2009 Ruling 2009-0312081R3 - Donation of Exchangeable Shares

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 taxable capital gain on the disposition of exchangeable shares will be nil where the shares are exchanged for shares that are subsequently gifted to a qualified donee.

Position: Yes.

Reasons: Based on the proposed transactions, the requirements of subparagraph 38(a.1)(iii) are satisfied.

XXXXXXXXXX 						2009-031208

XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX , in which you requested an advance income tax ruling on behalf of the taxpayers listed in Schedule A. We also acknowledge the additional information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX ).

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the ruling request:

(i) is in an earlier return of the taxpayers or a related person;
(ii) is being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or a related person;
(iii) is under objection by the taxpayers or a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
(v) is the subject of a ruling previously issued to the taxpayers by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act") and all terms used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the relevant definitions, the facts, proposed transactions and their purposes is as follows:

DEFINITIONS

"ACO" means XXXXXXXXXX . as described more fully in 2 and 3 below;

"BCO" means XXXXXXXXXX as described more fully in 3 below;

"CCO" means XXXXXXXXXX . as described in Schedule A;

"DCO" means XXXXXXXXXX . as described in 10 below;

"CRA" means the Canada Revenue Agency;

"designated stock exchange" has the meaning assigned by subsection 248(1);

"Donated Shares" means the number of BCO Shares indicated in Schedule A that will be gifted to each of the Recipients by each Taxpayer;

"Partnership" means XXXXXXXXXX as described in 4 below;

"qualified donee" has the meaning assigned by subsection 149.1(1);

"Recipient" or "Recipients" means the Charities listed in Schedule A either singly or collectively as the case may be;

"registered charity" has the meaning assigned by subsection 248(1);

"taxable Canadian corporation" has the meaning assigned by subsection 89(1);

"Taxpayer" or "Taxpayers" means the corporations listed in Schedule A either singly or collectively as the case may be; and

"Units" means the partnership units of the Partnership.

FACTS

1. Each of the Taxpayers is a "taxable Canadian corporation". The address, business number and Tax Services Office of each of the Taxpayers are set out in Schedule A.

2. ACO is a "taxable Canadian corporation". ACO is not a "mutual fund corporation" as defined in subsection 131(8).

3. ACO is controlled by BCO, a corporation that is not resident in Canada for purposes of the Act and that is resident in XXXXXXXXXX for purposes of the Canada-XXXXXXXXXX Income Tax Convention. The ordinary shares of BCO ("BCO Shares") are listed for trading on the XXXXXXXXXX , a designated stock exchange.

4. The Partnership is a general partnership existing under XXXXXXXXXX law. The Partnership provided XXXXXXXXXX services primarily in the XXXXXXXXXX sector.

5. Each of the Taxpayers owns non-voting exchangeable shares of ACO ("Exchangeable Shares"). The Exchangeable Shares are not listed or traded on any designated stock exchange. The terms and conditions of the Exchangeable Shares ("Exchangeable Share Provisions") that existed at the time of their issue, which continue to the present, are set out in the Articles of Amendment of ACO. Pursuant to these terms and conditions, an Exchangeable Share is economically equivalent to one BCO Share and includes a right to exchange the share for a BCO Share. Included in the Exchangeable Share Provisions is a mechanism whereby cash dividends are paid on the Exchangeable Shares whenever dividends are paid on the BCO Shares. The current dividend policy of BCO is XXXXXXXXXX . You advise us that the Exchangeable Share Provisions have not been amended in any relevant respect since the Exchangeable Shares were issued.

6. Under the Exchangeable Share Provisions, Exchangeable Shares entitle their holders to give notice ("Exchange Notice") of an intention to exercise a right to exchange the Exchangeable Shares for a corresponding number of BCO Shares and, if there are declared but unpaid dividends on the BCO Shares at the time of such exchange, a corresponding amount of cash (collectively, the "Exchange Consideration").

7. When an Exchange Notice is delivered in respect of particular Exchangeable Shares, BCO or a subsidiary of BCO (other than ACO) ("Permitted Subsidiary") has an overriding right ("Call Right") to purchase those particular Exchangeable Shares for the Exchange Consideration.

8. If BCO or a Permitted Subsidiary does not exercise the Call Right in respect of the Exchangeable Shares within the time specified in the Exchangeable Share Provisions, ACO is required to redeem those Exchangeable Shares for the Exchange Consideration.

9. With the exception of CCO, the Taxpayers acquired their Exchangeable Shares on XXXXXXXXXX , in consideration of their transfer to ACO of their Units. Each of the Taxpayers filed joint elections with ACO under subsection 85(1) in respect of their transfer of Units to ACO for Exchangeable Shares.

10. CCO acquired its Exchangeable Shares from DCO, a taxable Canadian corporation, on XXXXXXXXXX . CCO filed a joint election with DCO under subsection 85(1) in respect of the transfer to CCO of these shares. DCO acquired these Exchangeable Shares on XXXXXXXXXX , in consideration of its transfer to ACO of its Units. DCO filed a joint election with ACO under subsection 85(1) in respect of its transfer of Units to ACO for Exchangeable Shares.

PROPOSED TRANSACTIONS

11. Each of the Taxpayers will deliver an Exchange Notice to ACO, in accordance with the Exchangeable Share Provisions, in respect of no less than the number of Donated Shares. Such Exchange Notice will be delivered at a time when there are no declared but unpaid dividends on the BCO Shares, such that the Exchange Consideration shall consist solely of BCO Shares.

12. Pursuant to the terms and conditions of the Exchangeable Share Provisions, either

(a) BCO or a Permitted Subsidiary will exercise the Call Right in respect of the Exchangeable Shares that are the subject of such Exchange Notice whereby BCO or a Permitted Subsidiary will acquire the Exchangeable Shares in exchange for a corresponding number of BCO Shares, or

(b) ACO will redeem those Exchangeable Shares for a corresponding number of BCO shares (in either case, an "Exchange"). The relevant Taxpayer will receive, as consideration for the Exchange, the Exchange Consideration, which will consist solely of BCO Shares. Where the Exchange is undertaken by BCO, it will issue BCO Shares from treasury to the relevant Taxpayer. Where the Exchange is undertaken by a Permitted Subsidiary or ACO, the BCO Shares will be issued by BCO to the Permitted Subsidiary or ACO, as the case may be, to enable the Permitted Subsidiary or ACO to effect the Exchange.

13. Within thirty days of the Exchange, the relevant Taxpayer will give, by way of gift, the Donated Shares to the Recipient or Recipients. You advise that each of the Recipients is a registered charity and a qualified donee and that the "amount of the advantage", as defined in proposed subsection 248(32) contained in former Bill C-10 (Second Senate Reading December 4, 2007) 1 , in respect of the gifts, is expected to be nil for each of the Taxpayers.

PURPOSE OF THE PROPOSED TRANSACTIONS

14. The purpose of the proposed transactions in 11 to 13 above is for the Taxpayers to achieve their individual and separate philanthropic objectives in a tax-efficient manner.

RULING

Where a Taxpayer makes an Exchange, provided that:

(i) at the time of the Exchange, the BCO Shares are listed on a designated stock exchange,

(ii) the Exchange Consideration received by the relevant Taxpayer on that Exchange consists solely of BCO Shares,

(iii) the Exchangeable Shares are capital property of the relevant Taxpayer,

(iv) the relevant Taxpayer makes a gift of the Donated Shares to a Recipient or Recipients within thirty days of the Exchange,

(v) the Recipient or Recipients are qualified donees at the time the gift is made, and

(vi) the amount of the advantage as defined in proposed subsection 248(32) in former Bill C-10 is nil,

to the extent that the Taxpayer has a taxable capital gain arising from the disposition of an Exchangeable Share that was disposed of to acquire a BCO Share, that taxable capital gain will be nil pursuant to subparagraph 38(a.1)(iii).

This Ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 and is binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX .

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:

(i) the income tax consequences to any Taxpayer resulting from the Exchange absent the application of subparagraph 38(a.1)(iii),
(ii) the fair market value of any of the shares described in this Ruling, or
(iii) the amount that may be claimed pursuant to paragraph 110.1(1)(a) in any taxation year of the Taxpayers.

Yours truly,

XXXXXXXXXX
Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

ENDNOTES

1 Bill C-10 received second reading in the Senate on December 4, 2007, but Parliament was prorogued before this bill was enacted. The proposed amendments contained in this bill have yet to be re-introduced.