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:
Typical butterfly reorganizations (split-offs)
Position:
55(3)(B) applied.
Reasons:
XXXXXXXXXX 3-971507
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)XXXXXXXXXX;
(c)"ACB" means the expression "adjusted cost base" as defined in section 54;
(d)"agreed amount" in respect of a property means the amount that the transferor and transferee of the property have agreed upon in their election under subsection 85(1) in respect of the property;
(e)XXXXXXXXXX;
(f)"Canadian corporation" has the meaning assigned by subsection 89(1);
(g)"capital dividend account" has the meaning assigned by subsection 89(1);
(h)"capital property" has the meaning assigned by section 54;
(i)"cost amount" has the meaning assigned under subsection 248(1);
(j)"depreciable property" has the meaning assigned by subsection 13(21);
(k)"distribution" has the meaning assigned by subsection 55(1);
(l)"dividend rental arrangement" has the meaning assigned by subsection 248(1);
(m)"eligible capital property" has the meaning assigned by section 54;
(n)"eligible property" has the meaning assigned by subsection 85(1.1);
(o)"financial intermediary corporation" has the meaning assigned by subsection 191(1);
(p)"guarantee agreement" has the meaning assigned by subsection 112(2.2);
(q)"ITAR" means Income Tax Application Rules;
(r)"paid-up capital" has the meaning assigned by subsection 89(1);
(s)"private corporation" has the meaning assigned by subsection 89(1);
(t)XXXXXXXXXX;
(u)"RDTOH" means "refundable dividend tax on hand" which has the meaning assigned by subsection 129(3);
(v)"Regulations" means the Income Tax Regulations;
(w)"related persons" has the meaning assigned by subsection 251(2);
(x)"series of transactions or events" has the meaning assigned by subsection 248(10);
(y)"specified financial institution" and "restricted financial institution" have the meanings assigned under subsection 248(1);
(z)"specified person" has the meaning assigned by subsection 69(12);
(aa)"taxable Canadian corporation" has the meaning assigned by subsection 89(1);
(ab) "taxable dividend" has the meaning assigned by subsection 89(1); and
(ac) "UCC" means the expression "undepreciated capital cost" as defined in subsection 13(21).
FACTS
1. XXXXXXXXXX
XXXXXXXXXX
2.The corporate structure of XXXXXXXXXX is illustrated in Appendix I. All the corporations shown in Appendix I, except for XXXXXXXXXX, are private corporations and taxable Canadian corporations incorporated in Canada under the laws of a province of Canada. The relevant facts regarding these corporations are summarized below:
Controlling Jurisdiction Fiscal
Name of Corporation Shareholder incorporated year-end
XXXXXXXXXX
3.The principal business activities of the companies listed in paragraph 2 above are as follows:
XXXXXXXXXX.
4.The address for XXXXXXXXXX.
5.XXXXXXXXXX principal assets consist of shares of its wholly-owned subsidiary, XXXXXXXXXX, and XXXXXXXXXX rental properties, XXXXXXXXXX.
XXXXXXXXXX authorized and outstanding share capital, details of its shareholders and the respective tax values of their shareholdings are described in Appendix V.
XXXXXXXXXX declared a stock dividend on all its common shares in XXXXXXXXXX, when the Class XXXXXXXXXX preferred shares and Class XXXXXXXXXX preferred shares were issued as follows:
Number of Class of Paid-up Estimated Fair
Shareholder Shares Shares Capital Market Value
XXXXXXXXXX
XXXXXXXXXX had RDTOH of approximately $XXXXXXXXXX at its year-end on XXXXXXXXXX.
6.XXXXXXXXXX principal assets consist of XXXXXXXXXX% of the common shares of XXXXXXXXXX and an amount receivable from XXXXXXXXXX of approximately $XXXXXXXXXX.
XXXXXXXXXX authorized and outstanding share capital, details of its shareholders and the respective tax values of their shareholdings are described in Appendix IV.
XXXXXXXXXX had RDTOH of approximately $XXXXXXXXXX at its year-end on XXXXXXXXXX.
7.XXXXXXXXXX authorized and outstanding share capital consists of XXXXXXXXXX common shares with a par value of $XXXXXXXXXX per share of which XXXXXXXXXX are issued and outstanding and are all held by
XXXXXXXXXX
8.XXXXXXXXXX principal assets consist of XXXXXXXXXX and an amount of cash.
XXXXXXXXXX authorized and outstanding share capital, details of its shareholders and the respective tax values of their shareholdings are described in Appendix III.
XXXXXXXXXX had no RDTOH and no capital dividend account at its year-end on XXXXXXXXXX.
9.XXXXXXXXXX principal assets consist of XXXXXXXXXX, receivables from affiliated parties and an amount of cash.
XXXXXXXXXX authorized and outstanding share capital, details of its shareholders and the respective tax values of their shareholdings are described in Appendix II.
The shareholders of XXXXXXXXXX include
XXXXXXXXXX
XXXXXXXXXX had no RDTOH and no capital dividend account at its year-end on XXXXXXXXXX.
10.XXXXXXXXXX is a corporation incorporated under the laws of the State of XXXXXXXXXX in the United States. XXXXXXXXXX holds, as the sole trustee, XXXXXXXXXX% of all the voting shares of XXXXXXXXXX. The trust is a discretionary, revocable, revisionary trust which XXXXXXXXXX settled for the benefit of her four adult children.
11.None of the corporations in the proposed transactions described herein is a specified financial institution or restricted financial institution.
12.None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) is or will be subject to a guarantee agreement, within the meaning referred to in subsection 112(2.2).
13.None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) has been or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).
14.None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) is or will be subject to a dividend rental arrangement.
PROPOSED TRANSACTIONS
15.Each of XXXXXXXXXX will incorporate a new corporation under the XXXXXXXXXX ("Control 1", "Control 2", "Control 3" and "Control 4", respectively). Each of Control 1, Control 2, Control 3 and Control 4 will be a private corporation and a taxable Canadian corporation.
16.The authorized share capital of each of Control 1, Control 2, Control 3 and Control 4 will be as follows:
(a) XXXXXXXXXX Class XXXXXXXXXX voting, participating common shares with a par value of $XXXXXXXXXX each;
(b) XXXXXXXXXX Class XXXXXXXXXX non-voting, participating common shares with a par value of $XXXXXXXXXX each;
(c) XXXXXXXXXX of each of Class XXXXXXXXXX, Class XXXXXXXXXX and Class XXXXXXXXXX voting preferred shares, redeemable and retractable, subject to applicable law, at an amount equal to the redemption amount of the share at that time. The rights and restrictions will provide for the paid-up capital of such shares to be fixed by special resolution at an amount determined by the directors. The redemption amount of each share will be equal to the fair market value of the consideration received less the amount of liabilities assumed divided by the number of shares issued at the time.
On incorporation, one Class XXXXXXXXXX common share of each of Control 1, Control 2, Control 3 and Control 4, respectively, will be issued to XXXXXXXXXX.
17.XXXXXXXXXX will incorporate a new corporation ("Control 5"); XXXXXXXXXX will incorporate a new corporation ("Control 6"); the trustees of the XXXXXXXXXX Trusts will incorporate a new corporation ("Control 7") and XXXXXXXXXX will incorporate a new corporation ("Control 8"). Each of Control 5, Control 6, Control 7 and Control 8 will be incorporated under the XXXXXXXXXX and will be a private corporation and a taxable Canadian corporation.
18.The authorized share capital of each of Control 5, Control 6 and Control 8 will be as follows:
(a) XXXXXXXXXX Class XXXXXXXXXX voting, participating and with no par value common shares;
(b) XXXXXXXXXX Class XXXXXXXXXX non-voting, participating common shares with a par value of $XXXXXXXXXX each;
(c) XXXXXXXXXX of each of Class XXXXXXXXXX, Class XXXXXXXXXX and Class XXXXXXXXXX voting preferred shares, redeemable and retractable, subject to applicable law, at an amount equal to the redemption amount of the share at that time. The rights and restrictions will provide for the paid-up capital of such shares to be fixed by special resolution at an amount determined by the directors. The redemption amount of each share will be equal to the fair market value of the consideration received less the amount of liabilities assumed divided by the number of shares issued at the time.
The authorized share capital of Control 7 will be as follows:
(a) XXXXXXXXXX Class XXXXXXXXXX voting, participating common shares with a par value of $XXXXXXXXXX each;
(b) XXXXXXXXXX Class XXXXXXXXXX non-voting, participating common shares with a par value of $XXXXXXXXXX each;
(c) XXXXXXXXXX of each of Class XXXXXXXXXX, Class XXXXXXXXXX and Class XXXXXXXXXX voting preferred shares, redeemable and retractable, subject to applicable law, at an amount equal to the redemption amount of the share at that time. The rights and restrictions will provide for the paid-up capital of such shares to be fixed by special resolution at an amount determined by the directors. The redemption amount of each share will be equal to the fair market value of the consideration received less the amount of liabilities assumed divided by the number of shares issued at the time.
On incorporation, Class XXXXXXXXXX common shares of each of Control 5, Control 6 and Control 8, respectively, will be issued to the respective incorporators for nominal consideration.
On incorporation, Class XXXXXXXXXX common shares of Control 7 will be issued to the trustees of the XXXXXXXXXX Trusts for its par value.
19.Each of XXXXXXXXXX will transfer all of the XXXXXXXXXX common shares and XXXXXXXXXX Class XXXXXXXXXX preferred shares that it owns to its respective holding company, Control 1, Control 2, Control 3 and Control 4. As sole consideration for such transfers:
(a) each of Control 1, Control 2 and Control 3 will issue to the respective transferor XXXXXXXXXX Class XXXXXXXXXX common shares with a fair market value equal to the aggregate fair market value of the shares transferred by each transferor to the respective transferee; and
(b) Control 4 will issue to Life XXXXXXXXXX Class XXXXXXXXXX common shares with a fair market value equal to the aggregate fair market value of the shares transferred.
Each of Control 1, Control 2 and Control 3 will add to the legal paid-up capital of its Class XXXXXXXXXX common shares an amount of $XXXXXXXXXX. Control 4 will add to the legal paid-up capital of its Class XXXXXXXXXX common shares an amount of $XXXXXXXXXX. The paid-up capital of the XXXXXXXXXX common shares or XXXXXXXXXX Class XXXXXXXXXX preferred shares, as the case may be, transferred by each transferor will not exceed the adjusted cost base of the particular shares to its respective holder.
20.In connection with each transfer of shares described in paragraph 19 above, the 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 transfer. The agreed amount in respect of the shares so transferred will, in each case, be equal to the adjusted cost base to the particular transferor, immediately before the transfer, which amount will be less than the fair market value of such shares.
21.Each of XXXXXXXXXX will transfer all of the XXXXXXXXXX common shares and XXXXXXXXXX Class XXXXXXXXXX preferred shares that he or she owns to Control 8. As sole consideration for such transfers, Control 8 will issue to the respective transferor Class XXXXXXXXXX common shares, XXXXXXXXXX, with a fair market value equal to the aggregate fair market value of the shares transferred by each transferor to Control 8.
Control 8 will add to the legal paid-up capital of its common shares an amount equal to the aggregate amount of the paid-up capital of the XXXXXXXXXX common shares and XXXXXXXXXX Class XXXXXXXXXX preferred shares transferred. The paid-up capital of the XXXXXXXXXX common shares and XXXXXXXXXX Class XXXXXXXXXX preferred shares transferred by each transferor will not exceed the adjusted cost base of the particular shares to its respective holder.
22.In connection with each transfer of shares described in paragraph 21 above, the 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 transfer. The agreed amount in respect of the shares so transferred will, in each case, be equal to the adjusted cost base to the particular transferor, immediately before the transfer, which amount will be less than the fair market value of such shares.
23.XXXXXXXXXX will comply with the provisions of section 116 to obtain from the Minister a certificate in prescribed form in respect of the disposition of the common shares of XXXXXXXXXX and the Class XXXXXXXXXX preferred shares of XXXXXXXXXX.
24.Each of XXXXXXXXXX will transfer all of the XXXXXXXXXX Class XXXXXXXXXX common shares and Class XXXXXXXXXX preferred shares that he or she owns to Control 4. As sole consideration for such transfers, Control 4 will issue to the respective transferor Class XXXXXXXXXX common shares, in each case having a fair market value equal to the fair market value of the shares transferred to Control 4.
The paid-up capital of the XXXXXXXXXX common shares and XXXXXXXXXX Class XXXXXXXXXX preferred shares transferred by each transferor will not exceed the adjusted cost base of the particular shares to its respective holder.
The agreements in respect of the transfers described herein will contain a price adjustment clause.
XXXXXXXXXX will comply with the provisions of section 116 to obtain from the Minister a certificate in prescribed form in respect of the disposition of the Class XXXXXXXXXX common shares and Class XXXXXXXXXX preferred of XXXXXXXXXX that she owns to Control 4.
25.In connection with each transfer of shares described in paragraph 24 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 so transferred will, in each case, be equal to the adjusted cost base to the particular transferor, immediately before the transfer, which amount will be less than the fair market value of such shares.
26.Each of the XXXXXXXXXX Trusts will transfer all of the Class XXXXXXXXXX common shares and Class XXXXXXXXXX preferred shares of XXXXXXXXXX that it owns to Control 7. As sole consideration for such transfers, Control 7 will issue to each transferor XXXXXXXXXX Class XXXXXXXXXX common shares with a fair market value equal to the aggregate fair market value of the shares transferred by each transferor to Control 7.
The legal paid-up capital of the Class XXXXXXXXXX common shares of Control 7 will be equal to the par value of the Class XXXXXXXXXX common shares issued, which amount will not exceed the aggregate of the paid-up capital of the XXXXXXXXXX Class XXXXXXXXXX common shares and preferred shares transferred. The paid-up capital of the XXXXXXXXXX Class XXXXXXXXXX common shares and Class XXXXXXXXXX preferred shares transferred by each transferor will not exceed the adjusted cost base of the particular shares to its respective holder.
27.In connection with each transfer of shares described in paragraph 26 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 transfer. The agreed amount in respect of the shares so transferred will, in each case, be equal to the adjusted cost base to the particular transferor, immediately before the transfer, which amount will be less than the fair market value of such shares.
28.Each of the XXXXXXXXXX Trusts will comply with the provisions of section 116 to obtain from the Minister a certificate in prescribed form in respect of the disposition of the XXXXXXXXXX Class XXXXXXXXXX common shares and Class XXXXXXXXXX preferred shares.
29.The types of property, for the purposes of a distribution pursuant to subsection 55(1), of XXXXXXXXXX, immediately before the transfers of property described in paragraphs 30, 39 and 48 below ("Butterfly Transfer 1", "Butterfly Transfer 2" and "Butterfly Transfer 3", respectively), will be determined on a consolidated look-through basis by including the appropriate pro-rata share of the assets of XXXXXXXXXX Partnership and of any corporation over which XXXXXXXXXX, as the case may be, has the ability to exercise significant influence and will be properties of the following types:
(a) cash or near-cash property comprising of all of the current assets of each corporation including any cash, deposits, accounts receivable, inventory, and rights arising from prepaid expenses (hereinafter referred to as "prepaid expenses");
(b) business property, comprising of all of the assets of each corporation, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from a business other than a specified investment business; and
(c) investment property, comprising of all of the assets of each corporation, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property or from a specified investment business.
For this purpose, XXXXXXXXXX will be considered to have significant influence over a corporation if it has the ability to exercise significant influence, within the guidelines provided by section 3050 of the CICA Handbook, over that corporation or partnership or over any corporation or partnership which has significant influence over that corporation.
Butterfly Transfer 1, Butterfly Transfer 2 and Butterfly Transfer 3 will be carried out on a gross fair market value basis.
For greater certainty, any tax accounts, such as the balance of any RDTOH or capital dividend account of XXXXXXXXXX, as the case may be, will not be considered property for purposes of the proposed transactions described herein.
30.XXXXXXXXXX will sell, at fair market value, to each of Control 4 and Control 7 a portion of its cash and near-cash property, business property and investment property. As a result of such transfers, the fair market value of the cash and near-cash property, business property and investment property received by Control 4 or Control 7, as the case may be, will be equal to the proportion of the fair market value of all of the cash or near-cash property, business property and investment property, respectively, owned by XXXXXXXXXX immediately before the transfer, that:
(a) the fair market value, immediately before the transfer, of all the shares of the capital stock of XXXXXXXXXX held by Control 4 or Control 7, as the case may be, at that time
is of
(b) the fair market value immediately before the transfer of all the issued shares of the capital stock of XXXXXXXXXX at that time.
In consideration for such transfers, Control 4 and Control 7 will each issue XXXXXXXXXX Class XXXXXXXXXX preferred shares and assume a pro-rata share of the liabilities of XXXXXXXXXX.
Each of Control 4 and Control 7 will add to the respective legal paid-up capital maintained for its Class XXXXXXXXXX preferred shares an amount not to exceed the aggregate of the agreed amounts in respect of the transfer as described in paragraph 31 below, less the amount of liabilities of XXXXXXXXXX assumed by Control 4 or Control 7, as the case may be.
The agreements in respect of the transfers described herein will contain a price adjustment clause.
31.XXXXXXXXXX and each of Control 4 and Control 7 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 that is an eligible property transferred to Control 4 or Control 7, as the case may be. The agreed amount for the purposes of subsection 85(1) in respect of such property will be where the particular property is inventory or capital property (other than depreciable property of a prescribed class), the lesser of the cost amount of the property to XXXXXXXXXX immediately before the transfer and the fair market value of such property.
The fair market value of each property will equal or exceed the agreed amount in respect thereof. The liabilities assumed by Control 4 or Control 7, as the case may be, will not exceed the cost amount of the properties transferred.
32.Each of Control 4 and Control 7 will redeem its XXXXXXXXXX Class XXXXXXXXXX preferred shares owned by XXXXXXXXXX and will each issue to XXXXXXXXXX a non-interest-bearing demand promissory note (the "Control 4 Note 1") and the "Control 7 Note 1") each having a principal amount and fair market value equal to the redemption price of the XXXXXXXXXX Class XXXXXXXXXX preferred shares of Control 4 or Control 7, as the case may be.
33.XXXXXXXXXX will purchase for cancellation the Class XXXXXXXXXX common shares and Class XXXXXXXXXX preferred shares of XXXXXXXXXX owned by Control 4 and Control 7. In consideration XXXXXXXXXX will issue to each of Control 4 and Control 7 a non-interest-bearing demand promissory note (the "XXXXXXXXXX Note 1" and "XXXXXXXXXX Note 2") having a principal amount equal to the fair market value of the XXXXXXXXXX shares so purchased.
34.The Control 4 Note 1 will be set off against the XXXXXXXXXX Note 1, the Control 7 Note 1 will be set off against the XXXXXXXXXX Note 2 and the notes will be cancelled.
35.Each of XXXXXXXXXX will transfer all of the XXXXXXXXXX common shares that he or she owns to Control 4. As sole consideration for such transfers, Control 4 will issue to the respective transferor Class XXXXXXXXXX common shares, in each case having a fair market value equal to the fair market value of the shares transferred to Control 4.
The paid-up capital of the XXXXXXXXXX common shares transferred by each transferor will not exceed the adjusted cost base of the particular shares to its respective holder.
The agreements in respect of the transfers described herein will contain a price adjustment clause.
XXXXXXXXXX will comply with the provisions of section 116 to obtain from the Minister a certificate in prescribed form in respect of the disposition of the common shares of XXXXXXXXXX that she owns to Control 4.
36.In connection with each transfer of shares described in paragraph 35 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 so transferred will, in each case, be equal to the adjusted cost base to the particular transferor, immediately before the transfer, which amount will be less than the fair market value of such shares.
37.Control 4 will incorporate a new corporation under the XXXXXXXXXX ("Subco"). Subco will be a private corporation and a taxable Canadian corporation.
38.The authorized share capital of Subco will be as follows:
(a) XXXXXXXXXX Class XXXXXXXXXX voting, participating common shares with a par value of $XXXXXXXXXX each;
(b) XXXXXXXXXX Class XXXXXXXXXX voting preferred shares with a par value of $XXXXXXXXXX each, redeemable and retractable, subject to applicable law, at an amount equal to the redemption amount of the share at that time. The redemption amount of each share will be equal to the fair market value of the consideration received less the amount of liabilities assumed divided by the number of shares issued at the time subject to a price adjustment clause
On incorporation, Control 4 will subscribe for XXXXXXXXXX Class XXXXXXXXXX common shares at $XXXXXXXXXX per share.
39.XXXXXXXXXX will sell, at fair market value, to Subco a portion of its cash and near-cash property, business property and investment property. As a result of such transfers, the fair market value of the cash and near-cash property, business property and investment property received by Subco will be equal to the proportion of the fair market value of all of the cash or near-cash property, business property and investment property, respectively, owned by XXXXXXXXXX immediately before the transfer, that:
(a) the fair market value, immediately before the transfer, of all the shares of the capital stock of XXXXXXXXXX held by Control 4 at that time
is of
(b) the fair market value immediately before the transfer of all the issued shares of the capital stock of XXXXXXXXXX at that time.
In consideration for such transfers, Subco will each issue XXXXXXXXXX Class XXXXXXXXXX preferred shares and assume a pro-rata share of the liabilities of XXXXXXXXXX.
Subco will add to the stated capital account maintained for its Class XXXXXXXXXX preferred shares an amount of $XXXXXXXXXX.
40.Subco and Control 4 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 that is an eligible property transferred to Subco. The agreed amount for the purposes of subsection 85(1) in respect of such property will be, where the particular property is inventory or capital property (other than depreciable property of a prescribed class), the lesser of the cost amount of the property to XXXXXXXXXX immediately before the transfer and the fair market value of such property.
The fair market value of each property will equal or exceed the agreed amount in respect thereof. The liabilities assumed by Subco will not exceed the cost amount of the properties transferred.
41.Subco will redeem its XXXXXXXXXX Class XXXXXXXXXX preferred shares owned by XXXXXXXXXX and will issue to XXXXXXXXXX a non-interest-bearing demand promissory note (the "Subco Note") having a principal amount and fair market value equal to the redemption price of the XXXXXXXXXX Class XXXXXXXXXX preferred shares of Subco.
42.Subco will then be wound up into its parent, Control 4. As a result of the winding-up, the Subco Note will become a liability of Control 4.
43.XXXXXXXXXX will purchase for cancellation the common shares of XXXXXXXXXX owned by Control 4. In consideration XXXXXXXXXX will issue to Control 4 a non-interest-bearing demand promissory note (the "XXXXXXXXXX Note") having a principal amount equal to the fair market value of the XXXXXXXXXX shares so purchased.
44.The Subco Note will be set off against the XXXXXXXXXX Note and the notes will be cancelled.
45.XXXXXXXXXX will transfer all of its shares of XXXXXXXXXX to Control 5. As sole consideration for such transfer, Control 5 will issue to XXXXXXXXXX Class XXXXXXXXXX common shares with a fair market value equal to the fair market value of the shares transferred to Control 5.
Control 5 will add to the legal paid-up capital of its Class XXXXXXXXXX common shares an amount equal to the aggregate amount of the paid-up capital of the XXXXXXXXXX shares transferred. The paid-up capital of the XXXXXXXXXX shares transferred by XXXXXXXXXX will not exceed the adjusted cost base of the particular shares to its holder.
46.Each of XXXXXXXXXX will transfer all of the shares of XXXXXXXXXX that it owns to Control 6. As sole consideration for such transfers, Control 6 will issue to the respective transferor Class XXXXXXXXXX common shares with a fair market value equal to the aggregate fair market value of the shares transferred by each transferor to Control 6.
Control 6 will add to the legal paid-up capital of its Class XXXXXXXXXX common shares an amount equal to the aggregate amount of the paid-up capital of the shares of XXXXXXXXXX transferred. The paid-up capital of the shares of XXXXXXXXXX transferred by each transferor will not exceed the adjusted cost base of the particular shares to its respective holder.
XXXXXXXXXX will comply with the provisions of section 116 to obtain from the Minister a certificate in prescribed form in respect of the disposition of the common shares of XXXXXXXXXX, the Class XXXXXXXXXX preferred shares of XXXXXXXXXX and common shares of XXXXXXXXXX.
47.In connection with each transfer of shares described in paragraph 46 above, the 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 transfer. The agreed amount in respect of the shares so transferred will, in each case, be equal to the adjusted cost base to the particular transferor, immediately before the transfer, which amount will be less than the fair market value of such shares.
48.XXXXXXXXXX will sell, at fair market value, to each of Control 1, Control 2, Control 3, Control 4, Control 5, Control 6, Control 7 and Control 8 (collectively, the "Control Corporations") a portion of its cash and near-cash property, business property and investment property. As a result of such transfers, the fair market value of the cash and near-cash property, business property and investment property received by each of the Control Corporations will be equal to the proportion of the fair market value of all of the cash or near-cash property, business property and investment property, respectively, owned by XXXXXXXXXX immediately before the transfer, that:
(a) the fair market value, immediately before the transfer, of all the shares of the capital stock of XXXXXXXXXX held by that particular Control Corporation at that time
is of
(b) the fair market value immediately before the transfer of all the issued shares of the capital stock of XXXXXXXXXX at that time.
In consideration for such transfers, the Control Corporations will each issue Class XXXXXXXXXX preferred shares and assume a pro-rata share of the liabilities of XXXXXXXXXX.
Each of the Control Corporations will add to the respective legal paid-up capital of its Class XXXXXXXXXX preferred shares an amount not to exceed the aggregate of the agreed amounts in respect of the transfers described in paragraph 49 below, less the amount of liabilities of XXXXXXXXXX assumed by that Control Corporation.
The agreements in respect of the transfers described herein will contain a price adjustment clause.
49.XXXXXXXXXX and each of the Control Corporations 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 that is an eligible property transferred to each Control Corporation. The agreed amount for the purposes of subsection 85(1) in respect of such property will be where the particular property is inventory or capital property (other than depreciable property of a prescribed class), the lesser of the cost amount of the property to XXXXXXXXXX immediately before the transfer and the fair market value of such property.
The fair market value of each property will equal or exceed the agreed amount in respect thereof. The liabilities assumed by each of the Control Corporations will not exceed the cost amount of the properties transferred.
49.1XXXXXXXXXX will file articles of amendment XXXXXXXXXX to create a new class of special common shares that will be voting, not entitled to either dividends or to participate in any distribution until all of XXXXXXXXXX common shares have been redeemed and cancelled.
Each of the Control Corporations will subscribe for one special common share of XXXXXXXXXX for a nominal amount.
50.Each of the Control Corporations will redeem its Class XXXXXXXXXX preferred shares owned by XXXXXXXXXX and will each issue to XXXXXXXXXX a non-interest-bearing demand promissory note (the "Control 1 Note 1", "Control 2 Note 1", "Control 3 Note 1", "Control 4 Note 2", "Control 5 Note 1", "Control 6 Note 1", "Control 7 Note 2" and "Control 8 Note 1") each having a principal amount and fair market value equal to the redemption price of the Class XXXXXXXXXX preferred shares of that particular Control Corporation.
51.XXXXXXXXXX will purchase for cancellation the common shares of XXXXXXXXXX (other than the special common shares acquired by each Control Corporations as described in paragraph 49.1 above) owned by each of the Control Corporations. In consideration XXXXXXXXXX will issue to each of the Control Corporations a non-interest-bearing demand promissory note (XXXXXXXXXX) having a principal amount equal to the fair market value of the XXXXXXXXXX shares so purchased from the respective holder.
52.The Control 1 Note 1 will be set off against the XXXXXXXXXX Note 1, Control 2 Note 1 will be set off against the XXXXXXXXXX Note 2, Control 3 Note 1 will be set off against the XXXXXXXXXX Note 3, Control 4 Note 2 will be set off against the XXXXXXXXXX Note 4, Control 5 Note 1 will be set off against the XXXXXXXXXX Note 5, Control 6 Note 1 will be set off against the XXXXXXXXXX Note 6, Control 7 Note 2 will be set off against the XXXXXXXXXX Note 7 and Control 8 Note 1 will be set off against the XXXXXXXXXX Note 8 and all the notes will be cancelled.
53.The formal dissolution of XXXXXXXXXX will be delayed pending the receipt of the dividend refund due to XXXXXXXXXX on the deemed dividends arising on the purchase for cancellation of the shares of XXXXXXXXXX described in paragraph 51 above. The cash received by XXXXXXXXXX from the dividend refund will be paid immediately to each of the Control Corporations in the same proportion as described in paragraph 48 above and XXXXXXXXXX will then be dissolved.
54.The types of property for the purposes of a distribution pursuant to subsection 55(1), of XXXXXXXXXX, immediately before the transfer of property described in paragraph 57 below ("Butterfly Transfer 4"), will be determined on a consolidated look-through basis by including the appropriate pro-rata share of the assets of any corporation or partnership over which XXXXXXXXXX has the ability to exercise significant influence and will be properties of the following types:
(a) cash or near-cash property comprising of all of the current assets of each corporation including any cash, deposits, accounts receivable, inventory, and rights arising from prepaid expenses (hereinafter referred to as "prepaid expenses");
(b) business property, comprising of all of the assets of each corporation, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from a business other than a specified investment business; and
(c) investment property, comprising of all of the assets of each corporation, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property or from a specified investment business.
For this purpose, XXXXXXXXXX will be considered to have significant influence over a corporation if it has the ability to exercise significant influence, within the guidelines provided by section 3050 of the CICA Handbook, over that corporation or partnership or over any corporation or partnership which has significant influence over that corporation.
In determining the types of property, the cash or near-cash property will include the non-interest-bearing loans to XXXXXXXXXX which are payable on demand and will be distributed to each transferee corporation on the basis of the proportion determined in paragraph 57 below.
55.In determining, on a consolidated basis, the net fair market value of its cash or near-cash property, business property and investment property immediately before Butterfly Transfer 4, liabilities of XXXXXXXXXX, also determined on a consolidated basis by including the appropriate pro rata share of the liabilities of each corporation or partnership over which XXXXXXXXXX has significant influence, will be deducted in the calculation of the net fair market value of each such type of property of XXXXXXXXXX in the following manner:
(a) current liabilities of XXXXXXXXXX determined on a consolidated basis, will be allocated to cash or near-cash property (including cash, accounts receivable, inventory and prepaid expenses) in the proportion that the fair market value of each such property is of the fair market value of all cash or near-cash property. The allocation of current liabilities as described herein will not exceed the aggregate fair market value of all near-cash property of XXXXXXXXXX;
(b) liabilities of XXXXXXXXXX, determined on a consolidated basis, other than current liabilities, that relate, to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its fair market value. Liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net fair market value of such type of property after the allocation of liabilities to a particular property, as described herein; and
(c) any liabilities ("excess unallocated liabilities"), determined on a consolidated basis, that remain after the allocations described in steps (a) and (b) are made (including excess current liabilities, if any), will then be allocated to the cash or near-cash property, business property, and investment property of XXXXXXXXXX on a consolidated basis based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities.
For greater certainty, current liabilities would include prepaid rent, tenants' security deposits, the current portion of mortgages payable on property and bonuses payable to its owner-managers. The amount of the accrued bonuses payable, which are paid on an annual basis in the amount of approximately $XXXXXXXXXX each year, will be determined on the basis of the number of months from XXXXXXXXXX year-end on XXXXXXXXXX to the time immediately before Butterfly Transfer 4.
55.1XXXXXXXXXX will file the necessary documents to amend its memorandum and articles, where necessary, under XXXXXXXXXX to create three new classes of shares as follows:
(a) XXXXXXXXXX Class XXXXXXXXXX voting, participating common shares with no par value;
(b) XXXXXXXXXX Class XXXXXXXXXX voting, participating common shares with a par value of XXXXXXXXXX¢ per share; and
(c) XXXXXXXXXX non-voting preferred shares with a par value of $XXXXXXXXXX per share, redeemable and retractable for an amount equal to their par value.
55.2XXXXXXXXXX will exchange all of the XXXXXXXXXX common shares (the "Old Shares") held by it for XXXXXXXXXX Class XXXXXXXXXX voting common shares of XXXXXXXXXX with a fair market value equal to the fair market value of the Old Shares immediately before the exchange.
XXXXXXXXXX will add to the legal paid-up capital of the Class XXXXXXXXXX common shares an amount equal to the paid-up capital of the Old Shares immediately before the conversion.
XXXXXXXXXX will cancel all the Old Shares received on the exchange.
55.3The shareholder of XXXXXXXXXX will pass a resolution to convert the contributed surplus of $XXXXXXXXXX, that arose on the issuance of the XXXXXXXXXX Old Shares in the fiscal year ended XXXXXXXXXX as described in paragraph 7 above, into paid-up capital of the Class XXXXXXXXXX common shares issued on the exchange described in paragraph 55.2 above.
55.4XXXXXXXXXX will transfer all of the Class XXXXXXXXXX common shares of XXXXXXXXXX that it owns to XXXXXXXXXX. As sole consideration for the transfer, XXXXXXXXXX will issue to XXXXXXXXXX Class XXXXXXXXXX common shares and preference shares with an aggregate fair market value equal to the fair market value of the Class XXXXXXXXXX common shares transferred.
XXXXXXXXXX will add to the legal paid-up capital of its preference shares an amount of $XXXXXXXXXX and to the legal paid-up capital of its Class XXXXXXXXXX common shares $XXXXXXXXXX. The paid-up capital of the Class XXXXXXXXXX common shares transferred by XXXXXXXXXX will not exceed their adjusted cost base to XXXXXXXXXX.
55.5XXXXXXXXXX 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 the shares so transferred will be equal to the adjusted cost base to XXXXXXXXXX, immediately before the transfer, which amount will be less than the fair market value of such shares.
XXXXXXXXXX will cancel all the Class XXXXXXXXXX common shares received on the transfer.
55.6XXXXXXXXXX will redeem its preference shares owned by XXXXXXXXXX and will pay an amount in cash equal to the redemption price of the preference shares of $XXXXXXXXXX.
56.XXXXXXXXXX will file articles of amendment under XXXXXXXXXX to create a new class of special common shares that will be voting, not entitled to either dividends or to participate in any distribution until all of XXXXXXXXXX issued and outstanding common shares, Class XXXXXXXXXX preferred shares and Class XXXXXXXXXX preferred shares have been redeemed and cancelled and with no par value.
57.XXXXXXXXXX will sell, at fair market value, to each of the Control Corporations a portion of its cash and near-cash property, business property and investment property. As a result of such transfers, the net fair market value of the cash and near-cash property, business property and investment property, determined in the manner described in paragraph 55 above, received by each of the Control Corporations will be equal to the proportion of the net fair market value of all of the cash and near-cash property, business property and investment property, respectively, owned by XXXXXXXXXX immediately before the transfer, that:
(a) the fair market value, immediately before the transfer, of all the shares of the capital stock of XXXXXXXXXX owned by that particular Control Corporation at that time
is of
(b) the fair market value, immediately before the transfer, of all the issued shares of the capital stock of XXXXXXXXXX at that time.
In consideration for such transfers, each of the Control Corporations will issue to XXXXXXXXXX Class XXXXXXXXXX preferred shares with an aggregate redemption amount equal to the aggregate fair market value of the transferred property less any liabilities of XXXXXXXXXX assumed by that Control Corporation.
In order to meet the pro-rata test of a distribution in respect of the business properties of XXXXXXXXXX, some of the transferees will assume liabilities which are attributed to, or secured by, properties transferred to one or more other transferees. In such circumstances, the transferee assuming such liabilities will be granted an option by the other transferee or transferees, as the case may be, which option may only be exercised after the completion of the transfer of properties of XXXXXXXXXX described herein, to have the other transferee or transferees assume such liabilities in exchange for a cash payment by the particular transferee equal to the amount of such liabilities, including any unpaid accrued interest.
Each of the Control Corporations will add to the legal paid-up capital of its Class XXXXXXXXXX preferred shares an amount not to exceed the aggregate of the agreed amounts in respect of the transfers as described in paragraph 58 below, less the amount of liabilities of XXXXXXXXXX assumed by that Control Corporation.
The Class XXXXXXXXXX preferred shares of Control 8 issued to XXXXXXXXXX will represent more than 10% of the issued share capital of Control 8, having full voting rights under all circumstances, and will have a value equal to more than 10% of the fair market value of all the issued shares of Control 8, but will not be sufficient to cause XXXXXXXXXX to acquire control of Control 8.
58.XXXXXXXXXX and each of the Control Corporations 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 that is an eligible property transferred. The agreed amount for the purposes of subsection 85(1) in respect of such property will be:
(a) where the particular property is inventory or capital property (other than depreciable property of a prescribed class), the lesser of the cost amount of the property to XXXXXXXXXX immediately before the transfer and the fair market value of such property; and
(b) where the particular property is depreciable property of a prescribed class, the cost amount of such property.
The fair market value of each property transferred will equal or exceed the agreed amount in respect thereof. The liabilities assumed by each of the Control Corporations will not exceed the cost amount of the properties transferred.
59.With respect to the assumption of certain undertakings of XXXXXXXXXX, which relate to prepaid monthly rent, XXXXXXXXXX and each of the Control Corporations will file joint elections, in the form and within the time referred to in subsection 20(25) to have the rules of subsection 20(24) apply to XXXXXXXXXX as the payer and to each of the Control Corporations as the recipient in respect of any payment made by XXXXXXXXXX to each of the Control Corporations.
60.Following the distribution described in paragraph 57 above, each of the Control Corporations will subscribe for XXXXXXXXXX special common shares for a nominal amount.
61.Each of the Control Corporations will redeem the Class XXXXXXXXXX preferred shares issued to XXXXXXXXXX in Butterfly Transfer 4 by the issuance of a demand non-interest-bearing note (the "Control 1 Note 2, "Control 2 Note 2", "Control 3 Note 2", "Control 4 Note 3", "Control 5 Note 2", "Control 6 Note 2", "Control 7 Note 3" and "Control 8 Note 2") each having a principal amount and fair market value equal to the redemption price of the Class XXXXXXXXXX preferred shares of that particular Control Corporation.
62.XXXXXXXXXX will purchase for cancellation the common shares, Class XXXXXXXXXX preferred shares and Class XXXXXXXXXX preferred shares of XXXXXXXXXX owned by each of the Control Corporations. In consideration XXXXXXXXXX will issue to each of the Control Corporations a non-interest-bearing demand promissory note (XXXXXXXXXX) having a principal amount equal to the fair market value of the XXXXXXXXXX shares so purchased from the respective holder.
63.The Control 1 Note 2 will be set off against the XXXXXXXXXX Note 1, Control 2 Note 2 will be set off against the XXXXXXXXXX Note 2, Control 3 Note 2 will be set off against the XXXXXXXXXX Note 3, Control 4 Note 3 will be set off against the XXXXXXXXXX Note 4, Control 5 Note 2 will be set off against the XXXXXXXXXX Note 5, Control 6 Note 2 will be set off against the XXXXXXXXXX Note 6, Control 7 Note 3 will be set off against the XXXXXXXXXX Note 7 and Control 8 Note 2 will be set off against XXXXXXXXXX Note 8 and all the notes will be cancelled.
64.XXXXXXXXXX will continue to hold legal title to the real properties as bare trustee for the beneficial owners, the Control Corporations. Other than its responsibility as a bare trustee, XXXXXXXXXX will remain an inactive corporation. The purpose for the foregoing is to claim exemption from tax payable XXXXXXXXXX on the transfer of land and building located in XXXXXXXXXX.
65.XXXXXXXXXX will make a request to the XXXXXXXXXX Tax Services Office for approval to change its fiscal year-end from XXXXXXXXXX to a day immediately before the transfer of property described in paragraph 57 above. The only purpose of the request is to allow XXXXXXXXXX to claim capital cost allowance to be deducted in the last fiscal period that XXXXXXXXXX will carry on a business before the transfer of property described in paragraph 57 above.
PURPOSE OF THE PROPOSED TRANSACTIONS
66.The purpose of the proposed transactions is to allow for distribution of the properties of XXXXXXXXXX to the various shareholder family groups,
XXXXXXXXXX
the current distributions from the corporation, future acquisitions of properties, management succession and the amount of external borrowings.
XXXXXXXXXX
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, subject to the application of subsection 69(11) and of subsections 20(1.2) and 26(5) of the ITAR, to the transfer:
(i) by each of XXXXXXXXXX of the XXXXXXXXXX common shares, XXXXXXXXXX Class XXXXXXXXXX preferred shares and XXXXXXXXXX common shares to their respective holding company, Control 1, Control 2, Control 3 and Control 4 described in paragraph 19 above;
(ii) by each of XXXXXXXXXX of the XXXXXXXXXX common shares and XXXXXXXXXX Class XXXXXXXXXX preferred shares to Control 8 described in paragraph 21 above;
(iii) by each of XXXXXXXXXX of the XXXXXXXXXX Class XXXXXXXXXX common shares and Class XXXXXXXXXX preferred shares to Control 4 described in paragraph 24 above;
(iv) by each of the XXXXXXXXXX Trusts of the Class XXXXXXXXXX common shares and Class XXXXXXXXXX preferred shares of XXXXXXXXXX to Control 7 described 26 above;
(v) by XXXXXXXXXX of its properties that are eligible properties to Control 4 and Control 7 described in paragraph 30 above;
(vi) by each of XXXXXXXXXX of the XXXXXXXXXX common shares to Control 4 described in paragraph 35 above;
(vii) by XXXXXXXXXX of its properties that are eligible properties to Subco described in paragraph 39 above;
(viii)by XXXXXXXXXX of the shares of XXXXXXXXXX to Control 5 described in paragraph 45 above;
(ix) by each of XXXXXXXXXX of the shares of XXXXXXXXXX to Control 6 described in paragraph 46 above;
(x) by XXXXXXXXXX of its properties that are eligible properties to each of the Control Corporations described in paragraph 48 above; and
(xi) by XXXXXXXXXX of its properties that are eligible properties to each of the Control Corporations described in paragraph 57 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) and in respect of depreciable property, the transferee's capital cost of each such property will be determined in accordance with subsection 85(5). For the purposes of the joint elections described in paragraph 58 above, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition..." in subparagraph 85(1)(e)(i) will be read to mean the proportion of the undepreciated capital cost to the taxpayer of all the property of that class that the fair market value of the property immediately before the disposition is of the fair market value of all property of that class immediately before the disposition.
For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.
B.Subsection 85(2.1) will apply to determine the paid-up capital of the shares issued as consideration for the transfers of property described in paragraphs 19, 30, 39, 45, 46 (except for the transfer from XXXXXXXXXX), 48 and 57.
C.The provisions of paragraph 212.1(1)(a) will not apply to the transfer of:
(i) the common shares of XXXXXXXXXX and the Class XXXXXXXXXX preferred shares of XXXXXXXXXX to Control 8 by XXXXXXXXXX described in paragraph 21 above;
(ii) the Class XXXXXXXXXX common shares and Class XXXXXXXXXX preferred shares of XXXXXXXXXX to Control 7 from each of the XXXXXXXXXX Trusts described in paragraph 26 above; and
(iii) the shares of XXXXXXXXXX to Control 6 from XXXXXXXXXX described in paragraph 46 above.
For greater certainty, the provisions of paragraph 212.1(1)(b) will not apply to reduce the paid-up capital of the shares issued by each issuer in the transactions described in subparagraphs (i), (ii) and (iii) described herein.
D.The provisions of subsection 84(1) will not apply to the issuance of shares described in paragraphs 19, 21, 24, 26, 30, 35, 39, 45, 46, 48 and 57 above.
E.On the redemption of the Subco Class XXXXXXXXXX preferred shares, as described in paragraph 41 above, the amount, if any, by which the amount paid to redeem these shares exceeds the paid-up capital of these shares immediately before the redemption:
(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.
F.On the redemption of:
(i) the Class XXXXXXXXXX preferred shares of Control 4 and Control 7, as described in paragraph 32 above;
(ii) the Class XXXXXXXXXX preferred shares of each of the Control Corporations, as described in paragraph 50 above;
(iii) the Class XXXXXXXXXX preferred shares of each of the Control Corporations, as described in paragraph 61 above; and
on the purchase for cancellation of:
(iv) the Class XXXXXXXXXX common shares and Class XXXXXXXXXX preferred shares of XXXXXXXXXX held by Control 4 and Control 7, as described in paragraph 33 above;
(v) the common shares of XXXXXXXXXX held by Control 4, as described in paragraph 43;
(vi) the common shares of XXXXXXXXXX held by each of the Control Corporations, as described in paragraph 51 above; and
(vii) the common shares, the Class XXXXXXXXXX preferred shares and Class XXXXXXXXXX preferred shares of XXXXXXXXXX held by each of the Control Corporations, as described in paragraph 62 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; and
(ii) will be deemed pursuant to paragraph 84(3)(b) to be a dividend received by the holder of such shares.
G.The deemed dividends referred to in Rulings E and F above, to the extent that they are taxable 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, for greater certainty, such deduction will not be precluded by subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4); 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 in Rulings E and F above, 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).
H.No taxes under Part IV of the Act will be payable in respect of a dividend described in Rulings E and F above except as provided in paragraph 186(1)(b).
I.Part IV.1 of the Act will not apply to the deemed dividends described in Rulings E and F above because the dividends will be excepted dividends pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1.
J.Part VI.1 of the Act will not apply to the deemed dividends described in Rulings E and F above because the dividends will be excluded dividends pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).
K.Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is no:
(i) disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(ii) acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(iii) acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);
(iv) acquisition of property in the circumstances described in paragraph 55(3.1)(c); or
(v) acquisition of property in the circumstances described in paragraph 55(3.1)(d)
which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling F above.
L.The extinguishment of:
(i) the Control 4 Note 1, the Control 7 Note 1, the XXXXXXXXXX Note 1 and the XXXXXXXXXX Note 2 described in paragraph 34 above;
(ii) the Subco Note and the XXXXXXXXXX Note described in paragraph 44 above;
(iii) the Control 1 Note 1, the XXXXXXXXXX Note 1, the Control 2 Note 1, the XXXXXXXXXX Note 2, the Control 3 Note 1, the XXXXXXXXXX Note 3, the Control 4 Note 2, the XXXXXXXXXX Note 4, the Control 5 Note 1, the XXXXXXXXXX Note 5, the Control 6 Note 1, the XXXXXXXXXX Note 6, the Control 7 Note 2, the XXXXXXXXXX Note 7, the Control 8 Note 1 and the XXXXXXXXXX Note 8 described in paragraph 52 above; and
(iv) the Control 1 Note 2, the XXXXXXXXXX Note 1, the Control 2 Note 2, the XXXXXXXXXX Note 2, the Control 3 Note 2, the XXXXXXXXXX Note 3, the Control 4 Note 3, the XXXXXXXXXX Note 4, the Control 5 Note 2, the XXXXXXXXXX Note 5, the Control 6 Note 2, the XXXXXXXXXX Note 6, the Control 7 Note 3, the XXXXXXXXXX Note 7, the Control 8 Note 2 and the XXXXXXXXXX Note 8 described in paragraph 63 above
will not give rise to a "forgiven amount" for purposes of subsections 80(1) or 80.01(1).
M.Provided that the properties acquired as consideration for the assumption of the liabilities of:
(i) XXXXXXXXXX by Control 4 and Control 7, as described in paragraph 30 above;
(ii) XXXXXXXXXX by Subco, as described in paragraph 39 above, and subsequently assumed by Control 4 on the winding-up of Subco, as described in paragraph 44 above;
(iii) XXXXXXXXXX by each of the Control Corporations, as described in paragraph 48 above; and
(iv) XXXXXXXXXX by each of the Control Corporations, as described in paragraph 57 above,
continue to be used by each transferee for the purpose of gaining or producing income, and provided that interest on the assumed liabilities was deductible in computing the income of the respective transferor before the assumption, an amount paid or payable by each transferee (depending on the method regularly followed by each transferee in computing its income), not in excess of a reasonable amount, in respect of a year pursuant to a legal obligation to pay interest on the liabilities to be assumed by each transferee will be deductible in computing the transferee's income for tax purposes in that year in accordance with the provisions of paragraph 20(1)(c).
N.Provided that XXXXXXXXXX has included or will have included an amount in respect of the undertakings described in paragraph 59 above, in computing its income from its business pursuant to paragraph 12(1)(a) for the taxation year ending immediately before the time of the distribution of property of XXXXXXXXXX referred to in paragraph 57 above or any preceding taxation year, the payment made by XXXXXXXXXX to each of the Control Corporations in consideration for the assumption by each of the Control Corporations of those undertakings, may, to the extent that the payment is reasonable:
(i) pursuant to paragraph 20(24)(a), be deducted in computing the income of XXXXXXXXXX for its fiscal period in which the payment takes place, and
(ii) pursuant to paragraph 20(24)(b), shall be deemed to be an amount described in paragraph 12(1)(a) in respect of each of the Control Corporations.
O. Subsection 74.4(2) will not apply to the transfer of the XXXXXXXXXX Class XXXXXXXXXX preferred shares of XXXXXXXXXX transferred to Control 4 as described in paragraph 24 above.
P. After Subco has been wound up into Control 4 as described in paragraph 42 above, the provisions of subsection 88(1) will apply such that:
(i) each property of Subco distributed to Control 4 on the winding-up will be deemed by paragraph 88(1)(a) to have been disposed of by Subco for proceeds of disposition determined under that paragraph: and
(ii) the shares in the capital stock of Subco held by Control 4 immediately before the winding-up will be deemed by paragraph 88(1)(b) to have been disposed of by Control 4 for proceeds determined under that paragraph.
Q. Pursuant to subsection 1102(14) of the Regulations, each property which, prior to the commencement of the proposed transactions described herein, was depreciable property of a prescribed class or separate prescribed class of XXXXXXXXXX and which is acquired by each of the Control Corporations, as described in paragraph 57 above, will be depreciable property of the same prescribed class or separate prescribed class, as the case may be, of each of the Control Corporations.
R. Provided that the condition specified in paragraph 1100(2.2)(f) of the Regulations is satisfied, paragraph 1100(2.2)(h) of the Regulations will apply such that no amount will be included by each of the Control Corporations under paragraph 1100(2)(a) of the Regulations in respect of depreciable property of a prescribed class that is property acquired by each of the Control Corporations from XXXXXXXXXX, as described in paragraph 57 above.
S. Pursuant to subsection 1101(1ad) of the Regulations, each rental property (within the meaning given in subsection 1100(14) of the Regulations) which is acquired by each of the Control Corporations, as described in paragraph 57 above, and which would otherwise be rental property of a separate prescribed class under subsection 1101(1ac) of the Regulations, will be deemed not to be property of a separate prescribed class of each of the Control Corporations under subsection 1101(1ac) of the Regulations provided that such property was a rental property included in a prescribed class of XXXXXXXXXX other than a separate class prescribed under subsection 1101(1ac) of the Regulations.
T. The provisions of subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to the proposed transactions, in and by themselves.
U. 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.
V. The application of subsection 84.1(1) to the transfers by:
(i) XXXXXXXXXX of all the XXXXXXXXXX Class XXXXXXXXXX common shares and Class XXXXXXXXXX preferred shares that he or she owns to Control 4, as described in paragraph 24 above; and
(ii) XXXXXXXXXX of all the XXXXXXXXXX common shares that he or she owns to Control 4, as described in paragraph 35 above,
will result in a reduction of the paid-up capital of the Class XXXXXXXXXX common shares of Control 4 issued on the transfers.
W. The cost of the promissory notes issued in the proposed transactions described in paragraphs 32, 33, 41, 43, 50, 51, 61 and 62 above will be equal to their respective principal amounts.
X. Because of the application of paragraph 84(1)(c.3), XXXXXXXXXX will not be deemed to have paid and XXXXXXXXXX will not be deemed to have received a dividend as a result of the conversion of contributed surplus into paid-up capital described in paragraph 55.3 above.
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 reads and do not take into account any future amendments, whether currently proposed or not, to the Act.
OPINION
Provided that:
(a) our understanding of the facts and proposed transactions described herein is correct;
(b) the proposed amendment to the definition of "permitted redemption" in subsection 55(1), contained in Bill C-28 which was given first reading in the House of Commons on December 10, 1997, is enacted in substantially the same form;
(c) as part of the series of transactions or events that includes the proposed transactions described herein, there is no:
(i) disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(ii) acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(iii) acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);
(iv) acquisition of property in the circumstances described in paragraph 55(3.1)(c); or
(v) acquisition of property in the circumstances described in paragraph 55(3.1)(d)
which has not been described herein,
it is our opinion that by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividend referred to in Ruling E above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
1.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, or
(b) any tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given, or
(c) XXXXXXXXXX request to change its fiscal year-end, as described in paragraph 65 above. The responsibility for granting approval of such year-end changes rests with the tax services office where XXXXXXXXXX files its tax returns.
2.You have informed us that the sale agreements relating to the transfers of property described in paragraphs 24, 26, 30, 35 and 48 and the issuance of Subco's Class XXXXXXXXXX preferred shares described in paragraph 39 above will include a price adjustment clause which will permit the parties to alter the sale price of any such property, the number of shares received as consideration for such property and the retraction and redemption of any shares received.
Nothing in this letter should be interpreted as confirming that,
(a) for the purposes of the Act, any adjustment made pursuant to any such price adjustment clause in respect of a transaction subsequent to the time of such transaction will be effective, retroactively, to the time of such transaction,
(b) for the purposes of the Act, any amount paid pursuant to any such price adjustment clause, in respect of a transaction subsequent to the time of such transaction will be an additional payment of the redemption or purchase price of any shares redeemed or repurchased, or
(c) in the event that any adjustment is made pursuant to any such price adjustment clause, the proposed transactions referred to in paragraphs 30, 39, 48 and 57 above will be considered to have been carried out as described in those paragraphs, in particular, for the purposes of Rulings E and F above.
The operation of a price adjustment clause is not a proposed transactions and, consequently, advance rulings are not given by the Department in respect thereof. The Department's position with respect to price adjustment clauses in agreements is set out in IT-169 dated August 6, 1974.
3.Each of XXXXXXXXXX had RDTOH at its respective fiscal year end, on XXXXXXXXXX (and will each have a balance at its respective fiscal year end in 1997), and the taxation year of XXXXXXXXXX in which it purchases for cancellation its common shares held by each of the Control Corporations will coincide with the taxation year of each of the Control Corporations in which each Corporation redeems its Class XXXXXXXXXX Voting Preferred Shares held by XXXXXXXXXX and the taxation year of XXXXXXXXXX in which it purchases for cancellation its common shares, Class XXXXXXXXXX Preferred Shares and Class XXXXXXXXXX Preferred Shares held by each of the Control Corporations will coincide with the taxation of each of the Control Corporations in which each Control Corporation redeems its Class XXXXXXXXXX Preferred Shares held by XXXXXXXXXX. Consequently, this gives rise to the so-called circularity problem with respect to RDTOH, which is described in the paper given by Mr. R. Read of this Department on pages 18:23/24 of the 1988 Conference Report of the Canadian Tax Foundation. As explained in that paper, it is important to ensure that the dividends deemed by subsection 84(3) to be paid on the redemption or purchase for cancellation of shares, are paid by a corporation that does not have any RDTOH and that does not receive any dividends from another corporation which was entitled to a dividend refund during the taxation year of the first mentioned corporation in which such corporation would redeem or purchase for cancellation its shares.
You have indicated that while you are aware of the Department's position as set out herein, you do not propose to avoid the problem of circularity as described herein. Consequently, we must inform you that, in our view, this will result in each of XXXXXXXXXX and each of the Control Corporations being subject to Part IV tax. It is also our view that the circularity problem causes uncertainty as to which corporation is ultimately entitled to a dividend refund and which corporation is ultimately liable for Part IV tax. Since the problem will affect the assessment of the income tax returns of XXXXXXXXXX and the Control Corporations, the district taxation office at which each of XXXXXXXXXX and each of the Control Corporations files its respective T2 income tax return will have to be consulted in order to determine which corporation will receive the dividend refund and which corporation will be subject to the Part IV tax liability described in these comments.
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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