7 July 1996 Income Tax Severed Letter 9600333 - Single wing butterfly (no contentious issues)

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.

XXXXXXXXXX960033 XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: XXXXXXXXXX Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above- referenced taxpayer. In your letters of XXXXXXXXXX you provided additional information in respect of, and amendments to, the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

To the best of your knowledge and that of the taxpayers involved:

(i) none of the issues involved in the requested rulings is being considered by a Tax Services Office or a Taxation Centre in connection with a tax return already filed, and

(ii) none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.

Unless otherwise stated all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act").

In this letter, the following terms have the meanings specified:

(a) "adjusted cost base" ("ACB") has the meaning assigned to that term in section 54 of the Act;

(b) XXXXXXXXXX

(c) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7) of the Act;

(d) "capital property" has the meaning assigned to that term in section 54 of the Act;

(e) "cost amount" has the meaning assigned to that term by subsection 248(1) of the Act;

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

(g) "dividend refund" has the meaning assigned to that term in subsection 129(1) of the Act;

(h) "eligible property" has the meaning assigned to that term in subsection 85(1.1) of the Act;

(i) "paid-up capital" ("PUC") has the meaning assigned to that term by subsection 89(1) of the Act;

(j) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3) of the Act;

(k) "specified financial institution" ("SFI") has the meaning assigned to that term by subsection 248(1) of the Act;

(l) "specified investment business" has the meaning assigned by subsection 125(7) of the Act;

(m) "taxable Canadian corporation" ("TCC") has the meaning assigned to that term by subsection 89(1) of the Act;

(n) "taxable dividend" has the meaning assigned to that term by subsection 89(1) of the Act; and

(o) "valuation day" ("V-Day") has the meaning assigned by section 24 of the Income Tax Application Rules.

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

FACTS

1. XXXXXXXXXX is a TCC and a CCPC which was incorporated on XXXXXXXXXX It is governed by the provisions of the XXXXXXXXXX. The taxation year of XXXXXXXXXX ends on XXXXXXXXXX of each year.

2. The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX

Rights and restrictions for each class of shares is to be set by the Board of Directors at the time of issuance.

3. The issued and outstanding share capital of XXXXXXXXXX consists of XXXXXXXXXX Class XXXXXXXXXX common shares which have an aggregate PUC and stated capital of $XXXXXXXXXX XXXXXXXXXX has XXXXXXXXXX individual shareholders, both of whom are residents of Canada. The XXXXXXXXXX shareholders, XXXXXXXXXX ("Mr. A") XXXXXXXXXX ("Mr. B") own XXXXXXXXXX common share each. Mr. A and Mr. B each acquired their Class XXXXXXXXXX common share prior to XXXXXXXXXX at a cost of $XXXXXXXXXX and have held the shares continuously thereafter without interruption. XXXXXXXXXX

The V-Day value and the fair market value as at XXXXXXXXXX of the XXXXXXXXXX Class XXXXXXXXXX common shares is approximately $XXXXXXXXXX per share, respectively.

The Class XXXXXXXXXX common shares of XXXXXXXXXX represent capital property to each of its shareholders.

4. XXXXXXXXXX carried on the business of XXXXXXXXXX in Canada in which it utilized all of its property, until XXXXXXXXXX

Subsequent to XXXXXXXXXX continued to own the land and buildings only, which it leased proportionately to the shareholders, XXXXXXXXXX

XXXXXXXXXX

At the time of the proposed transfers of property described in paragraph 12 below, XXXXXXXXXX will not have any cash or XXXXXXXXXX on hand.

The lease payments received by XXXXXXXXXX from Mr. A and Mr. B represent income from property.

5. XXXXXXXXXX only assets consist of the land and buildings located in XXXXXXXXXX which are currently leased to Mr. A and Mr. B as described in paragraph 4 above. The land and buildings were acquired in XXXXXXXXXX and constitute capital property to XXXXXXXXXX

The various parcels of land together with their original cost, V-Day value and fair market value as at XXXXXXXXXX are as follows:

Original V-Day Cost Value FMV

XXXXXXXXXX

The various buildings together with their original cost, V-Day value and fair market value as at XXXXXXXXXX are as follows:

Original V-Day Cost Value FMV

XXXXXXXXXX

6. At the time of the proposed transfers of property described in paragraph 12 below, XXXXXXXXXX only liabilities will consist of debt owing to Mr. A and Mr. B. The amount owing to Mr. A and Mr. B at XXXXXXXXXX respectively.

7. XXXXXXXXXX ("TransfereeCo") is a TCC and a CCPC incorporated under the XXXXXXXXXX Mr. B is the sole shareholder of TransfereeCo. The authorized share capital of TransfereeCo includes Class XXXXXXXXXX voting common shares and one class of redeemable retractable, non-cumulative preferred shares ("TransfereeCo Preferred Shares"), the redemption amount of which will be set by the Directors at the date of issuance. Currently only one (1) Class XXXXXXXXXX common share has been issued to Mr. B.

8. As at XXXXXXXXXX did not have any RDTOH. In addition, at the end of their taxation years in which the proposed transactions are implemented neither XXXXXXXXXX nor TransfereeCo will have any RDTOH.

PROPOSED TRANSACTIONS

9. Mr. B will transfer his Class XXXXXXXXXX common share of XXXXXXXXXX which constitutes all of the shares in XXXXXXXXXX owned by Mr. B, to TransfereeCo. As sole consideration for such transfer, TransfereeCo will issue to Mr. B one Class XXXXXXXXXX common share from its capital stock. The Class XXXXXXXXXX common share of TransfereeCo will be capital property to Mr. B.

Mr. B and TransfereeCo will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfer of the Class XXXXXXXXXX common share of XXXXXXXXXX as described herein to TransfereeCo. The amount agreed upon in the election will be equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) of the Act.

The amount that will added to the stated capital of the Class XXXXXXXXXX common share of TransfereeCo as a result of the acquisition by TransfereeCo of the Class XXXXXXXXXX common share of XXXXXXXXXX will be $XXXXXXXXXX

10. Immediately before the proposed transfers of property described in paragraph 12 below, the assets of XXXXXXXXXX will be classified into XXXXXXXXXX types of property for the purposes of the definition of "distribution" in subsection 55(1) of the Act, as follows:

(a) cash or near cash property, comprising all of the current assets of XXXXXXXXXX

(b) investment property, comprising of all of the assets of XXXXXXXXXX, other than any cash or near cash property, any income from which would, for the purposes of the Act, be income from property or from a specified investment business, and

(c) business property, comprising all of the assets of XXXXXXXXXX other than cash or near cash property, any income from which would, for purposes of the Act, be income from an active business carried on by XXXXXXXXXX Immediately before the proposed transfer of property described in paragraph 12 below, XXXXXXXXXX will have only investment property.

11. In determining the net fair market value of its investment property immediately before the proposed transfers of property described in paragraph 12 below, the liabilities of XXXXXXXXXX, which consists solely of the shareholder debt owing to Mr. A and Mr. B, will be allocated to, and be deducted in the calculation of, the net fair market value of the investment property.

12. XXXXXXXXXX will then transfer XXXXXXXXXX% of the net fair market value of all its properties to TransfereeCo. More specifically, the following properties are to be transferred to TransfereeCo:

Land FMV

XXXXXXXXXX

Buildings FMV

XXXXXXXXXX

As consideration for the property so transferred, TransfereeCo will

(a) assume a portion of the liabilities of XXXXXXXXXX (i.e. a portion of the shareholder debt), such that the net fair market value of the investment property of XXXXXXXXXX transferred to TransfereeCo as described herein will be equal to XXXXXXXXXX% of the net fair market value of all investment property owned by XXXXXXXXXX immediately before such transfers, and

(b) issue to XXXXXXXXXX TransfereeCo Preferred Shares having an aggregate redemption value and fair market value equal to the amount by which the aggregate fair market value of the properties transferred to TransfereeCo as described herein exceeds the amount of liabilities assumed by TransfereeCo as described in (a) above.

13. XXXXXXXXXX and TransfereeCo will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfer of any eligible property of XXXXXXXXXX which is transferred to TransfereeCo as described in paragraph 12 above, the fair market value of which exceeds its cost amount. The amount agreed upon in such elections in respect of each of the eligible properties so transferred will be equal to:

(a) in the case of capital property (other than depreciable property of a prescribed class), an amount equal to the cost amount of such property; and

(b) in the case of depreciable property of a prescribed class, an amount equal to the cost amount of such property.

For greater certainty, the agreed amount for any eligible property included in the subsection 85(1) elections referred to herein will not exceed the fair market value of such property and will not be less than the amount of any liabilities assumed by TransfereeCo as consideration for the transfer of such property.

The amount that will be added to the stated capital of the TransfereeCo Preferred Shares which are to be issued as consideration for the property of XXXXXXXXXX which will be transferred to TransfereeCo as described in paragraph 12 above will be equal to the amount by which the aggregate cost of the property to TransfereeCo (determined pursuant to subsection 85(1) of the Act where relevant) exceeds the amount of liabilities assumed by TransfereeCo as consideration therefor.

14. TransfereeCo will redeem all of its TransfereeCo Preferred Shares held by XXXXXXXXXX for an amount equal to their fair market value (the "Redemption Price") and as payment of the Redemption Price will issue to XXXXXXXXXX a non-interest bearing note (the "TransfereeCo Note") payable on demand having a principal amount and fair market value equal to the Redemption Price. XXXXXXXXXX will accept the TransfereeCo Note as full payment for the Redemption Price of the TransfereeCo Preferred Shares so redeemed.

TransfereeCo will, immediately before such share redemptions, be related to XXXXXXXXXX within the meaning of subsection 251(2) of the Act and will be connected with XXXXXXXXXX within the meaning assigned by subsections 186(2) and 186(4) of the Act.

15. Immediately after the redemption of the TransfereeCo Preferred Shares as described in paragraph 14 above, XXXXXXXXXX will then purchase for cancellation from TransfereeCo the one (1) Class XXXXXXXXXX common share of XXXXXXXXXX held by TransfereeCo at its fair market value. XXXXXXXXXX will pay the purchase price for such share by returning the TransfereeCo Note described in paragraph 14 above to TransfereeCo and as a consequence thereof the TransfereeCo Note will be settled. TransfereeCo will accept the TransfereeCo Note as full payment for the purchase price of the common share of XXXXXXXXXX so purchased.

XXXXXXXXXX will, immediately before the purchase of the Class XXXXXXXXXX common share of XXXXXXXXXX held by TransfereeCo, be related to TransfereeCo within the meaning of subsection 251(2) of the Act and will be connected with TransfereeCo within the meaning assigned by subsections 186(2) and 186(4) of the Act.

16. Immediately following the transfers described in paragraph 12 above, the redemptions described in paragraph 14 above and the purchase described in paragraph 15 above, the net fair market value of the investment property retained by XXXXXXXXXX determined in the manner described in paragraph 10 above (after allocating and deducting liabilities, in the manner described in paragraph 11 above), will be equal to the proportion of the net fair market value of all of the investment property owned by XXXXXXXXXX, determined in the manner described in paragraph 10 above (after allocating and deducting liabilities, in the manner described in paragraph 11 above), immediately before such transfers, that:

(a) the fair market value, immediately before the transfer, of all the shares of the capital stock of XXXXXXXXXX, other than those owned by TransfereeCo, at that time

is of

(b) the fair market value, immediately before the transfer, of all the issued shares of the capital stock of XXXXXXXXXX at that time.

ADDITIONAL INFORMATION 17. Except as described in this letter, no liabilities have been or will be incurred by, and no assets have been or will be acquired by or disposed of by XXXXXXXXXX in contemplation of and before the proposed transfers of properties described in paragraph 12 above.

18. Neither TransfereeCo nor XXXXXXXXXX is, or will be at the time of the proposed transactions, an SFI.

19. None of the shares of XXXXXXXXXX or TransfereeCo 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) of the Act 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) of the Act; or

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

PURPOSE OF THE PROPOSED TRANSACTIONS

20. XXXXXXXXXX

A decision has been made that it would be in the best interests of both parties to go their separate ways by carrying out a single-wing butterfly.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. Subject to the application of the provisions of subsections 20(1.2) and 26(5) of the Income Tax Application Rules and to the application of paragraph 88(2.2)(b) of the Act, which applies for the purposes stated in the preamble to subsection 88(2.2) of the Act, and subject also to the application of subsection 85(5.1) of the Act as it may apply to the transfer referred to in (i) herein, the provisions of subsection 85(1) of the Act will apply to:

(i) the transfer of each eligible property by XXXXXXXXXX to TransfereeCo which is the subject of an election under subsection 85(1) as described in paragraphs 12 and 13 above, and to

(ii) the transfer of the Class XXXXXXXXXX common share of XXXXXXXXXX held by Mr. B to TransfereeCo as described in paragraph 9 above,

such that the agreed amounts in respect of each such transfer shall 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. For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to the transfers referred to herein.

B. As a result of the redemption by TransfereeCo of its TransfereeCo Preferred Shares as described in paragraph 14 above and the consequential purchase for cancellation of the Class XXXXXXXXXX common share of XXXXXXXXXX as described in paragraph 15 above:

(a) By virtue of paragraphs 84(3)(a) and 84(3)(b) of the Act:

••• TransfereeCo will be deemed to have paid, and XXXXXXXXXX will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the TransfereeCo Preferred Shares exceeds the PUC thereof; and

(ii) XXXXXXXXXX will be deemed to have paid, and TransfereeCo will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the purchase for cancellation of the common share of XXXXXXXXXX exceeds the PUC thereof;

(b) Provided that neither of XXXXXXXXXX nor TransfereeCo is entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividend referred to in (a)(i) or (ii) herein, neither of XXXXXXXXXX nor TransfereeCo will be subject to Part IV tax under subsection 186(1) of the Act in respect of such dividend; and

(c) The taxable dividends deemed to have been received by XXXXXXXXXX and TransfereeCo as a result of the redemption and purchase for cancellation referred to in paragraph (a) herein will be deductible by each of them in computing its respective taxable income pursuant to subsection 112(1) of the Act. For greater certainty, the provisions of subsections 112(2.2) and (2.4) of the Act will not apply to deny the subsection 112(1) deduction in respect of such dividends.

C. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

(a) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);

(b) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);

(c) an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or

(d) an acquisition of property in the circumstances described in paragraph 55(3.1)(d),

which has not been described herein, then by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividends referred to in the rulings given in subparagraph B(a) above and, for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.

D. By virtue of paragraph 191(2)(a) of the Act, XXXXXXXXXX will have a substantial interest in TransfereeCo immediately before the redemption of the TransfereeCo Preferred Shares as described in paragraph 14 above and TransfereeCo will have a substantial interest in XXXXXXXXXX immediately before the purchase for cancellation of the Class XXXXXXXXXX common share of XXXXXXXXXX described in paragraph 15 above. Consequently, no tax will be payable under either section 187.2 or section 191.1 of the Act in respect of:

(i) the dividend deemed to have been paid by TransfereeCo to XXXXXXXXXX upon the redemption of the TransfereeCo Preferred Shares since each such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act in the capacity of XXXXXXXXXX as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act in the capacity of TransfereeCo as the payer of the particular dividend, or

(ii) the dividend deemed to be paid by XXXXXXXXXX to TransfereeCo upon the repurchase of the Class XXXXXXXXXX common share of XXXXXXXXXX since such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act in the capacity of TransfereeCo as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act in the capacity of XXXXXXXXXX as the payer of the particular dividend.

E. The provisions of subsection 80(1) of the Act will not apply to the settlement of the TransfereeCo Note as described in paragraph 15 above.

F. The provisions of subsections 15(1), 56(2), and 246(1) of the Act will not apply to the proposed transactions described herein, in and by themselves.

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

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, and are binding on Revenue Canada, Customs, Excise and Taxation 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 any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Comments

Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:

(a) the determination of the fair market value or ACB of any particular asset or the PUC of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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

XXXXXXXXXX