Principal Issues: 1) Whether section 84.1 will apply to reduce the PUC on the shares of the new corporation received as consideration for the disposition of the shares. 2) Whether subsection 84(2) will apply to the proposed transactions. 3) Whether subsection 245(2) will apply to the proposed transactions.
Position: 1) No. Favorable ruling given. 2) No. Favorable ruling given. 3) No. Favorable ruling given.
Reasons: In accordance with the provisions of the Act and our previous positions.
XXXXXXXXXX 2022-092560
XXXXXXXXXX 2022
Re: Request for Advance Income Tax Rulings
Income Tax Rulings - XXXXXXXXXX Estate
Dear Madam,
This is in response to your letter dated XXXXXXXXXX requesting advance income tax rulings on behalf of the XXXXXXXXXX Estate. 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).
To the best of your knowledge and that of the parties involved in the Transactions, none of the Proposed Transactions or any of the matters covered by this application are the same as or substantially comparable to any transaction or matter that:
i. was addressed in a previously filed tax return of the taxpayer, or a related person, that is
A. is under review by the Canada Revenue Agency with respect to that return;
B. is the subject of an objection by the taxpayer or the related person;
C. is the subject of a legal proceeding, either in progress or completed, involving the individual or the related person; or
ii. has been the subject of an advance ruling request previously reviewed by the Income Tax Rulings Directorate.
DEFINITIONS AND ABBREVIATIONS
Unless otherwise indicated:
i. all statutory references are to provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the "Act")
ii. all words and phrases used in this application and defined in the Act shall have the meaning given to them in the Act;
iii. all monetary amounts are in Canadian dollars; and
iv. words importing the singular number shall include the plural and vice versa, where the context so requires.
In this letter with the exception of paragraph 26, the names and corporate names of the taxpayers are replaced with the following names and corporate names:
"Amalco" means the corporation resulting from the amalgamation of Newco and Holdco, as described in paragraph 23 of the Proposed Transactions;
"Estate" means the estate of X governed by the terms of the Will;
"Executor 1" means Ms. XXXXXXXXXX;
"Executor 2" means Ms. XXXXXXXXXX;
"Executor 3" means Mr. XXXXXXXXXX;
"Heirs" means Ms. XXXXXXXXXX, the spouse of X, Mr. XXXXXXXXXX, the son of X, Ms. XXXXXXXXXX, a daughter of X and Ms. XXXXXXXXXX, a daughter of X;
"Holdco" means XXXXXXXXXX;
"Legal Representatives" means Executor 1, Executor 2 and Executor 3;
"Newco" means the new corporation to be formed in connection with the implementation of the Proposed Transactions, as described in paragraph 17 of the Proposed Transactions;
"X" means Mr. XXXXXXXXXX.
The following abbreviations, terms and expressions have the meanings defined below.
"ACB" means "adjusted cost base" as defined in section 54;
"Agreed Amount" means the amount agreed on referred to in subsection 85(1);
"Business" means the investment management business carried on by Holdco;
"CCPC" means "Canadian-controlled private corporation" as defined in subsection 125(7);
"CDA" means "capital dividend account" as defined in subsection 89(1);
"connected corporation" has the meaning set out in 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 "fair market value", which 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;
"GRE" means "graduated taxable estate" as defined in subsection 248(1);
"GRIP" means "general rate income pool" as defined in subsection 89(1);
"NERDTOH" means "non-eligible refundable tax on hand” as defined in subsection 129(4);
"Non-arm's length" has the meaning set out in subsection 251(1);
"Preliminary Transactions" means the transactions described in paragraphs 12 to 16;
"Proposed Transactions" means the transactions described in paragraphs 17 through 24;
"PUC" means "paid-up capital" as defined in subsection 89(1);
"QSBCS" means "qualified small business corporation share" as defined in subsection 110.6(1);
"Resident of Canada" means a resident of Canada for purposes of the Act;
“RV” means redemption value;
"TCC” means "taxable Canadian corporation" as defined in subsection 89(1);
"Will" means the last will and testament of X, executed on XXXXXXXXXX;
XXXXXXXXXX;
STATEMENT OF RELEVANT FACTS
Facts about Holdco
1. Holdco is a CCPC and TCC incorporated on XXXXXXXXXX under the XXXXXXXXXX and is now governed by the XXXXXXXXXX. Holdco's fiscal period end is XXXXXXXXXX.
2. The authorized share capital of Holdco consists of an unlimited number of Class A, B, C and D shares.
Immediately before X's death, the issued and outstanding capital stock of Holdco consisted of XXXXXXXXXX Class A shares, and XXXXXXXXXX Class B shares. The principal rights, privileges, restrictions and conditions attached to those shares are as follows:
- Class A shares: no par value, voting and participating;
- Class B shares: par value of $XXXXXXXXXX, voting and non-participating, redeemable for the value of the consideration received upon issuance;
3. Holdco operated the Business immediately before X's death. Holdco's assets at that time consisted primarily of cash and equity investments. Holdco's investments consisted of investments in public company shares, bonds of public companies and mutual funds and income trusts. Holdco's liabilities consisted primarily of debt owing the shareholder.
4. Holdco's GRIP amount was $XXXXXXXXXX as of XXXXXXXXXX.
5. The amounts in Holdco's ERDTOH and NERDTOH accounts were $XXXXXXXXXX and $XXXXXXXXXX, respectively, as of XXXXXXXXXX.
6. Before his death, X had effective (de jure) control of Holdco for the purposes of the Act. Since his death, the Estate has had effective (de jure) control of Holdco for the purposes of the Act.
Facts about the death of X
7. X died on XXXXXXXXXX. Immediately before his death, X was a resident of Canada.
8. At the time of his death, X held all of the issued and outstanding shares of the capital stock of Holdco, which constituted Capital Property to X.
The following table shows the tax attributes of the shares of Holdco stock held by X immediately prior to X’s death:
Number Class ACB($) PUC($) FMV($)
XXXXX XXXXX XXXXX XXXXX XXXXX
9. The provisions of X's will provided that the shares of the capital stock of Holdco were to be bequeathed in equal shares among the Heirs.
10. As a consequence of X's death and pursuant to paragraph 70(5)(a), X was deemed to have disposed, immediately before X’s death, of all of the shares of the capital stock of Holdco and to have received as proceeds of disposition an amount equal to their FMV at that time.
Such deemed disposition of the shares of the capital stock of Holdco resulted in a capital gain to X of $XXXXXXXXXX.
At the time of X's death, the Class A and B shares of the capital stock of Holdco were not QSBCSs. Accordingly, X (and his assigns) have not claimed and will not claim a capital gains deduction pursuant to subsection 110.6(2.1) in computing X’s taxable income respecting the taxable capital gain resulting from the deemed disposition of the shares of the capital stock of Holdco described above.
Pursuant to paragraph 70(5)(b), the Estate was deemed to have acquired all of the shares of the capital stock of Holdco at a cost equal to their respective FMVs immediately before the death of X. Those shares acquired as a result of X's death constitute Capital Property to the Estate. The tax attributes of the shares held by the Estate are as follows:
Number Class ACB($) PUC($) FMV($)
XXXXX XXXXX XXXXX XXXXX XXXXX
11. The Estate is a resident of Canada and its first taxation year ended on XXXXXXXXXX.
PRELIMINARY TRANSACTIONS
12. On XXXXXXXXXX, the Estate acquired XXXXXXXXXX Class D shares of the capital stock of Holdco in exchange for XXXXXXXXXX Class A shares of the capital stock of Holdco. Subsection 51(1) applied to this exchange.
13. On XXXXXXXXXX, the Estate subscribed for XXXXXXXXXX new Class A shares of the capital stock of Holdco for $XXXXXXXXXX.
14. On XXXXXXXXXX, Holdco redeemed XXXXXXXXXX Class D shares of its capital stock held by the Estate for an amount equal to their FMV and RV, namely $XXXXXXXXXX. In consideration therefor, Holdco issued to the Estate a demand note in the principal amount of $XXXXXXXXXX (the "Note"). The Estate accepted the Note as full and absolute payment for the redemption of the Class D shares of the capital stock of Holdco.
Holdco was deemed to have paid and the Estate was deemed to have received a dividend pursuant to subsection 84(3). The total amount of such dividend was the amount by which the amount paid by Holdco on the redemption exceeded the PUC of the shares so redeemed. This dividend allowed Holdco to recover its ERDTOH and NERDTOH account balances.
In addition, as a result of the redemption described above, the Estate sustained a capital loss equal to the difference between the proceeds of disposition, as defined in section 54, and the ACB to the Estate of the shares so redeemed. In this regard, and considering the application of subsection 112(3.2), the Legal Representatives elected, pursuant to subsection 164(6), to treat all of the Estate's capital loss resulting from the above-described disposition as a capital loss of X resulting from X’s disposition of such shares in the terminal taxation year.
In addition, by virtue of subsection 40(3.61), subsection 40(3.6) did not apply to the Estate to deem the above capital loss to be nil.
15. On XXXXXXXXXX, Holdco redeemed XXXXXXXXXX Class B shares of its capital stock held by the Estate for an amount paid in cash equal to their FMV and RV, namely $XXXXXXXXXX.
16. In order to have sufficient liquidity to effect the redemptions described above, Holdco disposed of certain of its investments.
PROPOSED TRANSACTIONS
Incorporation of Newco and transfer of shares
17. The Estate will proceed to incorporate Newco pursuant to the XXXXXXXXXX. Newco will, at all relevant times and for all purposes of the Act, be a CCPC and a TCC. The fiscal period end of Newco will be XXXXXXXXXX of each year.
18. The authorized capital stock of Newco will consist of an unlimited number of Class A, B, C and E shares without par value. The principal rights, privileges, restrictions and conditions attached to such shares will be as follows:
- Class A shares: voting and participating;
- Class B shares: non-voting and participating;
- Class C shares: voting and non-participating; and
- Class E shares: non-voting, non-participating, entitled to a discretionary, monthly, non-cumulative dividend at a rate varying between XXXXXXXXXX% to XXXXXXXXXX% of the RV, having priority over the other classes of shares with respect to the rights to the payment of the RV in the event of a winding-up or dissolution, redeemable at the option of the holder or of the Corporation, having a redemption price equal to the RV.
19. The Estate will transfer to Newco its XXXXXXXXXX Class D shares of the capital stock of Holdco. In consideration therefor, Newco will issue to the Estate XXXXXXXXXX Class A shares of its capital stock having a FMV equal to the FMV of the Class D shares of the capital stock of Holdco so transferred on the date of transfer.
The Estate will accept the XXXXXXXXXX Class A shares of the capital stock of Newco as full and absolute payment for the transfer of the Class D shares of the capital stock of Holdco.
In addition, and for greater certainty, the total amount of the FMV represented by the XXXXXXXXXX Class A shares of the capital stock of Newco issued upon such transfer will not exceed the FMV of the Class D shares of the capital stock of Holdco so transferred.
The Estate and Newco will jointly make the election provided for in subsection 85(1) in the prescribed form and within the time provided for in subsection 85(6) in respect of the Class D shares of the capital stock of Holdco transferred to Newco. The Agreed Amount of the Estate and Newco for the Holdco Shares so 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 transfer and the ACB to the Estate at the time of transfer).
In addition, the Agreed Amount for the shares will not exceed their FMV at the time of transfer.
The PUC of the XXXXXXXXXX Class A shares of the capital stock of Newco will be equal to the ACB to the Estate of the Class D shares of the capital stock of Holdco so transferred.
As a result of this transfer, Holdco will be "connected” with Newco by virtue of subsection 186(4).
20. Holdco will remain a separate legal entity (i.e., Holdco will not be wound up into or amalgamated with Newco or any other corporation) for a period of XXXXXXXXXX months following the stock transfer referred to in the preceding paragraph. In addition, during this same period, Holdco will continue to carry on the Business. Furthermore, the Estate and the Heirs of X do not intend for Holdco cease to carry on the Business after this XXXXXXXXXX-month period.
Reduction of the PUC of the Class A shares of the capital stock of Newco
21. After the expiration of the XXXXXXXXXX-month period described in the preceding paragraph, Newco will proceed to reduce the PUC of the Class A shares of its capital stock in the amount of $XXXXXXXXXX or such other amount as is sufficient to reduce the PUC of the Class A shares to an amount of $XXXXXXXXXX. The amount of the reduction of the PUC of the Class A Shares of the capital stock of Newco will be paid through the issuance of eight (8) promissory notes payable to the order of the Estate as follows:
- A first note in the amount of $XXXXXXXXXX (or such other lesser amount representing XXXXXXXXXX of the amount of the PUC reduction) which is not repayable prior to the next day ("Note 1");
- A second note in the amount of $XXXXXXXXXX (or such other lesser amount representing XXXXXXXXXX of the amount of the PUC reduction) which is not repayable prior to the 2nd quarter following its issuance ("Note 2");
- A third note in the amount of $XXXXXXXXXX (or such other lesser amount representing XXXXXXXXXX of the amount of the PUC reduction) which is not repayable prior to the 3rd quarter following its issuance ("Note 3");
- A fourth note in the amount of $XXXXXXXXXX (or such other lesser amount representing XXXXXXXXXX of the amount of the PUC reduction) which is not repayable prior to the 4th quarter following its issuance ("Note 4");
- A fifth note in the amount of $XXXXXXXXXX (or such other lesser amount representing XXXXXXXXXX of the amount of the PUC reduction) which is not repayable prior to the 5th quarter following its issuance ("Note 5");
- A sixth note in the amount of $XXXXXXXXXX (or such other lesser amount representing XXXXXXXXXX of the amount of the PUC reduction) which is not repayable prior to the 6th quarter following its issuance ("Note 6");
- A seventh note in the amount of $XXXXXXXXXX (or such other lesser amount representing XXXXXXXXXX of the amount of the PUC reduction) which is not repayable prior to the 7th quarter following its issuance ("Note 7");
- An eighth note in the amount of $XXXXXXXXXX (or such other lesser amount representing XXXXXXXXXX of the amount of the PUC reduction) which is not repayable prior to the 8th quarter following its issuance ("Note 8");
22. Upon completion of the transaction described above, the Estate will then still hold XXXXXXXXXX Class A shares of the capital stock of Newco which will have an ACB, to the Estate, of $XXXXXXXXXX and a PUC of XXXXXXXXXX.
Amalgamation of Newco and Holdco
23. After a period of at least XXXXXXXXXX years following the transaction described in paragraph 19, Holdco will be amalgamated with Newco pursuant to subsection 87(1) to form Amalco. Amalco will continue to carry on the Business and its investment policy will remain the same.
24. At the appropriate time, the Estate wills distribute the shares held of the capital stock of Amalco, together with any outstanding Notes 1 through 8 or funds resulting from the redemption of such Notes, equally among the Heirs.
PURPOSE OF PROPOSED TRANSACTIONS
25. The purpose of the Proposed Transactions described above is to gradually deliver to the beneficiaries of X's estate property having a FMV equal to the ACB to the estate resulting from the application of subsection 70(5) to the shares of the capital stock of Holdco that were acquired as a consequence of X's death.
ADDITIONAL INFORMATION
26. Key contact information for the taxpayers to whom the advance rulings relate are:
XXXXXXXXXX
RULING
Provided that the Statement of Relevant Facts, the Preliminary Transactions, the Proposed Transactions and the Additional Information constitutes full disclosure of all relevant facts, Preliminary and Proposed Transactions and that such Proposed Transactions are implemented as described aboe, our determinations are as follows:
A. To the extent that the PUC of the Class A shares of the capital stock of Newco does not exceed the maximum amount that may be added to the PUC of such shares pursuant to paragraph 84.1(1)(a), the provisions of section 84.1 will not apply to reduce the PUC of the Class A shares in the capital stock of Newco upon the disposition of such shares described in paragraph 19 above.
B. The provisions of subsection 84(2) will not apply as a result of and by reason of the Proposed Transactions described above to deem Holdco to pay to, and the beneficiaries of the Estate to receive, a dividend on the shares of the capital stock of Holdco.
These rulings are subject to the limitations and general conditions set out in Information Circular 70-6R12 dated April 1, 2022, issued by the CRA and are binding on the CRA provided that the Proposed Transactions described in paragraphs 17 to 20 are completed by XXXXXXXXXXX. Subsequent Proposed Transactions described in paragraphs 21 to 24 must be completed within the time frames set out herein, as described above. These determinations are based on the current Act and do not take into account the proposed amendments thereto.
OTHER COMMENTS
In no event shall 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 forth herein;
(b) the Estate qualifies as a GRE;
(c) the amount allocated to a property in the Statement of Relevant Facts and Proposed Transactions truly represents the FMV or ACB of a property, or the PUC amount of a share; and
(d) the amount allocated to a corporation's CDA, GRIP, ERDTOH or NERDTOH truly represents the CDA, GRIP, ERDTOH or NERDTOH 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