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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1.Whether term preferred shares are acquired in the ordinary course of business
2. There are other potential tax consequences which arise from the exchange of debt and preferred shares - section 80 could apply to XXXXXXXXXX depending on the FMV of the preferred shares; and XXXXXXXXXX may have a gain/loss on disposition of debt.
3.Ruling B and C are confirmatory rulings since these rules apply by definition
Position:
1. No
2. XXXXXXXXXX has not requested rulings
3. We will provide favourable rulings
Reasons:
1.They are acquired as part of a series of loss consolidation transactions between sister companies
2.We are providing a disclaimer with respect to the FMV of the preferred shares
3.We have provided these rulings in the past.
952669
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sir:
Re: XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, and further to your submissions of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.
Unless otherwise indicated, all statutory references herein are references to provisions of the Income Tax Act (the "Act"). "Canadian-controlled private corporation" ("CCPC") and "taxable Canadian corporation" ("TCC") as referred to herein have the meanings assigned by subsections 125(7) and 89(1) of the Act respectively.
Our understanding of the statement of facts and proposed transactions is as follows:
Facts
1.XXXXXXXXXX is a Canadian-controlled private corporation and a taxable Canadian corporation. XXXXXXXXXX was formed as a result of an amalgamation on XXXXXXXXXX between predecessor XXXXXXXXXX head office is located in XXXXXXXXXX.
XXXXXXXXXX
XXXXXXXXXX federal corporate tax number is XXXXXXXXXX and it files its annual income tax returns at the XXXXXXXXXX District Office. Its fiscal year and taxation year end on XXXXXXXXXX.
XXXXXXXXXX has authorized capital of an unlimited number of common shares, of which XXXXXXXXXX are issued and outstanding with a stated capital of $XXXXXXXXXX% non-cumulative non-voting Class A shares of which XXXXXXXXXX are issued and outstanding with a stated capital of $XXXXXXXXXX and an unlimited number of Class B shares issuable in series of which XXXXXXXXXX Class B Series 1 Shares are issued and outstanding and XXXXXXXXXX Class B Series 2 Shares are issued and outstanding with stated capital of $XXXXXXXXXX respectively. All of the issued and outstanding common shares and Class A shares of XXXXXXXXXX are owned by XXXXXXXXXX All of the issued and outstanding Class B Series 2 shares and XXXXXXXXXX of the Class B Series 1 shares of XXXXXXXXXX are owned by XXXXXXXXXX The Class B shares were issued to XXXXXXXXXX pursuant to transactions described in our ruling XXXXXXXXXX The remaining XXXXXXXXXX Class B Series 1 shares are owned by XXXXXXXXXX These Class B shares were issued to XXXXXXXXXX pursuant to transactions described in our ruling XXXXXXXXXX The Class B Shares as a class have the following principal attributes:
(i) redeemable at the option of the holder for its stated capital plus accrued and unpaid dividends;
(ii) redeemable at the option of the issuer for its stated capital plus accrued and unpaid dividends;
(iii) non-voting;
(iv) dividend paying at the rate set for each Series as described below; and
(v) stated capital equal to the issue price of $XXXXXXXXXX per share.
2.XXXXXXXXXX is Canadian-controlled private corporation and a taxable Canadian corporation. XXXXXXXXXX is a corporation incorporated under the Canada Business Corporations Act ("CBCA") and has its head office in XXXXXXXXXX.
The issued and outstanding share capital of XXXXXXXXXX consists of one common share which is owned by XXXXXXXXXX is a holding company, the principal assets of which are all of the shares of XXXXXXXXXX.
3.XXXXXXXXXX was incorporated on XXXXXXXXXX under the laws of Canada and was continued under the CBCA on XXXXXXXXXX is a Canadian controlled private corporation and a taxable Canadian corporation. XXXXXXXXXX head office is in XXXXXXXXXX The authorized capital of XXXXXXXXXX consists of an unlimited number of common shares of which XXXXXXXXXX are issued and outstanding with a stated capital of $XXXXXXXXXX and an unlimited number of preferred shares of which none are issued and outstanding. XXXXXXXXXX was formerly a wholly-owned subsidiary of XXXXXXXXXX and became a wholly-owned subsidiary of XXXXXXXXXX as a result of a non-arm's length butterfly transaction as contemplated by the provisions of paragraph 55(3)(a) of the Act.
Its federal corporate tax number is XXXXXXXXXX and it files its annual federal income tax returns at XXXXXXXXXX District Office. Its fiscal year and taxation year end on XXXXXXXXXX.
4.XXXXXXXXXX carries on the business of
XXXXXXXXXX
is a "specified financial institution" within the meaning of subsection 248(1) of the Act
XXXXXXXXXX
5. XXXXXXXXXX.
6.XXXXXXXXXX was incorporated on XXXXXXXXXX under the CBCA. XXXXXXXXXX is a Canadian-controlled private corporation and a taxable Canadian corporation. XXXXXXXXXX head office is in XXXXXXXXXX The authorized capital of XXXXXXXXXX consists of unlimited number of common shares of which XXXXXXXXXX are issued and outstanding with a stated capital of $XXXXXXXXXX and unlimited number of preference shares of which none are issued and outstanding. XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX.
Its federal corporate number is XXXXXXXXXX and it files its annual federal income tax return at the XXXXXXXXXX District Office. Its fiscal year and taxation year end on XXXXXXXXXX.
XXXXXXXXXX is a specified financial institution for the same reasons described above for XXXXXXXXXX.
7. XXXXXXXXXX.
8.XXXXXXXXXX currently has non-capital loss carry forwards of approximately $XXXXXXXXXX These loss carry forwards expire according to the following schedule:
EXPIRY DATE NON-CAPITAL LOSS
XXXXXXXXXX
9.XXXXXXXXXX currently owes XXXXXXXXXX in excess of $XXXXXXXXXX on open book account in respect of funds which have been borrowed by XXXXXXXXXX from XXXXXXXXXX on an ongoing basis. Interest is payable on the outstanding amount of these borrowed funds at the end of each of the XXXXXXXXXX based on the XXXXXXXXXX prime lending rate XXXXXXXXXX.
10.XXXXXXXXXX currently owes XXXXXXXXXX approximately in excess of $XXXXXXXXXX on open book account in respect of funds which had been borrowed by XXXXXXXXXX from XXXXXXXXXX on an ongoing basis. Interest is payable on the outstanding amounts of these borrowed funds at the end of each of the XXXXXXXXXX based on the XXXXXXXXXX prime lending rate XXXXXXXXXX.
11.It is expected that the open-book account will continue to grow over time.
12.To the best of your knowledge, and that of the taxpayers named herein, none of the issues involved in this ruling request are being considered by a district taxation office and/or taxation centre in connection with a tax return already filed and none of the issues is under objection or appeal.
Proposed Transactions
13.XXXXXXXXXX will repay the outstanding open-book account of approximately $XXXXXXXXXX by issuing XXXXXXXXXX Class B Series 1 Shares. The shares will have all of the attributes described in paragraph 1 above and will have an annual dividend rate set for that Series equal to the prime rate of interest charged by XXXXXXXXXX principal banker XXXXXXXXXX preceding the commencement of any particular fiscal year of XXXXXXXXXX during which the shares are outstanding plus XXXXXXXXXX%.
14.XXXXXXXXXX will repay the outstanding open book account of approximately $XXXXXXXXXX by issuing XXXXXXXXXX Class B Shares Series 1 to XXXXXXXXXX These shares will have the attributes described in paragraph 1 above and will have a dividend rate set for that series equal to the prime rate of interest charged by XXXXXXXXXX principal bankers XXXXXXXXXX proceeding the commencement of any particular fiscal year of XXXXXXXXXX during which the shares are outstanding plus XXXXXXXXXX%.
15.None the issued shares of XXXXXXXXXX described herein, is or will be subject to a guarantee or other agreement, within the meaning of subsection 112(2.2) and 112(2.4) of the Act.
Purpose of the Proposed Transactions
XXXXXXXXXX have been consistently taxable and are expected to continue to be so. XXXXXXXXXX on the other hand, has non-capital loss carryforwards of approximately $XXXXXXXXXX as shown in paragraph 8 above. The purpose of the proposed transactions is to reduce XXXXXXXXXX taxable income and taxes payable by reducing the interest payable by XXXXXXXXXX.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts and proposed transactions, we confirm the following:
A.The dividends received by XXXXXXXXXX on the Class B Shares will be deductible in computing its taxable income for the year in which the dividends are received, pursuant to subsection 112(1) of the Act, and, for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), (2.2), or (2.4) of the Act.
B.Except to the extent that XXXXXXXXXX receives a dividend refund within the meaning of subsection 129(1), the provisions of Part IV of the Act will not apply with respect to the dividends received by XXXXXXXXXX on the Class B Shares.
C.The provisions of Part VI.1 of the Act will not be applicable to dividends paid to XXXXXXXXXX on the Class B Shares and the provisions of Part IV.1 of the Act will not be applicable to the dividends received by XXXXXXXXXX on the Class B Shares on the basis that XXXXXXXXXX have substantial interest in XXXXXXXXXX within the meaning of Part VI.1 of the Act.
D.As a result of the proposed transactions, in and of themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the rulings given.
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990, and are binding on Revenue Canada, Taxation, provided that the proposed transactions described herein are completed by XXXXXXXXXX. Our rulings are based on the Act in its present form and do not take into consideration any proposed amendments to the Act.
Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, we are not providing any comments on the fair market value of the Class B Shares.
Our favorable advance rulings as stated herein should not be considered as acceptance or confirmation of the amount of non-capital losses referred to in paragraph 8, or of the deductibility of such losses pursuant to section 111 of the Act.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
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