1999 Ruling 9920613 - INTER-CORPORATE DIVIDENDS

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 subsection 55(2)

Position: Inter-corporate dividends not subject to subsection 55(2)

Reasons: Purpose of the dividends was not to reduce any gain inherent in the shares. No intention to sell the shares on which the dividends will be paid

XXXXXXXXXX
XXXXXXXXXX 992061
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

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

(i) dealt with in an earlier return of the taxpayers or a related person;

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

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

(iv) subject to a ruling previously issued by the Income Tax Rulings & Interpretations Directorate; or

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

In this letter, unless otherwise stated, the following terms have the meanings specified:

(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 reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "adjusted cost base" (also "ACB") has the meaning assigned by section 54;

(c) "agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in their election under subsection 85(1) in respect of the property;

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

(e) "BCA" means the Business Corporations Act (XXXXXXXXXX);

(f) "CA" means the Company Act (XXXXXXXXXX);

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

(h) "XXXXXXXXXX Shares" means the XXXXXXXXXX Shares of Subco 1 as described in paragraphs 4 and 5;

(i) "eligible property" has the meaning assigned by subsection 85(1.1);

(j) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

(k) "net capital loss" has the meaning assigned by subsection 111(8);

(l) "non-capital loss" has the meaning assigned by subsection 111(8);

(m) "paid-up capital" has the meaning assigned by subsection 89(1);

(n) "Parentco" means XXXXXXXXXX;

(o) "participating equity" means shares of the capital stock of a corporation, other than shares whose entitlement to dividends, or to a share of the assets of the corporation in the event of liquidation, is fixed;

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

(q) "RDTOH" means "refundable dividend tax on hand" as defined in subsection 129(3);

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

(s) "specified financial institution" has the meaning assigned by subsection 248(1);

(t) "Subco 1" means XXXXXXXXXX;

(u) "Subco 2" means XXXXXXXXXX;

(v) "Subco 3" means XXXXXXXXXX;

(w) "Subco 4" means XXXXXXXXXX;

(x) "Subco 5" means XXXXXXXXXX;

(y) "Subco 6" means XXXXXXXXXX;

(z) XXXXXXXXXX;

(a.1) "subsidiary corporations" means collectively Subco 1, Subco 2, Subco 3, Subco 4, Subco 5 and Subco 6;

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

(c.1) "wholly owned corporation" has the meaning assigned by subsection 85(1.3);

(d.1) "XLLP" means a newly created limited liability partnership described in paragraph 19;

(e.1) "Yco" means XXXXXXXXXX; and

(f.1) "Zco" means XXXXXXXXXX.

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

Facts

1. Parentco is a public corporation and a taxable Canadian corporation. Parentco was formed by amalgamation on XXXXXXXXXX under the CA. The issued share capital of Parento includes XXXXXXXXXX shares and XXXXXXXXXX shares. The XXXXXXXXXX shares and the XXXXXXXXXX shares of Parentco are listed on the XXXXXXXXXX stock exchanges. The XXXXXXXXXX shares are also listed on the XXXXXXXXXX Stock Exchange.

2. As at XXXXXXXXXX and corporations controlled directly and indirectly by him own shares of Parentco representing approximately XXXXXXXXXX% of the votes and approximately XXXXXXXXXX% of the participating equity XXXXXXXXXX.

3.

XXXXXXXXXX

4. Subco 1 is a public corporation and a taxable Canadian corporation. Parentco owns directly, or indirectly through wholly owned corporations, XXXXXXXXXX Shares of Subco 1 representing approximately XXXXXXXXXX% of the value of the outstanding share capital and XXXXXXXXXX% of the votes. Of the total XXXXXXXXXX Shares owned, Parentco owns XXXXXXXXXX Shares directly, which shares have an aggregate ACB to Parentco of XXXXXXXXXX. The balance of the XXXXXXXXXX Shares (XXXXXXXXXX) are owned by Subco 3.

5. As at XXXXXXXXXX the outstanding capital stock of Subco 1 was as follows:

Number

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

6. Subco 3 was incorporated on XXXXXXXXXX under the BCA. It is a taxable Canadian corporation and a wholly owned corporation of Parentco. Subco 3's only asset is XXXXXXXXXX Shares of Subco 1 which have an aggregate ACB of $XXXXXXXXXX.

7. Subco 4 is a taxable Canadian corporation formed by amalgamation on XXXXXXXXXX under the BCA. All of the issued and outstanding shares of Subco 4 are owned by Parentco. Subco 4's only assets consist of certain non-interest bearing demand promissory notes receivable from Parentco and cash of less than $XXXXXXXXXX. Subco 4 has non-capital losses and net capital losses of $XXXXXXXXXX and $XXXXXXXXXX, respectively.

8. Subco 2 was formed by amalgamation on XXXXXXXXXX under the BCA. It is a taxable Canadian corporation and a wholly owned corporation of Parentco. Subco 2 carries on business as XXXXXXXXXX. Subco 2 has in excess of $XXXXXXXXXX of non-capital losses.

9. Parentco is, by virtue of its control over Subco 2, Subco 3 and Subco 4, related to each of these corporations. Parentco holds its shares in Subco 1, Subco 2, Subco 3 and Subco 4 as capital property.

10. Yco is a non-resident public corporation. Yco and corporations controlled by it (hereinafter collectively referred to as the "Yco Group") and Subco 5 (a wholly owned corporation of Subco 1) have a long-standing business relationship which includes XXXXXXXXXX. Each member of the Yco Group deals at arm's length with Parentco and each of the subsidiary corporations.

11. Zco is a non-resident public corporation. Zco deals at arm's length with Parentco and each of the subsidiary corporations.

12. The Yco Group currently owns XXXXXXXXXX Shares of Subco 1 representing approximately XXXXXXXXXX% of its participating equity. XXXXXXXXXX.

Proposed Transactions

13. The articles of Subco 2 will be amended to create a new class of XXXXXXXXXX shares

XXXXXXXXXX

14. Parentco will transfer XXXXXXXXXX Shares to Subco 4 in exchange for XXXXXXXXXX shares of Subco 4. The fair market value of the XXXXXXXXXX shares of Subco 4 issued as consideration for the XXXXXXXXXX Shares will not exceed the fair market value of the XXXXXXXXXX Shares so transferred. Parentco and Subco 4 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the fair market value of the XXXXXXXXXX Shares.

15. Subco 3 and Subco 4 will amalgamate under the provisions of the BCA to form Amalco. Amalco will be a taxable Canadian corporation. The issued and outstanding share capital of Amalco immediately following the amalgamation will consist of XXXXXXXXXX classes of XXXXXXXXXX shares and one class of XXXXXXXXXX shares (described below), all of which will be owned by Parentco:

Number
Class
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

The XXXXXXXXXX Shares are redeemable and retractable for $XXXXXXXXXX per share and have a non-cumulative dividend entitlement of XXXXXXXXXX% per annum. The XXXXXXXXXX Shares are redeemable and retractable for $XXXXXXXXXX per share and have a non-cumulative dividend entitlement of XXXXXXXXXX% per annum.

16. Parentco will transfer XXXXXXXXXX Shares to Subco 2 in exchange for XXXXXXXXXX Shares of Subco 2. The fair market value of the XXXXXXXXXX Shares issued as consideration for the XXXXXXXXXX Shares will not exceed the fair market value of the XXXXXXXXXX Shares so transferred. The transfer will not affect the value of any outstanding shares of Subco 2 other than those shares owned by Parentco or acquired by Parentco on the transfer. Parentco and Subco 2 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the fair market value of the XXXXXXXXXX Shares.

17. Amalco and Subco 2 will sell all of their XXXXXXXXXX Shares of Subco 1 (being, in aggregate, XXXXXXXXXX) to XLLP for cash proceeds equal to fair market value.

18. Following the sale of the XXXXXXXXXX Shares by Amalco and Subco 2:

(a) the directors of Subco 2 will declare and pay a dividend on the XXXXXXXXXX Shares and XXXXXXXXXX Shares owned by Parentco in an aggregate amount not to exceed the net proceeds realized by Subco 2 on the sale of the XXXXXXXXXX Shares described in paragraph 17; and

(b) the directors of Amalco will declare and pay a dividend on the XXXXXXXXXX Shares, XXXXXXXXXX Shares and XXXXXXXXXX Shares (the "total dividend") in an aggregate amount not to exceed the net proceeds realized by Amalco on the sale of the XXXXXXXXXX Shares described in paragraph 17, such total dividend to be declared and paid in the following order:

(i) on the XXXXXXXXXX Shares in an amount equal to the annual dividend entitlement attached to the shares,

(ii) on the XXXXXXXXXX Shares in an amount equal to the annual dividend entitlement attached to the shares, and

(iii) on the XXXXXXXXXX Shares in an amount equal to the amount by which the total dividend exceeds the dividends paid on the XXXXXXXXXX Shares and the XXXXXXXXXX Shares.

The payment of the dividends on the XXXXXXXXXX and XXXXXXXXXX Shares will not affect the redemption price of such shares.

19. Subco 1 will issue XXXXXXXXXX shares of its capital stock (the "XXXXXXXXXX") to a newly created limited liability partnership ("XLLP"). Each of Yco Group and Zco will own a 50% interest in XLLP. The XXXXXXXXXX will be convertible into XXXXXXXXXX Shares and XXXXXXXXXX Shares of Subco 1 and will have a fair market value of approximately $XXXXXXXXXX. XXXXXXXXXX will result in XLLP having an interest in Subco 1 approximately equal to XXXXXXXXXX% of the votes and XXXXXXXXXX% percent of the participating equity.

Purpose of the Proposed Transactions

20. The purpose for the proposed transactions is to allow Parentco to utilize the losses of its wholly owned corporations to shelter the gain from the sale of the XXXXXXXXXX Shares and to repatriate the cash proceeds from the sale to Parentco.

Additional Information

21. Parentco holds its shares in Subco 2, Subco 3 and Subco 4 and will hold its shares of Amalco (acquired as part of the proposed transactions) as long-term capital investments. Parentco is not proposing or contemplating any transaction which would result in a disposition of shares of Subco 2 or Amalco and none of the purposes of the payment of the dividends described in paragraph 18 is to effect a significant reduction in the portion of the capital gain that, but for such dividends, would have been realized on a disposition at fair market value of any share of capital stock immediately before the dividends.

22. The shares in the capital stock of Amalco and Subco 2 which are outstanding at the time the Dividends are paid have not been and will not be, at any time during the implementation of the proposed transactions described herein:

(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";

(b) the subject of a dividend rental arrangement as that term is defined in subsection 248(1);

(c) the subject of any secured undertaking of the type of described in paragraph 112(2.4)(a); or

(d) issued for consideration that is or includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

(ii) any right of the type described in subparagraph 112(2.4)(b)(ii).

23. Parentco is not a specified financial institution or a financial intermediary corporation.

24.

XXXXXXXXXX

25. XXXXXXXXXX.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as set forth below.

A. The dividends paid by Amalco and Subco 2 to Parentco as described in paragraph 18:

(a) will be included in computing Parentco's income pursuant to paragraph 12(1)(j) and will be deductible by Parentco in computing its taxable income pursuant to subsection 112(1). For greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3) and (2.4) will not apply to deny the deduction in respect of such dividends provided by subsection 112(1);

(b) XXXXXXXXXX;

(c) will not be subject to tax under Part IV.1 or Part VI.1 on the basis that Parentco has a substantial interest, within the meaning of subsection 191(2), in each of Subco 2 and Amalco.

B. Subsection 55(2) will not apply to the dividends described in paragraph 18.

C. The provisions of subsection 15(1), 56(2), 56(4), and 246(1) will not apply to the proposed transactions described herein, in and by themselves.

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

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could affect the rulings provided herein.

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

Caveat

Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation is making a determination or ruling in respect of:

(a) the cost or fair market value of any particular asset;

(b) the paid-up capital of any shares referred to herein; or

(c) any tax consequences relating to the 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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