Principal Issues: (1) Whether a taxable Canadian corporation has to pay Part VI.1 tax on taxable dividends to be paid on shares of its capital-stock (2) Whether subsection 245(2) applies.
Position: (1) No. (2) No.
Reasons: (1) Law and facts, the shares are neither “taxable preferred shares”, nor “short-term preferred shares” within the meaning assigned in subsection 248(1); (2) Law and facts.
XXXXXXXXXX 2023-097069
XXXXXXXXXX 2024
XXXXXXXXXX,
Subject: Request for advance income tax rulings
XXXXXXXXXX
This is in response to your letter dated XXXXXXXXXX requesting advance income tax rulings on behalf of XXXXXXXXXX. We have taken into account the revisions to your request that you sent us on XXXXXXXXXX, as well as the additional information you provided by email or during telephone conversations (XXXXXXXXXX).
To the best of your knowledge and that of the taxpayers involved in the transactions, none of the Proposed Transactions and/or issues involved in this ruling are the same as, or substantially similar to, transactions and/or issues that are:
i) in a previously filed return of the Taxpayers or a related person and;
A. being considered by the Canada Revenue Agency in connection with such return;
B. under objection by the Taxpayers or a related person; or
C. the subject of a current or completed court process involving the Taxpayers or a related person; or
ii) the subject of a ruling previously considered by the Income Tax Rulings Directorate.
Definitions
Unless otherwise specified:
i. all references to legislation are to provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the “Act”);
(ii) all terms and expressions used in this application that are defined in the Act have the meaning assigned to them in that definition;
(iii) all monetary amounts are in Canadian dollars; and
(iv) words importing the singular include the plural and vice versa, where the context so requires.
The following abbreviations, expressions and terms have the meanings set out below. Similarly, the parties involved in the proposed transactions (described below) will be referred to as follows:
“A Ltd.” means XXXXXXXXXX;
“ACB” means “adjusted cost base” as defined in section 54;
“arm’s length” has the meaning assigned to it in subsection 251(1);
“B Ltd.” means the XXXXXXXXXX corporation;
“C Ltd.” means the XXXXXXXXXX corporation;
“CCPC” means a “Canadian-controlled private corporation” as defined in subsection 125(7);
“Controlling Shareholder” has the meaning assigned to it in the USA;
“CRA” means the Canada Revenue Agency;
“CS” means common share;
“D Ltd.” means the XXXXXXXXXX corporation;
“E Ltd.” means XXXXXXXXXX;
“F Trust” means XXXXXXXXXX Trust, an irrevocable trust established under a trust deed executed on XXXXXXXXXX.
“fair market value” or “FMV” means the highest price, in dollars, that would be agreed upon in an arm’s length transaction between two knowledgeable and prudent parties, neither of which is under any compulsion to act;
“Group” has the meaning assigned to it in the USA;
“PC” means preferred share;
“Personal Trust” has the meaning assigned to it in subsection 248(1);
“Proposed Transactions” means the transactions referred to in paragraphs 28 and 29;
“PUC” means “paid-up capital” as defined in subsection 89(1);
“Safe income” means, in respect of a taxable dividend described in paragraph 55(2.1)(a) that is received by a dividend recipient from a dividend payer, the amount of the income earned or realized by any corporation — after 1971 and before the safe-income determination time for the transaction, event or series — that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at fair market value, immediately before the dividend, of the share on which the dividend is received;
“STPS” means “short-term preferred share” as defined in subsection 248(1);
“taxable dividend” has the meaning assigned to it in subsection 89(1);
“Taxation Year” has the meaning assigned to it in subsection 249(1);
“TCC” means “taxable Canadian corporation” as defined in subsection 89(1);
“TPS” means “taxable preferred share” as defined in subsection 248(1);
“Trust G” means XXXXXXXXXX Trust, an irrevocable trust established under a trust deed executed on XXXXXXXXXX;
“Trust H” means Trust XXXXXXXXXX, an irrevocable trust established under a trust deed executed on XXXXXXXXXX;
“USA” means the unanimous shareholder agreement of B Ltd.;
XXXXXXXXXX;
FACTS
1. A Ltd. is a CCPC and a TCC incorporated under the XXXXXXXXXX and its Taxation Year ends on XXXXXXXXXX. A Ltd. was incorporated for the purpose of carrying on XXXXXXXXXX.
2. The capital stock of A Ltd. consists of the following classes of shares:
(a) Class A common shares, with voting rights and participating, with no par value;
(b) Class G preferred shares, without voting rights, non-participating and redeemable at the option of the holder at a value of $XXXXXXXXXX per share.
3. B Ltd. is the sole shareholder of A Ltd.
4. B Ltd. is a CCPC and a TCC incorporated under the XXXXXXXXXX and its Taxation Year ends on XXXXXXXXXX. B Ltd. carries on a XXXXXXXXXX business.
5. The capital stock of B Ltd. consists of the following classes of shares:
(a) Class A CS, no par value, participating, entitled to dividends, with one vote per share.
(b) Class B CS, no par value, participating, entitled to dividends, with one vote per share.
6. C Ltd. holds XXXXXXXXXX Class B CS of B Ltd.
7. D Ltd. holds XXXXXXXXXX Class B CS of B Ltd.
8. E Ltd. holds XXXXXXXXXX Class B CS of B Ltd.
9. Trust F holds XXXXXXXXXX Class A CS of B Ltd.
10. Trust G holds XXXXXXXXXX Class A CS of B Ltd.
11. Trust H holds XXXXXXXXXX Class A CS of B Ltd.
12. The PUC of the Class A CS of the capital stock of B Ltd. is $XXXXXXXXXX and the PUC of the Class B CS of the capital stock of B Ltd. is $XXXXXXXXXX.
13. C Ltd. is a XXXXXXXXXX corporation.
14. D Ltd. is XXXXXXXXXX.
15. E Ltd. is a limited partnership whose purpose is to manage environmentally responsible investments to combat climate change.
16. F Trust is a inter vivos trust and a personal trust for the benefit of XXXXXXXXXX, his spouse and their children, and for the benefit of XXXXXXXXXX.
17. Trust G is a inter vivos trust and a personal trust for the benefit of XXXXXXXXXX, his spouse and their children, as well as for the benefit of XXXXXXXXXX.
18. Trust H is a inter vivos trust and a personal trust for the benefit of XXXXXXXXXX, his spouse and their children, as well as for the benefit of XXXXXXXXXX.
19. The USA was entered into by the shareholders of B Ltd. on XXXXXXXXXX and amended on XXXXXXXXXX.
21. Section 6 of the USA specifies that as of XXXXXXXXXX or in the event of default, an option to sell the Class B CSs may be exercised by their holders.
22. The following clauses provide for a purchase or repurchase value that does not exceed the FMV determined at the time the purchase or repurchase agreement is entered into:
(a) 6.2 – option of C Ltd., D Ltd. and E Ltd. to require B Ltd. to redeem the Class B CSs of its capital stock (for reasons other than the death of the holders of Class B CSs);
(b) 10.1 – option of an estate to transfer to B Ltd. its shares acquired as a result of the death of a Shareholder-Officer;
(c) 11.1.2 – option of C Ltd., D Ltd. and E Ltd. to require B Ltd. to repurchase all or part of the Class A CSs of its capital stock and convertible securities in the event of the death of XXXXXXXXXX for a price equal to their FMV, up to a maximum of $XXXXXXXXXX
23. Section 8 of the USA provides for compensation to be paid to C Ltd. and D Ltd. within 12 months following the disposition of their shares if certain triggering events occur during that period (public offering, liquidation of assets with capital gain, sale or merger of the corporation) and the value of the transaction at the time of the triggering event exceeds the value of the repurchase/purchase of the shares provided for in section 6 of the USA.
24. Section 9 of the USA gives B Ltd. the right to repurchase the Class B CSs of the capital stock of B Ltd. (i.e., the shares held by Trust F, Trust G and Trust H) in the situations described therein:
(a) 9.1.1: a Director-Shareholder voluntarily leaves the service of B Ltd. without a succession plan having been submitted by such Director-Shareholder and accepted by B Ltd.;
(b) 9.1.2: a Director-Shareholder is dismissed for serious cause;
(c) 9.1. 3: the shares held by a member of a Group or the shares issued in the capital of a corporate shareholder are subject to seizure and such seizure is not contested in good faith within ten (10) business days or if, following such contestation and the judgment rendered, a third-party purchaser acquires such Shares or shares;
(d) 9.1.4: a Shareholder-Officer or a member of their Group becomes bankrupt or insolvent within the meaning of any law governing insolvency;
(e) 9.1.5: a Shareholder-Officer or a member of their Group is found guilty by a court of competent jurisdiction of any offence under the Criminal Code, except, for greater certainty, any offence under the Highway Traffic Act;
(f) 9.1.6: a Shareholder-Officer or a member of their Group commits, directly or indirectly, acts that contravene any of the non-competition and non-solicitation covenants set out in section 12 of the USA, or that are prejudicial to the interests of B Ltd. or any of its subsidiaries, and such breach is not remedied within ten (10) business days of receipt of written notice from C Ltd., D Ltd., E Ltd. or B Ltd. indicating the breach;
(g) 9.1. 7: a Shareholder-Officer or a member of its Group refuses, neglects or fails to comply with the provisions of the USA (including those described in paragraph 2.7) and such failure is not remedied within ten (10) Business Days after receipt of a written notice signed by D Ltd. or B Ltd. indicating the alleged breach.
25. Those purchase and repurchase rights shall be exercised at a price that may vary according to the terms of withdrawal from the business. That price may correspond:
(a) with respect to the events referred to in subparagraphs 9.1.2, 9.1.3, 9.1.4, 9.1.6, and 9.1.7, at XXXXXXXXXX % of the FMV of the shares concerned;
(b) with respect to the events referred to in subparagraph 9.1.5, the lesser of $XXXXXXXXXX or the FMV of the shares concerned;
(c) at FMV, if a Shareholder-Officer holding Class A CSs voluntarily leaves the service of B Ltd.
26. For each shareholder of B Ltd., the Safe Income of B Ltd. is allocated as follows – the total amount is at least $XXXXXXXXXX:
(a) C Ltd.: $XXXXXXXXXX;
(b) D Ltd.: $XXXXXXXXXX;
(c) E Ltd.: $XXXXXXXXXX;
(d) Trust F: $XXXXXXXXXX;
(e) Trust G: $XXXXXXXXXX;
(f) Trust H: $XXXXXXXXXX.
27. B Ltd. and its subsidiaries are financially sound, are not bankrupt or insolvent, and will not be so in the near future. B Ltd. has no losses other than capital losses to carry forward.
PROPOSED TRANSACTIONS
28. The shareholders of B Ltd. will enter into an amendment to the USA to adopt the following changes:
(a) Clause 6.2 will be amended to read as follows: “The price per Share will be equal to their Fair Market Value, calculated without regard to the Agreement”;
(b) Clause 9.4.1 shall be amended to read as follows: “with respect to the events referred to in subparagraphs 9.1.2, 9.1.3, 9.1.4, 9.1.6 and 9.1.7, to XXXXXXXXXX % of the Fair Market Value of the Shares concerned, calculated without regard to the Agreement”;
(c) Clause 9.4.2 shall be amended to read as follows: “in respect of the events referred to in sub-paragraph 9.1.5, the lesser of $XXXXXXXXXX or the Fair Market Value of the Shares, calculated without regard to the Agreement”;
(d) Clause 9.4.3 shall be amended to read as follows: “in respect of the event referred to in subparagraph 9.1.1, at the Fair Market Value of the Shares, calculated without regard to the Agreement”;
(e) Clause 10.1.1 shall be amended to read as follows: “The purchase price for each of the Shares and Convertible Securities held by C Ltd., D Ltd. and E Ltd. shall be the Fair Market Value of the Shares and Convertible Securities, calculated without regard to the Agreement.”
(f) Clause 11.1.2 shall be amended to read as follows: “The purchase price for each of the Shares and Convertible Securities held by C Ltd. and/or D Ltd. shall be the Fair Market Value of the Shares and Convertible Securities, calculated without regard to the Agreement.”
29. Following the transaction contemplated in the preceding paragraph, B Ltd. will declare taxable dividends totalling $XXXXXXXXXX on its Class A and Class B CSs of the capital stock of B Ltd., which will be paid by the issuance of promissory notes, allocated as follows among the various shareholders:
(a) C Ltd.: $XXXXXXXXXX;
(b) D Ltd.: $XXXXXXXXXX;
(c) E Ltd.: $XXXXXXXXXX;
(d) Trust F: $XXXXXXXXXX;
(e) Trust G: $XXXXXXXXXX;
(f) Trust H: $XXXXXXXXXX.
The amount of taxable dividends paid by B Ltd. to shareholders holding Class A and Class B CSs of its capital stock will not exceed the Safe Income of those shares immediately prior to the payment of the dividend.
PURPOSE OF THE PROPOSED TRANSACTIONS
30. The purpose of the Proposed Transactions is to modify the USA so as to ensure that Class A and Class B CSs qualify for the exceptions provided in subparagraph (a)(i)(B) of the definition of STPSs and subparagraph (f)(ii) of the definition of TPS.
ADDITIONAL INFORMATION
31. The principal contact information for the taxpayer to whom the advance rulings relate is:
B Ltd.
XXXXXXXXXX
ADVANCE RULINGS
D. With respect to Class B CSs of B Ltd. held by C Ltd., D Ltd. and E Ltd.:
i. Clause (a)(i)(B) of the definition of STPS in subsection 248(1) will apply to section 6 of the USA in respect of these shares to the extent that the amount paid does not exceed the FMV of the shares, calculated without regard to the Agreement, on the acquisition date specified therein;
ii. subparagraph (f)(ii) of the definition of TPS in subsection 248(1) will apply to section 6 of the USA in respect of those shares to the extent that the amount paid does not exceed the FMV of the shares, calculated without regard to the Agreement, on the date of acquisition specified therein.
E. Class B CSs of the capital stock of B Ltd. held by C Ltd., D Ltd. and E Ltd. will not be treated as TPS or STPS by virtue of section 8 of the USA alone.
F. With respect to Class A CSs of the capital stock of B Ltd. held by Trust F, Trust G and Trust H:
i. Clause (a)(i)(B) of the definition of STPS in subsection 248(1) will apply to section 9 of the USA in respect of those shares to the extent that the amount paid does not exceed the FMV of the shares, calculated without regard to the Agreement, on the acquisition date specified therein;
ii. subparagraph (f)(ii) of the definition of TPS in subsection 248(1) will apply to section 9 of the USA in respect to those shares to the extent that the amount paid does not exceed the FMV of the shares, calculated without regard to the Agreement, on the acquisition date specified therein.
G. With respect to Class A CSs of the capital stock of B Ltd. held by Trust F, Trust G and Trust H:
i. Clause (a)(i)(B) of the definition of STPS in subsection 248(1) will apply to section 10 of the USA in relation to those shares to the extent that the amount paid does not exceed the FMV of the shares, calculated without regard to the Agreement, on the date of acquisition specified therein;
H. subparagraph (f)(ii) of the definition of TPS in subsection 248(1) will apply to section 10 of the USA in relation to those shares to the extent that the amount paid does not exceed the FMV of the shares, calculated without regard to the Agreement, on the date of acquisition specified therein. With respect to Class B CSs of the capital stock of B Ltd. held by C Ltd. and D Ltd.:
i. Clause (a)(i)(B) of the definition of “STPS” in subsection 248(1) will apply to section 11 of the USA in respect of those shares to the extent that the amount paid does not exceed the FMV of the shares, calculated without regard to the Agreement, on the acquisition date specified therein;
ii. subparagraph (f)(ii) of the definition of TPS in subsection 248(1) will apply to section 11 of the USA in respect of those shares to the extent that the amount paid does not exceed the FMV of the shares, calculated without regard to the Agreement, on the date of acquisition specified therein.
I. The provisions of subsection 245(2) will not apply as a result of and in connection with the transactions described above for the purpose of redetermining the tax consequences confirmed in the above decisions.
ADDITIONAL COMMENTS
The decisions rendered should not be interpreted as an acquiescence by the CRA that:
(a) we have considered the other tax consequences that could result from the Proposed Transactions set out herein;
(b) the amount allocated to a property in the statement of facts and Proposed Transactions truly represents the amount of the PUC of a share; and
(c) the amount of dividends provided for in paragraph 29 of the Proposed Transactions does not exceed the amount of Safe Income attributable to the shares in question.
A statement of our fees for the time spent reviewing your file will be sent to you separately.
We are pleased to be of assistance and look forward to hearing from you.
XXXXXXXXXX
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and
Regulatory Affairs Directorate