2006 Ruling 2006-0169591R3 - XXXXXXXXXX - PUC Reduction

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.

Principal Issues: Whether the distribution of property by a public corporation by way of a PUC reduction is subject to the provisions of subsection 84(2)?

Position: Yes.

Reasons: Meets the requirements of the provision based on the facts.

XXXXXXXXXX 								2006-016959

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Subject: XXXXXXXXXX - Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, as modified by your other correspondence, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. You have advised us that to the best of your knowledge and that of the taxpayer involved none of the issues involved in this ruling request are:

(i) in an earlier return of the taxpayer or any related person;

(ii) being considered by a tax services office ("TSO") or taxation centre ("TC") in connection with a previously filed tax return by the taxpayer or any related person;

(iii) under objection by the taxpayers or any related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The taxpayer has also represented that the proposed transactions described herein will not result in the taxpayer or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to this date of this letter, and unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph, clause or subclause is a reference to the relevant provision, and the Income Tax Act Regulations thereunder are referred to as the "Regulations";

(b) "adjusted cost base" means adjusted cost base as that term is defined in section 54;

(c) "BCA" means the Business Corporations Act (XXXXXXXXXX);

(d) "BN" means the tax identification number assigned by the CRA to the particular entity;

(e) "capital property" means capital property as that term is defined in section 54;

(f) "CNQ" means the Canadian Trading and Quotation System Inc. stock exchange;

(g) "Common Shares" means the common shares of Pubco;

(h) "Contingent Asset" means Pubco's right to receive payments from XXXXXXXXXX as a result of a settlement agreement entered into between Pubco and XXXXXXXXXX and their respective officers and directors on XXXXXXXXXX, in respect of certain outstanding litigation and subject to certain conditions being met. To date Pubco has received payments of $XXXXXXXXXX in respect of the settlement agreement and it is uncertain if any future payments will be received;

(i) "CRA" means the Canada Revenue Agency;

(j) "disposition" means a disposition as defined in subsection 248(1);

(k) "Distributed Cash" means the aggregate amount of cash distributed by Pubco to holders of Common Shares on the Distribution Date, which for greater certainty shall not include the Retained Cash;

(l) "Distributed Property" means the Investments and the Distributed Cash distributed by Pubco to holders of Common Shares on the Distribution Date;

(m) "Distribution Date" means the date the Distributed Property is transferred to the holders of Common Shares;

(n) "Investment Business" means the business carried on by Pubco of investing its funds in XXXXXXXXXX corporations which business commenced on or about XXXXXXXXXX;

(o) "Investments" means the equity investments in XXXXXXXXXX corporations held as of the Distribution Date;

(p) "XXXXXXXXXX Business" means the business that Pubco carried on directly and indirectly through its subsidiaries prior to XXXXXXXXXX , of XXXXXXXXXX , primarily in Canada, with some activities in XXXXXXXXXX;

(q) "OTCBB" means the Over The Counter Bulletin Board, a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities;

(r) "paid-up capital" means paid-up capital as that term is defined in subsection 89(1);

(s) "Paragraph" means a numbered paragraph in this advance tax ruling;

(t) "Proposed Transaction" means the proposed transaction described in Paragraph 8;

(u) "Pubco" means XXXXXXXXXX;

(v) "public corporation" means a public corporation as that term is defined in subsection 89(1);

(w) "Record Date" means the date determined by Pubco on which ownership of a Common Share will entitle holders thereof to a pro rata share of the Distributed Property, which, for greater certainty, will be the Distribution Date;

(x) "Retained Cash" means the amount of cash retained by Pubco after the Distribution Date to pay liabilities and maintain its OTCBB listing, CNQ listing and corporate status, which amount shall be approximately $XXXXXXXXXX;

(y) "special resolution" means a shareholder's resolution described in XXXXXXXXXX the BCA;

(z) "stated capital" means stated capital within the meaning of XXXXXXXXXX the BCA;

(aa) "taxable Canadian corporation" means a taxable Canadian corporation as that term is defined in subsection 89(1); and

(bb) "taxable dividend" means a taxable dividend as that term is defined in subsection 89(1).

FACTS

1. Pubco was incorporated pursuant to the BCA on XXXXXXXXXX. Pubco was formerly known as XXXXXXXXXX prior to XXXXXXXXXX.

2. Pubco is a taxable Canadian corporation and a public corporation. The status of Pubco as a public corporation is due to the fact that its Common Shares were once listed on a "prescribed stock exchange" within the meaning of Regulations 3200 and 3201 and Pubco's status as a public corporation has not been modified since Pubco's Common Shares were delisted in XXXXXXXXXX.

3. The issued and outstanding share capital of Pubco consists of an unlimited number of Common Shares. The Common Shares are currently listed and posted for trading on the OTCBB and the CNQ.

4. There are XXXXXXXXXX Common Shares (XXXXXXXXXX on a fully diluted basis) outstanding and management of Pubco believes that approximately XXXXXXXXXX Common Shares will be outstanding on the Distribution Date. The paid-up capital of each Common Share is not less than $XXXXXXXXXX per Common Share and will not be less than $XXXXXXXXXX per Common Share on the Distribution Date.

5. Historically, Pubco had been involved, directly and indirectly through its subsidiaries, in the XXXXXXXXXX Business.

6. On XXXXXXXXXX, the shareholders of Pubco approved, inter alia, a special resolution authorizing the change of business of Pubco from the XXXXXXXXXX Business to the XXXXXXXXXX Business. Pubco disposed of its last XXXXXXXXXX property in XXXXXXXXXX and does not currently own any XXXXXXXXXX properties XXXXXXXXXX. Since XXXXXXXXXX, the only business carried on by Pubco, other than the activities undertaken in connection with the disposition of its last remaining XXXXXXXXXX properties, is the XXXXXXXXXX Business.

7. The assets of Pubco currently consist of cash, accounts receivable, notes receivable, prepaid expenses and deposits, marketable securities and long-term investments. Pubco's liabilities consist of accounts payable and potentially some corporate tax payable. The total cost of Pubco's assets on XXXXXXXXXX, computed for accounting purposes, was $XXXXXXXXXX. Pubco had an accumulated deficit at that time of $XXXXXXXXXX. Pubco has approximately $XXXXXXXXXX in available non-capital losses and $XXXXXXXXXX in available capital losses as well as balances in certain resource tax pools.

PROPOSED TRANSACTION

8. Subject to the approval of the Pubco shareholders, the grant of the rulings herein and any other regulatory approvals, Pubco will reduce its stated capital, pursuant to a special resolution, in accordance with XXXXXXXXXX the BCA, by an aggregate amount equal to the lesser of (i) the paid-up capital of the Common Shares on the Distribution Date and (ii) the fair market value of the Distributed Property on the Distribution Date. The special resolution will expressly state that Pubco will cease its XXXXXXXXXX Business. Consequently, Pubco will not hold any equity XXXXXXXXXX subsequent to the completion of the Proposed Transactions. Concurrently with the reduction of legal capital, Pubco will distribute, on a pro rata basis, the Distributed Property to the holders of Common Shares as of the Record Date (the "Common Share Capital Return"). The current estimate of the fair market value of the Distributed Property is approximately $XXXXXXXXXX or $XXXXXXXXXX per Common Share.

ADDITIONAL INFORMATION

9. After the completion of the Proposed Transaction, Pubco will pursue other business opportunities other than XXXXXXXXXX business.

10. Pubco will not distribute the Retained Cash, XXXXXXXXXX Property or the Contingent Asset. The Contingent Asset is not assignable without prior consent from the various parties involved in the settlement agreement and as such management of Pubco believes that such property should not be distributed to its shareholders. Management of Pubco also believes that Pubco should retain its corporate status, OTCBB listing and maximize the value of the Contingent Asset inasmuch as such status, listing and Contingent Asset have value.

PURPOSE OF PROPOSED TRANSACTION

11. Management of Pubco believes that Pubco's Common Shares trade at a discount to the fair market value of its underlying properties and that the discount is greater than the discount of other XXXXXXXXXX corporations and accordingly, the discontinuance of Pubco's XXXXXXXXXX Business and the concurrent distribution of the Distributed Property will enhance shareholder value.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transaction, and provided that the Proposed Transaction is completed in the manner described above, our rulings are as set forth below.

A. Subject to the application of subsection 40(3), the payment of the Common Share Capital Return, will not, in and of itself, result in a disposition of a Common Share.

B. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to the Common Share Capital Return, such that Pubco will be deemed to have paid to a particular holder of Common Shares and such holder will be deemed to have received a taxable dividend to the extent, if any, that the aggregate fair market value of the Common Share Capital Return exceeds the amount by which the paid-up capital of such holder's Common Shares is reduced on the distribution.

C. Where a holder of Common Shares holds such shares as capital property, the Common Share Capital Return received by such holder will be deducted in computing the adjusted cost base of such holder's Common Shares pursuant to subparagraph 53(2)(a)(ii), and where the amount of such reduction in the paid-up capital of such holder's Common Shares exceeds the adjusted cost base of the particular holder's Common Shares, the excess will be deemed to be a capital gain of such holder for the year from the disposition of such shares pursuant to subsection 40(3).

D. To the extent that a holder of Common Shares realizes a capital gain as a result of the application of subsection 40(3), the amount of the gain will be added to the adjusted cost base of such shares pursuant to paragraph 53(1)(a).

E. The cost of the interests in the Distributed Property received by a holder of Common Shares on the Common Share Capital Return will be equal to the fair market value of such interests on the Distribution Date and such interests will be considered to be disposed of by Pubco for an amount equal to the fair market value of such interests.

F. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to any of the Proposed Transactions, in an by themselves.

G. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA provided that the Proposed Transactions are completed by XXXXXXXXXX. The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

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

(b) 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, including whether any of the Proposed Transactions would also be included in a series of transactions or events that include other transactions or events that are not described in this letter.

Yours truly,

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