30 November 1995 Ruling 9626823 - REORG SHAREHOLDER TO PARTNER

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							3-962682
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: XXXXXXXXXX

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 tax services 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)"adjusted cost base" has the meaning assigned by section 54;

(c)"CBCA" means the Canada Business Corporation Act;

(d)"capital gain" has the meaning assigned by paragraph 39(1)(a);

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

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

(g)"depreciable property" has the meaning assigned by subsection 13(21);

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

(i)"forgiven amount" has the meaning assigned by subsections 80(1) and 80.1(1);

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

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

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

(m)XXXXXXXXXX;

(n)"specified person" has the meaning assigned by subsection 69(12);

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

(p)"undepreciated capital cost" has the meaning assigned by subsection 13(21).

FACTS

1.XXXXXXXXXX was incorporated under the XXXXXXXXXX and is a private corporation.

The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX Class XXXXXXXXXX voting common shares of which XXXXXXXXXX are issued and outstanding. One Class XXXXXXXXXX share is held by each of

XXXXXXXXXX

XXXXXXXXXX was formed and organized to hold and manage assets and invest the profits therefrom, XXXXXXXXXX.

2. XXXXXXXXXX.

3.XXXXXXXXXX was incorporated under the XXXXXXXXXX. XXXXXXXXXX is a taxable Canadian corporation and a private corporation.

The authorized share capital of XXXXXXXXXX consists of an unlimited number of voting Class XXXXXXXXXX common shares and an unlimited number of non-voting non-participating Class XXXXXXXXXX shares.

The issued and outstanding of XXXXXXXXXX are held as follows:

Name of Shareholder Number of Shares and Class

XXXXXXXXXX

XXXXXXXXXX

4.XXXXXXXXXX was incorporated under the XXXXXXXXXX, XXXXXXXXXX is a taxable Canadian corporation and a private corporation.

The issued and outstanding shares of XXXXXXXXXX are all held by employees of XXXXXXXXXX. As at XXXXXXXXXX there were XXXXXXXXXX shareholders of XXXXXXXXXX and the largest single shareholder held XXXXXXXXXX% of the issued and outstanding shares of XXXXXXXXXX.

XXXXXXXXXX holds a XXXXXXXXXX% equity interest in XXXXXXXXXX.

5.XXXXXXXXXX was incorporated under the CBCA in XXXXXXXXXX. XXXXXXXXXX is a taxable Canadian corporation and a private corporation.

XXXXXXXXXX

6.XXXXXXXXXX is a limited partnership in which a XXXXXXXXXX% equity interest is held by XXXXXXXXXX, a XXXXXXXXXX% equity interest is held by XXXXXXXXXX and the remaining XXXXXXXXXX% equity is held by XXXXXXXXXX.

7.XXXXXXXXXX was incorporated under the CBCA in XXXXXXXXXX. XXXXXXXXXX is a taxable Canadian corporation and a private corporation.

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

Name of Shareholder Number of Shares and Class

XXXXXXXXXX

8.XXXXXXXXXX was incorporated under the XXXXXXXXXX and is a private corporation.

The authorized share capital of XXXXXXXXXX consists of an unlimited number of Class XXXXXXXXXX common voting shares, an unlimited number of Class XXXXXXXXXX participating non-voting shares and an unlimited number of Class XXXXXXXXXX redeemable preferred non-voting shares. One Class XXXXXXXXXX common voting share is held by each of

XXXXXXXXXX

XXXXXXXXXX

PROPOSED TRANSACTIONS

9.XXXXXXXXXX will incorporate a new corporation under the XXXXXXXXXX. XXXXXXXXXX will be a taxable Canadian corporation and a private corporation.

The authorized share capital of XXXXXXXXXX will consist of an unlimited number of common shares. XXXXXXXXXX will issue XXXXXXXXXX common shares at an issue price of $XXXXXXXXXX per share to the following:

Name of Shareholder Number of Shares and Class

XXXXXXXXXX

XXXXXXXXXX will act as general partner of a limited partnership to be created as described in paragraph 10 below ("XXXXXXXXXX").

10.XXXXXXXXXX will be created pursuant to the laws of the Province of XXXXXXXXXX. XXXXXXXXXX business will be to own and operate the business carried on by XXXXXXXXXX prior to the transfer of the business to XXXXXXXXXX. XXXXXXXXXX will contribute $XXXXXXXXXX to XXXXXXXXXX for XXXXXXXXXX units of partnership interest and XXXXXXXXXX will contribute $XXXXXXXXXX for 1 unit of partnership interest.

11.Pursuant to an agreement between XXXXXXXXXX will transfer at fair market value all of its assets, including its shares of XXXXXXXXXX. The consideration for the transfer will consist only of XXXXXXXXXX units of partnership interest and the assumption of all or substantially all of the liabilities of XXXXXXXXXX immediately before the transfer.

12.XXXXXXXXXX will jointly elect, in prescribed form, within the time referred to in subsection 96(4) to have the provisions of subsection 97(2), subject to the provisions of subsection 85(5.1), apply to the transfer of any of XXXXXXXXXX assets (other than cash, term deposits, inventory, accounts receivable and rights arising from prepaid expenses) which are capital property or eligible capital property of XXXXXXXXXX. The agreed amount for the purposes of paragraph 85(1)(a) in respect of such property transferred will be:

(a)in respect of capital property (other than depreciable property), the lesser of the cost amount of the property to XXXXXXXXXX and the fair market value of the property at the time of the transfer;

(b)in respect of eligible capital property, the least of the amounts described in subparagraphs 85(1)(d)(i) to (iii); and

(c)in respect to depreciable property, the least of the amounts described in subparagraphs 85(1)(e)(i) to (iii).

With respect to eligible capital property and depreciable property, XXXXXXXXXX will designate the order in which such property will be considered to have been disposed of for the purposes of paragraphs 85(1)(d) and (e) in accordance with the provisions of subparagraph 85(1)(e.1).

13.XXXXXXXXXX will jointly elect to have the provisions of section 22 apply to the transfer of the accounts receivable relating to the business of XXXXXXXXXX which will be transferred to XXXXXXXXXX.

14.All other assets of XXXXXXXXXX transferred to XXXXXXXXXX including inventory will be transferred at its respective fair market value.

15.XXXXXXXXXX will transfer legal ownership, but not beneficial ownership, of the XXXXXXXXXX Class XXXXXXXXXX common shares of XXXXXXXXXX that it holds to XXXXXXXXXX. XXXXXXXXXX will hold the XXXXXXXXXX Class XXXXXXXXXX common shares of XXXXXXXXXX as a bare trustee for XXXXXXXXXX pursuant to the terms of a joint venture agreement.

16.XXXXXXXXXX will sell, at fair market value, XXXXXXXXXX units of partnership interest (the "Partnership Units") in XXXXXXXXXX. The agreement for sale will specify that XXXXXXXXXX is acquiring a specific undivided partnership interest in XXXXXXXXXX. In consideration for the disposition of the Partnership Units, XXXXXXXXXX will issue two non-interest-bearing promissory notes with an aggregate principal amount equal to the fair market value of the XXXXXXXXXX units at the time of the transfer. One promissory note (the "Tax Note") will be issued for a principal amount equal to the portion of the consideration for the sale of the Partnership Units that is estimated to be income tax payable by XXXXXXXXXX on the disposition less an amount estimated to be RDTOH that will result on the disposition. The second promissory note (the "Non-Tax Note") will be issued for a principal amount equal to the amount of consideration less the amount of the Tax Note.

The Tax Note will be retired in XXXXXXXXXX instalments commencing one month subsequent to the day before the date on which the Tax Note is issued. The Non-Tax Note will be payable on demand.

17.XXXXXXXXXX will repurchase, at fair market value, its XXXXXXXXXX Class XXXXXXXXXX common shares held by XXXXXXXXXX. In consideration XXXXXXXXXX will issue a non-interest-bearing promissory note with a principal amount equal to the fair market value of such shares at the time of the disposition (the "XXXXXXXXXX Note").

18.The Non-Tax Note will be set off against the XXXXXXXXXX Note and the notes will be cancelled.

PURPOSE OF THE PROPOSED TRANSACTIONS

19.The purpose of the proposed transactions is to allow XXXXXXXXXX, which had previously held their indirect interest in the business of XXXXXXXXXX as shareholders, to earn their share of the income from the business of XXXXXXXXXX directly as limited partners in 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.By virtue of the application of paragraph (e) of the definition "disposition" in section 54, the transfer of legal ownership of the shares of XXXXXXXXXX without any change in the beneficial ownership thereof, as described in paragraph 15 above, will not be a disposition for purposes of the Act.

B.XXXXXXXXXX gain from the disposition of the XXXXXXXXXX units of partnership interest to XXXXXXXXXX described in paragraph 16 above will be a capital gain.

C.On the purchase for cancellation of the XXXXXXXXXX common shares as described in paragraph 17 above, the amount, if any, by which the amount paid to purchase the XXXXXXXXXX common shares exceeds the paid-up capital of these shares immediately before the purchase for cancellation:

(i)will be deemed pursuant to paragraph 84(3)(a) to be a dividend paid by the XXXXXXXXXX; and

(ii)will be deemed pursuant to paragraph 84(3)(b) to be a dividend received by the holder of such shares.

D.Provided that XXXXXXXXXX is a private corporation at the end of the taxation year in which the dividend referred to in Ruling C above is paid and that XXXXXXXXXX files its return of income for that year within the time limit referred to in subsection 129(1), the lesser of one-third of the amount of such dividend and the amount of XXXXXXXXXX RDTOH at the end of that year will be XXXXXXXXXX dividend refund for that year.

For greater certainty, the provisions of subsection 129(1.2) will not apply to deem such taxable dividend not to be a taxable dividend.

E.The provisions of subsection 69(11) will not apply to the transfers described in paragraph 11 above unless it may reasonably be considered that one of the main purposes of the series of transactions that includes the transfers was to obtain the benefit of any item described in paragraphs 69(11)(a) or (b) which is available to a specified person in respect of a subsequent disposition of the property or property substituted for the property.

F.Provided that, in each case, the aggregate fair market value of the transferred property is not less than the aggregate fair market value of consideration given in exchange, subsection 15(1) will not apply to the transfers of property described in paragraphs 11, 13, 14 and 16 above.

G.The provisions of subsection 56(2) will not apply to the transfers of property described in paragraphs 11, 13, 14 and 16 above.

H.The cancellation of the XXXXXXXXXX Note and the Non-Tax Note described in paragraph 17 above, will not give rise to a forgiven amount.

I.The provisions of subsection 246(1) will not apply to the proposed transactions, in and of themselves.

J.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.

OPINION

Provided that proposed subsection 69(11) is enacted in substantially the same form as set out in Bill C-69, which was given first reading in the House of Commons on December 2, 1996, it will not apply to the transfers described in paragraph 11 above unless, it may reasonably be considered that one of the main purposes of the series of transactions that includes the transfers was to obtain the benefit of any item described in subparagraphs 69(11)(a)(i) or (ii) which is available to a person (other than a person that would be affiliated with the vendors of the property, as defined in proposed section 251.1).

As stated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the opinion expressed above is not a ruling and is consequently not binding on the Department.

COMMENTS

Nothing in this ruling should be construed as confirmation, express or implied, that Revenue Canada has:

(a)reviewed or agreed to any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above;

(b)reviewed or agreed to 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

(c)agreed that XXXXXXXXXX or XXXXXXXXXX acts as agent for XXXXXXXXXX; and

in particular, we express no opinion on whether XXXXXXXXXX are tax-exempt entities for purposes of the Act.

Yours truly,

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