30 November 1997 Ruling 9730413 - 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: no new issues

Position:

Reasons:

XXXXXXXXXX							3-973041
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("Company")

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling for the above taxpayers. We also acknowledge your letters of XXXXXXXXXX.

To the best of your knowledge, and that of the parties to this ruling, none of the issues contained in this advance income tax ruling:

1. is in an earlier return of the taxpayer or a related person;

2. is being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the taxpayer or a related person,

3. is under objection by the taxpayer or related person,

4. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or

5. is the subject of a ruling previously issued by the Directorate.

In this letter, unless the context otherwise requires:

6. "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended, and, unless otherwise indicated, all legislative references are to provisions of the Act;

7. "adjusted cost base" ("ACB") has the meaning assigned by section 54;

8. XXXXXXXXXX;

9. "Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);

10. "Canadian corporation" has the meaning assigned by subsection 89(1);

11. "capital property" has the meaning assigned by section 54;

12. "cost amount" has the meaning assigned by subsection 248(1);

13. "depreciable property" has the meaning assigned by subsection 13(21);

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

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

16. "eligible capital property" has the meaning assigned by section 54;

17. "eligible property" has the meaning assigned by subsection 85(1.1);

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

19. "Newco" refers to the corporation to be formed as described in paragraph 29 below;

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

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

22. "public corporation" has the meaning assigned by subsection 89(1);

23. "refundable dividend tax on hand" has the meaning assigned by subsection 129(3);

24. "Regulations" mean the Income Tax Regulations;

25. XXXXXXXXXX;

26. "series of transactions or events" has the meaning assigned by subsection 248(1);

27. "significant influence" has the meaning assigned by paragraph 3050.04 of the CICA Handbook;

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

29. "specified person" has the meaning assigned by subsection 69(11);

30. "taxable Canadian corporation" ("TCC") has the meaning assigned by subsection 89(1);

31. "taxable dividend" has the meaning assigned by subsection 89(1); and

32. "undepreciated capital cost" ("UCC") has the meaning assigned by subsection 13(21).

FACTS

33. Company (federal account number XXXXXXXXXX) is a body corporate, incorporated on XXXXXXXXXX. It is a CCPC and a TCC. The fiscal year end of the company is XXXXXXXXXX. The federal corporate income tax returns are filed at the XXXXXXXXXX Taxation Centre and Company deals with the XXXXXXXXXX Tax Services Office.

34. The issued and outstanding shares of Company consist of XXXXXXXXXX Class XXXXXXXXXX voting, participating shares which are held equally by XXXXXXXXXX ("Holdco 1") (federal account number XXXXXXXXXX) and XXXXXXXXXX ("Holdco 2") (federal account number XXXXXXXXXX) which hold their shares as capital property. The PUC per share is $XXXXXXXXXX. The total PUC is $XXXXXXXXXX. There have not been any other shareholders of Company and the respective shareholders have held their shares since incorporation.

35. Company and its subsidiaries are in the business of developing "cashflow business properties" for resale or to hold and derive income therefrom. "Cashflow business properties" means business assets including XXXXXXXXXX which, upon development, Company can obtain substantial leveraged financing with the particular business asset immediately generating cashflow in excess of leveraged financing costs. The cashflow so generated is reinvested in the development of additional business assets.

XXXXXXXXXX

Substantially all of Company's assets are comprised of cashflow business properties or investments in subsidiaries substantially all of the assets of which are comprised of cashflow business properties. Company's cashflow business properties owned directly by the company include

XXXXXXXXXX

Company's and its subsidiaries' liabilities are comprised primarily of secured and unsecured debt against the cashflow business properties owned by Company and its subsidiaries.

36. Company currently has a nil balance in its refundable dividend tax on hand account.

37. Company's investments in other corporations are as follows:

									Federal
									Account
		Name							 Number

XXXXXXXXXX

XXXXXXXXXX

38. Company owns XXXXXXXXXX of the issued and outstanding shares of XXXXXXXXXX, consisting of XXXXXXXXXX Class XXXXXXXXXX voting, participating shares. The remaining XXXXXXXXXX shares are owned by a person who is not related to XXXXXXXXXX.

39. Company owns all of the issued and outstanding shares of XXXXXXXXXX, consisting of XXXXXXXXXX voting participating shares.

40. Company owns all of the issued and outstanding shares of XXXXXXXXXX, consisting of XXXXXXXXXX voting and participating shares.

41. Company owns all of the issued and outstanding shares of XXXXXXXXXX, consisting of XXXXXXXXXX voting and participating shares.

42. Company owns all of the issued and outstanding shares of XXXXXXXXXX, consisting of XXXXXXXXXX voting and participating shares.

43. Company has loans receivable from XXXXXXXXXX. The intercompany loans advanced by Company have arisen as a means of providing capital to the respective wholly-owned subsidiaries. These funds were utilized to develop cashflow business properties or invest in corporations developing cashflow business properties or used in the course of carrying on the business. The debtor companies do not have the ability to refinance or repay the non-current portion of the loans to Company without guarantees of Company or without the sale of the underlying property. The inter-company loans essentially represent long-term capital.

44. Each of Holdco 1 and Holdco 2 is a CCPC, private corporation and TCC.

45. Holdco 1 is owned by XXXXXXXXXX and by trusts established for the benefit of the children of XXXXXXXXXX. XXXXXXXXXX controls Holdco 1 through ownership of a majority of the voting shares.

46. Holdco 2 is XXXXXXXXXX% owned by XXXXXXXXXX who is not related to XXXXXXXXXX.

47. There are no contemplated changes to the share ownership of Newco or Company other than as described in the proposed transactions.

48. All of the cashflow business properties of Company and its investments in subsidiaries that own cashflow business properties represent eligible property for purposes of section 85. Company and its subsidiaries have not acquired, nor disposed of, any cashflow business properties in contemplation of the proposed reorganization. Neither Newco nor Company contemplates a sale of assets other than in the ordinary course of carrying on business.

49. Company's cashflow business properties and its investments in subsidiaries that own cashflow business properties have an estimated value of $XXXXXXXXXX. Debt on the cashflow business properties is $XXXXXXXXXX. It is estimated that the fair market value of the issued and outstanding Class XXXXXXXXXX shares of Company is $XXXXXXXXXX.

50. Immediately before the transfers of property described in paragraph 31 below, the types of property of Company will be determined on a consolidated look-through basis by including the appropriate pro rata share of the assets of any corporation or partnership over which Company has the ability to exercise significant influence (the "Consolidated Group") and will be classified into three types of property for the purposes of paragraph 55(3)(b) as follows:

(a) cash or near-cash property, being the current assets of the Consolidated Group including cash, accounts receivable, inventories, amounts due from affiliates in which Company does not have significant influence and rights arising from the prepayment of certain expenses (the "prepaid expenses");

(b) investment property, being all of the assets of the Consolidated Group, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property; and

(c) business property, being all of the assets of the Consolidated Group, other than cash or near-cash and investment property, any income from which would, for the purposes of the Act, be income from a business.

For purposes of determining Company's appropriate pro-rata share of each type of property of the assets of the Consolidated Group, the fair market value of the shares of any corporation over which Company has the ability to exercise significant influence, any partnership interest and any amount receivable by Company from such a corporation or partnership will be allocated between the three types of property by multiplying the fair market value of the shares of the particular corporation, partnership interest or amount receivable from the particular corporation or partnership, as the case may be, by the proportion that the net fair market value of each type of property owned by the particular corporation or partnership (as determined in this paragraph and paragraph 19 below) is of the aggregate fair market value of all the property owned by the corporation or partnership.

Immediately before the transfers described in paragraph 31 below, Company will have cash or near-cash and business property.

51. In determining the fair market value of each type of property owned by Company, immediately before the transfers of property described in paragraph 31 below, and by Newco, immediately after the transfers of property described in paragraph 31 below, the liabilities of Company and Newco will first be determined on a consolidated look-through basis by including the appropriate pro rata share of the liabilities of each member of the Consolidated Group (other than any amount owing by a member of the Consolidated Group to Company or any other member of the Consolidated Group) and allocated to each type of property of Company and Newco as follows:

(a) Current liabilities will be allocated to cash or near-cash property to the extent of the fair market value of such property.

(b) Liabilities, other than current liabilities, will be first allocated to the specific properties to which they relate, if any, and then to other properties of the same type, to the extent of the net fair market value of that particular type of property.

(c) Excess unallocated liabilities (including current liabilities remaining unallocated after step (a) above), if any, will then be allocated to the cash or near-cash, investment and business property of Company and Newco on a pro rata basis, based on the relative net fair market value of each type of property resulting after the allocation of liabilities in accordance with the rules described in steps (a) and (b) above and prior to the allocation of each excess liability.

52. In determining the types of property and the net equity of a property, the following general principles will be utilized:

(a) In determining the fair market value of the cash or near-cash, investment and business property of any particular corporation, current receivables, inventories and prepaid expenses will be considered as cash or near-cash property. Inventory will exclude real property. Current receivables will include amounts receivable or the portion thereof due and receivable within 12 months except for amounts that are due from Company. All real property or an interest therein will be treated as business property.

(b) Where the corporation is a member of a partnership, the corporation will be considered:

(i) to own a portion of the partnership's cash or near-cash, investment and business property equal to its proportionate interest in the partnership; and

(ii) to be responsible for its proportionate share of liabilities of the partnership.

(c) In determining the net equity value of the property of Company, in the event that the net amount of a particular property is less than zero, such negative amount will be deducted from the consolidated gross fair market value of that type of property.

(d) Under the consolidated look-through approach, Company's shares of, and loans to, its subsidiaries will not be included as property of any type since the net equity value of each type of property of the subsidiary will be included as property of Company.

ADDITIONAL INFORMATION

53. Neither Company nor Newco is, or will be, a "specified financial institution".

54. There are not, and will not be, at any time prior to the completion of the proposed transactions described below, any agreements (or undertakings) which constitute or include a "guarantee agreement", in respect of any shares referred to in this ruling.

55. None of the dividends described in this ruling will be received on a share of capital stock of a corporation as part of a dividend rental arrangement of the particular corporation.

56. None of the shares referred to in this ruling has been or will be issued or acquired as part of a transaction or event or a series of transactions or events contemplated by subsection 112(2.5).

57. No assets have been or will be acquired and no liabilities have been or will be incurred or paid by Company, or a corporation controlled by it, in contemplation of and before the transfer described in paragraph 31 below, except as described herein and any liabilities incurred in the completion of the proposed transactions described herein.

58. None of the parties is contemplating a disposition of any of the shares of Company or Newco, other than as described herein.

59. None of the parties is contemplating an acquisition of control of Company or Newco, other than as described herein.

60. It is not contemplated that any of the parties will sell or transfer any property as part of the series of transactions or events described herein, other than in the normal course of business, to a partnership or person who is not related to the vendor or transferor.

PROPOSED TRANSACTIONS

61. Holdco 2 will form a new corporation, Newco, under the XXXXXXXXXX. Newco will be a CCPC and a TCC. No shares will be issued on the incorporation. The authorized share capital of Newco will be an unlimited number of:

(a) Class XXXXXXXXXX shares which will be voting and participating;

(b) Class XXXXXXXXXX shares which will be voting, non-participating, entitled to a non-cumulative dividend of XXXXXXXXXX% per annum of the issue price being the consideration for which the shares were issued, redeemable at the issue price at the option of the holder or the company, and entitled to receive proceeds on liquidation or dissolution of the company in priority to the Class XXXXXXXXXX shares;

(c) Class XXXXXXXXXX shares which will be voting, non-participating, entitled to a non-cumulative dividend as declared by unanimous consent of the board of directors of XXXXXXXXXX% of the redemption amount and determined on an annual basis, redeemable at the option of the holder or the company at a redemption price of $XXXXXXXXXX per share, and entitled to receive proceeds on liquidation or dissolution of the company in priority to the Class XXXXXXXXXX shares; and

(d) Class XXXXXXXXXX shares which will be voting, non-participating, not entitled to a dividend, and redeemable at the issue price of $XXXXXXXXXX per share at the option of the holder.

The purpose of forming Newco will be to eliminate potential inequities which could arise in respect of dividend refunds and Part IV tax due to investment income earned subsequent to the transactions described below. Newco will be incorporated under the XXXXXXXXXX because it will receive real property located in XXXXXXXXXX in the course of the reorganization described herein XXXXXXXXXX.

62. Effective on or before the day preceding the transfer described in paragraph 31 below, Holdco 2 will sell, at fair market value, XXXXXXXXXX Class XXXXXXXXXX common shares of Company to Newco. As consideration, Newco will issue XXXXXXXXXX Class XXXXXXXXXX shares to Holdco 2. In respect of the transfer, Holdco 2 and Newco will jointly elect pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), to transfer the shares of Company at an amount equal to their ACB to Holdco 2 immediately before the transfer. The ACB of the shares so transferred will be less than their fair market value at the time of the transfer. Newco will add to the stated capital account in respect of the common shares so issued an amount that will not exceed the PUC of the Class XXXXXXXXXX common shares so received.

63. Company will then transfer XXXXXXXXXX% of each type of property owned by it to Newco in exchange for the assumption by Newco of a portion of the liabilities of Company and a number of Class XXXXXXXXXX shares of Newco having an aggregate redemption amount equal to the aggregate fair market value of the transferred assets less the amount of the liabilities so assumed. The fair market value of the cash or near-cash property and the business property (net of assumed liabilities) transferred by Company to Newco will be equal to XXXXXXXXXX% of the fair market value of all of the cash or near-cash property, the investment property and the business property (net of assumed liabilities), respectively, of Company immediately before the transfer. The liabilities assumed by Newco will be specifically allocated to particular properties. In no case will the liabilities allocated to an asset exceed the agreed amount, as described in paragraph 32 below, in respect of that asset.

For purposes of subsection 191(4), the sale agreement will specify a dollar amount in respect of each Class XXXXXXXXXX share. The amount to be specified will be equal to the fair market value of the consideration for which the share is issued. For greater certainty, the specified amount will not be subject to adjustment or described by reference to a formula.

Newco will add to the stated capital account in respect of the Class XXXXXXXXXX shares so issued an amount equal to the agreed amount (as set out in paragraph 32 below) in respect of the transfer of property received by it less the amount of the liabilities assumed on the transfer. The shares owned by Company will represent not more than 50% and not less than 10% of the votes and value of Newco.

64. In respect of the transfer of property described in paragraph 31 above, Company and Newco will jointly elect pursuant to subsection 85(1), in prescribed form and within the time specified in subsection 85(6), to transfer each asset that is an eligible property, within the meaning of subsection 85(1.1), and whose fair market value exceeds its cost amount, at the following agreed amounts, expressed in dollars:

(a) in the case of depreciable property of a prescribed class, an amount which is not less than the least of the amounts specified in subparagraphs 85(1)(e)(i) to 85(1)(e)(iii); and

(b) in the case of capital property (other than depreciable property of a prescribed class), an amount that is equal to its adjusted cost base.

The agreed amount in respect of each of the properties so transferred will be less than or equal to its fair market value at the time of the transfer. The directors of Newco will thereafter resolve to reduce the stated capital account of the Class XXXXXXXXXX shares to equal the stated capital of the Class XXXXXXXXXX Shares of Company held by Newco. The purpose of the reduction is to have equal dividends resulting on the purchases for cancellation described in paragraphs below.

65. Company will purchase for cancellation, at fair market value, the XXXXXXXXXX Class XXXXXXXXXX shares held by Newco. As consideration, Newco will receive as absolute payment, a demand non-interest-bearing promissory note from Company (the "Company Note"). Company will elect under subsection 256(9) that the acquisition of control will occur at the particular time of the day that the share purchase occurs.

66. Effective the day following the transaction described in paragraph 33 above, Newco will redeem, at their redemption amount, all of its Class XXXXXXXXXX shares held by Company. As consideration, Company will receive as absolute payment, a demand non-interest-bearing promissory note from Newco (the "Newco Note"). Newco will cause its taxation year end to occur at the end of this day.

67. The Company Note and the Newco Note will be offset and both notes will be cancelled.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to divide the cashflow business properties owned by Company and its subsidiaries between the shareholders on a net equity basis. The shareholders of Holdco 1 and Holdco 2 intend to divide the assets of Company to reflect their desire to pursue their interests independently and to allow each of them to manage properties within their own geographic location.

RULINGS

Provided that the above statements of facts and proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions and that the proposed transactions are carried out as set forth herein, the following rulings are given:

68. The acquisition of all the shares of Company by Newco from Holdco 2, as described in paragraph 30 above, will not result in an acquisition of control of Company for purposes of subsections 111(4) and 249(4).

69. Provided Newco and Company jointly elect under subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), in respect of the transfers of property described in paragraph 31 above, a vendor's proceeds of disposition of, and a purchaser's cost of, a particular property transferred will, by virtue of paragraph 85(1)(a), be deemed to be equal to the amount agreed upon in respect of that property, as described in paragraph 32 above and, for greater certainty, the provisions of paragraph 85(1)(b) will not be applicable in respect of those transfers where the debt assumed on a particular property is allocated to a different property.

70. By virtue of paragraph 1102(14)(d) of the Regulations, depreciable property of a prescribed class or a separate prescribed class of Company that is acquired by Newco, as described in paragraph 31 above, will be deemed to be property of that same prescribed class or separate prescribed class, as the case may be, to Newco.

71. For the purposes of determining the agreed amounts of the depreciable property of a prescribed class, as described in paragraph 32 above, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) will be interpreted to mean that portion of the undepreciated capital cost of all the property of that class that the fair market value of the assets of that class transferred is of the fair market value of all the assets of that class.

72. Provided that a liability of Company to be assumed by Newco, as described in paragraph 31 above, represented:

(a) borrowed money that was used by Company for the purposes of earning income from a business or property (other than borrowed money used to acquire property the income from which would be exempt or to acquire a life insurance policy); or

(b) an amount payable for property acquired by Company for the purpose of gaining or producing income from business other than property the income from which would be exempt or for property that is an interest in a life insurance policy;

then an amount paid in the year or payable in respect of the year (depending upon the method regularly followed by Newco in computing its income) pursuant to a legal obligation to pay interest on such a liability of Company so assumed by Newco will be deductible by Newco pursuant to the provisions of paragraph 20(1)(c) provided that Newco continues to use the borrowed money for the purposes described in (1) herein or continues to use the property for the purpose described in (2) herein, as the case may be. For greater certainty, the fact that the entire debt was assumed as payment for the transferred property but not so allocated to that particular property for purposes of the election described in paragraph 32 above will not invalidate this ruling.

73. Upon the purchase for cancellation by Company of its Class XXXXXXXXXX shares held by Newco, as described in paragraph 33 above, and upon the redemption by Newco of its Class XXXXXXXXXX shares held by Company, as described in paragraph 34 above, the amount by which the amount paid on the purchase for cancellation or redemption, as the case may be, exceeds the PUC of the particular shares so purchased or redeemed will be deemed to be a dividend paid by the particular payor and received by the particular recipient, by virtue of paragraph 84(3)(a) or 84(3)(b), as applicable. Each such dividend will be deductible by the particular recipient under subsection 112(1) in computing its taxable income for the taxation year in which it is deemed to have received such dividend and such deduction will not be precluded by any of subsections 112(2.1) to (2.4) and the provisions of subsection 112(3) will apply to any loss which may otherwise arise to the recipient as a result of the purchase for cancellation or redemption.

74. The provisions of subsection 55(2) will not apply to the dividends described in ruling F above by virtue of the application of paragraph 55(3)(b) provided that, as part of the series of transactions or events 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);

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

(c) acquisition of property in the circumstances described in subparagraphs 55(3.1)(c) or (d)

which has not been described herein.

75. The dividends described in ruling F above will not be subject to tax under Part IV except as provided in paragraph 186(1)(b).

76. The dividend described in ruling F above that is deemed to be received by Company from Newco on the redemption of the Class XXXXXXXXXX shares of Newco will be deemed by paragraph 191(4)(d) to be an "excluded dividend", as defined in subsection 191(1), and an "excepted dividend", as defined in section 187.1, to the extent that it does not exceed the amount by which the specified amount, as referred to in subsection 191(4) and as described in paragraph 31 above, exceeds the PUC of the shares immediately before the redemption, and therefore will, to that extent, not be subject to tax under Parts IV.1 and VI.1.

77. The Class XXXXXXXXXX common shares of Company that are purchased for cancellation, as described in paragraph 33 above, will not be considered to become taxable preferred shares as a result of the proposed transactions described above, in and by themselves.

78. The ACB to the holder of the Newco Note and the Company Note will be equal to the principal amount thereof.

79. The cancellation of the notes, as described in paragraph 35 above, will not give rise to a "forgiven amount" for purposes of section 80.

80. The provisions of subsections 15(1), 56(2) and 246(1) will not be applied as a result of the proposed transactions described herein, in and by themselves.

81. 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 herein.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada ("IC 70-6R3") and are binding provided the proposed transactions are completed by

XXXXXXXXXX.

OPINIONS

82. Provided that proposed paragraph 55(3.2)(h) is enacted in substantially the same form as set out in the proposed amendments in Bill C-28, which received first reading in the House of Commons on December 10, 1997, it is our opinion that proposed paragraph 55(3.2)(h) will not apply to deny the application of the provisions of paragraph 55(3)(b) as described in ruling G above.

83. It is our view that the Newco Note will not be included as consideration received by Company as a result of the transaction described in paragraph 31 above.

The foregoing comments are given in accordance with the practice referred to in paragraph 22 of IC 70-6R3 and are not binding on Revenue Canada.

COMMENTS

84. Nothing in this letter should be construed as our confirmation of the tax consequences of any transaction except those consequences expressly confirmed above.

85. Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed the determination of the fair market value, ACB or PUC of any shares referred to herein.

Yours truly,

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