1998 Ruling 9816063 - 110.1(3),110.1(6), 118.1(13)(A)

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: Issues related to non-qualifying security gift made by a taxable Canadian corporation to a U.S. Foundation. (See Statement of Principal Issues attached with Ruling)

Position: (See Statement of Principal issues attached with Ruling)

Reasons: (See Statement of Principal Issues attached with Ruling)

XXXXXXXXXX
XXXXXXXXXX 		3-981606

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. In your letters of XXXXXXXXXX you provided additional information in respect of the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations.

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; and

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

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

Definitions

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

(a) “adjusted cost base” has the meaning assigned in section 54 and subsection 248(1) of the Act;

(b) “capital property” has the meaning assigned in section 54 of the Act;

(c) “related persons” has the meaning assigned by section 251 of the Act;

(d) “subsidiary wholly-owned corporation” has the meaning assigned by subsection 248(1) of the Act; and

(e) “taxable Canadian corporation” has the meaning assigned by subsection 89(1) of the Act;

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

FACTS

1. XXXXXXXXXX (“NRCo”) is a corporation which was incorporated under the laws of the United States. The principal shareholders of NRCo are XXXXXXXXXX (“Mr. A”) and members of his family, all of whom are Canadian citizens and residents of the United States for the purposes of the Act.

2. XXXXXXXXXX ("Canco") is a taxable Canadian corporation which was incorporated under the Companies Act of the Province of XXXXXXXXXX. Canco is a subsidiary wholly-owned corporation of NRCo. Canco was originally incorporated to participate in XXXXXXXXXX operations in Canada on behalf of NRCo. Canco subsequently sold its Canadian operations and used the funds to buy United States XXXXXXXXXX operations.

3. XXXXXXXXXX (“Subco”) is a subsidiary wholly-owned corporation of Canco. Subco was incorporated under the laws of the United States. The assets of Subco consist of the following:

(a) less than XXXXXXXXXX% of the shares of XXXXXXXXXX, a United States public company, having a fair market value of approximately $XXXXXXXXXX; and

(b) debts receivable from related persons who are residents of the United States. These debts receivable have a principal amount of approximately $XXXXXXXXXX and bear a market rate of interest.

Subco is not engaged in any trade or business activities. The Subco shares owned by Canco have a fair market value of approximately $XXXXXXXXXX and an adjusted cost base of approximately $XXXXXXXXXX. The Subco shares represent capital property to Canco.

4. XXXXXXXXXX (the “Foundation”) is a private foundation which was incorporated under the laws of the State of XXXXXXXXXX. On XXXXXXXXXX, the Internal Revenue Service approved the Foundation as a non-profit corporation which is exempt from United States tax pursuant to section 501(c)(3) of the Internal Revenue Code. This approval is conditional upon the Foundation’s operations being as stated in its application for recognition of exemption. The only directors and officers of the Foundation are Mr. A and members of his family.

Subco has donated $XXXXXXXXXX to the Foundation. The balance of the funding for the Foundation is expected to come from Canco.

PROPOSED TRANSACTIONS

5. Canco will gift its shares in Subco to the Foundation. In its return of income for the taxation year in which the Subco shares are gifted, Canco will designate an amount pursuant to subsection 110.1(3) of the Act. The amount so designated will not be greater than the fair market value of the Subco shares at that time nor will it be less than Canco’s adjusted cost base of its shares of Subco.

PURPOSE OF THE PROPOSED TRANSACTIONS

6. The purpose of the proposed gift is to provide funding to the Foundation for its charitable activities in the U.S.

RULINGS GIVEN

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

A. Provided that at the time the gift of the Subco shares is made as described in paragraph 5 above:

(i) the Foundation is a non-profit corporation described under section 501(c)(3) of the U.S. Internal Revenue Code,

(ii) the Subco shares are capital property of Canco,

(iii) the fair market value of the Subco shares exceeds Canco’s adjusted cost base thereof, and

(iv) the making of the gift is proven by filing with the Minister a receipt containing prescribed information,

the amount designated by Canco in the manner described in paragraph 5 above will be deemed to be the proceeds of disposition of the Subco shares to Canco.

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

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

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 or adjusted cost base of any particular asset 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. For greater certainty, the amount of any deduction in respect of the gift will be subject to the provisions of subsection 110.1(6) of the Act and pursuant to paragraph 6 of Article XXI of the Treaty for the purposes of determining the amount of any deduction available to Canco in a taxation year pursuant to paragraph 110.1(1)(a) only Canco’s income from sources in the United States will be included in computing the amounts described in A, B, C and D of the formula referred to therein.

Yours truly,

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

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