2020-0852281R3 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), 186, 251(1) and 251(2)

XXXXXXXXXX                                                                                                      2020-085228

Dear XXXXXXXXXX:

      Re:  XXXXXXXXXX(collectively referred to as the “Taxpayers”)

      Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX (the “Request”) in which you requested an advance income tax ruling on behalf of the Taxpayers. 

We understand that to the best of your knowledge and that of the Taxpayers, none of the proposed transactions or issues involved in this Ruling are the same as or substantially similar to transactions or issues that are:

(a)   in a previously filed return of the Taxpayers 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 or a related person;

(c)   under objection by the Taxpayers or a related person;

(d)   the subject of a current or completed court process involving the Taxpayers or a related person; or

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

Unless otherwise noted, all references herein to sections or components thereof are references to the Income Tax Act, RSC 1985, c 1 (5th Supp), as amended (the “Act”), or, where appropriate, the Income Tax Regulations. C.R.C., c. 945, as amended, and all references to monetary amounts are in Canadian dollars.

This document is based solely on the facts and proposed transactions described below. The documentation submitted with the request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

DEFINITIONS

In this letter, unless otherwise noted, the following terms have the meaning specified herein. All references in the singular include the plural.

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

“agreed amount” in respect of a property 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) in respect of the property;

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

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

“CA” means The Corporations Act, XXXXXXXXXX, as amended from time to time and consolidated to the date of this letter;

“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” refers to each of Child 1, Child 2 and Child 3, as may be required in the context, and

“Children” refers to all of Child 1, Child 2 and Child 3;

“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;

“Corporate Shareholder” means XXXXXXXXXX;

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

“CRA” means the Canada Revenue Agency;

“DC” means XXXXXXXXXX;

“DC Voting Common Shares” means the Voting Common Shares in the capital of DC described in Paragraph 6(a);

“DC Class D Shares” means the Class D Shares in the capital of DC described in Paragraph 6(b);

“DC Class C Shares” means the Class C Shares in the capital of DC described in Paragraph 9;

“DC-TC1 Note” refers to the promissory note to be issued by TC1 to DC as described in Paragraph 35(a);

“DC-TC2 Note” refers to the promissory note to be issued by TC2 to DC as described in Paragraph 35(b);

“DC-TC3A Note” refers to the promissory note to be issued by TC3A to DC as described in Paragraph 35(c);

“DC-TC3B Note” refers to the promissory note to be issued by TC3B to DC as described in Paragraph 35(d);

“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 89(1);

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

“eligible refundable dividend tax on hand” or “ERDTOH” has the meaning assigned by subsection 129(4);

“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);

“non-eligible refundable dividend tax on hand” or NERDTOH” has the meaning assigned by subsection 129(4);

“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 and Child 3;

“Predecessor 1” refers to XXXXXXXXXX, being one of the predecessor corporations that amalgamated to form DC (as described in Paragraph 5);

“Predecessor 2” refers to XXXXXXXXXX, being one of the predecessor corporations that amalgamated to form DC (as described in Paragraph 5);

“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 13 to 40;

“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;

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

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

“Shareholders’ Agreement” refers to that Shareholders’ Agreement made among the shareholders of DC referred to in Paragraph 8;

“SIN” means social insurance number;

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

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

“Subco” means XXXXXXXXXX;

“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 16;

“TC1 Common Shares” refers to the shares of TC1 described in Paragraph 17;

“TC1 Note” refers to the promissory note to be issued by DC to TC1 described in Paragraph 38(a);

“TC1 Preferred Shares” refers to the shares of TC1 described in Paragraph 17;

“TC1 Voting Shares” refers to the shares of TC1 described in Paragraph 17;

“TC2” refers to the corporation to be incorporated described in Paragraph 16;

“TC2 Common Shares” refers to the shares of TC2 described in Paragraph 17;

“TC2 Note” refers to the promissory note to be issued by DC to TC2 described in Paragraph 38(b);

“TC2 Preferred Shares” refers to the shares of TC2 described in Paragraph 17;

“TC2 Voting Shares” refers to the shares of TC2 described in Paragraph 17;

“TC3A” refers to the corporation to be incorporated described in Paragraph 16;

“TC3A Common Shares” refers to the shares of TC3A described in Paragraph 17;

“TC3A Note” refers to the promissory note to be issued by DC to TC3A described in Paragraph 38(c);

“TC3A Preferred Shares” refers to the shares of TC3A described in Paragraph 17;

“TC3A Voting Shares” refers to the shares of TC3A described in Paragraph 17;

“TC3B” refers to the corporation to be incorporated described in Paragraph 16;

“TC3B Common Shares” refers to the shares of TC3B described in Paragraph 17;

“TC3B Note” refers to the promissory note to be issued by DC to TC3B described in Paragraph 38(d);

“TC3B Preferred Shares” refers to the shares of TC3B described in Paragraph 17;

“TC3B Voting Shares” refers to the shares of TC3B described in Paragraph 17;

“TransfereeCo” refers individually to TC1, TC2, TC3A and TC3B and ‘TransfereeCos’ refers collectively to TC1, TC2, TC3A and TC3B, as required in the context;

“Transaction Assets” means all of the property of DC except for $XXXXXXXXXX;

“Transaction Date” means the date on which the Proposed Transactions described in Paragraphs 24 to 35 are completed which date will be prior to XXXXXXXXXX;

“Transaction Liabilities” means all of the liabilities of DC; and

“Trust” means the XXXXXXXXXX established by Trust Agreement made the XXXXXXXXXX between XXXXXXXXXX, as Settlor, and Parent, XXXXXXXXXX and XXXXXXXXXX, as Trustees.

FACTS

1.    Child 1, Child 2 and Child 3 are Parent’s three adult children. The three Children and Parent are all residents of Canada.

2.    Corporate Shareholder is a corporation resident in Canada. Parent owns all of the issued voting shares of Corporate Shareholder and is the sole Director and sole Officer (President and Secretary). Parent has always held control of Corporate Shareholder. The other issued shares of Corporate Shareholder are directly or indirectly owned by the Children or Parent.

3.    Immediately prior to XXXXXXXXXX:

a)    The shareholders of Predecessor 1 were Corporate Shareholder with XXXXXXXXXX Class D Shares (with XXXXXXXXXX vote per each Class D Share) and the Trust with XXXXXXXXXX Voting Common shares (with XXXXXXXXXX vote per each Voting Common Share). The Redemption Amount per Class D Share of Predecessor 1 was the amount of $XXXXXXXXXX; and

b)    Predecessor 1 owned all of the issued and outstanding shares of Predecessor 2, being XXXXXXXXXX Voting Common Shares (with XXXXXXXXXX vote per each Voting Common Share).

4.    The capital beneficiaries of the Trust have always included Parent and Child 1, Child 2 and Child 3. Pursuant to a resolution passed on the XXXXXXXXXX, the trustees of the Trust resolved inter alia as follows to distribute to each of Child 1, Child 2 and Child 3, as capital beneficiaries of the Trust, XXXXXXXXXX and XXXXXXXXXX Voting Common Shares in the capital of Predecessor 1.

5.    DC is the corporation formed by the amalgamation of Predecessor 1 and Predecessor 2 on XXXXXXXXXX under the laws of the Province of XXXXXXXXXX. DC files its income tax returns at XXXXXXXXXX, is a TCC and a CCPC, and DC’s taxation year ends on XXXXXXXXXX. At the time of the amalgamation of Predecessor 1 and Predecessor 2:

a)    Corporate Shareholder owned XXXXXXXXXX Class D Shares of Predecessor 1 (with XXXXXXXXXX vote per each Class D Share) and each of Child 1, Child 2 and Child 3 owned XXXXXXXXXX Voting Common Shares of Predecessor 1 (with XXXXXXXXXX vote per each Voting Common Share), being all of the issued and outstanding shares of Predecessor 1; and

b)    Predecessor 1 owned all of the issued and outstanding shares of Predecessor 2, being XXXXXXXXXX Voting Common Shares (with XXXXXXXXXX vote per each Voting Common Share).

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

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

(i)   entitled to XXXXXXXXXX vote for each share held at all meetings of Shareholders of DC except meetings at which, pursuant to the CA, only holders of a specified class of shares are entitled to vote; and

(ii)  entitled to non-cumulative dividends if declared by the Directors of DC in an amount to be determined by and in the discretion of the Directors of DC (subject to liquidity requirements).

b)    Class D Shares (the “DC Class D Shares”):

(i)   entitled to XXXXXXXXXX vote for each share held at all meetings of Shareholders of DC except meetings at which, pursuant to the CA, only holders of a specified class of shares are entitled to vote;

(ii)  entitled to non-cumulative dividends if declared by the Directors of DC in an amount to be determined by and in the discretion of the Directors of DC Corporation, provided such amount shall not in any one financial year be greater than XXXXXXXXXX per cent of the redemption amount per share (subject to liquidity requirements); and

(iii) redeemable by DC for $XXXXXXXXXX per share.

7.    The current shareholders of DC are as follows:

a)    Corporate Shareholder: XXXXXXXXXX DC Class D Shares which have an aggregate redemption amount, FMV, PUC and ACB of $XXXXXXXXXX;

b)    Child 1: XXXXXXXXXX DC Voting Common Shares which have an aggregate PUC and ACB of $XXXXXXXXXX;

c)    Child 2: XXXXXXXXXX DC Voting Common Shares which have an aggregate PUC and ACB of $XXXXXXXXXX; and

d)    Child 3: XXXXXXXXXX DC Voting Common Shares which have an aggregate PUC and ACB of $XXXXXXXXXX.

All the shareholders of DC own their shares of DC as capital property.

8.    Child 1, Child 2, Child 3 and DC (but not the Corporate Shareholder) are parties to a Shareholders’ Agreement as confirmed by a Confirmation Agreement (collectively, the “Shareholders’ Agreement”) in respect of DC. The material terms of the Shareholders’ Agreement are summarized as follows:

a)    Subject to certain permitted transfers on death and certain permitted transfers while living, no Child shall sell, assign or transfer or otherwise dispose of, encumber or deal with any of the Shares owned by them except with the prior unanimous written consent of the shareholders of DC

b)    All decisions of the shareholders of DC shall be decided by unanimous vote. If Parent is no longer a director of DC, then all decisions of the board of directors of DC shall require the unanimous approval of the shareholders of DC.

9.    One of the authorized classes of shares of DC is the Class C Shares (the “DC Class C Shares”). No DC Class C shares have ever been issued by DC. The DC Class C Shares are 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.

10.   Parent, who is XXXXXXXXXX years old and is in reasonable health, has control of DC by virtue of owning all of the issued voting shares of Corporate Shareholder, which in turn has control of DC by owning the DC Class D Shares. Parent is the sole Officer and Director of DC, makes all decisions regarding DC and manages its investments by himself. Parent is a sophisticated investor and businessperson. Parent used to be a practising lawyer.

11.   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 the purposes of the Act. As of XXXXXXXXXX, DC’s assets are comprised of the following: cash, marketable securities, accounts receivable and an investment in Subco. Cash and marketable securities comprised in excess of XXXXXXXXXX% of DC’s assets by recorded book value on XXXXXXXXXX. DC holds the assets as capital property. DC’s liabilities consist of payables and accruals, a promissory note payable, income taxes payable and a shareholder loan. The liability recorded as due to corporate shareholder is a shareholder loan of the Corporate Shareholder.

12.   DC’s NERDTOH, ERDTOH, GRIP and CDA balances as at XXXXXXXXXX were approximately XXXXXXXXXX. 

PROPOSED TRANSACTIONS

13.   The Proposed Transactions will be completed in the sequence described below.

14.   Before the Transaction Date, DC will sell the XXXXXXXXXX Class A shares it holds in Subco to Parent for their FMV of $XXXXXXXXXX.

15.   On or before the Transaction Date, the Shareholders’ Agreement will be terminated in writing by all of the parties thereto.

16.   On or before the Transaction Date, new holding companies, TC1, TC2, TC3A and TC3B, will be incorporated by Parent under the laws of the Province of XXXXXXXXXX.

17.   The authorized capital of each of the TransfereeCos will consist of the following classes of shares: (i) voting participating common shares having XXXXXXXXXX vote per share (respectively, the “TC1 Common Shares”, “TC2 Common Shares”, “TC3A Common Shares” and “TC3B Common Shares”); (ii) voting non-participating special shares with a redemption amount of $XXXXXXXXXX per share and having XXXXXXXXXX vote per share (respectively, the “TC1 Voting Shares”, “TC2 Voting Shares”, “TC3A Voting Shares” and “TC3B 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 are issued (respectively the “TC1 Preferred Shares”, “TC2 Preferred Shares”, “TC3A Preferred Shares” and “TC3B Preferred Shares”). 

18.   On the day of the incorporation of TC1:

a)    Parent will subscribe for XXXXXXXXXX TC1 Voting Shares for cash consideration of $XXXXXXXXXX in the aggregate;

b)    Child 1 will subscribe for XXXXXXXXXX TC1 Common Share of TC1 for cash consideration of $XXXXXXXXXX in the aggregate; and

c)    Parent will become the sole Officer and Director of TC1.

19.   On the day of the incorporation of TC2:

a)    Parent will subscribe for XXXXXXXXXX TC2 Voting Shares for cash consideration of $XXXXXXXXXX in the aggregate;

b)    Child 2 will subscribe for XXXXXXXXXX TC2 Common Share for cash consideration of $XXXXXXXXXX in the aggregate; and

c)    Parent will become the sole Officer and Director of TC2.

20.   On the day of the incorporation of TC3A:

a)    Parent will subscribe for XXXXXXXXXX TC3A Voting Shares for cash consideration of $XXXXXXXXXX in the aggregate;

b)    Child 3 will subscribe for XXXXXXXXXX TC3A Common Share for cash consideration of $XXXXXXXXXX in the aggregate; and

c)    Parent will become the sole Officer and Director of TC3A.

21.   On the day of the incorporation of TC3B:

a)    Parent will subscribe for XXXXXXXXXX TC3B Voting Shares for cash consideration of $XXXXXXXXXX in the aggregate; and

b)    Child 3 will subscribe for XXXXXXXXXX TC3B Common Share for cash consideration of $XXXXXXXXXX in the aggregate; and

c)    Parent will become the sole Officer and Director of TC3B.

22.   Before the Transaction Date, DC will sell into the market place some or all of its publicly traded securities that at the time of sale are trading for less than their adjusted cost base.

23.   The transactions described in Paragraphs 24 to 36 will occur on the Transaction Date in the order set out below with each transaction occurring 5 minutes apart consistent with their time dating.

24.   Child 1 will transfer all of Child 1’s DC Voting Common Shares to TC1 in exchange for 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 CA.

25.   Child 2 will transfer all of Child 2’s DC Voting Common Shares to TC2 in exchange for the issuance of additional TC2 Common Shares. A nominal amount will be added to the stated capital account maintained for the TC1 Common Shares as permitted under the CA.

26.   Child 3 will transfer XXXXXXXXXX% of Child 3’s DC Voting Common Shares to TC3A in exchange for the issuance of additional TC3A Common Shares. A nominal amount will be added to the stated capital account maintained for the TC3A Common Shares as permitted under the CA.

27.   Child 3 will transfer XXXXXXXXXX% of Child 3’s DC Voting Common Shares to TC3B in exchange for the issuance of additional TC3B Common Shares. A nominal amount will be added to the stated capital account maintained for the TC3B Common Shares as permitted under the CA.

28.   In respect of each transfer of DC Voting Common Shares described in Paragraphs 24 to 27, Child 1, Child 2 and Child 3 will each make a joint election under subsection 85(1) with TC1, TC2, TC3A and TC3B, 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 Voting Common Shares transferred.

29.   Corporate Shareholder will retain ownership of the DC Class D Shares.

30.   On the Transaction Date, TC1, TC2, TC3A, and TC3B will each exchange their DC Voting Common Shares for DC Class C Shares having an aggregate redemption amount and FMV equal to the aggregate FMV of the DC Voting Common Shares exchanged. The amount added to the stated capital account of the DC Class C Shares issued will be equal to the aggregate stated capital of the DC Voting Common Shares exchanged.

31.   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-third of the aggregate FMV of such assets to TC1 in exchange for:

(i)   The assumption of one-third of the aggregate Transaction Liabilities; 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 Transaction Liabilities assumed by TC1 described in Paragraph 31(a)(i).

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

(i)   The assumption of one-third of the aggregate Transaction Liabilities; 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 Transaction Liabilities assumed by TC2 described in Paragraph 31(b)(i).

c)    DC will transfer Transaction Assets representing one-sixth of the aggregate FMV of such assets to TC3A in exchange for:

(i)   The assumption of one-sixth of the aggregate Transaction Liabilities; and

(ii)  The issuance of TC3A Preferred Shares which will have an aggregate redemption amount and FMV equal to the aggregate FMV of the Transaction Assets transferred to TC3A less the aggregate amount of the Transaction Liabilities assumed by TC3A described in Paragraph 31(c)(i).

d)    DC will transfer Transaction Assets representing one-sixth of the aggregate FMV of such assets to TC3B in exchange for:

(i)   The assumption of one-sixth of the aggregate Transaction Liabilities; and

(ii)  The issuance of TC3B Preferred Shares which will have an aggregate redemption amount and FMV equal to the aggregate FMV of the Transaction Assets transferred to TC3B less the aggregate amount of the Transaction Liabilities assumed by TC3B described in Paragraph 31(d)(i).

32.   For greater certainty, for the purposes of the aforesaid transfers of Transaction Assets from DC, any tax accounts, such as the balance of any non-capital losses of DC, net capital losses of DC, or the balance of any ERDTOH, NERDTOH, GRIP or CDA of DC, if any, will not be considered property of DC. 

33.   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 TC3B, as the case may be, will make a joint election within the limits permitted under subsection 85(1) in prescribed form and within the time limit referred to in subsection 85(6). The agreed amount will not be less than 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).

34.   The amount added to the stated capital account maintained for the TC1 Preferred Shares, TC2 Preferred Shares, TC3A Preferred Shares and TC3B Preferred Shares will be equal to the sum of the FMV of each property transferred for which a section 85 election is not made and the agreed amounts in respect of each property transferred for which a section 85 election is made, less the amount of any liability assumed on the transfer of the particular property to the TransfereeCo.

35.   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)    TC3A will redeem the TC3 Preferred Shares in exchange for a demand non-interest bearing promissory note (the “DC-TC3A Note”) having a principal amount and FMV equal to the aggregate FMV and redemption amount of such redeemed shares.

d)    TC3B will redeem the TC3B Preferred Shares in exchange for a demand non-interest bearing promissory note (the “DC-TC3B Note”) having a principal amount and FMV equal to the aggregate FMV and redemption amount of such redeemed shares.

36.   Each of the TransfereeCos will have its first taxation year end at the end of the Transaction Date.

37.   The transactions described in Paragraphs 38 to 39 will occur on the day after the Transaction Date in the order set out below with each transaction occurring 5 minutes apart consistent with their time dating.

38.   On the day after the Transaction Date, DC will redeem its DC Class C Shares held by each of the TransfereeCos as follows:

a)    DC will redeem the DC Class C 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 DC Class C 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 DC Class C Shares held by TC3A in exchange for a demand non-interest bearing promissory note (the “TC3A Note”) having a principal amount and FMV equal to the aggregate FMV and redemption amount of such redeemed shares.

d)    DC will redeem its DC Class C Shares held by TC3B in exchange for a demand non-interest bearing promissory note (the “TC3B Note”) having a principal amount and FMV equal to the aggregate FMV and redemption amount of such redeemed shares.

39.   On the day after the Transaction Date, 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 TC3A Note and the DC-TC3A 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 TC3B Note and the DC-TC3B 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.

40.   Prior to the redemption of the DC Class C Shares of DC held by each of the TransfereeCos, as described in Paragraph 38, that will result in a dividend deemed paid under the Act by DC to the TransfereeCos:

a)    DC will designate in the prescribed manner that the dividend deemed to be paid under the Act by DC to TC1 will be an eligible dividend in an amount equal to the lesser of: (a) one-third of the GRIP balance of DC, and (b) the amount of the dividend deemed to be paid.

b)    DC will designate in the prescribed manner that the dividend deemed to be paid under the Act by DC to TC2 will be an eligible dividend in an amount equal to the lesser of: (a) one-third of the GRIP balance of DC, and (b) the amount of the dividend deemed to be paid. 

c)    DC will designate in the prescribed manner that the dividend deemed to be paid under the Act by DC to TC3A will be an eligible dividend in an amount equal to the lesser of: (a) one-sixth of the GRIP balance of DC, and (b) the amount of the dividend deemed to be paid.

d)    DC will designate in the prescribed manner that the dividend deemed to be paid under the Act by DC to TC3B will be an eligible dividend in an amount equal to the lesser of: (a) one-sixth of the GRIP balance of DC, and (b) the amount of the dividend deemed to be paid.

Subsequent Distribution of ERDTOH/NERDTOH

41.   As soon as possible after the Transaction Date, following receipt of the dividend refund to which DC will become entitled as result of the Proposed Transactions, DC will distribute one-third of such amount to each of TC1 and TC2 and one-sixth of such amount to each of TC3A and TC3B. An agreement will be entered into whereby the TransfereeCos will agree that all other property or liabilities of DC, if any, not known by this time, will be subsequently shared among the TransfereeCos as follows: one-third of such amount(s) to each of TC1 and TC2 and one-sixth of such amount(s) to each of TC3A and TC3B.

Parent’s Will

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

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

b)    All of Parent’s TC2 Voting Shares will be bequeathed to Child 2 or to a trust for Child 2; and

c)    All of Parent’s TC3A Voting Shares and TC3B Voting Shares will be bequeathed to Child 3 or to a trust for Child 3.

43.   The TC1 Voting Shares, TC2 Voting Shares, TC3A Voting Shares and TC3B Voting Shares may be gifted to Parent’s Children or to trusts for them prior to Parent’s death in the event that Parent receives a terminal medical diagnosis.

Wind-Up of DC

44.   After DC files all required income tax returns it will wind-up into Corporate Shareholder.

ADDITIONAL INFORMATION

45.   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 a series of transactions or events that includes the Proposed Transactions.

46.   None of DC, TC1, TC2, TC3A and TC3B 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.

47.   During the implementation of the Proposed Transactions, none of the shares of DC, TC1, TC2, TC3A or TC3B 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).

48.   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).

49.   The PUC and ACB of the DC Class D Shares and DC Common Shares arose from transfers of property to DC in consideration for which such shares were issued.

50.   All of the Transaction Liabilities are legal obligations of DC and are enforceable in accordance with their terms.

51.   Each of DC, TC1, TC2, TC3A and TC3B 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.

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

53.   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.

54.   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 investment assets currently owned by DC, except in the case of death or incapacity.  Parent is in reasonable health and continues to be fully involved in the day-to-day management of the investments of DC.

55.   Parent is highly qualified to manage the investment portfolio of marketable securities owned by DC, while none of the three children have been involved in his businesses or investment decisions and are not commercially sophisticated.

56.   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.

57.   Parent does not intend to transfer his shares in Corporate Shareholder or any of his TC1 Voting Shares, TC2 Voting Shares, TC3A Voting Shares or TC3B Voting Shares other than by way of his will, as described in Paragraph 42 or assign, transfer, delegate, encumber or 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

58.   The purpose of the Proposed Transactions is to divide the Transaction Assets and Transaction Liabilities 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 to inherit, on the death of Parent, control over their respective individual interests in the Transaction Assets subject to their respective individual obligations in the Transaction Liabilities and to hold them in separate holding companies.

59.   The reason that two corporations are being established in respect Child 3 is to accommodate the estate planning objectives of Child 3 with respect to her own two children.

60.   The reason that each of the TransfereeCos will have its first taxation year end at the end of the Transaction Date is to prevent circularity in the calculation of the refund of RDTOH and Part IV tax liability of the TransfereeCos and DC.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes 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 and Child 3 to TC1, TC2, TC3A, TC3B described in Paragraphs 24 to 27; and by DC to TC1, TC2, TC3 and TC4 described in Paragraph 31, 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 24 to 27 to deem any of TC1, TC2, TC3A, or TC3B, as the case may be, to have paid, and Child 1, Child 2 or Child 3, 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, TC3A and TC3B, 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 TC1 Preferred Shares, TC2 Preferred Shares, TC3A Preferred Shares and TC3B Preferred Shares described in Paragraph 35, 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.

C.    By virtue of subsection 84(3), on the redemption of the DC Class C Shares described in Paragraph 38, 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 C Shares exceeds the PUC of such shares immediately before each such redemption.

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

E.    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 D, 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 39 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.    Neither subsection 245(2) nor subsection 55(4) will 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 23, 2019, 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 balance of the NERDTOH, ERDTOH, GRIP, CDA or any other tax account for any corporation described herein; or

c)    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, updated to November 26, 2015.

Yours truly,

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

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