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.
Principal Issues: Internal reorganization within a related group.
Position: Favourable rulings/opinions provided.
Reasons: In compliance with the law and previous positions.
XXXXXXXXXX
2009-033767
XXXXXXXXXX
XXXXXXXXXX , 2010
Dear Sir:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in your emails of XXXXXXXXXX .
We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues involved described 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 taxpayer or a related person;
(iv) before the courts or if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Except as otherwise stated, a reference in this ruling application to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act.
Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.
Throughout this letter, the corporate and individual taxpayers will be referred to as follows:
"A" refers to XXXXXXXXXX ;
"Cancol" refers to XXXXXXXXXX ;
"Canco2" refers to XXXXXXXXXX ;
"Canco3" refers to XXXXXXXXXX ;
"Canco4" refers to XXXXXXXXXX ;
"Canco5" refers to XXXXXXXXXX ;
"Canco6" refers to XXXXXXXXXX ;
"Canco7" refers to XXXXXXXXXX ;
"Holdco1" refers to XXXXXXXXXX ;
"Holdco2" refers to XXXXXXXXXX ;
"Newco" refers to a corporation to be incorporated under the XXXXXXXXXX as described in Paragraph 12; and
"Subco" refers to a corporation to be incorporated under the XXXXXXXXXX as defined in Paragraph 11.
Definitions
In this letter, the following terms have the meanings specified.
"ACB" has the meaning assigned to the expression "adjusted cost base" in section 54;
"Act" refers to the Income Tax Act (Canada);
"aggregate investment income" has the meaning assigned by subsection 129(4);
"CAD" refers to Canadian dollars;
"Canco1 Pref Shares" refers to the XXXXXXXXXX preference shares in the capital of Cancol held by Canco5;
"Canco5 Debt" refers to the USD $XXXXXXXXXX obligation of Canco5 owing to Cancol;
"CBCA" refers to the Canada Business Corporations Act;
"CCPC" refers to "Canadian-controlled private corporation", as defined in subsection 125(7);
"dividend rental arrangement" has the meaning assigned by subsection 248(1);
"eligible dividend" has the meaning assigned by subsection 89(1);
"excessive eligible dividend designation" has the meaning assigned by subsection 89(1);
"GRIP" refers to "general rate income pool", as defined in subsection 89(1);
"FMV" means "fair market value";
"guarantee agreement" has the meaning assigned by subsection 112(2.2);
"LRIP" refers to "low rate income pool", as defined in subsection 89(1);
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XXXXXXXXXX
"Paragraph" means a numbered paragraph in this letter;
"Proposed Transactions" means the transactions described in Paragraphs 11 to 21 herein;
"public corporation" has the meaning assigned by subsection 89(1);
"PUC" means "paid-up capital" within the meaning assigned by subsection 89(1);
"RDTOH" refers to "refundable dividend tax on hand", as defined in subsection 129(3);
"taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
"USD" refers to United States dollars.
Facts
1. Cancol is a corporation governed by the XXXXXXXXXX . It is a taxable Canadian corporation and a public corporation. Cancol's Business Number is XXXXXXXXXX . Its affairs are administered by the XXXXXXXXXX Tax Services Office of CRA and it files its return with the XXXXXXXXXX Tax Centre.
Holdco2 holds all of the "multiple voting shares" of the capital stock of Canco1, which entitle it to approximately XXXXXXXXXX % of the Canco1 shareholder votes. Holdco2 is wholly-owned by Holdco1, of which A is the controlling shareholder and sole common shareholder. A is an individual resident in Canada.
Cancol's subordinate voting shares, which represent approximately XXXXXXXXXX% of Cancol's issued common share capital, are listed on the XXXXXXXXXX Stock Exchange and are widely held.
As at XXXXXXXXXX , the approximate aggregated FMV of the shares of the capital stock of Canco1 held by the public was CAD $XXXXXXXXXX and the approximate aggregate FMV of all shares of the capital stock of Canco1 (not including the Canco1 Pref Shares) was CAD $XXXXXXXXXX .
Canco1 has an historical practice of paying dividends to its shareholders. In XXXXXXXXXX , it paid aggregate dividends to holders of its subordinated voting shares of approximately CAD $XXXXXXXXXX , a portion of which was reinvested through Canco1's reinvestment plan.
2. Canco2 is a corporation governed by the XXXXXXXXXX . It is a taxable Canadian corporation. Canco2 is controlled by Cancol. Canco2's shareholders are corporations controlled by A or Canco1. Canco2's Business Number is XXXXXXXXXX .
3. Canco3 is a corporation governed by the XXXXXXXXXX . It is a taxable Canadian corporation. Canco3 is and will be, at any relevant time and for all purposes of the Act, a CCPC.
Before XXXXXXXXXX , Canco3 had XXXXXXXXXX common shares outstanding, of which approximately XXXXXXXXXX % were owned by A or corporations controlled by A and XXXXXXXXXX % were owned by current or former employees of Canco1.
Canco3 has purchased for cancellation all of the common shares of its capital stock held by persons other than A or corporations controlled by A to avoid the need for such shareholders to comply with certain foreign reporting obligations to which they are otherwise expected to become subject. The transfers were all effective as of the same time on XXXXXXXXXX . It was determined (and agreed) that Canco3's entire value was attributable to the preferred shares of its capital stock and that the common shares of the capital stock of Canco3 had no value. As such, the common shares repurchased were surrendered to Canco3 for no payment. As a result of the cancellation of those shares, all of the common shares of the capital stock of Canco3 are held by A or corporations controlled by A.
Canco3 also has XXXXXXXXXX preferred shares outstanding, all of which are held by Canco1. The shares held by Canco1 represent the substantial majority of the equity value of Canco3. Canco3's Business Number is XXXXXXXXXX .
4. Canco3's GRIP balance at XXXXXXXXXX was $XXXXXXXXXX . Canco3's sole source of income is its investment in securities of related corporations, and it has no income that qualifies for a deduction under subsection 125(1). The shares of the capital stock of Canco5 held by Canco3 are capital property. Canco3's RDTOH balance at XXXXXXXXXX was XXXXXXXXXX .
5. Canco4 is a corporation governed by the XXXXXXXXXX . It is a taxable Canadian corporation. Canco4 is and will be, at any relevant time and for all purposes of the Act, a CCPC. Canco4's Business Number is XXXXXXXXXX .
Canco2 holds preference shares in the capital of Canco4. Canco3 holds common shares in the capital of Canco4 that give it control of Canco4. The common shares represent the residual value of Canco4 after satisfaction of the three classes of preferred shares. The ACB and the PUC of the common shares of the capital stock of Canco4 held by Canco3 are CAD $XXXXXXXXXX and CAD $XXXXXXXXXX , respectively. The common shares of the capital stock of Canco4 held by Canco3 before the Proposed Transactions are worth approximately CAD $XXXXXXXXXX.
6. Canco4's GRIP balance at XXXXXXXXXX was $XXXXXXXXXX . Canco4's sole source of income is its investment in securities of related corporations, and it has no income that qualifies for a deduction under subsection 125(1). Canco4's RDTOH balance at XXXXXXXXXX was XXXXXXXXXX .
7. Canco5 is a corporation governed by the XXXXXXXXXX . It is taxable Canadian corporation and a CCPC. Canco5's Business Number is XXXXXXXXXX .
The issued share capital of Canco5 consists of Class A shares and Class B shares, which are two classes of common shares with identical rights except that the Class A shares have XXXXXXXXXX votes per share while the Class B shares have only one vote. Canco3 holds XXXXXXXXXX Class B Shares with an aggregate ACB and PUC of CAD $XXXXXXXXXX and a par value of CAD $XXXXXXXXXX /share. Canco4 holds XXXXXXXXXX Class A shares with an aggregate ACB and PUC of CAD $XXXXXXXXXX and a par value of CAD $XXXXXXXXXX /share. The Canco5 Class A and Class B shares participate equally in dividends and in the assets of the corporation on liquidation. The difference in par value has no effect on their entitlements.
Canco5's assets consist of the Cancol Pref Shares and investments in other entities controlled by Cancol. All of Canco5's assets are capital property.
As at XXXXXXXXXX , the approximate FMV of Canco5 using a foreign exchange rate of XXXXXXXXXX CAD/USD was CAD $XXXXXXXXXX , not taking into account any "accrued" dividends on shares owned by Canco5.
8. Canco5's GRIP balance at XXXXXXXXXX was $XXXXXXXXXX . Canco5's sole source of income is its investment in securities of related corporations, and it has no income that qualifies for a deduction under subsection 125(1). Canco5's RDTOH balance at XXXXXXXXXX was XXXXXXXXXX .
9. The Cancol Pref Shares have a fixed cumulative dividend of XXXXXXXXXX %, payable annually in U.S. dollars, and are redeemable by the holder on demand for an aggregate amount of USD $XXXXXXXXXX . Canco5's ACB in the Cancol Pref Shares, and the PUC of the Cancol Pref Shares, is CAD $XXXXXXXXXX . The Cancol Pref Shares were issued on XXXXXXXXXX at a time at which the aggregate Canadian dollar equivalent value of their redemption amount was approximately CAD $XXXXXXXXXX .
Canco5 acquired one-half of the Canco1 Pref Shares on XXXXXXXXXX from Canco6 in exchange for the issuance of shares to Canco6, a subsidiary of Canco1 but controlled by A rather than by Canco1. This transfer was governed by subsection 85(1), reflecting an ACB and a PUC in those Canco1 Pref Shares of CAD $XXXXXXXXXX . Canco6 had acquired Canco1 subordinate voting shares from an unrelated shareholder of Canco1 many years earlier and exchanged those shares for Canco1 Pref Shares on XXXXXXXXXX in order to freeze this interest in Canco1. Canco6 subsequently transferred the shares of the capital stock of Canco5 it acquired in this transaction.
Canco5 acquired the balance of the Canco1 Pref Shares on the winding-up of Canco7 on XXXXXXXXXX . These shares had been issued for cash on XXXXXXXXXX and had an ACB of USD $XXXXXXXXXX (CAD $XXXXXXXXXX ), an amount which was added to the PUC of the Canco1 Pref Shares.
Canco5 received no dividends from Canco1 or Canco7 in XXXXXXXXXX . In XXXXXXXXXX , it received CAD $XXXXXXXXXX in dividends from Canco1 and no dividends from Canco7. In XXXXXXXXXX , it received CAD $XXXXXXXXXX in dividends from Canco1 and CAD $XXXXXXXXXX from Canco7. This dividend from Canco7 was paid in XXXXXXXXXX out of dividends received by it from Canco1 on the Canco1 Pref Shares in XXXXXXXXXX . Before XXXXXXXXXX , Canco5 did not hold any investments other than the Canco1 Pref Shares and the shares of the capital stock of Canco7. None of the dividends referred to in this Paragraph were paid out of low rate income of any person (i.e. income that benefited from the small business deduction in section 125 or from the deduction provided under subsection 130(1), or income that constitutes aggregate investment income).
Canco5 paid dividends of $XXXXXXXXXX in XXXXXXXXXX and $XXXXXXXXXX in XXXXXXXXXX . It paid no dividends prior to XXXXXXXXXX .
If Canco5 had ceased to be a CCPC prior to the Proposed Transactions, the approximate amount that would have to be added to its LRIP pursuant to subsection 89(8) would approximately be equal to CAD $XXXXXXXXXX .
10. The Canco5 Debt is a "commercial debt obligation" within the meaning of subsection 80(1) and was originally borrowed by Canco5 from an arm's length Canadian financial institution on XXXXXXXXXX , at which time the CAD equivalent amount was CAD $XXXXXXXXXX . On XXXXXXXXXX , Cancol acquired the Canco5 Debt from the arm's length institution on payment of USD $XXXXXXXXXX , at which time the CAD equivalent amount was CAD $XXXXXXXXXX . Cancol has held the Canco5 Debt since that time.
Proposed Transactions
11. Canco4 will incorporate Subco under the XXXXXXXXXX . Subco's share capital will consist of one class of voting common shares. On incorporation, Canco4 will subscribe for one common share for $XXXXXXXXXX . Subco will be a taxable Canadian corporation, and will be, at any relevant time and for all purposes of the Act, a CCPC.
12. Cancol will incorporate Newco under the XXXXXXXXXX . Newco's share capital will consist of one class of voting common shares and one class of non-voting preferred shares bearing dividends payable in the discretion of the directors of Newco, and redeemable and retractable on demand for the aggregate of CAD $XXXXXXXXXX per share and the amount of any declared and unpaid dividends on the share. On incorporation, Cancol will subscribe for XXXXXXXXXX common shares for $XXXXXXXXXX . Newco will add CAD $XXXXXXXXXX to its stated capital in respect of its common shares. Newco will be a taxable Canadian corporation, and will not be a CCPC.
13. The FMV of the Class B shares of the capital stock of Canco5 held by Canco3 will exceed their ACB. Canco3 will transfer its Class B shares in the capital stock of Canco5 to Canco4 in exchange for common shares in the capital stock of Canco4. Canco3 and Canco4 will agree to elect in accordance with the provisions of subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer, and will elect thereunder that Canco3's proceeds of disposition and Canco4's cost of the Class B shares of the capital stock of Canco5 will be equal to Canco3's ACB for the Class B shares immediately before the transfer. Canco4 will add an amount equal to the elected amount to the stated capital of its common shares.
14. Canco4 will transfer its Class A shares and Class B shares in the capital stock of Canco5 to Subco in exchange for common shares in the capital stock of Subco. Canco4 and Subco will agree to elect in accordance with the provisions of subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer, and will elect thereunder that Canco4's proceeds of disposition and Subco's cost of the Class A shares of the capital stock of Canco5 will be equal to an amount that is the lesser of the FMV and of the ACB of the Class A shares immediately before the transfer. Canco4 and Subco will elect under subsection 85(1) that Canco4's proceeds of disposition and Subco's cost of the Class B shares of the capital stock of Canco5 will be equal to Canco4's ACB for the Class B shares immediately before the transfer. For greater certainty, the agreed amount for purposes of the election for each property transferred will not be less that the lesser of the two amounts specified in paragraph 85(1)(c.1), nor will such amount exceed the amount permitted under paragraph 85(1)(c). Subco will add an amount equal to the aggregate elected amounts to the stated capital of its common shares.
15. Canco5 will declare and pay dividends on its Class A shares and on its Class B shares in an amount sufficient to ensure that, on the completion of the transactions described in Paragraphs 16 and 17 below, no amount will be added to Canco5's LRIP. Canco5 will not designate these dividends to be an eligible dividend. Canco5 will pay such dividends by issuing, to Subco at the time of the declaration, one or more demand, non-interest bearing Canadian dollar promissory notes in an aggregate principal amount equal to the aggregate amount of the dividends paid.
16. Subco will transfer its Class A shares and Class B shares in the capital stock of Canco5 to Newco in exchange for preferred shares in the capital stock of Newco with an aggregate redemption value equal to the aggregate FMV of the Class A shares and the Class B shares transferred. Subco and Newco will agree to elect in accordance with the provisions of subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer, and will elect thereunder that Subco's proceeds of disposition and Newco's cost of the Class A shares of the capital stock of Canco5 will be equal to an amount that is the lesser of the FMV and of Subco's ACB of the Class A shares immediately before the transfer. Subco and Newco will elect under subsection 85(1) that Subco's proceeds of disposition and Newco's cost of the Class B shares of the capital stock of Canco5 will be equal to Subco's ACB for the Class B shares immediately before the transfer. For greater certainty, the agreed amount for purposes of the election for each property transferred will not be less that the lesser of the two amounts specified in paragraph 85(1)(c.1), nor will such amount exceed the amount permitted under paragraph 85(1)(c). The agreement in respect of this transfer will contain a price adjustment clause. Newco will add an amount equal to the aggregate elected amount to the stated capital of its preferred shares and the PUC of the shares issued by Newco will not be higher than their FMV.
17. As a result of the transfer in Paragraph 16, Canco5 will cease to be a CCPC. Accordingly, its taxation year will be deemed to end immediately before that time pursuant to subsection 249(3.1). The calculation of Canco5's LRIP balance at the beginning of its first non-CCPC taxation year will be made in accordance with subsection 89(8). As a result of the dividend in Paragraph 15, no amount will be included in Canco5's LRIP under subsection 89(8).
18. Newco will redeem the preferred shares issued in Paragraph 16 by issuing to Subco a Canadian dollar-denominated, non-interest bearing demand promissory note with a principal amount equal to the redemption amount of the preferred shares being redeemed. Newco will designate the deemed dividend to be an eligible dividend in accordance with the requirements of subsection 89(14).
19. Cancol, as sole shareholder of Newco, will pass a special resolution to dissolve Newco. Newco will be wound up into Cancol in accordance with the provisions of subsection 88(1), and the Class A shares and Class B shares in the capital of Canco5 will be transferred to Cancol on the winding-up.
20. Cancol, as sole shareholder of Canco5, will pass a special resolution to dissolve Canco5. Canco5 will be wound up into Cancol in accordance with the provisions of subsection 88(1). On the winding up of Canco5, the Canco5 Debt and the Cancol Pref Shares will be cancelled. An election will be made in the prescribed form and within the prescribed time pursuant to subsection 80.01(4) with respect to the cancellation of the Canco5 Debt. The stated capital of the Class A and Class B shares of the capital stock of Canco5 will each be reduced to CAD $XXXXXXXXXX immediately prior to the dissolution.
21. Following the Proposed Transactions described above, Cancol will declare and pay in cash a dividend on its subordinate voting shares as an ordinary course dividend. Canco1 will have no LRIP at the time of its dividend to the public. In accordance with its standard practice, Cancol will designate the dividend to be an eligible dividend in accordance with the requirements of subsection 89(14).
22. No person referred to herein has made an election pursuant to section 261.
23. None of the Class A and Class B shares of the capital stock of Canco5 and the preferred shares of the capital stock of Newco will be, at any time during the implementation of the Proposed Transactions described herein;
(a) the subject of any undertaking that is a guarantee agreement;
(b) the subject of a dividend rental agreement;
(c) the subject of any secured undertaking of the type 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).
24. It is anticipated that Canco5 will have no capital dividend account at any relevant time. It is anticipated that at the end of its deemed taxation year-end generated by subsection 249(3.1), Canco5 will not have any RDTOH.
25. Newco will not be a financial intermediary corporation as defined in subsection 191(1).
26. At any time, Canco1 or Newco will not have a right described in paragraph 251(5)(b) in respect of the shares of the capital stock of Canco5.
27. Canco4 will realize a capital loss on the transfer of the Class A shares of the capital stock of Canco5, as described in paragraph 14 above, as a result of the limit stipulated by paragraph 85(1)(c). However, the capital loss in respect of the disposition of the Class A shares of the capital stock of Canco5 will be denied pursuant to subsections 40(3.3) and 40(3.4).
28. Subco will realize a capital loss on the transfer of the Class A shares of the capital stock of Canco5, as described in paragraph 16 above, as a result of the limit stipulated by paragraph 85(1)(c). However, the capital loss in respect of the disposition of the Class A shares of the capital stock of Canco5 will be denied pursuant to subsections 40(3.3) and 40(3.4).
Purpose of Proposed Transactions
29. Cancol wishes to simplify its corporate group structure. The economic value of the Cancol Pref Shares accrues entirely to Cancol itself. Accordingly, the shares do not represent any separate economic interest. However, their existence complicates financial reporting and requires the expenditure of management time. Accordingly, Canco1 wishes to eliminate the Cancol Pref Shares through a transaction that does not give rise to adverse income tax consequences.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant Facts, Proposed Transactions, Additional Information and the Purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:
A. Provided the elections required pursuant to subsection 85(6) are filed in the prescribed form and within the prescribed time, subsection 85(1) will apply to the disposition of shares of the capital stock of Canco5 described in Paragraphs 13, 14 and 16, and paragraph 85(1)(e.2) will not apply. The proceeds of disposition to Canco4 and the cost to Subco of the Class A shares of the capital stock of Canco5 transferred in paragraph 14 will be equal to the lesser of the FMV and of the Canco4's ACB of the Class A shares immediately before the disposition. The proceeds of disposition to Subco and the cost to Newco of the Class A shares of the capital stock of Canco5 transferred in paragraph 16 will be equal to the lesser of the FMV and of the Subco's ACB of the Class A shares immediately before the disposition. In every other case and subject to the limitation set out in paragraph 85(1)(c) or (c.1), the proceeds of disposition to the tranferor and the cost to the acquirer of the Class B shares transferred will be equal to the transferor's ACB of the Class B shares transferred immediately before the disposition.
B. Subsection 55(2) will apply to the taxable dividends that Subco will receive from Canco5 on the Class A shares or the Class B shares as described in Paragraph 15, unless none of the purposes of the dividend was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at FMV of the Class A shares or of the Class B shares of the capital stock of Canco5 immediately before the dividend and that could reasonably be considered to be attributable to anything other than income earned or realized by any corporation after 1971 and before the relevant safe-income determination time.
C. Pursuant to subsection 84(3), Newco will be deemed to have paid a dividend to Subco on the redemption of its preferred shares in Paragraph 18 equal to the amount by which the proceeds of redemption exceed the paid-up capital of such shares.
D. Subsection 55(2) will apply to the taxable dividend that Subco is otherwise deemed to receive pursuant to subsection 84(3) as a consequence of the redemption by Newco of its preferred shares held by Subco as described in Paragraph 18, unless the amount of the reduction to the accrued capital gain on the preferred shares of the capital stock of Newco as a consequence of such dividend is wholly attributable to income earned or realized by any corporation after 1971 and before the relevant safe-income determination time.
E. The Proposed Transactions, other than those contemplated in Paragraphs 19 and 20, will not, in and of themselves, be considered to result in any disposition to, or increase in interest by, an unrelated person described in subparagraphs 55(3)(a)(i) to (v).
F. Subsection 112(1) will apply to the dividends declared and paid pursuant to Paragraph 15 above, and none of subsections 112(2.1), (2.2),(2.3) or (2.4) will apply.
G. The dividends declared and paid from Canco5 to Subco according to Paragraph 15 will not be subject to tax under Part IV.1 or VI.1 by virtue of paragraph (b) of the definition of "excepted dividend" in subsection 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1), respectively.
H. Provided that, at the end of its deemed taxation year end in which the dividends were paid, Canco5 has not any RDTOH, the dividends declared and paid from Canco5 to Subco according to Paragraph 15 will not be subject to Part IV tax.
I. Subsection 112(1) will apply to the deemed dividend arising from the redemption of the preferred shares in the capital stock of Newco held by Subco, as provided for in Paragraph 18, and none of subsections 112(2.1), (2.2), (2.3) or (2.4) will apply.
J. The deemed dividend arising from the redemption of the preferred shares in the capital stock of Newco, as provided for in Paragraph 18, will not be subject to tax under Part IV.1 or VI.1 by virtue of paragraph (b) of the definition of "excepted dividend" in subsection 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1). Such deemed dividend will not be subject to Part IV tax.
K. Provided that Newco's LRIP balance is nil at the time it will be deemed to pay the dividend described in Paragraph 18, Newco will not be considered to have made an excessive eligible dividend election in connection with such deemed dividend.
L. On the winding-up of Newco described in Paragraph 19, subsection 88(1) will apply such that:
(a) Cancol will be deemed to dispose of its shares of the capital stock of Newco for proceeds of disposition equal to their ACB;
(b) Newco will be deemed to dispose of the Class A shares and the Class B shares of the capital stock of Canco5 for proceeds of disposition equal to their ACB, and Canco1 will be deemed to acquire those shares with the same cost; and
(c) the provisions of subsections 84(2) and 69(5) will not apply to Newco or Cancol.
M. On the winding-up of Canco5 described in Paragraph 20, subsection 88(l) will apply such that:
(a) Canco1 will be deemed to dispose of its Class A and Class B shares of the capital stock of Canco5 for proceeds of disposition equal to their ACB;
(b) Canco5 will be deemed to dispose of its assets, including its Cancol Pref Shares, for proceeds of disposition equal to their respective ACB, and Cancol will be deemed to acquire those assets with the same cost;
(c) Cancol will not realize any gain or loss pursuant to subsection 39(1) or 39(2) on the cancellation of the Cancol Pref Shares as a result of the winding-up;
(d) provided the election required pursuant to subsection 80.01(4) is made in the prescribed manner:
(i) the Canco5 Debt will be deemed to be settled for an amount equal to Cancol's cost amount in the debt, such that Cancol will have no gain or loss on the cancellation of the Canco5 Debt;
(ii) no "forgiven amount", within the definition of that term in subsection 80(1), will arise as a result of the deemed settlement of the Canco5 Debt; and
(iii) Canco5 will sustain a capital loss pursuant to subsection 39(2) equal to the amount by which the amount deemed to have been paid by Canco5 in satisfaction of the principal amount of the Canco5 Debt pursuant to subsection 80.01(4) exceeds the CAD equivalent of the USD $XXXXXXXXXX amount of the Canco5 Debt on the date such amount was borrowed by Canco5; and
(e) the provisions of subsection 84(2) and 69(5) will not apply to Canco5 or Cancol.
N. The Proposed Transactions will not, in and of themselves, cause Cancol to be considered as having made an excessive eligible dividend election in connection with the dividend described in Paragraph 21.
O. The provisions of subsections 15(1) and 56(2) and section 246 will not apply to the Proposed Transactions, in and by themselves.
P. 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 in the rulings above.
The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX .
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.
Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed:
(a) any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically confirmed in the rulings given above;
(b) the determination of the FMV or ACB of any property referred to herein, the PUC in respect of any share referred to herein, or the outstanding balance of various tax accounts for any of the corporate entities described herein, including the balance of GRIP, LRIP or RDTOH.
Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred and the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. In addition, any such adjustment could affect Ruling A above. Furthermore, none of the rulings given in this letter are intended to apply to the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Interpretation Bulletin IT-169.
It is our view that the winding-up of Newco into Canco1 as described in Paragraph 19 or the winding-up of Canco5 into Canco1 as described in Paragraph 20 could cause subsection 55(2) of the Act to apply to the taxable dividends referred to in Rulings B and D. However, we understand that the Department of Finance has issued a letter date April 21, 2005 (the "comfort letter"), indicating that it was prepared to recommend to the Minister of Finance that situations described in the comfort letter (i.e. essentially where a wholly-owned subsidiary is amalgamated with, or wound-up into, its parent) should not result in a significant increase in the interest of the subsidiary solely as a result of the application of paragraphs 55(3.01)(b) and (c). If such legislation is ever enacted and is effective for the period in which the Proposed Transactions take place, the Proposed Transactions contemplated in Paragraphs 19 and 20 should not cause subsection 55(2) to apply to the dividends described in Rulings B and D.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
Yours truly,
XXXXXXXXXX
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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