30 November 1996 Ruling 9707693 - INDUCEMENT - SHARE REDEMPTION

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:

whether redemption of shares for a nominal amount pursuant to their terms constitutes an inducement for purposes of 12(1)(x)

Position: No

Reasons:

any inducement would have been received at the time the shares were issued or the terms otherwise established

XXXXXXXXXX							970769
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re:XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. In your letter of XXXXXXXXXX, you provided additional information in respect of, and amendments to, the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

We understand that to the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

(a)involved in an earlier return of the taxpayer or a related person,

(b)being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayer or a related person,

(c)under objection, or

(d)before the courts or, if a judgment has been issued, the time limit for appeal has not expired.

Definitions

In this letter, the following terms have the meanings specified:

Unless otherwise indicated, all references to statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act");

"adjusted cost base" has the meaning assigned by section 54 of the Act;

"Holdco" means XXXXXXXXXX, a corporation which was incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX;

"Opco" means XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX under the Trust Company Act of XXXXXXXXXX (the "TCA"). It changed its name to XXXXXXXXXX;

"paid-up capital" has the meaning assigned by subsection 89(1) of the Act; and

"taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

.Holdco is a taxable Canadian corporation which was incorporated to XXXXXXXXXX. Except for the activities described in paragraphs 5 and 6 below, Holdco does not carry on any business itself.

.The issued share capital of Holdco as at XXXXXXXXXX consisted of XXXXXXXXXX Class XXXXXXXXXX common shares which were held by XXXXXXXXXX shareholders consisting of XXXXXXXXXX. The aggregate stated capital and paid-up capital of these shares was $XXXXXXXXXX.

.Opco is a taxable Canadian corporation which was established to be XXXXXXXXXX. Opco was registered on XXXXXXXXXX under the TCA to operate the business of a trust company. It carries on the business of a trust company servicing the financing needs of XXXXXXXXXX. Its fiscal year-end is also XXXXXXXXXX.

.The authorized share capital of Opco consists of XXXXXXXXXX Class XXXXXXXXXX non-voting, redeemable and non-cumulative preferred shares with a par value of $XXXXXXXXXX each and XXXXXXXXXX common shares with a par value of $XXXXXXXXXX each. The issued share capital of Opco as at XXXXXXXXXX consisted of XXXXXXXXXX Class XXXXXXXXXX shares and XXXXXXXXXX common shares. All of the Class XXXXXXXXXX preferred shares of Opco are owned by Holdco and all or substantially all of the common shares of Opco are owned by the shareholders of Holdco. The aggregate stated capital of the Class XXXXXXXXXX preferred shares of Opco as at XXXXXXXXXX was $XXXXXXXXXX and the aggregate stated capital of the common shares was $XXXXXXXXXX. The paid-up capital of the Class XXXXXXXXXX preferred shares and of the common shares of Opco is equal to their stated capital.

.On XXXXXXXXXX, XXXXXXXXXX and Holdco entered into an agreement (the "Contribution Agreement") under which XXXXXXXXXX agreed to contribute a maximum of $XXXXXXXXXX pursuant to the XXXXXXXXXX. The funds consisted of two elements: XXXXXXXXXX.

The XXXXXXXXXX Fund Trust was in the amount of $XXXXXXXXXX which was paid to Holdco by XXXXXXXXXX in XXXXXXXXXX instalments. The XXXXXXXXXX Fund Trust was used by Holdco to purchase XXXXXXXXXX redeemable preferred shares of Opco having a stated capital of $XXXXXXXXXX each and a redemption amount of $XXXXXXXXXX each (XXXXXXXXXX). The use of Holdco was necessary as funds could not be transferred to Opco directly from

XXXXXXXXXX

The ultimate purpose of such method of financing was to retain the capital in Opco and to divorce it from Holdco.

The XXXXXXXXXX Fund Trust received by Holdco from XXXXXXXXXX totalled $XXXXXXXXXX which was then transferred to Opco in trust for Holdco under a trust agreement (the "Trust Agreement") entered into by Holdco and Opco on XXXXXXXXXX. The funds were required to be used to provide financing services (e.g. mortgages, loans, guarantees, etc.) to XXXXXXXXXX. Income earned in the XXXXXXXXXX Fund Trust is added to the capital of the XXXXXXXXXX Fund Trust and does not flow out to Holdco. In addition, pursuant to the terms of the Trust Agreement, any dividends which Holdco might receive on its Class XXXXXXXXXX preferred shares of Opco are to be deposited with and added to the capital of the XXXXXXXXXX Fund Trust. As at XXXXXXXXXX Fund Trust was approximately $XXXXXXXXXX.

.Also on XXXXXXXXXX, Holdco and Opco entered into an agreement (the "Sunset Clause Agreement") under which Opco agreed not to redeem its Class XXXXXXXXXX preferred shares until the earlier of (a) XXXXXXXXXX and (b) Opco having obtained a XXXXXXXXXX.

.Under the terms of a separate contribution agreement, XXXXXXXXXX provided during XXXXXXXXXX an additional $XXXXXXXXXX of funding to Holdco XXXXXXXXXX. The amount received by Holdco from XXXXXXXXXX was then transferred to Opco in trust for Holdco under a separate trust agreement (the "Second Trust") entered into by Holdco and Opco. These funds are also to be used to provide financing services (e.g. mortgages, loans, guarantees, etc.) to XXXXXXXXXX. Income earned in the Second Trust is added to the Second Trust capital and does not flow out to Holdco. As at XXXXXXXXXX, the Second Trust was approximately $XXXXXXXXXX.

PROPOSED TRANSACTIONS

.Pursuant to the terms of the Sunset Clause Agreement, Opco will, on or about XXXXXXXXXX, redeem all of its Class XXXXXXXXXX preferred shares held by Holdco at their redemption amount of $XXXXXXXXXX per share.

PURPOSE OF THE PROPOSED TRANSACTIONS

.The purpose of the proposed transactions is to free Opco, a provincially chartered trust company, from any ties to Holdco, which has a mandate to provide funding for XXXXXXXXXX.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we confirm that the provisions of paragraph 12(1)(x) and subsections 15(1) and 56(2) of the Act will not apply to the redemption, in and by itself, of the Class XXXXXXXXXX preferred shares of Opco held by Holdco as described in paragraph 8 above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3, dated December 30, 1996, and are binding provided that the proposed transactions are completed by XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act.

V.COMMENTS

Nothing in this letter should be construed as confirming that the Department has agreed to or reviewed the tax consequences, if any, with respect to the transactions described in paragraphs 5 and 6 above. In particular, we are not commenting on any potential tax consequences arising from the subscription for the Class XXXXXXXXXX preferred shares of Opco by Holdco and the entering into the Sunset Clause Agreement by Holdco and Opco as described in paragraphs 5 and 6 above.

Although you have not requested a ruling with respect to the adjusted cost base of the Class XXXXXXXXXX preferred shares of Opco to Holdco immediately before the share redemption described in paragraph 8 above, it is our view that paragraph 69(1)(a) of the Act may be applicable to deem Holdco to have acquired the shares of Opco at fair market value. Alternatively, paragraph 53(2)(k) of the Act may be applicable to reduce the adjusted cost base of the Class XXXXXXXXXX preferred shares of Opco to Holdco. Finally, subsections 84(9) and 85(4) or proposed subsection 40(3.6) of the Act may apply to deny any loss arising on the redemption of such shares.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch