30 November 1997 Ruling 9819763 - CRYSTALLIZATION OF SAFE INCOME ON HAND

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: Whether property acquired on wind-up is ineligible property.

Position: No

Reasons: See issue sheet.

XXXXXXXXXX
XXXXXXXXXX 3-981976
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX ("Holdings")
XXXXXXXXXX
XXXXXXXXXX ("Newco")
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted taxpayers. We acknowledge receipt of your letters of XXXXXXXXXX and our telephone conversations in connection herewith.

To the best of your knowledge, and that of the taxpayers named herein, none of the issues involved in this advance income tax ruling request is under objection or appeal or is being considered by any tax services office or taxation centre of Revenue Canada in connection with any income tax return already filed.

Definitions

In this letter unless otherwise expressly stated:

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

(b) "ACB" means "adjusted cost base" as that expression is defined in section 54;

(c) "CBCA" means Canada Business Corporations Act;

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

(e) "capital property" has the meaning assigned by section 54;

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

(g) "disposition" has the meaning assigned by section 54;

(h) "ineligible property" has the meaning assigned by paragraph 88(1)(c);

(i) "market-to-market property" has the meaning assigned by subsection 142.2(1);

(j) "PUC" means "paid-up capital" as that expression is defined in subsection 89(1);

(k) "registered securities dealer" has the meaning assigned by subsection 248(1);

(l) "related persons" has the meaning assigned by subsection 251(2);

(m) "safe income on hand" refers to the income earned or realized, within the meaning of paragraphs 55(5)(b) or (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 any share of the corporation;

(n) "safe-income determination time" has the meaning assigned by subsection 55(1);

(o) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and

(p) "taxable dividend" has the meaning assigned by subsection 89(1).

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

FACTS

1. XXXXXXXXXX is a taxable Canadian corporation and a public corporation.

XXXXXXXXXX is in the business of XXXXXXXXXX.

2. The authorized share capital of XXXXXXXXXX consists of multiple voting shares ("MVS"), subordinate voting shares ("SVS") and preferred shares issuable in series. The holders of XXXXXXXXXX SVS are generally entitled to one vote per share (other than with respect to: (i) amalgamations, (ii) the sale, lease, transfer or other dispositions of all or substantially all of the assets of XXXXXXXXXX to another corporation, or (iii) the voluntary liquidation, dissolution or winding up of XXXXXXXXXX) and the holders of MVS are entitled to XXXXXXXXXX votes per share. The holders of XXXXXXXXXX MVS may, at any time, convert their holdings of XXXXXXXXXX MVS into XXXXXXXXXX SVS on a one for one basis. Except with respect to voting rights and conversion rights, the XXXXXXXXXX MVS and XXXXXXXXXX SVS are the same in all respects.

The XXXXXXXXXX SVS are listed for trading on the XXXXXXXXXX Stock Exchanges.

3. As at XXXXXXXXXX has issued and outstanding XXXXXXXXXX MVS and XXXXXXXXXX SVS.

4. Holdings is a Canadian-controlled private corporation and a taxable Canadian corporation.

Holdings owns all the issued and outstanding XXXXXXXXXX MVS. As at XXXXXXXXXX, Holdings had owned XXXXXXXXXX MVS. On XXXXXXXXXX, Holdings exercised its conversion right with respect to XXXXXXXXXX MVS. Holdings now owns XXXXXXXXXX MVS.

The shares of XXXXXXXXXX are capital property to Holdings.

5. The shareholders of Holdings and the number of shares held are as follows:

SHAREHOLDER NUMBER AND SHARES HELD

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX is controlled directly or indirectly by XXXXXXXXXX.

XXXXXXXXXX is controlled directly or indirectly by XXXXXXXXXX.

XXXXXXXXXX is controlled directly or indirectly by XXXXXXXXXX.

XXXXXXXXXX is controlled directly or indirectly by XXXXXXXXXX.

6. On XXXXXXXXXX, Holdings sold the XXXXXXXXXX SVS that it owned to Newco (a corporation described in paragraph 8 below) and received, as sole consideration, an equal number of Newco class A common shares, which constitutes all of the issued and outstanding shares of Newco.

7. In connection with the transfer of the XXXXXXXXXX SVS, Holdings and Newco will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will be equal to the ACB to Holdings ($XXXXXXXXXX per share) immediately before the transfer, which amount will be less than the fair market value of such shares ($XXXXXXXXXX per share) at such time.

Newco added an amount to its stated capital account for its class A common shares equal to the aggregate of the ACB of all the XXXXXXXXXX SVS transferred.

8. Newco is a corporation incorporated under the CBCA on XXXXXXXXXX and is a Canadian-controlled private corporation and a taxable Canadian corporation.

9. The authorized share capital of Newco consists of:

(a) an unlimited number of class A common shares;

(b) an unlimited number of class B common shares;

(c) an unlimited number of class C common shares;

(d) an unlimited number of class D common shares;

(e) an unlimited number of class E common shares; and

(f) an unlimited number of class F common shares.

10. All the issued and outstanding shares of Newco are held by Holdings and were acquired in the transaction described in paragraph 5 above.

11. On XXXXXXXXXX, Newco sold XXXXXXXXXX SVS to a third party for cash consideration equal to the fair market value of the shares at that time.

12. XXXXXXXXXX is a taxable Canadian corporation and a subsidiary of XXXXXXXXXX, a public corporation. XXXXXXXXXX.

PROPOSED TRANSACTIONS

13. Newco, by means of one or more special shareholders' resolutions, will increase the stated capital of its issued and outstanding class A common shares by an aggregate amount that will not exceed the safe income on hand of XXXXXXXXXX in respect of the XXXXXXXXXX SVS held by Newco, at the safe-income determination time in respect of a transaction or event or series of transactions or events that include the proposed transactions described herein.

The purpose of the multiple increases to stated capital is to avoid the application of subsection 55(2) on all dividends that are deemed to be paid by Newco as a result of such increases, in a case where the safe income on hand of XXXXXXXXXX has been incorrectly calculated.

14. Holdings will sell, at fair market value, for cash all of the Newco class A common shares that it holds to XXXXXXXXXX or a taxable Canadian corporation that is a related person to XXXXXXXXXX (XXXXXXXXXX or its designate will be referred to as "XXXXXXXXXX" as the context dictates).

15. Newco will then be wound up into XXXXXXXXXX under the relevant corporate law and, accordingly, all the XXXXXXXXXX SVS owned by Newco will be transferred and assigned to XXXXXXXXXX.

16. XXXXXXXXXX will designate in respect of the XXXXXXXXXX SVS in its return of income for the taxation year in which Newco is wound up an amount pursuant to paragraph 88(1)(d), equal to the difference between:

(a) the purchase price paid by XXXXXXXXXX for the shares of Newco, as described in paragraph 13 above; and

(b) the ACB to Newco of the XXXXXXXXXX SVS as a result of the transactions described in paragraphs 5 and 6 above.

17. XXXXXXXXXX will immediately after the distribution of the XXXXXXXXXX SVS to it by Newco, sell some or all of the shares so acquired for an aggregate sale price that is expected to be slightly in excess of the purchase price paid by it for the shares of Newco as described in paragraph 13 above.

None of the XXXXXXXXXX SVS acquired by XXXXXXXXXX on the wind-up of Newco will be sold to a person described in subclauses 88(1)(c)(vi)(B)(I), (II) or (III) in relation to Newco.

18. The purchase and sale agreement between Holdings and XXXXXXXXXX pursuant to which Holdings will sell the Newco class A common shares to XXXXXXXXXX will include representations and warranties, including a representation by Holdings that the facts disclosed herein relating to Holdings and XXXXXXXXXX are true and complete and that no person described in subclauses 88(1)(c)(vi)(B)(I), (II) or (III) in relation to Newco will acquire any XXXXXXXXXX SVS from XXXXXXXXXX or as part of the series of transactions that include the winding-up of Newco. The purchase agreement will also include indemnities for any losses incurred by a party as a result of a breach of representation or warranty by the other party and for any taxes, interest or penalties incurred by XXXXXXXXXX as a result of the cost of the XXXXXXXXXX SVS acquired by XXXXXXXXXX on the winding up of Newco being less than the amount described in Ruling G below.

PURPOSE OF PROPOSED TRANSACTIONS

19. The purpose of the proposed transactions is to allow Holdings to recover, on a tax-deferred basis, the safe income on hand of XXXXXXXXXX in respect of shares of XXXXXXXXXX held by Holdings. Even though XXXXXXXXXX is controlled by Holdings, it is a public corporation and Holdings is unable to indiscriminately cause XXXXXXXXXX to declare a dividend. Accordingly, Holdings must transfer its shares of XXXXXXXXXX, which are to be sold to an arm's- length party, to a company it controls, in order to be able to realize on a tax-deferred basis, the safe income on hand of XXXXXXXXXX attributable to its XXXXXXXXXX shares. In order to also realize the corresponding increase in the ACB of the shares of Newco held by Holdings, on a tax-deferred basis, it is necessary for such corporation to dispose of its shareholdings in Newco. Consequently, XXXXXXXXXX will acquire the shares of Newco and will wind up Newco such that there will be an increase in the ACB of the XXXXXXXXXX SVS distributed to it by Newco.

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. The XXXXXXXXXX SVS owned by Newco will not constitute mark-to-market property by virtue of paragraph (d) of the definition of "mark-to-market property" in subsection 142.2(1) as of the fiscal year ending immediately before the acquisition of control of Newco by XXXXXXXXXX and Newco will not be deemed to have disposed of the XXXXXXXXXX SVS pursuant to subparagraph 142.6(1)(b).

B. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to the proposed transactions described above, in and of themselves.

C. By virtue of subsection 84(1), Newco will be deemed to have paid a dividend on its outstanding class A common shares equal to each increase in PUC described in paragraph 13 above and each such dividend deemed to have been received by the recipient will:

(i) be deductible by the recipient, to the extent that it is a taxable dividend, in computing its taxable income for the taxation year in which such dividend is deemed to be received pursuant to subsection 112(1);

(ii) not be subject to tax under Part IV of the Act except as provided in paragraph 186(1)(b); and

(iii) be an "excluded dividend" within the meaning of subsection 191(1) and an "excepted dividend" within the meaning of section 187.1.

D. The provisions of subsection 55(2) will not apply to a deemed dividend described in ruling C above, provided that the full amount of the deemed dividend does not exceed the safe income on hand of XXXXXXXXXX in respect of the class A common shares of Newco immediately before the time of the dividend.

E. The provisions of paragraph 53(1)(b) will apply to increase the ACB to Holdings of its class A common shares in Newco by the amount of the dividends deemed to be received by it as described in ruling C above.

F. The provisions of subsection 88(1) will apply to the winding-up of Newco into XXXXXXXXXX as described in paragraph 15 above such that:

(i) pursuant to subparagraph 88(1)(a)(iii) Newco will be deemed to have disposed of its XXXXXXXXXX SVS distributed to XXXXXXXXXX on the winding-up of Newco for proceeds equal to their cost amount immediately before the winding-up; and

(ii) XXXXXXXXXX will be deemed to have disposed of its shares of Newco for proceeds equal to the greater of the amounts determined pursuant to subparagraphs 88(1)(b)(i) and (ii).

G. Pursuant to paragraphs 88(1)(c) and (d), the cost to XXXXXXXXXX of the XXXXXXXXXX SVS distributed by Newco to XXXXXXXXXX on the winding-up of Newco described in paragraph 15 above, will be deemed to be the amount deemed by paragraph 88(1)(a) to be the proceeds of disposition of the XXXXXXXXXX SVS to Newco, plus, subject to the provisions of subparagraphs 88(1)(d)(ii) and (iii), such portion of the amount, if any, by which:

(i) the aggregate of the ACB to XXXXXXXXXX of its shares of Newco immediately before the winding-up of Newco

exceeds

(ii) the aggregate of the amounts determined under subparagraphs 88(1)(d)(i) and (i.1) (which will not include any dividends deemed to be received by Holdings as described in ruling C above)

as is designated by XXXXXXXXXX in respect of the XXXXXXXXXX SVS in its return of income under Part I of the Act for its taxation year in which Newco is wound up as described in paragraph 16 above.

H. The XXXXXXXXXX SVS distributed by Newco to XXXXXXXXXX will not be considered "ineligible property".

I. 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 in the rulings given.

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

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

COMMENTS

Nothing in this ruling should be construed as confirmation, express or implied, of:

(a) the determination of the fair market value, ACB or PUC of any particular share referred to herein or the calculation of the safe income on hand attributable to the XXXXXXXXXX MVS or SVS held by Holdings or Newco; or

(b) the tax consequences of any transaction other than those described in the proposed transactions herein.

OPINION

The transfer of the XXXXXXXXXX SVS from Holdings to Newco, as described in paragraph 5 above, is a completed transaction which is beyond the scope of an advance income tax ruling. However, it is our opinion that the safe income on hand of XXXXXXXXXX in respect of the class A common shares of Newco includes the safe income on hand of XXXXXXXXXX in respect of the XXXXXXXXXX SVS held by Newco.

The foregoing opinion is not a ruling and, in accordance with the practice referred to in Information Circular 70-6R3, is not binding on Revenue Canada.

Yours truly,

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