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: standard divisive butterfly
Position:
Reasons:
3-960775
XXXXXXXXXX XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
We are writing in response to your letter of XXXXXXXXXX in which you requested an advance income tax ruling in respect of the above taxpayer. We also acknowledge your letter 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,
and
none of the issues involved in the requested rulings 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").
Facts
XXXXXXXXXX was incorporated by letters patent issued XXXXXXXXXX by the Province of XXXXXXXXXX is a taxable Canadian corporation and a Canadian-controlled private corporation which, as used here and subsequently, have the meanings assigned by subsection 89(1) and 125(7), respectively.
On incorporation, XXXXXXXXXX.
XXXXXXXXXX transferred assets including XXXXXXXXXX to the corporation and, in exchange, received a note, XXXXXXXXXX common shares issued at a par value of $XXXXXXXXXX each and XXXXXXXXXX preference shares issued at a par value of $XXXXXXXXXX each.
On XXXXXXXXXX sold XXXXXXXXXX common shares to XXXXXXXXXX and XXXXXXXXXX common shares to XXXXXXXXXX.
On XXXXXXXXXX common shares were issued by XXXXXXXXXX at $XXXXXXXXXX per share. XXXXXXXXXX then sold XXXXXXXXXX common shares to XXXXXXXXXX and XXXXXXXXXX common shares to XXXXXXXXXX.
On XXXXXXXXXX sold XXXXXXXXXX common shares and XXXXXXXXXX preference shares to XXXXXXXXXX and XXXXXXXXXX common shares to XXXXXXXXXX.
On XXXXXXXXXX sold XXXXXXXXXX common shares to XXXXXXXXXX.
On XXXXXXXXXX sold XXXXXXXXXX common shares to XXXXXXXXXX.
XXXXXXXXXX
On XXXXXXXXXX transferred XXXXXXXXXX common shares and XXXXXXXXXX preference shares to XXXXXXXXXX by way of a gift. XXXXXXXXXX also transferred XXXXXXXXXX common shares and XXXXXXXXXX preference shares to XXXXXXXXXX by way of a gift on the same date.
The current shares of XXXXXXXXXX are held as capital property, within the meaning assigned by section 54, as follows:
Shareholder Preference Common
XXXXXXXXXX
The per share paid-up capital, adjusted cost base and fair market value of the shares of XXXXXXXXXX are the same for XXXXXXXXXX and are as follows:
Paid-up Adjusted Fair Market
Share Capital Cost Base Value
Common XXXXXXXXXX
Preference XXXXXXXXXX
The terms "paid-up capital" and "adjusted cost base", as used here and subsequently, have the meanings assigned by subsection 89(1) and section 54, respectively.
XXXXXXXXXX are resident in Canada and are active in the affairs of XXXXXXXXXX.
XXXXXXXXXX Each of the assets of XXXXXXXXXX except for machinery and equipment, has a fair market value that is greater than or equal to its adjusted cost base. The fair market value of the machinery and equipment is greater than its undepreciated capital cost but is less than its cost. The term "undepreciated capital cost" has the meaning assigned by subsection 13(21).
XXXXXXXXXX does not have any unutilized losses or tax deductions for tax purposes or any amount in its refundable dividend tax on hand or capital dividend accounts. The terms "refundable dividend tax on hand" and "capital dividend account" have the meanings assigned by subsections 129(3) and 89(1), respectively.
Immediately before the transfers of property described in paragraph 29 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 and inventory;
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). It is not expected that there will be any accounts receivable or inventory at the time of the transfer referred to in paragraph 29 below. If any such assets do exist at that time, each transferee will receive its appropriate portion in accordance with paragraph 55(3)(b). It is also not expected that there will be any liabilities at the time of the above transfer.
Neither XXXXXXXXXX nor either of the Holdcos, corporations to be formed as described in paragraph 26 below, is or will be a "specified financial institution" as defined in subsection 248(1).
There are not, and will not be, at any time prior to the completion of the proposed transactions described below, any agreements (or undertakings) which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any shares referred to in this ruling.
None of the dividends described in this ruling will be received on a share of capital stock of a corporation as part of a dividend rental arrangement of the particular corporation. The expression "dividend rental arrangement" has the meaning assigned by subsection 248(1).
None of the shares referred to in this ruling has been or will be issued or acquired as part of a transaction or event or a series of transactions or events contemplated by subsection 112(2.5).
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 29 below, except as described herein.
None of the parties is contemplating a disposition of any of the shares of XXXXXXXXXX or the Holdcos, companies to be formed as described in paragraph 26 below, other than as described herein.
None of the parties is contemplating an acquisition of control of XXXXXXXXXX or the Holdcos, companies to be formed as described in paragraph 26 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, other than as described herein.
XXXXXXXXXX files its federal income tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office. Its federal tax account number is XXXXXXXXXX.
Proposed Transactions
XXXXXXXXXX will each incorporate a company under the XXXXXXXXXX (respectively, "Newco XXXXXXXXXX" and "Newco XXXXXXXXXX" and collectively "the Holdcos"). Each of the Holdcos will be a taxable Canadian corporation and a Canadian-controlled private corporation. The Holdcos will have authorized share capital of:
Class XXXXXXXXXX special shares which will be non-voting; non-participating; entitled to a non-cumulative dividend of XXXXXXXXXX%; and redeemable and retractable at $XXXXXXXXXX per share.
Class XXXXXXXXXX special shares which will be non-voting; non-participating; entitled to a non-cumulative dividend of XXXXXXXXXX%; and redeemable and retractable at the fair market value of the consideration received in exchange for those shares.
Common shares.
XXXXXXXXXX will transfer, at fair market value, XXXXXXXXXX preference shares and XXXXXXXXXX common shares of XXXXXXXXXX to Newco XXXXXXXXXX and in exchange will receive XXXXXXXXXX Class XXXXXXXXXX special shares and XXXXXXXXXX common shares of Newco XXXXXXXXXX, respectively. Newco XXXXXXXXXX will add to the stated capital accounts in respect of the Class XXXXXXXXXX special shares and common shares amounts equal to the respective paid-up capital of the preference and common shares of XXXXXXXXXX so transferred. XXXXXXXXXX will transfer, at fair market value, XXXXXXXXXX preference shares and XXXXXXXXXX common shares of XXXXXXXXXX to Newco XXXXXXXXXX and in exchange will receive XXXXXXXXXX Class XXXXXXXXXX special shares and XXXXXXXXXX common shares of Newco XXXXXXXXXX, respectively. Newco XXXXXXXXXX will add to the stated capital accounts in respect of the Class XXXXXXXXXX special shares and common shares amounts equal to the respective paid-up capital of the preference and common shares of XXXXXXXXXX so transferred. The common shares of XXXXXXXXXX referred to herein are not and will not be taxable preferred shares which, as used here and subsequently, has the meaning assigned by subsection 248(1)
XXXXXXXXXX will jointly elect with Newco XXXXXXXXXX will jointly elect with Newco XXXXXXXXXX in prescribed form and within the time limits referred to in subsection 85(6), pursuant to subsection 85(1), in respect of the transfers of the preference and common shares of XXXXXXXXXX as described in paragraph 27 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.
XXXXXXXXXX will then transfer, at fair market value, 50% of each type of property owned by it to each of Newco XXXXXXXXXX and Newco XXXXXXXXXX in exchange for Class XXXXXXXXXX special shares of the particular transferee. The fair market value of the cash or near cash property, the investment property and the business property transferred by XXXXXXXXXX to Newco XXXXXXXXXX and Newco XXXXXXXXXX will be equal to 50% of the fair market value of all of the cash or near cash property, the investment property and the business property of XXXXXXXXXX immediately before the transfer. The fair market value and aggregate redemption and retraction amount of the Class XXXXXXXXXX special shares so issued by Newco XXXXXXXXXX and Newco XXXXXXXXXX will be equal to the fair market value of the property so transferred to it.
In respect of the transfer of property described in paragraph 29 above, XXXXXXXXXX will jointly elect with each of Newco XXXXXXXXXX and Newco XXXXXXXXXX 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:
in the case of depreciable property of a prescribed class, an amount which is not less than the least of the amounts specified in subparagraphs 85(1)(e)(i) to 85(1)(e)(iii);
in the case of capital property (other than depreciable property of a prescribed class), an amount that is equal to its adjusted cost base;
in the case of inventory, an amount that is equal to the lesser of the cost amount of the property and its fair market value; and
in the case of eligible capital property, an amount which is equal to the least of the amounts specified in subparagraphs 85(1)(d)(i) to 85(1)(d)(iii), or, if such amount is nil, the amount of $1.
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 terms "cost amount" and "depreciable property", as used here and subsequently, and "eligible capital property" have the meanings assigned by subsections 248(1) and 13(21) and section 54, respectively.
Each of the Newco XXXXXXXXXX and Newco XXXXXXXXXX will add to the stated capital account in respect of the Class XXXXXXXXXX special shares so issued an amount equal to the aggregate of the agreed amounts as determined herein.
Newco XXXXXXXXXX and Newco XXXXXXXXXX will each redeem, at their redemption price, the Class XXXXXXXXXX special shares held by XXXXXXXXXX and will each issue to XXXXXXXXXX as payment therefor, a demand non-interest-bearing promissory note with a principal amount equal to the aggregate redemption amount of the shares so redeemed (the "Newco XXXXXXXXXX Note" and the "Newco XXXXXXXXXX Note", respectively).
XXXXXXXXXX will redeem, at their redemption amount, and purchase for cancellation, at their fair market value, all of its preference and common shares held by Newco XXXXXXXXXX and Newco XXXXXXXXXX. As consideration, XXXXXXXXXX will issue a demand non-interest-bearing promissory note to each of Newco XXXXXXXXXX and Newco XXXXXXXXXX having a respective principal amount equal to the aggregate of the redemption amount and fair market value of the shares so redeemed or purchased for cancellation (the "XXXXXXXXXX Note" and the "XXXXXXXXXX Note", respectively).
The Newco XXXXXXXXXX Note and the Newco XXXXXXXXXX Note will be respectively set off against the XXXXXXXXXX Note and the XXXXXXXXXX Note and all such notes will be cancelled.
XXXXXXXXXX will file Articles of Dissolution pursuant to the XXXXXXXXXX.
Subsequent to the above transactions, a Holdco may sell, at fair market value, to the other Holdco certain assets transferred to it as described in paragraph 29 above. The aggregate fair market value of any such property or properties sold by a Holdco will not exceed XXXXXXXXXX% of the aggregate fair market value of all property received by it as described in paragraph 29 above.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to divide the assets of XXXXXXXXXX between XXXXXXXXXX in order that they may pursue their independent business interests.
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:
Provided the relevant parties jointly elect under subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), in respect of the transfers of property described in paragraphs 27 and 29 above, a vendor's proceeds of disposition of, and a purchaser's cost of, a particular property transferred will, by virtue of paragraph 85(1)(a), be deemed to be equal to the amount agreed upon in respect of that property as described in paragraphs 28 and 30 above and, for greater certainty, the provisions of paragraph 85(1)(e.2) will not be applicable in respect of those transfers.
The application of subsection 84.1(1) to the transfers of the preference and common shares of XXXXXXXXXX described in paragraphs 27 above will not result in a reduction of the paid-up capital of the Class XXXXXXXXXX special shares of Newco XXXXXXXXXX and Newco XXXXXXXXXX pursuant to paragraph 84.1(1)(a) or a dividend being deemed to have been paid by Newco XXXXXXXXXX and Newco XXXXXXXXXX pursuant to paragraph 84.1(1)(b).
The provisions of subsection 85(2.1) will not apply to reduce the paid-up capital of the Class XXXXXXXXXX special shares of Newco XXXXXXXXXX and Newco XXXXXXXXXX issued to XXXXXXXXXX as described in paragraph 29 above.
Upon the redemption by each of Newco XXXXXXXXXX and Newco XXXXXXXXXX of its Class XXXXXXXXXX special shares held by XXXXXXXXXX as described in paragraph 31 above and upon the respective redemption and purchase for cancellation by XXXXXXXXXX of its preference and common shares held by Newco XXXXXXXXXX and Newco XXXXXXXXXX, as described in paragraph 32 above, the amount by which the amount paid on the redemption or purchase for cancellation, as the case may be, exceeds the paid-up capital of the particular shares redeemed or purchased for cancellation will be deemed to be a dividend paid by the particular payor and received by the particular recipient, by virtue of paragraph 84(3)(a) or 84(3)(b), as applicable. Each such dividend will be deductible by the particular recipient under subsection 112(1) in computing its taxable income for the taxation year in which it is deemed to have received such dividend and such deduction will not be precluded by any of subsections 112(2.1) to (2.4) and the provisions of subsection 112(3) will apply to any loss which may otherwise arise to the recipient as a result of the redemption or purchase for cancellation.
The provisions of subsection 55(2) will not apply to the dividends described in ruling D 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.
The dividends described in ruling D above will not be subject to tax under Part IV except as provided in paragraph 186(1)(b).
The common shares of XXXXXXXXXX that are purchased for cancellation as described in ruling D above will not be considered to become taxable preferred shares as a result of the proposed transactions described above, in and by themselves.
The dividend described in ruling D above that is deemed to be received by XXXXXXXXXX from Newco XXXXXXXXXX and Newco XXXXXXXXXX on the redemption of the Class XXXXXXXXXX special shares of Newco XXXXXXXXXX and Newco XXXXXXXXXX held by XXXXXXXXXX and the dividend described in ruling D above that is deemed to be received by Newco XXXXXXXXXX and Newco XXXXXXXXXX from XXXXXXXXXX on the redemption of the preference shares of XXXXXXXXXX held by Newco XXXXXXXXXX and Newco XXXXXXXXXX will be deemed to be an excepted dividend, as defined in paragraph 187.1(c), and an "excluded dividend", by virtue of paragraph (a) of the definition of "excluded dividend" found in subsection 191(1), and therefore will not be subject to tax under Parts IV.1 and VI.1, respectively.
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 herein.
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
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