30 November 1996 Ruling 9705823 - SBC PUREFICATION

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:

whether cash and short term investments would be considered to be assets used principally in an active business.

Position:

Yes in the particular circumstances.

Reasons:

Cash and short term investments being held for payment, following the year-end of the corporation, of bonuses to employees in accordance with company policy. Bonuses were earned by employees in carrying out the business of the corporation over the whole year and could have been paid during the year.

XXXXXXXXXX							3-970582
XXXXXXXXXX

Attention:XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sir:

Re: XXXXXXXXXX
Advance Income Tax Ruling

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 your letters of XXXXXXXXXX and our telephone conversations in connection herewith.

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 any tax services office or any 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) "agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in their election under subsection 85(1) in respect of the property;

(d) "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);

(e) "capital dividend account" has the meaning assigned by subsection 89(1);

(f) "capital property" has the meaning assigned by section 54;

(g) "cost amount" has the meaning assigned by subsection 248(1);

(h) "eligible property" has the meaning assigned by subsection 85(1.1);

(i) XXXXXXXXXX;

(j) "paid-up capital" has the meaning assigned by subsection 89(1);

(k) "qualified small business corporation share" has the meaning assigned by subsection 110.6(1);

(l) "restricted financial institution" has the meaning assigned by subsection 248(1);

(m) "series of transactions or events" has the meaning assigned by subsection 248(10);

(n) "small business corporation" has the meaning assigned by subsection 248(1);

(o) "specified financial institution" has the meaning assigned by subsection 248(1); and

(p) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).

Our understanding of the facts and of the proposed transactions is as follows:

FACTS

1. Opco is a corporation incorporated under the laws of the province of XXXXXXXXXX. Opco was incorporated under the name "XXXXXXXXXX". On XXXXXXXXXX its name was changed to "XXXXXXXXXX" and on XXXXXXXXXX its name was changed to "XXXXXXXXXX". Opco is a Canadian-controlled private corporation and a taxable Canadian corporation.

2. All the issued and outstanding shares of Opco are held by Holdco. The paid-up capital of the issued and outstanding common shares of Opco is $XXXXXXXXXX.

3. Opco carries on the business of a mutual fund dealer whose activities are governed by the Securities Act of XXXXXXXXXX.

In the XXXXXXXXXX period immediately preceding the proposed transactions described herein, XXXXXXXXXX% or more of the fair market value of the assets of Opco will have been used principally in an active business carried on by Opco in Canada.

It is Opco's policy to pay bonuses to its employees for carrying on the business of Opco each year. Short-term cash reserves accumulated to pay such bonuses in accordance with Opco's corporate policy, will be included in determining the assets of Opco used principally in an active business.

4. Holdco is a corporation incorporated under the laws of the province of XXXXXXXXXX. Holdco is a Canadian-controlled private corporation and a taxable Canadian corporation.

5. The issued and outstanding common shares of Holdco are held as follows:

Shareholder Number of Shares Held

XXXXXXXXXX

The paid-up capital of the issued and outstanding common shares of Holdco is $XXXXXXXXXX.

The shares of Holdco are capital property to XXXXXXXXXX residents of Canada for purposes of the Act.

6. Holdco is the parent of Opco and owns the land and building used by Opco in carrying on its business.

In the XXXXXXXXXX period immediately preceding the proposed transactions described herein, more than XXXXXXXXXX% of the fair market value of the assets of Holdco will have been attributable to either assets used in an active business carried on in Canada by Opco or to Holdco's shares of Opco.

7. Immediately prior to the sale of the Holdco shares described in paragraph 22 below, more than XXXXXXXXXX% of the fair market value of the assets of Holdco will be attributable to assets described in paragraphs (a) and (b) of the definition of "small business corporation".

8. There are not, and will not be at any time prior to the completion of the Proposed Transactions, any guarantee agreements in respect of any of the Holdco or Newco (a new corporation to be incorporated as described in paragraph 12 below) shares.

9. None of Holdco or Newco has entered, or will enter, into a dividend rental arrangement in respect of any of the shares to be redeemed as part of the Proposed Transactions.

10. None of the Holdco shares or Newco shares will be issued or acquired as part of a series of transactions described in subsection 112(2.5).

11. None of the corporations referred to herein is a specified financial institution or a restricted financial institution.

PROPOSED TRANSACTIONS

12. XXXXXXXXXX will incorporate a new corporation ("Newco") under the Canada Business Corporations Act. Newco will be a taxable Canadian corporation and a Canadian-controlled private corporation.

The authorized share capital of Newco will consist of:

(a) an unlimited number of voting common shares; and

(b) an unlimited number of preferred shares that are redeemable and retractable for a specified amount equal to the fair market value of the property for which the shares are issued, carrying a non-cumulative annual dividend rate equal to XXXXXXXXXX% of the amount for which such shares are issued.

13. On incorporation of Newco no shares will be issued. Subsequent to the incorporation of Newco each of XXXXXXXXXX will subscribe for a number of shares, in the ratio of their current holdings in Holdco, for nominal amounts.

14. Holdco will file articles of amendment under the XXXXXXXXXX authorizing the creation of a new class of common shares ( the "Class XXXXXXXXXX Common Shares"). The Class XXXXXXXXXX Common Shares will be voting, participating and entitled to XXXXXXXXXX votes for each share.

15. Each of XXXXXXXXXX will transfer to Newco Holdco common shares (or a fraction of a Holdco common share) with a fair market value equal to the fair market value of the properties of Holdco transferred to Newco as described in paragraph 17 below. As sole consideration for the transfer of the Holdco common shares, Newco will issue to the respective transferor, common shares with a fair market value equal to the fair market value of the Holdco common shares at the time of the transfer.

Newco will add to the stated capital account maintained for its common shares an amount equal to the paid-up capital of the Holdco common shares transferred to Newco.

16. In connection with each transfer of shares referred to in paragraph 15 above, each transferor and the transferee 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 transfers. The agreed amount in respect of the shares transferred will, in each case, be equal to the adjusted cost base of such shares to the particular transferor at the time of the transfer.

17. Holdco will transfer at fair market value to Newco cash and other assets not used in its business. As sole consideration for the transfer, Newco will issue to Holdco preferred shares with a redemption and retraction amount and fair market value equal to the fair market value of the transferred properties that will be received by Newco.

Newco will add to the stated capital account maintained for its preferred shares issued to Holdco an amount equal to the aggregate of the agreed amounts in respect of eligible property and the fair market value of all other properties transferred.

18. With respect to the transfer of property described in paragraph 17 above, Holdco 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. The agreed amount in respect of each eligible property so transferred will be the lesser of the fair market value at the time of the transfer and the adjusted cost base to Holdco at that time.

The agreed amount in respect of each property will not exceed its fair market value or be less than its cost amount.

19. Newco will redeem its preferred shares issued to Holdco by the issuance of a demand non-interest-bearing note (the "Newco Note") having a principal amount and fair market value equal to the redemption price of the preferred shares of Newco.

20. Holdco will then purchase for cancellation its common shares held by Newco in return for a demand non-interest-bearing note (the "Holdco Note") having a principal amount and fair market value equal to the fair market value of the common shares of Holdco purchased.

21. The Newco Note will be set off against the Holdco Note and the notes will be cancelled.

22. XXXXXXXXXX will sell at fair market value to Holdco the remaining Holdco common shares held by them at that time. As sole consideration for the transfer, Holdco will issue to the respective transferor, Class XXXXXXXXXX Common Shares with a fair market value equal to the fair market value of the Holdco common shares at the time of the transfer. Holdco will cancel all of its common shares received on the transfer.

Holdco will add to the share capital of its Class XXXXXXXXXX Common Shares an amount equal to the paid-up capital of the Holdco common shares transferred.

23. In connection with each transfer of shares referred to in paragraph 22 above, each transferor and the transferee will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsections 85(1) apply to the transfers. The agreed amount in respect of the shares transferred will, in each case, not exceed the fair market value or be less than the cost amount to XXXXXXXXXX, as the case may be, of the shares transferred. The actual agreed amount will be dependent on the claim for a capital gains deduction to be made pursuant to subsection 110.6(2.1) in respect of each transfer.

PURPOSE OF THE PROPOSED TRANSACTIONS

24. The purpose of the Proposed Transactions is to allow each of XXXXXXXXXX to reorganize their ownership of Holdco to:

(i) separate the cash and other assets that are not used in the active business operations of Holdco from the active business operations of Holdco; and

(ii) crystallize the gain on the Holdco common shares and utilize their capital gains exemption to the extent available.

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:

(i) the Holdco common shares by each of XXXXXXXXXX to Newco described in paragraph 15 above; and

(ii) the Holdco common shares by each of XXXXXXXXXX to Holdco described in paragraph 22 above

with the result that the agreed amount in each transfer will be deemed pursuant to paragraph 85(1)(a) to be the proceeds of disposition of that property to each transferor and the cost of that property to the respective transferee.

For greater certainty, paragraph 85(1)(e.2) will not apply to such transfers.

B. The provisions of subsection 85(1) will apply to the transfer of the properties of Holdco that are eligible property to Newco, as described in paragraph 17 above, such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a).

For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to such transfers.

C. The application of subsection 84.1(1) to the transfers by XXXXXXXXXX of their Holdco common shares to Newco, as described in paragraph 15 above, and the transfer of their Holdco common shares to Holdco, as described in paragraph 22 above, will not result in a reduction of the paid-up capital of the Newco common shares, or the paid-up capital of the Class XXXXXXXXXX Common Shares or a dividend being deemed to have been received by XXXXXXXXXX in either of the transfers.

D. On the redemption by Newco of its preferred shares held by Holdco described in paragraph 19 above and the purchase for cancellation by Holdco of its common shares described in paragraph 20 above the amount, if any, by which the amount paid to redeem or purchase these shares, as the case may be, exceeds the paid-up capital of these shares immediately before the redemption or purchase for cancellation, as the case may be,:

(i) will be deemed pursuant to paragraph 84(3)(a) to be a dividend paid by the issuer of such shares;

(ii) will be deemed pursuant to paragraph 84(3)(b) to be a dividend received by the holder of such shares; and

to the extent that they are taxable dividends, such dividends will:

(i) pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividend is deemed to have been received; and

(ii) by virtue of the application of paragraph (j) of the definition "proceeds of disposition" in section 54, the amount of a deemed dividend referred to herein, will be excluded from the proceeds of disposition of the shares, and any loss arising from the disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3).

E. No taxes under Part IV of the Act will be payable in respect of a dividend described in Ruling D above except as provided in paragraph 186(1)(b).

F. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the deemed dividends referred to in Ruling D above, in and by themselves, provided that there is not:

(i) a disposition of any property to a person with whom Holdco or Newco would not be related for purposes of the Act, or

(ii) a significant increase in the interest in any corporation of any person with whom Holdco or Newco would not be related for the purposes of the Act

other than as described in paragraphs 12 to 22 above, which occurs as part of a series of transactions or events that includes the proposed transactions described herein.

G. Subject to the provisions of subsection 110.6(8) and provided that at the time of the transfer of the Holdco common shares to Holdco described in paragraph 22 above, such shares are qualified small business corporation shares, XXXXXXXXXX will each be entitled to a deduction to the extent permitted by subsection 110.6(2.1) in respect of the capital gain realized on the disposition of such shares. For greater certainty, such deduction will not be denied by virtue of subsection 110.6(7), provided that the proposed transactions described in paragraphs 12 to 22 above are not undertaken as part of a series of transactions that includes an acquisition of property by a corporation for consideration that is significantly less than the fair market value of the property at the time of acquisition.

H. The provisions of subsections 15(1), 56(2) and 69(1) will not apply as a result of the proposed transactions, in and by themselves.

I. Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the ruling given.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 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 currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

COMMENT

1. Nothing in this letter should be construed as confirmation that Revenue Canada has reviewed or accepted that Holdco is a small business corporation as this is a question of fact the determination of which is not covered by this ruling.

Yours truly,

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