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 ISSUE:
Whether a repayment of a portion of a prepaid dividend (on distress preferred shares) received by a corporation would be excluded by the recipient in its computation of income
Position:
Favorable ruling given.
REASON:
A refund of a dividend overpayment would generally not, for the purpose of section 9 and paragraph 12(1)(x) be considered to have been received in the course of earning income from a business.
XXXXXXXXXX 3-991405
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX
This is in response to your letters of XXXXXXXXXX, wherein you request an advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge the information provided in subsequent correspondence and during various telephone conversations in connection with your request (XXXXXXXXXX).
We understand that to the best of your knowledge and that of the taxpayers involved:
i) none of the issues involved in the requested ruling is being considered by any District Tax Services Office or Taxation Centre of the Department in connection with a tax return already filed, and
ii) none of the issues involved in the requested ruling 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 R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
In this ruling:
Distressco refers to XXXXXXXXXX.
Targetco refers to XXXXXXXXXX.
Partnership refers to XXXXXXXXXX.
Subco refers to XXXXXXXXXX.
Our understanding of the facts and proposed transactions is as follows:
Facts
1. Distressco was incorporated under the Canada Business Corporations Act ("CBCA"). Distressco is a taxable Canadian corporation. XXXXXXXXXX. Distressco's taxation year ends on XXXXXXXXXX. The expression "taxable Canadian corporation" as referred to here and subsequently has the meaning assigned by section 89(1) of the Act.
XXXXXXXXXX
XXXXXXXXXX
In XXXXXXXXXX Distressco was in financial difficulty. Unable to obtain re-financing to continue its operations Distressco was at risk of being in default on several of its obligations. Distressco was able to negotiate a re-financing arrangement (the Re-financing Arrangement") using a form of "after tax financing" that required the issuance of distress preferred shares. The Re-financing Arrangement was the subject of an advance income tax ruling dated XXXXXXXXXX (the "Ruling").
2. Subco was incorporated under the CBCA on XXXXXXXXXX. Subco is a taxable Canadian corporation and its taxation year ends on XXXXXXXXXX.
Subco's authorized XXXXXXXXXX consists of 1 common share and XXXXXXXXXX non-voting, cumulative, redeemable, retractable, preferred shares (the "Distress Preferred Shares")
XXXXXXXXXX
XXXXXXXXXX issued and outstanding share capital XXXXXXXXXX.
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX
The XXXXXXXXXX were issued by Subco as part of the Re-financing Arrangement.
XXXXXXXXXX, Subco is restricted from carrying on any business, incurring liabilities or acquiring or disposing of any assets except as contemplated in the Ruling.
XXXXXXXXXX, Distressco will not dispose of any of the common shares of Subco which it holds prior to the date that Subco is wound-up or amalgamated.
3. XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
4.
XXXXXXXXXX
5. Distressco, Subco and the holders of Subco's Distress Preferred Shares entered into a dividend prepayment agreement dated XXXXXXXXXX (the "Prepayment Agreement") pursuant to which Subco prepaid the quarterly dividends relating to the period XXXXXXXXXX.
Under the terms of the Prepayment Agreement, if a Distress Preferred Share is redeemed prior to XXXXXXXXXX the holder of the redeemed Distress Preferred Share is required to repay to Subco the portion of the prepayment of dividends on the redeemed share that relates to the prepayment period subsequent to the date of redemption of the Distress Preferred Share (a "Post Redemption Period").
XXXXXXXXXX
The prepayment of dividends by Subco allows it time to arrange financing to be used to redeem the Distress Preferred Shares on or before XXXXXXXXXX. If such financing is not arranged, the Distress Preferred Shares may be redeemed by Subco pursuant to the Assigned Debt put arrangements described in XXXXXXXXXX of the Ruling.
6. In the course of the Re-Financing arrangement Distressco entered into an agreement with Subco ("the Contributed Capital Agreement") wherein Distressco and Subco agreed, inter alia, that amounts contributed by Distressco to Subco will be regarded by Subco as funds held for the benefit of Distressco until such time as they are used for Subco's expenses and dividend obligations. Moreover, it was agreed that the redemptions of the Distress Preferred Shares will be funded by repayments of the Assigned Debt (as defined in the Ruling) by Subco. XXXXXXXXXX.
7. On XXXXXXXXXX Distressco made a capital contribution to Subco equal to the amount of the aggregate prepayment of dividends made by Subco under the terms of the Prepayment Agreement. The amount of the capital contribution was added by Subco to the stated capital amount of its common shares.
Proposed Transaction
8. Subco proposes to redeem some or all of the Distress Preferred Shares referred to in paragraph 2 above prior to XXXXXXXXXX.
Purpose of the Proposed Transaction
The purpose of the proposed transaction is to allow Distressco to refinance its outstanding distress preferred shares.
Other information
9. (a) The address and corporate account number of the each of the parties to the transactions described herein are as follows:
XXXXXXXXXX.
(b) XXXXXXXXXX are served by the XXXXXXXXXX Tax Services Office (TSO) and the XXXXXXXXXX Taxation Centre.
Ruling
Provided that the above description of facts, proposed transactions, purpose of the proposed transaction and other information are accurate and constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose thereof, and provided further that the holder of a Distress Preferred Share that is redeemed prior to XXXXXXXXXX treats the repayment of the dividend as a reduction of a taxable dividend and not as a deductible expense, we rule as follows:
An amount received by Subco, pursuant to the Prepayment Agreement, from a holder of a Distress Preferred Share as a repayment of a portion of the dividend prepayment on a Distress Preferred Share that is redeemed by Subco before XXXXXXXXXX will not, for the purpose of section 9 or paragraph 12(1)(x), be considered to be received by Subco in the course of earning income from a business or property.
This ruling is given subject to the general limitations and qualifications set out in Information Circular IC 70-6R3 dated December 30, 1996, and is binding on Revenue Canada Custom , Excise and Taxation provided that the proposed transactions are completed by XXXXXXXXXX.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch