1997 Ruling 9705663 - : Sale of Shares Through Holdco

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.

Principal Issues:

Two brothers, A and B, own different classes of shares of PUBCO. A wishes to sell his shares. A and B each roll their shares to Holdco. Holdco sells the shares formerly owned by B and uses funds to redeem Holdco shares held by A. GAAR applicable?

Position:

No. Similar results could be obtained using section 51 if not a public company.

Reasons:

XXXXXXXXXX

Attention: XXXXXXXXXX

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 on behalf of the above-noted taxpayers. We also acknowledge our related telephone conversations and the additional submissions contained in your letters of XXXXXXXXXX.

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 taxation services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.

I. DEFINITIONS

1. In this letter, unless the context otherwise requires:

"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;

"Adjusted Cost Base" ("ACB") has the meaning assigned by s. 54;

"Canadian-Controlled Private Corporation" (CCPC) has the meaning assigned by ss. 125(7);

"Capital Dividend" has the meaning assigned by ss. 83(2);

"Capital Dividend Account" ("CDA") has the meaning assigned by ss. 89(1);

"Capital Property" has the meaning assigned by ss. 54;

"Eligible Property" has the meaning assigned by ss. 85(1.1);

"Mr. A" means XXXXXXXXXX;

"Mr. B" means XXXXXXXXXX;

"Opco" means XXXXXXXXXX;

"Paid-Up Capital" ("PUC") has the meaning assigned by ss. 89(1);

"Paragraph" refers to a numbered paragraph in this letter;

"Proposed Transactions" means the transactions described in Paragraphs 9 to 14;

"Public Corporation" has the meaning assigned by ss. 89(1);

"Refundable Dividend Tax on Hand" ("RDTOH") has the meaning assigned by ss. 129(3);

"Taxable Canadian Corporation" has the meaning assigned by ss. 89(1); and

"Taxable Dividend" has the meaning assigned by ss. 89(1).

II. FACTS

2. Mr. A is an individual resident in the Province of XXXXXXXXXX and is the brother of Mr. B.

3. Mr. B is an individual resident in the Province of XXXXXXXXXX.

4. Opco is a body corporate, incorporated pursuant to the Companies Act, RSNS 1989, c.81, as amended, (the "Companies Act"), and is a Public Corporation and a Taxable Canadian Corporation. Opco is XXXXXXXXXX

5. The XXXXXXXXXX common shares are held primarily by the family of which Mr. A and Mr. B are members and the terms and conditions of such shares provide in part as follows:

XXXXXXXXXX.

6. Mr. A holds approximately XXXXXXXXXX common shares and XXXXXXXXXX common shares. Mr. A is a director of Opco and is intimately involved in the operations of the Opco group of companies.

7. Mr. B owns XXXXXXXXXX common shares and is intimately involved in the operations of the Opco group of companies.

8. XXXXXXXXXX ("Holdco") is a body corporate incorporated pursuant to the Companies Act and is a Canadian-controlled Private Corporation and Taxable Canadian Corporation. Holdco is wholly owned by Mr. A and the share capital consists of XXXXXXXXXX voting common shares without nominal or par value, one of which was issued to Mr. A on incorporation for $XXXXXXXXXX and XXXXXXXXXX non-voting common shares without nominal or par value, none of which are issued. The share conditions provide that the voting and non-voting common shares shall rank pari passuother than in respect to votes and dividends. Dividends may be paid on either class to the exclusion of the other and in such amount as is determined by the directors. The sole asset of Holdco is the $XXXXXXXXXX paid on the incorporation on the subscription for the one outstanding common share.

III. PROPOSED TRANSACTIONS

9. Mr. A will transfer XXXXXXXXXX common shares to Holdco, and as sole consideration therefor Holdco will issue XXXXXXXXXX voting common shares. Mr. A and Holdco will jointly elect in accordance with the provisions of ss. 85(1) and within the time referred to in ss. 85(6), such that the XXXXXXXXXX common shares will be transferred to Holdco at an agreed amount equal to the ACB of theXXXXXXXXXXcommon shares to Mr. A, which amount will be less than the fair market value of such shares. The addition to the aggregate PUC of the voting common shares of Holdco will be reduced to an amount equal to the agreed amount pursuant to ss. 85(2.1).

10. Simultaneously with the transfer described in paragraph 9 above, Mr. B will transfer XXXXXXXXXX common shares to Holdco, and as sole consideration therefor, Holdco will issue XXXXXXXXXX non-voting common shares. Mr. B and Holdco will jointly elect in accordance with the provisions of ss. 85(1) and within the time referred to in ss. 85(6), such that the XXXXXXXXXX common shares will be transferred to Holdco at an agreed amount equal to the ACB of the XXXXXXXXXX common shares to Mr. B, which amount will be less than the fair market of such shares. The aggregate addition to the PUC of the non-voting common shares of Holdco will be reduced to the agreed amount pursuant to ss. 85(2.1).

11. Holdco will sell the XXXXXXXXXX common shares that it received from Mr. A and incur a capital gain. The sales will occur over a period of time determined by market conditions. Pursuant to a shareholders' agreement between Mr. A, Mr. B and Holdco (the "Shareholders' Agreement"), Mr. B shall have the right to appoint a director of Holdco so long as he holds shares of Holdco and that director shall determine the timing of the dispositions.

12. Holdco will then use a portion of the proceeds of disposition from each sale described in Paragraph 11, net of any tax payable as a result of the disposition but including any refund of RDTOH available, to purchase for cancellation a portion of the XXXXXXXXXX non-voting common shares of Holdco held by Mr. B. The proportion of the shares of Holdco to be purchased for cancellation shall be equal to the proportion that the number of XXXXXXXXXX common shares disposed of on the particular sale is of the original XXXXXXXXXX common shares transferred to Holdco pursuant to Paragraph 9. The amount to be paid for the non-voting common shares shall be determined in accordance with Paragraph 13(a).

13. The Shareholders' Agreement will provide that:

(a) the amount paid by Holdco to Mr. B for the purchase for cancellation of the non-voting common shares of Holdco, or on a winding-up of Holdco, shall be calculated so that Mr. B shall be in the same economic position had he disposed of the XXXXXXXXXX common shares that he transferred to Holdco, pursuant to Paragraph 10, directly, and received a capital gain based on his ACB of the XXXXXXXXXX common shares at the time of the transfer to Holdco described in Paragraph 10 without the benefit of any deduction for any losses otherwise available to him and on the basis of the highest marginal rates for an individual resident in XXXXXXXXXX;

(b) the dividend paid on the non-voting common shares shall be equal to the amount of the dividends paid by Opco on a corresponding number of XXXXXXXXXX common shares.

14. On the purchase for cancellation of the XXXXXXXXXX non-voting common shares of Holdco held by Mr. B, Holdco will elect in accordance with the provisions of s. 83 and in accordance with the time frame and procedures set out therein, to apply that portion of the CDA then available to Holdco to the deemed dividend arising on the purchase for cancellation of the non-voting common shares of Holdco held by Mr. B that is required to give effect to the intent of the parties as expressed in Paragraph 13(a). The purchase for cancellation of the non-voting common shares will be arranged so that there will be a series of purchases for cancellation. This is designed to ensure that the deemed dividend arising on each separate purchase for cancellation does not exceed the amount of the CDA elected with respect to that particular tranche.

IV. PURPOSE OF THE PROPOSED TRANSACTIONS:

15. XXXXXXXXXX

XXXXXXXXXX

V. 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 ss. 85(1) will apply to:

(a) the transfer of the XXXXXXXXXX common shares by Mr. A to Holdco, as described in Paragraph 9,

(b) the transfer of the XXXXXXXXXX common shares by Mr. B to Holdco, as described in Paragraph 10,

such that the agreed amounts in respect of each transfer shall be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a) provided the transferor and transferee jointly elect in prescribed form and within the time determined under subsection 85(6), and, for greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. As a result of the purchase for cancellation of the non-voting common shares of Holdco held by Mr. B as described in paragraph 12, by virtue of ss. 84(3), Holdco will be deemed to have paid and Mr. B will be deemed to have received a dividend equal to the amount by which the amount paid in respect of such purchases for cancellation exceeds the PUC of the non-voting common shares so purchased for cancellation.

C. The proceeds of disposition to Mr. B on the disposition of the non-voting common shares of Holdco as described in Paragraph 12 will be reduced for the purposes of calculating a capital gain on such disposition by the amount of the deemed dividend created pursuant to ss. 84(3) by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54.

D. Provided that the XXXXXXXXXX common shares held by Mr. A are Capital Property of Mr. A and provided that the XXXXXXXXXX common shares held by Mr. B are Capital Property, the Proposed Transactions, in and of themselves will not cause those shares not to be considered Capital Property of Holdco on their acquisition as described in Paragraphs 9 and 10. Further, the Proposed Transactions, in and of themselves, will not cause the common shares of Holdco, received by Mr. A and Mr. B as consideration for the transfers described in Paragraphs 9 and 10 above, not to be considered Capital Property to Mr. A and Mr. B.

E. Subsection 129(1.2) will not apply to deem any dividend received by Mr. B on the disposition of his non-voting common shares of Holdco, as described in Paragraph 12, not to be a taxable dividend.

F. Provided that the requirements set out in the Act for the payment of a capital dividend are met, ss. 83(2.1) will not apply to a Capital Dividend paid to Mr. B as described in Paragraph 13.

G. By virtue of paragraph (a) of the definition of "substantial interest" in ss. 191(2), no tax will be payable under ss. 191.1(1) by Holdco as the "payer" in respect of a taxable dividend paid on the purchase for cancellation of the non-voting common shares in the capital stock of Holdco held by Mr. B since each such dividend will be an "excluded dividend" within the meaning assigned by paragraph (a) of the definition of "excluded dividend" in ss. 191(1).

I. The provisions of ss. 15(1), 56(2) and 246(1) will not be applied as a result of the Proposed Transactions, in and by themselves.

J. The provisions of ss. 245(2) will not be applied as a result of the Proposed Transactions to redetermine the tax consequences described herein.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding provided that the Proposed Transactions are completed before XXXXXXXXXX.

These rulings are based on the Act as it currently 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 confirmation of the tax consequences of any of the transactions described in this letter other than as specifically described.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch