Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether the Proposed Transactions meet the requirements of paragraph 55(3)(b).
Position: Yes.
Reasons: Based on the Act and CRA publications and taxpayer representations.
XXXXXXXXXX 2018-075841
XXXXXXXXXX, 2019
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
We are writing in response to your request for an advance income tax ruling (Ruling request) on behalf of the above-noted taxpayer and the other taxpayers involved as described below (the taxpayers). We acknowledge your initial and revised Ruling requests, dated XXXXXXXXXX, respectively, as well as the additional information provided to us in subsequent letters and emails, and during our various telephone conversations. The documents submitted as part of your Ruling request are part of this document only to the extent described herein.
CONFIRMATION
To the best of your knowledge and that of the taxpayers involved, none of the proposed transactions or issues involved in this ruling request are the same as or substantially similar to transactions or issues that are:
i. in a previously filed tax return of the taxpayer or a related person and:
(A) being considered by the CRA in connection with such return;
(B) under objection by the taxpayer or a related person; or
(C) the subject of a current or completed court process involving the taxpayer or a related person; or
ii. the subject of a Ruling request previously considered by the Income Tax Rulings Directorate.
The tax account numbers, Tax Services Offices and the Tax Centres and head office address of the taxpayers involved are as follows:
XXXXXXXXXX
The above-referenced taxpayers have confirmed that the proposed transactions described herein will not affect their ability to pay any of their outstanding tax liabilities.
DEFINITIONS
Unless otherwise stated:
i. all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended, (the Act);
ii. all terms and conditions used in this Ruling request that are defined in the Act (or in the Regulations) have the meaning given in such definition;
iii. all references to monetary amounts are in Canadian dollars; and
iv. the singular should be read as plural and vice versa where the circumstances so require.
The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to as follows:
“ACB” has the meaning assigned to “adjusted cost base” by section 54;
“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);
“BCA” means the XXXXXXXXXX;
“BN” means the business number assigned by the CRA to a particular corporation for income tax purposes;
“Butterfly Distribution” means the transfer of property by DC to each of TC1 and TC2, as described in Paragraph 62;
“CCPC” means “Canadian-controlled private corporation” as that term is defined in subsection 125(7);
“capital property” has the meaning assigned by section 54;
“capital dividend” has the meaning assigned by subsection 83(2);
“CDA” means the “capital dividend account” as that term is defined in subsection 89(1);
“Child A1” means XXXXXXXXXX, an adult child of Mr. A and an individual resident in Canada;
“Child A2” means XXXXXXXXXX, an adult child of Mr. A and an individual resident in Canada;
“Child A3” means XXXXXXXXXX, an adult child of Mr. A and an individual resident in Canada;
“Child B1” means XXXXXXXXXX, an adult child of Mr. B and an individual resident in Canada;
“Child B2” means XXXXXXXXXX, an adult child of Mr. B and an individual resident in Canada;
“Child B3” means XXXXXXXXXX, an adult child of Mr. B and an individual resident in Canada;
“Child B4” means XXXXXXXXXX, an adult child of Mr. B and an individual resident in Canada;
“Childco B1” means XXXXXXXXXX as described in Paragraph 50;
“Childco B1 Class A Preferred Shares” means the Class A preference shares of the capital stock of Childco B1 that are currently issued and outstanding, as described in Paragraph 51;
“Childco B1 Common Shares” means the common shares of the capital stock of Childco B1 that are currently issued and outstanding, as described in Paragraph 51;
“Childco B1 Special Shares” means the special preference shares of the capital stock of Childco B1 that are currently issued and outstanding, as described in Paragraph 51;
“CRA” means the Canada Revenue Agency;
“DC” means the distributing corporation, XXXXXXXXXX, as described in Paragraph 1;
“DC Common Shares” means the common shares of the capital stock of DC that are currently issued and outstanding, as described in Paragraph 2;
“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 62;
“dividend refund” has the meaning assigned by subsection 129(1);
“dividend rental arrangement” has the meaning assigned by subsection 248(1);
“Effective Date” means the day of XXXXXXXXXX;
“eligible property” has the meaning assigned by subsection 85(1.1);
”ERDTOH” means “eligible refundable dividend tax on hand” as that term is defined by subsection 129(4);
“fair market value” or “FMV” means the highest price available in an open and unrestricted market between informed and prudent parties acting at arm’s length and under no compulsion to act, expressed in terms of cash;
“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);
“Founders” means collectively Mr. A and Mr. B;
“GRIP” means “general rate income pool” as that term is defined by subsection 89(1);
“guarantee agreement” has the meaning assigned by subsection 112(2.2);
“Holdco A” means XXXXXXXXXX as described in Paragraph 39;
“Holdco A Common Shares” means the common shares of the capital stock of Holdco A that are currently issued and outstanding, as described in Paragraph 40;
“Holdco A Special Shares” means the special preference shares of the capital stock of Holdco A that are currently issued and outstanding, as described in Paragraph 40;
“Land” means the XXXXXXXXXX, that has been beneficially owned by DC on a continuous basis since XXXXXXXXXX;
“Legal Titleholder” or “Legal Titleholders” means individually or collectively, as determined by the context, Legal Titleholder 1, Legal Titleholder 2 and Legal Titleholder 3;
“Legal Titleholder 1” means XXXXXXXXXX as described in Paragraph 9;
“Legal Titleholder 2” means XXXXXXXXXX as described in Paragraph 13;
“Legal Titleholder 3” means XXXXXXXXXX as described in Paragraph 17;
“Loans” means collectively the amounts advanced to DC by XXXXXXXXXX (corporations controlled by Mr. A and Mr. B respectively), XXXXXXXXXX as described in Paragraphs 6 and 29;
“Mr. A” means XXXXXXXXXX, an individual who is resident in Canada;
“Mr. B” means XXXXXXXXXX, an individual who is resident in Canada;
”NERDTOH” means “non-eligible refundable dividend tax on hand” as that term is defined by subsection 129(4);
“net FMV” means the FMV of an asset net of any associated liabilities allocated to that asset as described in Paragraph 61 for the purpose of determining the proportionate amount of any type of property distributed to TC1 and TC2;
“Nominee A1” means XXXXXXXXXX as described in Paragraph 21;
“Nominee A2” means XXXXXXXXXX as described in Paragraph 21;
“Nominee B1” means XXXXXXXXXX as described in Paragraph 25;
“Nominee B2” means XXXXXXXXXX as described in Paragraph 25;
“Nominee B3” means XXXXXXXXXX as described in Paragraph 25;
“Nominee B4” means XXXXXXXXXX as described in Paragraph 25;
“Nominees” or “Nominee corporations” means collectively Nominee A1, Nominee A2, Nominee B1, Nominee B2, Nominee B3 and Nominee B4;
“Paragraph” means a numbered or lettered paragraph of this letter;
“proceeds of disposition” has the meaning assigned by section 54;
“PUC” means “paid-up capital” as that term is defined by subsection 89(1);
“private corporation” has the meaning assigned by subsection 89(1);
“Proposed Transactions” means the transactions described in Paragraphs 55 to 74 under the heading Proposed Transactions;
“redemption amount” means with respect to a share of any class of a corporation, the amount for which such share is redeemable by the holder or retractable by the corporation;
“Redemption Notes” means, collectively the TC1 Redemption Note and the TC2 Redemption Note;
“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);
“Rental Property” means the XXXXXXXXXX;
“restricted financial institution” has the meaning assigned by subsection 248(1);
“specified financial institution” has the meaning assigned by subsection 248(1);
“specified investment business” has the meaning assigned by subsection 125(7);
“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 to that term by subsection 89(1);
“taxation year” has the meaning assigned by subsection 249(1);
“TC1” means XXXXXXXXXX, a transferee corporation in respect of the distributing that is described in Paragraph 35;
“TC1 Butterfly Rental Property” means an undivided interest in XXXXXXXXXX, beneficial ownership of which will be transferred to TC1 on the Butterfly Distribution as described in Paragraph 64, such that the net FMV of such property received by TC1 will be equal to or approximate TC1’s proportionate share of the net FMV of all property of DC of that type (as determined immediately before such transfer and set out in Paragraphs 59, 60 and 61, as applicable);
“TC1 Class A Preferred Shares” means the Class A preference shares of the capital stock of TC1 that are currently issued and outstanding, as described in Paragraph 36;
“TC1 Class B Preferred Shares” means the Class B preference shares of the capital stock of TC1, as described in Paragraph 36;
“TC1 Common Shares” means the common shares of the capital stock of TC1 that are currently issued and outstanding, as described in Paragraph 36;
“TC1 Redemption Note” means the non-interest bearing demand promissory note issued by TC1 to DC on the redemption of the TC1 Class B Preferred Shares held by DC whose principal amount and FMV will be equal to the aggregate redemption amount of those preferred shares;
“TC1 Special Shares” means the special preference shares of the capital stock of TC1 that are currently issued and outstanding, as described in Paragraph 36;
“TC2” means XXXXXXXXXX, a transferee corporation in respect of the distributing corporation that is described in Paragraph 46;
“TC2 Butterfly Rental Property” means an undivided interest in XXXXXXXXXX, beneficial ownership of which will be transferred to TC2 on the Butterfly Distribution as described in Paragraph 64, such that the net FMV of such property received by TC2 will be equal to or approximate TC2’s proportionate share of the net FMV of all property of DC of that type (as determined immediately before such transfer and set out in Paragraphs 59, 60 and 61, as applicable);
“TC2 Class A Preferred Shares” means the Class A preference shares of the capital stock of TC2, as described in Paragraph 47;
“TC2 Class B Preferred Shares” means the Class B preference shares of the capital stock of TC2, as described in Paragraph 47;
“TC2 Common Shares” means the common shares of the capital stock of TC2 that are currently issued and outstanding, as described in Paragraph 47;
“TC2 Redemption Note” means the non-interest bearing demand promissory note issued by TC2 to DC on the redemption of the TC2 Class B Preferred Shares held by DC whose principal amount and FMV will be equal to the aggregate redemption amount of those preferred shares;
“TC2 Special Shares” means the special preference shares of the capital stock of TC2 that are currently issued and outstanding, as described in Paragraph 47;
“TC” means TC1 or TC2 and “TCs” means both TC1 and TC2;
“Trust A1” means XXXXXXXXXX, a Canadian resident trust as described in Paragraph 42;
“Trust A2” means XXXXXXXXXX, a Canadian resident trust as described in Paragraph 38;
“Trust B” means XXXXXXXXXX, a Canadian resident trust as described in Paragraph 49;
“Trust Child B1” means XXXXXXXXXX, a Canadian resident trust as described in Paragraph 53;
“type of property” means one of the following three types of property into which DC’s property may be classified, as described in Paragraph 59:
(a) cash or near-cash property;
(b) investment property; and
(c) business property;
“UCC” means “undepreciated capital cost” as that term is defined in subsection 13(21).
FACTS
The relevant facts are as follows:
DC
1. DC is and will be, at all relevant times and for all purposes of the Act, a CCPC and a taxable Canadian corporation. DC was incorporated on XXXXXXXXXX under the BCA. DC has a XXXXXXXXXX taxation year end.
2. The history of the shareholdings of DC is as follows:
(a) On incorporation, the authorized share capital of DC consisted of an unlimited amount of the following shares:
i. Common Shares, which carry XXXXXXXXXX per share, are entitled to non-cumulative discretionary dividends, and share equally in the residual assets of the company upon dissolution;
ii. Class A Special Shares, which carry XXXXXXXXXX per share, are redeemable (at $XXXXXXXXXX per share) and retractable, entitled to non-cumulative discretionary dividends at a fixed percentage and, in the event of the liquidation, dissolution or winding-up of the corporation, entitles the holder to receive, before any distribution among the holders of the Class B Special Shares and the Common Shares, repayment of an amount equal to $XXXXXXXXXX per share, together with any declared but unpaid dividends; and
iii. Class B Special Shares, which are non-voting, redeemable and retractable, entitled to non-cumulative discretionary dividends at a fixed percentage and, and, in the event of the liquidation, dissolution or winding-up of the corporation, entitles the holder to receive, before any distribution among the holders of the Common Shares, repayment of an amount equal to the Class B Special Share redemption amount, together with any declared but unpaid dividends
(b) On XXXXXXXXXX, Trust A1 subscribed for XXXXXXXXXX DC Common Shares for $XXXXXXXXXX;
(c) On XXXXXXXXXX, Trust B subscribed for XXXXXXXXXX DC Common Shares for $XXXXXXXXXX;
(d) On XXXXXXXXXX, Trust A1 transferred all XXXXXXXXXX of its DC Common Shares to Holdco A in exchange for XXXXXXXXXX Holdco A Common Shares and XXXXXXXXXX Holdco A Special Shares pursuant to a section 85 rollover;
(e) On XXXXXXXXXX, Trust B transferred all XXXXXXXXXX of its DC Common Shares to TC2 in exchange for XXXXXXXXXX TC2 Common Shares and XXXXXXXXXX TC2 Special Shares pursuant to a section 85 rollover;
(f) On XXXXXXXXXX, Holdco A transferred all XXXXXXXXXX of its DC Common Shares to TC1 in exchange for XXXXXXXXXX TC1 Class A Preferred Shares and XXXXXXXXXX TC1 Special Shares pursuant to a section 85 rollover.
There have been no further changes to the share capital of DC since XXXXXXXXXX.
3. The current issued and outstanding share capital of DC consists of XXXXXXXXXX DC Common Shares, of which XXXXXXXXXX are owned by each of TC1 and TC2 as follows:
Shareholder Class and Number ACB PUC
TC1 XXXX DC Common Shares XXXX XXXX
TC2 XXXX DC Common Shares XXXX XXXX
TC1 and TC2 hold their respective shares in DC as capital property and all of such shares are eligible property.
None of Class A Special Shares or Class B Special Shares of DC have ever been issued.
4. DC owns real estate from which it earns rental income and DC carries on a specified investment business. Specifically, DC is the beneficial owner of the Rental Property and the Land, which it has continuously owned since XXXXXXXXXX.
5. As at XXXXXXXXXX, DC’s assets, with an approximate FMV of $XXXXXXXXXX of liabilities. The FMV of DC’s assets (gross), consisted of the following:
a) Cash of approximately $XXXXXXXXXX;
b) Accounts receivable of approximately $XXXXXXXXXX;
c) Loan receivable of approximately $XXXXXXXXXX (the “Loan Receivable”); and
d) Furniture, equipment and property (including land and buildings) with a FMV of approximately of $XXXXXXXXXX.
6. As at XXXXXXXXXX, DC had outstanding liabilities of approximately $XXXXXXXXXX consisting of the following: accounts payable, accrued liabilities, tenant deposits and advances made to DC by the Founders, or by corporations controlled by the Founders. These advances include the following amounts (referred to as the “Loans”), as at XXXXXXXXXX:
Due to: Loans
Mr. A $XXXXXXXXXX
Mr. B $XXXXXXXXXX
Total $XXXXXXXXXX
7. As at XXXXXXXXXX, DC had the following tax account balances:
NERDTOH $XXXXXXXXXX
ERDTOH $XXXXXXXXXX
GRIP $XXXXXXXXXX
CDA $XXXXXXXXXX
Legal Title to the Rental Property and the Land
8. The legal title for each property that forms the Rental Property is currently held by one of the following entities: DC; Legal Titleholder 1 or Legal Titleholder 2. Legal Titleholder 3 solely has legal title to the Land.
Legal Titleholder 1
9. Legal Titleholder 1 is a CCPC and a taxable Canadian corporation, which was incorporated XXXXXXXXXX under the BCA.
10. The issued and outstanding share capital of Legal Titleholder 1 consists of XXXXXXXXXX common shares, all of which are owned by DC.
11. Legal Titleholder 1 has had no activity since its incorporation. Legal Titleholder 1 earns no revenue and its assets are of nominal value.
12. Pursuant to a nominee agreement between Legal Titleholder 1 and DC, Legal Titleholder 1 holds the legal title to its properties as the nominee, agent and bare trustee for the sole benefit of DC and Legal Titleholder 1 will not deal with such property in any way without receiving the prior written instructions, consent or direction of DC.
Legal Titleholder 2
13. Legal Titleholder 2 is a CCPC and a taxable Canadian corporation, which was incorporated XXXXXXXXXX under the BCA.
14. The issued and outstanding share capital of Legal Titleholder 2 consists of XXXXXXXXXX common shares, all of which are owned by Legal Titleholder 1.
15. Legal Titleholder 2 has had no activity since its incorporation. Legal Titleholder 2 earns no revenue and its assets are of nominal value.
16. Pursuant to a nominee agreement between Legal Titleholder 2 and DC, Legal Titleholder 2 holds the legal title to its properties as the nominee, agent and bare trustee for the sole benefit of DC and Legal Titleholder 2 will not deal with such property in any way without receiving the prior written instructions, consent or direction of DC.
Legal Titleholder 3
17. Legal Titleholder 3 is a CCPC and a taxable Canadian corporation, which was incorporated on XXXXXXXXXX under the BCA.
18. The issued and outstanding share capital of Legal Titleholder 3 consists of XXXXXXXXXX common shares, all of which are owned by a wholly-owned corporation that is controlled by Child B3.
19. Legal Titleholder 3 has no activity. It holds the legal title to the Land. Legal Titleholder 3 has nominal assets and earns no revenue.
20. Pursuant to a nominee agreement between Legal Titleholder 3 and DC, Legal Titleholder 3 holds the legal title to the Land as the nominee, agent and bare trustee for the sole benefit of DC and it will not deal with the Land in any way without receiving the prior written instructions, consent or direction of DC.
Nominee A1 and Nominee A2
21. Nominee A1 and Nominee A2 are CCPCs and taxable Canadian corporations, which were each incorporated on XXXXXXXXXX under the BCA.
22. The issued and outstanding share capital of each of Nominee A1 and Nominee A2 consists of 1 common share, which are owned by Mr. A.
23. The sole purpose of Nominee A1 and Nominee A2 is to acquire legal title, but not beneficial ownership, of certain properties that will form the TC1 Butterfly Rental Property, from the current legal titleholder, being DC or one of the Legal Titleholders, such that collectively Nominee A1 and Nominee A2 will hold legal title of the TC1 Butterfly Rental Property on the transfer of such property as described in Paragraph 55. Nominee A1 and Nominee A2 each have no activity, no assets and earn no revenue.
24. Nominee A1 and Nominee A2 will, at all relevant times, hold legal title to all such property solely as nominee, agent and bare trustee for the beneficial owner of such property, namely DC or TC1, as the case may be.
Nominee B1, Nominee B2, Nominee B3 and Nominee B4
25. Nominee B1, Nominee B2, Nominee B3 and Nominee B4 are all CCPCs and taxable Canadian corporations, each of which was incorporated on XXXXXXXXXX under the BCA.
26. The issued and outstanding share capital of each of Nominee B1, Nominee B2, Nominee B3 and Nominee B4 consists of XXXXXXXXXX Class A common shares, which are owned by Child B1, Child B2, Child B3 and Child B4, respectively.
27. Each of Nominee B1, Nominee B2, Nominee B3 and Nominee B4 has been incorporated for the sole purpose of acquiring legal title, but not beneficial ownership, of certain properties that will form the TC2 Butterfly Rental Property and of the Land, from the current legal titleholder, being DC or one of the Legal Titleholders, such that collectively Nominee B1, Nominee B2, Nominee B3 and Nominee B4 will hold legal title of the TC2 Butterfly Rental Property and the Land on the transfer of such property as described in Paragraph 55. They each have no activity, nil or nominal assets and earn no revenue.
28. Nominee B1, Nominee B2, Nominee B3 and Nominee B4 will, at all relevant times, hold legal title to all such property solely as nominee, agent and bare trustee for the beneficial owner of such property, namely DC or TC2, as the case may be.
29. The term of the mortgages on the Rental Property were up for renewal on XXXXXXXXXX. The mortgages were repaid by funds advanced to DC from corporations controlled by Mr. A and Mr. B and such amounts are described above as the Loans.
Members of the families of Mr. A and Mr. B
30. The shares of TC1 are owned by the members of the family of Mr. A as set out in Paragraph 37. The shares of TC2 are owned by the members of the family of Mr. B as set out in Paragraph 49.
31. Mr. A and Mr. B are not related persons and deal at arm’s length with one another.
32. The issue of Mr. A are not related to Mr. B nor the issue of Mr. B.
Mr. A family
33. Child A1, Child A2 and Child A3 are siblings who are all related to each other pursuant to paragraphs 251(2)(a) and 251(6)(a) but not related to each other for the purposes of section 55.
34. Mr. A, Child A1, Child A2 and Child A3, are all residents of Canada for the purposes of the Act.
TC1
35. TC1 is a CCPC and a taxable Canadian corporation incorporated on XXXXXXXXXX under the BCA. TC1’s taxation year end is XXXXXXXXXX. TC1 has no assets (other than the XXXXXXXXXX DC Common Shares) and nil tax account balances including RDTOH/ERDTOH/NERDTOH, GRIP, CDA and non-capital/capital losses.
36. The authorized share capital of TC1 on incorporation consists of an unlimited amount of the following classes of shares:
(a) Common shares (TC1 Common Shares), which are voting (XXXXXXXXXX per share), participating and entitled to non-cumulative discretionary dividends;
(b) Class A preference shares (TC1 Class A Preferred Shares), which are non-voting and non-participating, redeemable and retractable at the FMV of the consideration received for the issuance of the shares, less the amount of any liabilities assumed by the company, and entitled to non-cumulative discretionary dividends at an annual rate between XXXXXXXXXX% of the redemption value, as and when declared by the board of directors;
(c) Class B preference shares (TC1 Class B Preferred Shares), which are non-voting and non-participating, redeemable and retractable at the FMV of the consideration received for the issuance of the shares, less the amount of any liabilities assumed by the company, and entitled to non-cumulative discretionary dividends at an annual between XXXXXXXXXX% of the redemption value, as and when declared by the board of directors;
(d) Class C preference shares (TC1 Class C Preferred Shares), which are non-voting and non-participating, redeemable and retractable at the FMV of the consideration received for the issuance of the shares, less the amount of any liabilities assumed by the company, and entitled to non-cumulative discretionary dividends at an annual rate between XXXXXXXXXX% of the redemption value, as and when declared by the board of directors; and
(e) Special preference shares (TC1 Special Shares), which are voting (XXXXXXXXXX votes per share), non-participating, redeemable (at $XXXXXXXXXX/share) and have no entitlement to dividends.
37. The current issued and outstanding share capital of TC1 are held as follows:
Shareholder Class and Number ACB PUC
Trust A2 XXXX TC1 Common Shares XXXX XXXX
Holdco A XXXX TC1 Class A Preferred Shares XXXX XXXX
Holdco A XXXX TC1 Special Shares XXXX XXXX
Trust A2
38. Trust A2 was settled under the laws of XXXXXXXXXX on XXXXXXXXXX with the following terms:
(a) The settlor of the trust is Mr. A;
(b) The trustees are Mr. A and 2 unrelated trustees;
(c) The beneficiaries of the Trust A2 are the issue of Mr. A (“individual beneficiaries”), any corporations owned by the individual beneficiaries and trusts where the only beneficiaries are one or more individual beneficiaries;
(d) Trust 2 is a discretionary trust; and
(e) The trust is not a reversionary trust under subsection 75(2) of the Act.
Holdco A
39. Holdco A is a CCPC and a taxable Canadian corporation incorporated on XXXXXXXXXX under the BCA. The head office of Holdco A is located in XXXXXXXXXX. Holdco A’s taxation year end is XXXXXXXXXX. Holdco A has no assets (other than the TC1 Class A Preferred Shares and the TC1 Special Shares as noted above) and nil tax account balances including RDTOH/ERDTOH/NERDTOH, GRIP, CDA and non-capital/capital losses.
40. The authorized share capital of Holdco A consists of the following classes of shares:
(a) Common shares (Holdco A Common Shares), which are voting (XXXXXXXXXX per share), participating and entitled to non-cumulative discretionary dividends;
(b) Class A preference shares (Holdco A Class A Preferred Shares), which are non-voting and non-participating, redeemable and retractable at the FMV of the consideration received for the issuance of the shares, less the amount of any liabilities assumed by the company, and entitled to non-cumulative discretionary dividends at an annual rate between XXXXXXXXXX% of the redemption value, as and when declared by the board of directors;
(c) Class B preference shares (Holdco A Class B Preferred Shares), which are non-voting and non-participating, redeemable and retractable at the FMV of the consideration received for the issuance of the shares, less the amount of any liabilities assumed by the company, and entitled to non-cumulative discretionary dividends at an annual rate between XXXXXXXXXX% of the redemption value, as and when declared by the board of directors; and
(d) Special preference shares (Holdco A Special Shares), which are voting (XXXXXXXXXX votes per share), non-participating, redeemable (at $XXXXXXXXXX/share) and have no entitlement to dividends.
41. The current issued and outstanding share capital of Holdco A are held as follows:
Shareholder Class and Number ACB PUC
Trust A1 XXXX Holdco A Special Shares XXXX XXXX
Child A1 XXXX Holdco A Common Shares XXXX XXXX
Child A2 XXXX Holdco A Common Shares XXXX XXXX
Child A3 XXXX Holdco A Common Shares XXXX XXXX
Trust A1
42. Trust A1 was settled on XXXXXXXXXX, the beneficiaries of which are the issue of Mr. A, with the following terms:
(a) The settlor of the trust is Mr. B;
(b) The trustee is Mr. A;
(c) The trust permits the trustees to distribute the assets to the beneficiaries; and
(d) The trust is not a reversionary trust under subsection 75(2) of the Act.
43. The trustees and beneficiaries of Trust A1 and Trust A2 are residents of Canada for the purposes of the Act.
Mr. B family
44. Child B1, Child B2, Child B3 and Child B4 are siblings. They are all related to each other pursuant to paragraphs 251(2)(a) and 251(6)(a) but not related to each other for the purposes of section 55.
45. Mr. B, Child B1, Child B2, Child B3 and Child B4 are all residents of Canada for the purposes of the Act.
TC2
46. TC2 is a CCPC and a taxable Canadian corporation incorporated on XXXXXXXXXX under the BCA. TC2’s taxation year end is XXXXXXXXXX. TC2 has no assets (other than the XXXXXXXXXX DC Common Shares) and nil tax account balances including RDTOH/ERDTOH/NERDTOH, GRIP, CDA and non-capital/capital losses.
47. The authorized share capital of TC2 consists of the following classes of shares:
(a) Common shares (TC2 Common Shares), which are voting (XXXXXXXXXX per share), participating and entitled to non-cumulative discretionary dividends;
(b) Class A preference shares (TC2 Class A Preference Shares), which are non-voting and non-participating, redeemable and retractable at the FMV of the consideration received for the issuance of the shares, less the amount of any liabilities assumed by the company, and entitled to non-cumulative discretionary dividends at an annual rate between XXXXXXXXXX% of the redemption value, as and when declared by the board of directors;
(c) Class B preference shares (TC2 Class B Preference Shares), which are non-voting and non-participating, redeemable and retractable at the FMV of the consideration received for the issuance of the shares, less the amount of any liabilities assumed by the company, and entitled to non-cumulative discretionary dividends at an annual rate between XXXXXXXXXX% of the redemption value, as and when declared by the board of directors; and
(d) Special preference shares (TC2 Special Shares), which are voting (XXXXXXXXXX votes per share), non-participating, redeemable (at $XXXXXXXXXX/share) and have no entitlement to dividends.
48. The issued and outstanding share capital of TC2 are held as follows:
Shareholder Class and Number ACB PUC
Child B1 XXXX TC2 Special Shares XXXX XXXX
Child B2 XXXX TC2 Special Shares XXXX XXXX
Child B3 XXXX TC2 Special Shares XXXX XXXX
Child B4 XXXX TC2 Special Shares XXXX XXXX
Childco B1 XXXX TC2 Common Shares XXXX XXXX
Child B2 XXXX TC2 Common Shares XXXX XXXX
Child B3 XXXX TC2 Common Shares XXXX XXXX
Child B4 XXXX TC2 Common Shares XXXX XXXX
Trust B
49. Trust B was a personal trust originally settled on XXXXXXXXXX for the benefit of the issue of Mr. B. The settlor of the trust was Mr. A and the trustee was Mr. B. Trust B wound-up following the distribution of the shares of the capital stock of TC2 to its beneficiaries on XXXXXXXXXX.
Childco B1
50. Childco B1 is a CCPC and a taxable Canadian corporation incorporated on XXXXXXXXXX under the BCA. The head office of Childco B1 is located in XXXXXXXXXX. Childco B1’s taxation year end is XXXXXXXXXX. Childco B1 has no assets (other than the XXXXXXXXXX TC2 Common Shares as noted above) and nil tax account balances including ERDTOH/NERDTOH, GRIP, CDA and non-capital/capital losses.
51. The authorized share capital of Childco B1 consists of the following classes of shares:
(a) Common shares (Childco B1 Common Shares), which are voting (XXXXXXXXXX per share), participating and entitled to non-cumulative discretionary dividends;
(b) Class A preference shares (Childco B1 Class A Preference Shares), which are non-voting and non-participating, redeemable and retractable at the FMV of the consideration received for the issuance of the shares, less the amount of any liabilities assumed by the company, and entitled to non-cumulative discretionary dividends at an annual rate between XXXXXXXXXX% of the redemption value, as and when declared by the board of directors;
(c) Class B preference shares (Childco B1 Class B Preference Shares), which are non-voting and non-participating, redeemable and retractable at the FMV of the consideration received for the issuance of the shares, less the amount of any liabilities assumed by the company, and entitled to non-cumulative discretionary dividends at an annual rate between XXXXXXXXXX% of the redemption value, as and when declared by the board of directors;
(d) Class C preference shares (Childco B1 Class C Preference Shares), which are non-voting and non-participating, redeemable and retractable at the FMV of the consideration received for the issuance of the shares, less the amount of any liabilities assumed by the company, and entitled to non-cumulative discretionary dividends at an annual rate between XXXXXXXXXX% of the redemption value, as and when declared by the board of directors; and
(e) Special preference shares (Childco B1 Special Shares), which are voting (XXXXXXXXXX votes per share), non-participating, redeemable (at $XXXXXXXXXX/share) and have no entitlement to dividends.
52. The issued and outstanding share capital of Child B1 Holdco are held as follows:
Shareholder Class and Number ACB PUC
Trust Child B1 XXXX Childco B1 Common Shares XXXX XXXX
Child B1 XXXX Childco B1 Special Shares XXXX XXXX
Child B1 XXXX Childco B1 Class A Preferred Shares XXXX XXXX
53. Trust Child B1 was settled under the laws of XXXXXXXXXX on XXXXXXXXXX:
(a) The Settlor of the trust is Mr. B;
(b) The Trustees are Child B1, Child B2 and Child B4;
(c) The beneficiaries of the Trust Child B1 are the issue of Child B1 (“individual beneficiaries”), any corporations owned by the individual beneficiaries and trusts where the only beneficiaries are one or more individual beneficiaries;
(d) Trust Child B1 is a discretionary trust; and
(e) The trust is not a reversionary trust under subsection 75(2) of the Act.
54. The trustees and beneficiaries of Trust B and Trust Child B1 are residents of Canada for the purposes of the Act.
PROPOSED TRANSACTIONS
Transfer of Legal Title of the Real Property and the Land
55. DC will transfer, or direct the transfer of, as the case may be, the legal title to the Rental Property and the Land from one of the current Legal Titleholders or DC, to one of the Nominee corporations. Concurrent with such transfer, each Nominee will enter into a nominee agreement with DC, pursuant to which the particular Nominee will acknowledge that it will hold the legal title to the particular property transferred as the nominee, agent and bare trustee for the sole benefit of DC and that it will not deal with such property without receiving the prior written instructions, consent or direction of DC.
Winding-up of Legal Titleholder 1 and Legal Titleholder 2
56. Immediately after the transfer of the legal title of the Rental Property held by each of Legal Titleholder 1 and Legal Titleholder 2 as described in Paragraph 55, and before the Butterfly Distribution, DC will, by way of special resolution, resolve to wind-up and dissolve each of Legal Titleholder 1 and Legal Titleholder 2 pursuant to the BCA. Articles of dissolution will be filed in respect of Legal Titleholder 1 and Legal Titleholder 2 in accordance with the provisions of the BCA.
Amendment to the Articles of TC1 and TC2
57. Articles of amendment will be filed for TC1 to amend the rights attaching to the TC1 Class B Preferred Shares to allow for voting rights of XXXXXXXXXX per share.
58. Articles of amendment will be filed for TC2 to amend the rights attaching to the TC2 Class B Preferred Shares to allow for voting rights of XXXXXXXXXX per share.
Butterfly Transactions
Types of Property Analysis
59. Immediately before the transfers of property by DC described in Paragraph 62 (referred to as the “Butterfly Distribution”), for the purposes of the definition of “distribution”, the property of DC will be classified into one of the following three types of property and the aggregate net FMV of each type of property of DC will be determined in the following manner:
(a) cash or near-cash property, comprising all current assets of DC, including cash, accounts receivable and the Loan Receivable, which is non-interest bearing and payable on demand by a corporation controlled jointly by Mr. A and Mr. B;
(b) investment property, comprising all of the assets of DC, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from property or from a specified investment business, including, for greater certainty, land, buildings, and equipment; and
(c) business property, comprising all of the assets of DC, other than property described in Paragraphs 59(a) and (b) above, any income from which would, for the purposes of the Act, be income from an active business carried on by DC, if any, (other than a specified investment business).
For greater certainty, for purposes of the transfer of the property by DC:
(a) tax accounts or other tax related amounts of DC, such as the balance of any non-capital losses, net capital losses, NERDTOH/ERDTOH, CDA or GRIP, will not be considered property;
(b) advances that are payable on demand or that are due within the next XXXXXXXXXX will be considered cash or near-cash property;
(c) deferred expenses, if any, which were expenditures deferred and amortized for accounting purposes but fully deducted for tax purposes, and any deferred income tax or future income tax assets recorded in the financial statements of DC, will not be considered property;
(d) any amount in respect of refunds of taxes, and interest thereon, actually receivable will be treated as cash or near-cash property and any potential refunds of taxes and interest thereon will, due to their contingent nature, be ignored; and
(e) no amount will be considered a liability unless it represents a true legal liability capable of quantification. For greater certainty, the amount of any deferred income taxes or future income taxes recorded in the financial statements of DC will not be considered a liability because such amount does not represent a legal obligation of DC at the time of the Proposed Transactions.
60. As a result of the classification of DC’s property as described in Paragraph 59, it is anticipated that DC will have cash and near-cash property and investment property, and no business property.
61. In determining the net FMV of each type of property of DC, 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) Current liabilities of DC, which include amounts owing by DC that have a term of less than XXXXXXXXXX, that are due on demand or that are otherwise normally classified as current liabilities (including accounts payable, accrued liabilities, shareholder advances and the current portion of any long-term debt), will be allocated to the cash or near-cash property of DC in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by DC to the extent that such allocation does not exceed the aggregate FMV of all cash or near-cash property of DC. To the extent that the total amount of current liabilities so allocated exceeds the total FMV of DC's cash or near cash property, DC will be considered to have a negative amount of cash or near-cash property;
(b) Liabilities, other than current liabilities, if any, of DC that relate to a particular property (including the Loans) will then be allocated to that particular property (and effectively to the type of property to which the property belongs) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property and liabilities that pertain to the same type of property, but not to a particular property, will then be allocated to that particular type of property, but not in excess of the total FMV of such type of property. To the extent that the liabilities pertaining to a particular type of property exceed the total FMV of that type of property of DC, DC will be considered to have a negative amount of property of that type;
(c) If any liabilities remain after the allocations described in (a) and (b) are made (“excess DC unallocated liabilities”), such excess DC unallocated liabilities will then be allocated to the cash or near-cash property and investment property, if any, of DC, based on the relative net FMV of each type of property prior to the allocation of such excess DC unallocated liabilities but after the allocations described in (a) and (b). However, where DC is considered to have a negative amount of a type of property because of (a) or (b), for the purposes of allocating such excess DC unallocated liabilities, the net FMV of that type of property will be deemed to be nil resulting in none of such excess DC unallocated liabilities being allocated to that type of property; and
(d) The cash or near cash property in DC are currently significantly less than the current liabilities. This is expected to continue until the date of the transactions. If this situation persists, all the DC unallocated liabilities will be allocated to the investment property.
For greater certainty, after the allocation of liabilities, the amount of each type of property allocated to each TC1 and TC2, net of the liabilities, will be proportionate to the respective shareholder’s proportionate share of the FMV of the shares of DC prior to the Butterfly Distribution.
Butterfly Distribution
62. On the Effective Date, DC will contemporaneously transfer to each of TC1 and TC2 a pro rata (XXXXXXXXXX) portion of the net FMV of each type of property owned by DC (collectively referred to as the “Distribution Property”), such that immediately after such property transfers and the corresponding assumptions of liabilities, the net aggregate FMV of each type of property transferred to each of TC1 and TC2 will, for greater certainty, be equal to or approximate the proportion determined by the formula:
A x B/C
where:
A is the net FMV, immediately before the transfers, of all property of that type of property owned at that time by DC;
B is the aggregate FMV, immediately before DC’s transfer of property to TC1 or TC2, as applicable, of all of the shares of the capital stock of DC owned, at that time, by TC1 or TC2, as the case may be; and
C is the aggregate FMV, immediately before DC’s transfer of property to TC1 or TC2, of all of the issued and outstanding shares of the capital stock of DC.
For the purposes of this Paragraph, the expression “approximate the proportion” above means that the discrepancy from that proportion of XXXXXXXXXX%, if any, will not exceed XXXXXXXXXX, determined as a percentage of the net FMV of each type of property that TC1 and TC2 has received on such transfer as compared to what each would have received had it received its exact pro rata (XXXXXXXXXX%) share of the net FMV of that type of property.
63. As consideration for the property transferred by DC to TC1 and TC2, each of TC1 and TC2 will:
(a) assume such of DC's liabilities, if any, as are specifically secured by assets received by TC1 or TC2, respectively;
(b) assume all amounts payable, if any, from DC to, in respect of TC1, Mr. A or a corporation controlled by Mr. A or, in respect of TC2, Mr. B or a corporation controlled by Mr. B;
(c) assume additional liabilities of DC as appropriate, so that on a net FMV basis TC1 and TC2, respectively, will receive a proportionate share of each type of property owned by DC, as set forth in Paragraph 62; and
(d) issue to DC, TC1 Class B Preferred Shares or TC2 Class B Preferred Shares, as the case may be, which will have an aggregate redemption amount and aggregate FMV equal to the amount of the FMV, at the time of the distribution, of the property received by each of TC1 and TC2 less the aggregate amount of the liabilities of DC assumed by TC1 and TC2, as the case may be, as described in (a) to (c) above. DC will hold the TC1 Class B Preferred Shares and the TC2 Class B Preferred Shares as capital property, and such shares will be taxable preferred shares.
For greater certainty, for the purposes of subsection 191(4), the amount specified in respect of the TC1 Class B Preferred Shares and the TC2 Class B Preferred Share which are to be redeemed, acquired or cancelled, will be pursuant to a resolution of the respective board of directors for each of TC1 and TC2, that is effective concurrently with the issuance of such shares. The amount to be specified in respect of each of such share will be expressed as a dollar amount (and not expressed as a formula), will not be subject to change thereafter, and will be equal to the FMV of the consideration for which each TC1 Class B Preferred Shares and the TC2 Class B Preferred Share is issued.
64. On the Butterfly Distribution, TC1 will receive beneficial ownership of the TC1 Butterfly Rental Property, and TC2 will receive beneficial ownership of the TC2 Butterfly Rental Property and the Land. Legal title to such properties will already have been transferred to a particular Nominee corporation as described in Paragraph 55. Concurrent with such transfer, TC1 and TC2 will enter into a nominee agreement with each respectively Nominee corporation, pursuant to which each Nominee corporation will acknowledge that it will hold the legal title to such property as the nominee, agent and bare trustee for the sole benefit of TC1 or TC2, as the case may be, and that it will not deal with such property without receiving the prior written instructions, consent or direction of TC1 or TC2, as applicable.
65. For greater certainty, the TC1 Class B Preferred Shares and the TC2 Class B Preferred Shares that are issued to DC will represent more than XXXXXXXXXX%, but less than XXXXXXXXXX%, of the issued share capital of TC1 or TC2, as applicable, having full voting rights in all circumstances. These preference shares will also represent more than XXXXXXXXXX% of the FMV of all the issued and outstanding shares of the capital stock of each of TC1 and TC2, respectively.
66. In respect of the Distribution Property, DC will jointly elect with TC1 or TC2, as the case may be, in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply, unless otherwise specified, to the transfers of each eligible property of DC that is transferred by DC to TC1 and TC2, as the case may be. The agreed amount in respect of each such eligible property will not be greater than the FMV of such property nor will it be less than the amount permitted under paragraph 85(1)(b). For greater certainty, the agreed amount in respect of each such transferred property will be within the limits prescribed 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); and
(b) 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). The amount of the liabilities assumed by TC1 or TC2, as the case may be, which are allocated by DC to a particular eligible property that is subject to an election under subsection 85(1), will not exceed the agreed amount elected for that particular property. The amount of liabilities assumed by TC1 or TC2, as the case may be, which are allocated by DC to a particular property that is not subject to an election under 85(1), will not exceed the FMV of any such property.
DC will jointly elect with TC1 or TC2, as the case may be, and file in prescribed form and within the prescribed time period in section 22 in respect of any accounts receivable that DC transfers to TC1 and TC2.
67. TC1 and TC2, respectively, will add to the stated capital maintained for the TC1 Class B Preferred Shares or the TC2 Class B Preferred Shares, as the case may be, an amount equal to the amount by which the aggregate of the agreed amounts, in the case of each eligible property, and the aggregate FMV, in the case of other properties, in respect of the Distribution Property transferred to TC1 and TC2, respectively, exceeds the liabilities assumed by TC1 and TC2, respectively. For greater certainty, the amount added to the stated capital account for the TC1 Class B Preferred Shares or the TC2 Class B Preferred Shares to be issued by TC1 and TC2, respectively, as partial consideration for the transferred property will not exceed the maximum amount that could be added to the PUC of the TC1 Class B Preferred Shares or the TC2 Class B Preferred Shares without a reduction taking place pursuant to subsection 85(2.1).
Redemption of TC1 and TC2 Class B Preferred Shares
68. On the Effective Date, and immediately after the Butterfly Distribution, each of TC1 and TC2 will redeem all of the TC1 Class B Preferred Shares or the TC2 Class B Preferred Shares, as the case may be, at an amount equal to the aggregate redemption amount and FMV of such shares. As consideration therefore, TC1 will issue TC1 Redemption Note and TC2 will issue TC2 Redemption Note, having a principal amount and FMV equal to the aggregate redemption amount and FMV of the preferred shares so redeemed. DC will accept TC1 Redemption Note and TC2 Redemption Note respectively as payment in full for the preferred shares so redeemed.
69. Immediately after the transaction described in Paragraph 68, TC1 Redemption Note and TC2 Redemption Note will be the only assets of DC.
Winding-up and dissolution of DC
70. On the day after the Effective Date, TC1 and TC2 will, by special resolution, resolve to wind-up and dissolve DC pursuant to the provisions of the BCA. In connection with the winding-up of DC, DC will distribute all of its assets to TC1 and TC2 in accordance with their shareholdings. In particular, DC will:
(a) assign and distribute the TC1 Redemption Note issued by TC1, to TC1; and
(b) assign and distribute the TC2 Redemption Note issued by TC2, to TC2.
As a result of the assignment and distribution of the TC1 Redemption Note and the TC2 Redemption Note by DC, the obligations under the Redemption Notes will be extinguished and such notes will be cancelled.
71. To the extent that the CDA of DC has a positive balance at the time of the winding-up of DC, and immediately prior to the distribution of the Redemption Notes by DC to TC1 and TC2 as described in Paragraph 70, DC will elect, in the prescribed manner and prescribed form required under subsection 83(2), to treat the portion of the winding-up dividend referred to in subparagraph 88(2)(b)(i) as a separate capital dividend paid on the DC Common Shares. Pursuant to subparagraph 88(2)(b)(iv), TC1 and TC2 will each be deemed to have received a proportionate capital dividend from DC.
72. Upon the receipt of any dividend refund to which DC may become entitled as a result of the Proposed Transactions, DC will immediately transfer the cash received in the form of a dividend (under the terms of the agreement governing the winding-up of DC) on a pro rata basis to each of TC1 and TC2 in the same proportion as described in Paragraph 62.
73. After the distribution of the Redemption Notes as described in Paragraph 70 and the distribution of any CDA or tax refunds as described in Paragraphs 71 and 72, but immediately before the formal dissolution of DC described in Paragraph 74, DC will not own or acquire any property or carry on any activity or undertaking.
74. Within a reasonable time following the distribution of any tax refund as described in Paragraph 72, articles of dissolution will be filed by DC with the appropriate Corporate Registry and upon receipt of the certificate of dissolution, DC will be dissolved.
75. 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 following the completion of the Proposed Transactions.
76. There will not be any material change in the composition of DC’s assets or liabilities from the date of this letter until the date the Proposed Transactions described herein are completed.
77. Within XXXXXXXXXX following the Butterfly Distribution, it is expected that the portion of the Loans payable to a corporation controlled by Mr. A, that is a debt assumed by TC1 in accordance with Paragraph 63(b), will be replaced by a mortgage from a financial institution. The new debt, the terms of which will be consistent with a long-term debt, will be XXXXXXXXXX term closed mortgage.
78. Within XXXXXXXXXX following the Butterfly Distribution, it is expected that the portion of the Loans payable to a corporation controlled by Mr. B, that is a debt assumed by TC2 in accordance with Paragraph 63(b), will be refinanced by altering the terms of the outstanding debt. The new debt will be secured by the assets of TC2 and will have a repayment term that is greater than XXXXXXXXXX. The terms of the new debt will in all manner be consistent with the terms of a secured, long-term mortgage obtained from a third party financial institution.
79. Except as described in this letter, no property has or will become property of DC and no liabilities have been or will be incurred or discharged by DC in contemplation of and before the Proposed Transactions, in the circumstances described in paragraph 55(3.1)(a).
80. None of the Distribution Property received by TC1 or TC2 on the Butterfly Distribution will be acquired by a person unrelated to TC1 or TC2, as the case may be, 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).
81. None of DC, TC1 or TC2 is, or will be at any time during the 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 paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1).
82. None of the shares of DC, TC1 or TC2 has been or will be at any time during the implementation of the Proposed Transactions:
(a) the subject of any undertaking or agreement that is referred to in subsection 112(2.2) as a “guarantee agreement”;
(b) the subject of a dividend rental arrangement within the meaning of subsection 112(2.3);
(c) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or
(d) a share that is issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).
83. Except as described in this letter, no shares of DC or of any other corporation described herein will be acquired or disposed of as part of a series of transactions or events that includes the Proposed Transactions.
84. The transactions completed in XXXXXXXXXX, relating to the shareholdings of DC, TC1, TC2 and Holdco A (the “XXXXXXXXXX Pre-Butterfly Transactions”), were implemented as part of a tax strategy intended to avoid the 21-year deemed disposition rule under subsection 104(4) in respect of the anniversary date of the settlement of Trust A1 and Trust B, and to effect certain estate planning in respect of Mr. A and Mr. B. The XXXXXXXXXX Pre-Butterfly Transactions would have been undertaken regardless of whether the Proposed Transactions would be implemented. Similarly, the Proposed Transactions would have been undertaken irrespective of whether the XXXXXXXXXX Pre-Butterfly Transactions were implemented.
85. Each of TC1 and TC2 will have the financial capacity to honour, upon presentation for payment, the amount payable under the TC1 Redemption Note or the TC2 Redemption Note, as the case may be.
PURPOSES OF THE PROPOSED TRANSACTIONS
86. The Founders have owned and operated the Rental Property and the Land together through DC since XXXXXXXXXX. Mr. A and Mr. B are now XXXXXXXXXX and each wishes to transition the Rental Property and the Land to the next generation. The purpose of the divisive reorganization is to allow the family of Mr. A and the family of Mr. B to have direct and separate control of their share of such property, to avoid family disputes and allow each family to operate independently from the other.
87. The purpose of the transfer by DC of its legal title to the Rental Property and the Land from the Legal Titleholders or DC to the Nominees as described in Paragraph 55, is to allow the subsequent transfer of the beneficial ownership of the Rental Property and the Land on the Butterfly Distribution, XXXXXXXXXX.
88. The purpose for TC1 and TC2 to effect the redemption of the TC1 Class B Preferred Shares and the TC2 Class B Preferred Shares on XXXXXXXXXX, and for TC1 and TC2 to resolve to wind-up and dissolve DC on the day after such redemptions, is to cause the resulting taxable dividends to be paid and received in separate taxation year ends to avoid a possible Part IV tax “circularity” issue.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all of 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, we confirm the following:
A. Subject to the application of 69(11), and 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 the Butterfly Distribution as described in Paragraph 62, such that the agreed amount in respect of each eligible property so transferred to TC1 or TC2 by DC, as the case may be, other than the accounts receivable, will be deemed to be the transferor’s proceeds of disposition and the transferee’s cost thereof pursuant to paragraph 85(1)(a).
For the purposes of the joint elections, 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 be interpreted to mean that proportion of the UCC to DC of all the property of that class immediately before the disposition that the FMV of the property at that time that is transferred, is of the aggregate FMV at that time of all the property of that class.
B. Paragraphs 84(3)(a) and (b) will apply, on the redemption by each of TC1 and TC2 of the TC1 Class B Preferred Shares and TC2 Class B Preferred Shares as described in Paragraph 68, to deem each of TC1 and TC2 to have paid, and DC to have received, a dividend at time that is a taxable dividend on such class of shares, equal to the amount, if any, by which the amount paid upon such redemption exceeds the aggregate PUC in respect of each class of those shares immediately before the redemption.
C. Subsection 84(2) and paragraph 88(2)(b) will apply to the distributions by DC to each of TC1 and TC2 in the course of its winding-up, liquidation or dissolution (the “winding-up distribution”), as described in Paragraphs 70 to 72 such that:
(a) subject to Rulings C(b) to (d) below, DC will be deemed to have paid a dividend (the “winding-up dividend”) on the DC Common Shares held by TC1 and TC2, as the case may be, equal to the amount, if any, by which:
(i) the aggregate FMV of the property distributed by DC in respect of the DC Common Shares on the winding-up, liquidation or dissolution,
exceeds
(ii) the amount, if any, by which the aggregate PUC of the DC Common Shares is reduced on the winding-up distribution, and
each of TC1 and TC2 will be deemed to have received at that time a taxable dividend on such shares equal to that proportion of the amount of the excess that the number of the shares of that class owned by TC1 and TC2, as the case may be, immediately before the winding-up distribution is of the number of shares of that class outstanding immediately before the winding-up distribution;
(b) to the extent that the CDA of DC has a positive balance immediately prior to its winding-up, and pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend paid on the DC Common Shares referred to in Ruling C(a) that does not exceed the CDA of DC determined immediately before the payment of the winding-up dividend, will be deemed, for the purposes of any subsection 83(2) election referred to in Paragraph 71, to be the full amount of a separate dividend, that is a capital dividend;
(c) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in Ruling C(b) that is deemed to be a separate dividend, will be deemed to be a separate dividend that is a taxable dividend; and
(d) pursuant to subparagraph 88(2)(b)(iv), each of TC1 and TC2 will be deemed to have received its proportional share of the dividends described in Rulings C(b) and C(c).
D. The taxable dividends received by TC1, TC2 and DC described in Rulings B and C above:
(a) will be included in computing the income of the recipient corporation deemed to have received such 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” 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 give rise to tax under Part IV except as provided in paragraph 186(1)(b);
(f) will not be subject to tax under Part IV.1 by virtue of paragraph (c) of the definition of “excepted dividend” in subsection 187.1; and
(g) will not be subject to tax under Part VI.1 by virtue of paragraph (a) of the definition of “excluded dividend” in subsection 191(1), in the case of the dividend deemed to be received by each of TC1 and TC2 from DC, and provided that an amount is specified for the purposes of subsection 191(4) (and thus deemed to be an “excluded dividend”), in the case of the dividends deemed to be received by DC from each of TC1 and TC2.
E. Provided that as part of the series of transactions or events that includes the Proposed Transactions, there is not:
(a) an acquisition of property in the circumstances described in paragraph 55(3.1)(a);
(b) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(c) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(d) an acquisition of shares of DC as described in subparagraph 55(3.1)(b)(iii);
(e) an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or
(f) an acquisition of property in the circumstances described in paragraph 55(3.1)(d),
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 Rulings B and C above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b) in respect of those dividends.
F. The distribution and extinguishment of the debt obligations of DC, TC1 and TC2 as a result of the cancellation of the Redemption Notes as described in Paragraph 70, will not give rise to a forgiven amount.
G. As a result of the Proposed Transactions, in and of themselves, subsection 245(2) will not be applied to re-determine the tax consequences confirmed in the Rulings given.
The Rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R9 dated April 23, 2019, and are binding on the CRA provided that the Proposed Transactions are completed in accordance with the time specified herein, and no later than XXXXXXXXXX.
The Rulings are based on the Act as it presently reads 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 expressively confirmed in the above Rulings, 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 outstanding balance of various tax accounts such as RDTOH, NERDTOH, ERDTOH, GRIP, non-capital losses or CDA, if any, for any of the corporate entities described herein;
(c) any Canadian tax consequences relating to the Rental Property;
(d) any provincial tax consequences of the Proposed Transactions; or
(e) any other income tax consequence relating to the facts, additional information or Proposed Transactions, or any transaction or event taking place either prior or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the Rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.
Nothing in this letter should be construed as confirmation, express or implied, that, for the purposes of any of the Rulings given above, any adjustment to the 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
Reorganizations Section II
For Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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