30 November 1997 Ruling 9805033 - KEY MAN FREEZE

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 980503
XXXXXXXXXX

XXXXXXXXXX,1998

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

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 tax services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.

DEFINITIONS

The following terms used herein have the following meanings:

"Act" means the Income Tax Act (Canada), 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;

"ACB" means "adjusted cost base" as that expression is defined in section 54 and subsection 248(1);

"Canadian-controlled private corporation" has the meaning assigned in section 125 and subsection 248(1);

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

"BCA" means the XXXXXXXXXX Business Corporations Act;

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

"safe income on hand" refers to the income earned or realized, within the meaning of paragraph 55(5)(c), by a corporation to the extent that it is on hand and can reasonably be considered to contribute to the capital gain that would be realized on a disposition at fair market value of all of the common shares of the corporation;

"stated capital" has the meaning assigned in the BCA; and

"taxable Canadian corporation" has the meaning assigned in subsection 89(1).

Our understanding of the statement of facts and proposed transactions is as follows:

FACTS

1. Ltd is a corporation incorporated under the BCA and is resident in Canada. Ltd is a taxable Canadian corporation and a Canadian-controlled private corporation.

2. The issued shares of Ltd are held as follows:

# PUC ACB FMV

Class B non-voting, retractable
special shares

XXXXXXXXXX

XXXXXXXXXX

Common shares

XXXXXXXXXX

XXXXXXXXXX

3. XXXXXXXXXX are individuals resident in Canada who are married to each other. XXXXXXXXXX hold the shares as capital property.

4. Ltd is a holding company. It owns all the issued shares of XXXXXXXXXX and XXXXXXXXXX. In addition, it holds between $XXXXXXXXXX to $XXXXXXXXXX of cash, marketable securities and investment type assets.

5. XXXXXXXXXX is a corporation incorporated under the BCA. It is a taxable Canadian corporation and a Canadian-controlled private corporation. It operates a XXXXXXXXXX. Its share structure is as follows:

Common shares # PUC ACB FMV

XXXXXXXXXX

6. XXXXXXXXXX is a corporation incorporated under the BCA. It is a taxable Canadian corporation and a Canadian-controlled private corporation. It operates a XXXXXXXXXX. Its share structure is as follows:

Common shares

XXXXXXXXXX

7. XXXXXXXXXX is a corporation incorporated under the BCA. It is a taxable Canadian corporation and a Canadian-controlled private corporation. It owns the real property XXXXXXXXXX. Its share structure is as follows:

Class A, non-voting retractable preferred shares

XXXXXXXXXX

Class B non-voting, retractable preferred shares

XXXXXXXXXX

XXXXXXXXXX

Common shares

XXXXXXXXXX

XXXXXXXXXX

8. XXXXXXXXXX is a corporation incorporated under the BCA. It is a taxable Canadian corporation and a Canadian-controlled private corporation. It is wholly-owned by XXXXXXXXXX is an individual resident in Canada who deals at arm's length with XXXXXXXXXX.

PROPOSED TRANSACTIONS

9. XXXXXXXXXX will incorporate a new holding company ("Newco"). They will transfer their common shares in Ltd to Newco in exchange for Newco common shares (one Newco common share each). The parties will elect jointly, within the time required, under subsection 85(1) at XXXXXXXXXX adjusted cost base. The stated capital of the Newco common shares will be equal to the PUC of the Ltd shares.

10. XXXXXXXXXX will reorganize its capital by exchanging its existing common shares for a class of non-voting preferred shares. The preferred shares will be retractable for an aggregate consideration equal to the FMV of the common shares exchanged for them. XXXXXXXXXX will pay dividends to Ltd prior to the reorganization up to the amount of its safe income on hand thereby reducing the value of the preferred shares.

11. Newco will subscribe for new common shares of XXXXXXXXXX for cash consideration equal to the FMV of such shares.

12. Ltd will create a new class of non-voting preferred shares, Class C. The shares will be retractable for an aggregate consideration equal to the FMV of the assets for which they are issued. Newco will exchange its common shares of Ltd for Class C shares of Ltd. The stated capital of the Class C shares will be set equal to the stated capital of the common shares ($XXXXXXXXXX)

13. Ltd will issue new common shares for cash consideration equal to their FMV. XXXXXXXXXX% of the new shares will be issued to Newco and XXXXXXXXXX% to XXXXXXXXXX.

14. XXXXXXXXXX will purchase Ltd Class B shares from XXXXXXXXXX equally for consideration equal to their FMV. XXXXXXXXXX will give demand promissory notes as consideration for the shares. Sufficient shares will be purchased so that XXXXXXXXXX will hold XXXXXXXXXX% of the redemption amount and FMV of all preferred shares outstanding. It is estimated that the Class B shares will comprise more than XXXXXXXXXX% of the total value of the company. If they do not, Ltd will redeem sufficient Class C shares to equalize the classes.

15. Newco and XXXXXXXXXX will enter into a shareholders' agreement that will provide, among other things, that redemptions of preferred shareholdings will be done at the same rate for the Newco and for XXXXXXXXXX. It is anticipated that the cash and near cash resources of Ltd will be used to redeem preferred shares. Further redemptions will have to be funded from retained future earnings. XXXXXXXXXX will use its redemption proceeds to make payments on the promissory note it issued on the purchase of the preferred shares.

PURPOSE OF THE PROPOSED TRANSACTIONS

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

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. Provided an election is filed in prescribed form and within the time determined under subsection 85(6), subsection 85(1) will apply to the dispositions of common shares in Ltd to Newco described in paragraph 9 above, such that the agreed amount in respect of the transfer will be deemed to be the proceeds of disposition to the transferor and the cost thereof to the transferee.

B. The provisions of section 86 will apply to the exchange by Ltd of the common shares of XXXXXXXXXX for preferred shares of XXXXXXXXXX described in paragraph 10 above. As a consequence, the cost to Ltd of the preferred shares will be deemed by paragraph 86(1)(b) to be equal to the ACB of Ltd's common shares before the exchange. The proceeds of disposition of the common shares will be deemed by paragraph 86(1)(c) to be Ltd's cost of the preferred shares.

C. The provisions of section 86 will apply to the exchange by Newco of the common shares of Ltd for Class C shares of Ltd described in paragraph 12 above. As a consequence, the cost to Newco of the Class C shares will be deemed by paragraph 86(1)(b) to be equal to the ACB of Newco's common shares prior to the exchange. The proceeds of disposition of the common shares will be deemed by paragraph 86(1)(c) to be Newco's cost of the Class C shares.

D. The provisions of subsection 15(1) will not apply to any of the proposed transactions described in paragraph 9 to 14 above.

E. Subsection 245(2) will not apply as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on Revenue Canada provided that the proposed transactions are completed before XXXXXXXXXX.

These 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 into law, could have an effect on the rulings provided herein.

Comments

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 or ACB of any property referred to herein, or the PUC of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other that 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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