Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Request for confirmation that the Charity's ownership of a XXXXXXXXXX% interest in the common shares in the corporation and its representation on the Board of Directors of the corporation, in and of themselves, would not be considered activities that would constitute the carrying on of a business that is not a related business of the Charity for the purposes of paragraph 149.1(2)(a).
Position: Ruling given subject to numerous caveats and comments. Notwithstanding the ruling provided, the described activities appear to extend beyond the mere ownership of shares in the corporation which suggest that the Charity will be carrying on a business that is not a related business as defined in subsection 149.1(1). The matter has been referred to the Charities Directorate for their consideration.
Reasons: See below.
XXXXXXXXXX
2011-043105
XXXXXXXXXX, 2012
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above named taxpayers. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).
This letter is based solely on the Facts and Proposed Transactions described below. Any documentation submitted in respect of your request does not form part of the Facts and Proposed Transactions and any references thereto are provided solely for the convenience of the reader.
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the ruling request:
A. is in an earlier return of the taxpayers or a related person;
B. is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayers or a related person;
C. is under objection by the taxpayers or a related person;
D. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
E. is the subject of a ruling previously considered by the Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act") and all terms used herein that are defined in the Act or the Income Tax Regulations ("the Regulations") have the meaning given in such definition unless otherwise indicated.
Our understanding of the relevant definitions, the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Definitions
a) "Aco" means XXXXXXXXXX as described in 7 and 8 below;
b) "Charity" means XXXXXXXXXX as described in 1 to 6 below;
c) "Class A Special Shares", "Class B Special Shares", and "Class C Special Shares" mean Class A Special Shares, Class B Special Shares, and Class C Special Shares respectively in the capital stock of Newco as described in 20 below;
d) "Combination Agreement" refers to the agreement as described in 23 to 25 below;
e) "Common Shares" means the common shares in the capital stock of Newco;
f) "CRA" means the Canada Revenue Agency;
g) "Newco" means XXXXXXXXXX as described in 17 below;
h) "Newco Shares" means shares in the capital stock of Newco;
i) "Province" means Her Majesty in Right of the Province XXXXXXXXXX, the government of the Province XXXXXXXXXX, and/or the XXXXXXXXXX Ministry XXXXXXXXXX or its Minister, as the context requires;
j) "Shareholder" means a holder of a share in the capital stock of Newco;
k) "Shareholder Debt" means indebtedness that is owed by Newco to a Shareholder;
l) "Special Shares" means the Class A Special Shares, the Class B Special Shares and the Class C Special Shares collectively; and
m) "Unanimous Shareholders Agreement" refers to the agreement as described in 26 and 27 below.
Facts
1. The Charity was initially incorporated by XXXXXXXXXX, and continued pursuant to letters patent issued under the Canada Corporations Act dated XXXXXXXXXX, as amended by various subsequent letters patent. The Charity was continued under the Canada Not-for-Profit Corporations Act by articles of continuance effective XXXXXXXXXX. Its head office is located at XXXXXXXXXX. It deals with the XXXXXXXXXX Tax Centre and the XXXXXXXXXX Tax Services Office.
2. The Charity is registered as a charitable organization pursuant to section 149.1. Its charitable registration number is XXXXXXXXXX.
3. The Charity's current charitable purposes, as set out in its articles of continuance, are as follows:
"XXXXXXXXXX."
4. The Charity divides its activities into XXXXXXXXXX operational units: XXXXXXXXXX. The corporate head office is based in XXXXXXXXXX and provides strategic and support services to the operational units.
5. Over the past XXXXXXXXXX years, the Charity has provided XXXXXXXXXX to persons in need and in various jurisdictions throughout Canada. XXXXXXXXXX services represent a significant area of charitable activities of the Charity, particularly in XXXXXXXXXX. In total, the XXXXXXXXXX employs XXXXXXXXXX full time equivalent staff in over XXXXXXXXXX locations across the province. Approximately XXXXXXXXXX staff is assigned to other core programs such as XXXXXXXXXX. The balance of XXXXXXXXXX full time equivalent staff employed in XXXXXXXXXX, as well as XXXXXXXXXX part time and casual XXXXXXXXXX workers, are engaged in providing XXXXXXXXXX through the Charity's XXXXXXXXXX program. In XXXXXXXXXX services programs represented approximately XXXXXXXXXX% of the revenue from government grants in XXXXXXXXXX and occupied XXXXXXXXXX% of the full and part time staff in XXXXXXXXXX.
6. In XXXXXXXXXX, the XXXXXXXXXX restructured its operations, completely removing the XXXXXXXXXX program from the rest of the operations. With the exception of XXXXXXXXXX support, the XXXXXXXXXX program functions separately from the remaining operations of the Charity, including with respect to matters involving XXXXXXXXXX all of which are the responsibility of a committee of the XXXXXXXXXX, not the Charity's Board of Directors.
7. Aco is XXXXXXXXXX share capital corporation created pursuant to the XXXXXXXXXX Business Corporations Act which operates under the business name of XXXXXXXXXX. It is a taxable Canadian corporation. Its head office is located at XXXXXXXXXX. It deals with the XXXXXXXXXX Tax Centre and the XXXXXXXXXX Tax Services Office. The common shares of Aco are owned by a business trust the beneficiaries of which are XXXXXXXXXX, as well as XXXXXXXXXX, an investment holding corporation.
8. Aco has provided XXXXXXXXXX services for over XXXXXXXXXX years in XXXXXXXXXX. Until this year, Aco had only provided XXXXXXXXXX services and was known for the excellent quality of service due to that focus. They currently employ approximately XXXXXXXXXX. Aco's projected XXXXXXXXXX revenue will be over $XXXXXXXXXX.
9. The provision of XXXXXXXXXX services in XXXXXXXXXX is the responsibility of the Province. XXXXXXXXXX are responsible XXXXXXXXXX for the tendering of contracts to XXXXXXXXXX, for the delivery of XXXXXXXXXX services including:
10. Each XXXXXXXXXX reports to one of the XXXXXXXXXX, which, under the XXXXXXXXXX, are responsible for XXXXXXXXXX. The XXXXXXXXXX, in turn, are accountable to the Province.
11. Currently, the Charity has contracts in XXXXXXXXXX in XXXXXXXXXX jurisdictions with a total value projected to be $XXXXXXXXXX. In terms of volume, the Charity currently supplies XXXXXXXXXX% of the overall XXXXXXXXXX and XXXXXXXXXX services in XXXXXXXXXX.
12. Aco currently provides XXXXXXXXXX services in XXXXXXXXXX. In XXXXXXXXXX, they were awarded a specialty XXXXXXXXXX program and since XXXXXXXXXX they have been providing XXXXXXXXXX services through the acquisition of a company called XXXXXXXXXX.
13. Managed competition or the tendering of contracts for these services was established in XXXXXXXXXX in the mid XXXXXXXXXX. XXXXXXXXXX.
14. XXXXXXXXXX.
15. XXXXXXXXXX.
16. XXXXXXXXXX.
Proposed Transactions
17. Newco is a corporation incorporated under the Canada Business Corporations Act, whose address is XXXXXXXXXX. Newco will be a jointly-owned subsidiary, the shareholders of which will be the Charity and Aco. Newco is a taxable Canadian corporation.
18. The purpose of Newco will be to provide XXXXXXXXXX services, XXXXXXXXXX to clients in the XXXXXXXXXX in XXXXXXXXXX. XXXXXXXXXX. Newco would become one of XXXXXXXXXX.
19. The share capital of Newco will be comprised of an unlimited number of shares designated as Common Shares and Class A Special Shares, Class B Special Shares, and Class C Special Shares. The Common Shares will have equal voting rights. On incorporation, each of the Charity and Aco will contribute $XXXXXXXXXX to Newco to subscribe for the following shares of Newco:
i. XXXXXXXXXX Common Shares to Aco; and
ii. XXXXXXXXXX Common Shares to the Charity.
20. Class A Special Shares, Class B Special Shares, and Class C Special Shares will be non-voting and redeemable by Newco or by the shareholder. The redemption price payable by Newco in respect of each Class A Special Share will be the amount determined to be the fair market value of the property transferred to Newco in exchange for the Class A Special Shares divided by the number of Class A Special Shares issued at the time of the transfer. The redemption price payable by Newco in respect of each Class B Special Share will be the amount determined to be the fair market value of the property transferred to Newco in exchange for the Class B Special Shares divided by the number of Class B Special Shares issued at the time of the transfer. The redemption price payable by Newco in respect of each Class C Special Share will be $XXXXXXXXXX per share.
21. The holders of the Class A Special Shares, Class B Special Shares, and Class C Special Shares of Newco will be entitled to receive dividends as and when declared by the directors of Newco out of the moneys of Newco properly applicable to the payment of dividends. The amount of dividends will be equal to the result obtained by multiplying the redemption price for each share by the then prevailing rate of interest prescribed under paragraph 4301(c) of the Regulations. The Class C Special Shares will rank in priority to the Class A Special Shares, the Class B Special Shares and the Common Shares. Subject to the priority in favour of the Class C Special Shares, each of the Class A Special Shares and the Class B Special Shares will rank equally with each other and in priority to the Common Shares. Subject to the priority in favour of the Class A Special Shares, Class B Special Shares, and Class C Special Shares, the holders of the Common Shares will be entitled to receive non-cumulative dividends if, as and when declared by the directors of Newco out of the moneys of Newco properly applicable to the payment of dividends, the amount of which the directors, in their absolute discretion, may from time to time or at any time determine. Newco will not declare or pay any dividends on any class of shares of Newco nor purchase, including by way of redemption, any of the shares in the capital of Newco if such dividend or purchase would result in Newco having insufficient net assets to redeem the issued and outstanding Special Shares or to pay the applicable redemption price upon dissolution in respect of the issued and outstanding Special Shares.
22. The Charity and Aco will transfer into Newco such employees and assets as are required to provide XXXXXXXXXX. While the Charity may also transfer other programs and services into Newco in the future, there is no immediate plan to do so at this time.
23. In accordance with the terms of a Combination Agreement to be entered into between the Charity, Aco and Newco, Aco will transfer to Newco, and Newco will agree to purchase from Aco, a number of purchased assets in consideration for which Newco will issue Class A Special Shares to Aco. The fair market value of the Class A Special Shares at issuance will equal the fair market value of the purchased assets which the Charity, Aco and Newco have agreed is $XXXXXXXXXX (see 29 below). In addition, Aco will subscribe for, and Newco will issue, Class C Special Shares, on the basis of one Class C Special Share for XXXXXXXXXX cash contribution in the amount of $XXXXXXXXXX for initial working capital.
24. In accordance with the terms of the Combination Agreement, it is intended that Aco and Newco will jointly elect under subsection 85(1) in prescribed form and manner and within the time referred to in subsection 85(6) with respect to the disposition of property. The agreed amount in the joint election will not be less than the least of the minimum elected amounts specified for the particular type of property in the relevant portions of subsection 85(1) and, in any event, the agreed amount will not exceed the fair market value of the property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b).
25. Also in accordance with the terms of the Combination Agreement, the Charity will transfer to Newco, and Newco will agree to purchase from the Charity, a number of purchased assets in consideration for which Newco will issue Class B Special Shares to the Charity. The fair market value of the Class B Special Shares at issuance will equal the fair market value of the purchased assets which the Charity, Aco and Newco have agreed is $XXXXXXXXXX (see 29 below). In addition, the Charity will subscribe for, and Newco will issue, Class C Special Shares, on the basis of one Class C Special Share for XXXXXXXXXX cash contribution in the amount of $XXXXXXXXXX for initial working capital. You advise that the Charity will not be making an election under subsection 85(1) for its transfer of purchased assets to Newco.
26. In accordance with the terms of a Unanimous Shareholders Agreement to be entered into between the Charity, Aco and Newco, a separate Board would be established to oversee Newco. As long as both the Charity and Aco will own XXXXXXXXXX number of Common Shares in Newco, each will have XXXXXXXXXX representation on the Board. The Board will be comprised of XXXXXXXXXX directors which will include XXXXXXXXXX nominees of Aco and XXXXXXXXXX nominees of the Charity. XXXXXXXXXX. None of the directors of Newco will also be directors of the Charity. The Board may fix the remuneration of the directors, officers and employees of Newco.
27. In accordance with the terms of the Unanimous Shareholders Agreement, funds received by Newco will be distributed as follows:
(a) the payment of all expenses, debts and liabilities of Newco which are due and payable from time to time;
(b) the establishment of such reserves as may be contemplated by approved budgets or otherwise approved by the Board of Newco;
(c) the fixed and preferential dividend on the Class A Special Shares, the Class B Special Shares and the Class C Special Shares; and
(d) thereafter, in such amounts, in such manner and in such order as the Board of Newco may determine:
(i) the redemption or purchase for cancellation of Special Shares;
(ii) the repayment of Shareholder Debt; and
(iii) dividends to holders of Common Shares.
28. You advise that the following agreements will be entered into:
a) The Charity will enter into an agreement with Newco with respect to the performance of XXXXXXXXXX by the Charity to Newco;
b) The Charity will enter into various agreements with Newco with respect to the XXXXXXXXXX assets not transferred to Newco;
c) The Charity will enter into a XXXXXXXXXX agreement with Newco with respect to the use of the XXXXXXXXXX by Newco; and
d) As contemplated in the Combination Agreement, Aco will transfer the XXXXXXXXXX to Newco.
These agreements, other than the XXXXXXXXXX agreement referred to in c) above, will not continue beyond an initial transition period of XXXXXXXXXX years. These agreements, other than the XXXXXXXXXX agreement referred to in c) above, will provide that Newco will pay the greater of cost or fair market value for these services or for the use of property. In accordance with the terms of the XXXXXXXXXX agreement referred to in c) above, Newco will not be required to pay any XXXXXXXXXX fees for the use of the XXXXXXXXXX. The Charity and Aco do not intend to enter into any other service or XXXXXXXXXX arrangements with Newco. The Charity intends to transfer to Newco any staff that is necessary to fulfill the administrative functions of Newco XXXXXXXXXX.
29. You advise it is currently estimated that the initial transfer from the Charity to Newco will involve tangible assets with an estimated value in the amount of $XXXXXXXXXX and goodwill in the amount of $XXXXXXXXXX for a total of $XXXXXXXXXX. The initial transfer from Aco to Newco will involve tangible assets with an estimated value in the amount of $XXXXXXXXXX and goodwill in the amount of $XXXXXXXXXX for a total of $XXXXXXXXXX. The projected gross revenue during the first year would be approximately $XXXXXXXXXX and projected net income before taxes is expected to be about $XXXXXXXXXX. You advise Newco currently has no plans to dispose of the assets transferred in other than in the normal course of operations.
30. You advise that following the transfer of assets to Newco and subject to 28 above, the Charity's involvement with Newco would be limited to passive management of an investment asset; it would not take an active role in day-to-day management of Newco. However, the Charity will carry out administrative functions related to managing its investment, such as setting broad policy with respect to standards and process, etc, and fulfilling its obligations qua shareholder.
Purpose of the Proposed Transactions
31. The purpose of the proposed transactions is to create a new entity that provides a complete suite of services including XXXXXXXXXX which will allow the parties to continue to fulfill their strategic mandates (XXXXXXXXXX) and will enable the Charity, through the new entity, to diversify its current services without endangering its charitable status. The proposed transactions will also enable both parties to protect their current revenue streams and to mitigate the overall liability risks associated with operating a large XXXXXXXXXX operation. In addition, a portion of any profits earned by Newco will be able to be used to support the charitable activities remaining within the Charity.
Ruling Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, we confirm that:
A. Subject to Comment D below, the Charity's ownership of a XXXXXXXXXX% interest in the Common Shares in Newco and its representation on the Board of Directors of Newco, in and of themselves, would not be considered activities that would constitute the carrying on of a business that is not a related business of the Charity for the purposes of paragraph 149.1(2)(a).
The above ruling, which is based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in the Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002, and is binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX.
Caveats
Except as expressly stated, this ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein. For greater certainty, the CRA has not considered, examined, agreed to or ruled on:
a) the determination of the fair market value, adjusted cost base or paid-up capital of the shares referred to in this letter;
b) the determination of fair market value or cost of any property or service, or the reasonableness of any particular amount;
c) the determination of arm's length between any of the parties referred to herein;
d) the HST implications of any of the proposed transactions; and
e) any tax consequences relating to the facts and proposed transactions described herein other than those described in the ruling given above, and, for greater certainty, the application of subsection 85(1) in respect of the transactions described in 22 to 24.
As noted above, the CRA has not considered, examined, agreed to or ruled on all possible tax consequences relating to the ruling. Some of the tax issues that have come to our attention include the following.
A. Subsection 245(2) will apply to recharacterize the deemed dividends or a portion of the deemed dividends under subsection 84(3) on the redemption of the Class A Special Shares owned by Aco, to the extent that such dividends or the portion of such dividends can reasonably be considered to be substituted for the business income that Aco would have realized on a straightforward disposition of its business assets (i.e., its depreciable property or property the proceeds of disposition of which would result in the realization of business income to Aco) to Newco.
B. Subsection 55(2) will apply to recharacterize the deemed dividends or a portion of the deemed dividends under subsection 84(3) on the redemption of the Special Shares owned by Aco as proceeds of disposition, to the extent that such deemed dividends or the portion of such dividends:
(i) is not recharacterized by subsection 245(2) as business income to Aco, as described in Comment A above;
(ii) is not subject to Part IV tax, as part of a series of transactions or events that includes the proposed transactions; and
(iii) can reasonably be considered to be attributable to anything other than income earned or realized by any corporation after 1971 and before the safe-income determination time, as part of a series of transactions or events that includes the proposed transactions.
C. The provisions of subsection 55(2) will apply to each of the actual dividends received by Aco on its Newco Shares, to the extent that:
(i) one of the purposes of paying such actual dividend on Aco's Newco Shares is to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of any share of capital stock immediately before the dividend and that can reasonably be considered to be attributable to anything other than income earned or realized by any corporation after 1971 and before the safe-income determination time, as part of a series of transactions or events that includes the proposed transactions; and
(ii) such actual dividend is not subject to Part IV tax, as part of a series of transactions or events that includes the proposed transactions.
D. Notwithstanding the above ruling, you have described activities in 28 above that appear to extend beyond the mere ownership of Newco Shares by the Charity which suggest that the Charity will be carrying on a business that is not a related business as defined in subsection 149.1(1). Such a determination is generally the responsibility of the Charities Directorate.
As you are aware, we consulted with the Charities Directorate with respect to the proposed transactions described above. In this regard, the Charities Directorate has considered the performance of XXXXXXXXXX services by the Charity to Newco. They have advised us that based on the information provided, that the performance of XXXXXXXXXX services by the Charity to Newco would be a business that is not a related business. They have also advised us that with respect to the proposed XXXXXXXXXX transactions between the Charity and Newco and the proposed XXXXXXXXXX of the XXXXXXXXXX by the Charity to Newco as described in 28 above, the Charity may or may not meet the requirements of the Act. The Charities Directorate will be providing you with additional comments on these matters under separate cover.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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