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: Will the exception to subsection 55(2), in paragraph 55(3)(b) apply to the Proposed Transactions?
Position: Yes.
Reasons: Conditions have been met and the butterfly denial rules in subsection 55(3.1) do not apply.
XXXXXXXXXX 2018-074506
XXXXXXXXXX, 2018
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (BN: XXXXXXXXXX, XXXXXXXXXX Tax Services Office, XXXXXXXXXX Taxation Centre)
XXXXXXXXXX (SIN: XXXXXXXXXX, XXXXXXXXXX Tax Services Office, XXXXXXXXXX Taxation Centre)
XXXXXXXXXX (SIN: XXXXXXXXXX, XXXXXXXXXX Tax Services Office, XXXXXXXXXX Taxation Centre)
XXXXXXXXXX (SIN: XXXXXXXXXX, XXXXXXXXXX Tax Services Office, XXXXXXXXXX Taxation Centre)
XXXXXXXXXX (SIN: XXXXXXXXXX, XXXXXXXXXX Tax Services Office, XXXXXXXXXX Taxation Centre)(herein referred to as the “Taxpayers”)
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the Taxpayers.
We understand that to the best of your knowledge and that of the Taxpayers, none of the proposed transactions and/or issues involved in this ruling are the same as or substantially similar to transactions and/or issues that are:
(a) in a previously filed return of the Taxpayers or a related person;
(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Taxpayers or a related person;
(c) under objection by the Taxpayers or a related person;
(d) the subject of a current or completed court process involving the Taxpayers or a related person; or
(e) the subject of a ruling previously considered by the Income Tax Rulings Directorate in relation to the Taxpayers or a related person.
Unless otherwise noted, all references herein to sections or components thereof are references to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended (the “Act”) and all references to monetary amounts are in Canadian dollars.
This document is based solely on the facts and proposed transactions described below. The documentation submitted with the request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
DEFINITIONS
In this letter, unless otherwise noted, the following terms have the meaning specified herein. All references in the singular include the plural.
“A” means XXXXXXXXXX, an individual who is resident in XXXXXXXXXX, Canada and XXXXXXXXXX years old;
“ACB” means “adjusted cost base” as that term is defined in section 54;
“active business” has the meaning assigned by subsection 248(1);
“Advances from Related Parties” referred to in Paragraph 21, is an amount owing by DC to XYZ Co., which is unsecured, non-interest bearing and due on demand with no fixed terms of repayment;
“agreed amount” means the amount that a transferor and a transferee have agreed on in a joint election under subsection 85(1) in respect of the transfer of an eligible property;
“arm’s length” has the meaning assigned by subsection 251(1);
“B” means XXXXXXXXXX, an individual who is resident in XXXXXXXXXX, Canada and XXXXXXXXXX years old;
“C” means XXXXXXXXXX, an individual who is resident in XXXXXXXXXX, Canada and XXXXXXXXXX years old;
“CA1” means XXXXXXXXXX;
“capital property” has the meaning assigned by section 54;
XXXXXXXXXX;
“CCPC” means “Canadian-controlled private corporation” as that term is defined in subsection 125(7);
“CDA” means “capital dividend account” as that term is defined in subsection 89(1);
“Co-op Equity Accounts” are XXXXXXXXXX equity accounts in XXXXXXXXXX represented by an accumulation of patronage dividends earned by DC, but not paid to DC, which are not payable until DC liquidates or is wound-up;
“CRA” means the Canada Revenue Agency;
“D” means XXXXXXXXXX, an individual who is resident in XXXXXXXXXX, Canada and XXXXXXXXXX years old;
“DC” means XXXXXXXXXX;
“DC Class A Common Shares” means the Class A common shares in the capital of DC described in Paragraph 4;
“DC Class B Common Shares” means the Class B common shares in the capital of DC described in Paragraph 4;
“DC Class C Common Shares” means the Class C common shares in the capital of DC described in Paragraph 4;
“DC Class G Shares” means the Class G preferred shares in the capital of DC described in Paragraph 4;
“DC Class H Shares” means the Class H preferred shares in the capital of DC described in Paragraph 4;
“DC Common Shares” means the DC Class A Common Shares and DC Class B Common Shares, collectively;
“DC Shares” means the DC Class C Common Shares, the DC Class G Shares and the DC Class H Shares, collectively;
“DC Transfer” refers to the transfer of property by DC to TC described in Paragraph 32;
“depreciable property” has the meaning assigned by subsection 13(21);
“disposition” has the meaning assigned by subsection 248(1);
“distribution” has the meaning assigned by subsection 55(1);
“distribution property” has the meaning assigned by Paragraph 32;
“dividend refund” has the meaning assigned by subsection 129(1);
“dividend rental arrangement” has the meaning assigned by subsection 248(1);
“eligible property” has the meaning assigned by subsection 85(1.1);
“FMV” means fair market value, which refers to the amount, expressed in money terms, that is the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm’s length and under no compulsion to act and contracting for a taxable purchase and sale, expressed in terms of cash;
XXXXXXXXXX;
XXXXXXXXXX;
“financial intermediary corporation” has the meaning assigned by subsection 191(1);
“forgiven amount” has the meaning assigned by subsections 80(1) and 80.01(1);
“GRIP” means “general rate income pool” as that term is defined in subsection 89(1);
“net capital loss” has the meaning assigned by subsection 111(8);
“non-capital loss” has the meaning assigned by subsection 111(8);
“Paragraph” means a numbered paragraph in this letter;
“Partnership” means XXXXXXXXXX, a general partnership owned by A, B, C and D, as described in Paragraph 12;
“prescribed rate of interest” means the rate of interest prescribed by Regulation 4301(c);
“proceeds of disposition” has the meaning assigned by section 54;
“Promissory Note #1” means the non-interest bearing demand promissory note to be issued by TC to DC on the redemption of its TC Class E Shares held by DC, described in Paragraph 35;
“Promissory Note #2” means the non-interest bearing demand promissory note to be issued by DC to TC on the redemption of its (i) XXXXXXXXXX DC Class G Shares and XXXXXXXXXX DC Class H Share and (ii) purchase for cancellation of its XXXXXXXXXX DC Class C Common Shares, held by TC, described in Paragraph 36;
“property” has the meaning assigned by subsection 248(1);
“Proposed Transactions” means the transactions described in the Proposed Transactions section of this letter;
“PUC” means “paid-up capital” as that term is defined in subsection 89(1);
“RDTOH” means “refundable dividend tax on hand” as that term is defined in subsection 129(3);
“related person” means, in relation to a particular person, another person who is related to the particular person by virtue of subsection 251(2), as modified for the purposes of section 55 by paragraph 55(5)(e);
“restricted financial institution” has the meaning assigned by subsection 248(1);
“series of transactions or events” means a series of transactions or events as interpreted by the Courts for purposes of the Act and includes the transactions or events referred to in subsection 248(10);
“Shareholder Loans” means the amounts due from DC to each of A, B, C and D that are unsecured, non-interest bearing and due on demand with no fixed terms of repayment, as described in Paragraphs 13 and 14 and referred to in Paragraph 21;
“short-term preferred shares” has the meaning assigned by subsection 248(1);
“specified class” has the meaning assigned by subsection 256(1.1);
“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” refers to an account that both DC and TC are required to maintain for each class of their respective share capital, issued in accordance with CA1, and reflects the aggregate amount of stated capital for each class of shares in the share capital of each of DC and TC, respectively;
“substantial interest” has the meaning assigned by subsection 191(2);
“taxable dividend” has the meaning assigned by subsection 89(1);
“taxable preferred shares” has the meaning assigned by subsection 248(1);
“taxation year” has the meaning assigned by subsection 249(1);
“TC” refers to the corporation to be incorporated by D as described in Paragraph 24 of the Proposed Transactions;
“TC Class C Common Shares means the Class C common shares in the capital of TC described in Paragraph 25;
“TC Class E Shares” means the Class E preferred shares in the capital of TC described in Paragraph 25;
“TC Class G Shares” means the Class G preferred shares in the capital of TC described in Paragraph 25;
“TC Class H Shares” means the Class H preferred shares in the capital of TC described in Paragraph 25;
“TCC” means “taxable Canadian corporation” as that term is defined in subsection 89(1);
“UCC” means “undepreciated capital cost” as that term is defined in subsection 13(21); and
“XYZ Co.” means XXXXXXXXXX, which is a corporation owned equally by A and B.
FACTS
1. DC is a TCC and a CCPC incorporated on XXXXXXXXXX, under CA1. The head office of DC is located in XXXXXXXXXX.
2. DC is in the business of XXXXXXXXXX.
3. DC has a XXXXXXXXXX taxation year end and reports its income from its XXXXXXXXXX business, for tax purposes, using XXXXXXXXXX.
4. The authorized share capital of DC consists of an unlimited amount of the following shares:
(a) Class A, B, C and D voting common shares without nominal or par value;
(b) Class E and F voting, non-participating preferred shares;
(c) Class G and H non-voting, non-participating preferred shares, redeemable and retractable for an amount equal to the FMV of the consideration received for the shares of that class when issued plus any declared and unpaid dividends thereon. These classes of shares have a non-cumulative dividend entitlement computed based on a fixed amount or percentage of the FMV of the consideration received for the shares when first issued, up to a maximum amount of the prescribed rate of interest at the time the shares were first issued, as determined by the CRA. These classes of shares are non-convertible and non-exchangeable, and determined by the Taxpayers to be shares of a specified class.
5. The issued and outstanding share capital of DC is held as follows:
Shareholder Shares PUC ACB Redemption
Amount
A XXXX Class G XXXX XXXX XXXX
B XXXX Class G XXXX XXXX XXXX
C XXXX Class A XXXX XXXX XXXX
C XXXX Class H XXXX XXXX XXXX
D XXXX Class B XXXX XXXX XXXX
D XXXX Class H XXXX XXXX XXXX
The DC Class G Shares and the DC Class H Shares are taxable preferred shares and short-term preferred shares.
6. The dividend entitlement of all four authorized classes of DC common shares in Paragraph 4(a) above is silent in DC’s Articles of Incorporation. However, the Taxpayers represent that the dividend entitlement on these shares is determined by DC’s Board of Directors, in their sole discretion, from time to time. While dividends have never been paid on any of the DC Common Shares, it has always been the intention of the shareholders of DC that dividends are paid pro rata to all the common shareholders, despite the fact that the common shareholders of DC each own common shares of a separate class.
7. A and B are brothers.
8. A and C are married.
9. B and D are married.
10. [Reserved]
11. A, B, C and D each own their shares of DC as capital property, and all such shares are eligible property.
History of DC shareholdings
12. Prior to XXXXXXXXXX, Partnership operated the business of XXXXXXXXXX and XXXXXXXXXX that is now operated by DC.
13. On XXXXXXXXXX, the following transactions occurred:
(a) D incorporated DC and became the first director.
(b) C subscribed for XXXXXXXXXX DC Class A Common Shares for $XXXXXXXXXX cash consideration.
(c) D subscribed for XXXXXXXXXX DC Class B Common Shares for $XXXXXXXXXX cash consideration.
(d) C transferred her interest in Partnership to DC, pursuant to subsection 85(1) at an agreed amount of $XXXXXXXXXX. As consideration for this transfer to DC, she received an unsecured, non-interest bearing promissory note receivable, due on demand, from DC equal to $XXXXXXXXXX and XXXXXXXXXX DC Class H Share.
(e) A transferred his interest in Partnership to DC, pursuant to subsection 85(1) at an agreed amount of $XXXXXXXXXX. As consideration for this transfer to DC, he received an unsecured, non-interest bearing promissory note receivable, due on demand, from DC equal to $XXXXXXXXXX and XXXXXXXXXX DC Class G Shares.
(f) B transferred his interest in Partnership to DC, pursuant to subsection 85(1) at an agreed amount of $XXXXXXXXXX. As consideration for this transfer to DC, he received an unsecured, non-interest bearing promissory note receivable, due on demand, from DC equal to $XXXXXXXXXX, and XXXXXXXXXX DC Class G Shares.
14. On XXXXXXXXXX, D transferred her interest in Partnership to DC, pursuant to subsection 85(1) at an agreed amount of $XXXXXXXXXX. As consideration for this transfer to DC, she received an unsecured, non-interest bearing promissory note receivable, due on demand, from DC equal to $XXXXXXXXXX and XXXXXXXXXX DC Class H Share.
15. As a result of the foregoing transactions, on XXXXXXXXXX, Partnership ceased to exist and DC continued to carry on the business of Partnership. Pursuant to subsection 98(5), the property of Partnership became the property of DC.
16. For clarity, none of the shares issued by DC as part of the foregoing transactions have been redeemed or purchased for cancellation by DC, and remain issued and outstanding as at the date of this letter. And, there have been no changes to DC’s authorized or issued share capital since XXXXXXXXXX.
17. As at XXXXXXXXXX, DC had no balances in the following tax accounts:
(a) RDTOH,
(b) GRIP, and
(c) CDA.
It is not anticipated that these tax account balances will change before the commencement of the Proposed Transactions.
18. As at XXXXXXXXXX, DC does not have any of the following losses:
(a) non-capital loss,
(b) net capital loss, and
(c) XXXXXXXXXX.
It is not anticipated that the above loss balances will change before the commencement of the Proposed Transactions.
19. As at XXXXXXXXXX, DC had the following UCC balances:
Class 6 $XXXXXXXXXX
Class 8 $XXXXXXXXXX
Class 10 $XXXXXXXXXX
Class 14.1 $XXXXXXXXXX
Class 16 $XXXXXXXXXX
Class 45 $XXXXXXXXXX
Class 50 $XXXXXXXXXX
20. As at XXXXXXXXXX, pursuant to its unaudited financial statements, DC had the following assets:
(a) current assets which primarily include cash, accounts receivable, taxes receivable, inventory (XXXXXXXXXX), prepaid expenses and deposits, and Co-op Equity Accounts; and
(b) long-term assets which primarily include XXXXXXXXXX automotive equipment and buildings.
21. As at XXXXXXXXXX, pursuant to its unaudited financial statements, DC had the following liabilities:
(a) current liabilities which primarily include accounts payable, accrued liabilities and taxes payable; and
(b) Advances from Related Parties and Shareholder Loans.
Since the XXXXXXXXXX taxation year end, there has not been a material change in the composition and value of DC’s assets and liabilities described above that would impact the Proposed Transactions. Moreover, there will not be any significant change in DC’s assets or liabilities (except as contemplated in the Proposed Transactions) from the date of this letter until the date that the Proposed Transactions are completed.
PROPOSED TRANSACTIONS
The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, which will be filed within the applicable due dates, unless otherwise indicated, following the completion of the Proposed Transactions.
Preliminary transactions
22. Pursuant to a reorganization of capital, DC will file Articles of Amendment in order to increase the votes per DC Class C Common Share from XXXXXXXXXX to XXXXXXXXXX.
23. C and D will each simultaneously enter into share exchange agreements with DC to undertake the following:
(a) C will exchange all XXXXXXXXXX DC Class A Common Shares for XXXXXXXXXX DC Class C Common Shares, and
(b) D will exchange all XXXXXXXXXX DC Class B Common Shares for XXXXXXXXXX DC Class C Common Shares.
These share exchanges will occur at FMV such that the aggregate FMV of all of the DC Class C Common Shares received by C and D, at the time of the exchanges, will be equal to the aggregate FMV of all of the DC Common Shares exchanged, immediately before the exchange. No election under subsection 85(1) will be filed with respect to these exchanges.
DC will cancel all XXXXXXXXXX DC Class A Common Shares and all XXXXXXXXXX DC Class B Common Shares so exchanged. The stated capital accounts of the cancelled DC Common Shares will be reduced by the amount of the stated capital of such shares immediately before the exchange resulting in nil balances; and an amount equal to the aggregate of the PUC of the DC Class A Common Shares and the PUC of the DC Class B Common Shares, immediately before the exchange, will be added to the stated capital account of the DC Class C Common Shares. For clarity, the aggregate PUC of the DC Class C Common Shares immediately after the exchange will equal the aggregate PUC of the DC Class A Common Shares and DC Class B Common Shares immediately before the exchange.
Both C and D do not desire to confer a benefit on a related person.
24. D will incorporate TC under CA1. No shares in the capital of TC will be issued to D on its incorporation. TC will be a TCC and a CCPC. TC will have a XXXXXXXXXX taxation year end.
25. The authorized share capital of TC will consist of an unlimited amount of the following shares:
(a) Class A, B, C and D voting common shares without nominal or par value;
(b) Class E non-voting, non-participating, non-convertible preferred shares, redeemable and retractable at an amount equal to the FMV of the consideration received for the shares, plus any declared and unpaid dividends thereon. This class of shares has a non-cumulative dividend entitlement computed based on a fixed percentage of the FMV of the consideration received for the shares when first issued, up to a maximum amount of the prescribed rate of interest at the time the shares were first issued, as determined by the CRA.
(c) Class F voting, non-participating, non-convertible preferred shares, redeemable and retractable at an amount equal to the FMV of the consideration received for the shares, plus any declared and unpaid dividends thereon. This class of shares has a non-cumulative dividend entitlement computed based on a fixed percentage of the FMV of the consideration received for the shares when first issued, up to a maximum amount of the prescribed rate of interest at the time the shares were first issued, as determined by the CRA.
(d) Class G and H non-voting, non-participating, non-convertible, non-exchangeable preferred shares, redeemable and retractable for an amount equal to the FMV of the consideration received for the shares of that class, plus any declared and unpaid dividends thereon. These classes of shares have a non-cumulative dividend entitlement computed based on a fixed percentage of the FMV of the consideration received for the shares when first issued, up to a maximum amount of the prescribed rate of interest at the time the shares were first issued, as determined by the CRA. It is the intention of TC, D and B that these shares are shares of a specified class.
26. D will transfer all XXXXXXXXXX DC Class C Common Shares and XXXXXXXXXX DC Class H Share to TC. As consideration for the XXXXXXXXXX DC Class C Common Shares, D will receive XXXXXXXXXX TC Class C Common Shares with an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX DC Class C Common Shares, at the time of the transfer; and, as consideration for the XXXXXXXXXX DC Class H Share, D will receive XXXXXXXXXX TC Class H Share with an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX DC Class H Share, at the time of the transfer. D and TC will jointly elect, in the prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to this transfer. The agreed amounts will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) as they apply to each property, nor will the agreed amounts exceed the FMV of the XXXXXXXXXX DC Class C Common Shares and XXXXXXXXXX DC Class H Share transferred to TC, respectively, at the time of the transfer.
The amount added to the stated capital account of the TC Class C Common Shares issued to D will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, in respect of the XXXXXXXXXX DC Class C Common Shares transferred to TC; and (ii) the aggregate ACB to D, immediately before the disposition, of the XXXXXXXXXX DC Class C Common Shares transferred to TC, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the increase to the PUC of the TC Class C Common Shares will not exceed the maximum amount that could be added to the PUC of such shares without an adjustment under paragraph 84.1(1)(a).
The amount added to the stated capital account of the TC Class H Share issued to D will be restricted to the greater of (i) the PUC, immediately before the disposition, in respect of the XXXXXXXXXX DC Class H Share transferred to TC; and (ii) the ACB to D, immediately before the disposition, of the XXXXXXXXXX DC Class H Share transferred to TC, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the increase to the PUC of the TC Class H Share will not exceed the maximum amount that could be added to the PUC of that share without an adjustment under paragraph 84.1(1)(a).
27. Simultaneously with D, B will transfer all XXXXXXXXXX DC Class G Shares to TC. As consideration for the transfer, B will receive XXXXXXXXXX TC Class G Shares with an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX DC Class G Shares, at the time of the transfer. B and TC will jointly elect, in the prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to this transfer. The agreed amount will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), nor will it exceed the FMV of the XXXXXXXXXX DC Class G Shares transferred to TC, at the time of the transfer.
The amount added to the stated capital account of the TC Class G Shares issued to B will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, in respect of the XXXXXXXXXX DC Class G Shares transferred to TC; and (ii) the aggregate ACB to B, immediately before the disposition, of the XXXXXXXXXX DC Class G Shares transferred to TC, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the increase to the PUC of the TC Class G Shares will not exceed the maximum amount that could be added to the PUC of such shares without an adjustment under paragraph 84.1(1)(a).
Immediately after the transfers in Paragraphs 26 and 27, the XXXXXXXXXX DC Class C Common Shares, XXXXXXXXXX DC Class H Share, and XXXXXXXXXX DC Class G Shares will be the only assets of TC, which TC will hold as capital property.
B and D do not desire to confer a benefit on any related person as a result of the above transfers of their shares.
28. After the transfers described in Paragraphs 26 and 27, the issued and outstanding share capital of TC will be held as follows:
Shareholder Shares PUC ACB Redemption
Amount
B XXXX Class G XXXX XXXX XXXX
D XXXX Class C XXXX XXXX XXXX
D XXXX Class H XXXX XXXX XXXX
The TC Class G Shares and the TC Class H Shares are taxable preferred shares and short-term preferred shares.
Types of Property
29. Immediately before the DC Transfer, the property of DC will be classified into the following three types of property for the purposes of the definition of distribution as follows:
(a) cash or near-cash property, comprising of DC’s cash, accounts receivable, taxes receivable, inventory (XXXXXXXXXX), prepaid expenses and deposits, and XXXXXXXXXX;
(b) business property, comprising all of the assets of DC, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from an active business (other than a specified investment business) including its Co-op Equity Accounts, and depreciable property; and
(c) investment property, comprising all of the assets of DC, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or income from a specified investment business.
For greater certainty, for purposes of the DC Transfer:
(i) any tax accounts of DC, such as any non-capital loss, XXXXXXXXXX, net capital loss, and the balance of any RDTOH, GRIP or CDA, if any, will not be considered property;
(ii) deferred expenses, which are expenses that are deferred and amortized for accounting purposes, but fully deducted for tax purposes, if any, will not be considered property; and
(iii) any advances to DC that have a term of less than 12 months or are due on demand, if any, are considered cash or near-cash property.
30. It is anticipated that DC will not own any property that would be classified as investment property immediately before the DC Transfer, based on the methodologies described in Paragraph 29.
31. In determining the net FMV of each type of property of DC immediately before the DC Transfer, the liabilities of DC will be allocated to, and deducted in the calculation of the net FMV of each such type of property of DC in the following manner:
(a) all current liabilities, Advances from Related Parties and Shareholder Loans will be allocated to each cash or near-cash property of DC in the proportion that the FMV of each such property is of the aggregate FMV of all cash or near-cash property of DC. The total amount of DC’s current liabilities to be allocated to DC’s cash or near cash property will not exceed the aggregate FMV of all of DC’s cash or near-cash property;
(b) following the allocation of the current liabilities, Advances from Related Parties and Shareholder Loans described in Paragraph 31(a), any remaining net FMV of accounts receivable, taxes receivable, inventory (XXXXXXXXXX), prepaid expenses and deposits will be reclassified as business property and excluded from the net FMV of DC’s cash or near-cash property, to the extent that such property will be collected, sold or consumed by DC or TC in the ordinary course of the business to which they relate (for clarity, cash and XXXXXXXXXX will not be reclassified to business property);
(c) liabilities of DC, other than those described in Paragraph 31(a), that relate to a particular property will then be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property but not to a particular property will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and
(d) if any liabilities remain after the allocations described in Paragraphs 31(a) and (c) are made, such remaining liabilities will then be allocated to the cash or near-cash property, business property and investment property of DC, on the basis of the relative net FMV of each type of property immediately prior to the allocation of such remaining liabilities, but after the allocation of the liabilities as described in Paragraphs 31(a) and (c). However, where DC is considered to have a negative amount of a type of property because of the allocations in Paragraphs 31(a) or (c), for the purposes of allocating the remaining liabilities, the net FMV of that type of property will be deemed nil resulting in none of those remaining liabilities being allocated to that type of property.
For greater certainty, for the purposes of determining the net FMV of each type of property of DC:
(i) the amount of deferred income tax liability, if any, will not be considered a liability because such amount does not represent a legal obligation;
(ii) amounts owing by DC that have a term of less than 12 months or are due on demand with no fixed terms of repayment are considered current liabilities;
(iii) current liabilities include amounts normally classified as current liabilities, including accounts payable, accrued liabilities and taxes payable; and
(iv) no amount will be considered to be a liability unless it represents a true legal liability that is capable of quantification.
DC Transfer
32. Immediately following the determination of the net FMV of DC’s types of property as described above, DC will transfer to TC, TC’s proportionate share of the net FMV of each type of property owned by DC at that time (collectively referred to as the “distribution property”), such that immediately following the transfer of the properties and the assumption by TC of DC’s liabilities, as described in Paragraph 33(a) below, the aggregate net FMV of each type of property transferred by DC to TC will be equal to or approximate that proportion of each type of property determined by the formula:
A x B/C, where
A is the net FMV, immediately before the DC Transfer, of all property of that type owned at that time by DC;
B is the FMV, immediately before the DC Transfer, of all the DC Shares owned, at that time, by TC; and
C is the FMV, immediately before the DC Transfer, of all the issued and outstanding DC Shares.
The expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net fair market value of each type of property that TC will receive as compared to what it would have received had it received its appropriate pro rata share of the net fair market value of that type of property of DC.
33. As consideration for the DC Transfer, TC will:
(a) assume such liabilities of DC, as appropriate, so that TC will receive a proportionate share of the net FMV of each type of property owned by DC; and
(b) issue TC Class E Shares to DC which will have an aggregate redemption amount and aggregate FMV equal to the amount by which the aggregate FMV, at the time of the DC Transfer, of the distribution property received by TC, exceeds the aggregate amount of the liabilities of DC assumed by TC, as described in Paragraph 33(a).
DC will hold the TC Class E Shares as capital property. The TC Class E Shares will be taxable preferred shares and short-term preferred shares.
34. In respect of the DC Transfer, DC and TC will jointly elect, in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers of each eligible property of DC that is transferred by DC to TC. The agreed amount in respect of each such eligible property will be as follows:
(a) in the case of capital property (other than depreciable property of a prescribed class), an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(c) in the case of depreciable property of a prescribed class, if any, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
(c) XXXXXXXXXX
The agreed amount in respect of each eligible property so transferred using the provisions of subsection 85(1) will not be greater than the FMV of such eligible property. The amount of the liabilities assumed by TC, which are allocated to a particular eligible property that is subject to an election under subsection 85(1), will not exceed the agreed amount for that particular property. The amount of liabilities assumed by TC which are allocated to a particular property that is not subject to an election under subsection 85(1) will not exceed the FMV of any such property.
TC will add to the stated capital account for the TC Class E Shares, an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred to TC, and (b) the aggregate FMV, in the case of each property transferred to TC that is not an eligible property, less (c) the aggregate principal amounts of the liabilities of DC assumed by TC. For greater certainty, the amount added to the stated capital account for the TC Class E Shares to be issued by TC as partial consideration for the distribution property will not exceed the maximum amount that could be added to the aggregate PUC of the TC Class E Shares without a reduction taking place pursuant to subsection 85(2.1).
35. Immediately after the DC Transfer, TC will redeem all of the issued TC Class E Shares held by DC for an amount equal to the aggregate redemption amount and FMV of such shares. As consideration therefor, TC will issue Promissory Note #1 to DC, which will have a principal amount and FMV equal to the aggregate FMV and redemption amount of the TC Class E Shares so redeemed. DC will accept Promissory Note #1 as payment in full for the TC Class E Shares so redeemed.
36. DC will then redeem all XXXXXXXXXX DC Class G Shares and XXXXXXXXXX DC Class H Share and purchase for cancellation the XXXXXXXXXX DC Class C Common Shares held by TC for an amount equal to the aggregate redemption amounts and FMV of such shares. As consideration therefor, DC will issue Promissory Note #2 to TC, which will have a principal amount and FMV equal to the aggregate FMV and the redemption amounts of the XXXXXXXXXX DC Class G Shares, XXXXXXXXXX DC Class H Share and XXXXXXXXXX DC Class C Common Shares so redeemed and purchased for cancellation. TC will accept Promissory Note #2 as payment in full for the shares so redeemed and purchased for cancellation.
37. Promissory Note #1 and Promissory Note #2 will be set-off in full against each other and cancelled without payment.
38. Immediately following the above Proposed Transactions, the net FMV of each type of DC’s property retained by DC, determined in the manner described in Paragraphs 29 to 31, will be equal to or approximate that proportion of the aggregate net FMV of that type of property of DC, determined immediately before the DC Transfer that:
(a) the aggregate FMV, immediately before the DC Transfer, of all the DC Shares owned at that time by A and C,
is of
(b) the aggregate FMV, immediately before the DC Transfer, of all the issued and outstanding DC Shares.
39. Except as described in this letter, no property has been or will be acquired, and no liabilities have been or will be incurred or paid by DC in contemplation of and before the Proposed Transactions, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).
40. There has not been and will not be, as part of a series of transactions or events that includes the Proposed Transactions, any disposition or acquisition of property in circumstances described in subparagraphs 55(3.1)(b)(i) or (iii), or an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii).
41. None of the distribution property received by TC on the DC Transfer will be acquired by a person unrelated to TC, or by a partnership, as part of a series of transactions or events that includes the Proposed Transactions, in the circumstances described in paragraph 55(3.1)(c).
42. None of the property retained by DC after the DC Transfer will be acquired by a person unrelated to DC, or by a partnership, as part of a series of transactions or events that includes the Proposed Transactions, in the circumstances described in paragraph 55(3.1)(d).
43. None of DC or TC is or will be, at any time during a series of transactions or events that includes the Proposed Transactions, a specified financial institution, a restricted financial institution or a corporation described in any of the paragraphs (a) to (f) of the definition of financial intermediary corporation.
44. At any time before and during the series of transactions and events that include the Proposed Transaction, none of the shares of DC or TC will be:
(a) the subject of any undertaking or agreement that is referred to in subsection 112(2.2) as a “guarantee agreement”;
(b) issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5);
(c) the subject of a dividend rental arrangement;
(d) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or
(e) issued for consideration that is or includes:
(i) an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or
(ii) any right of the type described in subparagraph 112(2.4)(b)(ii).
45. Immediately before the redemption of the TC Class E Shares held by DC described in Paragraph 35, DC will be connected with TC pursuant to paragraph 186(4)(a) and subsection 186(2), and both TC and DC will have a substantial interest in each other.
46. Each of DC and TC will have the financial capacity to honour, upon presentation for payment, the amount payable under their respective promissory notes issued as part of the Proposed Transactions.
47. The Proposed Transactions will not result in DC or a related person being unable to pay its existing tax liabilities.
PURPOSE OF THE PROPOSED TRANSACTIONS
48. B and D wish to carry on a XXXXXXXXXX business independently from A and C. The Proposed Transactions will allow B and D to have direct and separate control over their family’s pro rata share of DC’s property in order to achieve their purpose.
49. The purpose of DC’s share capital reorganization and share exchange transactions in Paragraphs 22 and 23 above is to ensure that the common shareholders of DC hold common Shares of DC with identical terms and conditions, including equal rights with respect to the receipt of dividends, prior to the distribution.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, additional information, proposed transactions and purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:
A. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the time limit specified in subsection 85(6), subsection 85(1) will apply to:
(a) the transfer of the XXXXXXXXXX DC Class C Common Shares and XXXXXXXXXX DC Class H Share owned by D to TC, as described in Paragraph 26;
(b) the transfer of the XXXXXXXXXX DC Class G Shares owned by B to TC, as described in Paragraph 27;
(c) the transfer of each eligible property owned by DC to TC on the DC Transfer, as described in Paragraphs 32 and 34;
such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor’s proceeds of disposition and the transferee’s cost of the particular eligible property, pursuant to paragraph 85(1)(a).
For purposes of the joint elections, when determining the agreed amount of depreciable property in the course of the DC Transfer, the reference in subparagraph 85(1)(e)(i) to “the undepreciated capital cost to the taxpayer of all of the property of that class immediately before the disposition” shall mean that proportion of the UCC to DC of all the property of that class immediately before the DC Transfer that the FMV at that time of the property that is transferred is of the aggregate FMV of all the property of that class at that time.
For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.
B. The application of subsection 84.1(1) to the share transfers by D and B, described in Paragraphs 26 and 27, respectively, will not result in:
(a) a deemed dividend paid by TC, and received by D and B, respectively, pursuant to paragraph 84.1(1)(b); and
(b) a reduction of the PUC of the TC Class C Common Shares, TC Class H Shares and TC Class G Shares, provided that the PUC of each class of shares of the capital stock of TC issued to D and B, respectively, on the transfers is a nominal amount not exceeding the maximum amount that could be added to the PUC of such classes of shares having regard to paragraph 84.1(1)(a).
C. As a result of the redemption by TC of the TC Class E Shares, owned by DC, as described in Paragraph 35, by virtue of subsection 84(3), TC will be deemed to have paid, and DC will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of all the TC Class E Shares exceeds the aggregate PUC in respect of those shares immediately before the redemption.
D. As a result of the purchase for cancellation by DC of the XXXXXXXXXX DC Class C Common Shares, and redemption by DC of the XXXXXXXXXX DC Class H Share and XXXXXXXXXX Class G Shares, owned by TC, as described in Paragraph 36, by virtue of subsection 84(3):
(a) DC will be deemed to have paid, and TC will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the purchase for cancellation of the XXXXXXXXXX DC Class C Common Shares exceeds the aggregate PUC in respect of those shares immediately before the purchase for cancellation; and
(b) DC will be deemed to have paid, and TC will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the XXXXXXXXXX DC Class H Share and XXXXXXXXXX Class G Shares exceeds the aggregate PUC in respect of each class of those shares immediately before the redemption.
E. The taxable dividends described in Rulings C and D above:
(a) will be included in computing the income of the recipient corporation deemed to have received such a dividend pursuant to subsection 82(1) and paragraph 12(1)(j);
(b) will be deductible by the recipient corporation pursuant to subsection 112(1) in computing its taxable income for the taxation year in which such a dividend is deemed to have been received, and, for greater certainty, such deduction will not be prohibited by subsections 112(2.1), (2.2), (2.3) or (2.4);
(c) will be excluded in determining the recipient corporation’s proceeds of disposition of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of proceeds of disposition;
(d) will, by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to have been received;
(e) will not be subject to tax under Part IV.1 or Part VI.1; and
(f) 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 is deemed to pay dividends, pursuant to paragraph 186(1)(b).
F. Provided that, as part of a series of transactions or events that includes the Proposed Transactions, there is not:
(a) an acquisition of property in the circumstances described in paragraph 55(3.1)(a);
(b) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(c) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(d) an acquisition of a share in the circumstances described in subparagraph 55(3.1)(b)(iii) or;
(e) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or (d);
which has not been described in this letter, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings C and D above, and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b) in respect of those dividends.
G. The set-off and cancellation of Promissory Note #1 and Promissory Note #2 will not, in and of itself, give rise to a forgiven amount. In addition, neither DC nor TC will otherwise realize a gain or incur any loss as a result of such set-off and cancellation.
H. The provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not apply to any of the Proposed Transactions, in and by themselves.
I. The provisions of subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.
The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R7 issued on April 22, 2016, and are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.
Unless otherwise expressly 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 FMV or ACB of any property referred to herein or the PUC in respect of any share referred to herein;
(b) the balance of the RDTOH, GRIP or CDA for any corporation described herein;
(c) whether any of the shares described herein constitute shares of a specified class; or
(d) any other tax consequence (including provincial tax consequences) relating to the facts, proposed transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.
Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer or issuance of shares. Furthermore, none of the rulings given in this letter are intended to apply to, or in the event of, the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses, dated March 28, 2013.
Yours truly,
XXXXXXXXXX
Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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