1999 Ruling 9931653 - BUTTERFLY REORGANIZATION

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: change in facts - butterfly ruling

Position: supplemental issued

Reasons: conforms to practice and law

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
			993165
Attention:  XXXXXXXXXX 

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling 990315 dated XXXXXXXXXX, 1999

This is in reply to your letter of XXXXXXXXXX wherein you advised of us certain amendments to the facts and proposed transactions described in advance income tax ruling 990315 which was issued on XXXXXXXXXX, 1999 (the "Ruling Letter"). We also acknowledge the information provided during our various telephone discussions (XXXXXXXXXX).

As requested the following amendments are hereby made to the Ruling Letter:

1. The last two subparagraphs of paragraph 4 of the Ruling Letter are replaced by:

The preferred shares of Opco are non-voting, have a par value of $XXXXXXXXXX each, are entitled to a non-cumulative dividend at the rate of XXXXXXXXXX% before any dividends can be paid on the common shares and are redeemable and retractable at a redemption price of $XXXXXXXXXX each.

The assets of Opco are comprised of accounts receivable, prepaid expenses, equipment, goodwill and a receivable from Propertyco (the "Opco Building Loan") which arose from Opco lending funds to Propertyco to finance building improvements. The Opco Building Loan is non-interest bearing with no stated terms of repayment. The premises used for Opco's business are leased from Propertyco. Opco carries on the business of XXXXXXXXXX. Its fiscal year end is XXXXXXXXXX.

2. Paragraph 5 of the Ruling Letter is replaced by:

Immediately prior to the proposed transactions described below, Opco will pay a dividend to both its preferred shareholders and to Propertyco, the holder of its common shares. The dividend to be paid to the preferred shareholders will be a cash dividend equal to the dividend entitlement on the issued and outstanding preferred shares. The dividend to be paid to Propertyco will be an amount equal to the aggregate of:

(a) its remaing cash balance; and

(b) the outstanding balance of the Opco Building Loan.

The dividend to Propertyco will be paid in cash to the extent of Opco's remaining cash balance with the balance being paid by set-off against the outstanding Opco Building Loan. The purpose of the payment of such dividends is to ensure that Opco will not have any cash or near cash property on hand at the time of the transfer of property described in paragraph 11 below.

3. The following is added as paragraph 5.1 of the Ruling Letter:

Propertyco will file Articles of Amendment to create two new classes of shares, being Class A preferred shares and new common shares.

The Propertyco Class A preferred shares will be:

• entitled to one vote per share;
• no par value;
• entitled to non-cumulative dividends at XXXXXXXXXX percent per annum;
• redeemable and retractable at any time for an amount equal to the Opco Proportion of the FMV of the common shares of Propertyco immediately before the exchange.

The Opco Proportion is the proportion that:

a) the net FMV of the business property of Propertyco, determined pursuant to the guidelines described in paragraphs 9 and 10 below, which is to be transferred to Newco as described in paragraph 11 below,

is of

b) the net FMV of all of the business property of Propertyco, determined pursuant to the guidelines described in paragraphs 9 and 10 below, immediately before the transfer.

Each of Mr. X and Mr. Y will exchange each issued and outstanding common share of Propertyco held by him for one Propertyco Class A preferred share and one new common share. As a result of the exchange the former common shares of Propertyco will be cancelled. No election will be filed under subsection 85(1) in respect of any of the share exchanges described herein.

4. Paragraph 7 of the Ruling Letter is replaced by:

Mr. X and Mr. Y will each transfer to Newco all of the Propertyco Class A preferred shares owned by him in exchange for common shares of Newco. No other consideration will be paid by Newco for such shares. The addition to the stated capital of the Newco common shares in respect of each such transfer will be equal to the FMV of the Class A preferred shares of Propertyco that were transferred.

Immediately after the share transfers described herein, the FMV of the shares of Newco owned by each of Mr. X and Mr. Y will be equal to or approximate the amount determined by the formula

(A x B/C) + D

as found in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1). In addition, no person other than Mr. X and Mr. Y will own any shares of Newco.

Following the share transfers described herein, Propertyco and Newco will be related to each other pursuant to subparagraph 251(2)(c)(i) of the Act.

The number of Propertyco Class A preferred shares owned by Newco will be more than 10 percent of all the issued shares of Propertyco, having full voting rights in all circumstances, and their FMV will be more than 10 percent of the aggregate FMV of all the issued shares of Propertyco.

5. Paragraph 8 of the Ruling Letter is replaced by:

Each of Mr. X and Mr. Y will jointly elect under subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), to transfer his Class A preferred shares of Propertyco to Newco at an agreed amount equal to his ACB of such shares, which amount is less than their FMV as of the date of transfer.

6. The liabilities of Opco referred to in subparagraph 10(a), do not include any liabilities owing by Opco to Propertyco.

7. The word "and" at the end of subparagraph 10(c) of the Ruling Letter is deleted and subparagraph 10(d) of the Ruling Letter is replaced by:

d) the amount of any deferred taxes or future income taxes recoverable which is recorded on the financial statements of Propertyco or Opco will not be considered a liability or an asset of such corporation; and

e) in determining the amount of cash or near cash property, the balance of cash on deposit with any financial institution will be reduced by any outstanding cheques written against that account. To the extent that the amount of any outstanding cheques exceeds the aggregate balance of any cash on hand and funds on deposit, such excess amount will be considered a current liability of such corporation.

8. The last subparagraph of paragraph 11 of the Ruling Letter is deleted.

9. In paragraph 14 of the Ruling Letter, the expression "purchase for cancellation" is replaced by "redemption".

10. Paragraph 15 of the Ruling Letter is replaced by:

On the first business day following the end of Newco's first taxation year, Propertyco will redeem its Class A preferred shares held by Newco at their FMV. The purchase price will be paid by Propertyco issuing to Newco a non-interest bearing demand promissory note (the "Propertyco Note") with a principal amount and FMV equal to the FMV of such Class A preferred shares held by Newco. Newco will accept the Propertyco Note as full payment of the purchase price for each Propertyco Class A preferred share so redeemed.

11. In ruling A, each reference to "common shares of Propertyco" is replaced by "Class A preferred shares of Propertyco".

12. Ruling F of the Ruling Letter is replaced by:

F. On the redemption by Propertyco of its Class A preferred shares held by Newco, as described in paragraph 14 above, Propertyco will be deemed by subsection 84(3) to have paid, and Newco will be deemed by that subsection to have received, a dividend equal to the amount by which the total redemption price paid for the shares exceeds the PUC in respect of those shares.

13. Ruling H of the Ruling Letter is replaced by:

H. No taxes under Part IV.1 will be payable by the recipient of any dividend referred to in Ruling E and F as each such dividend will be an excepted dividend by virtue of paragraph (c) of the definition "excepted dividend" in section 187.1.

14. Ruling I of the Ruling Letter is replaced by:

I. No taxes under Part VI.1 will be payable by the payer of any dividend referred to in Ruling E and F as each such dividend will be an excluded dividend by virtue of paragraph (a) of the definition "excluded dividend" in subsection 191(1) because each of Propertyco and Newco will have a substantial interest, within the meaning assigned by paragraph 191(2)(a), in the payer corporation immediately before the redemption of such shares.

15. Ruling J of the Ruling Letter is replaced by:

J. By virtue of paragraph 186(4)(b), Newco will be connected with Propertyco. Provided that the Newco 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 Ruling E above, Propertyco will not be subject to Part IV tax under subsection 186(1) in respect of such dividend.

16. Ruling K of the Ruling Letter is replaced by:

K. By virtue of paragraph 186(4)(b), Propertyco will be connected with Newco. Provided that Propertyco 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 Ruling F above, Newco will not be subject to Part IV tax under subsection 186(1) in respect of such dividend.

17. Ruling L of the Ruling Letter is replaced by:

L. For each Propertyco shareholder who holds Propertyco common shares as capital property, the provisions of subsection 86(1) of the Act will apply, and the provisions of subsection 86(2) of the Act will not apply, to the share exchange described in paragraph 5.1 above, such that the cost of the new Propertyco common shares and Propertyco Class A preferred shares received on the share exchange will be deemed by paragraph 86(1)(b) of the Act to be an amount equal to that proportion of the aggregate ACB to the particular shareholder, immediately before the share exchange, of the Propertyco common shares, that

(a) the fair market value, immediately after the share exchange, of the new Propertyco common shares or Propertyco Class A Preferred Shares, as the case may be,

is of

(b) the fair market value, immediately after the share exchange, of all the shares of Propertyco received by the particular shareholder for the Propertyco common shares.

Notwithstanding the amendments described herein, we confirm that, subject to the conditions set out in the Ruling Letter, the rulings given in the Ruling Letter, as amended herein, will continue to be binding on the Canada Customs and Revenue Agency in accordance with the practice outlined in Information Circular 70-6R3, dated December 30, 1996, provided that the proposed transactions are completed in the manner described in the Ruling Letter, as amended herein, by XXXXXXXXXX.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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