1998 Ruling 9807993 - SPLIT-UP BUTTERFLY

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
	xxxxxxxxxx	Tim Kuss
	xxxxxxxxxx	980799

Attention: xxxxxxxxxx

XXXXXXXXXX , 1998

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-referenced taxpayer. In your letter dated xxxXXXXXXX you provided additional information in respect of, and amendments to, the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX). The above-referenced taxpayer files its returns with the XXXXXXXXXX Taxation Centre.

To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this request

(a) is involved in an earlier return of the taxpayer or a related person,

(b) is being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayer or a related person,

(c) is under objection

(d) is before the courts or, if a judgment has been issued, the time limit for appeal has not expired, and

(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.

Definitions

(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) "adjusted cost base" has the meaning assigned to that term in section 54 of the Act;

(c) "BCA" means the XXXXXXXXXX Business Corporations Act; XXXXXXXXXX and, where applicable, its predecessor statutes;

(d) "Brother X" means XXXXXXXXXX;

(e) "Brother Y" means XXXXXXXXXX;

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

(g) "capital property" has the meaning assigned to that term in section 54 of the Act;

(h) "Child 1", "Child 2" and "Child 3" means XXXXXXXXXX;

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

(j) "eligible property" has the meaning assigned to that term in subsection 85(1.1) of the Act;

(k) "Holdco X means XXXXXXXXXX, a corporation that was incorporated under the BCA and which is controlled by Brother X;

(l) "Holdco Y means XXXXXXXXXX a corporation that was incorporated under the BCA and which is controlled by Brother Y;

(m) "Opco" means XXXXXXXXXX;

(n) "paid-up capital" has the meaning assigned to that term by subsection 89(1) of the Act;

(o) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3) of the Act,

(p) "specified financial institution" has the meaning assigned to that term by subsection 248(1) of the Act;

(q) "specified investment business" has the meaning assigned to that term by subsection 125(7) of the Act;

(r) "taxable Canadian ~orporation" has the meaning assigned to that term by subsection 89(1) of the Act; and

(s) "taxable dividend" has the meaning assigned to that term by subsection 89(1) of the Act.

Facts

1. Opco is a taxable Canadian corporation and a Canadian-controlled private corporation which was incorporated on

XXXXXXXXXX pursuant to the BCA XXXXXXXXXX. The taxation year of Opco ends on XXXXXXXXXX of each year. Opco is a resident of Canada for the purposes of the Act.

2. The issued share capital of Opco consists of XXXXXXXXXX

		xxxxxxxxxx
		xxxxxxxxxx
		xxxxxxxxxx
		xxxxxxxxxx
		xxxxxxxxxx
		xxxxxxxxxx
		xxxxxxxxxx

None of the shareholders of Opco has acquired any Opco shares in contemplation of the proposed transactions described herein. The Opco shares represent capital property to the holders thereof.

3. Child 1, Child 2 and Child 3 are the adult children of Brother X, and the nephews of Brother Y. Brother X and Brother Y are brotbers. Each of Brother X, Brother Y, Child 1, Child 2 and Child 3 is a resident of Canada for purposes of the Act.

4. Child 1, Child 2, Child 3 and Brother Y are actively engaged in the business of Opco. Brother X was previously engaged in the business of Opco, but is currently retired.

5. The assets of Opco consist of the following

Estimated Fair Market Value

(a) xxxxxxxxxx $ xxxxxxxxxx
(b) land and building xxxxxxxxxx
(c) office equipment & automobiles xxxxxxxxxx
(d) computer system xxxxxxxxxx
(e) cash xxxxxxxxxx
(f) accounts receivable xxxxxxxxxx
(g) prepaid expenses xxxxxxxxxx
(h) xxxxxxxxxx xxxxxxxxxx

Total $ xxxxxxxxxx

The land and building described above represent capital property to Opco.

The only liabilities of Opco consist of accounts payable and accrued charges.

6. As at XXXXXXXXXX, Opco had no RDTOH and it will not have any RDTOH at the end of its taxation year in which the proposed transactions are carried out.

Proposed Transactions

7. Opco will incorporate Subco pursuant to the provisions of the BCA. Subco will be a taxable Canadian corporation. The authorized capital of Subco will include common shares and a class of preferred shares having the terms and conditions described in paragraph 8(b) below. On incorporation Opco will subscribe for XXXXXXXXXX common shares of Subco for nominal consideration.

8. Opco will transfer its land, building and computer system to Subco in consideration for

(a) two promissory notes of Subco having an aggregate principal amount and fair market value equal to the total of the adjusted cost base of the land, and the undepreciated capital cost of each of the building and the computer system. The face value and the fair market value of each of the promissory notes will be equal; and

(b) redeemable, retractable, voting preferred shares of Subco having an aggregate fair market value equal to the difference between

(i) the aggregate fair market value of the land, building and computer system transferred to Subco, and

(ii) the aggregate face value of the promissory notes issued to Opco as described in (a) above.

Opco and Subco will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the provisions of subsection 85(1) of the Act apply to the transfer of the land, building and computer system as described herein. The amount agreed upon in such election in respect of each of the eligible properties so transferred will be equal to

(c) in the case of the land, an amount equal to its adjusted cost base; and

(d) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1) (e) (i) , (ii) and (iii) of the Act.

For greater certainty, the agreed amount for any eligible property included in the subsection 85(1) elections referred to herein will not be less than the amount of the Subco promissory notes issued as consideration for the transfer of such property and will not exceed the fair market value of each such property.

Subco will add to the stated capital account maintained for its preferred shares an amount equal to the aggregate of the agreed amounts in respect of the properties transferred less the principal amount of the Subco promissory notes described in (a) above.

9. Holdco X, Child 1, Child 2 and Child 3 will incorporate Newco pursuant to the provisions of the BCA. Newco will be a taxable Canadian corporation. The authorized capital of Newco will include common shares and 2 classes of redeemable, retractable voting preferred shares (such preferred shares are hereinafter referred to as the Newco Class A Preferred Shares and the Newco Class B Preferred Shares) . No shares of Newco will be issued on incorporation.

10. Holdco X and Brother X will transfer their shares of Opco to Newco in exchange for Newco Class A Preferred Shares, in each case having a fair market value equal to the fair market value of the shares of Opco transferred to Newco by each of Holdco X ayid Brother X, as the case may be. Holdco X and Newco and Brother X and Newco will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the provisions of subsection 85(1) of the Act apply to the transfer of shares described herein. The amount agreed upon in each such election will be equal to the transferor's adjusted cost base of the transferred shares, which amount will not be greater than their fair market value.

The amount that will be added to the stated capital of the Class A Preferred Shares of Newco will be equal to the transferor's adjusted cost base (determined in accordance with paragraph 84.1(2)(a.1) in the case of the Opco shares transferred by Brother X) of the transferred shares immediately before the disposition.

11. Each of Child 1, Child 2 and Child 3 will transfer his XXXXXXXXXX common shares of Opco to Newco in exchange for XXXXXXXXXX common shares of Newco. Each of Child 1 and Newco, Child 2 and. Newco, and Child 3 and Newco will jointly elect, in prescribed form and within the time limits referred to in subsection 85(5) of the Act, to have the provisions of subsection 85(1) of the Act apply to the transfer of shares described herein. The amount agreed upon in each such election will be equal to the transferor's adjusted cost base of the transferred shares, which amount will not be greater than their fair market value.

The amount that will be added to the stated capital of the common shares of Newco which will be issued as described herein will be equal to the transferor's adjusted cost base (determined in accordance with paragraph 84.1(2)(a.1)) of the transferred shares immediately before the disposition.

12. Immediately before the transfer of properties described in paragraph 13 below, the assets of Opco will be classified into three types of property for the purpose of the definition of "distribution" in subsection 55(1) of the Act, as follows:

(a) cash or near cash property, comprising all of the current assets of Opco including, in particular, cash, accounts receivable, rights arising from prepaid expenses and XXXXXXXXXX

(b) investment property, comprising all of the assets of Opco, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from property or from a specified investment business, and

(c) business property, comprising all of the assets of Opco, other than cash or near cash property, any income from which would, for purposes of the Act, be income from an actiVe business carried on by Opco.

For greater certainty, any tax accounts, such as the balance of any RDTOH account or CDA of Opco, will not be considered property of Opco for purposes of the proposed transactions described herein.

13. Opco will then transfer to Newco a portion of its cash or near cash property, investment property and business property such that the fair market value of each type of property so transferred to Newco will be equal to that proportion of the fair market value of all property of Opco of that type determined immediately before such transfer that

(a) the aggregate fair market value, immediately before the transfer, of all of the shares of the capital stock of Opco owned by Newco at that time

is of

(b) the aggregate fair market value, immediately before the transfer, of all of the issued and outstanding shares of the capital stock of Opco at that time.

For greater certainty, you have advised that XXXXXXXXXX% of the common shares and the preferred shares of Subco and one of the Subco notes will be transferred to Newco, while the remaining XXXXXXXXXX% of the common shares and the preferred shares of Subco and the other Subco note will be retained by Opco. Similarly, Opco will retain all office equipment and one automobile, while three automobiles will be distributed to Newco,

As consideration for the property so transferred, Newco will:

(c) assume XXXXXXXXXX% of the liabilities of Opco (not to exceed Opco's cost amount of the transferred property) and

(d) issue to Opco Newco Class B Preferred Shares having an aggregate fair market value and redemption amount equal to the amount by which the aggregate fair market value of the property transferred to Newco exceeds the amount of the liabilities assumed by Newco as described in (c) above.

Newco will add to the stated capital account in respect of the Newco Class B Preferred Shares it will issue as described herein an amount equal to the cost to Newco (as determined under section 85 of the Act, where relevant) of the property transferred to Newco less any liabilities assumed by it.

14. In respect of the transfers described in paragraph 13 above, Opco and Newco will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply in respect of the transfer of each asset that is an eligible property of Opco. The amount agreed upon in such election in respect of each of the eligible properties so transferred will be equal to:

(a) in the case of capital property (other than depreciable property of a prescribed class) , an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act;

(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(1), (ii) and (iii) of the Act; and

(c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii) of the Act.

In each case, the agreed amount will not exceed the fair market value of the respective property, nor will it be less than the amount of any liabilities assumed by Newco as consideration for the transfer of such property.

15. Newco will redeem all of its Newco Class B Preferred Shares held by Opco at their aggregate redemption amount and will pay the particular aggregate redemption amount by issuing to Opco a non-interest bearing promissory note (the "Newco Note") payable on demand having a principal amount and fair market value equal to the redemption amount of the Newco Class B Preferred Shares redeemed by Newco. Opco will accept the Newco Note as full payment for the redemption amount of the Newco Class B Preferred Shares so redeemed.

16. Qpco will purchase for cancellation all of its common shares held by Newco and will redeem all of its Class A, Class C and Class D shares held by Newco at their fair market value. Opco will pay the purchase price for such shares by assigning the Newco Note referred to in paragraph 15 above to Newco. Newco will accept the assignment of the Newco Note as full payment for the purchase price and redemption amount of the Opco shares so purchased or redeemed. As a consequence of the assignment of the Newco Note to Newco as described herein, all obligations under the Newco Note will be settled.

17. Newco will then cause its first fiscal year to end. Newco will have no refundable dividend tax on hand for such fiscal year end.

18. On the next day, Newco will sell for cash consideration its Subco shares and Subco promissory note to Opco at their fair market value. The aggregate fair market value of the Subco shares and Subco promissory note to be sold by Newco will be less than ten percent of the fair market value, at the time of the transfer of property described in paragraph 13 above, of all the property (other than money and indebtedness that is not convertible into other property) received by Newco by virtue of the transfer of property described in paragraph 13 above

Additional Information

19. No assets have been or will be acquired by or disposed of by Opco in contemplation of and before the proposed transfers of property described in paragraph 13 above, except in the ordinary course of business or as described in this letter.

20. Except as described in this letter, Opco will not dispose of any of its assets as part of the proposed series of transactions which includes the proposed transactions described herein and Opco will not dispose of any of its assets to an unrelated person subsequent to the proposed transactions

21. Neither of Opco nor Newco is, or will be at the time of the proposed transactions, a specified financial institution.

22. None of the shares of Opco or Newco has been or will be, at any time during the implementation of the proposed transactions described herein

(a) the subject of any undertaking or agreement that is referred to in subsection 112(2.2) of the Act as a "guarantee agreement"

(b) 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) of the Act; or

(c) the subject of a dividend rental arrangement as that term is defined in subsection 248(1) of the Act.

Purpose of the Proposed Transactions

23. The transactions are being carried out to divide the business currently carried on by Opco into two parts, since the existing operators can no longer carry on business together.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

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

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

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

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

which has not been described herein, then by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividends arising on

(i) the redemption by Newco of its Class B Preferred Shares as described in paragraph 15 above;

(ii) the purchase for cancellation of the common shares of Opco as described in paragraph 16 above; and

(iii) the redemption of the Class A, Class C and Class D shares of Opco as described in paragraph 16 above;

and, for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.

B. The settlement of the Newco Note as described in paragraph 16 above will not give rise to a “forgiven amount" within the meaning of subsection 80(1) or 80.01 of the Act.

C. The provisions of subsections 15(1) and 246(1) of the Act will not apply to the proposed transactions described herein, in and by themselves.

D. As a result of the proposed transactions, in and by themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the rulings given. For greater certainty, this ruling does not apply to the transfer of assets to Subco as described in paragraph 8 and the subsequent sale of the Subco shares by Newco to Opco as described in paragraph 18 above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada Customs, Excise and Taxation provided that the proposed transactions are completed by XXXXXXXXXX.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Comments

Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:

(a) the determination of the fair market value or adjusted cost base of any particular asset or the paid-up capital of any shares referred to herein: or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. For greater certainty, we are not commenting on any of the tax consequences relating to the transfer of assets to Subco as described in paragraph 8 and the subsequent sale of the Subco shares by Newco to Opco as described in paragraph 18 above, other than the effect of such transactions on the ruling given in A above.

Yours truly,

for Director

Reorganizations and International Division
Income lax Rulings and
Interpretations Directorate
Policy and Legislation Branch