Principal Issues: 1. Whether paragraph 20(1)(c) will apply to the proposed transactions? 2. Whether GAAR will apply to the proposed transactions?
Position: 1. Yes. 2. No.
Reasons: 1. Provisions of the ITA and previous positions. 2. Case law, provisions of the ITA, no abuse of section 55.
XXXXXXXXXX 2017-069679
XXXXXXXXXX 2019
Dear Sirs,
Subject: Request for advance income tax rulings
XXXXXXXXXX
This is further to our letter of XXXXXXXXXX (the "Letter") in which the Income Tax Rulings Directorate indicated that your advance ruling request C (regarding the amount of Amalco's accumulated profits for purposes of the concept of filling the hole for the purposes of paragraph 20(1)(c)) would be the subject of a separate letter from the CRA.
This is also in response to your emails (dated XXXXXXXXXX) and telephone conversations (XXXXXXXXXX) in which additional information was provided to us.
Following the study of your request, we confirm that the following changes should be made to the Letter.
The reference to "XXXXXXXXXX" in the first paragraph of the Letter is replaced by "XXXXXXXXXX".
PROPOSED TRANSACTIONS
1. The 5th and following paragraphs 5 of paragraph 23 of the Proposed Transactions are replaced by the following paragraphs:
Accounting for the transactions described in paragraphs 22 and 23 of the Proposed Transactions in accordance with applicable accounting principles (International Financial Reporting Standards) will give the following accounting result:
(a) a reduction in the share capital account of Amalco of approximately $XXXXXXXXXX (the original share capital account of Amalco will be equal to the share capital account of Newco, i.e. $XXXXXXXXXX); and (b) a reduction in the retained earnings account of Amalco by a net amount of approximately $XXXXXXXXXX;
b) a new debt (the Bco-Newco Note) of $XXXXXXXXXX will be shown on the books of Amalco.
The above accounting result will result from the following accounting entry:
To record the Bco-Newco Note: a debit (reduction) of the share capital account of approximately $XXXXXXXXXX, a debit (reduction) of the retained earnings account of approximately $XXXXXXXXXX XXXXXXXXXX, and a credit to a debt account (Bco-Newco Note) of $XXXXXXXXXX.
The Bco-Newco Note will be shown separately as debt on the books of Amalco, but will appear under the heading "Shareholders' Equity" on the balance sheet of Amalco.
RULING GIVEN
2. The following decision I. is added to the "Rulings Given" of the Letter:
I. The amount of "accumulated profits" (as defined in paragraphs 1.50 and 1.51 of Income Tax Folio S3-F6-C1, Interest Deductibility) of Amalco (the "new corporation" under section 87) for purposes of the "filling the hole" concept under paragraph 20(1)(c), will be XXXXXXXXXX at the time of the amalgamation (i.e., the amount XXXXXXXXXX)
3. The last paragraph of the section "Rulings Given" of the Letter is deleted.
We hereby confirm that the rulings in the Letter, as amended hereby, remain valid and binding on the CRA, subject to compliance with the other conditions and limitations set out in the Letter.
The statement of our additional fees for the time spent on your case will be sent to you under separate cover.
Best regards,
XXXXXXXXXX
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch