have received a dividend, on each such class, equal to the amount, if any, by which the aggregate amount paid thereon exceeds the paid-up capital in respect of such shares immediately before such redemption, and the dividends
(a) will be included in computing the income of TC pursuant to subsection 82(1) and paragraph 12(1)(j);
(b) will be deductible by TC pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4);
(c) will be excluded in determining the proceeds of disposition to TC of the shares so redeemed pursuant to paragraph (j) of the definition “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, except as provided in paragraph 186(1)(b), as TC will be connected with DC by virtue of paragraph 186(4)(b);
(f) will not be subject to tax under Part IV.1 by virtue of paragraph (c) of the definition of “excepted dividend” in section 187.1 because TC is a private corporation; and
(g) will not be subject to tax under Part VI.1.
J. The extinguishment of the debt obligations as a result of the cancellation of the DC Note and the TC Tempco Note, as described in paragraph 131, will not give rise to a “forgiven amount”, within the meaning thereof in subsections 80(1) or 80.01(1), and neither DC nor TC will realize any gain or sustain any loss upon the extinguishment of the debt obligations as a result of the cancellation of the DC Note and the TC Tempco Note, as described in paragraph 131.
DC Amalgamation
K. On the amalgamation of DC and Gco-Hco Subco, as described in paragraphs 132 and 133,
(a) the provisions of subsection 87(1) will apply; and
(b) the provisions of subsection 87(4), other than paragraphs (c), (d) and (e) thereof, will apply, so that:
(i) each shareholder (other than any predecessor corporation) of each predecessor corporation, will be deemed by paragraph 87(4)(a) to have disposed of such shareholder’s shares for proceeds of disposition equal to the shareholder’s adjusted cost base of such shares immediately prior to the amalgamation; and
(ii) each such shareholder will be deemed by paragraph 87(4)(b) to have acquired the shares of DC at a cost equal to the proceeds described in paragraph 87(4)(a).
TC Amalgamation
L. On the amalgamation of TC and TC Subco, as described in paragraphs 134 and 135,
(a) the provisions of subsection 87(1) will apply; and
(b) the provisions of subsection 87(4), other than paragraphs (c), (d) and (e) thereof, will apply, so that:
(i) each shareholder (other than any predecessor corporation) of each predecessor corporation, will be deemed by paragraph 87(4)(a) to have disposed of such shareholder’s shares for proceeds of disposition equal to the shareholder’s adjusted cost base of such shares immediately prior to the amalgamation; and
(ii) each such shareholder will be deemed by paragraph 87(4)(b) to have acquired the shares of DC at a cost equal to the proceeds described in paragraph 87(4)(a).
55(3)(b)
M. 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 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); or
(d) an acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);
which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in the rulings in paragraphs G and I and subsection 55(3.1) will not apply to exclude the application of paragraph 55(3)(b).
Other Rulings
N. The provisions of subsections 15(1), 56(2), 56(4), 69(4), 69(11) and 246(1) will not apply to any of the proposed transactions, in and of themselves.
O. As a result of the proposed transactions, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences as confirmed by the rulings above.
The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R7 dated April 22, 2016. They are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX.
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted, could have an effect on the rulings provided herein.
Unless otherwise confirmed, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:
(a) the PUC of any share or the ACB or FMV of any property referred to herein, or the outstanding balance of various tax accounts for any of the corporate entities described herein;
or
(b) any other tax consequence relating to the Facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above.
Nothing in this letter should be construed as a confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. Furthermore, none of the rulings given in this letter are intended to apply to or in the event of the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, 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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