2000 Ruling 2000-0027073 - XXXXXXXXXX

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: Incorporation of Newco by a municipality (XXXXXXXXXX %) and a society (XXXXXXXXXX %) which will acquire shares of a TCC. 149(10) is not applicable because of split of shareholdings of Newco. Is GAAR applicable?

Position: No

Reasons: GAAR Referral the purpose of the transactions is to acquire property owned by the TCC but the shareholders will only sell shares to avail themselves of capital gains election

XXXXXXXXXX
XXXXXXXXXX 2000-002707
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Advance Income Tax Ruling - XXXXXXXXXX

We are writing in response to your correspondence of XXXXXXXXXX wherein you had requested an advance income tax ruling on behalf of the XXXXXXXXXX. We also acknowledge our (XXXXXXXXXX) various telephone conversations in furtherance of this matter.

You have advised that, to the best of the knowledge of yourself and of responsible officials of the XXXXXXXXXX, none of the issues being considered in this advance income tax ruling request is involved in an income tax return of the XXXXXXXXXX, is being considered by a Taxation Services Office or Taxation Centre of Canada Customs and Revenue Agency, is the subject of an objection or appeal or is the subject of a previously issued advance income tax ruling.

In this advance income tax ruling:

XXXXXXXXXX is referred to as the "Municipality";

XXXXXXXXXX is referred to as "Landco"; and

XXXXXXXXXX is referred to as "Holdco".

FACTS

1. The Municipality is a XXXXXXXXXX municipality. As such, it is exempt from tax under Part I of the Income Tax Act (the "Act") by virtue of paragraph 149(1)(c) thereof.

2. The Municipality wants to acquire all of the land (the "Property") that makes up

XXXXXXXXXX.

3. The Property is currently owned by Landco. Landco was incorporated under the XXXXXXXXXX and is a "taxable Canadian corporation" within the meaning of that term in subsection 89(1) of the Act. The issued and outstanding shares of Landco consist of XXXXXXXXXX common shares owned by the following shareholders:

XXXXXXXXXX.

All of the shareholders are residents of Canada for purposes of the Act.

All of the shareholders have owned their respective shares since incorporation except for XXXXXXXXXX of the shares owned by XXXXXXXXXX which were transferred to him in XXXXXXXXXX from XXXXXXXXXX.

4. Holdco was incorporated under the XXXXXXXXXX and is a "taxable Canadian corporation" within the meaning of that term in subsection 89(1) of the Act. The issued and outstanding shares of Holdco consist of XXXXXXXXXX Class XXXXXXXXXX common shares without par value and XXXXXXXXXX Class XXXXXXXXXX preferred shares with a par value of $XXXXXXXXXX per share and a redempti.on amount of $XXXXXXXXXX per share. The shareholders of Holdco are as follows:

XXXXXXXXXX.

All of the shareholders are residents of Canada for purposes of the Act.

All of the Class XXXXXXXXXX shares have been owned by the respective shareholders since incorporation. All of the Class XXXXXXXXXX shares have been owned by the shareholders since XXXXXXXXXX.

5. In order for the Municipality to acquire the Property in question, the individual shareholders of both of Landco and of Holdco require the Municipality to purchase their shares. On XXXXXXXXXX, the Municipality offered to purchase (or have its nominee purchase) the shares of both of Landco and of Holdco for an aggregate purchase price of $XXXXXXXXXX. The "Completion Date" of the sale is the XXXXXXXXXX anniversary of the date on which the last "subject to" clause has been waived or fulfilled. All of the "subject to" clauses must be removed by XXXXXXXXXX. Prior to the Completion Date but subsequent to the waiving or the fulfilling of all of the "subject to" clauses, the Municipality may accelerate the Completion Date. If such acceleration occurs, the aggregate purchase price for the shares is reduced by $XXXXXXXXXX for each month that the Completion Date is accelerated.

6. The funds used by the Municipality to purchase the shares will come from a combination of federal, provincial and municipal government sources. In addition, the Municipality will receive funds raised by the XXXXXXXXXX (the "Society"), a XXXXXXXXXX society. The Society was formed to prevent private developers from purchasing and developing the Property. The Society offered to help with fundraising so that the Property could be purchased by the Municipality and preserved. Subsequent to the acquisition, the Society intends to play an active role in the preservation and operation of the park.

7. On the Completion Date, the sole asset of Holdco will be the shares of Landco. These shares have a low adjusted cost base relative to their fair market value.

8. On the Completion Date, the sole asset of Landco will be the Property and some improvements located thereon. The fair market value of the improvements is nominal. The adjusted cost base of the Property is low relative to its fair market value.

9. Both of Holdco and Landco will be free and clear of any liabilities or debts on the Completion Date.

PROPOSED TRANSACTIONS

10. A new corporation ("Newco") will be incorporated under XXXXXXXXXX. The Municipality will own XXXXXXXXXX% of the issued and outstanding shares of Newco which will entitle the Municipality to XXXXXXXXXX% of the votes that could be cast under all circumstances at annual meetings of Newco. The Society will own XXXXXXXXXX% of the issued and outstanding shares of Newco.

11. Newco will enter into the above described binding sales agreement with the individual shareholders of Holdco and Landco. At the same time, Newco will grant to the Municipality an option to purchase the Property for an amount equal to the lesser of the aggregate cost to Newco of the shares of Holdco and Landco or the fair market value of the Property at the time of the exercise of the option. The option will be subject to the successful completion of the purchase and the execution of the following transactions.

12. On the Completion Date, the Municipality will lend funds to Newco secured by a non-interest bearing promissory note due on demand. Newco will use the funds to purchase all of the shares of Holdco and Landco currently held by individuals at the aggregate price previously indicated.

13. Immediately thereafter, Holdco will be voluntarily dissolved under XXXXXXXXXX and the shares of Landco owned by Holdco will be distributed to Newco upon that dissolution. Subsequent to the winding-up of Holdco, Newco will own all of the shares of Landco.

14. Immediately thereafter, Landco will be voluntarily dissolved under XXXXXXXXXX and the Property owned by Landco will be distributed to Newco upon that dissolution. After the winding-up of Landco, Newco will own the Property.

15. The Municipality will exercise the option to purchase the Property from Newco for the amount as described in paragraph 11, above.

16. Newco will not be an agent of the Municipality in the execution of the Proposed Transactions.

PURPOSE OF PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to enable the Municipality to acquire the Property held by Landco.

RULINGS PROVIDED

Provided that the above statements of fact are accurate and complete and that the proposed transactions are undertaken as described, the following rulings are provided:

A. Newco will not be considered to be exempt from Part I tax by virtue of subsection 149(1) of the Act and, accordingly, the provisions of subsection 149(10) of the Act will not be applicable to Landco or to Holdco upon the acquisition of the shares of those corporations by Newco.

B. The provisions of subsection 245(2) of the Act will not be applicable as a result of the proposed transactions, in and of themselves, to re-determine the tax consequences confirmed in the above Ruling.

These rulings are provided subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and are binding upon the Agency provided that the proposed transactions are completed on or before XXXXXXXXXX. The rulings are based on the Act and the Income Tax Regulations in their present form and do not take into account the effects of any proposed amendments thereto.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch