1998 Ruling 9816513 - REVERSE 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.

XXXXXXXXXX
XXXXXXXXXX 981651
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

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

We understand that to the best of the knowledge of each of the taxpayers, none of the issues involved in the rulings requested in this letter is in any return of the taxpayers or related persons; is being considered by a tax services office or taxation centre in connection with a previously filed tax return of any of the taxpayers or related persons; is under objection by any of the taxpayers or related persons; is before the courts; or is the subject of a ruling previously issued by the Directorate.

In this letter any references to the "Act" are references to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter. All statutory references in this letter are references to the Act unless otherwise indicated.

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

FACTS

1. XXXXXXXXXX is a Canadian-controlled private corporation for purposes of the Act and is continued under the federal Canada Business Corporations Act (the "CBCA"). XXXXXXXXXX has operated its business of XXXXXXXXXX since 1986. It is anticipated that, in XXXXXXXXXX will make an initial public offering of its shares (the "IPO").

2. XXXXXXXXXX is a Canadian-controlled private corporation for purposes of the Act and is incorporated under the laws of the Province of XXXXXXXXXX is a holding company whose purpose is to hold XXXXXXXXXX common shares in the capital of XXXXXXXXXX. These common shares have an aggregate cost amount of $XXXXXXXXXX and an aggregate paid-up capital of $XXXXXXXXXX. XXXXXXXXXX has held these shares of XXXXXXXXXX since XXXXXXXXXX also holds approximately $XXXXXXXXXX in cash (the "Cash").

3. There are currently XXXXXXXXXX Class A preference shares with a par value of $XXXXXXXXXX each ("Preferred Shares") and XXXXXXXXXX common shares without par value issued and outstanding in the capital of XXXXXXXXXX. The Preferred Shares have a redemption and retraction value of $XXXXXXXXXX per share.

4 XXXXXXXXXX hold XXXXXXXXXX Preferred Shares of XXXXXXXXXX, respectively, having an aggregate fair market value and aggregate cost amount of $XXXXXXXXXX (or $XXXXXXXXXX per share). XXXXXXXXXX each hold 1 common share in the capital of XXXXXXXXXX and such shares have a cost amount and paid-up capital of $XXXXXXXXXX each.

5. XXXXXXXXXX are residents of Canada.

6. The Trust, established in XXXXXXXXXX, owns XXXXXXXXXX common shares in the capital of XXXXXXXXXX and such shares have a nominal cost amount and nominal paid- up capital. The beneficiaries of the Trust are XXXXXXXXXX and their XXXXXXXXXX minor children (the "Children"). The Trust is resident in Canada and is a "personal trust" for purposes of the Act.

7. The shares of XXXXXXXXXX held by the shareholders of XXXXXXXXXX (the "Shareholders") currently qualify for purposes of subsection 110.6(1) of the Act as "qualified small business corporation shares".

8. The shares of XXXXXXXXXX held by XXXXXXXXXX represent XXXXXXXXXX% of the outstanding common shares of XXXXXXXXXX owns directly XXXXXXXXXX% of the outstanding shares of XXXXXXXXXX and XXXXXXXXXX sister, brother and sister-in-law collectively own an additional XXXXXXXXXX% of the outstanding shares of XXXXXXXXXX. Collectively, the foregoing shareholders hold XXXXXXXXXX% of the outstanding shares of XXXXXXXXXX. No other persons not dealing at arm's length with the Shareholders hold shares of XXXXXXXXXX.

9. The shares of XXXXXXXXXX are widely held with approximately XXXXXXXXXX shareholders, including XXXXXXXXXX pension funds and XXXXXXXXXX investment funds. The total issued and outstanding shares of XXXXXXXXXX are XXXXXXXXXX common shares.

PROPOSED TRANSACTION

10. The Shareholders propose to sell their shares of XXXXXXXXXX (the "XXXXXXXXXX Shares") to XXXXXXXXXX in consideration for the issuance by XXXXXXXXXX of common shares (the "XXXXXXXXXX Shares") having an aggregate fair market value equal to the fair market value of the XXXXXXXXXX Shares. The Shareholders and XXXXXXXXXX will jointly elect pursuant to subsection 85(1) of the Act in respect of this sale such that, in respect of XXXXXXXXXX, the deemed proceeds of disposition determined under subsection 85(1) of the Act of their respective shares of XXXXXXXXXX is equal to the cost amount thereof and, in respect of the Trust, the deemed proceeds of disposition determined under subsection 85(1) of the Act is equal to the sum of the cost amount thereof and $XXXXXXXXXX thereby creating a capital gain to the Trust of approximately $XXXXXXXXXX (the "Gain"). The amount added to the stated capital, determined without reference to the Act, of the common shares of XXXXXXXXXX as a result of the issuance of the XXXXXXXXXX Shares received by the Shareholders as consideration for the transfer of the XXXXXXXXXX Shares will be limited, pursuant to subparagraph 26(3)(a)(ii) of the CBCA, to the paid-up capital of the XXXXXXXXXX Shares.

11. Prior to the end of XXXXXXXXXX, the Trust proposes to make payable an amount equal to the Gain to the Children, as beneficiaries of the Trust. The Trust will designate the amount of the Gain in respect of the Children in its return of income for the XXXXXXXXXX year under subsection 104(21). The Trust will also make a designation under subsection 104(21.2) in respect of the Gain such that, for the purposes of section 110.6, the shares of XXXXXXXXXX held by the Trust and sold to XXXXXXXXXX will be deemed to have been disposed of by the Children in XXXXXXXXXX. The Children propose to claim a deduction under subsection 110.6(2.1) in respect of the Gain allocated to them.

12. As a result of the recent continuation of XXXXXXXXXX under the CBCA, subsection 30(2) of the CBCA requires that within five years of such continuation XXXXXXXXXX shall cause XXXXXXXXXX to sell or otherwise dispose of its shares of XXXXXXXXXX. In particular, subsection 30(2) of the CBCA requires that:

A corporation shall cause a subsidiary body corporate of the corporation that holds shares of the corporation to sell or otherwise dispose of those shares within five years from the date (a) the body corporate became a subsidiary of the corporation; or (b) the corporation was continued under this Act."

The taxpayers understand that in order to comply with subsection 30(2) of the CBCA, XXXXXXXXXX may determine to amalgamate with or wind-up XXXXXXXXXX or otherwise cause XXXXXXXXXX to dispose of its shares of XXXXXXXXXX prior to the expiry of the said five year period.

PURPOSE OF THE PROPOSED TRANSACTIONS

13. The purpose of the Sale and the joint election by the Trust and XXXXXXXXXX whereby the Trust will realize the Gain, which will be allocated to the Children, is to allow the Children to crystallize their respective capital gains deduction for qualified small business corporation shares prior to the proposed IPO of XXXXXXXXXX which would subsequently disqualify the shares of XXXXXXXXXX held by the Shareholders as qualified small business corporation shares.

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, we confirm the following:

A. The application of subsection 84.1(1) of the Act will not result in the reduction of paid-up capital of the XXXXXXXXXX Shares issued by XXXXXXXXXX as described in paragraph 10 above or in a deemed dividend.

B. Subsection 84(2) of the Act will not apply as a result of the proposed sale referred to in paragraph 10 above to deem a dividend to have been received at any time by any of the Shareholders.

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

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996, and are binding provided that the proposed transactions are completed before 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.

Comments

Nothing in this letter should be construed as implying that a deduction pursuant to subsection 110.6(2.1) of the Act will be available to the Children as a result of the proposed Sale described herein.

Nothing in this ruling should be construed as implying that Revenue Canada has reviewed, accepted or otherwise agreed to:

(a) the determination of the adjusted cost base of any shares 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

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