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:
Application of 84.1 to a group of employee/shareholders who transfer their shares of an operating company to a holding corporation.
Position:
84.1 applies
Reasons:
Employee/shareholders do not deal at arm's length with Holdco -XXXXXXXXXX
XXXXXXXXXX 3-953297
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling Request
This is in reply to your letters of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge our related telephone conversations and the additional submissions contained in your letters of XXXXXXXXXX.
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the requested rulings is being considered by a district office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.
DEFINITIONS
"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1 as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
"ACB" means adjusted cost base" as defined in section 54;
"agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in their election under subsection 85(1) in respect of the property or the amount deemed by subsection 85(1) to be the amount so agreed on;
"CCPC" means Canadian-controlled private corporation as defined in subsection 125(7);
"Newco" means the new XXXXXXXXXX corporation described in Paragraph 12;
"non-retiring shareholders" has the meaning set out in Paragraph 4;
XXXXXXXXXX
"Paragraph" refers to a numbered paragraph in this letter;
"Proposed Transactions" means the transactions described in Paragraphs 9 to 16;
"PUC" means paid-up capital as defined in subsection 89(1);
"retiring shareholders" has the meaning set out in Paragraph 4; and
"taxable Canadian corporation" has the meaning assigned by subsection 89(1).
FACTS
1.XXXXXXXXXX is a CCPC and a taxable Canadian corporation.
2.XXXXXXXXXX is a CCPC and a taxable Canadian corporation. All of the issued and outstanding shares of XXXXXXXXXX are owned by XXXXXXXXXX.
3.Both XXXXXXXXXX were incorporated under the XXXXXXXXXX.
4.All of the issued and outstanding shares of XXXXXXXXXX are owned by the following individuals, all of whom are Canadian residents.
Common Number of Shares Percentage Ownership
XXXXXXXXXX
Preferred
XXXXXXXXXX
The par value and PUC of the common shares is $XXXXXXXXXX per share.
(1)all of these shareholders (the "retiring shareholders") will likely retire XXXXXXXXXX.
(2)all of these shareholders (the "non-retiring shareholders") will likely not be retiring XXXXXXXXXX.
5.All of the shareholders of XXXXXXXXXX are employees of
XXXXXXXXXX
6.The shareholders of XXXXXXXXXX are not related to each other within the meaning of subsection 251(2).
7.The value of each common share of XXXXXXXXXX is set XXXXXXXXXX by the shareholders pursuant to a shareholder agreement. The current fair market value of each common share is $XXXXXXXXXX.
8.The ACB of each XXXXXXXXXX common share held by certain of the retiring shareholders is less than $XXXXXXXXXX per share and the ACB of each XXXXXXXXXX common share held by the non-retiring shareholders is $XXXXXXXXXX, with the exception of the shares held by XXXXXXXXXX. The ACB of each share held by XXXXXXXXXX is $XXXXXXXXXX. All of the non-retiring shareholders acquired their XXXXXXXXXX common shares from arm's-length parties after 1971 for an amount equal to their respective ACBs of those shares.
PROPOSED TRANSACTIONS
9.XXXXXXXXXX will file Articles of Amendment under the XXXXXXXXXX authorizing the creation of XXXXXXXXXX classes of common shares. The shares of each class will have a par value of $XXXXXXXXXX each. The newly created classes of common shares will be identical in all respects except that each class of shares will have separate dividend entitlements such that a dividend can be paid on one class of shares and not the others.
10.Each of the XXXXXXXXXX shareholders of XXXXXXXXXX will exchange his existing shares of XXXXXXXXXX (the "exchanged shares") for common shares of one of the XXXXXXXXXX newly created classes such that each shareholder will own 100% of the issued and outstanding common shares of a particular class. The exchanged shares will be cancelled after the exchange. The PUC and par value of each newly created share issued to each of the XXXXXXXXXX shareholders will be $XXXXXXXXXX.
11.Those retiring shareholders whose ACB of their XXXXXXXXXX common shares is less than $XXXXXXXXXX per share, and XXXXXXXXXX, will jointly elect in prescribed form and within the time limits prescribed by subsection 85(6) for the provisions of subsection 85(1) to apply to the exchange of their shares described in Paragraph 10. The agreed amount will be $XXXXXXXXXX a share. The shareholders will claim a deduction to the extent allowed by subsection 110.6(2.1) with respect to the capital gain realized on the disposition of the exchanged shares.
12.The non-retiring shareholders will cause a new holding corporation ("Newco") to be incorporated under the XXXXXXXXXX. One share will be issued to XXXXXXXXXX for nominal consideration. The authorized capital of Newco will be identical to the authorized capital of XXXXXXXXXX except that the classes of shares Newco will be authorized to issue will have no par value.
13.The non-retiring shareholders will transfer their shares of XXXXXXXXXX to Newco. As consideration, each shareholder will receive the identical class and, with the exception of XXXXXXXXXX, number of common shares of Newco as that shareholder currently holds in XXXXXXXXXX will receive one less share of Newco than the number of XXXXXXXXXX shares he transfers to Newco due to the fact that he will already have been issued one share of Newco on its incorporation. The Newco shares received by each shareholder will each have a PUC of $XXXXXXXXXX and no par value.
14.XXXXXXXXXX will sell XXXXXXXXXX shares to Newco for $XXXXXXXXXX per share ($XXXXXXXXXX in aggregate) in exchange for a demand promissory note with a face amount of $XXXXXXXXXX.
15.The class of common shares of XXXXXXXXXX transferred to Newco by XXXXXXXXXX will be purchased for cancellation by XXXXXXXXXX for $XXXXXXXXXX per share. The purchase price will be satisfied by the payment of cash and/or the issuance of a demand promissory note.
16.Newco will use the funds received from the share redemption described in Paragraph 15 to repay the note due to XXXXXXXXXX.
PURPOSE OF PROPOSED TRANSACTIONS
The purpose of the Proposed Transactions is to set up a structure which will allow for the sale of shares of retiring employee/shareholders and the funding of the purchase price thereof. When a particular employee retires, the employee will sell his shares to Newco. XXXXXXXXXX will fund the payment for the shares by redeeming the shares purchased. This will result in a deemed dividend to Newco.
It is also a purpose of the Proposed Transactions to allow certain retiring shareholders to increase the ACB of their XXXXXXXXXX shares.
RULINGS
Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the Proposed Transactions, we confirm the following:
A.Each of the XXXXXXXXXX classes of XXXXXXXXXX common shares, referred to in Paragraph 9, will be considered to be a separate class of shares for the purposes of determining their PUC.
B.For the purposes of determining the ACB of a common share of XXXXXXXXXX, a share of any one of the XXXXXXXXXX different classes will only be considered to be identical to another share of that class and will not be considered to be identical to a share of any of the other XXXXXXXXXX classes of XXXXXXXXXX common shares.
C.Subsection 86(1) will be applicable to the transfer by the non-retiring shareholders and XXXXXXXXXX of their XXXXXXXXXX common shares to XXXXXXXXXX in exchange for new XXXXXXXXXX common shares.
D.The provisions of subsection 85(4) will not operate to deny any loss realized by the non-retiring shareholders on the transfer of their XXXXXXXXXX shares to Newco as described in Paragraph 13.
E.Subsection 84.1 will not apply to reduce the PUC of the Newco shares, received by the non-retiring shareholders as described in Paragraph 13, below $XXXXXXXXXX per share or to deem the non-retiring shareholders to have received a dividend.
F.Subsection 84.1(1) will not apply to deem XXXXXXXXXX to have received a dividend on the sale of his XXXXXXXXXX shares to Newco as described in Paragraph 14.
G.Paragraph 85(1)(e.2) will not apply to the retiring shareholders who elect for the provisions of subsection 85(1) to apply to the exchange of their XXXXXXXXXX shares described in Paragraph 10.
H.Subsection 55(2) will not apply to the dividend which will be received by Newco as a result of the purchase for cancellation of Newco's XXXXXXXXXX shares as described in Paragraph 15.
I.Control of XXXXXXXXXX will not be considered to have been acquired as a result of the Proposed Transactions.
J.Subsection 245(2) will not apply, as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences described in the requested rulings.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada (the "Department") and are binding provided that the Proposed Transactions are completed before XXXXXXXXXX. The rulings given should in no way be construed to constitute acceptance or confirmation by the Department of the fair market value of any share or the eligibility of any share for the capital gains deduction in section 110.6.
These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.
OPINION
Provided that proposed subsections 40(3.3) and (3.4) are enacted in substantially the same form as contained in the Notice of Ways and Means Motion tabled in the House of Commons by the Minister of Finance on June 20, 1996, it is our opinion that those subsections will not operate to deny the loss referred to in Ruling D.
In our view, any loss realized by a non-retiring shareholder on the transfer of that shareholder's XXXXXXXXXX shares to Newco will not be an allowable business investment loss within the meaning of paragraph 39(1)(c) because that shareholder would not deal at arm's length with Newco.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and Interpretations
Directorate
Policy and Legislation Branch
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