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:
This ruling was issued as a replacement for 3-962147 dated XXXXXXXXXX 1996 (the "Original Ruling"). The only difference between this and the Original Ruling is the ordering of the transactions. In the Original Ruling, XXXXXXXXXX transferred certain of its assets into subsidiary corporations and then carried out a butterfly transaction. In this ruling, XXXXXXXXXX butterflies assets to Newco and Newco transfers those assets to subsidiary companies. The reordering of the transactions was necessitated by the concerns of the XXXXXXXXXX which is the principal lender to XXXXXXXXXX, regarding security for its loans.
Position:
Reasons:
XXXXXXXXXX
XXXXXXXXXX 1-962613
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sir:
Re: XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested various amendments to the Rulings. In this regard, the Rulings are hereby replaced by the following.
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.
All of the above-captioned companies file their tax returns with the XXXXXXXXXX Taxation Centre and are within the jurisdiction of the XXXXXXXXXX Tax Services Office.
I. DEFINITIONS
"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;
"ACB" means adjusted cost base as defined in section 54;
"Eligible Property" has the meaning set out in subsection 85(1.1);
"Paragraph" means a numbered paragraph in this letter;
"Private Corporation" has the meaning assigned by subsection 89(1);
"Proposed Transactions" means the transactions described in Paragraphs 13 to 20;
"public corporation" has the meaning assigned by subsection 89(1); and
"taxable Canadian corporation" has the meaning assigned by subsection 89(1).
II. FACTS
1.All of the corporations described in this letter are, or in the case of Newco, will be, private corporations and taxable Canadian corporations with the exception of XXXXXXXXXX which is a public corporation.
2.XXXXXXXXXX is a citizen and resident of Canada.
3.XXXXXXXXXX was incorporated on XXXXXXXXXX All of the issued and outstanding shares of XXXXXXXXXX are owned by XXXXXXXXXX corporate account number is XXXXXXXXXX.
4.XXXXXXXXXX functions primarily as a holding company, although it has certain other assets and business activities.
5.XXXXXXXXXX was formed as a result of an amalgamation, undertaken to consolidate tax losses, on XXXXXXXXXX, of XXXXXXXXXX and its wholly owned subsidiary, XXXXXXXXXX corporate account number is x Except for two class XXXXXXXXXX redeemable preferred shares, all of the issued and outstanding shares in XXXXXXXXXX are owned by XXXXXXXXXX One Class XXXXXXXXXX redeemable preferred share is owned by each of XXXXXXXXXX.
6.The assets that XXXXXXXXXX owns are diverse, and represent most of the value of XXXXXXXXXX XXXXXXXXXX. In order to facilitate clearer financial reporting, XXXXXXXXXX wishes to segregate the ownership of XXXXXXXXXX assets other XXXXXXXXXX.
7. XXXXXXXXXX
8.XXXXXXXXXX was incorporated on XXXXXXXXXX in anticipation of the transfer of the shares in XXXXXXXXXX which was to have followed the XXXXXXXXXX amalgamation of XXXXXXXXXX It has no issued shares.
9.XXXXXXXXXX was incorporated on XXXXXXXXXX in anticipation of the transfer of the XXXXXXXXXX which was to have followed the XXXXXXXXXX amalgamation of XXXXXXXXXX It has no issued shares.
10.XXXXXXXXXX was incorporated on XXXXXXXXXX and it subsequently acquired the assets of the XXXXXXXXXX from its parent company. It is a wholly owned subsidiary of XXXXXXXXXX.
11.XXXXXXXXXX was incorporated on XXXXXXXXXX. It is a wholly owned subsidiary of XXXXXXXXXX.
12.Two new corporations, ("Newco") and ("Acquireco"), will be incorporated and XXXXXXXXXX.
13.XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX and its only significant asset is land held for resale or development. XXXXXXXXXX.
14.Approximately XXXXXXXXXX% of the shares of XXXXXXXXXX are owned by XXXXXXXXXX.
III. PROPOSED TRANSACTIONS
15.XXXXXXXXXX will transfer, to Newco, Class XXXXXXXXXX shares in XXXXXXXXXX with a fair market value equal to the fair market value of all of the assets transferred to Newco, as described in Paragraph 16, in exchange for the first common shares to be issued by Newco. An election under subsection 85(1) will be filed, in prescribed form and within the time determined under subsection 85(6), in respect of the transfer. The agreed amount in respect of the election will be equal to the ACB of the XXXXXXXXXX shares transferred to Newco. The fair market value of the transferred XXXXXXXXXX shares will exceed their ACB.
16.XXXXXXXXXX will transfer assets (essentially all of its assets other than its XXXXXXXXXX) to Newco in exchange for cash, the assumption by Newco of certain debts of XXXXXXXXXX and the issuance to XXXXXXXXXX of retractable redeemable preferred shares in Newco. The fair market value of the aggregate consideration received by XXXXXXXXXX will be equal to the fair market value of the transferred assets. Newco will obtain any cash to be paid to XXXXXXXXXX by borrowing from XXXXXXXXXX existing lender, effectively replacing a portion of XXXXXXXXXX debt with a new loan. An election under subsection 85(1) will be filed, in prescribed form and within the time determined under subsection 85(6), in respect of the transfer of assets which are Eligible Property. The amount agreed upon in the election on the transfer will be determined in light of the loss utilization objectives of XXXXXXXXXX but, in any event, will be within the limits set out in subsection 85(1). The redemption value of the preferred shares issued to XXXXXXXXXX by Newco will be subject to a price adjustment clause.
17.XXXXXXXXXX will repurchase its Class XXXXXXXXXX shares held by Newco by issuing to Newco a promissory note in the amount of the estimated fair market value of those shares.
18.Newco will redeem its preferred shares held by XXXXXXXXXX by issuing to XXXXXXXXXX a promissory note in the amount of the redemption value of those shares.
19.The promissory notes will be repaid by offset, one against the other.
20.Newco will transfer the assets of the XXXXXXXXXX in exchange for cash and the issuance of XXXXXXXXXX Class XXXXXXXXXX shares in XXXXXXXXXX will obtain the cash by borrowing from Newco's existing lender, effectively replacing a portion of Newco's debt with a new loan. An election under subsection 85(1) will be filed, in prescribed form and within the time determined under subsection 85(6), in respect of the transfer of assets which are Eligible Property. The agreed amount in respect of the election will be within the limits set out in subsection 85(1).
21.Newco will transfer all of its shares of XXXXXXXXXX to Acquireco in exchange for the first XXXXXXXXXX shares to be issued by Acquireco and certain non-share consideration. An election under subsection 85(1) will be filed, in prescribed form and within the time determined under subsection 85(6), in respect of the transfer of the XXXXXXXXXX shares. The amount agreed upon in the election will be within the limits set out in subsection 85(1).
22.Newco will transfer all of the shares in XXXXXXXXXX in exchange for first Class XXXXXXXXXX shares to be issued by XXXXXXXXXX An election under subsection 85(1) will be filed, in prescribed form and within the time determined under subsection 85(6), in respect of the transfer. The agreed amount in respect of the election will be within the limits set out in subsection 85(1).
23.XXXXXXXXXX will redeem the two issued and outstanding Class XXXXXXXXXX preferred shares for $XXXXXXXXXX each. At the same time, XXXXXXXXXX will issue to each of XXXXXXXXXX one Class XXXXXXXXXX non-voting preferred share for $XXXXXXXXXX. The Class XXXXXXXXXX preferred shares of XXXXXXXXXX will have the same terms as the existing Class XXXXXXXXXX preferred shares of XXXXXXXXXX.
IV. PURPOSE OF THE PROPOSED TRANSACTIONS
The overall purpose of the Proposed Transactions is to
XXXXXXXXXX
XXXXXXXXXX faces the expiry of a portion of its non-capital losses if they are not used in the taxation year ending XXXXXXXXXX Based on the forecasted income of XXXXXXXXXX for the year to date, it is expected that
XXXXXXXXXX
XXXXXXXXXX
(a) XXXXXXXXXX
(b) XXXXXXXXXX
(c) XXXXXXXXXX
The creation of Acquireco is necessitated by XXXXXXXXXX present plans to acquire additional shares in
XXXXXXXXXX
V. 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.Paragraph 85(1)(e.2) will not apply to deem any benefit to have been conferred on XXXXXXXXXX as a result of the transfer of assets, described in Paragraph 16, from XXXXXXXXXX to Newco.
B.Subsection 55(2) will not apply, by virtue of paragraph 55(3)(a), to deem any portion of the deemed dividend received by Newco on the repurchase of its XXXXXXXXXX Class XXXXXXXXXX shares, as described in Paragraph 17, to be proceeds of disposition of shares provided that there is no:
(a) significant increase in the interest in any corporation of any person (other than Newco) to whom Newco was not related; or
(b) disposition of property to a person (other than Newco) to whom Newco was not related;
that occurs subsequent to, and as part of a series of transactions which includes, any of the Proposed Transactions.
C.Subsection 55(2) will not apply, by virtue of paragraph 55(3)(a), to deem any portion of the deemed dividend received by XXXXXXXXXX on the redemption of its Newco preferred shares, as described in Paragraph 18, to be proceeds of disposition of shares provided that there is no:
(a)significant increase in the interest in any corporation of any person (other than XXXXXXXXXX) to whom XXXXXXXXXX was not related; or
(b)disposition of property to a person (other than XXXXXXXXXX) to whom XXXXXXXXXX was not related;
that occurs subsequent to, and as part of a series of transactions which includes, any of the Proposed Transactions.
D.Subsection 245(2) will not apply, as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences described in the rulings given in A, B and C above.
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.
Opinion
Provided that paragraph 55(3)(a) is enacted in substantially the same form as contained in the Notice of Ways and Means Motion tabled in the House of Commons on June 20, 1996, subsection 55(2) will not apply to deem:
(a)any portion of the deemed dividend received by Newco on the repurchase of its XXXXXXXXXX Class XXXXXXXXXX shares, as described in Paragraph 17; or
(b)any portion of the deemed dividend received by XXXXXXXXXX on the redemption of its Newco preferred shares, as described in Paragraph 18,
to be proceeds of disposition of shares, provided that there is no disposition or significant increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) that occurs subsequent to, and as part of a series of transactions as a part of which those deemed dividends were received.
1.Nothing in this letter should be construed as implying that Revenue Canada has reviewed, or agreed to, the tax consequences of the Proposed Transactions other than as specifically provided in Rulings A, B and C.
2.In particular, nothing in this letter should be construed as implying acceptance of the effectiveness of the operation of the price adjustment clause referred to in Paragraph 16. The general position of the Department with respect to 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
XXXXXXXXXX
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