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 representations.
XXXXXXXXXX 2023-099829
XXXXXXXXXX 2024
XXXXXXXXXX,
Subject: Request for advance decisions regarding income tax
XXXXXXXXXX
This is in response to your letter dated XXXXXXXXXX and received on XXXXXXXXXX, in which you requested an advance income tax ruling 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, none of the issues covered by this request for advance rulings:
(i) relates to an income tax return previously filed by the taxpayer or a related person;
(ii) is being considered by a Tax Services Office or Tax Centre in connection with an income tax return previously filed by the Taxpayer or a related person;
(iii) is the subject of a notice of objection by the Taxpayer or a related person;
(iv) is the subject of a current or completed court process involving the Taxpayer or a related person; or
(v) is the subject of a ruling request previously considered by the Income Tax Rulings Directorate.
The main contact details for taxpayers covered by the advance rulings are:
XXXXXXXXXX
Unless otherwise stated:
(i) all references to a statute are 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 in this Ruling that are defined in the Act have the meaning given in such definition;
(iii) all references to monetary amounts are in Canadian dollars;
(iv the singular should be read as plural and vice versa where the circumstances so require.
DEFINITIONS AND ABBREVIATIONS USED
The names and corporate names of the taxpayers are replaced by the names and corporate names indicated below.
“Distributing Corporation” (“DC”) means XXXXXXXXXX;
“Shareholder 1” means XXXXXXXXXX;
“Shareholder 2” means XXXXXXXXXX;
“Transferee Corporation 1” (“TC1”) means the new company to be incorporated by Shareholder 1 in accordance with Paragraph 21;
“Transferee Corporation 2” (“TC2”) “Transferee 2” means the new company to be incorporated by Shareholder 2 in accordance with Paragraph 21.
Unless otherwise indicated, the following abbreviations have the meanings defined below.
“ACB” means “adjusted cost base” within the meaning of the definition in section 54;
“Agreed Amount” has the meaning set out in subsection 85(1);
“arm's length” has the meaning ascribed to it in subsection 251(1);
“Capital property” has the meaning set out in the definition provided in section 54;
“CCPC” means “Canadian-controlled private corporation” within the meaning of the definition in subsection 125(7);
“CDA” means “capital dividend account” as defined in subsection 89(1);
“CG” means “capital gain” within the meaning of section 39;
“CL” means “capital loss” as defined in section 39;
“Connected Corporation” has the meaning set out in subsection 186(4);
“Cost Amount” has the meaning ascribed to it in subsection 248(1);
“CRA” means the Canada Revenue Agency;
“Distribution” has the meaning set out in subsection 55(1);
“DR” means “dividend refund” within the meaning of the definition in subsection 129(1);
“Eligible Property” has the meaning ascribed to it in subsection 85(1.1);
“ERDTOH” means eligible refundable dividend tax on hand, within the meaning of the definition in subsection 129(4);
“FMV“ means “fair market value” and refers to the highest price, in dollars, at which two parties who are dealing at arm's length and are well-informed and prudent would agree on the open market, neither party being forced to act;
“GRIP” means “general rate income pool” within the meaning of the definition in subsection 89(1);
“Immovable 1” means the building located at XXXXXXXXXX;
“Immovable 2” means the building located at XXXXXXXXXX;
“Mortgage Loan” means the mortgage loan made to DC by a financial institution and secured by the two Immovables as described in Paragraph 17;
“NERDTOH” means non-eligible refundable dividend tax on hand, within the meaning of the definition in subsection 129(4);
“Net Capital Loss” has the meaning as defined in subsection 248(1);
“Non-Capital Loss” has the meaning as defined in paragraph 111(8);
“Note 1” means the note issued as described in Paragraph 52;
“Note 2” means the note issued as described in Paragraph 52;
“Paragraph” means a numbered paragraph of this letter;
“Proposed Transactions” means the transactions referred to in Paragraphs 20 to 63;
“PUC” means “paid-up capital” within the meaning of the definition in subsection 89(1);
“RV” means “redemption value”;
“Taxable Dividend” has the meaning set out in the definition provided in paragraph 89(1);
“Taxation Year” has the meaning set out in subsection 249(1);
“TCC“ means “taxable Canadian corporation” within the meaning of the definition in subsection 89(1);
XXXXXXXXXX;
XXXXXXXXXX;
RELEVANT FACTS
1. All persons or corporations involved in the Proposed Transactions are persons resident in Canada.
2. Shareholder 1 and Shareholder 2 have been legally divorced since XXXXXXXXXX.
3. DC is a TCC and a CCPC.
4. DC was incorporated on XXXXXXXXXX under the XXXXXXXXXX.
5. The fiscal period of DC ends on XXXXXXXXXX.
6. DC does not have detailed share capital. DC can only issue one class of shares that include the three basic rights (voting, dividends and residual rights). Those shares qualify as common shares and are referred to as “common” class shares herein.
7. The shareholders of DC are Shareholder 1 and Shareholder 2, XXXXXXXXXX common shares of the share capital of DC. Those shares represent all of the issued and outstanding shares in the share capital of DC. The shareholding structure of DC has not changed and has remained stable since the incorporation of DC.
8. The shares of the capital stock of DC constitute Capital Property to Shareholder 1 and Shareholder 2.
9. As of the date hereof, DC has no balance of CDA, GRIP, ERDTOH, NERDTOH balance (taking into account the DR to which it is entitled for its Taxation Year ended XXXXXXXXXX), Net Capital Loss or Non-Capital Loss. Except for the NERDTOH (and the balance of the CDA given that a CG could be realized during the transactions described in Paragraphs 37 and 44), those balances should be substantially the same before the start of the Proposed Transactions described in Paragraphs 52 to 63.
10. DC is expected to generate a profit for its fiscal year ending XXXXXXXXXX and positive taxable income.
11. DC owns Immovable 1 and Immovable 2 (collectively referred to as the “Immovables”).
12. The Immovables were purchased by DC on XXXXXXXXXX from an unrelated person.
13. DC leases the Immovables in the ordinary course of its business.
14. The FMV of each of the Immovables has been valued at $XXXXXXXXXXX by a firm of chartered appraisers. The FMV of the Immovables will be updated in anticipation of the Proposed Transactions.
15. On XXXXXXXXXX, DC's assets consisted of cash, income tax receivable, XXXXXXXXXX, Immovable 1, Immovable 2, XXXXXXXXXX.
16. XXXXXXXXXX.
17. On XXXXXXXXXX, DC's liabilities consisted of accounts payable, deferred income, advances due to Shareholder 1 and Shareholder 2, and a single long-term debt charged on the Immovables (the Mortgage Loan).
18. Prior to the Proposed Transactions, the advances due to Shareholder 1 and Shareholder 2 will be equal. DC will have repaid a nominal amount to establish equality.
19. There have been no significant changes in the composition of DC’s assets and liabilities between XXXXXXXXXX and the date hereof. Furthermore, there will be no significant changes in the composition of DC’s assets and liabilities between the date hereof and the date on which the Proposed Transactions will be carried out.
PROPOSED TRANSACTIONS
Preliminary steps
20. Articles of amendment for DC will be filed in order to add restrictions on the transfer of the corporation's securities without making any other changes. The articles of amendment will not include a share conversion.
21. TC1 and TC2 will be incorporated by Shareholder 1 and Shareholder 2, respectively, under the XXXXXXXXXX.
22. The principal rights, privileges, restrictions and conditions of the shares comprising the share capital of TC1 and TC2 will include the following classes:
Class A
- Without par value;
- Participating in the remainder;
- Voting (XXXXXXXXXX per share);
- Entitling the holder to receive any dividend as declared by the board of directors.
Class E
- No par value;
- Voting (XXXXXXXXXX per share);
- Entitling the holder to a non-preferential and non-cumulative dividend at a maximum annual rate of XXXXXXXXXX%, calculated on the RV;
- The RV corresponds to the FMV of the assets received in consideration at the time of the issue of the shares minus the total of the FMV of any consideration other than shares given by the issuing corporation at the time of the issue of the shares;
- Redeemable at the option of the holder or the corporation at their FMV;
- Purchasable for cancellation by mutual agreement at the best possible price without exceeding the FMV;
- Commitment by the corporation not to redeem or declare dividends on any other class of shares if, as a result, it would no longer be in a position to redeem Class E shares at their FMV.
For the purposes of subsection 191(4), the terms of the Class E shares of the capital stock of TC1 and TC2 will specify, pursuant to a resolution of the board of directors that will come into force upon the issue of such shares, an amount for which each such share is to be redeemed, acquired or canceled. The amount to be specified will be expressed as an amount in dollars (and not determined by a formula), will not exceed the FMV of the consideration for which each Class E share of the capital stock of TC1 and TC2 is issued, and will not be subject to subsequent change.
23. Following the incorporation of TC1, Shareholder 1 will subscribe to XXXXXXXXXX Class A shares of the capital stock of TC1 for a consideration of $XXXXXXXXXX in cash.
24. Following the incorporation of TC2, Shareholder 2 will subscribe for XXXXXXXXXX Class A shares of the capital stock TC2 for a consideration of $XXXXXXXXXX in cash.
25. Shareholder 1 and Shareholder 2 will each transfer XXXXXXXXXX common shares of the capital stock of DC that they hold to TC1 and TC2, respectively. In consideration therefor, TC1 will issue XXXXXXXXXX Class A shares of its capital stock to Shareholder 1 and TC2 will issue XXXXXXXXXX Class A shares of its capital stock to Shareholder 2. The FMV of the shares issued will be equal to the FMV of the shares transferred.
With respect to those dispositions, Shareholder 1 and Shareholder 2 will jointly make an election with TC1 and TC2 respectively under paragraph 85(1) in the prescribed form and within the time limit provided for in subsection 85(6). The transfer will be made at an Agreed Amount equal to the ACB of the transferred shares.
For greater certainty, the PUC of the Class A shares of the capital stock of each of TC1 and TC2 issued to each of Shareholder 1 and Shareholder 2 respectively will not exceed the maximum amount that may be added to the PUC of such shares pursuant to paragraph 84.1(1)(a).
DC will be a corporation connected to TC1 and TC2 by virtue of paragraph 186(4)(b).
Distribution
26. The proposed Distribution of DC's property to TC1 and TC2 will be made using the net FMV method accepted by the CRA.
27. Immediately prior to the transfer described in Paragraph 32, DC's properties will be categorized by type of property according to the following three classes of property type, pursuant to the policy established by the CRA for the classification of properties for the purposes of the proportional distribution of each class of property type provided for in the definition of the term Distribution: cash and cash equivalents, business properties and investments.
28. As part of the transfer described in Paragraph 32, DC's properties will be classified as follows:
Properties classified as “cash and cash equivalents” (“Cash”) will include cash on hand and accounts receivable.
Investment-type properties (“Investments”) will include all of DC's properties, other than Cash, the income from which constitutes income from property or from a “specified investment business” within the meaning of subsection 125(7), namely Immovable 1, Immovable 2, XXXXXXXXXX.
29. DC will not own any properties in the “business property” class.
30. For greater certainty, DC's various tax accounts, including, among others, the CDA, the GRIP, the ERDTOH and/or the NERDTOH, as the case may be, will not be considered to be property for the purposes hereof.
31. For the purposes of calculating the net FMV of each type of DC's properties, immediately prior to the transfer of properties referred to in Paragraph 32, DC's liabilities will be allocated and deducted from the FMV of each type of property belonging to that same corporation as follows:
(i) Short-term liabilities will be allocated and applied to reduce the FMV of each item of Liquid Properties in proportion to the FMV of each item of Liquid Properties in relation to the total FMV of all items of Liquid Properties. Short-term liabilities will consist of accounts payable, deferred income (rent received in advance), taxes payable, if any, and advances due to shareholders.
For greater certainty, for the purposes of the determination described above, any amount collected from customers and established as deferred income will be considered a liability if there is a legal obligation to repay the amount or to provide other services.
(ii) Where applicable, debts other than short-term debts that relate to specific properties will be allocated to those properties up to their fair market value. The entire portion of such a debt exceeding the fair market value 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. If applicable, the debts that form part of the corporation's long-term debt will be debts covered by this subparagraph or the following subparagraph.
(iii) If applicable, debts other than short-term debts that do not relate to specific properties but that relate to a specific type of property will be allocated to the type of property to which they relate, up to the FMV of that type of property, determined after the Distribution provided for in the preceding subparagraph.
(iv) If applicable, all remaining debts, after the Distributions referred to in the preceding subparagraphs, may be allocated and applied to reduce the FMV of each type of property in proportion to the FMV of each type of property, such FMVs being determined after the Distributions referred to in the preceding subparagraphs and up to the FMV of that type of property determined after the Distributions referred to in the preceding subparagraphs.
32. DC will transfer to each of TC1 and TC2 a portion of its properties, such that each of TC1 and TC2 will receive its proportional share of the net FMV of Cash and Investments held by DC immediately prior to the transfer. This proportional share of the net FMV of the properties thus allocated to each of TC1 and TC2 will be established according to the FMV of the shares of the capital stock of DC that will belong, as the case may be, to TC1 and TC2 immediately prior to the Distribution on the FMV of all the issued and outstanding shares of the capital stock of DC immediately prior to the transfer. This transfer will constitute a Distribution.
The net FMV will correspond exactly or approximately to the result of the following calculation:
A × B/C where:
A represents the net FMV, immediately prior to the Distribution, of all such properties then owned by DC;
B is the FMV of the shares of the capital stock of DC that will be held by each of TC1 and TC2, as the case may be, prior to the Distribution; and
C is the FMV of all the issued and outstanding shares of DC's share capital immediately prior to the Distribution.
33. DC will sell to TC1 Cash and Investments (with the exception of Immovables) representing XXXXXXXXXX% of the FMV of such properties of DC in this class that it holds, namely:
(i) its cash (excluding rent received in advance (the distribution of the sums relating to rent received in advance will be carried out by the notary when calculating the customary distributions));
(ii) its accounts receivable and tax receivable, if any;
(iii) its personal property (XXXXXXXXXX).
34. In consideration for this transfer, TC1 will assume the following liabilities:
(i) XXXXXXXXXX% of DC's accounts payable and taxes payable, if any, as of the date of sale, not to exceed the total FMV of the properties received in consideration;
(ii) if the total FMV of the properties transferred to TC1 is greater than the amount of the debts assumed on the date of the sale, as described in (i) above, TC1 will also assume a portion of the advance owed by DC to Shareholder 1 up to the amount of that difference.
35. Simultaneously with the sale provided for in Paragraph 33, DC will sell to TC2, Cash and Investments (with the exception of Immovables) representing XXXXXXXXXX% of the FMV of such properties of DC in that class that it holds and whose Cost Amount will be equal to their FMV, namely:
(i) its cash (excluding rent received in advance (the distribution of the sums relating to rent received in advance will be carried out by the notary when calculating the customary distributions));
(ii) its accounts receivable and tax receivable, if any;
(iii) its personal property (XXXXXXXXXX).
36. In consideration for that transfer, TC2 will assume the following liabilities:
(i) XXXXXXXXXX% of DC's accounts payable and taxes payable, if any, as of the date of sale, not to exceed the total FMV of the property received in consideration.
(ii) if the total FMV of the assets transferred to TC2 is greater than the amount of the debts assumed on the day of the sale, as described in item (i) above, TC2 will also assume a portion of the advance owed by DC to Shareholder 2 up to the amount of that difference.
37. Subsequently, DC will transfer Immovable 1 to TC1, as follows:
DESCRIPTION FMV ($)
Building, XXXXX (“Buidling 1”) XXXXX
Land, XXXXX (“Land 1”) XXXXX
TOTAL XXXXX
38. As consideration for that transfer, TC1 will assume the following liabilities and issue the following shares:
(i) the remaining balance of the advance due from DC to Shareholder 1;
(ii) XXXXXXXXXX% of the Mortgage Loan;
(iii) XXXXXXXXXX Class E shares of its capital stock.
39. The RV of the Class E shares issued by TC1 will correspond to the FMV of Building 1 and of Land 1, less the total of the following amounts:
- (i) the remaining balance of the advances due by DC to Shareholder 1; and
- (ii) XXXXXXXXXX% of the Mortgage Loan.
40. DC and TC1 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 Building 1 and Land 1 transferred to TC1, each of which will constitute an Eligible Property.
The Agreed Amount chosen by DC and TC1 for Building 1 will be equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii).
The Agreed Amount chosen by DC and TC1 for Land 1 will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).
41. If it turns out that at the time of the Distribution, the amount of the debts assumed by TC1 in consideration for the transfer of Building 1 and Land 1 (as described in items (i) and (ii) of Paragraph 38) is greater than the total of the Cost Amount of Building 1 and of Land 1, the excess balance of the debts assumed by TC1 will be added to the Agreed Amount with respect to Land 1, without exceeding the FMV of Land 1. Consequently, the Agreed Amount chosen with respect to Land 1 would be determined under paragraph 85(1)(b) pursuant to paragraph 85(1)(e.3).
That would result, to DC, in a CG on the disposition of Land 1 which would have the effect of increasing its refundable portion of Part I tax (NERDTOH) and its CDA.
42. The PUC of the Class E shares of the capital stock of TC1 issued in connection with the transfer of DC's property described in Paragraphs 37 and 38 will be determined pursuant to the provisions of paragraph 85(2.1).
43. After the transfer of Immovable 1, TC1 will be a corporation connected to DC by virtue of paragraph 186(4)(b).
44. Simultaneously with the transfer of Immovable 1, DC will transfer Immovable 2 to TC2, as follows:
DESCRIPTION FMV ($)
Building, XXXXX (“Building 2”) XXXXX
Land, XXXXX (“Land 2”) XXXXX
TOTAL XXXXX
45. In consideration for that transfer, TC2 will assume the following liabilities and issue the following shares:
(i) the remaining balance of the advance due from DC to Shareholder 2;
(ii) XXXXXXXXXX% of the remaining balance on the Mortgage Loan; and
(iii) XXXXXXXXXX Class E shares of its capital stock.
46. The RV of the Class E shares issued by TC2 will correspond to the FMV of Building 2 and Land 2, less the total of the following amounts:
- (i) the remaining balance of the advance due from DC to Shareholder 2; and
- (ii) XXXXXXXXXX% of the Mortgage Loan.
47. DC and TC2 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 Building 2 and Land 2 transferred to TC2, which will constitute Eligible Property.
The Agreed Amount chosen by DC and TC2 for Immovable 2 will be equal to the lesser of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii).
The Agreed Amount chosen by DC and TC2 for Land 2 will be equal to the lowest of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).
48. If it turns out that at the time of the Distribution, the amount of the debts assumed by TC2 in consideration for the transfer of Building 2 and Land 2 (as described in items (i) and (ii) of Paragraph 45) is greater than the total of the Cost Amount for Immovable 2 and of Land 2, the excess balance of the debts assumed by TC2 will be added to the Agreed Amount in respect of Land 2, without exceeding the FMV of Land 2. Consequently, the Agreed Amount with respect to Land 2 would be determined under paragraph 85(1)(b) pursuant to paragraph 85(1)(e.3).
This would result, to DC, in a CG on the disposition of Land 2 which would have the effect of increasing its refundable portion of Part I tax (NERDTOH) and its CDA.
49. The RV of the Class E shares of the capital stock of TC2 issued as part of the rollover of DC's property described in Paragraphs 44 and 45 will be determined pursuant to the provisions of subsection 85(2.1).
50. After the transfer of Immovable 2, TC2 will be a corporation connected to DC by virtue of paragraph 186(4)(b).
51. At the time of the transfer of Immovable 1 and Immovable 2, the notary will make the customary distributions in respect of each of the Immovables, including the distribution of the cash relating to rents collected in advance.
Permitted redemptions
52. Immediately after the transfer of Immovable 1 and Immovable 2, each of TC1 and TC2 will redeem the Class E shares of its capital stock held by DC. In consideration therefor, each of TC1 and TC2 will issue to DC a non-interest-bearing demand note (Note 1 and Note 2, respectively), the principal of which will correspond to the RV of the Class E shares being redeemed. DC will accept Note 1 and Note 2 as absolute and full payment for the redemption for cancellation of such Class E shares of the capital stock of TC1 and TC2, respectively.
53. Upon the redemption by each of TC1 and TC2 of the Class E shares of its capital stock, each of TC1 and TC2 will be deemed to have paid and DC will be deemed to have received a dividend under subsection 84(3), the amount of which will correspond to the amount by which the RV of such Class E shares exceeds the PUC of the shares thus redeemed. That dividend will be a Taxable Dividend.
End of the fiscal period of TC1 and TC2
54. At the end of the day during which the share redemptions described in Paragraph 52 are completed, TC1 and TC2 will end their first fiscal period. That day will correspond to the end of the fiscal period of TC1 and TC2 and the first Taxation Year of TC1 and TC2 will end on that day.
Winding-up of DC
55. On the day following the day specified in Paragraph 54, the shareholders of DC will adopt a resolution authorizing the winding-up and dissolution of DC under the applicable provisions of the XXXXXXXXXX.
56. As part of such winding-up, DC will distribute and allocate, to TC1 and TC2, Note 1 and Note 2, respectively, which will represent all, or substantially all, of the property belonging to DC immediately prior to the winding-up of DC.
57. Due to the distribution of Note 1 and Note 2 as described in Paragraph 56, Note 1 and Note 2 will be extinguished by confusion [i.e., operation of law] pursuant to Article XXXXXXXXXX [Article 1683 of the Civil Code of Quebec].
58. Pursuant to subparagraph 88(2)(b)(i) and paragraph 83(2), a portion of the winding-up dividend may be considered as a separate dividend paid out of the CDA of DC, up to the amount of its CDA balance. The prescribed form will be filed within the prescribed time limit, or failing that, filed late with payment of the penalty provided for in subsection 83(4). The amount of the winding-up dividend in excess of the amount of the dividend that has been elected to be paid out of the CDA will be a Taxable Dividend.
59. Pursuant to paragraph 129(1)(a), at the end of its fiscal period, DC will receive a DR due to deemed dividends paid since it will likely have a positive balance of NERDTOH at the end of its fiscal period.
60. Immediately after the winding-up of DC and prior to its dissolution, DC will not own or acquire any assets, except for the collection of the DR or any other refund, and will not carry on any business.
61. Any DR and any other refund to which DC would be entitled by reason of the transactions provided for herein or other transactions will be allocated in proportion to the value of the shares of the capital stock of DC held by each of TC1 and TC2, pursuant to the winding-up agreement.
62. Within a reasonable time following the receipt and allocation of such DR and any other refunds, articles of dissolution will be filed with the regulatory authority and, on the date shown on the certificate of dissolution, DC will be dissolved. At the appropriate time, DC will file the required income tax returns.
63. Each of TC1 and TC2 will be liable for a Part IV tax computed pursuant to paragraph 186(1)(b) in respect of that portion of the winding-up dividend which is a Taxable Dividend.
ADDITIONAL INFORMATION
64. Following the transfer of Immovable 1 and Immovable 2 to TC1 and TC2, respectively, each of those corporations will refinance its immovable so that it is the sole debtor of the debt relating to such immovable.
65. With the exception of the transactions described in the Proposed Transactions, DC has not acquired and will not acquire any property, and has not incurred and will not incur any debt, in contemplation of and prior to the Distribution made in the course of the butterfly reorganization that is the subject of the Proposed Transactions.
66. None of the corporations involved in the present reorganization will dispose of any asset in favor of a person or partnership not related to them in the course of the butterfly reorganization that is the object of the Proposed Transactions.
67. The shares of the capital stock of TC1 and TC2 will not be sold to a third party during the series of transactions or events comprising the Proposed Transactions.
68. Except as described herein, there will be no acquisition of control of any of the corporations referred to herein as part of the series of transactions or events comprising the Proposed Transactions.
69. All material transactions that were completed prior to the filing of the request for advance rulings or that may be undertaken after the completion of the Proposed Transactions are described herein.
70. 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).
71. None of the shares of 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 undertakings referred to in subsection 112(2.2);
ii) the subject of a “dividend rental arrangement” within the meaning of subsection 248(1) and referred to in subsection 112(2.3);
iii) the subject of guarantee undertakings 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 the course of a transaction or event or a series of transactions or events of the type referred to in subsection 112(2.5).
PURPOSE OF THE PROPOSED TRANSACTIONS
72. The purpose of the proposed butterfly transaction is to proportionally distribute the assets and liabilities of DC to TC1 and TC2 so that those two corporations may continue their activities independently according to their own objectives.
ADVANCE RULINGS ISSUED
Provided that the statement of facts, the proposed transactions and the additional information constitute a full disclosure of all relevant facts and all proposed transactions and that the transactions are carried out as described above, 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 the shares of the capital stock of DC by its shareholders to TC1 and TC2, as described in Paragraph 25, and to the transfer of property by DC to TC1 and TC2, as described in Paragraphs 37 to 49, so that the Agreed Amount in respect of the transferred property will be deemed to be DC’s proceeds of disposition of the its property and to be the acquisition cost of such property for the transferee, as the case may be. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers of property described above.
B. The redemption by each of TC1 and TC2 of the Class E shares of their capital stock held by DC, as described in paragraph 52, will result in the following:
(i) the provisions of paragraph 84(3) will apply such that upon the redemption by each of TC1 and TC2 of the Class E 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 equal to the amount by which the RV of the Class E shares exceeds the PUC of such shares;
(ii) the deemed dividend paid by TC1 and TC2 described in paragraph (i) above will be deemed to have been received under subsection 84(3) by DC;
(iii) the deemed dividend referred to in paragraphs (i) and (ii) above, to the extent that it constitutes a taxable dividend:
(a) will be included in computing DC's income under paragraphs 12(1)(j) and 82(1)(a);
(b) will not be included in DC's proceeds of disposition of its Class E shares in the capital stock of TC1 and TC2 by reason of paragraph (j) of the definition “proceeds of disposition” in section 54;
(c) will be deductible in computing DC’s taxable income under subsection 112(1);
(iv) in addition, any loss arising from the disposition of those shares will be reduced by the amount of those dividends under subsection 112(3).
C. The winding-up of DC described in paragraphs 55 et seq. hereof will result in the following:
(i) 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 amount by which the principal of Note 1 and Note 2 (and any other amount paid by DC in this context, including the amounts linked to the distribution of DC's DR) exceeds the PUC of all the shares of the capital stock of DC held by TC1 and TC2, respectively;
(ii) the deemed dividend paid by DC to each of TC1 and TC2 described in paragraph (i) above will be deemed to have been received under subsection 84(2) by TC1 and TC2, respectively;
(iii) the deemed dividend paid to TC1 and TC2, referred to in paragraphs (i) and (ii) above, to the extent that it constitutes a Taxable Dividend:
(a) will be included in computing 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 of the capital stock of DC by reason of paragraph (j) of the definition of “proceeds of disposition” in section 54;
(c) will be deductible in computing the taxable income of TC1 and TC2, respectively, under subsection 112(1);
(iv) that a portion of the deemed dividend paid to TC1 and TC2, referred to in paragraphs (i) and (ii) above, will be considered as a separate dividend paid out of DC's CDA, pursuant to subsections 88(2) and 83(2), up to the amount of its CDA balance at the time of winding-up.
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 of the Proposed Transactions will not give rise to the application of subsection 55(2), due to the application of paragraph 55(3)(b).
E. DC will be subject to Part IV tax within the limits provided for in paragraph 186(1)(b) in respect of the Taxable Dividends described in Ruling B above. No Part IV tax will result if the ERDTOH and NERDTOH balance of each of TC1 and TC2 is nil.
F. Each of TC1 and TC2 will be subject to Part IV tax within the limits provided for 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 tax under Part IV.1 because they constitute “excepted dividends” within the meaning of section 187.1.
H. The Taxable Dividends described in Ruling B above and deemed to have been paid by each of TC1 and TC2 and received by DC, as the case may be, will be deemed to be excluded dividends under subsection 191(4) and will not be subject to tax under Part VI.1.
I. The Taxable Dividends described in Ruling 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 in subsection 191(1) and will not be subject to Part VI.1 tax.
J. The settlement of Note 1 and Note 2 as described in Paragraph 56 above will not result in a “forgiven amount” as defined in paragraph 80(1) or otherwise be subject to the rules regarding forgiveness of debt.
K. Subsections 15(1), 56(2) or 246(1) will not apply to the transactions proposed herein.
These rulings are issued subject to the limitations and general conditions stated in Information Circular 70-6R12 of April 1, 2022, published by the CRA and are binding on the CRA, provided that the Proposed Transactions described in Paragraphs 20 to 54 are completed within the time limits set forth herein and before the period of 6 months ending after the date hereof. The subsequent Proposed Transactions, described in Paragraphs 55 to 63, must be completed within the time limits set out herein, as described above. These decisions are based on the current Act and do not take into account the amendments proposed thereto.
OPINION
Provided that (i) the statement of the Facts, the Proposed Transactions, the Purpose of the Proposed Transactions and the Additional Information constitute a full and accurate disclosure of all relevant facts, all proposed transactions and all purposes of the proposed transactions; (ii) the Proposed Transactions are carried out as described above; and (iii) the Act is amended pursuant to the Notice of Ways and Means Motion tabled on November 28, 2023 (which passed first reading in the Senate on May 28, 2024 (Bill C-59)), the provisions of subsection 245(2) will not apply as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences confirmed in the above rulings.
The above opinion is not a ruling and, as stated in paragraph 19(f) of Information Circular 70-6R12 dated April 1, 2022, is not binding on the CRA.
OTHER COMMENTS
The rulings issued should in no way be interpreted as an acquiescence on the part of the CRA that:
a) we have considered the other tax consequences that could result from the proposed transactions;
b) the amount attributed to an asset in the statement of Facts and Proposed Transactions truly represents the FMV or ACB of a property, or the amount of the PUC of a share; and
c) the balance of the CDA, Non-Capital Losses, Net Capital Losses, as well as the amount allocated to the GRIP, ERDTOH or NERDTOH of a corporation truly represents the balance of the CDA, Non-Capital Losses, Net Capital Losses, or the amount allocated to the GRIP, ERDTOH or NERDTOH of such a corporation in the statement of Facts and Proposed Transactions.
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Reorganizations Division
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