30 November 1995 Ruling 9630903 - 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.

Principal Issues:

post butterfly sale of property by shareholders to distributing corp for cash

Position:

acceptable as cash payments are excluded by 55(3.1)(d)(ii)

Reasons:

wording of provision

XXXXXXXXXX 3-963090

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the above taxpayers. We also acknowledge your letter of XXXXXXXXXX.

To the best of your knowledge, and that of the parties to this ruling, none of the issues contained in this advance income tax ruling is being considered by a Tax Services Office and/or a Taxation Centre in connection with an income tax return previously filed and none of the issues contained herein is under objection or appeal.

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act").

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

Facts

XXXXXXXXXX, all of whom are resident in Canada.

Each of Holdco 1, Holdco 2 and Opco is a taxable Canadian corporation and a Canadian-controlled private corporation which, as used here and subsequently, have the meanings assigned by subsections 89(1) and 125(7), respectively. Holdco 1 was incorporated in XXXXXXXXXX. Holdco 2 was incorporated in XXXXXXXXXX. Opco was incorporated in XXXXXXXXXX. None of the outstanding shares of Holdco 1, Holdco 2 and Opco as described below was issued in contemplation of the proposed transactions described below.

All of the XXXXXXXXXX common shares of Opco, being the only class of shares issued, are held as capital property by Holdco 2. The adjusted cost base to Holdco 2 of its Opco common shares is $XXXXXXXXXX and the paid-up capital of those shares is $XXXXXXXXXX.

The terms "capital property" and "adjusted cost base", as used here and subsequently, have the meanings assigned by section 54. The term "paid-up capital", as used here and subsequently, has the meaning assigned by subsection 89(1).

All of the issued shares of Holdco 2, being XXXXXXXXXX class XXXXXXXXXX class XXXXXXXXXX and XXXXXXXXXX class XXXXXXXXXX common shares, are held as capital property by Holdco 1. The aggregate adjusted cost base to Holdco 1 of all of its Holdco 2 common shares is $XXXXXXXXXX and the aggregate paid-up capital of all of those shares is $XXXXXXXXXX.

The issued shares of Holdco 1 are held by their holders as capital property as follows:

			Number of		Adjusted		Paid-up
Holder		Common shares	Cost Base		Capital

XXXXXXXXXX

In respect of Holdco 1 and Holdco 2, all three classes of issued common shares have identical rights, including equal numbers of votes per share. Dividends may be paid in different amounts on each class of shares.

Opco conducts XXXXXXXXXX businesses XXXXXXXXXX The businesses are separate businesses for purposes of subsection 1100(1) of the Income Tax Regulations in respect of capital cost allowance under the Act.

XXXXXXXXXX

Immediately before the transfers of property described in paragraph 19 below, the property of XXXXXXXXXX (a company to be formed as described in paragraph 17 below) will be classified into three types of property for the purposes of paragraph 55(3)(b), as follows:

cash or near cash property, being the current assets of XXXXXXXXXX including cash, accounts receivable, inventory, advances to affiliates, and rights arising from the prepayment of certain expenses ("prepaid expenses");

investment property, being 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 property or a specified investment business; and

business property, being all of the assets of XXXXXXXXXX other than cash or near cash and investment property, any income from which would, for the purposes of the Act, be income from a business other than a specified investment business

The term "specified investment business" has the meaning assigned by subsection 125(7).

In determining the net fair market value of each type of property owned by XXXXXXXXXX (a company to be formed as described in paragraph 17 below) immediately before the transfers of property described in paragraph 19 below, the liabilities of XXXXXXXXXX will be allocated to and be deducted in the calculation of the net fair market value of each type of property of XXXXXXXXXX as follows:

Current liabilities (including the current portion of long-term debt) will be allocated to each cash or near cash property to the extent of the fair market value of such property.

Liabilities, other than current liabilities, will be first allocated to the specific properties to which they relate, if any, and then to other properties of the same type, to the extent of the net fair market value of that particular type of property.

Excess unallocated liabilities (including current liabilities remaining unallocated after step (a) above), if any, will then be allocated to the cash or near cash, investment and business property of XXXXXXXXXX on a pro rata basis, based on the relative net fair market value of each type of property resulting after the allocation of liabilities in accordance with the rules described in steps (a) and (b) above and prior to the allocation of each excess liability.

For the purposes of step (c) above, the net fair market value of accounts receivable, inventory and prepaid expenses initially classified as cash or near cash property for the purposes of step (a) above and that relate to a business and that will be sold or consumed by a corporation in the ordinary course of its business will then be reclassified as business property.

Additional Information

No assets have been or will be acquired or disposed of and no liabilities have been or will be incurred or paid by Holdco 1, Holdco 2, Opco or XXXXXXXXXX (a company to be formed as described in paragraph 17 below) in contemplation of and before the transfers of property described in paragraph 19 below, except as described herein.

None of the parties is contemplating a disposition of any of the shares of Holdco 1, Holdco 2, Opco, XXXXXXXXXX (a company to be formed as described in paragraph 16 below), or XXXXXXXXXX (a company to be formed as described in paragraph 17 below), other than as described herein.

None of the parties is contemplating an acquisition of control of Holdco 1, Holdco 2, Opco, XXXXXXXXXX (a company to be formed as described in paragraph 16 below), or XXXXXXXXXX (a company to be formed as described in paragraph 17 below), other than as described herein.

It is not contemplated that any of the parties will sell or transfer any property to a partnership or person who is not related to the vendor or transferor as part of the series of transactions or events described herein, other than in the normal course of business or as described herein.

Each of Holdco 1, Holdco 2 and Opco files its federal income tax returns at the XXXXXXXXXX Taxation Centre and is audited by the XXXXXXXXXX Tax Services Office. The federal income tax account numbers of Holdco 1, Holdco 2 and Opco are XXXXXXXXXX, respectively.

Proposed Transactions

XXXXXXXXXX will incorporate a new corporation ("XXXXXXXXXX") under the laws of XXXXXXXXXX. XXXXXXXXXX will be a taxable Canadian corporation and a Canadian-controlled private corporation. Its authorized share capital will include voting common shares as well as non-voting, redeemable and retractable preferred shares. No shares will be issued on incorporation.

Holdco 1, Holdco 2 and Opco will amalgamate under the laws of XXXXXXXXXX to form XXXXXXXXXX in such manner that:

(a)all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become property of XXXXXXXXXX by virtue of the amalgamation;

(b)all of the liabilities (except amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of XXXXXXXXXX by virtue of the amalgamation; and

(c)all of the shareholders of the predecessor corporations (except any predecessor corporation) immediately before the amalgamation will receive shares of the capital stock of XXXXXXXXXX by virtue of the amalgamation.

As a result of the amalgamation, all debts owing between the predecessor corporations will be cancelled and XXXXXXXXXX will assume all debts of the predecessor corporations owing to third parties. XXXXXXXXXX will have the same share capital as Holdco 1. As sole consideration received as a result of the amalgamation, each of the shareholders of Holdco 1 will receive the same number and type of common shares of XXXXXXXXXX having a fair market value and paid-up capital immediately after the amalgamation equal to the fair market value and paid-up capital, respectively, of the shares of Holdco 1 which they owned immediately before the amalgamation. XXXXXXXXXX will be a taxable Canadian corporation and a Canadian-controlled private corporation. The purpose of the amalgamation is to facilitate the intended division of assets described below.

XXXXXXXXXX will transfer, at fair market value, all of his XXXXXXXXXX Class XXXXXXXXXX common shares to XXXXXXXXXX in exchange for XXXXXXXXXX common shares. In respect of the transfer, XXXXXXXXXX will jointly elect pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), to transfer the shares of XXXXXXXXXX at an amount equal to their adjusted cost base to XXXXXXXXXX immediately before the transfer. The adjusted cost base of the shares so transferred will not exceed their fair market value at the time of the transfer. XXXXXXXXXX will add $XXXXXXXXXX to the stated capital account in respect of the common shares so issued.

XXXXXXXXXX will transfer, at fair market value, XXXXXXXXXX to XXXXXXXXXX in exchange for a number of XXXXXXXXXX preferred shares having a fair market value and redemption amount equal to the fair market value of XXXXXXXXXX. XXXXXXXXXX will add to the stated capital account in respect of the preferred shares so issued an amount equal to the aggregate fair market value of the property so received. This transfer is being undertaken separately from the property transferred in paragraph 20 below in order to have a separate real estate transaction XXXXXXXXXX

In respect of the transfer of property described above, XXXXXXXXXX will jointly elect pursuant to subsection 85(1), in prescribed form and within the time specified in subsection 85(6), to transfer each asset that is an eligible property, within the meaning of subsection 85(1.1), at the following agreed amounts:

depreciable property of a prescribed class will be transferred at an agreed amount which is equal to the undepreciated capital cost of the class at the time of the transfer; and

capital property (other than depreciable property of a prescribed class) will be transferred at an agreed amount which is equal to its adjusted cost base to XXXXXXXXXX

The agreed amount in respect of each of the properties so transferred will not exceed its fair market value at the time of the transfer. The terms "undepreciated capital cost" and "depreciable property", as used here and subsequently, have the meanings assigned by subsection 13(21). The provisions of subsection 85(2.1) will apply to reduce the paid-up capital of the preferred shares to the aggregate of the agreed amounts as determined herein.

XXXXXXXXXX will transfer, at fair market value, certain of its assets (including all of the XXXXXXXXXX business inventory and depreciable property used in the XXXXXXXXXX business, other than the property transferred as described in paragraph 19 above) to XXXXXXXXXX

The purchase price will be paid as follows:

the assumption by XXXXXXXXXX of certain liabilities of XXXXXXXXXX; and

by the issuance by XXXXXXXXXX of preferred shares which will have an aggregate redemption price equal to the balance of the purchase price. XXXXXXXXXX will add to the stated capital account in respect of its preferred shares so issued an amount equal to the excess of the fair market value of the property so acquired less the amount of the liabilities assumed on the transfer.

The liabilities assumed will be specifically allocated to particular properties. In no case will the liabilities allocated to an asset exceed the agreed amount, as described in paragraph 21 below, in respect of that asset.

In respect of the transfer of property described in paragraph 20 above, XXXXXXXXXX will jointly elect pursuant to subsection 85(1), in prescribed form and within the time specified in subsection 85(6), to transfer each asset that is an eligible property within the meaning of subsection 85(1.1), at the following agreed amounts:

inventory will be transferred at an agreed amount which is equal to its cost amount; and

depreciable property of a prescribed class will be transferred at an agreed amount which is equal to the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition.

The agreed amount in respect of each of the properties so transferred will not exceed its fair market value at the time of the transfer. The provisions of subsection 85(2.1) will apply to reduce the paid-up capital of the preferred shares to the aggregate of the agreed amounts as determined herein. The term "cost amount" has the meaning assigned by subsection 248(1).

In respect of the transfers of property described in paragraphs 19 and 20 above, XXXXXXXXXX will have received property from XXXXXXXXXX such that the net fair market value of each type of property so received by XXXXXXXXXX will be equal to or approximate the proportion (the "XXXXXXXXXX Proportion") of the net fair market value of all properties of XXXXXXXXXX of that type, determined immediately before such transfers of property, that the aggregate fair market value, immediately before such transfers of property, of the XXXXXXXXXX shares owned by XXXXXXXXXX is of the aggregate fair market value, immediately before such transfers of property, of all of the issued and outstanding shares of the capital stock of XXXXXXXXXX. The phrase "approximate the proportion" means within one percent of the XXXXXXXXXX Proportion, expressed as a percentage of the XXXXXXXXXX Proportion.

XXXXXXXXXX will purchase for cancellation its Class XXXXXXXXXX common shares held by XXXXXXXXXX. The purchase price will be paid by the issuance by XXXXXXXXXX to XXXXXXXXXX of a demand non-interest-bearing promissory note having a principal amount equal to the fair market value of the common shares of XXXXXXXXXX so purchased (the "XXXXXXXXXX Note").

XXXXXXXXXX will redeem, at their redemption price, its preferred shares held by XXXXXXXXXX and will issue, as payment therefor, to XXXXXXXXXX a non-interest-bearing demand promissory note having a principal amount equal to such redemption price (the "XXXXXXXXXX Note").

The XXXXXXXXXX Note and the XXXXXXXXXX Note will be offset and both notes will be cancelled.

Each of XXXXXXXXXX will transfer to XXXXXXXXXX, at fair market value, his XXXXXXXXXX co-ownership interest in the real property on which XXXXXXXXXX will continue to conduct its XXXXXXXXXX operation. XXXXXXXXXX will assume the related indebtedness of each of the co-owners. XXXXXXXXXX will receive cash from XXXXXXXXXX equal to the excess of the fair market value of his co-ownership interest so transferred over the indebtedness assumed by XXXXXXXXXX on the transfer. XXXXXXXXXX will receive class XXXXXXXXXX common shares of XXXXXXXXXX having a fair market value equal to the excess of the fair market value of his co-ownership interest so transferred over the indebtedness assumed by XXXXXXXXXX on the transfer. XXXXXXXXXX will receive class XXXXXXXXXX common shares of XXXXXXXXXX having a fair market value equal to the excess of the fair market value of his co-ownership interest so transferred over the indebtedness assumed by XXXXXXXXXX on the transfer. XXXXXXXXXX will add $XXXXXXXXXX to each of the stated capital accounts in respect of its Class XXXXXXXXXX and Class XXXXXXXXXX common shares so issued. The liabilities assumed will be specifically allocated to particular properties. In no case will the liabilities allocated to an asset exceed the agreed amount, as described in paragraph 27 below, in respect of that asset.

In respect of the transfer of property described in paragraph 26 above, each of XXXXXXXXXX will jointly elect with XXXXXXXXXX pursuant to subsection 85(1), in prescribed form and within the time specified in subsection 85(6), to transfer each asset that is an eligible property within the meaning of subsection 85(1.1), at the following agreed amounts:

in the case of depreciable property of a prescribed class, an amount which is equal to the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition; and

in the case of capital property (other than depreciable property of a prescribed class), an amount that is equal to its adjusted cost base to the transferor.

The agreed amount in respect of each of the properties so transferred will not exceed its fair market value at the time of the transfer.

Immediately following the transfers described in paragraph 20 above, the aggregate net fair market value of each type of property retained by XXXXXXXXXX, determined in accordance with the guidelines described in paragraphs 9 and 10 above, will be equal to that proportion of the aggregate net fair market value of that type of property of XXXXXXXXXX immediately before the transfers described in paragraph 19 above that:

the aggregate fair market value of all of the issued and outstanding shares of XXXXXXXXXX other than those held by XXXXXXXXXX, immediately before the transfers of property described in paragraph 19 above

is of

the aggregate fair market value of all of the issued and outstanding shares of XXXXXXXXXX immediately before such transfers.

Purpose of the Proposed Transactions

The proposed transactions are being undertaken because of a breakdown of the business relationship between XXXXXXXXXX The purpose of the proposed transactions is to divide the assets of Opco between XXXXXXXXXX so that each will have a separate corporate entity out of which to conduct the business for which they are responsible.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts and proposed transactions and the purpose of the proposed transactions, we confirm the following:

The provisions of subsection 87(1) will apply in respect of the amalgamation described in paragraph 17 above.

Provided the relevant parties jointly elect under subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), in respect of the transfers of property described in paragraphs 18, 19, 20 and 26 above, a vendor's proceeds of disposition of, and a purchaser's cost of, a particular property transferred will, by virtue of paragraph 85(1)(a) of the Act, be deemed to be equal to the amounts agreed upon in respect of that property, as described in paragraphs 18, 19, 21 and 27 above, respectively. For greater certainty, paragraph 85(1)(e.2) will not be applicable in respect of the transfers.

For the purposes of determining the agreed amounts of the depreciable property of a prescribed class, as described in paragraph 21 and 27 above, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) of the Act shall be interpreted to mean that portion of the undepreciated capital cost of all the property of that class that the fair market value of the assets of that class transferred is of the fair market value of all the assets of that class.

Upon the purchase for cancellation by XXXXXXXXXX of its Class XXXXXXXXXX common shares held by XXXXXXXXXX as described in paragraph 23 above, and upon the redemption by XXXXXXXXXX of its preferred shares held by XXXXXXXXXX, as described in paragraph 24 above, the amount by which the amount paid on the purchase for cancellation or redemption, as the case may be, exceeds the paid-up capital of the particular shares purchased for cancellation or redeemed will be deemed to be a dividend paid by the particular payor and received by the particular recipient, by virtue of paragraph 84(3)(a) or 84(3)(b), as applicable. Each such dividend will be deductible by the particular recipient under subsection 112(1) in computing its taxable income for the taxation year in which it is deemed to have received such dividend. The provisions of subsection 112(3) will apply to any loss which may otherwise arise to the recipient as a result of the purchase for cancellation or redemption.

The provisions of subsection 55(2) will not apply to the dividends described in ruling C above by virtue of the application of paragraph 55(3)(b) provided that, as part of the series of transactions or events that includes the proposed transactions described herein, there is no:

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

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

acquisition of property in the circumstances described in subparagraphs 55(3.1)(c) or (d)

which has not been described herein.

XXXXXXXXXX will be connected with XXXXXXXXXX and XXXXXXXXXX will be connected with XXXXXXXXXX by virtue of paragraph 186(4)(b) of the Act with respect to the dividends described in ruling C above.

The dividends described in ruling C above will not be subject to tax under Part IV except as provided in paragraph 186(1)(b).

The proceeds of disposition to XXXXXXXXXX on the purchase for cancellation by XXXXXXXXXX of its Class XXXXXXXXXX common shares, as described in paragraph 23 above and to XXXXXXXXXX on the redemption by XXXXXXXXXX of its preferred shares as described in paragraph 24 above, will, in each case, be determined by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 to be an amount equal to the paid-up capital of such shares.

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

The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed herein.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act.

The above 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 the proposed transactions are completed by XXXXXXXXXX.

Comments

Nothing in this letter should be construed as our confirmation of the tax consequences of any transaction except those consequences expressly confirmed above.

Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed the determination of the adjusted cost base or paid-up capital of any shares referred to herein.

In the event of a subsequent disposition of any shares of XXXXXXXXXX, nothing in this ruling should be construed as implying that the transactions described herein will not, for the purposes of paragraph 110.6(7)(a), be considered as part of a series of transactions or events which includes such subsequent disposition of shares. The phrase "series of transactions or events" has the meaning assigned by subsection 248(10).

Yours truly,

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