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:
Purpose of father retaining control of transferee corp. Reason given was to ensure that share value not reduced.
Position: accepted
Reasons: previously accepted in ruling 9612511
XXXXXXXXXX 3-963543
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sir:
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 taxpayer. We also acknowledge your letters of XXXXXXXXXX.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
XXXXXXXXXX has been carrying on an active farming business for several years. XXXXXXXXXX was incorporated in XXXXXXXXXX. XXXXXXXXXX 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) of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended (the "Act"), respectively. Unless otherwise stated every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act.
The outstanding share capital of XXXXXXXXXX consists of the following:
XXXXXXXXXX #1 Preferred shares which are entitled to a cumulative XXXXXXXXXX% dividend, to vote and have a par value of $XXXXXXXXXX each;
XXXXXXXXXX #2 Preferred shares which are entitled to a non-cumulative dividend, are not entitled to vote and have a par value of $XXXXXXXXXX each; and
XXXXXXXXXX Common shares which have a par value of $XXXXXXXXXX each.
The issued and outstanding shares of XXXXXXXXXX are held by their holders as capital property as follows:
#1 Preferred shares
XXXXXXXXXX
#2 Preferred shares
XXXXXXXXXX
Common shares
XXXXXXXXXX
All of the above individuals are resident in Canada.
XXXXXXXXXX
The term "capital property", as used here and subsequently, has the meaning assigned by section 54.
XXXXXXXXXX does not currently have any unutilized losses or deductions for tax purposes or any amounts in its refundable dividend tax on hand account or, to the best of your knowledge, its capital dividend account. The terms "refundable dividend tax on hand" and "capital dividend account" have the meanings assigned by subsections 129(3) and 89(1), respectively.
Other than as described herein, no sale or transfer of the shares of any of the corporations mentioned herein is presently contemplated.
XXXXXXXXXX files its federal income tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office.
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 Taxation Centre in connection with an income tax return previously filed and none of the issues contained herein is under objection or appeal.
Proposed Transactions
As it has not yet been decided which of XXXXXXXXXX will dispose of his shares in XXXXXXXXXX, either XXXXXXXXXX will incorporate Newco under the laws of XXXXXXXXXX. Whichever of XXXXXXXXXX becomes the shareholder of Newco will be subsequently referred to as the "Transferee". The authorized share capital of Newco will consist of the following: redeemable and retractable preferred shares - Classes XXXXXXXXXX; and common shares. Newco will issue XXXXXXXXXX common shares having a par value of $XXXXXXXXXX each to the Transferee for $XXXXXXXXXX.
The Transferee will transfer, at fair market value, all of his XXXXXXXXXX common shares of XXXXXXXXXX to Newco in exchange for a number of Class XXXXXXXXXX voting preferred shares of Newco which will be redeemable and retractable at an amount equal to the fair market value of the common shares of XXXXXXXXXX so acquired and have a par value of $XXXXXXXXXX each. In respect of the transfer, the Transferee and Newco 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 the Transferee immediately before the transfer. The adjusted cost base of the shares so transferred will be less than their fair market value at the time of the transfer. The aggregate par value of the Class XXXXXXXXXX preferred shares will be equal to the agreed amount referred to herein. The aggregate par value of the Class XXXXXXXXXX preferred shares will be less than the redemption price thereof and will not exceed the greater of the paid-up capital and the adjusted cost base, computed with reference to subsection 84.1(2), to the Transferee of the shares of XXXXXXXXXX so transferred. The terms "adjusted cost base" and "paid-up capital", as used here and subsequently, have the meanings assigned by section 54 and subsection 89(1), respectively.
XXXXXXXXXX will transfer, at fair market value, XXXXXXXXXX #1 preferred shares of XXXXXXXXXX to Newco in exchange for a number of Class XXXXXXXXXX voting preferred shares of Newco which will be redeemable and retractable at an amount equal to the fair market value of the preferred shares of XXXXXXXXXX so acquired and have a par value of $XXXXXXXXXX each. In respect of the transfer, XXXXXXXXXX and Newco 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 be less than their fair market value at the time of the transfer. The aggregate par value of the Class XXXXXXXXXX preferred shares will be equal to the agreed amount referred to herein. The aggregate par value of the Class XXXXXXXXXX preferred shares will be less than the redemption price thereof and will not exceed the greater of the paid-up capital and the adjusted cost base, computed with reference to subsection 84.1(2), to XXXXXXXXXX of the shares of XXXXXXXXXX so transferred.
XXXXXXXXXX will transfer, at fair market value, XXXXXXXXXX #2 preferred shares of XXXXXXXXXX to Newco in exchange for a number of Class XXXXXXXXXX non-voting preferred shares of Newco which will be redeemable and retractable at an amount equal to the fair market value of the preferred shares of XXXXXXXXXX so acquired and have a par value of $XXXXXXXXXX each. In respect of the transfer, XXXXXXXXXX and Newco 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 be less than their fair market value at the time of the transfer. The aggregate par value of the Class XXXXXXXXXX preferred shares will be equal to the agreed amount referred to herein. The aggregate par value of the Class XXXXXXXXXX preferred shares will be equal to the redemption price thereof and will not exceed the greater of the paid-up capital and the adjusted cost base, computed with reference to subsection 84.1(2), to XXXXXXXXXX of the shares of XXXXXXXXXX so transferred.
XXXXXXXXXX will transfer, at fair market value, certain assets (the "Transferred Assets") to Newco in exchange for Newco's assumption of a portion of the liabilities of XXXXXXXXXX and Class XXXXXXXXXX non-voting preferred shares of Newco having a par value of $XXXXXXXXXX and an aggregate redemption amount equal to the aggregate fair market value of the assets so transferred less the fair market value of the liabilities assumed. The Transferred Assets will include poultry quota, land, depreciable property of a prescribed class, inventory and amounts receivable. The aggregate fair market value of the Transferred Assets less the amount of the liabilities assumed on the transfer will be equal to the aggregate fair market value of the XXXXXXXXXX shares held by Newco. The term "depreciable property" has the meaning assigned by subsection 13(21).
In respect of the transfer described in paragraph 12 above, XXXXXXXXXX and Newco will jointly elect pursuant to subsection 85(1), in prescribed form and within the time referred to 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 least of the amounts specified in subparagraphs 85(1)(e)(i) to 85(1)(e)(iii);
inventory and capital property (other than depreciable property of a prescribed class) will be transferred at an agreed amount that is equal to the lesser of the cost amount of the property and its fair market value; and
eligible capital property will be transferred at an agreed amount that is equal to the least of the amounts specified in subparagraphs 85(1)(d)(i) to 85(1)(d)(iii).
The agreed amount in respect of each of the properties so transferred will be less than or equal to its fair market value at the time of the transfer. Any liabilities in excess of the agreed amount for a particular asset will be allocated to the poultry quota which will result in the realization of income from a business for the year pursuant to subsection 14(1). The aggregate par value of the Class XXXXXXXXXX preferred shares will be equal to the agreed amount referred to herein. The aggregate par value of the Class XXXXXXXXXX preferred shares will be less than the redemption price thereof. The terms "eligible capital property" and "depreciable property" have the meanings assigned by section 54 and subsection 13(21), respectively.
Newco will redeem, at their aggregate redemption amount, its Class XXXXXXXXXX preferred shares owned by XXXXXXXXXX and will issue, as consideration therefor, to XXXXXXXXXX a non-interest-bearing demand promissory notes having a principal amount equal to such redemption price (the "Newco Note").
XXXXXXXXXX will purchase for cancellation, at fair market value, all of its shares held by Newco and will issue, as consideration therefor, to Newco a demand non-interest-bearing promissory note having a principal amount equal to the fair market value of the shares of XXXXXXXXXX so purchased (the "XXXXXXXXXX Note").
The Newco Note and the XXXXXXXXXX Note will be offset and both notes will be cancelled.
Each of XXXXXXXXXX and Newco will continue their farming operations.
Purpose of the Proposed Transactions
XXXXXXXXXX has been withdrawing from the day-to-day operations of XXXXXXXXXX and intends to leave management of XXXXXXXXXX to XXXXXXXXXX. XXXXXXXXXX have conflicting views on the management of farm operations as well as future farm plans. The proposed transactions are being undertaken to divide the assets of XXXXXXXXXX between XXXXXXXXXX so that each will have a separate corporate entity out of which to conduct the farming business. XXXXXXXXXX will retain voting control of XXXXXXXXXX and Newco as he wishes to remain involved in the management of both farming businesses and in order to protect his financial investment in both businesses.
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:
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 transfer of property described in paragraphs 9, 10, 11 and 12 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), be deemed to be equal to the amount agreed upon in respect of that property, as described respectively in paragraphs 9, 10, 11 and 13 above. For greater certainty, paragraph 85(1)(e.2) will not be applicable in respect of the transfers.
Upon the redemption by Newco of its Class XXXXXXXXXX shares held by XXXXXXXXXX as described in paragraph 14 above and upon the purchase for cancellation by XXXXXXXXXX of its common shares held by Newco as described in paragraph 15 above, the amount by which the amount paid on the redemption or purchase for cancellation, as the case may be, exceeds the paid-up capital of the particular shares redeemed or purchased for cancellation 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.
By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the dividends received by XXXXXXXXXX and Newco, as described in ruling B above, provided that there is not:
a disposition of any property to a person with whom XXXXXXXXXX or Newco is not related; or
a significant increase in the interest in any corporation of a person with whom XXXXXXXXXX or Newco is not related,
which is part of the series of transactions or events, determined with reference to subsection 248(10), that includes the proposed transactions described herein.
The dividends described in ruling B above will not be subject to tax under Part IV except as provided in paragraph 186(1)(b).
Each of the dividends described in ruling B above will be deemed to be an excepted dividend, as defined in paragraph 187.1(b), and an "excluded dividend", by virtue of paragraph (a) of the definition of "excluded dividend" found in subsection 191(1), and therefore will not be subject to tax under Parts IV.1 and VI.1, respectively.
The cancellations of the Newco Note and the XXXXXXXXXX Note, as described in paragraph 16 above, will not give rise to a "forgiven amount" for purposes of section 80.
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 70-6R3 dated December 30, 1996 issued by Revenue Canada ("IC 70-6R3") and are binding provided the proposed transactions are completed by XXXXXXXXXX.
You have requested that we provide a ruling on possible future transactions (re: " The applicability of Section 110.6(7) of the Act to the situation should an eventual sale of shares occur in future."). As indicated in subparagraphs 15(c) and (j) of IC 70-6R3, we are unable to provide rulings where the transactions are to be completed at some indefinite future time or where a matter on which a determination is requested is primarily one of fact and the circumstances are such that all the pertinent facts cannot be established at the time of the ruling request.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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