2015-0608841R3 55(3)(a) spin-off

Principal Issues: Whether corporations related to each other and to relevant individuals. Whether dividends exempt from the application of subsection 55(2) by virtue of paragraph 55(3)(a).

Position: Yes, favourable rulings given.

Reasons: Complies with paragraph 55(3)(a) and administrative positions.

Author: XXXXXXXXXX
Section: 55(2), 55(3)(a), 251(2)(b)

XXXXXXXXXX                                                                                      2015-060884

XXXXXXXXXX, 2016

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 taxpayers referred to above.  The documents submitted with your request are part of this document only to the extent described herein.

We understand that to the best of your knowledge and that of the taxpayers on whose behalf this ruling was requested, none of the issues involved in this ruling are:

(a)   in an earlier return of the taxpayers referred to above or a related person;

(b)   being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers referred to above or a related person;

(c)   under objection by the taxpayers referred to above or a related person;

(d)   in relation to the taxpayers referred to above or a related person, before the courts or the subject of a judgment the time limit for appeal from which has not expired; or

(e)   the subject of a ruling previously considered by the Income Tax Rulings Directorate in relation to the taxpayers referred to above or a related person.

DEFINITIONS

In this letter, the singular should be read as plural and vice versa where the circumstances so require, all monetary amounts are expressed in Canadian dollars, and unless otherwise indicated or the context otherwise requires, the following terms have the meanings specified:

“Act” means the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended to the date hereof and, unless otherwise stated, all references to a section, subsection, paragraph, subparagraph and clause contained herein are to the Act;

“adjusted cost base” or “ACB” has the meaning assigned by section 54;

“agreed amount” means the amount that the transferor and the transferee of an eligible property have agreed upon in a joint election pursuant to subsection 85(1);

“arm’s length” has the meaning assigned by subsection 251(1);

“BCA” means the Business Corporations Act XXXXXXXXXX;

“BN” means the business number assigned to the particular entity by CRA;

“Canadian-controlled private corporation” or “CCPC” has the meaning assigned by subsection 125(7);

“capital dividend” means a dividend to which subsection 83(2) applies;

“capital dividend account” or “CDA” has the meaning assigned by subsection 89(1);

“capital property” has the meaning assigned by section 54;

“Child 1” means XXXXXXXXXX, a XXXXXXXXXX of Mr. A and Mrs. A and a resident of Canada for purposes of the Act;

“Child 2” means XXXXXXXXXX, a XXXXXXXXXX of Mr. A and Mrs. A and a resident of Canada for purposes of the Act;

“Child 3” means XXXXXXXXXX, a XXXXXXXXXX of Mr. A and Mrs. A and a resident of Canada for purposes of the Act;

“Child 4” means XXXXXXXXXX, a XXXXXXXXXX of Mr. A and Mrs. A and a resident of Canada for purposes of the Act;

XXXXXXXXXX;

“cost amount” has the meaning assigned by subsection 248(1);

“CRA” means the Canada Revenue Agency;

“disposition” has the meaning given in subsection 248(1);

“dividend refund” has the meaning assigned by subsection 129(1);

"eligible dividend" has the meaning assigned by subsection 248(1) and subsection 89(1);

“eligible property” has the meaning assigned by subsection 85(1.1);

“fair market value” or “FMV” means the highest price expressed in terms of money or money’s worth, available in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm’s length, neither party being under any compulsion to transact;

“FamCo” means XXXXXXXXXX, as more particularly described in Paragraph 1 below;

"general rate income pool" or "GRIP" has the meaning assigned by subsection 89(1);

“Mr. A” means XXXXXXXXXX, who is the spouse of Mrs. A and a resident of Canada for purposes of the Act;

“Mrs. A” means XXXXXXXXXX, who is the spouse of Mr. A and a resident of Canada for purposes of the Act;

“Newco1” means XXXXXXXXXX, as more particularly described in Paragraph 3;

“Newco2” means XXXXXXXXXX, as more particularly described in Paragraph 4;

“paid-up capital” or “PUC” has the meaning assigned by subsection 89(1);

“Paragraph” means a numbered paragraph in this letter;

“principal amount” has the meaning assigned by subsection 248(1);

“private corporation” has the meaning assigned by subsection 89(1);

“proceeds of disposition” has the meaning assigned by subsection 54;

“Promissory Note #1” means the promissory note issued by Child 3 to Famco, as described in Paragraph 11;

“Promissory Note #2” means the promissory note issued by FamCo to Child 3, as described in Paragraph 12;

“Promissory Note #3” means the promissory note issued by FamCo to Newco2, as described in Paragraph 20;

“Promissory Note #4” means the promissory note issued by FamCo to Newco1, as described in Paragraph 21;

“Promissory Note #5” means the promissory note issued by Newco1 to FamCo, as described in Paragraph 22;

“Promissory Note #6” means the promissory note issued by Newco2 to FamCo, as described in Paragraph 23;

“Proposed Transactions” means the proposed transactions which are described in Paragraphs 10 to 24.1;

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

“restricted financial institution” has the meaning assigned by subsection 248(1);

“series of transactions or events” includes the transactions or events referred to in subsection 248(10);

“SIN” means a Canadian social insurance number;

“specified financial institution” has the meaning assigned by subsection 248(1);

“stated capital” means the amount maintained in the stated capital account attributable to a share for purposes of the BCA;

“taxable Canadian corporation” or “TCC” has the meaning assigned by subsection 89(1);

“taxable dividend” has the meaning assigned by subsection 89(1); and

“taxation year” has the meaning assigned by subsection 249(1);

FACTS

1.FamCo is a CCPC. It was incorporated under the XXXXXXXXXX on XXXXXXXXXX.  It has XXXXXXXXXX year-end and is authorized to issue up to XXXXXXXXXX voting common shares. The issued and outstanding shares of FamCo are as follows:

Shareholder                 Number of shares             PUC               ACB                      Approximate FMV

Mr. A                            XXXX common                  $XXXX          $XXXX                  $XXXX

Mrs. A                         XXXX common                   $XXXX          $XXXX                  $XXXX

Child 1                         XXXX common                   $XXXX         $XXXX                   $XXXX

Child 2                         XXXX common                   $XXXX         $XXXX                   $XXXX

Child 3                         XXXX common                   $XXXX         $XXXX                   $XXXX

Child 4                         XXXX common                   $XXXX         $XXXX                   $XXXX

                                                                                $XXXX         $XXXX                  $XXXX

2.    FamCo carries on the business of XXXXXXXXXX. As at the date of this letter, Famco’s RDTOH balance is approximately $XXXXXXXXXX, its GRIP balance is approximately $XXXXXXXXXX, and the balance in its CDA is approximately $XXXXXXXXXX.

3.    Newco1 is a CCPC. It was incorporated under the BCA by Mr. A and Child 1 on XXXXXXXXXX.  Newco1 has a XXXXXXXXXX year-end, and is authorized to issue an unlimited number of each of the following classes of shares:

Class A voting common shares

Class B voting common shares

Class C non-voting common shares

Class D non-voting common shares

Class E voting, redeemable, retractable preferred shares

Class F voting, redeemable, retractable preferred shares

Class G non-voting, redeemable, retractable preferred shares

Class H non-voting, redeemable, retractable preferred shares

Class I non-voting, redeemable, retractable, non-exchangeable or transferable, preferred shares

Class J special voting shares

3.1.  The issued and outstanding shares of Newco1 are as follows:

Shareholder                          Number of shares               PUC           ACB           FMV

Mr. A                                     XXXX Class A                     $XXXX       $XXXX       $XXXX

Child 1                                  XXXX Class A                      $XXXX       $XXXX       $XXXX

                                                                                          $XXXX       $XXXX        $XXXX

3.2.  No other shares of Newco1 have been issued by it since its incorporation.

4.    Newco2 is a CCPC. It was incorporated under the BCA by Mrs. A and Child 4 on XXXXXXXXXX.  Newco2 has a XXXXXXXXXX year-end, and is authorized to issue an unlimited number of each of the following classes of shares:

Class A voting common shares

Class B voting common shares

Class C non-voting common shares

Class D non-voting common shares

Class E voting, redeemable, retractable preferred shares

Class F voting, redeemable, retractable preferred shares

Class G non-voting, redeemable, retractable preferred shares

Class H non-voting, redeemable, retractable preferred shares

Class I non-voting, redeemable, retractable, non-exchangeable or transferable, preferred shares

Class J special voting shares

4.1.  The issued and outstanding shares of Newco2 are as follows:

Shareholder                     Number of shares                PUC           ACB           FMV

Mrs. A                              XXXX Class A                      $XXXX       $XXXX       $XXXX

Child 4                             XXXXX Class A                    $XXXX       $XXXX       $XXXX

                                                                                      $XXXX       $XXXX       $XXXX

4.2.  No other shares of Newco2 have been issued by it since incorporation.

5.    FamCo, Newco1 and Newco2 all file their income tax returns with the XXXXXXXXXX Tax Centre and deal with the XXXXXXXXXX Tax Services Office.

6.    The shares of FamCo, Newco1 and Newco2 are capital property to the shareholders thereof.

7.    Reserved

8.    FamCo owns XXXXXXXXXX which has been used in the business of XXXXXXXXXX throughout the entire period it has been owned by Famco, which is estimated to be more than XXXXXXXXXX years.

9.    The estimated FMV of each XXXXXXXXXX owned by FamCo is $XXXXXXXXXX.

PROPOSED TRANSACTIONS

10.   XXXXXXXXXX owned by FamCo will be sold to Child 3 for FMV.  The consideration received by FamCo will be a promissory note (“Promissory Note #1”) payable by Child 3 to FamCo. The principal amount of Promissory Note #1 will be an amount equal to the FMV of the XXXXXXXXXX sold by FamCo to Child 3.

11.   The directors of FamCo will pass a resolution to declare a dividend on the common shares of FamCo in an amount equal to $XXXXXXXXXX. The directors will make the election provided for in subsection 83(2) for the full amount of this dividend to be paid out of the capital dividend account of FamCo. This dividend will be paid in cash.

12.   FamCo will purchase for cancellation its XXXXXXXXXX held by Child 3 for an amount equal to its FMV.  The consideration for the purchase for cancellation of its XXXXXXXXXX will be the issuance by FamCo of a non-interest bearing promissory note (“Promissory Note #2”) payable by FamCo to Child 3. The principal amount of Promissory Note #2 will be an amount equal to the FMV of the XXXXXXXXXX purchased by FamCo from Child 3.

12.1. The purchase for cancellation described in Paragraph 12 above will give rise to a deemed dividend to Child 3 pursuant to subsection 84(3). Famco will designate in writing in accordance with subsection 89(14) the portion of the deemed dividend equal to its GRIP balance to be an eligible dividend.

13.   Promissory Note #1 described in Paragraph 11, and Promissory Note #2 described in Paragraph 12, will be offset against one another and cancelled. To the extent that the principal amounts of Promissory Note #1 and Promissory Note #2 are not equal, any excess amount owing to either Child 3 or FamCo will be paid in cash or by the issuance of an additional promissory note. The parties agree that the set-off, and any additional cash payment made or promissory note issued by either Child 3 or Famco, as the case may be, will be accepted as full payment against the outstanding balances of Promissory Note #1 and Promissory Note #2.

14.   Mr. A will transfer XXXXXXXXXX of his XXXXXXXXXX common shares held in FamCo to Newco1. As consideration for the transfer, Newco1 will issue XXXXXXXXXX Class E shares to Mr. A, which will have a FMV equal to the FMV of the property received by Newco1 from Mr. A. Newco1 will add $XXXXXXXXXX, being an amount equal to the PUC of the XXXXXXXXXX of FamCo it received from Mr. A, to the stated capital of its XXXXXXXXXX Class E shares issued to Mr. A.

Mr. A and Newco1 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of Mr. A’s XXXXXXXXXX of FamCo to Newco1. The agreed amount in respect of this transfer will be equal to the ACB of the XXXXXXXXXX transferred, being $XXXXXXXXXX.

15.   Child 1 will transfer his XXXXXXXXXX held in FamCo to Newco1. As consideration for the transfer, Newco1 will issue XXXXXXXXXX Class E shares to Child 1, which will have a FMV equal to the FMV of the property received by Newco1 from Child 1. Newco1 will add $XXXXXXXXXX, being an amount equal to the PUC of the XXXXXXXXXX of FamCo it received from Child 1, to the stated capital of its XXXXXXXXXX Class E shares issued to Child 1.

Child 1 and Newco1 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of Child 1’s XXXXXXXXXX of FamCo to Newco1.  The agreed amount in respect of this transfer will be equal to the ACB of the XXXXXXXXXX transferred, being $XXXXXXXXXX.

16.   Mrs. A will transfer her XXXXXXXXXX held in FamCo to Newco2. As consideration for the transfer, Newco2 will issue XXXXXXXXXX Class E shares to Mrs. A, which will have a FMV equal to the FMV of the property received by Newco2 from Mrs. A. Newco2 will add $XXXXXXXXXX, being an amount equal to the PUC of the XXXXXXXXXX of FamCo it received from Mrs. A, to the stated capital of its XXXXXXXXXX Class E shares issued to Mrs. A.

Mrs. A and Newco2 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of Mrs. A’s XXXXXXXXXX of FamCo to Newco2.  The agreed amount in respect of this transfer will be equal to the ACB of the XXXXXXXXXX transferred, being $XXXXXXXXXX.

17.   Child 4 will transfer his XXXXXXXXXX held in FamCo to Newco2. As consideration for the transfer, Newco2 will issue XXXXXXXXXX Class E shares to Child 4, which will have a FMV equal to the FMV of the property received by Newco2 from Child 4. Newco2 will add $XXXXXXXXXX, being an amount equal to the PUC of the XXXXXXXXXX of FamCo it received from Child 4, to the stated capital of the XXXXXXXXXX Class E shares issued to Child 4.

Child 4 and Newco2 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of Child 4’s XXXXXXXXXX of FamCo to Newco2.  The agreed amount in respect of this transfer will be equal to the ACB of the XXXXXXXXXX transferred, being $XXXXXXXXXX.

18.   FamCo will transfer XXXXXXXXXX to Newco1.  As consideration for this transfer, Newco1 will issue XXXXXXXXXX Class F shares to FamCo having a FMV equal to the FMV of the property received by Newco1 from FamCo.

FamCo and Newco1 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to this transfer of property from FamCo to Newco1. The agreed amount in respect of this transfer will be an amount that is equal to the ACB of the property transferred, which amount will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act, and will not be greater than the FMV of the property transferred.

The amount added to the stated capital of the Class F shares of Newco1 issued to FamCo on this transfer will be equal to the agreed amount, which is the maximum amount permitted to be added to the PUC of these shares having regard to subsection 85(2.1).

19.   FamCo will transfer XXXXXXXXXX to Newco2.  As consideration for this transfer, Newco2 will issue XXXXXXXXXX Class F shares to FamCo having a FMV equal to the FMV of the property received by Newco2 from FamCo.

FamCo and Newco2 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to this transfer of property from FamCo to Newco2.  The agreed amount in respect of this transfer will be an amount that is equal to the ACB of the property transferred, which amount will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act, and will not be greater than the FMV of property transferred. The amount added to the stated capital of the Class F shares of Newco2 issued to FamCo on this transfer will be equal to the agreed amount, which is the maximum amount permitted to be added to the PUC of these shares having regard to subsection 85(2.1).

20.   FamCo will purchase for cancellation its XXXXXXXXXX common shares held by Newco2 for an amount equal to their FMV.  Consideration for the purchase for cancellation will be the issuance by FamCo of a non-interest bearing demand promissory note to Newco2 (Promissory Note #3). The principal amount and FMV of Promissory Note #3 will be an amount that is equal to the FMV of the XXXXXXXXXX common shares of FamCo purchased for cancellation. Newco2 will accept Promissory Note #3 as payment in full for the XXXXXXXXXX common shares that it held in Famco.

21.   FamCo will purchase for cancellation its XXXXXXXXXX common shares held by Newco1 for an amount equal to their FMV.  Consideration for the purchase for cancellation will be the issuance by FamCo of a non-interest bearing demand promissory note to Newco1 (Promissory Note #4). The principal amount and FMV of Promissory Note #4 will be an amount that is equal to the FMV of the XXXXXXXXXX common shares of FamCo purchased for cancellation. Newco1 will accept Promissory Note #4 as payment in full for the XXXXXXXXXX common shares that it held in Famco.

22.   Newco1 will redeem the XXXXXXXXXX Class F shares issued to FamCo in Paragraph 18 above for an amount equal to their FMV.  Consideration for the redemption will be the issuance by Newco1 of a non-interest bearing demand promissory note to FamCo (Promissory Note #5). The principal amount and FMV of Promissory Note #5 will be an amount that is equal to the FMV of the XXXXXXXXXX preferred shares of Newco1 redeemed. FamCo will accept Promissory Note #5 as payment in full for the XXXXXXXXXX preferred shares it held in Newco1.

23.   Newco2 will redeem the XXXXXXXXXX Class F shares issued to FamCo in Paragraph 19 above for an amount equal to their FMV.  Consideration for the redemption will be the issuance by Newco2 of a non-interest bearing demand promissory note to FamCo (Promissory Note #6). The principal amount and FMV of Promissory Note #6 will be an amount that is equal to the FMV of the XXXXXXXXXX Class F shares of Newco2 redeemed. FamCo will accept Promissory Note #6 as payment in full for the XXXXXXXXXX preferred shares it held in Newco2.

24.   Promissory Note #3 and Promissory Note #6 will be off-set against one another and cancelled, except to the extent that the principal amount of one of these promissory notes is greater than the other. In that case, an amount will remain outstanding under the promissory note with the greater principal amount equal to the amount by which the principal amount of the promissory note with the greater principal amount exceeds the principal amount of the promissory note with the lesser principal amount.

24.1. Promissory Note #4 and Promissory Note #5 will be off-set against one another and cancelled, except to the extent that the principal amount of one of these promissory notes is greater than the other. In that case, an amount will remain outstanding under the promissory note with the greater principal amount equal to the amount by which by which the principal amount of the promissory note with the greater principal amount exceeds the principal amount of the promissory note with the lesser principal amount.

ADDITIONAL INFORMATION

25.   None of FamCo, Newco1 or Newco2 will be, at any time during a series of transactions that includes the Proposed Transactions, a restricted financial institution, a specified financial institution, or a corporation described in any of paragraphs (a) to (f) of the definition of ‘financial intermediary corporation’ in subsection 191(1).

26.   None of the shares of Famco, Newco1 or Newco2 will be at any time during a series of events or transactions that includes the Proposed Transactions:

a)    the subject of any undertaking or agreement that is a guarantee agreement, within the meaning referred to in subsection 112(2.2);

b)    the subject of a dividend rental arrangement;

c)    the subject of any secured undertaking of the type described in paragraph 112(2.4)(a);

d)    issued for any consideration that is or includes:

i)    an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b));

ii)   any right of the type described in subparagraph 112(2.4)(b)(ii); or

e)    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).

27.   The Proposed Transactions described herein will occur in the order presented unless otherwise indicated, with the exception of the filing of the applicable election forms described in Paragraphs 10, 14, 15, 16, 17, 18 and 19, which will be filed by the applicable due date following completion of the Proposed Transactions.

28.   The purchases for cancellation and redemptions described in Paragraphs 20, 21, 22 and 23 will occur simultaneously.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to transfer property of FamCo into separate companies as part of an estate plan for Mr. A and Mrs. A that will enable each of Child 1, Child 2 and Child 4, to inherit an individual interest in specific XXXXXXXXXX. The reason that Mr. A acquires shares of Newco1, and Mrs. A acquires shares of Newco2, as part of the Proposed Transactions, is so that each of them will retain their economic interest in the underlying business previously carried on by Famco until such time as their shares pass to their children due to their deaths. For greater certainty, the shares of Newco1 and Newco2 may pass to the children pursuant to the wills of Mr. A and Mrs. A, or may be gifted prior to death in the event that Mr. A or Mrs. A is in palliative care or receives a terminal medical diagnosis.

RULINGS

Provided that the above statements of facts, Proposed Transactions, additional information and purpose of the Proposed Transactions are accurate and constitute complete disclosure of all relevant facts and proposed transactions, our rulings are as follows:

A.    Subject to the application of subsection 69(11), provided that the requisite joint elections are filed in prescribed form and manner within the prescribed time specified in subsection 85(6) and provided that each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1) will apply to:

(a)   the transfers of shares of FamCo and Newco1 described in Paragraphs 14 and 15;

(b)   the transfers of shares of FamCo and Newco2 described in Paragraphs 16 and 17; and

(c)   the transfers of XXXXXXXXXX by FamCo to each of Newco1 and Newco2 described in Paragraphs 18 and 19;

such that the Agreed Amount in respect of each such transfer will be deemed pursuant to paragraph 85(1)(a) to be the transferor’s proceeds of disposition of the particular property and the transferee’s cost thereof. 

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B.    As a result of the purchase by cancellation by FamCo of its common shares as described in Paragraph 20 and the purchase for cancellation or redemption, as the case may be, by Newco2 of its Class F shares described in Paragraph 23 above, by virtue of subsection 84(3):

(a)   FamCo will be deemed to have paid, and Newco2 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by FamCo in respect of its redemption of its common shares owned by Newco2 exceeds the PUC of such class of shares immediately before the redemption;

(b)   Newco2 will be deemed to have paid, and FamCo will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by Newco2 in respect of the repurchase of its Class F shares owned by FamCo exceeds the PUC attributable to such class of shares immediately before the purchase for cancellation.

C.    As a result of the purchase by cancellation by FamCo of its common shares as described in Paragraph 21 and the purchase for cancellation or redemption, as the case may be, by Newco1 of its Class F shares described in Paragraph 22 above, by virtue of subsection 84(3):

(a)   FamCo will be deemed to have paid, and Newco1 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by FamCo in respect of its redemption of its common shares owned by Newco1 exceeds the PUC of such class of shares immediately before the redemption;

(b)   Newco1 will be deemed to have paid, and FamCo will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by Newco1 in respect of the repurchase of its Class F shares owned by FamCo exceeds the PUC attributable to such class of shares immediately before the purchase for cancellation.

D.    The taxable dividends described in Rulings B and C above:

(a)   will be included in computing the income of the person deemed to have received such dividend pursuant to subsection 82(1) and paragraph 12(1)(j);

(b)   will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the taxation year in which such dividend is deemed to have been received and, for greater certainty, such deduction will not be prohibited by subsections 112(2.1), (2.2), (2.3), or (2.4);

(c)   will be excluded in determining the recipient’s proceeds of disposition of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of proceeds of disposition in section 54;

(d)   will, by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received;

(e)   will not be subject to tax under Part IV.1 by virtue of paragraph (c) of the definition of ‘excepted dividend’ in section 187.1;

(f)   will not be subject to tax under Part VI.1 by virtue of paragraph (a) of the definition of ‘excluded dividend’ in subsection 191(1); and

(g)   will not be subject to tax under Part IV except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend.

E.    By virtue of paragraph 55(3)(a), subsection 55(2) will not apply to the deemed dividends described in Rulings B and C above, provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) which is part of a series of transactions or events that includes any of the Proposed Transactions. For greater certainty, the Proposed Transactions, in and of themselves, will not be considered to result in any disposition to, or increase in interest described in subparagraphs 55(3)(a)(i) to (v).

F.    The provisions of subsections 15(1), 56(2) and 246(1) of the Act will not apply to the Proposed Transactions described herein, in and of themselves.

G.    As a result of the Proposed Transactions, in and of themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the rulings given.

Our rulings are given subject to the limitations set out in Information Circular 70-6R6 dated August 29, 2014, and are binding on the CRA provided the Proposed Transactions are completed within six months of the date of this letter.  Our rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act or Regulations.

Our Comments

Nothing in this ruling should be construed as implying that CRA has reviewed any tax consequences relating to the facts or the Proposed Transactions other than those described in the rulings given above, or has agreed:

(a)   to the fair market value or adjusted cost base of any asset or to the paid-up capital of any share; or

(b)   to any other tax consequences relating to any transaction described herein other than those specifically described in the rulings given above.

Furthermore, none of the rulings given in this letter are intended to apply to, or in the event of, the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated.  The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, dated March 28, 2013.

OPINION

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, additional information and purposes of the proposed transactions, provided that the Proposed Transactions are undertaken in the manner described above and provided that the Act is amended in accordance with the draft tax legislative proposals released on July 31, 2015, proposed subsections 55(2) and (2.1) will not apply in respect of the dividends described in Rulings B and C above, by virtue of the exception in proposed paragraph 55(3)(a).

The foregoing opinion is not a ruling and, as noted in paragraph 19(f) of Information Circular 70-6R6, is not binding on the CRA.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
Manager
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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