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 990151
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: XXXXXXXXXX
XXXXXXXXXX
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.
You have been advised by your clients that none of the issues involved in this ruling request is, to the best of their knowledge, being considered by a District Taxation Office or Taxation Centre in connection with any tax return already filed and, further, none of the issues involved is the subject of any Notice of Objection or is under appeal.
Definitions
Except as otherwise indicated, the following defined terms have the following meanings:
a) "Act" means the Income Tax Act, R.S.C. 1985 c.1, (5th Supp.), as amended to the date hereof and unless otherwise stated, every statutory reference herein is a reference to the relevant provision of the Act;
b) XXXXXXXXXX;
c) "ACB" means the expression "adjusted cost base" as defined in section 54;
d) "agreed amount" in respect of a property means the amount that the transferor and transferee of the property have agreed upon in their election under subsection 85(1) in respect of the property;
e) XXXXXXXXXX;
f) "Canadian corporation" has the meaning assigned by subsection 89(1);
g) "capital dividend account" has the meaning assigned by subsection 89(1);
h) "capital property" has the meaning assigned by section 54;
i) "cost amount" has the meaning assigned under subsection 248(1);
j) "depreciable property" has the meaning assigned by subsection 13(21);
k) "distribution" has the meaning assigned by subsection 55(1);
l) "dividend rental arrangement" has the meaning assigned by subsection 248(1);
m) "e1igible capital property" has the meaning assigned by section 54;
n) "eligible property" has the meaning assigned by subsection 85(1.1);
o) "financial intermediary corporation" has the meaning assigned by subsection 191(1);
p) "guarantee agreement" has the meaning assigned by subsection 112(2.2);
q) "ITAR" means Income Tax Application Rules ;
r) "paid-up capital" has the meaning assigned by subsection 89(1);
s) "private corporation" has the meaning assigned by subsection 89(1);
t) "RDTOH" means "refundable dividend tax on hand" which has the meaning assigned by subsection 129(3);
u) "Regulations" means the Income Tax Regulations;
v) "related persons" has the meaning assigned by subsection 251(2);
w) "series of transactions or events" has the meaning assigned by subsection 248(10);
x) "specified financial institution" and "restricted financial institution" have the meanings assigned under subsection 248(1);
y) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);
z) "taxable dividend" has the meaning assigned by subsection 89(1);
aa) "UCC" means the expression "undepreciated capital cost" as defined in subsection 13(21);
bb) "specified investment business" has the meaning assigned by subsection 125(7);
cc) "taxable preferred share" has the meaning assigned by subsection 248(1);
dd) "proceeds of disposition" has the meaning assigned by section 54;
and
ee) "dividend refund" has the meaning assigned by subsection 129(1).
Our understanding of the facts, proposed transactions and purpose of proposed transactions is as follows:
Facts
1. All the corporations, except for XXXXXXXXXX, are Canadian private corporations incorporated in Canada under the laws of a province of Canada. The relevant facts regarding these corporations are summarized below:
Name of Controlling Jurisdiction Date of
Corporation shareholder(s) incorporation
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
*Date of amalgamation.
2. XXXXXXXXXX ("Father") and XXXXXXXXXX ("Mother") are married to each other and are the parents of XXXXXXXXXX. All are resident in Canada.
3. The principal business activity of the companies is as follows:
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
4. Each of XXXXXXXXXX, respectively, is controlled by a separate Trust resident in Canada. Relevant details concerning these trusts are as follows:
Name of trust Trustee * Beneficiaries
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
*All decisions regarding the administration of the trusts must be approved by a majority of the trustees.
5. XXXXXXXXXX is a Canadian-controlled private corporation ("CCPC") that was formed as a result of an amalgamation which took place on XXXXXXXXXX.
The authorized and issued share capital of XXXXXXXXXX can be summarized as follows:
Authorized:
- class A voting non-participating common shares with a par value of $XXXXXXXXXX each.
- non-voting common shares without par value.
- voting preferred shares redeemable and retractable at $XXXXXXXXXX each having a par value of $XXXXXXXXXX each. Each share carries a fixed non-cumulative dividend rate of XXXXXXXXXX % per annum.
- class A voting preferred shares redeemable and retractable for $XXXXXXXXXX each having a par value of $XXXXXXXXXX each. Each share carries a fixed non-cumulative dividend rate of XXXXXXXXXX % per annum.
Issued and outstanding:
Paid-Up
Name of Number Capital
shareholder of shares ("PUC")
Class A voting shares
Mother XXXXXXXXXX $XXXXXXXXXX
Non-voting common shares
XXXXXXXXXX
Voting preferred shares
Father XXXXXXXXXX XXXXXXXXXX
Mother XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Class A voting preferred shares
Father XXXXXXXXXX XXXXXXXXXX
Mother XXXXXXXXXX XXXXXXXXXX
6. XXXXXXXXXX is a CCPC whose authorized and issued share capital of can be summarized as follows:
Authorized:
- Unlimited class A voting common shares without par value
- Unlimited class B voting common shares without par value
- Unlimited class C non-voting common shares without par value
- Unlimited class D non-voting common shares without par value
- Unlimited class E non-voting preferred shares without par value, redeemable and retractable at $XXXXXXXXXX each, with a non-cumulative dividend rate up to the XXXXXXXXXX prime rate plus XXXXXXXXXX % of the redemption price per annum
- Unlimited class F non-voting preferred shares without par value, redeemable and retractable at $ XXXXXXXXXX each, with a non-cumulative dividend rate up to the XXXXXXXXXX prime rate plus XXXXXXXXXX % of the redemption price per annum
Issued and outstanding:
Class of shares Shareholder Number of shares
Class A common XXXXXXXXXX XXXXXXXXXX
Class E preferred XXXXXXXXXX XXXXXXXXXX
Class F preferred XXXXXXXXXX XXXXXXXXXX
7. XXXXXXXXXX is a CCPC whose authorized and issued share capital can be summarized as follows:
Authorized:
- Unlimited class A voting common shares without par value.
- Unlimited class B voting common shares without par value.
- Unlimited class C non-voting common shares without par value.
- Unlimited class D non-voting common shares without par value.
- Unlimited class E non-voting preferred shares without par value, redeemable and retractable at $XXXXXXXXXX each, with a non-cumulative dividend rate up to the XXXXXXXXXX prime rate plus XXXXXXXXXX % of the redemption price per annum.
- Unlimited class F non-voting preferred shares without par value, redeemable and retractable at $XXXXXXXXXX each, with a non-cumulative dividend rate up to the XXXXXXXXXX prime rate plus XXXXXXXXXX % of the redemption price per annum.
Issued and outstanding:
Class of shares Shareholder Number of shares
Class A common XXXXXXXXXX XXXXXXXXXX
Class E preferred XXXXXXXXXX XXXXXXXXXX
Class F preferred XXXXXXXXXX XXXXXXXXXX
8. XXXXXXXXXX is a CCPC whose authorized and issued share capital can be summarized as follows:
Authorized:
- Unlimited class A voting common shares without par value.
- Unlimited class B voting common shares without par value.
- Unlimited class C non-voting common shares without par value.
- Unlimited class D non-voting common shares without par value.
- Unlimited class B non-voting preferred shares without par value, redeemable and retractable at $XXXXXXXXXX each, with a non-cumulative dividend rate up to the XXXXXXXXXX prime rate plus XXXXXXXXXX % of the redemption price per annum.
- Unlimited class F non-voting preferred shares without par value, redeemable and retractable at $XXXXXXXXXX each, with a non-cumulative dividend rate up to the XXXXXXXXXX prime rate plus XXXXXXXXXX % of the redemption price per annum.
Issued and outstanding:
Class of shares Shareholder Number of shares
Class A common XXXXXXXXXX XXXXXXXXXX
Class E preferred XXXXXXXXXX XXXXXXXXXX
Class F preferred XXXXXXXXXX XXXXXXXXXX
9. XXXXXXXXXX is a corporation resident in XXXXXXXXXX, U.S.A. with an issued and outstanding share capital which consists of one class of voting common shares and one class of preferred shares. All of the issued and outstanding share capital of XXXXXXXXXX is held by XXXXXXXXXX.
10. XXXXXXXXXX carries on the same business as XXXXXXXXXX. In addition, XXXXXXXXXX debts are guaranteed by XXXXXXXXXX for which it pays XXXXXXXXXX an annual guarantee fee.
11. XXXXXXXXXX is a CCPC whose authorized and issued share capital can be summarized as follows:
Authorized:
- class A participating voting common shares without par value.
- class B participating non-voting common shares without par value.
- preferred shares with a par value of $XXXXXXXXXX per share, redeemable and retractable.
Issued and outstanding:
class A common shares.
All the issued and outstanding shares of XXXXXXXXXX are held by XXXXXXXXXX.
12. XXXXXXXXXX and XXXXXXXXXX both carry on the same business of XXXXXXXXXX and guarantees XXXXXXXXXX debts in respect of which XXXXXXXXXX receives a fee from XXXXXXXXXX.
13. In XXXXXXXXXX advanced a loan to Father and Mother, in their capacity as employees, for the purposes of assisting them to acquire a dwelling for their personal habitation. The loan bears interest at the rate prescribed by Regulation 4301 and requires principal payments of $XXXXXXXXXX per year. The loan is of the type described in paragraph 15(2.4)(b). Since the loan was advanced prior to April 26, 1995, subsection 15(2.4) is read without reference to paragraph 15(2.4)(e). Accordingly, subsection 15(2.4) applies to the loan.
As the loan was advanced to Father and Mother, in their capacity as employees of XXXXXXXXXX, you propose to classify the loan as business property for the purposes of the pro-rata test.
14. On XXXXXXXXXX entered into a series of transactions, the purpose of which was to utilize its non-capital losses and to extinguish loans made during the year to Father and Mother, XXXXXXXXXX. These transactions can be summarized as follows:
On XXXXXXXXXX sold one of its Canadian rental properties to its wholly-owned subsidiary corporation, XXXXXXXXXX, for a purchase price equal to its FMV. Consideration was an assumption by XXXXXXXXXX of debt secured by the property and by XXXXXXXXXX issuing class A common shares to XXXXXXXXXX. A joint election in prescribed form was filed within the limit referred to in subsection 85(6) to have the provisions of subsection 85(1) apply with respect to the transfer of the land only. As a result of the transfer, XXXXXXXXXX realized a partial capital gain on the transfer of the lands and full recapture of capital cost allowance and a capital gain on the transfer of the building. The resulting increase in XXXXXXXXXX income was offset by XXXXXXXXXX available non-capital losses. An amount equal to one quarter of the capital gain realized on the transfer was added to XXXXXXXXXX capital dividend account.
On XXXXXXXXXX declared a dividend on its voting preferred shares and non-voting common shares. XXXXXXXXXX elected to pay the dividend out of its capital dividend account by filing an election in prescribed form within the time limits referred to in subsection 83(2). The company paid the maximum dividend allowed on the preferred shares in the amount of $XXXXXXXXXX and a separate dividend equal to the remaining balance of its capital dividend account in the amount of $XXXXXXXXXX. Payment of the dividends was made by way of issuing demand promissory notes (the XXXXXXXXXX Notes) to Father and Mother, XXXXXXXXXX, being the shareholders of record at the time the dividend was declared. Each of XXXXXXXXXX, respectively, added the amount of the dividend received from XXXXXXXXXX to its capital dividend account.
On XXXXXXXXXX, each of XXXXXXXXXX declared a dividend equal to the amount of its capital dividend account payable on its outstanding preferred shares. In each case, the dividend paying corporation elected that the dividend be paid out of its capital dividend account by filing an election in prescribed form within the time limit provided by subsection 83(2). Payment of the dividend was made by an assignment of the XXXXXXXXXX Note by each dividend paying corporation to its respective preferred shareholder.
All the XXXXXXXXXX Notes issued on XXXXXXXXXX were then held by Father, Mother, XXXXXXXXXX, which equaled in aggregate the total amount payable by them to XXXXXXXXXX. The XXXXXXXXXX Notes were applied to offset the total amount payable by Father, Mother,XXXXXXXXXX to XXXXXXXXXX. The result of this transaction is that both the XXXXXXXXXX Notes and the amount due to XXXXXXXXXX by Father, Mother, XXXXXXXXXX were extinguished by payment in full.
15. The above series of transactions would have proceeded irrespective of whether or not a butterfly reorganization was contemplated. The purposes of the transactions were clearly defined and have no effect on the proposed butterfly reorganization. Accordingly, it is your view that these transactions were not in contemplation of the butterfly reorganization and therefore are not part of the proposed butterfly distribution as they do not form part of the proposed series of transactions or events connected with implementing the proposed butterfly reorganization.
16.
XXXXXXXXXX
17.
XXXXXXXXXX
If at the time of distribution an amount has been received or has become receivable with respect to an order of expropriation, such amount will be classified, for the purposes of the pro-rata test, as cash and near-cash property; otherwise, the entire property will be classified as business property.
18.
XXXXXXXXXX
The timing for agreeing to new financing is dependent upon the availability of funds and interest rates and therefore is a business opportunity whose timing is largely outside the control of XXXXXXXXXX. The company's business has grown over the years by using equity takeouts to finance new investments. Accordingly, the contemplated transactions are in the normal course of XXXXXXXXXX business and are not in contemplation of the butterfly reorganization. Therefore, in your view, these transactions do not form part of the proposed butterfly distribution as they are not part of the proposed series of transactions or events to implement the proposed butterfly reorganization.
Purpose of the proposed reorganization
19.
XXXXXXXXXX
It is proposed that XXXXXXXXXX continue to hold all the shares of XXXXXXXXXX. The shares of XXXXXXXXXX cannot be distributed at this time without incurring U.S. tax. In addition, Father and Mother wish to retain voting control over XXXXXXXXXX.
Proposed transactions
19.1 A new U.S. private corporation ("XXXXXXXXXX") will be incorporated under the laws of XXXXXXXXXX, U.S.A. In this regard, Articles of Incorporation will be filed with the Secretary for the State of XXXXXXXXXX authorized share capital will include XXXXXXXXXX class A voting common shares without par value. On incorporation, one class A common share will be issued to XXXXXXXXXX for consideration of U.S.$XXXXXXXXXX.
19.2 XXXXXXXXXX will transfer all its shares of XXXXXXXXXX (common and preferred) to XXXXXXXXXX. As consideration for the XXXXXXXXXX Shares, XXXXXXXXXX will issue XXXXXXXXXX of its class A common shares to XXXXXXXXXX.
19.3 XXXXXXXXXX will exchange all its preferred shares of XXXXXXXXXX for additional common shares of XXXXXXXXXX having an aggregate fair market value ("FMV") equal to the aggregate FMV of the XXXXXXXXXX preferred shares.
It is proposed to proceed with the transactions described above in paragraphs 19.1 through 19.3 after a binding loan agreement has been entered into. Accordingly, implementation could take place before or after the proposed butterfly distribution.
20. Three new corporations will be incorporated under the XXXXXXXXXX as follows:
- XXXXXXXXXX will incorporate Subco 1
- XXXXXXXXXX will incorporate Subco 2
- XXXXXXXXXX will incorporate Subco 3
21. Each of Subco 1, Subco 2 and Subco 3 will be a private corporation and a taxable Canadian corporation.
22. The authorized share capital of Subco 1, Subco 2 and Subco 3 will be as follows:
- XXXXXXXXXX class A voting, non-participating common shares with a par value of $XXXXXXXXXX each;
- XXXXXXXXXX class B non-voting, participating common shares with a par value of $XXXXXXXXXX each;
and
- XXXXXXXXXX class C voting preferred shares without par value and XXXXXXXXXX class D non-voting preferred shares with a par value of $XXXXXXXXXX each. Each of the class C and D preferred shares will be redeemable at the option of the holder and retractable at the option of the company at an amount equal to the redemption amount of the share at that time. The rights and restrictions of each class of preferred shares will provide for the redemption amount for each preferred share to be fixed by an amount equal to the FMV of the consideration received less the amount of liabilities assumed, divided by the number of shares issued at the time. The rights and restrictions of the class C preferred shares will provide for the PUC of the issued shares of that class to be fixed by special resolution at an amount determined by the directors at the time of their issue.
23. On incorporation, Subco 1 will issue one class A common share to XXXXXXXXXX; Subco 2 will issue one class A common share to XXXXXXXXXX; and Subco 3 will issue one class A common share toXXXXXXXXXX. The subscription price for the class A common shares issued will be $XXXXXXXXXX per share.
24. Father and Mother will incorporate a new corporation under the XXXXXXXXXX (hereinafter referred to as "Holdco"). Holdco will be a private corporation and a taxable Canadian corporation.
25. The authorized share capital of Holdco will be as follows:
- XXXXXXXXXX class A voting, non-participating common shares with a par value of $XXXXXXXXXX each;
- XXXXXXXXXX class B non-voting, participating common shares with a par value of $XXXXXXXXXX each;
and
- XXXXXXXXXX class C non-voting preferred shares with a par value of $XXXXXXXXXX each and XXXXXXXXXX class D non-voting preferred shares with a par value of $XXXXXXXXXX each. The class C and D preferred shares will be redeemable at the option of the holder and retractable at the option of the company at an amount equal to the redemption amount of the share at that time. The rights and restrictions of the class C and D preferred shares will provide for the redemption amount for each preferred share to be fixed by an amount equal to the FMV of the consideration received less the amount of liabilities assumed, divided by the number of shares issued at the time.
26. On incorporation, Father and Mother will each be issued one class A common share of Holdco for a subscription price of $XXXXXXXXXX each.
27. XXXXXXXXXX will amalgamate with its parent, XXXXXXXXXX, to form "Amalco". Amalco's authorized share capital will be identical to that of XXXXXXXXXX immediately before the amalgamation. On amalgamation, all the shares of XXXXXXXXXX will be cancelled. All the shares of XXXXXXXXXX outstanding immediately before the amalgamation will be exchanged for identical shares of Amalco, one for one. All the property previously owned by XXXXXXXXXX and XXXXXXXXXX immediately prior to the amalgamation will become the property of Amalco. Likewise, all the liabilities of XXXXXXXXXX and XXXXXXXXXX immediately prior to amalgamation will become liabilities of Amalco.
28. Amalco will determine the assets and liabilities to be distributed in the proposed net equity butterfly reorganization. The objective is to distribute all of Amalco's Canadian real property together with related debt leaving XXXXXXXXXX holding all the shares of XXXXXXXXXX. As stated in the facts, both Amalco and XXXXXXXXXX carry on the same type of business and each employs more than 5 full-time employees. Accordingly, the real property owned by XXXXXXXXXX and Amalco, respectively, will be considered to be business property, for the purposes of the distribution described in paragraphs 39 and 40.
29. To achieve a qualifying distribution each shareholder receiving a distribution, hereinafter referred to as a "transferee", is to receive a pro-rata share of all of Amalco's real property together with a pro-rata share of each type of Amalco's other types of property (as more fully described in paragraph 39 below). Such other types of property are described in paragraph 30 below and will include all other property not included in the same type of property as the Canadian real property.
30. The types of property for the purposes of the distribution by Amalco, immediately before the transfer of property described in paragraph 39 below, will be determined on a consolidated look-through basis by including the appropriate pro-rata share of the assets of any corporation or partnership over which Amalco has the ability to exercise significant influence and will be properties of the following types:
- cash or near-cash property comprising of all of the current assets of each corporation including any cash, deposits, accounts receivable, inventory, and rights arising from prepaid expenses (hereinafter referred to as "prepaid expenses");
- business property, comprising of all of the assets of each corporation, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from a business other than a specified investment business; and
- investment property, comprising of all of the assets of each corporation, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property or from a specified investment business.
For this purpose, Amalco will be considered to have significant influence over a corporation if it has the ability to exercise significant influence, within the guidelines provided by section 3050 of the CICA Handbook, over that corporation or partnership or over any corporation or partnership which has significant influence over that corporation. In this regard Amalco will be considered to exercise significant influence over XXXXXXXXXX and XXXXXXXXXX.
In determining the types of property, Amalco's and XXXXXXXXXX real property will be classified, for the purposes of the butterfly, as business assets. This is based on Amalco's employing more than 5 full-time employees throughout the year and up to the time of distribution, in which case its rental business will be consider to be an "active business carried on by a corporation" as defined by subsection 125(7). Similarly, XXXXXXXXXX also employs more than 5 full-time employees throughout the year and therefore its rental business will also be considered to be an active business.
For greater certainty, any tax accounts, such as the balance of any RDTOH or capital dividend account of Amalco will not be considered property for purposes of the proposed transactions described herein.
31. In determining, on a consolidated basis, the net FMV of Amalco's cash or near-cash property, business property and investment property immediately before the distribution, liabilities of Amalco, also determined on a consolidated basis by including the appropriate pro rata share of the liabilities of each corporation or partnership over which Amalco has significant influence, will be deducted in the calculation of the net FMV of each such type of property of Amalco in the following manner:
- current liabilities of Amalco determined on a consolidated basis, will be allocated to cash or near-cash property (including cash, accounts receivable, inventory and prepaid expenses) in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property. The allocation of current liabilities as described herein will not exceed the aggregate FMV of all near-cash property of Amalco;
- liabilities of Amalco, determined on a consolidated basis, other than current liabilities, that relate, to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its fair market value. Liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and
- any liabilities ("excess unallocated liabilities"), determined on a consolidated basis, that remain after the allocations described in steps (a) and (b)) are made (including excess current liabilities, if any), will then be allocated to the cash or near-cash property, business property, and investment property of Amalco on a consolidated basis based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.
For greater certainty, current liabilities would include prepaid rent, tenants' security deposits, the current portion of mortgages payable on property and any bonuses payable to its owner-managers.
In the event that Amalco is found to have an insufficient amount of a particular type of property (determined on a consolidated basis as described above ) to affect a pro-rata distribution of all of Amalco's Canadian real property, Amalco, will acquire the necessary additional property from XXXXXXXXXX either by way of a dividend or purchase.
32. Each of Father, Mother, XXXXXXXXXX, respectively, will determine the number of their shares of Amalco whose aggregate value corresponds to their proportionate interest in the assets of Amalco to be distributed in the proposed butterfly reorganization. In this regard, XXXXXXXXXX will include all their preferred shares of Amalco and then determine the appropriate number of their Amalco common shares. If necessary, Amalco will undergo a stock split to provide the right number of whole shares for this purpose.
33. Each of Father and Mother will transfer the number of their respective preferred shares of Amalco determined in paragraph 32 to Holdco. As sole consideration for such transfers, Holdco will issue to each of Father and Mother class B non-voting common shares with an aggregate FMV equal to the aggregate FMV of the shares of Amalco transferred by each to Holdco.
34. (Reserved).
35. In connection with each transfer of shares described above, the transferor and the transferee will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) applied to the transfer. The agreed amount in respect to the shares so transferred will, in each case, be equal to the ACB to the particular transferor, immediately before the transfer, which amount will be less than the FMV of such shares.
36. Each of C Alta, S Alta and J Alta will transfer all of their preferred shares and the number of their non-voting common shares of Amalco determined in paragraph 32 to their respective Subco (i.e. C Alta to Subco 1, S Alta to Subco 2 and J Alta to Subco 3). As sole consideration for such transfers, each Subco will issue to its parent company class B non-voting common shares with an aggregate FMV equal to the aggregate FMV of the shares of Amalco transferred by each of the parent companies, respectively.
37. (Reserved).
38. In connection with each transfer of shares described above, the transferor and the transferee will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) applied to the transfer. The agreed amount in respect to the shares so transferred will, in each case, be equal to the ACB to the particular transferor, immediately before the transfer, which amount will be less than the FMV of such shares.
39. Amalco will sell, at fair market value, to each of Holdco, Subco 1, Subco 2 and Subco 3, hereinafter referred to as the "Transferee Corporations", a portion of its cash and near-cash property, business property and investment property. As a result of such transfers, the net FMV of the cash and near-cash property, business property and investment property, determined in the manner described in paragraph 31 above, received by each of the Transferee Corporations will be equal to the proportion of the net FMV of the cash and near-cash property, business property and investment property, respectively, owned by Amalco immediately before the transfer, that:
- the fair market value, immediately before the transfer, of all the shares of the capital stock of Amalco owned by that particular Transferee Corporation at that time
is of
- the fair market value, immediately before the transfer, of all the issued shares of the capital stock of Amalco at that time.
40. In consideration for such transfers, each of the Transferee Corporations will assume certain liabilities of Amalco and will issue to Amalco class D preferred shares with an aggregate redemption amount equal to the aggregate FMV of the transferred property less the amount of the liabilities of Amalco assumed by that Transferee Corporation.
41. In order to meet the pro-rata test of a distribution in respect of the business properties of Amalco, some of the transferee corporations will assume liabilities which are attributable to, or secured by, properties transferred to one or more other transferee corporations. In such circumstances, the transferee corporation assuming such liabilities will be granted an option by the other transferee corporation or transferee corporations, as the case may be, which option may only be exercised after the completion of the transfer of properties of Amalco described herein, to have the other transferee or transferees assume such liabilities in exchange for a cash payment by the particular transferee corporation equal to the amount of such liabilities, including any unpaid accrued interest. The amount of liabilities to be assumed under such an option will not exceed $XXXXXXXXXX which represents approximately XXXXXXXXXX% of the total liabilities.
42. Each of the Transferee Corporations will add to the legal paid-up capital of its class D preferred shares the amount of the aggregate par value of the class D preferred shares issued to Amalco which will not exceed the aggregate of the agreed amounts in respect of the transfers as described in paragraph 44 below less the amount of liabilities of Amalco assumed by the Transferee Corporation. For greater certainty, the amount to be added to the legal paid-up capital of each of the Transferee Corporations' class D preferred shares will not be greater than the maximum amount that could be added to the PUC having regard to subsection 85(2.1).
43. The liabilities assumed by the Transferee Corporations will be assumed as consideration for particular properties. In no case will the liabilities assumed as consideration for an asset exceed the agreed amount, described in paragraph 44 below in respect of that asset. It is expected that the amount of the liabilities assumed by Subco l, Subco 2 and Subco 3 will exceed the aggregate of the agreed amounts in respect of the property transferred to them. Consequently, Amalco will issue an interest-bearing demand promissory note to Subco l, Subco 2 and Subco3, respectively, equal to the amount of the excess (the "Excess Notes"). Consideration for the Excess Note will be an assumption by Subco 1, Subco 2 and Subco 3, as the case may be, of the amount of Amalco's liabilities that relate to the properties transferred to them in excess of the aggregate of the agreed amounts in respect of the property transferred to them. The interest rate on the Excess Notes will exceed the rate of interest on the debt assumed as consideration for these issues.
44. Amalco and each of the Transferee Corporations 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 each property of Amalco that is an eligible property transferred. The agreed amount for the purposes of subsection 85(1) in respect of such property will be:
- where the particular property is inventory or capital property (other than depreciable property of a prescribed class), the lesser of the cost amount of the property to Amalco immediately before the transfer and the FMV of such property; and
- where the particular property is depreciable property of a prescribed class, the cost amount of such property.
The FMV of each property transferred will equal or exceed the agreed amount in respect thereof.
45. With respect to the assumption of certain undertakings of Amalco which relate to prepaid monthly rent, Amalco and each of the Transferee Corporations will file joint elections, in the form and within the time referred to in subsection 20(25) to have the rules of subsection 20(24) apply to Amalco as the payer and to each of the Transferee Corporations as the recipient in respect of any payment made by Amalco to each of the Transferee Corporations.
46. Each of the Transferee Corporations will redeem their class D preferred shares issued to Amalco by the issuance of a demand non-interest-bearing note, each having a principal amount and FMV equal to the redemption price of the class D preferred shares of that particular Transferee Corporation ( the "Holdco Note", "Subco 1 Note" "Subco 2 Note", or "Subco 3 Note", as the case may be).
47. Amalco will purchase for cancellation all the common shares and redeem all preferred shares of Amalco owned by each of the Transferee Corporations. In consideration, Amalco will issue to each of the Transferee Corporations a non-interest-bearing demand promissory note, having a principal amount equal to the FMV of the Amalco shares so purchased/redeemed from the respective transferee corporation (the "Amalco Notes").
48. The Holdco Note will be set off against the Amalco Note held by Holdco, the Subco 1 Note will be set off against the Amalco Note and the Excess Note held by Subco 1, the Subco 2 Note will be set off against the Amalco Note and the Excess Note held by Subco 2 and the Subco 3 Note will be set off against the Amalco Note and the Excess Note held by Subco 3, and all the notes wil1 be cancelled.
49. Amalco will continue to hold legal title to the real properties distributed as bare trustee for the beneficial owners, the Transferee Corporations. The purpose of the foregoing is to claim exemption from tax otherwise payable pursuant to the XXXXXXXXXX.
50. Holdco may sell the real property transferred to it by Amalco following completion of the butterfly distribution. Consideration will likely be cash or debt or a combination of both. The purchaser may be anybody including another transferee corporation.
51. None of the shares involved in the proposed transactions has been or will be the subject of a guarantee agreement, within the meaning referred to in subsection 112(2.2).
52. None of the shares involved in the proposed transactions has been or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).
53. None of the corporations involved in the proposed transactions is or will be a specified financial institution, as defined in subsection 248(1).
54. None of the corporations involved in the proposed transactions has entered, or will enter, at any time prior to the completion of the proposed transactions, into a dividend rental arrangement.
55. There are no transactions, other than those disclosed herein, that form part of a series of transactions and events connected with this reorganization. In particular, except as described in this letter, no assets have been or will be acquired or liabilities incurred or paid by Amalco, XXXXXXXXXX in contemplation of or before the transfers of property described in paragraph 39 above.
Ruling
Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes thereof, we rule as follows:
a) Upon the filing of the appropriate elections, the provisions of subsection 85(1) will apply to the transfer:
- by each of Father and Mother of their Amalco preferred shares to Holdco described in paragraph 33 above;
- by XXXXXXXXXX of its preferred and common shares of Amalco to Subco 1 as described in paragraph 36 above;
- by XXXXXXXXXX of its preferred and common shares of Amalco to Subco 2 as described in paragraph 36 above;
- by XXXXXXXXXX of its preferred and common shares of Amalco to Subco 3 as paragraph 36 above; and
- by Amalco of its properties that are eligible properties to each of Holdco, Subco 1, Subco 2 and Subco 3 described in paragraphs 39 to 41 above
such that, the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(l)(a) and in respect of depreciable property, the transferee's capital cost of each such property will be determined in accordance with subsection 85(5). For the purposes of the joint elections described above, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition..." in subparagraph 85(l)(e)(i) will be read to mean the proportion of the undepreciated capital cost to the taxpayer of all the property of that class that the capital cost of the property immediately before the disposition is of the capital cost of all property of that class immediately before the disposition.
For greater certainty, paragraph 85(l)(e.2) will not apply to the transfers referred to herein.
b) The application of the provisions of subsection 85(2.1) will result in a reduction of the paid-up capital of the Class B non-voting common shares of Amalco issued to XXXXXXXXXX as described in paragraph 36 above to an amount equal to the agreed amount in the elections filed as described in paragraph 38 above.
c) The provisions of subsection 84(1) will not apply to the issuance of shares described in paragraphs 33 and 36 above.
d) On the redemption of:
- the class D preferred shares of Holdco, Subco 1, Subco 2 and Subco 3 described in paragraph 46 above and the preferred shares of Amalco, as described in paragraph 47 above;
and
- on the purchase for cancellation of the common shares of Amalco held by each of Subco I, Subco 2 and Subco 3 described in paragraph 47 above;
the amount, if any, by which the amount paid to redeem or purchase these shares, as the case may be, exceeds the paid-up capital of these shares immediately before the redemption or purchase for cancellation, as the case may be:
- will be deemed pursuant to paragraph 84(3)(a) to be a dividend paid by the issuer of such shares; and
- will be deemed pursuant to paragraph 84(3)(b) to be a dividend received by the holder of such shares.
e) The amount of a deemed dividend referred to in paragraph (d) above, to the extent that it is a taxable dividend, will:
- pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividend is deemed to have been received, and, for greater certainty, such deduction will not be precluded by subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4); and
- by virtue of the application of paragraph (j) of the definition "proceeds of disposition" in section 54, be excluded from the proceeds of disposition of the shares, and any loss arising from the disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3).
f) No taxes under Part IV of the Act will be payable in respect of a dividend described in paragraph above except as provided in paragraph 186(l)(b).
g) Part IV.I of the Act will not apply to the deemed dividends described in paragraph (d) above because the dividends will be excepted dividends pursuant to paragraph (c) of the definition of "excepted dividend" in section 187.1.
h) Part VI.1 of the Act will not apply to the deemed dividends described in paragraph (b) above because the dividends will be excluded dividends pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).
i) The extinguishment of the promissory notes described in paragraph 48 above will not give rise to a "forgiven amount" for purposes of subsections 80(1) or 80.01(1).
j) Provided that the properties acquired as consideration for the assumption of the liabilities of Amalco by Holdco, Subco I, Subco 2 and Subco 3 as described in paragraphs 40 and 43 continue to be used by each transferee for the purpose of gaining or producing income, and provided that interest on the assumed liabilities was deductible in computing the income of the respective transferor before the assumption, an amount paid or payable by each transferee (depending on the method regularly followed by each transferee in computing its income), not in excess of a reasonable amount, in respect of a year pursuant to a legal obligation to pay interest on the liabilities to be assumed by each transferee will be deductible in computing the transferee's income for tax purposes in that year in accordance with the provisions of paragraph 20(1)(c).
k) Provided that Amalco has included or will have included an amount in respect of the undertakings described in paragraph 45 above, in computing its income from its business pursuant to paragraph 12(l)(a) for the taxation year ending immediately before the time of the distribution of property of Amalco or any preceding taxation year, the payment made by Amalco to each of the Transferee Corporations in consideration for the assumption by each of the Transferee Corporations of those undertakings, may, to the extent that the payment is reasonable:
- pursuant to paragraph 20(24)(a), be deducted in computing the income of Amalco for its fiscal period in which the payment is made; and
- pursuant to paragraph 20(24)(b), will be deemed to be an amount described in paragraph 12(1)(a) in respect of each of the Transferee Corporations.
l) Pursuant to subsection 1102(14) of the Regulations, each property which, prior to the commencement of the proposed transactions described herein, was depreciable property of a prescribed class or separate prescribed class of Amalco and which is acquired by each of the Transferee Corporations, will be depreciable property of the same prescribed class or separate prescribed class, as the case may be, of each of the Transferee Corporations.
m) Provided that the condition specified in paragraph 1100(2.2)(f) of the Regulations is satisfied, paragraph 1100(2.2)(h) of the Regulations will apply such that no amount will be included by each of the transferee corporations under paragraph 1l00(2)(a) of the Regulations in respect of depreciable property of a prescribed class that is property acquired by each of the Transferee Corporations from Amalco.
n) Pursuant to subsection 110l(1ad) of the Regulations, each rental property (within the meaning given in subsection 1100(14) of the Regulations) which is acquired by each of the Transferee Corporations and which would otherwise be rental property of a separate prescribed class under subsection 1101(1ac) of the Regulations, will be deemed not to be property of a separate prescribed class of each of the Transferee Corporations under subsection 1101(1ac) of the Regulations provided that such property was a rental property included in a prescribed class of Amalco other than a separate class prescribed under subsection 1101(1ac) of the Regulations.
o) The provisions of subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to the proposed transactions, in and by themselves.
p) Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
q) The application of subsection 84.1(1) to the transfers by Father and Mother to Holdco described in paragraph 33 above, will result in a reduction of the paid-up capital of the common shares of Holdco issued on the transfers.
r) The cost of the promissory notes issued in the proposed transactions described in paragraphs 46 and 47 above will be equal to their respective principal amounts.
s) Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is no:
disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
acquisition of control in the circumstances described in subparagraph 55(3.l)(b)(ii);
acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);
acquisition of property in the circumstances described in paragraph 55(3.1)(c); or
acquisition of property in the circumstances described in paragraph 55(3.1)(d);
which has not been described herein, by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in paragraph (d) above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
t) Subsection 85.1(3) will apply to the transfer by XXXXXXXXXX of its shares of XXXXXXXXXX to XXXXXXXXXX as described in paragraph 19.2 above. Accordingly, XXXXXXXXXX ACB in the new shares of XXXXXXXXXX and its proceeds of disposition of its shares of XXXXXXXXXX will be deemed to be equal to XXXXXXXXXX ACB in the XXXXXXXXXX shares immediately before the transaction.
u) The provisions of section 51 will apply to the exchange referred to in paragraph 19.3 above, of preferred shares of XXXXXXXXXX for common shares of XXXXXXXXXX such that:
- except for the purpose of subsection 20(21), XXXXXXXXXX will be deemed not to have disposed of the preferred shares so exchanged; and
- the cost to XXXXXXXXXX of the common shares of XXXXXXXXXX acquired on the exchange will be equal to XXXXXXXXXX ACB, immediately before the exchange, of the preferred shares so exchanged.
These rulings are given subject to the limitations and qualifications set out 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.
Nothing in this ruling should be construed as implying that Revenue Canada has reviewed, accepted or otherwise agreed to:
the determination of the adjusted cost base of any share or the paid-up capital of any shares referred to herein; or
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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