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: What is the "amount" of a stock dividend which has been issued to convert safe income into the cost of shares in the issuing corporation
Position: The amount of the stock dividend is equal to the increase in the paid-up capital of the corporation
Reasons: The amount of a stock dividend is defined in subsection 248(1). Since none of subsections 112(2.1), (2.2) or (2.4) or sections 187.2 or 187.3 apply to the dividend, the amount is equal to the increase in the paid-up capital of the corporation
XXXXXXXXXX 982868
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 taxpayers. We also acknowledge receipt of your correspondence of XXXXXXXXXX and the information provided in our telephone discussions.
To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:
(i) dealt with in an earlier return of the taxpayers or a related person;
(ii) 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) under objection by the taxpayers or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings & Interpretations Directorate; or
v) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.
In this letter, the following terms have the meanings specified:
(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) "adjusted cost base" has the meaning assigned by section 54;
(c) "agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in their election under subsection 85(1) in respect of the property;
(d) "BCA" means the Canada Business Corporations Act;
(e) XXXXXXXXXX;
(f) “capital property” has the meaning assigned by section 54;
(g) "paid-up capital" has the meaning assigned by subsection 89(1);
(h) “private corporation” has the meaning assigned by subsection 89(1);
(i) “public corporation” has the meaning assigned by subsection 89(1);
(j) “safe-income determination time” has the meaning assigned by subsection 55(1);
(k) “safe income on hand” in respect of a particular share of a corporation at a particular time means the portion of the unrealized gain inherent in the shares at that time that cannot reasonably be considered to be attributable to anything other than income earned or realized, determined in accordance with subsection 55(5), by any corporation after 1971;
(l) “series of transactions or events" includes the transactions or events referred to in subsection 248(10);
(m) "specified financial institution" has the meaning assigned by subsection 248(1);
(n) "stated capital account" has the meaning assigned by the BCA or XXXXXXXXXX as the context requires;
(o) “stock dividend” has the meaning assigned by subsection 248(1);
(p) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. XXXXXXXXXX .(“Xco”) is a corporation continued under the BCA. Xco is a public corporation and a taxable Canadian corporation.
2. Xco, through its subsidiaries, carries on the business of XXXXXXXXXX.
3. XXXXXXXXXX (“Yco”), through its subsidiaries, carries on the business of XXXXXXXXXX. Yco is a public corporation and a taxable Canadian corporation.
4. XXXXXXXXXX.
5. XXXXXXXXXX (“Sco”) is a corporation incorporated under the Companies Act (XXXXXXXXXX). Sco is a public corporation and a taxable Canadian corporation. All of the issued and outstanding common shares of Sco are held by XXXXXXXXXX. (“Tco”), a corporation incorporated under the laws of XXXXXXXXXX the United States of America. Tco is a wholly-owned subsidiary of XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX the United States of America. XXXXXXXXXX.
6. Sco controls Xco through its ownership of XXXXXXXXXX common shares of Xco (the “Existing Xco Shares”) which represent XXXXXXXXXX% of the issued and outstanding common shares of Xco. The balance of Xco’s common shares are widely held by the public. All of Xco’s common shares are listed for trading on the XXXXXXXXXX Stock Exchanges. The Existing Xco Shares are capital property to Sco and were not acquired by Sco in the ordinary course of the business carried on by Sco.
7. The adjusted cost base of Sco's shares of Xco exceeds their paid-up capital. The fair market value of Sco's shares of Xco exceeds their adjusted cost base.
8. The safe income on hand of Xco attributable to the Existing Xco Shares is estimated to be approximately $XXXXXXXXXX at XXXXXXXXXX.
9. Following the merger of Xco and Yco, Sco’s interest in Zco is estimated to be approximately XXXXXXXXXX% of the outstanding common shares, voting and non-voting.
Proposed Transactions
10. Sco will cause a new corporation to be incorporated (“Subco 1") under the XXXXXXXXXX. Subco 1 will be a taxable Canadian corporation and will not be either a private corporation or a public corporation. The authorized capital of Subco 1 will consist of XXXXXXXXXX common shares. On incorporation, Sco will subscribe for one common share of Subco 1 for $XXXXXXXXXX.
11. Subco 1 will cause a new corporation to be incorporated (“Subco 2") under the XXXXXXXXXX. Subco 2 will be a taxable Canadian corporation and will not be either a private corporation or a public corporation. The authorized capital of Subco 2 will consist of XXXXXXXXXX common shares. On incorporation, Subco 1 will subscribe for one common share of Subco 2 for $XXXXXXXXXX.
12. Sco will transfer the Existing Xco Shares to Subco 1. Subco 1 will issue one common share to Sco as the sole consideration for the Existing Xco Shares. Subco 1 will add to the stated capital account of its common shares an amount equal to the paid-up capital of the Existing Xco Shares.
13. Sco and Subco 1 will jointly elect, pursuant to subsection 85(1), in prescribed form and within the time limit specified in subsection 85(6), in respect of the transfer of the Existing Xco Shares to Subco 1. The agreed amount for the transfer will be equal to the adjusted cost base of the Existing Xco Shares to Sco.
14. Subco 1 will transfer all of the Existing Xco Shares owned by it to Subco 2. Subco 2 will issue one common share to Subco 1 as the sole consideration for the Existing Xco Shares. Subco 2 will add to the stated capital account of its common shares an amount equal to the paid-up capital of the Existing Xco Shares.
15. Subco 1 and Subco 2 will jointly elect, pursuant to subsection 85(1), in prescribed form and within the time limit specified in subsection 85(6), in respect of the transfer of the Existing Xco Shares to Subco 2. The agreed amount for the transfer will be equal to the adjusted cost base of the Existing Xco Shares to Subco 1.
16. Following the transactions described in paragraphs 12 - 15 above, Sco will own all of the shares of Subco 1, Subco 1 will own all of the shares of Subco 2 and Subco 2 will own all of the Existing Xco Shares.
17. The directors of Subco 2 will declare a stock dividend payable to Subco 1. The stock dividend will be paid by the issuance of new common shares of Subco 2. The amount of the stock dividend will not exceed Sco’s estimate of the safe income on hand attributable to the Existing Xco Shares immediately before such shares were transferred to Subco 1.
18. The directors of Subco 2 will add to the stated capital account for the Subco 2 common shares an amount equal to the amount of the stock dividend so declared.
19. Subco 1 will transfer all of the Subco 2 common shares owned by it to Xco. In consideration, Xco will issue XXXXXXXXXX common shares (the “New Xco Shares”) to Subco 1 as the sole consideration for the Subco 2 common shares. The rights and restrictions attached to the New Xco Shares will be identical to the rights and restrictions attaching to the Existing Xco Shares and they will be part of the same class.
20. Subco 1 and Xco will jointly elect, pursuant to subsection 85(1), in prescribed form and within the time limit specified in subsection 85(6), in respect of the transfer of the Subco 2 shares to Xco. The agreed amount in respect of the transfer will be equal to the aggregate of the agreed amount referred to in paragraph 15 and the amount of the stock dividend referred to in paragraph 17.
21. The directors of Xco will add to the stated capital account of the Xco common shares on the issuance of the New Xco Shares to Subco 1 an amount equal to the paid-up capital of the Existing Xco Shares.
22. Subsequent to the acquisition by Xco of all of the issued and outstanding Subco 2 shares, Subco 2 will be wound up into Xco. In the course of the winding-up, Subco 2 will transfer all of the Existing Xco Shares to Xco.
23. As a consequence of the winding-up of Subco 2, Xco will cancel the Existing Xco Shares. Xco will deduct from the stated capital of its common shares, an amount equal to the result obtained by multiplying the paid-up capital for all of the Xco common shares (before the cancellation) by the number of Existing Xco Shares divided by the total number of Xco common shares immediately before the cancellation.
24. Immediately following the winding up of Subco 2, the paid-up capital and stated capital of each issued Xco common share will not be greater than they were at the time of the commencement of the proposed transactions. In addition, immediately following the cancellation of the Existing Xco Shares, the total number of issued and outstanding Xco common shares will be equal to the total number of issued and outstanding Xco common shares at the commencement of the proposed transactions.
25. Subco 2 will be formally dissolved under the XXXXXXXXXX.
26. Subco 1 will be wound-up and in the course of the winding-up Subco 1 will transfer all of the New Xco Shares to Sco. Subco 1 will then be formally dissolved under the XXXXXXXXXX.
27. Subsequent to the completion of the proposed transactions, Sco will transfer all the New Xco Shares owned by it to Zco on a tax-deferred basis under subsection 85(1) in exchange for shares of Zco.
28. The proposed transactions are not expected to have any impact on outstanding tax liabilities of any of the taxpayers.
29. Xco’s role in the proposed transactions is limited to assisting Sco in increasing its adjusted cost base of its shares in Xco by the amount of the safe income on hand attributable to such shares. Sco has agreed to reimburse Xco for all expenses incurred by it in connection with the proposed transactions and to indemnify Xco for any liabilities incurred by Xco in respect of any adverse tax consequences resulting therefrom.
30. Subco 2 will not at any time be a corporation described in any of paragraphs (a) to (f) of the definition “financial intermediary corporation” in subsection 191(1).
31. None of the Existing Xco Shares owned by Sco has been, and none of the shares of Subco 1 or Subco 2 will be, subject to a guarantee agreement within the meaning referred to in subsection 112(2.2) that is given by a specified financial institution or a specified person in relation to any such institution for the purposes described in subsection 112(2.2).
32. Neither Subco 1 nor Subco 2 will enter into a “dividend rental arrangement” as defined in subsection 248(1).
33. None of the Existing Xco Shares owned by Sco has been, and none of the shares of Subco 1 or Subco 2 will be, issued or acquired as part of a transaction or event or a series of transactions or events of the type described in subsection 112(2.5).
34. The fair market value of the Subco 2 shares acquired by Xco, as described in paragraph 19, will exceed the aggregate increase in the paid-up capital of the Xco common shares as a result of the issuance of the New Xco Shares.
Purpose of the Proposed Transactions
35. The purpose of the proposed transactions is to allow Sco to increase the adjusted cost base of its shares in Xco by the amount of safe income on hand of Xco attributable to the Existing Xco Shares. The proposed transactions will be implemented before the merger of Xco and Yco, as after the merger, Sco will not control Zco and, therefore, will not be able to direct Zco to participate in the steps necessary to access safe income. Sco has no present intention of disposing of the shares it will acquire in Zco upon the exchange of the New Xco Shares.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as set forth below.
A. The safe income on hand attributable to the Subco 2 shares owned by Subco 1 immediately following the issuance of the Subco 2 common share as described in paragraph 14 will equal the safe income on hand attributable to the Existing Xco Shares acquired by Subco 2 at the time immediately before the acquisition of those shares by Subco 2.
B. Provided subsection 55(2) does not apply to the stock dividend described in paragraph 17, the amount of the stock dividend will be the amount by which the paid-up capital of Subco 2 is increased by reason of the declaration and payment of the stock dividend.
C. Subsection 55(2) will not apply to the stock dividend described in paragraph 17 provided that the amount of the stock dividend does not exceed the safe income on hand attributable to the Subco 2 shares at the safe-income determination time in respect of the series of transactions which includes the payment of the stock dividend.
D. Provided there are no other transactions or events other than those described herein which are part of the series of transactions or events which include the proposed transactions and which are described in either paragraph (a) or (b) of the definition of safe-income determination time, the safe-income determination time, in respect of the series of transactions which includes the payment of the stock dividend, will be the time that is immediately before the time that the stock dividend (described in paragraph 17) is paid.
E. The provisions of subsection 88(1) will apply to the winding-up of each of Subco 2 and Subco 1, as described in paragraphs 22 and 26, with the result that:
(i) each of Subco 2 and Subco 1 will, pursuant to subparagraph 88(1)(a)(iii), be deemed to have disposed of the common shares of Xco owned by it for proceeds equal to the cost amount thereof to such corporation immediately before the winding-up; and
(ii) Xco and Sco will, pursuant to paragraph 88(1)(b), be deemed to have disposed of the shares of each of Subco 2 and Subco 1, respectively, for proceeds equal to the greater of the amounts described in subparagraphs 88(1)(b)(i) and (ii).
F. Subsection 15(1) will not apply to the proposed transactions, in and by themselves.
G. As a result of the proposed transactions, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given.
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 affect the rulings provided herein.
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, other than the dissolution of Subco 1 and 2, are completed by XXXXXXXXXX.
Caveat
Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to, reviewed, or is providing an opinion in respect of:
(a) the fair market value or the adjusted cost base of any particular asset;
(b) the paid-up capital or safe income on hand relating to any shares referred to in this advance ruling; or
(c) 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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