1999 Ruling 991426A - RETURN OF PUC BY PUBLIC CORPORATION

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 in a particular situation a "reorganization" of a taxpayer's business occurs for the purposes of subsection 84(2).

Position: Yes.

Reasons: Based upon the facts of the particular situation.

XXXXXXXXXX 991426

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above corporations. We also acknowledge your letters of XXXXXXXXXX as well as our various telephone conversations concerning this matter.

The corporations named above file their corporate income tax returns under account numbers XXXXXXXXXX, respectively, with each being serviced by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.

To the best of your knowledge and that of the taxpayers involved, none of the issues contained herein:

(i) is in an earlier tax return of the taxpayers or a related person;

(ii) is being considered by a tax services office or taxation 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; or

(v) is the subject of an advance income tax ruling previously issued by the Income Tax Rulings and Interpretations Directorate of Revenue Canada.

Definitions

Unless otherwise stated, in this letter the following terms and expressions have the meanings specified below:

"A Co." means XXXXXXXXXX.

"Act" means the Income Tax Act R.S.C. 1985 (5th Supp.), c.1 as amended to the date of this letter.

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

"B Co." means XXXXXXXXXX.

XXXXXXXXXX.

"C Co." means XXXXXXXXXX.

"capital property" has the meaning assigned by section 54 of the Act.

"Class A Special Shares" means the preference shares, described in paragraph 15 below, to be issued by B Co. to A Co. upon the transfer of assets to B Co., as described in paragraph 16 below, in furtherance of the reorganization of A Co.'s business operations.

"cost amount" has the meaning assigned by subsection 248(1) of the Act.

"D Co." means XXXXXXXXXX.

"depreciable property" has the meaning assigned by subsection 13(21) of the Act.

"dividend rental arrangement" has the meaning assigned by subsection 248(1) of the Act.

"E Co." means XXXXXXXXXX.

"eligible property" has the meaning assigned by subsection 85(1.1) of the Act.

"F Co." means XXXXXXXXXX.

"ITAR" means the Income Tax Application Rules.

"OBCA" means the Ontario Business Corporations Act, and where applicable, its predecessor statues XXXXXXXXXX.

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

"principal amount" has the meaning assigned by subsection 248(1) of the Act.

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

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

"Regulations" means the Income Tax Regulations.

"related persons" has the meaning assigned by subsection 251(2) of the Act.

"restricted financial institution" has the meaning assigned by subsection 248(1) of the Act.

"subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act.

"taxable Canadian corporation" has the meaning assigned to that expression by subsect ion 89(1) of the Act.

"UCC" means "undepreciated capital cost" within the meaning assigned that expression in subsection 13(21) of the Act.

"unrelated person" has the meaning assigned by paragraph 55(3.01)(a) of the Act.

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

Facts

1. A Co. is a taxable Canadian corporation and a public corporation. It was incorporated in XXXXXXXXXX. The address of its head office is XXXXXXXXXX.

XXXXXXXXXX

A Co. has a XXXXXXXXXX fiscal year end.

2. The authorized share capital of A Co. consists of:

a) XXXXXXXXXX.

b) XXXXXXXXXX.

c) XXXXXXXXXX.

d) XXXXXXXXXX.

e) XXXXXXXXXX.

f) an unlimited number of common shares without nominal or par value.

3. The issued share capital of A Co. consists of XXXXXXXXXX common shares and XXXXXXXXXX Preference Shares, XXXXXXXXXX.

All of the issued common shares of A Co. are owned by C Co. and are held by it as capital property. The aggregate adjusted cost base of the common shares of A Co. owned by C Co. is, approximately, $ XXXXXXXXXX.

The issued XXXXXXXXXX Preference Shares, XXXXXXXXXX, are held by members of the public XXXXXXXXXX.

4. B Co. is a taxable Canadian corporation and is neither a private corporation nor a public corporation for purposes of the Act. XXXXXXXXXX.

B Co.'s business activity includes XXXXXXXXXX.

B Co. has a XXXXXXXXXX fiscal year end.

5. The authorized share capital of B Co. consists of an unlimited number of common shares.

The issued share capital of B Co. consists of XXXXXXXXXX common shares, all of which are owned by C Co. and are held by it as capital property.

6. C Co. is a taxable Canadian corporation and is neither a private corporation nor a public corporation for purposes of the Act. XXXXXXXXXX.

C Co. is XXXXXXXXXX.

C Co. has a XXXXXXXXXX fiscal year end.

7. The authorized share capital of C Co. consists of an unlimited number of XXXXXXXXXX preference shares and an unlimited number of common shares.

The issued share capital of C Co. consists of XXXXXXXXXX preference shares and XXXXXXXXXX common shares. D Co. owns XXXXXXXXXX of the issued preference shares of C Co. while E Co. owns the remaining XXXXXXXXXX issued preference shares of C Co. and F Co. owns all of C Co.'s issued common shares. Each of E Co. and F Co. is an indirect subsidiary wholly-owned corporation of D Co.

Each of D Co., E Co. and F Co. is a taxable Canadian corporation. D Co. is also a public corporation the shares of which are listed on the XXXXXXXXXX and are widely held by members of the public. D Co. is involved in XXXXXXXXXX.

8. A Co. is a XXXXXXXXXX.

As noted in paragraph 1 above, A Co.

XXXXXXXXXX

A Co. is also engaged, directly and through subsidiary and affiliated corporations, in certain other business activities XXXXXXXXXX.

XXXXXXXXXX

In the income tax returns for its XXXXXXXXXX and subsequent taxation years, A Co. has filed a separate capital cost allowance schedule for the depreciable property associated with the XXXXXXXXXX. A Co. has not maintained separate capital cost allowance schedules by business unit for the remaining depreciable property of A Co. to be transferred to B Co. as described above.

9.

XXXXXXXXXX

10. The stated capital, as well as the paid-up capital, of the issued common shares of A Co. is approximately $XXXXXXXXXX.

The paid-up capital of the common shares of A Co. has arisen on issuances of those shares for cash, XXXXXXXXXX. In particular, A Co. has not at any time increased the paid-up capital of its common shares and elected to treat such amount as a dividend paid out of its XXXXXXXXXX capital surplus on hand.

In addition, A Co. has contributed surplus of XXXXXXXXXX all or substantially all of which has arisen as a result of cash contributions from C Co. or other corporations by which A Co. was historically controlled for purposes of the Act.

11. Each of A Co., B Co. and C Co. is a specified financial institution by virtue of being related persons with one or more corporations which is a specified financial institution. None of A Co., B Co. or C Co. is, or will be at any time prior to completion of the proposed transactions described herein, a restricted financial institution or a corporation described in any of paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1) of the Act.

12. None of the Class A Special Shares is or will be subject to a guarantee agreement, within the meaning referred to in subsection 112(2.2) of the Act.

13. None of the Class A Special Shares is or will be subject to a dividend rental arrangement.

14. None of the Class A Special Shares will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5) of the Act

Proposed Transactions

15. B Co. will file articles of amendment to create a new class of preferred shares such that its authorized capital will consist of an unlimited number of common shares and an unlimited number of Class A Special Shares.

The attributes of the Class A Special Shares will be as follows: without nominal or par value; non-voting, redeemable and retractable for an amount equal to the fair market value, at the time of their issue, of the property for which they are issued. The redemption/retraction amount of the Class A Special Shares will be subject to a price adjustment clause.

16. A Co. will sell, at fair market value, the following assets (the "Purchased Assets") to B Co.:

XXXXXXXXXX.

In consideration for the transfer of the Purchased Assets, B Co. will assume the accounts payable and accrued liabilities relating to XXXXXXXXXX and will issue to A Co. Class A Special Shares in its capital stock having a redemption and retraction amount, as well as an aggregate fair market value at the time of the transfer, equal to the aggregate fair market value, at the time of the transfer, of the Purchased Assets transferred to it by A Co. less the principal amount of the liabilities assumed by it.

In respect of the above issuance of Class A Special Shares, and in accordance with the OBCA, B Co. will add to the stated capital account maintained for its Class A Special Shares an amount equal to the amount by which the aggregate of the cost (immediately after the transfer and determined pursuant to subsection 85(1) of the Act where relevant) of the property transferred to B Co. exceeds the amount of the liabilities assumed by it.

17. Upon the sale of the Purchased Assets to B Co., A Co. will pay to B Co. an amount XXXXXXXXXX as consideration for B Co. assuming the obligations of A Co. XXXXXXXXXX.

With respect to this assumption, A Co. and B Co. will file a joint election, in the form and within the time referred to in subsection 20(25) of the Act, to have the rules of subsection 20(24) thereof apply to A Co. as the payer, and to B Co. as the recipient, XXXXXXXXXX.

XXXXXXXXXX

18. A Co. and B Co. will jointly elect under subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) thereof, with respect to the transfer of any eligible property included in the Purchased Assets transferred from A Co. to B Co. as described in paragraph 16 above. The agreed amount in respect of each such property in the joint election will not exceed the fair market value, at the time of the transfer, of the respective property nor will it be less than the amount permitted under paragraph 85(1)(b) of the Act.

Specifically, the agreed amount in respect of each such property in the joint election will not be less than the least of:

(i) in the case of capital property and inventory, the least of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

(ii) in the case of depreciable property of a prescribed class, the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and

(iii) in the case of eligible capital property, the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).

19. Immediately following the transfer of the Purchased Assets as described in paragraph 16 above, B Co. will redeem all of its Class A Special Shares held by A Co. and will issue to A Co. a non-interest bearing demand promissory note (the "Class A Note") having a principal amount and fair market value equal to the aggregate redemption price of such Class A Special Shares.

20. B Co. will then pay to A Co. an amount of cash equal to the estimated principal amount of the Class A Note. B Co. will obtain the funds to pay this amount from D Co., XXXXXXXXXX, and from C Co., XXXXXXXXX . When the principal amount of the Class A Note is known, any balance owing on the Class A Note will be paid in full in cash by B Co. If at that time B Co. has overpaid on the Class A Note, A Co. will pay the amount of such overpayment to B Co. in cash. The Class A Note will then be cancelled.

21. The directors of A Co. will pass a resolution authorizing a reduction of the stated capital of the common shares of A Co. by the amount of $XXXXXXXXXX and the payment of such an amount to C Co. as a return of capital.

In accordance with the above directors resolution, A Co. will then reduce the paid-up capital of its common shares by $XXXXXXXXXX and pay to C Co., in respect of such reduction of paid-up capital, $XXXXXXXXXX in cash. The fair market value of the common shares of A Co. exceeds, and will exceed at the time of this reduction of paid-up capital, the amount that will be paid to C Co. on this reduction of paid-up capital.

A Co. will utilize a portion of the cash received from B Co., as described in paragraph 20 above, to fund this payment.

22. The remainder of the cash received by A Co. upon the cancellation of the Class A Note will be utilized by A Co. to XXXXXXXXXX.

Additional Information

23. It is intended that the transfer of the Purchased Assets by A Co. to B Co. will occur on XXXXXXXXXX. It is estimated that the fair market value at that date of the assets to be transferred will be approximately as follows:

XXXXXXXXXX.

24. There is not a present intention to dispose, as part of a series of transactions or events which includes the redemption of the Class A Special Shares described in paragraph 19 above, of any property or to increase any interest in any corporation as described in any of subparagraphs 55(3)(a)(i) to (v) of the Act to any person or partnership that is an unrelated person to A Co. immediately prior to such transaction or event.

Purpose of the Proposed Transactions

25.

XXXXXXXXXX

Rulings Given

Provided that the above statements of facts, proposed transactions and purpose of the proposed transactions are accurate and constitute complete disclosure thereof, and that the proposed transactions are carried out as set forth herein, the following rulings are given:

A. The provisions of subsection 85(1) of the Act will apply, subject to the application of paragraph 88(2.2)(b) thereof and of subsections 20(1.2) and 26(5) of the ITAR, to the transfer by A Co. of its properties that are eligible properties, in respect of which an election under subsection 85(1) of the Act is made, to B Co., as described in paragraph 16 above, such that the agreed amount in respect of each transfer of such property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a) of the Act and in respect of depreciable property, the transferee's capital cost of each such property will be determined in accordance with subsection 85(5) thereof. For the purposes of the joint elections described in paragraph 18 above, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition..." in subparagraph 85(1)(e)(i) of the Act will be read to mean the proportion of the UCC to the taxpayer of all the property of that class that the capital cost of the property immediately before the disposition is of the capital cost of all property of that class immediately before the disposition.

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.

B. On the redemption of all of the Class A Special Shares held by A Co. as described in paragraph 19 above, the amount, if any, by which the amount paid to redeem those shares exceeds the paid-up capital of those shares immediately before the redemption:

(i) will be deemed pursuant to paragraph 84(3)(a) of the Act to be a dividend paid by B Co.;

(ii) will be deemed pursuant to paragraph 84(3)(b) of the Act to be a dividend received by A Co.;

(iii) will be included in A Co.'s income pursuant to paragraph 12(1)(j) of the Act;

(iv) to the extent that a dividend described in (ii) above is a taxable dividend, such dividend will, pursuant to subsection 112(1) of the Act, be deductible in computing the taxable income of A Co. for the year in which the dividend is deemed to have been received, and, for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), (2.2), (2.3) or (2.4) of the Act; and

(v) by virtue of the application of paragraph (j) of the definition "proceeds of disposition" in section 54 of the Act, the amount of a deemed dividend described in (ii) above will be excluded from the proceeds of disposition of the share.

C. Part IV.1 of the Act will not apply to the deemed dividend described in ruling B above, deemed to be paid as a result of the redemption of the Class A Special Shares, because the dividend will be an excepted dividend pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act.

D. Part VI.1 of the Act will not apply to the deemed dividend described in ruling B above, deemed to be paid as a result of the redemption of the Class A Special Shares, because the dividend will be an excluded dividend pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act.

E. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) of the Act, then by virtue of paragraph 55(3)(a) thereof, the provisions of subsection 55(2) of the Act will not apply to the taxable dividend referred to in ruling B. For greater certainty, the proposed transactions described in paragraphs 15 to 22 herein, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) of the Act.

F. Provided that A Co. has included or will have included an amount in respect of the undertakings relating to its obligations XXXXXXXXXX as described in paragraph 17 above, in computing its income from its business pursuant to paragraph 12(1)(a) of the Act for the taxation year which includes the time of the transfer of assets described in paragraph 16 above or any preceding taxation year, the payment made by A Co. to B Co. in consideration for the assumption by B Co. of those undertakings, to the extent that the payment is reasonable:

(i) may, pursuant to paragraph 20(24)(a) of the Act, be deducted in computing the income of A Co. for its fiscal period in which the payment takes place; and

(ii) will, pursuant to paragraph 20(24)(b) of the Act, be deemed to be an amount described in paragraph 12(1)(a) thereof in respect of B Co.

G. Subsection 84(2) of the Act will apply to the amount paid by A Co. to its shareholder C Co. on the reduction of the paid-up capital of the common shares of A Co., as described in paragraph 21 above, however A Co. will not be deemed thereunder to have paid a dividend on those shares provided the amount paid does not exceed the amount of the reduction to the paid-up capital in respect of A Co.'s common shares.

H. Subsection 84(4.1) of the Act will not apply to deem any amount paid by A Co. to its shareholder C Co. on the reduction of the paid-up capital of the common shares of A Co., as described in paragraph 21 above, to be a dividend.

I. The amount received by C Co. on the reduction of the paid-up capital of the common shares of A Co. described in paragraph 21 above will, by virtue of subparagraph 53(2)(a)(ii) of the Act, be deducted in calculating the adjusted cost base of the common shares of A Co. to C Co.

J. The provisions of subsections 15(1), 56(2), 56(4) and 246(1) of the Act will not be applied as a result of the proposed transactions, in and by themselves.

K. The provisions of subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada on 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 the effect of any proposed amendments thereto.

Comments

Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly:

i) the determination of the fair market value or adjusted cost base of any property referred to herein (in particular the determination of the fair market value of the Class A Special Shares and the Class A Note), or the paid-up capital of any shares;

ii) that should shares or property be acquired by a person or partnership which is an unrelated person to A Co., that such acquisition will not be part of the series of transactions which includes the redemption of the Class A Special Shares described in paragraph 19 above; and

iii) the income tax consequences arising should the price adjustment clause referred to in paragraph 15 above become operative, as the operation of a price adjustment clause is not a proposed transaction and, consequently, advance rulings are not given by the Department in respect thereof. The Department's general position with respect to price adjustment clauses in agreements is set out in Interpretation Bulletin IT-169 dated August 6, 1974.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch