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: See issue sheet
Position: See issue sheet
Reasons: See issue sheet
XXXXXXXXXX
XXXXXXXXXX 3-991044
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
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 receipt of your letters of XXXXXXXXXX and our telephone conversations in connection herewith.
You have confirmed that to the best of your knowledge and that of XXXXXXXXXX none of the issues contained herein:
(a) is in an earlier return of XXXXXXXXXX or a related person;
(b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of XXXXXXXXXX or a related person;
(c) is under objection by XXXXXXXXXX or a related person;
(d) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate of Revenue Canada.
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" and has the meaning assigned by section 54;
(c) "capital property" has the meaning assigned by section 54;
(d) "Capitalized Amount" means an amount equal to the aggregate of: (i) the retained earnings of XXXXXXXXXX; (ii) the increase in the retained earnings of XXXXXXXXXX from XXXXXXXXXX to the time immediately before the time control of XXXXXXXXXX is acquired; and (iii) the contributed surplus of XXXXXXXXXX at the time immediately before the time control of XXXXXXXXXX is acquired;
(e) "CBCA" means the Canada Business Corporations Act R.S.C. 1985 C-44 as amended to the date hereof;
(f) "XXXXXXXXXX" means XXXXXXXXXX as described in Paragraph 3;
(g) "XXXXXXXXXX" means XXXXXXXXXX, as described in Paragraph 2;
(h) "XXXXXXXXXX" means XXXXXXXXXX as described in Paragraph 1;
(i) "XXXXXXXXXX Shares" means all of the currently issued and outstanding shares of XXXXXXXXXX, being XXXXXXXXXX common shares;
(j) "XXXXXXXXXX" means XXXXXXXXXX as described in Paragraph 2;
(k) "Closing Date" means the date on which a favourable XXXXXXXXXX order is granted;
(l) "Closing Time" means the time of the day on the Closing Date that the transfer of the XXXXXXXXXX Shares to XXXXXXXXXX becomes effective, which time is after a favourable XXXXXXXXXX order is granted;
(m) "Conditions Precedent" means all of the conditions precedent which must be satisfied to complete the purchase and sale of the XXXXXXXXXX Shares pursuant to the Conditional Share Purchase Agreement as described in Paragraph 12;
(n) "Conditional Share Purchase Agreement" means the conditional share purchase agreement as described in Paragraph 12 to be entered into between XXXXXXXXXX, as vendor of the XXXXXXXXXX Shares, XXXXXXXXXX, as purchaser of the XXXXXXXXXX Shares and XXXXXXXXXX as the owner of the XXXXXXXXXX Shares at the time the Conditional Share Purchase Agreement will be executed;
(o) "Escrow Agreement" means the escrow agreement as described in Paragraph 13;
(p) XXXXXXXXXX;
(q) XXXXXXXXXX;
(r) "XXXXXXXXXX" means XXXXXXXXXX, as described in Paragraph 7;
(s) "paid-up capital" has the meaning assigned by subsection 89(1);
(t) "Paragraph" refers to a numbered Paragraph in this letter;
(u) "proceeds of disposition" has the meaning assigned by section 54;
(v) XXXXXXXXXX;
(w) XXXXXXXXXX;
(x) "public corporation" has the meaning assigned by subsection 89(1);
(y) "safe income on hand" in respect of 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 paragraphs 55(5)(b), (c) or (d)), by the corporation after 1971 and before the safe-income determination time for the series of transactions that includes the dividend described in ruling A below;
(z) "safe-income determination time" has the meaning assigned by subsection 55(1);
(aa) "stated capital" has the meaning assigned by the XXXXXXXXXX;
(bb) "Subco" means a subsidiary of XXXXXXXXXX to be incorporated as described in Paragraph 11;
(cc) "Subco Shares" means the redeemable, retractable preference shares of Subco that will be issued to XXXXXXXXXX as consideration for the transfer of the XXXXXXXXXX Shares by XXXXXXXXXX to Subco, as described in Paragraph 15;
(dd) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);
(ee) "XXXXXXXXXX" means XXXXXXXXXX, as described in Paragraph 6;
(ff) "XXXXXXXXXX" means XXXXXXXXXX, as described in Paragraph 9;
(gg) "XXXXXXXXXX" means XXXXXXXXXX, as described in Paragraph 4;
(hh) "XXXXXXXXXX" means XXXXXXXXXX, as described in Paragraph 5; and
(ii) "XXXXXXXXXX" means XXXXXXXXXX, as described in Paragraph 8.
FACTS
1. XXXXXXXXXX was originally incorporated under the laws of the province of XXXXXXXXXX and was deemed effective as of XXXXXXXXXX. On XXXXXXXXXX, the shares of the corporation now known as XXXXXXXXXX were indirectly acquired by XXXXXXXXXX and on XXXXXXXXXX the corporation changed its name to XXXXXXXXXX is governed by the XXXXXXXXXX and is a taxable Canadian corporation. All the issued and outstanding shares of XXXXXXXXXX are owned by XXXXXXXXXX.
XXXXXXXXXX
XXXXXXXXXX has its head office in XXXXXXXXXX and regional offices are located in XXXXXXXXXX. The District Office and Taxation Centre which are responsible for XXXXXXXXXX are the XXXXXXXXXX District Office and XXXXXXXXXX Taxation Centre. XXXXXXXXXX business number is XXXXXXXXXX.
2. XXXXXXXXXX was incorporated under the laws of the province of XXXXXXXXXX is a taxable Canadian corporation and all of its issued and outstanding shares are held by XXXXXXXXXX.
XXXXXXXXXX
The District Office and Taxation Centre which are responsible for XXXXXXXXXX are the XXXXXXXXXX District Office and the XXXXXXXXXX Taxation Centre. XXXXXXXXXX business number is XXXXXXXXXX.
3. XXXXXXXXXX is a wholly owned subsidiary of XXXXXXXXXX and is a taxable Canadian corporation.
4. XXXXXXXXXX is a wholly owned subsidiary of XXXXXXXXXX and is a taxable Canadian corporation.
5. XXXXXXXXXX is a wholly owned subsidiary of XXXXXXXXXX and is a taxable Canadian corporation.
6. XXXXXXXXXX is a corporation governed by the CBCA. XXXXXXXXXX is a XXXXXXXXXX corporation and a taxable Canadian corporation. The issued and outstanding shares of XXXXXXXXXX are widely held such that no person or related group of persons owns a sufficient number of shares which represent control of XXXXXXXXXX for purposes of the Act. The shares of XXXXXXXXXX are traded on the XXXXXXXXXX.
XXXXXXXXXX
7. XXXXXXXXXX was incorporated under the laws of the province of XXXXXXXXXX is a taxable Canadian corporation. All of the shares of XXXXXXXXXX are owned by XXXXXXXXXX in turn is a wholly owned subsidiary of XXXXXXXXXX.
8. XXXXXXXXXX was formed under the laws of the province of XXXXXXXXXX pursuant to articles of amalgamation filed on XXXXXXXXXX was formed by the amalgamation of XXXXXXXXXX. All of the shares of XXXXXXXXXX are owned by XXXXXXXXXX.
9. XXXXXXXXXX was incorporated under the laws of Canada on XXXXXXXXXX is a wholly owned subsidiary of XXXXXXXXXX and is a taxable Canadian corporation. XXXXXXXXXX.
The District Office and Taxation Centre which are responsible for XXXXXXXXXX are the XXXXXXXXXX District Office and the XXXXXXXXXX Taxation Centre. XXXXXXXXXX business number is XXXXXXXXXX.
10.
XXXXXXXXXX
PROPOSED TRANSACTIONS
11. XXXXXXXXXX will incorporate a new corporation under the CBCA ("Subco"). Subco will be a taxable Canadian corporation. XXXXXXXXXX will subscribe for a number of shares of Subco for a nominal amount on incorporation.
Subco will act as a holding company of XXXXXXXXXX for the sole purpose of acquiring the XXXXXXXXXX Shares prior to the sale of the XXXXXXXXXX Shares by XXXXXXXXXX to XXXXXXXXXX.
12. XXXXXXXXXX will enter into the Conditional Share Purchase Agreement which will provide, inter alia, that subject to the satisfaction of all of the Conditions Precedent, the final one of which will be XXXXXXXXXX approval, the following transactions will occur in the order specified below on the day that the XXXXXXXXXX approval is obtained.
13. Prior to the XXXXXXXXXX approval being granted, XXXXXXXXXX Subco and an escrow agent will enter into the Escrow Agreement. Pursuant to the terms of the Escrow Agreement, XXXXXXXXXX will transfer an amount equal to the purchase price for the XXXXXXXXXX Shares (estimated to be approximately $XXXXXXXXXX) to the specified escrow agent and XXXXXXXXXX will transfer all the XXXXXXXXXX Shares to the same escrow agent. The terms of the Escrow Agreement will provide for the release of the purchase price proceeds to XXXXXXXXXX and the release of the XXXXXXXXXX Shares to XXXXXXXXXX at the Closing Time.
14. Prior to the Closing Date, the directors of XXXXXXXXXX will pass a resolution which will add an amount equal to the Capitalized Amount to the stated capital account maintained for the XXXXXXXXXX Shares at a time concurrent with the issuance of a favourable XXXXXXXXXX order, if such an order is issued.
15. Following the receipt of XXXXXXXXXX approval for the disposition of the XXXXXXXXXX Shares by XXXXXXXXXX and the acquisition of the XXXXXXXXXX Shares by XXXXXXXXXX and prior to the Closing Time:
(a) XXXXXXXXXX will transfer, at fair market value, to XXXXXXXXXX the XXXXXXXXXX Shares. In consideration for the transfer, XXXXXXXXXX will issue to XXXXXXXXXX redeemable, retractable preference shares with a fair market value equal to the fair market value of the XXXXXXXXXX Shares at the time of the transfer.
XXXXXXXXXX will jointly elect with XXXXXXXXXX in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX Shares. The agreed amount in respect of the transfer of the XXXXXXXXXX Shares transferred will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) or (ii) and will not exceed the fair market value of the XXXXXXXXXX Shares at that time.
XXXXXXXXXX will add an amount to the stated capital of the redeemable, retractable preference shares issued as consideration for the transfer of the XXXXXXXXXX Shares not to exceed the aggregate paid-up capital of the XXXXXXXXXX Shares.
(b) XXXXXXXXXX will transfer, at fair market value, to XXXXXXXXXX the XXXXXXXXXX Shares. In consideration for the transfer, XXXXXXXXXX will issue to XXXXXXXXXX redeemable, retractable preference shares with a fair market value equal to the fair market value of the XXXXXXXXXX Shares at the time of the transfer.
XXXXXXXXXX will jointly elect with XXXXXXXXXX in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX Shares. The agreed amount in respect of the transfer of the XXXXXXXXXX Shares transferred will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) or (ii) and will not exceed the fair market value of the XXXXXXXXXX Shares at that time.
XXXXXXXXXX will add an amount to the stated capital of the redeemable, retractable preference shares issued as consideration for the transfer of the XXXXXXXXXX Shares not to exceed the aggregate paid-up capital of the XXXXXXXXXX Shares.
(c) XXXXXXXXXX will transfer, at fair market value, to XXXXXXXXXX the XXXXXXXXXX Shares. In consideration for the transfer, XXXXXXXXXX will issue to XXXXXXXXXX redeemable, retractable preference shares with a fair market value equal to the fair market value of the XXXXXXXXXX Shares at the time of the transfer.
XXXXXXXXXX will jointly elect with XXXXXXXXXX in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX Shares. The agreed amount in respect of the transfer of the XXXXXXXXXX Shares transferred will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) or (ii) and will not exceed the fair market value of the XXXXXXXXXX Shares at that time.
XXXXXXXXXX will add an amount to the stated capital of the redeemable, retractable preference shares issued as consideration for the transfer of the XXXXXXXXXX Shares not to exceed the aggregate paid-up capital of the XXXXXXXXXX Shares.
(d) XXXXXXXXXX will transfer, at fair market value, to Subco the XXXXXXXXXX Shares. In consideration for the transfer, Subco will issue to XXXXXXXXXX the Subco Shares with a fair market value equal to the fair market value of the XXXXXXXXXX Shares at the time of the transfer.
XXXXXXXXXX will jointly elect with Subco in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX Shares. The agreed amount in respect of the transfer of the XXXXXXXXXX Shares transferred will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) or (ii) and will not exceed the fair market value of the XXXXXXXXXX Shares at that time.
Subco will add an amount to the stated capital of the Subco Shares issued as consideration for the transfer of the XXXXXXXXXX Shares not to exceed the aggregate paid-up capital of the XXXXXXXXXX Shares.
(e) Subco will purchase for cancellation all of the Subco Shares held by XXXXXXXXXX in consideration for the issuance by Subco to XXXXXXXXXX of a non-interest-bearing demand note having a principal amount and fair market value equal to the fair market value of the Subco Shares (the "Subco Note"). The amount, if any, by which the amount paid for the purchase for cancellation of the Subco Shares exceeds the paid-up capital of these shares will be deemed pursuant to paragraph 84(3)(a) to be a dividend paid by Subco to XXXXXXXXXX.
(f) Following the transfers described above, Subco will then be wound up into its parent, XXXXXXXXXX. As a result of the wind-up, the XXXXXXXXXX Shares will become an asset of XXXXXXXXXX and the Subco Note will become a liability of XXXXXXXXXX.
16. At the Closing Time, the XXXXXXXXXX Shares and the purchase price proceeds for the XXXXXXXXXX Shares will be released from escrow and the purchase and sale of the XXXXXXXXXX Shares from XXXXXXXXXX to XXXXXXXXXX will be complete.
17. The purchase of the XXXXXXXXXX Shares by XXXXXXXXXX at the Closing Time will result in the acquisition of control of XXXXXXXXXX by XXXXXXXXXX. Pursuant to subsection 249(4), the taxation year of XXXXXXXXXX will be deemed to have ended immediately before the time that control of XXXXXXXXXX is acquired by XXXXXXXXXX will not elect pursuant to subsection 256(9) not to have that subsection apply.
18. XXXXXXXXXX will designate pursuant to paragraph 111(4)(e) in its return of income for the year that ended immediately before the acquisition of control of XXXXXXXXXX, resulting from the transfer of the XXXXXXXXXX Shares to XXXXXXXXXX, to have each capital property owned by it before that time to be deemed to have been disposed of for proceeds of disposition equal to the lesser of:
(a) the fair market value of the property immediately before that time; and
(b) the greater of the ACB to XXXXXXXXXX of the property immediately before the disposition and the amount designated by XXXXXXXXXX in respect of the property.
19. XXXXXXXXXX will make a series of designations (not to exceed 10), in accordance with paragraph 55(5)(f), in its return of income under Part I for the taxation year in which a dividend is deemed to be received by it as a result of the transaction referred to in Paragraph 14 above. Each such designation will be with respect to amounts which XXXXXXXXXX has reasonable grounds to believe should be included in income earned or realized for purposes of subsection 55(2) but for which there may be some elements of doubt or dispute.
PURPOSES OF THE PROPOSED TRANSACTIONS
20. The overall purpose of the Proposed Transactions is to allow XXXXXXXXXX to increase the ACB of the XXXXXXXXXX Shares by the safe income on hand attributable to the XXXXXXXXXX Shares before the sale of the XXXXXXXXXX Shares to XXXXXXXXXX.
21. The purposes of certain specific transactions are as follows:
(a) the addition of an amount equal to the Capitalized Amount to the stated capital of the XXXXXXXXXX Shares, as described in Paragraph 14, is to access XXXXXXXXXX estimated safe income on hand and to increase the ACB of the XXXXXXXXXX Shares;
(b) the transactions described in Subparagraphs 15(i) to 15(iv) are intended to utilize the available non-capital losses of XXXXXXXXXX to reduce a portion of the capital gain that will arise from the sale of the XXXXXXXXXX Shares to XXXXXXXXXX. The aggregate amount of non-capital losses of XXXXXXXXXX that will be available is estimated to be approximately $XXXXXXXXXX;
(c) the transfer of the XXXXXXXXXX Shares by XXXXXXXXXX to Subco and the winding-up of Subco prior to the sale of the XXXXXXXXXX Shares to XXXXXXXXXX is to utilize capital cost allowance of XXXXXXXXXX to shelter a portion of the capital gain that will arise on the sale of the XXXXXXXXXX Shares to XXXXXXXXXX; and
(d) the decision by XXXXXXXXXX not to elect pursuant to subsection 256(9) on the acquisition of the XXXXXXXXXX Shares by XXXXXXXXXX and the decision by XXXXXXXXXX to make a paragraph 111(4)(e) designation in respect of all of its capital property is to cause a deemed disposition of the capital property of XXXXXXXXXX prior to XXXXXXXXXX safe income determination time in respect of the Proposed Transactions.
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. By virtue of subsection 84(1), XXXXXXXXXX will be deemed to have paid a dividend on the XXXXXXXXXX Shares equal to the increase in paid-up capital described in Paragraph 14 and such dividend will be deemed to have been received by XXXXXXXXXX.
B. The provisions of paragraph 53(1)(b) will apply to increase the ACB to XXXXXXXXXX of the XXXXXXXXXX Shares held by XXXXXXXXXX by the amount of the dividend deemed to be received by XXXXXXXXXX as described in ruling A above.
C. The safe income determination time for the XXXXXXXXXX Shares with respect to the Proposed Transactions will be the time immediately before the time the dividend described in Ruling A is deemed to have been paid and will be after the time of the deemed disposition of the capital property of XXXXXXXXXX that arises pursuant to the paragraph 111(4)(e) designation made by XXXXXXXXXX as described in Paragraph 18.
D. Provided no election is made in accordance with subsection 256(9), not to have the provisions of that subsection apply, XXXXXXXXXX will be deemed to have acquired control of XXXXXXXXXX at the commencement of the day on which the XXXXXXXXXX Shares are acquired by XXXXXXXXXX will be entitled to make a paragraph 111(4)(e) designation in respect of its capital property as described in Paragraph 18.
E. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividend described in Paragraph 15(e), provided that as part of the series of transactions or events as part of which the dividend was received, there is no disposition or significant increase in interest as described in subparagraphs 55(3)(a)(i) to (v) which has not been described herein as Proposed Transactions.
F. Part IV.1 of the Act will not apply to the deemed dividend described in Ruling A above because the dividend will be an excepted dividend pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1.
G. Part VI.1 of the Act will not apply to the deemed dividend described in Ruling A above because the dividend will be an excluded dividend pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).
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.
OPINION
It is the opinion of Revenue Canada that any determination of the safe income on hand of the XXXXXXXXXX Shares held by XXXXXXXXXX would include the safe income on hand attributable to these shares before the designation pursuant to paragraph 111(4)(e) is made, as described in Paragraph 18, and would include any safe income on hand that may arise as a result of the deemed disposition of XXXXXXXXXX capital property pursuant to paragraph 111(4)(e). The safe income on hand of the XXXXXXXXXX Shares at such time would also be reduced by all the tax liabilities of XXXXXXXXXX, including all tax liabilities arising from the deemed disposition of XXXXXXXXXX capital property pursuant to the paragraph 111(4)(e) designation, incurred but not paid up to that time.
The foregoing opinion is not a ruling and, in accordance with the practice referred to in Information Circular 70-6R3, is not binding on Revenue Canada.
1. Nothing in this ruling should be construed as implying that Revenue Canada has reviewed or agreed with any computation of safe income on hand or the amount of non-capital losses available in any corporation mentioned herein.
2. Pursuant to paragraph 149(10)(b), XXXXXXXXXX will be deemed to have disposed of each property that was owned by it at the time that is immediately before the time that is immediately before the time that XXXXXXXXXX becomes exempt from tax for an amount equal to its fair market value at that time and to have reacquired the property at that time at a cost equal to that fair market value.
Yours truly,
for Director
Reorganization and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
12
.../cont'd
.../cont'd
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© Her Majesty the Queen in Right of Canada, 1999
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