Principal Issues: Gesco holds all of the issued and outstanding shares of the capital stock of Opco. The shares of the capital stock of Gesco are held by Mr.X (XXXXXXXXXX%), Ms.Y (XXXXXXXXXX%) and Mr.Z (XXXXXXXXXX%). Ms.Y will incorporate Nouco which will acquire all the shares of the capital stock of Gesco held by Mr.X. Nouco will borrow money from Gesco to buy the shares. Mr.X and Ms.Y are not related persons within the meaning of subsection 251(2). Whether section 84.1 applies so that a dividend will be deemed to have been paid to M.X by Nouco and to have been received by Mr.X from Nouco at the time of disposition.
Position: No. Mr.X and Nouco are dealing with each other at arm’s length.
Reasons: Question of Fact
XXXXXXXXXX 2020-086866
XXXXXXXXXX 2021
Subject: Request for an advance income tax ruling - XXXXXXXXXX
Dear Sir,
This is in response to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of XXXXXXXXXX. We have also taken into account the information you have sent us by email as well as additional information submitted during telephone conversations (XXXXXXXXXX).
We understand that to the best of your knowledge and that of the Taxpayers, none of the proposed transactions or issues involved in this Ruling are the same as or substantially similar to transactions or issues that:
i. are in a previously filed return of the Taxpayers or a related person; that is
A. under review by the Canada Revenue Agency with respect to that return;
B. under objection by the Taxpayers or a related person;
C. the subject of a current or completed court proceeding involving the Taxpayers or a related person; or
ii. have been the subject of a ruling previously considered by the Income Tax Rulings Directorate in relation to the Taxpayers or a related person.
DEFINITIONS AND ABBREVIATIONS USED
Unless otherwise stated:
i. all statutory references are to provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the "Act")
ii. all words and expressions used in this request and defined in the Act shall have the meaning given to them in the Act;
iii. all monetary amounts are in Canadian dollars;
iv. words importing the singular number shall include the plural, and vice versa, where the context so requires.
In this letter, with the exception of paragraph 27, the parties involved in the proposed transactions (described below) are identified as follows
"Holdco" means XXXXXXXXXX;
“Mr. X” means XXXXXXXXXX;
“Ms. Y” means XXXXXXXXXX;
“Mr. Z” means XXXXXXXXXX, son of Ms. Y;
“Newco” means the corporation to be incorporated under XXXXXXXXXX in connection with the Proposed Transactions;
“Opco” means XXXXXXXXXX
The following abbreviations, terms and expressions have the meanings defined below.
"ACB" means "adjusted cost base" as defined in section 54;
"Capital property" has the same meaning as in section 54;
"CCPC" means "Canadian-controlled private corporation" as defined in subsection 125(7);
“CRA” means the Canada Revenue Agency;
"Fair Market Value" or "FMV" means the highest price available in an open and unrestricted market between informed and prudent parties, acting at arm's length and under no compulsion to act, expressed in terms of cash;
"Projected Transactions" means the transactions described in paragraphs 21 to 25;
“PUC” means "paid-up capital" as defined in subsection 89(1);
"resident of Canada" means a resident of Canada for the purposes of the Act;
"TCC" means "taxable Canadian corporation" as defined in subsection 89(1).
XXXXXXXXXX
RELEVANT FACTS
Facts respecting Opco
1. Opco is a CCPC and TCC incorporated on XXXXXXXXXX under the XXXXXXXXXX. Opco's fiscal period end is XXXXXXXXXX.
2. The issued and outstanding capital stock of Opco consists of XXXXXXXXXX Class A shares, being voting and participating shares.
3. All of the issued and outstanding capital stock of Opco is held by Holdco.
4. Since its incorporation, Opco has operated XXXXXXXXXX
5. Ms.Y is the XXXXXXXXXX of Opco.
Facts respecting Holdco
6. Holdco is a CCPC and TCC incorporated on XXXXXXXXXX under XXXXXXXXXX. Holdco's fiscal year end is XXXXXXXXXX.
7. The issued and outstanding shares of Holdco consist of XXXXXXXXXX Class A shares, XXXXXXXXXX Class B shares and XXXXXXXXXX Class F shares. The principal rights, privileges, conditions and restrictions of those shares are as follows
- Class A shares: voting and participating;
- Class B shares: non-voting and participating;
- Class F shares: voting, as to XXXXXXXXXX votes per share, and non-participating.
8. Mr. X holds XXXXXXXXXX Class A shares in the capital stock of Holdco with a PUC of $XXXXXXXXXX and an ACB to Mr. X of $XXXXXXXXXX. Those shares represent XXXXXXXXXX% of the issued and outstanding Class A shares of the capital stock of Holdco.
9. The XXXXXXXXXX Class A shares of the capital stock of Holdco held by Mr. X constitute capital property Assets to him.
10. Ms.Y holds XXXXXXXXXX Class A shares, XXXXXXXXXX Class B shares and XXXXXXXXXX Class F shares in the capital stock of Holdco.
11. Mr. Z holds XXXXXXXXXX Class A shares in the capital stock of Holdco.
12. Since XXXXXXXXXX, Holdco has effected reductions in the total of its issued and paid-up share capital account for the Class A shares.
13. Holdco owns a building which it leases to Opco and which Opco uses in the operation of its business.
14. Holdco has obtained pre-approved mortgage financing from its financial institution.
Facts respecting Mr. X
15. Mr. X and Ms.Y are not related persons within the meaning of section 251(2).
16. Representations have been made that at all relevant times, Mr. X and Newco will deal with each other at arm's length.
17. Mr. X is an investor and businessman who made a capital contribution of $XXXXXXXXXX in XXXXXXXXXX in consideration for XXXXXXXXXX Class A shares of the capital stock of Holdco.
18. Mr. X never claimed the capital gains deduction pursuant to subsection 110.6(2.1).
19. An independent external valuation commissioned by Holdco has determined that the FMV of the shares in the capital stock of Holdco held by Mr. X is $XXXXXXXXXX.
20. After negotiation, the parties agreed on a sale price for the shares of $XXXXXXXXXX.
PROPOSED TRANSACTIONS
21. Newco will be incorporated under XXXXXXXXXX. Newco will, at all relevant times, be a CCPC and a TCC.
22. Ms. Y will subscribe for XXXXXXXXXX Class A shares in the capital stock of Newco, namely voting and participating shares, for a consideration of $XXXXXXX.
23. Newco will borrow $XXXXXXXXXX from Holdco for a term of XXXXXXXXXX years at an interest rate of XXXXXXXXXX% per year.
24. Mr. X will transfer to Newco his XXXXXXXXXX Class A shares in the capital stock of Holdco in consideration for $XXXXXXXXXX paid in cash.
As a result of the share transfer described above, Mr. X will realize a capital gain of $XXXXXXXXXX, in respect of which he will claim the capital gains deduction pursuant to subsection 110.6(2.1).
25. Newco will repay the loan described in paragraph 23 in accordance with the terms of the loan.
PURPOSE OF THE PROPOSED TRANSACTIONS
26. The purpose of the proposed Transactions is to enable Mr. X to sell his shares in the capital stock of Holdco to a corporation controlled by Ms. Y in the most economical and tax efficient manner possible.
ADDITIONAL INFORMATION
27. The main contact details for the taxpayers covered by the advance ruling are:
XXXXXXXXXX
ADVANCE RULING ISSUED
Provided that the statement of the relevant facts, the proposed transactions and the additional information constitutes full disclosure of all the relevant facts, all the proposed transactions and that the proposed transactions are carried out as described above, our decision is as follows:
Subsection 84.1(1) will not apply to deem a dividend to be received by Mr. X as a result of and by reason of the transaction described in paragraph 24.
This decision is subject to the restrictions and general conditions set out in Information Circular 70-6R10 dated September 29, 2020, issued by the CRA and is binding on the CRA provided that the Proposed Transactions described in paragraphs 21 to 24 are completed by XXXXXXXXXX. The Proposed Transaction set out in paragraph 25 must be completed within the timeframes set out herein, as described above.
OTHER COMMENTS
Nothing in this decision should be construed as implying an acceptance by the CRA that:
(a) we have considered the other tax consequences that may result from the Proposed Transactions set out herein;
(b) the amount attributed to a property in the statement of facts of the proposed transactions truly represents the FMV or ACB of a property, or the PUC of a share.
A statement of our fees for the time spent on your file will be sent to you under separate cover.
Yours sincerely,
XXXXXXXXXX
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
UNCLASSIFIED