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: single-wing butterfly
Position:
Reasons:
XXXXXXXXXX 963418
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted taxpayers. In your letters of XXXXXXXXXX, you informed us of additional information in respect of, and amendments to, the facts and proposed transactions described in your original letter. We also acknowledge the information provided in our various telephone conversations (XXXXXXXXXX).
To the best of your knowledge and that of the taxpayers concerned, none of the issues involved in this advance ruling request is being considered by a Tax Services Office or a Taxation Centre in connection with a tax return already filed and none of the issues is under objection.
Definitions
In this letter, the following terms have the meanings specified:
Unless otherwise indicated, all references to statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act");
"adjusted cost base", "capital property" and "proceeds of disposition" have the meanings assigned by section 54 of the Act;
"agreed amount" has the meaning assigned by subsection 85(1) of the Act;
"CBCA" means the Canada Business Corporations Act, and, where applicable, its predecessor statutes;
XXXXXXXXXX
"cost amount", "dividend rental arrangement", "restricted financial institution" and "specified financial institution" have the meanings assigned by subsection 248(1) of the Act;
"depreciable property" has the meaning assigned to that term by the definition found within subsection 13(21) of the Act;
"net capital loss" has the meaning assigned by subsection 111(8) of the Act;
"paid-up capital", "private corporation", "public corporation", "taxable Canadian corporation" and "taxable dividend" have the meanings assigned by subsection 89(1) of the Act;
"related" has the meaning assigned by subsection 251(2) of the Act;
XXXXXXXXXX
"specified person" has the meaning assigned to that term by paragraph (h) of the definition of "taxable preferred share" found within subsection 248(1) of the Act.
Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
XXXXXXXXXX is a taxable Canadian corporation and a public corporation. It was organized on XXXXXXXXXX pursuant to
XXXXXXXXXX
XXXXXXXXXX is a taxable Canadian corporation and is controlled by XXXXXXXXXX. XXXXXXXXXX was incorporated under the laws of Canada on XXXXXXXXXX under the name XXXXXXXXXX. The name of the corporation was changed in XXXXXXXXXX, and it is currently governed by the CBCA. XXXXXXXXXX is neither a public corporation nor a private corporation for purposes of the Act.
The issued share capital of XXXXXXXXXX consists of XXXXXXXXXX voting common shares, of which XXXXXXXXXX are held by XXXXXXXXXX and XXXXXXXXXX are held by XXXXXXXXXX and XXXXXXXXXX non-voting redeemable preferred shares, of which XXXXXXXXXX are held by XXXXXXXXXX and XXXXXXXXXX are held by XXXXXXXXXX. The aggregate paid-up capital of the common shares is $XXXXXXXXXX ($XXXXXXXXXX per share) and the aggregate paid-up capital of the preferred shares is $XXXXXXXXXX ($XXXXXXXXXX per share). The preferred shares are redeemable for $XXXXXXXXXX per share.
XXXXXXXXXX is a taxable Canadian corporation XXXXXXXXXX and is not related to XXXXXXXXXX. None of the issued and outstanding shares of XXXXXXXXXX was acquired by XXXXXXXXXX in contemplation of the proposed transactions described in paragraphs 7 to 15 below.
The XXXXXXXXXX shares represent capital property to XXXXXXXXXX. XXXXXXXXXX adjusted cost base of its common shares is $XXXXXXXXXX and that of its preferred shares is $XXXXXXXXXX.
The assets of XXXXXXXXXX consist of advances to shareholders, which have no fixed terms of repayment and are, therefore, payable on demand and are current assets and XXXXXXXXXX limited partnership units, representing a XXXXXXXXXX% interest, in XXXXXXXXXX, which is a limited partnership that exists between XXXXXXXXXX and an unrelated party. As of the date of undertaking the proposed transactions, the assets of XXXXXXXXXX may also include an amount of income tax receivable from the Province of XXXXXXXXXX, which will also be a current asset.
The fair market value of the advances to shareholders is equal to their cost amount. The fair market value of the limited partnership units exceeds their adjusted cost base to XXXXXXXXXX. The adjusted cost base of the limited partnership units to XXXXXXXXXX is not negative.
The liabilities of XXXXXXXXXX consist of loans payable to shareholders. XXXXXXXXXX of the outstanding loans are payable to XXXXXXXXXX. The total liabilities of XXXXXXXXXX are less than both the cost amount of XXXXXXXXXX assets and the aggregate fair market value of its assets.
XXXXXXXXXX
Proposed transactions
In accordance with the provisions of the CBCA, the articles of incorporation of XXXXXXXXXX will be amended by filing Articles of Amendment that will:
authorize the issue of the existing common and preferred classes of shares in series;
create Series XXXXXXXXXX common shares with attributes identical to the existing common shares;
create Series XXXXXXXXXX preferred shares with attributes identical to the existing preferred shares;
XXXXXXXXXX will exchange its XXXXXXXXXX common and XXXXXXXXXX preferred shares of XXXXXXXXXX for XXXXXXXXXX Series XXXXXXXXXX common shares and XXXXXXXXXX Series XXXXXXXXXX preferred shares. No other consideration will be received by XXXXXXXXXX on the exchange of shares. The common and preferred shares exchanged by XXXXXXXXXX will then be cancelled by XXXXXXXXXX. The stated capital of the Series XXXXXXXXXX common shares will equal the paid-up capital of the cancelled common shares and the stated capital of the Series XXXXXXXXXX preferred shares will equal the paid-up capital of the cancelled preferred shares.
XXXXXXXXXX will, in accordance with the relevant provisions of the CBCA, reduce the stated capital of its Series XXXXXXXXXX common shares and Series XXXXXXXXXX preferred shares held by XXXXXXXXXX to an amount equal to the adjusted cost base of the Series XXXXXXXXXX common shares and Series XXXXXXXXXX preferred shares through a statutory reduction. No amount will be paid to XXXXXXXXXX on the reduction.
XXXXXXXXXX will incorporate a new corporation ("Subco") under the provisions of the XXXXXXXXXX. Subco will be a taxable Canadian corporation but will not be a public corporation or a private corporation. Its authorized share capital will include voting common shares and non-voting, redeemable and retractable preferred shares. XXXXXXXXXX will subscribe for a nominal number of common shares of Subco for cash consideration.
Immediately before the transfer of property described in paragraph 12 below the assets of XXXXXXXXXX will consist solely of:
cash or near cash property, consisting of the advances to shareholders and income tax receivable, if any, described in paragraph 4 above; and
XXXXXXXXXX.
XXXXXXXXXX will sell to Subco that portion of its cash or near-cash property and of its XXXXXXXXXX Units such that the fair market value of each such type of property of XXXXXXXXXX so transferred to XXXXXXXXXX will be equal to that proportion of the fair market value of that type of property of XXXXXXXXXX, determined immediately before the transfers referred to herein, that:
the fair market value, immediately before the transfer, of all shares of the capital stock of XXXXXXXXXX owned by XXXXXXXXXX
is of
the fair market value, immediately before the transfer, of all the issued shares of the capital stock of XXXXXXXXXX.
For greater certainty, any tax accounts, such as the balance of any net capital loss carry-forwards will not be considered to be property of XXXXXXXXXX for purposes hereof.
As consideration for such property transferred by XXXXXXXXXX to Subco, Subco will:
issue a non-interest bearing demand promissory note with a principal amount and fair market value equal to the fair market value of the cash or near cash property transferred;
assume its pro-rata share of the liabilities of XXXXXXXXXX;
issue to XXXXXXXXXX a non-interest bearing demand promissory note with a principal amount and fair market value equal to the agreed amount of the XXXXXXXXXX Units pursuant to subsection 85(1) as described below, less the amount of the liabilities of XXXXXXXXXX assumed as described in (d) above; and
issue non-voting, redeemable and retractable, preferred shares of its capital stock, having an aggregate fair market value and redemption amount equal to the aggregate fair market value of the XXXXXXXXXX Units so transferred less the aggregate fair market value of the consideration described in (d) and (e) above.
XXXXXXXXXX and Subco will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act, with respect to the transfer to Subco of the XXXXXXXXXX Units. The agreed amount for the XXXXXXXXXX Units so transferred shall not be less than the adjusted cost base to XXXXXXXXXX and will not exceed the fair market value thereof.
Pursuant to the provisions of the XXXXXXXXXX, Subco will add an amount equal to the cost to it, as determined pursuant to subsection 85(1) where applicable, of theXXXXXXXXXX Units transferred by XXXXXXXXXX less the amount of liabilities assumed by it described in (d) above and the promissory note described in (e) above, to the stated capital account of its preferred shares.
Subco will redeem its preferred shares held by XXXXXXXXXX at their fair market value, and will pay the redemption price by issuing to XXXXXXXXXX a non-interest bearing demand promissory note having an aggregate principal amount and fair market value equal to the aggregate redemption price and fair market value of such redeemed shares (hereinafter referred to as the "Subco Note"). XXXXXXXXXX will accept the Subco Note in full and absolute payment of the redemption price of such redeemed shares.
XXXXXXXXXX will purchase for cancellation the XXXXXXXXXX Series XXXXXXXXXX common shares and will redeem the XXXXXXXXXX Series XXXXXXXXXX preferred shares held by XXXXXXXXXX at their fair market value. XXXXXXXXXX will pay the purchase price and redemption amount by assigning the Subco Note and the promissory notes issued by Subco as described in 12 (c) and (e) (the "Promissory Notes") above to XXXXXXXXXX. XXXXXXXXXX will accept the Subco Note and the Promissory Notes in full and absolute payment of the purchase price and redemption amount of such purchased and redeemed shares. As a result of the purchase for cancellation of the Series XXXXXXXXXX common shares of XXXXXXXXXX control of XXXXXXXXXX will be acquired by XXXXXXXXXX.
XXXXXXXXXX will then take steps to authorize and complete the winding-up and voluntary dissolution of Subco under the applicable provisions of the XXXXXXXXXX. On the winding-up all of the property of Subco will be transferred to XXXXXXXXXX and all of the liabilities of Subco will be assumed by XXXXXXXXXX. The Subco Note and the Promissory Notes will be extinguished on the winding-up. XXXXXXXXXX will elect in accordance with the provisions of paragraph 80.01(4)(c) of the Act with respect to the settlement of the Subco Note and the Promissory Note.
Purpose of the proposed transactions
XXXXXXXXXX wish to hold their proportionate interests in the XXXXXXXXXX limited partnership separately. In addition, XXXXXXXXXX wishes to hold its investment in XXXXXXXXXX directly and not through a holding corporation.
None of the corporations referred to herein is or will be at the time the proposed transactions described herein are implemented, a specified financial institution or a restricted financial institution.
None of the shares of any of the corporations referred to herein has been or will be subject to a guarantee agreement that is given by a specified financial institution or a specified person in relation to a specified financial institution for any purpose referred to in subsection 112(2.2) of the Act.
None of the shares of XXXXXXXXXX will be the subject of a dividend rental arrangement.
None of the shares of any of the corporations referred to herein has been or will be issued or acquired as part of a transaction or event or a series of transactions or events contemplated by subsection 112(2.5) of the Act.
Other than as described herein, no significant transactions which may be part of the series that includes the proposed transactions described herein have been completed in contemplation of the proposed transactions described herein and no such significant transactions are contemplated after the proposed transactions are completed.
Except as described in this letter, or in the ordinary course of its business, no property has been or will be acquired by or disposed of by XXXXXXXXXX and no liabilities have been or will be incurred by XXXXXXXXXX in contemplation of the proposed transactions described above.
Neither XXXXXXXXXX has any balances of losses or other tax accounts carried forward, other than a net capital loss of $XXXXXXXXXX. The XXXXXXXXXX Limited Partnership is profitable, as are XXXXXXXXXX.
The redemption and purchase for cancellation by XXXXXXXXXX of its shares owned by XXXXXXXXXX as described in paragraph 14 above will not be in contravention of the limitations imposed by subsections 34(2) and 36(2) of the CBCA.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, additional information and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
The provisions of subsection 86(1) of the Act will apply, and the provisions of subsection 86(2) of the Act will not apply, to the exchange of shares described in paragraph 8 above, such that:
(i)the cost to XXXXXXXXXX of the Series XXXXXXXXXX common shares of XXXXXXXXXX received on the exchange will be deemed by paragraph 86(1)(b) of the Act to be an amount equal to the aggregate adjusted cost base to XXXXXXXXXX, immediately before the exchange, of the common shares of XXXXXXXXXX;
(ii)the cost to XXXXXXXXXX of the Series XXXXXXXXXX preferred shares of XXXXXXXXXX received on the exchange will be deemed by paragraph 86(1)(b) of the Act to be an amount equal to the aggregate adjusted cost base to XXXXXXXXXX, immediately before the exchange, of the preferred shares of XXXXXXXXXX;
(iii)Pursuant to paragraph 86(1)(c) of the Act, XXXXXXXXXX will be deemed to have disposed of the common and preferred shares of XXXXXXXXXX, as the case may be, for proceeds of disposition equal to the aggregate cost to XXXXXXXXXX of the Series XXXXXXXXXX common shares and Series XXXXXXXXXX preferred shares determined in (i) and (ii) above, as the case may be.
On the reduction of the stated capital of the Series XXXXXXXXXX common shares and Series XXXXXXXXXX preferred shares held by XXXXXXXXXX as described in paragraph 9 above,
XXXXXXXXXX will not be deemed to have paid, and XXXXXXXXXX will not be deemed to have received a dividend pursuant to subsection 84(4) on such reduction of stated capital; and
subparagraph 53(2)(a)(ii) will not apply to reduce the adjusted cost base to XXXXXXXXXX of its Series XXXXXXXXXX common shares and Series XXXXXXXXXX preferred shares of XXXXXXXXXX.
The provisions of subsection 85(1) will apply to the transfer of the XXXXXXXXXX Units of XXXXXXXXXX to XXXXXXXXXX as described in paragraph 12 above such that the agreed amount shall be deemed to be XXXXXXXXXX proceeds of disposition and XXXXXXXXXX cost thereof pursuant to paragraph 85(1)(a) of the Act. For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to the transfer referred to herein.
The provisions of subsection 84(3) of the Act will apply:
as a result of the redemption by Subco of its preferred shares held by XXXXXXXXXX as described in paragraph 13 above, to deem Subco to have paid and XXXXXXXXXX to have received a dividend equal to the amount by which the redemption price paid exceeds the paid-up capital of those shares immediately before the redemption;
as a result of the purchase for cancellation by XXXXXXXXXX of its Series XXXXXXXXXX common shares owned by XXXXXXXXXX as described in paragraph 14 above, to deem XXXXXXXXXX to have paid and XXXXXXXXXX to have received a dividend equal to the amount by which the purchase price paid exceeds the paid-up capital of those shares immediately before the purchase;
as a result of the redemption by XXXXXXXXXX of its Series XXXXXXXXXX preferred shares held by XXXXXXXXXX as described in paragraph 14 above, to deem XXXXXXXXXX to have paid and XXXXXXXXXX to have received a dividend equal to the amount by which the redemption price paid exceeds the paid-up capital of those shares immediately before the redemption.
The deemed dividends referred to in Ruling D above will:
to the extent that they are taxable dividends, be deductible by the recipient pursuant to subsection 112(1) of the Act in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.2), (2.3) or (2.4) of the Act; and
be excluded in computing the proceeds of disposition of the shares so redeemed or purchased for cancellation by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act.
Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:
a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or
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) of the Act, subsection 55(2) of the Act will not apply to the taxable dividends referred to in the rulings given in D(b) and (c) above and, for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.
The provisions of subsection 88(1) of the Act will apply to the winding-up of Subco into XXXXXXXXXX as described in paragraph 15 above such that:
(i)pursuant to subparagraph 88(1)(a)(iii) of the Act, Subco will be deemed to have disposed of each property distributed to XXXXXXXXXX on the winding-up of Subco for proceeds equal to its respective cost amount immediately before the winding-up;
(ii)XXXXXXXXXX will be deemed to have disposed of its shares in Subco on the winding-up for proceeds equal to the greater of the amounts determined pursuant to subparagraphs 88(1)(b)(i) and (ii) of the Act; and
(iii)pursuant to paragraph 88(1)(c) of the Act, the cost to XXXXXXXXXX of each property distributed by Subco to XXXXXXXXXX on the winding-up of Subco shall be deemed to be the amount deemed by paragraph 88(1)(a) of the Act to be the proceeds of disposition of each such property to Subco.
Provided that XXXXXXXXXX elects in prescribed form and within the time referred to in paragraph 80.01(4)(c) to have the provisions of subsection 80.01(4) apply with respect to the Subco Note and the Promissory Notes, subsection 80.01(4) of the Act will apply to the settlement of the Subco Note and the Promissory Notes as described in paragraph 15 above such that the settlement of such notes will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).
The provisions of subsections 15(1), 56(2) and 246(1) of the Act will not apply to any of the proposed transactions described in paragraphs 7 through 15 above, in and of themselves.
As a result of the proposed transactions, in and of themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences as described in the rulings given. For greater certainty, subsection 245(2) of the Act will not apply, in and of itself, as a result of the reduction of stated capital of the Series XXXXXXXXXX common and Series XXXXXXXXXX preferred shares as described in paragraph 9 above, to redetermine the paid-up capital computed in accordance with the provisions of the Act.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 issued by Revenue Canada, Taxation on September 28, 1990 and are binding provided that the proposed transactions are completed by XXXXXXXXXX.
The above 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, could have an effect on the rulings provided herein, except as opined below.
Opinion
Provided that:
our understanding of the facts and proposed transactions described herein is correct;
the proposed amendment to the definition of "permitted redemption" in subsection 55(1) of the Act is enacted in substantially the same form as proposed in the Notice of Ways and Means Motion to Amend the Income Tax Act and Related Statutes which was tabled by the Minister of Finance on November 20, 1996;
as part of the series of transactions or events that includes the proposed transactions described herein, there is not:
a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or
an acquisition of property in the circumstances described in paragraph 55(3.1)(d);
which has not been described herein,
it is our opinion that by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividends referred to in the rulings given in D(a) above and, for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.
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 fair market value or adjusted cost base of any particular asset, or the paid-up capital 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
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