Principal Issues: (1) Whether subsection 107(2) will be applicable to the distribution of property from the trust to the beneficiaries? (2) Whether subsections 105(1) or 245(2) will be applicable to the proposed transactions?
Position: (1) Yes. (2) No. Favourable rulings provided.
Reasons: (1) All four of the conditions of subsection 107(4.1) are not met. Conditions of subsection 107(2) are met. (2) Wording of the Act and previous positions.
XXXXXXXXXX 2020-084408
XXXXXXXXXX
Subject: Request for Advance Income Tax Rulings
XXXXXXXXXX
Dear Sir,
This is in response to your letters dated XXXXXXXXXX requesting advance tax rulings on behalf of the above-noted taxpayers. We have also taken into account the information you have provided to us by email, including that of XXXXXXXXXX as well as additional information provided in telephone conversations (XXXXXXXXXX).
Unless otherwise indicated, all statutory references below are to the provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the "Act") and any reference to an amount expressed in dollars is a reference to such amount in Canadian dollars.
To your knowledge and that of the taxpayers involved, none of the issues raised in this ruling:
(i) relates to a tax return previously filed by the Taxpayers or a related person;
(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 related person;
(iv) is not the subject of a current or completed court process involving the Taxpayers or a related person; and
(v) is not the subject of a request for an advance ruling previously considered by the Income Tax Rulings Directorate.
DESIGNATION OF PARTIES
In this letter, the names and corporate names of the taxpayers are replaced with the following names and corporate names:
“Child 1” means XXXXXXXXXX;
“Child 2” means XXXXXXXXXX;
“Children” refers collectively to the children of Mr. A and Ms. A, who are currently Child 1 and Child 2;
"Former Zco" means XXXXXXXXXX Corporation, a corporation incorporated under Part IA of the QCA and resident in Canada, which was amalgamated with Yco on XXXXXXXXXX;
“Holdco-Child 1” means XXXXXXXX Corporation, a corporation incorporated under the QBCA and resident in Canada;
“Holdco-Child 2” means XXXXXXXX Corporation, a corporation incorporated under the QBCA and resident in Canada;
“Holdco-Mr. A” means XXXXXXXXXX Corporation, a corporation incorporated by virtue of the BCA and resident in Canada;
“Mr. A” means Mr. XXXXXXXXXX;
“Ms. A” means Ms. XXXXXXXXXX, the spouse of Mr. A.;
“Trust 1” means the XXXXXXXXXX, an inter vivos trust and a personal trust, created by the Trust 1 Deed under the Civil Code of Quebec, governed by the laws in force in the Province of Quebec and resident in Canada;
“Trust 2” means the XXXXXXXXXX, an inter vivos trust and a personal trust, created by the Trust 2 Deed under the Civil Code of Quebec, governed by the laws in force in the Province of Quebec and resident in Canada;
“Xco” means XXXXXXXXXX Corporation, a corporation incorporated under Part IA of the QCA, now governed by the QBCA and resident in Canada;
“Yco” means XXXXXXXXXX Corporation, a corporation incorporated under the QCA and resident in Canada, which was amalgamated with Former Zco on XXXXXXXXXX;
“Zco” means the XXXXXXXXXX Corporation resulting from the amalgamation of Yco and Former Zco on XXXXXXXXXX, governed by the QBCA and resident in Canada;
DEFINITIONS OF TERMS AND ABBREVIATIONS
In this letter, the following terms and abbreviations have the meanings described below:
“ACB” means "adjusted cost base" as defined in section 54;
“agreed amount" has the meaning assigned by subsection 85(1);
“capital property" has the meaning assigned by 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 the Canada Revenue Agency;
“Eligible dividend" has the meaning assigned by subsection 89(1);
“ERDTOH” means "eligible refundable dividend tax on hand" as defined in subsection 129(4);
“FMV” means the highest price, in dollars, that would be agreed upon in the open market by two knowledgeable and prudent parties dealing at arm's length, neither party being under any compulsion to act;
“GRIP” means "general rate income pool" as defined in subsection 89(1);
“inter vivos trust" has the meaning assigned by subsection 108(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);
“Paragraph” refers to a numbered paragraph herein;
“personal trust" has the same meaning as in the definition in subsection 248(1);
“Preliminary Transactions” means the transactions described in Paragraphs 16 through 23 below;
“proceeds of disposition” has the same meaning as in section 54;
“Proposed Transactions” means the transactions described in Paragraphs 24 through 26 below;
“PUC” means "paid-up capital" as defined in subsection 89(1);
“QBCA” means the Quebec Business Corporations Act, RLRQ, c. S-31.1;
“QCA” means the Quebec Companies Act, RLRQ, c. C-38;
“QSBCS” means "qualified small business corporation share" as defined in subsection 110.6(1);
“RDTOH” means "refundable dividend tax on hand" as defined in subsection 129(3);
“resident of Canada" means an individual, corporation or trust that is resident in Canada for the purposes of the Act;
“RV" means "redemption value";
“TCC" means "taxable Canadian corporation" as defined in subsection 89(1);
“Trust 1 Deed" means the trust deed which governs Trust Deed 1, dated XXXXXXXXXX;
“Trust 2 Deed" means the trust deed which governs Trust Deed 2, dated XXXXXXXXXX.
1. Mr. A and Ms. A are residents of Canada. Mr. A and Ms. A have two adult children, Child 1 and Child 2. The Children are residents of Canada. None of them plans to cease to be residents of Canada.
2. Trust 1 was established on XXXXXXXXXX and ceased to exist on XXXXXXXXXX. The day that is 21 years after the day on which Trust 1 was established within the meaning of subparagraph 104(4)(b)(ii) is XXXXXXXXXX. Trust 1 was a discretionary trust. Among its assets, Trust 1 held XXXXXXXXXX Class D shares of the capital stock of Yco, which were non-voting and participating shares. According to XXXXXXXXXX of the Trust 1 Deed, until the date of winding up (footnote 1), the trustees of Trust 1 could distribute the capital of the trust at their sole discretion.
3. Xco is a CCPC and TCC that was incorporated on XXXXXXXXXX. Its principal activity is to hold investments. In particular, it holds a portfolio of securities of publicly traded entities and securities of private entities. The shares issued by Xco are capital property to their holders. The capital stock of Xco consists of the following shares:
a) Class A: voting (XXXXXXXXXX), participating as to dividends and the residue on winding up;
b) Class B: non-voting, non-participating and entitled to a non-cumulative preferred XXXXXXXXXX% dividend of XXXXXXXXXX% calculated on the RV;
c) Class C: voting (XXXXXXXXXX) and non-participating;
d) Class D: non-voting and participating;
e) Class E: non-voting, non-participating and entitled to a discretionary dividend;
f) Class F: non-voting, non-participating and entitled to a discretionary dividend.
4. Trust 2 was created on XXXXXXXXXX by the delivery by the settlor, a person who was neither trustee nor beneficiary, of a one-ounce piece of pure silver. Trust 2 is a discretionary trust. XXXXXXXXXX of the Trust 2 Deed provides, inter alia, for Mr. A, Ms. A, Child 1 and Child 2 as discretionary beneficiaries of Trust 2. XXXXXXXXXX of the Trust 2 Deed specifies that until the date of winding up, the trustees have, in their absolute discretion, the power to distribute any or all of the capital of the trust to the beneficiaries. Under XXXXXXXXXX of the Trust Deed 2, the winding up date is the earlier of the day before the 100th anniversary of Trust 2, the date on which there is no longer any property held in the estate of Trust 2 and the date determined by the trustees in their absolute discretion. On the date of winding up, XXXXXXXXXX of the Trust 2 Deed provides that the trustees will distribute the property forming part of the trust patrimony to the beneficiaries in such proportions as they shall determine in their absolute discretion, except for the right, title and interest in the silver coin which shall be distributed in equal shares between Ms. A, Child 1 and Child 2.
5. On XXXXXXXXXX, Trust 2 borrowed $XXXXXXXXXX, at an interest rate of XXXXXXXXXX% per annum from an unrelated third party. The monetary sum of $XXXXXXXXXX was used by Trust 2 to subscribe for the shares of the capital stock of Xco and Former Zco referred to in Paragraphs 7, 9 and 10.
6. Former Zco was a CCPC and TCC that was incorporated on XXXXXXXXXX. Based on the terms of the Trust Deed 1, Former Zco qualified as a discretionary beneficiary of Trust 1. Its principal activity was to hold investments, specifically, the shares of Yco. The shares issued by Former Zco were capital property to their holders. The capital stock of Former Zco consisted of the following shares
a) Class A: voting (XXXXXXXXXX), participating as to dividends and in the residue in case of winding up;
b) Class B: non-voting, non-participating and entitled to a monthly non-cumulative preferred dividend of XXXXXXXXXX% calculated on the RV;
c) Class C: voting (XXXXXXXXXX) and non-participating;
d) Class D: non-voting and participating;
e) Class E: non-voting, non-participating, entitled to a non-cumulative monthly preferred dividend of XXXXXXXXXX% on the RV and a special (discretionary) dividend.
7. On XXXXXXXXXX, Trust 2 subscribed for XXXXXXXXXX Class D shares of the capital stock of Former Zco for a total cash consideration of $XXXXXXXXXX.
8. On XXXXXXXXXX, Trust 1 distributed, pursuant to subsection 107(2), XXXXXXXXXX Class D shares of the capital stock of Yco to its corporate beneficiary, Former Zco, in satisfaction of all of its capital interest in the trust.
9. Also on XXXXXXXXXX, Trust 2 exchanged its XXXXXXXXXX Class D shares of the capital stock of Former Zco pursuant to subsection 51(1). In exchange, Trust 2 received XXXXXXXXXX Class E shares of the capital stock of Former Zco having, at that time, a RV of $XXXXXXXXXX, a PUC of $XXXXXXXXXX and an ACB of $XXXXXXXXXX. The PUC of the Class E shares of the capital stock of Former Zco was determined pursuant to the provisions of subsection 51(3). Subsequently, Trust 2 subscribed for XXXXXXXXXX new Class D shares of the capital stock of Former Zco for a total cash consideration of $XXXXXXXXXX.
10. On XXXXXXXXXX, Mr. A undertook a freeze of his interest in Xco, whereby he exchanged his XXXXXXXXXX Class A shares of the capital stock of Xco pursuant to subsection 51(1). In exchange, Mr. A received XXXXXXXXXX Class B shares of the capital stock of Xco having, at that time, a RV of $XXXXXXXXXX, a PUC of $XXXXXXXXX and an ACB of $XXXXXXXXXX. The PUC of the Class B shares of the capital stock of Xco was determined pursuant to the provisions of subsection 51(3). Subsequently, Mr. A subscribed for XXXXXXXXXX Class C shares of the capital stock of Xco for a total cash consideration of $XXXXXXXXXX, while Trust 2 subscribed for XXXXXXXXXX Class D shares of the capital stock of Xco for a total cash consideration of $XXXXXXXXXX.
11. On XXXXXXXXXX, Former Zco amalgamated with its subsidiary, Yco, to form Zco. The principal activity of Zco is to hold investments, including a XXXXXXXXXX% interest in the capital stock of XXXXXXXXXX, a private corporation that holds all of the shares of XXXXXXXXXX, an active business in Canada. The capital stock of Zco consists of the same classes of shares that comprised the capital stock of Former Zco, as described in Paragraph 6. As a result of this amalgamation, Trust 2 received the same number of Class D and E shares in the capital stock of Zco that it previously held in the capital stock of Former Zco, i.e. XXXXXXXXXX Class D shares and XXXXXXXXXX Class E shares. For his part, Mr. A received the same number of Class C shares in the capital stock of Zco that he previously held in the capital stock of Former Zco. The shares issued by Zco constitute capital property to their holders.
12. On XXXXXXXXXX, Trust 2 exchanged its XXXXXXXXXX Class E shares of the capital stock of Zco pursuant to subsection 51(1). In exchange, Trust 2 received XXXXXXXXXX Class D shares of the capital stock of Zco having, at that time, an RV of $XXXXXXXXXX (footnote 2) , a PUC of $XXXXXXXXXX and an ACB of $XXXXXXXXXX. The PUC of the Class D shares of the capital stock of Zco was determined pursuant to the provisions of subsection 51(3). As a result of this share exchange, Trust 2 holds XXXXXXXXXX Class D shares of the capital stock of Zco.
13. Also on XXXXXXXXXX, by resolution of the trustees, all of the property (the bullion, cash balance and any other property) of Trust 1 was distributed to certain of its beneficiaries in satisfaction of all of their capital interests in the trust and thereafter Trust 1 was wound up.
14. As of XXXXXXXXXX, Xco's RDTOH balance was $XXXXXXXXXX, the GRIP balance was $XXXXXXXXXX and the CDA was $XXXXXXXXXX.
15. As of XXXXXXXXXX, Zco's RDTOH balance was $XXXXXXXXXX, the GRIP balance was $XXXXXXXXXX and the CDA was $XXXXXXXXXX.
PRELIMINARY TRANSACTIONS
16. On XXXXXXXXXX, Xco paid a dividend in the amount of $XXXXXXXXXX on the Class D shares held by Trust 2. Xco made the designation under subsection 89(14) so that the total amount of the dividend was an eligible dividend.
17. Holdco-Child 1 was incorporated on XXXXXXXXXX. Holdco-Child 1 is a CCPC and TCC whose principal activity is to hold investments. The capital stock of Holdco-Child 1 consists of the following shares:
a) Class A: voting (XXXXXXXXXX), participating as to dividends and in the residue in case of winding up;
b) Class B: non-voting, non-participating and entitled to a monthly non-cumulative preferred dividend of XXXXXXXXXX% calculated on the NAV;
c) Class C: voting (XXXXXXXXXX) and non-participating;
d) Class D: non-voting and participating;
e) Class E: non-voting, non-participating and entitled to a discretionary dividend;
f) Class F: non-voting, non-participating and entitled to a discretionary dividend;
g) Class G: non-voting, non-participating and entitled to a monthly non-cumulative preferred dividend of XXXXXXXXXX% calculated on the RV;
Upon incorporation, Child 1 subscribed for XXXXXXXXXX Class A shares of the capital stock of Holdco-Child 1 for a total cash consideration of $XXXXXXXXXX. The shares issued by Holdco-Child 1 constitute capital property to Child 1.
18. Holdco-Child 2 was incorporated on XXXXXXXXXX. Holdco-Child 2 is a CCPC and TCC whose principal activity is to hold investments. The capital stock of Holdco-Child 2 consists of shares with the same characteristics as those of Holdco-Child 1 as described in Paragraph 17.
Upon incorporation, Child 2 subscribed for XXXXXXXXXX Class A shares of the capital stock of Holdco-Child 2 for a total cash consideration of $XXXXXXXXXX. The shares issued by Holdco-Child 2 constitute capital property to Child 2.
19. Holdco-Mr. A was incorporated on XXXXXXXXXX. Holdco-Mr. A is a CCPC and TCC whose principal activity is to hold investments. The capital stock of Holdco-Mr. A consists of shares with the same characteristics as those of Holdco-Child 1 as described in Paragraph 17.
At the time of its incorporation, Mr. A subscribed for XXXXXXXXXX Class C shares and XXXXXXXXXX Class E shares of the capital stock of Holdco-Mr. A for cash consideration of $XXXXXXXXXX and $XXXXXXXXXX respectively, while Holdco-Child 1 and Holdco-Child 2 each subscribed for XXXXXXXXXX Class D shares of the capital stock of Holdco-Mr. A for cash consideration of $XXXXXXXXXX each. The shares issued by Holdco-Child A constitute capital property to Mr. A, Holdco-Child 1 and Holdco-Child 2.
20. On XXXXXXXXXX, Holdco Mr. A purchased for cancellation the XXXXXXXXXX Class D shares held by Holdco-Child 1 and Holdco-Child 2 and the XXXXXXXXXX Class E shares held by Mr. A for cash consideration equal to the subscription price for each of those shares. To the extent that the PUC of the redeemed shares was equal to the proceeds of disposition of those shares, no dividend was deemed to result from that share repurchase pursuant to subsection 84(3).
21. On XXXXXXXXXX, Zco amended its capital stock so that the Class E shares were now redeemable at a price of $XXXXXXXXXX per share and to add a new class of Class F shares with the following characteristics
- Class F: non-voting, entitled to a dividend declared at the discretion of the directors exclusively on Class F shares at the rate fixed by the directors or on Class A, D and F shares, at the same rate for all classes or at different rates for each class, except as to Class A and D shares pari passu with each other and which shall be at the same rate, as fixed by the directors in their discretion Those shares are redeemable at the option of the corporation at the amount of paid-up capital.
22. On XXXXXXXXXX, Trust 2 exchanged all of its XXXXXXXXXX Class D shares of the capital stock of Zco pursuant to subsection 51(1). In exchange, Trust 2 received:
a) XXXXXXXXXX Class D Shares having, at that time, an estimated FMV of $XXXXXXXXXX, a PUC of $XXXXXXXXXX and an ACB of $XXXXXXXXXX;
b) XXXXXXXXXX Class E Shares having, at that time, an FMV of $XXXXXXXXXX, a PUC of $XXXXXXXXXX and an ACB of $XXXXXXXXXX; and
c) XXXXXXXXXX Class F shares having, at that time, a RV and PUC of $XXXXXXXXXX and an ACB of $XXXXXXXXXX.
The PUC of the Class D, E and F shares of the capital stock of Zco was determined pursuant to the provisions of subsection 51(3).
The share exchange agreement contained a price adjustment clause.
23. On XXXXXXXXXX, Trust 2 exchanged all of its XXXXXXXXXX Class D shares of the capital stock of Xco pursuant to subsection 51(1). In exchange, Trust 2 received:
a) XXXXXXXXXX Class D Shares having, at that time, an estimated FMV of $XXXXXXXXXX, a PUC of $XXXXXXXXXX and an ACB of $XXXXXXXXXX; and
b) XXXXXXXXXX Class F shares having, at that time, an FMV and RV of $XXXXXXXXXX and an ACB of $XXXXXXXXXX.
The PUC of the Class D and F shares of the capital stock of Xco was determined pursuant to the provisions of subsection 51(3).
The share exchange agreement contained a price adjustment clause.
PROPOSED TRANSACTIONS
24. On or about XXXXXXXXXX, in accordance with the Trust 2 Deed, Trust 2 will distribute all of its property to the following named beneficiaries, resulting in the disposition of all of their capital interests in the trust:
a) Child 1 will receive XXXXXXXXXX Class D shares of the capital stock of Xco, as well as XXXXXXXXXX Class D shares and XXXXXXXXXX Class E shares of the capital stock of Zco;
b) Child 2 will receive XXXXXXXXXX Class D shares of the capital stock of Xco, as well as XXXXXXXXXX Class D shares and XXXXXXXXXX Class E shares of the capital stock of Zco;
c) Mr. A will receive XXXXXXXXXX Class F shares of the capital stock of Xco, XXXXXXXXXX Class E shares and XXXXXXXXXX Class F shares of the capital stock of Zco, together with the balance of the cash; and
d) Ms. A will receive XXXXXXXXXX Class E shares of the capital stock of Zco.
In accordance with XXXXXXXXXX of the Trust 2 Deed, the rights, title and interest in the coin will be distributed equally between Ms. A, Child 1 and Child 2. Thereafter, the trustees of Trust 2 will proceed to wind it up.
Trust 2 will not make an election under subsection 107(2.001).
The shares so distributed will constitute capital property to Mr. A, Ms. A and the Children.
25. On or about XXXXXXXXXX, the following share transfers will take place:
a) Mr. A will transfer his XXXXXXXXXX Class F shares of the capital stock of Xco to Holdco-Mr. A. In exchange, Mr. A will receive XXXXXXXXXX Class F shares of the capital stock of Holdco-Mr. A.
Mr. A and Holdco-Mr. A will make the subsection 85(1) election in the prescribed form and within the time set out in subsection 85(6) in respect of the Class F shares of the capital stock of Xco. For greater certainty, the amount agreed to by Mr. A and Holdco-Mr. A for the Class F shares of the capital stock of Xco transferred will not exceed their FMV at the time of transfer and will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) (i.e., their FMV at the time of transfer and their ACB to Mr. A at the time of transfer, respectively).
The amount that Holdco-Mr. A will add to the PUC of the Class F shares of its capital stock issued to Mr. A in consideration for the transfer will be $XXXXXXXXXX. For greater certainty, the PUC of the Class F shares of the capital stock of Holdco-Mr. A issued as consideration for the transfer will not exceed the maximum amount that can be added to the PUC of those shares pursuant to paragraph 84.1(1)(a).
b) Child 1 and Child 2 will each transfer their XXXXXXXXXX Class D shares of the capital stock of Xco to Holdco-Mr. A. In exchange, Child 1 and Child 2 will each receive XXXXXXXXXX Class D shares of the capital stock of Holdco-Mr. A.
The Children and Holdco-Mr. A will make the subsection 85(1) election in the prescribed form and within the time period set out in subsection 85(6) in respect of the Class D shares of the capital stock of Xco. For greater certainty, the amount agreed to by the Children and Holdco-Mr. A for the Class D shares of the capital stock of Xco transferred will not exceed their FMV at the time of the transfer and will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) (i.e., their FMV at the time of the transfer and their ACB to the Children at the time of the transfer, respectively).
The amount that Holdco-Mr. A will add to the PUC of the Class D shares of its capital stock issued to Child 1 and Child 2 will be $XXXXXXXXXX. For greater certainty, the PUC of the Class D shares of the capital stock of Holdco-Mr. A issued as consideration for the transfer will not exceed the maximum amount that may be added to the PUC of those shares pursuant to paragraph 84.1(1)(a).
c) Mr. A will transfer his XXXXXXXXXX Class F shares of the capital stock of Zco to Holdco-Mr. A. In exchange, Mr. A will receive XXXXXXXXXX Class F shares of the capital stock of Holdco-Mr. A.
Mr. A and Holdco-Mr. A will make the subsection 85(1) election in the prescribed form and within the time set out in subsection 85(6) in respect of the Class F shares of the capital stock of Zco. For greater certainty, the amount agreed to by Mr. A and Holdco-Mr. A for the Class F shares of the capital stock of Zco transferred will not exceed their FMV at the time of the transfer and will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) (i.e., their FMV at the time of the transfer and their ACB to Mr. A at the time of the transfer, respectively).
The amount that Holdco Mr. A will add to the PUC of the Class F shares of its capital stock issued to Mr. A in consideration for the transfer will be $XXXXXXXXXX. For greater certainty, the PUC of the Class F shares of the capital stock of Holdco-Mr. A issued as consideration for the transfer will not exceed the maximum amount that can be added to the PUC of those shares pursuant to paragraph 84.1(1)(a).
d) Child 1 and Child 2 will each transfer their XXXXXXXXXX Class D shares of the capital stock of Zco to Holdco-Mr. A. In exchange, Child 1 and Child 2 will each receive XXXXXXXXXX Class D shares of the capital stock of Holdco-Mr. A.
The Children and Holdco-Mr. A will make the subsection 85(1) election in the prescribed form and within the time set out in subsection 85(6) in respect of the Class D shares of the capital stock of Zco. For greater certainty, the amount agreed to by the Children and Holdco-Mr. A for the Class D shares of the capital stock of Zco transferred will not exceed their FMV at the time of the transfer and will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) (i.e., their FMV at the time of the transfer and their ACB for the Children at the time of the transfer, respectively).
The amount that Holdco Mr. A will add to the PUC of the Class D shares of its capital stock issued to Child 1 and Child 2 will be $XXXXXXXXXX. For greater certainty, the PUC of the Class D shares of the capital stock of Holdco-Mr. A issued as consideration for the transfer will not exceed the maximum amount that may be added to the PUC of those shares pursuant to paragraph 84.1(1)(a).
e) Child 1 will transfer the child’s XXXXXXXXXX Class D shares of the capital stock of Holdco-Mr. A to Holdco-Child 1. In exchange, Child 1 will receive XXXXXXXXXX Class A shares of the capital stock of Holdco-Child 1.
Child 1 and Holdco-Child 1 will make the subsection 85(1) election in prescribed form and within the time period set out in subsection 85(6) in respect of the Class D shares of the capital stock of Holdco-Mr. A. For greater certainty, the amount agreed to by Child 1 and Holdco-Child 1 for the Class D shares in the capital stock of Holdco-Mr. A transferred will not exceed their FMV at the time of the transfer and will not be less than the lesser of the amounts described in subparagraph 85(1)(c.1 )(i) and (ii) (i.e., their FMV at the time of transfer and their ACB for Child 1 at the time of transfer, respectively).
The amount that Holdco-Child 1 will add to the PUC of the Class A shares of its capital stock issued to Child 1 will be $XXXXXXXXXX. For greater certainty, the PUC of the Class A shares of the capital stock of Holdco-Child 1 issued as consideration for the transfer will not exceed the maximum amount that may be added to the PUC of those shares pursuant to paragraph 84.1(1)(a).
f) Child 2 shall transfer its XXXXXXXXXX Class D shares of the capital stock of Holdco-Mr. A to Holdco-Child 2. In exchange, Child 2 will receive XXXXXXXXXX Class A shares of the capital stock of Holdco-Child 2.
Child 2 and Holdco-Child 2 will make the subsection 85(1) election in prescribed form and within the time period set out in subsection 85(6) in respect of the Class D shares of the capital stock of Holdco-Mr. A. For greater certainty, the amount agreed to by Child 2 and Holdco-Child 2 for the Class D shares of the capital stock of Holdco-Mr. A transferred will not exceed their FMV at the time of the transfer and will not be less than the lesser of the amounts described in subparagraph 85(1)(c.1 )(i) and (ii) (i.e., their FMV at the time of transfer and their ACB for Child 2 at the time of transfer, respectively).
The amount that Holdco-Child 2 will add to the PUC of the Class A shares of its capital stock issued to Child 2 will be $XXXXXXXXXX. For greater certainty, the PUC of the Class A shares of the capital stock of Holdco-Child 2 issued as consideration for the transfer will not exceed the maximum amount that may be added to the PUC of those shares pursuant to paragraph 84.1(1)(a).
All share transfer agreements will include a price adjustment clause.
26. After the Proposed Transactions set out in Paragraph 25, Xco will pay a dividend in the amount of $XXXXXXXXXX on the Class D shares held by Holdco-Mr. A. Xco will make the designation provided for in subsection 89(14) so that the total amount of the dividend is an eligible dividend.
Thereafter, Holdco-Mr. A will pay a dividend in the amount of $XXXXXXXXXX to the holders of the Class D shares, i.e. an amount of $XXXXXXXXXX to each of Holdco-Child 1 and Holdco-Child 2. Holdco-Mr. A will make the designation under subsection 89(14) so that the total amount of the dividend is an eligible dividend.
PURPOSE OF THE PROPOSED TRANSACTIONS
The purpose of the Proposed Transactions described above is to distribute, on a tax-free basis pursuant to subsection 107(2), all of the property of Trust 2, consisting largely of shares of the capital stock of Xco and Zco, to the beneficiaries Mr. A., Ms. A, Child 1 and Child 2. After the distribution of the property of Trust 2 to its beneficiaries, the participating shares and discretionary dividend shares received by individuals (other than trusts) will be transferred, pursuant to subsection 85(1), to holding corporations, so that only the freeze shares will be retained in the hands of those individuals.
ADDITIONAL INFORMATION
The principal contact information for the taxpayers involved in the advance rulings is as follows:
XXXXXXXXXX
All material transactions that have been completed prior to the submission of the Request for Advance Rulings or that may be undertaken after the completion of the Proposed Transactions are described herein.
RULINGS GIVEN
Provided that the statement of facts, the Preliminary Transactions, the Proposed Transactions and the additional information constitute full disclosure of all relevant facts, all Preliminary Transactions and all Proposed Transactions and that the Proposed Transactions are carried out as described above, we confirm as follows:
A. The provisions of paragraph 107(2) will apply to the distribution of the property of Trust 2 to Mr. A, Ms. A, Child 1 and Child 2 as described in paragraph 24 above.
B. Section 105(1) will not apply to the distribution of Trust 2 property to Mr. A, Ms. A, Child 1 and Child 2 described in Paragraph 24 of the Proposed Transactions.
C. The taxable dividends described in Paragraph 26 above will be deductible in computing the taxable income of Holdco-Mr. A, Holdco-Child 1 and Holdco-Child 2, as the case may be, pursuant to subsection 112(1).
D. Subsection 56(2) will not apply as a result of and because of the Proposed Transaction described in paragraph 26 above.
E. 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 rulings above.
These rulings are subject to the limitations and general conditions set out in Information Circular 70-6R9 dated April 23, 2019, issued by the CRA and are binding on the CRA provided that the Proposed Transaction described in Paragraph 24 is completed by XXXXXXXXXX and the Proposed Transactions described in Paragraphs 25 and 26 are completed within XXXXXXXXXX of this letter. These rulings are based on the current Act and do not take into account any proposed amendments to it.
OTHER COMMENTS
Some of the above Preliminary Transactions and Proposed Transactions refer to price adjustment clauses. Since the application and operation of price adjustment clauses are not proposed transactions, we do not issue rulings on those clauses. Income Tax Folio S4-F3-C1 "Price Adjustment Clauses" sets out the CRA's administrative position on price adjustment clauses.
Furthermore, the decisions rendered should in no way be construed as an acquiescence on the part of the CRA that:
(a) the amount attributed to a property in the statement of Facts, Preliminary Transactions and Proposed Transactions truly represents the FMV or ACB of a property, the amount of the PUC of a share or the agreed amount of a property transferred pursuant to subsection 85(1);
(b) the amount allocated to the GRIP or RDTOH (or ERDTOH and NERDTOH) of a corporation is truly the GRIP or RDTOH (or ERDTOH and NERDTOH) of such corporation;
(c) the shares of the capital stock of a corporation qualify as QSBCSs within the meaning of subsection 110.6(1) or that such shares would entitle their holders to the capital gains deduction within the meaning of subsection 110.6(2.1); and
(d) we have considered the other tax consequences that may result from the facts, the Preliminary Transactions or the Proposed Transactions set out herein.
In particular, given the distribution described in paragraph 8 above, the date on which subsection 104(4) would be applicable to Trust 2 could be determined by reference to subsection 245(2) if the distribution of property described in paragraph 24 above were not completed before XXXXXXXXXX.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
Best regards,
XXXXXXXXXX
Manager
For the Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Pursuant to XXXXXXXXXX of the Trust 1 Deed, the liquidation date has been fixed by the Trust 1 Trustees as XXXXXXXXXX.
2 On XXXXXXXXXX, Zco paid a special dividend in the amount of $XXXXXXXXXX on its XXXXXXXXXX Class E shares and that dividend had the effect of decreasing the aggregate redemption value of those shares from $XXXXXXXXXX to $XXXXXXXXXX.