1999 Ruling 9905903 - REORGANIZATION

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: use of subsection 251(3) to override paragraph 55(5)(e) such that all transfers are to related parties

Position: allowable according to reply to Q.3 at 1998 APFF.

Reasons:

XXXXXXXXXX
XXXXXXXXXX 3-990590
XXXXXXXXXX

Attention: XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: Advance income tax ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the above taxpayers. We also acknowledge your letter of XXXXXXXXXX.

To the best of your knowledge, and that of the parties to this ruling, none of the issues contained in this advance income tax ruling:

1. is in an earlier return of the taxpayer or related person;

2. is being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

3. is under objection by the taxpayer or a related person;

4. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

5. is the subject of a ruling previously issued by this Directorate.

Definitions

Except as otherwise indicated, the following defined terms have the following meanings:

1. “Act” means the Income Tax Act, R.S.C. 1985 (5th Supp.) c. l, 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 provision of the Act;

2. “ACB” means the expression “adjusted cost base” as defined in section 54;

3. XXXXXXXXXX

4. “CCPC” means the expression “Canadian-controlled private corporation” which has the meaning assigned by subsection 125(7);

5. “Canadian corporation” has the meaning assigned by subsection 89(1);

6. “CDA” means the expression “capital dividend account” as defined in subsection 89(1);

7. “PUC” means the expression “paid-up capital” as defined in subsection 89(1);

8. “private corporation” has the meaning assigned by subsection 89(1);

9. “RDTOH” means “refundable dividend tax on hand” which has the meaning assigned by subsection 129(3);

10. ”series of transactions or events” has the meaning assigned by subsection 248(10);

11. “specified financial institution” and “restricted financial institution” have the meanings assigned by subsection 248(1);

12. “TCC” means “taxable Canadian corporation” which has the meaning assigned by subsection 89(1);

13. “taxable dividend” has the meaning assigned by subsection 89(1); and

14. “proceeds of disposition” has the meaning assigned by section 54.

Facts

1. Each of the following corporations is a Canadian corporation, TCC and private corporation:
Corporate
Name Date incorporated Account #

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

All the above companies were incorporated in XXXXXXXXXX and file their corporate income tax returns at the XXXXXXXXXX Taxation Centre. The responsible Taxation Services Office is XXXXXXXXXX.

2. XXXXXXXXXX are married to each other and are the parents of XXXXXXXXXX. All are resident in Canada.

3. The principal business activities of XXXXXXXXXX are as follows:

XXXXXXXXXX is an investment holding company which holds the voting preferred shares of XXXXXXXXXX and various portfolio investments.

XXXXXXXXXX is an investment holding company which holds all the equity shares of XXXXXXXXXX.

XXXXXXXXXX is a holding company which holds all the voting shares of XXXXXXXXXX.

XXXXXXXXXX owns and operates a XXXXXXXXXX.

4. XXXXXXXXXX is a CCPC whose authorized and issued share capital are as follows:

Authorized:

XXXXXXXXXX class A non-participating voting common shares with a XXXXXXXXXX of $XXXXXXXXXX each.

XXXXXXXXXX class B non-voting common shares with a XXXXXXXXXX of $XXXXXXXXXX each.

XXXXXXXXXX class C non-voting common shares with a XXXXXXXXXX of $XXXXXXXXXX each.

XXXXXXXXXX class D non-voting preferred shares redeemable and retractable at $XXXXXXXXXX each with a XXXXXXXXXX of $XXXXXXXXXX each.

XXXXXXXXXX class E non-voting preferred shares redeemable and retractable for $XXXXXXXXXX each with a XXXXXXXXXX of $XXXXXXXXXX each.

XXXXXXXXXX class F non-voting preferred shares redeemable and retractable for $XXXXXXXXXX each with a XXXXXXXXXX of $XXXXXXXXXX each.

The liquidation rights in order of priority are as follows:

Class A common - the amount paid up,

Class D and E preferred - the redemption amount plus any dividends declared but unpaid,

Class F preferred - the redemption amount plus any dividends declared but unpaid,

Class B common - the amount paid up,

Class C common - the amount paid up, and

Class B and C common - ratably, all remaining property of the company.

Issued and outstanding:

Shareholder	Class		Number		   PUC		     ACB

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX is controlled by XXXXXXXXXX.

5. XXXXXXXXXX is a CCPC whose authorized and issued share capital are as follows:

Authorized:

XXXXXXXXXX class A non-participating voting common shares with a XXXXXXXXXX of $XXXXXXXXXX each.

XXXXXXXXXX class B participating non-voting common shares with a XXXXXXXXXX of $XXXXXXXXXX each.

XXXXXXXXXX class C participating non-voting common shares with a XXXXXXXXXX of $XXXXXXXXXX each.

XXXXXXXXXX class D participating non-voting common shares with a XXXXXXXXXX of $XXXXXXXXXX each.

XXXXXXXXXX class E non-voting preferred shares redeemable and retractable for $XXXXXXXXXX each with a XXXXXXXXXX of $XXXXXXXXXX each.

The liquidation rights in order of priority are as follows:

Class A common - the amount paid up,

Class E preferred - the redemption amount,

Class B common - the amount paid up,

Class C common - the amount paid up,

Class D common - the amount paid up, and

Class B, C and D common - ratably, all remaining property of the company.

Issued and outstanding:

Shareholder	Class		Number		PUC

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX is controlled by XXXXXXXXXX is controlled by XXXXXXXXXX is controlled by XXXXXXXXXX.

6. XXXXXXXXXX is a CCPC whose authorized and issued share capital are as follows:

Authorized:

XXXXXXXXXX class A non-participating voting common shares with a XXXXXXXXXX of $XXXXXXXXXX each.

XXXXXXXXXX class B participating non-voting common shares with a XXXXXXXXXX of $XXXXXXXXXX each.

XXXXXXXXXX class C participating non-voting preferred shares redeemable and retractable for $XXXXXXXXXX each with a XXXXXXXXXX of $XXXXXXXXXX each.

Issued and outstanding:

Shareholder		Class			Number

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX is controlled by XXXXXXXXXX.

7. XXXXXXXXXX assets include cash, loans receivable from related parties, short-term securities and preferred shares in XXXXXXXXXX. It is your understanding that the ACB, PUC and fair market value of the XXXXXXXXXX shares is equal to their redemption amount; accordingly, there is no accrued gain in the XXXXXXXXXX preferred shares held by XXXXXXXXXX.

8. Previously, XXXXXXXXXX principal assets were shares of XXXXXXXXXX a Canadian corporation carrying on an active business in Canada. XXXXXXXXXX shareholdings represented a XXXXXXXXXX% interest in XXXXXXXXXX. In and around XXXXXXXXXX sold its shares of XXXXXXXXXX in an arm's-length transaction in which XXXXXXXXXX realized a capital gain. The resulting RDTOH and addition to the company's CDA was subsequently distributed to its shareholders by the payment of dividends. XXXXXXXXXX current assets represent the residual proceeds from the sale of the XXXXXXXXXX shares.

9. While it appears that XXXXXXXXXX has substantial income earned or realized for purposes of subsection 55(2), it may be insufficient to cover the entire amount of the dividends necessary to distribute XXXXXXXXXX property to its shareholders.

10. XXXXXXXXXX sole assets are shares of XXXXXXXXXX. Neither company has significant liabilities.

Purpose of the Proposed Transactions

11. XXXXXXXXXX has maintained its assets in short-term investments in contemplation of distributing its property amongst its shareholders. The shareholders of XXXXXXXXXX wish to receive their proportionate share of the residual property of XXXXXXXXXX so that they may each manage the investment of these funds in accordance with their own objectives. It is therefore proposed to liquidate XXXXXXXXXX followed by the liquidation of XXXXXXXXXX.

Proposed Transactions

12. The sole director of XXXXXXXXXX will pass director’s resolutions calling for and authorizing the disposition of all of XXXXXXXXXX assets and payment of all of XXXXXXXXXX liabilities (if any) as a preliminary step to the voluntary dissolution of XXXXXXXXXX pursuant to XXXXXXXXXX. Concurrently, the members of XXXXXXXXXX will pass special or consent resolutions pursuant to XXXXXXXXXX approving the disposition of all of the assets of XXXXXXXXXX as proposed by the sole director.

13. In the course of the wind up:

(a) XXXXXXXXXX will pay in full all its liabilities;

(b) XXXXXXXXXX will estimate the amount of its tax liability, if any, for its last taxation year and set aside sufficient funds to meet this liability;

(c) all of XXXXXXXXXX remaining property will be distributed to its shareholders: XXXXXXXXXX, in accordance with the liquidation rights of the shares held as provided in the memorandum or articles of the company; and

(d) XXXXXXXXXX will request a clearance certificate pursuant to subsection 159(2).

14. Prior to the distribution of XXXXXXXXXX property as described above, XXXXXXXXXX will elect, pursuant to subsection 83(2), in prescribed manner and prescribed form, that the full amount of any resulting dividend referred to in subparagraph 88(2)(b)(i) will be deemed to be a capital dividend.

15. Upon receipt of the clearance certificate pursuant to subsection 159(2), an ordinary or consent resolution will be passed by the members of XXXXXXXXXX pursuant to XXXXXXXXXX requesting the Registrar XXXXXXXXXX to strike XXXXXXXXXX off the Register thereby dissolving XXXXXXXXXX. The members resolution will then be filed with the Registrar XXXXXXXXXX together with an affidavit signed by the sole director of XXXXXXXXXX proving what disposition XXXXXXXXXX has made of its assets and confirming that XXXXXXXXXX has no debts or liabilities. XXXXXXXXXX will be dissolved following the filing with the Registrar XXXXXXXXXX of the members resolution and director’s affidavit.

16. The sole director of XXXXXXXXXX will pass director’s resolutions calling for and authorizing the disposition of all of XXXXXXXXXX assets and payment of all of XXXXXXXXXX liabilities (if any) as a preliminary step to the voluntary dissolution of XXXXXXXXXX pursuant to XXXXXXXXXX. Concurrently, the members of XXXXXXXXXX will pass special or consent resolutions pursuant to XXXXXXXXXX approving the disposition of all of the assets of XXXXXXXXXX as proposed by the sole director.

17. In the course of the wind up:

(a) XXXXXXXXXX will pay in full all its liabilities;

(b) XXXXXXXXXX will estimate the amount of its tax liability, if any, for its last taxation year and set aside sufficient funds to meet this liability;

(c) all of XXXXXXXXXX remaining property will be distributed to its shareholders: XXXXXXXXXX, in accordance with the liquidation rights of the shares held as provided in the memorandum or articles of the company; and

(d) XXXXXXXXXX will request a clearance certificate pursuant to subsection 159(2).

18. Prior to the distribution of XXXXXXXXXX property as described above, XXXXXXXXXX will elect, pursuant to subsection 83(2), in prescribed manner and prescribed form, that the full amount of any resulting dividend referred to in subparagraph 88(2)(b)(i) will be deemed to be a capital dividend.

19. Upon receipt of the clearance certificate pursuant to subsection 159(2), an ordinary or consent resolution will be passed by the members of XXXXXXXXXX pursuant to XXXXXXXXXX requesting the Registrar XXXXXXXXXX to strike XXXXXXXXXX off the Register thereby dissolving XXXXXXXXXX. The members resolution will then be filed with the Registrar XXXXXXXXXX together with an affidavit signed by the sole director of XXXXXXXXXX proving what disposition XXXXXXXXXX has made of its assets and confirming that XXXXXXXXXX has no debts or liabilities. XXXXXXXXXX will be dissolved following the filing with the Registrar XXXXXXXXXX of the members resolution and director’s affidavit.

Additional Information

20. There are no transactions or events, other than those disclosed herein, that form part of a series of transactions and events connected with this reorganization.

21. None of the companies mentioned herein is, or will be at the time of the proposed transactions, a specified financial institution or a restricted financial institution.

22. None of the shares of any of the corporations has been, or will be at any time during the implementation of the proposed transactions described herein:

(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a “guarantee agreement”;

(b) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or

(c) the subject of a dividend rental agreement as that term is defined in subsection 248(1).

Rulings Provided

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts and proposed transactions and the purposes of the proposed transactions, we confirm the following:

A. As a result of the distributions of XXXXXXXXXX property to XXXXXXXXXX, on the winding-up of XXXXXXXXXX:

(i) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (ii) to (iv) herein, each of XXXXXXXXXX will be deemed to have received a dividend (“winding-up dividend A.”) on its shares of XXXXXXXXXX equal to the proportion of the amount by which the aggregate fair market value of the property of XXXXXXXXXX distributed by XXXXXXXXXX on the winding-up in consideration for the cancellation of its shares exceeds the PUC thereof that the number of shares of each class held by each of XXXXXXXXXX is of the number of cancelled shares of each class;

(ii) pursuant to subparagraph 88(2)(b)(i), such portion of winding-up dividend A. as does not exceed XXXXXXXXXX CDA determined immediately before the payment of winding-up dividend A. will be deemed, for the purposes of the subsection 83(2) election referred to in paragraph 14 above, to be the full amount of a separate dividend;

(iii) pursuant to subparagraph 88(2)(b)(ii), the portion of winding-up dividend A. that is equal to the lesser of:

(A) XXXXXXXXXX pre-1972 capital surplus on hand as determined immediately before the payment of winding-up dividend A., and

(B) the amount by which winding-up dividend A. exceeds the portion, if any, in respect of which XXXXXXXXXX will elect under subsection 83(2)

will be deemed not to be a dividend; and

(iv) pursuant to subparagraph 88(2)(b)(iii), winding-up dividend A., to the extent that it exceeds the portion thereof referred to in (ii) herein that is deemed to be a separate dividend and the portion referred to in (iii) herein that is deemed not to be a dividend, will be deemed to be a separate dividend that is a taxable dividend.

B. As a result of the distributions of XXXXXXXXXX property to XXXXXXXXXX, on the winding-up of XXXXXXXXXX:

(i) pursuant to paragraph 88(2)(b) and subsections 84(2), but subject to (ii) to (iv) herein, each of XXXXXXXXXX will be deemed to have received a dividend ("winding-up dividend B.”) on its shares of XXXXXXXXXX equal to the proportion of the amount by which the aggregate fair market value of the property of XXXXXXXXXX distributed by XXXXXXXXXX on the winding-up in consideration for the cancellation of its shares exceeds the PUC thereof that the number of shares of each class held by each of XXXXXXXXXX is of the number of cancelled shares of each class;

(ii) pursuant to subparagraph 88(2)(b)(i) and subsection 89(3), such portion of winding-up dividend B. as does not exceed XXXXXXXXXX CDA determined immediately before the payment of winding-up dividend B., and in the order designated under subsection 89(3), will be deemed, for the purposes of the subsection 83(2) election referred to in paragraph 18 above, to be the full amount of a separate dividend;

(iii) pursuant to subparagraph 88(2)(b)(ii), the portion of winding-up dividend B. that is equal to the lesser of:

(A) XXXXXXXXXX pre-1972 capital surplus on hand as determined immediately before the payment of winding-up dividend B., and

(B) the amount by which winding-up dividend B. exceeds the portion, if any, in respect of which XXXXXXXXXX will elect under subsection 83(2)

will be deemed not to be a dividend and instead will be proceeds of disposition as defined by paragraph 54(i) in respect of the shares of XXXXXXXXXX; and

(iv) pursuant to subparagraph 88(2)(b)(iii), winding-up dividend B., to the extent that it exceeds the portion thereof referred to in (ii) herein that is deemed to be a separate dividend and the portion referred to in (iii) herein that is deemed not to be a dividend, will be deemed to be a separate dividend that is a taxable dividend paid on each class of shares, as the case may be, in the order designated under subsection 89(3).

C. By virtue of paragraph 55(3)(a), subsection 55(2) will not apply to the taxable dividends received by each of XXXXXXXXXX as described in ruling A(iv) above, and by each of XXXXXXXXXX as described in ruling B(iv) above, provided that, as part of the series of transactions or events as part of which the dividends are received, there is no event described in subparagraphs 55(3)(a)(i) to (v) which is part of the series of transactions or events that includes the proposed transactions described herein.

D. The deemed dividends referred to in rulings A and B above, to the extent that they are taxable dividends, will:

(i) be included in each recipient's income pursuant to paragraph l2(1)(j);

(ii) be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4); and

(iii) pursuant to the provisions of paragraph (j) of the definition of “proceeds of disposition” in section 54, be excluded in computing the proceeds of disposition on any disposition of shares of XXXXXXXXXX on the windings- up of these companies as described above; and

(iv) any loss arising from the disposition of the shares referred to in subparagraph (iii) herein will be reduced by the amount of such dividends pursuant to subsection 112(3).

E. No taxes under Part IV will be payable in respect of the dividends described in rulings A and B above except as provided in paragraph 186(1)(b).

F. Part IV.1 will not apply to the deemed dividends described in ruling A above because the dividends will be excepted dividends pursuant to paragraph (c) of the definition of “excepted dividend” in section 187.1.

G. Part VI. 1 will not apply to the deemed dividends described in ruling A above because the dividends will be excluded dividends pursuant to paragraph (a) of the definition of “excluded dividend” in subsection 191(1).

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

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

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

Comments

Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed:

1. the determination of the amount of the CDA or RDTOH; the PUC of any shares referred to herein, or the ACB or fair market value of any property referred to herein, or

2. any tax consequences arising from any of the facts or proposed transactions described herein other than those specifically referred to in the rulings given above.

Yours truly,

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

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