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:
1.Deductibility of interest on funds borrowed to redeem shares.
2.Non-application of subsection 84.1(1) upon sale of shares of Opco by an individual to Holdco which is owned by XXXXXXXXXX of the individual.
3.Eligibility for enhanced capital gains deduction upon sale of shares of a qualifying small business corporation.
4.No application of 55(2) upon redemption of shares of Opco by Holdco.
Position:
1.OK with proviso re: quantum of retained earnings and paid-up capital.
2.Ruling provided with proviso that "to the extent the vendors are at arm's length with the purchaser corporation prior to the sale of the shares".
3.No ruling provided - question of fact re: qualifying small business corporation.
4.No ruling provided - 55(2) will be applicable, but due to the particuar circumstances, the proceeds of disposition would be equal to the ACB of the shares resulting in no gain. Nonetheless, we are unable to provide a ruling as the acb of the shares is a question of fact.
Reasons:
1.Standard ruling re: money borrowed to redeem shares.
2.NAL relationship is a question of fact. Discussed with XXXXXXXXXX who agreed with wording of the ruling provided.
3.Question of fact.
4.Provision will be applicable but, based upon information provided, tax results would be nil.
XXXXXXXXXX 970037
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: XXXXXXXXXX
We are writing in response to your correspondence of XXXXXXXXXX wherein you had requested an advance income tax ruling on behalf of the following individuals and corporations:
XXXXXXXXXX
The local district taxation office for all of the taxpayers listed above is the XXXXXXXXXX Tax Services Office. You have also advised that, to the best of the knowledge of the above noted parties, none of the issues being considered in the context of this advance income tax ruling is being considered by a District Tax Services Office in connection with an income tax return previously filed nor has a Notice of Objection been filed with respect to any of those issues.
FACTS
1.XXXXXXXXXX is a "Canadian controlled private corporation" as that term is defined in subsections 125(7) and 248(1) of the Income Tax Act (the "Act").
2.XXXXXXXXXX carries on the business of XXXXXXXXXX.
3.All of the issued shares of XXXXXXXXXX are owned by XXXXXXXXXX. XXXXXXXXXX and are not "related persons" within the meaning of that term in subsection 251(2) of the Act. XXXXXXXXXX are not "related persons" within the meaning of that term in subsection 251(2) of the Act.
4.The current issued share capital of XXXXXXXXXX is as follows:
Aggregate
Redemption
Amount of
Class XXXX Class XXXX Class XXXX Class XXXX
Common Common Preferred Preferred
Shares Shares Shares Shares
XXXXXXXXXX
The aggregate paid-up capital, as that term is defined in subsection 89(1) of the Act, of the issued shares of XXXXXXXXXX is $XXXXXXXXXX. All of the shareholders of XXXXXXXXXX are individuals resident in Canada for the purposes of the Act.
5.XXXXXXXXXX are parties to a Unanimous Shareholders' Agreement dated XXXXXXXXXX (the "USA"). XXXXXXXXXX of the USA provides what is commonly known as a "XXXXXXXXXX" agreement among the parties. In essence, XXXXXXXXXX, may offer to sell their shares of XXXXXXXXXX to the other pair in writing at any price. If that offer is not accepted, then the offering pair are required to acquire the shares held by the other pair at the same price.
6.Prior to XXXXXXXXXX each owned XXXXXXXXXX Class XXXXXXXXXX Common Shares of XXXXXXXXXX and XXXXXXXXXX each owned XXXXXXXXXX Class XXXXXXXXXX Common Shares of XXXXXXXXXX. XXXXXXXXXX crystallized a portion of their enhanced capital gains deduction utilizing the following steps.
XXXXXXXXXX
7.No dividends have ever been paid by XXXXXXXXXX on the issued Class XXXXXXXXXX Preferred Shares.
8.XXXXXXXXXX own all of the issued shares of XXXXXXXXXX. XXXXXXXXXX is a Canadian-controlled private corporation as that term is defined in subsections 125(7) and 248(1). To date XXXXXXXXXX has been dormant and does not have any assets of any significance.
PROPOSED TRANSACTIONS
9.XXXXXXXXXX will transfer all of their shares of XXXXXXXXXX to XXXXXXXXXX pursuant to subsection 85(1) of the Act. The consideration which XXXXXXXXXX will receive from XXXXXXXXXX will be redeemable retractable Preferred Shares of XXXXXXXXXX having a redemption amount equal to the fair market value of the transferred XXXXXXXXXX shares and having an aggregate paid-up capital equal to the stated capital of the transferred XXXXXXXXXX shares. The agreement for the exchange of shares of XXXXXXXXXX for Preferred Shares of XXXXXXXXXX will provide that the parties undertake to file Revenue Canada Form T2057 within the time period provided for in subsection 85(6) of the Act. The agreed amount for the XXXXXXXXXX shares will be the fair market value of the shares which will be equal to the redemption amount in the case of the Class "XXXXXXXXXX" Preferred Shares and $XXXXXXXXXX for each Common Share as outlined below in paragraph 11. XXXXXXXXXX will each report a capital gain of $XXXXXXXXXX on their XXXXXXXXXX personal income tax returns and will claim the enhanced capital gains deduction within the limits set out in section 110.6 of the Act.
10.XXXXXXXXXX will obtain personal loans from a bank or other financial institution of $XXXXXXXXXX on which they will be legally obligated to pay interest and will loan those funds to XXXXXXXXXX on a non-interest bearing basis. Security for the loans by XXXXXXXXXX will be their principal residence personal guarantees and a specific pledge of their shares of XXXXXXXXXX.
11.XXXXXXXXXX will sell their shares of XXXXXXXXXX to XXXXXXXXXX for aggregate consideration of $XXXXXXXXXX allocated as follows:
XXXXXXXXXX
The share sale agreement will require XXXXXXXXXX to make a payment of $XXXXXXXXXX to XXXXXXXXXX on closing. The balance of the purchase price will be payable in monthly installments of XXXXXXXXXX. The share sale agreement will not contain any penalties for early payment of the outstanding debt by XXXXXXXXXX.
12.After XXXXXXXXXX has acquired all of the shares of XXXXXXXXXX. XXXXXXXXXX will refinance its assets and attempt to obtain an additional $XXXXXXXXXX of financing on these assets. The borrowed funds will bear interest pursuant to a legal obligation and will be used by XXXXXXXXXX to redeem XXXXXXXXXX Class XXXXXXXXXX Preferred Shares from XXXXXXXXXX having an aggregate redemption amount of $XXXXXXXXXX.
13.XXXXXXXXXX will also redeem XXXXXXXXXX Class "XXXXXXXXXX" Preferred Shares from XXXXXXXXXX at the aggregate redemption amount of $XXXXXXXXXX. This redemption price will be paid by
XXXXXXXXXX
14.Once XXXXXXXXXX has obtained funds of $XXXXXXXXXX from XXXXXXXXXX, XXXXXXXXXX will pay-out the remaining debt to XXXXXXXXXX under the share sale agreement plus any applicable interest. Depending on the amount of time necessary for XXXXXXXXXX to obtain financing, XXXXXXXXXX will make the monthly payments of $XXXXXXXXXX plus interest required by it to XXXXXXXXXX under the share sale agreement.
RULINGS PROVIDED
Provided that the preceding statements are accurate and complete and the proposed transactions are carried out as described above, we confirm the following:
A.Provided that the total of the "accumulated profits" of XXXXXXXXXX plus the paid-up capital, within the meaning of that term in subsection 89(1) of the Act, of the shares of XXXXXXXXXX owned by XXXXXXXXXX immediately prior to the redemption of those shares is equal to or greater than the amount paid upon the redemption of those shares, the interest expense on the borrowed funds which are used to redeem those shares will be deductible pursuant to paragraph 20(1)(c) of the Income Tax Act in computing the income of XXXXXXXXXX for the taxation year in respect of which such expense is paid or payable, depending on the method regularly followed by XXXXXXXXXX in computing its income; and
"accumulated profits" in this ruling means the retained earnings of XXXXXXXXXX computed in accordance with accounting principles generally accepted in Canada except that the computation is made on an unconsolidated basis with investments accounted for on a cost basis and those retained earnings do not include any appraisal surplus or profits resulting from non-arm's length transactions which transform appraisal surplus into profits on a non-taxable or tax-deferred basis.
B.Provided that each of XXXXXXXXXX deals at arm's length, within the meaning of that term in subsection 251(1) of the Act, with XXXXXXXXXX at the time of the sale of the shares described in paragraph 11 of the Proposed Transactions, the provisions of subsection 84.1(1) of the Act will not apply with respect to the sale of the XXXXXXXXXX shares to XXXXXXXXXX as described in that paragraph.
C.Subsection 245(2) will not apply to redetermine the tax effects of the rulings provided.
These rulings are provided subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and are binding upon the Department provided that the proposed transactions are completed by XXXXXXXXXX. This ruling is based on the Act and the Income Tax Regulations in their present form and does not take into account the effects of any proposed amendments thereto. In addition, nothing in the rulings given above should be construed as confirmation that we have reviewed and satisfied ourselves that XXXXXXXXXX deal at arm's length with XXXXXXXXXX. In the event that it is determined that XXXXXXXXXX do not deal at arm's length with XXXXXXXXXX at the time of the sale of the shares described in paragraph 11 above, ruling B above will not be valid.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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