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:
section 86 reorganization to shift puc to restore shareholders to what puc would have been if they had purchased a separate class of shares
Position:
acceptable as long as it does not exceed arm's length acb
Reasons:
could be done via 84.1 anyway, so it's consistent with tax policy
XXXXXXXXXX 963524
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re:XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter dated XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-referenced taxpayers. In your letter of XXXXXXXXXX you informed us of additional information in respect of, and amendments to, the facts and proposed transactions described in your original letter.
To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is being considered by a Tax Services Office or a Taxation Centre in connection with any tax return already filed and none of the issues is under objection or appeal.
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" has the meaning assigned by section 54 of the Act;
"Canadian-controlled private corporation" has the meaning assigned by subsection 125(7) of the Act;
"paid-up capital" ("PUC") and "taxable Canadian corporation" have the meanings assigned by subsection 89(1) of the Act;
"CBCA" means the Canada Business Corporations Act, and, where applicable, its predecessor statutes;
"connected" has the meaning assigned by subsection 186(4) of the Act;
XXXXXXXXXX
"related" has the meaning assigned by subsection 251(2) of the Act; and
"safe income on hand" refers to the income earned or realized, within the meaning of paragraph 55(5)(c) of the Act, by a corporation to the extent that it is on hand and can reasonably be considered to contribute to the capital gain that would be realized on a disposition at fair market value of all of the common shares of the corporation.
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 Canadian-controlled private corporation. XXXXXXXXXX was incorporated on XXXXXXXXXX under the CBCA under the name XXXXXXXXXX. The corporation changed its name to XXXXXXXXXX by Articles of Amendment dated XXXXXXXXXX
XXXXXXXXXX authorized share capital consists of an unlimited number of common shares and an unlimited number of non-voting, XXXXXXXXXX% cumulative, redeemable Special shares.
XXXXXXXXXX has XXXXXXXXXX issued and fully paid common shares, which are owned as follows:
XXXXXXXXXX
The total paid-up capital of the issued and outstanding common shares of XXXXXXXXXX is $XXXXXXXXXX ($XXXXXXXXXX per common share).
Upon incorporation, XXXXXXXXXX issued XXXXXXXXXX common shares at subscription prices totalling $XXXXXXXXXX. The average paid-up capital of the common shares was $XXXXXXXXXX per issued common share. XXXXXXXXXX subscribed for XXXXXXXXXX shares in XXXXXXXXXX at a subscription price of $XXXXXXXXXX at the time XXXXXXXXXX was incorporated.
XXXXXXXXXX (the "Individual Shareholders") are employees of XXXXXXXXXX. Of the XXXXXXXXXX common shares owned by him, each Individual Shareholder acquired XXXXXXXXXX common shares from treasury on XXXXXXXXXX at $XXXXXXXXXX per share.
XXXXXXXXXX is a taxable Canadian corporation and a Canadian-controlled private corporation. XXXXXXXXXX was incorporated on XXXXXXXXXX under the XXXXXXXXXX
XXXXXXXXXX authorized share capital consists of:
a) an unlimited number of common shares;
b) an unlimited number of voting, non-cumulative, retractable, redeemable Class XXXXXXXXXX shares;
c) an unlimited number of voting, non-cumulative, retractable, redeemable Class XXXXXXXXXX shares;
d) an unlimited number of voting, non-cumulative, retractable, redeemable Class XXXXXXXXXX shares;
XXXXXXXXXX has XXXXXXXXXX issued and fully paid Class XXXXXXXXXX shares and XXXXXXXXXX issued and fully paid common shares, all of which are owned by XXXXXXXXXX.
The Class XXXXXXXXXX shares of XXXXXXXXXX were issued to XXXXXXXXXX as consideration for the transfer by him of XXXXXXXXXX common shares of XXXXXXXXXX to XXXXXXXXXX which had been acquired by XXXXXXXXXX as described in paragraph 2 above. An election was made in respect of this transfer pursuant to section 85 of the Act.
XXXXXXXXXX is connected with XXXXXXXXXX
After the transfer described in paragraph 4 above, XXXXXXXXXX acquired XXXXXXXXXX common shares of XXXXXXXXXX on XXXXXXXXXX for a purchase price of $XXXXXXXXXX and an additional XXXXXXXXXX common shares of XXXXXXXXXX on XXXXXXXXXX for a purchase price of $XXXXXXXXXX. Each acquisition was from an arm's length person. The paid-up capital of each share acquired on these arm's length purchases was $XXXXXXXXXX
XXXXXXXXXX Neither XXXXXXXXXX, nor a person related to XXXXXXXXXX, owns any shares of XXXXXXXXXX either directly or indirectly. XXXXXXXXXX is not related to any of the Individual Shareholders.
XXXXXXXXXX and the Individual Shareholders are parties to a unanimous shareholders' agreement. It is anticipated that the existing shareholders' agreement will be replaced by a new agreement and that, as part thereof, the Class XXXXXXXXXX shareholders will agree to elect one nominee of the Class XXXXXXXXXX shareholder as a director.
All of the existing shareholders of XXXXXXXXXX have agreed to proceed with the proposed transactions, subject to XXXXXXXXXX receiving a favourable advance income tax ruling.
Proposed Transactions
XXXXXXXXXX will obtain Articles of Amendment and will thereby create an unlimited number of Class XXXXXXXXXX Common shares, an unlimited number of Class XXXXXXXXXX Common shares and an unlimited number of Class XXXXXXXXXX Common shares in addition to the existing class of common shares.
The holders of the Class XXXXXXXXXX Common shares, Class XXXXXXXXXX Common shares and Class XXXXXXXXXX Common shares will be entitled to receive dividends as determined annually by the directors. Such dividends will be paid in equal amounts per share on all Class XXXXXXXXXX Common shares, Class XXXXXXXXXX Common shares and Class XXXXXXXXXX Common shares without preference or distinction.
The Class XXXXXXXXXX Common shares, Class XXXXXXXXXX Common shares and Class XXXXXXXXXX Common shares will, in equal amounts per share, participate in the distribution of assets in the event of a liquidation, dissolution or winding up of XXXXXXXXXX without preference or distinction.
As long as there are sufficient Class XXXXXXXXXX Common shares issued to permit the Class XXXXXXXXXX Common shareholders to exercise over XXXXXXXXXX% of the total votes of all classes of shares, for the purposes of electing directors only, the Class XXXXXXXXXX Common shares will have XXXXXXXXXX votes per share, the Class XXXXXXXXXX Common shares will have XXXXXXXXXX votes per share and the Class XXXXXXXXXX Common shares will have 1 vote per share. For all other purposes, each of the Class XXXXXXXXXX Common shares, the Class XXXXXXXXXX Common shares and the Class XXXXXXXXXX Common shares will have one vote per share.
The Class XXXXXXXXXX Common shares, Class XXXXXXXXXX Common shares and Class XXXXXXXXXX Common shares of XXXXXXXXXX will constitute a separate class of shares for purposes of subsection 24(4) of the CBCA.
The three groups of common shareholders of XXXXXXXXXX will exchange their existing common shares of XXXXXXXXXX for a separate class of new Common shares as follows:
XXXXXXXXXX will exchange its XXXXXXXXXX common shares for XXXXXXXXXX Class XXXXXXXXXX Common shares; XXXXXXXXXX will exchange its XXXXXXXXXX common shares for XXXXXXXXXX Class XXXXXXXXXX Common shares; each of the XXXXXXXXXX Individual Shareholders will exchange his XXXXXXXXXX common shares for XXXXXXXXXX Class XXXXXXXXXX Common shares.
The paid-up capital of the existing common shares, $XXXXXXXXXX, will be reallocated amongst the three new classes of Common shares as follows:
Class XXXXXXXXXX Common $XXXXXXXXXX
Class XXXXXXXXXX Common $XXXXXXXXXX
Class XXXXXXXXXX Common $XXXXXXXXXX
$XXXXXXXXXX
The proposed reallocation of paid-up capital to the Class XXXXXXXXXX Common shares will give the Individual Shareholders paid-up capital equal to their adjusted cost base and will equal the paid-up capital the Individual Shareholders would have had if they had subscribed for treasury shares of a separate class at the time they subscribed for common shares of XXXXXXXXXX.
The allocation of paid-up capital to the Class XXXXXXXXXX Common shares will give XXXXXXXXXX paid-up capital equal to its pro-rata share of the existing paid-up capital. The paid-up capital of the Class XXXXXXXXXX Common shares will not be greater than the adjusted cost base (determined pursuant to subsection 84.1(2) of the Act) of the XXXXXXXXXX existing common shares of XXXXXXXXXX owned by XXXXXXXXXX. The Class XXXXXXXXXX Common shares to be issued to XXXXXXXXXX will have a fair market value of more than 10% of the fair market value of all the issued shares of the capital stock of XXXXXXXXXX within the meaning of subparagraph 186(4)(b)(ii) of the Act.
The remaining paid-up capital will be allocated to the Class XXXXXXXXXX Common shares owned by XXXXXXXXXX
After the exchange of shares, XXXXXXXXXX will offer to increase the paid-up capital attributable to each of the Class XXXXXXXXXX Common, Class XXXXXXXXXX Common and the Class XXXXXXXXXX Common shares by way of an increase in the stated capital of each class of shares under subsection 26(5) of the CBCA.
The Individual Shareholders who own the Class XXXXXXXXXX Common shares have indicated they do not intend to proceed with the proposed increase in the paid-up capital of the Class XXXXXXXXXX Common shares.
The increase in paid-up capital of each of the Class XXXXXXXXXX Common and Class XXXXXXXXXX Common shares will be equal to the safe income on hand of XXXXXXXXXX that is attributable to each class of shares. The increase in the paid-up capital of each class of shares will result in a deemed dividend paid on each class of shares which will reduce the retained earnings of XXXXXXXXXX and will increase the adjusted cost base of each class of shares accordingly.
Purpose of the proposed transactions
XXXXXXXXXX has U.S. resident shareholders and is currently undergoing a reorganization. In order to ensure the reorganization does not result in adverse U.S. income tax consequences to the U.S. shareholders, XXXXXXXXXX requires the ability to elect XXXXXXXXXX% of the Board of Directors of XXXXXXXXXX. XXXXXXXXXX has requested that XXXXXXXXXX and the Individual Shareholders approve a reorganization of the share capital of XXXXXXXXXX to give XXXXXXXXXX the ability to elect XXXXXXXXXX% of the Board of Directors as long as XXXXXXXXXX owns more than XXXXXXXXXX% of the voting shares.
XXXXXXXXXX is prepared to allocate its paid-up capital to the Individual Shareholders in recognition that both XXXXXXXXXX and the Individual Shareholders have an adjusted cost base that exceeds their share of the paid-up capital and that had they initially subscribed for separate classes of shares such as is being proposed by XXXXXXXXXX, the Individual Shareholders would have a paid-up capital equal to their adjusted cost base.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions 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:
By virtue of paragraph 186(4)(b) of the Act, XXXXXXXXXX will be connected with XXXXXXXXXX immediately following the exchange of shares described in paragraph 10 above. For greater certainty, the ownership by XXXXXXXXXX of XXXXXXXXXX Class XXXXXXXXXX Common shares of the capital stock of XXXXXXXXXX out of a total of XXXXXXXXXX issued shares, consisting of the Class XXXXXXXXXX Common shares, the Class XXXXXXXXXX Common shares and the Class XXXXXXXXXX Common shares, will constitute ownership of more than 10% of the issued share capital (having full voting rights under all circumstances) of XXXXXXXXXX, for purposes of subparagraph 186(4)(b)(i) of the Act.
For purposes of computing the paid-up capital of the Class XXXXXXXXXX Common, Class XXXXXXXXXX Common and Class XXXXXXXXXX Common shares that will be issued by XXXXXXXXXX as described in paragraph 10 above, each such class will constitute a separate class of shares of the capital stock ofXXXXXXXXXX
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 allocation of paid-up capital to the Class XXXXXXXXXX Common, Class XXXXXXXXXX Common and Class XXXXXXXXXX Common shares as described in paragraph 10 above.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 issued by Revenue Canada, Customs, Excise and 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.
1.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, adjusted cost base or paid-up capital of any particular share referred to herein or the calculation of the safe income on hand attributable to the common shares of XXXXXXXXXX and the safe income on hand attributable to the Class XXXXXXXXXX Common, Class XXXXXXXXXX Common and Class XXXXXXXXXX Common shares of XXXXXXXXXX;
(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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