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:
Would subsections 15(1) and 86(2) apply to a share for share exchange where inadequate consideration is taken back but the shareholder owns 100% of the issued share capital of the corporation.
Position:
No.
Reasons:
Under the given fact situation, no benefit had been conferred (see question #13 of the 1996 CMTC Round Table.
XXXXXXXXXX 972754
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. In your letter of XXXXXXXXXX you provided additional information in respect of the facts described in your original ruling. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein:
(i) is in an earlier return of the taxpayers or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person, other than the issue described in more detail in paragraph 3 below which is not the subject of a ruling request;
(iii)is under objection by the taxpayers or a related person; and
(iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.
Unless otherwise stated all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act").
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
FACTS
1.Subco is a corporation incorporated under the Canada Business Corporations Act ("CBCA") and is a taxable Canadian corporation ("TCC"), as that term is defined in subsection 89(1) of the Act. Its account number is XXXXXXXXXX.
2.Subco has two classes of shares outstanding designated as Special and Common. There are XXXXXXXXXX Special shares outstanding and XXXXXXXXXX Common shares outstanding.
XXXXXXXXXX
(i)XXXXXXXXXX
(ii)XXXXXXXXXX
XXXXXXXXXX
3.Holdco is a corporation incorporated under the CBCA and is a TCC. Holdco's account number is XXXXXXXXXX. Holdco currently owns all of the outstanding shares of Subco.
At XXXXXXXXXX Holdco owned XXXXXXXXXX Common shares and XXXXXXXXXX Special shares of Subco. The adjusted cost base ("ACB"), within the meaning assigned to that term in section 54 of the Act, of the XXXXXXXXXX Common shares of Subco owned by Holdco at XXXXXXXXXX was $XXXXXXXXXX. The ACB of the XXXXXXXXXX Special shares of Subco owned by Holdco at XXXXXXXXXX was $XXXXXXXXXX. Subsequent to XXXXXXXXXX, Holdco acquired the remaining XXXXXXXXXX Special shares of Subco that remained outstanding. The amount of $XXXXXXXXXX was allocated by Holdco as the cost of these XXXXXXXXXX Special shares. The XXXXXXXXXX Tax Services Office has been asked to confirm the cost amount to Holdco of the XXXXXXXXXX Special shares acquired. In the following years, Holdco made certain contributions of capital to Subco which will also increase the ACB of the Special shares and Common shares of Subco pursuant to paragraph 53(1)(c) of the Act. Due to the difficulties in determining the fair market value of Subco as a whole and the fair market value of the Special shares and Common shares of Subco individually, the allocation of the contributions of capital to the ACB of such shares has not yet been done.
PROPOSED TRANSACTIONS
4.Pursuant to the relevant provisions of the CBCA, Subco will file Articles of Amendment to convert the Special shares of Subco into a nominal number of Common shares of Subco in a reorganization of capital to which the provisions of section 86 of the Act will apply. The Common shares received on the conversion will have a value which is considerably less than the value of the Special shares converted; however, the aggregate fair market value of the Common shares of Subco immediately after the conversion will be equal to the aggregate fair market value of the Common shares and the Special shares immediately before the conversion.
PURPOSE OF THE PROPOSED TRANSACTIONS
5.Holdco and Subco would like to simplify the balance sheet of Subco. Neither the value of the outstanding Common shares of Subco nor the value of the outstanding Special shares of Subco can be determined with any certainty. Estimating the values would require considerable effort and would occasion considerable cost. There is no business reason to undertake the valuation exercise at this time. Rather than be concerned with actual values, it is proposed that the Special shares be converted into a nominal number of Common shares.
RULINGS GIVEN
Provided that the above statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transaction and purpose of the proposed transaction, and that the proposed transaction is carried out as set forth herein, the following rulings are given:
A.Subsection 86(2) of the Act will not apply to the reorganization of capital described in paragraph 4 above.
B.Subsection 15(1) of the Act will not apply to Holdco as a consequence of the reorganization of capital described in paragraph 4 above.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and are binding on Revenue Canada provided that the proposed transactions are completed by XXXXXXXXXX.
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed:
(a)the determination of the fair market value, ACB or the paid-up capital, as that term is defined in subsection 89(1) of the Act, of any shares referred to herein; or
(b)any tax consequences relating to the facts and proposed transaction described herein other than those specifically described in the rulings given above.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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