2096 Ruling 9603763 - REORGANIZATION

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: whether 55(3.1) applies

Position:no

Reasons:wording of provisions

									3-960376
XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sir:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the above taxpayer. We also acknowledge your letters of XXXXXXXXXX.

To the best of your knowledge, and that of the parties to this ruling, none of the issues contained in this advance income tax ruling is being considered by a Tax Services Office and/or a Taxation Centre in connection with an income tax return previously filed and none of the issues contained herein is under objection or appeal.

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act").

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

XXXXXXXXXX was incorporated in XXXXXXXXXX under the XXXXXXXXXX is a Canadian-controlled private corporation and a taxable Canadian corporation which, as used here and subsequently, have the meanings assigned by subsection 125(7) and 89(1), respectively.

The issued and outstanding share capital of XXXXXXXXXX consists of XXXXXXXXXX common shares which are held as capital property by their holders as follows:

Paid-up Adjusted
Shareholder Number Capital Cost Base

XXXXXXXXXX

All the shares were acquired by the particular shareholder on XXXXXXXXXX and have been held continuously since that date. The fair market value of each share exceeds the adjusted cost base thereof to the holder. The terms "capital property" and "adjusted cost base", as used here and subsequently, have the meanings assigned by section 54. The term "paid-up capital", as used here and subsequently, has the meaning assigned by subsection 89(1).

Each of XXXXXXXXXX is a Canadian-controlled private corporation and a taxable Canadian corporation.

XXXXXXXXXX

XXXXXXXXXX operates an XXXXXXXXXX business which is XXXXXXXXXX that are held as capital property by XXXXXXXXXX. The fair market value of the Real Properties exceeds their respective cost amount. The term "cost amount", as used here and subsequently, has the meaning assigned by subsection 248(1).

XXXXXXXXXX reports this rental income as income from a specified investment business which has the meaning assigned by subsection 125(7).

As at XXXXXXXXXX does not have any unutilized losses for tax purposes.

Immediately before the transfers of property described in paragraph 18 below, the property of XXXXXXXXXX will be classified into three types of property for the purposes of paragraph 55(3)(b), as follows:

cash or near cash property, being the current assets of XXXXXXXXXX including cash, accounts receivable, inventory, advances to affiliates, and rights arising from the prepayment of certain expenses;

investment property, being all of the assets of XXXXXXXXXX other than cash or near cash property, any income from which would, for the purposes of the Act, be income from property or a specified investment business; and

business property, being all of the assets of XXXXXXXXXX other than cash or near cash and investment property, any income from which would, for the purposes of the Act, be income from a business other than a specified investment business.

The term "specified investment business" has the meaning assigned by subsection 125(7).

Additional Information

No assets have been or will be acquired and no liabilities have been or will be incurred or paid by XXXXXXXXXX in contemplation of and before the transfers of property described in paragraph 18 below, except as described herein.

None of the parties is contemplating a disposition of any of the shares of XXXXXXXXXX or Realtyco, a company to be formed as described in paragraph 13 below, other than as described herein.

None of the parties is contemplating an acquisition of control of XXXXXXXXXX or Realtyco, a company to be formed as described in paragraph 13 below, other than as described herein.

It is not contemplated that any of the parties will sell or transfer any property as part of the series of transactions or events described herein, other than in the normal course of business or as described herein, to a partnership or person who is not related to the vendor or transferor.

XXXXXXXXXX files its federal income tax returns at the XXXXXXXXXX Taxation Centre and is audited by the XXXXXXXXXX Tax Services Office.

Proposed Transactions

XXXXXXXXXX will incorporate Realtyco under the XXXXXXXXXX Realtyco will be a Canadian-controlled private corporation and a taxable Canadian corporation. The authorized share capital of Realtyco will consist of common shares, class A non-voting special preferred shares and class B non-voting preferred shares. The issued share capital on incorporation will consist of XXXXXXXXXX common shares and will be held as follows:

Shareholder Number

XXXXXXXXXX

XXXXXXXXXX will file articles of amendment whereby class A non-voting special preferred shares will be created.

XXXXXXXXXX will then reorganize its share capital and all XXXXXXXXXX issued and outstanding common shares will be exchanged for XXXXXXXXXX class A special preferred shares and "new" common shares which will be issued prorata among the common shareholders of XXXXXXXXXX. The class A special preferred shares will have an aggregate redemption and retraction amount equal to the fair market value of the Real Properties. The aggregate paid-up capital of the class A special preferred shares and "new" common shares will be equal to that of the common shares so exchanged.

XXXXXXXXXX will each transfer, at fair market value, their respective class A special preferred shares of XXXXXXXXXX to Realtyco. As consideration, Realtyco will issue to each of XXXXXXXXXX class A special preferred shares having an aggregate redemption and retraction value equal to the fair market value of the class A special preferred shares of XXXXXXXXXX so transferred by it. It is your view that the fair market value, immediately before the transfer described in paragraph 18 below, of the shares of Realtyco acquired by each of XXXXXXXXXX will be equal to or approximate the respective amount determined by the formula contained in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1).

Each of XXXXXXXXXX will jointly elect with Realtyco, in prescribed form and within the time limits referred to in subsection 85(6), pursuant to subsection 85(1) in respect of the transfer of the class A special shares of XXXXXXXXXX as described in paragraph 16 above. The agreed amount in respect of the shares so transferred will be equal to the adjusted cost base of the shares to the transferee immediately before the transfer. The adjusted cost base of the shares so transferred will be less than their fair market value at the time of the transfer. Realtyco will add to the stated capital account in respect of its class A special preferred shares so issued an amount that will not exceed the paid-up capital of the class A special preferred shares of XXXXXXXXXX so received by it.

XXXXXXXXXX will then transfer, at fair market value, properties, including the Real Properties, to Realtyco in exchange for class A special preferred shares of Realtyco having an aggregate redemption and retraction amount equal to the fair market value of the transferred properties at that time. Realtyco will add to the stated capital account in respect of its preferred shares an amount that will not exceed the aggregate cost amount of the assets transferred to it by XXXXXXXXXX.

With respect to the transfer described in paragraph 18 above, XXXXXXXXXX and Realtyco will jointly elect pursuant to subsection 85(1), in prescribed form and within the time specified in subsection 85(6), to transfer each asset that is an eligible property within the meaning of subsection 85(1.1), at the following agreed amounts:

capital property (other than depreciable property of a prescribed class) will be transferred at an agreed amount that is equal to the lesser of the adjusted cost base to XXXXXXXXXX of the property and its fair market value; and

depreciable property of a prescribed class will be transferred at an agreed amount which is equal to the least of the amounts specified in subparagraphs 85(1)(e)(i) to 85(1)(e)(iii).

The agreed amount in respect of each of the properties so transferred will be less than or equal to its fair market value at the time of the transfer. The term "depreciable property" has the meaning assigned by subsection 13(21).

Realtyco will redeem its class A special preferred shares held by XXXXXXXXXX for their aggregate redemption amount which will be paid by the issuance of a demand non-interest-bearing promissory note (the "Realtyco Note") to XXXXXXXXXX Concurrently, XXXXXXXXXX will redeem its class A special preferred shares held by Realtyco for their aggregate redemption amount which will be paid by the issuance of a demand non-interest-bearing promissory note (the "XXXXXXXXXX Note") to Realtyco.

The Realtyco Note and the XXXXXXXXXX Note will be set off and both such notes will be cancelled.

Subsequent to the sale described in paragraph 18 above, Realtyco will lease, at fair market value, the Real Properties to XXXXXXXXXX for its use in carrying on the business as described above.

The fair market value of the cash or near cash property, investment property and business property, as the case may be, of Realtyco received from XXXXXXXXXX in the transaction described in paragraph 18 above, immediately following the transaction described in paragraph 21 above, will, in each case, be equal to a proportion (the "Realtyco Proportion") of the fair market value of all the cash or near cash property, investment property and business property, respectively, of XXXXXXXXXX immediately before the transaction described in paragraph 18 above. The Realtyco Proportion will be equal to the proportion that the fair market value of the outstanding shares of XXXXXXXXXX owned by Realtyco immediately before the transaction described in paragraph 18 above is of the total fair market value of all outstanding shares of XXXXXXXXXX immediately before the transaction described in paragraph 18 above. The types of property held by Realtyco will be determined on a basis consistent with the basis described in paragraph 7 above.

Purposes of the Proposed Transactions

The purposes of the proposed transactions are to

XXXXXXXXXX

and to provide flexibility regarding the holding of the Real Properties for financial, retirement, estate and succession planning purposes.

Rulings Given

Provided that the above statements of facts and proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions and that the proposed transactions are carried out as set forth herein, the following rulings are given:

The provisions of subsection 55(2) will not apply to any dividends that are deemed to be received by XXXXXXXXXX or Realtyco as a result of the redemptions referred to in paragraph 20 above, by virtue of the application of paragraph 55(3)(b), provided that, as part of the series of transactions or events that includes the proposed transactions described herein, there is no:

disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);

acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii); or

acquisition of property in the circumstances described in subparagraphs 55(3.1)(c) or (d),

which has not been described herein.

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.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada and are binding provided the proposed transactions are completed by XXXXXXXXXX.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch