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 butterfly dividends arising on the proposed transactions are exempt under paragraph 55(3)(b) from the application of subsection 55(2).
Position: Yes.
Reasons: Proposed transactions meet the requirements of the Act.
XXXXXXXXXX 2018-077215
XXXXXXXXXX, 2019
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
We are writing in response to your request original request dated XXXXXXXXXX for an advance income tax ruling on behalf of the above-noted taxpayers (the “Taxpayers”) all of which report to the XXXXXXXXXX TSO and XXXXXXXXXX Taxation Centre. We also acknowledge the additional information provided in your letters and in various email correspondence, as well as information provided during telephone conversations.
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.
“ACB” means “adjusted cost base” as that expression is defined in section 54 and subsection 248(1);
“Act 1” means XXXXXXXXXX;
“Act 2” means XXXXXXXXXX;
“Act 3” means XXXXXXXXXX;
“agreed amount” means the amount agreed on by the transferor and the transferee in respect of a transfer of an eligible property in a joint election filed pursuant to subsection 85(1);
“arm's length” has the meaning assigned by subsection 251(1);
“BN” means “business number” as that term is defined in subsection 248(1);
“capital dividend” means a dividend to which subsection 83(2) applies;
“capital property” has the meaning assigned by section 54;
“cash method” has the meaning assigned by subsection 28(1);
“CCPC” means “Canadian-controlled private corporation” as that expression is defined in subsection 125(7);
“CDA” means “capital dividend account” as that expression is defined in subsection 89(1);
“DC” means XXXXXXXXXX, a taxable Canadian corporation presently governed by Act 1;
“DC Note 1” means the non-interest bearing demand promissory note to be issued by DC to TC 1 on the redemption of its DC Class D Common Shares held by TC 1, described in Paragraph 62;
“DC Note 2” means the non-interest bearing demand promissory note to be issued by DC to TC 2 on the redemption of its DC Class D Common Shares held by TC 2, described in Paragraph 62;
“DC Note 3” means the non-interest bearing demand promissory note to be issued by DC to TC 3 on the redemption of its DC Class B Common Shares held by TC 3, described in Paragraph 62;
“DC Transfer” refers to the transfer of property by DC to the TCs as described in Paragraph 54;
“distribution” has the meaning assigned by subsection 55(1);
“dividend refund” has the meaning assigned by subsection 129(1);
“eligible dividend” has the meaning assigned by subsection 89(1);
“eligible property” has the meaning assigned by subsection 85(1.1);
“ERDTOH” means “eligible refundable dividend tax on hand” as defined in subsection 129(4);
“FarmCo” means XXXXXXXXXX, a taxable Canadian corporation governed by Act 1;
“FMV” means the highest price available in an open and unrestricted market, between informed prudent parties, acting at arm's length and with no compulsion to act, expressed in terms of cash;
“GRIP” means “general rate income pool” as that expression is defined in subsection 89(1);
“NERDTOH” means “non-eligible refundable dividend tax on hand” as defined in subsection 129(4);
“NumberCo” means XXXXXXXXXX, a taxable Canadian corporation governed by Act 1;
“OperatorCo” means XXXXXXXXXX, a taxable Canadian corporation governed by Act 1;
“Paragraph” refers to a numbered paragraph in this advance income tax ruling;
“Parent 1” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act and the spouse of Parent 2;
“Parent 1 Insurance Policy” means the term life insurance policy on the life of Parent 1 owned by DC;
“Parent 2” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act and the spouse of Parent 1;
“Preliminary Transactions” means the transactions that are described in the Preliminary Transactions section of this letter;
“private corporation” has the meaning assigned by subsection 89(1);
“proceeds of disposition” has the meaning assigned by section 54;
“property” has the meaning assigned by subsection 248(1);
“Proposed Transactions” means the proposed transactions that are described in the Proposed Transactions section of this letter;
“PUC” means “paid-up capital” as that expression is defined in subsection 89(1);
“RDTOH” means “refundable dividend tax on hand” as that expression is defined in subsection 129(3);
“related person” has the meaning assigned by section 251;
“series of transactions or events” includes the transactions or events referred to in subsection 248(10);
“short-term preferred shares” has the meaning assigned by subsection 248(1);
“Sibling 1” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act and a child of Parent 1 and Parent 2;
“Sibling 1 Insurance Policy” means the term life insurance policy on the life of Sibling 1 owned by DC;
“Sibling1Co” means XXXXXXXXXX, a taxable Canadian corporation governed by Act 1;
“Sibling 2” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act and a child of Parent 1 and Parent 2;
“Sibling 2 Insurance Policy” means the term life insurance policy on the life of Sibling 2 owned by DC;
“SIN” means Social Insurance Number;
“specified financial institution” has the meaning assigned by subsection 248(1);
“specified investment business” has the meaning assigned by subsection 125(7);
“Spouse 1” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act and the spouse of Sibling 1;
“Spouse1Co” means XXXXXXXXXX, a taxable Canadian corporation governed by Act 1;
“Spouse 2” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act and the spouse of Sibling 2;
“Spouse2Co” means XXXXXXXXXX, a taxable Canadian corporation governed by Act 1;
“standard share structure” means:
- An unlimited number of Class A Common Voting Shares.
- An unlimited number of Class B Common Voting Shares.
- An unlimited number of Class C Common Voting Shares.
- An unlimited number of Class D Common Voting Shares.
- An unlimited number of Class E Common Non-Voting Shares.
- An unlimited number of Class F Redeemable Retractable Preferred Non-Voting Shares.
- An unlimited number of each of the following classes of Redeemable Retractable Preferred Non-Voting Shares, namely:
- (i) Class G-1 Redeemable Retractable Preferred Non-Voting Shares;
- (ii) Class G-2 Redeemable Retractable Preferred Non-Voting Shares;
- (iii) Class G-3 Redeemable Retractable Preferred Non-Voting Shares;
- (iv) Class G-4 Redeemable Retractable Preferred Non-Voting Shares;
- (v) Class G-5 Redeemable Retractable Preferred Non-Voting Shares;
- (vi) Class G-6 Redeemable Retractable Preferred Non-Voting Shares;
- (vii) Class G-7 Redeemable Retractable Preferred Non-Voting Shares;
- (viii) Class G-8 Redeemable Retractable Preferred Non-Voting Shares;
- (ix) Class G-9 Redeemable Retractable Preferred Non-Voting Shares; and
- (x) Class G-10 Redeemable Retractable Preferred Non-Voting Shares.
- An unlimited number of Class H Redeemable Retractable Preferred Non-Voting Shares.
- An unlimited number of Class I Special Voting Shares;
“stated capital” means the amount of capital determined in respect of a class or series of shares in accordance with Act 1 or Act 2, as the case may be;
“Subsequent Event” means the event that is described in the Subsequent Event section of this letter;
“taxable Canadian corporation” has the meaning assigned by subsection 89(1);
“taxable dividend” has the meaning assigned by subsection 89(1);
“taxable preferred shares” has the meaning assigned by subsection 248(1);
“TC 1” means XXXXXXXXXX, a taxable Canadian corporation governed by Act 1;
“TC1 Note” means the non-interest bearing demand promissory note to be issued by TC 1 to DC on the redemption of its TC 1 Class G-8 Shares held by DC, described in Paragraph 61;
“TC 2” means XXXXXXXXXX, a taxable Canadian corporation presently governed by Act 1;
“TC2 Note” means the non-interest bearing demand promissory note to be issued by TC 2 to DC on the redemption of its TC 2 Class G-4 Shares held by DC, described in Paragraph 61;
“TC 3” means XXXXXXXXXX, a taxable Canadian corporation governed by Act 1;
“TC3 Note” means the non-interest bearing demand promissory note to be issued by TC 3 to DC on the redemption of its TC 3 Class G-3 Shares held by DC, described in Paragraph 61;
“transferee corporation” or TC has the meaning assigned to those words within the definition of “distribution” in subsection 55(1) and for the purposes of paragraph 55(3.1)(b), in paragraph 55(3.2)(h) and for greater certainty, includes each of TC 1, TC 2, and TC 3;
“UCC” means “undepreciated capital cost” as that term is defined in subsection 13(21).
FACTS
1. DC is and will be, at any relevant time, a CCPC and a taxable Canadian corporation. Its mailing address is: XXXXXXXXXX.
2. DC was incorporated under Act 2 on XXXXXXXXXX with the name XXXXXXXXXX.
3. DC carries on a farming business in XXXXXXXXXX and reports its income, for income tax purposes, in accordance with the cash method. DC’s taxation year and fiscal period end on XXXXXXXXXX.
4. Immediately prior to the Preliminary Transactions, the authorized share capital of DC was as follows:
Authorized Shares Share Class Share Type/Terms
Unlimited Class “A” Common voting shares;
Unlimited Class “B” Common voting shares;
Unlimited Class “C” Common voting shares;
Unlimited Class “D” Common voting shares;
Unlimited Class “E” Common non-voting shares;
Unlimited Class “F” Common non-voting shares;
Unlimited Class “G” Common non-voting shares;
Unlimited Class “H” Common non-voting shares;
Unlimited Class “I” Common non-voting shares;
Unlimited Class “J” Preferred non-voting shares;
Unlimited Class “K” Preferred non-voting shares;
Unlimited Class “L” Preferred non-voting shares; and
Unlimited Class “M” Preferred non-voting shares.
5. Immediately prior to the Preliminary Transactions, the shareholders of DC held the following shares, each with an ACB and stated capital of $XXXXXXXXXX per share, all of which are held as capital property:
Shareholder Shares Aggregate ACB Aggregate Stated
Capital/PUC
Sibling1Co XXXX Class “A” XXXX XXXX
Sibling 2 XXXX Class “B” XXXX XXXX
TC 1 XXXX Class “D” XXXX XXXX
6. The main assets of DC are farm equipment, XXXXXXXXXX handling facilities, XXXXXXXXXX inventory and accounts receivable. During XXXXXXXXXX, DC grew XXXXXXXXXX on approximately XXXXXXXXXX acres of farmland in XXXXXXXXXX, all of which it leased. Approximately XXXXXXXXXX of those acres were leased from unrelated persons. Approximately XXXXXXXXXX of those acres were leased (pursuant to year-to-year leases that were not in writing) from the following persons: TC 1, TC 2, Sibling1Co, TC 3, Sibling 1 and Spouse 1, jointly, Sibling 2 and Spouse 2, jointly, Sibling 2, Spouse2Co and, commencing on XXXXXXXXXX, FarmCo.
7. DC presently has a balance in its GRIP of $XXXXXXXXXX, which will be retained by DC. It does not presently have, nor is it expected to have at the end of its first taxation year beginning after XXXXXXXXXX, any balance in its NERDTOH, ERDTOH or CDA.
8. TC 1 is and will be, at any relevant time, a CCPC and a taxable Canadian corporation. Its mailing address is: XXXXXXXXXX.
9. TC 1 was incorporated under Act 1 on XXXXXXXXXX.
10. TC 1 carries on an investment business in XXXXXXXXXX, earns dividends on its shares of DC and, prior to XXXXXXXXXX, rent from farmland used by DC in its farming business. TC 1’s taxation year and fiscal period end on XXXXXXXXXX.
11. Immediately prior to the Preliminary Transactions, TC 1’s authorized share capital was as follows:
Authorized Shares Share Class Share Type/Terms
Unlimited Class “A” Common voting participating shares;
Unlimited Class “B” Common voting participating shares;
Unlimited Class “C” Common voting participating shares;
Unlimited Class “D” Common participating non-voting shares;
Unlimited Class “E” Common participating non-voting shares;
Unlimited Class “F” Common participating non-voting shares;
Unlimited Class “G” Preferred voting non-participating shares;
Unlimited Class “H” Preferred non-voting shares;
Unlimited Class “I” Preferred non-voting shares;
Unlimited Class “J” Preferred non-voting shares; and
Unlimited Class “K” Preferred non-voting shares.
12. Immediately prior to the Preliminary Transactions the shareholders of TC 1 held the following shares with the indicated ACB and stated capital, all of which are held as capital property:
Shareholder Shares Aggregate ACB Aggregate Stated
Capital/PUC
Parent 1 XXXX Class “A” XXXX XXXX
Parent 1 XXXX Class “H” XXXX XXXX
Parent 2 XXXX Class “D” XXXX XXXX
13. TC 1 presently has a balance in its GRIP of $XXXXXXXXXX, which will be retained by TC 1. TC 1 also presently has a balance in its CDA of $XXXXXXXXXX, which will be retained by TC 1. It does not presently have, nor is it expected to have at the end of its first taxation year beginning after XXXXXXXXXX, any balance in its NERDTOH or ERDTOH.
14. TC 2 is and will be, at any relevant time, a CCPC and a taxable Canadian corporation. Its mailing address is: XXXXXXXXXX.
15. TC 2 was incorporated under Act 3 on XXXXXXXXXX, with the name XXXXXXXXXX.
16. TC 2 carries on a farming business and reports it income for income tax purposes, in accordance with the cash method. Prior to XXXXXXXXXX, TC 2 also rented some of its farmland to DC. TC 2’s taxation year and fiscal period end on XXXXXXXXXX.
17. Immediately prior to the Preliminary Transactions, TC 2’s authorized capital was follows:
Authorized Share Type/Terms
XXXX Common voting participating shares;
XXXX XXXX% Non-Cumulative Redeemable Preferred Shares
18. Immediately prior to the Preliminary Transactions the shareholders of TC 2 held the following shares with the indicated ACB and stated capital, all of which are held as capital property:
Shareholder Shares Aggregate ACB Aggregate Stated
Capital/PUC
Parent 1 XXXX Common XXXX XXXX
Parent 1 XXXX Preferred XXXX XXXX
Parent 2 XXXX Common XXXX XXXX
19. TC 2 presently has a balance in its CDA of $XXXXXXXXXX, which will be retained by TC 2. TC 2 does not presently have, nor is it expected to have at the end of its current taxation year, any balance in its GRIP or RDTOH.
20. Sibling1Co is and will be, at any relevant time, a CCPC and a taxable Canadian corporation. Its mailing address is: XXXXXXXXXX.
21. Sibling1Co was incorporated under Act 1 on XXXXXXXXXX.
22. Sibling1Co carries on a farming business and reports it income for income tax purposes, in accordance with the cash method. Sibling1Co also earns dividends on its shares of DC and, prior to XXXXXXXXXX, rent from DC on some of its farmland. Sibling1Co’s taxation year and fiscal period end on XXXXXXXXXX.
23. Prior to the Preliminary Transactions, Sibling1Co’s authorized share capital was as follows:
Authorized Shares Share Class Share Type/Terms
Unlimited Class A Common voting shares;
Unlimited Class B Common voting shares;
Unlimited Class C Common non-voting shares;
Unlimited Class D Common non-voting shares;
Unlimited Class E Preferred redeemable non-voting shares; and
Unlimited Class F Preferred redeemable non-voting shares.
24. Immediately prior to the Preliminary Transactions the shareholders of Sibling1Co held the following shares with the indicated ACB and stated capital, all of which are held as capital property:
Shareholder Shares Aggregate ACB Aggregate Stated
Capital/PUC
Sibling 1 XXXX Class A XXXX XXXX
Sibling 1 XXXX Class E XXXX XXXX
Spouse 1 XXXX Class C XXXX XXXX
25. Sibling1Co does not presently have or any balance in its GRIP, or CDA, nor does it presently have, nor is it expected to have at the end of its first taxation year beginning after XXXXXXXXXX, any balance in its NERDTOH or ERDTOH.
26. TC 3 is and will be, at any relevant time, a CCPC and a taxable Canadian corporation. Its mailing address is: XXXXXXXXXX.
27. TC 3 was incorporated under Act 1 on XXXXXXXXXX.
28. TC 3 carries on a farming business and reports it income for income tax purposes, in accordance with the cash method. Prior to XXXXXXXXXX TC 3 also rented some of its farmland to DC. TC 3’s taxation year and fiscal period end on XXXXXXXXXX.
29. Prior to the Preliminary Transactions, TC 3’s authorized share capital was as follows:
Authorized Shares Share Class Share Type/Terms
Unlimited Class A Common voting shares;
Unlimited Class B Common voting shares;
Unlimited Class C Common non-voting shares;
Unlimited Class D Common non-voting shares;
Unlimited Class E Preferred redeemable non-voting shares; and
Unlimited Class F Preferred redeemable non-voting shares.
30. Immediately prior to the Preliminary Transactions the shareholder of TC 3 held the following shares with the indicated ACB and stated capital, all of which are held as capital property:
Shareholder Shares Aggregate ACB Aggregate Stated
Capital/PUC
Sibling 2 XXXX Class A XXXX XXXX
Sibling 2 XXXX Class E XXXX XXXX
31. TC 3 does not presently have any balance in its GRIP or CDA, nor does it presently have, nor is it expected to have at the end of its first taxation year beginning after XXXXXXXXXX, any balance in its NERDTOH or ERDTOH.
PRELIMINARY TRANSACTIONS
32. On XXXXXXXXXX, TC 1 amended its articles in order to adopt the standard share structure and concurrently entered into the following exchanges of shares on a tax-deferred basis pursuant to subsection 86(1):
(a) Parent 2 exchanged her XXXXXXXXXX Class “D” Shares of TC 1 for XXXXXXXXXX Class G-1 Redeemable Retractable Preferred Non-Voting Shares of TC 1 with an aggregate redemption price of $XXXXXXXXXX (the FMV of the XXXXXXXXXX Class “D” Shares) and stated capital/PUC of $XXXXXXXXXX in total;
(b) Parent 1 exchanged his XXXXXXXXXX Class “H” Shares of TC 1 for XXXXXXXXXX Class G-2 Redeemable Retractable Preferred Non-Voting Shares of TC 1 with an aggregate redemption price of $XXXXXXXXXX (the FMV of the Class “H” Shares) and stated capital/PUC of $XXXXXXXXXX in total; and
(c) Parent 1 exchanged his XXXXXXXXXX Class “A” Shares of TC 1 for XXXXXXXXXX new Class A Common Voting Shares of TC 1 with stated capital/PUC of $XXXXXXXXXX in total.
33. On XXXXXXXXXX, Sibling1Co amended its articles in order to adopt the standard share structure and concurrently entered into the following exchanges of shares on a tax-deferred basis pursuant to subsection 86(1):
(a) Spouse 1 exchanged her XXXXXXXXXX Class C Shares of Sibling1Co for XXXXXXXXXX new Class C Common Voting Shares of Sibling1Co with stated capital/PUC of $XXXXXXXXXX in total;
(b) Sibling 1 exchanged his XXXXXXXXXX Class E Shares of Sibling1Co for XXXXXXXXXX Class G-1 Redeemable Retractable Preferred Non-Voting Shares of Sibling1Co with an aggregate redemption price of $XXXXXXXXXX (the FMV of the Class E Shares) and stated capital/PUC of $XXXXXXXXXX in total; and
(c) Sibling 1 exchanged his XXXXXXXXXX Class A Shares of Sibling1Co for XXXXXXXXXX new Class A Common Voting Shares of Sibling1Co with stated capital/PUC of $XXXXXXXXXX in total.
34. On XXXXXXXXXX, FarmCo was incorporated pursuant to Act 1, having the standard share structure, by Parent 1. Parent 1 subscribed for XXXXXXXXXX Class A Common Voting Shares at an issue price of $XXXXXXXXXX per share.
35. On XXXXXXXXXX, Spouse1Co was incorporated pursuant to Act 1, having the standard share structure, by Spouse 1. Spouse 1 subscribed for XXXXXXXXXX Class A Common Voting Shares at an issue price of $XXXXXXXXXX per share.
36. On XXXXXXXXXX, TC 3 amended its articles in order to adopt the standard share structure and concurrently entered into the following exchanges of shares on a tax-deferred basis pursuant to subsection 86(1):
(a) Sibling 2 exchanged his XXXXXXXXXX Class E Shares of TC 3 for XXXXXXXXXX Class G-1 Redeemable Retractable Preferred Non-Voting Shares of TC 3 with an aggregate redemption price of $XXXXXXXXXX (the FMV of the Class E Shares) and stated capital/PUC of $XXXXXXXXXX in total; and
(b) Sibling 2 exchanged his XXXXXXXXXX Class A Shares of TC 3 for XXXXXXXXXX new Class A Common Voting Shares of TC 3 with stated capital/PUC of $XXXXXXXXXX in total.
37. On XXXXXXXXXX, TC 2 transferred the following XXXXXXXXXX to TC 1 on a tax-deferred basis pursuant to subsection 85(1):
(a) XXXXXXXXXX, in exchange for XXXXXXXXXX Class G-3 Redeemable Retractable Preferred Non-Voting Shares of TC 1 with an aggregate redemption price of $XXXXXXXXXX (the FMV of the XXXXXXXXXX) and stated capital/PUC of $XXXXXXXXXX in total;
(b) XXXXXXXXXX, in exchange for XXXXXXXXXX Class G-4 Redeemable Retractable Preferred Non-Voting Shares of TC 1 with an aggregate redemption price of $XXXXXXXXXX (the FMV of the XXXXXXXXXX) and stated capital/PUC of $XXXXXXXXXX in total;
(c) XXXXXXXXXX, in exchange for XXXXXXXXXX Class G-5 Redeemable Retractable Preferred Non-Voting Shares of TC 1 with an aggregate redemption price of $XXXXXXXXXX (the FMV of the XXXXXXXXXX) and stated capital/PUC of $XXXXXXXXXX in total; and
(d) XXXXXXXXXX, in exchange for XXXXXXXXXX Class G-6 Redeemable Retractable Preferred Non-Voting Shares of TC 1 with an aggregate redemption price of $XXXXXXXXXX (the FMV of the XXXXXXXXXX) and stated capital/PUC of $XXXXXXXXXX in total.
38. On XXXXXXXXXX, TC 1 transferred the following XXXXXXXXXX to FarmCo on a tax-deferred basis pursuant to subsection 85(1):
(a) XXXXXXXXXX, in exchange for XXXXXXXXXX Class G-1 Redeemable Retractable Preferred Non-Voting Shares of FarmCo with an aggregate redemption price of $XXXXXXXXXX (the FMV of the XXXXXXXXXX) and stated capital/PUC of $XXXXXXXXXX in total;
(b) XXXXXXXXXX, in exchange for XXXXXXXXXX Class G-2 Redeemable Retractable Preferred Non-Voting Shares of FarmCo with an aggregate redemption price of $XXXXXXXXXX (the FMV of the XXXXXXXXXX) and stated capital/PUC of $XXXXXXXXXX in total; and
(c) XXXXXXXXXX, in exchange for XXXXXXXXXX Class G-3 Redeemable Retractable Preferred Non-Voting Shares of Double S with an aggregate redemption price of $XXXXXXXXXX (the FMV of the XXXXXXXXXX) and stated capital/PUC of $XXXXXXXXXX in total.
39. On XXXXXXXXXX, DC was continued under Act 1, concurrently adopted XXXXXXXXXX as its sole name, concurrently adopted the standard share structure and entered into the following exchanges of shares on a tax-deferred basis pursuant to subsection 86(1):
(a) Sibling1Co exchanged its XXXXXXXXXX Class “A” Common Voting Shares of DC for XXXXXXXXXX new Class A Common Voting Shares of DC with stated capital/PUC of $XXXXXXXXXX in total;
(b) Sibling 2 exchanged his XXXXXXXXXX Class “B” Common Voting Shares of DC for XXXXXXXXXX new Class B Common Voting Shares of DC with stated capital/PUC of $XXXXXXXXXX in total; and
(c) TC 1 exchanged its XXXXXXXXXX Class “D” Common Voting Shares of DC for XXXXXXXXXX new Class D Common Voting Shares of DC with stated capital/PUC of $XXXXXXXXXX in total.
40. On XXXXXXXXXX, TC 2 was continued under Act 1, adopting XXXXXXXXXX as its sole name, and adopting the standard share structure. It concurrently, also entered into the following exchanges of shares on a tax-deferred basis pursuant to subsection 86(1):
(a) Parent 1 exchanged his XXXXXXXXXX Common Shares of TC 2 for XXXXXXXXXX Class G-1 Redeemable Retractable Preferred Non-Voting Shares of TC 2 with an aggregate redemption price of $XXXXXXXXXX, (the FMV of the XXXXXXXXXX Common Shares) and stated capital/PUC of $XXXXXXXXXX in total;
(b) Parent 1 exchanged his XXXXXXXXXX Preferred Shares of TC 2 for XXXXXXXXXX Class F Redeemable Retractable Preferred Non-voting Shares of TC 2 with an issue price and redemption price of $XXXXXXXXXX per share and stated capital/PUC of $XXXXXXXXXX in total; and
(c) Parent 2 exchanged her XXXXXXXXXX Common Shares of TC 2 for XXXXXXXXXX Class A Common Voting Shares of TC 2 with stated capital/PUC of $XXXXXXXXXX in total.
41. On XXXXXXXXXX, Spouse 1 exchanged her XXXXXXXXXX Class C Common Voting Shares of Sibling1Co on a tax-deferred basis pursuant to subsection 51(1) for XXXXXXXXXX Class H Redeemable Retractable Preferred Non-Voting Shares of Sibling1Co issued at a price of $XXXXXXXXXX per share with an aggregate issue price and redemption price of $XXXXXXXXXX (the FMV of the Class C Common Voting Shares of Sibling1Co) and stated capital/PUC of $XXXXXXXXXX in total.
42. On XXXXXXXXXX, TC 1 transferred XXXXXXXXXX Class D Common Voting Shares of DC to TC 2 on a tax-deferred basis pursuant to subsection 85(1), in exchange for XXXXXXXXXX Class G-2 Redeemable Retractable Preferred Non-Voting Shares of TC 2 with an aggregate redemption price of $XXXXXXXXXX, being the aggregate FMV of the XXXXXXXXXX Class D Common Voting Shares of DC so exchanged at that time, and stated capital/PUC of $XXXXXXXXXX in total.
43. On XXXXXXXXXX, Parent 1 transferred the following shares of TC 2 to TC 1:
(a) XXXXXXXXXX Class G-1 Redeemable Retractable Preferred Non-Voting Shares of TC 2 on a tax deferred basis pursuant to subsection 85(1) in exchange for XXXXXXXXXX Class G-7 Redeemable Retractable Preferred Non-Voting Shares of TC 1 with an aggregate redemption price of $XXXXXXXXXX (the FMV of the XXXXXXXXXX Class G-1 Redeemable Retractable Preferred Non-Voting Shares of TC 2) and stated capital/PUC of $XXXXXXXXXX in total; and
(b) XXXXXXXXXX Class F Redeemable Retractable Preferred Non-Voting Shares of TC 2 on a taxable basis in exchange for XXXXXXXXXX Class F Redeemable Retractable Preferred Non-Voting Shares of TC 1 with an issue price and redemption price of $XXXXXXXXXX per share and stated capital/PUC of $XXXXXXXXXX in total.
44. On XXXXXXXXXX, Parent 1 transferred XXXXXXXXXX of his XXXXXXXXXX Class G-2 Redeemable Retractable Preferred Non-Voting Shares of TC 1 to FarmCo on a tax-deferred basis pursuant to subsection 85(1) in exchange for XXXXXXXXXX Class G-4 Redeemable Retractable Preferred Non-Voting Shares of FarmCo with an aggregate redemption price of $XXXXXXXXXX, being the aggregate FMV of the XXXXXXXXXX Class G-2 Redeemable Retractable Preferred Non-Voting Shares of TC 1 so exchanged at that time, and stated capital/PUC of $XXXXXXXXXX in total.
45. On XXXXXXXXXX, Parent 2 transferred her XXXXXXXXXX Class G-1 Redeemable Retractable Preferred Non-Voting Shares of TC 1 to TC 2 on a tax-deferred basis pursuant to subsection 85(1) in exchange for XXXXXXXXXX Class G-3 Redeemable Retractable Preferred Non-Voting Shares of TC 2 with an aggregate redemption price of $XXXXXXXXXX, being the aggregate FMV of the XXXXXXXXXX Class G-1 Redeemable Retractable Preferred Non-Voting Shares of TC 1 so exchanged at that time and stated capital/PUC of $XXXXXXXXXX in total.
46. On XXXXXXXXXX, Sibling 2 transferred his XXXXXXXXXX Class B Common Voting Shares of DC to TC 3 on a tax-deferred basis pursuant to subsection 85(1) in exchange for XXXXXXXXXX Class G-2 Redeemable Retractable Preferred Non-Voting Shares of TC 3 with an aggregate redemption price of $XXXXXXXXXX, being the aggregate FMV of the XXXXXXXXXX Class B Common Voting Shares of DC so exchanged at that time, and stated capital/PUC of $XXXXXXXXXX in total.
47. On XXXXXXXXXX, the following corporations redeemed the following shares and paid the particular redemption price by issuing a promissory note payable on demand without interest to the particular shareholder:
(a) TC 2 redeemed the XXXXXXXXXX Class G-1 Redeemable Retractable Preferred Non-Voting Shares of TC 2 held by TC 1 at an aggregate redemption price of $XXXXXXXXXX;
(b) TC 2 redeemed the XXXXXXXXXX Class F Redeemable Retractable Preferred Non-Voting Shares of TC 2 held by TC 1 at an aggregate redemption price of $XXXXXXXXXX;
(c) TC 2 redeemed the XXXXXXXXXX Class G-2 Redeemable Retractable Preferred Non-Voting Shares of TC 2 held by TC 1 at an aggregate redemption price of $XXXXXXXXXX;
(d) TC 1 redeemed the XXXXXXXXXX Class G-1 Redeemable Retractable Preferred Non-Voting Shares of TC 1 held by TC 2 at an aggregate redemption price of $XXXXXXXXXX;
(e) TC 1 redeemed the XXXXXXXXXX Class G-3 Redeemable Retractable Preferred Non-Voting Shares of TC 1 held by TC 2 at an aggregate redemption price of $XXXXXXXXXX;
(f) TC 1 redeemed the XXXXXXXXXX Class G-4 Redeemable Retractable Preferred Non-Voting Shares of TC 1 held by TC 2 at an aggregate redemption price of $XXXXXXXXXX;
(g) TC 1 redeemed the XXXXXXXXXX Class G-5 Redeemable Retractable Preferred Non-Voting Shares of TC 1 held by TC 2 at an aggregate redemption price of $XXXXXXXXXX;
(h) TC 1 redeemed the XXXXXXXXXX Class G-6 Redeemable Retractable Preferred Non-Voting Shares of TC 1 held by TC 2 at an aggregate redemption price of $XXXXXXXXXX;
(i) TC 1 redeemed the XXXXXXXXXX Class G-2 Redeemable Retractable Preferred Non-Voting Shares of TC 1 held by FarmCo at an aggregate redemption price of $XXXXXXXXXX;
(j) FarmCo redeemed the XXXXXXXXXX Class G-1 Redeemable Retractable Preferred Non-Voting Shares of FarmCo held by TC 1 at an aggregate redemption price of $XXXXXXXXXX;
(k) FarmCo redeemed the XXXXXXXXXX Class G-2 Redeemable Retractable Preferred Non-Voting Shares of FarmCo held by TC 1 at an aggregate redemption price of $XXXXXXXXXX; and
(l) FarmCo redeemed the XXXXXXXXXX Class G-3 Redeemable Retractable Preferred Non-Voting Shares of FarmCo held by TC 1 at an aggregate redemption price of $XXXXXXXXXX.
No portion of any of the dividends deemed by subsection 84(3) to have been paid by any of TC 1, TC 2 and FarmCo was designated to be an eligible dividend or elected to be a capital dividend.
48. On XXXXXXXXXX, the promissory notes issued by FarmCo to TC 1 on the share redemptions described in subparagraphs (j), (k), and (l) of Paragraph 47 were set-off in full against the promissory note issued by TC 1 to FarmCo on the share redemption described in subparagraph (i) of Paragraph 47 and those promissory notes were cancelled.
49. On XXXXXXXXXX, the promissory notes issued by TC 2 to TC 1 on the share redemptions described in subparagraphs (a), (b), and (c) of Paragraph 47 were set-off against the promissory notes issued by TC 1 to TC 2 on the share redemptions described in subparagraphs (d), (e), (f), (g) and (h) of Paragraph 47. Those promissory notes were cancelled and a new promissory note was issued by TC 1 to TC 2 for $XXXXXXXXXX, being the net amount owing by TC 1 to TC 2.
50. On XXXXXXXXXX, DC withdrew all of the funds in its XXXXXXXXXX account. DC applied all of the funds to a loan which was a current liability.
51. On XXXXXXXXXX, OperatorCo was incorporated pursuant to Act 1 with the standard share structure and with Parent 1, Parent 2, Sibling 1 and Sibling 2 as the initial directors. Each of Parent 1, Parent 2, Sibling 1, Spouse 1, Sibling 2 and Spouse 2 subscribed for XXXXXXXXXX Class A Common Voting Shares at an issue price of $XXXXXXXXXX per share paid in cash.
52. On XXXXXXXXXX was registered as a business name, pursuant to XXXXXXXXXX, of a joint venture comprised of DC, TC1, TC2, TC3, Sibling1Co, FarmCo, Spouse1Co, Spouse2Co and OperatorCo.
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.
Types of Property
53. Immediately before the transfer of DC’s property described in Paragraph 54, 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 DC’s cash, accounts receivable, taxes receivable, farm inventory, prepaid expenses and deposits;
(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 leasehold interests in particular parcels of farmland used in the course of its farming business; 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, including the term life insurance policies that it owns on the lives of Parent 1, Sibling 1 and Sibling 2.
For greater certainty, for purposes of the Proposed Transactions:
(i) any tax accounts of DC, such as any non-capital loss, net capital loss, and the balance of any NERDTOH, ERDTOH, 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;
(iii) any advances by DC to other corporations that have a term of less than 12 months or are due on demand are considered cash or near-cash property;
(iv) the amount of deferred income tax liability will not be considered a liability or a debt because such amount does not represent a legal obligation; and
(v) no amount will be considered to be a liability or a debt unless it represents a true liability that is capable of quantification and, in particular, any income tax provision for the current taxation year of DC will not be considered to be a liability or a debt.
DC Transfer
54. DC will transfer (the “DC Transfer”) to TC 1, TC 2 and TC 3 each corporation’s proportionate share of the gross FMV of each type of property owned by DC at that time such that, immediately following the transfer of the types of properties as determined in Paragraph 53, the aggregate gross FMV of each type of property transferred by DC to each of TC 1, TC 2 and TC 3 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 gross FMV, immediately before the Proposed Transactions, of all property of that type owned at that time by DC;
B is the FMV, immediately before the Proposed Transactions, of all the shares of DC owned, at that time, by that corporation and
C is the FMV, immediately before the Proposed Transactions, of all the issued and outstanding shares of DC.
The expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed XXXXXXXXXX percent (XXXXXXXXXX%), determined as a percentage of the gross FMV of each type of property that each of TC 1, TC 2 and TC 3 will receive as compared to what it would have received had it received its appropriate pro rata share of the gross FMV of that type of property of DC.
For greater certainty, the Sibling 1 Insurance Policy will be retained by DC.
55. As part of the DC Transfer, DC will transfer XXXXXXXXXX interests in the Parent 1 Insurance Policy to TC 1, TC 2 and TC 3 respectively as a dividend in kind. The proceeds of the disposition of such interest in the policy will be determined in accordance with subsection 148(7) as the greater of the value of the interest; the FMV of the consideration given for the interest; and the adjusted cost basis of the interest to the holder of the policy immediately before the disposition of the policy.
The Parent 1 Insurance Policy will be updated to reflect the beneficiary as being all of DC, TC 1, TC 2 and TC 3 in the same proportion as their respective ownership of the policy. The Parent 1 Insurance Policy is not eligible property and no election will be made under subsection 85(1) in respect of this transfer of property.
56. As part of the DC Transfer, DC will transfer the Sibling 2 Insurance Policy to TC 3 as a dividend in kind. The proceeds of the disposition of such interest in the policy will be determined in accordance with subsection 148(7) as the greater of the value of the interest; the FMV of the consideration given for the interest; and the adjusted cost basis of the interest to the holder of the policy immediately before the disposition of the policy.
The Sibling 2 Insurance Policy will be updated to reflect the beneficiaries as being TC 3. Sibling 2 Insurance Policy is not eligible property and no election will be made under subsection 85(1) in respect of this transfer of property.
57. As consideration for the transfer of the property by DC to the TCs on the DC Transfer (other than the Parent 1 Insurance Policy and Sibling 2 Insurance Policy), each TC will:
(a) assume a proportionate share of the liabilities of DC such that the amount of the liabilities assumed will equal that proportion of the aggregate amount of the liabilities of DC, determined immediately before the DC Transfer, that:
(i) the aggregate FMV, immediately before the DC Transfer, of the shares of DC held by such TC;
is of
(ii) the aggregate FMV, immediately before the DC Transfer, of all of the issued and outstanding shares of DC.
and
(b) TC 1 will issue a number of its Class G-8 Redeemable Retractable Preferred Non-Voting Shares to DC which will be redeemable and retractable for an aggregate redemption amount, and have an aggregate FMV, equal to the aggregate FMV of the property transferred by DC to TC 1 less the amount of the total liabilities of DC assumed by TC 1 in (a). DC will hold the Class G-8 Redeemable Retractable Preferred Non-Voting Shares of TC 1 as capital property.
(c) TC 2 will issue a number of its Class G-4 Redeemable Retractable Preferred Non-Voting Shares to DC which will be redeemable and retractable for an aggregate redemption amount, and have an aggregate FMV, equal to the aggregate FMV of the property transferred by DC to TC 2 less the amount of the total liabilities of DC assumed by TC 2 in (a). DC will hold the Class G-4 Redeemable Retractable Preferred Non-Voting Shares of TC 2 as capital property.
(d) TC 3 will issue a number of its Class G-3 Redeemable Retractable Preferred Non-Voting Shares to DC which will be redeemable and retractable for an aggregate redemption amount, and have an aggregate FMV, equal to the aggregate FMV of the property transferred by DC to TC 3 less the amount of the total liabilities of DC assumed by TC 3 in (a). DC will hold the Class G-3 Redeemable Retractable Preferred Non-Voting Shares of TC 3 as capital property.
58. (reserved).
59. (reserved).
60. DC will jointly elect with each of TC 1, TC 2 and TC 3, as the case may be, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of each eligible property transferred by DC to such TC. The agreed amount specified in each such property transferred to a particular TC will be as follows:
(a) in the case of capital property (other than depreciable property), an amount not less than the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii);
(b) in the case of depreciable property, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
(c) in the case of farm inventory owned in connection with the farming business carried on by DC, an amount determined in accordance with the formula set out in paragraph 85(1)(c.2).
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 each 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 1, TC 2 and TC 3, as the case may be, will add to its respective stated capital account for the its particular class of preferred shares issued to DC as described in Paragraph 57, an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred to such TC, and (b) the aggregate FMV, in the case of each property transferred to that TC that is not an eligible property, less (c) the aggregate principal amounts of the liabilities of DC assumed by that TC. For greater certainty, the amount added to the stated capital account for the particular class of shares to be issued by that TC as partial consideration for the property it will receive on the distribution will not exceed the maximum amount that could be added to the aggregate PUC of such shares without a reduction taking place pursuant to subsection 85(2.1).
61. Immediately after the distribution of property by DC to the TCs on the DC Transfer, each of TC 1, TC 2 and TC 3, as the case may be, will redeem the particular class of preferred shares that it issued to DC as described in Paragraph 57 for their redemption amount. In each case, such TC will issue a non-interest bearing demand promissory note having a principal amount and FMV equal to the aggregate redemption amount and FMV of the particular preferred shares so redeemed by that TC. In particular, TC 1 will issue the TC1 Note to DC, TC 2 will issue the TC2 Note to DC and TC 3 will issue the TC3 Note to DC. DC will accept each of the TC1 Note, TC2 Note and TC3 Note, respectively, as payment in full for the redemption of that particular TC’s preferred shares.
62. On a contemporaneous basis DC will purchase for cancellation the following issued and outstanding common shares:
(a) the XXXXXXXXXX Class D Common Voting Shares held by TC 1 for a cancellation price equal to the aggregate FMV of those shares. The cancellation price will be paid by DC issuing a non-interest bearing demand promissory note having a principal amount and FMV equal to the aggregate FMV of the XXXXXXXXXX Class D Common Voting Shares held by TC 1 (“DC Note 1”);
(b) the XXXXXXXXXX Class D Common Voting Shares held by TC 2 for cancellation at a price equal to the aggregate FMV of those shares. The cancellation price will be paid by DC issuing a non-interest bearing demand promissory note having a principal amount and FMV equal to the aggregate FMV of the XXXXXXXXXX Class D Common Voting Shares held by TC 2 (“DC Note 2”); and
(c) the XXXXXXXXXX Class B Common Voting Shares held by TC 3 for cancellation at a price equal to the aggregate FMV of those shares. The cancellation price will be paid by DC issuing a non-interest bearing demand promissory note having a principal amount and FMV equal to the aggregate FMV of the XXXXXXXXXX Class B Common Voting Shares held by TC 3 (“DC Note 3”).
Each TC will accept the DC Note issued to it as full payment of the cancellation price of the particular common shares of DC that were held by that TC.
63. The respective DC Notes will be set-off in full against the corresponding TC Notes and such notes will be cancelled without payment. In particular, DC Note 1 will be set-off in full against the TC1 Note, DC Note 2 will be set-off in full against the TC2 Note and, DC Note 3 will be set-off in full against the TC3 Note.
SUBSEQUENT EVENT
64. Following the distribution of DC’s property on the DC Transfer, DC, TC 1, TC 2 and TC 3 will contribute the use of certain farmland, farm equipment and XXXXXXXXXX handling facilities and crop inputs to a joint venture identified as “XXXXXXXXXX”. For greater certainty, XXXXXXXXXX will not be a partnership or a trust and the use of any such property will not involve a disposition of any property acquired by any of the TCs on the DC Transfer described herein or of any property owned by DC immediately thereafter.
65. 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 permitted transaction described in subparagraphs 55(3.1)(a)(i) to (iv).
66. During the series of transactions or events that includes the Proposed Transactions a partnership was created with DC, TC1, TC2, TC3, Sibling1Co, FarmCo, Spouse1Co, Spouse2Co as partners. The partnership was dissolved before the implementation of the Proposed Transactions. The partnership did not acquire any property other than the initial cash contributions of $XXXXXXXXXX which were returned to the particular partners on dissolution.
67. 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).
68. None of the distribution property received by a TC on the DC Transfer will be acquired by a person unrelated to a 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).
69. 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).
70. None of DC, TC1, TC2, or TC3 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.
71. At any time before and during the series of transactions and events that include the Proposed Transaction, none of the shares of DC, TC1, TC2 or TC3 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).
72. Each of DC TC1, TC2 and TC3 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 as described in Paragraphs 61 and 62.
73. The Proposed Transactions will not result in any of the Taxpayers or a related person being unable to pay its existing tax liabilities.
PURPOSE OF PROPOSED TRANSACTIONS
74. The purpose of the Proposed Transactions is to reorganize the farming business currently carried on by DC into a business carried on as a joint venture in order to achieve the following advantages:
a) a joint venture can compensate its venturers (by way of allocations of revenue) in recognition of varying amounts of contributions to its business from year to year in a much more flexible manner than a corporation can compensate its shareholders (by way of dividends);
b) each corporate venturer can participate in the XXXXXXXXXX program (XXXXXXXXXX) whereas, at present, only DC can participate; and
c) the distribution will allow a more efficient corporate structure for the purposes of carrying out estate planning objectives.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions 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), 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 transfer of each eligible property owned by DC to TC 1, TC 2 and TC 3, as the case may be, on the DC Transfer described in Paragraph 54 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 of the particular property and the transferee’s cost thereof.
For the purposes of the joint elections, when determining the agreed amounts of depreciable property in the course of these transfers, 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 the taxpayer of all the property of that class immediately before the disposition that the FMV at that time of the property that is transferred is of the aggregate FMV at that time of all the property of that class.
For greater certainty, paragraph 85(1)(e.2) will not apply to these property transfers.
B. On the redemption by each of TC 1, TC 2 and TC 3 of its particular class of preferred shares owned by DC, as described in Paragraph 61, by virtue of paragraph 84(3)(a) and (b), each of TC 1, TC 2 and TC 3, as the case may be, 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 the preferred shares of such TC exceeds the aggregate PUC in respect of those particular shares immediately before the redemption.
C. As a result of the purchase for cancellation by DC of its particular class of common shares held by TC 1, TC 2 and TC 3, as the case may be, and as described in Paragraph 62, by virtue of subsection 84(3), DC will be deemed to have paid, and such TC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC in respect of its purchase for cancellation of those particular common shares owned by that TC exceeds the aggregate PUC of attributable to those shares immediately before the purchase for cancellation.
D. The taxable dividends described in Rulings B and C:
(a) will, pursuant to subsection 82(1) and paragraph 12(1)(j), be included in computing the income of the person deemed to have received such dividend;
(b) will, pursuant to subsection 112(1), be deductible by the recipient corporation in computing its taxable income in the year in which such dividend is deemed to have been received and, for greater certainty, such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4);
(c) will, pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54, be excluded in determining the proceeds of disposition to the recipient corporation of the shares so redeemed or purchased;
(d) will, pursuant to 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, by virtue of paragraph (b) or (c) of the definition of “excepted dividend” in section 187.1 and paragraph (a) of the definition of “excluded dividend” in subsection 191(1), not be subject to tax under Parts IV.1 or VI.1; and
(f) will not be subject to tax under Part IV except to the extent of the amount, if any, determined under paragraph 186(1)(b).
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 in the circumstances described in subparagraph 55(3.1)(b)(iii); or
(e) an acquisition of property in the circumstances described in subparagraph 55(3.1)(c) or (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 and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
F. The set-off and cancellation of the TC Notes and DC Notes as described in Paragraph 63 will not, in and of itself, give rise to a “forgiven amount” within the meaning of either subsection 80(1) or section 80.01. In addition none of DC, TC 1, TC 2 or TC 3, as the case may be, will realize any gain or incur a loss as a result of such set-off and cancellation.
G. The provisions of subsection 15(1), 56(2), 69(1) and 246(1) will not apply to any of the Proposed Transactions, in and by themselves.
H. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given herein.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R9 issued on April 23, 2019, and are binding on the CRA, provided that the Proposed Transactions are completed on or 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 confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:
(a) the PUC of any share or the ACB or FMV of any property referred to herein;
(b) the balance of the CDA, GRIP, RDTOH, ERDTOH or NERDTOH of any corporation;
(c) the amount of any capital loss or terminal loss of any entity referred to herein;
(d) the income tax consequences pertaining to any of the transactions or events described in the Preliminary Transactions, including for greater certainty, whether subsection 55(2) applied to any of the deemed dividends described in Paragraph 47;
(e) to the extent that a deemed dividend arises from a corporation redeeming, acquiring or purchasing for cancellation its shares, a problem of circularity may possibly arise when computing the Part IV tax and the dividend refund of each corporation. We do not provide any comment on this possible circularity issue; and
(f) any other tax consequence relating to the Facts, Proposed Transactions, Subsequent Event, Additional Information, 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.
Further, 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
For Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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