Principal Issues: (1) Whether continuance of a corporation incorporated under the Canada Business Corporations Act to the Co-operative Corporations Act of Ontario result in a disposition by the corporation of its assets? (2) Is an amount deemed to be paid and received under subsection 84(1) by the issuance by the cooperative of membership shares upon the conversion of shares of the capital stock of the corporation to effect the continuation? (3) Is a dividend deemed to be paid and received under subsection 84(3)? (4) Does subsection 86(1) apply to the conversion of shares for membership shares of the cooperative?
Position: (1) No. (2) No. (3) The amount of the dividend is based on the excess of the amount determined per subsection 84(5) over PUC. (4) Yes.
Reasons: Law and facts, past positions.
XXXXXXXXXX 2021-091682
XXXXXXXXXX
Dear Sir,
Subject: Request for advance income tax rulings
XXXXXXXXXX
This is in response to your letter of XXXXXXXXXX requesting an advance income tax ruling on behalf of XXXXXXXXXX. We have taken into account the revisions to your request that you sent to us on XXXXXXXXXX, as well as additional information that you sent to us by email or in telephone conversations (XXXXXXXXXX).
To the best of your knowledge and that of the taxpayers involved in the transactions, none of the transactions under consideration or 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:
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 has been the subject of an advance ruling request that the Tax Rulings Directorate has previously reviewed.
DEFINITIONS
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") and all references to regulations are to the Income Tax Regulations, C.R.C., c. 945, as amended (the "Regulations").
ii. all words and phrases referred to in this application and defined in the Act (or the Regulations) have the meanings assigned to them by those definitions.
iii. all monetary amounts are in Canadian dollars.
iv. the singular shall include the plural, and vice versa, if the context so requires.
In this letter, the parties involved in the transactions under consideration (described below) will be referred to as follows:
"Co-op" means XXXXXXXXXX;
"Opco" means XXXXXXXXXX;
The following abbreviations, expressions and terms have the meanings described below:
"ACB" means "adjusted cost base" as defined in section 54;
"Articles of continuance" means the articles referred to in sections 158 and 158.2 of the XXXXXXXXXX.
"Board of Directors" means the entire body of directors of Opco;
"Capital Property" has the same meaning as in section 54;
"CCPC" means a "Canadian-controlled private corporation" as defined in subsection 125(7);
"Common Share" means a common share described in paragraph 3;
"Corporations Canada" means the Office of the Director of Corporations Canada;
"CRA" means the Canada Revenue Agency;
"Directors" means the persons who are currently designated as directors of Opco;
"Disposition" has the same meaning as in subsection 248(1);
"Fair market value" or "FMV" means the highest price, in dollars, that two knowledgeable and prudent arm's length parties would agree on in the open market, neither party being under any compulsion to act;
"Member" has the meaning set out in the definition in XXXXXXXXXX and means those persons who, after the completion of the relevant transactions, hold a share in the share capital of Co-op;
"Minister XXXXXXXXXX" has the meaning set out in subsection 1(1) of the XXXXXXXXXX;
"Paragraph" means a numbered paragraph hereof;
"Proceeds of disposition" has the same meaning as in section 54;
"PUC" means "paid-up capital" as defined in subsection 89(1);
"Considered Transactions" means the transactions described in paragraphs 12 to 21;
"Share" means one of the shares in the share capital of Co-op described in paragraphs 15 and 17;
"Shareholder" means a person who has subscribed for and holds a Common Share;
"TCC" means a "taxable Canadian corporation" as defined in subsection 89(1);
XXXXXXXXXX;
FACTS
1. Opco, incorporated on XXXXXXXXXX under the XXXXXXXXXX, was a CCPC and a TCC.
2. Opco was a corporation that operated across Canada XXXXXXXXXX. Its clients included both shareholders and non-shareholders.
3. Opco's authorized share capital consisted of common and preferred shares. Only common shares (i.e., no par value, voting and participating shares) were issued and outstanding.
4. Opco had XXXXXXXXXX Shareholders. Each Shareholder owned one (1) Common Share. The tax attributes of the Common Shares for each Shareholder are set out in Appendix A. There were no shareholders' agreements between the Shareholders.
5. All Shareholders of Opco were resident in Canada and were not related to each other.
6. The Common Shares of Opco were Capital Property to each Shareholder.
7. Opco's fiscal period ended on XXXXXXXXXX of each year.
8. Due to changes in the economic and business climate in which Opco operated and in light of its future objectives, the Board of Directors determined that it was in the best interests of Opco to continue as a co-operative corporation under the XXXXXXXXXX. Indeed, according to Opco's Articles of Association and Bylaws, XXXXXXXXXX. Consequently, XXXXXXXXXX. Furthermore, given the current trend reflected in the fact that there are fewer and fewer XXXXXXXXXX, Opco foresaw that maintaining the current status would only increase inequity between members and represent an increased risk of disinvestment for the corporation.
9. The Board of Directors called a special meeting of the shareholders of Opco to recommend and present a shareholder resolution that Opco be continued from a corporation under XXXXXXXXXX to a cooperative under XXXXXXXXXX effective XXXXXXXXXX.
10. The special meeting was held on XXXXXXXXXX, at which time the Shareholders approved the special resolution.
11. On XXXXXXXXXX, Opco redeemed two Common Shares, each of which was held by 2 separate Shareholders, for an amount equal to their FMV plus a premium. After the redemption of the Common Shares, Opco had XXXXXXXXXX Shareholders.
RELEVANT TRANSACTIONS
12. On XXXXXXXXXX, Opco reduced the PUC of the Common Shares by $XXXXXXXXXX, so that the PUC of each Common Share was $XXXXXXXXXX. The amount of the PUC reduction was paid in cash to Shareholders at the same time. No consideration in excess of the PUC reduction was paid to Shareholders. An amount equal to this PUC reduction was deducted in computing the ACB to each Shareholder of the Common Shares pursuant to subparagraph 53(2)(a)(ii).
13. On XXXXXXXXXX, Opco declared and paid a cash dividend on the Common Shares in the amount of $XXXXXXXXXX. The FMV of each Common Share was $XXXXXXXXXX immediately after the dividend was paid.
14. On XXXXXXXXXX, pursuant to XXXXXXXXXX and XXXXXXXXXX, Opco filed articles of continuance with Corporations Canada and articles of continuance with the Minister XXXXXXXXXX to continue Opco as a cooperative corporation under the XXXXXXXXXX, namely Co-op, and to continue Opco as if it had been incorporated under that Act.
15. Co-op's share capital structure provides for the possibility of issuing up to XXXXXXXXXX shares of its share capital stock, each with a par value of $XXXXXXXXXX. Co-op's authorized share capital has only one class of shares that qualify as "common share" within the meaning of subsections 26(1) and (2) XXXXXXXXXX.
16. On XXXXXXXXXX, each Common Share held by each Shareholder was converted into a Share of the share capital of Co-op in connection with the continuance of Opco as a cooperative, as provided for in its articles of continuance. On this basis, Co-op added to the class of Shares in its share capital an amount of $XXXXXXXXXX for each Share issued in consideration for the cancellation of the Common Shares, each of which had a PUC of $XXXXXXXXXX.
17. Opco's articles of continuance that were filed also include the following information:
a. its main activity is to provide services to its members in connection with the XXXXXXXXXX group;
b. no shares in its share capital may be allocated, issued or transferred without the approval of the Board of Directors;
c. if payments are made to members, they must be made in proportion to the patronage of each member;
d. each share of the share capital confers one voting right on its holder.
18. The Minister XXXXXXXXXX issued a certificate of continuance with an effective date of XXXXXXXXXX. XXXXXXXXXX issued a certificate of discontinuance with an effective date of XXXXXXXXXX.
19. On XXXXXXXXXX, as a result of the continuance of Opco as a cooperative under the XXXXXXXXXX, XXXXXXXXXX new Members subscribed for a share of the share capital of Co-op for consideration of $XXXXXXXXXX each.
20. The XXXXXXXXXX new Members are corporations that carry on business activities in XXXXXXXXXX.
21. None of the XXXXXXXXXX Members of Co-op has more than one vote in the conduct of the affairs of the co-operative corporation and all Members are individuals and corporations which are defined as such in the Articles of the co-operative corporation. No agreements between members have been concluded between them.
PURPOSES OF THE RELEVANT TRANSACTIONS
22. The purpose of the Relevant Transactions is to enable Opco to change the way it operates and to facilitate the management of its business to meet the needs of its shareholders in a new business environment. Although Opco has operated and carried on business in the past on a corporate basis, the cooperative structure allows Opco more flexibility to better manage a larger number of members and to standardize the member capital for each.
ADDITIONAL FACTS
23. The main contact details for the taxpayers covered by the advance rulings are:
XXXXXXXXXX
RULINGS
Provided that the statement of Facts, the Relevant Transactions and the Additional Information constitute full disclosure of all relevant facts and relevant transactions and that the Relevant Transactions were conducted in the manner described above, our decisions are as follows:
A. The continuance of Opco from a corporation under the XXXXXXXXXX to a cooperative corporation under the XXXXXXXXXX, as described in paragraph 14 above, will not, in and of itself, result in a disposition or deemed disposition by Opco of its assets.
B. Subsection 84(1) will not apply to the increase in share capital resulting from the transaction described in paragraph 16 pursuant to paragraph 84(1)(c).
C. As a result of the transaction described in paragraph 16, no dividend will be deemed to have been paid by Opco or deemed to have been received by each of the Shareholders pursuant to paragraph 84(3) to the extent that the amount paid, having regard to paragraph 84(5), by Opco is the PUC of the Common Shares.
D. The rules in section 86(1) will apply to the disposition by a Shareholder of a Common Share in consideration for a Share which is described in paragraph 16, provided that:
a. the Shareholder holds the Common Share as capital property;
b. the Shareholder and Opco will not make an election pursuant to subsection 85(1) in respect of the exchange
so that
c. paragraph 86(1)(b) will deem the cost to the Shareholder of the Share received to be the ACB to the Shareholder of the Common Share owned immediately before the disposition;
d. pursuant to paragraph 86(1)(c), the Shareholder will be deemed to have disposed of the Shareholder’s Common Share for proceeds of disposition equal to the cost to the Shareholder of the Share received as determined by paragraph (c) above.
e. the PUC of the Share will be equal to the PUC of the Common Share exchanged and subsection 86(2.1) will not apply to adjust the PUC of that Share.
For greater certainty, the provisions of section 86(2) will not apply.
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 Relevant Transactions described in paragraphs 12 to 21 are completed by XXXXXXXXXX. These rulings are based on the current Act and do not take into account any 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 Relevant Transactions set out herein;
(b) the amount attributed to a property in the Statement of Facts and Relevant Transactions truly represents the FMV or ACB of a property, or the PUC amount of a share.
A statement of our 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