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: Cost of shares acquired as a result of a foreign merger
Position: Cost of shares includes an amount equal to the fair market value of the consideration given to acquire such shares.
Reasons: Cost of property acquired is equal to what was given up to acquire the property
XXXXXXXXXX 2001-009269
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: XXXXXXXXXX ("Canco")
Request for Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted taxpayer.
To the best of your knowledge, and that of the taxpayers named herein, none of the issues involved in this advance income tax ruling request is under objection or appeal or is being considered by any tax services office or taxation centre of the Canada Customs and Revenue Agency in connection with any income tax return already filed.
Except as otherwise noted, all statutory references in this ruling application are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof (the "Act").
Facts
1. Canco is XXXXXXXXXX corporation governed by the Business Corporations Act (XXXXXXXXXX). Canco is a "taxable Canadian corporation" and a "public corporation" within the meaning of subsection 89(1).
2. The federal tax account number of Canco is XXXXXXXXXX. Canco's tax affairs are administered by the CCRA's XXXXXXXXXX Tax Services Office and it files its tax returns at the CCRA's XXXXXXXXXX Tax Services Office. Canco's fiscal year-end is XXXXXXXXXX.
3. Canco's current mailing address is as follows:
XXXXXXXXXX.
4. Canco carries on business as a XXXXXXXXXX company.
5. XXXXXXXXXX ("Targetco") is a corporation incorporated under and governed by the laws of XXXXXXXXXX. The issued and outstanding share capital of Targetco consists of (i) common shares listed for trading on the XXXXXXXXXX Stock Exchange XXXXXXXXXX.
6. XXXXXXXXXX ("Holdco") is a corporation incorporated on XXXXXXXXXX and governed by the laws of XXXXXXXXXX. The issued and outstanding share capital of Holdco consists of XXXXXXXXXX common shares with no par value (the "Holdco Shares"), all of which are owned by Canco. Holdco is a holding company that owns shares of XXXXXXXXXX subsidiaries of Canco.
7. XXXXXXXXXX ("Subco") is a corporation incorporated XXXXXXXXXX and governed by the laws of XXXXXXXXXX. The issued and outstanding share capital of Subco consists of XXXXXXXXXX common shares with a par value of U.S. $XXXXXXXXXX per share (the "Subco Shares"), all of which are owned indirectly by Canco through another XXXXXXXXXX corporation.
8. Canco, Subco and Targetco entered into an agreement and plan of merger (the "Merger Agreement") under the laws of XXXXXXXXXX dated as of XXXXXXXXXX pursuant to which Subco will merge with and into Targetco as described more particularly in paragraph 10 below.
9. Prior to the consummation of the merger as described below, Holdco will acquire all of the Subco Shares so that Subco will become a direct wholly owned subsidiary of Holdco. Holdco will remain a direct wholly owned subsidiary of Canco.
10. Pursuant to the terms of the Merger Agreement and transactions to be undertaken in connection therewith:
(a) Subco will merge with and into Targetco at the effective time ("Effective Time"). The Effective Time is defined as the time at which a certificate of merger is duly filed with the XXXXXXXXXX Secretary of State, which filing shall be made within XXXXXXXXXX business days after the last of the conditions set forth in Section XXXXXXXXXX of the Merger Agreement have been satisfied or waived, or at such other date as the parties may agree and specify in the certificate of merger.
(b) At the Effective Time, Subco will cease to exist as a separate corporation.
(c) At the Effective Time, Targetco will continue as the surviving corporation (the merged entity is hereafter referred to as "Mergeco") and will succeed to and assume all rights, properties, liabilities and obligations of Subco.
(d) At the Effective Time, all of the issued and outstanding common shares of Targetco owned by its shareholders (other than common shares held by Targetco or any wholly owned subsidiary of Targetco or held by Canco or any wholly owned subsidiary of Canco, which will be cancelled) prior to the merger will be cancelled and converted into the right to receive XXXXXXXXXX common shares of Canco for each Targetco common share so converted (the "Conversion Ratio"). XXXXXXXXXX.
(e) Canco will issue common shares to Targetco common shareholders in accordance with the Conversion Ratio. No fractional shares of Canco will be issued upon the merger. Instead, Canco will pay to each holder of Targetco shares who would otherwise be entitled to a fractional share an amount of cash in lieu of such fractional share. XXXXXXXXXX.
(f) At the Effective Time, the Subco Shares (held by Holdco) will be converted into and become one newly issued, fully-paid and non-assessable voting preferred share of Mergeco with a redemption amount and fair market value equal to the fair market value of the Subco Shares immediately before the Effective Time.
(g) At the Effective Time, the Holdco Shares (held by Canco) will be converted into and become one newly issued, fully-paid and non-assessable voting preferred share of Holdco with a redemption amount and fair market value equal to the fair market value of the Holdco Shares immediately before the Effective Time.
(h) At the Effective Time, Holdco will issue a promissory note (the "Holdco Note") to Canco evidencing interest-bearing indebtedness owing by Holdco to Canco, and will issue common shares (the "New Holdco Shares") to Canco, all in consideration for Canco issuing its common shares to Targetco shareholders. The principal amount of the Holdco Note (the "Holdco Note Amount") will be determined prior to the Effective Time. The Holdco Note Amount will not exceed the fair market value of the Targetco shares outstanding immediately before the Effective Time and will take into account the amount of interest-bearing indebtedness that Holdco is able to incur without resulting in the application of XXXXXXXXXX thin capitalization restrictions on the deductibility of interest (although it is anticipated that the Holdco Note Amount will be less than the full amount otherwise permitted under these restrictions). The applicable interest rate on the Holdco Note will also be determined prior to the Effective Time based on prevailing commercial interest rates for similar indebtedness. The number of New Holdco Shares issued to Canco will be equal to the number of Targetco common shares outstanding immediately before the Effective Time (other than common shares held by Targetco or any wholly owned subsidiary of Targetco or held by Canco or any wholly owned subsidiary of Canco, which shares will be cancelled).
(i) At the Effective Time, Mergeco will issue common shares (the "New Mergeco Shares") to Holdco in consideration for Holdco issuing the Holdco Note and the New Holdco Shares to Canco (as described in paragraph 10(h) above). The number of New Mergeco Shares issued to Holdco will be equal to the number of New Holdco Shares issued by Holdco to Canco as described in paragraph 10(h).
(j) The fair market value of the Canco common shares issued by Canco to the former Targetco shareholders under the terms of the Merger Agreement will be an amount equal to the fair market value of each of (i) the aggregate fair market value of the Holdco Note and the New Holdco Shares (the "Holdco Consideration Amount"), and (ii) the aggregate fair market value of the New Mergeco Shares (the "Mergeco Consideration Amount") (that is, in each case, an amount equal to the fair market value of the Targetco common shares outstanding immediately before the Effective Time), less any amounts paid by Canco to former Targetco shareholders in lieu of the issuance of fractional shares.
(k) Canco will add to the stated capital account of the Canco common shares issued to the former Targetco shareholders an amount equal to the Holdco Consideration Amount (which equals the Mergeco Consideration Amount) less any amounts paid by Canco to such shareholders in lieu of the issuance of fractional shares.
(l) XXXXXXXXXX.
Proposed Transactions
11. The following transactions or events will be completed or occur prior to the consummation of the merger:
(a) The shareholders of Targetco must approve the merger in accordance with the laws of XXXXXXXXXX.
(b) All regulatory approvals required to consummate the transactions contemplated by the Merger Agreement must be obtained.
(c) The shares of Canco that are to be issued in the merger must be approved for listing on the XXXXXXXXXX Stock Exchange XXXXXXXXXX.
(d) Various conditions set out in the Merger Agreement as a precondition to the consummation of the merger must be fulfilled or waived.
12. Provided that the conditions set out in paragraph 11 are satisfied or waived, at the effective time Subco will merge into Targetco, in accordance with the terms of the Merger Agreement and the related transactions described in paragraph 10.
13. Immediately following the merger, Holdco will be the sole shareholder of Mergeco, Canco will be the sole shareholder of Holdco and the former shareholders of Targetco will be shareholders of Canco.
Purpose of Proposed Transactions
14. The purpose of the Proposed Transactions is to facilitate the acquisition of Targetco by Canco by means of a XXXXXXXXXX . The form of the reorganization is intended, among other things, to permit a deferral of U.S. taxation for the shareholders of Targetco by ensuring that such shareholders receive shares of Canco as consideration for their shares of Targetco on the merger. XXXXXXXXXX.
Rulings
Provided that the above statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and purposes of the Proposed Transactions we confirm the following:
A. For purposes of computing the adjusted cost base, for purposes of the Act, of the Holdco Note issued to Canco as described in paragraph 10(h), the cost of the Holdco Note will be equal to the Holdco Note Amount.
B. For purposes of computing the adjusted cost base, for purposes of the Act, of the New Holdco Shares issued to Canco as described in paragraph 10(h), the cost of such shares to Canco will be equal to an amount equal to the aggregate of (i) the fair market value, at the Effective Time, of the Canco common shares (and cash in lieu of fractional shares) issued to the shareholders of Targetco, and (ii) the costs incurred by Canco for the purpose of acquiring the New Holdco Shares to the extent that such costs are not deductible by Canco in the year or any subsequent year in computing its income for purposes of the Act, less (iii) the Holdco Note Amount.
C. For purposes of computing the adjusted cost base for purposes of the Act of the New Mergeco Shares issued to Holdco, as described in paragraph 10(i), the cost of such shares to Holdco will be equal to the fair market value, at the Effective Time, of the Holdco Note and New Holdco Shares issued to Canco.
D. Paragraph 51(1)(b) will apply to deem the cost, for purposes of the Act, of the Holdco preferred share described in paragraph 10(g), to be equal to the adjusted cost base to Canco of the Holdco Shares immediately before the Effective Time.
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could affect the rulings provided herein.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 and are binding on the Canada Customs and Revenue Agency provided that the Proposed Transactions are completed by XXXXXXXXXX.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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