Principal Issues: See below.
Position: Favourable rulings provided.
Reasons: See below.
XXXXXXXXXX 2021-090461
XXXXXXXXXX
Dear Madam, Sir,
Re: Request for Advance Income Tax Rulings
XXXXXXXXXX
This is in response to your letter dated XXXXXXXXXX and updated on XXXXXXXXXX, in which you requested advance income tax rulings on behalf of the XXXXXXXXXX. We have also taken into account the information you have sent to us by email, as well as additional information submitted during telephone conversations (XXXXXXXXXX).
To the best of your knowledge and that of the taxpayers involved in the transactions, none of the proposed transactions or matters covered by this request 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
ii. has been the subject of an advance ruling request previously considered by the Income Tax Rulings Directorate, other than the advance ruling request related to the 2006 Ruling, described in paragraph 16 hereof.
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");
ii. all words and phrases used in this request and defined in the Act have the meaning given to them in the Act;
iii. all monetary amounts are in Canadian dollars;
iv. words importing the singular number include the plural and vice versa, where the context so requires.
In this letter, the parties involved in the proposed transactions (described below) are identified as follows:
Individuals:
"CC" means the children of Mr. C and Ms.CC, i.e. CC1, CC2, CC3 and CC4;
"CC1" means XXXXXXXXXX;
"CC2" means XXXXXXXXXX;
"CC3" means XXXXXXXXXX;
"CC4" means XXXXXXXXXX;
"Mr. C. Family" means Mr. C., Ms.CC. and their descendants;
"Mr. C." means XXXXXXXXXX;
"Mr. X" means XXXXXXXXXX;
"Ms. CC" means XXXXXXXXXX, the spouse of Mr. C;
"Ms. X" means XXXXXXXXXX, the spouse of Mr. X;
"X Family" means Mr. X, Ms.X and their descendants;
Trusts:
"NTebC4" means a new trust described in paragraph 29 of this document;
"T2MC" means XXXXXXXXXX, which is described in paragraph 19 of this document;
"TC1" means XXXXXXXXXX, which is described in paragraph 15 of this document;
"TebC4" means the trust for the exclusive benefit of CC4 described in paragraph 17 of this letter;
"TebMC" means XXXXXXXXXX, which is described in paragraph 18 of this document;
"TPE" means XXXXXXXXXX, which was wound up as part of a plan of reorganization for Family X described in the 2019 Decision;
"XXXXXXXXXX" means XXXXXXXXXX, an inter vivos trust created by XXXXXXXXXX under the laws of the Province of XXXXXXXXXX, which is described in paragraph 16 of this letter;
Corporations:
"Amalco" means XXXXXXXXXX, the company resulting from the amalgamation of XXXXXXXXXX pursuant to paragraph XXXXXXXXXX of the XXXXXXXXXX. Amalco is described in paragraph 14 of this letter.
"Fco" means XXXXXXXXXX, which is described in paragraphs 3 through 7 of this letter;
"F2co" means XXXXXXXXXX, which is described in paragraphs 8 through 12 of this letter; and
"Holdco" means XXXXXXXXXX, which is described in paragraph 13 of this letter.
The following abbreviations, terms and phrases have the meanings described below.
"2006 Ruling" means Advance Ruling 2006-0196501R3, as amended by Advance Ruling 2007-0243581R3. The 2006 Ruling describes the transactions undertaken in connection with the dissolution of XXXXXXXXXX and the principal tax consequences associated with such transactions.
"2019 Ruling" means Advance Ruling 2019-0834741R3. The 2019 Ruling describes the reorganization of certain entities of Family X effected on or about XXXXXXXXXX. The transaction described in paragraph 85 of the 2019 Ruling, however, was not completed;
"ACB" means "adjusted cost base" as defined in section 54;
"Capital Property" has the same meaning as in section 54;
"CCPC" means "Canadian-controlled private corporation" as defined in subsection 125(7).
"CRA" means the Canada Revenue Agency;
"DR" means "dividend refund" as defined in subsection 129(1);
"ERDTOH" means "eligible refundable dividend tax on hand" as defined in subsection 129(4);
"fair market value" or "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);
"NERDTOH" means “non-eligible dividend on hand” as defined in subsection 129(4);
"Personal Trust" has the meaning assigned by the definition in subsection 248(1);
"Predecessor Corporation" has the meaning set out in subsection 87(1);
"Proposed Transactions" means the transactions described in paragraphs 22 through 30 below;
"PUC” means "paid-up capital" as defined in subsection 89(1);
"Related Persons" has the meaning set out in subsection 251(2);
"Resident of Canada" means a resident of Canada for purposes of the Act;
"safe income on hand" means income earned or realized (within the meaning assigned by paragraph 55(5)(c)) by a corporation (after 1971 and before the safe income determination time in respect of the transaction, event or series of transactions or events), to the extent that it is on hand, and could reasonably be considered to contribute to the capital gain that would have been realized on a disposition at FMV of a share of the corporation;
"Taxable Dividend" has the same meaning as 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;
XXXXXXXXXX;
XXXXXXXXXX.
Facts
1. Mr. C, Ms.CC and CC are Residents of Canada and none of them plans to stop being a Resident of Canada.
2. CC4 is a minor, XXXXXXXXXX.
3. Fco, incorporated on XXXXXXXXXX under the XXXXXXXXXX and currently governed by the XXXXXXXXXX, is a CCPC and a TCC. Fco is a holding company of the Mr. C. Family and its principal business is to make investments. Fco owns XXXXXXXXXX Class D Shares and XXXXXXXXXX Class E Shares of the capital stock of F2co. The Taxation Year of Fco ends XXXXXXXXXX. Pursuant to subsection 249.1(7), Fco has requested permission to change its fiscal period end to XXXXXXXXXX.
4. As of XXXXXXXXXX, the amount of safe income on hand, for purposes of subsection 55(2), that was attributable to the XXXXXXXXXX Class D shares of the capital stock of F2co held by Fco was approximately XXXXXXXXXX.
5. The issued and outstanding shares of capital stock of Fco are as follows:
(a) XXXXXXXXXX Class A shares, non-voting, participating, entitled to receive dividends, when declared, and to share in the remaining property of the corporation upon dissolution;
(b) XXXXXXXXXX Class X voting shares (XXXXXXXXXX votes per share), non-participating, not entitled to any dividend and becoming non-voting shares upon the earlier of the death or incapacity of Mr. C. In the event of dissolution or winding-up of the corporation, the holders of the Class X shares shall be entitled, in priority to the holders of the Class A, Y and V shares, to payment of the amount paid into the issued and paid-up capital stock account which is attributable to such shares. Upon the death of Mr. C., the corporation shall redeem all of the Class X shares for a price equal to the amount paid into the issued and paid-up capital account pertaining to such shares;
(c) XXXXXXXXXX Class Y shares, non-voting, non-participating and non-dividend bearing. These shares carry one vote per share only when the Class X shares become non-voting. In the event of dissolution or winding-up of the corporation, the holders of the Class Y shares shall be entitled, in priority to the holders of the Class A and Class V shares, to the payment of the amount paid into the issued and paid-up capital account which pertains to such shares; and
(d) XXXXXXXXXX Class V shares, which are non-voting, non-participating and entitle the holder thereof to object to any change in the restrictions on the issuance, ownership and transfer of shares and other securities of Fco set forth in its articles. In the event of the dissolution or winding up of the corporation, the holders of the Class V shares shall be entitled to receive, in priority to the holders of the Class A shares, payment of the amount paid into the issued and paid-up capital account which shall pertain to such shares.
6. The names of the holders of the currently issued and outstanding shares of capital stock of Fco, the number of shares held by each and the tax attributes of such shares are as follows:
|
Holder |
Number and class |
PUC and capital stock issued and paid ($) |
ACB ($) |
Redemption value or FMV ($) |
|
CC1 |
XXXXX Class A Shares |
XXXXX |
XXXXX |
XXXXX |
|
CC2 |
XXXXX Class A Shares |
XXXXX |
XXXXX |
XXXXX |
|
CC3 |
XXXXX Class A Shares |
XXXXX |
XXXXX |
XXXXX |
|
TebC4 |
XXXXX Class A Shares |
XXXXX |
XXXXX |
XXXXX |
|
Mr. C |
XXXXX Class X Shares |
XXXXX |
XXXXX |
XXXXX |
|
T2MC |
XXXXX Class Y Shares |
XXXXX |
XXXXX |
XXXXX |
|
TC1 |
XXXXX Class V shares |
XXXXX |
XXXXX |
XXXXX |
All of the issued and outstanding shares of capital stock of Fco constitute Capital Property to each shareholder.
7. As of XXXXXXXXXX, the amount of Fco's GRIP was XXXXXXXXXX and the amount of Fco's ERDTOH and NERDTOH account was XXXXXXXXXX and XXXXXXXXXX, respectively. During its Taxation Year ended XXXXXXXXXX, Fco did not earn any GRIP and Fco did not pay any dividends after XXXXXXXXXX.
8. F2co, incorporated on XXXXXXXXXX under the XXXXXXXXXX, is a CCPC and a TCC. F2co is a holding company for the Mr. C. Family and its principal business is XXXXXXXXXX. F2co owns XXXXXXXXXX Class B shares of the capital stock of Holdco with a FMV of more than XXXXXXXXXX. F2co's Taxation Year ends on XXXXXXXXXX. Pursuant to subsection 249.1(7), F2co has requested permission to change its fiscal period end to XXXXXXXXXX.
9. The issued and outstanding shares of capital stock of F2co are as follows:
a) XXXXXXXXXX participating Class A voting shares are entitled to receive dividends, when declared, and to share in the remaining property of the corporation upon dissolution;
b) XXXXXXXXXX Class C shares, non-voting, non-participating and entitled to receive, when declared, a maximum non-cumulative dividend, in preference to dividends on Class A and B shares or any other shares ranking junior to the Class C shares, of XXXXXXXXXX per week on their redemption value. In the event of the dissolution or winding up of the corporation, the holders of the Class C shares will be entitled, in priority to the holders of the Class A, B, X, Y and V shares, to the payment of the redemption value for the Class C shares as well as to the declared and unpaid dividends on the shares. The shares are redeemable at the option of the holder or the corporation at a price equal to the redemption value and any declared and unpaid dividends on the shares.
The redemption value of each Class C share is equal to its pro rata share of the amount in the issued and paid-up share capital account for those shares, plus (i) an amount equal to its pro rata share of any increase in the issued and paid-up share capital account for those shares since their issue that results from any additional contribution made for that purpose by a holder of Class C shares without the issue of additional shares, minus (ii) an amount equal to its pro rata share of any reduction in the issued and paid-up share capital account for those shares since their issue, where the amount of the reduction has been paid to the holders of Class C shares, plus (iii) a premium equal to the difference between the FMV, on the issue of those Class C shares, of the consideration received by the corporation in consideration for the issue of those Class C shares and the total formed by:
A. the amount paid into the issued and paid-up share capital account on the issue of those shares; and
B. the FMV of any property, other than the Class C shares, given in payment of that consideration;
c) XXXXXXXXXX Class D shares, non-voting, non-participating and entitled to receive, when declared, a maximum monthly non-cumulative dividend, preferential to dividends on Class A, B, C and E shares, or any other shares ranking junior to the Class D shares, XXXXXXXXXX of their redemption value In the event of dissolution or winding up of the corporation, the holders of the Class D shares will be entitled, in priority to the holders of the Class A, B, C, E, X, Y and V shares, to the payment of the redemption value for the Class D shares as well as to any declared and unpaid dividends on the shares. The shares are redeemable at the option of the holder or the corporation at a price equal to the redemption value and any declared and unpaid dividends on the shares.
The redemption value of each Class D share is equal to its pro rata share of the amount contributed to the issued and paid-up share capital account for those shares, plus (i) an amount equal to its pro rata share of any increase in the issued and paid-up share capital account for those shares since their issue that resulting from an additional contribution made for that purpose by a holder of Class D shares without the issue of additional shares, minus (ii) an amount equal to its pro rata share of any reduction in the issued and paid-up share capital account for those shares since their issue, where the amount of the reduction has been paid to the holders of Class D shares, plus (iii) a premium equal to the difference between the FMV, at the time of the issue of those Class D shares, of the consideration received by the corporation in consideration for the issue of those Class D shares and the total formed by:
A. the amount paid into the issued and paid-up share capital account for those shares on the issue of those shares; and
B. the FMV of any property, other than the Class D shares, given as payment for that consideration;
d) XXXXXXXXXX Class E shares, non-voting, non-participating and entitled to receive, when declared, a maximum monthly non-cumulative dividend in preference to the dividends on the Class A, B and C shares, or on any other shares ranking junior to the Class E shares, XXXXXXXXXX of the redemption value In the event of dissolution or winding up of the corporation, the holders of the Class E shares will be entitled, in priority to the holders of the Class A, B, C, X, Y and V shares, to the payment of the redemption value for the Class E shares as well as to any declared and unpaid dividends on the shares. The shares are redeemable at the option of the holder or the corporation at a price equal to the redemption value and any declared and unpaid dividends on the shares.
The redemption value of each Class E share is equal to its pro rata share of the amount contributed to the issued and paid-up share capital account for those shares, plus (i) an amount equal to its pro rata share of any increase in the issued and paid-up share capital account for those shares since their issue resulting from an additional contribution made for that purpose by a holder of Class E shares without the issue of additional shares, minus (ii) an amount equal to its pro rata share of any reduction in the issued and paid-up share capital account for such shares since their issue, where the amount of the reduction has been paid to the holders of Class E shares;
e) XXXXXXXXXX Class X shares, voting (XXXXXXXXXX vote per share), non-participating, not entitled to any dividend and becoming non-voting from the earlier of the death or incapacity of Mr. C. In the event of dissolution or winding-up of the corporation, the holders of the Class X shares will be entitled, in priority to the holders of the Class A, B, Y and V shares, to payment of the amount of the issued and paid-up share capital account pertaining to those shares. On the death of Mr. C, the corporation shall redeem all the shares for a price equal to the issued and paid-up share capital account pertaining to those shares;
f) XXXXXXXXXX Class Y shares, non-voting and non-participating. These shares carry one vote per share only when the Class X shares become non-voting. In the event of dissolution or winding-up of the corporation, the holders of the Class Y shares will be entitled, in priority to the holders of the Class A, B and V shares, to payment of the amount in the issued and paid-up share capital account pertaining to those shares; and
g) XXXXXXXXXX Class V shares, which are non-voting, non-participating and entitle the holder to object to any change in the restrictions on the issue, ownership and transfer of shares and other securities of F2co provided for in its articles. In the event of dissolution or winding-up of the corporation, the holders of the Class V shares will be entitled, in priority to the holders of the Class A and Class B shares, to payment of the issued and paid-up share capital account that pertains to those shares.
10. The names of the holders of the currently issued and outstanding shares of the capital stock of F2co, the number of shares held by each and the tax attributes of such shares are as follows:
|
Holder |
Number and Class |
PUC and paid-up share capital ($) |
ACB ($) |
Cash surrender value or FMV ($) |
|
TebMC |
XXXXX Class A shares |
XXXXX |
XXXXX |
XXXXX |
|
Mr. C |
XXXXX Class C shares |
XXXXX |
XXXXX |
XXXXX |
|
Fco |
XXXXX Class D shares |
XXXXX |
XXXXX |
XXXXX |
|
Fco |
XXXXX Class E shares |
XXXXX |
XXXXX |
XXXXX |
|
Mr. C |
XXXXX Class X shares |
XXXXX |
XXXXX |
XXXXX |
|
T2MC |
XXXXX Class Y shares |
XXXXX |
XXXXX |
XXXXX |
|
TC1 |
XXXXX Class V shares |
XXXXX |
XXXXX |
XXXXX |
All issued and outstanding shares of the share capital of F2co constitute Capital Property to each shareholder.
11. According to F2co's financial statements at the end of the XXXXXXXXXX taxation year, F2co's assets and liabilities are summarized as follows:
Cash and cash equivalents XXXXXXXXXX
Shares in the capital stock of Holdco XXXXXXXXXX
Cash surrender value of insurance policies XXXXXXXXXX
Note receivable from Amalco XXXXXXXXXX
Advance payable to Amalco XXXXXXXXXX
Currently, F2co's balance sheet is comparable to that at the end of its XXXXXXXXXX taxation year.
12. As at XXXXXXXXXX, F2co's GRIP amount was XXXXXXXXXX and F2co's ERDTOH and NERDTOD account amounts were XXXXXXXXXX, respectively. In its taxation year ended XXXXXXXXXX, F2co did not earn any DRs and F2co did not pay any dividends after XXXXXXXXXX.
13. Holdco, incorporated on XXXXXXXXXX under the XXXXXXXXXX, is a CCPC and a TCC. Holdco is a holding company for Family X and its principal business is XXXXXXXXXX. Holdco holds XXXXXXXXXX Class A shares of the capital stock of Amalco with a FMV of over XXXXXXXXXX. F2co holds XXXXXXXXXX of the issued and outstanding Class B shares of the capital stock of Holdco with a FMV of more than XXXXXXXXXX. The remaining issued and outstanding shares of the capital stock of Holdco are held directly or indirectly by members of the X Family or by trusts whose beneficiaries are members of the X Family. Holdco's taxation year ends on XXXXXXXXXX. In accordance with subsection 249.1(7), Holdco has requested permission to change its fiscal period to XXXXXXXXXX.
14. Amalco is a CCPC and a TCC. Amalco is a holding company of Family X and its principal business is XXXXXXXXXX. Holdco holds XXXXXXXXXX of the issued and outstanding Class A shares of the capital stock of Amalco with a FMV of more than XXXXXXXXXX. The remaining issued and outstanding shares of the capital stock of Amalco are held directly or indirectly by members of the X Family or by trusts whose beneficiaries are members of the X Family. Amalco's taxation year ends XXXXXXXXXX.
15. TC1 is a personal and inter vivos trust, resident in Canada. TC1 was created by a trust indenture under the XXXXXXXXXX on XXXXXXXXXX for the purpose of, inter alia: (i) providing for the exercise of the voting rights attached to the shares held by TC1, (ii) ensuring that no changes are made to the restrictions on issue, ownership and transfers provided for in the articles of association of the corporations in which TC1 holds shares, and (iii) taking the necessary and appropriate measures to ensure that TC1 retains at all times more than XXXXXXXXXX of the voting rights attached to all the shares issued by each of the corporations in which TC1 will hold such percentage of shares upon the death or incapacity of Mr. X. TC1 was created by the transfer, by Mr. X as the settlor, of a note for XXXXXXXXXX, which is still held by TC1.
In particular, TC1 holds XXXXXXXXXX Class V shares in the capital stock of each of Fco and F2co.
16. XXXXXXXXXX was a personal, inter vivos trust created by XXXXXXXXXX under the laws of the Province of XXXXXXXXXX. In accordance with the terms of the XXXXXXXXXX and the Trustees' resolutions, XXXXXXXXXX distributed all of its assets to its beneficiaries and was wound up as described in the 2006 Ruling. The principal transactions described in the 2006 Ruling are as follows:
a) The trustees of XXXXXXXXXX exercised their power and discretion under paragraph 1(i) of XXXXXXXXXX to determine that the date of distribution will be the date of the winding-up of XXXXXXXXXX.
b) On the distribution date, the trustees of XXXXXXXXXX distributed the funds of XXXXXXXXXX (i.e. fund2, fund3, fund4 and fund5) to the beneficiaries in full payment of their respective shareholding in XXXXXXXXXX.
c) Where at the time of the distribution a beneficiary under the age of majority (minor beneficiary) was entitled to a portion of a XXXXXXXXXX fund, in accordance with Article 14 of XXXXXXXXXX, the trustees distributed the minor beneficiary's share of the XXXXXXXXXX fund to a new separate trust for the exclusive benefit of that minor beneficiary. Following the distribution of the XXXXXXXXXX funds, there were XXXXXXXXXX new separate trusts created for the minor beneficiaries including TebC4. The distributions to the minor trusts were made by XXXXXXXXXX in settlement of their respective shareholdings in XXXXXXXXXX. The terms of the trusts for minors (including TebC4) are set out in Article 14 of XXXXXXXXXX.
d) After the distribution date, XXXXXXXXXX was wound-up by filing the appropriate tax returns and elections.
17. TebC4 was created as part of the winding-up of XXXXXXXXXX pursuant to XXXXXXXXXX. Specifically, on the date of distribution by XXXXXXXXXX, CC4 was a minor beneficiary entitled to receive a portion of XXXXXXXXXX's fund5. This property was distributed to TebC4 in satisfaction of its equity interest in XXXXXXXXXX.
Mr. C has been the sole trustee of TebC4 since its formation. No person other than CC4 is entitled to any part of the capital or income of TebC4 and if CC4 dies before reaching the age of majority, the property of TebC4 will be distributed to his estate. Until the beneficiary reaches the age of majority, the trustees may encroach, at their discretion, on the income and capital of TebC4 for the exclusive benefit of CC4. When CC4 reaches the age of majority, the trustee must then distribute all of TebC4's assets to the beneficiary in satisfaction of the beneficiary’s capital interest in the trust. Articles 15 to 29 of XXXXXXXXXX apply mutatis mutandis to TebC4, whose property is retained by virtue of Article 14 of XXXXXXXXXX for the exclusive benefit of CC4. The 2006 Decision ruled that CC4's interest in TebC4 is irrevocably vested in CC4.
The only asset of TebC4 is XXXXXXXXXX Class A shares of the capital stock of Fco, the tax attributes of which are described in 6 above. These shares (or substituted shares) were obtained in the winding-up of XXXXXXXXXX.
18. TebMC is a personal, inter vivos trust, resident in Canada. TebMC was established XXXXXXXXXX by a trust deed, by virtue of XXXXXXXXXX, for the exclusive benefit of Mr. C and his descendants or, failing that, the descendants of Mr. X. TebMC was created by Mr. X as settlor. Mr. X transferred a silver bar to it for the benefit of the beneficiaries. Mr. C is one of the two trustees of TebMC. Any decision of the trustees is and will be made by a majority of the votes cast and Mr. C must be part of that majority. However, Mr. C cannot be the sole trustee. The trust deed provides for who will be the trustees upon the death or incapacity of Mr. C. The TebMC deed contains a clause providing that no minor beneficiary will be entitled to receive income or capital from TebMC, as the case may be, or to have the use of such income or capital, while the beneficiary is a minor beneficiary.
The only assets of TebMC are XXXXXXXXXX Class A shares of the capital stock of F2co and the silver bar.
19. T2MC is a personal and inter vivos Trust, resident in Canada. T2MC was established XXXXXXXXXX by a trust deed, by virtue of XXXXXXXXXX, for the exclusive benefit of Mr. C and his descendants or, failing that, the other descendants of Mr. X. T2MC was created to provide primarily for the voting rights attached to the shares held by T2MC and to take the necessary and useful measures to ensure that T2MC retains at all times more than XXXXXXXXXX of the voting rights attached to all the shares issued by each of the corporations in which T2MC will hold such percentage of shares upon the death or incapacity of Mr. C. T2MC was created by Mr. X as settlor. Mr. X transferred to it a silver bar for the benefit of the beneficiaries. Mr. C is one of the two trustees of T2MC. Decisions of the trustees are or will be taken by a majority of the votes cast and Mr. C will have to be part of that majority. The trust deed provides for who will be the trustees upon the death or incapacity of Mr. C and includes, inter alia, governance appropriate to the circumstances of the Mr. C Family.
The only assets of T2MC are XXXXXXXXXX Class Y shares of the capital stock of each of F2co and Fco and the silver bar.
20. In XXXXXXXXXX, Mr. C, Fco, F2co, TebMC and T2MC participated in the implementation of a restructuring plan for Family X described in the 2019 Decision. The participation of Mr. C, Fco, F2co, TebMC and T2MC in this restructuring can be summarized as follows:
(a) Fco and F2co were among the beneficiaries of TPE and received property from TPE. In addition, as part of the winding-up of TPE, F2co received shares of the capital stock of a predecessor corporation of Amalco pursuant to subsection 107(2). Currently, F2co holds its interest in Amalco through its XXXXXXXXXX Class B shares of the capital stock of Holdco.
(b) Mr. C conducted an estate freeze of his interest in F2co whereby Mr. C converted his XXXXXXXXXX Class B shares of the capital stock of F2co into XXXXXXXXXX Class C shares of the capital stock of F2co and TebMC subscribed for XXXXXXXXXX Class A shares of the capital stock of F2co.
c) T2MC was incorporated for the exclusive benefit of Mr. C and his descendants or, failing that, of the descendants of Mr. X in order to exercise control over the corporations of the Mr. C Family.
21. Mr. C has always had effective control of Fco and F2co. Fco and F2co are related Persons.
Proposed Transactions
The Proposed Transactions will be carried out in the order indicated below and will be completed by XXXXXXXXXX.
22. Fco will amend its articles of incorporation to add XXXXXXXXXX Class Z shares and cancel the Class B shares. The XXXXXXXXXX Class Z shares will be non-voting, non-participating and entitled to receive, when declared, a maximum, non-cumulative dividend, in preference to dividends on the Class A shares, of XXXXXXXXXX per week on the redemption value. In the event of dissolution or winding up of the corporation, the holders of the Class Z shares will be entitled, in priority to the holders of the Class A, X, Y and V shares, to payment of the redemption value for the Class Z shares as well as to any declared and unpaid dividends on the shares. The shares will be redeemable at the option of the holder or the corporation at a price equal to the redemption value and any declared and unpaid dividends on the shares.
The redemption value of each Class Z share will be equal to its pro rata share of the amount contributed to the issued and paid-up share capital account for such shares on issue, plus (i) an amount equal to its pro rata share of any increase in the issued and paid-up share capital account for such shares since issue resulting from an additional contribution made for that purpose by a holder of Class Z shares without the issue of additional shares, minus (ii) an amount equal to its share of any reduction in the issued and paid-up share capital account for those shares since their issue, where the amount of the reduction has been paid to the holders of Class Z shares, plus (iii) a premium equal to the difference between the FMV, on the issue of those Class Z shares, of the consideration received by the corporation in consideration for the issue of those Class Z shares and the total formed by :
A. the amount paid into the issued and paid-up share capital account for those shares on the issue of those shares; and
B. the FMV of any property, other than the Class Z shares, given in payment of that consideration.
On the issue of the Class Z preferred shares, the corporation and each share subscriber will determine, by mutual agreement, the FMV of each of the properties forming part of the consideration received by the corporation on the issue of those Class Z preferred shares. A price adjustment clause to the redemption value will be applicable in the event of a disagreement with the CRA or any other tax authority as to the valuation of the FMV of one or more of the properties forming part of the consideration received by the corporation upon the issue of the Class Z shares.
23. TebC4 will exchange its XXXXXXXXXX Class A shares of the capital stock of Fco for XXXXXXXXXX Class Z shares of the capital stock of Fco.
TebC4 and Fco will not make an election pursuant to subsection 85(1) in respect of the exchange.
The issued and paid-up share capital of the exchanged shares (XXXXXXXXXX) will be added to the issued and paid-up share capital of the shares issued as consideration.
The FMV of the exchanged XXXXXXXXXX Class A shares of the capital stock of Fco will be equal to the FMV of the XXXXXXXXXX Class Z shares of the capital stock of Fco received on the exchange.
24. For clarification purposes, F2co will amend its articles of incorporation to add the underlined passages below in the description of the redemption value of Class C, D and E shares:
(a) the redemption value of each Class C share shall be equal to its pro rata share of the amount contributed to the issued and paid-up share capital account for such shares upon their issue, plus (i) an amount equal to its pro rata share of any increase in the issued and paid-up share capital account for such shares since their issue resulting from an additional contribution made for that purpose by a holder of Class C shares without the issuance of additional shares, minus (ii) an amount equal to its pro rata share of any reduction in the issued and paid-up share capital account for those shares since their issue, where the amount of the reduction has been paid to the holders of Class C shares, plus (iii) a premium equal to the difference between the FMV, at the time of the issue of those Class C shares, of the consideration received by the corporation in consideration for the issue of those Class C shares and the total formed by :
A. the amount paid into the issued and paid-up share capital account for those shares on the issue of those shares; and
B. the FMV of any property, other than the Class C shares, given in payment of that consideration;
(b) the redemption value of each Class D share shall be equal to its pro rata share of the amount contributed to the issued and paid-up share capital account for such shares on their issue, plus (i) an amount equal to its pro rata share of any increase in the issued and paid-up share capital account for such shares since their issue resulting from an additional contribution made for that purpose by a holder of Class D shares without the issue of additional shares, minus (ii) an amount equal to its pro rata share of any reduction in the issued and paid-up share capital account for those shares since their issue, where the amount of the reduction has been paid to the holders of Class D shares, plus (iii) a premium equal to the difference between the FMV, at the time of the issue of those Class D shares, of the consideration received by the corporation in consideration for the issue of those Class D shares and the total of :
A. the amount paid into the issued and paid-up share capital account for those shares on the issue of those shares; and
B. the FMV of any property, other than the Class D shares, given in payment of that consideration; and
(c) the redemption value of each Class E share shall be equal to its pro rata share of the amount contributed to the issued and paid-up share capital account for those shares on their issue, plus (i) an amount equal to its pro rata share of any increase in the issued and paid-up share capital account for those shares since their issue resulting from an additional contribution made for that purpose by a holder of Class E shares without the issuance of additional shares, minus (ii) an amount equal to its pro rata share of any reduction in the issued and paid-up share capital account for those shares since their issue, the amount of the reduction having been paid to the holders of Class E shares;
For greater certainty, the redemption value of the XXXXXXXXXX Class D shares will remain the same despite the increase in issued and paid-up share capital provided for in 25 below.
25. F2co shall effect an increase in the issued and paid-up share capital of the XXXXXXXXXX Class D shares of its capital stock held by Fco, without any amount being paid to Fco. The increase in the issued and paid-up share capital will be effected by the capitalization of part of the premium on the XXXXXXXXXX Class D shares of the capital stock of F2co. The amount of the increase will be an amount determined by the Board of Directors which will not exceed XXXXXXXXXX.
F2co will make the designation provided under subsection 89(14) so that the total amount of the deemed dividend pursuant to subsection 84(1) resulting from the transaction is an eligible dividend. Fco will include the amount of the taxable dividend received from F2co in computing its income, and deduct a corresponding amount in computing its taxable income pursuant to subsection 112(1). In addition, the amount of the taxable dividend received from F2co will be included in Fco's GRIP. The amount of the taxable dividend paid on the XXXXXXXXXX Class D shares of the capital stock of F2co will not exceed the safe income on hand available for the Class D shares of the capital stock of F2co held by Fco immediately before the time F2co is deemed to have paid the dividend.
F2co will be connected with Fco pursuant to subsection 186(2) and paragraph 186(4)(a). Fco will be subject to Part IV tax to the extent provided in paragraph 186(1)(b) in respect of the eligible taxable dividend received from F2co.
Fco will include in its ERDTOH the amount determined pursuant to subparagraph 129(4)(a)(ii) of the ERDTOH definition.
26. Fco will effect an increase in the issued and paid-up share capital of the XXXXXXXXXX Class Z shares of its capital stock held by TebC4, without any amount being paid to TebC4. The increase in issued and paid-up share capital will be effected by capitalization of the premium on the XXXXXXXXXX Class Z shares of the capital stock of Fco. The amount of the increase will be an amount determined by the board of directors which will be equal to the difference between the redemption value of the XXXXXXXXXX Class Z shares of the capital stock of Fco and the PUC for those shares.
Fco will make the designation provided under subsection 89(14) so that the total amount of the deemed dividend pursuant to subsection 84(1) resulting from the transaction is an eligible dividend. TebC4 will include the amount of the taxable dividend received from Fco in computing its income and will not deduct any amount pursuant to subsection 104(6).
27. F2co will redeem XXXXXXXXXX Class E shares of its capital stock held by Fco. In consideration, F2co will issue to Fco a non-interest bearing demand note in a principal amount equal to the redemption value of the Class E shares so redeemed. The redemption amount will be equal to the estimated tax liability of TebC4 in respect of the taxable dividend described in 26 above.
The redemption value of the Class E shares of the capital stock of F2co that will be redeemed will be their PUC and ACB, to Fco.
28. Pursuant to the XXXXXXXXXX, Fco will reduce the issued and paid-up share capital of all XXXXXXXXXX Class Z shares of the capital stock of Fco held by TebC4 by an amount of approximately XXXXXXXXXX, being an amount equal to the estimated taxes payable by TebC4 in respect of the taxable dividend described in 26 above. The full amount of the reduction of the issued and paid-up share capital of the XXXXXXXXXX Class Z shares of the capital stock of Fco will be paid to TebC4 through the assignment of the note issued by F2co to Fco as described in 27 above. The redemption value of the XXXXXXXXXX Class Z shares of Fco will be reduced by the amount of the reduction of the issued and paid share capital of such shares in accordance with the terms and conditions of such shares.
29. NTebC4 will be constituted by a trust deed, pursuant to the XXXXXXXXXX, for the exclusive benefit of CC4. No person other than CC4 will be entitled to any part of the capital or income of NTebC4. The trustees may, in their absolute discretion, use the income of the trust to pay living and maintenance expenses incurred for the exclusive benefit of CC4 and out of the capital any sum required to pay such expenses. They will also have the power at any time to deliver to CC4 any property in full or partial satisfaction of C4’s income or capital interest, including the power to deliver to CC4 all of the property of NTebC4. Within a reasonable time after the death of CC4, the residue of the capital of NTebC4, if any, will be distributed to C4’s estate. NTebC4 will be created by Mr. CC as the settlor. Mr. CC will transfer to it a silver bar for the benefit of the beneficiary. Mr. C will be the sole trustee of NTebC4. The trust deed will provide who the trustees will be upon the death or incapacity of Mr. C. NTebC4 will be a personal, inter vivos trust resident in Canada.
30. Mr. C, as trustee of TebC4, will transfer to NTebC4 the XXXXXXXXXX Class Z shares of the capital stock of Fco, without consideration. After this transfer, the only property of TebC4 will be the note referred to in 28 above. According to TebC4's legal advisors, this transfer will take place in accordance with the provisions of Article 15(x) of XXXXXXXXXX, which apply mutatis mutandis to TebC4. Finally, TebC4 will be wound up after filing the appropriate tax returns and elections and after paying its taxes in respect of the taxable dividend described in 26 above with the proceeds of the note referred to in 28 above.
Immediately before the transfer of property by TebC4 to NTebC4, NTebC4 will hold only the silver bar, as referred to in 29 above. This silver bar will be property the cost of which is not included for the purposes of the Act in computing any balance of expenses or other undeducted amounts in respect of NTebC4. This property will have a nominal value and the only reason for the transfer of this property to NTebC4 by the settlor will be to form NTebC4.
NTebC4 will not be a beneficiary of TebC4 within the meaning of the XXXXXXXXXX or the Act, will not have any of the rights and privileges that would arise therefrom, and will not receive the Transferred Property in satisfaction of an interest as a beneficiary of TebC4. TebC4 will terminate, both for the purposes of XXXXXXXXXX and for the purposes of the Act, upon the transfer of its property to NTebC4 and the filing of its tax returns and payment of its taxes. NTebC4 will not elect to avoid the application of paragraph (f) of the definition of "disposition" in subsection 248(1).
Purpose of the Proposed Transactions
31. The purpose of the Proposed Transactions is that, in view of the special condition of CC4, NTebC4 will continue to hold and administer the assets that are currently held by TebC4 (or assets that will be substituted for them) without their prior distribution or other transfer to CC4.
Additional Information
32. The main contact details for the taxpayers covered by the advance ruling are:
TebC4
XXXXXXXXXX
Fco
XXXXXXXXXX
F2co
XXXXXXXXXX
Rulings
Provided that the statement of relevant facts, the Proposed Transactions and the Additional Information constitute full disclosure of all relevant facts and proposed transactions and that the Proposed Transactions are carried out as described above, our decisions are as follows:
A. The provisions of subsection 86(1) will apply to the share exchange described in 22 and 23 above, provided that:
(a) TebC4 holds its XXXXXXXXXX Class A shares of Fco capital stock as Capital Property; and
(b) TebC4 and Fco do not file an election pursuant to subsection 85(1) in respect of the exchange;
such that
(c) pursuant to paragraph 86(1)(b), the cost to TebC4 of the XXXXXXXXXX Class Z shares in the capital stock of Fco will be deemed to be the ACB to TebC4 of its XXXXXXXXXX Class A shares in the capital stock of Fco immediately before the exchange;
(d) pursuant to paragraph 86(1)(c), TebC4 will be deemed to have disposed of the XXXXXXXXXX Class A shares of the capital stock of Fco for proceeds of disposition equal to the total cost to TebC4 of the XXXXXXXXXX Class Z shares of the capital stock of Fco received by TebC4 and determined in (c) above; and
(e) the PUC of the XXXXXXXXXX Class Z shares of the capital stock of Fco will be equal to the PUC of the XXXXXXXXXX Class A shares of the capital stock of Fco exchanged and subsection 86(2.1) will not apply to adjust the PUC of those shares.
For greater certainty, the provisions of subsection 86(2) will not apply.
B. For greater certainty, the amendments to F2co's articles described in 24 above will not result in a disposition of the XXXXXXXXXX Class C shares of the capital stock of F2co held by Mr. C and the XXXXXXXXXX Class D shares and XXXXXXXXXX Class E shares of the capital stock of F2co held by Fco.
C. As a result of the increase in the PUC of the XXXXXXXXXX Class D shares of the capital stock of F2co described in 25 above and the increase in the PUC of the XXXXXXXXXX Class Z shares of the capital stock of Fco described in 26 above, subsection 84(1) will apply such that:
(a) F2co or Fco, as the case may be, will be deemed to have paid at that time a dividend on the subject shares equal to the amount of the PUC increase; and
(b) Fco or TebC4, as the case may be, shall be deemed to have received at that time such dividend.
D. The following provisions will apply to the dividends described in C above to the extent that they are Taxable Dividends and the designation by virtue of subsection 89(14) is filed:
(a) in the case of the dividend deemed to have been paid by F2co and deemed to have been received by Fco on the XXXXXXXXXX Class D shares held by it in the capital stock of F2co, such dividend:
(i) will be included in computing Fco's income pursuant to paragraph 12(1)(j) and subparagraph 82(1)(a.1)(i);
(ii) will be deductible in computing Fco's taxable income pursuant to subsection 112(1) for the year in which the dividend is received, and for greater certainty, such deduction will not be prohibited by subsection 112(2.1), (2.2), (2.3) or (2.4)
(iii) will be included in computing Fco's GRIP under the description of E of the definition of GRIP in subsection 89(1);
(iv) will be deducted in computing F2co's GRIP in its subsequent taxation year under the description of G in the definition of GRIP in subsection 89(1);
(v) will not be subject to Part IV.1 and Part VI.1 taxes;
(vi) will be subject to Part IV tax to Fco to the extent provided for in paragraph 186(1)(b) and such Part IV tax will be included in Fco's ERDTOH account for the year pursuant to subparagraph 129(4)(a)(ii) of the definition of ERDTOH;
(vii) will result in a DR to F2co to the extent provided for in subparagraph 129(1)(a)(i) and that DR will be deducted from F2co's ERDTOH pool for the subsequent year pursuant to paragraph 129(4)(c) of the definition of ERDTOH;
(viii) subsection 55(2) will not apply to the dividend provided that the amount of the dividend is less than the safe income on hand attributable to the XXXXXXXXXX Class D shares of the capital stock of F2co held by Fco immediately before the time F2co is deemed to have paid the dividend; and
(ix) provided that the amount of the dividend is less than the safe income on hand attributable to the XXXXXXXXXX Class D shares of the capital stock of F2co held by Fco immediately before the time F2co is deemed to have paid the dividend, paragraph 53(1)(b) will apply so that the amount of that taxable dividend deemed to have been received by Fco will be added to the ACB to Fco of the XXXXXXXXXX Class D shares held by it in the capital stock of F2co;
(b) in the case of the dividend deemed to have been paid by Fco and deemed to have been received by TebC4 on the XXXXXXXXXX Class Z shares it holds of the capital stock of Fco, that dividend:
(i) will be included in computing the income of TebC4 pursuant to paragraph 12(1)(j) and subparagraph 82(1)(a.1)(i);
(ii) will be deducted in computing Fco's GRIP in its subsequent taxation year pursuant to the description of G in the definition of GRIP in subsection 89(1);
(iii) will not be subject to Part VI.1 tax;
(iv) will give rise to an DR to Fco within the limits set out in subparagraph 129(1)(a)(i) and that DR will be deducted from Fco's RDTOH account for the subsequent year pursuant to paragraph 129(4)(c) of the definition of ERDTOH; and
(v) paragraph 53(1)(b) will apply so that the amount of that taxable dividend deemed to have been received by TebC4 will be added to the ACB of TebC4's XXXXXXXXXX Class Z shares of the capital stock of Fco.
For greater certainty, subsection 129(1.2) will not apply to the deemed dividend paid by Fco on the XXXXXXXXXX Class Z shares of its capital stock held by TebC4.
E. As a result of the redemption by F2co of the Class E shares of its capital stock held by Fco described in 27 above:
(a) no dividend will be deemed to have been paid by F2co or deemed to have been received by Fco pursuant to subsection 84(3) to the extent that the amount paid on the redemption of the shares is the PUC of those shares; and
(b) Fco will not realize any capital gain to the extent that the proceeds of disposition of the shares do not exceed the ACB to Fco of those shares immediately before the redemption.
F. Subject to the application of subsection 40(3), the payment through the reduction of the PUC of the Class Z shares of the capital stock of Fco described in 28 above will not result in:
(a) a disposition of the Class Z shares of the capital stock of Fco held by TebC4;
(b) a dividend deemed to have been paid by Fco by virtue of paragraph 84(4)(a) or a dividend deemed to have been received by TebC4 by virtue of paragraph 84(4)(b); and
the amount received by TebC4 on the PUC reduction will reduce the ACB to TebC4 of its Class Z shares in the capital stock of Fco pursuant to subparagraph 53(2)(a)(ii).
G. The transfer of property from TebC4 to NTebC4 as described in 30 above will have the following results:
(a) this transfer of property from TebC4 to NTebC4 will not result in a disposition of the property by TebC4 by virtue paragraph (f) of the definition of "disposition" in subsection 248(1);
(b) NTebC4 will be deemed to be the same trust as and a continuation of TebC4 under paragraph 248(25.l)(a) and the transfer of the property from TebC4 to NTebC4 will not result in a disposition of the beneficiary's interest in TebC4 for the purposes of sections 106 and 107; and
(c) subsection 104(5.8) will apply, which would generally result in NTebC4 being deemed by subsection 104(4), if applicable, to have disposed of each of its properties referred to in that subsection on the day that is 21 years after the day TebC4 was established.
H. Subsection 104(4) will not apply to NTebC4 because of the exclusion in paragraph (g) of the definition "trust" in subsection 108(1).
I. Subsections 15(1), 56(2), 56(4) and 246(1) will not apply in respect of the Proposed Transactions described above.
J. The provisions of subsection 245(2) will not apply as a result of and because of the Proposed Transactions described above for the purpose of redetermining the tax consequences confirmed in the rulings above.
These rulings are subject to the limitations and general conditions set out in Information Circular 70-6R11 dated April 1, 2021, issued by the CRA and are binding on the CRA provided that the Proposed Transactions described in paragraphs 22 to 30 are completed before 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 rulings 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 and Proposed Transactions truly represents the FMV or ACB of a property, or the PUC amount of a share;
(c) the amount of the dividend provided for in paragraph 25 of the Proposed Transactions does not exceed the amount of safe income on hand attributable to the subject shares; and
(d) the amount allocated to a corporation's GRIP, ERDTOH or NERDTOH truly represents the GRIP, ERDTOH or NERDTOH of such corporation.
In addition, since the application and operation of price adjustment clauses are not proposed transactions, we do not issue rulings on these clauses. Income Tax Folio S4-F3-C1, Price Adjustment Clauses, sets out the CRA's administrative position on price adjustment clauses.
The 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