2017 Ruling 2017-0703821R3 - Supplementary ruling- XXXXXXXXXX continuance

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: 1. Does subsection 15(1) apply to deem a shareholder benefit to the shareholder that acquired a "control block" of shares on the XXXXXXXXXX continuance transaction that occurred on XXXXXXXXXX? 2. Can certain shareholders of the XXXXXXXXXX, that are XXXXXXXXXX (and TCCs) avail themselves of the 112(1) deduction on dividends received from the XXXXXXXXXX?

Position: 1. No; 2. Yes, with caveats.

Reasons: 1. Subsection 15(1) does not apply because the benefit was realized on a share for share exchange, whereby the corporation that continued as a XXXXXXXXXX acquired and cancelled the shares of the shareholder that acquired the controlling block of shares, simultaneously with the shareholder acquiring the control block (See exception 15(1)(a)(ii)). 2. Yes, it is available, provided that the shares are not term preferred shares acquired in the ordinary course of business XXXXXXXXXX.

XXXXXXXXXX							2017-070382

Attention: XXXXXXXXXX:

XXXXXXXXXX, 2017

Dear Sir,

Re: Supplemental Income Tax Ruling
XXXXXXXXXX

We are writing in response to our discussion in XXXXXXXXXX and emails dated XXXXXXXXXX from your colleague, XXXXXXXXXX, requesting additional rulings be added to the Income Tax Ruling 2016-0643751R3, dated XXXXXXXXXX (the “Original Ruling”).

Capitalized terms used in this letter, but not defined herein, have the meanings given to them in the Original Ruling.

The Original Ruling is amended as follows:

1. New definitions will be added in the section entitled “Definitions”:

“dividend rental arrangement” has the meaning assigned by subsection 248(1);

“effective time of continuance” is the time that the Taxpayer continues as a XXXXXXXXXX under Act1 as stated in the letters patent issued by the Minister, which is at XXXXXXXXXX; and

“term preferred share” has the meaning assigned by subsection 248(1).

New Paragraphs 19 through 24 will be added after Paragraph 18 in the section entitled “Additional Representations of the Taxpayer”:

19. At the time the shares of the capital stock of the Taxpayer were legally issued or acquired as described in Paragraph 13, the existence of the Taxpayer was not limited.

20. The Class XXXXXXXXXX Preferred shares issued by the Taxpayer will not be term preferred shares on the effective date of continuance or at any time thereafter, having regard to the terms and conditions of the shares and any agreement relating to the shares.

21. At the effective date of continuance, ACo was the only shareholder of the Taxpayer described in paragraph (b) of the definition of “term preferred share” in subsection 248(1).

22. ACo did not acquire its Class XXXXXXXXXX shares and its XXXXXXXXXX shares in the ordinary course of its business, and ACo did not acquire its Common shares in the ordinary course of its business.

23. It is not reasonable to expect at any time that the Class XXXXXXXXXX Preferred shares will be redeemed, acquired, cancelled, or the paid-up capital thereon reduced by any of the persons listed in paragraph (i) of the definition of “term preferred share”, as a consequence of the terms or conditions of those shares when established or modified.

24. The Class XXXXXXXXXX Preferred shares and Common shares will not at any time on the effective date of continuance, or at any time thereafter, be:

a. the subject of any undertaking that is referred to in subsection 112(2.2) as a “guarantee agreement”;

b. the subject of a dividend rental arrangement;

c. the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

d. issued for consideration that is or includes:

i. an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

ii. any right of the type described in subparagraph 112(2.4)(b)(ii).

2. As a consequence of the above additions, Paragraphs 19 and 20 of the Original Ruling will become Paragraphs 25 and 26.

3. The following rulings will be added after Ruling D in the section entitled “Rulings Given”:

RULING E: The provisions of subsections 15(1), 56(2) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

RULING F: With respect to the shareholders of the Taxpayer that were shareholders of the Taxpayer at the effective time of continuance, and based on their shareholdings at that time, subsection 112(1) will apply to permit a deduction to be claimed in computing the taxable income of such a shareholder that is a XXXXXXXXXX and a taxable Canadian corporation, equal to the amount of dividends paid by the Taxpayer as a XXXXXXXXXX and received by the shareholder on its Class XXXXXXXXXX or Common shares, but only to the extent that the dividend is not allocated XXXXXXXXXX pursuant to XXXXXXXXXX. For greater certainty, such deduction will not be prohibited by subsections 112(2.1), 112(2.2), 112(2.3) and 112(2.4).

RULING G: Subsection 112(1) will apply to permit a deduction to be claimed in computing the taxable income of a shareholder that is a XXXXXXXXXX and is a taxable Canadian corporation, equal to the amount of dividends paid by the Taxpayer as a XXXXXXXXXX and received by the shareholder on its Class XXXXXXXXXX or Common shares acquired after the effective time of continuance, and for greater certainty, such deduction will not be prohibited by subsections 112(2.1), 112(2.2), 112(2.3) and 112(2.4), provided that the shareholder’s shares of the Taxpayer are not term preferred shares that are acquired in the ordinary course of its business, but only to the extent that the dividend is not allocated XXXXXXXXXX pursuant to XXXXXXXXXX.

The reason for two separate rulings dealing with subsection 112(1) is to acknowledge the fact that the shareholdings of the Taxpayer will change after the effective time of continuance, which limits Ruling F. Ruling G acknowledges that the Taxpayer will have new shareholders and that existing shareholders may alter their shareholdings after the effective time of continuance, and those changes could cause certain shareholders to acquire term preferred shares of the Taxpayer in the ordinary course of their business.

We confirm that the rulings given in the Original Ruling, as modified by this letter, will continue to be binding on the Canada Revenue Agency subject to the same limitations and qualifications set out in the Original Ruling and in Information Circular 70-6R7 dated April 22, 2016.

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.

An invoice for our fees in connection with this supplementary ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
For Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch