Principal Issues: Whether the taxable dividends deemed to have been paid pursuant to subsection 88(2) are subject to subsection 55(2).
Position: No.
Reasons: None of the purposes of the payment or receipt of the taxable dividends is to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at FMV of any shares of the capital stock of Opco.
XXXXXXXXXX 2020-084063
XXXXXXXXXX 2020
Dear Sir,
Subject: Request for advance income tax rulings
XXXXXXXXXX
This is in response to your letter of XXXXXXXXXX requesting advance income tax rulings on behalf of the taxpayer 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).
To the best of your knowledge and that of the parties involved in the transactions, none of the matters to which this request for advance rulings:
(i) relates to a tax return previously filed by the taxpayers or a person related to them
(ii) is under examination by a Tax Services Office or Tax Centre in connection with a tax return previously filed by the taxpayers or a person related to them;
(iii) is the subject of a notice of objection by the taxpayers or a person related to them;
(iv) is not the subject of a pending or completed legal proceeding involving the taxpayers or a person related to them;
(v) is not the subject of a ruling request previously reviewed by the Income Tax Rulings Directorate.
Unless otherwise indicated, all statutory references below are to the Income Tax Act, R.S.C. 1985 c. 1, (5th Supp.), as amended (the "Act").
DESIGNATION OF PARTIES AND DEFINITIONS
The names and corporate names of taxpayers are replaced, except in paragraph 31, by the names and corporate names listed below.
«A» means XXXXXXXXXX;
«B» means XXXXXXXXXX;
«C» means XXXXXXXXXX;
«D» means XXXXXXXXXX;
«Child 1» means XXXXXXXXXX;
«Child 2» means XXXXXXXXXX;
«Estate» means Father's estate.
«Father» means XXXXXXXXXX;
« Holdco A» means XXXXXXXXXX;
« Holdco B» means XXXXXXXXXX;
« Holdco C» means XXXXXXXXXX;
«Opco» means XXXXXXXXXX;
« Trust A» means «XXXXXXXXXX» Trust;
« Trust B» means «XXXXXXXXXX» Trust;
« Trust C» means «XXXXXXXXXX» Trust;
Unless otherwise indicated, the following abbreviations, expressions and terms have the meanings described 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).
“CDA” means "capital dividend account" within the meaning of the definition in subsection 89(1);
“CRA” means Canada Revenue Agency;
"DR" means "dividend refund" as defined in subsection 129(1);
"Eligible dividend" has the same meaning as in subsection 89(1);
"ERDTOH" means "eligible refundable dividend tax on hand" as defined in subsection 129(4);
"FMV" means fair market value;
“GRIP” means "general rate income pool" as defined in subsection 89(1);
"NERDTOH" means "non-eligible refundable dividend tax on hand" as defined in subsection 129(4);
"non-arm's length" has the meaning assigned by subsection 251(1);
"Proposed transactions" means the transactions referred to in paragraphs 25 to 28;
“PUC” means "paid-up capital" as defined in subsection 89(1);
"RDTOH" means "refundable dividend tax on hand" as defined in subsection 129(3) when that provision was in force;
"Taxable dividend" has the same meaning as in subsection 89(1);
"TCC" means "taxable Canadian corporation" as defined in subsection 89(1);
XXXXXXXXXX;
XXXXXXXXXX;
FACTS
1. A, B and C are sisters and brother.
2. A, B and C are residents of Canada for the purposes of the Act.
3. Holdco A, Holdco B, Holdco C and Opco shares are at all times relevant as capital property for their holder.
Facts respecting Holdco A
4. The fiscal period of Holdco A ends on XXXXXXXXXX of each year. Holdco A is a CCPC and a TCC. Holdco A is a holding corporation that owns shares in the capital stock of Opco and manages various investments.
5. The authorized capital stock of Holdco A consists of an unlimited number of Class A, B, C, D, E and F shares without par value. The principal rights, privileges, restrictions and conditions for the issued and outstanding shares of the capital stock of Holdco A are as follows:
Class A: non-voting, participating. The holders are entitled to share, pari passu with the holders of Class F shares, in proportion to the number of A or F shares held, the remaining property of the corporation in the event of its winding up and only in the event of winding up or dissolution.
Class B: non-voting, non-cumulative preferred dividend calculated on the redemption value of the shares, redeemable at the redemption value, which is the amount of the paid-up capital of the share plus a premium equal to the difference between the FMV of the property transferred to the corporation and the paid-up capital of the share.
Class C: non-voting, non-cumulative preferred dividend calculated on the redemption value of the shares, redeemable at the redemption value, which is the amount of the paid-up capital of the share plus a premium equal to the difference between the FMV of the property transferred to the corporation and the paid-up capital of the share.
Class D: non-voting, non-cumulative preferred dividend calculated on the redemption value of the shares, redeemable at the redemption value, which is the amount of the paid-up capital of the share plus a premium equal to the difference between the FMV of the property transferred to the corporation and the paid-up capital of the share.
Class F: voting (XXXXXXXXXX per share), non-participating. Only in the event of a winding up or dissolution are the holders of Class F shares entitled to the remaining property of the corporation on a pari passu basis with the holders of Class A shares, in proportion to the number of shares held out of the total for Class A and F shares.
6. On XXXXXXXX, the holders of the issued and outstanding shares of the capital stock of Holdco A, as well as the PUC, ACB and FMV of the shares, are described below.
Shareholder Class Number PUC($) ACB($) FMV($) Trust A A XXXXX XXXXX XXXXX XXXXX A B XXXXX XXXXX XXXXX XXXXX Child 1 C XXXXX XXXXX XXXXX XXXXX Child 2 C XXXXX XXXXX XXXXX XXXXX A D XXXXX XXXXX XXXXX XXXXX Child 1 D XXXXX XXXXX XXXXX XXXXX Child 2 D XXXXX XXXXX XXXXX XXXXX A F XXXXX XXXXX XXXXX XXXXX
Facts respecting Holdco B
7. The fiscal period of Holdco B ends on XXXXXXXXXX of each year. Holdco B is a CCPC and a TCC. Holdco B is a holding corporation that owns shares in the capital stock of Opco and manages various investments.
8. The authorized capital stock of Holdco B consists of an unlimited number of shares without par value of Classes A, B, C, D, E and F. The principal rights, privileges, restrictions and conditions for the issued and outstanding shares of the capital stock of Holdco B are as follows:
Class A: non-voting, participating. The holders are entitled to share, pari passu with the holders of Class F shares, in proportion to the number of A or F shares held, in the remaining property of the corporation in the event of its winding up and only in such event.
Class F: voting (XXXXXXXXXX per share), non-participating. Only in the event of winding up or dissolution, the holders of Class F shares are entitled to the remaining property of the corporation pari passu with the holders of Class A shares, in proportion to the number of shares held out of the total for Class A and F shares.
9. On XXXXXXXXXX, the holders of the issued and outstanding shares of the capital stock of Holdco B, as well as the PUC, ACB and FMV of the shares, are described below.
Shareholder Class Number PUC($) ACB($) FMV($) Trust B A XXXXX XXXXX XXXXX XXXXX B F XXXXX XXXXX XXXXX XXXXX
Facts respecting Holdco C
10. The fiscal period of Holdco C ends on XXXXXXXXXX of each year. Holdco C is a CCPC and a TCC. Holdco C is an XXXXXXXXXX investments.
11. The authorized capital stock of Holdco C consists of an unlimited number of shares without par value of Classes A, B, C, D, E and F. The principal rights, privileges, restrictions and conditions for the issued and outstanding shares of the capital stock of Holdco C are as follows:
Class A: non-voting, participating. The holders are entitled to share, pari passu with the holders of Class F shares, in proportion to the number of A or F shares held, in the remaining property of the corporation in the event of its winding up and only in such event.
Class B: non-voting, non-cumulative preferential dividend calculated on the redemption value of the shares, redeemable at the redemption value, which is the amount of the paid-up capital of the share plus a premium equal to the difference between the FMV of the property transferred to the corporation and the paid-up capital of the share.
Class C: non-voting, non-cumulative preferred dividend calculated on the redemption value of the shares, redeemable at the redemption value, which is the amount of the paid-up capital of the share plus a premium equal to the difference between the FMV of the property transferred to the corporation and the paid-up capital of the share.
Class F: voting (XXXXXXXXXX per share), non-participating. Only in the event of winding up or dissolution, the holders of Class F shares are entitled to the remaining property of the corporation pari passu with the holders of Class A shares, in proportion to the number of shares held out of the total of Class A and F shares.
12. On XXXXXXXXXX, the holders of the issued and outstanding shares of the capital stock of Holdco C, as well as the PUC, ACB and FMV of the shares, are described below.
Shareholder Class Number PUC($) ACB($) FMV($) Trust C A XXXXX XXXXX XXXXX XXXXX C B XXXXX XXXXX XXXXX XXXXX C C XXXXX XXXXX XXXXX XXXXX C F XXXXX XXXXX XXXXX XXXXX
Facts respecting Opco
13. The fiscal period of Opco ends on XXXXXXXXXX of each year. Opco is a CCPC and a TCC. Opco is a XXXXXXXXXX corporation.
14. The authorized capital stock of Opco consists of an unlimited number of shares without par value of Classes A, B, C, D, E, F, G, H, I and J. The principal rights, privileges, restrictions and conditions for the issued and outstanding shares of the capital stock of Opco are as follows:
Class A: voting (XXXXXXXXXX per share), participating pari passu with Class B and C shares.
Class B: voting (XXXXXXXXXX per share), participating pari passu with Class A and C shares.
Class C: voting (XXXXXXXXXX per share), participating pari passu with Class A and B shares.
Class E: voting (XXXXXXXXXX per share), non-participating, redeemable on demand.
Class J: non-voting, non-cumulative preferred dividend calculated on the redemption value of the shares, redeemable at the redemption value, which is the paid-up capital of the share plus a premium determined by resolution of the directors.
15. On XXXXXXXXXX, the holders of the issued and outstanding shares of Opco's capital stock, as well as the PUC, ACB and FMV of the shares, are described below.
Shareholder Class Number PUC($) ACB($) FMV($) Holdco A A XXXXX XXXXX XXXXX XXXXX Holdco B B XXXXX XXXXX XXXXX XXXXX Holdco C C XXXXX XXXXX XXXXX XXXXX Estate E XXXXX XXXXX XXXXX XXXXX Estate J XXXXX XXXXX XXXXX XXXXX
16. Towards the end of the XXXXXXXXXX calendar year, the directors of Opco decided to liquidate all of the marketable security share investments held by Opco for cash in the belief that the value of the shares had peaked. Following the disposition of those shares, Opco paid the tax resulting from those dispositions in its fiscal period ended XXXXXXXXXX. Subsequent to XXXXXXXXXX, Opco declared and paid a dividend out of its CDA, equally to the holders of the Class A, B and C shares, but subject to a preferred dividend on the Class J shares. The remaining cash, of approximately $XXXXXXXXXX, was invested in a high-interest account. This cash is the only asset held by Opco. Opco has no liabilities.
17. As of XXXXXXXXXX, Opco had an RDTOH amount of $XXXXXXX, a GRIP amount of $XXXXXXX and no non-capital loss balance.
Facts respecting Trust A
18. Trust A is a discretionary trust that was established on XXXXXXXXXX. Trust A is resident in Canada. The trustees are A, C and Child 1.
19. The beneficiaries of Trust A include, among others, A, A’s spouse within the meaning of the Act, any descendant to the second degree of A, and, excluding a corporation in which Trust A holds shares, any corporation of which one or more of the above beneficiaries holds all the participating shares.
Facts respecting Trust B
20. Trust B is a discretionary trust that was established on XXXXXXXXXX. Trust B is resident in Canada. The trustees are B, C and D.
21. Trust B's beneficiaries include, among others, B, his spouse within the meaning of the Act, any descendant to the second degree of B, and, excluding a corporation in which Trust B holds shares, any corporation of which one or more of the above beneficiaries holds all the participating shares.
Facts respecting Trust C
22. Trust C is a discretionary trust that was established on XXXXXXXXXX. Trust C is resident in Canada. The trustees are A, B and C.
23. The beneficiaries of Trust C include, among others, C, C’s spouse within the meaning of the Act, any descendant to the second degree of C, and, excluding a corporation in which Trust C holds shares, any corporation of which one or more of the above beneficiaries holds all the participating shares.
Facts respecting the Estate
24. Father's will provides that A, B and C are the executors of the Estate and that A, B and C are also beneficiaries in equal shares of the Class E and J shares that the Estate holds in the capital stock of Opco.
PROPOSED TRANSACTIONS
25. In accordance with Father's will, the Estate will distribute all of the Class E and Class J shares that the Estate owns in the capital stock of Opco equally among A, B and C. Each of A, B and C will receive XXXXXXXXXX Class E shares and XXXXXXXXXX Class J shares in the capital stock of Opco.
26. A, B and C will each exchange XXXXXXXXXX Class E shares they hold in the capital stock of Opco and each will receive XXXXXXXXXX Class J shares in the capital stock of Opco in return. The provisions of subsection 51(1) will apply in respect of such exchanges. The PUC of the Class J shares in the capital stock of Opco will be determined in accordance with the provisions of subsection 51(3) and will be $XXXXXXXXXX for each of A, B and C. The Class J shares in the capital stock of Opco will have an ACB, to each of A, B and C, of $XXXXXXXXXX. After the exchanges, each of A, B and C will hold XXXXXXXXXX Class J shares in the capital stock of Opco.
27. Immediately following the exchanges described in paragraph 26, Opco will redeem all of the Class J shares of its capital stock then outstanding, being XXXXXXXXXX shares. The consideration paid will be an amount of one dollar for each share redeemed. No dividend will result from the application of the provisions of subsections 84(2) and 84(3) since the amount paid will be equivalent to the amount of the PUC of the shares so redeemed.
28. Following the share redemptions described in paragraph 27, Holdco A, Holdco B and Holdco C will pass a special resolution under the BCA authorizing the winding up and dissolution of Opco.
As part of the winding up, Opco will distribute its cash equally to each of Holdco A, Holdco B and Holdco C.
Pursuant to paragraph 88(2)(b) and subsection 84(2), Opco will be deemed to have paid, and each of Holdco A, Holdco B and Holdco C will be deemed to have received, a dividend on the Class A, Class B and Class C shares, as the case may be, of the capital stock of Opco, the amount of which will be the excess of the amount or value of the funds or property distributed or appropriated over the PUC in respect of the Class A, B and C shares, all in proportion to the number of Class A, B and C shares of the capital stock of Opco held by Holdco A, Holdco B or Holdco C, as the case may be.
Pursuant to subsection 89(14), Opco will designate all or a portion of the winding-up dividend that is a Taxable Dividend as an Eligible Dividend and will notify Holdco A, Holdco B and Holdco C in the prescribed manner.
Any DR to which Opco would be entitled as a result of the Proposed Transactions described herein or other transactions will be allocated and distributed (pursuant to the terms of the winding up) in equal shares to each of Holdco A, Holdco B and Holdco C. Following the distribution and receipt of such DR, Articles of Dissolution will be filed with the regulatory authority and, on the date shown on the Certificate of Dissolution, Opco will be dissolved. In due course, Opco will file the required tax returns.
ADDITIONAL INFORMATION
29. The payment or receipt of each Taxable Dividend described in paragraph 28 will not operate to significantly reduce the portion of the capital gain that would, but for each Taxable Dividend, have been realized on a disposition of a share of the capital stock of Opco at FMV immediately before each Taxable Dividend.
PURPOSE OF PROPOSED TRANSACTIONS
30. The purpose of the Proposed Transactions is to divide the assets of Opco proportionally between Holdco A, Holdco B and Holdco C. This will allow Holdco A, Holdco B and Holdco C and their respective managers to manage their investments independently in the future according to their risk tolerance.
ADDITIONAL PARTICULARS
31. The main contact details for the taxpayers covered by the advance rulings are as follows:
XXXXXXXXXX
RULINGS GIVEN
Provided that the statement of relevant facts, the Proposed Transactions and the additional information constitute full disclosure of all relevant facts and proposed transactions and that the Proposed Transactions are carried out as described above, our decisions are as follows:
A. The winding up of Opco described in paragraph 28 of the Proposed Transactions will result in the following:
(i) by virtue of paragraph 88(2)(b) and subsection 84(2), Opco will be deemed to have paid to each of Holdco A, Holdco B and Holdco C a dividend on the Class A, Class B and Class C shares, as the case may be, of the capital stock of Opco, the amount of which will be the excess of the amount or value of the funds or property distributed or allocated over the PUC in respect of the Class A, B and C shares, all in proportion to the number of Class A, B and C shares of the capital stock of Opco held by each of Holdco A, Holdco B and Holdco C, as applicable;
(ii) the deemed dividend paid by Opco to each of Holdco A, Holdco B and Holdco C that is described in paragraph (i) above, will be deemed to have been received under subsection 84(2) by Holdco A, Holdco B and Holdco C, respectively;
(iii) the deemed dividend paid to Holdco A, Holdco B and Holdco C referred to in paragraphs (i) and (ii) above, to the extent that it will constitute a Taxable Dividend:
(a) will be included in computing the income of Holdco A, Holdco B and Holdco C respectively by virtue of paragraphs 12(1)(j) and 82(1)(a);
(b) will not be included in the proceeds of disposition to Holdco A, Holdco B and Holdco C respectively of the shares of the capital stock of Opco because of paragraph (j) of the definition "proceeds of disposition" in section 54;
(c) will be deductible in computing the taxable income of Holdco A, Holdco B and Holdco C respectively, by virtue of subsection 112(1);
B. The provisions of subsection 55(2) will not apply as a result of and because of the Proposed Transactions described above to recharacterize the dividends described in Ruling A.
C. The provisions of subsection 245(2) will not apply as a result of and because of the Proposed Transactions described above to redetermine the tax consequences confirmed in the above rulings.
These rulings are subject to the limitations and general conditions set out in Information Circular 70-6R10 - Advance Income Tax Rulings and Technical Interpretations, dated September 29, 2020, issued by the CRA and are binding on the CRA provided that the Proposed Transactions described in paragraphs 25 to 28 are completed before XXXXXXXXXX. These rulings are based on the current Act and do not take into account any proposed amendments to the Act.
OTHER COMMENTS
The decisions rendered should in no way be construed as acquiescence on the part of the CRA that:
(a) we have considered the other tax consequences that may result from the Proposed Transactions set out herein;
(b) the amount allocated to a property in the Statement of Facts and Proposed Transactions truly represents the FMV or ACB of a property, or the PUC amount of a share; and
(c) the amount attributed to the CDA, GRIP, RDTOH, ERDTOH, or NERDTOH of a corporation truly represents the CDA, GRIP, RDTOH, ERDTOH, or NERDTOH of such corporation.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover
Best regards,
XXXXXXXXXX
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch