Principal Issues: Whether an internal reorganization meets the requirements of paragraphs 55(3)(a) and 55(3.01)(g).
Position: Yes. Favourable rulings given.
Reasons: In accordance with the provisions of the Act and our previous positions.
XXXXXXXXXX 2023-098912
XXXXXXXXXX 2024
XXXXXXXXXX
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 that you 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 nor any of the matters addressed in this request are the same as or substantially similar to, transactions or issues that:
i. is 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 under objection by the taxpayer or the related person;
C. is the subject of an ongoing or completed court proceeding involving the taxpayer 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 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 expressions used in this application and defined in the Act shall have the meaning assigned to them in the Act;
iii. all monetary amounts are in Canadian dollars; and
iv. words importing the singular number only shall include the plural and vice versa where the context so requires.
In this letter, unless otherwise indicated, the names and corporate names of taxpayers are replaced by the following names and corporate names:
"ACB" means "adjusted cost base" as defined in section 54;
"Advance 1" means the advance described in paragraph 14 of this letter;
"Advance 2" means the advance described in paragraph 19 of this letter;
"Agreed Amount" has the meaning assigned by subsection 85(1);
"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;
"Depreciable Property" has the same meaning as in subsection 13(21);
"Dividend Payor" means a corporation referred to in subsections 112(1) or (2) or 138(6) from which a Dividend Recipient has received a Taxable Dividend described in paragraph 55(2.1)(a);
"Dividend Recipient" as defined in paragraph 55(2.1)(a);
"DR" means "dividend refund" as defined in subsection 129(1);
"Eligible Dividend" has the meaning assigned by the definition in subsection 89(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 an open market between two arm's length parties who are knowledgeable, informed and prudent, neither of whom is under any compulsion to act;
"GRIP" means "general rate income pool" as defined in subsection 89(1);
"Minority Shareholders of Opco 2" means the holders of Class F shares of the capital stock of Opco 2, as described in paragraph 12 of this letter;
"Minority Shareholders of Opco 3" means the holders of Class B shares of the capital stock of Opco 3, as described in paragraph 17 of this letter;
"Mr. A" means XXXXXXXXXX;
"Mr. B" means XXXXXXXXXX;
"Mr. C" means XXXXXXXXXX;
"NERDTOH" means "non-eligible refundable dividend tax on hand" as defined in subsection 129(4);
"Newco A" means the new corporation to be incorporated in connection with the implementation of the Preliminary Transactions, as described in paragraph 26 of this letter;
"Newco B" means the new corporation to be incorporated in connection with the implementation of the Preliminary Transactions, as described in paragraph 27 of this letter;
"Newco" means the new corporation to be incorporated in connection with the implementation of the Proposed Transactions, as described in paragraph 34 of this letter;
"Note 1" means the Demand Note issued by Opco 2 to Opco in paragraph 20 of this Letter;
"Note 2" means the demand note issued by Opco 3 to Opco in paragraph 21 of this letter;
"Opco 2" means XXXXXXXXXX, which is described in paragraphs 10 to 14 of this letter;
"Opco 3" means XXXXXXXXXX, which is described in paragraphs 15 to 19 of this letter;
"Opco Note" means the demand note issued by Opco to Realtyco in paragraph 39 of this letter;
"Opco Realty Properties" means the Opco properties described in paragraph 7 of this letter;
"Opco" means XXXXXXXXXX, as described in paragraphs 3 to 9 of this letter;
"Preliminary Transactions" means the transactions described in paragraphs 20 to 32 below;
"Proposed Transactions" means the transactions described in paragraphs 33 to 40 below;
"PUC" means "paid-up capital" as defined in subsection 89(1);
"Realtyco Note" means the demand note issued by Realtyco to Opco in paragraph 38 of this letter;
"Realtyco" means the new corporation to be formed in connection with the implementation of the Proposed Transactions, as described in paragraph 33 of this letter;
"Related Persons" has the meaning set out in subsection 251(2);
"Resident of Canada" means a resident of Canada for the purposes of the Act;
"Safe Income" means, in respect of a Taxable Dividend described in paragraph 55(2. 1)(a) that is received by a Dividend Recipient from a Dividend Payor, the amount of income earned or realized by a corporation - after 1971 and before the safe income determination time in respect of the transaction, event or series of transactions or events - that could reasonably be considered to contribute to the capital gain that would have been realized on a disposition at FMV, immediately before the dividend, of the share on which the dividend was received;
"Taxable Dividend" has the meaning assigned by the definition 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);
"Trust A" means the new trust to be created in connection with the implementation of the Preliminary Transactions, as described in paragraph 24 of this letter;
"Trust B" refers to the new trust that will be created as part of the implementation of the Preliminary Transactions, as described in paragraph 25 of this letter;
"UCC" means "undepreciated capital cost" as defined in subsection 13(21);
The following abbreviations, terms and expressions have the meanings set out below.
XXXXXXXXXX;
XXXXXXXXXX;
Facts
1. Mr. A, Mr. B and Mr. C are Residents of Canada and none of them intends to cease to be a Resident of Canada.
2. Mr. A, Mr. B and Mr. C are not Related Persons.
3. Opco is a CCPC and a TCC. Opco is governed by the XXXXXXXXXX. Opco's Taxation Year ends on XXXXXXXXXX. Opco carries on a XXXXXXXXXX.
4. The authorized share capital of Opco consists of, among other things, an unlimited number of Class A, Class B, Class C, Class D and Class E shares without par value, having the following principal rights, privileges, restrictions and conditions:
- Class A shares: voting (XXXXXXXXXX per share), participating, entitled to receive any dividends declared, in proportion to the shares held by all holders of Class A and B shares, and to share, concurrently with the holders of Class B shares, in the remaining property of the Corporation upon its liquidation, dissolution or winding-up;
- Class B shares: non-voting, participating, entitled to receive any dividends declared, in proportion to the shares held by all holders of Class A and B shares, and to share, concurrently with the holders of Class A shares, in the remaining property of the Corporation upon its liquidation, dissolution or winding-up;
- Class C shares: non-voting, non-participating, entitled to receive, in priority to the holders of Class A, B, E and F shares and pari passu with the holders of Class D shares, a non-cumulative preferential monthly dividend at the rate of XXXXXXXXXX% of the redemption value, redeemable at the option of the Corporation or the holder at a redemption value equal to the FMV of the consideration received by the Corporation on issue, plus the amount of all declared but unpaid dividends, if any, and with a price adjustment clause.
- Class D shares: non-voting, non-participating, entitled to receive, in priority to the holders of Class A, B, E and F shares and pari passu with the holders of Class C shares, a monthly, non-cumulative, preferential dividend at the rate of XXXXXXXXXX% of the redemption value, redeemable at the option of the Corporation or the holder at a redemption value equal to the FMV of the consideration received by the Corporation on issue, plus the amount of all declared but unpaid dividends, if any, and with a price adjustment clause.
- Class E shares: voting (XXXXXXXXXX per share), non-participating, entitled to receive, in priority to the holders of Class A and B shares and after the holders of Class C, D and F shares, a monthly, non-cumulative preferential dividend, at a rate of XXXXXXXXXX% of the redemption value and redeemable at the option of the holder at a redemption value equal to the FMV of the consideration received by the Corporation at the time of their issue, plus the amount of all declared but unpaid dividends, if any.
5. The share ownership and tax attributes of the issued and outstanding shares of Opco's share capital are as follows:
|
Shareholder |
Number and Class |
PUC ($) |
ACB ($) |
FMV ($) |
|
Mr. A |
XXXXX Class A shares |
XXXXX |
XXXXX |
XXXXX |
|
Mr. B |
XXXXX Class A shares |
XXXXX |
XXXXX |
XXXXX |
|
Mr. C |
XXXXX Class B shares |
XXXXX |
XXXXX |
XXXXX |
The shares of the capital stock of Opco constitute Capital Property to each of its shareholders.
6. Mr. A and Mr. B have always acted jointly and in concert to control Opco.
7. Opco owns the following properties (collectively, the "Opco Realty Properties"):
XXXXXXXXXX
The Opco Realty Properties constitute Capital Property to Opco.
8. As of XXXXXXXXXX, the amount of Opco's GRIP was $XXXXXXXXXXX and the amount of Opco's ERDTOH and NERDTOH accounts were $XXXXXXXXXXX, respectively.
9. Opco also owns a majority of the common shares of the capital stock of two operating companies, Opco 2 and Opco 3.
10. Opco 2 is a CCPC and a TCC. Opco 2 is governed by the XXXXXXXXXX. Opco 2's Taxation Year ends on XXXXXXXXXX. Opco 2 carries on a XXXXXXXXXX business.
11. The authorized share capital of Opco 2 consists of, among other things, the following two classes of shares:
- Class A shares: voting (XXXXXXXXXX per share), participating, entitled, pari passu with the holders of Class F shares, to receive any dividends declared by the corporation and to share in the remaining property of the corporation upon its liquidation, dissolution or winding-up;
- Class F shares: non-voting, participating, entitled, pari passu with the holders of Class A shares, to receive any dividend declared by the Corporation and to share in the remaining property of the Corporation upon its liquidation or dissolution.
12. The XXXXXXXXXX issued and outstanding Class A shares of the capital stock of Opco 2 are held by Opco and the XXXXXXXXXX issued and outstanding Class F shares of the capital stock of Opco 2 are held by XXXXXXXXXX key employees of the Corporation. Specifically, XXXXXXXXXX employees each hold XXXXXXXXXX Class F Shares and one employee holds XXXXXXXXXX Class F Shares (collectively, the "Minority Shareholders of Opco 2").
13. As of XXXXXXXXXX, the amount of Opco 2's GRIP was $XXXXXXXXXXX and the amount of each of Opco 2's ERDTOH and NERDTOH accounts was XXXXXXXXXX.
14. As of XXXXXXXXXX, Opco 2 had an advance receivable from Opco in the amount of $XXXXXXXXXXX ("Advance 1").
15. Opco 3 is a CCPC and a TCC. Opco 3 is governed by the XXXXXXXXXX. Opco 3's Taxation Year ends on XXXXXXXXXX. Opco 3 specializes in the sale and installation of XXXXXXXXXX.
16. The authorized share capital of Opco 3 includes the following two classes of shares:
- Class A shares: voting (XXXXXXXXXX per share), participating, entitled, pari passu with the holders of Class B shares, to receive any dividend declared by the corporation and to share in the remaining property of the corporation upon its liquidation or dissolution;
- Class B shares: non-voting, participating, entitled, pari passu with the holders of Class A shares, to receive any dividend declared by the Corporation and to share in the remaining property of the Corporation upon its liquidation or dissolution.
17. The XXXXXXXXXX issued and outstanding Class A shares of the capital stock of Opco 3 are held by Opco and the XXXXXXXXXX issued and outstanding Class B shares of the capital stock of Opco 3 are held equally by XXXXXXXXXX key employees of the Corporation (collectively, the "Minority Shareholders of Opco 3").
18. As of XXXXXXXXXX, the amount of Opco 3's GRIP was $XXXXXXXXXXX and the amount of Opco 3's ERDTOH and NERDTOH accounts were XXXXXXXXXX, respectively.
19. As of XXXXXXXXXX, Opco 3 had an advance receivable from Opco in the amount of $XXXXXXXXXXX ("Advance 2").
Preliminary Transactions
The Preliminary Transactions will be carried out in the order described below and will take place no later than XXXXXXXXXX.
Dividend Payments
20. Opco 2 will declare a dividend in the amount of $XXXXXXXXXX on the Class A shares of its capital stock held by Opco and in the amount of $XXXXXXXXXX on the Class F shares of its capital stock held by the Minority Shareholders of Opco 2. This dividend will be payable through the issuance of non-interest bearing demand notes.
Opco 2 will make the designation under subsection 89(14) so that this dividend is an Eligible Dividend to the extent of its GRIP balance.
Opco will accept the $XXXXXXXXXX demand note ("Note 1") as full and absolute payment of such dividend.
Such dividend will be a Taxable Dividend and deductible in computing Opco's taxable income pursuant to subsection 112(1).
Opco 2 is connected with Opco within the meaning of subsection 186(2) and paragraph 186(4)(a). Consequently, the dividend will be subject to Part IV tax, based on the DR received by Opco 2, pursuant to paragraph 186(1)(b).
The amount of the dividend will not exceed the amount of Safe Income attributable to the XXXXXXXXXX Class A shares of the capital stock of Opco 2 held by Opco immediately before the time the dividend is paid.
The Minority Shareholders of Opco 2 will accept the demand note as full and absolute payment of such dividend and will include the Taxable Dividend in their tax returns for the XXXXXXXXXX Taxation Year.
21. Opco 3 will declare a dividend in the amount of $XXXXXXXXXX on the Class A shares of its capital stock held by Opco and in the amount of $XXXXXXXXXX on the Class B shares of its capital stock held by the Minority Shareholders of Opco 3. This dividend will be payable by the issuance of non-interest bearing demand notes.
Opco 3 will make the designation provided for in subsection 89(14) so that this dividend constitutes an Eligible Dividend to the extent of its GRIP balance.
Opco will accept the $XXXXXXXXXX demand note ("Note 2") as full and absolute payment of such dividend.
Such dividend will be a Taxable Dividend and deductible in computing Opco's taxable income pursuant to subsection 112(1).
Opco 3 is connected with Opco within the meaning of subsection 186(2) and paragraph 186(4)(a). Consequently, the dividend will be subject to Part IV tax based on the DR received by Opco 3 pursuant to paragraph 186(1)(b).
The amount of the dividend will not exceed the amount of Safe Income attributable to the XXXXXXXXXX Class A shares of the capital stock of Opco 3 held by Opco immediately before the time the dividend is paid.
The Minority Shareholders of Opco 3 will accept the demand note as full and absolute payment of such dividend and will include the Taxable Dividend in their tax returns for the XXXXXXXXXX Taxation Year.
22. Advance 1 and Note 1 will be cancelled by way of set-off.
23. Part of Advance 2 and Note 2 will be cancelled by way of set-off to the extent of the lesser amount. As a result of this set-off, the balance of the advance receivable by Opco 3 from Opco will be $XXXXXXXXXX.
Estate planning
24. Trust A will be created under the XXXXXXXXXX by Mr. B as settlor. The trustees of Trust A will be Mr. A, Mr. A's spouse and Mr. C. The beneficiaries of Trust A will be as follows:
- Mr. A;
- Mr. A.'s spouse
- Mr. A.'s three children
- any corporation, incorporated or to be incorporated, controlled directly or indirectly by one or more beneficiaries of the trust to the extent that the trustees have designated such corporation as a beneficiary in writing.
25. Trust B will be created pursuant to the XXXXXXXXXX by Mr. A. as settlor. The trustees of Trust B will be Mr. B, Mr. B's daughter and Mr. C. The beneficiaries of Trust B will be as follows:
- Mr. B;
- Mr. B's spouse
- Mr. B's two children
- Mr. B's two sisters
- any corporation, incorporated or to be incorporated, controlled directly or indirectly by one or more beneficiaries of the trust, provided that the trustees have designated such corporation as a beneficiary in writing.
26. Newco A will be incorporated under the XXXXXXXXXX by Mr. A as incorporator. Newco A will be a TCC and a CCPC. Its Taxation Year-end will be XXXXXXXXXX.
The authorized share capital of Newco A will include the following two classes of shares:
- Class A shares: voting (XXXXXXXXXX per share), participating, entitled to receive any dividend declared by the corporation and to share in the remaining property of the corporation upon its liquidation, dissolution or winding-up;
- Class C shares: non-voting, non-participating, entitled to receive a monthly, non-cumulative, preferential dividend at a maximum rate of XXXXXXXXXX% of the redemption value, redeemable at the option of the corporation or the holder at a redemption value equal to the FMV of the consideration received by the corporation when they were issued, plus the amount of any dividends declared but unpaid, if any, and containing a price adjustment clause.
Mr. A will subscribe for XXXXXXXXXX Class A shares of the capital stock of Newco A for cash consideration of $XXXXXXXXXX.
27. Newco B will be incorporated under the XXXXXXXXXX by Mr. B as incorporator. Newco B will be a TCC and a CCPC. Its Taxation Year-end will be XXXXXXXXXX.
The authorized share capital of Newco B will include the following two classes of shares:
- Class A shares: voting (XXXXXXXXXX per share), participating, entitled to receive any dividend declared by the corporation and to share in the remaining property of the corporation upon its liquidation, dissolution or winding-up;
- Class C shares: non-voting, non-participating, entitling the holder to receive a monthly, non-cumulative, preferential dividend at a maximum rate of XXXXXXXXXX% of the redemption value, redeemable at the option of the corporation or the holder at a redemption value equal to the FMV of the consideration received by the corporation when they were issued, plus the amount of any dividends declared but unpaid, if any, and including a price adjustment clause.
Mr. B will subscribe for XXXXXXXXXX Class A shares of the capital stock of Newco B for cash consideration of $XXXXXXXXXX.
28. Mr. A, Mr. B and Mr. C will exchange all of their shares in the capital stock of Opco as follows:
a) Mr. A will exchange his XXXXXXXXXX Class A shares of the capital stock of Opco for XXXXXXXXXX Class C shares of the capital stock of Opco;
b) Mr. B will exchange his XXXXXXXXXX Class A shares of the capital stock of Opco for XXXXXXXXXX Class C shares of the capital stock of Opco;
c) Mr. C will exchange his XXXXXXXXXX Class B shares of the capital stock of Opco for XXXXXXXXXX Class D shares of the capital stock of Opco.
A price adjustment clause will be included in each of the exchange agreements. Each of those agreements will provide that the exchange is carried out pursuant to subsection 51(1).
The FMV of the shares exchanged will be the FMV of the shares received on the exchange. The PUC of the Class C and Class D shares of Opco issued as consideration for the exchanges will be determined in accordance with subsection 51(3).
29. Mr. A, Newco A, Mr. B and Newco B will subscribe for Class E shares of the capital stock of Opco as follows:
a) Mr. A will subscribe for XXXXXXXXXX Class E shares of the capital stock of Opco for cash consideration of $XXXXXXXXXX;
b) Newco A will subscribe for XXXXXXXXXX Class E shares of the capital stock of Opco for cash consideration of $XXXXXXXXXX;
c) Mr. B will subscribe for XXXXXXXXXX Class E shares of the capital stock of Opco for cash consideration of $XXXXXXXXXX;
d) Newco B will subscribe for XXXXXXXXXX Class E shares of the capital stock of Opco for cash consideration of $XXXXXXXXXXX.
30. Trust A, Trust B and Mr. C. will subscribe for Class B shares of the capital stock of Opco as follows:
a) Trust A will subscribe for XXXXXXXXXX Class B shares of the capital stock of Opco for cash consideration of $XXXXXXXXXXX;
b) Trust B will subscribe for XXXXXXXXXX Class B shares of the capital stock of Opco for cash consideration of $XXXXXXXXXXX;
c) Mr. C. will subscribe for XXXXXXXXXX Class B shares of the capital stock of Opco for cash consideration of $XXXXXXXXXX.
31. Mr. A will transfer XXXXXXXXXX Class C shares that he holds in the capital stock of Opco to Newco A. In consideration, Newco A will issue XXXXXXXXXX Class C shares of its capital stock to Mr. A. The FMV of the transferred shares will be equal to the FMV of the shares received in consideration for the transferred shares.
Mr. A and Newco A 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 Class C shares of the capital stock of Opco that will be transferred to Newco A. For greater certainty, the Agreed Amount of Mr. A and Newco A for the shares of the capital stock of Opco so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) (namely, respectively, their FMV at the time of the transfer and their ACB, to Mr. A, at the time of the transfer).
The amount that Newco A will add to the PUC of the Class C shares of its share capital issued to Mr. A will be equal to the PUC of the shares transferred immediately before the transfer. For greater certainty, the PUC of the shares issued will not exceed the amount determined by variable B in the formula in paragraph 84.1(1)(a).
32. Mr. B will transfer XXXXXXXXXX Class C shares that he holds of the capital stock of Opco to Newco B. In consideration, Newco B will issue XXXXXXXXXX Class C shares of its capital stock to Mr. B. The FMV of the transferred shares will be equal to the FMV of the shares received in consideration for the transferred shares.
Mr. B and Newco B 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 Class C shares of the capital stock of Opco that will be transferred to Newco B. For greater certainty, the Agreed Amount of Mr. B and Newco B for the shares of the capital stock of Opco so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) (namely, respectively, their FMV at the time of the transfer and their ACB, to Mr. B, at the time of the transfer).
The amount that Newco B will add to the PUC of the Class C shares of its capital stock issued to Mr. B will be equal to the ACB of the shares transferred immediately before the transfer. For greater certainty, the PUC of the shares issued will not exceed the amount determined by variable B of the formula in paragraph 84.1(1)(a).
Proposed Transactions
The Proposed Transactions will be carried out in the order set out below. The Proposed Transactions described in paragraphs 34 to 38 will take place no later than XXXXXXXXXX and the Proposed Transactions described in paragraphs 39 and 40 will take place on XXXXXXXXXX.
33. Holdco will be incorporated under the XXXXXXXXXX by Mr. A and Mr. B as incorporators. Holdco will be a TCC and a CCPC. Its Taxation Year end will be XXXXXXXXXX.
Holdco's authorized share capital will include the following classes of shares:
- Class B shares: voting (XXXXXXXXXX per share), non-participating, non-dividend bearing and redeemable at a redemption value equal to their issued and paid-up capital;
- Class C shares: non-voting, non-participating, entitled to receive a monthly, non-cumulative, preferential dividend at a maximum rate of XXXXXXXXXX% of the redemption value, redeemable at the option of the corporation or the holder at a redemption value equal to the FMV of the consideration received by the corporation when they were issued, plus the amount of any dividends declared but not paid, if any, and with a price adjustment clause.
- Class D shares: non-voting, non-participating, entitled to receive a monthly, non-cumulative, preferential dividend at a maximum rate of XXXXXXXXXX% of the redemption value, redeemable at the option of the Corporation or the holder at a redemption value equal to the FMV of the consideration received by the Corporation on issue, plus the amount of any dividends declared but unpaid, if any, and containing a price adjustment clause.
- Class I shares: non-voting, participating, entitled to receive any dividends declared by the corporation and to share in the remaining property of the corporation on its liquidation or dissolution.
No shares in the share capital of Holdco will be issued at the time of its incorporation.
34. Realtyco will be incorporated under the XXXXXXXXXX by Holdco as incorporator. Realtyco will be a TCC and a CCPC. Its taxation year-end will be XXXXXXXXXX.
Realtyco's authorized share capital will include the following classes of shares:
- Class A shares: voting (XXXXXXXXXX per share), participating, and entitled to receive any dividends declared by the corporation and to share in the remaining property of the corporation upon its liquidation, dissolution or winding-up.
- Class C shares: non-voting, non-participating, entitled to receive a monthly, non-cumulative, preferential dividend at a maximum rate of XXXXXXXXXX% of the redemption value, redeemable at the option of the corporation or the holder at a redemption value equal to the FMV of the consideration received by the corporation on issue, plus the amount of any dividends declared but unpaid, if any, and with a price adjustment clause.
- Class D shares: non-voting, non-participating, entitled to receive a monthly, non-cumulative, preferential dividend at a maximum rate of XXXXXXXXXX% of the redemption value, redeemable at the option of the corporation or the holder at a redemption value equal to the FMV of the consideration received by the corporation on issue, plus the amount of any dividends declared but unpaid, if any, and containing a price adjustment clause.
No shares in the share capital of Realtyco will be issued at the time of its incorporation.
35. Mr. A, Mr. B, Mr. C, Trust A, Trust B, Newco A and Newco B will transfer all of their shares of the capital stock of Opco to Holdco as follows:
a) Mr. A will transfer his XXXXXXXXXX Class C shares and XXXXXXXXXX Class E shares of the capital stock of Opco to Holdco. In consideration therefor, Holdco will issue XXXXXXXXXX Class C shares and XXXXXXXXXX Class B shares of its capital stock to Mr. A;
b) Mr. B will transfer his XXXXXXXXXX Class C shares and XXXXXXXXXX Class E shares of the capital stock of Opco to Holdco. In consideration therefor, Holdco will issue XXXXXXXXXX Class C shares and XXXXXXXXXX Class B shares of its capital stock to Mr. B;
c) Mr. C will transfer his XXXXXXXXXX Class D shares and XXXXXXXXXX Class B shares of the capital stock of Opco to Holdco. In consideration therefor, Holdco will issue XXXXXXXXXX Class D shares and XXXXXXXXXX Class I shares of its capital stock to Mr. C.
d) Trust A will transfer its XXXXXXXXXX Class B shares of the capital stock of Opco to Holdco. In consideration therefor, Holdco will issue XXXXXXXXXX Class I shares of its capital stock to Trust A;
e) Trust B will transfer its XXXXXXXXXX Class B shares of the capital stock of Opco to Holdco. In consideration therefor, Holdco will issue XXXXXXXXXX Class I shares of its capital stock to Trust B;
(f) Newco A will transfer its XXXXXXXXXX Class C shares and XXXXXXXXXX Class E shares of the capital stock of Opco to Holdco. In consideration therefor, Holdco will issue XXXXXXXXXX Class C shares and XXXXXXXXXX Class B shares of its capital stock to Newco A;
g) Newco B will transfer its XXXXXXXXXX Class C shares and XXXXXXXXXX Class E shares of the capital stock of Opco to Holdco. In consideration therefor, Holdco will issue XXXXXXXXXX Class C shares and XXXXXXXXXX Class B shares of its capital stock to Newco B.
In each of these transfers, the FMV of the transferred shares will be equal to the FMV of the shares received in consideration for the transferred shares.
The transferor and the transferee, for each of the transfers, 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 shares of the capital stock of Opco that will be transferred to Holdco. For greater certainty, for each of the transfers, the Agreed Amount of the parties for the shares of the capital stock of Opco so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) (namely, respectively, their FMV at the time of the transfer and their ACB, to the transferor, at the time of the transfer).
The amount that Holdco will add to the PUC of the shares of its capital stock issued in consideration for the transferred shares will be determined in accordance with the provisions of subsection 85(2.1) or paragraph 84.1(1)(a), as the case may be.
36. Holdco will transfer XXXXXXXXXX Class C shares that it holds in the capital stock of Opco to Realtyco. In consideration, Realtyco will issue XXXXXXXXXX Class A shares and XXXXXXXXXX Class C shares of its capital stock to Holdco. The FMV of the transferred shares will be equal to the FMV of the shares received in consideration for the transferred shares.
Holdco and Realtyco 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 Class C shares of the capital stock of Opco that will be transferred to Realtyco. For greater certainty, the Agreed Amount of Holdco and Realtyco for the shares of the capital stock of Opco so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) (namely, respectively, their FMV at the time of the transfer and their ACB, to Holdco, at the time of the transfer).
The amount that Realtyco will add to the PUC of the Class A shares and Class C shares of its capital stock issued to Holdco will be determined in accordance with the provisions of subsection 85(2.1).
37. Opco will transfer the Opco Realty Properties to Realtyco. Opco will receive as consideration for the property transferred to Realtyco:
a) the assumption by Realtyco of the debts of Opco which are secured by a mortgage on the Opco Realty Properties; and
b) XXXXXXXXXX Class D shares of the capital stock of Realtyco having a total redemption value equal to the amount by which the total FMV of the assets transferred by Opco to Realtyco exceeds the total principal amount of the liabilities of Opco assumed by Realtyco.
Opco and Realtyco will make the election referred to in 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 Realtyco. The Agreed Amount of Opco and Realtyco for each transferred property will be determined in accordance with the limits set out in subsection 85(1).
The total of the FMV of the consideration represented by the debts to be assumed by Realtyco and allocated as consideration for each property will not exceed the Agreed Amount in respect of the property.
The amount that Realtyco will add to the PUC of the Class D shares of its capital stock issued to Opco will be determined in accordance with the provisions of subsection 85(2.1).
The sale agreement will include a price adjustment clause.
38. Realtyco will redeem the XXXXXXXXXX Class D shares of its capital stock held by Opco. In consideration therefor, Realtyco will issue a non-interest bearing demand promissory note with a principal amount equal to the redemption value of the Class D shares of its capital stock being redeemed (the "Realtyco Note").
Opco will accept the Realtyco Note as full and absolute payment for the redemption of such Class D shares of the capital stock of Realtyco.
39. Opco will redeem the XXXXXXXXXX Class C shares of its capital stock held by Realtyco. In consideration therefor, Opco will issue a non-interest bearing demand promissory note with a principal amount equal to the redemption value of the Class C shares of its capital stock being redeemed (the "Opco Note").
Realtyco will accept the Opco Note as full and absolute payment for the redemption of such Class C shares of the capital stock of Opco.
Opco will make the designation provided for in subsection 89(14) so that such dividend will constitute an Eligible Dividend.
40. The Realtyco Note and the Opco Note will be cancelled by way of set-off.
Purpose of the Preliminary Transactions and the Proposed Transactions
41. The purpose of the Preliminary Transactions described in paragraphs 24 to 32 is to implement an estate plan for Mr. A and Mr. B whereby the value of the shares of the capital stock of Opco held personally by Mr. A and Mr. B is frozen in favour of a trust for the benefit of their respective families.
42. The purpose of the Proposed Transactions described above is to transfer the Opco Realty Properties into a separate corporation for asset protection business purposes given the operational risks associated with Opco's business.
Additional Information
43. The main contact details of the taxpayers concerned by the advance ruling are:
XXXXXXXXXX
44. All material transactions that have been undertaken prior to the submission of the advance ruling request 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.
45. The estate planning transactions described in paragraphs 24 to 32 of the Preliminary Transactions will not be carried out with a view to completing the series of transactions that includes the Proposed Transactions and would be completed notwithstanding the implementation of the Proposed Transactions, and vice versa.
Rulings Rendered
Provided that the statement of relevant facts, the Preliminary Transactions, the Proposed Transactions and the Additional Information constitutes full disclosure of all relevant facts and of all preliminary and proposed transactions and that the Proposed Transactions are carried out as described above, our rulings are as follows:
A. The redemption by Realtyco of the XXXXXXXXXX Class D shares of its capital stock held by Opco described in 38 above will result in the following:
(a) the provisions of subsection 84(3) will apply so that Realtyco will be deemed to have paid, and Opco will be deemed to have received, a dividend in an amount equal to the amount, if any, by which the amount paid by the corporation on the redemption exceeds the PUC of such shares immediately before that time;
(b) the deemed dividend received by Opco described in paragraph (a) above, to the extent that it constitutes a Taxable Dividend:
(i) will be included in computing Opco's income 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 of "proceeds of disposition" in section 54;
(iii) will be deductible in computing Opco's taxable income pursuant to subsection 112(1);
(iv) any loss on the disposition of those shares will be reduced by the amount of that dividend pursuant to subsection 112(3);
(v) provided that Realtyco is not entitled to a DR in its taxation year in which it is deemed to have paid the dividend described in paragraph (a) above, Opco will not be subject to Part IV tax in respect of the dividend deemed to have been received pursuant to paragraph 186(1)(b).
B. The redemption by Opco of the XXXXXXXXXX Class C shares of its capital stock held by Realtyco described in 39 above will have the following results:
(a) the provisions of subsection 84(3) will apply so that Opco will be deemed to have paid, and Realtyco will be deemed to have received, a dividend in an amount equal to the amount, if any, by which the amount paid by the corporation on the redemption exceeds the PUC of such shares immediately before that time;
(b) the deemed dividend received by Realtyco described in paragraph (a) above, to the extent that it constitutes a Taxable Dividend:
(i) will be included in computing Realtyco's income 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 of "proceeds of disposition" in section 54;
(iii) will be deductible in computing Realtyco's taxable income pursuant to subsection 112(1);
(iv) any loss on the disposition of those shares will be reduced by the amount of that dividend pursuant to subsection 112(3);
(v) since Opco will be entitled to a DR pursuant to subsection 129(1) in its taxation year in which it is deemed to have paid the dividend described in paragraph (a) above, Realtyco will be subject to Part IV tax in respect of the deemed dividend received to the extent provided in paragraph 186(1)(b).
C. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the Taxable Dividends arising from the redemptions described in Rulings A and B above, to the extent that no disposition of property or significant increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) occurs as part of the series of transactions that includes the Proposed Transactions. For greater certainty, the Proposed Transactions, in and of themselves, will not be considered to result in a disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v). In particular, the Proposed Transactions described in paragraph 35 above will be deemed not to be described in subparagraph 55(3)(a)(ii) by virtue of paragraph 55(3.01)(g).
D. The provisions of subsection 245(2) will not apply as a result of and by virtue 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 are completed before XXXXXXXXXX. These determinations are based on the current Act and do not take into account any proposed amendments thereto.
Other Comments
The rulings should in no way be construed as implying on the part of the CRA that:
(a) we have considered the other tax consequences that may arise from the Preliminary-Transactions and Proposed Transactions set out herein;
b) the amount attributed to a property in the statement of facts, the Preliminary Transactions and the Proposed Transactions truly represents the FMV or ACB of a property, or the amount of the PUC of a share;
(c) the amount of the dividends provided for in paragraphs 20 and 21 of the Preliminary Transactions does not exceed the amount of safe income attributable to the relevant shares;
(d) we have reviewed the allocation of Safe Income between Opco and Realtyco (we are generally of the view that Safe Income should be allocated in a manner consistent with documents 2020-0861031C6 and 2021-0889611E5); and that the amount allocated to a corporation's GRIP, ERDTOH or NERDTOH truly represents such corporation's GRIP, ERDTOH and NERDTOH.
In addition, since the application and operation of price adjustment clauses are not proposed transactions, we do not issue rulings on such clauses. Income Tax Folio S4-F3-C1, Price Adjustment Clauses, sets out the CRA's administrative position with respect to price adjustment clauses.
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Best regards,
XXXXXXXXXX
for the Director
Reorganization Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch