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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: 15(1)(c) exemption from shareholder benefit
Position: Favorable Ruling Given
Reasons: In accordance with the exemption
XXXXXXXXXX 2003-018402
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above noted taxpayers and others identified herein. We also acknowledge the additional information provided, during our various telephone conversations, in connection with your requests.
We understand that to the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein:
(a) is in an earlier return of M Ltd., C Ltd. or a related person;
(b) is being considered by a tax services office or taxation centre in connection with a previously filed return of M Ltd., C Ltd., or a related person;
(c) is under objection by M Ltd., C Ltd., or a related person;
(d) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate of the Canada Customs and Revenue Agency.
DEFINITIONS
In this letter, the following terms have the meanings specified:
(a) "Act" means the Income Tax Act (Canada) R.S.C. 1985 (5th Supp), as amended to the date hereof. All statutory references in this letter are to the Act, unless stated otherwise;
(b) "A Ltd." means XXXXXXXXXX, as described in paragraph 16;
(c) "CCPC" means "Canadian-controlled private corporation" as that expression is defined in subsection 248(1);
(d) "C Ltd." means XXXXXXXXXX as described in paragraphs 10 to 15, whose address is XXXXXXXXXX and whose business number is XXXXXXXXXX; The XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre are responsible for C Ltd.;
(e) "C Ltd. Common Shareholders" means the shareholders of C Ltd. who hold any class of C Ltd. Common Shares and a reference to a "C Ltd. Common Shareholder" means any one of such shareholders;
(f) "C Ltd. Common Shares" means the Class A common shares and Class B common shares of C Ltd.;
(g) "CCRA" means Canada Customs and Revenue Agency;
(h) "CS Ltd." means XXXXXXXXXX, as described in paragraph 16;
(i) "D Trust" means the XXXXXXXXXX, as described in paragraph 18;
(j) "R Limited Partnership" means the XXXXXXXXXX, as described in paragraph 17;
(k) "E Trust" means the XXXXXXXXXX as described in paragraph 8;
(l) "M Ltd." means XXXXXXXXXX, as described in paragraphs 1 to 6, whose address is XXXXXXXXXX and whose business number is XXXXXXXXXX. The XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre are responsible for M Ltd.
(m) "M Ltd. Common Shareholders" means the shareholders of M Ltd. who hold any class of M Ltd. Common Shares and a reference to an "M Ltd. Common Shareholder" means any one of such shareholders;
(n) "M Ltd. Common Shares" means the Class A Voting Common Shares, Class B Non-Voting Common Shares and Class C Voting Common Shares of M Ltd.;
(o) "Mr. R" means XXXXXXXXXX and "Mrs. R" means Mr. R's spouse, XXXXXXXXXX;
(p) "Proposed Transactions" means the transactions proposed in paragraphs 19 to 27.2;
(q) "S Ltd." means XXXXXXXXXX, as described in paragraph 16; and
(r) "taxable Canadian corporation" means "taxable Canadian corporation" as that expression is defined in subsection 248(l).
FACTS
M Ltd. and its Shareholders
1. M Ltd. is a CCPC and a taxable Canadian corporation that was incorporated under the laws of XXXXXXXXXX.
2. The business activities of M Ltd. consist solely of holding investment assets such as cash, marketable securities, real estate and shares in other private corporations. However, none of the issued shares in M Ltd. derive their value principally from real property situated in Canada.
3. The current authorized share capital of M Ltd. consists of Class A Voting Common Shares, Class B Non-Voting Common Shares, Class C Voting Common Shares, First Preferred Shares, Second Preferred Shares and Third Preferred Shares. The current issued share capital of M Ltd. is owned as follows:
Shareholder
Number of Class of Shares
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
4. On XXXXXXXXXX M Ltd. filed Articles of Amendment which, among other things, created the Class C Voting Common Shares and amended the rights attaching to the Class A Voting Common Shares. The Class A Voting Common Shares and Class C Voting Common Shares have the same attributes with the exception that the Class A Voting Common Shares may only receive taxable dividends, when, as and if declared by the board of directors of M Ltd. whereas the Class C Voting Common Shares may receive capital and/or taxable dividends when, as and if declared by the board of directors. Following the filing of the Articles of Amendment, the Canadian resident shareholders of M Ltd. exchanged their Class A Voting Common Shares for Class C Voting Common Shares on a share for share basis. The purpose of this transaction was to allow M Ltd. to stream capital dividends to Canadian resident shareholders, in accordance with CCRA's Interpretation Bulletin IT-146R4.
5. The Class B Non-Voting Common Shares have similar attributes to the Class C Voting Common Shares with the exception that the Class B Non-Voting Common Shares do not carry a right to vote. The First Preferred Shares have a cumulative fixed dividend entitlement, the Second Preferred Shares have a non-cumulative fixed dividend entitlement and the Third Preferred Shares have no dividend entitlement. In addition, all of the classes of preferred shares have a fixed entitlement on the liquidation, dissolution or winding-up of M Ltd. The First Preferred Shares have a right to one vote per share at all meetings of shareholders, the Second Preferred Shares are non-voting and the Third Preferred Shares have a right to one vote per share at all meetings of shareholders.
6. All of the shareholders of M Ltd. are residents of Canada with the exception of the E Trust, XXXXXXXXXX. The E Trust, XXXXXXXXXX are resident in the United States.
7. XXXXXXXXXX.
8. The E Trust was settled by Mr. R and Mrs. R. The trustee of the E Trust is Mr. R. The beneficiaries of the E Trust are Mrs. R and the children of Mr. R and Mrs. R. The E Trust is a U.S. revocable living trust that was established for U.S. probate planning purposes.
9. The XXXXXXXXXX is a U.S. revocable living trust that was established for U.S. probate planning purposes.
9.1 The shares in M Ltd. owned by each of the shareholders represent capital property to them.
C Ltd. and its Shareholders
10. C Ltd. is a taxable Canadian corporation that was incorporated under the laws of XXXXXXXXXX.
11. The business activities of C Ltd. consist solely of holding investment assets such as cash, marketable securities, real estate and shares in other private corporations. However, none of the issued shares in C Ltd. derive their value principally from real property situated in Canada.
12. The current authorized share capital of C Ltd. consists of Class A common shares, Class B common shares, Class A shares, Class B shares, Class C shares, Class D shares, Class W shares, Class X shares, Class Y shares and Class Z shares. The current issued share capital of C Ltd. is owned as follows:
Shareholder
Number and Class of Shares
E Trust
XXXXXXXXXX
CS Ltd.
XXXXXXXXXX
A Ltd.
XXXXXXXXXX
S Ltd.
XXXXXXXXXX
13. The rights attaching to the Class A common shares and Class B common shares of C Ltd. each provide for one vote per share and are similar in all other respects with the exception that no dividend may be declared on the Class B common shares without an equivalent dividend having been paid or sum set aside for the Class A common shares. No such limitation exists on the dividend entitlements for the Class A common shares.
14. The Class A - D shares and Class W - Z shares are preference shares with fixed dividend entitlements and fixed entitlements on the liquidation, dissolution or winding up of C Ltd. The Class A, Class B, Class Y and Class Z shares carry one vote per share. The Class C, Class D, Class W and Class X shares are non-voting shares.
15. All of the shareholders of C Ltd. are residents of Canada with the exception of the E Trust.
16. A Ltd. and S Ltd. are both CCPCs and taxable Canadian corporations that are owned, directly or indirectly, by the extended family of Mr. R. CS Ltd. is a taxable Canadian corporation that is owned, directly or indirectly, by the extended family of Mr. R. The business activities of A Ltd., S Ltd. and CS Ltd. consist solely of holding investment assets such as cash, marketable securities, real property and shares of other private corporations (in addition to C Ltd.).
16.1 The shares in C Ltd. owned by each of the shareholders represent capital property to them.
The R Limited Partnership
17. The R Limited Partnership is a U.S. family limited partnership that was formed by the E Trust. The E Trust is both the general partner and the initial limited partner of the R Limited Partnership. On the transfer of assets by the E Trust to the R Limited Partnership described in paragraph 28 below, the E Trust will acquire a XXXXXXXXXX% limited partner interest in the R Limited Partnership.
The D Trust
18. The D Trust is an irrevocable U.S. grantor trust. You understand that as a grantor trust, the D Trust will be a disregarded entity for U.S. income tax purposes. The D Trust has the same U.S. tax identification number as the E Trust. The beneficiaries of the D Trust are trusts that have been established for each of the children of Mr. R.
PROPOSED TRANSACTIONS
M Ltd. and its Shareholders
19. M Ltd. will grant to each M Ltd. Common Shareholder, in connection with that shareholder's ownership of M Ltd. Common Shares and not in respect of, in the course of, or by virtue of, any office or employment of any person, a right to acquire in respect of each M Ltd. Common Share, XXXXXXXXXX Class B Non-Voting Common Shares of M Ltd. for $XXXXXXXXXX per share. This right to acquire the Class B Non-Voting Common Shares will be granted to each M Ltd. Common Shareholder for nil consideration.
20. Shortly following the grant of the rights described in paragraph 19 above, each M Ltd. Common Shareholder will exercise in full the right to acquire the Class B Non-Voting Common Shares. Each M Ltd. Common Shareholder will pay the nominal subscription price in respect of the Class B Non-Voting Common Shares. M Ltd. will issue Class B Non-Voting Common Shares to each M Ltd. Common Shareholder in accordance with the exercise of the rights. M Ltd. will add to the stated capital account maintained for its Class B Non-Voting Common Shares, an amount equal to the amount received on the subscriptions for such shares.
21. Following the exercise of all of the rights, the issued share capital of M Ltd. will be as follows:
Shareholder
Number and Class of Shares
E Trust
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
22. The exercise of the rights will neither affect the percentage ownership interest of any shareholder of M Ltd., nor will it affect the percentage of common voting shares held by any M Ltd. Common Shareholder. The new Class B Non-Voting Common Shares issued to each M Ltd. Common Shareholder will represent approximately XXXXXXXXXX% of the value of the equity shares previously held by such shareholder and the original common shares of each M Ltd. Common Shareholder will represent approximately XXXXXXXXXX% of the value of the equity shares previously held by such shareholder. However, the value of the M Ltd. Common Shareholders' overall equity interests will remain unchanged.
C Ltd. and its Shareholders
23. C Ltd. will file Articles of Amendment with the XXXXXXXXXX amending its articles to create a new class of non-voting common shares ("Class C common shares").
24. C Ltd. will grant to each C Ltd. Common Shareholder, in connection with that shareholder's ownership of C Ltd. Common Shares and not in respect of, in the course of, or by virtue of, any office or employment of any person, a right to acquire in respect of each C Ltd. Common Share, XXXXXXXXXX Class C common shares of C Ltd. for $XXXXXXXXXX per share. This right to acquire Class C common shares will be granted to each C Ltd. Common Shareholder for nil consideration.
25. Shortly following the grant of the rights described in paragraph 24 above, each C Ltd. Common Shareholder will exercise in full the right to acquire the Class C common shares. Each C Ltd. Common Shareholder will pay the nominal subscription price in respect of the Class C common shares. C Ltd. will issue Class C common shares to each C Ltd. Common Shareholder in accordance with the exercise of the rights. C Ltd. will add to the stated capital account maintained for its Class C common shares an amount equal to the amount received on the subscriptions for such shares.
26. Following the exercise of all of the rights, the issued share capital of C Ltd. will be as follows:
Shareholder
Number and Class of Shares
E Trust
XXXXXXXXXX
CS Ltd.
XXXXXXXXXX
A Ltd.
XXXXXXXXXX
S Ltd.
XXXXXXXXXX
27. The exercise of the rights will neither affect the percentage ownership interest of any shareholder of C Ltd., nor will it affect the percentage of common voting shares held by any C Ltd. Common Shareholder. The new Class C common shares issued to each C Ltd. Common Shareholder will represent approximately XXXXXXXXXX% of the value of the equity shares previously held by such shareholder and the original common shares of each C Ltd. Common Shareholder will represent approximately XXXXXXXXXX% of the value of the equity shares previously held by such shareholder. However, the value of the C Ltd. Common Shareholders' overall equity interests will remain unchanged.
Addition of Conversion Right and Exercise
27.1 Shortly after the exercise of the rights, as described in paragraph 20 above, M Ltd. will file Articles of Amendment with the XXXXXXXXXX. The Articles of Amendment will change the rights, privileges, restrictions and conditions attaching to the Class B Non-Voting Common Shares so that the holders of such shares:
(i) are entitled to receive taxable dividends only; and
(ii) may at any time exchange all or any part of the Class B Non-Voting Common Shares for an equal number of a new class of non-voting common shares (the "Class D Non-Voting Common Shares") by written notice to M Ltd.
Furthermore, the Articles of Amendment of M Ltd. will create the Class D Non-Voting Common Shares which will have the same rights and privileges as the Class B Non-Voting Common Shares except that the holders of the Class D Non-Voting Common Shares may receive taxable and/or capital dividends. The Class D Non-Voting Common Shares will also include a right to allow holders to exchange all or any part of such shares for an equal number of Class B Non-Voting Common Shares by written notice to M Ltd.
27.2 Shortly following the filing of the Articles of Amendment, each Canadian resident shareholder of M Ltd. will notify M Ltd. in writing of his or her respective intention to exchange all of his or her Class B Non-Voting Common Shares of M Ltd. for a corresponding number of Class D Non-Voting Common Shares in accordance with the exchange rights set forth in the Articles of Amendment. M Ltd. will accept the notices from the Canadian resident shareholders, cancel the Class B Non-Voting Common Shares tendered for exchange and issue the new Class D Non-Voting Common Shares. Following the exchanges of shares by the Canadian resident shareholders, the issued share capital of M Ltd. will be as follows:
Shareholder
Number and Class of Shares
E Trust
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
28. The E Trust intends to transfer all of its Class B Non-Voting Common shares of M Ltd. and all of its Class C common shares of C Ltd. received on the exercise of the rights (representing approximately XXXXXXXXXX% of the total value of the common shares held by the E Trust in each of M Ltd. and C Ltd. respectively) to the R Limited Partnership. As consideration for the transfer of the Class B Non-Voting Common Shares of M Ltd. and Class C common shares of C Ltd., the E Trust will acquire a XXXXXXXXXX% limited partnership interest in the R Limited Partnership. The E Trust will apply to CCRA for a clearance certificate under section 116 with respect to this transfer.
29. The E Trust will transfer its XXXXXXXXXX% limited partnership interest in the R Limited Partnership to the D Trust in exchange for a promissory note.
29.1 None of the holders of the Class A Voting Common Shares and none of the holders of the Class C Voting Common Shares of M Ltd. have a present intention to dispose of any of those shares. As well, none of the holders of the Class A common shares and none of the holders of the Class B common shares of C Ltd. have a present intention to dispose of any of those shares.
PURPOSE OF PROPOSED AND ADDITIONAL TRANSACTIONS
30. The purpose of granting the rights to the M Ltd. Common Shareholders and C Ltd. Common Shareholders is to assist Mr. R in carrying out certain U.S. estate planning.
31 The purpose of the transfer of the shares of M Ltd. and C Ltd. by the E Trust to the R Limited Partnership (as described in paragraph 28) and the subsequent transfer of the limited partnership interest to the D Trust (as described in paragraph 29) is for U.S. estate planning purposes.
31.1 More specifically, the purpose of the transactions described in paragraphs 19 to 27, 28 and 29 above is as follows:
(a) The recapitalization process is being done principally for U.S. estate/tax planning for Mr. R (ie. to allow Mr. R's assets to be passed to the beneficiaries and charities he chooses in a tax efficient process).
(b) The recapitalization bifurcates those shares that combine voting and equity into separate shares with voting generally separate from equity. The intent of the recapitalization is not to dilute any shareholder as to either votes or equity. Rather, it is to generally separate the votes from the equity. XXXXXXXXXX. The proposed transactions allow for the transfer of approximately XXXXXXXXXX% of the value of the equity owned by the E Trust in M Ltd., and approximately XXXXXXXXXX% of the value of the equity owned by the E Trust in C Ltd., and not the voting control.
RULINGS
Provided the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we confirm the following:
A. Paragraph 15(1)(c) will apply to the granting of the rights described in paragraphs 19 and 24 of the Proposed Transactions so that no benefit will be included in the income of a shareholder pursuant to subsection 15(1) as a result of the granting of those rights or as a result of the exercise of those rights, in and of themselves.
B. The issuance of the Class B Non-Voting Common shares by M Ltd. and the issuance of the Class C common shares by C Ltd. on the exercise of the rights described in paragraphs 20 and 25 above by the M Ltd. Common Shareholders and C Ltd. Common Shareholders, respectively, will not result in a "disposition" (within the meaning of that term in subsection 248(1)) by such shareholders of their existing M Ltd. Common Shares or C Ltd. Common Shares.
C. The adjusted cost base of the Class B Non-Voting Common shares for each M Ltd. Common Shareholder and the adjusted cost base of the Class C common shares for each C Ltd. Common Shareholder that will be issued on the exercise of the rights described in paragraphs 20 and 25 above will, subject to any averaging required by subsection 47(1), be equal to the subscription price paid for such shares by the particular M Ltd. Common Shareholder or C Ltd. Common Shareholder, as the case may be.
D. The filing of Articles of Amendment by M Ltd., as described in paragraph 27.1 above, will not cause a "disposition" (within the meaning of that term in subsection 248(1)) by the holders of the Class B Non-Voting Common Shares in M Ltd. of their existing shares, nor will it be considered an "acquisition" of new shares by such holders for the purposes of section 116.
E. Subsection 51(1) will apply to the exchanges of Class B Non-Voting Common Shares in M Ltd. for Class D Non-Voting Common Shares in M Ltd. by the Canadian resident shareholders of M Ltd., as described in paragraph 27.2 above.
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could affect the rulings provided herein.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued on May 17, 2002 and are binding on the CCRA provided that the Proposed Transactions are completed before XXXXXXXXXX.
Nothing in this ruling should be construed as implying that the CCRA has reviewed or is making a determination in respect of any tax consequences relating to or arising as a result of any transaction other than those described in the rulings given, including, for greater certainty, the tax consequences relating to or arising as a result of:
(a) any of the transactions proposed under the heading "Additional Information"; and
(b) a sale or other disposition of any of the Class A Voting Common Shares or the Class C Voting Common Shares in M Ltd. or any of the Class A common shares or the Class B common shares in C Ltd. and any loss that may be realized as a result thereof.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 2003
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