1999 Ruling 9925273 - PART II.1 TAX

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 section 183.1 and subsection 84(3)

Position: Tax under section 183.1 not applicable; subsection 84(3) not applicable

Reasons: See Issue Sheet

XXXXXXXXXX 992527

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

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, other than specifically disclosed in your letter of XXXXXXXXXX, 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) "Acquireco 1" means XXXXXXXXXX;

(c) "Acquireco 2" means XXXXXXXXXX.;

(d) "Acquireco 3" means XXXXXXXXXX;

(e) "Acquireco 4" means XXXXXXXXXX;

(f) "adjusted cost base" has the meaning assigned in section 54;

(g) "BCA1" means the Company Act (XXXXXXXXXX);

(h) "BCA2" means the XXXXXXXXXX Business Corporations Act;

(i) "Holdco" means XXXXXXXXXX;

(j) "Opco" means XXXXXXXXXX;

(k) "Parentco" means XXXXXXXXXX;

(l) "public corporation" has the meaning assigned in subsection 89(1);

(m) "taxable Canadian corporation" has the meaning assigned in subsection 89(1);

(n) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);

(o) "stock dividend" has the meaning assigned in subsection 248(1); and

(p) "wholly owned corporation" has the meaning assigned in subsection 85(1.3).

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as set forth below.

Facts

1.

XXXXXXXXXX

2. Parentco is a public corporation and a taxable Canadian corporation. Parentco was formed by amalgamation on XXXXXXXXXX under the BCA1. The issued share capital of Parentco includes, but is not limited to, Class A voting shares (the "Class A Shares") and Class B non-voting shares (the "Class B Shares"). The Class A Shares and the Class B Shares are listed on the XXXXXXXXXX stock exchanges. The Class B shares are also listed on the XXXXXXXXXX Stock Exchange.

3. The Class B Shares were created in XXXXXXXXXX when Parentco paid a stock dividend of one Class B Share for each Class A Share outstanding. At that time, the Class A Shares were made convertible into Class B Shares which carry a dividend preference. Class A Shares have been converted into Class B Shares from time to time. Certain convertible preferred shares of Parentco have also been converted into Class B Shares from time to time. The Class B Shares are not convertible into any other property. Parentco has not paid dividends on its Class B Shares in any year since XXXXXXXXXX.

4. Opco was formed by amalgamation onXXXXXXXXXX under the BCA2. It is a taxable Canadian corporation and a wholly owned corporation of Parentco.

5. Holdco was incorporated on XXXXXXXXXX under the BCA2. It is a taxable Canadian corporation and a wholly owned corporation of Parentco. Holdco's only asset is all of the issued and outstanding shares of Acquireco 1. Holdco acquired the shares of Acquireco 1 from Opco on XXXXXXXXXX as part of a butterfly reorganization which was implemented in accordance with advance tax ruling 3-942986, dated XXXXXXXXXX.

6. Acquireco 1 was incorporated on XXXXXXXXXX under the BCA1. It is a taxable Canadian corporation and a wholly owned corporation of Holdco. As at XXXXXXXXXX, Acquireco 1 owned XXXXXXXXXX Class B Shares. Substantially all of the Class B Shares owned by Acquireco 1 were acquired by it prior to XXXXXXXXXX for the purpose of reducing the level of non-Canadian share ownership of Parentco. During its XXXXXXXXXX fiscal years, Acquireco 1 purchased approximately XXXXXXXXXX additional Class B Shares on the open market. XXXXXXXXXX.

Acquireco 1 also acted as a trustee under a management share purchase plan ("MSPP") of Parentco. As a result of the departure of various employees over the years, Acquireco 1 acquired XXXXXXXXXX Class B Shares under the terms of the MSPP and held approximately XXXXXXXXXX Class B Shares as trustee for various employees. The MSPP terminated on XXXXXXXXXX and all of the shares were released and delivered to the employees by Acquireco 1.

Acquireco 1's only assets consist of the Class B Shares described above and cash of approximately $XXXXXXXXXX.

7. Acquireco 2 was incorporated on XXXXXXXXXX under the BCA1. It is a taxable Canadian corporation and a wholly owned corporation of Parentco. As at XXXXXXXXXX Acquireco 2 owned XXXXXXXXXX Class B Shares and these shares represent its only asset.

In XXXXXXXXXX, Acquireco 2 acquired its Class B Shares from Acquireco 3, a wholly owned corporation of Parentco. As consideration for the purchase, Acquireco 2 issued common shares to Acquireco 3. Following the transfer of the Class B Shares to Acquireco 2, Acquireco 3 was wound up and distributed its assets to Parentco.

Acquireco 3 had previously acquired the Class B Shares on the conversion of XXXXXXXXXX Preferred shares of Parentco (the "Preferred Shares") in accordance with the conversion privileges attaching to such shares. Acquireco 3 purchased the Preferred Shares from Acquireco 4 (a related taxable Canadian corporation) for cash. Acquireco 4 had previously acquired the Preferred Shares for cash from Parentco's treasury.

8. The approximate adjusted cost base of the Class B Shares held by Acquireco 1 and Acquireco 2 is set out below. The fair market value of the Class B Shares as represented by their closing market price on XXXXXXXXXX was $XXXXXXXXXX and $XXXXXXXXXX.

Corporation
Adjusted Cost Base
Acquireco 1
$XXXXXXXXXX
Acquireco 2
$XXXXXXXXXX
Purpose of the Proposed Transactions

9. The purpose of the proposed transactions is to simplify the share capital of Parentco by eliminating the reciprocal shareholdings. Parentco views the incestuous ownership of the Class B Shares by Acquireco 1 and Acquireco 2 as an unnecessary complicating factor in the capital structure of Parentco and believes that such shareholdings are considered confusing by analysts and the financial community at large and may detract from the market value of the shares of Parentco.

Proposed Transactions

10. Holdco will undertake a voluntary winding-up under the BCA2. As a consequence of the winding up, all the property of Holdco will be distributed to, and all liabilities of Holdco, if any, will be assumed by, Parentco. Articles of Dissolution will then be filed and Holdco will be dissolved.

11. Acquireco 1 will undertake a voluntary winding-up under the BCA1. As a consequence of the winding up, all the property of Acquireco 1 will be distributed to, and all liabilities of Acquireco 1, if any, will be assumed by, Parentco. Acquireco 1 will then be dissolved.

12. Acquireco 2 will undertake a voluntary winding-up under the BCA1. As a consequence of the winding up, all the property of Acquireco 2 will be distributed to, and all liabilities of Acquireco 2, if any, will be assumed by, Parentco. Acquireco 2 will then be dissolved.

13. The Class B Shares of Parentco distributed to Parentco by Acquireco 1 and Acquireco 2 on the winding-up of these corporations will be cancelled by Parentco.

Additional Information

14. The proposed transactions are not part of a series of transactions or events which includes any acquisition of Class B Shares by Acquireco 1 which occurred prior to XXXXXXXXXX, or which occurred prior to XXXXXXXXXX, where such acquisition was part of a series of transactions commencing before XXXXXXXXXX.

15. No amount paid by Acquireco 1 as proceeds of disposition on the acquisition of Class B Shares on or after XXXXXXXXXX was paid in substitution for dividends which would have been paid in the normal course by Parentco.

16. The issuance of the Class B Shares as a stock dividend on the Class A Shares in XXXXXXXXXX, as described in paragraph 3, was not part of any series of transactions or events that included the acquisition of any Class B Shares by Acquireco 1.

17. The proposed transactions are not part of a series of transactions or events which includes the reorganization which was implemented in accordance with advance tax ruling 3-942986, dated 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 provisions of subsection 88(1) will apply to the winding-up of each of Holdco, Acquireco 1 and Acquireco 2 (a "Subsidiary" or collectively the "Subsidiaries") described in paragraphs 10, 11 and 12 such that:

(i) each property of a Subsidiary (other than an interest in a partnership or a property described in subparagraph 88(1)(a)(i)) will be deemed to have been disposed of by the Subsidiary for proceeds equal to the cost amount to the respective Subsidiary of the property immediately before the winding-up by virtue of subparagraph 88(1)(a)(iii);

(ii) the shares of the capital stock of a Subsidiary owned by Parentco immediately before the winding-up will be deemed to have been disposed of by Parentco on the winding-up of the Subsidiary for proceeds equal to the greater of the amounts determined under subparagraphs 88(1)(b)(i) and (ii); and

(iii) subsection 84(2) will not apply to the winding-up of the Subsidiaries by virtue of paragraph 88(1)(d.1).

B. The distribution of the Class B Shares to Parentco on the winding up of Acquireco 1 and Acquireco 2 and the cancellation of such shares by Parentco will not give rise to a deemed dividend under subsection 84(3).

C. The distribution of the Class B Shares to Parentco on the winding up of Acquireco 1 and Acquireco 2 and the cancellation of such shares by Parentco will not result in a liability for tax under Part II.1 of the Act to Parentco for its taxation year in which the shares are so distributed and cancelled.

D. 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.

E. As a result of the proposed transactions, in and by themselves, the provisions of subsection 245(2) will not be applied to re-determine 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 the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

Opinions Given

A. Parentco will not become liable for tax under Part II.1 of the Act, as a result of the proposed transactions, in and of themselves, in respect of any acquisition of Class B shares by Acquireco 1 or Acquireco 2, as described herein, which occurred prior to date of this ruling.

B. The winding up of Holdco will not affect the rulings which were issued in advance ruling 3-942986.

Caveat

Nothing in this ruling should be construed as implying that Canada Customs and Revenue Agency 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