30 November 1996 Ruling 9727733 - 55(3)(A) OF THE ACT

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:

Father owns nominal controlling voting shares in both Opco1 and Opco2. Is subsection 55(4) of the Act applicable with respect to Father's ownership of Opco2's voting shares ?

Position:

No.

Reasons:

Accepted reason for Father to have direct voting control in Opco2.

XXXXXXXXXX							972773
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the additional information provided in your letters of XXXXXXXXXX and in 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;

(iii)is under objection by the taxpayers or a related person;

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; and

(v) is the subject of a ruling previously issued by the Directorate.

Definitions

In this letter, the following terms have the meanings specified:

(a)Unless otherwise indicated, all references to statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act");

(b)"adjusted cost base" has the meaning assigned by section 54 of the Act;

(c)"agreed amount" has the meaning assigned by subsection 85(1) of the Act;

(d)XXXXXXXXXX;

(e)"capital property" has the meaning assigned by section 54 of the Act;

(f) "Child1" means XXXXXXXXXX;

(g) "Child2" means XXXXXXXXXX;

(h)"connected" has the meaning assigned by subsection 186(4) of the Act;

(i)"depreciable property" has the meaning assigned by subsection 13(21) of the Act;

(j)"dividend refund" has the meaning assigned by subsection 129(1) of the Act;

(k)"dividend rental arrangement" has the meaning assigned by subsection 248(1) of the Act;

(l) "Father" means XXXXXXXXXX;

(m)"guarantee agreement" has the meaning assigned by subsection 112(2.2) of the Act;

(n) "Opco1" means XXXXXXXXXX;

(o) "Opco2" means XXXXXXXXXX;

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

(q)"private corporation" has the meaning assigned by subsection 89(1) of the Act;

(r)"proceeds of disposition" has the meaning assigned by section 54 of the Act;

(s)"refundable dividend tax on hand" has the meaning assigned by subsection 129(3) of the Act;

(t)"related" has the meaning assigned by section 251 of the Act;

(u)"restricted financial institution" has the meaning assigned by subsection 248(1) of the Act;

(v)"Subco1" means XXXXXXXXXX, a taxable Canadian corporation and a private corporation;

(w)"specified financial institution" has the meaning assigned by subsection 248(1) of the Act;

(x)"specified person" has the meaning assigned by paragraph (h) of the definition "taxable preferred share" in subsection 248(1) of the Act;

(y)"subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act;

(z)"taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(aa)"taxable dividend" has the meaning assigned by subsection 89(1) of the Act; and

(ab)"term preferred share" has the meaning assigned by subsection 248(1) of the Act.

Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1.Father and his two adult children, Child1 and Child2, are resident in Canada.

2.Opco1 is a taxable Canadian corporation and a private corporation which is governed by the XXXXXXXXXX. Opco1 was formed on or about XXXXXXXXXX as a result of the amalgamation (pursuant to the provisions of subsection 87(1) of the Act) of former XXXXXXXXXX and its subsidiary wholly-owned corporation, XXXXXXXXXX.

The issued and outstanding shares of Opco1 consist of the following:

a)XXXXXXXXXX Class XXXXXXXXXX voting, redeemable shares having an aggregate redemption amount, adjusted cost base and paid-up capital of $XXXXXXXXXX;

b)XXXXXXXXXX Class XXXXXXXXXX non-voting shares having an aggregate redemption amount of $XXXXXXXXXX, an adjusted cost base of $XXXXXXXXXX and a paid-up capital of $XXXXXXXXXX;

c)XXXXXXXXXX Class XXXXXXXXXX non-voting shares having an aggregate redemption amount of $XXXXXXXXXX, an adjusted cost base of $XXXXXXXXXX and a paid-up capital of $XXXXXXXXXX; and

d) XXXXXXXXXX common shares having an aggregate adjusted cost base and paid-up capital of $XXXXXXXXXX.

All of the issued and outstanding Class XXXXXXXXXX, Class XXXXXXXXXX and Class XXXXXXXXXX shares of Opco1 are owned by Father. The issued and outstanding common shares of Opco1 are owned equally by Child1 and Child2. As a result of his ownership of the Class XXXXXXXXXX shares, Father controls Opco1.

On the incorporation of a predecessor of Opco1 ("Predecessor1") Father acquired XXXXXXXXXX Class XXXXXXXXXX voting, redeemable shares of Predecessor1 and each of Child1 and Child2 acquired XXXXXXXXXX common shares thereof. In XXXXXXXXXX, Father acquired XXXXXXXXXX Class XXXXXXXXXX shares and XXXXXXXXXX Class XXXXXXXXXX shares of Predecessor1 as consideration for the tax-deferred transfer of certain eligible property, pursuant to the provisions of subsection 85(1) of the Act, to Predecessor1. Over the years, some of the Class XXXXXXXXXX shares of Predecessor1 and its successor corporations have been redeemed.

The assets of Opco1 include the assets relating to its XXXXXXXXXX business, and its investments in related corporations, including certain preferred shares of Opco2 as more fully described in paragraph 3 below, and XXXXXXXXXX common shares of Subco1 having an adjusted cost base and paid-up capital of $XXXXXXXXXX. The remaining issued and outstanding XXXXXXXXXX common shares of Subco1 are owned by persons who deal at arm's length with Opco1, Father, Child1 and Child2. Furthermore, the aforesaid preferred shares of Opco2 were acquired by a predecessor of Opco1 in XXXXXXXXXX as the result of its transfer of certain eligible property to a predecessor of Opco2 on a tax-deferred basis pursuant to the provisions of subsection 85(1) ("XXXXXXXXXX Reorganization"). Prior to the XXXXXXXXXX Reorganization, the business now carried on by Opco2 and its subsidiaries was carried on by a predecessor of Opco1, either directly or indirectly through a subsidiary corporation. Due to significant business growth and the bonding requirement inherent in the XXXXXXXXXX business, it was decided in XXXXXXXXXX to transfer these operations into a separate corporation.

It is not expected that Opco1 will have any refundable dividend tax on hand ("RDTOH") at the end of its taxation year which includes the proposed transactions described below.

3.Opco2 is a taxable Canadian corporation and a private corporation which is governed by the provisions of the XXXXXXXXXX. Opco2 was formed in XXXXXXXXXX as a result of the amalgamation (pursuant to the provisions of subsection 87(1) of the Act) of former XXXXXXXXXX and its subsidiary wholly-owned corporation, XXXXXXXXXX.

The issued and outstanding shares of Opco2 consist of the following:

a)XXXXXXXXXX Class XXXXXXXXXX non-voting, non-cumulative, redeemable, retractable preferred shares having an aggregate redemption amount of $XXXXXXXXXX, an adjusted cost base of $XXXXXXXXXX and paid-up capital of $XXXXXXXXXX;

b)XXXXXXXXXX Class XXXXXXXXXX non-voting, non-cumulative, redeemable, retractable preferred shares having aggregate redemption amount of $XXXXXXXXXX, an adjusted cost base of $XXXXXXXXXX and paid-up capital of $XXXXXXXXXX;

c)XXXXXXXXXX Class XXXXXXXXXX non-voting, non-cumulative, redeemable, retractable preferred shares having an aggregate redemption amount of $XXXXXXXXXX, an adjusted cost base of $XXXXXXXXXX and paid-up capital of $XXXXXXXXXX;

d)XXXXXXXXXX Class XXXXXXXXXX non-voting, non-cumulative, redeemable, retractable preferred shares having an aggregate redemption amount of $XXXXXXXXXX, an adjusted cost base of $XXXXXXXXXX and paid-up capital of $XXXXXXXXXX;

e)XXXXXXXXXX Class XXXXXXXXXX voting, redeemable shares having an aggregate redemption amount, adjusted cost base and paid-up capital of $XXXXXXXXXX;

f)XXXXXXXXXX common shares having an aggregate adjusted cost base and paid-up capital of $XXXXXXXXXX.

All of the issued and outstanding Class XXXXXXXXXX, Class XXXXXXXXXX, Class XXXXXXXXXX and Class XXXXXXXXXX preferred shares of Opco2 are owned by Opco1. The issued and outstanding XXXXXXXXXX Class XXXXXXXXXX shares of Opco2 are owned by Father. The issued and outstanding XXXXXXXXXX common shares of Opco2 are owned equally by Child1 and Child2. As a result of his ownership of the XXXXXXXXXX Class XXXXXXXXXX shares of Opco2, Father controls Opco2.

On the incorporation of a predecessor of Opco2 ("Predecessor2"), and as part of the XXXXXXXXXX Reorganization, Father acquired XXXXXXXXXX Class XXXXXXXXXX voting, redeemable shares of Predecessor2, each of Child1 and Child2 acquired XXXXXXXXXX common shares thereof and a predecessor of Opco1 acquired all the issued and outstanding Class XXXXXXXXXX, Class XXXXXXXXXX, Class XXXXXXXXXX and Class XXXXXXXXXX preferred shares of Predecessor2 as consideration for the transfer of certain eligible property to Predecessor2 as referred to in paragraph 2 above.

The Class XXXXXXXXXX shares of Predecessor2 were acquired by Father for the purpose of protecting the interest of the predecessor of Opco1 in Predecessor2 and none of the main purposes for such acquisition was to avoid the application of subsection 55(2) of the Act.

The assets of Opco2 include the assets relating to its XXXXXXXXXX business and its investments in related corporations.

It is not expected that Opco2 will have any RDTOH at the end of its taxation year which includes the proposed transactions described below.

4.The common shares of Subco1, the common shares of Opco2, the common shares of Opco1, and the Class XXXXXXXXXX preferred shares of Opco2 are held by Opco1, Child1 and Child2, as the case may be, as capital property.

Proposed Transactions

5.Opco1 will sell all of its common shares of Subco1 to Opco2 in return for the issuance of XXXXXXXXXX class XXXXXXXXXX non-voting, non-cumulative, redeemable, retractable preferred shares of Opco2 ("the Opco2 Class XXXXXXXXXX Preferred Shares") having an aggregate fair market value and redemption amount equal to the fair market value at that time of the common shares of Subco1 so transferred by Opco1. Opco1 will hold the Opco2 Class XXXXXXXXXX Preferred Shares as capital property.

6.In respect of the transfer of the common shares of Subco1 described in paragraph 5 above, Opco1 and Opco2 will file a joint election under subsection 85(1) of the Act in prescribed form and within the time referred to in subsection 85(6) of the Act. The agreed amount, in respect of the common shares of Subco1 will be equal to the adjusted cost base of the common shares of Subco1 to Opco1, which amount will be less than the fair market value of the said shares at the time of the transfer.

For the purposes of the relevant corporate laws, the aggregate amount that will be added to the stated capital of the Opco2 Class XXXXXXXXXX Preferred Shares to be issued as described in paragraph 5 above will be equal to the agreed amount in respect of the election as described therein.

7.Immediately after the completion of the transactions as described in paragraph 5 above, Opco2 will redeem its Opco2 Class XXXXXXXXXX Preferred Shares owned by Opco1 and in consideration therefor will issue to Opco1 a demand non-interest bearing promissory note (the "Opco2 Note 1") having a principal amount and fair market value equal to the aggregate redemption amount of the Opco2 Class XXXXXXXXXX Preferred Shares so redeemed. Opco1 will accept the Opco2 Note 1 in full satisfaction of the redemption price of the said shares.

8.Child1 will sell all of his common shares of Opco2 to Opco1 in return for the issuance of 1 Opco1 Class XXXXXXXXXX non-voting, non-cumulative, redeemable, retractable preferred share (the "Opco1 Class XXXXXXXXXX Preferred Share") having a fair market value and redemption amount equal to the fair market value at that time of the common shares of Opco2 so transferred by Child1.

9.In respect of the transfer of the common shares of Child1 described in paragraph 8 above, Child1 and Opco1 will file a joint election under subsection 85(1) of the Act in prescribed form and within the time referred to in subsection 85(6) of the Act. The agreed amount, in respect of the common shares of Opco2 will be equal to the fair market value of the common shares of Opco2, which amount will be less than their adjusted cost base to Child1 at the time of the said transfer.

For the purposes of the relevant corporate laws, the amount that will be added to the stated capital of the 1 Opco1 Class XXXXXXXXXX Preferred Share to be issued as described in paragraph 8 above will be equal to the agreed amount in respect of the election as described therein.

10.Immediately after the completion of the transactions as described in paragraph 8 above, Opco2 will purchase for cancellation its common shares held by Opco1 and in consideration therefor will issue to Opco1 a demand non-interest bearing promissory note (the "Opco2 Note 2") having a principal amount and fair market value equal to the aggregate fair market value of its common shares so purchased. Opco1 will accept the Opco2 Note 2 in full satisfaction of the purchase price of such shares.

11.Child2 will sell all of his common shares of Opco1 to Opco2 in return for the issuance of XXXXXXXXXX common shares of Opco2 (the "Opco2 Common Shares") having an aggregate fair market value equal to the fair market value at that time of the common shares of Opco1 so transferred by Child2.

12.In respect of the transfer of the common shares of Opco1 described in paragraph 11 above, Child2 and Opco2 will file a joint election under subsection 85(1) of the Act in prescribed form and within the time referred to in subsection 85(6) of the Act. The agreed amount, in respect of the common shares of Opco1 will be equal to the adjusted cost base of the common shares of Opco1 to Child2, which amount will be less than the fair market value of the said shares at the time of the transfer.

For the purposes of the relevant corporate laws, the aggregate amount that will be added to the stated capital of the Opco2 Common Shares to be issued as described in paragraph 11 above will be equal to the agreed amount in respect of the election as described therein.

13.Immediately after the completion of the transactions as described in paragraph 11 above, Opco1 will purchase for cancellation its common shares held by Opco2 and in consideration therefor will issue to Opco2 a demand non-interest bearing promissory note (the "Opco1 Note") having a principal amount and fair market value equal to the aggregate fair market value of its common shares so purchased. Opco2 will accept the Opco1 Note in full satisfaction of the purchase price of such shares.

14.Immediately after the completion of the transactions as described in paragraph 13 above, Opco2 will redeem all its Class XXXXXXXXXX, Class XXXXXXXXXX, Class XXXXXXXXXX and Class XXXXXXXXXX preferred shares held by Opco1 and in consideration therefor Opco2 will issue to Opco1 a demand non-interest bearing promissory note (the "Opco2 Note 3") having a principal amount and fair market value equal to the aggregate redemption amount of all its Class XXXXXXXXXX, Class XXXXXXXXXX, Class XXXXXXXXXX and Class XXXXXXXXXX preferred shares so redeemed. Opco1 will accept the Opco2 Note 3 in full satisfaction of the redemption price of such shares.

15.Immediately after the completion of the transactions as described in paragraph 14 above, Opco2 will redeem all its Class XXXXXXXXXX shares held by Father and in consideration therefor Opco2 will issue to Father a demand non-interest bearing promissory note (the "Opco2 Note 4") having a principal amount and fair market value equal to the aggregate redemption amount of its Class XXXXXXXXXX shares so redeemed. Father will accept the Opco2 Note 4 in full satisfaction of the redemption price of such shares.

16.Immediately after the completion of the transactions as described in paragraph 15 above, the Opco1 Note will be set off against the following: the Opco2 Note 1, the Opco2 Note 2, the Opco2 Note 3 and any other debts of Opco2 owing to Opco1. In addition, Opco1 will transfer a real property owned by it which is situated in XXXXXXXXXX at its fair market value to Opco2. As consideration for such property Opco2 will assume any balance of mortgage relating to such property and will reduce the balance owing by Opco1 under the Opco1 Note by an amount equal to the difference between the fair market value of the property so transferred and the mortgage assumed by Opco2 as described herein. The balance of the Opco1 Note, after the aforesaid set-off, will be paid by a new demand interest bearing promissory note to be issued by Opco1.

Additional Information

17.Opco2 owns XXXXXXXXXX% of the voting shares of XXXXXXXXXX. The remaining shares of these two companies are owned by persons who deal at arm's length with Opco2, Father, Child1 and Child2. XXXXXXXXXX will be amalgamated pursuant to the provisions of subsection 87(1) of the Act. This amalgamation will not occur as part of the series which includes the proposed transactions as described above.

18.Neither Opco1 nor Opco2 is or will be, at any time during the series of transactions herein described, a specified financial institution or a restricted financial institution.

19.None of the shares of Opco1 or Opco2 referred to herein has been or will be subject to a guarantee agreement, within the meaning referred to in subsection 112(2.2) of the Act, that is given by a specified financial institution or a specified person in relation to any such institution for any of the purposes described in that subsection. None of the shares of Opco1 or Opco2 referred to herein has been or will be part of a dividend rental arrangement for purposes of subsection 112(2.3) of the Act. None of the shares of Opco1 or Opco2 referred to herein has been or will be a term preferred share.

20.None of the shares of Opco1 or Opco2 referred to herein will be, at any time before the completion of the proposed transactions described herein, shares to which paragraph (g) of the definition of "taxable preferred share" in subsection 248(1) of the Act or paragraph (e) of the definition "taxable RFI shares" in subsection 248(1) of the Act would apply to deem the share to be, respectively, a taxable preferred share or a taxable RFI share.

21.None of the shares of Opco1 or Opco2 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) of the Act.

22.Neither Opco1 nor Opco2 is, or will be, at any time before the completion of the proposed transactions described herein, a corporation described in any of the paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1) of the Act.

23.There is not a present intention to dispose of the shares of any of the corporations referred to herein to a person or partnership who was not related to Opco1 or Opco2 immediately prior to such disposition.

Purpose of the Proposed Transactions

24.The purpose of the proposed transactions is to allow Father to relinquish management and control of Opco2 to Child2 while Father and Child1 will be exclusively involved in the management and control of Opco1.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A.The provisions of subsection 84(3) of the Act will apply:

(a)as a result of the redemption by Opco2 of its Opco2 Class XXXXXXXXXX Preferred Shares as described in paragraph 7 above, to deem Opco2 to have paid and Opco1 to have received a dividend equal to the amount by which the redemption price paid exceeds the paid-up capital of those shares immediately before the redemption;

(b)as a result of the purchase for cancellation by Opco1 of its common shares held by Opco2 as described in paragraph 13 above, to deem Opco1 to have paid and Opco2 to have received a dividend equal to the amount by which the purchase price paid exceeds the paid-up capital of those shares immediately before the cancellation; and

(c)as a result of the redemption by Opco2 of its Class XXXXXXXXXX, Class XXXXXXXXXX, Class XXXXXXXXXX and Class XXXXXXXXXX preferred shares held by Opco1 as described in paragraph 14 above, to deem Opco2 to have paid and Opco1 to have received a dividend equal to the amount by which the redemption price paid exceeds the paid-up capital of those shares immediately before the redemption.

B.The deemed dividends referred to in Ruling A above will be excluded in computing the proceeds of disposition of the shares so redeemed or purchased for cancellation by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act and, to the extent that they are taxable dividends:

(a)will be included in the recipient's income pursuant to paragraph 12(1)(j) of the Act;

(b)will be deductible by the recipient pursuant to subsection 112(1) of the Act 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(2.2), (2.3) or (2.4) of the Act;

(c)provided that neither Opco1 nor Opco2 is entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividends referred to in Ruling A, neither Opco1 nor Opco2 will be subject to Part IV tax under subsection 186(1) of the Act in respect of such dividend, because Opco1 is connected with Opco2 and Opco2 is connected with Opco1; and

(d)will not be subject to tax under Part IV.1 and Part VI.1 of the Act by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act because each of Opco1 and Opco2 will have a substantial interest, within the meaning assigned by subsection 191(2) of the Act, in the payer corporation immediately before the redemption or purchase for cancellation of such shares.

C.By virtue of paragraph 55(3)(a) of the Act, the provisions of subsection 55(2) of the Act will not apply to the deemed dividends referred to in Ruling A, in and by themselves, provided that there is not:

(i)a disposition of any property to a person with whom Opco1 or Opco2 would not be related for the purposes of section 55 of the Act,

or

(ii)a significant increase in the interest in any corporation of any person with whom Opco1 or Opco2 would not be related for the purposes of section 55 of the Act,

either of which is part of a transaction or event or a series of transactions or events, determined with reference to subsection 248(10) of the Act, that includes the proposed transactions described in this letter. For greater certainty, the proposed transactions described in paragraphs 5 to 16 above, in and by themselves, will not be considered to result in any of the events described in (i) or (ii) above.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada, Customs, 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 the proposed amendments to paragraph 55(3)(a) of the Act are enacted in substantially the same form as proposed in Bill C-28 which received first reading on December 10, 1997, it is our opinion that, by virtue of paragraph 55(3)(a) of the Act, the provisions of subsection 55(2) of the Act will not apply to the deemed dividends referred to in Ruling A 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 which includes the redemption by Opco2 of its Opco2 Class XXXXXXXXXX Preferred Shares held by Opco1, the purchase for cancellation by Opco1 of its common shares held by Opco2, the redemption by Opco2 of its Class XXXXXXXXXX, Class XXXXXXXXXX, Class XXXXXXXXXX and Class XXXXXXXXXX preferred shares held by Opco1. For greater certainty, the proposed transactions described in paragraphs 5 to 16 above, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of proposed subparagraphs 55(3)(a)(i) to (v).

Comments

Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:

(a)the determination of the fair market value, adjusted cost base or V-day value of any particular asset or share or the paid-up capital of any shares referred to herein; or

(b)any tax consequences relating to the facts and proposed transactions 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