2002 Ruling 2002-0149813 - Stock Split and Amalgamation

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 CCRA.

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

Principal Issues:

1. Whether a stock split results in a disposition of shares.

2. Whether the Amalco shares will be "grandfathered shares".

Position:

1. No.

2. Yes.

Reasons:

1. It meets our requirements contained in Interpretation Bulletin IT-65.2. Subsection 87(4.2) is applicable.

XXXXXXXXXX 2002-014981

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re:

Business No.

Taxation Centre
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

You have been advised by your clients that to the best of their knowledge, none of the issues involved in this ruling request:

(i) is in an earlier return;

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return;

(iii) is under objection;

(iv) is before the courts; or

(v) is the subject of a previously issued ruling.

DEFINITIONS

Unless otherwise indicated, all references to a statute are to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof (the "Act").

In this letter, the following terms have the meaning specified:

"CBCA" means the Canada Business Corporations Act, as amended;

XXXXXXXXXX

"adjusted cost base" has the meaning assigned by section 54;

"the Family" means XXXXXXXXXX, an individual who is not a resident of Canada and XXXXXXXXXX, an individual who is a resident of Canada;

"grandfathered share" has the meaning assigned by subsection 248(1);

"paid-up capital" has the meaning assigned by subsection 89(1);

"public corporation" has the meaning assigned by subsection 89(1);

"short-term preferred share" has the meaning assigned by subsection 248(1);

"taxable Canadian corporation" has the meaning assigned by subsection 89(1); and

"taxable preferred share" has the meaning assigned by subsection 248(1).

Our understanding of the facts, purposes of the proposed transactions and the proposed transactions is as follows:

FACTS

1. XXXXXXXXXX ("Aco") is a corporation incorporated under the XXXXXXXXXX. Aco conducts financing and investment activities. The common shares of Aco trade over-the-counter. Aco is a taxable Canadian corporation.

2. The authorized capital of Aco consists of:

? XXXXXXXXXX Class A preferred shares (the "Aco Class A Shares"),

? XXXXXXXXXX Class B preferred shares (the "Aco Class B Shares");

? XXXXXXXXXX Class C preferred shares, issuable in series, the first series of which consists of XXXXXXXXXX Class C preferred shares, Series A (the "Aco Class C Shares");

? an unlimited number of Class D preferred shares, issuable in series, the first series of which consists of XXXXXXXXXX Class D, Series A preferred shares (the "Aco Class D Shares"); and

? an unlimited number of common shares (the "Aco Common Shares").

3. The issued and outstanding share capital of Aco is as follows:

? as of the date hereof, there are XXXXXXXXXX Aco Class B Shares issued and outstanding owned by XXXXXXXXXX. The issued Aco Class B shares were created by Articles of Amendment dated XXXXXXXXXX, and subsequently amended by Articles of Amendment dated XXXXXXXXXX. The holders of the Aco Class B Shares are entitled to receive fixed, preferential, cumulative cash dividends equal to $XXXXXXXXXX times the lesser of XXXXXXXXXX% of the prime rate (as defined in the Articles) and XXXXXXXXXX% per annum. The Aco Class B Shares are redeemable by Aco in exchange for an amount per share equal to the stated value of each such Share. In the event of the liquidation, dissolution or winding-up of Aco, the holders of the Aco Class B Shares are entitled to receive, before any distribution of the assets of Aco among the holders of Aco Class C Shares, Aco Class D Shares or Aco Common Shares, the stated value of the Aco Class B Shares plus all accrued and unpaid dividends and are not entitled to share further in the distribution of the property or assets of Aco. The holders of Aco Class B Shares are entitled, as a class, to a number of votes equal to XXXXXXXXXX% of the total number of votes attaching to all shares of Aco outstanding at such time and each holder of an Aco Class B Share is entitled to a proportionate number of such votes. The paid-up capital of the Aco Class B Shares is $XXXXXXXXXX;

? as of the date hereof, there are XXXXXXXXXX Aco Class D Shares issued and outstanding owned by XXXXXXXXXX. The Aco Class D Shares in their present form were created by Articles of Amendment dated XXXXXXXXXX. The Aco Class D Shares are grandfathered shares under paragraph (a) of the definition in subsection 248(1). Each Aco Class D Share was originally issued for $XXXXXXXXXX per share. The Aco Class D Shares rank after the Aco Class A Shares, the Aco Class B Shares and the Aco Class C Shares and ahead of the Aco Common Shares with respect to the payment of dividends and the return of capital. Dividends on the Aco Class D Shares are paid quarterly at an annual rate of XXXXXXXXXX% of the prime rate (as defined in the Articles) times the original issue price. The Aco Class D Shares participate equally in dividends, share-for-share with the Aco Common Shares after a dividend of XXXXXXXXXX per Aco Common Share is paid in the fiscal year of Aco. In the event of liquidation, dissolution or winding-up of Aco, the holders of the Aco Class D Shares rank after the Aco Class A Shares, the Aco Class B Shares and the Aco Class C Shares. In such event, the holders of Aco Class D Shares are entitled to receive from the assets of Aco, the amount paid for each such Aco Class D Share plus an amount equal to all accrued and unpaid dividends, and after each holder of Aco Common Shares has received $XXXXXXXXXX per share, the holders of Aco Class D Shares are entitled to share equally share-for-share in any further distribution of the assets of Aco. The holders of Aco Class D Shares are not entitled to vote except under certain circumstances, such as resolutions relating to a winding-up or an amalgamation. The paid-up capital of the Aco Class D Shares is $XXXXXXXXXX;

? until the consolidation described in paragraph 8, below, there were XXXXXXXXXX Aco Common Shares issued and outstanding XXXXXXXXXX Aco Common Shares representing XXXXXXXXXX% of the outstanding Aco Common Shares were owned directly or indirectly by the Family. The Aco Common Shares are subject to the preferences of the Aco Class A Shares, the Aco Class B Shares, the Aco Class C Shares, and the Aco Class D Shares. Holders of the Aco Common Shares are entitled to dividends if and when declared by the Board of Directors. (As noted above, if holders of Aco Common Shares receive a dividend of XXXXXXXXXX in a fiscal year of Aco, any additional dividend in such fiscal year shall be paid in equal amounts per share on the issued Aco Class D Shares and Aco Common Shares). Subject to the rights of the other classes, on a dissolution or winding-up of Aco, the holders of Aco Common Shares are entitled to the assets of Aco. (As also noted above, if a holder of Aco Common Shares has received $XXXXXXXXXX per share upon dissolution or winding-up, all subsequent distributions on a dissolution or wind-up are paid in equal amounts per share on the issued Aco Class D Shares and Aco Common Shares). The paid-up capital of the Aco Common Shares is $XXXXXXXXXX.

It is represented that XXXXXXXXXX deal at arm's length with Aco, the Family and with each other.

4. On XXXXXXXXXX, the board of directors passed a resolution declaring a stock dividend of XXXXXXXXXX Aco Class D Shares for each Aco Class D Share held and XXXXXXXXXX Aco Common Shares for each Aco Common Share held. This would have resulted in the issuance of XXXXXXXXXX Class D Shares and approximately XXXXXXXXXX Common Shares. (Prior to the XXXXXXXXXX, resolution, there were XXXXXXXXXX Aco Class D Shares and XXXXXXXXXX Aco Common Shares issued and outstanding). As noted above, the holders of Aco Class D Shares are entitled to share with the holders of Common Shares share-for-share in respect of dividends and in respect of distributions on dissolution and winding-up after the holders of Aco Common Shares receive a dividend of XXXXXXXXXX per Aco Common Share in the fiscal year and after the holders of Aco Common Shares receive $XXXXXXXXXX per Aco Common Share on dissolution or winding-up. Accordingly, the directors understood that the proportions of Aco Common Shares and Aco Class D Shares had to remain the same so that the holders of Aco Class D Shares would not be prejudiced. However, as noted above, the authorized capital of Aco only provided for XXXXXXXXXX Aco Class D Shares. Accordingly, the dividend on the Aco Class D Shares was invalid and after the resolution was passed, there remained XXXXXXXXXX Aco Class D Shares but there were then approximately XXXXXXXXXX Aco Common Shares issued and outstanding as opposed to the XXXXXXXXXX Aco Common Shares which were issued and outstanding prior to the XXXXXXXXXX resolution.

5. XXXXXXXXXX ("Bco") is a corporation incorporated under the CBCA. Bco conducts financing and investment activities. The issued shares of Bco are listed for trading on the XXXXXXXXXX Stock Exchange. Bco is a taxable Canadian corporation and a public corporation.

6. The authorized capital of Bco consists of:

? an unlimited number of dividend shares (the "Bco Dividend Shares");
? an unlimited number of preferred shares (the "Bco Preferred Shares");
? an unlimited number of subordinate voting shares (the "Bco SVS"); and
? an unlimited number of multiple voting shares (the "Bco MVS").

7. The issued and outstanding share capital of Bco is as follows:

? as of the date hereof, there are XXXXXXXXXX Bco Dividend Shares issued and outstanding. The holders of Bco Dividend Shares are not entitled to vote except in respect of special matters, including an amalgamation. The holders of Bco Dividend Shares are entitled to receive cumulative, preferential cash dividends payable semi-annually in an amount equal to XXXXXXXXXX of the product obtained by multiplying XXXXXXXXXX by XXXXXXXXXX% of a floating bank prime rate as defined in the Articles of Bco. These shares are redeemable by Bco after XXXXXXXXXX, at a price of XXXXXXXXXX per share. In the event of liquidation, holders of Bco Dividend Shares are entitled to the payment of XXXXXXXXXX per share before any payments are made to holders of junior shares. The Articles creating the Bco Dividend Shares state that for the purposes of subsection 191(4), the specified amount in respect of a Dividend Share is XXXXXXXXXX. The paid-up capital of the Bco Dividend Shares is $XXXXXXXXXX;

? as of the date hereof, there are XXXXXXXXXX Bco SVS and XXXXXXXXXX Bco MVS issued and outstanding. The Family owns XXXXXXXXXX Bco MVS and XXXXXXXXXX Bco SVS representing XXXXXXXXXX% of the voting interest in Bco. The holders of Bco SVS are entitled to one vote per share. The holders of Bco MVS are entitled to XXXXXXXXXX votes per share. The holders of Bco SVS and Bco MVS are entitled to receive dividends, subject to the prior rights of the holders of the Bco Dividend Shares if, as and when declared by the board of directors of Bco, in equal amounts, and at the same time as the holders of the other class of shares. In the event of liquidation, the holders of Bco MVS and SVS share the remaining property of Bco equally, share-for-share, subject to the preferential distribution to holders of Bco Dividend Shares. Each Bco MVS is convertible at any time into one Bco SVS. The paid-up capital of the Bco SVS is $XXXXXXXXXX and the paid-up capital of the Bco MVS is $XXXXXXXXXX.

8. To correct the error as noted in paragraph 4 above, the Aco Common Shares have been consolidated on the basis of one Common Share for every XXXXXXXXXX issued and outstanding Aco Common Shares. This will result in there being XXXXXXXXXX Aco Class D Shares and XXXXXXXXXX Aco Common Shares issued and outstanding (i.e., the same number as immediately prior to the board of directors resolution on XXXXXXXXXX, described in paragraph 4 above). This resolution was approved by the shareholders of Aco in a meeting which was held on XXXXXXXXXX.

9. On XXXXXXXXXX, the shareholders of Aco passed a resolution authorizing the continuance of Aco from the XXXXXXXXXX to the CBCA. The Articles of Continuation were filed on XXXXXXXXXX.

PROPOSED TRANSACTIONS

10. To properly give effect to the economic intent of the stock dividend of Aco declared on XXXXXXXXXX, the Aco Common Shares and the Aco D Shares will be subdivided on the basis of XXXXXXXXXX for XXXXXXXXXX. The Articles of Incorporation of Aco will be amended to increase the maximum number of Class D preference shares, series A that Aco is authorized to issue to XXXXXXXXXX. As part of the subdivision, the share provisions of the Aco Class D Shares will be amended to take into account the XXXXXXXXXX to XXXXXXXXXX subdivision so that the Aco Class D Share dividend rate of XXXXXXXXXX% of prime rate will be multiplied by the paid-up amount for each Aco Class D Share after the subdivision (i.e., XXXXXXXXXX) and the Aco Class D Share entitlement to additional dividends in a fiscal year of Aco will occur after the holders of Aco Common Shares receive $XXXXXXXXXX per share in any fiscal year of Aco (i.e., XXXXXXXXXX). Similarly, on dissolution and winding-up, the Aco Class D Shares will be entitled to the paid-up amount for each Aco Class D Share after the subdivision, and the entitlement to share in additional assets of the Corporation on dissolution and winding-up will occur after the holder of each Aco Common Share receives XXXXXXXXXX per Aco Common Share (i.e., XXXXXXXXXX).

11. Aco and Bco will merge under the provisions of the CBCA to form an amalgamated corporation ("Amalco"). The authorized capital of Amalco will consist of XXXXXXXXXX Amalco Class A Preferred Shares (the "Amalco Class A Shares"), an unlimited number of Amalco Class B Shares, issuable in series, the first class of which consists of XXXXXXXXXX Amalco Class B Preferred Shares, Series 1 (the "Amalco Class B Shares"), an unlimited number of dividend shares (the "Amalco Dividend Shares"), an unlimited number of subordinated voting shares (the "Amalco SVS") and an unlimited number of multiple voting shares (the "Amalco MVS").

12. The Amalco Class A Shares will have share provisions virtually identical to the Aco Class B Shares, including the right to XXXXXXXXXX% of the total number of votes of Amalco. The Amalco Class B Shares will have share provisions virtually identical to the subdivided Aco Class D Shares described above. (However, the reference to Common Shares in such share provisions will be replaced by a reference to Amalco SVS and Amalco MVS because the Common Shares will be converted to Amalco SVS as described in paragraph 14 below). The Amalco Dividend Shares will have share provisions virtually identical to the Bco Dividend Shares, including the designation of a specified amount under subsection 191(4). The Amalco SVS and MVS will have share provisions virtually identical to the Bco SVS and Bco MVS.

13. The Amalco Class A Shares will rank in priority to all other classes. The Amalco Class B Shares will rank in priority to the Amalco Dividend Shares, the Amalco SVS and the Amalco MVS. The Amalco Dividend Shares will rank in priority to the Amalco SVS and Amalco MVS.

14. Under the provisions of the proposed amalgamation agreement:

(a) each issued Aco Class B Share will be exchanged for one Amalco Class A Share;

(b) each issued Aco Class D Share will be exchanged for one Amalco Class B Share;

(c) each issued Aco Common Share will be exchanged for one Amalco SVS;

(d) each issued Bco Dividend Share will be exchanged for one Amalco Dividend Share;

(e) each issued Bco SVS will be exchanged for XXXXXXXXXX Amalco SVS; and

(f) each issued Bco MVS will be exchanged for XXXXXXXXXX Amalco MVS.

Under the amalgamation, all of the property of Aco and Bco immediately before the amalgamation will become property of Amalco and all of the liabilities of Aco and Bco immediately before the amalgamation will become liabilities of Amalco by virtue of the amalgamation. The Family will own XXXXXXXXXX% of the outstanding Amalco SVS and XXXXXXXXXX% of the outstanding Amalco MVS which in aggregate will represent XXXXXXXXXX% of the total votes attaching to the Amalco SVS and Amalco MVS.

15. Amalco will not issue fractional shares to holders of Bco SVS or to holders of Bco MVS. Where the application of the exchange set out in paragraph 14 above would otherwise result in a shareholder receiving a fractional Amalco share, such shareholder will be entitled to receive the next lowest whole number of Amalco shares.

16. A shareholder of Aco and Bco who votes against certain of the corporate resolutions discussed above, will have a right to exercise dissent rights under the relevant corporate statute.

PURPOSE OF THE PROPOSED TRANSACTIONS

17. The purpose of the consolidation described in paragraph 8 above is to properly give effect to the economic intent of the stock dividends of Aco declared on XXXXXXXXXX. As noted above, the Aco Common Shares must be consolidated on the basis of 1 Aco Common Share for every XXXXXXXXXX Aco Common Shares issued and outstanding so that the holders of the Aco Class D Shares are not prejudiced economically.

18. The purpose of the subdivision described in paragraph 10 above is also to properly give effect to the economic intent of the stock dividend of Aco declared on XXXXXXXXXX . This subdivision will also provide a reasonable exchange ratio in respect of the amalgamation described above in paragraph 11 above. It should be noted that if the Aco Common Shares were not subdivided on the basis of XXXXXXXXXX to XXXXXXXXXX, there may not be a sufficiently large number of Amalco SVS Shares and Amalco MVS Shares for trading on the XXXXXXXXXX Stock Exchange.

19. The purpose of the amalgamation described in paragraph 11 above is to provide improved liquidity for shareholders of each of Aco and Bco. It is expected that the amalgamation will also allow for operational synergies and cost reductions, the benefits of which will accrue to shareholders of each corporation.

RULINGS

Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, purposes of the proposed transactions and proposed transactions, we rule as follows:

A. Provided that there is no change in the paid-up capital of the Aco Common Shares or Aco Class D Shares, or in the interest, rights or privileges of the holders of the Aco Common Shares or Aco Class D Shares on the stock subdivision described in paragraph 10 above:

(i) a holder of Aco Common Shares or Aco Class D Shares will not be regarded as having disposed of such holder's Aco Common Shares or Aco D Shares as the case may be;

(ii) the aggregate adjusted cost base of the subdivided Aco Common Shares and subdivided Aco D Shares will be equal to the aggregate adjusted cost base of such shares held by a holder of such shares immediately before the stock subdivision; and

(iii) neither subsection 84(1) nor 84(3) will apply to deem a holder of Aco Common Shares or Aco Class D Shares to have received a dividend as a result of the stock subdivision.

B. Provided that there is no change in the paid-up capital of the Aco Class D Shares, or in the interest, rights or privileges of the holder of the Aco Class D Shares on the stock subdivision described in paragraph 10 above and provided that the Aco Class D Shares are grandfathered shares:

(i) the subdivided Aco Class D Shares will continue to be grandfathered shares;

(ii) the subdivided Aco Class D Shares will be considered to have been issued at the time the Aco Class D Shares were issued; and

(iii) the subdivided Aco Class D Shares will be considered to have been acquired by a shareholder of Aco who receives such shares at the time of subdivision, at the time the Aco Class D Shares were acquired by such shareholder.

C. Upon the amalgamation described in paragraph 11 above, provided that the terms and conditions of the Amalco Class A Shares are substantially the same as the terms and conditions of the Aco Class B Shares, subsection 87(4.2) will apply for the purposes of applying Parts IV.I and VI.I of the Act and the definitions "short-term preferred share" and "taxable preferred share" such that:

(i) the Amalco Class A Shares will be deemed to have been issued, at the time the Aco Class B Shares were issued;

(ii) the Amalco Class A Shares will be deemed to have been acquired by a shareholder of Amalco who receives such shares at the time of the amalgamation described in paragraph 11 above, at the time the Aco Class B Shares were acquired by such shareholder of Amalco; and

(iii) Amalco will be deemed to be the same corporation as, and a continuation of Aco and Bco.

D. Upon the amalgamation described in paragraph 11 above, provided that the terms and conditions of the Amalco Class B Shares are substantially the same as the terms and conditions of the Aco Class D Shares, subsection 87(4.2) will apply for the purposes of applying Parts IV.I and VI.I of the Act and the definitions "short-term preferred share" and "taxable preferred share" such that:

(i) the Amalco Class B Shares will be deemed to have been issued at the same time as the Aco Class D Shares were issued;

(ii) provided that the Aco Class D Shares were shares described in paragraphs (a), (b), (c), or (d) of the definition "grandfathered share", the Amalco Class B Shares will be deemed to be the same share as the Aco Class D Shares for the purpose of that definition;

(iii) the Amalco Class B Shares will be deemed to have been acquired by a shareholder of Amalco who received such shares at the time of the amalgamation described in paragraph 11, at the time the Aco Class D Share was acquired by such shareholder; and

(iv) Amalco will be deemed to be the same corporation as, and a continuation of Aco and Bco.

E. Upon the amalgamation described in paragraph 11 above, provided that the terms and conditions of the Amalco Dividend Shares are substantially the same as the terms and conditions of the Bco Dividend Shares, subsection 87(4.2) will apply for the purposes of applying Parts IV.I and VI.I and the definitions "short-term preferred share" and "taxable preferred share" such that:

(i) for the purposes of paragraphs 191(4)(d) and (e), the Amalco Dividend Shares will be deemed to have been issued for the same consideration as that for which the Bco Dividend Share was issued and to have been issued for the purpose for which the Bco Dividend Share was issued; and

(ii) for the purposes of subsection 191(4), the Amalco Dividend Share will be deemed to have been issued for consideration having a fair market value equal to the consideration for which the Bco Dividend Share was issued.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Customs and Revenue Agency 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

Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:

(a) the determination of the adjusted cost base, the paid-up capital or fair market value of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other that those described in the rulings given above.

For example, we have not confirmed that the Aco Class D Shares are grandfathered shares.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch