30 November 1995 Ruling 9627273 - REORG FARM CORP

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

XXXXXXXXXX 3-962727

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayer. We also acknowledge your letters of XXXXXXXXXX and our telephone conversations (XXXXXXXXXX) in connection herewith.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the requested rulings is being considered by any tax services office or taxation centre in connection with a tax return already filed, or is under objection or appeal.

Definitions

In this letter unless otherwise expressly stated:

(a)"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1 as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) XXXXXXXXXX;

(c)"adjusted cost base" has the meaning assigned by section 54;

(d)"agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in their election under subsection 85(1) in respect of the property;

(e)"Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);

(f)"capital dividend account" has the meaning assigned by subsection 89(1);

(g)"capital property" has the meaning assigned by section 54;

(h)"cost amount" has the meaning assigned by subsection 248(1);

(i)"depreciable property" has the meaning assigned by subsection 13(21);

(j)"eligible property" has the meaning assigned by subsection 85(1.1);

(k)"ITAR" means the Income Tax Application Rules;

(l)"NISA" means "net income stabilization account" which has the meaning assigned by subsection 248(1);

(m)"paid-up capital" has the meaning assigned by subsection 89(1);

(n)"private corporation" has the meaning assigned by subsection 89(1);

(o)"RDTOH" means "refundable dividend tax on hand" which has the meaning assigned by subsection 129(3);

(p)"Regulations" means the Income Tax Regulations;

(q)"restricted financial institution" has the meaning assigned by subsection 248(1);

(r)"series of transactions or events" has the meaning assigned by subsection 248(10);

(s)"share of the capital stock of a family farm corporation" has the meaning assigned by subsection 70(10);

(t)"specified financial institution" has the meaning assigned by subsection 248(1);

(u) XXXXXXXXXX

(v)"taxable Canadian corporation" has the meaning assigned by subsection 89(1).

Our understanding of the facts and of the proposed transactions is as follows:

FACTS

1.XXXXXXXXXX is a corporation incorporated under the laws of the province of XXXXXXXXXX. XXXXXXXXXX is a Canadian-controlled private corporation and a taxable Canadian corporation. XXXXXXXXXX Each of the shares of XXXXXXXXXX qualifies as a share of the capital stock of a family farm corporation.

2.XXXXXXXXXX issued and outstanding shares consist of XXXXXXXXXX common shares and XXXXXXXXXX preferred which are all held by XXXXXXXXXX

The adjusted cost base and paid-up capital of the issued shares are as follows:

Shares Adjusted Cost Base Paid-up Capital

Common $XXXXXXXXXX $XXXXXXXXXX
Preference XXXXXXXXXX XXXXXXXXXX

The adjusted cost base of the common shares of XXXXXXXXXX is based on an estimate of the V-day value of these shares. XXXXXXXXXX has not made an election under subsection 26(7) of the ITAR to deem the cost of capital property owned on December 31, 1971 to be an amount equal to its fair market value on valuation day.

3.The shares of XXXXXXXXXX are capital property to XXXXXXXXXX.

4.As at XXXXXXXXXX had a balance of $XXXXXXXXXX in its capital dividend account and no RDTOH.

5.XXXXXXXXXX has XXXXXXXXXX adult children, XXXXXXXXXX, who are all residents of Canada for purposes of the Act.

6.The assets and liabilities of XXXXXXXXXX, on its statement of financial position as at XXXXXXXXXX, were as follows:

Assets Amount

(a)current assets - accounts $XXXXXXXXXX
receivable, income taxes
receivable, inventory of feed,
seed and silage and rights
arising from prepaid expenses;

(b)equipment, land and buildings; XXXXXXXXXX

(c)shares in:

XXXXXXXXXX

NISA deposit XXXXXXXXXX

Liabilities

(d)accounts payable & accrued charges $ XXXXXX

(e)bank loan XXXXXXXXXX
note payable - XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX

(f)rent deposits XXXXXXXXXX

The bank indebtedness is a demand loan that is unsecured but supported by the guarantee of XXXXXXXXXX.

The fair market value of the land and buildings is approximately $XXXXXXXXXX.

Prior to the proposed transactions described herein, XXXXXXXXXX will sell, at fair market value, to XXXXXXXXXX for consideration that consists only of money or indebtedness that is not convertible into other property. XXXXXXXXXX acquired will be used in the business of farming by XXXXXXXXXX and will not be sold as part of the series of transactions described herein.

XXXXXXXXXX will also dispose of its shares in the XXXXXXXXXX and request the return of its NISA deposit. The proceeds from the disposition of its assets and the return of the NISA deposit will be utilized by XXXXXXXXXX to pay its accounts payable and notes payable to XXXXXXXXXX.

7.The types of property, for the purposes of a distribution pursuant to subsection 55(1), of XXXXXXXXXX, immediately before the transfer of property described in paragraph 18 below (the "Butterfly Transfer"), will be properties of the following types:

(a)cash or near-cash property, comprising of accounts receivable, inventories and rights arising from any prepaid expenses (hereinafter referred to as "prepaid expenses") that will not be collected, sold, or consumed, as the case may be, in the ordinary course of its business; and

(b)business property, comprising all of the assets of XXXXXXXXXX, other than cash or near-cash property.

For the purpose of determining the types of property residences on different parcels of land that are rented to employees of XXXXXXXXXX (the rent is included as active business income in XXXXXXXXXX) will be categorized as business property for the purposes of a distribution.

8.In determining the net fair market value of each type of property of XXXXXXXXXX, immediately before the Butterfly Transfer, the liabilities of XXXXXXXXXX will be allocated to, and be deducted in the calculation of the net fair market value of each type of property, as follows:

(i)current liabilities, which include the unsecured bank demand loan, will be allocated against cash or near-cash property to the extent of the fair market value of the cash or near-cash property of XXXXXXXXXX; and

(ii)the excess unallocated current liabilities remaining unallocated after step (i) above, if any, will then be allocated to business assets.

As a result of the allocation described herein, XXXXXXXXXX will only have business property immediately before the Butterfly Transfer.

9.None of the corporations referred to herein is a specified financial institution or a restricted financial institution.

10.None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) is or will be subject to a guarantee agreement within the meaning referred to in subsection 112(2.2).

11.None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) is or will be part of a dividend rental arrangement within the meaning referred to in subsection 112(2.3).

12.None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) has been or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

13.No assets have been or will be acquired or disposed of and no liabilities have been or will be incurred by XXXXXXXXXX in contemplation of the Butterfly Transfer, otherwise than as a result of one of the transactions described in subparagraphs 55(3.1)(a)(i) to (iv).

PROPOSED TRANSACTIONS

14.XXXXXXXXXX will incorporate XXXXXXXXXX new corporations under the XXXXXXXXXX. Each ofXXXXXXXXXX will be a Canadian-controlled private corporation and a taxable Canadian corporation.

XXXXXXXXXX will subscribe for one common share in each of XXXXXXXXXX for a nominal amount in each case.

15.The authorized share capital of each of XXXXXXXXXX will consist of an unlimited number of common shares, an unlimited number of non-voting Class XXXXXXXXXX shares and an unlimited number of voting Class XXXXXXXXXX shares that are redeemable and retractable for a specified amount equal to the fair market value of the property for which the shares are issued, with a non-cumulative dividend rate that is equal to the prime rate charged by XXXXXXXXXX, eligible to receive on liquidation or winding-up their redemption or retraction price inclusive of all declared and unpaid dividends.

16.XXXXXXXXXX will transfer to XXXXXXXXXX of his shares in XXXXXXXXXX As sole consideration, each of XXXXXXXXXX will issue common shares with a fair market value equal to the fair market value of the XXXXXXXXXX shares transferred at that time. Each of XXXXXXXXXX will add to its respective stated capital account maintained for its common shares an amount equal to the paid-up capital of the XXXXXXXXXX shares transferred to each recipient.

17.XXXXXXXXXX will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of XXXXXXXXXX shares. The agreed amount in respect of the shares so transferred will be equal to the adjusted cost base to XXXXXXXXXX immediately before the transfer, which amount will not exceed the fair market value of such shares.

18.XXXXXXXXXX will sell at fair market value to each of XXXXXXXXXX a portion of its net business property determined in the manner described in paragraph 8 above. As a result of such transfers, the net fair market value of the business property received by each transferee will be equal to the proportion of the net fair market value of each type of property of XXXXXXXXXX, immediately before the transfer, that:

(a)the aggregate of the fair market value, immediately before the transfer, of all shares of the capital stock of XXXXXXXXXX owned by XXXXXXXXXX, as the case may be, at that time

is of

(b)the fair market value immediately before the transfer of all of the issued shares of the capital stock of XXXXXXXXXX at that time.

In consideration for such transfers, each transferee will issue Class XXXXXXXXXX preferred shares and may assume a portion of the liabilities of XXXXXXXXXX. The liabilities assumed by a particular transferee will not exceed the cost amount of the properties transferred from XXXXXXXXXX.

Each of XXXXXXXXXX will add to the stated capital account maintained for its respective Class XXXXXXXXXX preferred shares an amount equal to the amount by which the aggregate of the cost amounts of the properties transferred to it exceeds the liabilities assumed.

19.XXXXXXXXXX and each of XXXXXXXXXX will jointly elect, in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of XXXXXXXXXX that is an eligible property transferred to XXXXXXXXXX, as the case may be. The agreed amount for the purposes of subsection 85(1) in respect of each such property will be:

(a)where the particular property is capital property (other than depreciable property of a prescribed class), the lesser of the cost amount of the property to XXXXXXXXXX immediately before the transfer and the fair market value of such property; and

(b)where the particular property is depreciable property of a prescribed class, the least of the amounts specified in paragraph 85(1)(e).

Each transferee will allocate any liabilities assumed, as described in paragraph 18 above, to specific property acquired in such manner that the amount of liabilities allocated to a particular property will not exceed the agreed amount of that property in the case of eligible property and the fair market value of the property in any other case.

The subsection 85(1) election referred to herein will exclude any cash, accounts receivable or prepaid expenses.

20.Each of XXXXXXXXXX will redeem all of its Class XXXXXXXXXX preferred shares issued to XXXXXXXXXX for the redemption price of such shares. The redemption price will be paid, by each of XXXXXXXXXX, by the issuance of a demand promissory note having a principal amount and fair market value equal to the redemption price (the "XXXXXXXXXX").

As a result of the redemption of the Class XXXXXXXXXX preferred shares by each of XXXXXXXXXX held by XXXXXXXXXX:

(a)each of XXXXXXXXXX will be deemed, pursuant to paragraph 84(3)(a) to have paid a dividend equal to the amount, if any, by which the amount paid to redeem the particular shares exceeds the paid-up capital of such shares immediately before the redemption; and

(b)a dividend will be deemed to have been received at that time by XXXXXXXXXX, pursuant to paragraph 84(3)(b), equal to the amount, if any, by which the amount paid to redeem the particular shares exceeds the paid-up capital of such shares immediately before the redemption.

21.XXXXXXXXXX will then purchase for cancellation the common shares and preferred shares held by each of XXXXXXXXXX for a demand promissory note (the "XXXXXXXXXX"). XXXXXXXXXX will each have a principal amount and fair market value equal to the fair market value of the common shares and preferred shares of XXXXXXXXXX held by each of XXXXXXXXXX immediately before they are purchased for cancellation.

The purchase for cancellation of XXXXXXXXXX common shares held by each of XXXXXXXXXX will be carried out in two stages:

(a)in the first stage, XXXXXXXXXX will purchase a sufficient number of common shares or part thereof which will result in a deemed dividend, pursuant to the provisions of subsection 83(2), equal to XXXXXXXXXX capital dividend account immediately before that time, which XXXXXXXXXX will elect, pursuant to subsection 83(2), to have been paid from its capital dividend account; and

(b)in the second stage, XXXXXXXXXX will purchase the balance of its common shares held by each of XXXXXXXXXX

As a result of the purchase for cancellation of the common shares and preferred shares of XXXXXXXXXX held by each of XXXXXXXXXX:

(a)XXXXXXXXXX will be deemed, pursuant to paragraph 84(3)(a) to have paid a dividend to each of XXXXXXXXXX equal to the amount, if any, by which the amount paid to purchase the particular shares exceeds the paid-up capital of such shares immediately before the purchase; and

(b)a dividend will be deemed to have been received at that time by each of XXXXXXXXXX, pursuant to paragraph 84(3)(b), equal to the amount, if any, by which the amount paid to purchase the particular shares exceeds the paid-up capital of such shares immediately before the purchase.

22.The obligations under the XXXXXXXXXX held by XXXXXXXXXX will then be offset against the XXXXXXXXXX and all the notes will be cancelled.

23.Following the transactions described in paragraphs 14 to 22 above, XXXXXXXXXX will file articles of dissolution pursuant to the provisions of the XXXXXXXXXX.

24.XXXXXXXXXX will transfer by way of a gift all his shares in XXXXXXXXXX The proceeds to XXXXXXXXXX of his shares in each of XXXXXXXXXX will be the cost amount of such shares at the time of the transfer.

PURPOSE OF THE PROPOSED TRANSACTIONS

25.The purpose of the proposed transactions is to allow XXXXXXXXXX to transfer XXXXXXXXXX land and buildings and ongoing farming business to XXXXXXXXXX for them to carry on the farming business.

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:

A.The provisions of subsection 73(4) will apply with respect to the dispositions by XXXXXXXXXX of the common shares of XXXXXXXXXX such that

(i)XXXXXXXXXX will be deemed to have disposed of the shares of each of XXXXXXXXXX for proceeds of disposition equal to the amount determined under subparagraph 73(4)(a)(i);

(ii)section 69 will not apply in determining the proceeds of disposition of such shares; and

(iii)each of XXXXXXXXXX will be deemed to have acquired the shares of XXXXXXXXXX, as the case may be, for an amount equal to the proceeds of disposition to XXXXXXXXXX as determined in (a) above.

B.By virtue of the provisions of paragraph 55(3)(b), the provisions of subsection 55(2) will not apply to the deemed dividends described in paragraphs 20 and 21 above, provided that, as part of the series of transactions that includes the proposed transactions described herein, there is no:

(a)disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);

(b)acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);

(c)acquisition of property in the circumstances described in paragraph 55(3.1)(c); or

(d)acquisition of property in the circumstances described in paragraph 55(3.1)(d)

which has not been described herein.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada and are binding provided that the proposed transactions are completed before XXXXXXXXXX.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

COMMENTS

1.Nothing in this letter should be construed as implying that Revenue Canada has reviewed or agreed to the tax consequences of any transactions other than the proposed transactions described herein.

2.Nothing in this letter should be construed as confirmation, express or implied, of the adjusted cost base or fair market value of the shares of XXXXXXXXXX or property transferred.

3.In the event of a subsequent disposition of any shares of XXXXXXXXXX, nothing in this ruling should be construed as implying that the transactions described herein will not, for the purposes of paragraph 55(3.1)(b) or paragraph 110.6(7)(a), be considered as part of a series of transactions or events which includes such subsequent disposition of shares of XXXXXXXXXX.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and Interpretations
Directorate
Policy and Legislation Branch