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:
Application of 84.1, 40(3.6) and GAAR to transactions designed to facilitate 164(6) loss carry-back.
Position:
Not applicable.
Reasons:
Transactions meet technical requirements of provisions. No misuse or abuse.
XXXXXXXXXX 3-972019
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sir:
Re: XXXXXXXXXX
Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayer. We also acknowledge your letters of XXXXXXXXXX and our related 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 taxation services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.
Definitions
"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1 as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
"adjusted cost base" has the meaning assigned by section 54;
"ITAR" means the Income Tax Application Rules;
"paid-up capital" has the meaning assigned by subsection 89(1);
"Paragraph" means a numbered paragraph in this letter;
"Proposed Transactions" means the transactions described in Paragraphs 12 to 15;
"private corporation" has the meaning assigned by subsection 89(1);
"taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
"V-Day" means "valuation day" as defined in ITAR 34.
Facts
1.XXXXXXXXXX ("Mr. A") passed away on XXXXXXXXXX.
2.Mr. A was survived by his adult son, XXXXXXXXXX ("Mr. B"), his adult daughters, XXXXXXXXXX ("Ms. C") and XXXXXXXXXX ("Ms. D"), and his minor grandchildren, XXXXXXXXXX (who are children of Ms. C).
3.Mr. A's last will is dated XXXXXXXXXX.
4.The executors appointed under the will of Mr. A are all three of his children, Mr. B, Ms. C and Ms. D (collectively, "the Executors").
5.At the time of his death, Mr. A was a resident of Canada and immediately following his death, his children and grandchildren were, and still are, residents of Canada.
6.XXXXXXXXXX ("Aco") is a private corporation and a taxable Canadian corporation.
7.Aco was formed by the amalgamation of XXXXXXXXXX. Mr. A received XXXXXXXXXX common shares of Aco on the amalgamation.
7.1On XXXXXXXXXX, Mr. A exchanged his XXXXXXXXXX common shares of Aco for XXXXXXXXXX Aco Class XXXXXXXXXX shares with the characteristics described in Paragraph 8. Also on XXXXXXXXXX (the "Trust") subscribed for XXXXXXXXXX new common shares of Aco for $XXXXXXXXXX and Mr. A subscribed for XXXXXXXXXX Class XXXXXXXXXX shares for $XXXXXXXXXX.
The adjusted cost base to Mr. A of his XXXXXXXXXX Aco common shares prior to their transfer was $XXXXXXXXXX, which represented their V-day value. Mr. A had never made an election pursuant to ITAR 26(7).
An election was filed pursuant to section 85 with respect to the transfer of Mr. A's XXXXXXXXXX Aco common shares with an elected amount of $XXXXXXXXXX. The $XXXXXXXXXX capital gain arising on the transfer was equal to the capital gains exemption claimed on Mr. A's XXXXXXXXXX personal tax return. The XXXXXXXXXX Aco Class XXXXXXXXXX shares received by Mr. A have an aggregate paid-up capital of $XXXXXXXXXX, which was equal to the paid-up capital of the original XXXXXXXXXX common shares for which the XXXXXXXXXX Class XXXXXXXXXX shares were exchanged.
8.At the date of Mr. A's death, the authorized share capital of Aco consisted of:
(a) unlimited voting common shares;
(b) unlimited non-voting Class XXXXXXXXXX shares that are redeemable and retractable for $XXXXXXXXXX per share and entitled to non-cumulative monthly dividends of $XXXXXXXXXX per share; and
(c) unlimited, non-participating, voting Class XXXXXXXXXX shares that are redeemable for $XXXXXXXXXX per share.
8.1The following shares were issued and outstanding as fully paid and non-assessable and registered in the names of the following persons at the date of Mr. A's death:
Name Number and Class of Shares
Mr. A XXXXXXXXXX Class XXXXXXXXXX shares
XXXXXXXXXX Class XXXXXXXXXX shares
Trust XXXXXXXXXX common shares
8.2In his terminal income tax return, Mr. A will report the deemed disposition of XXXXXXXXXX Aco Class XXXXXXXXXX shares for proceeds of disposition of $XXXXXXXXXX.
9.The Trust was settled on XXXXXXXXXX by Ms. D. The Trustees of the Trust are Ms. D, Ms. C and Mr. B. The beneficiaries are the issue of Mr. A. The Trust is a discretionary inter-vivos trust.
10.Under the last Will of Mr. A, he provided, in general terms, that:
a) The Class XXXXXXXXXX shares of Aco were to be distributed to Mr. B and Ms. D on his death.
b) The residue of his estate, after providing for an annuity for XXXXXXXXXX, was to be divided equally between his children and grandchildren. There was a trust set aside for the share of each grandchild who was under the age of XXXXXXXXXX years at the time of Mr. A's death.
11.XXXXXXXXXX ("Numberco") was incorporated on XXXXXXXXXX. Its authorized share capital consists of:
(a) unlimited common shares,
(b) unlimited non-voting Class XXXXXXXXXX shares that are redeemable and retractable for $XXXXXXXXXX per share and entitled to non-cumulative monthly dividends of $XXXXXXXXXX per share,
(c) unlimited non-voting Class XXXXXXXXXX Shares that are redeemable, but not retractable, for $XXXXXXXXXX per share and entitled to a cumulative monthly dividend of $XXXXXXXXXX per share, and
(d) unlimited non-participating, voting Class XXXXXXXXXX shares that are redeemable for $XXXXXXXXXX per share.
The Trust is the sole shareholder of Numberco and holds one common share for which it paid the nominal sum of $XXXXXXXXXX.
Proposed Transactions
12.The Trust will transfer its XXXXXXXXXX Aco common shares to Numberco in return for XXXXXXXXXX Numberco common shares. The Trust and Numberco will file a joint election under subsection 85(1) with respect to the transfer, within the time limits provided by subsection 85(6), that the proceeds of disposition of the XXXXXXXXXX common shares be equal to $XXXXXXXXXX, the adjusted cost base of the transferred XXXXXXXXXX Aco common shares.
13.Mr. B and Ms. D will transfer their XXXXXXXXXX Class XXXXXXXXXX voting shares of Aco to Numberco in return for XXXXXXXXXX Class XXXXXXXXXX voting shares of Numberco with rights identical to those of the XXXXXXXXXX Class XXXXXXXXXX voting shares of Aco. Mr. B and Ms. D will each file a joint election with Numberco under subsection 85(1), within the time limits provided by subsection 85(6), that the aggregate proceeds of disposition be equal to $XXXXXXXXXX, the adjusted cost base of the transferred XXXXXXXXXX Class XXXXXXXXXX shares.
14.The Estate will transfer its XXXXXXXXXX Aco Class XXXXXXXXXX shares, valued at $XXXXXXXXXX, to Numberco. The Estate and Numberco will file a joint election under subsection 85(1), within the time limits provided by subsection 85(6), in respect of the transfer, that the proceeds of disposition be equal to $XXXXXXXXXX, the adjusted cost base of the transferred Class XXXXXXXXXX shares. The Estate will receive as consideration:
a) XXXXXXXXXX Numberco Class XXXXXXXXXX preferred shares with a redemption/retraction value of $XXXXXXXXXX and a stated capital of $XXXXXXXXXX; and
b) XXXXXXXXXX Numberco Class XXXXXXXXXX preferred shares with a redemption value and stated capital of $XXXXXXXXXX.
15.On or before XXXXXXXXXX, the XXXXXXXXXX Class XXXXXXXXXX shares of Numberco, received by the Estate as described in Paragraph 14, will be redeemed by Numberco for their fair market value of $XXXXXXXXXX. The redemption proceeds of $XXXXXXXXXX will be paid to the Estate in cash.
The Executors will make a timely election under subsection 164(6) in order that any capital loss realized on the redemption can be offset against capital gains reported on the terminal tax return of Mr. A.
Purposes of Proposed Transactions
The primary asset owned by Mr. A at the time of his death were his Class XXXXXXXXXX shares of Aco. The deemed disposition of these shares on his death triggered a capital gain of $XXXXXXXXXX with an associated significant tax liability. The planning for payment of this tax liability and avoidance of future double taxation are the main reasons for the proposed reorganization. In general, the objectives of the proposed series of transactions are:
a)to enable the Estate to extract from Aco the funds required to pay the taxes due on death without double taxation;
b)to avoid double taxation at the shareholder level on future distributions of values that will have been already taxed in Mr. A terminal tax return; and
c)to reorganize the corporate structure in a manner which will facilitate a future “bump” in the cost base of Aco’s non-depreciable capital properties on a future reorganization, again to avoid double taxation.
With the above objectives in mind, there are a number of specific purposes associated with the proposed transactions:
a)It is intended that voting control of Aco will remain with Mr. B and Ms. D, as it would if no reorganization plan were undertaken;
b)The Executors wish to utilize the provisions of subsection 164(6) to the extent contemplated, and allowed by, the Act. Accordingly, included in the Proposed Transactions is the redemption of Class XXXXXXXXXX Shares issued by a recently incorporated corporation (Numberco) in order that the resulting capital loss can be offset against the capital gains reported on Mr. A's terminal tax return; and
c)Under the proposed plan, all the shareholders of Aco will transfer their Aco shares to Numberco to permit, at some point in the future, the combination of Numberco and Aco (either by liquidation or amalgamation) in order to obtain a “bump” in the underlying tax cost of certain assets owned by Aco (this is a contemplated future, not a currently proposed, transaction).
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.Subsection 84.1(1) will not apply to deem a dividend to have been received by the Estate as a result of the transfer of its XXXXXXXXXX Aco Class XXXXXXXXXX shares to Numberco in return for Class XXXXXXXXXX preferred shares of Numberco, as described in Paragraph 14.
B.The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions to redetermine the tax consequences described herein.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding provided that the Proposed Transactions are completed before XXXXXXXXXX.
These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.
Nothing in this letter should be construed as confirmation of the tax consequences of any of the transactions described in this letter other than as specifically described.
Opinions
Provided that our understanding of the facts and proposed transactions described herein is correct and provided that the Act is amended substantially in accordance with Bill C-28 which received first reading on December 10, 1997, it is our opinion that subsection 40(3.6) will not apply to deny a capital loss realized by the Estate on the redemption of the XXXXXXXXXX Class XXXXXXXXXX shares of Numberco held by the Estate, as described in Paragraph 15.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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