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:
Significant increase in the total direct interest of the remaining siblings' in the distributing corporation on the redemption of the departing sibling's shares.
Position:
Not in the particular situation.
Reasons:
Distributing corporation controlled by mother and transferee corporation will also be controlled by mother.
XXXXXXXXXX 2000-004938
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX ("XXXXXXXXXX/Aco")
XXXXXXXXXX ("XXXXXXXXXX/Bco")
XXXXXXXXXX ("XXXXXXXXXX/Mother")
XXXXXXXXXX ("XXXXXXXXXX/Child 1")
Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted taxpayers. We acknowledge your letter of XXXXXXXXXX and our telephone conversations in connection herewith.
We understand that to the best of your knowledge and that of XXXXXXXXXX/Aco, XXXXXXXXXX/Bco, XXXXXXXXXX/Mother and XXXXXXXXXX/Child 1 none of the issues contained herein:
(a) is in an earlier return of XXXXXXXXXX/Aco, XXXXXXXXXX/Bco, XXXXXXXXXX/Mother or XXXXXXXXXX/Child 1 or a related person;
(b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of XXXXXXXXXX/Aco, XXXXXXXXXX/Bco, XXXXXXXXXX/Mother or XXXXXXXXXX/Child 1 or a related person;
(c) is under objection by XXXXXXXXXX/Aco, XXXXXXXXXX/Bco, XXXXXXXXXX/Mother or XXXXXXXXXX/Child 1 or a related person;
(d) is before the courts or, if a judgment 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.
You advised that the proposed transactions described herein, will have no impact on outstanding tax liabilities of XXXXXXXXXX/Aco, XXXXXXXXXX/Bco, XXXXXXXXXX/Mother or XXXXXXXXXX/Child 1 or a related person.
ADMINISRATIVE MATTERS:
The taxpayers' names and Social Insurance Numbers / Business Numbers are as follows:
XXXXXXXXXX /Mother XXXXXXXXXX
XXXXXXXXXX /Child 1 XXXXXXXXXX
XXXXXXXXXX GROUP
Related and Associated Companies
XXXXXXXXXX /Aco XXXXXXXXXX
XXXXXXXXXX /Bco XXXXXXXXXX
XXXXXXXXXX . XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX . ("XXXXXXXXXX /Cco") XXXXXXXXXX
XXXXXXXXXX . ("XXXXXXXXXX /Dco") XXXXXXXXXX
XXXXXXXXXX .("XXXXXXXXXX /Hco") XXXXXXXXXX
XXXXXXXXXX . XXXXXXXXXX
XXXXXXXXXX . XXXXXXXXXX
XXXXXXXXXX . XXXXXXXXXX
XXXXXXXXXX . XXXXXXXXXX Associated Companies
XXXXXXXXXX . XXXXXXXXXX
XXXXXXXXXX . XXXXXXXXXX
XXXXXXXXXX . XXXXXXXXXX
Related Companies
XXXXXXXXXX ./Fco XXXXXXXXXX
XXXXXXXXXX ./Gco XXXXXXXXXX
XXXXXXXXXX . XXXXXXXXXX
XXXXXXXXXX . XXXXXXXXXX
XXXXXXXXXX . XXXXXXXXXX
XXXXXXXXXX . XXXXXXXXXX
XXXXXXXXXX . XXXXXXXXXX
XXXXXXXXXX . XXXXXXXXXX
The taxpayers' addresses are as follows:
XXXXXXXXXX /Mother
XXXXXXXXXX
XXXXXXXXXX /Child 1
XXXXXXXXXX
XXXXXXXXXX /Aco Group
XXXXXXXXXX
The above taxpayers file their personal and corporate tax returns at the XXXXXXXXXX Taxation Centre.
DEFINITIONS
In this letter unless otherwise expressly stated:
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp..), c.1 as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act;
(b) "ACB" means "adjusted cost base" as that expression is defined in section 54 and subsection 248(1);
(c) "agreed amount" in respect of a property means the amount that the transferor and transferee of the property have agreed upon in their election under subsection 85(1) in respect of the property;
(d) XXXXXXXXXX;
(e) "CCRA" means, on or after November 1, 1999, the Canada Customs and Revenue Agency, and before November 1, 1999, Revenue Canada, Taxation;
(f) "capital property" has the meaning assigned by section 54;
(g) "cost amount" has the meaning assigned by subsection 248(1);
(h) "disposition" has the meaning assigned by subsection 248(1);
(i) "dividend refund" has the meaning assigned by subsection 129(1);
(j) "dividend rental arrangement" has the meaning assigned by subsection 248(1);
(k) "eligible property" has the meaning assigned by subsection 85(1.1);
(l) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);
(m) "guarantee agreement" has the meaning assigned by subsection 112(2.2);
(n) "XXXXXXXXXX/Aco Group" means XXXXXXXXXX/Aco and the related and associated corporations listed in Administrative Matters;
(o) "XXXXXXXXXX/Ico" means a predecessor corporation, formerly named XXXXXXXXXX;
(p) "paid-up capital" has the meaning assigned by subsection 89(1);
(q) "private corporation" has the meaning assigned by subsection 89(1);
(r) "related persons" has the meaning assigned by subsection 251(2);
(s) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
(t) "taxable dividend" has the meaning assigned by subsection 89(1).
FACTS
1. The companies listed under the XXXXXXXXXX/Aco Group were all incorporated under the XXXXXXXXXX and are all taxable Canadian corporations and private corporations.
2. XXXXXXXXXX/Mother is the mother of XXXXXXXXXX/Child 1, XXXXXXXXXX ("XXXXXXXXXX/Child 2"), XXXXXXXXXX ("XXXXXXXXXX/Child 3") and XXXXXXXXXX ("XXXXXXXXXX/Child 4").
3. XXXXXXXXXX/Mother owns XXXXXXXXXX voting non-participating shares in XXXXXXXXXX/Aco.
Each of XXXXXXXXXX/Child 1, XXXXXXXXXX/hild 2, XXXXXXXXXX/Child 3 and XXXXXXXXXX/Child 4 own XXXXXXXXXX non-voting common shares of XXXXXXXXXX/Aco.
XXXXXXXXXX/Mother owns indirectly through her XXXXXXXXXX% owned holding company, XXXXXXXXXX non-voting preferred shares and XXXXXXXXXX non-voting preferred shares of XXXXXXXXXX/Aco.
4. XXXXXXXXXX/Mother owns XXXXXXXXXX voting non-participating shares, XXXXXXXXXX non-voting common shares and XXXXXXXXXX non-voting preferred shares of XXXXXXXXXX/Bco.
XXXXXXXXXX/Child 1, XXXXXXXXXX/Child 2, XXXXXXXXXX/Child 3 and XXXXXXXXXX/Child 4 each own XXXXXXXXXX non-voting common shares of XXXXXXXXXX/Bco.
XXXXXXXXXX/Eco, an unrelated corporation, owns XXXXXXXXXX non-voting preferred shares of XXXXXXXXXX/Bco.
5. XXXXXXXXXX/Bco's only assets are XXXXXXXXXX preferred shares and XXXXXXXXXX common shares of XXXXXXXXXX/Eco, XXXXXXXXXX preferred shares of XXXXXXXXXX/Aco and a $XXXXXXXXXX note receivable from XXXXXXXXXX/Aco.
The redemption price of the XXXXXXXXXX preferred shares of XXXXXXXXXX/Eco held by XXXXXXXXXX/Bco is equal to the redemption price of the XXXXXXXXXX non-voting preferred shares of XXXXXXXXXX/Bco held by XXXXXXXXXX/Eco.
6. XXXXXXXXXX /Mother owns 1 voting common share of XXXXXXXXXX/Dco.
7. Except as described above, there are no other shareholders of XXXXXXXXXX/Aco, XXXXXXXXXX/Bco or XXXXXXXXXX/Dco.
8. All the issued shares, as described in Paragraphs 3 to 6, are capital property of each owner thereof.
9. XXXXXXXXXX/Mother controls both XXXXXXXXXX/Aco and XXXXXXXXXX/Bco directly and has indirect control of the XXXXXXXXXX/Aco Group of companies.
10. XXXXXXXXXX/Child 1 owns XXXXXXXXXX% of the outstanding shares of XXXXXXXXXX/Fco.
11. XXXXXXXXXX/Fco owns XXXXXXXXXX% of the shares of XXXXXXXXXX/Gco and note/loan receivables from XXXXXXXXXX/Aco and XXXXXXXXXX/Gco totalling $XXXXXXXXXX.
12. XXXXXXXXXX/Gco holds a XXXXXXXXXX% interest in a joint venture, XXXXXXXXXX/KJV. XXXXXXXXXX/Child 2, XXXXXXXXXX/Child 3 and XXXXXXXXXX/Child 4 each own XXXXXXXXXX% of the XXXXXXXXXX/KJV joint venture indirectly through their respective holding companies. The remainder is owned by arm's length third parties.
Prior Reorganizations
13. Prior to XXXXXXXXXX, the various real estate interests were owned jointly through family holding companies controlled by XXXXXXXXXX ("XXXXXXXXXX/Father"), and his brother, XXXXXXXXXX ("XXXXXXXXXX/Uncle"). XXXXXXXXXX/Father and XXXXXXXXXX/Uncle also held additional properties through a partnership with an unrelated third party.
14. XXXXXXXXXX/Father, who died in XXXXXXXXXX, was the husband of XXXXXXXXXX/Mother and the father of XXXXXXXXXX/Child 1, XXXXXXXXXX/Child 2, XXXXXXXXXX/Child 3 and XXXXXXXXXX/Child 4.
15. As a result of two reorganizations, XXXXXXXXXX/Father, XXXXXXXXXX/Uncle and the unrelated party, separated their partnership interest in various real estate properties. As a result XXXXXXXXXX/Father acquired XXXXXXXXXX/Ico and its wholly owned subsidiaries, XXXXXXXXXX/Lco and XXXXXXXXXX/Mco. The major assets of these companies were:
(a) a XXXXXXXXXX% interest in XXXXXXXXXX (the "Partnership"), which in turn, held a XXXXXXXXXX% interest in XXXXXXXXXX/Hco and XXXXXXXXXX rental properties located at XXXXXXXXXX (The latter XXXXXXXXXX rental properties were subsequently sold at fair market value to unrelated third parties.)
The remaining XXXXXXXXXX% interest in the Partnership was held by XXXXXXXXXX/Dco which, in turn, was owned XXXXXXXXXX% by XXXXXXXXXX/Father;
(b) the following rental properties:
XXXXXXXXXX (land and building)
XXXXXXXXXX (land and building)
(c) Land:
XXXXXXXXXX
(d) XXXXXXXXXX partnership interest
(e) XXXXXXXXXX
(f) Investment in XXXXXXXXXX
(g) Investment in XXXXXXXXXX
(h) Mortgages, loans, notes and advances receivable
(i) Goodwill
16. The properties owned by XXXXXXXXXX/Bco were transferred to XXXXXXXXXX/Aco pursuant to the provisions in subsection 85(1). As consideration for the transfer, XXXXXXXXXX/Bco received non-share consideration consisting of a promissory note and assumption of debt worth $XXXXXXXXXX and XXXXXXXXXX preferred shares with a redemption value of $XXXXXXXXXX. The ACB and paid-up capital of the XXXXXXXXXX preferred shares issued by XXXXXXXXXX/Aco was XXXXXXXXXX.
17. On XXXXXXXXXX, the Partnership acquired an additional XXXXXXXXXX% interest in XXXXXXXXXX/Hco from an unrelated third party for $XXXXXXXXXX.
18. On XXXXXXXXXX/Aco transferred the following properties to its wholly owned subsidiary, XXXXXXXXXX/Cco pursuant to the provisions in subsection 85(1):
(a) its XXXXXXXXXX% interest in the Partnership;
(b) XXXXXXXXXX (land and building); and
(c) XXXXXXXXXX (land and building).
As consideration for the transfer, XXXXXXXXXX/Aco received XXXXXXXXXX common shares in XXXXXXXXXX/Cco with a fair market value of $XXXXXXXXXX, and an ACB and paid-up capital of $XXXXXXXXXX.
Current Valuations
19. The estimated fair market, as XXXXXXXXXX, of:
(a) XXXXXXXXXX/Aco's common shares was approximately $XXXXXXXXXX;
(b) XXXXXXXXXX/Bco's common shares was approximately $XXXXXXXXXX;
(c) XXXXXXXXXX/Child 1's XXXXXXXXXX non-voting common shares of XXXXXXXXXX/Aco was approximately $XXXXXXXXXX;
(d) XXXXXXXXXX/Child 1's XXXXXXXXXX non-voting common shares of XXXXXXXXXX/Bco was approximately $XXXXXXXXXX; and
(e) the XXXXXXXXXX common shares of XXXXXXXXXX/Hco held by XXXXXXXXXX/Cco was approximately $XXXXXXXXXX.
20. XXXXXXXXXX/Child 1 and the XXXXXXXXXX/Aco Group have agreed that XXXXXXXXXX/Child 1 will accept the following assets as consideration for the transfer of her XXXXXXXXXX non-voting common shares of XXXXXXXXXX/Aco and her XXXXXXXXXX non-voting common shares of XXXXXXXXXX/Bco:
(a) XXXXXXXXXX common shares of XXXXXXXXXX/Hco; and
(b) a combination of cash and/or notes receivable with a combined fair market value equal to the difference between the fair market value of the XXXXXXXXXX common shares of XXXXXXXXXX/Hco and the aggregate fair market value of XXXXXXXXXX/Child 1's XXXXXXXXXX non-voting common shares of XXXXXXXXXX/Aco and XXXXXXXXXX non-voting common shares of XXXXXXXXXX/Bco at the time of the transfer.
PROPOSED TRANSACTIONS
Transfer of the XXXXXXXXXX common shares of XXXXXXXXXX/Hco
21. The articles of incorporation of XXXXXXXXXX/Cco will be amended to create a class of special shares which will be non-voting, non-participating (except for a discretionary non-cumulative dividend), redeemable and retractable for an amount equal to the fair market value of the property received for the issuance of such shares.
22. The articles of incorporation of XXXXXXXXXX/Dco will be amended to create the following classes of shares:
(a) a class of voting, non-participating common shares ("XXXXXXXXXX common shares");
(b) a class of non-voting, participating common shares ("XXXXXXXXXX common shares") which will be issued to XXXXXXXXXX/Child 1 as consideration for the transfers to be made to XXXXXXXXXX/Dco as described in paragraph 31 below;
(c) a class of non-voting, non-participating special shares, redeemable and retractable, with a non-cumulative dividend rate set at the prescribed rate at the time the shares are issued ("XXXXXXXXXX preferred shares"), which will be issued to XXXXXXXXXX/Mother as consideration for the transfer to be made to XXXXXXXXXX/Dco as described in paragraph 29 below; and
(d) a second class of non-voting, non-participating special shares (except for a discretionary non-cumulative dividend) ("XXXXXXXXXX preferred shares"), which will be issued to XXXXXXXXXX/Cco as consideration for the transfer to be made to XXXXXXXXXX/Dco as described in paragraph 27 below.
All classes of shares of XXXXXXXXXX/Dco that are entitled to dividends, will have rights and restrictions attached thereto that will ensure that dividends cannot be paid on the shares if to do so would reduce the value of the net assets of the company to less than the aggregate of the redemption amounts of all the issued preferred shares.
Following the creation of the new shares described herein, XXXXXXXXXX/Mother will subscribe for XXXXXXXXXX common shares and XXXXXXXXXX/Child 1 will subscribe for XXXXXXXXXX common shares for a nominal subscription price of $XXXXXXXXXX per share.
23. The Partnership will be dissolved following the passing of a resolution consenting to the dissolution by XXXXXXXXXX/Cco and XXXXXXXXXX/Dco. Immediately before that time, each of XXXXXXXXXX/Cco and XXXXXXXXXX/Dco will agree to assume their respective proportion of the liabilities of the Partnership and each will receive its proportionate undivided interest in each property of the Partnership so distributed.
The Partnership holds XXXXXXXXXX common shares of XXXXXXXXXX/Hco and XXXXXXXXXX rental properties (known as XXXXXXXXXX) (the "Other Assets").
Immediately before the dissolution of the Partnership, XXXXXXXXXX/Cco and XXXXXXXXXX/Dco will jointly elect under the provisions of subsection 98(3), in prescribed form and within the time referred to in subsection 96(4), in respect of all the property of the Partnership distributed to XXXXXXXXXX Cco and XXXXXXXXXX/Dco as described above.
24. XXXXXXXXXX/Dco will transfer its undivided interest in the XXXXXXXXXX common shares of XXXXXXXXXX/Hco and the Other Assets received on the dissolution of the Partnership to XXXXXXXXXX/Cco. In consideration XXXXXXXXXX/Cco will issue to XXXXXXXXXX/Dco special shares of XXXXXXXXXX/Cco with a fair market value equal to the fair market value of the property transferred from XXXXXXXXXX/Dco.
XXXXXXXXXX/Cco will add an amount to the legal paid-up capital of the class of the special shares issued to XXXXXXXXXX/Dco equal to the paid-up capital of the shares transferred.
25. XXXXXXXXXX/Dco and XXXXXXXXXX /Cco will jointly elect in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the undivided interest in the XXXXXXXXXX common shares of XXXXXXXXXX/Hco and the Other Assets. The agreed amount in respect of the transfer will be equal to the adjusted cost base to XXXXXXXXXX/Dco of its undivided interest in the XXXXXXXXXX common shares of XXXXXXXXXX/Hco and the Other Assets, immediately before the transfer, which amount will be less than the fair market value of such property.
Following the transfer, XXXXXXXXXX/Cco will own XXXXXXXXXX common shares in XXXXXXXXXX/Hco and the Other Assets.
26. XXXXXXXXXX/Cco will redeem all of its special shares issued to XXXXXXXXXX/Dco in the transaction described in paragraph 24 above. In consideration XXXXXXXXXX/Cco will issue to XXXXXXXXXX/Dco an interest-bearing demand promissory note having a principal amount equal to the fair market value of the special shares so redeemed (the "XXXXXXXXXX/Cco Note 1").
27. XXXXXXXXXX/Cco will transfer its XXXXXXXXXX common shares of XXXXXXXXXX/Hco to XXXXXXXXXX/Dco. As sole consideration for the transfer of the XXXXXXXXXX common shares of XXXXXXXXXX/Hco, XXXXXXXXXX/Dco will issue to XXXXXXXXXX/Cco XXXXXXXXXX preferred shares redeemable and retractable at an amount equal to the aggregate fair market value of the XXXXXXXXXX common shares of XXXXXXXXXX/Hco transferred.
XXXXXXXXXX/Dco will add an amount to the legal paid-up capital of its XXXXXXXXXX preferred shares issued to XXXXXXXXXX/Cco equal to the paid-up capital of the shares transferred.
28. XXXXXXXXXX/Cco and XXXXXXXXXX/Dco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the XXXXXXXXXX common shares of XXXXXXXXXX/Hco. The agreed amount in respect of the election will be equal to the adjusted cost base of the XXXXXXXXXX common shares of XXXXXXXXXX/Hco to XXXXXXXXXX/Cco at the time of the transfer, which amount will be less than the fair market value thereof at that time.
Freeze of XXXXXXXXXX/Mother's interest in XXXXXXXXXX/Dco
29. XXXXXXXXXX/Mother will transfer her one common share in XXXXXXXXXX/Dco to XXXXXXXXXX/Dco. As sole consideration for the transfer of the one common share of XXXXXXXXXX/Dco, XXXXXXXXXX/Dco will issue to XXXXXXXXXX/Mother XXXXXXXXXX preferred shares redeemable and retractable at an amount equal to the fair market value of the one common share of XXXXXXXXX /Dco so transferred.
XXXXXXXXXX/Dco will add an amount to the legal paid-up capital of its XXXXXXXXXX preferred shares issued to XXXXXXXXXX/Mother equal to the paid-up capital of the share transferred.
30. XXXXXXXXXX/Mother and XXXXXXXXXX/Dco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the 1 common share of XXXXXXXXXX/Dco. The agreed amount in respect of the election will be equal to the lower of the adjusted cost base and the fair market value of the 1 common share of XXXXXXXXXX/Dco to XXXXXXXXXX/Mother at the time of the transfer.
Transfer of XXXXXXXXXX/Child 1's shares in XXXXXXXXXX/Aco and XXXXXXXXXX/Bco
31. XXXXXXXXXX/Child 1 will transfer her XXXXXXXXXX common shares of XXXXXXXXXX/Bco and her XXXXXXXXXX common shares of XXXXXXXXXX/Aco to XXXXXXXXXX /Dco. As sole consideration for the transfer of the XXXXXXXXXX common shares of XXXXXXXXXX/Bco and the XXXXXXXXXX common shares of XXXXXXXXXX/Aco, XXXXXXXXXX/Dco will issue to XXXXXXXXXX/Child 1 XXXXXXXXXX common shares with a fair market value equal to the aggregate fair market value of the XXXXXXXXXX common shares of XXXXXXXXXX/Bco and the XXXXXXXXXX common shares of XXXXXXXXXX/Aco so transferred.
XXXXXXXXXX/Dco will add an amount to the legal paid-up capital of its XXXXXXXXXX common shares issued to XXXXXXXXXX/Child 1 equal to the aggregate paid-up capital of the shares transferred.
32. XXXXXXXXXX/Child 1 and XXXXXXXXXX/Dco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to such transfer of the XXXXXXXXXX common shares of XXXXXXXXXX/Bco and the XXXXXXXXXX common shares of XXXXXXXXXX/Aco. The agreed amount in respect of each property transferred will be equal to the adjusted cost base of that property to XXXXXXXXXX/Child 1 at the time of the transfer, which will be less than the fair market value thereof at that time.
Redemption of Shares
33. After the transfer of XXXXXXXXXX/Child 1's shares as described in paragraph 31 above, XXXXXXXXXX/Bco will purchase for cancellation its XXXXXXXXXX common shares held by XXXXXXXXXX/Dco. In consideration XXXXXXXXXX/Bco will issue to XXXXXXXXXX/Dco a promissory note ("XXXXXXXXXX/Bco Note 1"), which will be non-interest-bearing and be payable on demand and will have a principal amount and fair market value equal to the fair market value of the XXXXXXXXXX common shares so purchased.
34. After the share purchase described in paragraph 33 above, XXXXXXXXXX/Aco will purchase for cancellation the XXXXXXXXXX common shares held by XXXXXXXXXX/Dco. In consideration XXXXXXXXXX/Aco will issue to XXXXXXXXXX/Dco two promissory notes ("XXXXXXXXXX/Aco Note 1" and "XXXXXXXXXX/Aco Note 2") with the aggregate of their principal amounts being equal to the amount of the fair market value of the XXXXXXXXXX common shares purchased (the "XXXXXXXXXX/Aco Purchase Proceeds").
The XXXXXXXXXX/Aco Note 1 will be a non-interest-bearing demand promissory note with a principal amount and fair market value equal to the difference between the principal amount of the XXXXXXXXXX/Dco Note (issued as a result of the transaction described in paragraph 35 below) and the principal amount of the XXXXXXXXXX/Bco Note 1.
The XXXXXXXXXX/Aco Note 2 will be interest-bearing (at a market rate to be determined) and payable within a fixed term. The XXXXXXXXXX/Aco Note 2 will have a principal amount and fair market value equal to the difference between the XXXXXXXXXX/Aco Purchase Proceeds and the principal amount of the XXXXXXXXXX/Aco Note 1.
35. Immediately after the purchase of the XXXXXXXXXX/Bco and XXXXXXXXXX/Aco shares described in paragraphs 33 and 34 above and before the end of the taxation year of XXXXXXXXXX/Dco, XXXXXXXXXX/Dco will redeem all of its XXXXXXXXXX preferred shares issued to XXXXXXXXXX/Cco in the transaction described in paragraph 27 above. In consideration XXXXXXXXXX/Dco will issue to XXXXXXXXXX/Cco a non-interest-bearing demand promissory note having a principal amount equal to the fair market value of the XXXXXXXXXX preferred shares redeemed ("the "XXXXXXXXXX/Dco Note").
36. XXXXXXXXXX/Dco will settle the principal amount of the XXXXXXXXXX/Dco Note by assigning the XXXXXXXXXX/Bco Note and the XXXXXXXXXX/Aco Note 1 to XXXXXXXXXX/Cco. The XXXXXXXXXX/Dco Note will then be cancelled.
ADDITIONAL PROPOSED TRANSACTIONS
37. In order to simplify the inter-company debt, it is intended that in a subsequent taxation year of XXXXXXXXXX/Bco that commences after the share purchase described in paragraph 33 above, XXXXXXXXXX/Bco will repay the XXXXXXXXXX/Bco Note which will then be held by XXXXXXXXXX/Cco, as a result of the assignment in paragraph 36 above. XXXXXXXXXX/Bco will assign a portion of its current note receivable from XXXXXXXXXX/Aco to XXXXXXXXXX/Cco equal to the principal amount of the XXXXXXXXXX/Bco Note.
38. In addition to the proposed transactions, which are the subject of this advance tax ruling request, it is proposed that XXXXXXXXXX/Child 1's XXXXXXXXXX% owned holding company, XXXXXXXXXX/Fco, will sell its shares in XXXXXXXXXX/Gco and its receivables to the respective holding companies (one third to each) of XXXXXXXXXX/Child 2, XXXXXXXXXX/Child 3 and XXXXXXXXXX/Child 4, for proceeds that are equal to fair market value.
39. There are not, and will not be, at any time prior to the completion of the proposed transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any of the shares to be redeemed or repurchased as part of the proposed transactions.
40. None of XXXXXXXXXX/Aco, XXXXXXXXXX/Bco, XXXXXXXXXX/Dco or XXXXXXXXXX/Cco has, or will have, entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the shares to be redeemed or repurchased as part of the proposed transactions.
41. None of the shares to be redeemed or repurchased as part of the proposed transactions will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).
42. XXXXXXXXXX/Aco, XXXXXXXXXX/Bco, XXXXXXXXXX/Dco and XXXXXXXXXX/Cco are not financial intermediary corporations.
PURPOSES OF THE TRANSACTIONS
43. The purpose of the proposed transactions is to separate XXXXXXXXXX/Child 1's interest in the XXXXXXXXXX/Aco Group from XXXXXXXXXX/Child 2, XXXXXXXXXX /Child 3 and XXXXXXXXXX/Child 4 by transferring assets owned by the XXXXXXXXXX/Aco Group to her (through XXXXXXXXXX/Dco) in exchange for her XXXXXXXXXX non-voting common shares of XXXXXXXXXX/Aco and her XXXXXXXXXX non-voting common shares of XXXXXXXXXX/Bco. This will allow XXXXXXXXXX/Child 1 to pursue her investment objectives independently from her siblings.
RULINGS
Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, we confirm the following:
A. The provisions of subsection 85(1) will apply to the transfer:
(i) by XXXXXXXXXX/Dco of its undivided interest in the XXXXXXXXXX common shares of XXXXXXXXXX/Hco and the Other Assets to XXXXXXXXXX/Cco described in paragraph 24 above;
(ii) by XXXXXXXXXX/Cco of the XXXXXXXXXX common shares of XXXXXXXXXX/Hco to XXXXXXXXXX/Dco described in paragraph 27 above;
(iii) by XXXXXXXXXX/Mother of the 1 common share of XXXXXXXXXX/Dco to XXXXXXXXXX/Dco described in paragraph 29 above; and
(iv) by XXXXXXXXXX/Child 1 of the XXXXXXXXXX common shares of XXXXXXXXXX/Bco and the XXXXXXXXXX common shares of XXXXXXXXXX/Aco to XXXXXXXXXX/Dco described in paragraph 31 above
such that, the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a).
For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.
B. The application of subsection 84.1(1) to the transfer of the XXXXXXXXXX common shares of XXXXXXXXXX/Bco and the XXXXXXXXXX common shares of XXXXXXXXXX/Aco by XXXXXXXXXX/Child 1 to XXXXXXXXXX/Dco described in paragraph 31 above will not result in a reduction of the paid-up capital of the XXXXXXXXXX/Dco XXXXXXXXXX common shares pursuant to the provisions of paragraph 84.1(1)(a) or result in a dividend being deemed to be paid to XXXXXXXXXX/Child 1 pursuant to the provisions of paragraph 84.1(1)(b).
C. The provisions of subsection 85(2.1) will not apply to reduce the paid-up capital of the shares received as consideration in the transfers described in Ruling A above.
D. On the purchase for cancellation of the XXXXXXXXXX common shares of XXXXXXXXXX/Bco and the XXXXXXXXXX common shares of XXXXXXXXXX/Aco described in paragraph 33 above, and the redemption of the special shares of XXXXXXXXXX/Cco described in paragraph 26 above, the XXXXXXXXXX preferred shares of XXXXXXXXXX/Dco described in paragraph 35 above, the amount if any, by which the amount paid to redeem or purchase the particular shares, as the case may be, exceeds the paid-up capital of the particular shares immediately before the redemption or the purchase for cancellation:
(i) will be deemed pursuant to paragraph 84(3)(a) to be a dividend paid by the issuer of such shares; and
(ii) will be deemed pursuant to paragraph 84(3)(b) to be a dividend received by the holder of such shares;
(iii) will be included in each recipient's income pursuant to paragraph 12(1)(j);
and
(iv) to the extent that a dividend described in (ii) above is a taxable dividend, such a dividend will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient 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);
(v) by virtue of the application of paragraph (j) of the definition of "proceeds of disposition" in section 54, the amount of a deemed dividend described in (ii) above will be excluded from the proceeds of disposition of the share, and any loss arising from the disposition of the share will be reduced by the amount of such dividends pursuant to subsection 112(3); and
(vi) no taxes in respect of Part IV of the Act will be payable in respect to the dividends described in (ii) above except to the extent of the amount, if any, determined under paragraph 186(1)(b).
E. Part IV.1 of the Act will not apply to the deemed dividends described in Ruling D above because the dividends will be excepted dividends pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1.
F. Part VI.1 of the Act will not apply to the deemed dividends described in Ruling D above because the dividends will be excluded dividends pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).
G. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends described in Ruling D above, provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events that includes the proposed transactions .
H. The settlement of the XXXXXXXXXX/Dco Note described in paragraph 36 above will not give rise to a forgiven amount.
I. The provisions of subsection 98(3) will apply to the dissolution of the Partnership and distribution of its property to XXXXXXXXXX/Cco and XXXXXXXXXX/Dco as described in paragraph 23 above.
J. Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 issued by CCRA and are binding provided that the proposed transactions are completed before XXXXXXXXXX.
These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.
Nothing in this ruling should be construed as confirmation, express or implied, of:
(a) the determination of the fair market value or adjusted cost base of any property referred to herein, or the paid-up capital of any shares; or
(b) any tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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