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: Standard Gross Asset Butterfly
Position: Rulings Given
Reasons: No significant issues
XXXXXXXXXX
XXXXXXXXXX 992872
XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX, and your subsequent correspondence requesting an advance income tax ruling on behalf of XXXXXXXXXX ("Mr. A"), XXXXXXXXXX ("Child A1"), XXXXXXXXXX ("Child A2"), XXXXXXXXXX ("Child A3"), hereinafter collectively referred to as "Family A"; XXXXXXXXXX ("Mr. B"), XXXXXXXXXX ("Child B1"), XXXXXXXXXX ("Child B2"), hereinafter collectively referred to as "Family B"; XXXXXXXXXX ("Opco") andXXXXXXXXXX ("Holdco"). You have advised that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request:
(a) is involved in an earlier return of the taxpayers or a related person,
(b) is being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayers or a related person,
(c) is under objection,
(d) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired, and
(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter (herein referred to as the "Act") and unless otherwise expressly stated:
(a) "active business" has the meaning assigned by subsection 248(1);
(b) "adjusted cost base" (also referred to as "ACB") has the meaning assigned by section 54;
(c) "agreed amount" means the amount that a transferor and transferee have agreed upon in their election under subsection 85(1) in respect of a transfer of "eligible property";
(d) "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7) of the Act;
(e) "capital dividend account" has the meaning assigned by subsection 89(1);
(f) "capital property" has the meaning assigned by section 54;
(g) "cost amount" has the meaning assigned by subsection 248(1);
(h) "dividend rental arrangement" has the meaning assigned by subsection 248(1);
(i) "eligible property" has the meaning assigned by subsection 85(1.1);
(j) "guarantee agreement" has the meaning assigned by subsection 112(2.2);
(k) "BCA" means the Business Corporations Act, R.S.O. 1990, c.B.16, as amended;
(l) "paid-up capital" has the meaning assigned by subsection 89(1);
(m) "refundable dividend tax on hand" has the meaning assigned by subsection 129(3);
(n) "related persons" has the meaning assigned by subsection 251(2);
(o) "restricted financial institution" has the meaning assigned by subsection 248(1);
(p) "series of transactions or events" includes the related transactions or events referred to in the definition of series of transactions in subsection 248(10);
(q) "significant influence" has the meaning assigned by section 3050 of the Canadian Institute of Chartered Accountants Handbook;
(r) "specified financial institution" has the meaning assigned by subsection 248(1);
(s) "specified investment business" has the meaning assigned by subsection 125(7);
(t) "specified person" has the meaning assigned by paragraph (h) of the definition "taxable preferred share" in subsection 248(1);
(u) "stated capital" and "stated capital account" have the meanings assigned thereto by the BCA;
(v) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);
(x) "taxable dividend" has the meaning assigned by subsection 89(1); and
(y) "taxable preferred share" has the meaning assigned by subsection 248(1).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is set out as follows:
FACTS
1. Opco was formed under the laws of XXXXXXXXXX by way of articles of amalgamation filed on XXXXXXXXXX. Opco is a taxable Canadian corporation and a Canadian-controlled private corporation which is currently governed by the provisions of the BCA. Opco's federal income tax account number is XXXXXXXXXX and it files its federal income tax return with the XXXXXXXXXX Taxation Centre.
2. Opco's business consists of XXXXXXXXXX buildings, as well as the participation in land development joint ventures. Since Opco employs in its business throughout the year more than five (5) full time employees, all of its rental income is reported for Canadian income tax purposes as income from an active business.
3. Holdco was incorporated under the laws of XXXXXXXXXX. Holdco is a taxable Canadian corporation and a Canadian-controlled private corporation which is currently governed by the provisions of the BCA. Holdco's federal income tax account number is XXXXXXXXXX and it files its federal income tax return with the XXXXXXXXXX Taxation Centre.
4. All of the issued and outstanding shares of Opco are owned by Holdco (and have been so owned since XXXXXXXXXX). The issued and outstanding shares of Holdco are owned by the members of Family A and Family B as follows:
Name and SIN#
of
Shareholder
Class A Special Shares*
Class B Special Shares
Class C Special Shares
CommonShares*
Family A
Mr. A XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Child A1 XXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Child A2 XXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Child A3 XXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Family B
Mr. B XXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Child B1 XXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Child B2 XXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
* - Indicates shares with full voting rights under all circumstances.
There are no other issued and outstanding shares in the capital of Holdco. The voting shares of Holdco are owned equally by Family A and Family B. The only difference in the shareholdings of Holdco between the two families is that Family A collectively owns an additional XXXXXXXXXX Class C shares of Holdco which are non-voting and have a fair market value of $XXXXXXXXXX. Since the fair market value of Opco's assets net of liabilities have been appraised at a value in excess of $XXXXXXXXXX, the percentage difference in the fair market value of the two families' holdings in Holdco amounts to approximately XXXXXXXXXX%. In other words, the value of Family A's interest in Holdco is approximately XXXXXXXXXX and the value of Family B's interest is approximately XXXXXXXXXX% (the "Family B Proportion").
5. Mr. A is the father of Child A1, Child A2 and Child A3 (the "Family A Children") and Mr. B is the father of Child B1 and Child B2 (the "Family B Children"). XXXXXXXXXX Each of the Family A Children and the Family B Children has attained the age of majority. Each of Mr. A, Mr. B, the Family A Children and the Family B Children is a resident of Canada.
6. Mr. A and Mr. B have owned their respective shares of Holdco since XXXXXXXXXX. The Family A Children and Family B Children acquired their respective Class B shares and Class C shares of Holdco in XXXXXXXXXX through XXXXXXXXXX from their respective fathers and their grandmother. The common shares were acquired by the Family B Children in XXXXXXXXXX from a personal trust in satisfaction of their capital interest therein and by the Family A Children in XXXXXXXXXX from their respective personal trusts in satisfaction of their respective capital interests therein. All of these trusts owned their respective shares of Holdco from XXXXXXXXXX. None of the issued and outstanding shares of Holdco are taxable preferred shares since they were issued prior to XXXXXXXXXX. No shares have been redeemed by Holdco after XXXXXXXXXX.
7. The attributes of the issued and outstanding shares of Holdco are as follows:
Class A: 1 vote per share;
redeemable @ $XXXXXXXXXX per share; and
no dividend entitlement.
Class B: non-voting;
redeemable and retractable @ $XXXXXXXXXX per share; and
no dividend entitlement.
Class C: non-voting;
redeemable and retractable @ $XXXXXXXXXX per share; and
no dividend entitlement.
Common: 1 vote per share; and
fully participating
The redemption/retraction amount of each class of shares, other than the common shares, is fixed by way of formula in the articles of incorporation of Holdco. Holdco is not controlled by any one person, any group of related persons, or any group of persons acting in concert.
8. Each of Opco and Holdco has a fiscal year end of XXXXXXXXXX. Holdco has no assets other than the shares of and a loan receivable from Opco. Opco's assets (which will become the assets of DC Amalco following the amalgamation of Opco and Holdco as described in paragraph 15 below), are comprised of the following properties:
(a) a XXXXXXXXXX ownership in XXXXXXXXXX buildings and XXXXXXXXXX properties (the "Allocated Properties");
(b) a XXXXXXXXXX% undivided interest in XXXXXXXXXX buildings in XXXXXXXXXX (the "XXXXXXXXXX Properties");
(c) various undivided interests in XXXXXXXXXX properties (the "Co-Tenancy Properties");
(d) various undivided interests in XXXXXXXXXX land development co-tenancies (the "Land Projects");
(e) equipment and fixtures relating to the Allocated Properties, Co-Tenancy Properties, XXXXXXXXXX Properties and sundry office equipment;
(f) shares of XXXXXXXXXX corporations, XXXXXXXXXX (hereinafter referred to collectively as the "Corporate Shares"), all of which hold land for development purposes or mortgages from the sale of such property; and
(g) cash, prepaid expenses, accounts and loans receivable, including various taxes receivable and marketable securities which do not represent portfolio investments.
9. Apart from specific mortgages on one of the Allocated Properties and some of the Co-Tenancy Properties, the other liabilities of Opco (and of DC Amalco after the proposed amalgamation described in paragraph 15 below) comprise accounts payable, loans payable, tenant deposits, bank debt and debt payable to the individual shareholders. These liabilities will also include any liabilities arising as a result of the proposed transactions up to and including the time of the proposed distribution of property by DC Amalco as described in 22 below (i.e., including transaction costs and any taxes arising as a result of transactions completed at that time other than taxes in respect of Part IV), but will exclude any liability arising from any proposed transaction taking place after that time. None of the mortgages or other debt has been acquired in contemplation of the proposed transactions.
10. Each of the Allocated Properties, the XXXXXXXXXX Properties and the Co-tenancy Properties constitutes capital property to Opco. Separate capital cost allowance ("CCA") pools are maintained for all of the properties owned by Opco with the exception of XXXXXXXXXX of the Allocated Properties (XXXXXXXXXX) and XXXXXXXXXX of the Co-Tenancy Properties.
11. Independent valuations have been obtained for each of the real properties owned by Opco which indicate that XXXXXXXXXX Allocated Properties (hereinafter called the "Family B Properties") have a fair market value which is approximately equal to the fair market value of the remaining XXXXXXXXXX Allocated Properties (hereinafter called the "Family A Properties").
12. It is anticipated that at the time of the proposed transactions described below, Opco will have refundable dividend tax on hand of about $XXXXXXXXXX and a capital dividend account of about $XXXXXXXXXX.
13. The parties have agreed to proceed with the proposed transactions described below consequent upon obtaining the rulings requested herein.
14. None of the transactions or events herinbefore described in this letter occurred in contemplation of the proposed transactions hereinafter described in this letter or is part of the same series of transactions or events as the proposed transactions.
PROPOSED TRANSACTIONS
15. Opco and Holdco will amalgamate in accordance with the provisions of the BCA and continue as one corporation under the name, "XXXXXXXXXX" (hereinafter called "DC Amalco"). On the amalgamation of Opco and Holdco:
(a) all of the property and liabilities of Holdco and Opco (except shares in the capital stock of either such corporation held by the other such corporation and amounts receivable from, or payable to, each other) will become the property and liabilities of DC Amalco;
(b) all issued and outstanding shares in the capital stock of Opco owned by Holdco will be cancelled without any repayment of capital in respect thereof; and
(c) each shareholder of Holdco at that time will only receive shares of DC Amalco in exchange for the shares of Holdco owned by the particular shareholder immediately before the amalgamation. The authorized capital of DC Amalco will include Class A shares, Class B shares, Class C shares and common shares having terms and conditions that are identical to the terms and conditions of the Class A shares, Class B shares, Class C shares and common shares, respectively, of Holdco before the amalgamation, except that the redemption value of each class of shares other than the common shares will be specified in the articles. The terms of the amalgamation agreement will specify that Class A shares, Class B shares, Class C shares and common shares of Holdco are to be converted into Class A shares, Class B shares, Class C shares and common shares, respectively of DC Amalco on a one for one basis. The aggregate stated capital and fair market value of each class of shares issued by DC Amalco will be equal to the aggregate stated capital and fair market value, respectively, of each similar class of shares of Holdco owned by the shareholders immediately before the amalgamation.
16. After the amalgamation of Opco and Holdco to form DC Amalco as described in paragraph 15 above, Mr. B will incorporate a new corporation, "Trusteeco", under the laws of XXXXXXXXXX. All the shares of Trusteeco will be owned by Mr. B and Trusteeco will be a taxable Canadian corporation and a Canadian-controlled private corporation governed by the provisions of the BCA. The purpose of Trusteeco is to allow the divisive reorganization described below to take place XXXXXXXXXX and as such Trusteeco will have no purpose or activity other than to hold registered title to the properties registered in its name, as described in paragraph 17 below.
17. Registered title to all of the Family B Properties and a one-half interest in each of DC Amalco's interest in its remaining real properties to the extent that DC Amalco is the registered owner (apart from the Family A Properties) will be transferred by DC Amalco to Trusteeco. Trusteeco will sign a trust declaration indicating that it is holding all such properties in trust for DC Amalco as bare trustee and as indicated in paragraph 16 above, Trusteeco's only function will be to hold legal title to all such property and it will not be able to take any action with respect to any such property without instructions from DC Amalco. As a result DC Amalco will remain as the sole beneficial owner of each such property and will be able to cause the legal title of such property to revert to it at any time.
18. Following the above transfers of registered title, a new corporation, "Transfereeco" will be incorporated under the laws of XXXXXXXXXX by Mr. B. Transfereeco will be a taxable Canadian corporation and a Canadian-controlled private corporation governed by the provisions of the BCA.
19. The authorized share capital of Transfereeco will consist of an unlimited number of several classes of shares with terms and conditions as follows:
Class A:
one vote per share;
redeemable and retractable for $XXXXXXXXXX per share; and
no dividend entitlement.
Class B:
non-voting;
redeemable and retractable for $XXXXXXXXXX per share; and
no dividend entitlement.
Class C:
non-voting
redeemable and retractable for $XXXXXXXXXX per share; and
no dividend entitlement.
Class D:
one vote per share;
redeemable and retractable for XXXXXXXXXX of "an amount which is equal to the fair market value of the net consideration received for the first issuance of the Class D shares"; and
no dividend entitlement.
Common:
one vote per share; and
fully participating.
The terms and conditions of the Class A, B, C and common shares of Transfereeco are intended to mirror the terms and conditions of the corresponding Class A, B, and C shares and the common shares of DC Amalco (except that the Class A shares will be retractable). The provisions of each of the above classes of shares of Transfereeco, with the exception of the common shares, will permit their respective redemption price to be paid by the issuance of a promissory note. Upon the incorporation of Transfereeco, Mr. B will receive 1 Class A share at a subscription price of $XXXXXXXXXX to be paid in cash.
20. Each of Mr. B, Child B1 and Child B2 (hereinafter sometimes referred to collectively as the "Share Transferors" and separately as a "Share Transferor") will transfer all of the DC Amalco shares owned by each of them at that time to Transfereeco. As consideration for the transfer of the shares by each particular Share Transferor, Transfereeco will issue to each Share Transferor the same number of a class of shares of Transfereeco that have terms and conditions that are identical to the terms and conditions of the class of shares of DC Amalco that were transferred to it by the particular Share Transferor such that after the transfers are complete:
(a) Mr. B will have received XXXXXXXXXX Class A shares (in addition to the 1 Class A share purchased on incorporation) and XXXXXXXXXX Class B shares of Transfereeco; and
(b) Child B1 and Child B2 will have each received XXXXXXXXXX common shares, XXXXXXXXXX Class B shares and XXXXXXXXXX Class C shares of Transfereeco.
For greater certainty, no non-share consideration will be paid by Transfereeco to any Share Transferor and the fair market value of the aggregate share consideration received by each Share Transferor will be equal to the fair market value of the DC Amalco shares transferred to Transfereeco by such Share Transferor. Transfereeco will hold the shares of DC Amalco it receives as capital property. The number of shares of DC Amalco held by Transfereeco will represent more than ten percent (10%) of all the shares of DC Amalco having full voting rights under all circumstances and their aggregate fair market value will be more than 10% of the aggregate fair market value of all the issued and outstanding shares of DC Amalco. Each Share Transferor will jointly elect with Transfereeco in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to such transfer of shares (such shares being eligible property of each particular Share Transferor). The agreed amount in respect of each such election will be equal to the adjusted cost base of such shares to the particular Share Transferor at the time of the transfer, which amount will not exceed their fair market values at that time. In accordance with clause 24(3) of the BCA the amount that will be added to the stated capital account of each particular class of shares so issued by Transfereeco will be equal to the aggregate paid-up capital of the corresponding class of DC Amalco shares transferred to it by the Share Transferors.
21. Immediately before the property transfers described in paragraph 22 below, the property of DC Amalco will be classified into the following three different types for purposes of paragraph 55(3)(b) such classification being determined on a consolidated basis by including DC Amalco's appropriate pro-rata share of the assets of any corporation over which DC Amalco has the ability to exercise significant influence (DC Amalco and any such corporation are hereinafter sometimes collectively called the "Group"):
(a) cash or near-cash property, consisting of all of the current assets of the Group, including cash, accounts receivable (which, for greater certainty, will not include long-term advances), term deposits and marketable securities (other than portfolio investments);
(b) investment property, consisting of all the assets of the Group, other than cash or near-cash property, any income from which would constitute income from property or a specified investment business to DC Amalco; and
(c) business property, comprising all of the assets of the Group, not included in (a) or (b), any income from which would be income from a business (other than a specified investment business) to DC Amalco.
For the purposes of this letter, a corporation will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation. For purposes of determining the fair market value of each type of property of DC Amalco, the fair market value of the shares of any other corporation over which a corporate shareholder has the ability to exercise significant influence and of any indebtedness of any such corporation to its corporate shareholder will be allocated between the three types of property described above, by multiplying the fair market value of such shares or indebtedness, as the case may be, by the proportion that the fair market value of each type of property owned by the particular corporation is of the aggregate fair market value of the property owned by such corporation.
For greater certainty, any tax accounts of a member of the Group, such as the amount of refundable dividend tax on hand, the balance of any capital dividend account, or any deferred income tax debit balance will not be considered property for purposes of the classification described herein. For the purpose of calculating the fair market value of each type of property, as described above, each member of the Group will include its respective partnership share of each property of any partnership of which such member is a partner, other than a limited partnership of which it is a limited partner and not a general partner. Immediately before the transfer of property described in paragraph 22 below, DC Amalco will not own any investment property other than marketable securities held as portfolio investments and Corporate Shares in respect of corporations over which DC Amalco does not exert significant influence and long term advances to such corporations.
22. DC Amalco will transfer at fair market value certain of its cash or near cash property and business property, described in (i) to (vii) below (the Transferred Assets") to Transfereeco:
(i) the Family B Properties, together with XXXXXXXXXX Properties;
(ii) a XXXXXXXXXX% beneficial undivided interest in the Co-Tenancy Properties;
(iii) the equipment and fixed assets relating to (i) and (ii);
(iv) XXXXXXXXXX% of the Corporate Shares;
(v) XXXXXXXXXX% of the Land Projects;
(vi) XXXXXXXXXX% of any marketable securities on hand; and
(vii) approximately XXXXXXXXXX% of the remaining cash or near-cash assets of Amalco (other than marketable securities)
such that immediately following the transfer of all the Transferred Assets to Transfereeco the fair market value of each type of property transferred to Transfereeco, as described herein, will approximate that proportion (the "Transferee Proportion") of the fair market value of all property of that type of DC Amalco immediately before the transfer that:
(a) the aggregate fair market value of the DC Amalco shares owned by Transfereeco immediately before the transfer,
is of
(b) the aggregate fair market value of all the issued and outstanding DC Amalco shares owned by all shareholders of DC Amalco immediately before the transfer.
For the purpose of this paragraph the expression "approximate that proportion" means the discrepancy from that proportion, if any, that would not exceed one percent (1%), as determined as a percentage of the fair market value of each type of property that Transfereeco has received as compared to what Transfereeco would have received had it received its appropriate pro-rata share of the fair market value of that type of property. Trusteeco (and any other corporation holding registered title to any of the Transferred Assets) will also acknowledge as a result of the transfer that it is now holding the title to such Transferred Assets in trust for Transfereeco.
23. As consideration for the transfer of property described in paragraph 22 above Transfereeco will:
(a) assume all of the mortgage liabilities relating to the real property included in the Transferred Assets described in 22(i) above;
(b) assume XXXXXXXXXX% of the mortgage liabilities relating to any real property included in the Transferred Assets described in 22(ii) above;
(c) assume XXXXXXXXXX% of the liabilities relating to the Land Projects described in 22(v);
(d) assume additional liabilities of DC Amalco such that the total liabilities assumed by Transfereeco as described herein and in (c) above will be equal to the total fair market value of the Transferred Assets described in 22(v) and (vii) and not to exceed XXXXXXXXXX% of DC Amalco's liabilities; and
(e) issue to DC Amalco XXXXXXXXXX Class D shares, having an aggregate redemption value and fair market value equal to the aggregate fair market value of the Transferred Assets less the amount of the liabilities assumed by Transfereeco as described in (a), (b), (c) and (d) hereof.
For the purpose of subsection 191(4), the terms and conditions of the agreement relating to the issuance of the Class D shares to be issued as described in (e) above will, at the time of their issue, specify an amount in respect of each share, including an amount for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each of the Class D shares will be pursuant to a resolution of the board of directors of Transfereeco, will be expressed as a dollar amount, will not be determined by a formula and will be equal to the fair market value of the Transferred Assets received by Transfereeco as consideration for each such share less the amount of liabilities assumed by Transfereeco as described in (a) to (d) above. Such amount will also be added to the stated capital of the Class D shares in accordance with the BCA.
The number of Class D shares of Transfereeco issued to DC Amalco as described herein will represent more than 10% of all the shares of Transfereeco having full voting rights under all circumstances and their aggregate fair market value will be more than 10% of the aggregate fair market value of all of the issued and outstanding shares of Transfereeco.
24. In respect of the Transferred Assets described in 22(i) to (iv) and (vi) above, DC Amalco and Transfereeco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each such property transferred by DC Amalco to Transfereeco that is an eligible property whose fair market value exceeds or may exceed the cost amount thereof to DC Amalco. The agreed amount in respect of each eligible property so transferred and included in the election:
(a) in the case of the depreciable property of a prescribed class, will not be less than the least of the amounts referred to in subparagraphs 85(1)(e)(i) to (iii); and
(b) in the case of capital property (other than a depreciable property), will not be less than the least of the amounts referred to in subparagraphs 85(1)(c.1)(i) and (ii).
In each case, the agreed amount will not be less than the amount of any non-share consideration received by Transfereeco in respect of each transfer of eligible property nor will the agreed amount exceed the fair market value of each eligible property so transferred. However, in keeping within the above limits, the agreed amount may include such amount as may be required to offset the capital loss arising in respect of the transfer of XXXXXXXXXX of the Co-tenancy Properties and the terminal loss arising in respect of the transfer of XXXXXXXXXX of the Family B Properties (XXXXXXXXXX) to the extent that such terminal loss exceeds any gains arising from the sale of a XXXXXXXXXX% interest in the Land Projects to Transfereeco.
25. Following the completion of the transfer of the Transferred Assets, all of the Class D shares of Transfereeco owned by DC Amalco will be redeemed in consideration for the issuance by Transfereeco of a promissory note (the "Redemption Note"), the terms of which will be as follows:
(a) payable on demand by the holder thereof;
(b) non-interest bearing;
(c) having a principal amount and fair market value equal to the aggregate Redemption Amount and fair market value of the Class D shares so redeemed; and
(d) assignable by the holder thereof.
DC Amalco will accept the Redemption Note as full payment of the aggregate Redemption Amount for the Class D shares and Transfereeco will select a fiscal and taxation year which ends at the end of the day on which the redemption of all its Class D shares occurs.
26. On the day following the end of the taxation year of Transfereeco described above DC Amalco will redeem all of its Class A, Class B and Class C shares owned by Transfereeco at their redemption amount and purchase for cancellation all of its common shares owned by Transfereeco at the fair market value thereof. The redemption of the Class A, Class B, and Class C shares and the repurchase for cancellation of the common shares will occur by way of separate resolutions, as follows:
(a) first DC Amalco will redeem or purchase for cancellation a sufficient number of such shares, owned by Transfereeco which will result in a deemed dividend, pursuant to the provisions of subsection 84(3), equal to XXXXXXXXXX% of DC Amalco's capital dividend account on hand immediately before that time. DC Amalco will elect, in prescribed manner and prescribed form and at or before the earlier of the time and the day referred to in subsection 83(2), to have the rules therein apply to the full amount of the deemed dividend resulting from the purchase of the DC Amalco shares; and
(b) second, DC Amalco will redeem or purchase for cancellation all the remaining shares held by Transfereeco.
For greater certainty, following the redemption or purchase for cancellation of shares of DC Amalco during the first stage as described in (a) above, Transfereeco will continue to hold:
(c) shares of DC Amalco which would give Transfereeco XXXXXXXXXX% or more of the votes that could be cast under all circumstances at an annual meeting of shareholders of DC Amalco;
(d) shares of DC Amalco having an aggregate fair market value of XXXXXXXXXX% or more of the aggregate fair market value of all of the issued shares of DC Amalco; and
(e) XXXXXXXXXX% or more of the issued and outstanding common shares of DC Amalco.
DC Amalco will issue to Transfereeco, as consideration for the purchase for cancellation of its shares, two non-interest bearing promissory notes, the first being referred to as the "Capital Dividend Note" and the second being referred to as the "Cancellation Note". The Capital Dividend Note will have a principal amount and fair market value equal to the fair market value of the DC Amalco shares purchased in the first stage, as described in (a) above. The Cancellation Note will have a principal amount and fair market value equal to the fair market value of the DC Amalco shares purchased in the second stage, as described in (b) above. These two promissory notes will be payable on demand by the holder thereof and be assignable by the holder thereof.
Transfereeco will accept the Cancellation Note and the Capital Dividend Note as full payment of the aggregate Redemption Amount for the Class A, B and C shares and the purchase for cancellation of its common shares of DC Amalco.
27. The Capital Dividend Note and the Cancellation Note issued to Transfereeco by DC Amalco, as described in paragraph 26, will be set-off against the Redemption Note issued to DC Amalco by Transfereeco, as described in paragraph 25. In order to fully settle the Redemption Note issued by Transfereeco to DC Amalco, Transfereeco will be required to assume an additional amount of liabilities of DC Amalco in order that the aggregate fair market value of the property transferred by DC Amalco to Transfereeco (net of the liabilities of DC Amalco assumed by Transfereeco as described in this paragraph and in paragraph 23 above) will be equal to the Transferee Proportion of the fair market value of all property of DC Amalco (net of all liabilities of DC Amalco), immediately before the transfer described in paragraph 22.
28. None of Opco, Holdco, DC Amalco or Transfereeco is, or will be, at the time of any of the proposed transactions described in this letter are implemented, a specified financial institution or a restricted financial institution.
29. Except as described in this letter:
(a) no liabilities have been incurred by, and no assets have been acquired by or disposed of by any of Opco, Holdco or DC Amalco in contemplation of the proposed transactions described herein; and
(b) no property of Opco, Holdco or DC Amalco that is to be transferred pursuant to the proposed transactions will be transferred to any other person or partnership as part of a series of transactions that includes the proposed transactions described herein.
30. None of the shares of any of the corporations referred to herein has been or will be at any time during the implementation of the proposed transactions described in this letter:
(a) subject to a guarantee agreement that is given by a specified financial institution or a specified person in relation to a specified financial institution for any purpose referred to in subsection 112(2.2);
(b) issued or acquired as part of a transaction or event or a series of transactions or events contemplated by subsection 112(2.5); or
(c) the subject of a dividend rental arrangement.
31. The Class D shares to be issued by Transfereeco, as described in paragraph 23 of this letter, will be redeemed at an amount not greater than the fair market value of the consideration for which such shares will be issued.
PURPOSE OF THE PROPOSED TRANSACTIONS
32. The purpose of the proposed transactions is to divide the assets of Opco held by Family B and Family A through Holdco such that each family will have direct and separate ownership of its pro-rata share of all the property of Opco held through Holdco. This will enable each of Family B and Family A to operate their pro-rata share of such properties independently of each other.
RULINGS GIVEN
Provided the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we confirm the following:
A. The transfer of registered title to the Family B Properties and a one-half interest in DC Amalco's interest in each of its remaining properties to the extent DC Amalco is the registered owner (apart from the Family A Properties) by DC Amalco to Trusteeco, as described in paragraph 17, will not, in and by itself, constitute a disposition of such properties within the meaning of section 54.
B. Subsection 85(1) will apply to the transfer of the DC Amalco shares owned by each Share Transferor to Transfereeco, as described in paragraph 20, where each particular Share Transferor and Transfereeco makes a valid election, as described in paragraph 20, such that the agreed amount in respect of each such transfer shall be deemed to be the proceeds of disposition of such shares to each Share Transferor and the cost thereof to Transfereeco pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the share transfers referred to herein.
C. The transfer of the shares of DC Amalco owned by the Share Transferors to Transfereeco by the Share Transferors, as described in paragraph 20, will not, in and of itself, result in an acquisition of control of DC Amalco by Transfereeco such that subsection 249(4) will not apply solely as a result of that share transfer at that time.
D. The amalgamation of Holdco and Opco, as described in paragraph 15, will be an amalgamation within the meaning of subsection 87(1) with the result that:
(a) each shareholder of Holdco will be deemed by paragraph 87(4)(a) to have disposed of all of that shareholder's shares of a particular class of Holdco for proceeds equal to the adjusted cost base of such shares immediately before the amalgamation of Holdco and Opco;
(b) each shareholder of Holdco will be deemed by paragraph 87(4)(b) to have acquired his or her shares of each particular class of DC Amalco for an amount equal to the amount deemed in (a) above to be the proceeds of disposition to the particular shareholder in respect of the shares of the similar class of Holdco; and
(c) the provisions of paragraphs 87(4)(c), (d) and (e), will not apply to the amalgamation of Holdco and Opco.
E. Subsection 85(1) will apply to the transfer of the Transferred Asset described in subparagraphs 22(i) to (iv) and (vi) above where each such asset so transferred is an eligible property and provided Transfereeco and DC Amalco file a valid election in respect of such transfer, as described in paragraph 24, such that the agreed amount in respect of each such transfer shall be deemed to be the proceeds of disposition to DC Amalco and the cost thereof to Transfereeco pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the share transfers referred to herein.
For the purpose of this ruling, the reference in subparagraph 85(1)(e)(i) to "...the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition..." shall be interpreted to mean the portion of the undepreciated capital cost of all the property of that class immediately before the transfer that the capital cost of the property of that class transferred is of the capital cost of all the properties of that class.
F. The application of the provisions of subsection 85(2.1) will result in a reduction to the paid-up capital of the Class D shares of Transfereeco issued to DC Amalco, as described in subparagraph 23(e) above, to an amount equal to the cost of the properties to Transfereeco (determined under subsection 85(1) where relevant) less the amount of liabilities assumed by Transfereeco in respect thereof, as described in subparagraphs 23(a) to (d) above.
G. Paragraph 84.1(1)(a) shall not apply to reduce the paid up capital of any class of shares issued by Transfereeco to the particular Share Transferor, as described in paragraph 20, nor shall paragraph 84.1(1)(b) apply to deem a dividend to have been paid to the particular Share Transferor by Transfereeco.
H. Mr. A will acquire control of DC Amalco upon the redemption and purchase for cancellation of the common and Class A shares of DC Amalco owned by Transfereeco, as described in paragraph 26, such that subsection 249(4) will apply to deem the year end of DC Amalco to have ended immediately before that time.
I. On the redemption by Transfereeco of the Class D shares issued by it to DC Amalco, as described in paragraph 25, Transfereeco shall be deemed to have paid, by virtue of paragraph 84(3)(a), and DC Amalco shall be deemed to have received, by virtue of paragraph 84(3)(b), a dividend equal to the amount by which the amount paid on the particular share redemption exceeds the paid-up capital of the Class D shares so redeemed by Transfereeco.
J. On the redemption by DC Amalco of the Class A, B and C shares issued by it to Transfereeco and DC Amalco's purchase for cancellation of its common shares issued to Transfereeco, as described in subparagraphs 26(a) and (b), DC Amalco shall be deemed to have paid to Transfereeco, by virtue of paragraph 84(3)(a), and Transfereeco shall be deemed to have received, by virtue of paragraph 84(3)(b), separate dividends each of which will be equal to the amount by which the amount paid on the redemption or purchase, as the case may be, of the particular shares of DC Amalco owned by Transfereeco exceeds the paid-up capital of such shares. Provided that DC Amalco elects pursuant to subsection 83(2), as described in subparagraph 26(a) in respect of the full amount of each such dividend, the dividend arising as a result of the redemption or purchase for cancellation of such shares shall be deemed to be a capital dividend.
K. With respect to each deemed dividend referred to in I and J above
(i) the amount of each such dividend shall be excluded from the proceeds of disposition of the shares so redeemed or purchased for cancellation, as the case may be, by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54; and
(ii) each such dividend will be a taxable dividend unless the payer thereof elects in respect thereof in accordance with subsection 83(2) as described in J above.
L. To the extent that each deemed dividend referred to in I and J above is a taxable dividend, such dividend
(i) shall be included in the recipient's income pursuant to section 82 and paragraph 12(1)(j);
(ii) shall be deductible by a recipient corporation thereof pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be denied by any of subsections 112(2.1) to (2.4); and
(iii) shall be an "excepted dividend", within the meaning assigned by paragraph (c) of the definition of "excepted dividend" in section 187.1, to the recipient thereof and, therefore will not be subject to tax under Part IV.1.
M. To the extent that each deemed dividend referred to in J above is a taxable dividend, such dividend shall be an "excluded dividend", within the meaning assigned by paragraph (a) of the definition of "excluded dividend" in subsection 191(1), to the payer thereof and, therefore will not be subject to tax under Part VI.1.
N. Provided the amount paid by Transfereeco on the redemption of its Class D shares owned by DC Amalco, as described in paragraph 25, is equal to the amount specified in respect of such shares as described in paragraph 23, any taxable dividend referred to in L that arises in respect of such redemption will not be subject to tax under Part VI.1 as such dividend will be deemed by paragraph 191(4)(d) to be an "excluded dividend" as defined in subsection 191(1).
O. By virtue of paragraph 186(4)(b) Transfereeco will be connected with DC Amalco immediately before the time the dividends referred to in I are paid and DC Amalco will be connected with Transfereeco immediately before the time the dividends referred to in J are paid such that
(i) provided that Transfereeco is not entitled to a dividend refund (within the meaning of subsection 129(1)) in respect of its taxation year in which it is deemed to pay the dividend referred to in I above, DC Amalco shall not be subject to tax under Part IV on the amount of the deemed dividend referred to in I; and
(ii) Transfereeco shall, pursuant to paragraph 186(1)(b), be subject to tax under Part IV in an amount equal to that proportion of the dividend refund, if any, to which DC Amalco will become entitled for its taxation year in which the deemed dividends referred to in J are deemed to be paid, that the aggregate amount of each such dividend received by Transfereeco is of the aggregate of all taxable dividends paid by DC Amalco in its taxation year in which such taxable dividends are paid.
P. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not
(i) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(ii) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(iii) an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or
(iv) an acquisition of property in the circumstances described in paragraph 55(3.1)(d),
which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in ruling K above. For greater certainty, subsection 55(3.1) will not apply to preclude the application of paragraph 55(3)(b) to the transactions proposed herein.
Q. Each of the common shares of DC Amalco that are purchased for cancellation, as described in paragraph 26 above, will not be considered to become a taxable preferred share as a result of the proposed transactions described above, in and by themselves.
R. The set-off of the mutual debt obligations outstanding between DC Amalco and Transfereeco under the Redemption Note issued by Transfereeco to DC Amalco and Capital Dividend Note and the Cancellation Note issued by DC Amalco to Transfereeco, as described in paragraph 27, will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1) nor shall DC Amalco or Transfereeco otherwise realize any gain or incur any loss as a result thereof.
S. The provisions of subsection 69(11) will not apply to DC Amalco's disposition of the Transferred Assets, as described in paragraph 22 above, unless, as part of a series of transactions or events which includes any of such transfers, it may reasonably be considered that one of the main purposes of the series was to obtain the benefit of any item described in paragraph 69(11)(a) which is available to a person (other than a person that would be affiliated with the vendors of the property immediately before the series began, if section 251.1 were read without reference to the definition of "controlled" in subsection 251.1(3)) or to obtain a benefit described in paragraph 69(11)(b).
T. The provisions of paragraph 1100(2.2)(a) of the Income Tax Regulations (the "Regulations") will apply to the acquisition by Transfereeco of any Transferred Asset, as described in paragraph 22, that is a depreciable property such that, subject to paragraphs 1100(2.2)(f) and (g), paragraphs 1100(2.2)(h), (i) and (j) of the Regulations will apply to any such property.
U. The provisions of paragraph 1102(14)(a) of the Regulations will apply to the acquisition by Transfereeco of any Transferred Asset, as described in paragraph 22 above, that is a depreciable property so that any such property that is property of a prescribed class or a separate prescribed class of DC Amalco immediately before the time of the transfer will be deemed to be property of that same prescribed class or a separate prescribed class, as the case may be, of Transfereeco.
V. Where a capital property owned by DC Amalco is transferred to Transfereeco, as described in paragraph 22, such transfer will not, in and by itself, cause such property to cease to be regarded as a capital property in the hands of Transfereeco.
W. The provisions of subsections 15(1), 56(2) and 246(1) will not apply as a result of the proposed transactions described above, in and by themselves.
X. 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 confirmed herein.
The above Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and are binding on the Canada Customs and Revenue Agency ("CCRA") provided that the proposed are completed by XXXXXXXXXX. The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.
OPINIONS
Provided the proposed amendment to add the definition of "disposition" in subsection 248(1), as set out in the December 23, 1998 draft legislation, is enacted as set forth therein, the transfer of registered title to the Family B Properties and a one-half interest in DC Amalco's interest in each of its remaining properties to the extent DC Amalco is the registered owner (apart from the Family A Properties) by DC Amalco to Trusteeco, as described in paragraph 17, will not, in and by itself, constitute a disposition of such properties within the meaning of subsection 248(1).
For the purposes of determining Transfereeco's gain or loss from a disposition of any undivided interest in a capital property that is a Transferred Asset transferred to Transfereeco, as described in paragraph 22, the allocation of the adjusted cost base of an undivided interest in such a property pursuant to section 43, will be equal to that portion of the adjusted cost base of each such property to DC Amalco immediately before the transfer that the fair market value of portion of the undivided interest in the property that is transferred to Transfereeco is of the total fair market value of the property provided such an allocation results in a reasonable allocation of the adjusted cost base of the particular property.
Nothing in this letter should be construed as confirmation of the income tax consequences of any of the transactions described in this letter other than as specifically described. In addition, nothing in this letter should be construed as confirmation, express or implied, that the CCRA has agreed to or reviewed the determination of the capital dividend account or refundable dividend tax on hand of any corporation; the fair market value or adjusted cost base of any property; or the amount of stated capital or paid-up capital of any share.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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