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:
(a) Whether an amount is included in computing income under paragraph 12(1)(x) of the Act.
(b) Whether the taxpayer may make an election pursuant to subsection 53(2.1) of the Act to reduce the cost of shares acquired by the 12(1)(x) amount thereby reducing the adjusted cost base of the property pursuant to paragraph 53(2)(s).
Position:
(a) Yes
(b) Yes
Reasons:
(a) The amount received is considered to be an inducement for purposes of paragraph 12(1)(x).
(b) The amount that would, but for subsection 53(2.1), be included in the taxpayer's income under paragraph 12(1)(x) was received in respect of the cost of a property acquired by the taxpayer in the year.
XXXXXXXXXX 2001-006751
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling - XXXXXXXXXX
We are writing in response to your correspondence of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX.
To the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein are:
(i) dealt with in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or
(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.
DEFINITIONS
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
(b) "ACO" means XXXXXXXXXX;
(c) "BCO" means XXXXXXXXXX;
(d) "EXCHANGE A" means the XXXXXXXXXX;
(e) "CCO" means XXXXXXXXXX;
(f) "EXCHANGE B" means XXXXXXXXXX;
(h) "DCO" means XXXXXXXXXX;
(i) "ECO" means XXXXXXXXXX;
(j) "EXCHANGE C" means XXXXXXXXXX.
STATEMENT OF FACTS
1. ACO is a "public corporation," a "taxable Canadian corporation," and is resident in Canada for purposes of the Act. ACO's tax account/business number is XXXXXXXXXX. It files its tax returns at the XXXXXXXXXX Taxation Services Office. The principal executive offices of ACO are located at XXXXXXXXXX Shares of ACO are listed on EXCHANGE B and EXCHANGE C. ACO and its subsidiaries (the "ACO Group") are engaged XXXXXXXXXX.
2. BCO is a public corporation created under and governed by the laws of XXXXXXXXXX. Shares of BCO are listed on EXCHANGE A. BCO is a non-resident of Canada for purposes of the Act. Its business includes XXXXXXXXXX. At present, BCO and its affiliates (the "BCO Group") are XXXXXXXXXX.
3. XXXXXXXXXX DCO is a public corporation created under and governed by the XXXXXXXXXX Shares of DCO are listed on EXCHANGE A. XXXXXXXXXX.
4. XXXXXXXXXX.
5. ECO is a corporation that is a wholly-owned subsidiary of BCO created under, and governed by, the XXXXXXXXXX. ECO is a non-resident of Canada for purposes of the Act. XXXXXXXXXX.
6. XXXXXXXXXX.
7. ACO intends to acquire ECO from BCO indirectly through CCO, a corporation that will be formed as a wholly-owned subsidiary of ACO under the XXXXXXXXXX CCO will be a non-resident of Canada and a controlled foreign affiliate of ACO for purposes of the Act.
PROPOSED TRANSACTIONS
8. It is proposed that CCO will acquire all of the issued and outstanding shares of ECO from BCO for a purchase price of XXXXXXXXXX. The purchase price is to be satisfied by CCO causing ACO to issue XXXXXXXXXX of ACO common shares to BCO upon closing, and by causing ACO to issue an additional XXXXXXXXXX of ACO common shares to BCO only in the event that it fails to satisfy a covenant included in the purchase agreement, XXXXXXXXXX, with respect to a continuing commercial relationship between the ACO Group and the BCO Group. XXXXXXXXXX
9. ACO will hold the shares of CCO as capital property and CCO will hold the shares of ECO as capital property.
10. XXXXXXXXXX.
11. As consideration for ACO issuing its common shares to BCO and ACO agreeing to the covenant in the purchase agreement, referred to paragraph 8 above, CCO will issue XXXXXXXXXX of CCO common shares to ACO.
PURPOSE OF THE TRANSACTIONS
12. The purpose of the proposed transactions is to facilitate the acquisition of ECO by ACO, indirectly through CCO, while XXXXXXXXXX agreeing to maintain a continuing commercial relationship between the ACO Group and the BCO Group XXXXXXXXXX.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all 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, our rulings are as follows:
A. The XXXXXXXXXX difference between the XXXXXXXXXX of common shares issued by ACO to BCO and the XXXXXXXXXX purchase price of the shares of ECO is an inducement for purposes of paragraph 12(1)(x). As a result, XXXXXXXXXX, but for an election by ACO under subsection 53(2.1), be included in computing ACO's income under paragraph 12(1)(x) for ACO's taxation year that includes the indirect acquisition of ECO through CCO by ACO.
B. ACO may make an election pursuant to subsection 53(2.1) to reduce the cost of the CCO shares acquired by ACO XXXXXXXXXX for purposes of paragraph 53(2)(s). As a result of such an election by ACO under subsection 53(2.1), no amount will be included in computing ACO's income under paragraph 12(1)(x) in respect of the inducement referred to in Ruling A.
These rulings are provided subject to the limitations and qualifications set out in Information Circular 70-6R4 issued by the Canada Customs & Revenue Agency on January 29, 2001 and are binding upon the Agency provided that the proposed transactions are completed on or before XXXXXXXXXX. The rulings are based on the Income Tax Act and Regulations in their present form and do not take into account the effects of any proposed amendments thereto.
Nothing in this ruling should be construed as confirmation, express or implied, of:
(a) the determination of the fair market value of any shares; or
(b) any tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given.
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
.../cont'd
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