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:
Whether a particular fact pattern would constitue a "reorganization" of the taxpayer's business for purpose of subsection 84(2) of the Act. If so, subsection 84(4.1) of the Act will not apply.
Position:
Yes.
Reasons:
Based on the particualr facts of that case.
XXXXXXXXXX 962616
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. In your letter of XXXXXXXXXX you provided additional information in respect of the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
To the best of your knowledge and that of the taxpayers involved:
(i)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, and
(ii)none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.
Unless otherwise stated all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act").
In this letter, the following terms have the meanings specified:
(a)"adjusted cost base" ("ACB") has the meaning assigned to that term in section 54 of the Act;
(b)"CBCA" means the Canada Business Corporations Act and, where applicable, its predecessor statutes;
(c)"paid-up capital" ("PUC") has the meaning assigned by subsection 89(1) of the Act;
(d)"private corporation" has the meaning assigned to that term in subsection 89(1) of the Act;
(e)"public corporation" has the meaning assigned to that term in subsection 89(1) of the Act; and
(f)"tax benefit" has the meaning assigned to that term in subsection 245(1) of the Act.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
FACTS
1.XXXXXXXXXX was incorporated under the CBCA by
XXXXXXXXXX.
2.XXXXXXXXXX became listed on the XXXXXXXXXX The XXXXXXXXXX common shares have been listed on the XXXXXXXXXX since that time and, consequently, XXXXXXXXXX is a public corporation.
3. XXXXXXXXXX.
4.XXXXXXXXXX authorized share capital consists of an unlimited number of common shares without par value. As at XXXXXXXXXX common shares of XXXXXXXXXX have been issued and are outstanding. No other shares are either issued or outstanding.
5.The issued and outstanding common shares of XXXXXXXXXX have a stated capital of $XXXXXXXXXX and a PUC of $XXXXXXXXXX. The difference between the stated capital and the PUC is attributable to the reductions described in the definition of PUC in subsection 89(1) of the Act with respect to XXXXXXXXXX Specifically, the difference is attributable to the fact that XXXXXXXXXX.
XXXXXXXXXX reduced its stated capital by $XXXXXXXXXX pursuant to a special resolution of shareholders in XXXXXXXXXX No amount was paid to the shareholders of XXXXXXXXXX at that time with respect to this reduction. Effectively, by doing so, XXXXXXXXXX capitalized a portion of its accumulated deficit to this share capital. The stated capital that was reduced was represented by cash that had been received upon the issuance of shares in the past.
6.In XXXXXXXXXX incorporated XXXXXXXXXX subsidiary wholly-owned corporations. These wholly-owned subsidiaries are: XXXXXXXXXX All XXXXXXXXXX corporations were incorporated in XXXXXXXXXX pursuant to the CBCA.
7.XXXXXXXXXX are corporations controlled by a public corporation.
8.As at XXXXXXXXXX assets consist of the following:
Book Value FMV
XXXXXXXXXX
Investments:
XXXXXXXXXX
9.The shares of XXXXXXXXXX were acquired in XXXXXXXXXX when XXXXXXXXXX transferred XXXXXXXXXX to XXXXXXXXXX in consideration for XXXXXXXXXX common shares of XXXXXXXXXX These XXXXXXXXXX common shares of XXXXXXXXXX represent an interest of approximately XXXXXXXXXX filed an election pursuant to subsection 85(1) of the Act whereby the elected transfer price was established at $XXXXXXXXXX.
10.The shares of XXXXXXXXXX were acquired in XXXXXXXXXX when XXXXXXXXXX sold its shares in XXXXXXXXXX in consideration for shares of XXXXXXXXXX, a public corporation, having a fair market value of $XXXXXXXXXX not file a subsection 85(1) election with respect to this disposition. As a consequence, this disposition XXXXXXXXXX in a taxable transaction where the proceeds of disposition will be $XXXXXXXXXX.
11.The shares of XXXXXXXXXX, as described in paragraph 10 above, were acquired by XXXXXXXXXX in consideration for common shares of XXXXXXXXXX elected, pursuant to subsection 85(1) of the Act, that the proceeds of disposition of the XXXXXXXXXX properties was XXXXXXXXXX.
12.On XXXXXXXXXX transferred the following assets to its wholly-owned subsidiary, XXXXXXXXXX
FMV
XXXXXXXXXX
13.As consideration for the assets transferred, XXXXXXXXXX received XXXXXXXXXX common shares of XXXXXXXXXX No election XXXXXXXXXX filed pursuant to subsection 85(1) of the Act with respect to this transfer such that the transfer XXXXXXXXXX fully taxable transaction for the purpose of the Act.
14.The XXXXXXXXXX common shares have a PUC, ACB and fair market value of $XXXXXXXXXX and represent approximately XXXXXXXXXX% of the total assets of XXXXXXXXXX.
15. XXXXXXXXXX.
16.XXXXXXXXXX have concluded a Subscription Agreement under which XXXXXXXXXX will issue sufficient shares to give XXXXXXXXXX approximately a XXXXXXXXXX% interest. The shares issued will be in consideration for the transfer of shares of XXXXXXXXXX.
PROPOSED TRANSACTIONS
17.There are at present XXXXXXXXXX options outstanding at various prices. It is anticipated that these options, which are held by the directors, will be exercised prior to the proposed transactions described in paragraphs 18 to 26 below. As a result of the exercise of these options, the number of issued and authorized shares of XXXXXXXXXX will increase to XXXXXXXXXX.
18. XXXXXXXXXX.
19.A special resolution will be passed at the Shareholders' meeting by which the stated capital account of the common shares of XXXXXXXXXX will be reduced immediately after this meeting in an amount equal to the fair market value of the XXXXXXXXXX common shares of XXXXXXXXXX held by XXXXXXXXXX The payment with respect to the reduction will be made by the distribution of the XXXXXXXXXX shares of XXXXXXXXXX to the XXXXXXXXXX Shareholders on the basis of XXXXXXXXXX Management estimates that the fair market value of the XXXXXXXXXX shares is approximately $XXXXXXXXXX.
20.As there are presently XXXXXXXXXX shareholders of XXXXXXXXXX, there will be an identical number of shareholders of XXXXXXXXXX Further, there will be XXXXXXXXXX shareholders that will hold more than XXXXXXXXXX shares in XXXXXXXXXX Based on the current value of the XXXXXXXXXX shares, each of these shareholders will hold a block of shares that has a minimum approximate value of $XXXXXXXXXX Insiders will hold less than XXXXXXXXXX% of the shares.
21.A special resolution will be passed at the Shareholders' meeting by which the shares of XXXXXXXXXX presently issued and outstanding will be consolidated on the basis of XXXXXXXXXX shares that are presently issued and outstanding. Provided that this special resolution is passed, the number of issued and outstanding shares will be XXXXXXXXXX.
22.The XXXXXXXXXX Shareholders will be asked to approve and authorize the Subscription Agreement described in paragraph 16 above. Under the terms of the Subscription Agreement, XXXXXXXXXX will be authorized to issue XXXXXXXXXX common shares in its share capital to XXXXXXXXXX in exchange for XXXXXXXXXX common shares of XXXXXXXXXX These shares will be issued after the proposed transactions described in paragraphs 17 to 21 above have been completed. The consideration received for the shares is estimated at $XXXXXXXXXX per share or in total $XXXXXXXXXX This is the value that has been attributed to the XXXXXXXXXX that are held by XXXXXXXXXX.
23.Provided that the XXXXXXXXXX Shareholders approve the Subscription Agreement, there will be concurrent subscription of shares of XXXXXXXXXX The cash obtained from this share subscription will be used for working capital purposes. XXXXXXXXXX is a minority shareholder in XXXXXXXXXX, the sole shareholder of XXXXXXXXXX.
24.XXXXXXXXXX was incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX Its head office is situated at XXXXXXXXXX has acquired certain XXXXXXXXXX from XXXXXXXXXX, a corporation that is held by XXXXXXXXXX.
25.After XXXXXXXXXX is transferred to the XXXXXXXXXX Shareholders, it will be a private corporation.
26. XXXXXXXXXX.
PURPOSE OF THE PROPOSED TRANSACTIONS
27.XXXXXXXXXX wish to use a public corporation in order to hold their interest in the XXXXXXXXXX The use of XXXXXXXXXX to hold this interest will not result in any tax benefit. Through the negotiations between XXXXXXXXXX management and XXXXXXXXXX it has been agreed that assets having a value of approximately $XXXXXXXXXX be left in XXXXXXXXXX by the present shareholders so that once the share subscription is completed, XXXXXXXXXX will hold approximately XXXXXXXXXX% of XXXXXXXXXX and the present shareholders of XXXXXXXXXX will hold approximately XXXXXXXXXX%. In order to achieve this result, it is necessary to reorganize the business of XXXXXXXXXX such that the present shareholders of XXXXXXXXXX will, through the creation of XXXXXXXXXX and the reduction of stated capital described in paragraph 19 above, continue to hold those assets that are not to be transferred and allow XXXXXXXXXX to continue to pursue the strategic vision of the present management of XXXXXXXXXX.
RULINGS GIVEN
Provided that the above statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and that the proposed transactions are carried out as set forth herein, the following rulings are given:
A.Subsection 84(4.1) of the Act will not apply to deem any amount paid by XXXXXXXXXX to its shareholders on the reduction of the stated capital of the common shares of XXXXXXXXXX, as described in paragraph 19 above, to be a dividend.
B.Subsection 84(2) of the Act will apply so that any amount paid by XXXXXXXXXX to its shareholders on the reduction of the stated capital of the common shares of XXXXXXXXXX, as described in paragraph 19 above, that is in excess of the PUC of such shares will be deemed to be a taxable dividend.
C.The entire amount received by a shareholder of XXXXXXXXXX in respect of the reduction of stated capital of the common shares of XXXXXXXXXX, as described in paragraph 19 above will, by virtue of subparagraph 53(2)(a)(ii) of the Act, be deducted in calculating the ACB of the common shares of XXXXXXXXXX to such shareholder.
D.Paragraph 39(1)(a) of the Act will apply to reduce a capital gain, to the extent of a taxable dividend described in Ruling B above, that may arise with respect to the common shares of XXXXXXXXXX, whether immediately as a consequence of subsection 40(3) of the Act or subsequently as a consequence of a disposition of such shares.
E.As a result of the proposed transactions, in and by themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the rulings given.
F. XXXXXXXXXX.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992, and are binding on Revenue Canada provided that the proposed transactions are completed by XXXXXXXXXX.
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed:
(a)the determination of the fair market value or ACB of any particular asset or the PUC of any shares referred to herein, particularly the PUC of the common shares of XXXXXXXXXX at the date of the reduction of stated capital described in paragraph 19 above; or
(b)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
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