2000 Ruling 1999-0014853 - MUTUAL FUND CORPORATION WINDING-UP

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether a corporation with three classes of shares will cease to be a mutual fund corporation if it redeems its only class of shares listed on the stock exchange.

Position:

Factual determination as to whether the requirements in the definition of "mutual fund corporation" in subsection 131(8) are met after the redemption.

Reasons:

In order to make the capital gains dividends election under subsection 131(1), a corporation must be a mutual fund corporation throughout the taxation year in which a dividend became payable. However, to be a mutual fund corporation throughout the taxation year, the corporation must also be a public corporation throughout the taxation year. In this case, based on the facts provided, it is our view the corporation would continue to be a public corporation after the redemption provided that the Minister does not designate the corporation not to be a public corporation pursuant to the definition of "public corporation" in subsection 89(1).

XXXXXXXXXX
XXXXXXXXXX 							1999- 001485
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sir:

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 taxpayer. We also acknowledge receipt of your letters dated XXXXXXXXXX.

You advise that to the best of your knowledge and that of the taxpayer referred to above, none of the issues involved in the ruling request is:

I. in an earlier return of the taxpayer or related persons;

II. being considered by a taxation services office or a taxation centre in connection with a previously filed tax return of the taxpayer or related persons;

III. under objection by the taxpayer or related persons;

IV. before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

V. the subject of a ruling previously issued by the Directorate.

In this letter, unless otherwise indicated, all statutory references are to the provisions of the Income Tax Act (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act"), and the following terms have the meanings specified:

a) "A Co" means XXXXXXXXXX,

b) "B Co" means XXXXXXXXXX,

c) "C Co" means XXXXXXXXXX, and

d) "taxable Canadian corporation" has the meaning assigned to that expression by subsection 89(1).

Our understanding of the facts, proposed transactions and their purposes is set out below.

FACTS

1. A Co was established on XXXXXXXXXX as a closed end investment fund to invest in a portfolio consisting of common shares of XXXXXXXXXX. Its fiscal period ends on XXXXXXXXXX of each year. A Co's head office is in XXXXXXXXXX and its tax services office is in XXXXXXXXXX. Its federal business number is XXXXXXXXXX.

2. A Co is a taxable Canadian corporation, a public corporation within the meaning assigned to this expression by subsection 89(1), and a mutual fund corporation within the meaning assigned to this expression by subsection 131(8).

3. The issued and outstanding shares of A Co at XXXXXXXXXX were as follows:

a) XXXXXXXXXX shares

b) XXXXXXXXXX shares

c) XXXXXXXXXX shares

The XXXXXXXXXX shares are owned by B Co, a taxable Canadian corporation. The XXXXXXXXXX shares are listed and trade on the XXXXXXXXXX Stock Exchange. The XXXXXXXXXX shares are owned by C Co, a taxable Canadian corporation. C Co also owns all the XXXXXXXXXX shares of B Co. The XXXXXXXXXX shares currently represent more than 95%, by fair market value, of all the issued shares of the capital stock of A Co.

4. A Co's principal assets consist of shares XXXXXXXXXX. As at XXXXXXXXXX, the fair market value and the adjusted cost base of the XXXXXXXXXX were approximately $XXXXXXXXXX and $XXXXXXXXXX, respectively.

5.

XXXXXXXXXX

6. The rights, restrictions and attributes attaching to the issued and outstanding shares of A Co are described below:

a) XXXXXXXXXX shares

i) Dividends: XXXXXXXXXX.

ii) Retraction: retractable by a shareholder XXXXXXXXXX).

iii) Redemption: redeemable by XXXXXXXXXX.

iv) Priority: XXXXXXXXXX.

b) XXXXXXXXXX shares

i) Dividends: participating dividends in an amount determined at the discretion of A Co's board of directors. XXXXXXXXXX.

ii) Retraction: XXXXXXXXXX may be surrendered for retraction by the shareholder at any time. XXXXXXXXXX.

XXXXXXXXXX

Shareholders are entitled to receive cash or may request XXXXXXXXXX as payment when shares are surrendered for retraction. If a shareholder requests cash, it would be necessary to sell some XXXXXXXXXX to fund the retraction.

iii) Redemption: the XXXXXXXXXX shares may be redeemed by A Co at any time.

iv) Priority: XXXXXXXXXX.

v) Voting Rights: XXXXXXXXXX.

c) XXXXXXXXXX shares

i) Dividends: no stated dividend policy; subject to the discretion of the A Co's board of directors.

ii) Retraction: retractable at any time by the shareholders XXXXXXXXXX.

iii) Priority: XXXXXXXXXX.

iv) Voting Rights: XXXXXXXXXX.

PROPOSED TRANSACTIONS

7. On XXXXXXXXXX, A Co will redeem all of the issued and outstanding XXXXXXXXXX shares for $XXXXXXXXXX per share plus any accrued but unpaid dividends. The cash required to finance the redemption of the XXXXXXXXXX shares will be raised by selling XXXXXXXXXX.

8. The proceeds to be received by B Co from A Co on the redemption of the XXXXXXXXXX shares will be used by B Co to redeem its XXXXXXXXXX shares.

9. A Co will redeem all of its issued and outstanding XXXXXXXXXX shares immediately following or coincident with the redemption of its XXXXXXXXXX shares. The amount payable on the redemption will be equal to the excess of the fair market value of the assets then owned by A Co over the amount of its trade payables and accrued liabilities. In computing the amount of its accrued liabilities, a reasonable provision will be established for the costs anticipated to be incurred in connection with the winding-up. The holder of XXXXXXXXXX shares will be entitled to request that the redemption proceeds be paid in kind (i.e., XXXXXXXXXX having a fair market value equal to the redemption price). XXXXXXXXXX.

10. There will be XXXXXXXXXX issued and outstanding XXXXXXXXXX shares following the redemption of the XXXXXXXXXX shares and the XXXXXXXXXX shares. On or before XXXXXXXXXX, A Co will pay dividends to the holders of the XXXXXXXXXX shares. The aggregate amount of those dividends will be equal to the amount, if any, by which the value of its assets exceed the amount of its liabilities. As a consequence, the fair market value of the XXXXXXXXXX shares will be nominal on XXXXXXXXXX. The XXXXXXXXXX shares will not be retracted or redeemed prior to XXXXXXXXXX. The XXXXXXXXXX shares will represent 100% of the issued and outstanding shares from XXXXXXXXXX until after the end of the XXXXXXXXXX fiscal year.

11. You advise that after that the redemption of the XXXXXXXXXX shares and XXXXXXXXXX shares, A Co will still have some cash on hand. That cash will be invested in short-term money market instruments until XXXXXXXXXX. From XXXXXXXXXX, A Co will not carry on any other activity, undertaking or business.

12. You advise that A Co will not elect in prescribed form pursuant to subparagraph (c)(i) of the definition of "public corporation" in subsection 89(1) not to be a public corporation.

PURPOSE OF PROPOSED TRANSACTIONS

13. The purpose of the proposed transactions is to wind up the operations of A Co in accordance with the terms and conditions of the shares of A Co but still have A Co continue in existence beyond XXXXXXXXXX to allow A Co to take full advantage of the capital gains refund mechanism. The purpose for claiming the capital gains refund is to offset the federal tax otherwise payable in respect of the capital gain from the disposition of the XXXXXXXXXX resulting from the proposed transactions described in 7 and 9 above.

RULING GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and purpose of the proposed transactions, we confirm the following:

Provided A Co otherwise meets the conditions described in subsection 131(8) of the Act and provided that the Minister does not designate A Co not to be a public corporation pursuant to subparagraph (c)(ii) of the definition of "public corporation" in subsection 89(1) of the Act, the implementation of the proposed transactions will not, in and of themselves, cause us to consider that A Co has ceased to meet the conditions described in subsection 131(8) of the Act throughout its fiscal year that will end on XXXXXXXXXX.

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued on December 30, 1996 and is binding on Revenue Canada provided the transactions are carried out by XXXXXXXXXX. This ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch