30 November 1995 Ruling 9616223 - DIVISIVE 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.

XXXXXXXXXX							3-961622
XXXXXXXXXX

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 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)XXXXXXXXXX;

(c)"ACB" means "adjusted cost base" as that expression is defined in section 54;

(d)"annuitant" has the meaning assigned by subsection 146(1);

(e)"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;

(f)"Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);

(g)"capital dividend account" has the meaning assigned by subsection 89(1);

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

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

(j)"distribution" has the meaning assigned by subsection 55(1);

(k)"eligible property" has the meaning assigned by subsection 85(1.1);

(l)"paid-up capital" has the meaning assigned by subsection 89(1);

(m)"RDTOH" means "refundable dividend tax on hand" which has the meaning assigned by subsection 129(3);

(n)"RRSP" means "registered retirement savings plan" which has the meaning assigned by subsection 146(1);

(o)"restricted financial institution" has the meaning assigned by subsection 248(1);

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

(q)"specified financial institution" has the meaning assigned by subsection 248(1);

(r)"specified shareholder" has the meaning assigned by subsection 248(1);

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

(t)"taxable Canadian property" has the meaning assigned by paragraph 115(1)(b).

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

FACTS

1.XXXXXXXXXX is a Canadian-controlled private corporation incorporated under the laws of the province of XXXXXXXXXX is a holding company XXXXXXXXXX.

2.The authorized share capital of XXXXXXXXXX consists of:

XXXXXXXXXXClass XXXXXXXXXX voting participating common shares without par value, that are entitled to dividends as declared and in the event of a wind-up or liquidation will be entitled to the assets of the corporation following the repayment of paid-up capital on a pro-rata basis;

XXXXXXXXXXClass XXXXXXXXXX voting non-participating common shares without par value, that are not entitled to receive dividends, unless there are no Class XXXXXXXXXX shares issued and outstanding, and in the event of a wind-up or liquidation will only be entitled to receive its paid-up capital and no other asset.

3.The issued and outstanding shares of XXXXXXXXXX are held as follows:

Number of Paid-up Estimated fair
Shareholder Class of Share shares Capital market value

XXXXXXXXXX

XXXXXXXXXX

Substantially all the members of the XXXXXXXXXX are residents of Canada and they hold their shares of XXXXXXXXXX as capital property.

4.The shareholders of XXXXXXXXXX had entered into a shareholder agreement on XXXXXXXXXX which had been amended on a number of occasions, the latest being on XXXXXXXXXX and provides, among other things, for the following:

(a) XXXXXXXXXX

(b) XXXXXXXXXX

(c) XXXXXXXXXX

(d) XXXXXXXXXX

5.XXXXXXXXXX is a Canadian-controlled private corporation incorporated under the laws of the province of XXXXXXXXXX.

XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX The issued and outstanding shares of XXXXXXXXXX are held by the XXXXXXXXXX Group. XXXXXXXXXX.

6.XXXXXXXXXX is a Canadian-controlled private corporation incorporated under the laws of the province of XXXXXXXXXX holds the shares of XXXXXXXXXX a wholly-owned subsidiary, XXXXXXXXXX.

The issued and outstanding shares of XXXXXXXXXX are held by the XXXXXXXXXX Group. XXXXXXXXXX.

7.XXXXXXXXXX is a Canadian-controlled private corporation incorporated under the laws of the province of XXXXXXXXXX carries on an active business that is XXXXXXXXXX.

8.At XXXXXXXXXX had no RDTOH and no balance in its capital dividend account.

9.The assets and liabilities of XXXXXXXXXX, immediately before the transfer described in paragraph 17 below, will be as follows:

XXXXXXXXXX.

10.The types of property for the purposes of a "distribution" of XXXXXXXXXX, immediately before the transfer of property described in paragraph 17 below, will be classified into two types of property, as follows:

(a)cash or near-cash property, consisting of cash and accounts receivable; and

(b)investment property consisting of XXXXXXXXXX.

11.In determining the net fair market value of its cash or near-cash property and investment property immediately before the transfer of property described in paragraph 17 below, the current liabilities of XXXXXXXXXX will be deducted in the calculation of the net fair market value of the cash or near-cash property of XXXXXXXXXX.

12.There are not, and will not be at any time prior to the completion of the proposed transactions, any agreements or undertakings which constitute or include a "guarantee agreement" in respect of the issued shares of any corporation described herein.

13.None of XXXXXXXXXX or Newco has, or will have, entered into a "dividend rental arrangement" in respect of the issued shares of any corporation described herein.

14.None of the issued shares of any corporation described herein were 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).

PROPOSED TRANSACTIONS

15.A new corporation will be incorporated under the XXXXXXXXXX ("Newco"). Newco will be a Canadian-controlled private corporation. The authorized share capital of Newco will consist of at least one class of voting participating common shares without par value.

16.The members of the XXXXXXXXXX Group will transfer to Newco each issued and outstanding Class XXXXXXXXXX common share of XXXXXXXXXX held by them in exchange for the issuance by Newco of a common share (the "Exchange").

Newco will agree to jointly file an election under subsection 85(1) in prescribed form and within the time limits set out in subsection 85(6) with any holder of shares of XXXXXXXXXX who wishes to file such an election. The agreed amount for any such election will be at the discretion of the holder and will not be less than the lesser of the holder's ACB and the fair market value of the transferred shares of XXXXXXXXXX and not greater than the fair market value of such shares.

The paid-up capital of the common shares of Newco will be equal to the paid-up capital of the Class XXXXXXXXXX common shares of XXXXXXXXXX transferred to Newco.

XXXXXXXXXX

17.Following the transactions described in paragraph 16 above, XXXXXXXXXX will purchase, at fair market value, all the Class XXXXXXXXXX common shares of XXXXXXXXXX held by Newco. As consideration for the purchase of its Class XXXXXXXXXX common shares, XXXXXXXXXX will transfer to Newco all of its assets held at that time, except for an amount of $XXXXXXXXXX in cash, and Newco will assume all of XXXXXXXXXX liabilities.

18.As a result of the distribution of the properties of XXXXXXXXXX described in paragraph 17 above, the net fair market value of the cash or near-cash property and investment property received by Newco, will be equal to or approximate the proportion (the "Newco Proportion") of the net fair market value of all of the cash or near-cash and investment property 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 Newco 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.

Although the proportion of the net fair market value of XXXXXXXXXX cash or near-cash property and investment property transferred to Newco may not be exactly equal to the Newco Proportion, it will be approximately equal to the Newco Proportion. Any difference between the net fair market value of the cash or near-cash property and investment property transferred to Newco from XXXXXXXXXX and the Newco Proportion of the net fair market value of XXXXXXXXXX cash or near-cash property and investment property will not exceed XXXXXXXXXX% of the Newco Proportion of the net fair market value of the cash or near-cash property or investment property of XXXXXXXXXX, as the case may be.

ADDITIONAL INFORMATION

19. XXXXXXXXXX

XXXXXXXXXX

20.On XXXXXXXXXX incorporated a new wholly-owned subsidiary, ("Subco") to which it transferred certain assets.

XXXXXXXXXX

21.On XXXXXXXXXX repurchased XXXXXXXXXX Class XXXXXXXXXX common shares held by various shareholders, individuals and XXXXXXXXXX for an aggregate redemption price of approximately $XXXXXXXXXX The amount to repurchase the XXXXXXXXXX Class XXXXXXXXXX common shares had been provided for by XXXXXXXXXX and held in a separate bank account set up for this purpose. The repurchase was made pursuant to the terms of the shareholders' agreement, described in paragraph 5 above, and would have been done whether the proposed transactions described herein are carried out. No shareholder of XXXXXXXXXX who had his shares repurchased was a specified shareholder.

PURPOSE OF PROPOSED TRANSACTIONS

22.The purpose of the proposed transactions is to complete the restructuring 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.Subject to the provisions of paragraphs 85.1(2)(a), (b) and (c), and provided that the XXXXXXXXXX Class XXXXXXXXXX common shares represent capital property to the holder thereof, the provisions of subsection 85.1(1) will apply to the Exchange described in paragraph 16 above, such that:

(i)provided that the holder does not, in his return of income for the taxation year in which the Exchange will occur, include in computing his income for such year any portion of the gain or loss, otherwise determined, from the disposition of his XXXXXXXXXX Class XXXXXXXXXX common shares, the holder will be,

(a)deemed by subparagraph 85.1(1)(a)(i) to have disposed of his XXXXXXXXXX Class XXXXXXXXXX common shares for proceeds of disposition equal to his ACB of such share immediately before the Exchange, and

(b)deemed by subparagraph 85.1(1)(a)(ii) to have acquired his common shares of Newco issued on the Exchange at a cost to him equal to his ACB of the XXXXXXXXXX Class XXXXXXXXXX common shares immediately before the Exchange;

(ii)the cost to Newco of the XXXXXXXXXX Class XXXXXXXXXX common shares acquired by it will be deemed to be equal to the paid-up capital of such shares immediately before the Exchange.

B.The provisions of subsection 85(1) will apply to any transfers of XXXXXXXXXX Class XXXXXXXXXX common shares described in paragraph 16 above in respect of which the transferor and Newco file a valid election with the result that the agreed amount in respect of the XXXXXXXXXX Class XXXXXXXXXX common shares transferred will be deemed pursuant to paragraph 85(1)(a) to be the proceeds of disposition of that property to the transferor thereof and the cost of that property to the transferee thereof.

C.On the purchase for cancellation of the XXXXXXXXXX Class XXXXXXXXXX common shares, as described in paragraph 17 above, the amount, if any, by which the amount paid to purchase the particular shares exceeds the paid-up capital of the particular shares immediately before 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)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(2.1), (2.2), (2.3) or (2.4);

(iv)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);

(v)Part IV.1 of the Act will not apply to the deemed dividends described in (ii) above because the dividends will be excepted dividends pursuant to paragraph (c) of the definition of "excepted dividend" in section 187.1;

(vi)Part VI.1 of the Act will not apply to the deemed dividends described in (i) above because the dividends will be excluded dividends pursuant to paragraph (b) of the definition of "excluded dividend" in subsection 191(1); and

(vii)no taxes under Part IV of the Act will be payable in respect of a dividend described in (ii) above.

D.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.

E.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.

F.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.

COMMENT

Nothing in this letter should be construed as implying that the Department has agreed to 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, proposed transactions or additional information described above other than those specifically confirmed in the rulings given.

Yours truly,

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