Principal Issues: Whether the proceeds from the sale of eligible capital property can be paid to shareholder/managers as a deductible bonus.
Position: Yes.
Reasons: The company is a CCPC paying bonuses to active shareholder/key employees who are residents of Canada to reduce the CCPC's income from the Business and the asset sale to a nominal amount.
XXXXXXXXXX 2005-014639
XXXXXXXXXX, 2006
Re: Advance Income Tax Ruling
XXXXXXXXXX
Dear XXXXXXXXXX:
This is in response to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.
We understand that to the best of your knowledge and that of the taxpayer involved none of the issues involved in this ruling is:
(i) dealt with in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) subject to a ruling previously issued to the taxpayer or a related person by the Income Tax Rulings Directorate; or
(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.
In this letter, the following terms have the meanings specified:
(a) "Act" means the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended to the date hereof. All statutory references in this letter are references to the Act, unless stated otherwise;
(b) "Assets" means all of the assets of the Business, including goodwill;
(c) "Bonus" means, in total, $XXXXXXXXXX and
- with respect to Key Employee A, $XXXXXXXXXX,
- with respect to Key Employee B, $XXXXXXXXXX,
- with respect to Key Employee C, $XXXXXXXXXX,
- with respect to Key Employee D, $XXXXXXXXXX;
(d) "Business" means the XXXXXXXXXX business of Canco;
(e) "Canco" means XXXXXXXXXX. Canco's business number is #XXXXXXXXXX and it is served by the XXXXXXXXXX TSO and the XXXXXXXXXX TC;
(f) "CCPC" or "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);
(g) "CRA" means the Canada Revenue Agency;
(h) "Key Employee (s)" means Key Employee A, Key Employee B, Key Employee C, and Key Employee D, either singularly or collectively;
Key Employee A, Key Employee B, and Key Employee D are served by the XXXXXXXXXX TSO and the XXXXXXXXXX TC. Key Employee C is served by the XXXXXXXXXX TSO and the XXXXXXXXXX TC;
(i) "Key Employee A" means XXXXXXXXXX, a resident of XXXXXXXXXX, Canada;
(j) "Key Employee B" means XXXXXXXXXX, a resident of XXXXXXXXXX, Canada;
(k) "Key Employee C" means XXXXXXXXXX, a resident of XXXXXXXXXX, Canada;
(l) "Key Employee D" means XXXXXXXXXX, a resident of XXXXXXXXXX, Canada;
(m) "Limited Partnership" means the Purchaser;
(k) "Paragraph" means a numbered paragraph in this letter;
(l) "Proposed Transaction" means the transaction described in Paragraph 10;
(m) "Purchaser" means XXXXXXXXXX;
(n) "taxation year" has the meaning assigned by subsection 249(1);
(o) "TC" means Taxation Centre;
(p) "Trust" means XXXXXXXXXX an unincorporated open-ended investment trust governed by the laws of the Province of XXXXXXXXXX;
(q) "TSO" means Tax Services Office.
Our understanding of the Facts and Proposed Transaction is as follows:
FACTS
1. Canco is a CCPC. From XXXXXXXXXX, until XXXXXXXXXX, Canco operated the Business in XXXXXXXXXX.
2. Canco is primarily an employee owned and managed business. The shareholdings of Canco are as follows:
Key Key Key Key Employee A Employee B Employee C Employee D Totals
Class A Common XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX
Class E Preferred XXXXXXX XXXXXXX XXXXXXX XXXXXXX X XXXXXX
3. Key Employee A and Key Employee B are brothers. Key Employee C and Key Employee D are not related to Key Employee A or Key Employee B.
4. On XXXXXXXXXX, Canco sold the Assets to the Purchaser. Canco received total consideration of approximately $XXXXXXXXXX in respect of the sale of the Assets of the Business to the Purchaser.
5. Trust owns XXXXXXXXXX% of the units of Limited Partnership issued by the Purchaser. Canco owns XXXXXXXXXX% of the units of the Limited Partnership issued by the Purchaser.
6. Canco and the Purchaser will file an election pursuant to subsection 97(2) in respect of the sale of the Assets. Canco is of the view that its taxable income relating to the cash proceeds received from the Purchaser is primarily characterized as goodwill or eligible capital property. Canco is of the view that the Bonus will not exceed the amount that will be included in Canco's business income for the taxation year ended XXXXXXXXXX pursuant to subsection 14(1).
7. On XXXXXXXXXX, the Board of Directors of Canco passed a resolution declaring the Bonus payable to each Key Employee. The Bonus cannot be paid to each Key Employee until a favourable advance income tax ruling is received.
8. All of the Key Employees were active in the day-to-day management of the operations of Canco prior to the sale of the Assets referred to in Paragraph 4. All of the Key Employees were involved in the Business full time, occupying the four most senior/critical management positions, as follows:
XXXXXXXXXX
9. The Key Employees will continue to be involved in the business of Purchaser.
PROPOSED TRANSACTION
10. Canco will pay the Bonus to each Key Employee no later than XXXXXXXXXX.
PURPOSE OF THE PROPOSED TRANSACTION
11. The purpose of the Proposed Transaction is to remunerate the Key Employees for their contributions toward the successful management of Canco.
RULINGS
Provided that:
(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, Proposed Transaction and purpose of the proposed transactions,
(b) the Proposed Transaction is completed in the manner described above,
(c) there are no other transactions which may be relevant to the rulings requested,
(d) Canco withholds source deductions from the amount of the Bonus in accordance with the prescribed rules and remits the source deductions to the Receiver General within the prescribed time,
our rulings are as set forth below:
A. Paragraph 18(1)(a), section 67 and subsection 78(4) will not apply to prohibit Canco from deducting the amount of the Bonus in computing its income from a business for the taxation year that ended on XXXXXXXXXX.
B. Pursuant to subsection 5(1), the amount of the Bonus paid to each Key Employee must be included in calculating his respective employment income in the taxation year in which it is received.
CAVEATS
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding provided that the Proposed Transaction takes place on or before XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act.
Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:
(i) the accuracy of any amounts referred to in this letter;
(ii) the GST implications of the Proposed Transaction;
(iii) any other tax consequences of the Proposed Transaction or of related
transactions,
and without restricting the generality of the foregoing, in no way implies acceptance by the CRA of the allocation of the proceeds from the sale of the Assets described in Paragraph 4.
Finally, since the CRA does not administer the XXXXXXXXXX, we are not providing any assurances with respect to those acts.
Yours truly,
XXXXXXXXXX
For Director
Business and Partnerships Division
Income Tax Rulings Directorate