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.
Principal Issues:
(1) Does GAAR apply to the premature distribution of trust assets? (2) Does subsection 55(4) apply since the father retains voting control of all companies?
Position:
(1) No. (2) No.
Reasons:
(1) Scheme of act allows distributions at any time. (2) Valid reasons for father retaining control.
XXXXXXXXXX 3-971939
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling for the above taxpayers. We also acknowledge your letters of XXXXXXXXXX.
To the best of your knowledge, and that of the parties to this ruling, none of the issues contained in this advance income tax ruling:
is in an earlier return of the taxpayer or a related person,
is being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the taxpayer or a related person,
is under objection by the taxpayer or related person,
is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or
is the subject of a ruling previously issued by the Directorate.
Definitions and Abbreviations
In this letter, the following terms have the meanings specified:
"Act" means the Income Tax Act R.S.C. 1985 (5th Supp.) c.1, as amended, and, unless otherwise indicated, all legislative references are to provisions of the Act;
"adjusted cost base" ("ACB") has the meaning assigned by section 54;
"Amalco" means the corporation formed by the amalgamation of XXXXXXXXXX described in paragraph 13 below;
"Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);
XXXXXXXXXX
"capital property" has the meaning assigned by section 54;
"XXXXXXXXXX Trust" means the XXXXXXXXXX as described in paragraph 3 below;
XXXXXXXXXX
"Farm Land" means the land referred to in paragraph 7 below;
XXXXXXXXXX
XXXXXXXXXX
"New XXXXXXXXXX" means a new corporation to be incorporated as described in paragraph 14 below;
"paid-up capital" ("PUC") has the meaning assigned by subsection 89(1);
"refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);
"related persons" has the meaning assigned by subsection 251(2);
"specified financial institution" ("SFI") has the meaning assigned by subsection 248(1);
XXXXXXXXXX
"Trust Indenture" means the Trust Indenture creating the XXXXXXXXXX Trust referred to in paragraph 3 below; and
"taxable Canadian corporation" ("TCC") has the meaning assigned by subsection 89(1).
Facts
XXXXXXXXXX is a TCC and a CCPC. Its fiscal year and tax year end is XXXXXXXXXX. It was incorporated under the laws of XXXXXXXXXX. Since XXXXXXXXXX to the present time all of its issued shares have been owned by XXXXXXXXXX.
XXXXXXXXXX is a TCC and a CCPC. Its fiscal year and tax year end is XXXXXXXXXX. It was incorporated under the laws of XXXXXXXXXX. Since XXXXXXXXXX to the present time the issued shares of XXXXXXXXXX have been owned as follows:
XXXXXXXXXX
The ACB of the Common shares held by the XXXXXXXXXX Trust is $XXXXXXXXXX and the PUC of the Common shares is $XXXXXXXXXX.
The Preferred shares entitle the holder to one vote per share. The Common shares entitle the holder to one vote per share. The Preferred shares are redeemable by XXXXXXXXXX for $XXXXXXXXXX per share and entitle the holders thereof to $XXXXXXXXXX per share on the wind-up of XXXXXXXXXX. The Preferred shares are not entitled to dividends. The ACB and PUC of the Preferred shares is $XXXXXXXXXX per share.
The XXXXXXXXXX Trust is an inter vivos trust which was created
XXXXXXXXXX
XXXXXXXXXX
All individuals are resident in Canada.
Under the Trust Indenture the normal termination date for the XXXXXXXXXX Trust is defined to be the date of death of the last to die of XXXXXXXXXX. However, the Trust Indenture provides that the Trustees may decide upon an earlier termination date. On termination of the XXXXXXXXXX Trust the Trust Indenture provides that the capital of the Trust is to be divided equally among XXXXXXXXXX.
The XXXXXXXXXX Trust filed an election under subsection 104(5.3) on XXXXXXXXXX. The exempt beneficiaries listed in the election included XXXXXXXXXX.
In addition to owning all the shares of XXXXXXXXXX has a very substantial investment portfolio of marketable securities and bonds.
XXXXXXXXXX carries on the business of
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
In addition to XXXXXXXXXX has a portfolio of marketable securities, owns XXXXXXXXXX and other miscellaneous assets.
XXXXXXXXXX
At the end of its XXXXXXXXXX taxation year XXXXXXXXXX had $XXXXXXXXXX RDTOH. At the end of its XXXXXXXXXX taxation year XXXXXXXXXX had $XXXXXXXXXX RDTOH.
Proposed Transactions
XXXXXXXXXX
Neither the shareholdings nor assets of XXXXXXXXXX will be affected in any way by such change in its governing jurisdiction. This transaction will be undertaken to cause XXXXXXXXXX which will allow them to amalgamate as described in paragraph 13 below.
XXXXXXXXXX will amalgamate and become one corporation under the governing corporate legislation of the XXXXXXXXXX in a vertical short-form amalgamation. The amalgamation will meet the criteria described in subsection 87(1). The amalgamated corporation will be hereinafter referred to as "Amalco". The issued shares of Amalco will be identical to those of XXXXXXXXXX prior to the amalgamation, namely
XXXXXXXXXX
The attributes attaching to the classes of Preferred shares and Common shares of Amalco will be identical respectively to those of the classes of Preferred shares and Common shares of XXXXXXXXXX as described in paragraph 2 above.
XXXXXXXXXX will incorporate a new corporation under the laws of the XXXXXXXXXX (hereinafter referred to as "New XXXXXXXXXX"). Its authorized share capital will consist of Class XXXXXXXXXX Preferred shares, Class XXXXXXXXXX Preferred shares and Common shares. The attributes attaching to the Class XXXXXXXXXX Preferred shares of New XXXXXXXXXX will be identical to those of the presently issued Preferred shares of XXXXXXXXXX as described in paragraph 2 above. The Class XXXXXXXXXX Preferred shares will be redeemable and retractable for a redemption amount that is equal to the redemption amount of the Class XXXXXXXXXX Preferred shares of New XXXXXXXXXX as described in paragraph 18 below and will be non-voting. The Class XXXXXXXXXX Preferred shares will be entitled to non-cumulative discretionary fixed rate dividends. The Common shares of New XXXXXXXXXX will carry one vote per share. This transaction will be undertaken to allow the transfer of the XXXXXXXXXX, as described in paragraph 18 below, to a corporation incorporated under the laws of XXXXXXXXXX.
XXXXXXXXXX will subscribe for XXXXXXXXXX Class XXXXXXXXXX Preferred shares for $XXXXXXXXXX in New XXXXXXXXXX. The purpose of this transaction is to allow XXXXXXXXXX, after completion of the proposed transactions referred to herein, to retain control of the XXXXXXXXXX business and all corporations on the same basis as it is presently.
Amalco will obtain Articles of Amendment under the governing corporate legislation of the XXXXXXXXXX to change its XXXXXXXXXX issued and outstanding Common shares into a number of new Common shares and XXXXXXXXXX shares. The PUC of the original Common shares will be allocated between the new Common shares and the XXXXXXXXXX shares in proportion to their fair market values.
Each XXXXXXXXXX share will be redeemable and retractable for an amount equal to XXXXXXXXXX of the aggregate fair market values of those properties to be transferred by Amalco to New XXXXXXXXXX, as described in paragraph 18 below, immediately before such transfer to New XXXXXXXXXX. The XXXXXXXXXX Shares will be non-voting. The new Common shares will carry not greater than XXXXXXXXXX votes in total.
XXXXXXXXXX Trust will transfer, at fair market value, its XXXXXXXXXX shares of Amalco to New XXXXXXXXXX in exchange for a number of Common shares issued out of the treasury of New XXXXXXXXXX. XXXXXXXXXX Trust and New XXXXXXXXXX will jointly elect pursuant to subsection 85(1), in prescribed form and within the time limits referred to in subsection 85(6), to transfer the shares at an agreed amount equal to the ACB to the XXXXXXXXXX Trust of the XXXXXXXXXX shares of Amalco. New XXXXXXXXXX will add an amount to the stated capital account of its Common shares equal to the PUC of the XXXXXXXXXX shares of Amalco so received.
Thereafter Amalco will transfer, at fair market value, certain properties to New XXXXXXXXXX, being the
XXXXXXXXXX
As sole consideration for these transferred properties, New XXXXXXXXXX will issue to Amalco XXXXXXXXXX Class XXXXXXXXXX Preferred shares out of its treasury, each such share having a redemption price equal to XXXXXXXXXX of the aggregate fair market values of the transferred properties. Amalco and New XXXXXXXXXX will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to transfer each asset (other than cash) that is an eligible property, within the meaning of subsection 85(1.1), at the following agreed amounts:
in the case of depreciable property of a prescribed class, an amount which is equal to the least of the amounts specified in subparagraphs 85(1)(e)(i) to 85(1)(e)(iii);
in the case of the XXXXXXXXXX, the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
in the case of XXXXXXXXXX inventory, the amount determined in subparagraph 85(1)(c.2)(i) where "D" will equal $XXXXXXXXXX; and
in the case of the XXXXXXXXXX, the amount of $XXXXXXXXXX.
The agreed amount in respect of each of the properties so transferred will be less than or equal to its fair market value at the time of the transfer.
New XXXXXXXXXX will add an amount to the stated capital account in respect of its Class XXXXXXXXXX Preferred shares equal to the aggregate of the elected amounts with respect to the transferred properties. New XXXXXXXXXX will add an amount to the stated capital account in respect of its Class XXXXXXXXXX Preferred shares equal to amount of the cash transferred by Amalco to New XXXXXXXXXX.
Immediately thereafter New XXXXXXXXXX will redeem the XXXXXXXXXX Class XXXXXXXXXX Preferred shares owned by Amalco for the aggregate redemption price of such shares and issue to Amalco as payment therefor a promissory note payable on demand (the "New XXXXXXXXXX Note").
New XXXXXXXXXX will cause its taxation year to end at the end of the day on which the redemption of the XXXXXXXXXX Class XXXXXXXXXX Preferred shares of New XXXXXXXXXX occurs.
On the day following the date of the redemption of the XXXXXXXXXX Class XXXXXXXXXX Preferred shares of New XXXXXXXXXX, Amalco will redeem the XXXXXXXXXX shares in its capital stock owned by New XXXXXXXXXX for their aggregate redemption amount. The redemption price for such shares will be paid by Amalco assigning to New XXXXXXXXXX the New XXXXXXXXXX Note. As a result of the assignment of the New XXXXXXXXXX Note to New XXXXXXXXXX, the New XXXXXXXXXX Note will be satisfied and cancelled.
New XXXXXXXXXX will continue to carry on the XXXXXXXXXX business and will enter into a similar joint venture agreement in that regard to the one to which XXXXXXXXXX is currently a party.
Prior to XXXXXXXXXX as permitted by the Trust Indenture the Trustees of the XXXXXXXXXX Trust will terminate the XXXXXXXXXX Trust and will distribute XXXXXXXXXX of the Common shares owned by the Trust in the capital stock of each of Amalco and New XXXXXXXXXX together with XXXXXXXXXX of all other assets of the XXXXXXXXXX Trust to each XXXXXXXXXX for their own use absolutely. The purpose of the XXXXXXXXXX Trust terminating prior to XXXXXXXXXX is to ensure there will be no deemed dispositions of XXXXXXXXXX Trust assets on XXXXXXXXXX pursuant to subsections 104(4), 104(15) and 104(5.3).
No liabilities will be incurred and no property will be acquired or disposed of, by XXXXXXXXXX in contemplation of and before the proposed transactions.
There are no significant transactions which were completed prior to the time of the ruling request and there are no transactions contemplated after completion of the proposed transactions described herein.
Neither XXXXXXXXXX is, or will be at the time of the proposed transactions described herein, a SFI.
None of the shares of XXXXXXXXXX, Amalco, or New XXXXXXXXXX has been, or will be, at any time during the implementation of the proposed transactions described herein:
the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";
a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or
the subject of a dividend rental arrangement as that term is defined in subsection 248(1).
XXXXXXXXXX, Amalco and New XXXXXXXXXX file or will file their federal tax returns at the XXXXXXXXXX Taxation Centre and deal or will deal with the XXXXXXXXXX Tax Services Office.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to separate the XXXXXXXXXX business from the other assets in order to separate the business risk of the XXXXXXXXXX operation from passive investments and also to separate management functions. The XXXXXXXXXX must continue to be owned by a XXXXXXXXXX corporation for purposes of XXXXXXXXXX. It is intended that XXXXXXXXXX will retain control of New XXXXXXXXXX in the same way that he presently has control of XXXXXXXXXX until such time as XXXXXXXXXX are able to take over management of the business and have entered into a shareholder agreement among themselves. XXXXXXXXXX also wants to be in a position to do estate planning regarding the XXXXXXXXXX separately from the other investments in XXXXXXXXXX.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts and proposed transactions and the purpose of the proposed transactions, we confirm the following:
The provisions of subsection 85(1) will apply to:
the disposition of the XXXXXXXXXX shares of Amalco by the XXXXXXXXXX Trust to New XXXXXXXXXX as described in paragraph 17 above; and
the disposition of the XXXXXXXXXX by Amalco to New XXXXXXXXXX as described in paragraph 18 above
such that the agreed amount, as described in paragraphs 17 and 18 above, in respect of each transfer will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not be applicable in respect of the transfers.
Subsection 51(1) will apply to the conversion by the holders of the XXXXXXXXXX Common shares of Amalco into new Common shares and XXXXXXXXXX shares, as described in paragraph 16 above, with the result that:
except for the purpose of subsection 20(21), each holder will be deemed not to have disposed of its Common shares of Amalco; and
the cost to each holder of the new Common shares and XXXXXXXXXX shares of Amalco will be equal to the proportion of the ACB to the holder of the Common shares of Amalco immediately before the exchange that the fair market value, immediately after the exchange, of all the shares of the particular class acquired by the holder is of the fair market value, immediately after the exchange, of all the shares acquired by the holder on the exchange.
Upon the redemption by New XXXXXXXXXX of its Class XXXXXXXXXX Preferred shares held by Amalco, as described in paragraph 19 above, and upon the redemption by Amalco of its XXXXXXXXXX shares held by New XXXXXXXXXX, as described in paragraph 21 above, the amount by which the amount paid on the redemption exceeds the PUC of the particular shares redeemed will be deemed to be a dividend paid by the particular payor and received by the particular recipient, by virtue of paragraph 84(3)(a) or 84(3)(b), as applicable. Each such dividend will be deductible by the particular recipient under subsection 112(1) in computing its taxable income for the taxation year in which it is deemed to have received such dividend and such deduction will not be precluded by any of subsections 112(2.1), (2.2), (2.3) or (2.4). The provisions of subsection 112(3) will apply to any loss which may otherwise arise to the recipient as a result of the redemption.
The dividends described in ruling C above will not be subject to tax under Part IV except as provided in paragraph 186(1)(b).
Each of the dividends described in ruling C above will be deemed to be an "excluded dividend" by virtue of paragraph (a) of the definition of "excluded dividend" contained in subsection 191(1), and an "excepted dividend" by virtue of paragraph (b) of the definition of "excepted dividend" contained in section 187.1 and, therefore, will not be subject to tax under Parts IV.1 and VI.1.
By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the dividends received by Amalco and New XXXXXXXXXX, as described in ruling C above, provided that there is not:
a disposition of any property to a person with whom Amalco or New XXXXXXXXXX is not related; or
a significant increase in the interest in any corporation of a person with whom Amalco or New XXXXXXXXXX is not related,
which is part of the series of transactions or events, determined with reference to subsection 248(10), that includes the proposed transactions described herein. For greater certainty, none of the proposed transactions described herein will be considered to result in such a disposition or increase in interest.
Subsection 55(4) will not apply to deem Amalco and New XXXXXXXXXX to not be related to one another as a result of the proposed transaction described in paragraph 15 above.
The extinguishment of the New XXXXXXXXXX Note as described in paragraph 21 above will not give rise to a "forgiven amount" within the meaning of subsections 80(1) or 80.01(1).
The provisions of subsections 15(1), 56(2) and 246(1) will not be applied as a result of the proposed transactions described herein, in and by themselves.
The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed herein.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada ("IC 70-6R3") and are binding provided the proposed transactions (other than paragraph 23 above) are completed by XXXXXXXXXX and the proposed transaction described in paragraph 23 above is completed prior to XXXXXXXXXX.
Opinion
Provided that proposed subparagraphs 55(3)(a)(i) to (v) are reintroduced and enacted in substantially the same form as set out in the proposed amendments tabled by the Department of Finance on December 2, 1996 in Bill C-69, it is our opinion that subsection 55(2) will not apply to the taxable dividends described in ruling C above, provided that as part of the series of transactions or events as part of which the dividends are received, there is no event described in proposed subparagraphs 55(3)(a)(i) to (v) which has not been described herein as a proposed transaction. For greater certainty, the distribution by the XXXXXXXXXX Trust of its assets on termination of the XXXXXXXXXX Trust as described in paragraph 23 above will not be considered to result in a disposition or increase in interest described in any of proposed subparagraphs 55(3)(a)(i) to (v).
The foregoing comment is given in accordance with the practice referred to in paragraph 22 of IC 70-6R3 and is not binding on Revenue Canada.
Nothing in this letter should be construed as our confirmation of the tax consequences of any transaction except those consequences expressly confirmed above.
Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed the determination of the ACB or PUC of any shares referred to herein.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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