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: Application of 84.1,40(3.6) and GAAR to transactions designed to facilitate 164(6) loss carry-back.
Position: Not applicable.
Reasons: Transactions meet technical requirements of provisions. No misuse or abuse.
xxxxxxxxxx
xxxxxxxxxx 3-990456
xxxxxxxxxx
Attention: xxxxxxxxxx
XXXXXXXXXX, 1999
Dear Sir:
Re: XXXXXXXXXX
xxxxxxxxxx
Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge your letters of XXXXXXXXXX.
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the requested rulings is being considered by a taxation services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.
XXXXXXXXXX Tax Services Office was XXXXXXXXXX and his Taxation Centre was XXXXXXXXXX Tax Services Office is, and Newco's will be, XXXXXXXXXX. Their corporate tax returns are or will be filed at the XXXXXXXXXX Taxation Centre
Definitions
"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;
"ACB" means adjusted cost base as defined in section 54;
"ITAR" means the Income Tax Application Rules;
"PUC" means "paid-up capital" as defined in subsection 89(1);
"Paragraph" means a numbered paragraph in this letter;
"Proposed Transactions" means the transactions described in Paragraphs 16 to 26;
"private corporation" has the meaning assigned by subsection 89(1);
"taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
"V-Day" means "valuation day" as defined in ITAR 24.
Facts
1. XXXXXXXXXX died on XXXXXXXXXX.
2. XXXXXXXXXX was survived by XXXXXXXXXX adult children XXXXXXXXXX who are the beneficiaries of the Estate.
3. XXXXXXXXXX last will (the "Will") is dated XXXXXXXXXX.
4. The Executor appointed under the will is XXXXXXXXXX (the "Executor") , solicitor for the deceased and a Canadian resident who is unrelated to the deceased and his surviving children.
5. At the time of his death, XXXXXXXXXX was a resident of Canada and, immediately following his death, his children were, and still are, residents of Canada.
6. Each of XXXXXXXXXX is a private corporation and a taxable Canadian corporation.
7. XXXXXXXXXX was incorporated on XXXXXXXXXX changed its name to XXXXXXXXXX.
8. XXXXXXXXXX was the registered owner of XXXXXXXXXX Class "B" shares of XXXXXXXXXX prior to XXXXXXXXXX. This represented all of the issued and outstanding Class "B" shares. XXXXXXXXXX of these shares were beneficially owned by XXXXXXXXXX and XXXXXXXXXX was beneficial owner of XXXXXXXXXX Class "B" shares.
9. On XXXXXXXXXX, as registered owner, transferred XXXXXXXXXX Class "B" shares of XXXXXXXXXX to XXXXXXXXXX for XXXXXXXXXX Class "B" shares of XXXXXXXXXX, a company incorporated on the same date. An election was filed with respect to the transfer under section 85(1) of the Act. The agreed amount was equal to the fair market value of the shares on V-Day i.e., $XXXXXXXXXX. The advisors preparing the elections were unaware of the XXXXXXXXXX% beneficial interest of XXXXXXXXXX. On XXXXXXXXXX, the XXXXXXXXXX Class "B" shares of XXXXXXXXXX were exchanged for XXXXXXXXXX Class C shares of XXXXXXXXXX. Subsection 86(1) applied to the exchange. Also on that date, XXXXXXXXXX also issued XXXXXXXXXX common shares in the name of XXXXXXXXXX for nominal consideration.
10. Immediately after the XXXXXXXXXX transactions, XXXXXXXXXX was the registered owner of XXXXXXXXXX common shares and XXXXXXXXXX Class C shares of XXXXXXXXXX but beneficial ownership of XXXXXXXXXX% of the shares of XXXXXXXXXX (being XXXXXXXXXX Class C and XXXXXXXXXX common shares) was, and still is, held by XXXXXXXXXX.
XXXXXXXXXX
11. At the date of XXXXXXXXXX death, the authorized share capital of XXXXXXXXXX consisted of unlimited common shares and unlimited Class C shares that are redeemable and retractable for $XXXXXXXXXX per share. The only assets of XXXXXXXXXX are XXXXXXXXXX Class A and XXXXXXXXXX Class B shares of XXXXXXXXXX and a note receivable from XXXXXXXXXX in the amount of $XXXXXXXXXX.
12. The fair market value of the XXXXXXXXXX% interest in XXXXXXXXXX held by XXXXXXXXXX at the time of his death was $XXXXXXXXXX. The fair market values assigned to the XXXXXXXXXX Class C shares and XXXXXXXXXX common shares beneficially owned by XXXXXXXXXX are $XXXXXXXXXX and $XXXXXXXXXX respectively.
13. The retained earnings of XXXXXXXXXX as at XXXXXXXXXX were $XXXXXXXXXX and it is anticipated that retained earnings of XXXXXXXXXX as at XXXXXXXXXX will exceed $XXXXXXXXXX.
14. The Will provides, in general terms, that the Executor has discretion to retain, sell or distribute to the beneficiaries the shares of XXXXXXXXXX owned by XXXXXXXXXX on his death.
15. A capital gains exemption of $XXXXXXXXXX will be claimed as a deduction against the capital gains arising on the deemed disposition of the XXXXXXXXXX Class C shares to be reported in XXXXXXXXXX terminal tax return,
Proposed Transactions
16. A new corporation, xxxxxxxxxx ("Newco"), was incorporated on XXXXXXXXXX for the purposes of these transactions. Newco is a private corporation and a taxable Canadian corporation.
17. Newco's authorized share capital will consist of:
unlimited voting common shares;
unlimited voting Class A shares that are redeemable and retractable at $XXXXXXXXXX per share and entitled to a monthly non-cumulative dividend of $XXXXXXXXXX per share
unlimited non-voting Class B shares that are redeemable and retractable at $XXXXXXXXXX per share and entitled to a monthly non-cumulative dividend of $XXXXXXXXXX per share, and
unlimited non-voting Class C shares that are redeemable, but not retractable, at $XXXXXXXXXX per share. The Class C shares are entitled to a cumulative monthly dividend of $XXXXXXXXXX per share.
18. XXXXXXXXXX children will subscribe for the common shares of Newco for nominal consideration
19. Share certificates will be reissued to allow the XXXXXXXXXX common and XXXXXXXXXX Class C shares of XXXXXXXXXX beneficially owned by XXXXXXXXXX to be held in his name.
19.1 XXXXXXXXXX will transfer his XXXXXXXXXX common and
XXXXXXXXXX Class C shares of XXXXXXXXXX to a new holding company ("Holdco"). A joint election will be filed under subsection 85(1) with respect to the transfer.
19.2 The authorized share capital of XXXXXXXXXX will be amended to include a new class of shares, Class D shares. Each Class D share will be entitled to vote, will be redeemable and retractable for $XXXXXXXXXX per share, will have the right to receive an annual XXXXXXXXXX % cumulative dividend and will have priority over common shares on a wind-up or liquidation.
19.3XXXXXXXXXX will issue one Class D share to Holdco for $XXXXxXXXXX cash consideration.
20. The Estate will transfer its XXXXXXXXXX Class C shares and XXXXXXXXXX common shares of XXXXXXXXXX to Newco, An election will be made with respect to this transfer under subsection 85(1), within the time limits provided by subsection 85(6). The Estate and Newco will elect an agreed amount equal to the ACBs of the Class C and common shares being $XXXXXXXXXX and $XXXXXXXXXX respectively. The Estate will receive XXXXXXXXXX Class A shares and XXXXXXXXXX Class B shares of Newco as consideration for the transfer of its XXXXXXXXXX Class C shares (i.e. total value of consideration equal to $XXXXXXXXXX). The Estate will receive XXXXXXXXXX Class B shares of Newco as consideration for the transfer of its XXXXXXXXXX common shares. The Class A shares will have an ACB and a PUC of $XXXXXXXXXX and the Class B shares will have an ACB of $XXXXXXXXXX and a PUC of $XXXXXXXXXX.
21. The Estate will distribute its XXXXXXXXXX Class A shares of Newco to the beneficiaries of the Estate.
22. XXXXXXXXXX will borrow $XXXXXXXXXX from a financial institution and pay a dividend of $XXXXXXXXXX to XXXXXXXXXX.
23. XXXXXXXXXX will pay a dividend of $XXXXXXXXXX ($XXXXXXXXXX on its Class C shares, $XXXXXXXXXX on its Class D share and $XXXXXXXXXX on its common shares) pro-rata to its shareholders. Newco will receive $XXXXXXXXXX and Holdco will receive $XXXXXXXXXX.
24. On or before XXXXXXXXXX, within the initial taxation year of the Estate, the Estate's XXXXXXXXXX Newco Class B shares will be redeemed by Newco for their fair market value of $XXXXXXXXXX for which the Estate will receive a promissory note with principal amount of $XXXXXXXXXX, and cash of $XXXXXXXXXX. The promissory note will bear a market rate of interest; will be payable over XXXXXXXXXX years (but repayable at any time by Newco); and will be convertible into Class C shares of Newco at the option of either Newco or the holder, A capital loss and deemed dividend of $XXXXXXXXXX will be realized by the Estate on the redemption of the Class B shares.
25. The Executor will make a timely election under subsection 164(6) in order that the capital loss realized can be offset against the capital gains to be reported in the terminal tax return of XXXXXXXXXX.
26. After XXXXXXXXXX, it is anticipated that all or part of the promissory note will be converted into Class C shares of Newco.
Purposes of Proposed Transactions
The primary assets owned by XXXXXXXXXX at the time of his death were XXXXXXXXXX common and XXXXXXXXXX Class C shares of XXXXXXXXXX. The deemed disposition of these shares on his death gave rise to a capital gain of $XXXXXXXXXX with an associated significant tax liability. The planning for payment of this tax liability and avoidance of future double taxation are the main reasons for the proposed reorganization which is the subject of this letter. In general, the objectives of the Proposed Transactions are
- to enable the Estate to extract from XXXXXXXXXX the funds required to pay the taxes due on death without double taxation, and
- to avoid double taxation at the shareholder level on future distributions of values that will have been already taxed in XXXXXXXXXX terminal tax return.
More specifically the purposes of the Proposed Transactions can be described as follows:
1. It is intended that voting control and future growth of XXXXXXXXXX will be transferred from the Estate to XXXXXXXXXX children, the beneficiaries of the Estate.
2. The Executor wishes to utilize the provisions of subsection 164(6) to the extent contemplated, and allowed, by the Act. Accordingly, included in the Proposed Transactions is the redemption of Class B shares issued by a new corporation (Newco) in order that the resulting capital loss can be offset against the capital gains to be reported in XXXXXXXXXX terminal tax return.
3. It is intended that the interest-bearing promissory note issued to the Estate by Newco, representing part of the consideration paid on the redemption of the Class B shares of Newco, be converted at a subsequent date into Class C shares issued by Newco, since Newco will not likely have income against which its interest expense can be absorbed.
4. The purpose of issuing a Class D share of XXXXXXXXXX to Holdco is to ensure that Holdco owns shares of XXXXXXXXXX that have a value and voting rights in excess of XXXXXXXXXX% of,the value and voting rights of all of the issued shares of XXXXXXXXXX.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the Proposed Transactions, our rulings are as follows.
A. Subsection 84.1(1) will not apply to reduce the PUC of the Class A and B Newco shares received by the Estate, or to deem a dividend to have been received by the Estate, as a result of the transfer by the Estate of the shares of XXXXXXXXXX to Newco in return for Class A and B shares of Newco, as described in Paragraph 20.
B. The provisions of subsection 26(5) of the ITAR will not be applicable for the purposes of computing the ACB in determining the gain or loss on disposition of:
(i) the XXXXXXXXXX Class C and XXXXXXXXXX common shares of XXXXXXXXXX at the time of their transfer by the Estate to Newco, as described in Paragraph 20; and
(ii) the XXXXXXXXXX Newco Class B shares at the time of their redemption by Newco, as described in Paragraph 24.
C. Subsection 40(3.6) will not apply to deny the capital loss realized by the Estate on the redemption of the Newco Class B shares described in Paragraph 24
D. 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 described herein.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding provided that the Proposed Transactions (other than those described in Paragraphs 25 and 26) 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
Nothing in this letter should be construed as confirmation of the tax consequences of any of the transactions described in this letter including, in particular, the transaction described in Paragraph 19.3 and the application of subsection 245(2) thereto, 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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