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: Whether the Proposed Transactions would, in and by themselves, operate to deny the exception in paragraph 55(3)(b) from applying to the dividends resulting from the 2008 Split-up Butterfly.
Position: The Proposed Transactions will not, in and by themselves, cause the exception in paragraph 55(3)(b) not to apply.
Reasons: Wording of the statute
XXXXXXXXXX , 2010
Dear XXXXXXXXXX :
Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers referred to above. We also acknowledge the information provided during our telephone conversations (XXXXXXXXXX) and correspondence concerning your request. The information or documents submitted with your request are part of this letter only to the extent described herein.
We understand that to the best of your knowledge and that of the taxpayers on whose behalf this ruling is being requested, none of the issues involved in this ruling request is:
(a) in an earlier return of the taxpayers or related persons;
(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or related persons;
(c) under objection by the taxpayers or related persons;
(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(e) the subject of a ruling previously considered by the Income Tax Rulings Directorate.
You have advised that, to the best of your knowledge and that of each of the taxpayers, the Proposed Transactions will not result in any of the taxpayers or related person described herein being unable to pay its outstanding tax liabilities.
Unless otherwise expressly stated, every reference herein to the "Act" or to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision 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 and the Income Tax Regulations thereunder are referred to as the "Regulations."
In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:
"XXXXXXXXXX Split-up Butterfly" means the transactions completed by TC2 and DC on or about XXXXXXXXXX as described generally in Paragraph 9;
"ACB" means "adjusted cost base" as that expression is defined in subsection 248(1);
"agreed amount" in respect of an eligible property means the amount that the transferor and the transferee of the property have agreed upon in an election under subsection 85(1);
"BCA" means the Business Corporations Act (XXXXXXXXXX) and, where applicable, its predecessor statutes;
"Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);
"capital property" has the meaning assigned by section 54;
"CRA" refers to the Canada Revenue Agency;
"DC" refers to XXXXXXXXXX ;
"Employee1" refers to XXXXXXXXXX ;
"Employee2" refers to XXXXXXXXXX ;
"eligible property" has the meaning assigned by subsection 85(1.1);
"FMV" or "fair market value" means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale expressed in terms of cash;
"forgiven amount" has the meaning assigned by subsection 80(1);
"Implementation Date" means the date that the Proposed Transactions will be implemented and completed;
"PUC" means paid-up capital as that expression is defined in subsection 89(1);
"Paragraph" refers to a numbered paragraph in this letter;
"private corporation" has the meaning assigned by subsection 89(1);
"proceeds of disposition" has the meaning assigned by section 54;
"Proposed Transactions" means the proposed transactions described in Paragraphs 19 to 24;
"related persons" has the meaning assigned by subsection 251(2);
"series of transactions" includes the transactions or events referred to in subsection 248(10);
"share" has the meaning assigned by subsection 248(1);
"Shareholder1" refers to XXXXXXXXXX ;
"Shareholder2" refers to XXXXXXXXXX ;
"stated capital" has the meaning assigned by the BCA;
"Subco" refers to XXXXXXXXXX ;
"taxable Canadian corporation" ("TCC") has the meaning assigned by subsection 89(1);
"taxable dividend" has the meaning assigned by subsection 89(1);
"TC1" refers to XXXXXXXXXX ; and
"TC2" refers to XXXXXXXXXX .
1. DC was incorporated under the BCA and is a CCPC and a TCC. DC carries on business as XXXXXXXXXX in Canada. DC deals with the XXXXXXXXXX Tax Service Office and its returns are filed with the XXXXXXXXXX Taxation Centre.
2. The issued and outstanding shares of DC consist of XXXXXXXXXX Class A common voting shares which are all owned by TC1.
3. TC1 was incorporated under the BCA and is a CCPC and a TCC. TC1 deals with the XXXXXXXXXX Tax Service Office and its returns are filed with the XXXXXXXXXX Taxation Centre.
4. The shareholders of DC immediately prior to the XXXXXXXXXX Split-up Butterfly distribution were:
a. TC1 which held XXXXXXXXXX Class A common voting shares; and
b. Shareholder2 who held XXXXXXXXXX Class B common voting shares.
5. TC2 was incorporated under the BCA and was, at the time of the XXXXXXXXXX Split-up Butterfly, a CCPC and a TCC. All of the issued and outstanding shares of TC2 were held at that time by Shareholder2.
6. Shareholder1 is, and has always been, a resident of Canada. Shareholder1 is, and was at the time of the XXXXXXXXXX Split-up Butterfly, an employee of DC and actively involved in DC's business.
7. Shareholder2 was, at the time of the XXXXXXXXXX Split-up Butterfly, a resident of Canada.
8. Shareholder1 and Shareholder2 were not related to each other within the meaning of subsection 251(2) at the time of the XXXXXXXXXX Split-up Butterfly.
9. On or about XXXXXXXXXX , the following transactions occurred (the "XXXXXXXXXX Split-up Butterfly"):
a. Shareholder2 transferred all of his shares of DC to TC2 in exchange for shares of TC2. An election was made under subsection 85(1) with respect to such transfer;
b. DC transferred XXXXXXXXXX % of each of its net cash or near cash, business and investment property to TC2 and received shares of TC2 as consideration. An election under subsection 85(1) was made with respect to the transfer of property that was eligible property; and
c. all of the shares of DC held by TC2 were purchased for cancellation in consideration of the issue of a promissory note by DC to TC2. All of the shares of TC2 held by DC were redeemed in consideration of the issue of a promissory note by TC2 to DC. The notes were set-off against each other and cancelled.
10. No advance income tax ruling was obtained from the CRA with respect to the XXXXXXXXXX Split-up Butterfly.
11. As a result of the XXXXXXXXXX Split-up Butterfly, the XXXXXXXXXX Class A common voting shares of DC held by TC1 represent all of the issued and outstanding shares of DC. TC1 holds such shares of DC as capital property.
12. Employee1 is a resident of Canada and is an employee of DC.
13. Employee2 is a resident of Canada and was an employee of Subco.
14. Shareholder1, Shareholder2, Employee1 and Employee2 are not related to each other within the meaning of subsection 251(2) and are dealing with each other at arm's length at all relevant times.
15. At the time the XXXXXXXXXX Split-up Butterfly was completed, DC held XXXXXXXXXX % of the issued and outstanding shares of Subco. The remaining XXXXXXXXXX % of the issued and outstanding shares of Subco were held by Employee2. DC and Employee2 were issued their shares of Subco on incorporation. The Subco shares held by DC were property owned immediately before the XXXXXXXXXX Split-up Butterfly transfer by DC and not disposed of by it on the transfer.
16. Subco was incorporated under the BCA and is, and was at all relevant times, a CCPC and a TCC.
17. The aggregate FMV of all of the issued and outstanding shares of DC on the Implementation Date is estimated to be $XXXXXXXXXX (subject to working capital and other adjustments).
18. Effective XXXXXXXXXX Employee2 sold XXXXXXXXXX shares in Subco to DC for $XXXXXXXXXX representing the then current FMV of such Subco shares. The FMV of the shares of Subco had declined since the XXXXXXXXXX Split-up Butterfly as a result of business difficulties. The sale of the Subco shares by Employee2 to DC resulted in an acquisition of control by DC of Subco. Employee2 also settled XXXXXXXXXX shareholder loan advances to Subco of $XXXXXXXXXX for $XXXXXXXXXX and ceased to be an employee of Subco and DC as well as agreeing to a non-compete period. The settlement of the shareholder loan advances from Employee2 to Subco will give rise to a forgiven amount which will be reported by Subco in accordance with section 80. No amount was paid in consideration of the non-compete.
19. Articles of Amendment will be filed for DC to increase the authorized capital by adding Class A voting preferred shares and Class B non-voting preferred shares issuable in one or more series.
20. DC will grant employee stock options to Employee1.
21. On the Implementation Date, DC will issue to Employee1, pursuant to the exercise of the employee stock option, approximately (i) XXXXXXXXXX non-voting, redeemable and retractable Class B series II preferred shares which have a non-cumulative dividend rate of XXXXXXXXXX % and an aggregate redemption amount and FMV of approximately $XXXXXXXXXX ; and (ii) XXXXXXXXXX non-voting, redeemable and retractable Class C preferred shares, ranking in priority behind the DC Class B preferred shares, which have a non-cumulative dividend rate of XXXXXXXXXX % and an aggregate redemption amount and FMV to be determined, but likely less than $XXXXXXXXXX (or thereabouts). On the exercise of the employee stock option, Employee1 will pay DC a nominal amount for the issuance of the DC Class B and Class C preferred shares. The nominal amount paid by Employee1 to DC on the issuance of the DC Class B series II preferred shares will be added to the stated capital of the DC Class B series II preferred shares. The nominal amount paid by Employee1 to DC on the issuance of the DC Class C preferred shares will be added to the stated capital of the DC Class C preferred shares.
22. On the Implementation Date, TC1 will subscribe for 1 Class A voting preferred share of DC, having a non-cumulative dividend rate of XXXXXXXXXX % for a subscription price of $XXXXXXXXXX . An amount of $XXXXXXXXXX will be added to the stated capital of the Class A preferred shares of DC. The Class A preferred share of DC is being issued to TC1 to ensure that at all relevant times, TC1 controls DC.
23. On the Implementation Date, TC1 will exchange all of its Class A common voting shares of DC for a number of redeemable, retractable, non-voting Class B series I preferred shares of DC with a non-cumulative dividend rate of XXXXXXXXXX %. The aggregate redemption amount and FMV of the Class B series I preferred shares of DC received by TC1 will equal the aggregate FMV at the time of the exchange of the DC Class A common voting shares for which they were exchanged. No other consideration will be received by TC1 on the share exchange. The share exchange will be subject to a standard price adjustment clause. No election will be made under subsection 85(1) with respect to the share exchange. The PUC of the Class B series I preferred shares of DC will be determined having regard to subsection 86(2.1).
24. Immediately after the share exchange described in Paragraph 23, the following shareholders will concurrently subscribe for and be issued Class B common voting shares of DC for a subscription price of $1.00 per share:
a. TC1 - XXXXXXXXXX Class B common voting shares; and
b. Employee1 - XXXXXXXXXX Class B common voting shares.
Purpose of the Proposed Transactions
25. The purpose of the Proposed Transactions is to:
a. issue DC stock reflecting a portion of DC's current FMV to Employee1; and
b. permit Employee1 to participate in the growth of the business of DC.
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our ruling is set forth below:
A. The Proposed Transactions will not, in and by themselves, cause any of the provisions of subsection 55(3.1) to operate to deny the exception in paragraph 55(3)(b) to the dividends resulting from the XXXXXXXXXX Split-up Butterfly.
The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on the CRA provided that the Proposed Transactions are completed by XXXXXXXXXX .
The above ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the ruling provided herein.
1. Unless otherwise confirmed in the above ruling, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination or accepted any method for determination in respect of:
a. the PUC of any share or the ACB or FMV of any property referred to herein; or
b. any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the ruling given above, and for greater certainty, we are not commenting on:
(i) whether any of the Proposed Transactions would be part of a series of transactions or events that includes the XXXXXXXXXX Split-up Butterfly; or
(ii) any tax consequences of the XXXXXXXXXX Split-up Butterfly.
2. You have informed us that the transaction described in Paragraph 23 will be subject to a price adjustment clause. Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of the ruling given above, any adjustment to the FMV of the properties transferred or 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. Furthermore, the ruling given in this letter is not 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.
For Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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