2018-0749491R3 55(3)(a) Reorganization

Principal Issues: Did the reorganization meet the requirements of paragraph 55(3)(a)?

Position: Yes.

Reasons: Meets legislative requirements. Consistent with prior rulings involving similar issues.

Author: XXXXXXXXXX
Section: 55(2), 55(3)(a), 55(4), 85(1), "GRIP", 129(1), 186, 187.1, 191, 251(2)

XXXXXXXXXX                                                                                                               2018-074949

XXXXXXXXXX, 2018

Dear XXXXXXXXXX:

Re:   XXXXXXXXXX

         Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers.  We also acknowledge the information provided in subsequent letters, e-mails and telephone discussions (XXXXXXXXXX).  The information that you provided in such correspondence and in the telephone discussions form part of this letter only to the extent described herein.

We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues described herein is:

(i)   dealt with in an earlier return of the taxpayers or a person related to the taxpayers;

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

(iii) under objection by the taxpayers or a person related to the taxpayers;

(iv)  before the courts or if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v)   the subject of a ruling previously issued by the Income Tax Rulings Directorate.

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 from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph, and clause or subclause, is a reference to the relevant provision, and the Income Tax Regulations thereunder are referred to as the “Regulations;”

“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);

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

“BCA” means the XXXXXXXXXX;

“BN” refers to business number as that term is defined in subsection 248(1);

“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” refers to Child 1, Child 2, Child 3 and/or Child 4, as may be required in the context;

“Child 1” refers to XXXXXXXXXX, who is an adult child of Parent;

“Child 2” refers to XXXXXXXXXX, who is an adult child of Parent;

“Child 3” refers to XXXXXXXXXX, who is an adult child of Parent;

“Child 4” refers to XXXXXXXXXX, who is an adult child of Parent;

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

“CRA” means the Canada Revenue Agency;

“DC” means XXXXXXXXXX;

“DC Common Shares” means the common shares in the capital of DC described in Paragraph 4;

“DC Class A Shares” means the Class A preferred shares in the capital of DC described in Paragraph 4;

“DC Class B Shares” means the Class B preferred shares in the capital of DC described in Paragraph 4;

“DC Class C Shares” means the Class C preferred shares in the capital of DC described in Paragraph 4;

“DC Class D Shares” means the Class D preferred shares in the capital of DC described in Paragraph 11;

“DC-TC1 Note” refers to the promissory note to be issued by TC1 to DC as described in Paragraph 28;

“DC-TC2 Note” refers to the promissory note to be issued by TC2 to DC as described in Paragraph 28;

“DC-TC3 Note” refers to the promissory note to be issued by TC3 to DC as described in Paragraph 28;

“DC-TC4 Note” refers to the promissory note to be issued by TC4 to DC as described in Paragraph 28;

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

“dividend rental arrangement” has the meaning assigned by 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;

“financial intermediary corporation” has the meaning assigned by subsection 191(1);

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

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

“Paragraph” refers to a numbered paragraph in this letter;

“Parent” refers to XXXXXXXXXX, who is the parent of Child 1, Child 2, Child 3 and Child 4;

“Parent Note” means the demand non-interest bearing note currently due by DC to Parent in the principal amount of approximately $XXXXXXXXXX;

“Parent Note 2” means the promissory note to be issued by DC to Parent described in Paragraph 12;

“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 section 54;

“Proposed Transactions” refers to the transactions described in Paragraphs 11 to 31;

“redemption amount” means with respect to a share of any class of a corporation, the amount for which such share is redeemable by the holder or retractable by the corporation;

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

“Rental Property” means DC’s land and building known municipally as XXXXXXXXXX from which it earns rental income and any assets related thereto;

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

“stated capital account” has the meaning assigned by the BCA;

“SIN” means social insurance number;

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

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

“substituted property” includes the property described in subsection 248(5);

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

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

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

“TC1” refers to the corporation to be incorporated described in Paragraph 13;

“TC1 Note” refers to the promissory note to be issued by DC to TC1 described in Paragraph 30;

“TC1 Transferred Shares” refers to the number of DC Common Shares to be transferred by Child 1 to TC1 described in Paragraph 19;

“TC2” refers to the corporation to be incorporated described in Paragraph 13;

“TC2 Note” refers to the promissory note to be issued by DC to TC2 described in Paragraph 30;

“TC2 Transferred Shares” refers to the number of DC Common Shares to be transferred by Child 2 to TC2 described in Paragraph 19;

“TC3” refers to the corporation to be incorporated described in Paragraph 13;

“TC3 Note” refers to the promissory note to be issued by DC to TC3 described in Paragraph 30;

“TC3 Transferred Shares” refers the number of DC Common Shares to be transferred by Child 3 to TC3 described in Paragraph 19;

“TC4” refers to the corporation to be incorporated described in Paragraph 13;

“TC4 Note refers to the promissory note to be issued by DC to TC4 described in Paragraph 30;

“TC4 Transferred Shares” refers to the number of DC Common Shares to be transferred by Child 4 to TC4 described in Paragraph 19;

”TransfereeCo” refers individually to TC1, TC2, TC3 and TC4 and ‘TransfereeCos’ refers collectively to TC1, TC2, TC3 and TC4, as required in the context;

“Transaction Assets” means the cash and portfolio XXXXXXXXXX of DC, but not including the Rental Property, to be transferred by DC to the TransfereeCos described Paragraph 27; and

“Transaction Date” means the date on which the Proposed Transactions described in Paragraphs 26 to 28 are completed which date will be prior to XXXXXXXXXX.

FACTS

1.    DC is a corporation incorporated on XXXXXXXXXX under the laws of the XXXXXXXXXX. DC files its income tax returns at the XXXXXXXXXX.

2.    DC is a private corporation, a TCC and a CCPC. DC’s taxation year ends on XXXXXXXXXX. DC is XXXXXXXXXX.  Its assets consists primarily of XXXXXXXXXX.

3.    Child 1, Child 2, Child 3, and Child 4 are Parent’s four adult children.

4.    There are four classes of issued and outstanding shares in the capital of DC. They are outlined below along with the relevant share terms:

a)    Common shares (the “DC Common Shares”):

(i)   Entitled to one (1) vote per share; and

(ii)  Entitled to dividends if, as, and when declared by the board of the directors (subject to the dividend rights associated with the various classes of preferred shares).

b)    Class A preferred shares (the “DC Class A Shares”):

(i)   Entitled to one (1) vote per share;

(ii)  Entitled to non-cumulative dividends at a rate of XXXXXXXXXX% per annum on the initial issue price of the Class A Shares; and

(iii) Redeemable and retractable for $XXXXXXXXXX per share.

c)    Class B preferred shares (the “DC Class B Shares”):

(i)   Not entitled to vote;

(ii)  Entitled to non-cumulative dividends at a rate of not less than XXXXXXXXXX% nor more than XXXXXXXXXX% per quarter of the redemption amount of the Class B Shares; and

(iii) Redeemable and retractable for a redemption amount equal to the FMV of property received by the corporation in exchange for their issuance.

d)    Class C preferred shares (the “DC Class C Shares”):

(i)   Not entitled to vote;

(ii)  Entitled to non-cumulative dividends at a rate of not less than XXXXXXXXXX% per annum of the redemption amount of the Class C Shares; and

(iii) Redeemable and retractable for a redemption amount of $XXXXXXXXXX per share.

5.    The current shareholders of DC are as follows:

a)    Parent:

(i)   XXXXXXXXXX DC Class A Shares which have an aggregate redemption amount, FMV, PUC and ACB of $XXXXXXXXXX;

(ii)  XXXXXXXXXX DC Class B Shares which have an aggregate redemption amount, FMV, PUC and ACB of $XXXXXXXXXX;

(iii) XXXXXXXXXX DC Class C Shares which have an aggregate redemption amount and FMV of $XXXXXXXXXX and a PUC and ACB of $XXXXXXXXXX;

b)    Child 1:

XXXXXXXXXX DC Common Shares which have an aggregate PUC and ACB of $XXXXXXXXXX;

c)    Child 2:

XXXXXXXXXX DC Common Shares which have an aggregate PUC and ACB of $XXXXXXXXXX;

d)    Child 3:

XXXXXXXXXX DC Common Shares which have an aggregate PUC and ACB of $XXXXXXXXXX; and

e)    Child 4:

XXXXXXXXXX DC Common Shares which have an aggregate PUC and ACB of $XXXXXXXXXX.

No capital gains exemption has ever been claimed with respect to the DC Common Shares; any substituted property; or any shares for which such DC Common Shares were substituted.

6.    Parent, who is XXXXXXXXXX years old and in good health, currently controls DC by virtue of the XXXXXXXXXX DC Class A Shares. Parent is in charge of all operational matters of DC.  Specifically, he oversees and is actively involved in all of DC’s decisions related to the acquisition and disposition of XXXXXXXXXX, as required.

7.    All of the shareholders of DC hold their shares as capital property, and each of the shareholders is a person who is resident in Canada for purposes of the Act.

8.    DC’s assets are comprised of the following:

XXXXXXXXXX

DC holds the assets as capital property.

9.    DC’s liabilities consist of nominal accounts payable and the Parent Note.

10.   DC’s GRIP, CDA and RDTOH balances as at XXXXXXXXXX were $XXXXXXXXXX, $XXXXXXXXXX and $XXXXXXXXXX respectively.

PROPOSED TRANSACTIONS

The Proposed Transactions will be completed in the following sequence:

11.   On or before the Transaction Date, DC will amend its articles of incorporation to effect the following:

a)    Increase the number of votes per share to which the DC Class A Shares are entitled from XXXXXXXXXX.  The purpose of this step is to ensure that Parent maintains control of DC at all relevant times.

b)    Create a new class of non-voting Class D preferred shares (the “DC Class D Shares”), which will be redeemable and retractable for a redemption amount equal to the FMV of the property received by the corporation in exchange for their issuance.

c)    Split the number of issued and outstanding DC Common Shares to facilitate the transfer of DC Common Shares by each Child to his/her respective TransfereeCo described in Paragraphs 19 to 23 and avoid the transfer of fractional shares.

12.   On or before the Transaction Date, DC will redeem the XXXXXXXXXX DC Class B Shares and the XXXXXXXXXX DC Class C Shares for their respective redemption amounts in exchange for a demand non-interest bearing promissory note issued by DC to Parent with a principal amount and FMV equal to the aggregate redemption amount of the redeemed shares (the “Parent Note 2”).  DC will designate in prescribed manner that the full amount of any dividend deemed to be paid by DC to Parent resulting from such redemptions to be an eligible dividend.

13.   On or before the Transaction Date, new holding companies, TC1, TC2, TC3 and TC4, will be incorporated by Parent under the laws of the XXXXXXXXXX.  Each of the TransfereeCos will be a private corporation, a TCC and a CCPC.

14.   The authorized capital of each of the TransfereeCos will consist of the following classes of shares: (i) voting participating common shares having one vote per share (respectively, the “TC1 Common Shares”, “TC2 Common Shares”, “TC3 Common Shares” and “TC4 Common Shares”); (ii) voting non-participating special shares having one vote per share (respectively, the TC1 Voting Shares”, “TC2 Voting Shares”, “TC3 Voting Shares” and “TC4 Voting Shares”); and (iii) non-voting preferred shares which are redeemable and retractable for an amount equal to the FMV of the property in consideration for which such shares were issued (respectively the “TC1 Preferred Shares”, TC2 Preferred Shares, “TC3 Preferred Shares” and “TC4 Preferred Shares”).

15.   On the day of the incorporation of TC1:

a)    Parent will subscribe for XXXXXXXXXX TC1 Voting Shares for cash consideration of $XXXXXXXXXX; and

b)    Child 1 will subscribe for XXXXXXXXXX TC1 Common Shares of TC1 for cash consideration of $XXXXXXXXXX.

16.   On the day of the incorporation of TC2:

a)    Parent will subscribe for XXXXXXXXXX TC2 Voting Shares for cash consideration of $XXXXXXXXXX; and

b)    Child 2 will subscribe for XXXXXXXXXX TC2 Common Shares for cash consideration of $XXXXXXXXXX.

17.   On the day of the incorporation of TC3:

a)    Parent will subscribe for XXXXXXXXXX TC3 Voting Shares for cash consideration of $XXXXXXXXXX; and

b)    Child 3 will subscribe for XXXXXXXXXX TC3 Common Shares for cash consideration of $XXXXXXXXXX.

18.   On the day of the incorporation of TC4:

a)    Parent will subscribe for XXXXXXXXXX TC4 Voting Shares for cash consideration of $XXXXXXXXXX; and

b)    Child 3 will subscribe for XXXXXXXXXX TC4 Common Shares for cash consideration of $XXXXXXXXXX.

19.   On the Transaction Date, Child 1, Child 2, Child 3, and Child 4 will each transfer to TC1, TC2, TC3 and TC4, as the case may be, such number of DC Common Shares having an aggregate FMV equal to one-quarter of the aggregate FMV of the Transaction Assets less one-quarter of the aggregate amount outstanding on the Parent Note and Parent Note 2 (in each case, the “ TC1 Transferred Shares”, “TC2 Transferred Shares”, “TC3 Transferred Shares” and “TC4 Transferred Shares”) in the manner described in Paragraphs 20 to 24.

20.   Child 1 will transfer the TC1 Transferred Shares to TC1 in exchange for:

(a)   A demand non-interest bearing promissory note having a principal amount and FMV equal to the PUC and ACB of the transferred shares; and

(b)   The issuance of additional TC1 Common Shares.

A nominal amount will be added to the stated capital account maintained for the TC1 Common Shares as permitted under the BCA.  The ACB and PUC of such TC1 Common Shares will be nominal.

21.   Child 2 will transfer the TC2 Transferred Shares to TC2 in exchange for:

a)    A demand non-interest bearing promissory note having a principal amount and FMV equal to the PUC and ACB of the transferred shares; and

b)    The issuance of additional TC2 Common Shares.

A nominal amount will be added to the stated capital account maintained for the TC2 Common Shares as permitted under the BCA.  The PUC and ACB of such TC2 Common Shares will be nominal.

22.   Child 3 will transfer the TC3 Transferred Shares to TC3 in exchange for:

a)    A demand non-interest bearing promissory note having a principal amount and FMV equal to the PUC and ACB of the transferred shares; and

b)    The issuance of additional TC3 Common Shares.

A nominal amount will be added to the stated capital account maintained for the TC3 Common Shares as permitted under the BCA.  The PUC and ACB of such TC3 Common Shares will be nominal.

23.   Child 4 will transfer the TC4 Transferred Shares to TC4 in exchange for:

a)    A demand non-interest bearing promissory note having a principal amount and FMV equal to the PUC and ACB of the transferred shares; and

b)    The issuance of additional TC4 Common Shares.

A nominal amount will be added to the stated capital account maintained for the TC4 Common Shares as permitted under the BCA.  The PUC and ACB of such TC4 Common Shares will be nominal.

24.   In respect of each transfer of DC Common Shares described in Paragraphs 19 to 23, Child 1, Child 2, Child 3, and Child 4 will each make a joint election under subsection 85(1) with TC1, TC2, TC3 and TC4, as the case may be, in prescribed form and within the time limit referred to in subsection 85(6).  The agreed amount in each case will be an amount equal to the ACB of the DC Common Shares transferred.

25.   Following the completion of the transfers described in Paragraphs 19 to 23, Child 1, Child 2, Child 3, and Child 4 will each retain ownership of such number of DC Common Shares having an aggregate FMV equal to the FMV of the Rental Property less any liabilities of DC other than the Parent Note and Parent Note 2.

26.   On the Transaction Date, TC1, TC2, TC3, and TC4 will each exchange their DC Common Shares for DC Class D Shares having an aggregate redemption amount and FMV equal to the aggregate FMV of the DC Common Shares exchanged.

27.   On the Transaction Date, DC will transfer a portion of the Transaction Assets to each of the TransfereeCos as follows:

a)    DC will transfer Transaction Assets representing one-quarter of the aggregate FMV of such assets to TC1 in exchange for:

(i)   The assumption of one-quarter of the aggregate amount owing to Parent under the Parent Note and the Parent Note 2; and

(ii)  The issuance of TC1 Preferred Shares which will have an aggregate redemption amount and FMV equal to the aggregate FMV of the Transaction Assets transferred to TC1 less the aggregate amount of the liabilities assumed by TC1 described in Paragraph 27(a)(i).

b)    DC will transfer Transaction Assets representing one-quarter of the aggregate FMV of such assets to TC2 in exchange for:

(i)   The assumption of one-quarter of the aggregate amount owing to Parent under the Parent Note and Parent Note 2; and

(ii)  The issuance of TC2 Preferred Shares which will have an aggregate redemption amount and FMV equal to the aggregate FMV of the Transaction Assets transferred to TC2 less the aggregate amount of the liabilities assumed by TC2 described in Paragraph 27(b)(i).

c)    DC will transfer Transaction Assets representing one-quarter of the aggregate FMV of such assets to TC3 in exchange for:

(i)   The assumption of one-quarter of the aggregate amount owing to Parent under the Parent Note and the Parent Note 2; and

(ii)  The issuance of TC3 Preferred Shares which will have an aggregate redemption amount FMV equal to the aggregate FMV of the Transaction Assets transferred to TC2 less the aggregate amount of the liabilities assumed by TC3 described in Paragraph 27(c)(i).

d)    DC will transfer Transaction Assets representing one-quarter of the aggregate FMV of such assets to TC4 in exchange for:

(i)   The assumption of one-quarter of the aggregate amount owing to Parent under the Parent Note and the Parent Note 2; and

(ii)  The issuance of TC4 Preferred Shares which will have an aggregate redemption amount and FMV equal to the aggregate FMV of the Transaction Assets transferred to TC4 less the aggregate amount of the liabilities assumed by TC4 described in Paragraph 27(d)(i).

In respect of each transfer of Transaction Assets described above, to the extent the transferred property is eligible property, DC and each of TC1, TC2, TC3, and TC4, as the case may be, will make a joint election under subsection 85(1) in prescribed form and within the time limit referred to in subsection 85(6).  The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

In each case, the agreed amounts in respect of a property transferred will not exceed the FMV of the property, nor will it be less than the amount permitted under paragraph 85(1)(b).

The amount added to the stated capital account maintained for the TC1 Preferred Shares, TC2 Preferred Shares, TC3 Preferred Shares and TC4 Preferred Shares will be equal to the sum of the agreed amounts in respect of each property transferred, less the aggregate amount of the liabilities assumed by TC1, TC2, TC3 and TC4, as the case may be, which is the maximum amount permitted to be added to the PUC of the shares having regard to subsection 85(2.1).

28.   On the Transaction Date, each of the TransfereeCos will redeem their preferred shares held by DC as follows:

a)    TC1 will redeem the TC1 Preferred Shares in exchange for a demand non-interest bearing promissory note (the “DC-TC1 Note”) having a principal amount and FMV equal to the aggregate FMV and redemption amount of such redeemed shares.

b)    TC2 will redeem the TC2 Preferred Shares in exchange for a demand non-interest bearing promissory note (the “DC-TC2 Note”) having a principal amount and FMV equal to the aggregate FMV and redemption amount of such redeemed shares.

c)    TC3 will redeem the TC3 Preferred Shares in exchange for a demand non-interest bearing promissory note (the “DC-TC3 Note”) having a principal amount and FMV equal to the aggregate FMV and redemption amount of such redeemed shares.

d)    TC4 will redeem the TC4 Preferred Shares in exchange for a demand non-interest bearing promissory note (the “DC-TC4 Note”) having a principal amount and FMV equal to the aggregate FMV and redemption amount of such redeemed shares.

29.   Each of the TransfereeCos will have its first taxation year end on the day after the Transaction Date.  The purpose of the timing of these taxation year ends is to prevent circularity in the calculation of the refund of RDTOH and Part IV tax liability of the TransfereeCos and DC.

30.   On or about XXXXXXXXXX, DC will redeem its Class D Shares held by each of the TransfereeCos as follows:

a)    DC will redeem the Class D Shares held by TC1 in exchange for a demand non-interest bearing promissory note (the “TC1 Note”) having a principal amount and FMV equal to the aggregate FMV and redemption amount of such redeemed shares.

b)    DC will redeem its Class D Shares held by TC2 in exchange for a demand non-interest bearing promissory note (the “TC2 Note”) having a principal amount and FMV equal to the aggregate FMV and redemption amount of such redeemed shares.

c)    DC will redeem its Class D Shares held by TC3 in exchange for a demand non-interest bearing promissory note (the “TC3 Note”) having a principal amount and FMV equal to the aggregate FMV and redemption amount of such redeemed shares.

d)    DC will redeem its Class D Shares held by TC4 in exchange for a demand non-interest bearing promissory note (the “TC4 Note”) having a principal amount and FMV equal to the aggregate FMV and redemption amount of such redeemed shares.

31.   On or about XXXXXXXXXX, the promissory notes owing by each TransfereeCo to DC will be set off with the promissory notes owing by DC to each TransfereeCo as follows:

a)    The TC1 Note and the DC-TC1 Note will be set-off against each other in full payment and satisfaction of the amounts due thereunder, which will result in the cancellation of such notes;

b)    The TC2 Note and the DC-TC2 Note will be set-off against each other in full payment and satisfaction of the amount due thereunder, which will result in the cancellation of such notes;

c)    The TC3 Note and the DC-TC3 Note will be set-off against each other in full payment and satisfaction of the amounts due thereunder, which will result in the cancellation of such notes; and

d)    The TC4 Note and the DC-TC4 Note will be set-off against each other in full payment and satisfaction of the amounts due thereunder, which will result in the cancellation of such notes.

SUBSEQUENT TRANSACTIONS

32.   Parent’s last will and testament will provide for the following direct bequeaths on Parent’s death:

a)    All of Parent’s TC1 Voting Shares will be bequeathed to Child 1;

b)    All of Parent’s TC2 Voting Shares will be bequeathed to Child 2;

c)    All of Parent’s TC3 Voting Shares will be bequeathed to Child 3; and

d)    All of Parent’s TC4 Voting Shares will be bequeathed to Child 4.

ADDITIONAL INFORMATION

33.   Other than as described herein, there are no transactions that have been completed prior to the date of this letter nor are there any other transactions that are currently being contemplated that would form part of the series of transactions or events that includes the Proposed Transactions.

34.   None of DC, TC1, TC2, TC3 and TC4 is or will be, at any time during a series of transactions or events that includes the Proposed Transactions, a restricted financial institution; a specified financial institution or a corporation described in any of the paragraphs (a) to (f) of the definition of financial intermediary corporation.

35.   During the implementation of the Proposed Transactions, none of the shares of DC, TC1, TC2, TC3 or TC4 will be:

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

(b)   issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5);

(c)   the subject of a dividend rental arrangement;

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

(e)   issued for 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)); or

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

36.   As part of the series of transactions or events that includes any of the Proposed Transactions, there will not be:

(a)   a disposition of property described in subparagraphs 55(3)(a)(i), (iii) or (iv); or

(b)   significant increase described in subparagraphs 55(3)(a)(ii) or (v).

37.   The PUC and ACB of the DC Class B Shares, DC Class C Shares and DC Common Shares arose from transfers of property to DC in consideration for which such shares were issued and from increases in legal stated capital that resulted in the deemed payment of dividends that were either elected to be capital dividends or were taxable dividends.  Such amounts are not subject to reduction or other adjustment under any provision of the Act.

38.   The Parent Note is a legal obligation of DC and is enforceable in accordance with its terms.  All or substantially all of the balance due under the Parent Note is made up of advances made by Parent to DC or the unpaid portion of the purchase price for assets transferred by Parent to DC.

39.   Each of DC, TC1, TC2, TC3 and TC4 will have the financial capacity to honour, upon presentation for payment, the amount payable under its respective promissory note issued as part of the Proposed Transactions.

40.   The Proposed Transactions will not result in DC or a related person being unable to pay its tax liabilities.

41.   Each Child acquired his/her DC Common Shares on XXXXXXXXXX on the winding-up of a family trust that was at all times a resident of Canada.

42.   Parent will control DC and each of the TransfereeCos, in order to retain control over the property currently owned by DC and the investment decisions related thereto in the same manner as before the Proposed Transactions and to protect his economic interest in the Parent Note and Parent Note 2 that, following the completion of the Proposed Transactions, will be payable to him by the TransfereeCos.

43.   Parent has no intention of ceasing to control the TransfereeCos or DC, and has no immediate plans to retire from his daily duties related to the management of the XXXXXXXXXX currently owned by DC, except in the case of death or incapacity.  Parent is in good health and continues to be fully involved in the day-to-day management of DC.

44.   Parent is highly qualified to manage the relevant XXXXXXXXXX given his long-tenured professional experience as XXXXXXXXXX spanning many decades.

45.   For greater certainty, the TC1 Voting Shares, TC2 Voting Shares, TC3 Voting Shares and TC4 Voting Shares may be gifted to Parent’s children prior to Parent’s death in the event that Parent is in palliative care or receives a terminal medical diagnosis.

46.   For greater certainty, none of the purposes of Parent acquiring and maintaining voting control of the TransfereeCos is to cause his children to be related to the TransfereeCos so that subsection 55(2) would not apply to any of the deemed dividends resulting from the Proposed Transactions since Parent intends to exercise the same degree of control over each of the TransfereeCos that he currently exercises over DC.

47.   Parent does not intend to transfer any of his DC Class A Shares, TC1 Voting Shares, TC2 Voting Shares, TC3 Voting Shares or TC4 Voting Shares other than by way of his will, as described in Paragraph 32 or assign, transfer, delegate, encumber of otherwise restrict Parent’s entitlement to exercise the voting rights attached to such shares. However, in the event that Parent’s death is imminent, Parent may choose to gift such shares to Child 1, Child 2, Child 3, and/or Child 4, as the case may be.

PURPOSE OF THE PROPOSED TRANSACTIONS

48.   The purpose of the Proposed Transactions is to divide the Transaction Assets proportionately among the TransfereeCos as part of an estate plan for Parent, with Parent’s children maintaining their respective current economic interests in DC’s property and Parent’s control over such assets. Parent’s intent is to enable each of Child 1, Child 2, Child 3, and Child 4 to inherit, on the death of Parent, control over their respective individual interests in the Transaction Assets and to hold them in separate holding companies.

49.   The redemption by DC of the DC Class B Shares and the DC Class C Shares held by Parent as described in Paragraph 12 will occur in DC’s taxation year that ends on XXXXXXXXXX.  The redemption by DC of the DC Class D Shares will occur in DC’s following taxation year.  The purpose for completing the respective redemptions in different taxation years of DC is to ensure that DC will receive a dividend refund in respect of the taxable dividends deemed to be paid to Parent on the redemption of the DC Class B Shares and the DC Class C Shares (on which Parent will be subject to personal tax at the highest marginal rate) that will not result in any Part IV tax payable by the TransfereeCos which would be the result if the redemption of the DC Class B Shares, DC Class C Shares and DC Class D Shares were to occur in the same taxation year.

RULINGS

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

A.    Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the time limit prescribed in subsection 85(6), subsection 85(1) will apply to the transfer of each eligible property owned by Child 1, Child 2, Child 3 and Child 4 to TC1, TC2, TC3, TC4 described in Paragraphs 20 to 23; and by DC to TC1, TC2, TC3 and TC4 described in Paragraph 27, such that the agreed amount in respect of each such transfer will be deemed to be the transferor’s proceeds of disposition of the particular eligible property and the transferee’s cost thereof.

For greater certainty, paragraph 84.1(1)(b) will not apply to the transfers of DC Common Shares described in Paragraphs 20 to 23 to deem any of TC1, TC2, TC3, or TC4, as the case may be, to have paid, and Child 1, Child 2, Child 3 or Child 4, as the case may be, to have received a dividend provided that, in the case of each transfer, the FMV of the consideration paid by TC1, TC2, TC3 and TC4, as the case may be (other than shares of that TransfereeCo), does not exceed the greater of (i) the PUC of the DC Common Shares transferred; and (ii) subject to paragraphs 84.1(2)(a) and (a.1), the ACB of such shares.

B.    By virtue of subsection 84(3), on the redemption of the DC Class B Shares and the DC Class C Shares described in Paragraph 12, DC will be deemed to have paid, and Parent will be deemed to have received, a dividend equal to the amount, if any, by which the amount paid on each redemption of DC Class B Shares and DC Class C Shares, as the case may be, exceeds the PUC of such shares immediately before such redemption.

C.    By virtue of subsection 84(3), on the redemption of the TC1 Preferred Shares, TC2 Preferred Shares, TC3 Preferred Shares and TC4 Preferred Shares described in Paragraph 28, each of the TransfereeCos will be deemed to have paid, and DC will be deemed to have received, a dividend equal to the amount by which the amount paid on each redemption of preferred shares exceeds the PUC of such shares immediately before such redemption.

D.    By virtue of subsection 84(3), on the redemption of the DC Class D Shares described in Paragraph 30, DC will be deemed to have paid, and each TransfereeCo will be deemed to have received, a dividend equal to the amount by which the amount paid on each redemption of DC Class D Shares exceeds the PUC of such shares immediately before each such redemption.

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

(a)   will be included in computing the income of the corporation deemed to have received such a 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 year in which such a 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 or Part VI.1; and

(f)   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.

F.    By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to any of the taxable dividends referred to in Ruling E, provided that as part of the series of transactions or events that includes the Proposed Transactions, there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v). For greater certainty, the Proposed Transactions described herein, in and by themselves, will not be considered to result in a disposition or increase in interest described in subparagraphs 55(3)(a)(i) to (v).

G.    The mutual set-off and cancellation of the corresponding notes owing by the TransfereeCos and by DC as described in Paragraph 31 will not, in any case, give rise to a “forgiven amount” within the meaning of subsection 80(1) or 80.01(1).

H.    The provisions of subsections 15(1), 69(4) and 246(1) will not apply to the Proposed Transactions described herein, in and by themselves.

I.    Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed herein.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R7 issued on April 22, 2016, and are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

COMMENTS

Unless otherwise expressively confirmed, nothing in this ruling should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:

a)    the FMV or ACB of any property referred to herein or the PUC in respect of any share referred to herein;

b)    the outstanding balance of various tax accounts such as RDTOH, GRIP, non-capital losses, or CDA for any of the corporate entities described herein;

c)    any Canadian tax consequences relating to the Rental Property; or

d)    any provincial tax consequences of the Proposed Transactions or any other tax consequence relating to the facts, proposed transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer or issuance of shares.  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, Price Adjustment Clauses, dated March 28, 2013.

Yours truly,

XXXXXXXXXX
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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