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.
XXXXXXXXXX 3-970152
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings. We also acknowledge your letters of XXXXXXXXXX and our various telephone conversations.
We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in the requested rulings is being considered by a tax services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.
DEFINITIONS
In this letter unless otherwise expressly stated:
(a)"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to 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)"CBCA" means the Canada Business Corporations Act;
(d)"capital property" has the meaning assigned by section 54;
(e)"cost amount" has the meaning assigned under subsection 248(1);
(f)"depreciable property" has the meaning assigned by subsection 13(21);
(g)"eligible capital property" has the meaning assigned by section 54;
(h)"eligible property" has the meaning assigned by subsection 85(1.1);
(i)"forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);
(j)"paid-up capital" has the meaning assigned by subsection 89(1);
(k)"public corporation" has the meaning assigned by subsection 89(1);
(l)"short-term preferred shares" has the meaning assigned by subsection 248(1);
(m)"taxable Canadian corporation" has the meaning assigned by subsection 89(1);
(n)"taxable dividend" has the meaning assigned by subsection 89(1);
(o)"taxable preferred shares" has the meaning assigned by subsection 248(1); and
(p)"term preferred shares" has the meaning assigned by subsection 248(1).
FACTS
1.XXXXXXXXXX, is a taxable Canadian corporation and public corporation which was incorporated under the CBCA on XXXXXXXXXX.
XXXXXXXXXX is served by the XXXXXXXXXX Tax Services Office and its corporate account number is XXXXXXXXXX.
2.The authorized share capital of XXXXXXXXXX consists of an unlimited number of common shares; an unlimited number of Class XXXXXXXXXX Preferred Shares; and an unlimited number of Class XXXXXXXXXX Preferred Shares.
XXXXXXXXXX
3. XXXXXXXXXX
XXXXXXXXXX was incorporated on XXXXXXXXXX under the laws of the Province of XXXXXXXXXX.
XXXXXXXXXX is an inactive holding company.
4.The common shares of XXXXXXXXXX are listed on The XXXXXXXXXX Stock Exchange XXXXXXXXXX.
5.The paid-up capital of XXXXXXXXXX common shares is not less than $XXXXXXXXXX. The paid-up capital of XXXXXXXXXX arises from the issuance of XXXXXXXXXX common shares for cash as well as the issuance of its common shares for shares of XXXXXXXXXX.
6.XXXXXXXXXX has never declared or paid a dividend on its common shares.
7.The terms and conditions of the common shares of XXXXXXXXXX are such that they are not taxable preferred shares, short-term preferred shares or term preferred shares.
8.The business of XXXXXXXXXX consists generally of XXXXXXXXXX. The corporate structure of XXXXXXXXXX prior to the proposed transactions described below is as follows:
XXXXXXXXXX
9.XXXXXXXXXX conducts its business through XXXXXXXXXX.
10.XXXXXXXXXX operates its business XXXXXXXXXX described as follows:
XXXXXXXXXX
11. XXXXXXXXXX
12. XXXXXXXXXX
13.XXXXXXXXXX is an inactive corporation which is the lessee for premises in XXXXXXXXXX. These premises were used previously by XXXXXXXXXX.
14. XXXXXXXXXX
15.Following a series of quarterly losses incurred since acquiring XXXXXXXXXX. As a result of these losses and the utilization of the proceeds of its financings to fund the above-described acquisitions, XXXXXXXXXX financial resources are now limited. XXXXXXXXXX it is unable to obtain further debt financing. The board of directors of XXXXXXXXXX has determined to undertake a series of transactions to reorganize the businesses of XXXXXXXXXX in order to focus XXXXXXXXXX limited resources on
XXXXXXXXXX
16. XXXXXXXXXX
17. XXXXXXXXXX
18. XXXXXXXXXX
19. XXXXXXXXXX
20.XXXXXXXXXX will, following the above-described transactions, have XXXXXXXXXX operating businesses:
XXXXXXXXXX
21.XXXXXXXXXX has determined that the business conducted by XXXXXXXXXX is a viable one for which it will be able to raise approximately $XXXXXXXXXX in equity financing. A transfer of the XXXXXXXXXX business to an inactive subsidiary ("Newco") with no other assets or liabilities will be the most effective method to use in XXXXXXXXXX efforts to raise this equity financing. Following discussions with the XXXXXXXXXX, XXXXXXXXXX is confident that it would be able to obtain a listing for the shares of Newco.
PROPOSED TRANSACTIONS
22.XXXXXXXXXX will sell, at fair market value, to Newco its assets used in the XXXXXXXXXX division consisting of accounts receivable, inventory, depreciable property and eligible capital property of the business. The eligible capital property of the business has an estimated fair market value of approximately $XXXXXXXXXX.
In consideration for such transfer, Newco will issue a number of common shares to XXXXXXXXXX and assume certain liabilities of XXXXXXXXXX.
23.XXXXXXXXXX and Newco will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of XXXXXXXXXX, other than the accounts receivable relating to the business of the XXXXXXXXXX division, that is an eligible property transferred to Newco. The agreed amount for the purposes of subsection 85(1) in respect of such property will be the fair market value of such property at the time of the transfer.
The fair market value of each property will equal or exceed the agreed amount in respect thereof. The liabilities assumed by Newco will not exceed the cost amount to Newco of the properties transferred.
24.XXXXXXXXXX and Newco will jointly elect to have the provisions of section 22 apply to the transfer of the accounts receivable relating to the business of the XXXXXXXXXX division which will be transferred to Newco.
25.XXXXXXXXXX will transfer to XXXXXXXXXX, at fair market value, the common shares of Newco in partial settlement of its indebtedness to XXXXXXXXXX. The indebtedness of XXXXXXXXXX will be reduced by an amount equal to the fair market value of the common shares of Newco transferred to XXXXXXXXXX. The aggregate amount of indebtedness owing by XXXXXXXXXX exceeds the fair market value of the shares of Newco at the time of the transfer.
26.The shareholders of XXXXXXXXXX will hold a special meeting on XXXXXXXXXX to pass a special resolution to reduce the paid-up capital of XXXXXXXXXX issued and outstanding common shares by an amount of $XXXXXXXXXX. The payment with respect to the reduction will be made by the distribution of the common shares of Newco to each XXXXXXXXXX shareholder on a basis proportionate to the number of common shares of XXXXXXXXXX held by each particular shareholder at that time. The fair market value of the Newco common shares at the time of the distribution will be less than the amount of the reduction to the paid-up capital of XXXXXXXXXX.
27.Newco will obtain new equity financing to raise approximately $XXXXXXXXXX in the form of common shares. The new common shares issued would account for approximately XXXXXXXXXX% of the total number of Newco common shares issued and outstanding. The common shares of Newco will be listed on the XXXXXXXXXX Stock Exchange.
PURPOSE OF PROPOSED TRANSACTIONS
28.The purpose of the proposed transactions is to enable XXXXXXXXXX to raise additional equity capital in Canada. To achieve this result it was necessary to segregate the business carried on by XXXXXXXXXX, which has incurred losses since its acquisition in XXXXXXXXXX, from the business of XXXXXXXXXX without incurring any immediate tax liability.
RULINGS
Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:
A.The provisions of subsection 85(1) will apply to the transfer of eligible property from XXXXXXXXXX to Newco described in paragraph 22 above with the result that the amount agreed upon by the transferor and transferee in their joint election in respect of each eligible property transferred will be deemed, pursuant to paragraph 85(1)(a), to be proceeds of disposition of that property to the transferor and the cost of that property to the transferee. Paragraph 85(1)(h) will apply to deem that the cost to XXXXXXXXXX of the Newco shares received as consideration for the transfer described in paragraph 22 above will be the aggregate of the agreed amounts in respect of each eligible property transferred less the fair market value at the time of the transfer of any consideration other than such shares.
B.The transfer of the Newco common shares to the shareholders of XXXXXXXXXX described in paragraph 26 above will result in XXXXXXXXXX receiving proceeds of disposition equal to the fair market value at the time of the transfer of the shares transferred and an acquisition by each XXXXXXXXXX shareholder of such shares for an adjusted cost base equal to the fair market value of the shares received at that time.
C.The reduction of the paid-up capital of the common shares of XXXXXXXXXX described in paragraph 26 above, will not, in and by itself, result in a disposition, within the meaning of section 54, by XXXXXXXXXX shareholders of their common shares.
D.The amount received by a shareholder of XXXXXXXXXX in respect of the reduction of the paid-up capital of the common shares of XXXXXXXXXX described in paragraph 26 above will, by virtue of subparagraph 53(2)(a)(ii), be deducted in calculating the adjusted cost base of the common shares of XXXXXXXXXX to such shareholder.
E.Subsection 84(4.1) will not apply to deem any amount paid by XXXXXXXXXX to its shareholders on the reduction of paid-up capital of the XXXXXXXXXX common shares described in paragraph 26 above, to be a dividend.
F.Subsection 84(2) will not apply to deem any amount paid by XXXXXXXXXX to its shareholders on the reduction of the paid-up capital, as described in paragraph 26 above, to be a dividend provided the amount paid does not exceed the amount of the reduction to XXXXXXXXXX paid-up capital.
G.The partial settlement of XXXXXXXXXX indebtedness to XXXXXXXXXX, as described in paragraph 25 above, will not give rise to a "forgiven amount" for purposes of subsections 80(1) or 80.01(1).
H.Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada and are binding provided that the proposed transactions are completed before XXXXXXXXXX.
These rulings are based on the Act as it reads and do not take into account any future amendments, whether currently proposed or not, to the Act.
Nothing in this letter should be construed as implying that the Department has agreed to or accepted:
(a)the determination of the fair market value or adjusted cost base of any property referred to herein, or the paid-up capital of any shares;
(b)that the business of the XXXXXXXXXX division is a separate business from any other business carried on by XXXXXXXXXX; or
(c)any tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 1996
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© Sa Majesté la Reine du Chef du Canada, 1996
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