| 19(1) | File No. 7-4639 |
| S. Shinerock | |
| (613) 957-2108 |
January 29, 1990
Dear Sirs:
We are responding to your letter of December 14, 1989, which was forwarded to this Directorate by the District Taxation Office in Regina for reply.
Your letter describes a transaction that is contemplated by one of your clients, whereby the shareholders of an operating company ("Opco") would set up a holding company ("Holdco"), that would have identical shareholders and attributes of share capital. It is then proposed to cause Opco to issue to Holdco a class of special shares that would be redeemable and retractable, and that would also carry the right to a dividend in priority to other classes of shares of Opco. Such shares would be issued for nominal consideration and solely for the purpose of transferring retained earnings from Opco to Holdco. You ask whether this arrangement would be acceptable to the Department.
Comments
The arrangement described by you is clearly one that relates to a specific proposed transaction. Confirmation of the tax consequences of a specific proposed transaction will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance ruling are set out in Information Circular 70-6R. If you wish to submit such a request, we would be pleased to consider it. No certainty can be given, however, that an advance income tax ruling will be issued, since this would depend on the nature of the request and the related facts and proposed transactions. Having said this, we are able to offer the following general comments on your situation.
It would appear that the issue of the special shares would be undertaken as part of a series of transactions or events to "purify" Opco so that the existing shares of Opco would meet the requirements of the definition of qualified small business corporation shares, within the meaning assigned under subsection 110.6(l) of the Income Tax Act (the "Act"). Therefore, it would seem reasonable that the holders of such shares would implement the above-mentioned transactions in contemplation of both the sale of their shares of Opco and the subsequent claim by them of a capital gains deduction pursuant to subsection 110.6(2.1) of the Act.
Although the purification of Opco, in and by itself, could no doubt be carried out pursuant to the "excepting" provisions of paragraph 55(3) (a) of the Act, the dividend arising from the redemption of the special shares as part of the series of transactions or events referred to herein would be subject to the provisions of subsection 55(2) of the Act should such series (which includes the subsequent sale of the Opco shares) result in either one of the two events described in subparagraph 55(3)(a)(i) or (ii) of the Act Here, we would like to point out that:
(i) subsection 248(10) of the Act contains an extended definition of the term "series of transactions or events", and
(ii) it is our view that a preliminary transaction will form part of a series of transactions referred to in-subsection 248(10) of the Act if, at the time the preliminary transaction is carried out, the taxpayer has the intention to implement the subsequent transactions constituting the series and the subsequent transactions will be part of a series even though at the time of the completion of the preliminary transaction the taxpayer either had not determined all of the important elements of the subsequent transactions including, possibly, the identity of other taxpayers involved, or had lacked the ability to implement the subsequent transactions.
We trust these comments will be of assistance.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch