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 3-981367
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the above taxpayer. We also acknowledge your letters dated 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.
Unless otherwise stated all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c. 1, as amended, (the "Act").
Definitions
In this letter, the following terms have the meanings specified:
"adjusted cost base" ("ACB") has the meaning assigned to that term in section 54;
"BCA" means the XXXXXXXXXX and, where applicable, its predecessor statutes;
"Canadian-controlled private corporation" ("CCPC") has the meaning assigned to that term by subsection 125(7);
"capital dividend account" ("CDA") has the meaning assigned to that term in subsection 89(1);
"capital property" has the meaning assigned to that term in section 54;
"cost amount" has the meaning assigned to that term in subsection 248(1);
"dividend refund" has the meaning assigned by subsection 129(1);
XXXXXXXXXX;
XXXXXXXXXX;
XXXXXXXXXX;
"paid-up capital" ("PUC") has the meaning assigned to that term by subsection 89(1);
XXXXXXXXXX;
"refundable dividend tax on hand" ("RDTOH") has the meaning assigned to that term by subsection 129(3);
"specified financial institution" ("SFI") has the meaning assigned to that term by subsection 248(1);
"specified investment business" has the meaning assigned to that term by subsection 125(7);
"taxable Canadian corporation" ("TCC") has the meaning assigned to that term by subsection 89(1);
"taxable dividend" has the meaning assigned to that term by subsection 89(1);
"taxable preferred shares" has the meaning assigned by subsection 248(1);
XXXXXXXXXX;
XXXXXXXXXX;
XXXXXXXXXX;
"undepreciated capital cost" has the meaning assigned by subsection 13(21).
Facts
A. XXXXXXXXXX.
B. XXXXXXXXXX are the sons of XXXXXXXXXX and are brothers (collectively referred to as the "brothers").
C. XXXXXXXXXX are the daughters of XXXXXXXXXX and are sisters (collectively referred to as the "sisters").
D. In XXXXXXXXXX settled a trust for each of his XXXXXXXXXX children. Each trust acquired XXXXXXXXXX outstanding common shares of XXXXXXXXXX for fair value consideration of $XXXXXXXXXX per share.
E. XXXXXXXXXX periodically made dividend distributions in the form of XXXXXXXXXX% non-cumulative, non-voting Class A special shares of no par value, redeemable at $XXXXXXXXXX each, to each of the trusts.
F. In XXXXXXXXXX, the trusts referred to in paragraph D above were wound up and the common and Class A Special shares of XXXXXXXXXX were distributed to the brothers and sisters.
G. In XXXXXXXXXX, the share capital of XXXXXXXXXX was reorganized such that theXXXXXXXXXX common shares were exchanged for XXXXXXXXXX per month non-cumulative, non-voting Class B special shares. These shares have a redemption value equal to the fair value of the consideration received by the company (the common shares) and currently have a value of $XXXXXXXXXX each. At that time XXXXXXXXXX. subscribed for XXXXXXXXXX new common shares for fair market value consideration of $XXXXXXXXXX. These shares were gifted: XXXXXXXXXX. One of the purposes of this reorganization was to allow the daughters a greater participation in XXXXXXXXXX given that they were not actively involved with the other companies. The acquisition and gifting of the common shares by XXXXXXXXXX was to allow the shares to be excluded from family property under the XXXXXXXXXX.
H. In XXXXXXXXXX name was changed to XXXXXXXXXX.
I. XXXXXXXXXX his wife, and his sons (XXXXXXXXXX) acquired share interests in a number of other companies, most of which carry on active businesses. These companies are not associated with XXXXXXXXXX. In some cases they rent building space from XXXXXXXXXX. The more significant of these companies are XXXXXXXXXX.
J. As noted above, certain buildings owned by XXXXXXXXXX are rented to other non-associated companies owned by members of the XXXXXXXXXX family. In XXXXXXXXXX an option was granted to XXXXXXXXXX, which is a partnership owned equally by the brothers, to acquire certain buildings owned by XXXXXXXXXX for $XXXXXXXXXX. The option is valid from XXXXXXXXXX and expires in XXXXXXXXXX. The option price was not less than the fair value of the properties at the time the option was granted.
K. XXXXXXXXXX died in XXXXXXXXXX, and his investments in various companies were distributed in accordance with the terms of his will. Notwithstanding the distribution, XXXXXXXXXX is not associated with the other companies owned by members of the XXXXXXXXXX family.
L. In XXXXXXXXXX redeemed all XXXXXXXXXX Class A special shares for cash. Funds were provided largely from the repayment of funds loaned to other companies.
M. XXXXXXXXXX is a CCPC and a TCC. Its assets are primarily cash or near-cash and investment assets. As reported on its XXXXXXXXXX income tax return, XXXXXXXXXX earned primarily investment income, but did earn some active business income in the nature of consulting fees and packaging income. The XXXXXXXXXX operations have been largely discontinued and are considered to have nominal value. XXXXXXXXXX is serviced by the XXXXXXXXXX Taxation Services Office.
N. At the end of its XXXXXXXXXX year XXXXXXXXXX had RDTOH of about $XXXXXXXXXX and a capital dividend account of about $XXXXXXXXXX.
O. The assets of XXXXXXXXXX include the following:
(a) an interest in XXXXXXXXXX which represents an interest in a pool of investment assets (marketable securities and real estate) that is owned by the investors including the brothers, the sisters, children of the brothers and the sisters and the mother of the brothers and the sisters and companies owned by these individuals;
(b) a XXXXXXXXXX% interest in the XXXXXXXXXX which owns and rents a commercial building;
(c) a XXXXXXXXXX% share interest in XXXXXXXXXX which carries on an active business (the other shares are owned by third parties);
(d) an investment in the shares of XXXXXXXXXX which is an inactive company with liquid assets of about $XXXXXXXXXX;
(e) an investment in shares of XXXXXXXXXX which has a tax basis of $XXXXXXXXXX and has been written down for accounting purposes to a realizable value of nil;
(f) an equity share in XXXXXXXXXX which will be considered an investment property for purposes of paragraph 55(3)(b);
(g) a $XXXXXXXXXX amount due from XXXXXXXXXX for management fees which is an active business receivable that will be considered a cash or near-cash property for purposes of paragraph 55(3)(b); and
(h) land and buildings ("rental properties") consisting of XXXXXXXXXX separate buildings and related land.
XXXXXXXXXX of the rental properties are rented to companies owned by the brothers. The other properties are rented to third parties. As XXXXXXXXXX is not associated with the companies owned by the brothers, the rental income is not categorized as active business income and, therefore, all of the rental properties will be considered investment property for purposes of paragraph 55(3)(b).
P. Immediately before the transfers of property as described in paragraph W below, the types of property of XXXXXXXXXX will be determined on a consolidated look-through basis which includes the appropriate pro rata share of the assets of any corporation or partnership over which XXXXXXXXXX has the ability to exercise significant influence (the "XXXXXXXXXX Group"). The assets will then 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 XXXXXXXXXX Group including cash, short-term deposits, amounts receivable, marketable securities (other than portfolio investments), amounts due from affiliates in which XXXXXXXXXX does not have significant influence and rights arising from the prepayment of certain expenses;
(b) investment property, being all of the assets of the XXXXXXXXXX Group, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property or a specified investment business, including portfolio investments and the equity share in a XXXXXXXXXX; and
(c) business property, being all of the assets of the XXXXXXXXXX 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 XXXXXXXXXX appropriate pro rata share of each type of property of the assets of the XXXXXXXXXX Group, the fair market value of the shares of any corporation over which XXXXXXXXXX has the ability to exercise significant influence, any partnership interest and any amount receivable by XXXXXXXXXX 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 fair market value of each type of property owned by the particular corporation or partnership (as determined in this paragraph) is of the aggregate fair market value of all the property owned by the corporation or partnership.
For greater certainty, any tax accounts, such as the balance of any RDTOH account or CDA of XXXXXXXXXX, will not be considered property of XXXXXXXXXX for purposes of the proposed transactions described herein.
Q. In summary, XXXXXXXXXX each own XXXXXXXXXX common shares and XXXXXXXXXX Class B special shares of XXXXXXXXXX. Each of XXXXXXXXXX hold their shares of XXXXXXXXXX as capital property. Each of the common shares of XXXXXXXXXX is not a taxable preferred share.
R. In summary, XXXXXXXXXX each ownXXXXXXXXXX common shares and XXXXXXXXXX Class B special shares of XXXXXXXXXX. Each of XXXXXXXXXX hold their shares of XXXXXXXXXX as capital property. Each of the common shares of XXXXXXXXXX is not a taxable preferred share.
Proposed Transactions
S. XXXXXXXXXX will each cause the incorporation of a new corporation pursuant to the BCA ("Holdco 1", "Holdco 2" and "Holdco 3", respectively - "the Sistercos"). On incorporation, XXXXXXXXXX will acquire one common share of Holdco 1, XXXXXXXXXX will acquire one common share of Holdco 2, and XXXXXXXXXX will acquire one common share of Holdco 3. Each of Holdco 1, Holdco 2, and Holdco 3 will be a TCC and a CCPC. The authorized share capital of each of Holdco 1, Holdco 2, and Holdco 3 will include common shares and a class of voting special shares ("Class A shares") which will be redeemable and retractable at an amount equal to the fair market value of the property for which they are issued and which will be entitled to dividends at the discretion of the directors.
T. XXXXXXXXXX will each transfer, at fair market value, their XXXXXXXXXX common shares and XXXXXXXXXX Class B Special shares of XXXXXXXXXX to Holdco 1, Holdco 2 and Holdco 3, respectively. Additional common shares of Holdco 1, Holdco 2, and Holdco 3, having an aggregate fair market value equal to that of the shares so transferred, will be issued to XXXXXXXXXX, respectively, as consideration for the transfers. In respect of the transfer, each of XXXXXXXXXX and Holdco 1, XXXXXXXXXX and Holdco 2, and XXXXXXXXXX and Holdco 3 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 XXXXXXXXXX at an amount equal to their ACB to the transferor immediately before the transfer. The ACB of the shares so transferred will not exceed their fair market value at the time of the transfer. Holdco 1, Holdco 2 and Holdco 3 will add to the stated capital account in respect of its common shares so issued an amount that will not exceed the greater of the aggregate PUC of the shares transferred to it or the aggregate ACB base of those shares, as determined under paragraphs 84.1(2)(a) and (a.1), to the transferor immediately before the disposition.
U. XXXXXXXXXX will cause the incorporation of a new corporation pursuant to the BCA ("Brotherco"). On incorporation, XXXXXXXXXX will each acquire one common share of Brotherco. Brotherco will be a TCC and a CCPC. The authorized share capital of Brotherco will include common shares and a class of voting special shares ("Class A shares") which will be redeemable and retractable at an amount equal to the fair market value of the property for which they are issued and which will be entitled to dividends at the discretion of the directors.
V. XXXXXXXXXX will each transfer, at fair market value, their XXXXXXXXXX common shares and XXXXXXXXXX Class B Special shares of XXXXXXXXXX to Brotherco. Additional common shares of Brotherco, having an aggregate fair market value equal to that of the shares so transferred, will be issued to XXXXXXXXXX as consideration for the transfer. In respect of the transfer, each of XXXXXXXXXX will jointly elect with Brotherco pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), to transfer the shares of XXXXXXXXXX at an amount equal to their ACB to the transferor immediately before the transfer. The ACB of the shares so transferred will not exceed their fair market value at the time of the transfer. Brotherco will add to the stated capital account in respect of the common shares so issued an amount that will not exceed the greater of the aggregate PUC of the shares transferred to it or the aggregate ACB of those shares, as determined under paragraphs 84.1(2)(a) and (a.1), to the transferor immediately before the disposition.
W. XXXXXXXXXX will transfer, at fair market value, to each of the Sistercos and Brotherco a proportionate amount of each type of property owned by XXXXXXXXXX such that the aggregate of the fair market value of each type of property received by the recipient will be equal to or approximate the proportion of the fair market value of all property of the particular type owned by XXXXXXXXXX immediately before the transfer that:
the aggregate of the fair market value, immediately before the transfer, of all shares of the capital stock of XXXXXXXXXX owned by the recipient at that time
is of:
the fair market value, immediately before the transfer, of all the issued shares of the capital stock of XXXXXXXXXX at that time.
It is intended that the investment property distributed to Brotherco will include a full interest in those properties that are currently being rented to companies controlled by the brothers.
As consideration for the property so transferred, each of the Sistercos and Brotherco will respectively assume its proportionate amount of XXXXXXXXXX liabilities, if any, and will issue to XXXXXXXXXX that number of its Class A shares having a fair market value and aggregate redemption amount equal to the fair market value of the assets of XXXXXXXXXX so received by it less the fair market value of XXXXXXXXXX liabilities assumed by it. The Class A shares of the Sistercos and Brotherco will represent capital property to XXXXXXXXXX. It is anticipated that there will not be a significant amount of liabilities at the time of the transfer. At this time, it is not certain whether the liabilities will be fully paid in cash prior to the transfer or proportionately assumed by the transferee corporations (in which case, the redemption amount of the Class A shares would be correspondingly reduced).
The Class A shares of the Sistercos and Brotherco, as the case may be, issued to XXXXXXXXXX will be entitled to more than 10% of the voting rights under all circumstances in respect of the issued share capital the Sistercos and Brotherco, as the case may be, and will represent more than 10% of the fair market value of all of the issued share capital of the Sistercos and Brotherco, as the case may be, such that each of the Sistercos and Brotherco will be connected with XXXXXXXXXX pursuant to paragraph 186(4)(b).
For the purposes of subsection 191(4), the terms and conditions of the Class A shares of the Sistercos and Brotherco, as the case may be, to be issued as described herein will specify an amount in respect of each such share, including an amount for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each of its Class A shares, at the time of its issuance by a resolution to be made by the board of directors of the Sistercos and Brotherco, as the case may be, will be expressed as a dollar amount, will not be determined by a formula and will not exceed the fair market value of the property to be received by the Sistercos and Brotherco, as the case may be, as consideration for such shares. The agreement between the Sistercos and Brotherco, as the case may be, and XXXXXXXXXX pursuant to which its Class A shares will be issued will also refer to the redemption price as a dollar amount.
X. In respect of the transfers of property described in paragraph W above, XXXXXXXXXX and each of the Sistercos and Brotherco 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), 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 the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).
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 amount of any liabilities assumed on the transfer, if any, will not exceed the aggregate of the agreed amounts in respect of the transferred properties.
Each of the Sistercos and Brotherco will add to the stated capital account maintained for its Class A shares an amount equal to the aggregate of the cost (determined pursuant to subsection 85(1), where relevant) of the properties transferred to that transferee and the fair market value of all other properties so transferred to it, less the amount of any liabilities assumed by that transferee as consideration for the properties transferred.
Y. Each of the Sistercos and Brotherco will then redeem its Class A shares held by XXXXXXXXXX for an amount equal to their fair market value (the "Redemption Price") and as payment of the Redemption Price will issue to XXXXXXXXXX a non-interest-bearing note (the "Sisterco Notes", and the "Brotherco Note"), payable on demand, having a principal amount and fair market value equal to the Redemption Price. XXXXXXXXXX will accept the Sisterco Notes and the Brotherco Note as full payment for the Redemption Price of the Class A shares of the Sistercos and Brotherco so redeemed.
Z. At the end of the day on which the redemption of their respective Class A shares described in paragraph Y above occurs, each of the Sistercos and Brotherco will cause its first fiscal period and taxation year end to occur.
AA. Subsequent to the year end of the Sistercos and Brotherco referred to in paragraph Z above, the shareholders of XXXXXXXXXX, will, by special resolution, resolve to wind up and dissolve XXXXXXXXXX under the applicable provisions of the BCA. In connection with the wind up, XXXXXXXXXX will distribute to the Sistercos and Brotherco, respectively, the Sisterco Notes and the Brotherco Note.
Prior to the distribution of such notes, XXXXXXXXXX will elect, pursuant to subsection 83(2), in prescribed manner and prescribed form, that the part of any resulting dividend referred to in subparagraph 88(2)(b)(i) will be deemed to be a capital dividend. Each of the Sistercos and Brotherco will receive its proportionate share of the CDA of XXXXXXXXXX.
BB. As a result of the assignment and distribution of the Sisterco Notes and the Brotherco Note, the obligations under the notes will be cancelled.
CC. Following receipt of the dividend refund to which XXXXXXXXXX will become entitled as a result of the proposed transactions described herein, XXXXXXXXXX will distribute such amount pro rata to each of the Sistercos and Brotherco. The refund will not arise until after the end of the fiscal period in which the dividend was paid (or deemed paid).
DD. Following the above transaction, all of the properties and liabilities of XXXXXXXXXX will have been distributed or discharged, as the case may be. Articles of Dissolution will then be executed and filed accordingly. The common shares of XXXXXXXXXX will be cancelled and XXXXXXXXXX will be dissolved.
EE. Except as described herein, no liabilities have been or will be incurred and no assets have been or will be acquired by or disposed of by XXXXXXXXXX or a corporation controlled by XXXXXXXXXX in contemplation of and before the proposed transfer of properties described in paragraph W above. Nor is it contemplated that subsequent to the implementation of the transactions described herein under "Proposed Transactions" that the Sistercos or Brotherco will transfer or sell any of its assets to any other person except as described herein or in the normal course of its business.
It should be noted that while XXXXXXXXXX owns XXXXXXXXXX% of XXXXXXXXXX, the remaining XXXXXXXXXX% is owned by a family that deals at arm’s length with XXXXXXXXXX. Preliminary discussions have taken place over the last year in determining whether XXXXXXXXXX shares of XXXXXXXXXX will be sold, whether XXXXXXXXXX will acquire the remaining shares of XXXXXXXXXX or whether there will be no ownership change. An offer to purchase XXXXXXXXXX shares of XXXXXXXXXX was received in XXXXXXXXXX. Under the terms of the shareholders' agreement, XXXXXXXXXX may in turn offer to purchase the shares owned by the other party. At this time it is not possible to determine the final outcome or the timing of such outcome of these events. However, any disposition or acquisition will not occur in contemplation of the proposed transactions described herein.
FF. None of XXXXXXXXXX, Holdco 1, Holdco 2, Holdco 3, Brotherco, and the Sistercos is, or will be at the time of the proposed transactions, an SFI.
GG. None of the shares of XXXXXXXXXX, Holdco 1, Holdco 2, Holdco 3, or Brotherco has been or will be, at any time during the implementation of the proposed transactions described herein:
(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";
(b) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or
(c) the subject of a dividend rental arrangement as that term in defined in subsection 248(1).
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to allow the sisters and the brothers to continue to hold, through the Sistercos and Brotherco, their proportional share of the classes of property of XXXXXXXXXX. However, the investment assets received by Brotherco will include those properties being rented by companies controlled by the brothers. These transactions will permit the sisters greater discretion with respect to future investments made by their respective companies.
Rulings Provided
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts and proposed transactions and the purposes of the proposed transactions, we confirm the following:
A. Subject to the application of subsection 69(11) and provided the relevant parties 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 W 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 amounts agreed upon in respect of that property, as described in paragraph W above. For greater certainty, paragraph 85(1)(e.2) will not be applicable in respect of the transfers.
B. Subject to the application of subsection 69(11) and provided the relevant parties 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 V 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 amounts agreed upon in respect of that property, as described in paragraph V above. For greater certainty, paragraph 85(1)(e.2) will not be applicable in respect of the transfers.
C. Subject to the application of subsection 69(11) and provided the relevant parties 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 W 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 amounts agreed upon in respect of that property, as described in paragraph X above, respectively. For greater certainty, paragraph 85(1)(e.2) will not be applicable in respect of the transfers.
D. As a result of the redemption by the Sistercos and Brotherco of their Class A shares held by XXXXXXXXXX, as described in paragraph Y above, and as a result of the distributions by XXXXXXXXXX in the course of its winding-up, as described in paragraph AA above:
(a) By virtue of paragraphs 84(3)(a) and 84(3)(b), each of the Sistercos and Brotherco will be deemed to have paid, and XXXXXXXXXX will be deemed to have received, a dividend equal to the amount by which the amount paid in respect of the redemption by each of the Sistercos and Brotherco of its Class A shares exceeds the PUC of such shares; and
(b) Pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (ii) to (iv) therein,
(i) each of the Sistercos and Brotherco will be deemed to have received a dividend (the "winding-up dividend") on its common shares of XXXXXXXXXX equal to the proportion of the amount by which the aggregate fair market value of the property of XXXXXXXXXX distributed by XXXXXXXXXX to each of the Sistercos and Brotherco, on its winding-up as consideration for the cancellation of its common shares exceeds the PUC thereof, that the number of shares of such class held by each of the Sistercos and Brotherco, as the case may be, is of the number of all such shares that are cancelled;
(ii) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (b)(i) as does not exceed XXXXXXXXXX CDA determined immediately before the payment of the winding-up dividend will be deemed, for the purposes of the subsection 83(2) election referred to in paragraph AA above, to be the full amount of a separate dividend;
(iii) pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to the lesser of:
a. XXXXXXXXXX pre-1972 capital surplus on hand as determined immediately before the payment of the winding-up dividend, and
b. the amount by which the winding-up dividend exceeds the portion thereof in respect of which XXXXXXXXXX will elect under subsection 83(2)
will be deemed not to be a dividend; and
(iv) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in (ii) herein that is deemed to be a separate dividend and the portion referred to in (iii) herein that is deemed not to be a dividend, will be deemed to be a separate dividend that is a taxable dividend.
E. The deemed dividends referred to in Ruling D above, to the extent that they are taxable dividends, will:
(a) be included in each recipient's income pursuant to paragraph 12(1)(j);
(b) be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be precluded by any of subsections 112(2.1) to (2.4);
(c) be excluded in computing the proceeds of disposition to the holder of the shares so redeemed pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54; and
(d) by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received.
F. Provided that the specified amount referred to in paragraph W above in respect of the Class A shares of each of the Sistercos, and Brotherco which are to be redeemed, as described in paragraph Y above, is equal to their Redemption Amount, Parts IV.1 and VI.1 will not apply to the dividend deemed to have been paid by each of the Sistercos and Brotherco, as described in Ruling (a) above, because each such dividend will, pursuant to subsection 191(4) , be an "excepted dividend" for the purposes of section 187.2 and an "excluded dividend" for the purposes of section 191.1.
G. The deemed dividends received by XXXXXXXXXX as described in paragraph (a) above will not result in any tax being exigible under subsection 186(1) except as provided in paragraph 186(1)(b).
H. The deemed dividend received by each of the Sistercos and Brotherco as described in paragraph (b) above will not result in any tax being exigible under subsection 186(1) except as provided in paragraph 186(1)(b).
I. The provisions of subsection 55(2) will not apply to the dividends described in Ruling D 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 and, for greater certainty, subsection 55(3.1) will not apply to deny the application of paragraph 55(3)(b).
J. The extinguishment of the debt obligations as a result of the cancellation of the Sisterco Notes and the Brotherco Note, as described in paragraph BB above, will not give rise to a "forgiven amount", within the meaning thereof in subsections 80(1) and 80.01(1).
K. XXXXXXXXXX will not realize any capital gain or incur any capital loss upon the extinguishment of the debt obligations as a result of the cancellation of the Sisterco Notes and the Brotherco Note, as described in paragraph BB above.
L. The common shares of XXXXXXXXXX will not, as a result of the proposed transactions in and by themselves, become taxable preferred shares.
M. The provisions of subsections 15(1), 56(2), 56(4) and 246(1) will not apply to any of the proposed transactions described above, in and by themselves.
N. 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 described herein are completed by XXXXXXXXXX.
1. Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed the determination of the amount of the CDA or RDTOH; the PUC of any shares referred to herein; or the ACB or fair market value of any property referred to herein.
2. In the event of a subsequent disposition of any shares of any of the Sistercos or Brotherco, nothing in this ruling should be construed as implying that the transactions described herein will not, for the purposes of subsection 55(3.1) or paragraph 110.6(7)(a), be considered to be part of a series of transactions or events which includes such subsequent disposition of shares. The phrase "series of transactions or events" has the meaning assigned by subsection 248(10).
3. You have requested a ruling (request K) that subsection 88(1) will apply to the wind-up of XXXXXXXXXX described in paragraph AA above. As there is no taxable Canadian corporation which owns 90% or more of the issued shares of XXXXXXXXXX, the provisions of subsection 88(1) are not applicable.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
15
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.../cont’d
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© Her Majesty the Queen in Right of Canada, 1997
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© Sa Majesté la Reine du Chef du Canada, 1997