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: no new issues
Position:
Reasons:
XXXXXXXXXX 3-962138
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the above taxpayer. We also acknowledge your letters of XXXXXXXXXX.
To the best of your knowledge, and that of the parties to this ruling, none of the issues contained in this advance income tax ruling is being considered by a Tax Services Office and/or a Taxation Centre in connection with an income tax return previously filed and none of the issues contained herein is under objection or appeal.
Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act").
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
XXXXXXXXXX is a Canadian-controlled private corporation and a taxable Canadian corporation which, as used here and subsequently, have the meanings assigned by subsections 125(7) and 89(1), respectively. XXXXXXXXXX was incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX. XXXXXXXXXX has continuously carried on XXXXXXXXXX businesses from inception to the current time.
The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX voting common shares without nominal or par value (the "Common Shares") and XXXXXXXXXX non-cumulative voting preferred shares (the "Preferred Shares").
The issued and outstanding shares of XXXXXXXXXX are held by their holders as capital property as follows:
Holder Number
Common Shares
XXXXXXXXXX
Preferred Shares
XXXXXXXXXX
The paid-up capital of the Common Shares and Preferred Shares is XXXXXXXXXX, respectively. The Preferred Shares do not have a significant fair market value and do not entitle the holder to receive a significant amount of the assets of XXXXXXXXXX on dissolution. XXXXXXXXXX acquired their shares of XXXXXXXXXX, respectively. None of the shares was acquired in contemplation of the proposed transactions described below.
XXXXXXXXXX. All of the individuals are resident in Canada. The terms "paid-up capital" and "capital property", as used here and subsequently, have the meaning assigned by subsection 89(1) and section 54, respectively.
XXXXXXXXXX
The assets consisted essentially of inventory.
XXXXXXXXXX to be a "joint venture". Each owns XXXXXXXXXX. Capital cost allowance is calculated and claimed individually by XXXXXXXXXX.
XXXXXXXXXX. This acquisition is considered to have occurred in the ordinary course of XXXXXXXXXX business and was not made in contemplation of the proposed transactions described below.
Immediately before the transfers of property described in paragraph 27 below, the property of XXXXXXXXXX will be classified into three types of property for the purposes of paragraph 55(3)(b), as follows:
cash or near cash property, being the current assets of XXXXXXXXXX including accounts receivable, inventory and rights arising from the prepayment of certain expenses (the "prepaid expenses") that will not be collected, sold or consumed, as the case may be, in the ordinary course of business;
investment property, being all of the assets of XXXXXXXXXX other than cash or near cash property, any income from which would, for the purposes of the Act, be income from property or a specified investment business; and
business property, being all of the assets of XXXXXXXXXX other than cash or near cash and investment property, any income from which would, for the purposes of the Act, be income from a business other than a specified investment business.
The term "specified investment business" has the meaning assigned by subsection 125(7).
For the purposes of determining the types of property under paragraph 55(3)(b) owned by XXXXXXXXXX:
funds on deposit with a commodity broker for taking hedging positions on commodities as part of its normal business operations; and
"patronage accounts" which relate to dividends received on purchases made by XXXXXXXXXX from XXXXXXXXXX and to its accounts with XXXXXXXXXX
will be categorized as business property.
In determining the net fair market value of each type of property owned by XXXXXXXXXX, immediately before the transfers of property described in paragraph 27 below, the liabilities of XXXXXXXXXX will be allocated to and be deducted in the calculation of the net fair market value of each type of property of XXXXXXXXXX as follows:
Current liabilities will be allocated to each cash or near cash property (other than accounts receivable, inventory and prepaid expenses that relate to a business and that will be sold or consumed by a corporation in the ordinary course of its business) on a pro-rata basis based on the proportion that the fair market value of each such cash or near cash property bears to the fair market value of all cash or near cash property of XXXXXXXXXX including all accounts receivable, inventory and prepaid expenses.
Liabilities, other than current liabilities, will be first allocated to the specific properties to which they relate, if any, and then to other properties of the same type, to the extent of the net fair market value of that particular type of property.
Excess unallocated liabilities (including current liabilities remaining unallocated after step (a) above), if any, will then be allocated to the cash or near cash, investment and business property of XXXXXXXXXX on a pro rata basis, based on the relative net fair market value of each type of property resulting after the allocation of liabilities in accordance with the rules described in steps (a) and (b) above and prior to the allocation of each excess liability.
For the purposes of step (c) above, the net fair market value of accounts receivable, inventory and prepaid expenses initially classified as cash or near cash property for the purposes of step (a) above and that relate to a business and that will be sold or consumed by a corporation in the ordinary course of its business will then be reclassified as business property. This reclassification will apply for the purpose of determining the types of property of XXXXXXXXXX for the purposes of paragraph 55(3)(b).
XXXXXXXXXX currently has a balance of $XXXXXXXXXX in its capital dividend account all of which will be paid to its common shareholders in proportion to their shareholdings before the proposed transactions described in paragraphs 24 through 44 below. XXXXXXXXXX does not currently have, and will not have before the time the proposed transactions described below are carried out, any unutilized losses or deductions for tax purposes or any amounts in its refundable dividend tax on hand account. At the time of the transactions described in paragraphs 29 and 30 below, XXXXXXXXXX will not have any amounts in its refundable dividend tax on hand account. The terms "refundable dividend tax on hand" and "capital dividend account" have the meanings assigned by subsections 129(3) and 89(1), respectively.
Each of XXXXXXXXXX reports income from XXXXXXXXXX.
The common shares of XXXXXXXXXX referred to herein are not, and will not, as a result of the proposed transactions described below, be taxable preferred shares which, as used here and subsequently, has the meaning assigned by subsection 248(1).
Neither XXXXXXXXXX nor any of the corporations to be formed as described in paragraph 22 below, is or will be a "specified financial institution" as defined in subsection 248(1).
There are not, and will not be, at any time prior to the completion of the proposed transactions described below, any agreements (or undertakings) which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any shares referred to in this ruling.
None of the dividends described in this ruling will be received on a share of capital stock of a corporation as part of a dividend rental arrangement of the particular corporation. The expression "dividend rental arrangement" has the meaning assigned by subsection 248(1).
None of the shares referred to in this ruling has been or will be issued or acquired as part of a transaction or event or a series of transactions or events contemplated by subsection 112(2.5).
No assets have been or will be acquired or disposed of and no liabilities have been or will be incurred or paid by XXXXXXXXXX, or a corporation controlled by it, in contemplation of and before the transfer described in paragraph 27 below, except as described herein.
None of the parties is contemplating a disposition of any of the shares of XXXXXXXXXX or any of the corporations to be formed as described in paragraph 22 below, other than as described herein.
None of the parties is contemplating an acquisition of control of XXXXXXXXXX or any of the corporations to be formed as described in paragraph 22 below, other than as described herein.
It is not contemplated that any of the parties will sell or transfer any property to a partnership or person who is not related to the vendor or transferor as part of the series of transactions or events described herein, other than as described herein, or, other than in the normal course of business.
XXXXXXXXXX files its federal income tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Taxation Services Office.
Proposed Transactions
Each of XXXXXXXXXX will incorporate a new corporation (XXXXXXXXXX, respectively). Each of XXXXXXXXXX will be a taxable Canadian corporation and a Canadian-controlled private corporation.
The authorized share capital of XXXXXXXXXX will include three classes of an unlimited number of preferred shares (Class XXXXXXXXXX Preferred Shares, Class XXXXXXXXXX Preferred Shares and Class XXXXXXXXXX Preferred Shares) each having the following attributes:
redeemable at any time at the option of the holder or issuer for an aggregate amount ("Redemption Amount") equal to the fair market value of the property received therefor (net of liabilities assumed) by the corporation at the time of issuance;
entitled to a non-cumulative cash dividend of a fixed amount per share per annum, which fixed amount will be XXXXXXXXXX% per annum (or such other amount as may be set by the directors of the corporation from time to time having in mind general interest levels in XXXXXXXXXX, not to exceed a reasonable amount) of the Redemption Amount;
entitled to a prior return of the Redemption Amount on a liquidation, dissolution or winding-up of the corporation in priority to the Common Shares of the corporation;
may be purchased, redeemed or cancelled by the corporation in the manner provided in the Business Corporations Act XXXXXXXXXX at the option of either the corporation or the holder for a price not less than the lesser of:
the aggregate Redemption Amount of such shares to be purchased at the particular time; and
the realizable value of the net assets of the corporation immediately before such purchase;
provide that any preference, right, condition or limitation attaching to the Preferred Shares can only be amended by a special resolution of the holders of each class of shares of the corporation each voting separately as a class;
restrict the payment of dividends on other classes of shares so that no such dividends may be paid on any classes of shares of the corporation so as to reduce the value of the Preferred Shares then outstanding; and
non-voting.
The Articles of Incorporation will also provide that, subject to the restrictions contained in subparagraph (f) herein, dividends may be declared and paid on any class of shares of the corporation to the exclusion of any other class of shares of the particular corporation.
XXXXXXXXXX will transfer, at fair market value, all of their shares of XXXXXXXXXX as follows:
Each of XXXXXXXXXX will elect jointly with XXXXXXXXXX under subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), to transfer the shares of XXXXXXXXXX at an amount equal to their adjusted cost base to XXXXXXXXXX immediately before the transfer. The adjusted cost base of the shares so transferred will be less than their fair market value at the time of the transfer.
As consideration, XXXXXXXXXX will issue to each of XXXXXXXXXX a non-interest-bearing promissory demand note having a principal amount and fair market value equal to the adjusted cost base (calculated in accordance with section 84.1) to XXXXXXXXXX of his or her transferred shares, and Class XXXXXXXXXX Preferred Shares having a fair market value and redemption amount equal to the difference between the fair market value of his or her transferred shares at the date of the transfer and the principal amount of the demand note issued to him or her as described herein. XXXXXXXXXX will add $XXXXXXXXXX to the stated capital account in respect of the Class XXXXXXXXXX Preferred Shares so issued. Paragraph 84.1(1)(a) will apply to decrease the paid-up capital in respect of those shares to nil for tax purposes.
The term "adjusted cost base", as used here and subsequently, has the meaning assigned by section 54.
XXXXXXXXXX will transfer, at fair market value, all of their shares of XXXXXXXXXX as follows:
Each of XXXXXXXXXX will elect jointly with XXXXXXXXXX under subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), to transfer the shares of XXXXXXXXXX at an amount equal to their adjusted cost base to XXXXXXXXXX immediately before the transfer. The adjusted cost base of the shares so transferred will be less than their fair market value at the time of the transfer.
As consideration, XXXXXXXXXX will issue to each of XXXXXXXXXX a non-interest-bearing promissory demand note having a principal amount and fair market value equal to the adjusted cost base (calculated in accordance with section 84.1) to XXXXXXXXXX of his or her transferred shares, and Class XXXXXXXXXX Preferred Shares having a fair market value and redemption amount equal to the difference between the fair market value of his or her transferred shares at the date of the transfer and the principal amount of the demand note issued to him or her as described herein. XXXXXXXXXX will add $XXXXXXXXXX to the stated capital account in respect of the Class XXXXXXXXXX Preferred Shares so issued. Paragraph 84.1(1)(a) will apply to decrease the paid-up capital in respect of those shares to nil for tax purposes.
XXXXXXXXXX will transfer, at fair market value, all of his shares of XXXXXXXXXX as follows:
XXXXXXXXXX will elect with XXXXXXXXXX under subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), to transfer the shares of XXXXXXXXXX at an amount equal to their adjusted cost base to XXXXXXXXXX immediately before the transfer. The adjusted cost base of the shares so transferred will be less than their fair market value at the time of the transfer.
As consideration, XXXXXXXXXX will issue to XXXXXXXXXX a non-interest-bearing promissory demand note having a principal amount and fair market value equal to the adjusted cost base (calculated in accordance with section 84.1) to XXXXXXXXXX of his transferred shares, and Class XXXXXXXXXX Preferred Shares having a fair market value and redemption amount equal to the difference between the fair market value of his transferred shares at the date of the transfer and the principal amount of the demand note issued to him as described herein. XXXXXXXXXX will add $XXXXXXXXXX to the stated capital account in respect of the Class XXXXXXXXXX Preferred Shares so issued. Paragraph 84.1(1)(a) will apply to decrease the paid-up capital in respect of those shares to nil for tax purposes.
XXXXXXXXXX will then transfer all of its property, at fair market value, to XXXXXXXXXX in such manner that the net fair market value of each type of property so transferred to each such transferee will be equal to the proportion of the net fair market value of all properties of XXXXXXXXXX of that type, determined immediately before such transfers of property, that:
the aggregate fair market value, immediately before such transfers of property, of the XXXXXXXXXX shares owned by the respective transferee
is of
the aggregate fair market value, immediately before such transfers of property, of all of the issued and outstanding shares of the capital stock of XXXXXXXXXX.
As consideration for the transferred properties, each of the transferees will:
as partial consideration for the transferred properties, assume liabilities of XXXXXXXXXX in an amount not exceeding the aggregate of the amounts agreed upon in their respective election described in paragraph 28 below in respect of the transferred properties, and
as the balance of the consideration for the transferred properties, issue to XXXXXXXXXX that number of its Class XXXXXXXXXX Preferred Shares which will have an aggregate fair market value and an aggregate redemption and retraction price equal to the amount by which the aggregate fair market value of the transferred properties exceeds the aggregate fair market value of the liabilities, if any, assumed as described in subparagraph 27.(c) above.
The liabilities assumed by the transferees will be specifically allocated to particular properties. In no case will the liabilities allocated to an asset exceed the agreed amount, as described in paragraph 28 below, in respect of that asset.
Each of the transferees will add to the stated capital account in respect of the Class XXXXXXXXXX Preferred Shares so issued an amount equal to the aggregate agreed amounts (as set out in paragraph 28 below) in respect of the transfer of property received by it less the amount of the liabilities assumed on the transfer.
In respect of the transfer of property described in paragraph 27 above, XXXXXXXXXX will jointly elect pursuant to subsection 85(1), in prescribed form and within the time specified in subsection 85(6), to transfer each asset that is an eligible property, within the meaning of subsection 85(1.1), and whose fair market value exceeds its cost amount, at the following agreed amounts, expressed in dollars:
in the case of depreciable property of a prescribed class, an amount which is not less than the least of the amounts specified in subparagraphs 85(1)(e)(i) to 85(1)(e)(iii);
in the case of capital property (other than depreciable property of a prescribed class), an amount that is equal to the lesser of the cost amount to XXXXXXXXXX of the property and the fair market value thereof; and
in the case of XXXXXXXXXX inventories, the amount determined under paragraph 85(1)(c.2).
For the purposes of determining the agreed amounts of the depreciable property of a prescribed class, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) shall be interpreted to mean that portion of the undepreciated capital cost of all the property of that class that the fair market value of the assets of that class transferred is of the fair market value of all the assets of that class.
The agreed amount in respect of each of the properties so transferred will be less than or equal to its fair market value at the time of the transfer. The terms "cost amount" and "depreciable property", as used here and subsequently, have the meanings assigned by subsections 248(1) and 13(21), respectively.
Each of XXXXXXXXXX will redeem its Class XXXXXXXXXX Preferred Shares held by XXXXXXXXXX at their redemption amount and each will pay the respective redemption amount by the proportionate assumption of the remaining debts of XXXXXXXXXX, if any, and by the issuance of a non-interest-bearing demand promissory note having a principal amount and fair market value equal to the fair market value of the shares so redeemed less the amount of the debts of XXXXXXXXXX so assumed, if any (respectively, "Note 1", "Note 2" and "Note 3" and collectively, the "Holdco Notes"). XXXXXXXXXX will accept the assumptions of debt, if any, and the receipt of the Holdco Notes as full payment of each redemption amount.
XXXXXXXXXX will then purchase for cancellation, at fair market value, its outstanding common shares held by XXXXXXXXXX. XXXXXXXXXX will pay the purchase price for such shares by issuing to each of XXXXXXXXXX a non-interest-bearing demand promissory note having a principal amount and fair market value equal to the fair market value of the shares of XXXXXXXXXX so purchased (respectively, "Note 1A", "Note 2A" and "Note 3A" and collectively, the "XXXXXXXXXX Notes"). Each of XXXXXXXXXX will accept Note 1A, Note 2A and Note 3A, respectively, in full payment of the purchase price of its common shares so purchased. The purchases will occur simultaneously.
XXXXXXXXXX will then demand payment of the Holdco Notes and each of XXXXXXXXXX will satisfy its respective obligation under Note 1, Note 2 and Note 3 by transferring Note 1A, Note 2A and Note 3A, respectively, to XXXXXXXXXX for cancellation.
XXXXXXXXXX will transfer, at fair market value, his interest in all of the XXXXXXXXXX assets to XXXXXXXXXX. As consideration, XXXXXXXXXX will issue to XXXXXXXXXX a non-interest-bearing demand promissory note having a principal amount and fair market value equal to the aggregate of the agreed amounts as determined in paragraph 33 below and Class XXXXXXXXXX Preferred Shares with a nominal stated capital and with a fair market value and redemption amount equal to the difference between the fair market value of the transferred assets at the date of the transfer and the principal amount of the demand note issued as partial consideration for the transferred assets.
In respect of the transfer of property described in paragraph 32 above, XXXXXXXXXX will jointly elect pursuant to subsection 85(1), in prescribed form and within the time specified in subsection 85(6), to transfer each asset that is an eligible property, within the meaning of subsection 85(1.1), at the following agreed amounts, expressed in dollars:
in the case of depreciable property of a prescribed class, an amount which is not less than the least of the amounts specified in subparagraphs 85(1)(e)(i) to 85(1)(e)(iii);
in the case of capital property (other than depreciable property of a prescribed class), an amount that is equal to the lesser of the cost amount to XXXXXXXXXX of the property and the fair market value thereof; and
in the case of inventories, the amount determined under paragraph 85(1)(c.2).
The agreed amount in respect of each of the properties so transferred will be less than or equal to its fair market value at the time of the transfer.
XXXXXXXXXX will transfer, at fair market value, his interest in all of the XXXXXXXXXX assets to XXXXXXXXXX. As consideration, XXXXXXXXXX will issue to XXXXXXXXXX a non-interest-bearing demand promissory note having a principal amount and fair market value equal to the aggregate of the agreed amounts as determined in paragraph 35 below and Class XXXXXXXXXX Preferred Shares with a nominal stated capital and with a fair market value and redemption amount equal to the difference between the fair market value of the transferred assets at the date of the transfer and the principal amount of the demand note issued as partial consideration for the transferred assets.
In respect of the transfer of property described in paragraph 34 above, XXXXXXXXXX will jointly elect pursuant to subsection 85(1), in prescribed form and within the time specified in subsection 85(6), to transfer each asset that is an eligible property, within the meaning of subsection 85(1.1), at the following agreed amounts, expressed in dollars:
in the case of depreciable property of a prescribed class, an amount which is not less than the least of the amounts specified in subparagraphs 85(1)(e)(i) to 85(1)(e)(iii);
in the case of capital property (other than depreciable property of a prescribed class), an amount that is equal to the lesser of the cost amount to XXXXXXXXXX of the property and the fair market value thereof; and
in the case of inventories, the amount determined under paragraph 85(1)(c.2).
The agreed amount in respect of each of the properties so transferred will be less than or equal to its fair market value at the time of the transfer.
XXXXXXXXXX will transfer, at fair market value, his interest in all of the XXXXXXXXXX assets to XXXXXXXXXX As consideration, XXXXXXXXXX will issue to XXXXXXXXXX a non-interest-bearing demand promissory note having a principal amount and fair market value equal to the aggregate of the agreed amounts as determined in paragraph 37 below and Class XXXXXXXXXX Preferred Shares with a nominal stated capital and with a fair market value and redemption amount equal to the difference between the fair market value of the transferred assets at the date of the transfer and the principal amount of the demand note issued as partial consideration for the transferred assets.
In respect of the transfer of property described in paragraph 36 above, XXXXXXXXXX will jointly elect pursuant to subsection 85(1), in prescribed form and within the time specified in subsection 85(6), to transfer each asset that is an eligible property, within the meaning of subsection 85(1.1), at the following agreed amounts, expressed in dollars:
in the case of depreciable property of a prescribed class, an amount which is not less than the least of the amounts specified in subparagraphs 85(1)(e)(i) to 85(1)(e)(iii);
in the case of capital property (other than depreciable property of a prescribed class), an amount that is equal to the lesser of the cost amount to XXXXXXXXXX of the property and the fair market value thereof; and
in the case of inventories, the amount determined under paragraph 85(1)(c.2).
The agreed amount in respect of each of the properties so transferred will be less than or equal to its fair market value at the time of the transfer.
XXXXXXXXXX will then transfer, at fair market value, their respective interests in the XXXXXXXXXX assets except for a XXXXXXXXXX% interest in certain Class 10 assets which will be retained by XXXXXXXXXX. In exchange, XXXXXXXXXX will transfer to each of XXXXXXXXXX. XXXXXXXXXX assets having a fair market value equal to the fair market value of the XXXXXXXXXX assets so received. The transfers will be effected on a taxable basis and no elections in respect thereof will be made pursuant to subsection 85(1).
Subsequent Transactions
XXXXXXXXXX will be issued one common share of XXXXXXXXXX of nominal value for corporate law purposes: to ensure that there is a shareholder entitled to vote, receive dividends and receive property of the corporation on dissolution after the reorganization described above. XXXXXXXXXX had not yet determined what use, if any, will be made of XXXXXXXXXX.
XXXXXXXXXX will sell the XXXXXXXXXX inventory received from XXXXXXXXXX, at fair market value, to arm's length parties, to XXXXXXXXXX.
XXXXXXXXXX intends to purchase a XXXXXXXXXX from an arm's length third party using, as a trade-in, XXXXXXXXXX received from XXXXXXXXXX on the transfer described in paragraph 27 above. The value of the XXXXXXXXXX being traded-in exceeds XXXXXXXXXX% of the value of the assets to be received by XXXXXXXXXX on that transfer. The purchase price of the XXXXXXXXXX is in excess of the trade-in value. This transaction will be done in the ordinary course of business of XXXXXXXXXX.
The shareholders of XXXXXXXXXX will transfer personally-held XXXXXXXXXX assets to their respective corporations pursuant to subsection 85(1).
XXXXXXXXXX will sell, at fair market value, XXXXXXXXXX land to XXXXXXXXXX. No election under subsection 85(1) will be filed in respect of this sale.
XXXXXXXXXX, are contemplating an estate freeze of their respective shareholdings of XXXXXXXXXX in favour of their children.
Purpose of the Proposed Transactions
XXXXXXXXXX wish to carry on separate XXXXXXXXXX businesses since they and their families have different interests and objectives. XXXXXXXXXX.
Rulings Given
Provided that the above statements of facts and proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions and that the proposed transactions are carried out as set forth herein, the following rulings are given:
Upon the redemption by each of XXXXXXXXXX of their Class XXXXXXXXXX Preferred Shares held by XXXXXXXXXX, as described in paragraph 29 above, and the purchase for cancellation by XXXXXXXXXX of its common shares held by each of XXXXXXXXXX, as described in paragraph 30 above, the amount by which the amount paid on the redemption or purchase for cancellation, as the case may be, exceeds the paid-up capital of the particular shares redeemed or purchased for cancellation will be deemed to be a dividend paid by the particular payor and received by the particular recipient, by virtue of paragraph 84(3)(a) or 84(3)(b), as applicable. Each such dividend will be deductible by the particular recipient under subsection 112(1) in computing its taxable income for the taxation year in which it is deemed to have received such dividend and such deduction will not be precluded by any of subsections 112(2.1), (2.2), (2.3) or (2.4) and the provisions of subsection 112(3) will apply to any loss which may otherwise arise to the recipient as a result of the redemption or purchase for cancellation.
The provisions of subsection 55(2) will not apply to the dividends described in ruling A above by virtue of the application of paragraph 55(3)(b) provided that, as part of the series of transactions or events that includes the proposed transactions described herein, there is no:
disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii); or
acquisition of property in the circumstances described in subparagraphs 55(3.1)(c) or (d),
which has not been described herein.
The dividends described in ruling A above will not be subject to tax under Part IV.
The common shares of XXXXXXXXXX that are purchased for cancellation as described in ruling A above will not be considered to become taxable preferred shares as a result of the proposed transactions described above, in and by themselves.
The dividend described in ruling A above that is deemed to be received by XXXXXXXXXX on the respective redemption of the Class XXXXXXXXXX Preferred Shares of XXXXXXXXXX held by XXXXXXXXXX will be deemed to be an "excluded dividend" by virtue of paragraph (a) of the definition of "excluded dividend" contained in subsection 191(1), and an "excepted dividend" by virtue of paragraph (c) of the definition of "excepted dividend" contained in section 187.1 and, therefore, will not be subject to tax under Parts IV.1 and VI.1.
The cancellation of the Holdco Notes and the XXXXXXXXXX Notes, as described in paragraph 31 above, will not give rise to a "forgiven amount" for purposes of section 80.
The provisions of subsections 15(1), 56(2) and 246(1) or paragraph 85(1)(e.2) will not be applied as a result of the proposed transactions described herein, in and by themselves.
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 herein.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada ("IC 70-6R2") and are binding provided the proposed transactions are completed by XXXXXXXXXX.
Nothing in this letter should be construed as our confirmation of the tax consequences of any transaction except those consequences expressly confirmed above.
In the event of a subsequent disposition of any shares of XXXXXXXXXX, nothing in this ruling should be construed as implying that the transactions described herein will not, for the purposes of paragraph 110.6(7)(a), be considered as part of a series of transactions or events which includes such subsequent disposition of shares. The phrase "series of transactions or events" has the meaning assigned by subsection 248(10).
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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