2026 Ruling 2025-1076711R3 - Reduction of Paid-Up Capital

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: Does the PUC reduction on high PUC low ACB preferred shares to allow for the election of a capital dividend on the redemption of the shares.

Position: Yes.

Reasons: The series of transactions is similar to those on ATR-54 and do not offend the scheme of the Act.

XXXXXXXXXX 2025-107671

XXXXXXXXXX, 2026

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your request dated XXXXXXXXXX for an advance income tax ruling on behalf of the taxpayers described below. We also acknowledge the additional information provided in your various email correspondence (XXXXXXXXXX).

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 and;

i. being considered by the Canada Revenue Agency in connection with such return;
ii. under objection by the taxpayers or a related person; or

iii. the subject of a current or completed court process involving the taxpayers or a related person; or

b. the subject of a ruling previously considered by the Income Tax Rulings Directorate.

XXXXXXXXXX

Unless otherwise stated:

i. all statutory references are to the relevant provisions of the Income Tax Act (Canada)(the “Act”), or, where appropriate, the Income Tax Regulations (the “Regulations);

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 definitions;

iii. all references to monetary amounts are to Canadian dollars; and

iv. the singular should be read as plural and vice versa where the circumstances so require.

DEFINITIONS

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:

(a) “Act1” means the XXXXXXXXXX Business Corporations Act;

(b) “arm’s length” has the meaning assigned by subsection 251(1);

(c) “cash equivalents” means short-term, highly liquid investments that are readily convertible to known amounts of money;

(d) “Children” means collectively, the two sons and five daughters of Parent and the Taxpayer;

(e) “CRA” refers to the Canada Revenue Agency;

(f) “FMV” means “fair market value” 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 money;

(g) “Holdco” means XXXXXXXXXX, a corporation created on XXXXXXXXXX on the amalgamation of Holdco2 and Opco3;

(h) “Holdco2” means XXXXXXXXXX, a corporation created on the amalgamation of XXXXXXXXXX;

(i) “Marketable Securities” means Short term or readily saleable financial assets that are actively traded in an open market;

(j) “Opco3” means XXXXXXXXXX, which was incorporated in XXXXXXXXXX and continued under Act1 in XXXXXXXXXX;

(k) “paid-up capital” has the meaning assigned by subsection 89(1);

(l) “Paragraph” refers to a numbered paragraph in this letter;

(m) “Parent” means the former spouse of the Taxpayer, XXXXXXXXXX, who passed away on XXXXXXXXXX;

(n) “Proposed Transactions” means the transactions described in Paragraphs 13 to 16;

(o) “Taxpayer” refers to XXXXXXXXXX, an individual resident in Canada and the parent of the Children;

FACTS

A complete description of all the relevant facts is as follows.

1. Holdco is a taxable Canadian corporation and a Canadian-controlled private corporation as defined in subsections 89(1) and 125(7), respectively.

2. Holdco’s authorized share capital consists of an unlimited number of: class A common shares (“Class A Shares”), class B common shares (“Class B Shares”), class C common shares (“Class C Shares”), class D preferred shares (“Class D Shares”), class E preferred shares (“Class E Shares”), class F preferred shares (“Class F Shares”), class G preferred shares (“Class G Shares”) and class H preferred shares (“Class H Shares”). The rights, privileges, restrictions and limitations attached to each class of issued shares is as follows:

a) Class B Shares: the holders of the Class B Shares are not entitled to vote at meetings of the shareholders of Holdco. The holders of the Class B Shares are entitled to receive dividends. In the event of winding-up of Holdco, the holders of the Class B Shares are entitled to share equally in the remaining assets of Holdco subject to any prior or equal rights attaching to the other classes of Holdco shares;

b) Class C Shares: the holders of the Class C Shares are entitled to vote at meetings of the shareholders of Holdco. The holders of the Class C Shares are not entitled to receive dividends. In the event of a winding-up of Holdco, the holders of the Class C Shares are entitled to receive an amount equal to the issue price of the Class C Shares, subject to the rights, privileges, restrictions or conditions attaching to other classes of shares;

c) Class D Shares: the holders of the Class D Shares are not entitled to vote at meetings of the shareholders of Holdco. The holders of the Class D Shares shall be entitled to receive dividends subject to the discretion of the board. The Class D Shares are redeemable and retractable at any time by the demand of the holder of the shares (subject to applicable law), for an aggregate amount equal to the aggregate FMV of the consideration received on the issuance thereof. On the winding up of Holdco, the holders of the Class D Shares shall receive an amount equal to the redemption value of the Class D Shares, together with all declared but unpaid dividends;

d) Class E Shares: the holders of the Class E Shares are not entitled to vote at meetings of the shareholders of Holdco. The holders of the Class E Shares shall be entitled to receive dividends subject to the discretion of the board. The Class E Shares are redeemable and retractable at any time by the demand of the holder of the shares (subject to applicable law), for an aggregate amount equal to the aggregate FMV of the consideration received on the issuance thereof. On the winding up of Holdco, the holders of the Class E Shares shall receive an amount equal to the redemption value of the Class E Shares, together with all declared but unpaid dividends;

e) Class F Shares: the holders of the Class F Shares are not entitled to vote at meetings of the shareholders of Holdco. The holders of the Class F Shares shall be entitled to receive dividends subject to the discretion of the board; the shares are redeemable and retractable at any time by the demand of the holder of the shares (subject to applicable law), for an aggregate amount equal to the aggregate FMV of the consideration received on the issuance thereof. On the winding up of Holdco, the holders of the Class F Shares shall receive an amount equal to the redemption value of the Class F Shares, together with all declared but unpaid dividends;

f) Class G Shares: the holders of the Class G Shares are not entitled to vote at meetings of the shareholders of Holdco. The holders of the Class G Shares shall be entitled to receive dividends subject to the discretion of the board; the shares are redeemable and retractable at any time by the demand of the holder of the shares (subject to applicable law), for an aggregate amount equal to the aggregate FMV of the consideration received on the issuance thereof. On the winding up of Holdco, the holders of the Class G Shares shall receive an amount equal to the redemption value of the Class G Shares, together with all declared but unpaid dividends; and

g) Class H Shares: the holders of the Class H Shares are not entitled to vote at meetings of the shareholders of Holdco. The holders of the Class H Shares shall be entitled to receive dividends subject to the discretion of the board; the shares are redeemable and retractable at any time by the demand of the holder of the shares (subject to applicable law), for an aggregate amount equal to the aggregate FMV of the consideration received on the issuance thereof. On the winding up of Holdco, the holders of the Class H Shares shall receive an amount equal to the redemption value of the Class H Shares, together with all declared but unpaid dividends.

3. Holdco's issued and outstanding shares, the paid-up capital attached to those shares and the ACB of those shares to the holder are as follows:

	Shareholder	Shares			Paid-up		ACB		Redemption
						Capital				Values
	Children	XXXX Class B Shares	XXXX		XXXX		XXXX
	Taxpayer	XXXX Class C Shares	XXXX		XXXX		XXXX
	Taxpayer	XXXX Class D Shares	XXXX		XXXX		XXXX
	Taxpayer	XXXX Class E Shares	XXXX		XXXX		XXXX
	Taxpayer	XXXX Class F Shares	XXXX		XXXX		XXXX
	Taxpayer	XXXX Class G Shares	XXXX		XXXX		XXXX
	Taxpayer	XXXX Class H Shares	XXXX		XXXX		XXXX

4. The paid-up capital of Class D Shares and Class E Shares of Holdco was created on the transfer in XXXXXXXXXX by Parent of the shares of four corporations to a predecessor corporation of Holdco. At the time, the paid-up capital of the shares of the predecessor corporation was not subject to an adjustment under the Act.

5. There have been no subsequent transactions that would reduce the paid-up capital of the Class D Shares or Class E Shares of Holdco for the purposes of the Act.

6. The shares of Holdco are capital property to the Taxpayer and the Children.

7. For the purpose of the Act, the Taxpayer and the Children are all resident in Canada.

8. The significant assets of Holdco include cash and cash equivalents and Marketable Securities.

9. In addition, Holdco owns two life insurance policies on the life of the Taxpayer. These are both last-to-die policies that were originally placed on the lives of Parent and the Taxpayer.

a) A XXXXXXXXXX policy was purchased in XXXXXXXXXX with a death benefit of $XXXXXXXXXX as of XXXXXXXXXX.

b) A XXXXXXXXXX policy was purchased in XXXXXXXXXX with a death benefit of $XXXXXXXXXX as of XXXXXXXXXX.

On the death of the Taxpayer, the excess of the policy proceeds over the adjusted cost base of the policies will be added to the capital dividend account of Holdco.

10. Holdco’s capital dividend account balance, which consists primarily of the non-taxable portion of capital gains from the sale of Marketable Securities, is $XXXXXXXXXX at the end of the Holdco’s XXXXXXXXXX taxation year.

11. On XXXXXXXXXX, Holdco disposed of various properties, including capital property, to an arm’s length purchaser for cash proceeds of $XXXXXXXXXX. The disposition of the capital properties resulted in the realization of capital gains, the non-taxable portion of which were added to Holdco’s CDA.

12. By XXXXXXXXXX, Holdco had donated Marketable Securities with a FMV of $XXXXXXXXXX. As a result of these dispositions, Holdco realized capital gains. The non-taxable portion of these gains (approximately $XXXXXXXXXX) was added to its capital dividend account.

PROPOSED TRANSACTIONS

13. The shareholders of Holdco will, in accordance with Act1, pass a special resolution to reduce the total stated capital of the corporation’s Class D Shares from $XXXXXXXXXX to $XXXXXXXXXX (the amount equal to the ACB of the shares to the Taxpayer). No amount will be paid to, or received by, the Taxpayer in connection with the reduction. Holdco will account for the reduction in stated capital by adding an amount of $XXXXXXXXXX to its contributed surplus account.

14. The shareholders of Holdco will, in accordance with Act1, pass a special resolution to reduce the total stated capital of the corporation’s Class E Shares from $XXXXXXXXXX to $XXXXXXXXXX (the amount equal to the ACB of the shares to the Taxpayer). No amount will be paid to or received by, the Taxpayer in connection with the reduction. Holdco will account for the reduction in stated capital by adding an amount of $XXXXXXXXXX to its contributed surplus account.

15. The Taxpayer will exchange XXXXXXXXXX Class D Shares of Holdco, with a total redemption price of $XXXXXXXXXX, for XXXXXXXXXX Class F Shares of Holdco with an issue price and a redemption price of $XXXXXXXXXX per share. The exchange will be governed by subsection 51(1). The stated capital of the Class D Shares will be reduced proportionately by $XXXXXXXXXX with $XXXXXXXXXX being added to the stated capital of the Class F Shares.

16. The Taxpayer will exchange XXXXXXXXXX Class E shares of Holdco, with a total redemption price of $XXXXXXXXXX, for XXXXXXXXXX Class F Shares of Holdco with an issue price and a redemption price of $XXXXXXXXXX per share. The exchange will be governed by subsection 51(1). The stated capital of the Class E Shares will be reduced proportionately by $XXXXXXXXXX with $XXXXXXXXXX being added to the stated capital of the Class F Shares.

PURPOSE OF THE PROPOSED TRANSACTIONS

17. The purpose of the Proposed Transactions is to ensure that if the preferred shares of Holdco are redeemed after the death of the Taxpayer, a greater portion of the amount paid by Holdco on the redemption of such shares will be deemed to be paid as a dividend.

RULINGS GIVEN

A. The reduction of the paid-up capital of the Class D Shares of Holdco, as described in Paragraph 13, will not result in a disposition of those shares by the Taxpayer for the purposes of the Act.

B. The reduction of the paid-up capital of the Class E Shares of Holdco, as described in Paragraph 14, will not result in a disposition of those shares by the Taxpayer for the purposes of the Act.

C. Provided that Holdco does not make any payment or distribution to the Taxpayer in connection with the reduction of the paid-up capital of the Class D Shares, as described in Paragraph 13, no amount will be deducted, pursuant to subparagraph 53(2)(a)(ii) in computing the adjusted cost base of the Class D Shares of Holdco to the Taxpayer.

D. Provided that Holdco does not make any payment or distribution to the Taxpayer in connection with the reduction of the paid-up capital of the Class E Shares, as described in Paragraph 14, no amount will be deducted, pursuant to subparagraph 53(2)(a)(ii) in computing the adjusted cost base of the Class E Shares of Holdco to the Taxpayer.

E. 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 70-6R12 issued on April 1, 2022, and are binding on the CRA, provided that the Proposed Transactions are completed no later than six (6) months after the date of this letter.

OTHER COMMENTS

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 paid-up capital of any share or the ACB or FMV of any property referred to herein;

(b) the balance of the capital dividend account or any other tax account of Holdco;

(c) any other tax consequence relating to the facts, the transactions described in this letter, additional information, or any transaction or event taking place either prior to the transactions described in this letter or subsequent thereto; and

(d) whether any of the transactions described in this letter are, or will be, legally effective.

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. Furthermore, the operation of a price adjustment clause may invalidate one or more of the rulings provided. 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