7 July 1996 Income Tax Severed Letter 9615853 - Reorganization of XXXXXXXXXX

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 3-961585

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: XXXXXXXXXX Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, as revised by your letter of XXXXXXXXXX, in which you requested various advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge your letters of XXXXXXXXXX and our telephone conversations in connection herewith.

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

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 adjusted cost base as that expression is defined in section 54 and subsection 248(1);

(c) "capital loss" has the meaning assigned by paragraph 39(1)(b);

(d) "capital property" has the meaning assigned by section 54;

(e) XXXXXXXXXX

(f) "cost amount" has the meaning assigned by subsection 248(1);

(g) "forgiven amount" has the meaning assigned by subsection 80(1) and 80.01(1);

(h) XXXXXXXXXX

(i) "PUC" means paid-up capital as that expression is defined in subsection 89(1);

(j) "private corporation" has the meaning assigned by subsection 89(1);

(k) "series of transactions or events" has the meaning assigned by subsection 248(10);

(l) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and

(m) "UCC" means undepreciated capital cost as that expression is defined in subsections 13(21) and 248(1).

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

FACTS

1. XXXXXXXXXX is a private corporation incorporated under the laws of XXXXXXXXXX in XXXXXXXXXX and by virtue of XXXXXXXXXX no tax is payable under Part I of the Act on its taxable income.

XXXXXXXXXX

2. The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX common shares and its issued and outstanding shares are held as follows:

Shareholder No. of Common Shares PUC/ACB

XXXXXXXXXX

The articles of incorporation of XXXXXXXXXX provide that the holders of the shares of XXXXXXXXXX will not be entitled to receive, and XXXXXXXXXX will not declare or pay, a dividend in excess of XXXXXXXXXX% per annum on the paid-up capital of such shares.

3. XXXXXXXXXX principal assets consist of three residential apartment buildings.

XXXXXXXXXX

The assets and liabilities of XXXXXXXXXX as at XXXXXXXXXX are as follows:

Property Property Property A B C Total

XXXXXXXXXX

PROPOSED TRANSACTIONS

4. Each of XXXXXXXXXX will incorporate a new corporation ("Newco 1", "Newco 2" and "Newco 3", respectively). Each of Newco 1, Newco 2 and Newco 3 will be a XXXXXXXXXX and their articles of incorporation will provide that each shareholder will not be entitled to receive, and each corporation will not declare or pay, a dividend in excess of XXXXXXXXXX% per annum on its paid-up capital. Each of XXXXXXXXXX as the respective shareholder of Newco 1, Newco 2 and Newco 3 will continue to be bound by the terms and conditions of the XXXXXXXXXX mortgage on Property A, Property B and Property C.

The authorized share capital of each of Newco 1, Newco 2 and Newco 3 will consist of an unlimited number of common shares. Each of XXXXXXXXXX will subscribe for common shares in their respective Newcos in the amount of $XXXXXXXXXX each.

5. XXXXXXXXXX will transfer, at fair market value, to each of Newco 1, Newco 2 and Newco 3 Property A, Property B and Property C, respectively, and a proportion of its other assets. The other assets to be transferred would not include $XXXXXXXXXX in cash which would be retained by XXXXXXXXXX to be distributed to its shareholders on its wind-up as described in paragraph 7 below. As consideration for the transfers, each of Newco 1, Newco 2 and Newco 3 will assume a proportion of the liabilities of XXXXXXXXXX and will each issue a demand non- interest-bearing note ("Newco 1 Note", "Newco 2 Note" and "Newco 3 Note"). The estimated amount of the notes will be determined in the following manner:

Newco 1 Note Newco 2 Note Newco 3 Note Total

XXXXXXXXXX

6. Following the transfer of XXXXXXXXXX properties, the Newco 1 Note, Newco 2 Note and Newco 3 will be settled for no payment. Each of Newco 1, Newco 2 and Newco 3 will designate in prescribed form and within the time limit referred to in subsections 80(5), (7), (8), (9) and (10) to reduce immediately after that time the cost amount of each property described in subsections 80(5), (7), (8), (9) and (10), to the maximum extent permitted in respect of the respective settlement. The unapplied portion of the forgiven amount will be included in the income of Newco 1, Newco 2 or Newco 3, as the case may be, in the manner provided in subsection 80(13).

7. Immediately following the forgiveness of the Newco 1 Note, Newco 2 Note and Newco 3 Note, XXXXXXXXXX will take steps to authorize and complete the dissolution of XXXXXXXXXX under the applicable provisions of the laws of XXXXXXXXXX will, in the course of its winding-up, transfer all of its assets, which will consist of only $XXXXXXXXXX in cash, in equal proportions to each of XXXXXXXXXX

PURPOSE OF THE PROPOSED TRANSACTIONS

8. XXXXXXXXXX The purpose of the proposed transactions is to allow each shareholder to receive a building and a share of the other assets and liabilities of 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 69(11) will not apply to the transfer of the properties of XXXXXXXXXX to Newco 1, Newco 2 and Newco 3.

B. Each of Newco 1, Newco 2 and Newco 3 will acquire the properties of XXXXXXXXXX at fair market value which will be the adjusted cost base to the respective holder of such properties.

C. Provided that XXXXXXXXXX is exempt from tax under Part I prior to the time at which the properties of XXXXXXXXXX are transferred to Newco 1, Newco 2 and Newco 3, on the transfer of such properties XXXXXXXXXX will cease to be a corporation to which XXXXXXXXXX applies and will thereafter be a taxable Canadian corporation and the provisions of subsection 149(10) will apply to XXXXXXXXXX at that time.

Pursuant to paragraph 149(10)(a) the taxation year of XXXXXXXXXX will be deemed to have ended immediately before the transfer and a new taxation year of XXXXXXXXXX will be deemed to have commenced at that time and pursuant to paragraph 149(10)(b) XXXXXXXXXX will be deemed to have disposed of all of its properties owned by it immediately before that time for an amount equal to the fair market value of such properties.

D. Section 80 will apply to the forgiveness of the Newco 1 Note, Newco 2 Note and Newco 3 Note as described in paragraph 6 above.

E. Subsection 15(1.2) will not apply to the forgiveness of the Newco 1 Note, Newco 2 Note and Newco 3 Note.

F. XXXXXXXXXX will realize a capital loss in respect of the disposition of the Newco 1 Note, Newco 2 Note and Newco 3 Note on their settlement for no proceeds as described in paragraph 6 above.

G. As a result of winding-up of XXXXXXXXXX, as described in paragraph 7 above, pursuant to paragraph 88(2)(b), each of XXXXXXXXXX will be deemed to have received a winding-up dividend on its shares of XXXXXXXXXX equal to the amount by which the aggregate net fair market value of the property distributed by XXXXXXXXXX to XXXXXXXXXX, as the case may be, exceeds the paid-up capital of such shares.

H. On the winding-up of XXXXXXXXXX, each of XXXXXXXXXX will be deemed to have disposed of its shares of XXXXXXXXXX for proceeds equal to the aggregate net fair market value of the property distributed by XXXXXXXXXX

I. 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.

COMMENTS

Nothing in this ruling should be construed as confirmation, express or implied, that Revenue Canada has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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