1999 Ruling 9904333 - 88(1)(D) BUMP

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: 88(1)(d) bump (see Statement of Principal Issues attached with Ruling)

Position: (See Statement of Principal Issues attached with Ruling)

Reasons: (See Statement of Principal Issues attached with Ruling)

XXXXXXXXXX
XXXXXXXXXX 3-990433
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. In your letters of XXXXXXXXXX you provided additional information concerning the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) is the subject of a ruling previously issued by this Directorate.

Definitions

In this letter, the following terms have the meanings specified:

(a) Unless otherwise indicated, all references to statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended ( the "Act");

(b) "ACB" means "adjusted cost base" as that expression is defined in section 54 and subsection 248(1);

(c) "arm's length" has the meaning assigned by subsection 251(1);

(d) "BCA" means the Business Corporations Act XXXXXXXXXX as amended;

(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) "financial institution" has the meaning assigned by subsection 142.2(1)

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

(j) "investment dealer" has the meaning assigned by subsection 142.2(1);

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

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

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

(n) "proceeds of disposition" has the meaning assigned by section 54;

(o) "public corporation" has the meaning assigned by subsection 89(1);

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

(q) "safe income on hand" in respect of particular shares of a corporation at a particular time refers to the income earned or realized, within the meaning of paragraphs 55(5)(b) or (c), by any corporation after 1971 and before the safe-income determination time to the extent that it is on hand and can reasonably be considered to contribute to the capital gain that would be realized on a disposition at fair market value of the particular share of the corporation;

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

(s) "stated capital" has the meaning assigned by XXXXXXXXXX of the BCA;

(t) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1); and

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

FACTS

1. XXXXXXXXXX ("Xco") is a corporation governed by the BCA. Xco is XXXXXXXXXX a taxable Canadian corporation for purposes of the Act.

XXXXXXXXXX

Xco is not a financial institution for purposes of the mark-to-market rules.

XXXXXXXXXX

The fiscal year of Xco ends on XXXXXXXXXX.

The assets of Xco include all the issued and outstanding shares of:

XXXXXXXXXX

(individually, a "Holdco" and collectively, the "Holdcos").

Each Holdco is a taxable Canadian corporation XXXXXXXXXX for purposes of the Act.

The Holdcos have no issued and outstanding shares other than the common shares issued to Xco. The paid-up capital of the outstanding common shares of each Holdco for the purposes of the Act is $XXXXXXXXXX.

Each Holdco owns XXXXXXXXXX non-voting and exchangeable shares of XXXXXXXXXX ("Canco2") ("Exchangeable Shares of Canco2"). Canco2 is a corporation governed by the provisions of the BCA. Canco2 is an indirect subsidiary of XXXXXXXXXX ("Parentco"). Parentco is a XXXXXXXXXX the parent company of the Parentco group of companies. Parentco and its group of companies in Canada are carrying on the business of XXXXXXXXXX.

The terms and conditions of the Exchangeable Shares of Canco2 provide that they are exchangeable for common shares of Parentco on a one-for-one basis at any time, without any subsequent holding period restriction

XXXXXXXXXX

The Holdcos have no liabilities other than nominal liabilities in respect of professional services (e.g., audit). The Exchangeable Shares of Canco2 represent capital property to each Holdco.

Each Holdco has received XXXXXXXXXX dividends in respect of the Exchangeable Shares of Canco2 and in turn has paid dividends to Xco.

XXXXXXXXXX

It is possible that at least one further dividend will be received by each Holdco before the proposed transactions described below are implemented. Each Holdco intends to declare and pay a dividend to Xco equal to any dividend received by such Holdco.

2. Between XXXXXXXXXX, Xco acquired XXXXXXXXXX common shares of XXXXXXXXXX ("Canco1"). The ACB of the common shares of Canco1 to Xco was $XXXXXXXXXX.

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX, the shareholders of Canco1 became entitled to dispose of their shares of Canco1 in exchange for Exchangeable Shares of Canco2 at the rate of XXXXXXXXXX Exchangeable Shares of Canco2 for each common share of Canco1.

XXXXXXXXXX

3. XXXXXXXXXX, Xco incorporated XXXXXXXXXX subsidiary wholly-owned corporations under the provisions of the BCA: XXXXXXXXXX.

Xco then transferred XXXXXXXXXX of the common shares of Canco1, being XXXXXXXXXX common shares of Canco1, to each Holdco in exchange for common shares of such Holdco. Xco and each of the Holdcos jointly elected to have the provisions of subsection 85(1) apply to the transfers such that the cost of the common shares of Canco1 to each Holdco was deemed to be an amount equal to the ACB of such shares to Xco immediately before the transfer.

The purpose of using XXXXXXXXXX Holdcos was to facilitate the indirect sale on a staggered basis of the Exchangeable Shares of Canco2 to be received XXXXXXXXXX in exchange for the common shares of Canco1.

XXXXXXXXXX, Xco attempted to negotiate an arrangement with Canco2 pursuant to which Xco would have sold the common shares of the Holdcos rather than the common shares of Canco1 to Canco2 XXXXXXXXXX.

If Canco2 had been willing to buy the common shares of the Holdcos, Xco would have increased the stated capital of the issued and outstanding common shares of each Holdco immediately prior to the Plan Execution by an aggregate amount equal to the safe income on hand of Canco1 attributable to the common shares of Canco1 held by each Holdco. This would have resulted in an increase in the ACB of the common shares of each Holdco to Xco by an equal amount.

Unfortunately, Canco2 was unwilling to acquire the common shares of the Holdcos because of XXXXXXXXXX.

XXXXXXXXXX

XXXXXXXXXX, each Holdco transferred its XXXXXXXXXX common shares of Canco1 to Canco2. In consideration for the transfer of the common shares of Canco1, Canco2 issued to each Holdco XXXXXXXXXX Exchangeable Shares of Canco2. Subsequently each Holdco and Canco2 jointly elected in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each transfer. The aggregate number of Exchangeable Shares of Canco2 received by the Holdcos collectively was XXXXXXXXXX.

Immediately after the aforesaid share exchanges, the safe income on hand attributable to the Exchangeable Shares of Canco2, acquired by each Holdco in the exchange, included the safe income on hand attributable to the common shares of Canco1 beneficially owned by each Holdco immediately before the exchange.

4. XXXXXXXXXX ("Broker") is a subsidiary wholly-owned corporation of the XXXXXXXXXX, a taxable Canadian corporation for purposes of the Act, a registered securities dealer and a financial institution. Accordingly, Broker could not itself acquire the Holdcos from Xco without causing capital gains to be realized by the Holdcos pursuant to subsection 142.6(1) of the Act.

5. XXXXXXXXXX ("Purchaseco") is a company subsisting under the BCA. Purchaseco is a private corporation and a taxable Canadian corporation for purposes of the Act. Purchaseco has been formed in contemplation of the proposed transactions described below.

All of the issued and outstanding shares of Purchaseco are owned by XXXXXXXXXX ("Individual A") and XXXXXXXXXX ("Individual B"), XXXXXXXXXX. Individual A and Individual B acquired the Purchaseco shares with their own funds and own their shares both legally and beneficially.

Purchaseco is not a corporation referred to in any of paragraphs (a) to (e) of the definition of "restricted financial institution" in subsection 248(1) of the Act, is not an investment dealer or is not controlled by a financial institution.

Purchaseco and Xco are not related to each other. Neither shareholder of Purchaseco is an employee, officer or director of Xco, Broker or any entity related to them for the purposes of the Act. Purchaseco will receive professional advice only from Firm A and XXXXXXXXXX ("Firm B") in respect of the legal and tax aspects of the proposed transactions described herein. None of the shareholders of Purchaseco, Firm A or Firm B is providing legal or tax advice to Xco or Broker in connection with the proposed transactions described herein.

Purchaseco and Xco will be dealing at arm's length with each other in connection with the proposed purchase and sales of the common shares of the Holdcos described below.

6. Prior to the implementation of the proposed transactions described below, each Holdco will, pursuant to the provisions of the BCA, increase the stated capital of its issued and outstanding common shares owned by Xco by an amount not exceeding the aggregate safe income on hand attributable to such shares at the time of such increase.

The increases in the stated capital of the issued and outstanding common shares of each Holdco will result in dividends that will be deemed to have been received by Xco by virtue of subsection 84(1) and an increase in the PUC and ACB of the common shares of each Holdco to Xco of an equal amount.

PROPOSED TRANSACTIONS

7. Purchaseco will open an account with Broker and will retain Broker to provide services in connection with the implementation of the proposed transactions described below, including

(a) the acquisition of the common shares of the Holdcos from Xco; and

(b) the disposition of the common shares of Parentco as described in paragraphs 8 and 11 below.

In arranging for these acquisitions and dispositions, Broker will assist Purchaseco with respect to price, timing, credit risk, clearing and settlement procedures and other issues generally associated with acting as an agent in the arrangement of an acquisition and disposition transaction of this size and nature. Broker will not be bound by any agreements to be entered into between Purchaseco and Xco in respect of the acquisitions and dispositions referred to herein.

In consideration for structuring and arranging the acquisitions and dispositions referred to herein, Purchaseco will agree to pay Broker an agency commission determined by reference to the amount of the sale proceeds received by Purchaseco from the sale of the common shares of Parentco as described below. In addition, Purchaseco will pay interest to Broker with respect to any credit extended to Purchaseco by Broker to facilitate the acquisitions and dispositions referred to herein.

Purchaseco will not be acting as agent of Broker with respect to the acquisitions and dispositions referred to herein.

8. On a particular day in the future (the "Transaction Day"), Xco will make an offer (the "Offer") to sell to Purchaseco all but not part of the common shares of a particular Holdco at a price specified by Xco (the "Purchase Price"). Purchaseco will have until the end of a period of time specified by Xco on the Transaction Day to accept the Offer.

During the Transaction Day, and after the Offer with respect to the particular Holdco has been made by Xco, Purchaseco will consult with Broker about the market for the common shares of Parentco. It will be Purchaseco's decision whether or not to accept the Offer. If Purchaseco is inclined to accept the Offer, it will instruct Broker as its agent to sell short that number of common shares of Parentco that it will receive as described in paragraph 10 below as a consequence of the exercise of its exchange right in respect of the Exchangeable Shares of Canco2 owned by that particular Holdco, at a minimum specified price per share which is to be determined by Purchaseco. Subject to the successful completion of the short sales, Purchaseco will accept the Offer.

None of the purchasers under these short sales of common shares of Parentco by Purchaseco will be a person described in any of subclauses 88(1)(c)(vi)(B)(I), (II), or (III) of the Act in relation to the particular Holdco.

If Purchaseco accepts the Offer, on the Transaction Day, Broker will lend to Purchaseco an amount equal to the Purchase Price for the common shares of the particular Holdco (the "Broker Loan") and, on the Transaction Day, Purchaseco will use the amount received by it under the Broker Loan to pay the Purchase Price for the particular Holdco in cash to Xco. Xco will, on the Transaction Day, transfer all of the common shares of the particular Holdco to Purchaseco. The transfer will be recorded in the share register of the particular Holdco. Purchaseco will acquire the common shares of the Holdco on its own account, and not as agent for any other person, including Broker.

The Broker Loan will be considered, approved and made by Broker in the ordinary course of its business and at a normal commercial interest rate. Purchaseco will grant a security interest in the Exchangeable Shares of Canco2 held by the Holdco in favour of Broker in order to secure its obligations under the Broker Loan.

9. On the Transaction Day, but after the acquisition of the Holdco shares by Purchaseco as described in paragraph 8 above, Purchaseco as the sole shareholder of the particular Holdco will pass a resolution authorizing the winding-up of the particular Holdco and immediately thereafter the particular Holdco will deliver such documents as may be necessary to transfer the legal and the beneficial ownership of the Exchangeable Shares of Canco2 and any other property of the particular Holdco to Purchaseco.

Articles of dissolution will be filed in respect of the particular Holdco as soon as all appropriate tax clearance certificates related to the particular Holdco have been received.

Purchaseco will designate in respect of the Exchangeable Shares of Canco2 distributed by the particular Holdco to it in its return of income for the taxation year in which the Holdco is wound up an amount equal to the maximum amount permitted under paragraph 88(1)(d).

10. On the Transaction Day, but after the distribution of the legal and beneficial ownership of the Exchangeable Shares of Canco2 by the particular Holdco to Purchaseco, Purchaseco will give notice to the appropriate person that it is exercising its right to exchange its Exchangeable Shares of Canco2 for the same number of common shares of Parentco. It is hoped that the exchange will be effected on short notice (e.g., two to three business days); however, it is possible that Purchaseco will not receive the common shares of Parentco for five or more business days.

11. Purchaseco will settle the short sale by one of two alternatives:

(a) If the common shares of Parentco are received by Purchaseco by the time the short sale is required to be settled (normally three days), Purchaseco will use such shares to cover its short sale delivery obligation. Purchaseco will then receive cash proceeds from the short sale.

(b) If the common shares of Parentco are received by Purchaseco at a later time, Purchaseco will borrow common shares of Parentco from a third party securities lender in order to satisfy its delivery obligation on the settlement of the short sale and may be required to use the proceeds received by it from the short sale (or other acceptable collateral) to secure such loan. When the common shares of USco are ultimately received by Purchaseco as a consequence of the exercise of its exchange right, the securities loan will be closed out and any cash collateral will be returned to Purchaseco. No securities lender will be a person referred to in any of subclauses 88(1)(c)(vi)(B)(I), (II), or (III) of the Act in relation to the particular Holdco.

Purchaseco will have no obligation to account to Xco or Broker for its net profit from the short sales of common shares of Parentco.

12. Purchaseco will use the cash proceeds from the sale of the Parentco shares which are received by it as described in paragraph 11 above to repay the Broker Loan and all interest thereon.

13. The transactions described in paragraphs 8, 9, 10, 11 and 12 above are expected to be repeated in respect of the common shares of the other Holdcos owned by Xco. Such transactions may be repeated either concurrently or separately.

PURPOSES OF THE PROPOSED TRANSACTIONS

14. The purposes of the proposed transactions are twofold:

(a) firstly, to allow Xco to dispose of its indirect interest in the Exchangeable Shares of Canco2 in a tax efficient manner (i.e. in a manner entitling it to reduce the gains by the amount of the safe income on hand that is attributable to the common shares of the particular Holdco); and

(b) secondly, to enable Purchaseco to earn a profit from the purchase of the Holdco shares followed by the sale of the Exchangeable Shares of Canco2.

RULINGS

Provided that

(i) the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions;

(ii) the proposed transactions are completed in the manner described above; and

(iii) Purchaseco does not acquire the shares of any Holdco as agent on behalf of Broker;

our rulings are as follows:

A. The provisions of paragraph 142.6(1)(b) will not apply to deem any Holdco to have disposed, immediately before the acquisition of the common shares of such Holdco by Purchaseco, of the Exchangeable Shares of Canco2 held by that Holdco.

B. The provisions of subsection 88(1) will apply to the winding-up of each Holdco into Purchaseco as described in paragraph 9 above such that:

(i) pursuant to subparagraph 88(1)(a)(iii) each Holdco will be deemed to have disposed of its Exchangeable Shares of Canco2 distributed to Purchaseco on the winding-up of such Holdco for proceeds equal to their cost amount immediately before the winding-up; and

(ii) Purchaseco will be deemed to have disposed of the common shares of each Holdco on the winding-up for proceeds equal to the greater of the amounts determined pursuant to subparagraphs 88(1)(b)(i) and (ii).

C. Pursuant to paragraphs 88(1)(c) and (d), the cost to Purchaseco of the Exchangeable Shares of Canco2 distributed by a particular Holdco to Purchaseco on the winding-up of the particular Holdco as described in paragraph 9 above, will be deemed to be the amount deemed by paragraph 88(1)(a) to be the proceeds of disposition of the Exchangeable Shares of Canco2 to the particular Holdco, 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 Purchaseco of its common shares of the particular Holdco immediately before the winding-up of the particular Holdco, exceeds

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

as is designated by Purchaseco in respect of the Exchangeable Shares of Canco2 distributed by the particular Holdco to Purchaseco in its return of income under Part I of the Act for its taxation year in which the particular Holdco is wound up, as described in paragraph 9 above.

D. As a result of the proposed transactions described above, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given above.

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

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:

(a) the determination of the fair market value or ACB of any particular asset or share or the PUC of any shares referred to herein or the calculation of the safe income on hand of Canco2 attributable to the Exchangeable Shares of Canco2 held by each Holdco; or

(b) 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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