Principal Issues: Does the paragraph 55(3)(b) exception apply to the Proposed Transactions such that the dividends resulting in the Proposed Transactions are not re-characterized under subsection 55(2)?
Position: Yes, favourable rulings given.
Reasons: The proposed transaction meets the statutory requirements of paragraph 55(3)(b).
XXXXXXXXXX 2021-091179
XXXXXXXXXX
Subject: Request for advance decisions regarding income tax
XXXXXXXXXX
Dear Sir,
This is in response to your letter dated XXXXXXXXXX and updated on XXXXXXXXXX, in which you requested advance income tax rulings on behalf of XXXXXXXXXX We have also taken into account the information you sent us by email, as well as additional information submitted during telephone conversations (XXXXXXXXXX).
To the best of your knowledge and that of the Taxpayer, none of the proposed transactions or issues involved in this ruling are the same as or substantially similar to transactions or issues that are:
i. in a previously filed tax return of the Taxpayer or a related person and:
A. being considered by the CRA in connection with any such tax return;
B. under objection by the Taxpayer or a related person; or
C. the subject of a current or completed court process involving the Taxpayer or a related person; or
ii. the subject of a ruling request previously considered by the Income Tax Ruling Directorate in relation to the Taxpayer or a related person.
Definitions
Unless otherwise stated:
i. all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Supp.) c. 1, as amended, (the “Act”);
ii. all terms and conditions used herein that are defined in the Act have the meaning given in such definition;
iii. all references to monetary amounts are in Canadian dollars; and
iv. the singular should be read as plural and vice versa where the circumstances so require.
In this letter, with the exception of Paragraph 58, the names and corporation names of the taxpayers are replaced by the following names and corporation names:
“A” refers to Ms. XXXXXXXXXX.
“Amalco” means the corporation resulting from the amalgamation of Holdco A and Distributing Corporation as described in Paragraph 54;
“B” refers to Ms. XXXXXXXXXX;
“Child 1” means Ms. XXXXXXXXXX;
“Child 2” means Ms. XXXXXXXXXX;
“Distributing Corporation” refers to XXXXXXXXXX, which is described in Paragraphs 8 to 14;
“Holdco A” means XXXXXXXXXX, which is described in Paragraphs 19 to 22;
“Holdco B” refers to XXXXXXXXXX, which is described in Paragraphs 23 to 26;
“Holdco E-1” refers to XXXXXXXXXX, which is described in Paragraphs 27 to 30;
“Holdco E-2” refers to XXXXXXXXXX, which is described in Paragraphs 31 to 34;
“Newco” means XXXXXXXXXX, the new corporation described in Paragraph 35;
“Transferee Corporation” XXXXXXXXXX, which is described in Paragraphs 15 to 18;
“Trust B” means XXXXXXXXXX, which is described in Paragraph 4;
“Trust E-1” means XXXXXXXXXX, which is described in Paragraph 5;
“Trust E-2” means XXXXXXXXXX, which is described in Paragraph 6;
The following abbreviations, terms and expressions have the meanings defined below.
“ACB” means “adjusted cost base” as defined in section 54;
“Affiliated persons” is as defined in subsection 251.1(1);
“Agreed amount” has the meaning set out in subsection 85(1);
“Capital Dividend” means a dividend for which an election has been made in accordance with subsection 83(2);
“Capital Property” is as defined in section 54;
“CCPC“ means “Canadian-controlled private corporation” within the meaning of the definition in subsection 125(7);
“CDA” means “capital dividend account” within the meaning of the definition in subsection 89(1);
“Completed Transaction” means the transaction described in Paragraph 35;
“CRA” means the Canada Revenue Agency;.
“Depreciable Property” within the meaning of the definition in subsection 13(21);
“Distributing Corporation Note” means the note payable on demand in favor of Distributing Corporation, as described in Paragraph 53;
“Distributing Corporation's 2022 DR” means the DR to be received by Distributing Corporation for its taxation year ending XXXXXXXXXX, as described in Paragraph 41;
“Distribution” within the meaning of the definition in subsection 55(1);
“DR” means “dividend refund” within the meaning of the definition in subsection 129(1);
“Eligible Dividend” is within the meaning of the definition in subsection 89(1);
“Eligible Property” is within the meaning of the definition in subsection 85(1.1);
“ERDTOH” means “eligible refundable dividend tax on hand” as defined in subsection 129(4);
“FMV” or “fair market value” means the highest price, in dollars, at which two parties who are dealing at arm's length and who are knowledgeable, prudent, and neither party is compelled to act, would agree in an open and unrestricted market;
“GRIP” means “general rate income pool” within the meaning of the definition in subsection 89(1);
“Identical Property” is within the meaning of the definition in subsection 248(12);
“Inter vivos trust” is as defined in subsection 108(1);
“NERDTOH” means “non-eligible refundable dividend tax on hand” within the meaning of the definition in subsection 129(4);
“Personal trust” is as defined in subsection 248(1);
“Proposed Transactions” means the transactions described in Paragraphs 36 to 54;
“PUC” means “paid-up capital” within the meaning of the definition in subsection 89(1);
“RV” means “redemption value”
“Safe Income” means income earned or realized (within the meaning of 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), that 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” is as defined in subsection 89(1);
“Taxation Year” is as defined in subsection 249(1);
“TCC” means “taxable Canadian corporation” within the meaning of the definition in subsection 89(1);
“Transferee Corporation Note” means the note payable on demand in favor of Distributing Corporation, as described in Paragraph 51;
XXXXXXXXXX;
XXXXXXXXXX;
Facts
Facts relating to individuals
1. A and B are sisters.
2. Child 1 and Child 2 are B's children.
3. A, B, Child 1 and Child 2 are persons who reside in Canada for the purposes of the Act.
4. Trust B is a trust created on XXXXXXXXXX by a trust deed under XXXXXXXXXX and the capital of Trust B may be distributed at the discretion of the trustees. The trustee of Trust B is A and the beneficiaries are as follows:
• B;
• Child 1;
• Child 2;
• The unborn descendants of Child 1;
• The unborn descendants of Child 2;
• Any corporation designated by the trustees, incorporated or to be incorporated, of which at least the majority of the shares conferring voting rights will be held by the trust and/or one or more of the persons designated as beneficiary above.
For greater certainty, such a corporation will only become a beneficiary of the trust after confirmation of its status as a beneficiary by the trustees by means of a written decision of the trustees. However, a corporation of which the trust is or will become a shareholder may not under any circumstances be a beneficiary of this trust with regard to the shares and income arising from the shares of its own share capital that are the property of the trust or the property substituted for them; this corporation may, however, be a beneficiary of the income and capital of the trust with regard to all other property.
Any trust designated by the trustees, created or to be created, whose sole beneficiaries are or will be one or more of the persons designated as beneficiary above.
For greater certainty, such a trust will only become a beneficiary after confirmation of its status as beneficiary by the trustees by means of a written resolution of the trustees.
5. Trust E-1 is a trust created on XXXXXXXXXX by Child 1 for her own benefit. The trustee of Trust E-1 is A.
6. Trust E-2 is a trust created on XXXXXXXXXX by Child 2 for her own benefit. The trustee of Trust E-2 is A.
7. Trust B, Trust E-1 and Trust E-2 are non-testamentary and personal trusts resident in Canada for the purposes of the Act.
Facts relating to Distributing Corporation
8. Distributing Corporation was incorporated on XXXXXXXXXX under XXXXXXXXXX and its Taxation Year ends on XXXXXXXXXX. Distributing Corporation is a TCC and a CCPC. Distributing Corporation is a holding corporation that holds a portfolio of investments.
9. The issued and outstanding shares of the capital stock of Distributing Corporation have the following main characteristics:
a. Class A shares: no par value, non-participating, with XXXXXXXXXX voting rights per share, not entitled to receive dividends, in the event of winding-up or dissolution, entitled to receive, after distribution to holders of Class X shares, Class Y shares and Class C shares, but before distribution to the holders of Class B shares and Class D shares of the sums to be paid to them, an amount equal to the amount equal to the issued and paid-up share capital account of each of the Class A shares;
b. Class B shares: no par value, participating, non-voting, entitled to receive a discretionary dividend after payment of the dividend provided below to holders of Class X shares or Class Y shares, in the event of winding-up or dissolution, right to receive the remainder of the corporation's assets pari passu with Class D shares, but after distribution to holders of Class X shares, Class Y shares, Class A shares and Class C shares of the sums to be paid to them;
c. Class D shares: no par value, participating, non-voting, entitled to receive a discretionary dividend after payment of the dividend provided below to holders of Class X shares or Class Y shares, in the event of winding-up or dissolution, right to receive the remainder of the corporation's assets pari passu with Class B shares, but after distribution to the holders of Class X shares, Class Y shares, Class A shares and Class C shares of the sums to be paid to them;
d. Class X shares: no par value, no voting rights, the right to receive a dividend in preference to the other classes of the corporation's share capital after the death of B equal to the proceeds of any life insurance policy taken out on the life of B and of which the corporation is the beneficiary divided by the number of Class X shares issued and outstanding at the time of B's death, in the event of winding-up or dissolution, the right to receive, pari passu with Class Y shares but prior to distributions to holders of Class A shares, Class B shares, Class C shares and Class D shares, the excess of the proceeds of any life insurance policy life insurance policy taken out on the life of B and of which the corporation would be the beneficiary, received or receivable by the corporation as a result of the death of B, over the amount of any dividend paid to the holders of Class X shares (the “Redemption Price of the Class X Shares”), redeemable at the option of the holder and at the option of the corporation for an amount equivalent to the Redemption Price of the Class X Shares;
e. Class Y shares: no par value, no voting rights, the right to receive a dividend in preference to the other Classes of the corporation's share capital after the death of A equal to the proceeds of any life insurance policy taken out on the life of A and of which the corporation is the beneficiary divided by the number of Class Y shares issued and outstanding at the time of A's death, in the event of winding-up or dissolution, the right to receive, pari passu with Class X shares but prior to distribution to holders of Class A shares, Class B shares, Class C shares and Class D shares, the excess of the proceeds of any life insurance policy life insurance policy taken out on the life of A and of which the corporation would be the beneficiary, received or to be received by the corporation as a result of the death of A, over the amount of any dividend paid to the holders of Class Y shares (the “Redemption Price of the Class Y Shares”), redeemable at the option of the holder and at the option of the corporation for an amount equivalent to the Redemption Price of the Class Y Shares.
10. The shareholding and tax attributes of the shares of the capital stock of Distributing Corporation are as follows:
|
Shareholder |
Number and Class |
ACB ($) |
PUC ($) |
FMV or RV ($) |
|
A |
XX Class A shares |
XX |
XX |
XX |
|
Transferee Corp |
XX Class B shares |
XX |
XX |
XX |
|
Holdco A |
XX Class D shares |
XX |
XX |
XX |
|
Transferee Corp |
XX Class X shares |
XX |
XX |
XX |
|
Holdco A |
XX Class Y shares |
XX |
XX |
XX |
The shareholding of Distributing Corporation has been the same since XXXXXXXXXX.
11. A has effective (de jure) control of Distributing Corporation since it holds XXXXXXXXXX% of the voting shares of the capital stock of Distributing Corporation, namely XXXXXXXXXX Class A shares.
12. According to the financial statements of Distributing Corporation as at XXXXXXXXXX, the assets of Distributing Corporation consisted primarily of the following: cash and cash equivalents, interest receivable, investments in bonds, mutual funds and shares of public companies. The liabilities of Distributing Corporation as at XXXXXXXXXX consisted primarily of the following: accounts payable, accrued liabilities, taxes payable and loans from directors.
Distributing Corporation does not exercise significant influence (within the meaning of Section 3051 of the CICA CPA Canada Handbook – Accounting) over the entities in which it holds interests.
There have been no significant changes or modifications in the composition of the assets and liabilities of Distributing Corporation between XXXXXXXXXX and the date hereof. In addition, there will be no significant changes or modifications in the composition of the assets and liabilities of Distributing Corporation between the date hereof and the date on which the Proposed Transactions described below will be carried out.
13. The amount in Distributing Corporation's ERDTOH and NERDTOH accounts was $XXXXXXXX and $XXXXXXXX, respectively, as at XXXXXXXXXX. Distributing Corporation did not receive any DR for the tax year ending XXXXXXXXXX. The balance in Distributing Corporation's CDA was approximately $XXXXXXXXXXX as at XXXXXXXXXX. The balance of Distributing Corporation's GRIP was $XXXXXXXXXX. Distributing Corporation did not pay any Eligible Dividends during the fiscal year ending XXXXXXXXXX.
14. As of XXXXXXXXXX, Distributing Corporation's capital and non-capital losses balance were XXXXXXXXXX.
Particulars for Transferee Corporation
15. Transferee Corporation was incorporated on XXXXXXXXXX under XXXXXXXXXX and its Taxation Year ends on XXXXXXXXXX. Transferee Corporation is a TCC and a CCPC. Transferee Corporation is a holding corporation.
16. The issued and outstanding shares of the capital stock of Transferee Corporation have the following main characteristics:
a. Class B common shares: no par value, participating, non-voting, the right to receive a discretionary dividend after providing for the full payment of dividends on all preferred shares, in the event of winding-up or dissolution, the right to receive the remainder of the corporation's assets pari passu with the Class A common shares, but after providing for the payment of the amount payable on the preferred shares;
b. Class A preferred shares: no par value, non-participating, non-voting, entitled to receive a non-cumulative monthly discretionary dividend in priority to other Classes of shares at a rate not exceeding XXXXXXXXXX% calculated on the redemption price, redeemable at the option of the corporation or the holder for an amount corresponding to its share of the amount credited to the stated capital account for those shares, plus a premium of XXXXXXXXXX equal to the difference between the FMV, at the time of the issuance of those shares, of the consideration received by the corporation in consideration of the issuance of those shares and the total of: (i) the amount paid into the stated capital account for those shares; and (ii) the FMV of any property other than shares of that Class, given in payment of that consideration;
c. Class B preferred shares: no par value, non-participating, non-voting, entitled to receive a non-cumulative monthly dividend in priority to other Classes of shares if no dividend is declared on the Class A preferred shares at a rate of XXXXXXXXXX% calculated on the redemption price, redeemable at the option of the corporation or the holder for an amount corresponding to its share of the amount credited to the stated capital account for those shares, plus a premium equal to the difference between the FMV, at the time of the issue of those shares, of the consideration received by the corporation in consideration of the issue of those shares and the total of: (i) the amount paid into the stated capital account for those shares; and (ii) the FMV of any property other than shares of that Class, given in payment of that consideration;
d. Class C preferred shares: no par value, non-participating, with rights XXXXXXXXXX votes per share, redeemable at the option of the corporation for an amount corresponding to its share of the amount credited to the stated capital account for those shares.
17. The shareholding and tax attributes of the shares of Transferee Corporation's share capital are as follows:
|
Shareholder |
Number and Class |
ACB ($) |
PUC ($) |
FMV or RV ($) |
|
Trust B |
XX Class B com. sh. |
XX |
XX |
XX |
|
Holdco B |
XX Class A pref. sh. |
XX |
XX |
XX |
|
Holdco E-1 |
XX Class B pref. sh. |
XX |
XX |
XX |
|
Holdco E-2 |
XX Class B pref. sh. |
XX |
XX |
XX |
|
Holdco B |
XX Class C pref. sh. |
XX |
XX |
XX |
18. A has effective (de jure) control of Transferee Corporation since it holds XXXXXXXXXX% of the voting shares of the capital stock of Holdco B, namely the XXXXXXXXXX Class C preferred shares of the capital stock of Holdco B, and the latter holds XXXXXXXXXX% of the shares with voting rights in the capital stock of Distributing Corporation, namely the XXXXXXXXXX Class C preferred shares of the capital stock of Distributing Corporation.
Particulars for Holdco A
19. Holdco A was incorporated on XXXXXXXXXX under XXXXXXXXXX and its Taxation Year ends on XXXXXXXXXX. Holdco A is a TCC and a CCPC. Holdco A is a holding corporation.
20. The issued and outstanding shares of the capital stock of Holdco A have the following principal characteristics:
a. Class B common shares: no par value, participating, non-voting, the right to receive a discretionary dividend after providing for the full payment of dividends on all preferred shares, in the event of winding-up or dissolution, the right to receive the remaining assets of the corporation pari passu with the Class A common shares, but after providing for the payment of the amount payable on the preferred shares;
b. Class A preferred shares: no par value, non-participating, non-voting, entitled to receive a non-cumulative monthly discretionary dividend in priority to other classes of shares at a rate not exceeding XXXXXXXXXX% calculated on the redemption price, redeemable at the option of the corporation or the holder for an amount corresponding to its share of the amount credited to the stated capital account for those shares, plus a premium equal to the difference between the FMV, at the time of the issue of those shares, of the consideration received by the corporation in consideration of the issue of those shares and the total formed by: (i) the amount paid into the stated capital account for those shares; and (ii) the FMV of any property other than shares of this Class, given in payment of that consideration;
c. Class C preferred shares: no par value, non-participating, with the right to XXXXXXXXXX votes per share, right of redemption at the option of the corporation for an amount corresponding to its share of the amount credited to the stated capital account for those shares.
21. 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 ($) |
|
A |
XX Class B com. sh. |
XX |
XX |
XX |
|
A |
XX Class A pref. sh. |
XX |
XX |
XX |
|
A |
XX Class C pref. sh. |
XX |
XX |
XX |
22. A has effective control (de jure) of Holdco A since she holds XXXXXXXXXX% of the voting shares of the capital stock of Holdco A, namely the XXXXXXXXXX Class C preferred shares.
Particulars for Holdco B
23. Holdco B was incorporated on XXXXXXXXXX under XXXXXXXXXX and its Taxation Year ends on XXXXXXXXXX. Holdco B is a TCC and a CCPC. Holdco B is a holding corporation.
24. The issued and outstanding shares of the capital stock of Holdco B have the following principal characteristics:
a. Class B common shares: no par value, participating, non-voting, the right to receive a discretionary dividend after providing for the full payment of dividends on all preferred shares, in the event of winding-up or dissolution, the right to receive the remaining assets of the corporation pari passu with the Class A common shares, but after providing for the payment of the amount payable on the preferred shares;
b. Class C preferred shares: no par value, non-participating, with the right to XXXXXXXXXX votes per share, redeemable at the option of the corporation for an amount corresponding to its share of the amount recorded in the stated capital account for those shares;
c. Class Z preferred shares: no par value, non-participating, non-voting, redeemable at the option of the corporation or the holder for an amount of XXXXXXXXXX per issued and outstanding share.
|
Shareholder |
Number and Class |
ACB ($) |
PUC ($) |
FMV or RV ($) |
|
B |
XX Class B com. sh. |
XX |
XX |
XX |
|
B |
XX Class Z pref. sh. |
XX |
XX |
XX |
|
B |
XX Class C pref. sh. |
XX |
XX |
XX |
26. A has effective (de jure) control of Holdco B since it holds XXXXXXXXXX% of the voting shares of the capital stock of Holdco B, namely the XXXXXXXXXX Class C preferred shares.
Particulars for Holdco E-1
27. Holdco E-1 was incorporated on XXXXXXXXXX under the XXXXXXXXXX and its Taxation Year ends on XXXXXXXXXX. Holdco E-1 is a TCC and a CCPC. Holdco E-1 is a holding corporation.
28. The issued and outstanding shares of the capital stock of Holdco E-1 have the following principal characteristics:
a. Class A common shares: no par value, participating, with voting rights, right to receive a discretionary dividend in the event of winding-up or dissolution, right to receive the remainder of the corporation's assets pari passu with Class B common shares;
b. Class C preferred shares: no par value, non-participating, with the right to XXXXXXXXXX votes per share, no dividend rights, redeemable at the option of the corporation for an amount equivalent to the consideration received by the corporation at the time of their issue.
29. The shareholding and tax attributes of the shares of the capital stock of E-1 Holdco are as follows:
|
Shareholder |
Number and Class |
ACB ($) |
PUC ($) |
FMV or RV ($) |
|
Trust E-1 |
XX Class A com. shares |
XX |
XX |
XX |
|
A |
XX Class C pref. shares |
XX |
XX |
XX |
30. A has effective (de jure) control of Holdco E-1 since the XXXXXXXXXX preferred shares of Class C that it holds give it XXXXXXXXXX% of the voting rights of Holdco E-1.
Particulars for Holdco E-2
31. Holdco E-2 was incorporated on XXXXXXXXXX under the XXXXXXXXXX and its Taxation Year ends on XXXXXXXXXX. Holdco E-2 is a TCC and a CCPC. Holdco E-2 is a holding corporation.
32. The issued and outstanding shares of the capital stock of Holdco E-2 have the following principal characteristics:
a. Class A common shares: no par value, participating, with voting rights, right to receive a discretionary dividend in the event of winding-up or dissolution, right to receive the remainder of the corporation's assets pari passu with Class B common shares;
b. Class C preferred shares: no par value, non-participating, with the right to XXXXXXXXXX votes per share, no dividend rights, redeemable at the option of the corporation for an amount equivalent to the consideration received by the corporation at the time of their issuance.
33. The shareholding and tax attributes of the shares of the capital stock of Holdco E-2 are as follows:
|
Shareholder |
Number and Class |
ACB ($) |
PUC ($) |
FMV or RV ($) |
|
Trust E-2 |
XX Class A com. shares |
XX |
XX |
XX |
|
A |
XX Class C pref. shares |
XX |
XX |
XX |
34. A has effective (de jure) control of E-2 Holdco since the XXXXXXXXXX Class C preferred shares it holds confer XXXXXXXXXX% of the voting rights of E-2 Holdco.
Completed Transaction
35. On XXXXXXXXXX, Newco was incorporated by Transferee Corporation under XXXXXXXXXX. Newco's authorized share capital includes the following classes of shares:
i. An unlimited number of common shares with voting rights;
ii. An unlimited number of preferred shares with the following rights:
a. Redeemable at the option of the holder or the corporation at an amount equal to the consideration received at the time of issue;
b. Entitlement to a non-cumulative monthly dividend at a rate varying between XXXXXXXXXX% and XXXXXXXXXX% per month;
c. Voting rights on any matter affecting the rights, conditions or restrictions attaching to the shares;
d. Priority over all other shares in the event of a distribution of the corporation's assets, winding-up, dissolution or any other form of distribution of assets;
e. Provide that no dividend may be paid on any other class of shares if the amount of the dividend would render it incapable of redeeming them back for their redemption value;
f. Included a price adjustment clause.
Transferee Corporation has subscribed for XXXXXXXXXX common shares of the capital stock of Newco for a cash consideration of $XXXXXXXXXXX.
Proposed Transactions
The Proposed Transactions will be carried out in the order indicated below. The Proposed Transactions described in Paragraphs 36 to 42 will take place no later than XXXXXXXXXX and those described in Paragraphs 43 to 54 will take place on or after XXXXXXXXXX.
36. The existence of Distributing Corporation will be continued under the XXXXXXXXXX regime.
37. Distributing Corporation will increase the stated capital relating to the Class B shares of its share capital by an amount equivalent to XXXXXXXXXX of its CDA balance at that time, without consideration.
Distributing Corporation will be deemed to have paid and Transferee Corporation will be deemed to have received a dividend on the Class B shares in an amount equal to the increase in the PUC pursuant to subsection 84(1).
Distributing Corporation will make the election provided for in subsection 83(2) so that the total amount of such dividend is deemed to be a Capital Dividend. This election under subsection 83(2) will be made in the prescribed form and manner.
38. Distributing Corporation will increase the stated capital relating to the Class D shares of its share capital by an amount equivalent to XXXXXXXXXX of its CDA balance at that time, without consideration.
Distributing Corporation will be deemed to have paid and Holdco A will be deemed to have received a dividend under subsection 84(1) on the Class D shares in an amount equal to the increase in the PUC.
Distributing Corporation will make the election provided for in subsection 83(2) so that the total amount of this dividend is deemed to be a Capital Dividend. This election under subsection 83(2) will be made in the prescribed form and manner.
39. Distributing Corporation will increase the stated capital relating to the Class B shares of its share capital by an amount corresponding approximately to the XXXXXXXXXX of the amount necessary for Distributing Corporation to obtain a DR equal to the sum of its ERDTOH and NERDTOH balance at that time, without consideration.
Distributing Corporation will be deemed to have paid and Transferee Corporation will be deemed to have received a dividend on the Class B shares in an amount equal to the increase in the PUC under subsection 84(1). That dividend will be a Taxable Dividend.
A portion of that Taxable Dividend corresponding to the XXXXXXXXXX of Distributing Corporation's GRIP balance at that time will be designated as an Eligible Dividend under subsection 89(14).
Transferee Corporation will include the amount of the taxable dividend received from Distributing Corporation in computing its income, and will deduct a corresponding amount in computing its taxable income pursuant to subsection 112(1). In addition, the portion of the taxable dividend that was designated in accordance with subsection 89(14) will be included in the GRIP of Transferee Corporation.
The amount of the taxable Dividend will not exceed the Safe Income attributable to the XXXXXXXXXX Class B shares of the capital stock of Distributing Corporation held by Transferee Corporation immediately prior to the time Distributing Corporation is deemed to have paid the dividend.
Distributing Corporation will be connected to Transferee Corporation under subsection 186(2) and paragraph 186(4)(a). Transferee Corporation will be subject to Part IV tax within the limits provided for in paragraph 186(1)(b) in respect of the taxable Dividend received from Distributing Corporation.
Transferee Corporation will include in its ERDTOH account the amount determined under subparagraph 129(4)(a)(ii) of the ERDTOH definition and in its NERDTOH account the amount determined under paragraph 129(1)(b) of the NERDTOH definition.
40. Distributing Corporation will increase the stated capital relating to the Class D shares of its capital stock by an amount corresponding approximately to the XXXXXXXXXX of the amount necessary for Distributing Corporation to obtain an DR equal to the sum of its balance of ERDTOH and NERDTOH at that time, without consideration.
Distributing Corporation will be deemed to have paid and Holdco A will be deemed to have received a dividend on the Class D shares in an amount equal to the increase in the PUC under subsection 84(1). That dividend will be a Taxable Dividend.
A portion of that Taxable Dividend corresponding to the XXXXXXXXXX of the balance of Distributing Corporation's GRIP at that time will be designated as an Eligible Dividend under subsection 89(14).
Holdco A will include the amount of the Taxable Dividend received from Distributing Corporation in computing its income, and will deduct a corresponding amount in computing its taxable income pursuant to subsection 112(1). In addition, the portion of the Taxable Dividend designated under subsection 89(14) will be included in Transferee Corporation's GRIP.
The amount of the Taxable Dividend will not exceed the Safe Income attributable to the XXXXXXXXXX Class D shares of the capital stock of Distributing Corporation held by Holdco A immediately before the time at which Distributing Corporation is deemed to have paid the dividend.
Distributing Corporation will be connected to Holdco A under paragraph 186(2) and paragraph 186(4)(a). Holdco A will be subject to Part IV tax within the limits provided for in paragraph 186(1)(b) in respect of the taxable dividend received from Distributing Corporation.
Holdco A will include in its ERDTOH account the amount determined under subparagraph 129(4)(a)(ii) of the ERDTOH definition and in its NERDTOH account the amount determined under paragraph 129(1)(b) of the NERDTOH definition.
41. Distributing Corporation will be entitled, for its Taxation Year ending XXXXXXXXXX, to a DR from its ERDTOH and NERDTOH accounts, the amount of which will be determined pursuant to the provisions of subparagraphs 129(1)(a)(i) and 129(1)(a)(ii) respectively (the “Distributing Corporation's XXXXXXXXXX DR”). This DR will be deducted from Distributing Corporation's ERDTOH and NERDTOH accounts for the subsequent year, in accordance with paragraph 129(4)(c) of the ERDTOH definition and paragraph 129(4)(d) of the NERDTOH definition.
42. Holdco A will exchange its XXXXXXXXXX Class D shares of the capital stock of Distributing Corporation for XXXXXXXXXX Class B shares of Distributing Corporation's share capital.
Distribution of Distributing Corporation's Property
43. The proposed Distribution of Distributing Corporation's property to Newco will be made using the net FMV method accepted by the CRA.
44. Immediately prior to the Distribution described in paragraph 48 below, Distributing Corporation's assets will be classified into the following three asset classes, pursuant to the policy established by the CRA for the classification of assets for the purposes of the proportional distribution of each asset class provided for in the definition of the term Distribution: cash and cash equivalents, investment assets and business assets.
45. In the context of the Distribution described in paragraph 48 below, Distributing Corporation's assets will be classified as follows:
a) “Cash and cash equivalents” (“Cash”) will constitute the first type of assets. Distributing Corporation's Cash will consist of cash and cash equivalents, interest receivable, prepaid expenses, income taxes receivable (if any) and Distributing Corporation's XXXXXXXXXX DR.
b) “Investment property” (the “Investment Property”) will constitute the second type of property. The Investment Property will include all of Distributing Corporation's property, other than Cash, the income from which constitutes income from property or a specified investment business within the meaning of subsection 125(7), including investments in bonds, mutual funds and shares of public companies.
Distributing Corporation will not own any property in the “business property” class.
46. For greater certainty, Distributing Corporation's various tax accounts, including, among others, the CDA, ERDTOH, NERDTOH and GRIP accounts, will not be considered property for such purposes.
47. For the purposes of calculating the net FMV of each type of Distributing Corporation's assets, immediately prior to the transfer of assets described in paragraph 48 below, Distributing Corporation's liabilities will be allocated to and deducted from the FMV of each type of asset belonging to Distributing Corporation pursuant to the following steps:
a) Short-term debts will be allocated and applied to reduce the FMV of each asset forming part of the Liquid Assets in proportion to the FMV of each item of the Liquid Assets over the total FMV of all assets forming part of the Liquid Assets. The Distribution of short-term debts will not exceed the total FMV of all assets forming part of the Liquid Assets. Short-term debts will be composed of accounts payable and accrued expenses, the portion of the long-term debt that is part of the short-term liabilities, and taxes payable (if any).
b) 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 a debt exceeding the FMV of a property will be considered to relate to the type of properties to which the given property relates (and not to a specific property) for the purposes of the distribution described below. Debts that are part of the corporation's long-term debt will be debts covered by this paragraph or the following paragraph.
c) Debts, other than short-term debts, which do not relate to specific assets but which 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 distribution provided for in paragraph b) above.
d) If necessary, all debts remaining after the distributions referred to in paragraphs a) to c) above may be allocated and applied to reduce the FMV of each type of property in proportion to the net FMV of each type of property, such net FMVs being determined after the distributions referred to in paragraphs a) to c) above and up to the net FMV of this type of property determined after the distributions referred to in paragraphs a) to c) above.
48. Distributing Corporation will transfer to Newco a portion of its assets and Newco will assume a portion of Distributing Corporation's liabilities, such that Newco will receive its proportional share of the net FMV of the Cash and Investment Assets held by Distributing Corporation immediately prior to the transfer. This proportional share of the net FMV of the assets thus allocated to Newco will be established based on the FMV of the shares of the share capital of Distributing Corporation that will belong to Transferee Corporation immediately prior to the transfer over the FMV of all the issued and outstanding shares of the share capital of Distributing Corporation immediately prior to the transfer. This transfer followed by the winding-up of Newco into Transferee Corporation described in paragraph 50 below will constitute a Distribution.
Distributing Corporation and Newco will make the election provided for in subsection 85(1) in the prescribed form and within the time limit provided for in subsection 85(6), in respect of each property transferred to Newco that will constitute an Eligible Property.
The Agreed Amount of Distributing Corporation and Newco for each transferred asset that will be a capital property, other than a depreciable property, will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).
Distributing Corporation will receive as consideration for the assets transferred to Newco:
a) the assumption by Newco of part of Distributing Corporation's debts that have been allocated (for the purposes of determining the net FMV of each type of property) to the property that will be transferred to Newco by Distributing Corporation; and
b) the preferred shares of the capital stock of Newco having a total RV corresponding to the amount by which the total FMV of the assets transferred by Distributing Corporation to Newco exceeds the total principal amount of the debts assumed by Newco.
The total amount of the FMV of the consideration represented by the debts that will be assumed by Newco and allocated as consideration for each asset that will be an Eligible Property will not exceed the Agreed Amount (as determined pursuant to the rules described above) in respect of the asset.
The total amount of the FMV of the consideration represented by the liabilities that will be assumed by Newco and allocated as consideration for each asset that is not an Eligible Property will not exceed the FMV with respect to the asset.
The PUC of the preferred shares of the capital stock of Newco will be determined pursuant to the provisions of subsection 85(2.1).
Newco will be connected to Distributing Corporation by virtue of subsection 186(4).
Authorized redemptions
49. Newco will redeem all of the preferred shares of its capital stock held by Distributing Corporation. In consideration therefor, Newco will issue a non-interest-bearing demand note with a principal amount equal to the RV of the preferred shares of its capital stock being redeemed (the “Distributing Corporation Note”). Distributing Corporation will accept the Distributing Corporation Note as full and complete payment for the repurchase of such preferred shares of the capital stock of Newco.
Upon the redemption of those shares, Newco will be deemed to have paid and Distributing Corporation will be deemed to have received a dividend under subsection 84(3), in respect of the redemption of the preferred shares, the amount of which will correspond to the excess of the redemption price of the preferred shares over their PUC. That dividend will be a taxable dividend.
50. Newco will be wound-up into Transferee Corporation. As part of the winding-up, all of Newco's assets will be transferred to Transferee Corporation and Transferee Corporation will assume all of Newco's debts. The Distributing Corporation Note will then be assumed by Transferee Corporation.
Newco will subsequently be dissolved at the appropriate time.
51. Distributing Corporation will purchase for cancellation the XXXXXXXXXX Class B shares and the XXXXXXXXXX Class X shares of its capital stock held by Transferee Corporation. In consideration therefor, Distributing Corporation will issue a note payable on demand and not bearing interest, the principal of which will correspond to the purchase price of such shares (the “Transferee Corporation Note”). Transferee Corporation will accept the Transferee Corporation Note as absolute and complete payment for the repurchase of such Class B and Class X shares of the capital stock of Distributing Corporation.
Upon the repurchase of such shares, Distributing Corporation will be deemed to have paid and Transferee Corporation will be deemed to have received a dividend under subsection 84(3), in respect of the repurchase of the Class B and Class X shares, in an amount equal to the amount by which the purchase price of the shares, as the case may be, exceeds their PUC. This dividend will be a taxable dividend.
52. The Distributing Corporation Note and Transferee Corporation Note will be extinguished by set-off pursuant to XXXXXXXXXX.
Amalgamation
53. A will transfer her XXXXXXXXXX Class A shares of the capital stock of Distributing Corporation to Holdco A in consideration for a cash amount of $XXXXXXXXXXX.
54. Distributing Corporation and Holdco A will amalgamate to form Amalco. The amalgamation will be a vertical amalgamation as described in paragraph 184(1) of the CBCA.
The articles of Amalco will be identical to the articles of Holdco A.
The issued and outstanding capital stock of Amalco will correspond to that of Holdco A. The corporation resulting from the amalgamation will not issue shares at the time of the amalgamation. The shares of the capital stock of Distributing Corporation will be cancelled at the time of the amalgamation.
The combination of Distributing Corporation and Holdco A will constitute a “amalgamation” within the meaning of subsection 87(1). Amalco will be a TCC and a CCPC.
Purpose of the Proposed Transactions
55. The purpose of the increases in the PUC of the shares of the capital stock of Distributing Corporation described in Paragraphs 37 and 38 of the Proposed Transactions is to proportionally distribute the CDA of Distributing Corporation between Distributing Corporation and Distributing Corporation.
56. The purpose of the increases in the PUC of the shares of the capital stock of Distributing Corporation described in Paragraphs 39 and 40 of the Prior Transactions is to create a DR for Distributing Corporation corresponding to the balance of the ERDTOH and NERDTOH accounts of Distributing Corporation, which can then be distributed proportionally between Distributing Corporation and Transferee Corporation as part of the butterfly reorganization.
57. The purpose of the Proposed Transactions is to enable the shareholders of Distributing Corporation to divide the assets of Distributing Corporation between two separate corporations (Distributing Corporation and Transferee Corporation) as part of a “one-winged butterfly” reorganization.
Additional information
58. The main contact details for taxpayers covered by the advance decisions are:
XXXXXXXXXX
59. All significant transactions that were carried out before the application for advance decisions was submitted or that could be undertaken after the conclusion of the Proposed Transactions, and which will form part of the series of transactions or events that will include the Proposed Transactions, are described herein.
60. With the exception of the Proposed Transactions, Distributing Corporation has not acquired and will not acquire any assets, and has not incurred and will not incur any debt, in anticipation of and prior to the Distribution made as part of the butterfly reorganization that is the subject of the Proposed Transactions.
61. With the exception of what is described herein, none of Distributing Corporation, Amalco, Transferee Corporation and Newco will dispose of any asset to a person not related to the vendor or to a partnership in the context of the butterfly reorganization that is the subject of the Proposed Transactions.
62. With the exception of the Proposed Transactions described herein, there will be no acquisition of control of Distributing Corporation, Amalco, Transferee Corporation and Newco in the series of transactions or events comprising the Proposed Transactions, taking into account subsection 256(7) and paragraph 55(5)(e).
63. Distributing Corporation's principal activity is the management of an investment portfolio. More specifically, Distributing Corporation buys and from time to time disposes of investments on the advice of securities brokers or investment advisors. The investments held by Distributing Corporation constitute Capital Property. As part of the Proposed Transactions described above, Transferee Corporation will receive assets from Distributing Corporation, including investments. Following the Proposed Transactions, Transferee Corporation will hold and dispose of the investments received from Distributing Corporation in the normal course of its investment activities in the same manner as Distributing Corporation did prior to the Proposed Transactions. Distributing Corporation (and Amalco) will continue to hold and dispose of its investments in the normal course of its investment activities in the same manner as Distributing Corporation did prior to the Proposed Transactions.
64. Distributing Corporation, Amalco, Transferee Corporation and Newco are not, and none of them will be at the time of the Proposed Transactions, a “specified financial institution” within the meaning of the definition of that term in subsection 248(1).
65. None of the shares of the capital stock of Distributing Corporation, Amalco, Transferee Corporation or Newco has been or will be at any time during the term of the series of proposed Transactions:
(a) subject to a guarantee as stated in paragraph 112(2.2);
(b) subject to a “dividend rental arrangement” within the meaning of subsection 248(1) as stated in subsection 112(2.3); or
(c) issued or acquired in the course of a transaction, event or series of transactions or events of the kind stated in subsection 112(2.5).
Advance Rulings Issued
Provided that the statement of the relevant Facts, the Completed Transaction, the Proposed Transactions and the Additional Information constitutes a full disclosure of all the relevant facts, all the transactions carried out and all the proposed transactions and that the Proposed Transactions are carried out as described above, our rulings are as follows:
A. Due to the increase in the PUC of the XXXXXXXXXX Class B shares of the capital stock of Distributing Corporation described in paragraph 39 above and the increase in the PUC of the XXXXXXXXXX Class D shares of the capital stock of Distributing Corporation described in paragraph 40 above, paragraph 84(1) will apply such that:
a) Distributing Corporation will be deemed to have paid and Transferee Corporation will be deemed to have received at that time a dividend equal to the amount of the increase in the PUC; and
b) Distributing Corporation will be deemed to have paid and Holdco A will be deemed to have received at that time a dividend equal to the amount of the increase in the PUC.
B. The following provisions will apply to the dividends described in A above to the extent that they constitute taxable dividends:
a) in the case of the dividend deemed to have been paid by Distributing Corporation and received by Transferee Corporation on the XXXXXXXXXX Class B shares of the capital stock of Distributing Corporation, such dividend:
(i) will be included in computing Transferee Corporation's income under paragraphs 12(1)(j) and 82(1)(a);
(ii) will be deductible in computing Transferee Corporation's taxable income under subsection 112(1) for the year in which the dividend is received and, for greater certainty, that deduction will not be disallowed under subsections 112(2.1), (2.2), (2.3) or (2.4);
(iii) will be subject to Part IV tax to Transferee Corporation within the limits provided for in paragraph 186(1)(b);
(iv) subsection 55(2) will not apply to the dividend provided that the amount of such dividend is less than the Safe Income available for the XXXXXXXXXX Class B shares of the capital stock of Distributing Corporation held by Transferee Corporation immediately before the time at which Distributing Corporation is deemed to have paid the dividend;
b) in the case of the dividend deemed to have been paid by Distributing Corporation and received by Holdco A on the XXXXXXXXXX Class D shares of the capital stock of Distributing Corporation, such dividend:
(i) will be included in computing Holdco A's income under paragraphs 12(1)(j) and 82(1)(a);
(ii) will be deductible in computing the taxable income of Holdco A under subsection 112(1) for the year in which the dividend is received and, for greater certainty, that deduction will not be prohibited by subsections 112(2.1), (2.2), (2.3) or (2.4);
(iii) will be subject to Part IV tax to Holdco A within the limits provided for in paragraph 186(1)(b);
(iv) subsection 55(2) will not apply to the dividend provided that the amount of such dividend is less than the Safe Income attributable to the XXXXXXXXXX Class D shares of the capital stock of Distributing Corporation held by Holdco A immediately before the time when Distributing Corporation is deemed to have paid the dividend;
C. The repurchase by Newco of the preferred shares of its capital stock held by Distributing Corporation, as described in Paragraph 49 above, will result in the following:
a) The provisions of paragraph 84(3) will apply such that Newco will be deemed to have paid and Distributing Corporation will be deemed to have received a dividend in an amount corresponding to any excess of the RV of the preferred shares of the capital stock of Newco over the PUC of such shares;
b) The deemed dividend received by Distributing Corporation as described in paragraph a) above, to the extent that it constitutes a taxable dividend;
(i) will be included in computing Distributing Corporation's income under paragraphs 12(1)(j) and 82(1)(a);
(ii) will not be included in the proceeds of disposition of the shares, by reason of paragraph (j) of the definition of “proceeds of disposition” in section 54;
(iii) will be deductible in computing Distributing Corporation's taxable income under subsection 112(1); and
(iv) in addition, any loss arising on the disposition of those shares will be reduced by the amount of those dividends under subsection 112(3).
D. The purchase for cancellation by Distributing Corporation of the XXXXXXXXXX Class B shares and the XXXXXXXXXX Class X shares of its capital stock held by Distributing Corporation, as described in paragraph 51 above, will have the following results:
a) The provisions of paragraph 84(3) will apply such that Distributing Corporation will be deemed to have paid, and Transferee Corporation will be deemed to have received, a dividend in an amount equal to the amount, if any, by which the purchase price of the Class B Shares and the Class X Shares exceeds the PUC of such shares;
b) The deemed dividend received by Transferee Corporation described in paragraph a) above, to the extent that it constitutes a taxable Dividend:
(v) will be included in computing Distributing Corporation's income under paragraphs 12(1)(j) and 82(1)(a);
(vi) will not be included in the proceeds of disposition of the shares, by reason of paragraph (j) of the definition of “proceeds of disposition” in section 54;
(vii) will be deductible in computing Transferee Corporation's taxable income under subsection 112(1);
(viii) in addition, any loss arising from the disposition of those shares will be reduced by the amount of those dividends pursuant to subsection 112(3).
E. Provided that there is no transaction, other than a Completed Transaction or a Proposed Transaction described herein, forming part of a series of transactions or events (within the meaning of subsection 248(10)) that includes the Proposed Transactions, and which is:
(a) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(b) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(c) an acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);
(d) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) and 55(3.1)(d);
the taxable dividends resulting from the transactions described in paragraphs 49 and 51 above will not give rise to the application of subsection 55(2), due to the application of paragraph 55(3)(b).
F. Provided that Newco is not entitled to a DR in the taxation year in which it is deemed to have paid the dividend described in 49 above, Distributing Corporation will not be subject to Part IV tax in respect of the deemed dividend received pursuant to paragraph 186(1)(b).
G. As Distributing Corporation will be entitled to a DR under subsection 129(1) in the course of its taxation year during which it will be deemed to have paid the dividend described in paragraph 51 above, Transferee Corporation will be subject to Part IV tax in respect of the deemed dividend received within the limits provided for in paragraph 186(1)(b).
H. The taxable dividends described in Paragraphs 39, 40, 49 and 51 above will be deemed to be “excluded dividends” within the meaning of section 187.1 and subsection 191(1) and will not be subject to the taxes of Parts IV.1 and VI.1.
I. The settlement of the Distributing Corporation Note and Transferee Corporation Note, as described in Paragraph 52 above, will not result in an “forgiven amount” as defined in paragraph 80(1).
J. Subsections 15(1), 56(2) or 246(1) will not apply to the Proposed Transactions described above in relation to the various taxpayers involved in those transactions.
K. 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.
These rulings are issued subject to the limitations and general conditions stated in Information Circular 70-6R12 dated April 1, 2022, published by the CRA and are binding on the CRA provided that the Proposed Transactions described in Paragraphs 36 to 54 are completed before XXXXXXXXXX. These rulings are based on the current Act and do not take into account the amendments proposed therein.
Other Comments
The rulings issued should in no way be interpreted as an acquiescence on the part of the CRA, according to which:
a) we have examined the other tax consequences that could result from the Proposed Transactions set out herein;
b) the amount attributed to an asset in the Statement of Facts and the Proposed Transactions truly represents the FMV or the ACB of an asset, or the amount of the PUC of a share;
c) the amount of the dividend provided for in Paragraphs 39 and 40 of the Proposed Transactions does not exceed the amount of Safe Income attributable to the shares in question; and that
d) the amount attributed to the CDA, the GRIP, the ERDTOH or the NERDTOH of a corporation truly represents the CDA, the GRIP, the ERDTOH or the NERDTOH of such a corporation.
The statement of our fees for the time spent studying your file will be sent to you under separate cover.
Best regards,
XXXXXXXXXX
For the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 FMV estimated at XXXXXXXXXX.
2 FMV estimated at XXXXXXXXXX.
3 FMV estimated at XXXXXXXXXX.
4 FMV estimated at XXXXXXXXXX.
5 FMV estimated at XXXXXXXXXX.
6 FMV estimated at XXXXXXXXXX.