Principal Issues: A trust realized a capital gain by the application of subparagraph 104(4)(b)(ii) on the deemed disposition of shares of the capital stock of a Canadian-controlled private corporation (CCPC) and will include the taxable capital gain realized in its income for the year. The trust will enter into a pipeline type transaction by transferring the shares of the capital-stock of the CCPC to a newly created corporation in consideration for shares of the capital stock of the new corporation. The assets of the corporation subject to the pipeline transaction consist mainly of shares of the capital stock of a subsidiary corporation which carries on an active business and loans receivable from the subsidiary corporation. The corporation subject to the pipeline transaction will continue to own the shares of the capital stock of its subsidiary and the operations of the subsidiary will be maintained for the years following the completion of the pipeline transaction. The corporation subject to the pipeline transaction will remain a separate entity from the newly created corporation following the completion of the pipeline transaction. One year after the pipeline transaction is completed, the corporation subject to the pipeline transaction will gradually pay dividends to the newly created corporation with the excess liquidity generated by its activities. The newly created corporation will gradually reduce the paid-up capital of the shares of its capital stock held by the trust. 1) Whether section 84.1 applies to reduce the PUC of the shares of the capital stock of the new corporation received by the trust as consideration for the disposition of the shares of the capital stock of the CCPC. 2) Whether subsection 84(2) will apply to the proposed transactions. 3) Whether subsection 245(2) will apply to the proposed transactions.
Position: 1) No. Favorable ruling given. 2) No. Favorable ruling given. 3) No. Favorable ruling given.
Reasons: In accordance with the provisions of the Act and our previous positions.
XXXXXXXXXX 2022-093326
Le XXXXXXXXXX
Dear Madam,
Subject: Request for advance income tax rulings
XXXXXXXXXX
This is in response to your letter dated XXXXXXXXXX requesting advance income tax rulings on behalf of XXXXXXXXXX. We have also taken into account the information you have 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 any of the matters covered by this request are the same as or substantially similar to any transaction or issues that are:
i. addressed in a previously filed tax return of the taxpayer, or a related person, that is:
A. under review by the Canada Revenue Agency in connection with that return;
B. the subject of an objection by the taxpayer or the related person;
C. the subject of a current or completed court process involving the taxpayers or a related person;
ii. the subject of an advance ruling request previously considered by the Income Tax Rulings Directorate.
Definitions
Unless otherwise indicated :
i. all statutory herein 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 57, the names and corporate names of the taxpayers are replaced by the following names and corporate names:
“A” means Mr. XXXXXXXXXX;
"B" means to Mr. XXXXXXXXXX;
"C" means Mr. XXXXXXXXXX;
"Child 1" means Mr. XXXXXXXXXX, the son of Spouse;
"Child 2" refers to Ms. XXXXXXXXXX, the daughter of A and Spouse;
"Child 3" means Mr. XXXXXXXXXX, the son of A and Spouse.
"Holdco A" means XXXXXXXXXX;
"Holdco B" means XXXXXXXXXX;
"Holdco" means XXXXXXXXXX;
"Newco 1" means the new corporation described in paragraph 27 of the Completed Transactions;
"Newco 2" means the new corporation to be incorporated in connection with the Proposed Transactions, as described in paragraph 46 of the Proposed Transactions;
"Opco" means XXXXXXXXXX;
"Spouse" means Ms. XXXXXXXXXX, the spouse of A;
"Trust 1" means XXXXXXXXXX;
"Trust 2" means XXXXXXXXXX;
The following abbreviations, terms and expressions have the meanings specified below:
"ACB" means "adjusted cost base" as defined in section 54;
"Agreed amount" has the meaning assigned by subsection 85(1);
"CCPC" means "Canadian-controlled private corporation" as defined in subsection 125(7);
"Completed Transactions" means the transactions described in paragraphs 27 to 38;
"Cost Amount" has the same meaning assigned by subsection 248(1);
"CRA" means the Canada Revenue Agency;
"DR" means "dividend refund" as defined in subsection 129(1);
"Eligible dividend" has the same meaning as in subsection 89(1);
"ERDTOH" means "eligible refundable dividend tax on hand" as defined in subsection 129(4);
"FMV" means "fair market value", which refers to the highest price, in dollars, that two arm's length parties who are knowledgeable and prudent would agree on in the open market, neither party being under any compulsion to act;
"GRIP" means "general rate income pool" as defined in subsection 89(1);
"Holdco Advance B" means the advance described in paragraph 15;
"Holdco Advance" means the advance described in paragraph 15;
"Holdco Advance A" means the advance described in paragraph 15;
"NERDTOH" means "non-eligible refundable dividend tax on hand" as defined in subsection 129(4);
"Note 1" means the demand note issued under number 36;
"Note 2" means the demand note issued under number 36;
"Opco Advance 1" means the advance described in paragraph 22;
"Opco Advance 2" means the advance described in paragraph 22;
"Opco Advance 3" means the advance described in paragraph 33;
"Opco Advance 4" means the advance described in paragraph 33;
"Opco Advance 5" means the advance described in paragraph 33;
"Opco Advance 6" means the advance described in paragraph 33;
"Opco Advance 7" means the advance described in paragraph 34;
"Opco Advance 8" means the advance described in paragraph 35;
"Personal trust" has the meaning assigned by subsection 248(1);
"Preliminary Transactions" means the transactions described in paragraphs 39 to 45;
"Proposed Transactions" means the transactions described in paragraphs 46 to 55;
"PUC" means "paid-up capital" as defined in subsection 89(1);
"Related Person" has the meaning set out in subsection 251(2);
"Resident of Canada" means a resident of Canada for the purposes of the Act;
"RV" means "redemption value";
"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 the definition in subsection 89(1);
"Taxation Year" has the meaning assigned by subsection 249(1);
"TCP" means "taxable Canadian corporation" as defined in subsection 89(1);
“Inter vivos trust” has the meaning assigned by subsection 108(1);
XXXXXXXXXX;
XXXXXXXXXX;
Facts
Facts about Trust 1
1. Trust 1 is a trust governed by the XXXXXXXXXX that was constituted under a trust deed on XXXXXXXXXX. It is an inter vivos trust and a personal trust. Trust 1 is resident in Canada. Its taxation year end is XXXXXXXXXX.
2. The trustees of Trust 1 are A, B and C (collectively referred to as the "Trustees"). All Trustees are residents of Canada.
3. Trust 1 is a discretionary family trust. The beneficiaries of Trust 1 are as follows:
- A, born XXXXXXXXXX;
- Spouse, born on XXXXXXXXXX;
- Child 1, born on XXXXXXXXXX;
- Child 2, born on XXXXXXXXXX;
- Child 3, born on XXXXXXXXXX;
- Any other child of the first degree of A. As of the date hereof, no children of A other than those explicitly named above have been born or adopted;
- Any child of the first degree of Child 1. As of the date hereof, Child 1 has no child of the first degree;
- Any child of the first degree of the children of A. As of the date hereof, no child of A has a child of the first degree;
- Any legal entity formed or to be formed, the control of which is held by A.
All beneficiaries of Trust 1 are residents of Canada.
4. The 21st anniversary of the creation of Trust 1 was XXXXXXXXXX.
5. On XXXXXXXXXX, Trust 1 held a cash balance, one silver coin, XXXXXXXXXX Class H shares of the capital stock of Holdco and XXXXXXXXXX Class G shares of the capital stock of Holdco A. These shares are Capital Property to Trust 1.
6. No capital gains deduction was claimed by a beneficiary of Trust 1 (or by an individual with whom a beneficiary of Trust 1 did not deal at arm's length) in respect of the XXXXXXXXXX Class H shares held by Trust 1 in the capital stock of Holdco or in respect of substituted shares pursuant to subsection 248(5). In addition, Trust 1's ACB of the Class H shares of the capital stock of Holdco was not based, directly or indirectly, on the pre-1972 tax-free zone.
Facts about Trust 2
7. Trust 2 is a trust governed by the XXXXXXXXXX constituted under a trust deed on XXXXXXXXXX. It is an inter vivos trust and a personal trust. Trust 2 is resident in Canada. Its taxation year end is XXXXXXXXXX.
8. The trustees of Trust 2 are A, B and C. All trustees are resident in Canada.
9. Trust 2 is a discretionary family trust. The beneficiaries of Trust 2 are as follows:
- A;
- Spouse;
- Child 1;
- Child 2;
- Child 3;
- Any child of A or Spouse, born or who may be born or legally adopted prior to the winding up of the trust. As of the date hereof, no child of A or Spouse other than those expressly named above has been born or adopted;
- Any grandchild of A or Spouse, born or who may be born or legally adopted prior to the winding up of the trust. As of the date hereof, A and Spouse have no grandchildren;
- Any legal person constituted or to be constituted whose control is held by one or more beneficiaries. However, such a legal person shall not become a beneficiary until it is designated by written decision of the trustees;
- Any inter vivos trust created or to be created whose beneficiaries will be one or more beneficiaries of this trust. However, such a trust shall not become a beneficiary until it is designated by written decision of the Trustees.
All beneficiaries of Trust 2 are residents of Canada.
Facts about Holdco A
10. Holdco A is a TCC and CCPC resulting from an amalgamation on XXXXXXXXXX under the XXXXXXXXXX. Its taxation year end is XXXXXXXXXX. Holdco A is a holding corporation that holding portfolio investments (publicly traded stocks, bonds, mutual funds), interests in several private corporations, an interest in a subsidiary, and rental properties.
11. The principal rights, privileges, restrictions and conditions attached to the issued and outstanding shares of the capital stock of Holdings A are as follows:
- Class A shares: no par value, voting and participating;
- Class B shares: no par value, non-voting and non-participating, entitled to a variable, non-preferential and non-cumulative dividend at a monthly floating rate of up to XXXXXXXXXX% of the RV, redeemable at the option of the holder or the corporation at a price equal to the RV, which is defined as the difference between, on the one hand, the FMV of the consideration received by the corporation upon their issuance and, on the other hand, the total formed by : 1) the FMV of any property, other than shares, given by the corporation in payment of that consideration; and 2) any reduction in the paid-up capital of those shares made in return for payment;
- Class C shares: no par value, voting (XXXXXXXXXX votes per share) and non-participating;
- Class D shares: without par value, non-voting and non-participating, entitled to a variable, non-preferential, non-cumulative dividend at a variable annual rate of up to XXXXXXXXXX% of the RV, redeemable at the option of the holder or the corporation at a price equal to the RV, which is defined as the amount paid up on such shares plus a premium, upon the death of A, equal to the excess of : 1) any insurance proceeds on the life of A, cashed in or cashable by the corporation, following the death of the latter, over 2) the adjusted cost basis of such life insurance policy;
- Class E shares : having a par value of $XXXXXXXXXX, non-voting and non-participating, entitled to a variable, non-preferential and non-cumulative dividend at a fixed monthly rate of XXXXXXXXXX% of the RV, redeemable at the option of the holder or the corporation at a price equal to the RV, which is defined as the par value of such shares plus a premium equal to the difference between, on the one hand, the FMV of the consideration received by the corporation upon their issuance, and, on the other hand, the total made up of : (1) the nominal value of the shares of that class; and (2) the FMV of any property, other than a share of that class, given in payment of that consideration;
- Class G shares: without par value, non-voting and non-participating, entitled to a variable, non-preferential and non-cumulative dividend at a variable annual rate of up to XXXXXXXXXX% of the RV, redeemable at the option of the holder or the corporation at a price equal to the RV, which is defined as the difference between, on the one hand, the FMV of the consideration received by the corporation on their issue and, on the other hand, the total formed by : 1) the FMV of any property, other than a share, given by the corporation in payment of that consideration; and 2) any reduction in the issued and paid-up capital of those shares made against payment.
12. Prior to XXXXXXXXXX, the shareholding and tax attributes of the shares of the capital stock of Holdco A are as follows:
|
Shareholder |
Number and Class |
ACB ($) |
PUC ($) |
FMV or RV ($) |
|
Trust 2 |
XXXXX Class A shares |
XXXXX |
XXXXX |
XXXXX |
|
Trust 1 |
XXXXX Class G shares |
XXXXX |
XXXXX |
XXXXX |
|
A |
XXXXX Class B shares |
XXXXX |
XXXXX |
XXXXX |
|
A |
XXXXX Class C shares |
XXXXX |
XXXXX |
XXXXX |
|
A |
XXXXX Class D shares |
XXXXX |
XXXXX |
XXXXX |
|
A |
XXXXX Class E shares |
XXXXX |
XXXXX |
XXXXX |
Facts about Holdco B
13. Holdco B is a TCC and CCPC incorporated on XXXXXXXXXX under the XXXXXXXXXX. Its taxation year-end is XXXXXXXXXX. Holdco B is a holding corporation holding interests in a number of private corporations. Holdco B is a minority shareholder of Holdco which is not a Related Person of A, nor of any person to whom A is related.
Facts about Holdco
14. Holdco is a TCC and CCPC resulting from an amalgamation on XXXXXXXXXX under the XXXXXXXXXX. Its taxation year-end is XXXXXXXXXX. Holdco is a management corporation with an interest in Opco.
15. As at XXXXXXXXXX, Holdco's assets consisted primarily of a cash balance, interest receivable on advances to Opco, XXXXXXXXXX Class A shares of the capital stock of Opco, and the Holdco Advance, bearing interest at a rate of XXXXXXXXXX% and without repayment terms, receivable from Opco. As of XXXXXXXXXX, the liabilities of Holdco consisted primarily of the Holdco Advance A with a principal amount of $XXXXXXXXXX and the Holdco Advance B with a principal amount of $XXXXXXXXXX.
16. As at XXXXXXXXXX, the composition of Holdco's assets and liabilities will be similar to that as at XXXXXXXXXX, except for certain advances receivable or due that have been or will be repaid in connection with the Completed Transactions or the Preliminary Transactions described below.
17. The principal rights, privileges, restrictions and conditions attached to the issued and outstanding shares of the capital stock of Holdco are as follows:
-
- Class A shares: no par value, voting and participating;
- Class G shares: having a par value of $XXXXXXXXXX per share, voting and non-participating, entitled to a fixed, non-preferential, non-cumulative dividend of XXXXXXXXXX% per annum on the amount paid for each share on issue, redeemable at any time at the option of the holder at a price equal to the amount of the consideration paid for that share plus any declared but unpaid dividends:
- Class H shares : without par value, non-voting and non-participating, entitled to a variable, non-preferential, non-cumulative dividend at a monthly floating rate of up to XXXXXXXXXX% on the RV, redeemable at the option of the holder or the corporation at a price equal to the RV, which is defined as the difference between the FMV of the consideration received by the corporation on issue and the total of (i) the FMV of any property, other than shares, given by the corporation in payment of that consideration. and (ii) any reduction in the PUC of those shares given in exchange for payment.
18. Prior to XXXXXXXXXX, the shareholding and tax attributes of Holdco’s share capital were as follows:
|
Shareholder |
Number and Class |
ACB ($) |
PUC ($) |
FMV or RV ($) |
|
Trust 2 |
XXXXX Class A shares |
XXXXX |
XXXXX |
XXXXX |
|
Trust 1 |
XXXXX Class H shares |
XXXXX |
XXXXX |
XXXXX |
|
A |
XXXXX Class G shares |
XXXXX |
XXXXX |
XXXXX |
|
Holdco B |
XXXXX Class A shares |
XXXXX |
XXXXX |
XXXXX |
|
Holdco B |
XXXXX Class H shares |
XXXXX |
XXXXX |
XXXXX |
|
Holdco B |
XXXXX Class G shares |
XXXXX |
XXXXX |
XXXXX |
The shares of the capital stock of Holdco constitute Capital Property to each of its shareholders. A has effective (de jure) control of Holdco.
19. The amount of the Holdco GRIP was $XXXXXXXXXX as of XXXXXXXXXX.
20. Holdco's ERDTOH and NERDTOH account amounts were XXXXXXXXXX as of XXXXXXXXXX.
Facts about Opco
21. Opco is a TCC and CCPC incorporated on XXXXXXXXXX under the XXXXXXXXXX. Its taxation year-end is XXXXXXXXXX. Opco is a corporation that specializes in the manufacture and installation of reinforcing steel.
22. As at XXXXXXXXXX, Opco's assets included a cash balance, accounts receivable, inventories, work in progress, prepaid expenses, property, plant and equipment, intangible assets, the interest-bearing Opco Advance 1 receivable from Holdco A with a principal amount of $XXXXXXXXXX and the interest-bearing Opco Advance 2 receivable from Holdco B with a principal amount of $XXXXXXXXXX.
23. As at XXXXXXXXXX, the composition of Opco's assets and liabilities will be similar to that as at XXXXXXXXXX, except for certain advances receivable or payable that have been or will be repaid in connection with the Completed Transactions or the Preliminary Transactions described below.
24. All of the issued and outstanding shares of the capital stock of Opco, being the XXXXXXXXXX Class A shares (i.e., voting and participating shares), are held by Holdco.
25. The amount of Opco's GRIP was $XXXXXXXXXX as at XXXXXXXXXX.
26. The amount of Opco's ERDTOH and NERDTOH accounts were XXXXXXXXXX as at XXXXXXXXXX.
Completed Transactions
27. On XXXXXXXXXX, Newco 1 was incorporated under the XXXXXXXXXX. Newco 1 is a TCC and a CCPC. Its taxation year end is XXXXXXXXXX.
The authorized share capital of Newco 1 consists of XXXXXXXXXX classes of shares including Class D.2 and E.1 shares. The principal rights, privileges, restrictions and conditions attached to these shares are as follows:
- Class D.2 shares: no par value, non-voting and participating;
- Class E.1 shares: no par value, voting, non-participating, redeemable at an amount equal to the PUC of the shares.
28. On XXXXXXXXXX, following the incorporation of Newco 1, A subscribed to XXXXXXXXXX Class E.1 shares of the capital stock of Newco 1 for consideration of $XXXXXXXXXX and Trust 2 subscribed to XXXXXXXXXX Class D.2 shares of the capital stock of Newco 1 for a consideration of $XXXXXXXXXX.
29. On XXXXXXXXXX, following the incorporation of Newco 1, the trustees of Trust 2 designated Newco 1 as a discretionary beneficiary of Trust 2, by written decision of the trustees, as required by the trust deed.
30. On XXXXXXXXXX, following the incorporation of Newco 1, A disposed of the XXXXXXXXXX Class G shares that he held of the capital stock of Holdco to Newco 1 for cash consideration of $XXXXXXXXXX.
31. On XXXXXXXXXX, Trust 1 made a distribution to A of the XXXXXXXXXX Class G shares of the capital stock of Holdco A.
Pursuant to paragraph 107(2)(a), Trust 1 was deemed to have disposed of the shares and received proceeds equal to their Cost Amount to Trust 1 immediately before that time. In addition, pursuant to paragraph 107(2)(b), A was deemed to have acquired the shares at a cost equal to their Cost Amount to Trust 1 immediately before that time. Finally, the proceeds of disposition of the Trust 1 capital interest disposed of by A on the distribution described above were deemed to be equal to the amount determined under paragraph 107(2)(c), while the ACB of that capital interest was deemed to be equal to the amount determined under paragraph 107(1)(a).
32. By virtue of subparagraph 104(4)(b)(ii), at the end of the day that was 21 years after the day on which Trust 1 was established, i.e., XXXXXXXXXX, Trust 1 was deemed to have disposed of all of the property it held, including the XXXXXXXXXX Class H shares of the capital stock of Holdco, for proceeds of disposition equal to their FMV at that time, and was deemed to have reacquired that property immediately after that day, i.e., XXXXXXXXXX, for an amount equal to that value.
Any capital gain arising from the deemed disposition pursuant to subsection 104(4) described above will be reported in Trust 1's income tax return for the taxation year ending on XXXXXXXXXX.
Trust 1 will not allocate any portion of the taxable capital gain to its beneficiaries and will pay the tax on the taxable capital gain within the time allowed by the Act.
As a result of this transaction, the ACB to Trust 1 of the XXXXXXXXXX Class H shares of the capital stock of Holdco is $XXXXXXXXXX and the PUC is $XXXXXXXXXX.
33. On XXXXXXXXXX, Opco declared a dividend in the amount of $XXXXXXXXXX on the Class A shares of its capital stock held by Holdco. This dividend was payable through the transfer of a portion of Opco Advance 1 in the amount of $XXXXXXXXXX (the "Opco Advance 3") and a portion of Opco Advance 2 in the amount of $XXXXXXXXXX (the "Opco Advance 4") to Holdco.
As a result of the transfer, the balance of the advance receivable by Opco from Holdco A was $XXXXXXXXXX (the "Opco Advance 5") and the balance of the advance receivable by Opco from Holdco B was $XXXXXXXXXX (the "Opco Advance 6").
Opco made the designation under subsection 89(14) that this dividend be an eligible dividend to the extent of its GRIP balance.
This dividend was a taxable dividend and deductible in computing Holdco's taxable income pursuant to subsection 112(1).
Opco was connected with Holdco within the meaning of subsection 186(2) and paragraph 186(4)(a). Thus, the dividend was subject to Part IV tax pursuant to paragraph 186(1)(b) based on the DR received by Opco.
The amount of the dividend did not exceed the Safe Income on Hand available to the XXXXXXXXXX Class A shares of Opco's capital stock held by Holdco immediately before the time the dividend is paid.
34. On XXXXXXXXXX, the Holdco Advance A and part of the Opco Advance 3 were extinguished by way of set-off to the extent of the lesser amount, pursuant to XXXXXXXXXX. As a result of this offset, the balance of the advance receivable by Holdco from Holdco A was $XXXXXXXXXX (the "Opco Advance 7").
35. On XXXXXXXXXX, the Advance from Holdco B and part of the Opco Advance 4 were extinguished by way of set-off to the extent of the lesser amount under Article XXXXXXXXXX. As a result of this offset, the balance of the advance receivable by Holdco from Holdco B was $XXXXXXXXXX (the "Opco Advance 8").
36. On XXXXXXXXXX, following receipt of the dividend from Opco, Holdco declared a dividend in the amount of $XXXXXXXXXX on the Class A shares of its capital stock held by Trust 2 and Holdco B.
Specifically, Trust 2 received a dividend of $XXXXXXXXXX payable through the transfer of the Opco 7 Advance and the issuance of a demand note in the amount of $XXXXXXXXXX (the "Note 1") to Trust 2. Trust 2 accepted the Opco 7 Advance and Note 1 as full and absolute payment of such dividend.
For its part, Holdings B received a dividend of $XXXXXXXXXX payable through the transfer of the Opco Advance 8 and the issuance of a demand note in the amount of $XXXXXXXXXX (the "Note 2") to Holdco B. Holdco B accepted Opco Advance 8 and Note 2 as full and absolute payment of such dividend.
Holdco made the designation pursuant to subsection 89(14) that the dividends be Eligible Dividends to the extent of its GRIP balance.
In the case of Holdco B, the dividend was a taxable dividend and deductible in computing Holdco B's taxable income pursuant to subsection 112(1).
Holdco was connected with Holdco B within the meaning of paragraph 186(4)(b). Thus, the dividend was subject to Part IV tax pursuant to paragraph 186(1)(b) based on the DR received by Holdco.
The amount of the dividend did not exceed the Safe Income on Hand for the XXXXXXXXXX Class A shares of the capital stock of Holdco held by Holdco B immediately before the time the dividend was paid.
37. The Opco 8 Advance was extinguished by set-off by virtue of XXXXXXXXXX.
38. On XXXXXXXXXX, following receipt of the dividend from Holdco described in paragraph 36, Trust 2 distributed that dividend to Newco 1 by way of a transfer of the Opco 7 Advance and Note 1. The transfer of the Notes constituted an amount paid by Trust 2 and received by Newco 1. Pursuant to subsection 104(6), Trust 2 will deduct the amount of the taxable dividend received from Holdco and paid to Newco 1 in computing its income for its taxation year ending XXXXXXXXXX.
Trust 2 will make a designation pursuant to subsection 104(19) in respect of the taxable dividend received from Holdco and paid to Newco 1 so that such taxable dividend will be deemed not to have been received by Trust 2 and will be deemed to have been received by Newco 1.
The dividend will be a Taxable Dividend and deductible in computing Newco 1's taxable income by virtue of subsection 112(1).
Holdco was connected with Newco 1 within the meaning of subsection 186(2) and paragraph 186(4)(a). Thus, the dividend was subject to Part IV tax pursuant to paragraph 186(1)(b) only to the extent of the DR received by Holdco.
The amount of the dividend did not exceed the Safe Income on Hand respecting the XXXXXXXXXX Class A shares of the capital stock of Holdco held by Trust 2 immediately before the time the dividend is paid.
Preliminary Transactions
39. Prior to XXXXXXXXXX, Child 2 will, without consideration, through a notarial deed en minute, renounce her beneficial interest in Trust 1 by virtue of XXXXXXXXXX.
40. On XXXXXXXXXX, Opco will repay a portion of the Holdco Advance in the amount of $XXXXXXXXXX. The partial repayment of the Holdco Advance will be in cash.
41. On XXXXXXXXXX, Opco will declare a dividend in the amount of $XXXXXXXXXX on the Class A shares of its capital stock held by Holdco. Holdco will accept the cash amount of $XXXXXXXXXX, the Opco 5 Advance and the Opco 6 Advance as full and absolute payment of such dividend.
Opco will make the designation under subsection 89(14) that this dividend be an Eligible Dividend to the extent of its GRIP balance.
This dividend will be a taxable dividend and deductible in computing Holdco's taxable income by virtue of subsection 112(1).
Opco is connected with Holdco within the meaning of subsection 186(2) and paragraph 186(4)(a). Thus, the dividend will be subject to Part IV tax pursuant to paragraph 186(1)(b) based on the DR received by Opco.
The amount of the dividend will not exceed the Safe Income on Hand respecting the XXXXXXXXXX Class A shares of Opco's capital stock held by Holdco immediately before the time the dividend is paid.
42. On XXXXXXXXXX, Holdco will declare a dividend in the amount of $XXXXXXXXXX on the Class A shares of its capital stock held by Trust 2 and Holdco B.
Specifically, Trust 2 will receive a dividend in the amount of $XXXXXXXXXX payable through a cash payment of $XXXXXXXXXX and the transfer of the Opco 5 Advance to Trust 2. Trust 2 will accept the cash amount of $XXXXXXXXXX and the Opco 5 Advance as full and absolute payment of such dividend.
For its part, Holdco B will receive a dividend of $XXXXXXXXXX payable in cash of $XXXXXXXXXX and through the transfer of the Opco Advance 6 to Holdco B. Holdco B will accept the cash amount of $XXXXXXXXXX and the Opco 6 Advance as full and absolute dividend payment.
Holdco will make the designation under subsection 89(14) so that the dividend is an Eligible Dividend to the extent of its GRIP balance.
In the case of Holdco B, the dividend will be a taxable dividend and deductible in computing Holdco B's taxable income by virtue of subsection 112(1).
Holdco is connected with Holdco B within the meaning of paragraph 186(4)(b). Thus, the dividend will be subject to Part IV tax pursuant to paragraph 186(1)(b) based on the DR received by Holdco.
The amount of the dividend will not exceed the Safe Income on Hand respecting the 20 Class A shares of the capital stock of Holdco held by Holdco B immediately before the time the dividend is paid.
43. The Opco 6 Advance will be extinguished by set-off under XXXXXXXXXX.
44. On XXXXXXXXXX, following receipt of the dividend from Holdco described in paragraph 42, Trust 2 will distribute that dividend to Newco 1 through the payment of $XXXXXXXXXX in cash and the transfer of the Opco Advance 5 to Newco 1. The transfer of the $XXXXXXXXXX cash and Opco Advance 5 will constitute an amount paid by Trust 2 and received by Newco 1. Under subsection 104(6), Trust 2 will deduct the amount of the taxable dividend received from Holdco and paid to Newco 1 in computing its income for its taxation year ending XXXXXXXXXX.
Trust 2 will make a designation pursuant to subsection 104(19) in respect of the taxable dividend received from Holdco and paid to Newco 1 so that such dividend will be deemed not to have been received by Trust 2 and will be deemed to have been received by Newco 1.
The dividend will be a Taxable Dividend and deductible in computing Newco 1's taxable income by virtue of subsection 112(1).
Holdco is connected with Newco 1 within the meaning of subsection 186(2) and paragraph 186(4)(a). Thus, the dividend will be subject to Part IV tax pursuant to paragraph 186(1)(b) only to the extent of the DR received by Holdco.
The amount of the dividend will not exceed the Safe Income on Hand respecting the XXXXXXXXXX Class A shares of the capital stock of Holdco held by Trust 2 immediately before the time the dividend is paid.
45. On XXXXXXXXXX, following receipt of the dividends from Holdco described in paragraphs 42 and 44, Newco 1 will make a non-interest bearing advance in the amount of $XXXXXXXXXX to Opco and Holdco B will make a non-interest bearing advance in the amount of $XXXXXXXXXX to Opco.
Proposed Transactions
46. On XXXXXXXXXX, Newco 2 will be incorporated pursuant to the XXXXXXXXXX. Newco 2 will be a TCC and a CCPC. Its taxation year end will be XXXXXXXXXX.
The authorized share capital of Newco 2 will consist of XXXXXXXXXX classes of shares, including class D.2, E.1 and H.2 shares. The principal rights, privileges, restrictions and conditions attached to those shares will be as follows:
- Class D.2 shares: without par value, non-voting and participating;
- Class E.1 shares: without par value, voting, non-participating, redeemable at an amount equal to the PUC of the shares;
- Class H.2 shares: without par value, non-voting, non-participating, entitled to a non-cumulative dividend at an annual rate varying between XXXXXXXXXX%, calculated on the PUC, redeemable at the option of the corporation and at the option of the holder at an amount equal to the RV of the shares plus a premium equal to the difference between the FMV of the consideration received by the corporation on issue and the total of the amount paid for those shares into the issued and paid-up capital account and the FMV of any property other than shares of that class given by the corporation in payment of that consideration, plus any declared but unpaid dividends. The FMV of the shares is furthermore directly reduced by any reduction in the PUC of those shares given as consideration.
47. Following the creation of Newco 2, Newco 1 will subscribe for XXXXXXXXXX Class E.1 shares of the capital stock of Newco 2 for a cash consideration of $XXXXXXXXXX.
48. Concurrently with the transaction described in the preceding paragraph, Trust 2 will transfer the XXXXXXXXXX Class A shares that it holds in the capital stock of Holdco to Newco 2. In consideration, Newco 2 will issue XXXXXXXXXX Class D.2 shares of its capital stock. The FMV of the transferred shares will be equal to the FMV of the shares received in consideration for the transferred shares.
Trust 2 will accept the XXXXXXXXXX Class D.2 shares of the capital stock of Newco 2 as full and absolute payment for the purchase of the XXXXXXXXXX Class A shares of the capital stock of Holdco.
The amount that Newco 2 will add to the PUC of the Class D.2 shares of its capital stock issued to Trust 2 will be $XXXXXXXXXX.
Trust 2 and Newco 2 will make the subsection 85(1) election in prescribed form and within the time period set out in subsection 85(6), in respect of the Class A shares of the capital stock of Holdco to be transferred to Newco 2. For greater certainty, the Agreed Amount of Trust 2 and Newco 2 for the shares of the capital stock of Holdco so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) (namely, their FMV at the time of the transfer and the ACB for Trust 2 at the time of the transfer, respectively, being $XXXXXXXXXX).
49. Concurrently with the transaction described in paragraph 47, Trust 1 will transfer the XXXXXXXXXX Class H shares that it holds of the capital stock of Holdco to Newco 2. In consideration, Newco 2 will issue XXXXXXXXXX Class H.2 shares of its capital stock to Trust 1. The FMV of the transferred shares will be equal to the FMV of the shares received in consideration for the transferred shares.
Trust 1 will accept the XXXXXXXXXX Class H.2 shares of the capital stock of Newco 2 as full and absolute payment for the purchase of the XXXXXXXXXX Class H shares of the capital stock of Holdco.
The amount that Newco 2 will add to the PUC of the Class H.2 shares of its capital stock issued to Trust 1 will be equal to the ACB to Trust 1 of the Class H shares of the capital stock of Holdco immediately before the transfer, being $XXXXXXXXXX.
After the transfer, Newco 2 will be a connected corporation with Holdco pursuant to paragraph 186(4)(a).
50. Holdco will remain a separate legal entity (i.e., Holdco will not be wound up into Newco 2 or any other corporation, or merged with Newco 2 or any other corporation). In addition, Holdco will continue to operate its business for a minimum period of XXXXXXXXXX following the share transfer described in the previous paragraph.
51. Opco will continue to carry on its business for a minimum period of XXXXXXXXXX following the share transfer described in paragraph 49.
52. After XXXXXXXXXX following the share transfer described in paragraph 49, Opco will gradually begin paying dividends on the Class A shares of its capital stock held by Holdco from cash surpluses generated by its operations or from funds raised through borrowing. For greater certainty, the dividend payments will be spread over a period of more than XXXXXXXXXX.
53. After XXXXXXXXXX has elapsed following the share transfer described in paragraph 49, Holdco will gradually begin to pay dividends on the Class A shares of its capital stock held by Newco 2 and Holdco B from the surplus cash generated by its operations (i.e., the dividend and interest income received from Opco). For greater clarity, the dividend payments will be spread over a period of more than XXXXXXXXXX.
54. After the expiry of a period of XXXXXXXXXX following the share transfer described in paragraph 49, Newco 2 will make phased reductions in the PUC of the Class H.2 shares of its capital stock held by Trust 1. For greater certainty, the PUC reductions will be phased in over a period of more than XXXXXXXXXX.
55. A portion of the amounts received by Trust 1 for the PUC reductions described in the preceding paragraph will thereafter be distributed to the beneficiaries of Trust 1 in accordance with the Trust Indenture.
Purpose of the Proposed Transactions
56. The purpose of the Proposed Transactions described above is to retain the value of the Class H shares of Holdco's capital stock in Trust 1 in order to gradually return the value of those shares, the FMV of which corresponds to the ACB, to Trust 1, resulting from the application of subsection 104(4), to the beneficiaries of Trust 1.
Additional Information
57. The main contact details of the taxpayers covered by the advance rulings are:
XXXXXXXXXX
Advance Rulings Issued
Provided that the statement of relevant facts, the Completed Transactions, the Preliminary Transactions, the Proposed Transactions and the Additional Information constitutes full disclosure of all relevant facts, completed transactions, preliminary transactions and proposed transactions and that the Proposed Transactions are carried out as described above, we rule as follows:
A. To the extent that the PUC of the Class H.2 shares of the capital stock of Newco 2 issued to Trust 1 in the transaction described in 49 above does not exceed the maximum amount that may be added to the PUC of such shares pursuant to paragraph 84.1(1)(a), the provisions of section 84.1 will not apply so as to reduce the PUC of such shares.
B. The provisions of subsection 84(2) will not apply as a result of and by reason of the Proposed Transactions described above to deem Holdco to pay to Trust 1, and Trust 1 to receive, a dividend on the Class H shares of the capital stock of Holdco.
C. 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 70-6R12, dated April 1, 2022, issued by the CRA and are binding on the CRA provided that the Proposed Transactions described in paragraphs 46 to 51 are completed by XXXXXXXXXX. Subsequent Proposed Transactions described in paragraphs 52 to 55 must be completed within the timeframes set out herein, as described above. These decisions are based on the current Act and do not take into account the proposed amendments thereto.
Other Comments
In no event shall the decisions rendered be construed as an acquiescence on the part of the CRA that:
(a) we have considered the other tax consequences that may result from the Completed Transactions, the Preliminary Transactions and the Proposed Transactions set out herein;
(b) we have reviewed the application of subsections 75(2) and 107(2) to the Completed Transactions, the Preliminary Transactions and the Proposed Transactions set out herein; the amount attributed to a property in the Statement of Facts, the Completed Transactions, the Preliminary Transactions and the Proposed Transactions is really the FMV or ACB of a property, or the amount of the PUC of a share or the Agreed Amount of a property transferred pursuant to subsection 85(1);
(c) the amount of the dividends provided for in paragraphs 33, 36 and 38 of the Completed Transactions, paragraphs 41, 42 and 44 of the Preliminary Transactions and paragraphs 52 and 53 of the Proposed Transactions do not exceed the amount of Safe Income on Hand respecting the relevant shares; and
(d) the amount allocated to a corporation's GRIP, ERDTOH or NERDTOH truly represents the GRIP, ERDTOH or NERDTOH of such corporation.
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Best regards,
XXXXXXXXXX
For the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch