30 November 1996 Ruling 9627303 - BUTTERFLY

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							962730
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. In your letter dated XXXXXXXXXX you provided additional information in respect of the proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

XXXXXXXXXX file their returns with the XXXXXXXXXX Taxation Centre and are served by the XXXXXXXXXX Tax Services Office. XXXXXXXXXX file their returns with the XXXXXXXXXX Taxation Centre.

To the best of your knowledge and that of the taxpayers involved:

a)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

b)none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.

Definitions and Abbreviations

In this letter, the following terms have the meanings specified:

a)"Act" means the Income Tax Act, R.S.C. 1995, c. 1 (5th supplement), as amended as at the date hereof, and any reference to any Part, section, subsection, paragraph or subparagraph is a reference to the specified Part or provision of the Act;

b)"adjusted cost base" ("ACB") has the meaning assigned by section 54;

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

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

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

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

g)"eligible property" has the meaning assigned in subsection 85(1.1);

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

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

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

k)"related persons" has the meaning assigned by subsection 251(2);

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

m)"specified investment business" ("SIB") has the meaning assigned by subsection 125(7);

n)"taxable Canadian corporation" ("TCC") has the meaning assigned by subsection 89(1).

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

Facts

1.XXXXXXXXXX is a CCPC and a TCC incorporated on XXXXXXXXXX under the Canada Corporations Act as XXXXXXXXXX. By Supplementary Letters Patent dated XXXXXXXXXX its name was changed to XXXXXXXXXX and it was continued under the Canada Business Corporations Act ("CBCA") on XXXXXXXXXX under its present name. Since its incorporation, XXXXXXXXXX has operated as an investment holding company and its assets have consisted primarily of cash and marketable securities. The taxation year of XXXXXXXXXX ends on XXXXXXXXXX of each year and its Head Office is at XXXXXXXXXX.

2. The authorized share capital of XXXXXXXXXX consists of:

XXXXXXXXXX voting Class XXXXXXXXXX preferred shares with a non-cumulative dividend entitlement not exceeding XXXXXXXXXX% per annum of the redemption price, redeemable at $XXXXXXXXXX per share;

Unlimited number of voting Class XXXXXXXXXX preferred shares with a fixed cumulative preferential dividend of XXXXXXXXXX% per annum of the issue price, retractable at the issue price and convertible, subject to certain terms and conditions, at the option of the holder, into common shares on a one-for-one basis;

Unlimited number of voting Class XXXXXXXXXX preferred shares with a non-cumulative dividend not exceeding XXXXXXXXXX% per annum of the redemption price, redeemable at the issue price;

Unlimited number of voting Class XXXXXXXXXX preferred shares with a non-cumulative dividend not exceeding XXXXXXXXXX% per annum of the redemption price, redeemable at the issue price, ($XXXXXXXXXX per share); and

Unlimited number of common shares without nominal or par value.

3.The issued share capital of XXXXXXXXXX consists of:

(a)XXXXXXXXXX Class XXXXXXXXXX preferred shares;

(b)XXXXXXXXXX Class XXXXXXXXXX preferred shares;

(c)XXXXXXXXXX Class XXXXXXXXXX preferred shares;

(d)XXXXXXXXXX Class XXXXXXXXXX preferred shares; and

(e)XXXXXXXXXX common shares.

4.The issued shares of XXXXXXXXXX are owned as follows:

			Preferred                         Common

XXXXXXXXXX

The PUC and ACB of each of the issued and outstanding shares of XXXXXXXXXX are:

			Preferred                        Common

XXXXXXXXXX

The total PUC of the outstanding Class XXXXXXXXXX preferred shares is $XXXXXXXXXX.

On XXXXXXXXXX redeemed XXXXXXXXXX Class XXXXXXXXXX preferred shares at $XXXXXXXXXX per share by the issue of a non-interest bearing promissory note of $XXXXXXXXXX. XXXXXXXXXX made an election under subsection 83(2) in respect of the resulting dividend. The directors and tax advisors of XXXXXXXXXX review the CDA on a regular basis and generally distribute the CDA on an annual basis. At the time of the redemption, the proposed transactions described herein had not been contemplated.

None of XXXXXXXXXX have acquired any shares of XXXXXXXXXX in contemplation of the proposed transactions described herein.

5.XXXXXXXXXX. They are all adults and residents of Canada for purposes of the Act.

6.The shares of XXXXXXXXXX are capital property to each of the shareholders described above.

7.The principal assets of XXXXXXXXXX comprise cash, short-term deposits and marketable securities (including bonds and publicly traded preferred and common stock). These marketable securities represent portfolio investments of XXXXXXXXXX as it does not have significant influence, within the meaning of section 3050 of the CICA Handbook, over any corporations in which it holds marketable securities. The principal liability of XXXXXXXXXX is a non-interest bearing demand note owing to XXXXXXXXXX.

8.As at XXXXXXXXXX had a balance of $XXXXXXXXXX in its RDTOH account and a balance of $XXXXXXXXXX in its CDA.

Proposed Transactions

9.Each of XXXXXXXXXX will incorporate a corporation under the CBCA ("XXXXXXXXXX", respectively; each referred to as a "Holding Corporation" and collectively as the "Holding Corporations"). Each of the Holding Corporations will be a TCC. No shares of the Holding Corporations will be issued at that time.

10.XXXXXXXXXX will have authorized share capital as follows:

a) an unlimited number of Class XXXXXXXXXX% non-voting, non-cumulative preferred shares without nominal or par value, redeemable at $XXXXXXXXXX per share;

b) an unlimited number of Class XXXXXXXXXX% non-voting, non-cumulative preferred shares without nominal or par value redeemable at $XXXXXXXXXX per share;

c) an unlimited number of Class XXXXXXXXXX% non-voting, non-cumulative preferred shares without nominal or par value redeemable at $XXXXXXXXXX per share; and

d)an unlimited number of common shares.

11.XXXXXXXXXX will each have the following authorized share capital:

a) an unlimited number of Class XXXXXXXXXX% non-voting, non-cumulative preferred shares without nominal or par value redeemable at $XXXXXXXXXX per share;

b) an unlimited number of Class XXXXXXXXXX% non-voting, non-cumulative preferred shares without nominal or par value redeemable at $XXXXXXXXXX per share; and

c) an unlimited number of common shares.

The common shares of the Holding Corporations will be common shares within the meaning assigned in subsection 248(1).

12.XXXXXXXXXX will transfer all of her shares of XXXXXXXXXX to XXXXXXXXXX as follows:

XXXXXXXXXX Class XXXXXXXXXX preferred shares of XXXXXXXXXX in exchange for XXXXXXXXXX Class XXXXXXXXXX preferred shares of XXXXXXXXXX having an aggregate PUC and fair market value "(FMV") equal to those of the Class XXXXXXXXXX shares of XXXXXXXXXX so transferred;

XXXXXXXXXX Class XXXXXXXXXX preferred shares of XXXXXXXXXX in exchange for XXXXXXXXXX Class XXXXXXXXXX preferred shares of XXXXXXXXXX having an aggregate PUC and FMV equal to those of the Class XXXXXXXXXX shares of XXXXXXXXXX so transferred; and

XXXXXXXXXX Class XXXXXXXXXX preferred shares of XXXXXXXXXX in exchange for XXXXXXXXXX common shares of XXXXXXXXXX having an aggregate PUC equal to that of the Class XXXXXXXXXX shares of XXXXXXXXXX so transferred.

XXXXXXXXXX will be the sole shareholder of XXXXXXXXXX after the transfer.

13.XXXXXXXXXX will transfer all of her shares of XXXXXXXXXX to XXXXXXXXXX as follows:

XXXXXXXXXX Class XXXXXXXXXX preferred shares of XXXXXXXXXX in exchange for XXXXXXXXXX Class XXXXXXXXXX preferred shares of XXXXXXXXXX having an aggregate PUC and FMV equal to those of the Class XXXXXXXXXX shares of XXXXXXXXXX so exchanged; and

XXXXXXXXXX common shares of XXXXXXXXXX in exchange for XXXXXXXXXX common shares of XXXXXXXXXX having an aggregate PUC equal to that of the XXXXXXXXXX common shares so exchanged.

XXXXXXXXXX will be the sole shareholder of XXXXXXXXXX after the transfer.

14.XXXXXXXXXX will transfer all of his shares of XXXXXXXXXX to XXXXXXXXXX as follows:

XXXXXXXXXX Class XXXXXXXXXX preferred shares of XXXXXXXXXX in exchange for XXXXXXXXXX Class XXXXXXXXXX preferred shares of XXXXXXXXXX having an aggregate PUC and FMV equal to those of the Class XXXXXXXXXX shares of XXXXXXXXXX so transferred; and

XXXXXXXXXX common shares of XXXXXXXXXX in exchange for XXXXXXXXXX common shares of XXXXXXXXXX having an aggregate PUC equal to that of the common shares of XXXXXXXXXX so transferred.

XXXXXXXXXX will be the sole shareholder of XXXXXXXXXX after the transfer.

15.Each of XXXXXXXXXX and their respective Holding Corporations will jointly file elections in prescribed form under subsection 85(1) within the time prescribed in subsection 85(6) in respect of the shares of XXXXXXXXXX transferred to the companies. The elected amount will be the cost amount of the properties transferred. The shares of XXXXXXXXXX will qualify as eligible property as provided in subsection 85(1.1).

Prior to the transfers of property described in paragraph 17 below, XXXXXXXXXX will dispose of any asset that has a FMV less than its cost amount ("loss property") and discharge all of its liabilities, including loans from shareholders, such that it will be left with assets comprising cash and marketable securities which will represent shareholders' equity. The disposition of any loss property will be to an arm's length person.

16.Immediately before the transfers of property described in paragraph 17 below, the property of XXXXXXXXXX will be classified into three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near cash property, comprising all of the current assets of XXXXXXXXXX, including any cash, short-term deposits, interest receivable and any marketable securities which are not held as portfolio investments;

(b) investment property, comprising all of the assets of XXXXXXXXXX, other than cash or near cash property, any income from which would, for purposes of the Act, be income from property or from a SIB (for these purposes marketable securities held as portfolio investments will be considered investment property); and

(c) business property, comprising all of the assets of XXXXXXXXXX, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from a business (other than a SIB).

XXXXXXXXXX will not have any business property at the time of the transfers described in paragraph 17 below. For greater certainty, any tax accounts, such as the balance of any RDTOH or CDA of XXXXXXXXXX, will not be considered property for purposes of the proposed transactions described herein.

17.Immediately following the determination of the FMV of its properties as described in paragraph 16 above, XXXXXXXXXX will transfer a pro rata share of all of its cash or near cash property and investment property to each of XXXXXXXXXX in such a manner that the FMV of each such type of property so transferred to each of XXXXXXXXXX, respectively, will be equal to the proportion of all of the property of that type owned by XXXXXXXXXX that the FMV of the shares of XXXXXXXXXX owned by each of XXXXXXXXXX, respectively, is of all of the issued shares of XXXXXXXXXX.

As consideration for the transferred properties each Holding Corporation will issue to XXXXXXXXXX Class XXXXXXXXXX preferred shares having a PUC equal to the cost amount of the properties transferred and a redemption price and FMV equal to the FMV of the properties transferred. Each of the Holding Corporations and XXXXXXXXXX will jointly elect in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply in respect of each "eligible property" that has been transferred. The agreed amount in such elections in respect of each eligible property so transferred will be its cost amount. For greater certainty, the FMV of each property transferred will not be less than its cost amount.

18.Each of XXXXXXXXXX will redeem all of their Class XXXXXXXXXX preferred shares owned by XXXXXXXXXX for FMV consideration consisting of demand notes payable (XXXXXXXXXX notes) to XXXXXXXXXX.

The principal amount and FMV of the note issued by each Holding Corporation will be equal to the aggregate redemption price of the Class XXXXXXXXXX preferred shares redeemed by that corporation. XXXXXXXXXX will accept the note issued by each Holding Corporation as full payment for the Class XXXXXXXXXX preferred shares redeemed by that corporation.

19.At the end of the day on which the redemption of their respective preferred shares described in paragraph 18 above occurs, each of the Holding Corporations will cause its first fiscal period and taxation year to end.

20.Subsequent to the year end of the Holding Corporations referred to above, the Holding Corporations, as the shareholders of XXXXXXXXXX, will, by special resolution, resolve to wind up and dissolve XXXXXXXXXX pursuant to the relevant provisions of the CBCA. In connection with the winding-up, XXXXXXXXXX will distribute to each of the Holding Corporations the demand note issued by that Holding Corporation upon the redemption of the Class XXXXXXXXXX preferred shares of that Holding Corporation referred to in paragraph 18 above.

Prior to the distribution of such notes, XXXXXXXXXX will elect, pursuant to subsection 83(2), in prescribed manner and prescribed form that the full amount of any resulting dividend referred to in subparagraph 88(2)(b)(i) be deemed to be a capital dividend. Each of the Holding Corporations will receive its proportionate share of the CDA.

As a result of the assignment and distribution of the above notes, the obligations under the notes will be cancelled.

Following receipt of the dividend refund to which XXXXXXXXXX will become entitled as a result of the proposed transactions described herein, XXXXXXXXXX will distribute such amount prorata among the common shareholders based on their entitlement. The refund will not arise until after the end of the fiscal year in which the dividend was paid (or deemed paid). All property of XXXXXXXXXX will now have been distributed and all liabilities of XXXXXXXXXX will have been discharged.

21.Upon completion of the above proposed transactions and subsequent to a Revenue Canada assessment for the taxation year in which the series of transactions is completed, Articles of Dissolution will then be executed and such Articles of Dissolution will be filed pursuant to the CBCA. All of the outstanding shares of XXXXXXXXXX will be cancelled. XXXXXXXXXX will surrender its charter and be dissolved.

Additional Information

22.Other than as described herein, no liabilities will be incurred, and no assets will be acquired or disposed of, by XXXXXXXXXX in contemplation of and before the proposed transactions, except in the ordinary course of the business of the corporation.

23.None of XXXXXXXXXX is, or will be at the time of the proposed transactions, an SFI.

24.None of the shares of XXXXXXXXXX has been or will be, at any time during the implementation of the proposed transactions described herein:

(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";

(b) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or

(c) the subject of a dividend rental arrangement as that term is defined in subsection 248(1).

Purpose of the Proposed Transactions

As each of the present shareholders of XXXXXXXXXX has their own cash requirements and investment objectives, it is intended that the assets of XXXXXXXXXX be divided amongst the shareholders in proportion to their ownership of shares of XXXXXXXXXX.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A.The provisions of subsection 85(1) will apply to:

(a)the transfer of the shares of XXXXXXXXXX by each of XXXXXXXXXX to their respective Holding Corporation as described in paragraphs 12, 13 and 14; and

(b) the transfer of each eligible property of XXXXXXXXXX to the Holding Corporations as described in paragraph 17;

such that the agreed amount in respect of each transfer shall be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B.The application of subsection 84.1(1) will not result in a reduction of the PUC of the preferred shares issued by each of the Holding Corporations described in paragraphs 12, 13 and 14 above.

C.The application of subsection 85(2.1) will not result in a reduction of the PUC of the Class XXXXXXXXXX preferred shares issued by each of the Holding Corporations described in paragraph 17 above.

D.As a result of the redemption by the Holding Corporations of their Class XXXXXXXXXX preferred shares held by XXXXXXXXXX and as a result of the distributions by XXXXXXXXXX in the course of its winding-up, as described in paragraphs 18 and 20:

By virtue of paragraph 84(3)(a) and paragraph 84(3)(b), each Holding Corporation will be deemed to have paid and XXXXXXXXXX will be deemed to have received a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the Class XXXXXXXXXX preferred shares of the particular Holding Corporation exceeds the PUC thereof.

Pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (ii) to (iv) herein, each Holding Corporation will be deemed to have received a dividend (the "winding-up dividend") on its Class XXXXXXXXXX preferred shares, Class XXXXXXXXXX preferred shares, Class XXXXXXXXXX preferred shares and common shares, as the case may be, equal to the proportion of the amount, if any, by which the aggregate FMV of the property of XXXXXXXXXX distributed by XXXXXXXXXX to the Holding Corporations on its winding-up as consideration for the cancellation of its shares of a particular class, exceeds the PUC thereof, that the number of shares of such class held by each Holding Corporation is of the number of shares of that class that are cancelled.

Pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (b)(i) as does not exceed XXXXXXXXXX CDA determined immediately before the payment of the winding-up dividend shall be deemed, for the purposes of the subsection 83(2) election referred to in paragraph 20, to be the full amount of a separate dividend.

Pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to the lesser of:

XXXXXXXXXX pre-1972 capital surplus on hand as determined immediately before the payment of the winding-up dividend, and

the amount by which the winding-up dividend exceeds the portion thereof in respect of which XXXXXXXXXX will elect under subsection 83(2)

shall be deemed not to be a dividend.

Pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in (ii) herein that is deemed to be a separate dividend and the portion referred to in (iii) herein that is deemed not to be a dividend, shall be deemed to be a separate dividend that is a taxable dividend.

By virtue of subsections 186(2) and 186(4), each Holding Corporation will be connected with XXXXXXXXXX. Provided that the particular Holding Corporation is not entitled to a dividend refund (within the meaning of subsection 129(1)) in respect of its taxation year in which it is deemed to pay the dividend referred to in (a) above, XXXXXXXXXX will not be subject to Part IV tax under subsection 186(1) in respect of such dividend;

(ii)By virtue of subsections 186(2) and 186(4), XXXXXXXXXX will be connected with each of the Holding Corporations. Consequently, each of the Holding Corporations shall, pursuant to paragraph 186(1)(b), be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which XXXXXXXXXX will become entitled as a result of the payment of the dividend referred to in (b)(iv) above, that the amount of such dividend received by the particular Holding Corporation is of the aggregate of all taxable dividends paid by XXXXXXXXXX in its taxation year in which such dividend is paid.

E.The taxable dividends deemed to have been received by XXXXXXXXXX and by the Holding Corporations as a result of the redemption of Class XXXXXXXXXX preferred shares of the Holding Corporations and the winding-up of XXXXXXXXXX described in paragraphs D(a) and D(b)(iv) above will be deductible by each of them in computing its respective taxable income pursuant to subsection 112(1). For greater certainty, the provisions of subsections 112(2.2) and (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividends.

F.By virtue of the definition of "substantial interest" in paragraph 191(2)(a), XXXXXXXXXX will have a substantial interest in each Holding Corporation immediately before the redemption of their Class XXXXXXXXXX preferred shares as described in paragraph 18 above and each Holding Corporation will have a substantial interest in XXXXXXXXXX immediately before its winding-up as described in paragraph 20 above. Consequently, no tax will be payable under section 191.1 in respect of the taxable dividends arising on the redemption of the Class XXXXXXXXXX preferred shares of each Holding Corporation or on the winding-up of XXXXXXXXXX as the dividends will be "excluded dividends" as defined in subsection 191(1). The dividends deemed to be received by XXXXXXXXXX and each Holding Corporation in respect of the redemption of the Class XXXXXXXXXX preferred shares of each Holding Corporation and the winding-up of XXXXXXXXXX, respectively, will be "excepted dividends" by virtue of paragraph (c) of the definition of excepted dividend in section 187.1 with the result that no tax will be payable by either XXXXXXXXXX or any Holding Corporation by virtue of section 187.2 in respect of these deemed dividends received by each corporation.

G.Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

(a)a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);

(b)an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);

(c)an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or

(d)an acquisition of property in the circumstances described in paragraph 55(3.1)(d),

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in the rulings given in D(a) and D(b)(iv) above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

H.The extinguishment of the debt obligations in respect of the Holding Corporations and XXXXXXXXXX as a result of the cancellation of the demand notes issued by the Holding Corporations, as described in paragraph 20, will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

I.The provisions of subsections 15(1), 56(2) and 246(1) will not be applied as a result of the proposed transactions, in and by themselves.

J.As a result of the proposed transactions, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the general 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, Customs, Excise and Taxation provided that the proposed transactions are completed by XXXXXXXXXX.

These rulings are based on the Act in its present form 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.

Comments

Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:

(a) the determination of the FMV or ACB of any property referred to herein, or the PUC of any shares referred to herein; 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