1998 Ruling 9821683 - 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 3-982168
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you informed us of certain changes to ruling #3-952670 which was issued on XXXXXXXXXX, 1995 in respect of the above-referenced taxpayer (the "Ruling"). In that regard, the Ruling is hereby cancelled and is consolidated in the rulings attached. We also acknowledge your letters of 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, or

4. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

All statutory references contained in this letter are to the Income Tax Act, (the "Act") R.S.C. 1985 (5th Supp.) c.1 as amended to the date hereof, except as otherwise indicated, and the following defined terms have the following meanings:

5. "adjusted cost base" has the meaning assigned by section 54;

6. "agreed amount" in respect of a property means the amount that the transferor and transferee agree upon for purposes of paragraph 85(1)(a) in the applicable subsection 85(1) election;

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

8. "capital dividend account" has the meaning assigned by subsection 89(1);

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

10. "paid-up capital" has the meaning assigned by subsection 89(1);

11. "private corporation" has the meaning assigned by subsection 89(1); and

12. "taxable Canadian corporation" ("TCC") has the meaning assigned by subsection 89(1).

Facts

1. XXXXXXXXXX ("Opco") was incorporated XXXXXXXXXX. Opco is in the business of managing and developing XXXXXXXXXX. It currently has XXXXXXXXXX Class A common shares issued and outstanding, all of which are held by XXXXXXXXXX ("Holdco").

2. Holdco was incorporated in XXXXXXXXXX under the provisions of the Canada Business Corporations Act (the "CBCA"). The principal asset of Holdco is the XXXXXXXXXX common shares of Opco. Holdco currently has XXXXXXXXXX common shares, XXXXXXXXXX common shares, XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares issued and outstanding, of which XXXXXXXXXX% of each class is held by each of XXXXXXXXXX.

3. XXXXXXXXXX was incorporated in XXXXXXXXXX under the provisions of the CBCA. It is a TCC and a private corporation. XXXXXXXXXX currently has XXXXXXXXXX common shares, XXXXXXXXXX Class A shares, XXXXXXXXXX Class B shares and XXXXXXXXXX Class C shares issued and outstanding.

4. The common shares are held as capital property equally by each of the XXXXXXXXXX.

5. The common shares are entitled to one vote per share and represent more than 50% of the fair market value of the issued capital stock of XXXXXXXXXX.

6. The Class A, B and C shares are held by XXXXXXXXXX estate (the "Estate"). The Class A and B shares are non-voting. The Class C shares are entitled to one vote per share to the extent that they are not transferred to a person other than the spouse or child of the original holder (XXXXXXXXXX), are non-participating and are redeemable for nominal consideration.

7. On XXXXXXXXXX died. His will provides, inter alia, that:

a. XXXXXXXXXX, and his surviving spouse, XXXXXXXXXX are to act as executors and trustees of his Estate. Decisions are to be made by the majority subject to a veto granted to XXXXXXXXXX; and

b. The shares of XXXXXXXXXX previously held by XXXXXXXXXX (i.e. the Class A, B and C shares) are held in trust (the "Trust") for XXXXXXXXXX as income beneficiary. Upon her death, they are to be transferred in absolute ownership to XXXXXXXXXX in equal shares.

8. In XXXXXXXXXX obtained life insurance policies on the lives of each of XXXXXXXXXX (the "Policies"). The Policies contain options pursuant to which the insurance originally subscribed for may be increased (the "Options"). You have represented that the purpose of the Policies was to fund the purchase for cancellation of the shares of XXXXXXXXXX held directly or indirectly by XXXXXXXXXX upon their respective deaths. You have also provided a letter from XXXXXXXXXX which confirms the same purpose of the Policies.

9. XXXXXXXXXX holding companies have been incorporated pursuant to the provisions of the CBCA (XXXXXXXXXX", individually, and the "Holdcos", collectively). Each of the Holdcos is a TCC and a CCPC. The articles of each of the Holdcos provide for Class A, B, C, D, E and F shares.

10. The income earned or realized by XXXXXXXXXX for purposes of subsection 55(2) which remains on hand and which could reasonably be considered to contribute to the capital gain that would be realized on a disposition at fair market value of the particular shares of XXXXXXXXXX to be held by XXXXXXXXXX immediately before the payment of the dividend referred to in paragraph 15 below ("Safe Income on Hand") has been determined to be at least $XXXXXXXXXX in respect of the common shares of XXXXXXXXXX and at least $XXXXXXXXXX in respect of the Class B XXXXXXXXXX shares of XXXXXXXXXX as of XXXXXXXXXX. The expression "income earned or realized" has the meaning assigned by paragraph 55(5)(b) ("Safe Income"). As you are aware, we have not considered the computation of Safe Income and provide no assurance with respect to its computation.

Proposed Transactions

11. Each of XXXXXXXXXX will transfer, at fair market value, all of his or her common shares of XXXXXXXXXX to XXXXXXXXXX, respectively, pursuant to the provisions of subsection 85(1) for an agreed amount equal to the adjusted cost base of such transferred shares to the transferor. The purchase price for the common shares of XXXXXXXXXX will be satisfied by the issuance of Class A shares by the purchaser corporation which shares will have all the characteristics of common shares and have an aggregate fair market value equal to that of the shares so transferred. The adjusted cost base of the shares so transferred will not exceed their fair market value at the time of the transfer. XXXXXXXXXX will add to the stated capital account in respect of the Class A shares so issued an amount that will not exceed the greater of the aggregate paid-up capital of the shares transferred to it or the aggregate adjusted cost base of those shares, as determined under paragraphs 84.1(2)(a) and (a.1), to the transferor immediately before the disposition.

12. The Estate will transfer, at fair market value, all of its Class A, B and C shares of XXXXXXXXXX to Estateco pursuant to the provisions of subsection 85(1) for an agreed amount equal to the adjusted cost base to the Estate of such transferred shares. The purchase price for the shares so transferred will be satisfied by the issuance of Class A shares of Estateco to the Estate. Estateco will add to the stated capital account in respect of the Class A shares so issued an amount that will not exceed the greater of the aggregate paid-up capital of the transferred shares or the aggregate adjusted cost base of those shares, as determined under paragraphs 84.1(2)(a) and (a.1), to the Estate immediately before the disposition.

13. Immediately thereafter, all of the issued and outstanding Class A and B shares of XXXXXXXXXX held by Estateco will be purchased for cancellation at their fair market value for cash by XXXXXXXXXX. As a result of these purchases, the amount by which the amount paid on the purchase exceeds the paid-up capital of the shares so purchased will be deemed to be a dividend paid by XXXXXXXXXX and received by the Estateco, by virtue of paragraph 84(3)(a) or 84(3)(b), as applicable.

14. The executors and trustees of the Estate will enter into an agreement pursuant to which they agree to:

a. name XXXXXXXXXX as sole director of Estateco until the legacy in her favour under the terms of the Will of XXXXXXXXXX (the "Legacy") is paid in full; and

b. allocate all distributions received by the Estate from Estateco to XXXXXXXXXX to the extent that she has not received full payment of the amount of the Legacy.

15. On or before XXXXXXXXXX will declare and pay a dividend on its common shares held by XXXXXXXXXX in the amount of $XXXXXXXXXX in total.

Future Transaction

16. XXXXXXXXXX has obtained and may obtain additional life insurance policies on the lives of XXXXXXXXXX in the future. Within 365 days of the death of any of XXXXXXXXXX, the estate of the deceased will cause the deceased's holding company (XXXXXXXXXX) to purchase for cancellation (or redeem, as the case may be) such number of shares as have a fair market value equal to the proceeds under the Policies (and any future life insurance policies acquired) and Options on the life of the deceased at that time.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to enable the income of XXXXXXXXXX to be allocated and distributed to each of XXXXXXXXXX so that each of XXXXXXXXXX can exercise individual control over his or her share of the accumulated profits of XXXXXXXXXX, via the declaration of taxable dividends on the common shares, and to enable XXXXXXXXXX to have immediate access to a portion of her entitlement of the Estate at her sole discretion.

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:

1. 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 paragraphs 11 and 12 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) of the Act, be deemed to be equal to the amounts agreed upon in respect of that property, as described in paragraphs 11 and 12 above, respectively.

2. XXXXXXXXXX will be connected with each of XXXXXXXXXX and Estateco pursuant to the provisions of subsections 186(2) and 186(4) immediately following the proposed transactions described in paragraph 14 above. Each of the dividends described in paragraphs 13 and 15 above will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b).

3. Each of the dividends described in paragraphs 13 and 15 above will be deductible by the particular recipient under subsection 112(1) in computing its taxable income for the taxation year in which it will receive or will be deemed to have received such dividend.

4. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the dividends received by Estateco, as described in paragraph 13 above, provided that, as part of the series of transactions or events as part of which the dividends are received, there is no event described in subparagraphs 55(3)(a)(i) to (v) which is part of the series of transactions or events, determined with reference to subsection 248(10), that includes the proposed transactions described herein. For greater certainty, the proposed transactions described herein, in and by themselves, will not be considered to result in a disposition or increase in interest described in subparagraphs 55(3)(a)(i) to (v) with respect to the dividends deemed to be received by Estateco.

5. Provided that the aggregate amount of the taxable dividends paid by XXXXXXXXXX on its common shares as described in paragraph 15 above does not exceed the Safe Income on Hand attributable to each common share of XXXXXXXXXX held by each of XXXXXXXXXX, respectively, determined immediately before the payment of such dividends, the provisions of subsection 55(2) will not apply to any of the taxable dividends described in paragraph 0 above.

6. Each of the dividends described in paragraph 13and 15 above will be deemed to be an "excluded dividend" by virtue of paragraph (a) of the definition of "excluded dividend" contained in subsection 191(1), and will not be subject to tax under Part VI.1.

7. Subsection 131(12) of S.C. 1998, c. 21 will deem the shares of XXXXXXXXXX, which are to be issued as described in paragraph 11 above, to be, for the purposes of the application rule described in paragraph 131(11)(b) of S.C. 1998, c. 21, the same shares as the shares of XXXXXXXXXX in consideration for which they are issued.

8. 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 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 the proposed transactions described herein are completed by 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.

Comments

Nothing in this letter should be construed as implying that Revenue Canada has agreed to or reviewed:

1. the determination of the adjusted cost base or fair market value of any property or the paid-up capital of any shares referred to herein, or the calculation of the Safe Income on Hand attributable to the common and Class B preferred shares of XXXXXXXXXX, or

2. any tax consequences arising from any of the facts or proposed transactions described herein other than those specifically referred to 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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