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.
XXXXXXXXXX 3-961032
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re:XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings. We also acknowledge your letters of XXXXXXXXXX, our various telephone conversations and a letter from 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 tax services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.
Definitions
Non-Statutory Terms
In this letter unless otherwise expressly stated:
(a)XXXXXXXXXX;
(b) XXXXXXXXXX;
(c)"butterfly reorganization" means a divisive reorganization of a corporation where the dividends received in the course of the reorganization were not subject to subsection 55(2) by virtue of the application of paragraph 55(3)(b);
XXXXXXXXXX.
Statutory Terms
In this letter unless otherwise expressly stated:
(a)"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;
(b)"ACB" means the expression "adjusted cost base" as defined in section 54;
(c) XXXXXXXXXX;
(d)"CBCA" means Canada Business Corporation Act;
(e)"Canadian corporation" has the meaning assigned by subsection 89(1);
(f)"capital property" has the meaning assigned by section 54;
(g)"cost amount" has the meaning assigned under subsection 248(1);
(h)"depreciable property" has the meaning assigned by subsection 13(21);
(i)"distribution" has the meaning assigned by subsection 55(1);
(j)"dividend rental arrangement" has the meaning assigned by subsection 248(1);
(k)"eligible capital property" has the meaning assigned by section 54;
(l)"eligible property" has the meaning assigned by subsection 85(1.1);
(m) XXXXXXXXXX;
(n)"guarantee agreement" has the meaning assigned by subsection 112(2.2);
(o)"ITAR" means Income Tax Application Rules;
(p) XXXXXXXXXX;
(q)"PUC" means the expression "paid-up capital" as defined in subsection 89(1);
(r)"predecessor corporation" has the meaning assigned by subsection 87(1);
(s)"private corporation" has the meaning assigned by subsection 89(1);
(t)"public corporation" has the meaning assigned by subsection 89(1);
(u)"Regulations" means the Income Tax Regulations;
(v)"series of transactions or events" has the meaning assigned by subsection 248(10);
(w) XXXXXXXXXX;
(x)"specified person" has the meaning assigned by subsection 69(12);
(y)"taxable Canadian corporation" has the meaning assigned by subsection 89(1);
(z)"taxable dividend" has the meaning assigned by subsection 89(1); and
(aa)"UCC" means the expression "undepreciated capital cost" as defined in subsection 13(21).
FACTS
1.XXXXXXXXXX is a corporation incorporated under the laws of XXXXXXXXXX is a taxable Canadian corporation and has an XXXXXXXXXX taxation year end.
2.XXXXXXXXXX is a corporation incorporated under the laws of XXXXXXXXXX. XXXXXXXXXX is a taxable Canadian corporation and has an XXXXXXXXXX taxation year end.
3.XXXXXXXXXX is a corporation subject to the laws of XXXXXXXXXX. XXXXXXXXXX was formed as a result of the amalgamation of XXXXXXXXXX. XXXXXXXXXX is a taxable Canadian corporation and had a taxation year end on XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX.
4.XXXXXXXXXX. XXXXXXXXXX is a taxable Canadian corporation and a public corporation. XXXXXXXXXX has an XXXXXXXXXX year end. The shares of XXXXXXXXXX are widely held.
5.XXXXXXXXXX is a corporation subject to the laws of XXXXXXXXXX and is a taxable Canadian corporation. XXXXXXXXXX is the corporation formed as a result of the amalgamation of
XXXXXXXXXX.
6. XXXXXXXXXX.
7.The authorized and issued capital of XXXXXXXXXX was as follows:
Authorized Shares Issued SharesCommon unlimited XXXXXXXXXX
The ownership and aggregate paid-up capital of the shares of XXXXXXXXXX is as follows:
Class of Number Aggregate
Shareholder Shares of Shares Paid-Up Capital
XXXXXXXXXX
The shares of XXXXXXXXXX constitute capital property to each of XXXXXXXXXX. The ACB of the XXXXXXXXXX shares to each shareholder, computed in accordance to the provisions of ITAR 26(3), is greater than the paid-up capital of such shares and the fair market value of the XXXXXXXXXX shares to each shareholder will be greater than their ACB at the time of the transfer described in paragraph 24 below.
8.The authorized and issued capital of XXXXXXXXXX was as follows:
Authorized Shares Issued Shares
XX% Preferred XXXXXXXXXX XXXXXXXXXX
Common unlimited XXXXXXXXXX
All of the issued and outstanding shares of XXXXXXXXXX have been owned, since the incorporation of XXXXXXXXXX. The shares of XXXXXXXXXX constitute capital property to XXXXXXXXXX. The ACB and paid-up capital of the XXXXXXXXXX outstanding shares of XXXXXXXXXX owned by XXXXXXXXXX is $XXXXXXXXXX. The fair market value of the XXXXXXXXXX shares will be greater than their ACB at the time of the transfer described in paragraph 30 below.
9.The authorized and issued capital of XXXXXXXXXX was as follows:
Authorized Shares Issued Shares
Series XXXXXXXXXX Preference XXXXXXXXXX XXXXXXXXXX
Class XX preferred (voting) unlimited XXXXXXXXXX
Class XX preferred (voting) unlimited XXXXXXXXXX
Class XX preferred (non-voting) unlimited XXXXXXXXXX
Class XX preferred (non-voting) unlimited XXXXXXXXXX
Class XX preferred (non-voting) unlimited XXXXXXXXXX
Class XX Preferred Shares,
Series XXXXXXXXXX (non-voting) unlimited XXXXXXXXXX
Class XX Preferred Shares,
Series XXXXXXXXXX (non-voting) unlimited XXXXXXXXXX
Class XX common (voting) unlimited XXXXXXXXXX
Class XX common (non-voting) unlimited XXXXXXXXXX
The Series XXXXXXXXXX Preference shares are retractable at $XXXXXXXXXX per share from and after the XXXXXXXXXX anniversary of the issuance of such shares, and are entitled to one vote per share only if XXXXXXXXXX dividends have not been paid.
XXXXXXXXXX is a directly held wholly-owned subsidiary of XXXXXXXXXX, which in turn is a directly held wholly-owned subsidiary of XXXXXXXXXX, which in turn is a directly held wholly-owned subsidiary of XXXXXXXXXX
XXXXXXXXXX
The assets of XXXXXXXXXX include
XXXXXXXXXX
XXXXXXXXXX owns all of the shares of XXXXXXXXXX and an interest in XXXXXXXXXX
XXXXXXXXXX owns
XXXXXXXXXX
10.XXXXXXXXXX is a corporation incorporated under the laws of XXXXXXXXXX It is a taxable Canadian corporation and a private corporation.
The authorized and issued capital of XXXXXXXXXX was as follows:
Authorized Shares Issued Shares
Common unlimited XXXXXXXXXX
The shares of XXXXXXXXXX are owned as follows:
Shareholder Number of shares held %
XXXXXXXXXX
11. XXXXXXXXXX
12.The authorized and issued capital of XXXXXXXXXX was as follows:
Class of Shares Authorized Shares Issued Shares Class XXXXXXXXXX
Class XXXXXXXXXX
Common XXXXXXXXXX
The Class XXXXXXXXXX shares are non-voting and participating.
The Class XXXXXXXXXX shares are non-voting, participating, and convertible into common shares at a conversion ratio of one Class XXXXXXXXXX share for one common share.
As at XXXXXXXXXX, the shares of XXXXXXXXXX were owned as follows:
Shareholder Class of Shares Number of SharesXXXXXXXXXX
The XXXXXXXXXX shares held by XXXXXXXXXX represented XXXXXXXXXX percent, of total equity and XXXXXXXXXX percent of the votes, and the XXXXXXXXXX shares held by XXXXXXXXXX represented XXXXXXXXXX percent, of total equity and XXXXXXXXXX percent of the votes.
XXXXXXXXXX
The authorized capital of XXXXXXXXXX will be amended to create two classes of Preferred shares as follows:
Class XXXXXXXXXX Preferred Shares
Class XXXXXXXXXX preferred shares, which shares are without nominal or par value, are voting, are entitled to a fixed preferential non-cumulative dividend at the rate of XXXXXXXXXX% of the redemption amount of such shares and are redeemable and retractable for an amount, determined by formula, equal to the fair market value of the property received net of liabilities assumed for the issuance of the shares.
Class XXXXXXXXXX Preferred Shares
Class XXXXXXXXXX preferred shares, which shares are without nominal or par value, are voting, are entitled to a fixed preferential non-cumulative dividend at the rate of XXXXXXXXXX% of the redemption amount of such shares and are redeemable and retractable for an amount, determined by formula, equal to the fair market value of the property received net of liabilities assumed for the issuance of the shares.
For the purposes of subsection 191(4), the terms and conditions of the Class XXXXXXXXXX preferred shares and Class XXXXXXXXXX preferred shares described herein, will specify an amount in respect of each such share. The amount to be specified in respect of each such share, at the time of issuance, will be expressed as a dollar amount, will not be determined by a formula and will not exceed the fair market value of the consideration for which each such share will be issued.
13.The property of XXXXXXXXXX includes
XXXXXXXXXX
As at XXXXXXXXXX, the UCC of the depreciable property of XXXXXXXXXX, the cost of land of XXXXXXXXXX and the estimated fair market value of each property of XXXXXXXXXX were as follows:
UCC/Cost Fair market value
XXXXXXXXXX
XXXXXXXXXX
The book values (except as noted) of other assets of XXXXXXXXXX on hand as at XXXXXXXXXX were as follows:
XXXXXXXXXX
14.The outstanding principal amounts of the liabilities of XXXXXXXXXX were as follows:
XXXXXXXXXX
The amount of debt exceeds the cost amount of assets since deductions for tax purposes in respect of certain assets acquired with indebtedness have exceeded principal repayments on the debt.
15.The property of XXXXXXXXXX includes
XXXXXXXXXX
As at XXXXXXXXXX, the UCC of the depreciable property of XXXXXXXXXX, the cost of the land of XXXXXXXXXX and the estimated fair market value of each property of XXXXXXXXXX were as follows:
XXXXXXXXXX
XXXXXXXXXX
16.The outstanding principal amounts of the liabilities of XXXXXXXXXX were as follows:
XXXXXXXXXX
17.None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) is or will be subject to a guarantee agreement, within the meaning referred to in subsection 112(2.2).
18.None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) has been or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).
19.None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) is or will be subject to a dividend rental arrangement.
20. XXXXXXXXXX
The common shares of XXXXXXXXXX have been owned by XXXXXXXXXX since XXXXXXXXXX and the common shares of XXXXXXXXXX have been owned by XXXXXXXXXX since the incorporation of XXXXXXXXXX
20a.Neither XXXXXXXXXX has any balance in its RDTOH or capital dividend account at the end of its taxation year on XXXXXXXXXX, nor will XXXXXXXXXX have any RDTOH prior to the end of its taxation year in which the transactions described herein are completed.
PROPOSED TRANSACTIONS
21.XXXXXXXXXX will transfer to XXXXXXXXXX the legal title to (but not the beneficial ownership of) the real property to be transferred to XXXXXXXXXX as described in paragraph 30 below.
22.XXXXXXXXXX will transfer to XXXXXXXXXX the legal title to (but not the beneficial ownership of) the real property to be transferred to XXXXXXXXXX as described in paragraph 35 below.
The purpose of the transfer of the legal title before the beneficial ownership of the real property as described herein, XXXXXXXXXX if a dividend was to be received by a corporation in the course of the reorganization, subsection 55(2) would not be applicable to the dividend by reason of the application of paragraph 55(3)(b).
23.XXXXXXXXXX will incorporate a new corporation ("XXXXXXXXXX Opco") pursuant to the provisions of the XXXXXXXXXX. XXXXXXXXXX Opco will be a taxable Canadian corporation. The authorized share capital of XXXXXXXXXX Opco will consist of an unlimited number of common shares. All of the issued and outstanding shares of XXXXXXXXXX Opco will be owned by XXXXXXXXXX
24.XXXXXXXXXX will transfer all of the XXXXXXXXXX common shares that it owns to XXXXXXXXXX. As sole consideration for such transfer, XXXXXXXXXX will issue to XXXXXXXXXX common shares.
XXXXXXXXXX will add to the stated capital account maintained for its common shares an amount not to exceed the paid-up capital of the XXXXXXXXXX common shares transferred. The paid-up capital of the XXXXXXXXXX common shares transferred will not exceed the adjusted cost base of such shares to XXXXXXXXXX
25.In connection with the transfer of shares described in paragraph 24 above, the transferor and the transferee will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will be equal to the adjusted cost base to XXXXXXXXXX, immediately before the transfer, which amount will be less than the fair market value of such shares.
26. XXXXXXXXXX
27.XXXXXXXXXX will transfer, at fair market value, to XXXXXXXXXX Opco the accounts receivable, furniture, operating equipment and prepaid expenses relating to XXXXXXXXXX (the "XXXXXXXXXX Current Operating Assets"). In consideration for the transfer, XXXXXXXXXX Opco will assume current liabilities of XXXXXXXXXX in respect of XXXXXXXXXX, other than the current portion of the long-term liabilities of XXXXXXXXXX (the "XXXXXXXXXX Current Operating Liabilities"), and XXXXXXXXXX Opco will issue to XXXXXXXXXX a non-interest-bearing promissory note (the "XXXXXXXXXX Opco Operating Note I") with a principal amount equal to the excess, if any, of the fair market value of the XXXXXXXXXX Current Operating Assets over the fair market value of the XXXXXXXXXX Current Operating Liabilities. In the event that the fair market value of the XXXXXXXXXX Current Operating Liabilities exceeds the fair market value of the XXXXXXXXXX Current Operating Assets, XXXXXXXXXX will issue to XXXXXXXXXX Opco a non-interest-bearing note (the "XXXXXXXXXX Operating Note") with a principal amount equal to such excess. No subsection 85(1) elections will be made in respect of the transfer of the XXXXXXXXXX Current Operating Assets.
XXXXXXXXXX
28. XXXXXXXXXX
29.XXXXXXXXXX will transfer, at fair market value, to XXXXXXXXXX Opco the accounts receivable, furniture, operating equipment and prepaid expenses relating to XXXXXXXXXX (the "XXXXXXXXXX Current Operating Assets"). In consideration for the transfer, XXXXXXXXXX Opco will assume current liabilities of XXXXXXXXXX in respect of XXXXXXXXXX, other than the current portion of the long-term liabilities of XXXXXXXXXX (the "XXXXXXXXXX Current Operating Liabilities"), and XXXXXXXXXX Opco will issue to XXXXXXXXXX a non-interest-bearing promissory note (the "XXXXXXXXXX Opco Operating Note II") with a principal amount equal to the excess, if any, of the fair market value of the XXXXXXXXXX Current Operating Assets over the fair market value of the XXXXXXXXXX Current Operating Liabilities. In the event that the fair market value of the XXXXXXXXXX Current Liabilities exceeds the fair market value of the XXXXXXXXXX Current Operating Assets, XXXXXXXXXX will issue to XXXXXXXXXX Opco a non-interest-bearing promissory note (the "XXXXXXXXXX Operating Note") with a principal amount equal to such excess. No subsection 85(1) elections will be made in respect of the transfer of the XXXXXXXXXX Current Operating Assets.
XXXXXXXXXX
30.XXXXXXXXXX will sell, at fair market value, to XXXXXXXXXX interest in each of its assets (which in the case of real property will be a beneficial interest) and will issue to XXXXXXXXXX a non-interest-bearing demand promissory note (the "XXXXXXXXXX Issue Note"), the principal amount of which will be equal to the amount, if any, by which the principal amount of the liabilities assumed by XXXXXXXXXX in consideration for the assets transferred to XXXXXXXXXX exceeds the aggregate of the agreed amounts in respect of each eligible property transferred from XXXXXXXXXX and the fair market value of other property transferred. Included in the transfer of assets, XXXXXXXXXX will be responsible for, or entitled to, as the case may be, XXXXXXXXXX% of any income tax liability or recovery of XXXXXXXXXX for its taxation year that is deemed to end as a result of the proposed transactions described herein and all previous taxation years (other than any liability arising as a consequence of the proposed transactions). As a result of such transfer, the fair market value of the cash and near-cash property, business property and investment property received by XXXXXXXXXX will be equal to the proportion of the fair market value of all of the cash and near-cash property, business property and investment property, respectively, owned by XXXXXXXXXX immediately before the transfer, that:
(a) the fair market value, immediately before the transfer, of all the shares of the capital stock of XXXXXXXXXX owned by XXXXXXXXXX at that time
is of
(b) the fair market value, immediately before the transfer, of all the issued shares of the capital stock of XXXXXXXXXX at that time.
In consideration for the transfer of the assets of XXXXXXXXXX and the issuance of the XXXXXXXXXX Issue Note, XXXXXXXXXX will assume XXXXXXXXXX% of the liabilities of XXXXXXXXXX and will issue to XXXXXXXXXX Class XXXXXXXXXX preferred shares with a redemption amount equal to the aggregate of the fair market value of the assets transferred by XXXXXXXXXX and the XXXXXXXXXX Issue Note less the fair market value of the liabilities assumed by XXXXXXXXXX
XXXXXXXXXX will add to the stated capital account maintained for its Class XXXXXXXXXX preferred shares an amount equal to the fair market value of the consideration for which the shares were issued.
31.XXXXXXXXXX will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of XXXXXXXXXX that is an eligible property transferred to XXXXXXXXXX. The agreed amount in respect of such property so transferred will, in each case, not be less than the lesser of the cost amount or fair market value of the property at the time of the transfer. In the case of capital property that is a leasehold interest or eligible capital property, the amount elected in respect of any such property will not be less than $XXXXXXXXXX or greater than the fair market value of the particular property at the time of the transfer.
The liabilities assumed will be allocated to specific properties transferred from XXXXXXXXXX and the XXXXXXXXXX Issue Note. The amount of liabilities to be allocated to a property transferred pursuant to subsection 85(1) will not exceed the elected amount in respect of that property. The amount of liabilities allocated to property other than a property transferred pursuant to subsection 85(1) will not exceed the fair market value in respect of that property.
32.XXXXXXXXXX will redeem its Class XXXXXXXXXX preferred shares issued to XXXXXXXXXX by issuing to XXXXXXXXXX a demand non-interest-bearing promissory note (the "XXXXXXXXXX Redemption Note I") having a principal amount equal to the redemption amount of the XXXXXXXXXX Class XXXXXXXXXX preferred shares.
33.XXXXXXXXXX will purchase for cancellation its common shares owned by XXXXXXXXXX by issuing to XXXXXXXXXX a demand non-interest-bearing promissory note (the "XXXXXXXXXX Redemption Note") having a principal amount and fair market value equal to the fair market value of the XXXXXXXXXX common shares.
34.The XXXXXXXXXX Redemption Note I will be set off against the XXXXXXXXXX Redemption Note and the XXXXXXXXXX Issue Note and all the notes will be cancelled.
35.Following the transactions described in paragraphs 30 to 34 above, XXXXXXXXXX will sell, at fair market value, to XXXXXXXXXX% interest in each of its assets (which in the case of real property will be a beneficial interest) and will issue to XXXXXXXXXX a non-interest-bearing demand promissory note (the "XXXXXXXXXX Issue Note"), the principal amount of which will be equal to the amount, if any, by which the principal amount of the liabilities assumed by XXXXXXXXXX in consideration for the assets transferred to XXXXXXXXXX exceeds the aggregate of the agreed amounts in respect of each eligible property transferred from XXXXXXXXXX and the fair market value of other property transferred. Included in the transfer of assets, XXXXXXXXXX will be responsible for, or entitled to, as the case may be, XXXXXXXXXX% of any income tax liability or recovery of XXXXXXXXXX for its taxation year that is deemed to end as a result of the proposed transactions described herein and all previous taxation years (other than any liability arising as a consequence of the proposed transactions). As a result of such transfer, the fair market value of the cash and near-cash property, business property and investment property received by XXXXXXXXXX will be equal to the proportion of the fair market value of all of the cash and near-cash property, business property and investment property, respectively, owned by XXXXXXXXXX immediately before the transfer, that:
(a) the fair market value, immediately before the transfer, of all the shares of the capital stock of XXXXXXXXXX owned by XXXXXXXXXX at that time
is of
(b) the fair market value, immediately before the transfer, of all the issued shares of the capital stock of XXXXXXXXXX at that time.
In consideration for the transfer of the assets of XXXXXXXXXX and the issuance of the XXXXXXXXXX Issue Note, XXXXXXXXXX will assume XXXXXXXXXX% of the liabilities of XXXXXXXXXX and will issue to XXXXXXXXXX Class XXXXXXXXXX preferred shares with a redemption amount equal to the aggregate of the fair market value of the assets transferred by XXXXXXXXXX and the XXXXXXXXXX Issue Note less the fair market value of the liabilities assumed by XXXXXXXXXX
XXXXXXXXXX will add to the stated capital account maintained for its Class XXXXXXXXXX preferred shares an amount equal to the fair market value of the consideration for which the shares were issued.
36.XXXXXXXXXX will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of XXXXXXXXXX that is an eligible property transferred to XXXXXXXXXX. The agreed amount in respect of such property so transferred will, in each case, not be less than the lesser of the cost amount or fair market value of the property at the time of the transfer. In the case of capital property that is a leasehold interest or eligible capital property, the amount elected in respect of any such property will not be less than $XXXXXXXXXX or greater than the fair market value of the particular property at the time of the transfer.
The liabilities assumed will be allocated to specific properties transferred from XXXXXXXXXX and the XXXXXXXXXX Issue Note. The amount of liabilities to be allocated to a property transferred pursuant to subsection 85(1) will not exceed the elected amount in respect of that property. The amount of liabilities allocated to property other than a property transferred pursuant to subsection 85(1) will not exceed the fair market value in respect of that property.
37.XXXXXXXXXX will redeem its Class XXXXXXXXXX preferred shares issued to XXXXXXXXXX by issuing to XXXXXXXXXX a demand non-interest-bearing promissory note (the "XXXXXXXXXX Redemption Note II") having a principal amount equal to the redemption amount of the XXXXXXXXXX Class XXXXXXXXXX preferred shares.
38.XXXXXXXXXX will purchase for cancellation its common shares owned by XXXXXXXXXX by issuing to XXXXXXXXXX a demand non-interest-bearing promissory note (the "XXXXXXXXXX Redemption Note") having a principal amount and fair market value equal to the fair market value of the XXXXXXXXXX common shares.
39.The XXXXXXXXXX Redemption Note II will be set off against the XXXXXXXXXX Redemption Note and XXXXXXXXXX Issue Note and all the notes will be cancelled.
40. XXXXXXXXXX
41.XXXXXXXXXX (referred to in this paragraph as "predecessor corporations") will amalgamate under the provisions of the XXXXXXXXXX to form a new corporation ("XXXXXXXXXX Amalco") in such a manner that:
(a) all of the property (except any amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the merger will become property of XXXXXXXXXX Amalco by virtue of the merger;
(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger will become liabilities of XXXXXXXXXX Amalco by virtue of the merger; and
(c) all the shares of XXXXXXXXXX held by XXXXXXXXXX and all the shares of XXXXXXXXXX held by XXXXXXXXXX will be cancelled on the amalgamation and, as the sole shareholder of XXXXXXXXXX will become the sole shareholder of XXXXXXXXXX Amalco with no shares of XXXXXXXXXX Amalco being issued on the amalgamation.
42.The proposed transactions described in paragraphs 30, 32, 33, 34, 35, 37, 38 and 39 above will take place on the same day. The transactions described in paragraphs 21, 22, 23, 24, 26, 27, 28 and 29 above will be carried out prior to the date that the proposed transactions described in paragraphs 30, 32, 33, 34, 35, 37, 38 and 39 above will take place. The amalgamation described in paragraph 41 above will occur on the day immediately following the day the proposed transactions described in paragraphs 30, 32, 33, 34, 35, 37, 38 and 39 take place. The transactions described in paragraphs 30, 32, 33, 34, 35, 37, 38 and 39 will be carried out in the order described herein.
43.Neither XXXXXXXXXX has incurred or will incur any liabilities except for costs associated with the proposed transactions, and no assets have been or will be acquired or disposed of by either XXXXXXXXXX, in contemplation of and before the distributions described in paragraphs 30 and 35 above. Liabilities that have been or will be incurred or assets that have been or will be acquired or disposed of by either XXXXXXXXXX in the ordinary course of their respective businesses are not considered to be incurred or acquired in contemplation of a distribution of property made in the course of the reorganization described above.
44.In addition you have advised us that:
(a) XXXXXXXXXX has amalgamated with its wholly-owned subsidiary, XXXXXXXXXX (accordingly, references to "XXXXXXXXXX" in the description of the proposed transactions refer to the corporation formed on this amalgamation);
(b) the aggregate non-capital losses of XXXXXXXXXX and its wholly-owned subsidiary, XXXXXXXXXX are estimated to be approximately $XXXXXXXXXX;
(c) XXXXXXXXXX
(d) XXXXXXXXXX
(e) the non-capital losses of XXXXXXXXXX were $XXXXXXXXXX; and
(f) XXXXXXXXXX are contemplating a series of transactions which would involve an acquisition of XXXXXXXXXX shares of XXXXXXXXXX and a reorganization of the holding of XXXXXXXXXX. It is expected that these transactions will be completed prior to the proposed transactions described herein.
PURPOSE OF PROPOSED TRANSACTIONS
45.The purpose of the proposed transactions is to allow each of XXXXXXXXXX to hold their respective interests in XXXXXXXXXX directly so that each may be able to deal independently with the income tax consequences arising from
XXXXXXXXXX
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.The provisions of subsection 85(1) will apply, subject to the application of subsection 69(11) and of subsections 20(1.2) and 26(5) of the ITAR, to the transfer:
(i)by XXXXXXXXXX of the XXXXXXXXXX common shares to XXXXXXXXXX described in paragraph 24 above;
(ii)by XXXXXXXXXX of its properties that are eligible properties to XXXXXXXXXX described in paragraph 30 above; and
(iii)by XXXXXXXXXX of its properties that are eligible properties to XXXXXXXXXX described in paragraph 35 above
such that, the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a) and in respect of depreciable property, the transferee's capital cost of each such property will be determined in accordance with subsection 85(5). For the purposes of the joint elections described in paragraphs 31 and 36 above, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition..." in subparagraph 85(1)(e)(i) will be read to mean the proportion of the undepreciated capital cost to the taxpayer of all the property of that class that the capital cost of the property immediately before the disposition is of the capital cost of all property of that class immediately before the disposition.
For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.
B.Subsection 85(2.1) will apply to reduce the paid-up capital of the XXXXXXXXXX Class XXXXXXXXXX preferred shares or Class XXXXXXXXXX preferred shares, as the case may be, issued:
(i)to XXXXXXXXXX for the transfer of property described in paragraph 30 above; and
(ii)to XXXXXXXXXX for the transfer of property described in paragraph 35 above.
C.On the redemption of the XXXXXXXXXX Class XXXXXXXXXX shares held by XXXXXXXXXX as described in paragraph 32 above, the purchase for cancellation of the XXXXXXXXXX common shares held by XXXXXXXXXX as described in paragraph 33 above, the redemption of the XXXXXXXXXX Class XXXXXXXXXX shares held by XXXXXXXXXX as described in paragraph 37 above and the purchase for cancellation of the XXXXXXXXXX common shares held by XXXXXXXXXX as described in paragraph 38 above, the amount, if any, by which the amount paid to redeem or purchase the particular shares exceeds the paid-up capital of the particular shares immediately before the redemption or the purchase for cancellation:
(i)will be deemed pursuant to paragraph 84(3)(a) to be a dividend paid by the issuer of such shares;
(ii)will be deemed pursuant to paragraph 84(3)(b) to be a dividend received by the holder of such shares;
(iii)will be included in income pursuant to paragraph 12(1)(j);
(iv)to the extent that a dividend described in (ii) above is a taxable dividend, such dividend will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividend is deemed to have been received, and, for greater certainty, such deduction will not be precluded by any of subsections 112(2.2), (2.3) or (2.4), and in the case of the dividends received by XXXXXXXXXX on the purchase for cancellation of the XXXXXXXXXX common shares and XXXXXXXXXX common shares, such deduction will not be precluded by subsection 112(2.1); and
(v)by virtue of the application of paragraph (j) of the definition "proceeds of disposition" in section 54, the amount of a deemed dividend described in (ii) above will be excluded from the proceeds of disposition of the share, and any loss arising from the disposition of the share will be reduced by the amount of such dividends pursuant to subsection 112(3).
D.No taxes under Part IV of the Act will be payable in respect of a dividend described in Ruling C.
E.Part IV.1 of the Act will not apply to the deemed dividends described in Ruling C above because the dividends will be excepted dividends pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1.
F.Part VI.1 of the Act will not apply to the deemed dividends described in Ruling C above, deemed to be paid as a result of the purchase for cancellation of the XXXXXXXXXX common shares and the XXXXXXXXXX common shares because the dividends will be excluded dividends pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).
G.The deemed dividend described in Ruling C above, deemed to be paid as a result of the redemption of the XXXXXXXXXX Class XXXXXXXXXX shares and XXXXXXXXXX Class XXXXXXXXXX shares, will to the extent that it does not exceed the amount by which the specified amount referred to in paragraph 12 above exceeds the paid-up capital of the shares immediately before the redemption, be deemed to be an excluded dividend by virtue of subsection 191(4) and therefore not be subject to tax under Part VI.1 of the Act.
H.Provided that XXXXXXXXXX or events which includes the proposed transactions described herein, by virtue of the provisions of paragraph 55(3)(b), the provisions of subsection 55(2) will not apply to the deemed dividends described in Ruling C above, provided that, as part of the series of transactions that includes the proposed transactions described herein, there is no:
(a)disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(b)acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(c)acquisition of property in the circumstances described in paragraph 55(3.1)(c); or
(d)acquisition of property in the circumstances described in paragraph 55(3.1)(d)
which has not been described herein.
I.Pursuant to subsection 1102(14) of the Regulations, each property which, prior to the commencement of the proposed transactions described herein, was depreciable property of a prescribed class or separate prescribed class of XXXXXXXXXX, as the case may be, and which is acquired by XXXXXXXXXX from XXXXXXXXXX, as described in paragraphs 30 and 35 above, will be depreciable property of the same prescribed class or separate prescribed class, as the case may be, of XXXXXXXXXX.
J.Provided that the condition specified in paragraph 1100(2.2)(f) of the Regulations is satisfied, paragraph 1100(2.2)(h) of the Regulations will apply such that no amount will be included by XXXXXXXXXX under paragraph 1100(2)(a) of the Regulations in respect of depreciable property of a prescribed class that is property acquired by XXXXXXXXXX from XXXXXXXXXX, as the case may be, as described in paragraphs 30 and 35 above.
K.Pursuant to subsection 1101(1ad) of the Regulations, each rental property (within the meaning given in subsection 1100(14) of the Regulations) which is acquired by XXXXXXXXXX, as described in paragraphs 30 and 35 above, and which would otherwise be rental property of a separate prescribed class under subsection 1101(1ac) of the Regulations, will be deemed not to be property of a separate prescribed class of XXXXXXXXXX under subsection 1101(1ac) of the Regulations provided that such property was a rental property included in a prescribed class of XXXXXXXXXX, as the case may be, other than a separate class prescribed under subsection 1101(1ac) of the Regulations.
L.The purchase for cancellation by XXXXXXXXXX of its common shares held by XXXXXXXXXX, as described in paragraph 33 above, will result in the acquisition of control of XXXXXXXXXX. Pursuant to subsection 249(4), the taxation year of XXXXXXXXXX will be deemed to have ended immediately before the time that control of XXXXXXXXXX is so acquired by XXXXXXXXXX. Provided that no election is made in accordance with the provisions of subsection 256(9) not to have the provisions of that subsection apply, XXXXXXXXXX will be deemed to have acquired control of XXXXXXXXXX at the commencement of the day on which XXXXXXXXXX taxation year is deemed by subsection 249(4) to have ended.
M.The purchase for cancellation by XXXXXXXXXX of its common shares held by XXXXXXXXXX, as described in paragraph 38 above, will result in the acquisition of control of XXXXXXXXXX. Pursuant to subsection 249(4), the taxation year of XXXXXXXXXX will be deemed to have ended immediately before the time that control of XXXXXXXXXX is so acquired by XXXXXXXXXX. Provided that no election is made in accordance with the provisions of subsection 256(9) not to have the provisions of that subsection apply, XXXXXXXXXX will be deemed to have acquired control of XXXXXXXXXX at the commencement of the day on which XXXXXXXXXX taxation year is deemed by subsection 249(4) to have ended.
N. XXXXXXXXXX
(i)the fair market value of all the property of that separate prescribed class at the end of that taxation year; and
(ii)the amount in respect of property of that separate prescribed class otherwise allowed under regulations made under paragraph 20(1)(a) or subsection 20(16) in computing XXXXXXXXXX income for that taxation year,
and the amount deducted shall be deemed to have been allowed in respect of property of that separate prescribed class under regulations made under paragraph 20(1)(a).
O.Provided that XXXXXXXXXX continues to use the property acquired from XXXXXXXXXX, as described in paragraphs 30 and 35 above, for the purpose of gaining or producing income (other than income which is exempt from taxation) from such property and XXXXXXXXXX has a legal obligation to pay interest in respect of the liabilities assumed by XXXXXXXXXX as described in paragraphs 30 and 35 above in respect of such liabilities (other than liabilities in respect of which XXXXXXXXXX were not entitled to deduct interest under paragraph 20(1)(c)), any such interest paid in the year or payable in respect of the year (depending on the method regularly followed by XXXXXXXXXX in computing its income for the purposes of the Act) by XXXXXXXXXX in respect of such liabilities, not in excess of a reasonable amount, will be deductible in computing the income of XXXXXXXXXX under paragraph 20(1)(c).
P.Provided that XXXXXXXXXX Amalco continues to use the property acquired from XXXXXXXXXX, as described in paragraph 41 above, for the purpose of gaining or producing income (other than income which is exempt from taxation) from such property and XXXXXXXXXX Amalco has a legal obligation to pay interest in respect of the liabilities assumed by XXXXXXXXXX Amalco as described in paragraph 41 above in respect of such liabilities (other than liabilities in respect of which XXXXXXXXXX were not entitled to deduct interest under paragraph 20(1)(c)), any such interest paid in the year or payable in respect of the year (depending on the method regularly followed by XXXXXXXXXX Amalco in computing its income for the purposes of the Act) by XXXXXXXXXX Amalco in respect of such liabilities, not in excess of a reasonable amount, will be deductible in computing the income of XXXXXXXXXX Amalco under paragraph 20(1)(c).
Q.Provided that XXXXXXXXXX Opco continues to use the property acquired from XXXXXXXXXX, as described in paragraphs 26 and 28 above, for the purpose of gaining or producing income (other than income which is exempt from taxation) from such property and XXXXXXXXXX Opco has a legal obligation to pay interest in respect of the XXXXXXXXXX Current Operating Liabilities and the XXXXXXXXXX Current Operating Liabilities, as described in paragraph 27 and 29 above, any such interest paid in the year or payable in respect of the year (depending on the method regularly followed by XXXXXXXXXX Opco in computing its income for the purposes of the Act) by XXXXXXXXXX Opco in respect of such liabilties, not in excess of a reasonable amount, will be deductible in computing the income of XXXXXXXXXX Opco under paragraph 20(1)(c).
R.Provided that XXXXXXXXXX has included or will have included an amount in respect of the undertakings described in paragraph 27 above, in computing its income from its business pursuant to paragraph 12(1)(a) for the taxation year ending immediately before the time of the acquisition of control of XXXXXXXXXX referred to in Ruling L above or any preceding taxation year, the payment made by XXXXXXXXXX Opco in consideration for the assumption by XXXXXXXXXX Opco of those undertakings, may, to the extent that the payment is reasonable:
(i)pursuant to paragraph 20(24)(a), be deducted in computing the income of XXXXXXXXXX for its fiscal period in which the payment takes place, and
(ii)pursuant to paragraph 20(24)(b), shall be deemed to be an amount described in paragraph 12(1)(a) in respect of XXXXXXXXXX Opco.
S.Provided that XXXXXXXXXX has included or will have included an amount in respect of the undertakings described in paragraph 29 above, in computing its income from its business pursuant to paragraph 12(1)(a) for the taxation year ending immediately before the time of the acquisition of control of XXXXXXXXXX referred to in Ruling M above or any preceding taxation year, the payment made by XXXXXXXXXX in consideration for the assumption by XXXXXXXXXX Opco of those undertakings, may, to the extent that the payment is reasonable:
(i)pursuant to paragraph 20(24)(a), be deducted in computing the income of XXXXXXXXXX for its fiscal period in which the payment takes place, and
(ii)pursuant to paragraph 24(24)(b), shall be deemed to be an amount described in paragraph 12(1)(a) in respect of XXXXXXXXXX Opco.
T.Provided that the shares of XXXXXXXXXX held by XXXXXXXXXX and the shares of XXXXXXXXXX held by XXXXXXXXXX, prior to the proposed transactions described herein, constitute capital property to the particular holder, such shares will represent capital property to XXXXXXXXXX for the purposes of the proposed transactions described herein.
U.The cancellation of the XXXXXXXXXX Redemption Note, XXXXXXXXXX Redemption Note I and XXXXXXXXXX Issue Note, as described in paragraph 34 above, and the cancellation of the XXXXXXXXXX Redemption Note, XXXXXXXXXX Redemption Note II and XXXXXXXXXX Issue Note, as described in paragraph 39 above, will not give rise to a "forgiven amount".
V. XXXXXXXXXX
W. XXXXXXXXXX
X.XXXXXXXXXX will not be required to include any amount in computing their respective income in respect of the XXXXXXXXXX and the XXXXXXXXXX , respectively, or the assignment of the XXXXXXXXXX and XXXXXXXXXX , respectively, as described in paragraphs 26 and 28 above, except such amounts that are paid or payable by XXXXXXXXXX Opco under the terms of the XXXXXXXXXX and XXXXXXXXXX , as the case may be, and such amounts will be required to be included in computing the income of XXXXXXXXXX, as the case may be, in the taxation year that such amounts are paid or payable.
Y.The provisions of subsections 15(1), 56(2), 69(1), 69(4) and 246(1), will not apply to the proposed transactions, in and of themselves.
Z.Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
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 and are binding provided that the proposed transactions are completed before XXXXXXXXXX
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.
1.Nothing in this letter should be construed as confirmation that Revenue Canada has reviewed or accepted
(a)the determination of the fair market value or adjusted cost base of any property referred to herein, or the paid-up capital of any shares, or
(b)any tax consequences arising from the facts or proposed transactions described herein other than those specifically confirmed in the rulings given.
2.In the event that proposed paragraph 55(3.2)(h), set out in section 26 of the Notice of Ways and Means Motion tabled in the House of Commons by the Honourable Paul Martin, Minister of Finance on June 20, 1996, is enacted as proposed, each corporation that is a shareholder and specified shareholder of XXXXXXXXXX, as the case may be, at any time during the course of a series of transactions or events, a part of which includes a distribution made by XXXXXXXXXX, as the case may be, would be deemed to be a transferee corporation in relation to XXXXXXXXXX, as the case may be.
3.It is our view that subsection 69(11) will apply where there is a subsequent disposition of the property or a property substituted therefor within 3 years after XXXXXXXXXX transfers of property to XXXXXXXXXX and that is part of the series of transactions described herein.
4.Our rulings should not be considered as an indirect approval of any kind with respect to the possible operation of the price adjustment clause described in paragraph 12 above. Advance income tax rulings are not given in respect of price adjustment clauses as the possible operation of such a clause is not a proposed transaction. The Department's position on price adjustment clauses is stated in Interpretation Bulletin IT-169.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and Interpretations
Directorate
Policy and Legislation Branch
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