Principal Issues: A trust will realize a capital gain as a result of the application of subparagraph 104(4)(b)(ii) to shares of a Canadian-controlled private corporation and will include the taxable capital gain realized in its income. After the 21st anniversary of the trust, the trust will enter into a pipeline type transaction (the Proposed Transactions). The trust will continue to hold the shares or substituted shares of the Corporation involved in the pipeline transaction. The assets of the Corporation that are the subject of the pipeline transaction consist solely of shares of a subsidiary which holds portfolio investments. The Corporation involved in the pipeline transaction will continue to own the shares of its subsidiary and the operations of the subsidiary will be maintained for the years following the completion of the pipeline transaction. The shares or substituted shares of the Corporation involved in the pipeline transaction will not be redeemed (or their paid-up capital reduced) for many years after the completion of the pipeline transaction. The trust will use the proceeds of partial notes receivable repayments to pay its income taxes arising from taxable dividends and taxable capital gains realized in connection with the disclosed transactions. 1) Does section 84.1 apply to the Proposed Transactions? 2) Does subsection 84(2) apply to the Proposed Transactions? 3) Does section 245 apply to the Proposed Transactions?
Position: 1) No. 2) No. 3) No.
Reasons: Wording of the Act and previous positions.
XXXXXXXXXX 2020-084808
XXXXXXXXXX
Subject: Request for advance income tax rulings
XXXXXXXXXX
Dear Sir,
This is in response to your letter dated XXXXXXXXXX, and amended on XXXXXXXXXX, requesting advance income tax rulings on behalf of your client, XXXXXXXXXX. We have also taken into account the information you have provided to us by email as well as additional information submitted during 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").
To your knowledge and that of the parties involved in the transactions, none of the matters relating to 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 connected with them;
(iv) is the subject of an ongoing or completed legal process involving the taxpayers or a person related to them;
(v) is the subject of a ruling request previously considered by the Tax Rulings Directorate.
DEFINITIONS AND ABBREVIATIONS USED
The names and corporate names of the taxpayers are replaced by the names and corporate names listed below.
"Aco" means XXXXXXXXXX Corporation, incorporated under the CBCA;
"Amalco" means the corporation resulting from the amalgamation of Aco, Bco and ULC 1 as described in paragraph 68 of the Proposed Transactions;
"Bco" means XXXXXXXXXX Corporation, incorporated under the CBCA;
"Child" means XXXXXXXXXX, child of Father and grandchild of Grandfather and Grandmother;
"Grandfather" means the late XXXXXXXXXX;
"Grandmother" means the late XXXXXXXXXX;
"Trust 1" means XXXXXXXXXX, which is an inter vivos personal trust;
"Trust 2" means XXXXXXXXXX, which is an inter vivos personal trust;
"Trust 3" means XXXXXXXXXX, which is a testamentary trust created pursuant to the will of XXXXXXXXXX;
"Trust 4" means XXXXXXXXXX, a testamentary trust created pursuant to the will of XXXXXXXXXX;
"Trustee 1" means XXXXXXXXXX;
"ULC 1" means the new Corporation to be created pursuant to the transaction described in paragraph 59 of the Proposed Transactions.
Unless otherwise stated, the following abbreviations have the meanings defined below.
"ACB" means "adjusted cost base" as defined in section 54;
"Agreed amount" has the meaning assigned by subsection 85(1);
"Capital dividend" means a dividend for which an election has been made pursuant to subsection 83(2);
"Capital property" has the same meaning as in section 54;
"CBCA" means the Canada Business Corporations Act, R.S.C. (1985), c. C-44;
"CCPC" means "Canadian-controlled private corporation" as defined in subsection 125(7);
"CDA" means "capital dividend account" as defined in subsection 89(1);
"Completed Transactions" means the transactions referred to in paragraphs 52 to 55 of this letter;
"connected corporation" has the meaning assigned by subsection 186(4);
"CRA" means the 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 the highest price, in dollars, that would be agreed upon in the open market by two knowledgeable and prudent arm's length parties, neither of whom is under any compulsion to act;
"GRIP" means "general rate income pool" as defined in subsection 89(1);
"Inter vivos Personal Trust" has the same meaning as in subsections 108(1) and 248(1);
"NERDTOH" means "non-eligible refundable dividend tax on hand" as defined in subsection 129(4);
"Non-arm's length" means not dealing at arm’s length as set out in subsection 251(1);
"Note 1" means a demand note as described in paragraph 55 of the Completed Transactions;
"Note 2" means a demand note as described in paragraph 55 of the Completed Transactions;
"Note 3" means a demand note as described in paragraph 57 of the Proposed Transactions;
"Note 4" means a demand note as described in paragraph 57 of the Proposed Transactions;
"Note 5" means a demand note as described in paragraph 63 of the Proposed Transactions;
"Note 6" means a demand note as described in paragraph 65 of the Proposed Transactions;
"Ordinary dividend" means a taxable dividend that is not an eligible dividend;
"Proposed Transactions" means the transactions referred to in paragraphs 56 to 69 of this letter;
"PUC" means "paid-up capital" as defined in subsection 89(1);
"Rollover 1 Shares" means the XXXXXXXXXX Class A shares of the capital stock of Bco held by Trust 1, as described in the table in paragraph 22 of the Bco facts;
"Rollover 2 Shares" means the XXXXXXXXXX Class A shares of the capital stock of Bco held by Trust 2, as described in the table in paragraph 22 of the Bco facts;
"RV" means "redemption value".
"taxable dividend" has the meaning assigned by the definition in subsection 89(1);
"Taxation Year" has the meaning set out in subsection 249(1);
"TCC" means "taxable Canadian corporation" as defined in subsection 89(1);
XXXXXXXXXX;
FACTS
Facts respecting individuals
1. Grandfather died on XXXXXXXXXX.
2. Grandmother was Grandfather's wife. She died on XXXXXXXXXX.
3. Father was born on XXXXXXXXXX.
4. Child was born on XXXXXXXXXX.
5. Father and Child are residents of Canada for the purposes of the Act.
6. Father is a Canadian citizen.
7. Child is a dual citizen. She is a Canadian and American citizen.
Facts respecting Aco
8. Aco is a TCC and CCPC incorporated under the CBCA with a fiscal period end of XXXXXXXXXX. Its sole business is to hold, manage and trade in various investments.
9. As at XXXXXXXXXX, Aco had the following tax accounts:
- ERDTOH of $XXXXXXXXXX;
- NERDTOH of $XXXXXXXXXX;
- GRIP of $XXXXXXXXXX;
- CDA of $XXXXXXXXXX.
10. From XXXXXXXXXX to XXXXXXXXXX, Aco realized capital gains of $XXXXXXXXXX.
- Aco's CDA, as of XXXXXXXXXX, totalled $XXXXXXXXXX;
- Subject to the other income earned by Aco for its XXXXXXXXXX fiscal period, the amount of NERDTOH will also be increased.
11. As at XXXXXXXXXX, Aco's assets consisted primarily of cash, advances, shares of Canadian and U.S. public corporations and units of equity mutual funds.
12. As of XXXXXXXXXX, Aco owed the following amounts to the trusts:
- Trust 1 $XXXXXXXXXX;
- Trust 2 $XXXXXXXXXX;
- Trust 4 $XXXXXXXXXX.
13. The tax attributes of all issued shares of the capital stock of Aco are set out in the table below. The FMV of the Class A shares of the capital stock of Aco is shown for information purposes and has been estimated from the internal financial statements of Aco as at XXXXXXXXXX.
|
Shareholders |
Number and class |
$ACB |
$PUC |
$RV |
$FMV |
|
Bco |
XXXXXX Class A shares |
XXXXXX |
XXXXXX |
XXXXXX |
XXXXXX |
|
Trust 3 |
XXXXXX Class B shares |
XXXXXX |
XXXXXX |
XXXXXX |
XXXXXX |
|
Father |
XXXXXX Class F shares |
XXXXXX |
XXXXXX |
XXXXXX |
XXXXXX |
|
Total |
XXXXXX |
XXXXXX |
XXXXXX |
XXXXXX |
14. The Class A shares of the capital stock of Aco are voting and participating.
15. The Class B shares of the capital stock of Aco are non-voting, non-participating, entitled each fiscal period to non-cumulative preferential dividends, which may not exceed a maximum rate of XXXXXXXXXX% per XXXXXXXXXX, but not more, calculated on the amount of the redemption price and are redeemable at the option of the Corporation or the holder at the FMV of the consideration received by the Corporation upon their issuance plus any dividends declared but unpaid.
16. The Class F shares of the capital stock of Aco are non-voting, non-participating, entitled in each fiscal period of the corporation to fixed, non-cumulative preferential dividends of XXXXXXXXXX% XXXXXXXXXX, but not more, calculated on the amount of the redemption price and are redeemable at the option of the corporation or the holder at the FMV of the consideration received by the corporation on issuance plus any dividends declared but unpaid.
17. The current shareholders of Aco wish to continue to operate the corporation for many years. Their objective is to grow the portfolio for the benefit of future generations.
Facts respecting Bco
18. Bco is a CCPC incorporated under the CBCA with a fiscal period end of XXXXXXXXXX.
19. Bco is a holding company and its principal business activity is holding the shares of Aco.
20. As at XXXXXXXXXX, the assets of Bco consisted primarily of XXXXXXXXXX Class A shares of the capital stock of Aco.
21. As at XXXXXXXXXX, Bco had the following tax accounts:
- ERDTOH and NERDTOH of XXXXXXXXXX;
- GRIP of XXXXXXXXXX;
- CDA of $XXXXXXXXXX.
22. The tax attributes of all issued shares of the capital stock of Bco are set out in the table below. The FMV of the Class A shares of the capital stock of Bco is shown for information purposes and has been estimated from the internal financial statements of Bco as at XXXXXXXXXX.
|
Shareholders |
Number and class |
$ACB |
$PUC |
$RV |
$FMV |
|
Trust 1 |
XXXXXX Class A shares (Rollover 1 Shares) |
XXXXXX |
XXXXXX |
XXXXXX |
XXXXXX |
|
Trust 2 |
XXXXXX Class A shares (Rollover 2 Shares) |
XXXXXX |
XXXXXX |
XXXXXX |
XXXXXX |
|
Total |
XXXXXX |
XXXXXX |
XXXXXX |
XXXXXX |
23. The Class A shares of the capital stock of Aco held by Trust 1 and Trust 2 are capital assets for them.
Facts respecting Trust 1
24. Trust 1 is an inter vivos personal trust. Trust 1 is resident in Canada for the purposes of the Act. Its Taxation Year ends on XXXXXXXXXX.
25. Trust 1 was established pursuant to a trust deed executed on XXXXXXXXXX under the XXXXXXXXXX.
26. The current income and capital beneficiaries of Trust 1 are:
-
- Father;
- Child.
27. The current Trust 1 trustees are Father and Trustee 1 (the "Trust 1 Trustees").
28. The 21st anniversary of the formation of Trust 1 will take place on XXXXXXXXXX.
29. No capital gains deduction pursuant to subsection 110.6(2.1) has been claimed by the beneficiaries of Trust 1 or by a person with whom Trust 1 does not deal at arm's length in respect of any capital gain realized in respect of the Rollover Shares 1 or a share for which such shares have been substituted within the meaning of subsection 248(5). In addition, the ACB to Trust 1 of the Rollover Shares is not based, directly or indirectly, on the tax-free zone relating to the pre-1972 period.
30. During his lifetime, Grandfather did not designate successor beneficiaries as permitted by section XXXXXXXXXX of the Trust 1 Deed.
31. During Grandfather's and Grandmother's lifetime, the Trust 1 Trustees had discretionary power as to the distribution of income and capital to the beneficiaries. However, the Trust 1 Deed provides that any use of or encroachment on capital must be made in equal shares among the beneficiaries if neither Grandfather nor Grandmother is a Trust 1 Trustee.
32. The Trust 1 Deed provides that the Trust 1 Trustees shall make a distribution of the capital and accumulated income of the trust no later than the date of Father's XXXXXXXXXX birthday or when Father's youngest child of the first degree (Child) reaches the age of XXXXXXXXXX.
33. Notwithstanding the foregoing winding-up time, the Trust Deed 1 permits the Trustees, in their sole and absolute discretion, to distribute all of the capital and accumulated income of the Trust prior to the foregoing winding-up time. However, in order to respect the settlor's wishes, the current trustees do not intend to make any substantial distribution of the trust capital before the period provided for in the previous point.
34. The Trust 1 Deed provides that, if at the time of the winding up of Trust 1, Grandfather is no longer acting as Trust 1 Trustee, the capital and accumulated income of Trust 1 must be distributed on the winding up of Trust 1 to the then living capital beneficiaries in equal shares as between them, unless the Trust 1 Trustees, including Grandfather and Grandmother, have provided by minute Deed to establish particular proportions as to the distribution of the principal or accumulated income. During their lifetime, Grandfather and Grandmother did not establish specific proportions of capital and income distributions.
Restrictions in respect of minor beneficiaries
35. Notwithstanding the above, the Trust 1 Trustees will not be able to use for the benefit or distribute the annual net income to the income beneficiaries if they have not attained the age of XXXXXXXXXX.
36. Notwithstanding the foregoing, the Trust 1 Trustees shall not remit all or any part of the capital to Capital Beneficiaries who have not attained the age of XXXXXXXXXX.
Power of the Trustees of Trust 1
37. Under Article XXXXXXXXXX of the Trust 1 Deed, the Trust 1 Trustees may do and perform all acts necessary for the proper management and administration of the property of Trust 1.
Facts respecting Trust 2
38. Trust 2 is an inter vivos personal trust. Trust 2 is resident in Canada for the purposes of the Act. Its Taxation Year ends on XXXXXXXXXX.
39. Trust 2 was established by a trust deed on XXXXXXXXXX pursuant to the XXXXXXXXXX.
40. The current beneficiaries of the income and capital of Trust 2 are:
-
- Father;
- Child.
41. The current trustees of Trust 2 are Father and Trustee 1 (the "Trust 2 Trustees").
42. The 21st anniversary of Trust 2's incorporation will take place on XXXXXXXXXX.
43. No capital gains deduction pursuant to subsection 110.6(2.1) has been claimed by the beneficiaries of Trust 2 or by a person with whom Trust 2 does not deal at arm's length in respect of any capital gain realized in respect of the Rollover Shares or a share for which such shares have been substituted within the meaning of subsection 248(5). In addition, the ACB to Trust 2 of the Rollover Shares is not based, directly or indirectly, on the tax-free zone relating to the pre-1972 period.
44. During her lifetime, Grandmother did not designate successor beneficiaries as permitted by Section XXXXXXXXXX of the Trust 2 Deed.
45. During Grandfather's and Grandmother's lives, the Trust 2 Trustees had discretionary authority as to the distribution of income and capital to the beneficiaries. However, the Trust 2 Deed provides that any use of or encroachment on capital must be made in equal shares among the beneficiaries if neither Grandfather nor Grandmother is a Trust 2 Trustee.
46. The Trust 2 Deed provides that the Trust 2 Trustees shall make a distribution of the capital and accumulated income of the trust no later than the date of Father's XXXXXXXXXX birthday or when Father's youngest child in the first degree (Child) reaches the age of XXXXXXXXXX.
47. Notwithstanding the foregoing winding-up time, Trust Deed 2 permits the Trustees, in their sole and absolute discretion, to distribute all of the capital and accumulated income of the Trust prior to the foregoing winding-up time. However, in order to respect the settlor's wishes, the current trustees do not intend to make any substantial distribution of the trust capital before the period provided for in the previous point.
48. The Trust 2 Deed provides that, if at the time of the winding up of Trust 2, Grandmother is no longer acting as a Trust 2 Trustee, the capital and accumulated income of Trust 2 must be distributed on the winding up of Trust 2 to the then living capital beneficiaries in equal shares as between them, unless the Trust 2 Trustees, including Grandfather and Grandmother have provided by minute Deed to establish particular proportions as to the distribution of the principal or accumulated income. During their lifetime, Grandfather and Grandmother did not establish specific proportions of capital and income distributions.
Restrictions respecting minor beneficiaries
49. Notwithstanding the above, the Trust 2 Trustees will not be able to use for the benefit or distribute the annual net income to the income beneficiaries if they have not attained the age of XXXXXXXXXX.
50. Notwithstanding the above, the Trustees of Trust 2 will not be able to deliver all or part of the capital to Capital Beneficiaries who have not attained the age of XXXXXXXXXX.
Power of the trustees
51. According to Article XXXXXXXXXX of the Trust 2 Deed, the Trust 2 Trustees may do and perform all acts necessary for the proper management and administration of the property of Trust 2
COMPLETED TRANSACTIONS
52. On XXXXXXXXXX, Aco declared a dividend in the amount of $XXXXXXXXXX. This dividend was payable on the Class F shares of its capital stock through the issuance of a demand note in the amount of $XXXXXXXXXX to Father.
In respect of the above dividend, Aco elected pursuant to subsection 83(2) to have the full amount of the dividend deemed to be a Capital Dividend. This subsection 83(2) election was made in the prescribed manner.
53. On XXXXXXXXXX, Aco declared a dividend in the amount of $XXXXXXXXXX. This dividend was payable on the Class B shares of its capital stock through the issuance of a demand note in the amount of $XXXXXXXXXX to Trust 3.
In respect of the above dividend, Aco elected pursuant to subsection 83(2) to have the full amount of such dividend deemed to be a Capital Dividend. This subsection 83(2) election was made in the prescribed manner.
54. On XXXXXXXXXX, Aco increased the PUC of the XXXXXXXXXX Class A shares of its capital stock held by Bco by $XXXXXXXXXX. Pursuant to subsection 84(1), Aco was deemed to have paid, and Bco was deemed to have received, at that time a dividend in the amount of $XXXXXXXXXX.
In respect of the above dividend, Aco elected pursuant to subsection 83(2) to have the full amount of the above dividend deemed to be a Capital Dividend. This subsection 83(2) election was made in the prescribed manner.
Bco's CDA was increased by an amount of $XXXXXXXXXX pursuant to subsection 89(1).
55. On XXXXXXXXXX, Bco declared a dividend in the amount of $XXXXXXXXXX. This dividend was payable on the Class A shares of its capital stock through the issuance of two demand notes to its shareholders, namely
- a note in the amount of $XXXXXXXXXX to Trust 1 (Note 1);
- a note in the amount of $XXXXXXXXXX to Trust 2 (Note 2).
In respect of the above dividend, Bco elected pursuant to subsection 83(2) to have the full amount of such dividend deemed to be a Capital Dividend. This subsection 83(2) election was made in the prescribed manner.
PROPOSED TRANSACTIONS
56. Before XXXXXXXXXX, ACO will increase the PUC of the XXXXXXXXXX Class A shares of its capital stock by $XXXXXXXXXX.
In accordance with subsection 84(1), Aco will be deemed to have paid, and Bco will be deemed to have received, at that time a dividend in the amount of $XXXXXXXXXX.
This dividend will be a Taxable Dividend and Aco will designate a portion of this Taxable Dividend, namely $XXXXXXXXXX, as an Eligible Dividend in accordance with the provisions of subsection 89(14).
Aco will obtain the following DRs:
- DR of $XXXXXXXXXX from its ERDTOH under subparagraph 129(1)(a)(i);
- DR of $XXXXXXXXXX from its NERDTOH under subparagraph 129(1)(a)(ii).
Bco will be liable for Part IV tax in an amount equal to Aco's DR of $XXXXXXXXXX. An amount of $XXXXXXXXXX will be added to Bco's ERDTOH while an amount of $XXXXXXXXXX will be added to its NERDTOH.
The amount of the Taxable Dividend will be deductible in computing Bco's income pursuant to subsection 112(1).
The amount of income earned or realized for the purposes of subsection 55(2) that can reasonably be considered to contribute to the unrealized capital gain of the shares on which the dividend will be deemed to have been paid will be greater than the amount of the dividend of $XXXXXXXXXX.
57. Before XXXXXXXXXX, Aco will reduce the PUC of the XXXXXXXXXX Class A shares of its capital stock by $XXXXXXXXXX.
The PUC reduction will be payable through the issuance to Bco of the following demand notes
- a note in the amount of $XXXXXXXXXX to Bco (Note 3);
- a note in the amount of $XXXXXXXXXX to Bco (Note 4).
No consideration in excess of the PUC reduction will be paid to Bco. Thus, no dividend will be deemed to have been paid under section 84(4).
58. Before XXXXXXXXXX, Bco will declare a dividend in the amount of $XXXXXXXXXX. This dividend will be payable on the Class A shares of its capital stock by the transfer of Note 3 in the amount of $XXXXXXXXXX to Trust 1 and by the transfer of Note 4 in the amount of $XXXXXXXXXX to Trust 2.
This dividend will be a Taxable Dividend and Bco will designate a portion of this Taxable Dividend, namely $XXXXXXXXXX, as an Eligible Dividend in accordance with the provisions of subsection 89(14).
Thus, each of Trust 1 and Trust 2 will receive the following dividends:
Trust 1 (total $XXXXXXXXXX):
- an Eligible Dividend in the amount of $XXXXXXXXXX;
- an Ordinary Dividend in the amount of $XXXXXXXXXX.
Trust 2 (total $XXXXXXXXXX):
- an Eligible Dividend in the amount of $XXXXXXXXXX;
- an Ordinary Dividend in the amount of $XXXXXXXXXX.
Bco will receive the following DRs:
- DR of $XXXXXXXXXX from its ERDTOH under subparagraph 129(1)(a)(i);
- DR of $XXXXXXXXXX from its NERDTOH under subparagraph 129(1)(a)(ii).
59. Before XXXXXXXXXX, a new corporation will be incorporated (ULC 1) under the XXXXXXXXXX.
ULC 1 will be a TCC and its Taxation Year will end on XXXXXXXXXX of each year.
The authorized capital stock of ULC 1 will include, inter alia, the following classes of shares:
- Class A common shares, which are voting and participating shares as to the dividends and remaining property of the corporation;
- Class B preferred shares, i.e. non-voting, non-participating shares, entitling the holder to receive a non-cumulative annual dividend at a maximum rate of XXXXXXXXXX% calculated on the redemption value of the shares and redeemable at the holder's option for a consideration equal to the FMV of the consideration received at the time of their issuance, less any consideration other than in shares paid or assumed by the corporation. To this redemption value shall be added the amount of any declared but unpaid dividends;
- Class C preferred shares, i.e. non-voting, non-participating shares entitling their holders to receive a non-cumulative annual dividend at a maximum rate of XXXXXXXXXX% calculated on the redemption value of the shares and redeemable at the holder's option for a consideration equal to the FMV of the consideration received upon their issuance less any consideration other than shares paid or assumed by the corporation. To this redemption value shall be added the amount of any dividends declared but not yet paid;
- Class D preferred shares, being non-voting, non-participating shares, entitled to an annual non-cumulative dividend at a maximum rate of XXXXXXXXXX% of the redemption value and redeemable for the FMV of the consideration received by the corporation upon their issuance plus any declared but unpaid dividends;
- Class E preferred shares, being non-voting, non-participating shares, entitled to an annual non-cumulative dividend of XXXXXXXXXX% of the redemption value and redeemable at the FMV of the consideration received by the corporation at the time of issue plus any dividends declared but unpaid;
- Class F preferred shares, which are voting, non-participating, non-dividend bearing shares redeemable either on the death of the holder or at the option of the holder;
- Class G preferred shares, i.e. non-voting, non-participating shares, entitling the holder to receive a non-cumulative annual dividend at a maximum rate of XXXXXXXXXX% calculated on the redemption value of the shares and redeemable at the holder's option for a consideration equal to the FMV of the consideration received at the time of their issuance less any consideration other than in shares paid or assumed by the corporation. To this redemption value shall be added the amount of any dividends declared but not yet paid.
Trust 1 will subscribe for XXXXXXXXXX Class A common shares of the capital stock of ULC 1 in consideration for a cheque in the amount of $XXXXXXXXXX.
Trust 2 will subscribe for XXXXXXXXXX Class A common shares of the capital stock of ULC 1 in consideration for a cheque in the amount of $XXXXXXXXXX.
60. Before XXXXXXXXXX, Aco and Bco will be continued/prorogued under the XXXXXXXXXX.
There will be no change in the shareholding of Aco and Bco.
61. On XXXXXXXXXX, at the end of that day, being the day that is 21 years after Trust 1 was established, Trust 1 will be deemed to dispose of all of its property at that time, in accordance with subparagraph 104(4)(b)(ii), for consideration equal to its FMV, and to have reacquired that property at a cost equal to that FMV.
Trust 1 will therefore be deemed to dispose of the following property:
- Rollover Shares 1;
- XXXXXXXXX Class A common shares of the capital stock of ULC 1;
- an advance in the amount of $XXXXXXXXXX receivable from Aco and Note 1 and Note 3, the total FMV (and principal) of which is $XXXXXXXXXX.
Trust 1 will be required to include in income a taxable capital gain resulting from the application of subparagraph 104(4)(b)(ii).
Trust 1 will not allocate any portion of that taxable capital gain and will therefore be required to pay tax on that taxable capital gain before XXXXXXXXXX.
As a result of these deemed dispositions, the tax attributes of the shares of the capital stock of Bco and ULC 1 held by Trust 1 are as follows. The FMV of the Class A shares of the capital stock of Bco is shown for information purposes and has been estimated from the internal financial statements of Bco as at XXXXXXXXXX:
|
Corporations |
Number and class |
$ACB |
$PUC |
$FMV |
|
Bco |
XXXXXX Class A shares |
XXXXXX |
XXXXXX |
XXXXXX |
|
ULC 1 |
XXXXXX Class A common shares |
XXXXXX |
XXXXXX |
XXXXXX |
|
Total |
XXXXXX |
XXXXXX |
XXXXXX |
62. On XXXXXXXXXX, at the end of that day, being the day that is 21 years after the establishment of Trust 2, Trust 2 will be deemed to dispose of all of its property at that time, in accordance with subparagraph 104(4)(b)(ii), for consideration equal to its FMV and to have reacquired that property at a cost equal to that FMV.
Trust 2 will therefore be deemed to have the following property:
- Rollover 2 Shares;
- XXXXXXXXXX Class A common shares of the capital stock of ULC 1;
- an advance in the amount of $XXXXXXXXXX receivable from Aco, as well as Note 2 and Note 4, the total FMV (and principal) of which is $XXXXXXXXXX.
Trust 2 will be required to include in its income a taxable capital gain resulting from the application of subparagraph 104(4)(b)(ii).
Trust 2 will not allocate any portion of that taxable capital gain and will therefore be required to pay tax on that taxable capital gain before XXXXXXXXXX.
As a result of these deemed dispositions, the tax attributes of the shares of the capital stock of Bco and ULC 1 held by Trust 2 are as follows. The FMV of the Class A shares of the capital stock of Bco is shown for information purposes and has been estimated from the internal financial statements of Bco as at XXXXXXXXXX:
|
Corporations |
Number and class |
$ACB |
$PUC |
$FMV |
|
Bco |
XXXXXX Class A shares (Rollover 1 Shares) |
XXXXXX |
XXXXXX |
XXXXXX |
|
ULC 1 |
XXXXXX Class A common shares |
XXXXXX |
XXXXXX |
XXXXXX |
|
Total |
XXXXXX |
XXXXXX |
XXXXXX |
63. Immediately following the time at which the transaction described in paragraph 61 of the Proposed Transactions becomes effective, Trust 1 will transfer to ULC 1 the Rollover 1 Shares. In consideration, ULC 1 will issue to Trust 1:
(a) a note payable on demand (Note 5) with a principal amount and FMV equal to the lesser of:
i. the FMV at the time referred to in paragraph 104(4)(b)(ii) for Trust 1 of the Rollover 1 Shares, less $XXXXXXXXXX; or
ii. the FMV on the date of the transfer for Trust 1 of the Rollover 1 Shares, less $XXXXXXXXXX; and
(b) XXXXXXXXXX Class B Preferred Shares of its capital stock having a FMV of $XXXXXXXXXX, plus the amount, if any, by which the FMV of the Rollover 1 Shares on the date of the transfer exceeds the FMV of such shares at the time referred to in subparagraph 104(4)(b)(ii) for Trust 1.
Trust 1 will accept Note 5, together with the Class B Preferred Share in the capital stock of ULC 1, as full and absolute payment for the transfer of the Rollover Shares.
In addition, and for greater certainty, the total amount of the FMV represented by the Note 5 and the Class B Preferred Share of the capital of ULC 1 issued upon such transfer will not exceed the FMV of the Rollover Shares at the time of such transfer.
Trust 1 and ULC 1 will make the election provided for in subsection 85(1) in the prescribed form and within the time period provided for in subsection 85(6), in respect of the Rollover 1 Shares to be transferred to ULC 1. For greater certainty, the Agreed Amount of Trust 1 and ULC 1 for the Rollover 1 Shares transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) (being, respectively, their FMV at the time of the transfer and the ACB for Trust 1 at the time of the transfer).
In addition, the Agreed Amount for the shares will not exceed their FMV at the time of transfer and will not be less than the amount set out in paragraph 85(1)(b).
The PUC of the Class B Preferred Share of the capital stock of ULC 1 will be equal to $XXXXXXXXXX, being the amount by which the ACB to Trust 1 of the Rollover 1 Shares immediately before the disposition exceeds the principal amount of Note 5 payable by ULC 1 immediately after the disposition.
Since the Agreed Amount will be equal to the ACB of the transferred shares, no capital gain will arise from this transaction.
64. After XXXXXXXXXX, Trust 1 will subscribe for Class B preferred shares of the capital stock of ULC 1 on the basis of one share for each $XXXXXXXXXX of principal amount of Note 5.
Trust 1 will use the Note 5 to pay for this subscription.
65. Immediately following the time at which the transaction described in paragraph 62 of the Proposed Transactions becomes effective, Trust 2 will transfer to ULC 1 the Rollover 2 Shares. In consideration, ULC 1 will issue to Trust 2:
(a) a note payable on demand (Note 6) with a principal amount and FMV equal to the lesser of:
i. the FMV at the time referred to in paragraph 104(4)(b)(ii) for Trust 2 of the Rollover 2 Shares, less $XXXXXXXXXX; or
ii. the FMV on the date of the transfer for Trust 2 of the Rollover 2 Shares, less $XXXXXXXXXX; and
(b) XXXXXXXXXX Class C Preferred Shares of its capital stock having a FMV of $XXXXXXXXXX, plus the amount, if any, by which the FMV of the Rollover 2 Shares on the date of the transfer exceeds the FMV of such shares at the time referred to in subparagraph 104(4)(b)(ii) for Trust 2.
Trust 2 will accept Note 6, together with the Class C Preferred Share of the capital of ULC 1, as full and absolute payment for the transfer of the Rollover 2 Shares
For greater certainty, the total amount of the FMV represented by Note 6 and the Class C Preferred Share of the capital stock of ULC 1 issued upon such transfer will not exceed the FMV of the Rollover 2 Shares at the time of such transfer.
Trust 2 and ULC 1 will make the election provided for in subsection 85(1) in the prescribed form and within the period provided for in subsection 85(6), in respect of the Rollover 2 Shares to be transferred to ULC 1. For greater certainty, the Trust 2 and ULC 1 Agreed Amount for the Rollover 2 Shares transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) (being, respectively, their FMV at the time of the transfer and the ACB, for Trust 2, at the time of the transfer).
In addition, the Agreed Amount for the shares will not exceed their FMV at the time of transfer and will not be less than the amount set out in paragraph 85(1)(b).
The PUC of the Class C Preferred Share of the capital stock of ULC 1 will be equal to $XXXXXXXXXX, being the excess of the ACB to Trust 2 of the Rollover 2 Shares immediately before the disposition over the principal amount of Note 6 payable by ULC 1 immediately after the disposition.
Since the Agreed Amount will be equal to the ACB of the transferred shares, no capital gain will arise from this transaction.
66. After XXXXXXXXXX, Trust 2 will subscribe for Class C preferred shares of the capital stock of ULC 1 on the basis of one share for each $XXXXXXXXXX of principal amount of Note 6.
Trust 2 will use Note 6 to pay for this subscription.
67. Bco will be a connected corporation of ULC 1.
68. On XXXXXXXXXX, or at any other time provided that at least XXXXXXXXXX elapses from the date on which the transactions described in paragraphs 63 and 65 of the Proposed Transactions become effective, Aco, Bco and ULC 1 will amalgamate to form Amalco.
The fiscal period of Aco, Bco and ULC 1 will be deemed to end immediately before the amalgamation on XXXXXXXXXX.
Amalco will choose XXXXXXXXXX as its fiscal period end.
The capital stock of Amalco will be identical to the capital stock of ULC 1.
In connection with the amalgamation, the holders of Class A shares of the capital stock of ULC 1 will receive Class A common shares of the capital stock of Amalco, the holders of Class B and C shares of the capital stock of ULC 1 will receive Class B and C shares of the capital stock of Amalco, respectively, and the holders of Class B and F shares of the capital stock of Aco will receive Class D and E shares of the capital stock of Amalco, respectively.
As a result of this amalgamation, the issued and outstanding shares of the capital stock of Amalco will be held as follows:
|
Shareholders |
Number and class of Amalco shares |
$ACB |
$PUC |
$FMV |
|
Trust 1 |
XXXXXX Class A Common shares |
XXXXXX |
XXXXXX |
XXXXXX |
|
XXXXXX Class B preferred shares |
XXXXXX |
XXXXXX |
XXXXXX |
|
|
Trust 2 |
XXXXXX Class A common shares |
XXXXXX |
XXXXXX |
XXXXXX |
|
XXXXXX Class C Preferred Shares |
XXXXXX |
XXXXXX |
XXXXXX |
|
|
Trust 3 |
XXXXXX Class D Preferred Shares |
XXXXXX |
XXXXXX |
XXXXXX |
|
Father |
XXXXXX Class E Preferred Shares |
XXXXXX |
XXXXXX |
XXXXXX |
|
Total |
XXXXXX |
XXXXXX |
XXXXXX |
As a result of the amalgamation, Amalco will assume the debts, liabilities and demand notes of the predecessor corporations. Thus, Amalco will be indebted to Trust 1 and Trust 2 in the following amounts:
|
Trust 1 |
Trust 2 |
||
|
Due to Trust 1 |
$XXXXXXXXXX |
Due to Trust 2 |
$XXXXXXXXXX |
|
Note 1 |
$XXXXXXXXXX |
Note 2 |
$XXXXXXXXXX |
|
Note 3 |
$XXXXXXXXXX |
Note 4 |
$XXXXXXXXXX |
|
TOTAL: |
$XXXXXXXXXX |
TOTAL: |
$XXXXXXXXXX |
69. No redemption of common or preferred shares in the capital stock of Amalco is anticipated in the next few years.
Rather, the intention of the of Trust 1 Trustees and the Trust 2 Trustees is to retain the assets in Amalco in order to grow the investment portfolio. However, a portion of the demand notes will be repaid, but only to the extent necessary to enable Trust 1 and Trust 2 to pay the taxes arising from this series of transactions.
The notes payable on demand were obtained through the payment of Taxable Dividends and Capital Dividends, and not through the transactions described in paragraphs 63 to 66 of the Proposed Transactions.
When the decision is made, in accordance with the trust deeds and other legal documents, to distribute amounts of Amalco money to Trust 1 and Trust 2, these corporations will first repay the demand notes to the trusts before any reduction in the PUC of the shares or redemption of shares.
PURPOSE OF THE PROPOSED TRANSACTIONS
70. The purpose of the Completed Transactions and the Proposed Transactions is to subject the property held by Trust 1 and Trust 2 to the deemed disposition of property on the 21st anniversary of such trusts pursuant to subparagraph 104(4)(b)(ii) while benefiting from the existing CDA, ERDTOH and NERDTOH tax balances of Aco and Bco, and to eventually deliver property held by Trust 1 and Trust 2 to the beneficiaries in accordance with the directions set out in the related trust deeds.
ADDITIONAL INFORMATION
XXXXXXXXXX
RULINGS ISSUED
Provided that the Statement of Facts, Completed Transactions, Proposed Transactions and Additional Information constitutes full disclosure of all relevant facts, and that the Proposed Transactions are carried out as described above, our decisions are as follows
A. To the extent that:
(a) the principal amount of Note 5 payable by ULC 1 will not exceed the ACB to Trust 1 of the Rollover Shares; and
(b) the PUC of the Class B Preferred Share of the capital stock of ULC 1 issued to Trust 1 will not exceed the maximum amount that may be added to the PUC of that share pursuant to section 84.1(1)(a),
the provisions of section 84.1 will not apply to deem a dividend to be paid by ULC 1 to Trust 1 or to reduce the PUC of the Class B Preferred Share of the capital stock of ULC 1 described in paragraph 63 of the Proposed Transactions.
B. To the extent that:
(a) the principal amount of Note 6 payable by ULC 1 will not exceed the ACB to Trust 2 of the Rollover Shares 2; and
(b) the PUC of the Class C Preferred Share of the capital stock of ULC 1 issued to Trust 2 will not exceed the maximum amount that may be added to the PUC of that share pursuant to section 84.1(1)(a),
the provisions of section 84.1 will not apply to deem a dividend to be paid by ULC 1 to Trust 2 and received by Trust 2 or to reduce the PUC of the Class C preferred share of the capital stock of ULC 1 described in paragraph 65 of the Proposed Transactions.
The provisions of subsection 84(2) will not apply as a result of and by reason of the Proposed Transactions described above to deem Bco to have paid to Trust 2 and Trust 2, and Trust 2 to have received, a dividend on the Rollover Shares 1 and Rollover Shares 2 as the case may be.
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 rulings above.
These rulings are subject to the limitations and general conditions set out in Information Circular 70-6R10 dated September 29, 2020, issued by the CRA and are binding on the CRA provided that the Proposed Transactions described in paragraphs 56 to 66 are completed by XXXXXXXXXX. As for the subsequent transaction provided for in paragraph 68 of the Proposed Transactions, it shall not be completed before the date indicated herein, as described above. These decisions are based on the current Act and do not take into account the proposed amendments to the Act.
OTHER COMMENTS
In no event should the decisions rendered be construed as an 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 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 amount of a share;
(c) the amount of the dividend in paragraph 56 of the Proposed Transactions does not exceed the amount of "safe income" attributable to the Class A shares of the capital stock of Aco; and
(d) the amount allocated to the CDA, GRIP, ERDTOH and NERDTOH, as the case may be, of a corporation truly represents the CDA, GRIP, the ERDTOH and NERDTOH, as the case may be, of such corporation.
The statement of our fees for the time spent on your file 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