30 November 1996 Ruling 9719893 - BUTTERFLY REORGANIZATION

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: None

Position: n/a

Reasons: n/a

XXXXXXXXXX							3-971989
XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sir:

Re: XXXXXXXXXX

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 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) "adjusted cost base" has the meaning assigned by section 54;

(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) "distribution" has the meaning assigned by subsection 55(1);

(i) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

(j) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

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

(l) "private corporation" has the meaning assigned by subsection 89(1);

(m) "RDTOH" means "refundable dividend tax on hand" which has the meaning assigned by subsection 129(3);

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

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

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

(q) "specified investment business" has the meaning assigned by subsection 125(7);

(r) XXXXXXXXXX;

(s) "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. Holdco was incorporated under the XXXXXXXXXX. Holdco is a Canadian-controlled private corporation and a taxable Canadian corporation.

2. XXXXXXXXXX ("Mrs. C"), mother of Mr. A and Mr. B, subscribed for XXXXXXXXXX common shares of Holdco on incorporation for an amount of $XXXXXXXXXX. On XXXXXXXXXX, Holdco acquired the common and preferred shares of another Canadian-controlled corporation ("Opco") from Mrs. C for consideration consisting of XXXXXXXXXX Class XXXXXXXXXX preferred shares of Holdco (the "Holdco Preferred Shares"). The Holdco Preferred Shares had a redemption price of $XXXXXXXXXX each, entitled to non-cumulative dividends of XXXXXXXXXX% per annum on the redemption price and had a paid-up capital of $XXXXXXXXXX.

Mr. A and Mr. B are residents of Canada for purposes of the Act and they hold their shares in Holdco as capital property.

3. On XXXXXXXXXX, Opco redeemed its common and preferred shares held by Holdco in exchange for a payment of $XXXXXXXXXX.

4. The transactions described in paragraphs 2 and 3 above were carried out as part of a property settlement between Mrs. C and her husband upon their divorce.

5. Mrs. C died on XXXXXXXXXX. A deemed disposition at fair market value of Mrs. C's shares of Holdco was realized pursuant to subsection 70(5) and reported in the terminal return for Mrs. C. The shares of Holdco were distributed from the estate of Mrs. C on XXXXXXXXXX and each of Mr. A and Mr. B received XXXXXXXXXX common shares and XXXXXXXXXX Holdco Preferred Shares.

6. Since the redemption and repurchase of the shares of Opco, Holdco's assets have consisted of only cash.

The only liabilities of Holdco will be bank charges and accrued professional fees payable.

The taxation year of Holdco ends on XXXXXXXXXX.

7. At XXXXXXXXXX, Holdco had RDTOH in the amount of $XXXXXXXXXX and a nil balance in its capital dividend account.

8. The types of property for the purposes of a "distribution" of Holdco, immediately before the transfer of property described in paragraph 17 below on the wind-up of Holdco, will be classified as only one type of property, cash or near-cash property, including cash and interest receivable.

9. Neither of the corporations to be incorporated by Mr. A and Mr. B as described in paragraph 14 below ("Aco" and "Bco"), nor any corporation to which either of those corporations will be related, will be a specified financial institution.

10. There are not, and will not be at any time prior to the completion of the proposed transactions, any agreements or undertakings which constitute or include a "guarantee agreement" in respect of the issued shares of any corporation described herein.

11. None of Holdco, Aco or Bco has, or will have, entered into a "dividend rental arrangement" in respect of the issued shares of any corporation described herein.

12. None of the issued shares of any corporation described herein were 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).

13. No property has or will become property of, and no liabilities have been or will be incurred by Holdco in contemplation of and before the series of transactions described herein.

PROPOSED TRANSACTIONS

14. Each of Mr. A and Mr. B will incorporate a corporation under the XXXXXXXXXX ("Aco" and "Bco", respectively). Aco and Bco will be taxable Canadian corporations and Canadian-controlled private corporations.

15. Each of Mr. A and Mr. B will transfer all the Holdco common shares and Holdco Preferred Shares that he holds to Aco and Bco, respectively. As sole consideration for such transfer, each of Aco and Bco will issue to the respective transferor voting fully-participating common shares.

16. In connection with each transfer of shares described in paragraph 15 above, the transferor and 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. Each of Aco and Bco will add to its stated capital account for its common shares the amount of $XXXXXXXXXX.

17. Following the transactions described in paragraphs 14, 15 and 16 above, the shareholders of Holdco will pass a special resolution to authorize the dissolution of Holdco under the XXXXXXXXXX.

As part of the dissolution of Holdco, all of the liabilities of the corporation will be paid in full prior to the distribution of all of the remaining assets of the corporation. On the distribution of the assets of Holdco, each of Aco and Bco will receive 50% of all assets of Holdco.

18. As a result of the distribution of the properties of Holdco described in paragraph 17 above, the fair market value of the cash or near-cash property received by each of Aco and Bco, will be equal to the proportion of the fair market value of all of the cash or near-cash property owned by Holdco, immediately before the transfer, that:

(a) the fair market value, immediately before the transfer, of all the shares of the capital stock of Holdco owned by Aco or Bco, 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 Holdco at that time.

ADDITIONAL INFORMATION

19. The formal dissolution of Holdco will be delayed pending the receipt of the dividend refund due to Holdco. The cash received by Holdco from the dividend refund will be paid immediately to Aco and Bco in the same proportion as described in paragraph 18 above and Holdco will then be dissolved.

Purpose of the Proposed Transactions

20. The purpose of the proposed transactions is to allow each of Mr. A and Mr. B to separate their interests in Holdco. The proposed transactions will allow Mr. A and Mr. B to effect the separation and avoid the tax that would have been payable if Holdco had been wound up and its assets distributed to its individual shareholders.

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. As a result of the winding-up of Holdco, as described in paragraph 17 above, and the payments to Aco and Bco, as described in paragraph 19 above, pursuant to paragraph 88(2)(b) and subsection 84(2), each of Aco and Bco will be deemed to have received a winding-up dividend on their shares of Holdco equal to the amount by which the aggregate of the net fair market value of the property distributed by Holdco on its winding-up, including the payments described in paragraph 19, to Aco or Bco, as the case may be, exceeds the paid-up capital of such shares.

B. The deemed dividends referred to in ruling A above, to the extent that they are taxable dividends, will:

(i) be included in each recipient's income pursuant to paragraph 12(1)(j);

(ii) be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4), and

(iii) pursuant to the provisions of paragraph (j) of the definition of "proceeds of disposition" in section 54, be excluded in computing the proceeds of disposition to, Aco or Bco, as the case may be, of the shares so redeemed.

C. No tax will be payable under Part IV.1 of the Act in respect of the deemed dividends described in Ruling A above, because the dividends will be excepted dividends pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1.

D. No tax will be payable under Part VI.1 of the Act in respect of the deemed dividends described in Ruling A above, because the dividends will be excluded dividends pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

E. By virtue of subsection 186(2) and paragraph 186(4)(a), Holdco will be connected with Aco and Bco such that the dividends deemed to have been received by Aco or Bco, as described in Ruling A above, will not result in any tax being payable under subsection 186(1), except to the extent that Holdco is entitled to a dividend refund, within the meaning of subsection 129(1), for the taxation year in which the dividend is deemed to have been paid.

F. The provisions of subsection 55(2) will not apply to the dividends described in Ruling A above, by virtue of the application of paragraph 55(3)(b) provided that, as part of the series of transactions that includes the proposed transactions described herein, there is no:

(a) disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i); or

(b) acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii)

which has not been described herein.

G. The provisions of subsection 85(1) will apply to the transfer from each of Mr. A and Mr. B of the Holdco common shares and Holdco Preference Shares to Aco and Bco, respectively, described in paragraph 15 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).

H. The application of subsection 84.1(1) to the transfer of shares of Holdco by Mr. A and Mr. B described in paragraph 15 above, will not result in a reduction to the paid-up capital of the shares of Aco or Bco, as the case may be, issued as consideration, and no amount will be deemed by paragraph 84.1(1)(b) to be a dividend paid to the transferors by reason of such transfers.

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

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 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.

COMMENTS

1. Nothing in this ruling should be construed as confirmation, express or implied, of:

(a) the adjusted cost base or fair market value of the shares of Holdco held by Aco and Bco; and

(b) the tax consequences of any transaction other than those described in the proposed transactions herein.

2. In the event of a subsequent disposition of any shares of Aco or Bco, nothing in this letter should be construed as implying that the transactions described herein will not, for the purposes of paragraph 55(3.1)(b) or paragraph 110.6(7)(a), be considered as part of a series of transactions or events which includes such subsequent disposition of shares of Aco or Bco, as the case may be.

Yours truly,

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