Revenue Canada Taxation
Head Office
XXXX
C. Savage (613) 957-2111
Attention: XXXX
March 19, 1986
Dear Sirs:
Re: Subsection 247(1) of the Income Tax Act (the "Act")
This is in response to your request of January 28, 1986 for our views with respect to the application of subsection 247(1) of the Act in a hypothetical situation which you described as follows:
1. A Canadian corporation has assets which consist of shares of a public company. This corporation also provides management services to two other corporations which are at arm's length with that corporation and all of its shareholders.
2. As the assets are not necessary for the corporation's management business and as it is deemed advisable to place those assets under the control of the respective shareholders, a reorganization described in paragraph 55(3)(b) of the Act is proposed.
3. The Canadian corporation has four individual shareholders who are all resident in Canada and three corporate shareholders each of whom are resident in Canada and private corporations.
4. The four individual shareholders will each roll over their shares to their holding corporations electing under Subsection 85(1) such that no capital gain will result on the disposition.
5. The Canadian corporation will then sell the assets of the corporation to each of the shareholders in accordance with their respective interests in the corporation. The Canadian corporation will receive preferred shares from each of the shareholding corporations having a redemption amount equal to the fair market value of the assets transferred. The Canadian corporation will make the transfer on the basis of Section 85(1), electing to sell the assets at cost amount.
6. The preferred shares issued by each of the shareholding corporations will, where applicable provincial law permits, have a nominal stated capital. Where applicable provincial law does not permit the issuance of shares with a nominal stated capital, the stated capital of those shares will be reduced by a special resolution of the shareholders of those corporations after issuance.
7. Subsequently, the preferred shares will be redeemed for cash or equivalent.
8. Thereafter, the Canadian corporation will pay a dividend to its shareholder in an amount equal to the amount received by it on the redemption of the various preferred shares.
9. The Canadian corporation intends to continue with its management service business but it is anticipated that several of the shareholders will not be interested in continuing to own shares in this business and will arrange to sell their shares to at least two of the remaining shareholders for fair market value. The parties have agreed that this is a nominal amount. The parties will be acting at arm's length throughout the proposed series of transactions.
10. The transactions are not being entered into with any regard to the new $500,000.00 capital gains exemption. No capital gains will be generated because of the transaction and the parties will not be in a better position to realize capital gains after the transaction than they were before.
In our opinion, while it is clear that one of the purposes of the transaction which you described is to effect a significant reduction of the assets of the corporation, there does not appear to be an avoidance of any tax that might otherwise have become payable in consequence of a distribution of property of the corporation. The dividends paid by the corporation, which result in the reduction of its assets, would be subject to the provision of subsection 55(2) of the Act when received by the shareholders. The fact that the provisions of paragraphs 55(3)(a) or 55(3)(b) of the Act may render subsection 55(2) of the Act inapplicable would not cause us to consider that tax has been avoided. The provisions of subsection 55(1) of the Act may also be applicable on the sale of shares of the "stripped" corporation.
Provided that the transactions described comprise the entire series, the provisions of subsection 247(1) of the Act would not appear to be applicable.
We hope this will be of assistance.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch