Principal Issues: Whether the proposed transactions meet the requirements of paragraph 55(3)(b).
Position: Yes.
Reasons: Based on the Act, CRA publications and taxpayer's representations.
XXXXXXXXXX 2024-100882
XXXXXXXXXX 2024
Subject: Request for Advance Income Tax Rulings
XXXXXXXXXX
Dear XXXXXXXXXX,
This is in response to your letter of XXXXXXXXXX as amended on XXXXXXXXXX, in which you requested advance income tax rulings on behalf of the taxpayer indicated above. 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 parties involved in the transactions involved, none of the issues involved in this ruling request is:
(i) in a previously filed tax return of the taxpayers or persons related to the taxpayers;
(ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayers or persons related to the taxpayers;
(iii) under objection by the taxpayers or persons related to the taxpayers;
(iv) the subject of a current or completed court process involving the taxpayers or persons related to the taxpayers; or
(v) the subject of an advance income ruling previously issued by the Income Tax Rulings Directorate.
The main contact information for taxpayers involved in the advance rulings is:
XXXXXXXXXX
Unless otherwise indicated:
(i) all statutory references are to provisions of the Income Tax Act, R.S.C. 1985, (5th Supp.), c. 1, as amended (the “Act”);
(ii) all monetary amounts are in Canadian dollars; and
(iii) the singular includes the plural, and vice versa, if the context so requires.
DEFINITIONS AND ABBREVIATIONS USED
The names and corporate names of taxpayers are replaced by the names and corporate names indicated below.
“BROTHER1” refers to XXXXXXXXXX, brother of SISTER1, SISTER2, BROTHER2 and BROTHER3;
“BROTHER2” refers to XXXXXXXXXX, brother of SISTER1, SISTER2, BROTHER1 and BROTHER3;
“BROTHER3” refers to XXXXXXXXXX, brother of SISTER1, SISTER2, BROTHER1 and BROTHER2;
“DISTRIBUTING CORPORATION” (“DC”) means XXXXXXXXXX, the corporation resulting from the amalgamation of XXXXXXXXXX corporations;
“FATHER” refers to the late XXXXXXXXXX, deceased on XXXXXXXXXX, father of SISTER1, SISTER2, BROTHER1, BROTHER2 and BROTHER3;
“SISTER1” refers to XXXXXXXXXX, sister of SISTER2, BROTHER1, BROTHER2 and BROTHER3;
“SISTER2” refers to XXXXXXXXXX, sister of SISTER1, BROTHER1, BROTHER2 and BROTHER3.
“TRANSFERREE CORPORATION2” (“TC2”) means XXXXXXXXXX;
“TRANSFEREE CORPORATION1” (“TC1”) means XXXXXXXXXX;
“TRUST” means XXXXXXXXXX, a testamentary trust created as a result of the death of FATHER, XXXXXXXXXX;
Unless otherwise indicated, the following abbreviations have the meanings defined below.
“ACB” means “Adjusted Cost Base” as defined in section 54;
“Advances” refers collectively to TRUST Advance, SISTER1 Advance and SISTER2 Advance;
“Agreed Amount” has the meaning set out in subsection 85(1);
“Capital Dividend” means a dividend for which an election has been made pursuant to subsection 83(2);
“Capital Property” has the same meaning as in section 54;
“CCPC” means “Canadian-controlled private corporation” as defined in subsection 125(7);
“CDA” means “capital dividend account” as defined in subsection 89(1);
“Completed Transactions” means the transactions referred to in Paragraphs 20 to 23;
“Connected Corporation” has the meaning set out in subsection 186(4);
“Cost Amount” has the same meaning as in subsection 248(1);
“CRA” means the Canada Revenue Agency;
“Distribution” has the meaning set out in subsection 55(1);
“DR” means “dividend refund” and has the meaning set out in subsection 129(1);
“Eligible Dividend” has the meaning set out in subsection 89(1);
“Eligible Property” has the meaning set out in subsection 85(1.1);
“ERDTOH” means “eligible refundable dividend tax on hand” as defined in subsection 129(4);
“FMV” means “fair market value” and means the highest price available in an open and unrestricted market between informed prudent parties dealing with each other at arm’s length and without compulsion to act, expressed in terms of cash;
“GRIP” means “General Rate Income Pool” as defined in subsection 89(1);
“NERDTOH” means “non-eligible refundable dividend tax on hand” as defined in subsection 129(4);
not dealing at “arm’s length” has the meaning assigned by subsection 251(1);
“NOTE1” means the note issued in Paragraph 43;
“NOTE2” means the note issued in Paragraph 43;
“Paragraph” means a numbered paragraph of this letter;
“Permitted Exchange” has the same meaning as in subsection 55(1);
“Proposed Transactions” means the transactions referred to in Paragraphs 24 to 54;
“PUC” means “paid-up capital” as defined in subsection 89(1);
“RV” means “redemption value”;
“SISTER1 Advance” means the advance to be paid by DC to SISTER1, as described in Paragraph 12;
“SISTER1 CDA NOTE” means the note issued in Paragraph 23;
“SISTER2 Advance” means the advance payable by DC to SISTER2, as described in Paragraph 12;
“SISTER2 CDA NOTE” means the note issued in Paragraph 23;
“Taxable Dividend” has the same meaning as in subsection 89(1);
“Taxation Year” has the meaning set out in subsection 249(1);
“TCC” means “taxable Canadian corporation” as defined in subsection 89(1);
“TRUST Advance” means the advance payable by DC to TRUST, as described in Paragraph 12; and
“Winding-up Dividend” means the dividend resulting from the winding-up of DC, as described in ruling C(i) below.
XXXXXXXXXX;
RELEVANT FACTS
1. All persons or corporations involved in the Proposed Transactions are Canadian residents.
2. DC is a TCC and a CCPC. DC's fiscal period ends on XXXXXXXXXX.
3. The issued and outstanding shares in the capital stock of DC's are as follows:
- XXXXXXXXXX common shares (non-voting, participating);
- XXXXXXXXXX Class C shares (preferred, non-voting);
- XXXXXXXXXX Class E shares (voting (XXXXXXXXXX votes per share) and non-participating).
4. The tax characteristics of all issued shares in the capital stock of DC as of the date hereof are set out in the table on the following page:
Shareholder Number and Classes ACB PUC FMV/RV
SISTER1 XXXXX common shares XXXXX XXXXX XXXXX
SISTER2 XXXXX common shares XXXXX XXXXX XXXXX
SISTER1 XXXXX Class C shares XXXXX XXXXX XXXXX
SISTER2 XXXXX Class C shares XXXXX XXXXX XXXXX
BROTHER1 XXXXX Class E shares XXXXX XXXXX XXXXX
BROTHER2 XXXXX Class E shares XXXXX XXXXX XXXXX
BROTHER3 XXXXX Class E shares XXXXX XXXXX XXXXX
The FMV of the common shares in the capital stock of DC will be determined at the appropriate time for the implementation of the Proposed Transactions.
5. The shares in the capital stock of DC constitute Capital Property to SISTER1, SISTER2, BROTHER1, BROTHER2 and BROTHER3.
6. The directors of DC are BROTHER1, BROTHER2 and BROTHER3.
7. DC's principal activity is the management of investments, in particular securities traded on the open market.
8. As at XXXXXXXXXX, DC's assets consisted of a cash balance in the amount of $XXXXXXXXXXX and various stock market investments with a FMV of approximately $XXXXXXXXXXX.
9. DC does not exercise significant influence over the entities in which it holds interests.
10. Stock market investments are usually long-term investments of DC.
11. Stock market investments held by DC constitute Capital Property to it.
12. As at XXXXXXXXXX, DC's liabilities, excluding the Class C shares of its capital stock presented under liabilities in the financial statements, consisted of accounts payable, income taxes payable, future income taxes, the TRUST Advance, the SISTER1 Advance and the SISTER2 Advance. The principal amounts of the TRUST Advance, the SISTER1 Advance and the SISTER2 Advance were $XXXXXXXXXX, respectively. The Advances bear no interest and have no repayment terms.
13. There have been no material changes in the composition of the assets and liabilities of DC between XXXXXXXXXX and the date hereof.
14. DC is not a “small business corporation” as defined in subsection 248(1) and the shares in the capital stock of DC held by SISTER1, SISTER2, BROTHER1, BROTHER2 and BROTHER3 are not “qualified small business corporation shares” as defined in subsection 110.6(1).
15. As at XXXXXXXXXX, DC's GRIP balance is $XXXXXXXXXX, excluding Eligible Dividends paid in the amount of $XXXXXXXXXX for its Taxation Year ended XXXXXXXXXX.
16. As at XXXXXXXXXX, DC's ERDTOH balance was $XXXXXXXXXXX, excluding the DR claimed in the amount of $XXXXXXXXXXX for its Taxation Year ended XXXXXXXXXX, while the NERDTOH balance was $XXXXXXXXXXX.
17. As at XXXXXXXXXX, DC had no balance of net capital loss carryforwards or non-capital loss carryforwards.
18. As at XXXXXXXXXX, DC's CDA balance was approximately $XXXXXXXXXXX according to available information. DC had realized capital gains and losses since XXXXXXXXXX.
19. DC may dispose of certain securities and stock market investments in exchange for XXXXXXXXXX cash.
COMPLETED TRANSACTIONS
20. On XXXXXXXXXX, TC1 was incorporated under the XXXXXXXXXX. SISTER1 was appointed director of TC1. TC1 has not issued any shares of its capital stock.
21. On XXXXXXXXXX, TC2 was incorporated under the XXXXXXXXXX. SISTER2 was appointed director of TC2. TC2 has not issued any shares of its capital stock.
22. The principal rights, privileges, conditions and restrictions of the shares comprising the capital stock of each of TC1 and TC2 include those for the following Classes:
Class A
- No par value;
- Participating in the remainder;
- Voting (XXXXXXXXXX per share);
- Entitled to receive any dividend declared by the Board of Directors.
Class C
- No par value;
- Non-voting;
- Entitled to a dividend, non-preferential and non-cumulative, at a monthly rate of XXXXXXXXXX%, calculated on the RV;
- The RV corresponds to the FMV of the consideration received when the shares were issued;
- Redeemable at the option of the holder or the corporation at the amount of their RV;
- Purchasable by mutual agreement at the best possible price without exceeding the RV.
- Price adjustment clause in the event of a challenge to the FMV by tax authorities.
Class D
- No par value;
- Non-voting;
- Entitled to a dividend, non-preferential and non-cumulative, at a monthly rate of XXXXXXXXXX%, calculated on the RV;
- The RV corresponds to the FMV of the consideration received when the shares were issued;
- Redeemable at the option of the holder or the corporation at the amount of their RV;
- Purchasable by mutual agreement at the best possible price without exceeding the RV;
- Price adjustment clause in the event that the FMV of the assets is challenged by the tax authorities.
23. On XXXXXXXXXX, DC declared a dividend in the amount of $XXXXXXXXXX on the common shares of its share capital, payable on XXXXXXXXXX through the issuance of demand notes to SISTER1 and SISTER2, the principal amount of which totaled $XXXXXXXXXX (the SISTER1 CDA NOTE and the SISTER2 CDA NOTE). In connection with such dividend, the DC will elect 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 manner. The purpose of the Capital Dividend was to reduce the balance of DC's CDA to zero prior to the implementation of the Proposed Transactions.
PROPOSED TRANSACTIONS
Permitted exchange
24. SISTER1 will transfer the XXXXXXXXXX common shares and the XXXXXXXXXX Class C shares in the capital stock of DC that it holds to TC1. In consideration, TC1 will issue XXXXXXXXXX Class A shares of its capital stock to SISTER1. The FMV of the shares issued will be equal to the FMV of the shares transferred.
SISTER1 and TC1 will jointly make an election under subsection 85(1) in the prescribed form and within the time specified in subsection 85(6). The transfer will be made for an Agreed Amount equal to the ACB of the shares transferred.
For greater certainty, the PUC of the Class A shares in the capital stock of TC1 issued to SISTER1 will not exceed the maximum amount that may be added to the PUC of such shares pursuant to paragraph 84.1(1)(a).
25. SISTER2 will transfer the XXXXXXXXXX common shares and the XXXXXXXXXX Class C shares in the capital stock of DC that it holds to TC2. In consideration, TC2 will issue XXXXXXXXXX Class A shares of its capital stock to SISTER2. The FMV of the shares issued will be equal to the FMV of the shares transferred.
SISTER2 and TC2 will jointly make an election under subsection 85(1) in the prescribed form and within the time specified in subsection 85(6). The transfer will be made for an Agreed Amount equal to the ACB of the shares transferred.
For greater certainty, the PUC of the Class A shares in the capital stock of TC2 issued to SISTER2 will not exceed the maximum amount that may be added to the PUC of such shares pursuant to paragraph 84.1(1)(a).
26. BROTHER1 will transfer the XXXXXXXXXX Class E shares in the capital stock of DC that he holds to TC1. In consideration, TC1 will issue XXXXXXXXXX Class D shares of its capital stock to BROTHER1.
BROTHER1 will jointly elect with TC1 under subsection 85(1) in the prescribed form and within the time limit set out in subsection 85(6). The transfer will be made for an Agreed Amount equal to the ACB of the shares transferred.
For greater certainty, the PUC of the Class D shares in the capital stock of TC1 issued to BROTHER1 will not exceed the maximum amount that may be added to the PUC of such shares pursuant to paragraph 84.1(1)(a).
27. BROTHER2 will transfer the XXXXXXXXXX Class E shares in the capital stock of DC that he holds to TC1. In consideration, TC1 will issue XXXXXXXXXX Class D shares of its capital stock to BROTHER2.
BROTHER2 and TC1 will jointly make an election under subsection 85(1) in the prescribed form and within the time limit set out in subsection 85(6). The transfer will be made for an Agreed Amount equal to the ACB of the shares transferred.
For greater certainty, the PUC of the Class D shares in the capital stock of TC1 issued to BROTHER2 will not exceed the maximum amount that may be added to the PUC of such shares pursuant to paragraph 84.1(1)(a).
28. BROTHER3 will transfer the XXXXXXXXXX Class E shares in the capital stock of DC that he holds to TC1. In consideration, TC1 will issue XXXXXXXXXX Class D shares of its capital stock to BROTHER3.
BROTHER3 will jointly elect with TC1 under subsection 85(1) in the prescribed form and within the time limit set out in subsection 85(6). The transfer will be made for an Agreed Amount equal to the ACB of the shares transferred.
For greater certainty, the PUC of the Class D shares in the capital stock of TC1 issued to BROTHER3 will not exceed the maximum amount that may be added to the PUC of such shares pursuant to paragraph 84.1(1)(a).
29. DC will be a connected corporation of TC1 and TC2 pursuant to paragraph 186(4)(a).
Distribution
30. The proposed distribution of the property of DC to TC1 and TC2 will be made using the net FMV method accepted by the CRA.
31. Immediately prior to the transfer described in Paragraph 36, the property of DC will be classified by property type, according to the following three property types, in accordance with the policy established by the CRA for the classification of property for the purposes of the proportionate distribution of each type of property provided for in the definition of Distribution: cash and near cash, business property and investment property.
32. In connection with the transfer described in Paragraph 36, the classification of DC's property will be as follows:
a. “Cash and near cash” (”Cash") will constitute one type of asset. DC's Cash assets will consist of, among other things, cash (including cash, if any, in investment accounts managed by investment advisors), accounts receivable (including income taxes receivable), certificates of deposit and similar short-term investments, marketable securities (other than those held as portfolio investments).
b. “Investments” (the “Investments”) will include all property of DC, other than Cash, the income from which constitutes income from property or from a “specified investment business” within the meaning of subsection 125(7).
33. DC will not own any property in the “business property” category.
34. For greater certainty, DC's various tax accounts, including but not limited to CDA, GRIP, ERDTOH and/or NERDTOH, will not be considered property for the purposes hereof.
35. For the purposes of calculating the net FMV of each property type of DC, immediately prior to the transfer of property referred to in Paragraph 36, the debts of DC will be allocated to and deducted from the FMV of each type of property owned by DC according to the following steps:
a. Current liabilities will be allocated and applied against the FMV of each property forming part of the Cash in proportion to the FMV of each item of Cash over the total FMV of all properties forming part of the Cash. Short-term liabilities will consist of accounts payable, taxes payable if any, the TRUST Advance, the SISTER1 Advance, the SISTER2 Advance, the SISTER1 CDA NOTE and the SISTER2 CDA NOTE.
b. If applicable, debts, other than short-term debts, that relate to specific assets will be allocated to those assets up to their FMV. Any portion of such indebtedness 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. Where applicable, indebtedness that forms part of the corporation's long-term debt will be indebtedness to which this or the following paragraph applies.
c. If applicable, debts, other than current liabilities, that do not relate to specific assets but do relate to a specific type of asset, will be allocated to the type of asset to which they relate, up to the FMV of that type of asset, determined after the allocation provided for in the preceding subparagraph.
d. If applicable, any remaining liabilities, after the allocations referred to in the preceding subparagraphs, may be allocated and applied against the FMV of each type of property in proportion to the FMV of each type of property, such FMVs being determined after the allocations referred to in the preceding subparagraphs and up to the FMV of such type of property determined after the allocations referred to in the preceding subparagraphs.
36. DC will transfer to each of TC1 and TC2 a portion of its property, so that each of TC1 and TC2 will receive its proportionate share of the net FMV of the Cash and Investments held by DC immediately prior to the transfer. This proportionate share of the net FMV of the property thus distributed to each of TC1 and TC2 will be established on the basis of the FMV of the shares in the capital stock of DC owned, as the case may be, by the shareholders of DC, i.e., TC1 and TC2, immediately prior to the Distribution, over the FMV of all the issued and outstanding shares in the capital stock of DC immediately prior to the transfer. This transfer will constitute a Distribution.
The net FMV will correspond exactly to or approximate the result of the following calculation:
A x B/C where:
A represents the net FMV, immediately prior to the Distribution, of all such property then owned by DC;
B represents the FMV of the shares in the capital stock of DC that will belong to each of TC1 and TC2, as the case may be, prior to the Distribution; and
C represents the FMV of all issued and outstanding shares in the capital stock of DC immediately prior to the Distribution.
37. DC will jointly with each TC1 and TC2 make an election under subsection 85(1) in the prescribed form and within the time prescribed in subsection 85(6), in respect of each property transferred to each TC1 and TC2 that will constitute Eligible Property.
The Agreed Amount agreed to by DC and each of TC1 and TC2 for each Eligible Property that will be a Capital Property other than depreciable property, will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).
38. As consideration for the transfer described in Paragraph 36, TC1 will assume the following liabilities of DC corresponding to the proportionate FMV of the shares in the capital stock of DC and will issue the following shares:
(i) the SISTER1 Advance and the SISTER1 CDA Note;
(ii) an amount of accounts payable and taxes payable, if any, and the TRUST Advance;
the sum of the amounts in items (i) and (ii) assumed by TC1 will correspond to the proportionate FMV of the shares in the capital stock of DC held by TC1;
(iii) Class C shares in the capital stock of TC1, the FMV of which will correspond to the FMV of the shares in the capital stock of DC held by TC2 less the liabilities assumed in items (i) and (ii) above.
39. As consideration for the transfer described in Paragraph 36, TC2 will assume the following liabilities and issue the following shares:
(i) the SISTER2 Advance and the SISTER2 CDA NOTE;
(ii) an amount of the accounts payable, accrued expenses and tax payable, if any, and the TRUST Advance;
the sum of the amounts in items (i) and (ii) assumed by TC2 will correspond to the proportionate FMV of the shares in the capital stock of DC held by TC2;
(iii) Class C shares in the capital stock of TC2, the FMV of which will correspond to the FMV of the shares in the capital stock of DC held by TC2 less the liabilities assumed in items (i) and (ii) above.
40. The total amount of the FMV of the consideration represented by the liabilities of DC to be assumed by TC1 and TC2, as the case may be, and allocated as consideration for each property that will be an Eligible Property, will not exceed the Agreed Amount (as determined in accordance with the rules described in Paragraph 37 above) in respect of the property.
41. For greater certainty, the PUC of the Class C shares in the capital stock of each of TC1 and TC2 will be determined in accordance with the provisions of subsection 85(2.1).
42. Each of TC1 and TC2 will be a connected corporation of DC pursuant to paragraph 186(4)(a).
Permitted redemptions
43. Immediately following the transfer described in Paragraph 36, each of TC1 and TC2 will redeem the Class C preferred shares of its capital stock held by DC in consideration for the issuance of an interest-free note payable on demand in an amount equal to the FMV of the redeemed shares (“NOTE1” and “NOTE2,” respectively). DC will accept the NOTE1 and the NOTE2 as full and absolute payment for the redemption of such Class C shares in the capital stock of each of TC1 and TC2, as the case may be.
44. The redemption by each of TC1 and TC2 of the Class C preferred shares of its capital stock will give rise to a deemed dividend paid by each of TC1 and TC2 and deemed to be received by DC pursuant to subsection 84(3), equal to the excess of the amount paid by each for the redemption over the respective PUCs. Each such dividend will be a Taxable Dividend.
Fiscal period-end of TC1 and TC2
45. At the end of the day on which the share repurchases described in Paragraph 43 are completed, TC1 and TC2 will end their first fiscal period. That day will correspond to the fiscal period-end of TC1 and TC2, and the first Taxation Year of TC1 and TC2 will end at the end of that day.
Winding-up of DC
46. On the day following the transaction described in Paragraph 45, the directors of DC will adopt a resolution authorizing the winding-up and dissolution of DC pursuant to the applicable provisions of the XXXXXXXXXX and will enter into a winding-up agreement.
47. Under the terms of the winding-up agreement, NOTE1 and NOTE2 will be distributed to TC1 and TC2 respectively. As a result of the distribution of NOTE1 and NOTE2, NOTE1 and NOTE2 will be extinguished by confusion [operation of law] in accordance with Article XXXXXXXXXX.
48. To the extent that DC has a positive balance in its CDA immediately prior to the distribution of its property in the winding-up, DC will make the election under subsection 83(2) so that the portion of the winding-up dividend deemed under subparagraph 88(2)(b)(i) to be a separate dividend will be deemed a capital dividend to the extent of the balance in DC's CDA immediately prior to the distribution of its property in the winding-up. The election under subsection 83(2) will be made in the prescribed manner or, failing that, filed late with a payment of the penalty under subsection 83(4). The excess of the amount of the winding-up dividend over the amount of the dividend elected to be paid out of the CDA will be a Taxable Dividend.
49. To the extent that DC has a positive GRIP balance immediately before the distribution of its property in the winding-up, DC will designate a portion of the winding-up dividend, which is deemed under subparagraph 88(2)(b)(iii) to be a separate dividend, to be an Eligible Dividend and will notify TC1 and TC2 in writing pursuant to subsection 89(14). The amount designated as an Eligible Dividend will be equal to the GRIP balance of DC at the end of DC's taxation year in which the distribution is made.
50. Pursuant to paragraph 129(1)(a), at the end of its fiscal period, DC will receive a DR in respect of the deemed dividends paid that will be Taxable Dividends since it will likely have a positive GRIP balance at the end of its fiscal period.
51. Each of TC1 and TC2 will be liable for Part IV tax computed pursuant to paragraph 186(1)(b) in respect of the portion of the winding-up dividend that is a Taxable Dividend.
52. Any DR and any other refund to which DC would be entitled as a result of the transactions contemplated herein or other transactions, will be distributed in proportion to the FMV of the shares in the capital stock of DC held by each of TC1 and TC2, pursuant to the winding-up agreement.
53. Within a reasonable time following the receipt and distribution of that DR and any other repayment, articles of dissolution will be filed with the regulatory authority and, on the date appearing on the certificate of dissolution, DC will be dissolved. At the appropriate time, DC will file the required tax returns.
54. Immediately following the winding-up of DC and prior to its dissolution, DC will not own or acquire any property, except for the repayment of the DR or any other reimbursement, and will not carry on any business.
ADDITIONAL INFORMATION
55. 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 are described herein.
56. Except for the Proposed Transactions described herein, DC has not acquired and will not acquire any property (other than stock investments that may have been acquired in the ordinary course of its investment business), and has not incurred and will not incur any indebtedness (other than current accounts payable incurred in the course of its investment business), in contemplation of and prior to the Distribution effected in connection with the butterfly reorganization that is the subject of the Proposed Transactions.
57. Except as described herein, none of DC, TC1 and TC2 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.
58. Except for the Proposed Transactions described herein, there will be no acquisition of control of DC, TC1 or TC2 in connection with the series of transactions or events comprising the Proposed Transactions described herein.
59. The principal activity of DC is the management of investments and securities for members of the same family. More specifically, DC purchases and disposes of investments and securities from time to time, sometimes on the advice of securities brokers or investment advisors. The investments and securities held by DC constitute capital property to DC. Upon completion of the proposed Transactions described above, TC1 and TC2 will receive the assets of DC, including its investments and securities. TC1 and TC2 will hold and dispose of the investments and securities received from DC in the ordinary course of their investment activities in the same manner as DC would do if the Proposed Transactions described herein were not completed.
60. The method to be used for the distribution of the property of DC among the shareholders is intended to ensure that each shareholder receives a proportionate share of the net FMV of each type of property of DC.
61. DC, TC1 and TC2 are not, and none of them will be at the time of the Proposed Transactions, a “specified financial institution” within the meaning of subsection 248(1).
62. None of the shares in the capital stock of DC, TC1 and TC2 has been or will be at any time during the term of the series of Proposed Transactions:
i) the subject of any guarantee, covenant or agreement referred to in subsection 112(2.2);
ii) the subject of a “dividend rental arrangement” as defined in subsection 248(1) and referred to in subsection 112(2.3);
iii) the subject of any guarantee, covenant or agreement referred to in subsection 112(2.4);
iv) issued for consideration including:
(a) an obligation as described in subparagraph 112(2.4)(b)(i); or
(b) a right as described in subparagraph 112(2.4)(b)(ii);
(v) issued or acquired in connection with a transaction, event or series of transactions or events of the type referred to in subsection 112(2.5).
PURPOSE OF PROPOSED TRANSACTIONS
63. The purpose of the Completed Transactions and the Proposed Transactions is to enable each shareholder participating in the profits of DC to obtain direct control over that shareholder’s portion of the corporation's assets.
ADVANCE RULINGS ISSUED
Provided that the statement of facts, the Completed Transactions, the Proposed Transactions and the Additional Information constitutes full disclosure of all relevant facts, all relevant completed transactions and all proposed transactions and that the transactions are carried out as previously described, our rulings are as follows:
A. Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfers of shares in the capital stock of DC by its shareholders to TC1 and TC2, as described in Paragraphs 24 to 28, and to the transfer of property by DC to TC1 and TC2, as described in Paragraphs 36 to 39, so that the Agreed Amount in respect of the transferred property will be deemed to be the proceeds of disposition of such property to DC and to be the acquisition cost of such property for the TC, as the case may be. For greater certainty, paragraph 85(1)(e.2) will not apply to the above property transfers.
B. The redemption by each of TC1 and TC2 of the Class C shares of their capital stock held by DC, as described in Paragraph 43, will have the following results:
(i) the provisions of subsection 84(3) will apply so that upon the redemption by each of TC1 and TC2 of the Class C shares of their capital stock held by DC, each of TC1 and TC2 will be deemed to have paid, and DC will be deemed to have received, a dividend in an amount corresponding to the excess of the amount paid respectively by TC1 and TC2 upon the redemption of the Class C shares over the PUC of such shares;
(ii) the deemed dividend paid by TC1 and TC2 described in ruling B(i) above will be deemed to have been received under subsection 84(3) by DC;
(iii) the deemed dividend referred to in rulings B(i) and B(ii) above, to the extent that it constitutes a Taxable Dividend:
(a) will be included in computing the income of DC pursuant to paragraphs 12(1)(j) and 82(1)(a);
(b) will not be included in DC's proceeds of disposition of its Class C shares in the capital stock of TC1 and TC2 by virtue of paragraph (j) of the definition of “proceeds of disposition” in section 54;
(c) will be deductible in computing the taxable income of DC under subsection 112(1);
(iv) in addition, any loss resulting from the disposition of such shares will be reduced by the amount of such dividends under subsection 112(3).
C. The winding-up of DC described in Paragraphs 46 to 54 hereof will have the following results:
(i) subject to rulings C(iii) and C(iv) below, pursuant to paragraph 88(2)(b) and subsection 84(2), DC will be deemed to have paid to each of TC1 and TC2 a dividend corresponding to the excess of the principal amount of NOTE1 and NOTE2 (and any other amounts paid by DC in this context, including amounts related to the distribution of DC's DR) over the PUC of all the shares in the capital stock of DC held by TC1 and TC2 respectively (the Winding-up Dividend);
(ii) the deemed dividend paid by DC to each of TC1 and TC2 described in ruling C(i) above will be deemed to have been received under subsection 84(2) by TC1 and TC2 respectively;
(iii) to the extent that DC has a positive balance in its CDA immediately prior to its winding-up, pursuant to subparagraph 88(2)(b)(i), the portion of the winding-up dividend that does not exceed the balance of DC's CDA, determined immediately prior to the payment of the winding-up dividend, will be deemed for the purposes of the election under subsection 83(2) referred to in Paragraph 48, to be for the full amount a separate dividend;
(iv) under subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion determined in C(iii) that is deemed to be a separate dividend, will be deemed to be a separate dividend that is a Taxable Dividend;
(v) pursuant to subparagraph 88(2)(b)(iv), TC1 and TC2 will be deemed to have received their proportionate share of the dividends determined in rulings C(iii) and C(iv) above;
(vi) the deemed dividend paid to TC1 and TC2 referred to in rulings C(i) and C(ii) above, to the extent that it constitutes a Taxable Dividend:
(a) will be included in the income of TC1 and TC2, respectively, under paragraphs 12(1)(j) and 82(1)(a);
(b) will not be included in the proceeds of disposition to TC1 and TC2, respectively, of the shares in the capital stock of DC by virtue of paragraph (j) of the definition “proceeds of disposition” in section 54;
(c) will be deductible in computing the taxable income of TC1 and TC2, respectively, under subsection 112(1).
D. Provided that there is no transaction, other than a Proposed Transaction described herein, that is part of a series of transactions or events (within the meaning of subsection 248(10)) that includes the Proposed Transactions, and that is:
(i) an acquisition of property in the circumstances described in subparagraph 55(3.1)(a);
(ii) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(iii) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(iv) an acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);
(v) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) and 55(3.1)(d);
the deemed Taxable Dividends described in rulings B and C above will not give rise to the application of subsection 55(2), because of the application of paragraph 55(3)(b).
E. DC will be subject to Part IV tax to the extent provided in paragraph 186(1)(b) in respect of the Taxable Dividends described in Ruling B above. No Part IV tax will result if each of TC1 and TC2 has a nil balance of ERDTOH and NERDTOH.
F. Each of TC1 and TC2 will be subject to Part IV tax to the extent provided in paragraph 186(1)(b) in respect of the Taxable Dividend described in ruling C above.
G. The Taxable Dividends described in rulings B and C above and deemed to have been received by DC, TC1 and TC2, as the case may be, are not subject to Part IV.1 tax, as they constitute “excepted dividends” within the meaning of section 187.1.
H. The Taxable Dividends described in rulings B and C above and deemed to have been paid by DC and received by TC1 and TC2 will be “excluded dividends” within the meaning of the definition provided in subsection 191(1) and will not be subject to Part VI.1 tax.
I. The settlement of NOTE1 and NOTE2 as described in Paragraph 47 above, will not result in a “forgiven amount” as defined in subsection 80(1) or otherwise be subject to the rules regarding debt forgiveness.
J. Subsections 15(1), 56(2) or 246(1) will not apply to the transactions contemplated herein.
The provisions of subsection 245(2) will not apply as a result of and by reason of the Proposed Transactions described above to redetermine the tax consequences confirmed in the rulings above.
These rulings are subject to the restrictions 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 24 to 43 are completed within the timeframes set out herein and before the 6-month period ending after the date hereof. Subsequent Proposed Transactions, as described in paragraphs 45 to 54, 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
These rulings should in no way be construed as an acquiescence on the part of CRA that:
a) we have examined the other tax consequences that could result from the Proposed Transactions;
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; and
c) the balance of the CDA, as well as the amount attributed to the GRIP, ERDTOH or NERDTOH of a corporation truly represents the balance of the CDA, the amount attributed to the GRIP, ERDTOH or NERDTOH of such corporation in the Statement of Facts and Proposed Transactions.
Nothing in this letter shall be construed as a confirmation, express or implied, that, for purposes of any of the Advance Rulings rendered, any adjustment to the FMV of the Transferred Assets or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of the shares. In addition, the application of a price adjustment clause may invalidate one or more advance income tax rulings. Income Tax Folio S4-F3-C1, Price Adjustment Clauses, sets out the CRA's administrative position on price adjustment clauses.
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for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch