2096 Ruling 9633803 - ARTICLE 13 - CANADA - NETHERLANDS TREATY

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.

Principal Issues: Application of Article 13 of Canada - Netherlands Treaty

Position: Gain on disposition of shares exempt

Reasons: See Issue Sheet at end of Ruling

XXXXXXXXXX                   					3-963380

Attention: XXXXXXXXXX

XXXXXXXXXX , 1996

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX and certain other taxpayers referred to therein. We also acknowledge our meeting and your subsequent letter of XXXXXXXXXX.

We understand that to the best of your knowledge and that of the responsible officers of XXXXXXXXXX and the shareholders of XXXXXXXXXX none of the issues involved in the requested rulings is being considered by a Tax Services Office or Taxation Centre in connection with an income tax return already filed and none of the issues involved is subject to a Notice of Objection under section 165 of the Act or is otherwise under appeal.

I. DEFINITIONS

In this letter unless otherwise expressly stated:

(a) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended as at 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) "capital gain" has the meaning assigned by section 39;

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

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

(f) "fair market value" means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale;

(g) "fiscal period" has the meaning assigned by subsection 249.1(1);

(h) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(i) "net capital loss" has the meaning assigned by subsection 111(8);

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

(k) "Paragraph" means a numbered paragraph in this letter;

(l) "public corporation" has the meaning assigned by subsection 89(1);

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

(n) "specified shareholder" has the meaning assigned by subsection 248(1);

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

(p) "Treaty" means the Convention as defined in paragraph 2 of the Canada-Netherlands Income Tax Convention Act, 1986; and

(q) "wholly owned corporation" has the meaning assigned by subsection 85(1.3).

II. FACTS

Our understanding of the facts is as follows:

1. XXXXXXXXXX is a taxable Canadian corporation. The fiscal period of XXXXXXXXXX ends on XXXXXXXXXX in each year. XXXXXXXXXX was continued under the Canada Business Corporations Act (the "CBCA") on XXXXXXXXXX owns approximately XXXXXXXXXX% of the issued and outstanding Class “A” Common Shares (the "XXXXXXXXXX Common Shares") of XXXXXXXXXX and all of the XXXXXXXXXX Shares (the "XXXXXXXXXX Preferred Shares") of XXXXXXXXXX (collectively, the "XXXXXXXXXX Shares"). XXXXXXXXXX has no material assets other than the XXXXXXXXXX Shares and a significant cash balance (the "XXXXXXXXXX Cash"). The issued and outstanding shares of XXXXXXXXXX consist of XXXXXXXXXX common shares (the "XXXXXXXXXX Common Shares"). The stated capital, as that term is used in the CBCA, and paid-up capital of the XXXXXXXXXX Common Shares is $XXXXXXXXXX.

2. The XXXXXXXXXX Common Shares are owned by XXXXXXXXXX, a corporation which was incorporated under the laws of the Netherlands. For the purposes of the Treaty, XXXXXXXXXX is a resident of the Netherlands. XXXXXXXXXX acquired the XXXXXXXXXX Common Shares prior to XXXXXXXXXX. Ten shares of a predecessor corporation to XXXXXXXXXX have been owned by XXXXXXXXXX since XXXXXXXXXX was inactive until XXXXXXXXXX. In XXXXXXXXXX acquired an additional XXXXXXXXXX shares of XXXXXXXXXX. On XXXXXXXXXX and a wholly XXXXXXXXXX owned sister corporation of XXXXXXXXXX amalgamated. The amalgamated corporation continued to be named XXXXXXXXXX.

3. XXXXXXXXXX is currently amending the Articles of Continuance of XXXXXXXXXX by filing Articles of Amendment pursuant to the CBCA so as to create a new class of preferred shares (the "XXXXXXXXXX Special Shares"). The XXXXXXXXXX Special Shares will be: (a) non-voting; (b) entitled to annual dividends equal to XXXXXXXXXX per cent of the amount paid-up thereon; and (c) redeemable by XXXXXXXXXX at any time and retractable by the holder at any time for an amount per share equal to the fair market value of the XXXXXXXXXX Common Shares (determined at the time immediately before the exchange described in Paragraph 9) divided by the number of issued XXXXXXXXXX Special Shares.

4. XXXXXXXXXX acquired XXXXXXXXXX% of the shares of XXXXXXXXXX in XXXXXXXXXX. At that time, the balance of the shares of XXXXXXXXXX were indirectly owned by XXXXXXXXXX increased its ownership of XXXXXXXXXX to XXXXXXXXXX% in XXXXXXXXXX and to XXXXXXXXXX% in XXXXXXXXXX. This shareholding decreased to XXXXXXXXXX% in XXXXXXXXXX and XXXXXXXXXX% in XXXXXXXXXX following the exercise of purchase warrants and incentive stock options. XXXXXXXXXX acquired additional shares of XXXXXXXXXX in XXXXXXXXXX sufficient to maintain its proportionate ownership of XXXXXXXXXX.

5. XXXXXXXXXX is a public corporation and a taxable Canadian corporation. The fiscal period of XXXXXXXXXX ends on XXXXXXXXXX in each year. XXXXXXXXXX is subject to the CBCA and resulted from the merger of XXXXXXXXXX is engaged in the business of the XXXXXXXXXX also owns all of the issued and outstanding shares of XXXXXXXXXX. The issued and outstanding shares of XXXXXXXXXX consist of the XXXXXXXXXX Common Shares and the XXXXXXXXXX Preferred Shares. More than XXXXXXXXXX% of the value of the shares of XXXXXXXXXX is derived from assets actively used in the business of XXXXXXXXXX or XXXXXXXXXX. In making this determination, working interests in XXXXXXXXXX have been considered to be properties actively used in XXXXXXXXXX or XXXXXXXXXX business.

6. XXXXXXXXXX is a taxable Canadian corporation. The fiscal period of XXXXXXXXXX ends on XXXXXXXXXX of each year. XXXXXXXXXX was incorporated under the CBCA on XXXXXXXXXX carries on a business of XXXXXXXXXX The issued and outstanding shares of XXXXXXXXXX consist of common shares.

7. On XXXXXXXXXX, the preferred shares of XXXXXXXXXX. were sold by XXXXXXXXXX to an arm’s-length purchaser, XXXXXXXXXX. A capital loss of $XXXXXXXXXX was realized by XXXXXXXXXX on the sale of Series “B” preferred shares. The Series "B" preferred were acquired by XXXXXXXXXX from treasury for $XXXXXXXXXX in XXXXXXXXXX currently has undeducted net capital losses of $XXXXXXXXXX (the "XXXXXXXXXX Capital Losses").

III. PROPOSED TRANSACTIONS

Following receipt of the rulings provided herein, the transactions described below will be completed in the order in which they appear:

8. XXXXXXXXXX will cause a new corporation to be incorporated under the CBCA ("Newco"). Newco will be a taxable Canadian corporation and will have authorized share capital consisting of a class of common shares (the "Newco Common Shares") and a class of preferred shares (the "Newco Preferred Shares"). The Newco Preferred Shares will be: (a) non-voting; (b) entitled to annual dividends equal to XXXXXXXXXX per cent of the amount paid-up thereon; and (c) redeemable by Newco at any time and retractable by the holder at any time for an amount equal to the fair market value of the consideration for which they are issued as determined by the directors of Newco. XXXXXXXXXX will subscribe for XXXXXXXXXX Newco Common Share for aggregate consideration of $XXXXXXXXXX.

9. XXXXXXXXXX will reorganize its shareholding in XXXXXXXXXX by exchanging each XXXXXXXXXX Common Share for XXXXXXXXXX new XXXXXXXXXX Common Share (a "New XXXXXXXXXX Common Share") (which will be a share of the same class as the XXXXXXXXXX Common Shares) and XXXXXXXXXX Special Share, and the exchanged XXXXXXXXXX Common Shares will be cancelled. The amount added to the stated capital of the XXXXXXXXXX Special Shares will be equal to the stated capital of the exchanged XXXXXXXXXX Common Shares less $XXXXXXXXXX. The amount added to the stated capital of the New XXXXXXXXXX Common Shares will be $XXXXXXXXXX.

10. XXXXXXXXXX will transfer its XXXXXXXXXX Special Shares to Newco in exchange for XXXXXXXXXX Newco Common Shares to be issued by Newco. The amount added to the stated capital of the Newco Common Shares will equal the stated capital of the transferred XXXXXXXXXX Special Shares.

11. XXXXXXXXXX will transfer the XXXXXXXXXX Shares and the XXXXXXXXXX Cash to Newco. As the sole consideration for such transfer, Newco will issue to XXXXXXXXXX Newco Preferred Shares which will have an aggregate redemption amount equal to the aggregate of the fair market value of the XXXXXXXXXX Shares and the amount of the XXXXXXXXXX Cash. In relation to the transfer of the XXXXXXXXXX Shares, XXXXXXXXXX and Newco will jointly make an election pursuant to subsection 85(1), which election will be filed in prescribed form and within the time period provided for in section 85. The agreed amount for the purposes of such election will be an amount equal to the adjusted cost base to XXXXXXXXXX of the XXXXXXXXXX Shares and will not exceed the fair market value of the XXXXXXXXXX Shares. The paid-up capital of the Newco Preferred Shares will not exceed the aggregate of the agreed amount for the purposes of election and the amount of the XXXXXXXXXX Cash.

12. Newco will redeem the Newco Preferred Shares which are owned by XXXXXXXXXX in exchange for a non-interest-bearing demand promissory note (the "Newco Note") with a principal amount equal to the aggregate redemption amount of such shares.

13. XXXXXXXXXX will redeem the XXXXXXXXXX Special Shares which are owned by Newco in exchange for a non-interest-bearing demand promissory note (the "XXXXXXXXXX Note") with a principal amount equal to the aggregate redemption amount of such shares.

14. The obligations of Newco and XXXXXXXXXX to each other under the Newco Note and the XXXXXXXXXX Note will be fully paid and satisfied by way of a set-off of the amounts owing under such notes, in accordance with a written agreement (the "Set-Off Agreement") to that effect, which agreement will also provide for the cancellation of such notes after the set-off has been completed.

15. XXXXXXXXXX will transfer the New XXXXXXXXXX Common Shares to XXXXXXXXXX in exchange for a cash payment by XXXXXXXXXX to XXXXXXXXXX (the “XXXXXXXXXX Payment”) equal to the fair market value of the New XXXXXXXXXX Common Shares (estimated to be $XXXXXXXXXX).

16. XXXXXXXXXX and XXXXXXXXXX will amalgamate on XXXXXXXXXX under the provisions of the CBCA to form a new corporation ("Amalco") and in connection with such amalgamation:

(a) all of the property of XXXXXXXXXX and XXXXXXXXXX (except for the shares of XXXXXXXXXX owned by XXXXXXXXXX) immediately before the amalgamation will become property of Amalco by virtue of the amalgamation; and

(b) all of the liabilities of XXXXXXXXXX and XXXXXXXXXX before the amalgamation will become liabilities of Amalco by virtue of the amalgamation.

17. On XXXXXXXXXX, Amalco will dispose of the assets used in its business of XXXXXXXXXX to a related corporation for proceeds of disposition equal to the fair market value of such property.

IV. ADDITIONAL INFORMATION

18. At no time during the series of transactions which comprise the proposed transactions will any of the XXXXXXXXXX Special Shares or the Newco Preferred Shares be:

(a) the subject of a guarantee agreement; or

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

19. Neither Newco nor XXXXXXXXXX has, or will have, entered into a dividend rental arrangement as defined in subsection 248(1), in respect of any of the XXXXXXXXXX Special Shares or the Newco Preferred Shares to be redeemed as part of the proposed transactions.

20. Neither XXXXXXXXXX nor Newco is, or will be a specified financial institution, at the time of the redemption of the XXXXXXXXXX Special Shares or the Newco Preferred Shares.

21. Except as disclosed herein, none of XXXXXXXXXX, any corporation controlled by it, or any predecessor corporation of any such corporation will incur any liabilities or has acquired or will acquire any assets in contemplation of and before the proposed transactions.

V. PURPOSE OF THE PROPOSED TRANSACTIONS

The proposed transactions are to be undertaken for the purpose of permitting the utilization of the XXXXXXXXXX Capital Losses following the amalgamation of XXXXXXXXXX and XXXXXXXXXX to offset capital gains from subsequent dispositions of capital property currently owned by XXXXXXXXXX.

VI. RULINGS PROVIDED

Provided that the above statements of facts and proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions and that the proposed transactions are carried out as set forth herein, the following rulings are given:

A. Provided that XXXXXXXXXX holds the XXXXXXXXXX Common Shares as capital property, the provisions of subsection 86(1) will apply to the exchange of the XXXXXXXXXX Common Shares for New XXXXXXXXXX Common Shares and XXXXXXXXXX Special Shares as described in Paragraph 9 such that:

(a) the aggregate cost to XXXXXXXXXX of the New XXXXXXXXXX Common Shares will be that proportion of the aggregate adjusted cost base to XXXXXXXXXX immediately before the exchange of its XXXXXXXXXX Common Shares that the fair market value of XXXXXXXXXX New XXXXXXXXXX Common Shares immediately after the exchange is of the aggregate fair market value at that time of all the New XXXXXXXXXX Common Shares and XXXXXXXXXX Special Shares received by XXXXXXXXXX on the exchange;

(b) the aggregate cost to XXXXXXXXXX of the XXXXXXXXXX Special Shares will be that proportion of the aggregate adjusted cost base to XXXXXXXXXX immediately before the exchange of its XXXXXXXXXX Common Shares that the fair market value of XXXXXXXXXX Special Shares immediately after the exchange is of the aggregate fair market value at that time of all the New XXXXXXXXXX Common Shares and XXXXXXXXXX Special Shares received by XXXXXXXXXX on the exchange; and

(c) XXXXXXXXXX will be deemed to have disposed of the XXXXXXXXXX Common Shares for proceeds of disposition equal to the aggregate adjusted cost base to XXXXXXXXXX of the XXXXXXXXXX Common Shares immediately before the exchange;

and for greater certainty, subsection 86(2) will not apply to the transfer.

B. In accordance with paragraph 7 of Article 13 of the Treaty, any gain realized on the disposition of the XXXXXXXXXX Special Shares, described in Paragraph 10, will be exempt from taxation in Canada.

C. The provisions of subsection 85(1) will apply to the transfer by XXXXXXXXXX to Newco, as described in Paragraph 11, of the XXXXXXXXXX Shares such that:

(a) the proceeds of disposition to XXXXXXXXXX and Newco’s aggregate cost of the XXXXXXXXXX Shares will be deemed by paragraph 85(1)(a) to be equal to the elected amount in respect of the transfer of the XXXXXXXXXX Shares;

(b) the cost of the XXXXXXXXXX Newco Preferred Shares received by XXXXXXXXXX as consideration for the XXXXXXXXXX Shares will be deemed by paragraph 85(1)(g) to be equal to the elected amount in respect of the transfer of the XXXXXXXXXX Shares; and

(c) for greater certainty, paragraph 85(1)(e.2) will not apply to the transfer.

D. On the redemption by Newco of the XXXXXXXXXX Newco Preferred Shares owned by XXXXXXXXXX:

(a) paragraphs 84(3)(a) and (b) will apply to deem Newco to have paid and XXXXXXXXXX to have received, on a separate class of shares comprising the redeemed Newco Preferred Shares, a dividend of an amount equal to the amount by which the principal amount of the Newco Note which is issued in payment of the redemption price of the redeemed Newco Preferred Shares exceeds the paid-up capital of such shares immediately prior to their redemption; and

(b) paragraph (j) of the definition of “proceeds of disposition” in section 54 will apply to exclude the amount of that deemed dividend from the proceeds of disposition of the Newco Preferred Shares recognized by XXXXXXXXXX as a result of the redemption of such shares by Newco.

E. On the redemption by XXXXXXXXXX of the XXXXXXXXXX Special Shares owed by Newco:

(a) paragraphs 84(3)(a) and (b) will apply to deem XXXXXXXXXX to have paid and Newco to have received, on a separate class of shares comprising the purchased XXXXXXXXXX Special Shares, a dividend of an amount equal to the amount by which the principal amount of the XXXXXXXXXX Note which is issued in payment of the purchase price of the purchased XXXXXXXXXX Special Shares exceeds the paid-up capital of such shares immediately prior to their redemption; and

(b) paragraph (j) of the definition of “proceeds of disposition” in section 54 will apply to exclude the amount of that deemed dividend from the proceeds of disposition of the XXXXXXXXXX Special Shares recognized by Newco as a result of the redemption of such shares by XXXXXXXXXX.

F. The full amount of each of the deemed dividends referred to in Rulings D(a) and E(a) hereof:

(a) will be a taxable dividend that will, by virtue of subparagraph 82(1)(a)(ii), be included in computing the income of the recipient for the year in which it is received;

(b) will, by virtue of subsection 112(1), be deductible in computing the income of the recipient in the year in which it is received and, for greater certainty, such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) and (2.4);

(c) will be an "excepted dividend" for purposes of Part IV.1 of the Act by virtue of paragraph (b) of the definition "excepted dividend" in section 187.1; and

(d) will be an "excluded dividend" for purposes of Part VI.1 of the Act by virtue of paragraph (a) of the definition "excluded dividend" in subsection 191(1).

G. The cost amount to XXXXXXXXXX of the Newco Note described in Paragraph 12 and the cost amount to Newco of the XXXXXXXXXX Note described in Paragraph 13 will, in each case, be equal to the principal amount of each such note.

H. The provisions of section 80 will not apply to the set-off of the amounts owing under the Newco Note and the XXXXXXXXXX Note pursuant to the Set-Off Agreement.

I. The provisions of subsection 55(2) will not apply to the dividends described in Rulings D and E 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:

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

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

(c) acquisition of a share in the circumstances described in subparagraph 55(3.1)(b)(iii); or

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

which has not been described herein.

J. On the disposition of the New XXXXXXXXXX Common Shares in exchange for the XXXXXXXXXX Payment, as described in Paragraph 15:

(a) paragraph 212.1(1)(a) will apply to deem XXXXXXXXXX to have paid and XXXXXXXXXX to have received a dividend of an amount equal to the amount by which the amount of the XXXXXXXXXX Payment exceeds the paid-up capital of the New XXXXXXXXXX Common Shares immediately prior to their disposition; and

(b) paragraph (k) of the definition of “proceeds of disposition” in section 54 will apply to exclude the amount of that deemed dividend from the proceeds of disposition of the New XXXXXXXXXX Common Shares recognized by XXXXXXXXXX as a result of the disposition of such shares to XXXXXXXXXX.

K. For the purposes of subsection 111(4), control of XXXXXXXXXX will not be considered to have been acquired by a person or group of persons as a result of any of the Proposed Transactions.

L. The amalgamation of XXXXXXXXXX and XXXXXXXXXX, as described in Paragraph 16, will be an amalgamation within the meaning of subsection 87(1) which will be subject to the provisions of section 87. For greater certainty, for the purposes of applying section 111 Amalco will, by virtue of subsection 87(2.11), be deemed to be the same corporation as, and a continuation of, each of XXXXXXXXXX and XXXXXXXXXX.

M. 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.

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 as set out in Information Circular 70-6R2 dated September 28, 1990 and are binding on Revenue Canada provided that the proposed transactions described herein are completed before XXXXXXXXXX.

OPINION

Provided that our understanding of the facts and proposed transactions described herein is correct and further provided that the Act is amended in accordance with Bill C-69 which received first reading on December 2, 1996, it is our opinion that Ruling K will continue to apply to prevent, and that, provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions which includes the payment of the dividends described in Rulings D and E above, other than as described herein, the exception in paragraph 55(3)(a) will prevent, the application of subsection 55(2) to any of the dividends referred to in Rulings D and E above.

Nothing in this letter should be construed as confirmation of the tax consequences of any of the transactions described in this letter other than as specifically described, including the fair market value of any property or the amount of any loss.

Yours truly

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