1999 Ruling 9902123 - CRYSTALLIZATION OF SAFE INCOME

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

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

Position: No

Reasons: 88(1)(c.3)(iv) states for purposes of 88(1)(c)(vi)(B) property acquired in substitution for a property distributed to the parent does not include property that was not owned by the person at any time after the acquisition of control referred to in 88(1)(c)(vi)(B).

xxxxxxxxxx
xxxxxxxxxx							3-990212
xxxxxxxxxx

Attention: xxxxxxxxxx

XXXXXXXXXX, 1999

Dear Sirs:

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

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

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

DEFINITIONS

In this letter unless otherwise expressly stated

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

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

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

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

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

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

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

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

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

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

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

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

(m) "safe income on hand" in respect of the shares 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 (as defined in paragraph 55(5)(b)) by the corporation and its subsidiaries after 1971 and before the safe-income determination time for the series of transactions that includes the proposed transactions described herein;

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

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

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

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

FACTS

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

XXXXXXXXXX is in the business of XXXXXXXXXX.

2. The authorized share-capital of XXXXXXXXXX consists of

xxxxxxxxxx

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

3. As at XXXXXXXXXX has issued and outstanding XXXXXXXXXX and xxxxxxxxxx.

xxxxxxxxxx

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

Holdings owns all the issued and outstanding xxxxxxxxxx. As at XXXXXXXXXX, Holdings owned XXXXXXXXXX.

The shares of XXXXXXXXXX are capital property to Holdings.

5. The shareholders of Holdings and the number of shares held

are as follows:

	SHAREHOLDER	NUMBER AND SHARES HELD

xxxxxxxxxx
xxxxxxxxxx

xxxxxxxxxx
xxxxxxxxxx

xxxxxxxxxx
xxxxxxxxxx

xxxxxxxxxx

xxxxxxxxxx
xxxxxxxxxx
xxxxxxxxxx

XXXXXXXXXX is controlled directly or indirectly by

xxxxxxxxxx.

XXXXXXXXXX is controlled directly or indirectly by

xxxxxxxxxx.

XXXXXXXXXX is controlled directly or indirectly by

xxxxxxxxxx.

XXXXXXXXXX is controlled directly or indirectly by

xxxxxxxxxx.

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

7. The authorized share capital of Newco consists of:

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

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

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

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

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

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

8. All the issued and outstanding shares of Newco will be held by Holdings and will be acquired in the transaction described in paragraph 14 below.

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

XXXXXXXXXX.

PROPOSED TRANSACTIONS

10. Holdings will exercise its conversion right and exchange approximately XXXXXXXXXX that it holds for approximately XXXXXXXXXX (the "Converted Shares")

11. Holdings will then sell the Converted Shares, at fair market value, to Newco. As consideration for the transfer of the Converted Shares, Newco will issue to Holdings a number of Class A common shares with a fair market value equal to the fair market value of the Converted Shares at the time of the transfer.

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

Newco will add an amount to its stated capital account for its class A common shares equal to the aggregate of the ACB of all the Converted Shares transferred,

13. Newco, by means of one or more special shareholders' resolutions, will increase the stated capital of its issued and outstanding class A common shares by an aggregate amount that will not exceed the safe income on hand of XXXXXXXXXX in respect of the Converted Shares held by Newco.

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

14. Holdings will sell, at fair market value, for cash all of the Newco class A common shares that it holds to XXXXXXXXXX or a taxable Canadian corporation that is a related person to XXXXXXXXXX.

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

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

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

(b) the ACB to Newco of the Converted Shares as a result of the transactions described in paragraph 11 above.

17. XXXXXXXXXX will immediately after the distribution of the Converted Shares to it by Newco, sell some or all of the shares so acquired for an aggregate sale price that is expected to be slightly in excess of the purchase price paid by it for the shares of Newco as described in paragraph 14 above.

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

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

PURPOSE OF PROPOSED TRANSACTIONS

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

RULINGS

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

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

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

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

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

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

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

D. Immediately after the transfer described in paragraph 11 above, the safe income on hand of Holdings in respect of the Class A common shares of Newco will include the safe income on hand of XXXXXXXXXX in respect of the Converted Shares held by Newco at that time.

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

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

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

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

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

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

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

exceeds

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

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

I. The Converted Shares distributed by Newco to XXXXXXXXXX will not be considered "ineligible property".

J. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

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

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

COMMENTS

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

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

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

Yours truly,

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