2019-0791661R3 55(3)(a) Reorganization

Principal Issues: Whether the reorganization meets the requirements of paragraph 55(3)(a).

Position: Yes.

Reasons: Meets legislative requirements.

Author: XXXXXXXXXX
Section: 55(3)(a)

XXXXXXXXXX                                                                                                                                                    2019-079166

XXXXXXXXXX, 2019

RE:   Advance Income Tax Ruling
         XXXXXXXXXX

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 additional information provided in your letters and in various email correspondence as well as information provided in our telephone conversations (XXXXXXXXXX).

PRELIMINARY MATTERS

To the best of your knowledge, and that of the responsible officers of the above-noted taxpayers, none of the proposed transactions or issues involved in this ruling request are the same as or substantially similar to transactions or issues that are:

(a)   in a previously filed tax return of any of the above-noted taxpayers or a related person and:

i.    being considered by the CRA in connection with such return;

ii.   under objection by any of the above-noted taxpayers or a related person; or

iii.  the subject of a current or completed court process involving any of the above-noted taxpayers or a related person; or

(b)   the subject of a ruling request previously considered by the Income Tax Rulings Directorate.

Unless otherwise stated, all references herein to a part, section, subsection, paragraph, subparagraph, clause or subclause is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended (the “Act”), or the Income Tax Regulations, C.R.C., c.945 (the “Regulations”), as appropriate, and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

In this ruling application, unless otherwise specified, the following terms have the meanings specified below:

“adjusted cost base” or “ACB” means “adjusted cost base” as defined in section 54;

“BCA” means the XXXXXXXXXX;

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

“capital property” has the meaning assigned by section 54 and subsection 248(1);

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

“dividend refund” has the meaning assigned to that term in subsection 129(1);

“ERDTOH” means eligible refundable dividend tax on hand and has the meaning assigned to that term by subsection 129(4);

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

“FMV” means fair market value, being the highest price available in an open and unrestricted market between informed prudent parties acting at arm’s length and without compulsion to act, expressed in terms of money;

“Holdco 1” means XXXXXXXXXX, a corporation existing under the BCA;

“NERDTOH” means non-eligible refundable dividend tax on hand and has the meaning assigned to that term by subsection 129(4);

“Opco 1” means XXXXXXXXXX, a corporation existing under the BCA;

“Opco 2” means XXXXXXXXXX, a corporation existing under the BCA;

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

“Paragraph” means a numbered paragraph in this letter;

“Parent 1” means XXXXXXXXXX;

“Parent 2” means XXXXXXXXXX;

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

“Promissory Note 1” means the non-interest bearing demand promissory note issued by Opco 1 to Opco 2 in the amount of $XXXXXXXXXX, as described in Paragraph 27;

“Promissory Note 2” means the non-interest bearing demand promissory note issued by Opco 1 to Holdco 1 in the amount of $XXXXXXXXXX, as described in Paragraph 28;

“Promissory Note 3” means the non-interest bearing demand promissory note issued by Holdco1 to Opco 1 in the amount of $XXXXXXXXXX, as described in Paragraph 29;

“Promissory Note 4” means the non-interest bearing demand promissory note issued by Opco 2 to Holdco 1 in the amount of $XXXXXXXXXX, as described in Paragraph 30;

“Promissory Note 5” means the non-interest bearing demand promissory note issued by Holdco 1 to Opco 2 in the amount of $XXXXXXXXXX, as described in Paragraph 31;

“Proposed Transactions” means the proposed transactions described in Paragraphs 17 to 33;

“related group” has the meaning assigned by subsection 251(4);

“related persons” has the meaning assigned by subsection 251(2), and where applicable, as modified for the purposes of section 55 by paragraph 55(5)(e);

“resident of Canada” means resident of Canada for the purposes of the Act;

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

“Share and Property Transfers” means the steps described in Paragraphs 17 to 26;

“Share Redemptions” means the transactions described in Paragraphs 27 to 31;

“Sibling 1” means XXXXXXXXXX;

“Sibling 2” means XXXXXXXXXX;

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

“Spouse 1” means XXXXXXXXXX; and

“Spouse 2” means XXXXXXXXXX.

FACTS

1.    Parent 1 is an individual resident in Canada and is the spouse of Parent 2, who is also an individual resident in Canada.

2.    Parent 1 and Parent 2 are the parents of Sibling 1 and Sibling 2.

3.    Sibling 1 is an individual resident in Canada.  Sibling 1 and Spouse 1, who is also an individual resident in Canada, are married.

4.    Sibling 2 is an individual resident in Canada.  Sibling 2 and Spouse 2, who is also an individual resident in Canada, are married.

5.    Opco 1 is a CCPC that was incorporated by Parent 1 and Parent 2 on XXXXXXXXXX.  It carries out XXXXXXXXXX.  The significant assets of Opco 1 include: XXXXXXXXXX.

6.    The authorized share capital of Opco 1 consists of the following: (i) unlimited Class A voting common shares; (ii) unlimited Class B non-voting common shares; (iii) unlimited Class C voting common shares; (iv) unlimited Class D non-voting common shares; (v) unlimited Class E voting common shares; (vi) unlimited Class F non-voting, redeemable, retractable preferred shares; (vii) unlimited Class G non-voting, redeemable, retractable preferred shares; (viii) unlimited Class H voting, redeemable, retractable preferred shares; (ix) unlimited Class I non-voting, redeemable, retractable preferred shares; and (x) unlimited Class J non-voting, redeemable, retractable preferred shares.  The following chart illustrates the current issued and outstanding shares of Opco 1:

Issued Share Capital of Opco 1

Shareholder       Number and Class of Shares            ACB           PUC

Parent 1          XXXX Class I preferred shares            XXXX         XXXX
                        (redeemable at $XXXX/share)

                        XXXX Class H preferred shares          XXXX        XXXX
                        (redeemable at $XXXX/share)

Parent 2          XXXX Class I preferred shares            XXXX        XXXX
                        (redeemable at $XXXX/share)

Sibling 1          XXXX Class I preferred shares            XXXX        XXXX
                        (redeemable at $XXXX/share)

Spouse 1          XXXX Class I preferred shares            XXXX       XXXX
                         (redeemable at $XXXX/share)

Sibling 2            XXXX Class A common shares           XXXX       XXXX

                          XXXX Class I preferred shares            XXXX       XXXX
                          (redeemable at $XXXX/share)

Spouse 2          XXXX Class A common shares            XXXX        XXXX

                         XXXX Class I preferred shares             XXXX         XXXX
                         (redeemable at $XXXX/share)

7.    The shares of Opco 1 are capital property to its shareholders.

8.    Parent 1 has controlled Opco 1 since it was incorporated.

9.    Holdco 1 is a CCPC and was incorporated on XXXXXXXXXX. It is a holding company and the only assets of Holdco 1 are the shares of Opco 2 and cash.  It has a XXXXXXXXXX year end.

10.   The authorized share capital of Holdco 1 consists of the following: (i) unlimited Class A voting common shares; (ii) unlimited Class B non-voting common shares; (iii) unlimited Class C voting common shares; (iv) unlimited Class D non-voting common shares; (v) unlimited Class E voting common shares; (vi) unlimited Class F non-voting, redeemable, retractable preferred shares; (vii) unlimited Class G non-voting, redeemable, retractable preferred shares; (viii) unlimited Class H voting, redeemable, retractable preferred shares; (ix) unlimited Class I non-voting, redeemable, retractable preferred shares; and (x) unlimited Class J non-voting, redeemable, retractable preferred shares.  The following chart illustrates the current issued and outstanding shares of Holdco 1:

Issued Share Capital of Holdco 1

Shareholder       Number and Class of Shares               ACB         PUC

Parent 1             XXXX Class H preferred shares          XXXX       XXXX
                          (redeemable at $XXXX/share)

                           XXXX Class I preferred shares            XXXX       XXXX
                           (redeemable at $XXXX/share)

Parent 2              XXXX Class I preferred shares            XXXX       XXXX
                            (redeemable at $XXXX/share)

Sibling 1               XXXX Class A common shares           XXXX      XXXX

                             XXXX Class I preferred shares            XXXX      XXXX
                             (redeemable at $XXXX/share)

Spouse 1              XXXX Class C common shares            XXXX      XXXX

                              XXXX Class I preferred shares            XXXX      XXXX
                              (redeemable at $XXXX/share)

Sibling 2                XXXX Class I preferred shares             XXXX      XXXX
                              (redeemable at $XXXX/share)

Spouse 2               XXXX Class I preferred shares             XXXX     XXXX
                              (redeemable at $XXXX/share)

11.   The shares of the Holdco 1 are capital property to its shareholders.

12.   Parent 1 has controlled Holdco 1 since it was incorporated.

13.   Opco 2 is a CCPC and was incorporated by Parent 1, Parent 2 and Sibling 1 on XXXXXXXXXX.  Opco 2 carries on XXXXXXXXXX.  The significant assets of Opco 2 include: XXXXXXXXXX.

14.   The authorized share capital of Opco 2 consists of the following: (i) unlimited Class A voting common shares; (ii) unlimited Class B non-voting common shares; (iii) unlimited Class C voting common shares; (iv) unlimited Class D non-voting common shares; (v) unlimited Class E voting common shares; (vi) unlimited Class F non-voting, redeemable, retractable preferred shares; (vii) unlimited Class G non-voting, redeemable, retractable preferred shares; (viii) unlimited Class H voting, redeemable, retractable preferred shares; (ix) unlimited Class I non-voting, redeemable, retractable preferred shares; and (x) unlimited Class J non-voting, redeemable, retractable preferred shares.  The following chart illustrates the current issued and outstanding shares of Opco 2:

Issued Share Capital of Opco 2

Shareholder       Number and Class of Shares             ACB      PUC

Holdco 1             XXXX Class A common shares         XXXX     XXXX

                           XXXX Class B common shares         XXXX     XXXX

15.   The shares of Opco 2 are capital property to its shareholders.

16.   Parent 1 controls Opco 2, via his shareholdings in Holdco 1.

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, which will be filed within the applicable due dates following the completion of the Proposed Transactions.

Share and Property Transfers

17.   Holdco 1 will exchange the XXXXXXXXXX Class A common shares and XXXXXXXXXX Class B common shares of Opco 2 for XXXXXXXXXX Class H preferred shares and XXXXXXXXXX Class I preferred shares with an aggregate redemption amount and FMV equal to the aggregate FMV of Holdco 1’s XXXXXXXXXX Class A common shares and XXXXXXXXXX Class B common shares.  The XXXXXXXXXX Class H preferred shares of Opco 2 held by Holdco 1 will have a redemption value of $XXXXXXXXXX and the XXXXXXXXXX Class I preferred shares will have a redemption value of $XXXXXXXXXX.  The aggregate cost base and PUC of the shares exchanged will be allocated pro rata to the XXXXXXXXXX Class H preferred shares and XXXXXXXXXX Class I preferred shares by the relative fair market values of those new classes of shares.

18.   Sibling 1 will subscribe for XXXXXXXXXX Class A common shares of Opco 2 for $XXXXXXXXXX/share XXXXXXXXXX) and Spouse 1 will subscribe for XXXXXXXXXX Class C common shares of Opco 2 for $XXXXXXXXXX/share (XXXXXXXXXX).

19.   Sibling 2 will transfer XXXXXXXXXX Class I preferred shares held in Holdco 1 to Opco 1 pursuant to subsection 85(1).  As sole consideration for the transfer, Sibling 2 will receive XXXXXXXXXX Class I preferred shares (non-voting) in Opco 1 redeemable/retractable at $XXXXXXXXXX/share and having an aggregate FMV equal to the aggregate FMV of the Holdco 1 shares so transferred.  Sibling 2 and Opco 1 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 share transfer.  For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital account in respect of the XXXXXXXXXX Class I preferred shares of Opco 1 issued to Sibling 2 will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, in respect of the XXXXXXXXXX Class I preferred shares of Holdco 1 transferred to Opco 1; and (ii) the aggregate ACB to Sibling 2, immediately before the disposition, of such shares, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

20.   Spouse 2 will transfer XXXXXXXXXX Class I preferred shares held in Holdco 1 to Opco 1 pursuant to subsection 85(1).  As sole consideration for the transfer, Spouse 2 will receive XXXXXXXXXX Class I preferred shares (non-voting) in Opco 1 redeemable/retractable at $XXXXXXXXXX/share and having an aggregate FMV equal to the aggregate FMV of the Holdco 1 shares so transferred.  Spouse 2 and Opco 1 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 share transfer.  For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital account in respect of the XXXXXXXXXX Class I preferred shares of Opco 1 issued to Spouse 2 will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, in respect of the XXXXXXXXXX Class I preferred shares of Holdco 1 transferred to Opco 1; and (ii) the aggregate ACB to Spouse 2, immediately before the disposition, of such shares, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

21.   Sibling 1 will transfer XXXXXXXXXX Class I preferred shares held in Opco 1 to Opco 2 pursuant to subsection 85(1).  As sole consideration for the transfer, Sibling 1 will receive XXXXXXXXXX Class I preferred shares (non-voting) in Opco 2 redeemable/retractable at $XXXXXXXXXX/share and having an aggregate FMV equal to the aggregate FMV of the Opco 1 shares so transferred.  Sibling 1 and Opco 2 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 share transfer.  For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital account in respect of the XXXXXXXXXX Class I preferred shares in Opco 2 issued to Sibling 1 will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, in respect of the XXXXXXXXXX Class I preferred shares of Opco 1 transferred to Opco 2; and (ii) the aggregate ACB to Sibling 1, immediately before the disposition, of such shares, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

22.   Spouse 1 will transfer XXXXXXXXXX Class I preferred shares held in Opco 1 to Opco 2 pursuant to subsection 85(1).  As sole consideration for the transfer, Spouse 1 will receive XXXXXXXXXX Class I preferred shares (non-voting) of Opco 2 redeemable/retractable at $XXXXXXXXXX/share and having an aggregate FMV equal to the aggregate FMV of the Opco 1 shares so transferred.  Spouse 1 and Opco 2 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 share transfer.  For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital account in respect of the XXXXXXXXXX Class I preferred shares of Opco 2 issued to Spouse 1 will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, in respect of the XXXXXXXXXX Class I preferred shares held in Opco 1 transferred to Opco 2, and (ii) the aggregate ACB to Spouse 1, immediately before the disposition, of such shares, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

23.   Parent 1 will transfer XXXXXXXXXX Class I preferred shares held in Opco 1 to Holdco 1 pursuant to subsection 85(1).  As sole consideration for the transfer, Parent 1 will receive XXXXXXXXXX Class I preferred shares (non-voting) in Holdco 1 redeemable/retractable at $XXXXXXXXXX/share and having an aggregate FMV equal to the aggregate FMV of the Opco 1 shares so transferred.  Parent 1 and Holdco 1 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 share transfer.  For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital account in respect of the XXXXXXXXXX Class I preferred shares of Holdco 1 issued to Parent 1 will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, in respect of the XXXXXXXXXX Class I preferred shares of Opco 1 transferred to Holdco 1, and (ii) the aggregate ACB to Parent 1, immediately before the disposition, of such shares, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

24.   Parent 2 will transfer XXXXXXXXXX Class I preferred shares of Opco 1 to Holdco 1 pursuant to subsection 85(1).  As sole consideration for the transfer, Parent 2 will receive XXXXXXXXXX Class I preferred shares (non-voting) in Holdco 1 redeemable/retractable at $XXXXXXXXXX/share and having an aggregate FMV equal to the aggregate FMV of the Opco 1 shares so transferred.  Parent 2 and Holdco 1 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 share transfer.  For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital account in respect of the XXXXXXXXXX Class I preferred shares of Holdco 1 issued to Parent 2 will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, in respect of the XXXXXXXXXX Class I preferred shares of Opco 1 transferred to Holdco 1, and (ii) the aggregate ACB to Parent 2, immediately before the disposition, of such shares, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

25.   Sibling 1 will transfer XXXXXXXXXX Class I preferred shares held in Holdco 1 to Opco 2 pursuant to subsection 85(1).  As sole consideration for the transfer, Sibling 1 will receive XXXXXXXXXX Class I preferred shares (non-voting) in Opco 2 redeemable/retractable at $XXXXXXXXXX/share and having an aggregate FMV equal to the aggregate FMV of the Holdco 1 shares so transferred.  Sibling 1 and Opco 2 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 share transfer.  For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and(ii).

The amount added to the stated capital account in respect of the XXXXXXXXXX Class I preferred shares of Opco 2 issued to Sibling 1 will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, in respect of the XXXXXXXXXX Class I preferred shares of Holdco 1 transferred to Opco 2, and (ii) the aggregate ACB to Sibling 1, immediately before the disposition, of such shares, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

26.   Opco 1 will transfer XXXXXXXXXX to Holdco 1 pursuant to subsection 85(1).  As sole consideration for the transfer, Opco 1 will receive XXXXXXXXXX Class I preferred shares (non-voting) in Holdco 1 redeemable/retractable at $XXXXXXXXXX/share and having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX so transferred.  Opco 1 and Holdco 1 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 assets from Opco 1 to Holdco 1.  The agreed amount will be limited to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital in respect of the XXXXXXXXXX Class I preferred shares of Holdco 1 issued to Opco 1 will not exceed the maximum amount permitted to be added to the PUC of the shares, having regard to subsection 85(2.1).

Share Redemptions

27.   Opco 1 will redeem the XXXXXXXXXX Class I preferred shares issued to Opco 2 in Paragraphs 21 and 22 above for an amount equal to their FMV.  As sole consideration for the redemption of these shares, Opco 1 will issue Promissory Note 1 to Opco 2 which will have a principal amount and FMV equal to the aggregate FMV and the redemption amount of the XXXXXXXXXX Class I preferred shares of Opco 1 so redeemed and Opco 2 will accept Promissory Note 1 as payment in full for the preferred shares so redeemed.

28.   Opco 1 will redeem the XXXXXXXXXX Class I preferred shares issued to Holdco 1 in Paragraphs 23 and 24 above for an amount equal to their FMV.  As sole consideration for the redemption of these shares, Opco 1 will issue Promissory Note 2 to Holdco 1 which will have a principal amount and FMV equal to the aggregate FMV and the redemption amount of the XXXXXXXXXX Class I preferred shares of Opco 1 so redeemed and Holdco 1 will accept Promissory Note 2 as payment in full for the preferred shares so redeemed.

29.   Holdco 1 will redeem the XXXXXXXXXX Class I preferred shares issued to Opco 1 in Paragraphs 19, 20 and 26 above for an amount equal to their FMV.  As sole consideration for the redemption of these shares, Holdco 1 will issue Promissory Note 3 to Opco 1 which will have a principal amount and FMV equal to the aggregate FMV and the redemption amount of the XXXXXXXXXX Class I preferred shares of Holdco 1 so redeemed and Opco 1 will accept Promissory Note 3 as payment in full for the preferred shares so redeemed.

30.   Opco 2 will redeem the XXXXXXXXXX Class I preferred shares issued to Holdco 1 in Paragraph 17 above for an amount equal to their FMV.  As sole consideration for the redemption of these shares, Opco 2 will issue Promissory Note 4 to Holdco 1 which will have a principal amount and FMV equal to the aggregate FMV and the redemption amount of the XXXXXXXXXX Class I preferred shares of Opco 2 so redeemed and Holdco 1 will accept Promissory Note 4 as payment in full for the preferred shares so redeemed.

31.   Holdco 1 will redeem the XXXXXXXXXX Class I preferred shares issued to Opco 2 in Paragraph 25 above for an amount equal to their FMV.  As sole consideration for the redemption of these shares, Holdco 1 will issue Promissory Note 5 to Opco 2 which will have a principal amount and FMV equal to the aggregate FMV and the redemption amount of the XXXXXXXXXX Class I preferred shares of Holdco 1 so redeemed and Opco 2 will accept Promissory Note 5 as payment in full for the preferred shares so redeemed.

Set-Off of Notes

32.   Opco 2 will assign the receivable from Promissory Note 1 which was issued to Opco 2 by Opco 1 in Paragraph 27 to Holdco 1 in consideration for the partial set-off of Promissory Note 4 (owed by Opco 2 to Holdco 1).

33.   Immediately following the Share Redemptions and the assignment of the receivable and partial set-off of Promissory Note 4 described in Paragraph 32 above, the following notes will be offset against one another as follows:

a.    Promissory Note 1 (owed by Opco 1 to Opco 2, the receivable of which is assigned by Opco 2 to Holdco 1 as described in Paragraph 32) and Promissory Note 2 (owed by Opco 1 to Holdco 1) will be offset against Promissory Note 3 (owed by Holdco 1 to Opco 1); and

b.    The remainder of Promissory Note 4 (owed by Opco 2 to Holdco 1) will be offset against Promissory Note 5 (owed by Holdco 1 to Opco 2).

The set-offs will be accepted as full payment against the outstanding balance of promissory notes by each holder, the result of which is that all obligations under each such note will be extinguished.

ADDITIONAL INFORMATION

34.   The Proposed Transactions described herein will occur in the order presented, with the exception of the filing of the applicable election forms described in Paragraphs 19 to 26, which will be filed by the applicable due date following the completion of the Proposed Transactions, or unless otherwise indicated in Paragraphs 36 to 38.

35.   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.

36.   The Share and Property Transfers will occur contemporaneously with each other.

37.   The Share Redemptions will occur contemporaneously with each other the day immediately following the day in which the Share Property Transfers are completed.

38.   The set-off of the various notes described in Paragraph 33 will occur contemporaneously with each other but after the assignment of the receivable described in Paragraph 32.

39.   None of the shares described in this letter will be at any time during the 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 agreement” referred to in subsection 112(2.3) as that term is defined in subsection 248(1);

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

d.    issued for consideration that is or includes 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

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).

40.   None of the shares described in this letter will be at any time during the series of events or 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).

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

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to facilitate the succession and estate planning of Parent 1 and Parent 2 which involves the reorganization of the shareholdings of the relevant entities in such a manner such that Parent 1 and Parent 2’s estate is simplified and the growth of the business accrues entirely for the benefit of Sibling 1, Spouse 1, Sibling 2 and Spouse 2.  The Proposed Transactions separate ownership of the Opco 1 assets into separate companies and separate ownership in Opco 1 and Opco 2 such that Sibling 1 and Spouse 1 to own and operate Opco 2 and Sibling 2 and Spouse 2 to own and operate Opco 1.

RULINGS GIVEN

Provided that the above statements of Facts, Proposed Transactions, Additional Information and Purpose of the Proposed Transactions are accurate and constitute a complete disclosure of all relevant information, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A.    The provisions of subsection 51(1) will apply to the exchange of shares of Holdco 1’s XXXXXXXXXX Class A common shares and XXXXXXXXXX Class B common shares of Opco 2 for XXXXXXXXXX Class H preferred shares and XXXXXXXXXX Class I preferred shares of Opco 2 as described in Paragraph 17.

B.    Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in prescribed form and manner within the prescribed time specified in subsection 85(6), subsection 85(1) will apply to the following transfers:

a.    the transfers by Sibling 2 and Spouse 2 of the preferred shares of Holdco 1 held by them to Opco 1, as described in Paragraphs 19 and 20;

b.    the transfers by Sibling 1 and Spouse 1 of the preferred shares of Opco 1 held by them to Opco 2, as described in Paragraphs 21 and 22;

c.    the transfers by Parent 1 and Parent 2 of the preferred shares of Opco 1 held by them to Holdco 1, as described in Paragraphs 23 and 24;

d.    the transfers by Sibling 1 of the preferred shares of Holdco 1 held by him to Opco 2, as described in Paragraph 25; and

e.    the transfers of XXXXXXXXXX by Opco 1 to Holdco 1, as described in Paragraph 26

such that the agreed amounts in respect of the particular property so transferred will be deemed to be the particular transferor’s proceeds of disposition and the particular transferee’s cost of such property pursuant to paragraph 85(1)(a).  For greater certainty, paragraph 85(1)(e.2) will not apply to any of these transfers.

C.    Subsection 84(3) will apply to:

a.    the redemption by Opco 1 of its preferred shares as described in Paragraphs 27 and 28 such that Opco 1 will be deemed to have paid, and each of Opco 2 and Holdco 1 will be deemed to have received;

b.    the redemption by Holdco 1 of its preferred shares as described in Paragraphs 29 and 31 such that Holdco 1 will be deemed to have paid, and each of Opco 1 and Opco 2 will be deemed to have received;

c.    the redemption by Opco 2 of its preferred shares as described in Paragraph 30 such that Opco 2 will be deemed to have paid, and Holdco 1 will be deemed to have received;

a dividend on such shares equal to the amount by which the amount paid by the corporation on such redemption exceeds the PUC in respect of those particular shares immediately before that time.

D.    Each of the dividends described in Ruling C above will be a taxable dividend that:

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 corporation 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 pursuant to paragraph (j) of the definition of proceeds of disposition;

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 is paid such dividend.

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

F.    Subsections 15(1), 56(2) and 246(1), in and of themselves, will not apply to the Proposed Transactions.

G.    Subsection 245(2) will not apply as a result of the Proposed Transactions, in and of themselves, to re-determine the tax consequences in the rulings given above.

These rulings are subject to the limitations and qualifications set out in Information Circular IC 70-6R9 dated April 23, 2019, and are binding on the CRA provided that the Proposed Transactions are completed no later than six months after the date of this letter. The above rulings are based on the law as it reads at the date of this letter and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

OTHER COMMENTS

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

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

(b)   the balance of the CDA, GRIP, or RDTOH of any corporation, including any ERDTOH/NERDTOH balances;

(c)   whether any of the shares described herein constitute shares of a specified class; or

any other tax consequence relating to the facts, additional information, 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, 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.

To the extent that a deemed dividend arises from a corporation redeeming, acquiring or purchasing for cancellation of its shares, a problem of circularity may possibly arise when computing the Part IV tax and the dividend refund of each corporation.  We do not provide any comments on that possible issue.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purposes 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 and 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.

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

Yours truly,

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

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