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.
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As you are aware, ruling requests from the above companies involve a proposed "freeze" using subsection 85.1(3) (or some other variation) on the following lines.
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UKCO set up NEWUSCO (a non-resident of Canada) and subscribes for 100% of its common shares. CANCO then disposes of all its common shares of USOPCO to NEWUSCO in exchange for retractable shares of NEWUSCO (alleged having FMV equal to that of the common shares) under the provisions of 85.1(3), the stated purpose being that it is now more efficient for USOPCO to operate directly under UKCO.
We have been asked to rule that 85.1(3) applies and that subsections 15(1), 56(2), 95(6) and 245(2) do not.
It has been decided that we will not rule on freezes of this type for the following reasons;
- (i) The real intent of the proposed transactions is, generally, to sever the connection with Canada (without Canadian tax consequences) because there are greater overall tax benefits in a non-Canadian corporate structure. We do not normally rule in such circumstances (I/C 70-6R para. 14) [Information Circular 70-6R].
- (ii) Although 85.1(3) has, technically, applied in the cases brought to our attention it would be necessary for the FMV of the retractable shares to equal that of the common shares if the application of 15(1), 56(2) or 245(2) is to be avoided. Any ruling would therefore, involve acceptance by us that equal FMV had, in fact, been taken back. This would be difficult to establish since CANCO will have lost control of USOPCO and also all or part of its future growth. There are also other valuation problems. Our published position is that we will not rule where the matter involved is the determination of FMV of property (I/C 70-6R para. 14).
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