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.
XXXXXXXXXX
XXXXXXXXXX 972663
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sir:
Subject: XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.
To the best of your knowledge, none of the issues involved in this advance income tax ruling request are being considered by a District Taxation Office or Taxation Centre in connection with a tax return already filed and none of the issues are under objection or appeal.
Definitions
In this letter, the following terms have the meanings specified:
(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, subparagraph or clause is a reference to the relevant provision of the Act;
(b) "accumulated profits" means retained earnings computed in accordance with Canadian generally accepted accounting principles, except that the computation:
(i) is made on an unconsolidated basis with investments accounted for on a cost basis; and
(ii) does not include any appraisal surplus or profits resulting from non-arm's-length transactions which transform appraisal surplus into profits on a non-taxable or tax-deferred basis;
(c) "adjusted cost base" has the meaning assigned by section 54;
(d) "adjusted equity" has the meaning assigned by proposed subsection 20.2(2) of the December 20, 1991 Draft Legislation "Tax Treatment of Interest Expense";
(e) "CBCA" means Canada Business Corporation Act;
(f) XXXXXXXXXX;
(g) "Canadian corporation" has the meaning assigned by subsection 89(1);
(h) "capital property" has the meaning assigned by section 54;
(i) "dividend rental arrangement" has the meaning assigned by subsection 248(1);
(j) "paid-up capital" has the meaning assigned by subsection 89(1);
(k) "public corporation" has the meaning assigned by subsection 89(1);
(l) "series of transactions or events" has the meaning assigned by subsection 248(10);
(m) "subsidiary controlled corporation" has the meaning assigned by subsection 248(1);
(n) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
(o) "taxable dividend" has the meaning assigned by subsection 89(1).
Our understanding of the statement of facts and proposed transactions is as follows:
Statement of Facts:
1. XXXXXXXXXX was incorporated in XXXXXXXXXX and is governed by the CBCA. It is a public corporation and a taxable Canadian corporation.
2. XXXXXXXXXX is a strategic management and holding corporation whose principal subsidiaries and associated companies are XXXXXXXXXX. Other XXXXXXXXXX subsidiaries and associated companies are engaged in XXXXXXXXXX.
3. XXXXXXXXXX became the parent company of XXXXXXXXXX as a result of the transactions which were the subject of advance income tax rulings XXXXXXXXXX.
4. XXXXXXXXXX is a public corporation and a taxable Canadian corporation.
5.
XXXXXXXXXX.
6. XXXXXXXXXX became the parent company of XXXXXXXXXX as a result of the transactions which were the subject of advance income tax rulings XXXXXXXXXX.
7. XXXXXXXXXX was incorporated in XXXXXXXXXX and is governed by the CBCA. It is a taxable Canadian corporation and a subsidiary controlled corporation of XXXXXXXXXX.
8. The principal activities of XXXXXXXXXX.
The principal activity of XXXXXXXXXX Other Business Division is to hold the investments which were transferred from XXXXXXXXXX pursuant to the XXXXXXXXXX Reorganization, including an investment in XXXXXXXXXX common shares of XXXXXXXXXX.
9.
XXXXXXXXXX.
10. XXXXXXXXXX and certain of its subsidiary corporations, including XXXXXXXXXX are parties to particular tax loss consolidation transactions for which advance income tax rulings have been issued XXXXXXXXXX.
11. XXXXXXXXXX has XXXXXXXXXX common shares issued and outstanding, representing all of the issued voting shares. Pursuant to an advance income tax ruling XXXXXXXXXX common shares are held, as at XXXXXXXXXX, as follows:
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
It is your intention to complete by XXXXXXXXXX all of the proposed transactions set out in advance income tax ruling XXXXXXXXXX. Accordingly, on XXXXXXXXXX will own directly XXXXXXXXXX common shares (approximately XXXXXXXXXX%) and the remaining XXXXXXXXXX common shares through XXXXXXXXXX has also issued preferred shares in the Canadian market. All of the preferred shares are non-voting, fixed value and non-participating, and are not convertible into common shares.
12. The adjusted cost base of the XXXXXXXXXX common shares of XXXXXXXXXX which will be directly held by XXXXXXXXXX is estimated to be $XXXXXXXXXX and the paid-up capital of these shares will not be less than the stated capital, estimated to be $XXXXXXXXXX. The fair market value of these XXXXXXXXXX common shares will exceed the adjusted cost base to XXXXXXXXXX of such shares. The XXXXXXXXXX common shares are held as capital property of XXXXXXXXXX.
13. The adjusted cost base of the XXXXXXXXXX common shares of XXXXXXXXXX which are directly held by XXXXXXXXXX is estimated to be $XXXXXXXXXX and the paid-up capital of these shares will not be less than the stated capital, estimated to be $XXXXXXXXXX. The fair market value of these XXXXXXXXXX common shares will exceed the adjusted cost base to XXXXXXXXXX of such shares. The XXXXXXXXXX common shares are held as capital property of XXXXXXXXXX.
14. XXXXXXXXXX was incorporated in XXXXXXXXXX and is governed by the CBCA. It is a taxable Canadian corporation and a subsidiary controlled corporation of XXXXXXXXXX.
15. XXXXXXXXXX has XXXXXXXXXX Class B shares issued and outstanding which entitle the holders of such shares to receive dividends equal to the retained earnings of the Other Business Division of XXXXXXXXXX. The XXXXXXXXXX Class B shares are held, as at XXXXXXXXXX, as follows:
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
It is your intention that XXXXXXXXXX will be wound-up into XXXXXXXXXX under the provisions of the CBCA and that subsection 88(1) will apply to the winding-up. As a result, XXXXXXXXXX will own directly XXXXXXXXXX Class B shares of XXXXXXXXXX. The fair market value of these XXXXXXXXXX Class B shares will exceed the adjusted cost base to XXXXXXXXXX of such shares. The XXXXXXXXXX Class B shares are held as capital property of XXXXXXXXXX.
16. XXXXXXXXXX also has issued and outstanding XXXXXXXXXX preferred shares and Class A shares all of which are held by XXXXXXXXXX.
17. Since XXXXXXXXXX became the parent of XXXXXXXXXX has paid regular quarterly common share dividends. For the fiscal periods XXXXXXXXXX, the cumulative net income applicable to common shares for accounting purposes of XXXXXXXXXX, on a nonconsolidated basis, has exceeded the cumulative dividends declared and paid by XXXXXXXXXX on all outstanding common shares by approximately $XXXXXXXXXX. During this period, except for the XXXXXXXXXX period, annual net income applicable to common shares of XXXXXXXXXX, on a non-consolidated basis, has exceeded common share dividends. Taxable dividend payments by XXXXXXXXXX on its common shares in each of the XXXXXXXXXX taxation years were $XXXXXXXXXX. The current dividend policy of XXXXXXXXXX is that it will pay dividends on its common shares of approximately $XXXXXXXXXX per quarter.XXXXXXXXXX targeted net income applicable to common shares for XXXXXXXXXX is $XXXXXXXXXX.
18. No changes to the share capital structure of XXXXXXXXXX are contemplated before the date of the commencement of the proposed transactions with the exception of changes that would result from the refinancing, conversion or new issuance of preferred shares and the ordinary operation of XXXXXXXXXX Shareholder Dividend Reinvestment and Stock Purchase Plan, Employees' Savings Plan, the exercise of XXXXXXXXXX stock options by officers and key employees and the purchase by XXXXXXXXXX of its common shares pursuant to a normal course issuer bid.
19. There are not, and will not be at any time prior to the completion of the proposed transactions herein, any guarantee agreements of the type described in subsection 112(2.2) in respect of the common shares of XXXXXXXXXX or the Class B shares of XXXXXXXXXX.
20. None of the common shares of XXXXXXXXXX and the Class B shares of XXXXXXXXXX referred to herein 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).
21. None of the common shares of XXXXXXXXXX and the Class B shares of XXXXXXXXXX referred to herein is or will be subject to a dividend rental arrangement.
Proposed Transactions:
22. On or after XXXXXXXXXX will declare and pay a cash dividend of $XXXXXXXXXX on its outstanding common shares held by XXXXXXXXXX will fund the dividend with borrowed funds from an external financial institution.
23. XXXXXXXXXX will immediately declare and pay a cash dividend of $XXXXXXXXXX, representing the same amount of dividend it received from XXXXXXXXXX under paragraph 22 above, on its outstanding Class B shares held by XXXXXXXXXX.
24. XXXXXXXXXX will cause a new corporation to be incorporated ("Newco") under the CBCA. Newco will be a taxable Canadian corporation and a subsidiary wholly-owned corporation of XXXXXXXXXX. Newco will be a special purpose corporation used only to facilitate the proposed transactions described herein. XXXXXXXXXX will invest an amount equal to the total dividends it receives of $XXXXXXXXXX ($XXXXXXXXXX from XXXXXXXXXX under paragraph 22 above and $XXXXXXXXXX from XXXXXXXXXX under paragraph 23 above) by making an equity investment of $XXXXXXXXXX in Newco.
25. Newco will make a capital contribution of $XXXXXXXXXX to XXXXXXXXXX.
26. XXXXXXXXXX will use the amount received as capital contribution, as described in paragraph 25 above, to repay the principal amount of the external borrowing incurred as described in paragraph 22 above. XXXXXXXXXX will record the capital contribution as an increase to contributed surplus.
27. Newco will be wound-up into XXXXXXXXXX.
28. XXXXXXXXXX intends, in the ordinary course of business, to continue to declare and pay quarterly dividends on its common shares as described in paragraph 17 above. None of the purposes of paying the dividends referred to above will be to effect a significant reduction in the portion of the gain that, but for the dividends, would have been realized on a disposition at fair market value of any share of the capital stock immediately before the dividend.
29. Other than as described in the proposed transactions above or in advance income tax ruling XXXXXXXXXX neither XXXXXXXXXX is currently contemplating a disposition of the common shares of XXXXXXXXXX, nor is XXXXXXXXXX currently contemplating a disposition of the Class B shares of XXXXXXXXXX.
Purpose of the Proposed Transactions:
30. All of the issued and outstanding common shares of XXXXXXXXXX are ultimately wholly owned by XXXXXXXXXX. Recently, XXXXXXXXXX has reported a deficit in its non-consolidated financial statements with its investments reported on a cost basis. However, XXXXXXXXXX has adjusted equity of approximately $XXXXXXXXXX.
The purpose of the proposed transactions is to transfer accounting profits from XXXXXXXXXX to XXXXXXXXXX in order to eliminate XXXXXXXXXX non-consolidated deficit with its investment reported on the cost basis, and to bring XXXXXXXXXX non-consolidated retained earnings (deficit), to the extent possible, closer to what it would be if XXXXXXXXXX recorded its investment in XXXXXXXXXX on the equity basis for accounting purposes without aggravating XXXXXXXXXX equity position. This is desirable from XXXXXXXXXX perspective in light of the existing uncertainty regarding the December 20, 1991 Draft Legislation on interest deductibility and Revenue Canada's administrative practice as set out in Interpretation Bulletin IT-80. In addition, the proposed transactions would alleviate the concerns raised by certain bond-rating agencies and other financing-related parties with XXXXXXXXXX reported non-consolidated deficit, including the perception issue as to XXXXXXXXXX ability to declare dividends payable to its shareholders.
The proposed transactions would have XXXXXXXXXX declare and pay a special cash dividend to XXXXXXXXXX and subsequently have XXXXXXXXXX pay a special cash dividend to XXXXXXXXXX of the same amount as it received from XXXXXXXXXX.
Since the purpose of the transaction is to transfer accounting profits from XXXXXXXXXX to XXXXXXXXXX, and not to transfer $XXXXXXXXXX of cash from XXXXXXXXXX to XXXXXXXXXX would then contribute the total amount of the special cash dividend to Newco which would make a capital contribution to XXXXXXXXXX. This will ensure that XXXXXXXXXX has sufficient cash to fund its ongoing operations.
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 dividends received by XXXXXXXXXX, as described in paragraph 22 above, and XXXXXXXXXX, as described in paragraph 23 above, will be taxable dividends, that will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividend is received, and, for greater certainty, such deduction will not be precluded by any of subsections 112 (2.1), (2.2), (2.3) or (2.4).
B. Part IV.I will not apply to the dividends described in paragraphs 22 and 23 above because the dividends will be "excepted dividends" pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1. Part VI.I will not apply to the dividends described in paragraphs 22 and 23 above because the dividends will be "excluded dividends" pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).
C. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends described in paragraphs 22 and 23 above, provided that there is not:
i) a disposition of any property to a person to whom XXXXXXXXXX, as the case may be, was not related for the purposes of the Act,
or
ii) a significant increase in the interest in any corporation of any person to whom XXXXXXXXXX, as the case may be, was not related for the purposes of the Act,
which is part of a series of transactions or events that includes the proposed transactions described herein.
D. The provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not be applied as a result of the proposed transactions.
E. The provisions of subsection 245(2) will not be applied as a result of 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 issued by Revenue Canada, Customs and Excise and Taxation on December 30, 1996, and are binding provided that the proposed transactions are completed by XXXXXXXXXX.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
Opinion
Provided that our understanding of the facts and proposed transactions described herein is correct and further provided that proposed paragraph 55(3)(a) is enacted in substantially the same form as proposed in Bill C-69 which received first reading on December 2, 1996, it is our opinion that, by virtue of proposed paragraph 55(3)(a), the provisions of proposed subsection 55(2) will not apply to the taxable dividends described in paragraphs 22 and 23 above provided that there is no disposition or increase in interest described in any of proposed subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events that includes the proposed transactions described herein.
Nothing in this ruling should be construed as implying that Revenue Canada has reviewed, accepted or otherwise agreed to the determination of the adjusted cost base of any share or the paid-up capital of any shares referred to herein. Furthermore, we are not providing any comments with respect to the purpose of the proposed transactions.
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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