Principal Issues: Whether the proposed transactions meet the requirements of paragraph 55(3)(b).
Position: Yes.
Reasons: The proposed transaction meets the statutory requirements.
XXXXXXXXXX 2020-085254
XXXXXXXXXX
Dear Madam,
Subject: 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 XXXXXXXXXX. We have also taken into account the information you sent 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, 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 is
A. under review by the Canada Revenue Agency with respect to that return;
B. the subject of an objection by the taxpayer or the related person;
C. the subject of a legal proceeding, either in progress or completed, involving the individual or the related person;
ii. has been the subject of an advance ruling request previously reviewed by the Income Tax Rulings Directorate.
Definitions
Unless otherwise stated:
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 expressions used in this request and defined in the Act shall have the meaning given to them in the Act;
iii. all monetary amounts are in Canadian dollars;
iv. words importing the singular number shall include the plural and vice versa, if the context so requires.
In this letter, with the exception of paragraph 30, the parties involved in the proposed transactions (described below) will be identified as follows
"A" means Mr. XXXXXXXXXX, brother of B;
"B" means Mr. XXXXXXXXXX, brother of A;
"C" refers to Mr. XXXXXXXXXX, father of A and B;
"D" means Mrs. XXXXXXXXXX, mother of A and B;
"Transferor" means the XXXXXXXXXX corporation;
"Transferor" means the corporation to be incorporated in connection with the Proposed Transactions;
"Estate" means the estate of C.
The following abbreviations, expressions and terms have the meaning described below.
"ACB" means "adjusted cost base" as defined in section 54;
"Agreed Amount" has the meaning assigned by subsection 85(1);
"Capital property" has the meaning assigned by section 54;
"CCPC" means "Canadian-controlled private corporation" as defined in subsection 125(7);
"CDA" means "capital dividend account" and has the meaning assigned to the term by subsection 89(1);
“Cost amount” has the meaning assigned by subsection 248(1);
"CRA" means the Canada Revenue Agency;
"Depreciable property" has the meaning assigned by subsection 13(21);
“Distribution” has the meaning assigned by subsection 55(1);
"DR" means "dividend refund" as defined in subsection 129(1);
“Eligible property” has the meaning assigned to that term in subsection 85(1.1);
"ERDTOH" means "eligible refundable dividend tax on hand" as defined in subsection 129(4);
“FMV” means the highest price expressed in terms of money or money’s worth available in an open and unrestricted market between informed, prudent parties, acting at arm’s length and under no compulsion to act, expressed in terms of cash;
“GRIP” has the meaning assigned to the term “general rate income pool” by subsection 89(1);
"NERDTOH" means "non-eligible refundable dividend tax on hand" as defined in subsection 129(4);
"Preliminary transaction" means the transaction described in paragraph 17;
"Proposed Transactions" means the transactions described in paragraphs 18 to 28;
"PUC" has the meaning assigned to the term “paid-up capital” by subsection 89(1);
"RV" means "redemption value".
"Taxable Dividend" has the meaning assigned by the definition in subsection 89(1);
“Taxation year” has the meaning assigned by subsection 249(1);
"TCC" means "taxable Canadian corporation" as defined in subsection 89(1);
"XXXXXXXXXX" means the XXXXXXXXXX;
"XXXXXXXXXX" means the XXXXXXXXXX;
"XXXXXXXXXX" means XXXXXXXXXX;
Facts
1. Transferor was incorporated on XXXXXXXXXX under the XXXXXXXXXX and is currently governed by the XXXXXXXXXX. The fiiscal period of Transferor ends on XXXXXXXXXX of each year. Transferor is and will be, at all relevant times and for all purposes of the Act, a CCPC and a TCC.
2. Transferor carries on XXXXXXXXXX. For the purposes of the Act, Transferor computes its income under the "cash method" under subsection 28(1).
3. According to the financial statements of Transferor as at XXXXXXXXXX, Transferor's current assets consisted primarily of inventory, accounts receivable, prepaid expenses and income taxes receivable. At that date, Transferor also held XXXXXXXXXX, an advance receivable from a related corporation, shares in XXXXXXXXXX.
In addition, as of XXXXXXXXXX, it had current liabilities of $XXXXXXXXXX and long-term liabilities of $XXXXXXXXXX.
There have been no material changes or modifications in the composition of the assets and liabilities of Transferor between XXXXXXXXXX and the date hereof. In addition, there will be no material changes or modifications in the composition of the assets and liabilities of Transferor between the date hereof and the date on which the Proposed Transactions described below are completed.
4. A and B take an active part, on a regular and continuous basis, in XXXXXXXXXX of Transferor.
5. The authorized share capital of Transferor consists of, inter alia, an unlimited number of shares without par value of Classes A, H and I. The principal rights, privileges, conditions and restrictions of the shares of those classes are as follows:
Class A shares are voting and participating.
Class H and I shares are non-voting and non-participating. The holders of Class H and I shares are entitled to receive a non-cumulative preferential dividend in such amount as the directors in their sole discretion determine, which shall be payable before any dividend is declared or paid on the Class A shares. In the event of dissolution, winding-up or other distribution of property of the corporation, the holders of Class H and I shares shall be entitled, in priority to the holders of Class A shares, to the payment of (i) the dividends declared and unpaid on such shares and (ii) the amount representing the NAV of such shares, which is defined as the amount paid for those shares into the issued and paid-up capital account for that class plus a premium equal to the difference between the FMV of the consideration received by the corporation on their issue and the aggregate of:
- the amount paid for those shares into the issued and paid-up capital account for that class; and
- the FMV of any property, other than a share, given by the corporation in payment of that consideration.
6. A holds XXXXXXXXXX Class A shares of the capital stock of Transferor. Those shares have a PUC and ACB to A of $XXXXXXXXXX.
7. B holds XXXXXXXXXX Class A shares of the capital stock of Transferor. Those shares have a PUC and ACB for B of $XXXXXXXXXX.
8. The Estate holds XXXXXXXXXX Class H shares of the capital stock of Transferor. That share has a PUC, a RV and ACB, for the Estate, of $XXXXXXXXXX.
9. D holds XXXXXXXXXX Class I share of the capital stock of Transferor. That share has a PUC, RV and ACB, for D, of $XXXXXXXXXX.
10. No dividends have been paid on the Class H and Class I shares of the capital stock of Transferor since their issue in XXXXXXXXXX.
11. The shares of the capital stock of Transferor constitute Capital Property to each of A, B, Estate and D.
12. C died on XXXXXXXXXX.
13. Transferor was the beneficiary of a life insurance policy on the life of C in the amount of $XXXXXXXXXX (the "Life Insurance Policy"). As of the date hereof, no amount has been paid out under the Policy.
14. Section 7.1 of the Transferor Shareholders Agreement dated XXXXXXXXXX (the "Agreement") provides, inter alia, that in the event of C's death, Transferor shall pay to the Estate, as a dividend on the Class H share of its capital stock, the amount received under any life insurance policy taken out on C's life of which it is the beneficiary, out of its CDA.
15. As at XXXXXXXXXX, the amount of the GRIP of Transferor was XXXXXXXXXX.
16. As of XXXXXXXXXX, the amount of Transferor’s ERDTOH and NERDTOH accounts was $XXXXXXXXXX and $XXXXXXXXXX respectively.
Preliminary Translation
17. On XXXXXXXXXX, Transferor paid a Taxable Dividend in the amount of $XXXXXXXXX on the Class A shares of its capital stock held by A and B.
Proposed Transactions
The Proposed Transactions will be carried out in the order indicated below.
Distribution by Transferor of the proceeds of the Life Insurance Policy and redemption by Transferor of the Class H share of its capital stock held by the Estate
18. Following receipt by Transferor of the proceeds of the Life Insurance Policy, Transferor will declare and pay a dividend on the Class H share of its capital stock held by the Estate in an amount equal to the amount by which the proceeds of the Life Insurance Policy received exceeded Transferor's adjusted cost basis (as defined in subsection 148(9)), immediately before C's death, of the Life Insurance Policy. In respect of such dividend, Transferor will make an election under subsection 83(2) to have the full amount of such dividend deemed to be a capital dividend. This subsection 83(2) election will be made in the prescribed form and manner.
19. Pursuant to section 7.1 of the Agreement, Transferor will redeem the Class H share of its capital stock held by the Estate for an amount equal to its RV, being $XXXXXXXXXX.
Redemption by Transferor of the Class I share of its capital stock held by D
20. Transferor will redeem the Class I share of its capital stock held by D for an amount equal to its RV, i.e. $XXXXXXXXXX.
Incorporation of Transferor
21. The Transferor shall be incorporated under the XXXXXXXXXX. The Transferor will, at all relevant times and for all purposes of the Act, be a CCPC and a TCC. The fiscal period end of Transferor will be XXXXXXXXXX.
The authorized share capital of Transferor will consist of, inter alia, an unlimited number of Class A-1 and F shares. The principal rights, privileges, conditions and restrictions of those shares will be as follows:
- The Class A-1 shares will be voting and participating.
- The Class F shares will be non-voting, non-participating, entitled to a non-cumulative dividend, preferential to the dividends on the Class A-1 shares, at a rate varying between XXXXXXXXXX% and XXXXXXXXXX% per annum of the RV and will be redeemable at the option of the holder and at the option of the corporation at a price equal to the amount paid into the issued and paid-up capital account plus a premium equal to the difference between the FMV of the consideration received on issue of the shares and the total of the amount paid for that share into the stated capital account and the FMV of any property, other than a share, given by the corporation in payment of that consideration. A price adjustment clause 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 on the issuance of the Class F shares.
No shares of the capital stock of the Transferee will be issued upon the formation of the Transferee.
Permitted exchange
22. A will transfer his XXXXXXXXXX Class A shares of the capital stock of Transferor to Transferee. In return, Transferee will issue XXXXXXXXXX Class A-1 shares of the capital stock of Transferee to A.
A and Transferee will 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 XXXXXXXXXX Class A shares of the capital stock of Transferor. For greater certainty, the Agreed Amount between A and Transferee for the XXXXXXXXXX Class A shares of the capital stock of Transferor transferred will be equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) (namely, their FMV at the time of transfer and the ACB, to A, at the time of transfer, respectively).
The PUC of the Class A-1 shares of the capital stock of Transferee will be set at an amount equal to the PUC of the XXXXXXXXXX transferred Class A shares of the capital stock of Transferor.
After the transfer, Transferor will be connected with Transferee pursuant to subsection 186(4).
Distribution
23. The proposed Distribution of the property of the Transferor to the Transferee will be made on the basis of the net FMV method accepted by the CRA. Immediately prior to the Distribution described in paragraph 25 below, the Transferor Property will be classified into the following two types of property for the purposes of Distribution:
(a) "cash and cash equivalents" (the "Cash") will be one type of property. The Cash of Transferor will consist of, inter alia, cash on hand, accounts receivable (including income taxes receivable), inventory, prepaid expenses and an advance receivable from a related corporation.
b) "Business Property" will be the second type of property. Business Property will include all property of Transferor, other than Cash, the income from which constitutes income from a business as defined in subsection 248(1), other than a "specified investment business" as defined in subsection 125(7).
Inventory, accounts receivable and prepaid expenses of Transferor allocated to Transferee, originally classified as Cash and which will be collected, sold or used by Transferee in carrying on its business, will be reclassified as Business Property, and their net FMV determined after the allocation of current liabilities, as described in paragraph 24 below, may be included in the net FMV of the Business Property.
Transferor will not own "investment-type" property, i.e., property, other than Cash, the income from which constitutes income from property or from a "specified investment business" as defined in subsection 125(7).
For greater certainty, the various tax accounts of Transferor, including, but not limited to, CDA, ERDTOH, NERDOH and GRIP accounts, will not be considered property for the purposes of these guidelines.
24. For the purposes of calculating the net FMV of each type of property of Transferor, immediately prior to the transfer of property referred to in paragraph 25 below, the liabilities of Transferor will be allocated to and deducted from the FMV of each type of property owned by that corporation in the following manner:
(a) Short-term debt shall be allocated and applied against the FMV of each Cash item (prior to the reclassification provided for in paragraph 23 above) in the proportion that the FMV of each Cash item bears to the total FMV of all Cash items. Short-term debt will consist of short-term bank loans, accounts payable and accrued expenses, the portion of long-term debt forming part of current liabilities and taxes payable, if any. Short-term debt that will be allocated to property that will initially be part of Cash and that will be reclassified as Business Property will subsequently be considered as debt allocated to Business Property.
(b) Indebtedness, other than short-term indebtedness, that relates to specific properties will be allocated to those properties to the extent of their FMV. Any portion of such debt in excess of the FMV of a property will be considered to relate to the type of property to which the particular property relates (and not to a specific property) for the purposes of the allocation described below. Indebtedness that forms part of the corporation's long-term debt will be indebtedness to which this or the following paragraph applies.
(c) Liabilities, other than short-term liabilities, that do not relate to specific assets but do relate to a specific type of property shall be allocated to the type of property to which they relate, up to the FMV of that type of property, determined after the Distribution in paragraph 24(b) above.
(d) If applicable, any liabilities remaining after the Distributions referred to in paragraphs 24(a) to 24(c) above may be allocated and applied against the FMV of each type of property in proportion to the FMV of each type of property as determined after the Distributions referred to in paragraphs 24(a) to 24(c) above and up to the FMV of that type of property as determined after the Distributions referred to in paragraphs 24(a) to 24(c) above.
25. Transferor will transfer to Transferee a portion of its property and Transferee will assume a portion of Transferor's liabilities, such that Transferee will receive its pro rata share of the net FMV of the Cash and Business Property held by Transferor immediately prior to the transfer. This pro rata share of the net FMV of the property so allocated to the Transferee will be based on the FMV of the shares of the capital stock of Transferor owned by Transferee immediately prior to the Distribution over the FMV of all the issued and outstanding shares of the capital stock of Transferor immediately prior to the transfer. This transfer will constitute a Distribution.
The Transferor and the Transferee will make the election under subsection 85(1) in the prescribed form and within the prescribed time set out in subsection 85(6), in respect of each property transferred to the Transferee that will constitute Eligible Property within the meaning of subsection 85(1.1).
The Agreed Amount between Transferor and Transferee for each transferred property that will be inventory (as defined in subsection 248(1)), other than property described in paragraph 85(1)(c.2), will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).
The Agreed Amount between Transferor and Transferee for each transferred property that will be inventory (as defined in subsection 248(1)) and will be paragraph 85(1)(c.2) property, i.e., inventory purchased by the taxpayer that will be held by Transferor in its XXXXXXXXXX immediately before the transfer, will be equal to the amount determined pursuant to subparagraph 85(1)(c.2)(i)
The Agreed Amount between Transferor and Transferee for each property transferred that will be property other than depreciable Property shall be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).
The Agreed Amount between Transferor and Transferee for each transferred property that will be Depreciable Property will be equal to the lesser of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii). In this regard, the reference in subparagraph 85(1)(e)(i) to "... the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition..." will be interpreted to mean "that proportion of the taxpayer's undepreciated capital cost of all property of that class immediately before the disposition that the FMV to the taxpayer of the transferred property of that class is of the FMV to the taxpayer of all property of that class immediately before the disposition.
The Transferor will receive as consideration for the property transferred to the Transferee:
(a) the assumption by Transferee of a portion of the liabilities of Transferor distributed (for the purpose of determining the net FMV of each type of property) to the property to be transferred to Transferee by Transferor; and
(b) Class F shares of the capital stock of Transferee. The FMV of such Class F shares will be the amount by which the total FMV of the property transferred by Transferor to Transferee in consideration for the issue of such Class F shares exceeds the total principal amount of the liabilities assumed by Transferee.
The total amount of the FMV of the consideration represented by the liabilities to be assumed by Transferee and allocated as consideration for each property which will be an Eligible Property shall not exceed the Agreed Amount (as determined in accordance with the rules described in paragraph 25 above) in respect of the property.
The total amount of the FMV of the consideration represented by the debts to be assumed by Transferee and allocated as consideration for each property that is not an Eligible Property shall not exceed the FMV in respect of the property.
The PUC of the Class F shares of Transferee will be determined in accordance with the provisions of subsection 85(2.1).
The agreement for the transfer of assets from Transferor to Transferee described above will contain a price adjustment clause that will apply in the event of a disagreement by the CRA or any other taxing authority as to the valuation of the FMV of the transferred assets.
The transferee will be "connected" to the transferor pursuant to subsection 186(4).
Permitted redemptions
26. Immediately after the transfer of property described in paragraph 25 above, Transferee will redeem the Class F shares of its capital stock held by Transferor. In consideration therefor, Transferee will issue to Transferor a note payable on demand (the "Transferee Note"), bearing no interest and having a principal amount equal to the amount of the RV of the Class F shares of Transferee's capital stock being redeemed. Transferor will accept the Transferee Note as full and absolute payment for the redemption of such Class F shares of the capital stock of Transferee.
Upon redemption of such shares, Transferee will be deemed to have paid and Transferor will be deemed to have received a dividend pursuant to subsection 84(3), in respect of the redemption of the Class F shares, in an amount equal to the amount by which the RV of the redeemed Class F shares exceeds their PUC. This dividend will be a Taxable Dividend.
27. Immediately following the share repurchase described in the preceding paragraph, Transferor will purchase for cancellation the XXXXXXXXXX Class A shares of its capital stock held by Transferee. The purchase price for the XXXXXXXXXX Class A shares of Transferor's capital stock will be the FMV of such shares. In consideration thereof, Transferor will issue to Transferee a non-interest bearing demand note (the "Transferor Note"), the principal amount of which will be equal to the purchase price of such shares. The Transferor Note will be accepted by Transferee as full and absolute payment for the purchase of such Class A shares of the capital stock of Transferor.
Upon the purchase of such shares, Transferor will be deemed to have paid and Transferee will be deemed to have received a dividend pursuant to subsection 84(3), in respect of the purchase of the Class A shares, in an amount equal to the amount by which the purchase price of the Class A shares purchased exceeds their PUC. This dividend will be a Taxable Dividend.
28. The Transferee Note and the Transferor Note will be extinguished by set-off pursuant to XXXXXXXXXX.
Purpose of the Proposed Transactions
29. The purpose of the Proposed Transactions is to enable, in a "one-wing butterfly" reorganization, each of A and B to continue their XXXXXXXXXX independently, through separate corporations. Specifically, the Proposed Transactions are intended to split the assets of Transferor so that Transferee will continue XXXXXXXXXX and Transferor will continue XXXXXXXXXX.
Additional Information
30. The main contact details for the taxpayers covered by the advance rulings are:
XXXXXXXXXX
31. All Proposed Transactions will be carried out chronologically in the order in which they are presented.
32. All material transactions that have been undertaken prior to the submission of the request for advance rulings or that may be undertaken after the conclusion of the Proposed Transactions, and that will form part of the series of transactions or events that will include the Proposed Transactions, are described herein.
33. Other than the Proposed Transactions, Transferor has not acquired and will not acquire any property, and has not incurred and will not incur any indebtedness, in anticipation of and prior to the Distribution pursuant to the butterfly reorganization that is the subject of the Proposed Transactions.
34. Except as described herein, neither Transferor nor Transferee will dispose of any property to any person unrelated to the vendor or any partnership in connection with the butterfly reorganization that is the subject of the Proposed Transactions.
35. Other than the Proposed Transactions, there will be no acquisition of control of Transferor and Transferee in the series of transactions or events comprising the Proposed Transactions, taking into account subsection 256(7) and paragraph 55(5)(e).
36. Following the Proposed Transactions, Transferor will continue XXXXXXXXXX and Transferee will continue XXXXXXXXXX.
37. Transferor and Transferee are not, and neither will be at the time of the Proposed Transactions, a "specified financial institution" within the meaning of subsection 248(1).
38. None of the shares of the capital stock of Transferor and Transferee has been or will be at any time during the term of the series of Proposed Transactions:
(a) subject to a covenant as referred to in Section 112(2.2);
(b) subject to a "dividend rental arrangement" within the meaning of subsection 248(1) as referred to in subsection 112(2.3); or
(c) issued or acquired in connection with a transaction, event or series of transactions or events of the kind referred to in subsection 112(2.5).
Rulings
Provided that the statement of relevant facts, the Preliminary Transaction, the Proposed Transactions and the Additional Information constitutes full disclosure of all relevant facts, all Preliminary Transactions and all Proposed Transactions and that the Proposed Transactions are carried out as described above, our rulings are as follows:
A. The redemption by Transferee of the Class F shares of its capital stock held by Transferor, as described in paragraph 26 above, as well as the purchase for cancellation by Transferor of the XXXXXXXXXX Class A shares of its capital stock held by Transferee, as described in paragraph 27 above, will result in the following:
(a) the provisions of subsection 84(3) will apply such that:
(i) Transferee will be deemed to have paid, and Transferor will be deemed to have received, a Taxable Dividend in an amount equal to the excess of the RV of the Class F shares of the capital stock of Transferee over the PUC of such shares; and
(ii) Transferor will be deemed to have paid, and Transferee will be deemed to have received, a Taxable Dividend in an amount equal to the excess of the purchase price of the Class A shares of the capital stock of Transferor over the RV of such shares;
(b) the Taxable Dividends described in Rulings A(a)(i) and (ii) above and deemed to have been received by Transferor and Transferee, as the case may be, to the extent that they are taxable Dividends:
(i) will be included in computing the income of Transferor and Transferee, as the case may be, pursuant to paragraphs 12(1)(j) and 82(1)(a);
(ii) will not be included in the proceeds of disposition of the shares by virtue of paragraph (j) of the definition "proceeds of disposition" in section 54;
(iii) will be deductible in computing the taxable income of the transferor and transferee, as the case may be, by virtue of subsection 112(1);
(iv) in addition, any loss on the disposition of those shares will be reduced by the amount of those dividends by virtue of subsection 112(3).
B. Provided that there is no transaction, other than a Proposed Transaction described herein, that is part of a series of transactions or events (as defined in subsection 248(10)) that includes the Proposed Transactions, and that is:
(a) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(b) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(c) an acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);
(d) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) and 55(3.1)(d);
Taxable Dividends resulting from the transactions described in paragraphs 26 and 27 above will not give rise to the application of subsection 55(2),by virtue of the application of paragraph 55(3)(b).
C. Each of Transferor and Transferee will be subject to Part IV tax to the extent provided by paragraph 186(1)(b) in respect of the Taxable Dividends described in Rulings A(a)(i) and (ii) above and deemed to be received by each such corporation.
D. The Taxable Dividends described in Rulings A(a)(i) and (ii) above will be deemed to be "excepted dividends" within the meaning of section 187.1 and subsection 191(1) and will not be subject to Part IV.1 and Part VI.1 taxes.
E. For the purpose of determining the agreed amount in respect of the Depreciable Property of Transferor that will be transferred by Transferor to Transferee as described in paragraph 25 above, the reference in subparagraph 85(1)(e)(i) to "... the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" will be interpreted to mean "that proportion of the taxpayer's undepreciated capital cost of all property of that class immediately before the disposition that the taxpayer's FMV of the transferred property of that class is of the taxpayer's FMV of all property of that class immediately before the disposition.
F. Settlements of the Transferee Note and the Transferor Note, as described in paragraph 28, will not result in a "forgiven amount" as defined in subsection 80(1).
G. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to the Proposed Transactions described above for the various taxpayers involved in those transactions.
H. 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 18 to 28 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
The rulings rendered should in no way 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 attributed to the CDA, GRIP, ERDTOH or NERDTOH of a corporation truly represents the CDA, GRIP, ERDTOH or NERDTOH of such a corporation.
To the extent that Transferor has an ERDTOH or NERTOH balance at the end of its Taxation Year ending after the purchase by it of the XXXXXXXXXX Class A shares of its capital stock held by Transferee described in paragraph 27, the Proposed Transactions described in paragraphs 26 and 27 would result in a "circular" ERDTOH/NERDTOH calculation. Consequently, we wish to inform you that Transferor and Transferee may be subject to Part IV tax pursuant to paragraph 186(1)(b). This "circularity" issue causes uncertainty as to which corporation would ultimately be entitled to receive a DR and which corporation would ultimately have to pay Part IV tax. Since this situation would have an impact on the assessment of the Transferor and Transferee, the Tax Services Office where the corporations are required to file their tax returns should be consulted to determine which corporation would receive the DR and which corporation would be subject to Part IV tax pursuant to paragraph 186(1)(b).
In addition, some of the Proposed Transactions refer to price adjustment clauses. For example, the terms of the Class F shares of the capital stock of Transferee issued to Transferor in connection with the proposed transaction described in paragraph 25 above will contain a price adjustment clause. In this regard, nothing in this letter should, under any circumstances, be construed as an acquiescence on the part of the CRA that:
(a) for the purposes of the Act, any adjustment, in accordance with one of the price adjustment clauses relating to one or more of the Proposed Transactions, made subsequent to that transaction, shall be deemed to be valid and effective retroactively to the date of the transaction;
(b) for the purposes of the Act, any amount paid, in accordance with any of the price adjustment clauses relating to one or more of the Proposed Transactions, subsequent to such transaction, shall be deemed to be an additional amount paid in the transaction or the price paid for the acquisition or redemption of a share; or that in the event that an adjustment is made in accordance with any of the price adjustment clauses, the Proposed Transactions shall be deemed to have been completed as described herein, particularly for the purposes of Ruling A above.
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