1999 Ruling 9900823 - A BUMP UNDER PARAGRAPH 88(1)(C)

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: A winding up under subsection 88(1) and the bump under paragraph 88(1)(c). Whether the note is substituted property which taints the bump?

POSITION: No, the note was secured by cash and was repaid instantaneously.

REASONS: The note did not meet the definition of subtituted property

XXXXXXXXXX
XXXXXXXXXX 990082
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX

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

We are advised that, to the best knowledge of XXXXXXXXXX, none of the issues involved in this advance income tax ruling request is in an earlier return of XXXXXXXXXX or any of the other companies noted in this ruling or any other related person, is under objection or appeal, is being considered by any of the Tax Services Offices or Taxation Centres of Revenue Canada in connection with any tax return already filed or is the subject of a ruling previously issued by the Rulings 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 relevant facts, the proposed transactions and the purposes of the proposed transactions is as follows:

FACTS

1. XXXXXXXXXX is a corporation that was continued on XXXXXXXXXX under the Canada Business Corporations Act (the "CBCA") as XXXXXXXXXX. On XXXXXXXXXX, the company changed its name to XXXXXXXXXX and on XXXXXXXXXX it again changed its name to XXXXXXXXXX pursuant to the transactions set out in paragraphs 2 to 5. XXXXXXXXXX is a "taxable Canadian corporation" as defined in subsection 89(1 ) of the Act, and is an indirect wholly-owned subsidiary of XXXXXXXXXX a corporation incorporated under the laws of XXXXXXXXXX, U.S.A.

The issued and outstanding share capital of XXXXXXXXXX is as follows:

- Class XXXXXXXXXX Special Shares, unlimited authorized shares; redeemable at the value of consideration received upon issuance; nil shares issued and outstanding;

- Class XXXXXXXXXX Special Shares, redeemable at the value of consideration received upon issuance; nil shares issued and outstanding; and

- Common Shares, without nominal or par value; unlimited authorized shares; XXXXXXXXXX shares issued and outstanding, at stated value.

2. The XXXXXXXXXX of companies (the "Group") carries on XXXXXXXXXX.

XXXXXXXXXX is a corporation incorporated under the CBCA.

Its issued and outstanding share capital is as follows:

- XXXXXXXXXX% Cumulative XXXXXXXXXX Preferred Shares, unlimited authorized shares; without nominal, or par value; redeemable at $XXXXXXXXXX each; XXXXXXXXXX shares issued and outstanding;

- Special Shares, without nominal or par value; unlimited authorized shares; XXXXXXXXXX shares issued and outstanding, at stated value; and

- Common shares, without nominal or par value; unlimited authorized shares; XXXXXXXXXX shares issued and outstanding, at stated value.

All of the issued shares of XXXXXXXXXX are owned by XXXXXXXXXX.

All of the Canadian Group companies have or will have a XXXXXXXXXX year end.

3. On XXXXXXXXXX completed a series of transactions, whereby it acquired all of the outstanding shares of XXXXXXXXXX.

4. Immediately following its acquisition, XXXXXXXXXX was wound up on a tax-free basis pursuant to the provisions of subsection 88(1) of the Act, and the property of XXXXXXXXXX was distributed to XXXXXXXXXX. The property constituted principally the shares of XXXXXXXXXX along with certain loans to those subsidiaries. An election will be made under the provisions of paragraph 88(1)(d) of the Act to increase the adjusted cost base of the shares of XXXXXXXXXX to their fair market value.

5. Following the wind-up of XXXXXXXXXX, under the provisions of section 85 of the Act, XXXXXXXXXX transferred the shares of XXXXXXXXXX.

6. In XXXXXXXXXX entered into an Asset Purchase Agreement with an arm's-length vendor, XXXXXXXXXX a U.S. corporation, and its U.S. parent corporation providing for the purchase by XXXXXXXXXX of all of XXXXXXXXXX assets (other than certain excluded assets) and assumption of all of XXXXXXXXXX liabilities. XXXXXXXXXX is not a resident of Canada.

7. XXXXXXXXXX assets consisted almost entirely of stock of operating subsidiaries. XXXXXXXXXX had more than XXXXXXXXXX directly owned subsidiaries, and more than XXXXXXXXXX indirect subsidiaries.

8. Until XXXXXXXXXX owned all of the capital stock of XXXXXXXXXX, a corporation incorporated and resident in the United States. XXXXXXXXXX owns the stock of various subsidiaries incorporated and resident in the United States and in other countries other than Canada. In addition, XXXXXXXXXX is also directly engaged in the XXXXXXXXXX.

9. Until XXXXXXXXXX owned all of the capital stock of XXXXXXXXXX. Each of XXXXXXXXXX is incorporated and resident in the United States. XXXXXXXXXX own XXXXXXXXXX common shares, respectively, of the capital stock of XXXXXXXXXX ("Canco"), representing substantially all of the capital stock of Canco. The remaining XXXXXXXXXX shares of Canco are owned by persons who deal at arm's-length with XXXXXXXXXX Canco is incorporated and resident in Canada and owns shares of various other corporations incorporated and resident in Canada. Canco is a corporation incorporated under the XXXXXXXXXX Business Corporations Act. Its issued and outstanding share capital is as follows:

- Common Shares; XXXXXXXXXX authorized shares; XXXXXXXXXX shares issued and outstanding.

10. The Asset Purchase Agreement provided that any subsidiary of XXXXXXXXXX could purchase any direct or indirect subsidiary of XXXXXXXXXX, provided the separate purchase did not (a) result in an economic cost to XXXXXXXXXX, (b) create any financial risk to XXXXXXXXXX under its debt agreements, or (c) delay or adversely affect the closing of the transaction. Pursuant to this provision, the parties agreed to the purchase by subsidiaries of XXXXXXXXXX of several subsidiaries of XXXXXXXXXX.

11. The closing (the "Closing") of the Asset Purchase Agreement occurred on XXXXXXXXXX Prior to the Closing, on XXXXXXXXXX, the shares of XXXXXXXXXX were distributed to XXXXXXXXXX pursuant to a plan of liquidation adopted by XXXXXXXXXX under the XXXXXXXXXX Business Corporations Act.

12. XXXXXXXXXX loaned the amount of U.S. $XXXXXXXXXX to XXXXXXXXXX bearing a reasonable rate of interest (the "Borrowing"). XXXXXXXXXX had previously borrowed the funds on the Canadian market place from third party lenders.

On XXXXXXXXXX, pursuant to the Asset Purchase Agreement, XXXXXXXXXX issued to XXXXXXXXXX a U.S. $XXXXXXXXXX promissory note for the purchase of all of the stock of XXXXXXXXXX. This represented the fair market value of the underlying shares of Canco. The promissory note was acquired by XXXXXXXXXX as part of the subsequent acquisition of the total U.S. $XXXXXXXXXX purchase of assets from XXXXXXXXXX Subsequently, XXXXXXXXXX transferred U.S. $XXXXXXXXXX to XXXXXXXXXX in full payment of the promissory note issued by XXXXXXXXXX. Finally, XXXXXXXXXX transferred these funds along with U.S.$XXXXXXXXXX of its existing funds to XXXXXXXXXX.

PROPOSED TRANSACTIONS

13. XXXXXXXXXX will be dissolved under U.S. law and all of their assets, the shares of Canco, will be distributed to XXXXXXXXXX.

14. Subsequent to the distribution of the shares of Canco to XXXXXXXXXX, Canco will be wound up, pursuant to the provisions of subsection 88(1) of the Act, and the property of Canco will be distributed to XXXXXXXXXX. A designation will be made under the provisions of paragraph 88(1)(d) to increase the adjusted cost base of the shares of various subsidiaries owned by Canco to their fair market value. Certain of these shares will be sold to other Group operating subsidiaries in Canada and will be ultimately amalgamated in order to combine the different lines of business. No property distributed to XXXXXXXXXX on the winding-up of Canco, or any other property acquired by any person in substitution therefor, will be acquired by a person or persons described in subclauses 88(1)(c)(vi)(B)(I), (II) or (III) of the Act.

PURPOSE OF THE PROPOSED TRANSACTIONS

15. The purpose of the proposed transaction is to ultimately consolidate the recently acquired Canco operations with the pre-existing Group's operations in Canada.

RULINGS

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

(A) By virtue of subsection 212.1(4) of the Act, the provisions of subsection 212.1(1) of the Act will not apply to the transfer of the common shares of Canco by XXXXXXXXXX to XXXXXXXXXX as described in paragraph 13 above;

(B) Pursuant to paragraphs 88(1)(c) and (d) of the Act, the cost to XXXXXXXXXX of the property distributed by Canco to XXXXXXXXXX on the winding-up of Canco, will be deemed to be the amount deemed by paragraph 88(1)(a) of the Act to be the proceeds of disposition of the property to Canco, plus, where the property is a share that is a capital property of Canco at the time that XXXXXXXXXX last acquired control of Canco, subject to the provisions of subparagraphs 88(1)(d)(ii) and (iii), such portion of the amount, if any, by which:

the aggregate of the adjusted cost base to XXXXXXXXXX of its shares of Canco immediately before the winding-up of Canco as described in paragraph 14 above

exceeds

the aggregate of the amounts determined under subparagraphs 88(1)(d)(i) and (i.1)

as is designated by XXXXXXXXXX in its return of income under Part I of the Act for its taxation year in which Canco is wound up;

(C) Provided that interest on the Borrowing referred to in paragraph 12 above is deductible to XXXXXXXXXX under paragraph 20(1)(c) of the Act in computing its income for a taxation year, such interest will not cease to be deductible solely as a result of the dissolution of XXXXXXXXXX into XXXXXXXXXX as described in paragraph 13 above or as a result of the winding-up of Canco into XXXXXXXXXX as described in paragraph 14 above;

(D) XXXXXXXXXX will not recognize foreign accrual property income pursuant to the distribution of Canco to XXXXXXXXXX on the liquidation of XXXXXXXXXX by virtue of paragraph 95(2)(f) except to the extent that there is an increase in value of Canco from the date of Closing;

(E) XXXXXXXXXX will not be subject to Canadian taxation on the distribution of the shares of Canco by virtue of Article XIII of the Canada-U.S. Income Tax Convention (1980) provided that the value of the outstanding shares of Canco is not derived principally from real property situated in Canada as defined in the afore-noted Article XIII;

and

(F) Section 245 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 dated December 30, 1996, provided that the proposed transactions are completed by 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 letter should be construed as confirmation, express or implied, of :

(a) the determination of the fair market value, adjusted cost base, paid-up capital of any particular shares referred to herein; or

(b) the tax consequences of any of the transactions described in this letter other than as specifically described.

Yours truly,

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

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