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 transaction meets legislative and administrative requirements. Analysis of three party share exchange. Definition of distribution and permitted exchange.
Position: Transaction meets requirements.
Reasons: Consistent with law and administrative requirements.
XXXXXXXXXX, 2012
XXXXXXXXXX 2011-042544
Attention: XXXXXXXXXX
Re: Advance Income Tax Ruling
XXXXXXXXXX
We are writing in response to your letters of XXXXXXXXXX, (and related emails) in which you requested an advance income tax ruling on behalf of the above-referenced taxpayer. The documents submitted as part of your request are part of this document only to the extent described herein.
You have advised that, to the best of your knowledge and that of the taxpayers involved, none of the issues contained in this letter is:
(a) in an earlier return of XXXXXXXXXX or a related person;
(b) being considered by a tax services office or a taxation centre in connection with a previously filed return of XXXXXXXXXX or a related person;
(c) under objection by XXXXXXXXXX or a related person;
(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(e) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Definitions
Unless otherwise noted, (i) all references herein to sections or components thereof are references to the Act, as amended, or the Regulations, as appropriate, (ii) all references to monetary amounts are in Canadian dollars and (iii) the following terms have the meanings ascribed to them below:
“ACB” means adjusted cost base, as defined in section 54.
“Acquired Corporation” means XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX to be the new holding company of the XXXXXXXXXX group XXXXXXXXXX.
“Acquisition” refers to the acquisition by Foreign Pubco of XXXXXXXXXX the shares of Acquired Corporation on XXXXXXXXXX for $XXXXXXXXXX.
“Act” means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter.
“agreed amount” means the amount agreed on by the transferor and transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1).
“Amalgamation 1” means the amalgamation pursuant to the laws of Canada on XXXXXXXXXX among Canco Predecessor 1, Canco Predecessor 2 (which was a wholly-owned subsidiary of XXXXXXXXXX) and Canco Predecessor 3 (which was a wholly-owned subsidiary of Canco Predecessor 2).
“Amalgamation 2” means the merger on XXXXXXXXXX of XXXXXXXXXX into Foreign Spinco.
“arm’s length” has the meaning assigned by section 251.
“Brandco” means XXXXXXXXXX
“Business A” means the XXXXXXXXXX segments XXXXXXXXXX and the XXXXXXXXXX categories in XXXXXXXXXX as well as the XXXXXXXXXX business conducted in XXXXXXXXXX and the XXXXXXXXXX group’s business of XXXXXXXXXX.
“Business A Segment 1” means the XXXXXXXXXX business carried on in Canada by Canco.
“Business A Segment 2” means the XXXXXXXXXX business carried on in XXXXXXXXXX.
“Business B” means the XXXXXXXXXX.
“Business B Segment 1” means the XXXXXXXXXX business carried on in Canada by Canco.
“Business B Segment 2” means the XXXXXXXXXX business carried on in XXXXXXXXXX.
“Butterfly Percentage” means the proportion, expressed as a percentage, that the net FMV of the business property transferred by Canco to TCo as described in Paragraph 80 is of the net FMV of all the business property of Canco, determined (i) immediately before the transfer by Canco of the Newsub Common Shares to TSub described in Paragraph 80; and (ii) using the principles set out in Paragraphs 73 to 75.
“Canada Group” means the Canco Group and the Forsub Group.
“Canco” means XXXXXXXXXX Canco employs approximately XXXXXXXXXX people.
“Canco Common Shares” means common shares in the capital of Canco.
“Canco Creditor 1” means XXXXXXXXXX.
“Canco Creditor 1 Note” means an interest-bearing note receivable from Canco issued by Canco to Canco Creditor 1 having a principal amount of $XXXXXXXXXX with approximately $XXXXXXXXXX plus accrued and unpaid interest currently owed to Canco Creditor 1 and approximately $XXXXXXXXXX plus accrued and unpaid interest currently owed to Canlp.
“Canco Creditor 2” means XXXXXXXXXX.
“Canco Creditor 2 Note” means a non-interest-bearing note receivable from Canco in the amount of approximately $XXXXXXXXXX and other note receivables from Canco in the amount of approximately $XXXXXXXXXX.
“Canco Group” means Canco and its Canadian subsidiaries, some of which are described in Paragraphs 34 and 35.
“Canco Predecessor 1” means XXXXXXXXXX
“Canco Predecessor 2” means XXXXXXXXXX
“Canco Predecessor 3” means XXXXXXXXXX
“Canco Purchase Note” means a promissory note payable to TCo on demand without interest or fixed terms of repayment, having a principal amount and FMV equal to the aggregate FMV of the common shares purchased for cancellation.
“Canco Sub 1” means XXXXXXXXXX.
“Canco Sub 2” means XXXXXXXXXX.
“Canco Sub 3” means XXXXXXXXXX. Canco Sub 3 is a XXXXXXXXXX limited company existing under the laws of Country 3.
“Canco Sub 4” means XXXXXXXXXX, a ULC existing under the laws of XXXXXXXXXX incorporated on XXXXXXXXXX.
“Canco Sub 5” XXXXXXXXXX
“Canco Sub 6” means XXXXXXXXXX an unlimited company incorporated on XXXXXXXXXX under the laws of Country 4.
“Canco Sub 7” means XXXXXXXXXX, an unlimited company incorporated under the laws of Country 4.
“Canco Sub 8” means XXXXXXXXXX.
“Canco Sub 9” means XXXXXXXXXX, a ULC existing under the laws of XXXXXXXXXX incorporated on XXXXXXXXXX.
“Canco Sub 10” means XXXXXXXXXX, a corporation existing under the First Act.
“Canco Sub 11” means XXXXXXXXXX
“Canlp” means XXXXXXXXXX (a partnership the majority of the partnership interest in which was recently acquired by and is currently held by Canlp Partner).
“Canlp Partner” means XXXXXXXXXX, a wholly-owned subsidiary of Foreign Pubco Sub 1.
“capital property” has the meaning assigned by section 54.
“CDA” means capital dividend account as defined in section 89.
“connected” has the meaning assigned by subsection 186(4).
“cost amount” has the meaning assigned by subsection 248(1).
“Country 1” means XXXXXXXXXX.
“Country 2” means XXXXXXXXXX.
“Country 2 Treaty” means the XXXXXXXXXX
“Country 3” means XXXXXXXXXX
“Country 4” means XXXXXXXXXX
“Country 5” means XXXXXXXXXX.
“CRA” means the Canada Revenue Agency.
XXXXXXXXXX
“depreciable property” has the meaning assigned by subsection 13(21).
“distribution” has the meaning assigned by subsection 55(1).
“dividend rental arrangement” has the meaning assigned by subsection 248(1).
“eligible capital property” has the meaning assigned by section 54.
“eligible property” has the meaning assigned by subsection 85(1.1).
“Exchange” means XXXXXXXXXX.
“External Debt” means the debt that may be issued by Foreign Spinco to arm’s length lenders.
“financial intermediary corporation” has the meaning assigned by subsection 191(1).
“First Act” refers to the XXXXXXXXXX.
“FMV” means fair market value, being the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and without compulsion to act, expressed in term of money.
“Forco” means XXXXXXXXXX, a corporation governed by the laws of Country 5. Forco does not reside in Canada for purposes of the Act and resides in Country 5 for purposes of the application of the XXXXXXXXXX Income Tax Convention.
“Forco Companies” means those corporations, LLCs and partnerships through which Foreign Spinco indirectly owns all of the issued and outstanding shares of Canco.
“Foreign Pubco” means XXXXXXXXXX Foreign Pubco is a corporation governed by the laws of XXXXXXXXXX. Foreign Pubco shares are part of XXXXXXXXXX. Foreign Pubco manages and reports operating results through XXXXXXXXXX. Foreign Pubco manages the operations of XXXXXXXXXX by XXXXXXXXXX, and the operations of XXXXXXXXXX by XXXXXXXXXX. Foreign Pubco’s reportable segments are XXXXXXXXXX.
“Foreign Pubco Brands” means trademarks registered in the name of Foreign Pubco or its subsidiaries. Foreign Pubco Brands include XXXXXXXXXX brands with XXXXXXXXXX and approximately XXXXXXXXXX brands XXXXXXXXXX.
“Foreign Pubco Note” means a promissory note issued by Foreign Pubco, payable to Forco on demand without interest or fixed terms of repayment, having a principal amount and FMV equal to the aggregate FMV of the membership interests in Newco 3 transferred to Foreign Pubco as described in Paragraph 85.
“Foreign Pubco Sub 1” means XXXXXXXXXX.
“Foreign Pubco Sub 2” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX.
“Foreign Pubco Sub 3” means XXXXXXXXXX, which is an LLC governed by the laws of XXXXXXXXXX.
“Foreign Pubco Sub 4” means XXXXXXXXXX, which is an LLC governed by the laws of XXXXXXXXXX.
“Foreign Pubco Sub 5” means XXXXXXXXXX which is an LLC governed by the laws of XXXXXXXXXX.
“Foreign Pubco Sub 6” means XXXXXXXXXX, which is an LLC governed by the laws of XXXXXXXXXX.
“Foreign Pubco Sub 7” means XXXXXXXXXX , which is a corporation governed by the laws of Country 1.
“Foreign Pubco Sub 8” means XXXXXXXXXX.
“Foreign Pubco Sub 9” means XXXXXXXXXX.
“Foreign Spinco” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX.
“forgiven amount” has the meaning assigned by subsections 80(1) and 80.01(1).
“Forlp” means XXXXXXXXXX.
“Forsub” means XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX.
“Forsub Group” means Forlp, Forsub and their subsidiary corporations, some of which are described in Paragraphs 40 to 47.
“guarantee agreement” has the meaning assigned by subsection 112(2.2).
“inventory” has the meaning assigned by subsection 248(1).
“Large Investors” means XXXXXXXXXX which respectively owned approximately XXXXXXXXXX% of the common stock of Foreign Pubco.
“legal capital” in respect of a share of an unlimited liability company means the capital of the company for the purposes of the statute by which the corporation is governed.
“LLC” means a limited liability company.
“LLP” means a limited partnership or a limited liability partnership.
“New Employeeco 1” means XXXXXXXXXX, an LLC formed under the laws of XXXXXXXXXX as a subsidiary wholly-owned corporation of Foreign Spinco.
“New Employeeco 2” means XXXXXXXXXX, an LLC formed under the laws of XXXXXXXXXX as a subsidiary wholly-owned corporation of Foreign Spinco.
“New Holdco” means a corporation incorporated under the laws of Country 5 as a subsidiary wholly-owned corporation of Newco 4.
“New Partnerco” means XXXXXXXXXX, an LLC formed under the laws of XXXXXXXXXX as a subsidiary wholly-owned corporation of Foreign Spinco or an affiliate.
“New Partnership” means a XXXXXXXXXX formed under and governed by the laws of Country 5, the partners of which are Newco 4 and New Partnerco.
“Newco 1” means XXXXXXXXXX, a corporation or LLC incorporated or formed, as the case may be, under the laws of XXXXXXXXXX as a subsidiary wholly-owned corporation of XXXXXXXXXX.
“Newco 2” means XXXXXXXXXX, an LLC formed under the laws of XXXXXXXXXX as a subsidiary wholly-owned corporation of Foreign Pubco Sub 2.
“Newco 3” means XXXXXXXXXX, an LLC formed under the laws of XXXXXXXXXX as a subsidiary wholly-owned corporation of Forco.
“Newco 4” means an LLC to be formed under the laws of XXXXXXXXXX as a subsidiary wholly-owned corporation of Foreign Spinco.
“Newco 5” means XXXXXXXXXX, an LLC formed under the laws of XXXXXXXXXX as a subsidiary wholly-owned corporation of Foreign Spinco.
“Newco 6” means XXXXXXXXXX, an LLC formed under the laws of XXXXXXXXXX as a subsidiary wholly-owned corporation of Brandco.
“Newco 8” means XXXXXXXXXX, a corporation or LLC incorporated or formed, as the case may be, under the laws of XXXXXXXXXX as a subsidiary wholly-owned corporation of Foreign Spinco.
“Newco 9” means XXXXXXXXXX, a corporation or LLC incorporated or formed, as the case may be, under the laws of XXXXXXXXXX as a subsidiary wholly-owned corporation of Foreign Spinco.
“Newco 10” means XXXXXXXXXX, a corporation or LLC incorporated or formed, as the case may be, under the laws of XXXXXXXXXX as a subsidiary wholly-owned corporation of Newco 9.
“Newsub” means XXXXXXXXXX, a corporation incorporated under the provisions of the First Act as a subsidiary wholly-owned corporation of Canco.
“Newsub Common Shares” means common shares in the capital of Newsub.
“Paragraph” refers to a numbered paragraph in this letter.
“Partnership 3” means XXXXXXXXXX, a XXXXXXXXXX governed by the laws of Country 5.
“Partnership 4” means XXXXXXXXXX, which is a XXXXXXXXXX governed by the laws of Country 5.
“Partnership 5” means XXXXXXXXXX, an LLP governed by the laws of XXXXXXXXXX
“Pension Plan” means the following pension plans of Canco:
XXXXXXXXXX
XXXXXXXXXX
“prepaid expenses” means the rights arising out of the prepayment of expenses.
“principal amount” has the meaning assigned by subsection 248(1).
“private corporation” has the meaning assigned by subsection 89(1).
“proceeds of disposition” has the meaning assigned by section 54.
“Products” means XXXXXXXXXX.
“Proposed Transactions” means the transactions described in the Proposed Transactions section of this letter.
“PUC” means paid-up capital which has the meaning assigned by subsection 89(1).
“RDTOH” means refundable dividend tax on hand, within the meaning of subsection 129(3).
“Reassessment” means a proposed assessment for additional tax for taxation years XXXXXXXXXX.
“Redemption Amount” means an amount equal to the aggregate FMV of the consideration paid to TSub for the issuance of a TSub Preferred Share plus any dividend declared but unpaid on that share.
“Regulations” means the Income Tax Act Regulations promulgated under the Act.
“related persons” has the meaning assigned by subsection 251(2).
XXXXXXXXXX
“RFI” means restricted financial institution which has the meaning assigned by subsection 248(1).
“Ruling” means the advance income tax rulings and opinions in this letter.
“short-term preferred share” has the meaning assigned by subsection 248(1).
“significant influence” has the meaning assigned by section 3051.04 of the Accounting Standards for Private Enterprises or by IAS 28 of the International Financial Reporting Standards.
“specified financial institution” has the meaning assigned by subsection 248(1).
“specified investment business” has the meaning assigned by subsection 125(7).
“Spin-Out” means the distribution of the common shares of Foreign Spinco pro rata to the shareholders of Foreign Pubco as a dividend-in-kind.
“stated capital” in respect of the share capital of a corporation has the meaning assigned by the statute by which the corporation is governed.
XXXXXXXXXX
XXXXXXXXXX
“substantial interest” has the meaning assigned by subsection 191(2).
“taxable Canadian corporation” has the meaning assigned by subsection 89(1);
“taxable Canadian property” has the meaning assigned by subsection 248(1).
“taxable dividend” has the meaning assigned by subsection 89(1).
“taxable preferred share” has the meaning assigned by subsection 248(1).
“TCo” means XXXXXXXXXX, a ULC.
“term preferred share” has the meaning assigned by subsection 248(1).
“Three-Party Share Exchange” means the share exchange between Foreign Pubco, Foreign Spinco and Newco 4 as described below in this letter.
“TSub” means XXXXXXXXXX, a ULC.
“TSub Preferred Shares” means the preferred shares in the capital of TSub.
“TSub Redemption Note” means a promissory note issued by TSub on the redemption of the TSub Preferred Shares, payable to Canco on demand without interest or fixed terms of repayment, having a principal amount and FMV equal to the aggregate Redemption Amount of the TSub Preferred Shares so redeemed.
“ULC” means an unlimited liability company.
Facts
1. Foreign Pubco is a holding company that carries on its operations through subsidiaries. Foreign Pubco does not reside in Canada for purposes of the Act. The outstanding common stock of Foreign Pubco is publicly traded and listed on the Exchange. Foreign Pubco is widely held and, to the best of Foreign Pubco's knowledge, except as noted below, no one shareholder or group of related persons owns more than XXXXXXXXXX% and only the Large Investors own more than XXXXXXXXXX% of the common stock of Foreign Pubco.
2. Foreign Pubco undertook the Acquisition of all the shares of Acquired Corporation. The Acquisition was completed on XXXXXXXXXX.
3. On XXXXXXXXXX, Canco Predecessor 1 acquired (i) the shares of Canco Sub 1 from Forco in consideration for shares in the capital of Canco, and (ii) the shares of Canco Predecessor 2 from Canco Creditor 1 in consideration for Canco Creditor 1 Note.
4. On XXXXXXXXXX, Canco was formed on Amalgamation 1. The businesses of Canco Predecessor 1, Canco Predecessor 2 and Canco Predecessor 3 were fully integrated to the operational level. Subsequent to Amalgamation 1 XXXXXXXXXX. All functions of Canco Predecessor 1, Canco Predecessor 2 and Canco Predecessor 3 were brought together.
4.01 Splitting Canco's liabilities and assets requires huge effort by many teams of people. XXXXXXXXXX.
4.1 Forco owns all of the issued and outstanding Canco Common Shares. Forco does not reside in Canada for purposes of the Act . Canco is a Canadian resident, a taxable Canadian corporation and a private corporation. Canco's financial year-end is XXXXXXXXXX.
The authorized share capital of Canco consists of an unlimited number of Canco Common Shares. The Canco Common Shares are not short-term preferred shares nor taxable preferred shares.
5. On XXXXXXXXXX, Canco acquired the shares of Canco Sub 3 from Canlp in consideration for two notes, one in the amount of $XXXXXXXXXX and one in the amount of XXXXXXXXXX$XXXXXXXXXX (subsequently repaid).
6. On XXXXXXXXXX:
(a) Foreign Spinco was formed by Amalgamation 2. Foreign Pubco owns all of the issued and outstanding Foreign Spinco shares (being XXXXXXXXXX shares of common stock). Foreign Spinco does not reside in Canada for purposes of the Act.
(b) Canco
(i) transferred the shares of Canco Sub 3 to Canco Sub 1 in consideration for shares of Canco Sub 1 and a note in the amount of XXXXXXXXXX$XXXXXXXXXX (subsequently repaid);
(ii) contributed the shares of Canco Sub 1 to Forlp (Canco Sub 4 contributed a pro-rata amount of cash); and
(iii) borrowed funds from affiliated companies (subsequently repaid) to make two loans to XXXXXXXXXX, one in the amount of XXXXXXXXXX$XXXXXXXXXX and one in the amount of XXXXXXXXXX$XXXXXXXXXX, which in turn used the funds to make corresponding loans in the same currencies to Forlp, which used the funds to subscribe for shares of Canco Sub 1. Subsequently, on the same date, Canco Sub 1 distributed the shares of Canco Subco 3 to Forlp and Forlp contributed the shares of Canco Sub 1 to Canco Subco 3.
7. On XXXXXXXXXX, Canco Sub 6 acquired the shares of Canco Sub 7 for cash.
8. [Reserved]
9. On XXXXXXXXXX, Foreign Pubco Sub 1 acquired all the issued and outstanding shares of Forco (being XXXXXXXXXX shares of common stock) from XXXXXXXXXX
9.1. According to the Minutes of a Meeting of the Board of Directors of Foreign Pubco, on XXXXXXXXXX, the Board of Directors of Foreign Pubco met to discuss plans and goals in respect of their Strategic Plan. XXXXXXXXXX.
9.2. According to the Minutes of a Meeting of the Board of Directors of Foreign Pubco, on XXXXXXXXXX, the Board of Directors of Foreign Pubco met again XXXXXXXXXX.
9.3. According to the Minutes of a Meeting of the Board of Directors of Foreign Pubco, on XXXXXXXXXX, the Board of Directors of Foreign Pubco met and authorized the formation of a special committee XXXXXXXXXX.
9.4. XXXXXXXXXX, Foreign Pubco XXXXXXXXXX would split into two separately listed public corporations by virtue of a tax-free spin-off XXXXXXXXXX.
10. On XXXXXXXXXX, Canco Sub 6 acquired the shares of Canco Sub 8 for cash.
Foreign Pubco
11. XXXXXXXXXX.
12. XXXXXXXXXX.
Foreign Pubco's Business
13. [Reserved]
14. [Reserved]
15. Foreign Pubco and its subsidiaries are the registered owners of the Foreign Pubco Brands.
Forco Companies
16. Foreign Spinco owns all the issued and outstanding shares of Canco Creditor 2 (being XXXXXXXXXX common shares), which is a corporation governed by the First Act.
Foreign Spinco also owns all of the issued and outstanding stock of Foreign Pubco Sub 2 (being XXXXXXXXXX shares of Class A Voting common stock and XXXXXXXXXX shares of Class B Non-Voting common stock).
17. [Reserved]
18. Foreign Pubco Sub 2 owns all of the issued and outstanding membership interests in Foreign Pubco Sub 3 and Foreign Pubco Sub 4.
19. Foreign Pubco Sub 4 is the founding general partner (with a XXXXXXXXXX% interest) and Foreign Pubco Sub 3 is the founding limited partner (with a XXXXXXXXXX% interest) of Partnership 3.
20. Partnership 3 owns all of the issued and outstanding membership interests in Foreign Pubco Sub 5.
21. Partnership 3 owns all of the issued and outstanding membership interests in Foreign Pubco Sub 6.
22. Foreign Pubco Sub 5 is the limited partner (with a XXXXXXXXXX% interest) and Foreign Pubco Sub 6 is the general partner (with a XXXXXXXXXX% interest) of Partnership 4.
23. Partnership 4 is the limited partner (with a XXXXXXXXXX% interest) and Partnership 3 is the managing partner (with a XXXXXXXXXX% interest) of Partnership 5.
24. Partnership 5 owns all of the issued and outstanding stock of Foreign Pubco Sub 7.
25. Foreign Pubco Sub 7 owns all the issued and outstanding shares (being XXXXXXXXXX shares of common stock) of Acquired Corporation.
26. Acquired Corporation owns all the issued and outstanding shares of Foreign Pubco Sub 8, a corporation governed by the laws of Country 1.
27. Foreign Pubco Sub 8 owns all the issued and outstanding shares of Foreign Pubco Sub 9 (being XXXXXXXXXX shares of common stock), which is a corporation governed by the laws of Country 1.
28. Foreign Pubco Sub 9 owns all the issued and outstanding shares of Foreign Pubco Sub 1 (being XXXXXXXXXX shares of common stock), which is a corporation governed by the laws of Country 1.
Canco Businesses
29. Approximately XXXXXXXXXX% of Canco's employees are employed in Business A Segment 1, XXXXXXXXXX% are employed in Business B Segment 1 and XXXXXXXXXX% of the employees are shared between Business A Segment 1 and Business B Segment 1. XXXXXXXXXX.
30. Canco operates and distributes the Products in XXXXXXXXXX. Canco also XXXXXXXXXX to Foreign Spinco.
31. Canco utilizes XXXXXXXXXX.
32. Brandco owns the majority of the trademarks which Canco uses in its business. In XXXXXXXXXX, Canco paid a royalty of $XXXXXXXXXX to Brandco for the right to use these trademarks, and its predecessor, Canco Predecessor 3, paid a royalty to XXXXXXXXXX of $XXXXXXXXXX on trademarks that are currently also owned by Brandco. Canco also paid approximately $XXXXXXXXXX in royalties to various affiliates in respect of trademarks owned by these entities. Canco Predecessor 3 also paid and received royalties.
33. Canco has the Pension Plans in Canada, some of which are associated to Business A Segment 1 and/or Business B Segment 1.
34. Canco directly owns all of the issued and outstanding shares of companies that include:
(a) Canco Sub 9. Prior to the Country 3 Debt Restructuring, Canco Sub 9 held two note receivables from Forlp, one in the amount of XXXXXXXXXX$XXXXXXXXXX and one in the amount of XXXXXXXXXX$XXXXXXXXXX;
(b) Canco Sub 4, which holds a XXXXXXXXXX% interest in Forlp;
(c) Canco Sub 10, which holds bare legal title to certain real properties beneficially owned by Canco; and
(d) Forsub, a XXXXXXXXXX limited company existing under the laws of Country 3, XXXXXXXXXX.
35. Canco also owns a XXXXXXXXXX% interest in Forlp and XXXXXXXXXX common shares of Canco Sub 11, which holds a non-interest-bearing note receivable from Canco in the amount of approximately $XXXXXXXXXX. XXXXXXXXXX holds the XXXXXXXXXX remaining issued and outstanding shares of Canco Sub 11, in trust for Canco.
36. Foreign Pubco Sub 1 recently acquired all the issued and outstanding shares of Canco Creditor 1 (being XXXXXXXXXX shares of common stock), which was incorporated on XXXXXXXXXX and is a ULC governed by the laws XXXXXXXXXX. Canco Creditor 1 holds a portion of Canco Creditor 1 Note.
37. [Reserved]
38. [Reserved]
39. [Reserved]
Forsub Group
40. Forlp was formed on XXXXXXXXXX and is a limited partnership existing under the laws of Country 3. Forlp is a holding partnership that owns the Country 3 and Country 4 companies.
Forlp owns directly all of the issued and outstanding shares (being XXXXXXXXXX common shares) of Canco Sub 3, a holding company.
41. Canco Sub 3 owns directly all of the issued and outstanding shares (being XXXXXXXXXX common shares) of Canco Sub 1, a holding company.
42. Canco Sub 1 owns directly all of the issued and outstanding shares (being XXXXXXXXXX common shares) of Canco Sub 2, and all of the issued and outstanding shares of XXXXXXXXXX, which owns all of the issued and outstanding shares of XXXXXXXXXX, which is dormant. Canco Sub 1 is a XXXXXXXXXX limited company existing under the laws of Country 3.
43. Canco Sub 2 owns directly all of the issued and outstanding shares (being XXXXXXXXXX common shares) of XXXXXXXXXX, and all of the issued and outstanding shares of XXXXXXXXXX, both of which are dormant. Canco Sub 2 owns shares in the capital of three companies resident in Country 3, as follows:
(a) XXXXXXXXXX Class A preferred shares of XXXXXXXXXX;
(b) XXXXXXXXXX ordinary shares of XXXXXXXXXX; and
(c) XXXXXXXXXX Class A shares of XXXXXXXXXX.
Canco Sub 2 is a XXXXXXXXXX limited company existing under the laws of Country 3.
44. XXXXXXXXXX owns directly all of the issued and outstanding shares (being XXXXXXXXXX common shares) of Canco Sub 5, a holding company for the Country 4 companies, all of the issued and outstanding shares (being XXXXXXXXXX common shares) of XXXXXXXXXX, all of the issued and outstanding shares of XXXXXXXXXX, each of which is dormant, and all of the issued and outstanding shares of XXXXXXXXXX, each of which is in the process of being liquidated and dissolved. XXXXXXXXXX is a XXXXXXXXXX limited company existing under the laws of Country 3.
45. Canco Sub 5 owns directly all of the issued and outstanding shares (being XXXXXXXXXX common shares) of Canco Sub 6, a holding company for the Country 4 companies. Canco Sub 5 was incorporated on XXXXXXXXXX and is a XXXXXXXXXX limited company existing under the laws of Country 3.
46. Canco Sub 6 owns directly all of the issued and outstanding shares (being XXXXXXXXXX common shares) of Canco Sub 7, and all of the issued and outstanding shares (being XXXXXXXXXX common shares) of Canco Sub 8.
47. Canco Sub 7 owns directly all of the issued and outstanding shares of XXXXXXXXXX, which is dormant.
Canadian Loan Restructuring
48. Canco Creditor 1 recently assigned to Foreign Pubco Sub 1 approximately $XXXXXXXXXX of the Canco Creditor 1 Note on a reduction of the stated capital of the common shares of Canco Creditor 1.
Foreign Pubco Sub 1 then contributed the same amount of the Canco Creditor 1 Note to Canlp Partner by way of an assignment of Foreign Pubco Sub 1's interest in the note.
Canlp Partner in turn contributed the same amount of the note to Canlp by way of an assignment of Canlp Partner's interest in the note.
Other Canco Assets and Liabilities
49. In addition to the shares of the subsidiaries described in this letter, the assets of the Canada Group include assets used to carry on Business A Segment 1, Business B Segment 1 and the businesses carried on by the Forsub Group (including XXXXXXXXXX).
50. The liabilities of the Canada Group include (i) accounts payable and other accrued expenses incurred in connection with Business A Segment 1, Business B Segment 1 and the businesses carried on by the Forsub Group; (ii) interest-bearing notes in the aggregate amount of approximately $XXXXXXXXXX plus accrued and unpaid interest payable to Canlp; (iii) the portion of the Canco Creditor 1 Note payable to Canco Creditor 1; (iv) an interest-bearing note in the amount of approximately $XXXXXXXXXX plus accrued and unpaid interest payable to a third party bank; (v) a promissory note in the amount of approximately $XXXXXXXXXX payable by Canco to XXXXXXXXXX, a direct wholly-owned subsidiary of Forco; and (vi) an amount payable to Canco Creditor 2.
51. [Reserved]
Cash Repatriation
52. XXXXXXXXXX.
XXXXXXXXXX. Forlp would use the cash to pay interest on the debt owed by Forlp to Canco Sub 9 and/or distribute the cash to its partners. Canco Sub 9 and Canco Sub 4 would distribute any amounts received to Canco.
To the extent there is excess cash in Canco (including cash received from the Forsub Group), Canco would use the cash to pay interest and/or principal on its notes payable to Canlp and/or Canco Creditor 1.
53. In the XXXXXXXXXX taxation year, the excess cash in the Forsub Group was estimated to be approximately $XXXXXXXXXX. Consistent with corporate practice, before the end of the XXXXXXXXXX taxation year, (i) such amount was distributed up to Forlp, (ii) Forlp used the cash to pay interest on the debt owed by Forlp to Canco Sub 9 and/or distribute the cash to its partners, and (iii) Canco Sub 9 and Canco Sub 4 distributed any received amounts to Canco.
54. In the XXXXXXXXXX taxation year, the excess cash in Canco (including cash to be received from the Forsub Group) was estimated to be approximately $XXXXXXXXXX. Consistent with corporate practice, before the end of the XXXXXXXXXX taxation year, such amount was transferred by Canco (i) in part as an interest payment to Canco Creditor 1, (ii) in part as an interest payment to Canlp, (iii) in part as an interest payment to a third party bank, and (iv) the balance as a principal repayment to Canco Creditor 1 and/or Canlp. Canco Creditor 1 distributed the amount received by it, less applicable income and withholding tax, to Foreign Pubco Sub 1.
Country 3 XXXXXXXXXX Reorganizations
55. The following reorganizations have occurred or are proposed:
(a) Country 3 Debt Restructuring: Canco and its subsidiaries recently undertook a series of transactions to restructure the debt of Forlp, as follows:
(i) Forlp paid the accrued interest on its XXXXXXXXXX-denominated indebtedness to Canco Sub 9, and Canco Sub 9 used the funds to pay dividends to Canco.
(ii) Canco borrowed funds, and used a portion of the borrowed funds to subscribe for additional shares of Canco Sub 4. Canco and Canco Sub 4 made capital contributions to Forlp. Forlp used the contributed funds to repay a portion of the XXXXXXXXXX-denominated note held by Canco Sub 9. Canco Sub 9 used the funds to repay a portion of its XXXXXXXXXX denominated note held by Canco. Canco repaid the funds borrowed by it.
(iii) Canco borrowed additional funds, and used the borrowed funds to make a loan to Forlp. Forlp used these funds to repay the balance of its XXXXXXXXXX-denominated note held by Canco Sub 9. Canco Sub 9 used the funds to repay the balance of its XXXXXXXXXX-denominated note held by Canco. Canco repaid the funds borrowed by it.
(iv) Canco contributed to Canco Sub 9 the new XXXXXXXXXX-denominated note of Forlp for a new XXXXXXXXXX-denominated non-interest bearing promissory note of Canco Sub 9.
(v) Steps similar to those described in subparagraphs (i), (iii) and (iv) were undertaken in respect of the XXXXXXXXXX-denominated notes of Canco Sub 9 and Forlp.
Canco repaid all amounts borrowed by it in the transactions described in this Paragraph on the same day they were borrowed.
(b) Country 4 amalgamation: Canco Sub 8, Canco Sub 7 and the XXXXXXXXXX were amalgamated XXXXXXXXXX.
(c) Country 3 XXXXXXXXXX Reorganization: After the integration of the Foreign Pubco and Acquired Corporation businesses in Country 3, the Country 3 business decided to reorganize itself XXXXXXXXXX. Since XXXXXXXXXX, the legacy Foreign Pubco XXXXXXXXXX. The legacy Foreign Pubco XXXXXXXXXX by Canco Sub 2 but under XXXXXXXXXX. These products were moved to be XXXXXXXXXX.
(d) XXXXXXXXXX Obligation: The indebtedness owed by Canco to XXXXXXXXXX will be amended to change the interest rate on the obligation to a fixed or floating rate and to require cash be paid on a demand for repayment. A new holding company will be incorporated as a corporation under the laws of XXXXXXXXXX. On the incorporation of the new holding company, Forco will subscribe for one or more shares of the new holding company for nominal consideration. A new limited partnership will be formed under the laws of XXXXXXXXXX. The partners of the new limited partnership will be the new holding company (with a XXXXXXXXXX% limited partnership interest) and the Acquired Corporation (with a XXXXXXXXXX% general partnership interest). On the formation of the new limited partnership, the new holding company and the Acquired Corporation will subscribe for membership interests in the new limited partnership for nominal consideration. XXXXXXXXXX will distribute its receivable from Canco to Forco and XXXXXXXXXX may be wound-up. Forco will contribute such receivable to the new holding company in exchange for shares. The new holding company will contribute such receivable to the new limited partnership and the Acquired Corporation will contribute cash to the new limited partnership.
(e) Foreign Spinco will XXXXXXXXXX change its name. Foreign Pubco and certain subsidiaries of Foreign Pubco and Foreign Spinco may also change their names.
(f) A new holding company may be incorporated as a corporation under the laws of XXXXXXXXXX. On the incorporation of the new holding company, Foreign Pubco may subscribe for one or more shares of that company for nominal consideration. Foreign Pubco may subscribe for additional shares of the new holding company to provide additional funds to the new holding company.
(g) XXXXXXXXXX
(h) Canco did apply for a change in its fiscal period so that it has a fiscal year-end prior to the implementation of the transfer described in Paragraph 61. It intends to subsequently apply for a further change in its fiscal period to change back to its existing fiscal period.
(i) The partnership agreement in relation to Forlp may be amended to allow an appropriate allocation of partnership income and loss between Canco and New Sub for the periods that include the transfer described in Paragraph 61.
XXXXXXXXXX
56. XXXXXXXXXX.
CRA Audit
57. On XXXXXXXXXX, the CRA issued a letter notifying Canco that it intends to issue the Reassessment. On XXXXXXXXXX, the CRA informed Canco that it is closing the audit with no adjustment.
Proposed Transactions
58. [Reserved].
Real Estate Holding Corporation
59. The following transfers of legal title will occur:
(a) Canco will transfer to Canco Sub 10 legal title (if held by Canco) to any real property located in XXXXXXXXXX and XXXXXXXXXX located in XXXXXXXXXX the beneficial interest in which is to be transferred to Newsub as described below. In consideration, Canco Sub 10 will pay $1 to Canco. Canco Sub 10 will enter into a nominee agreement whereby it confirms that it is holding legal title to such real property as nominee for and bare trustee of Canco.
The transfer of any such property by Canco to Newsub as described below will be a transfer of beneficial interest only. Immediately after such transfer, the nominee agreement will be amended to confirm that Canco Sub 10 is holding such real property as nominee for and bare trustee of Newsub.
(b) The shares of Canco Sub 10 will be transferred to Newsub as described below.
Newsub
60. Newsub will be incorporated as a corporation under the First Act. Newsub will be a private corporation and a taxable Canadian corporation. The authorized capital of Newsub will consist of an unlimited number of common shares. On the incorporation of Newsub, Canco will subscribe for one or more Newsub Common Shares for nominal consideration.
61. Canco will transfer to Newsub the assets of Canco used in or held in connection with Business B Segment 1, including cash and certain accounts receivable, trade receivables, inventories, prepaid expenses and business assets related to Business B Segment 1, the shares of and receivables from Canco Sub 4, the shares of and receivables from Canco Sub 9, the shares of Forsub, Canco's partnership interest in Forlp and Canco's shares of certain other subsidiaries. As consideration for such property, Newsub will:
(a) if applicable, assume all or a portion of the liabilities of Canco referred to in Paragraphs 50 and 35;
(b) assume an amount of Canco's current liabilities which relate to Business B Segment 1; and
(c) issue additional Newsub Common Shares to Canco, having an aggregate FMV at that time equal to the amount by which the aggregate FMV of all the property transferred to Newsub exceeds the amount of the liabilities assumed by Newsub in (a) and (b) above.
Canco will sublease certain leased premises to Newsub, and Canco and Newsub will enter into a transitional services agreement to share certain XXXXXXXXXX. Newsub will indemnify Canco for any liability incurred by Canco in respect of a guarantee of XXXXXXXXXX. Canco may indemnify Newsub for certain liabilities assumed by Newsub where the parties wish for that liability to be assumed by Newsub for administrative ease or other reasons but to have the burden of the liability remain with Canco.
For purposes of applying the types of property classification in regards to Canco and Newsub, any liability that is assumed by Newsub, but in respect of which Canco provides an indemnity to Newsub, will, to the extent of that indemnity, be treated as a liability of Canco and not of Newsub, and any liability that is retained by Canco, but in respect of which Newsub provides an indemnity to Canco, will, to the extent of that indemnity, be treated as a liability of Newsub and not of Canco.
62. Newsub will jointly elect with Canco, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to each transfer of eligible property to Newsub and in respect of which the Newsub Common Shares have been issued as full or partial consideration therefor as described above. The agreed amount in each election will be as follows:
(a) in the case of capital property (other than depreciable property) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
(c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).
In addition, in each case, the agreed amount will not exceed the FMV of the particular eligible property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b). The amount of any liabilities assumed by Newsub which are allocated to a particular eligible property that is the subject of an election under subsection 85(1) as described herein will not exceed the agreed amount for that particular property. The amount added to the stated capital account maintained for the Newsub Common Shares will equal the amount by which the aggregate cost to Newsub (determined pursuant to subsection 85(1), where relevant) of the properties transferred to Newsub exceeds the aggregate amount of the liabilities assumed by Newsub on that transfer.
Newsub will not elect with Canco to have the rules in section 22 apply to the transfer by Canco of its accounts receivable to Newsub.
63. For the purposes of the joint elections described in Paragraph 62, the reference in subparagraph 85(1)(e)(i) to the "undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" shall be interpreted to mean that proportion of the undepreciated capital cost to Canco of all of the property of that class immediately before the disposition that the FMV at that time of the asset that is transferred is of the FMV at that time of all property of that class.
For the purposes of the joint elections described in Paragraph 62, if Canco and Newsub so indicate in their joint election, the reference in subparagraph 85(1)(d)(i) to "4/3 of the taxpayer's cumulative eligible capital in respect of the business immediately before the disposition" shall be interpreted to mean the proportion of 4/3 of Canco's cumulative eligible capital in respect of its business immediately before the transfer to Newsub that the transferred eligible capital property in respect of the business (based on FMV at that time or the amount of the cumulative eligible capital that is attributable to those assets) is of all of Canco's eligible capital property in respect of the business (based on FMV at that time or the amount of the cumulative eligible capital that is attributable to those assets).
XXXXXXXXXX Restructuring
64. The following steps are being considered for the restructuring in XXXXXXXXXX:
(a) The shares of XXXXXXXXXX, owned by XXXXXXXXXX, an LLC governed by the laws of XXXXXXXXXX, will be transferred up the corporate chain to Foreign Pubco Sub 1. None of the corporations or partnerships in the corporate chain is part of the Canada Group.
(b) Newco 1 will be incorporated as a corporation or formed as an LLC under the laws of XXXXXXXXXX as a subsidiary wholly-owned corporation of XXXXXXXXXX. The authorized capital of Newco 1 will consist only of common shares or membership interests, as the case may be. On the incorporation or formation, as the case may be, of Newco 1, XXXXXXXXXX will subscribe for one or more common shares of or membership interests in, as the case may be, Newco 1 for nominal consideration.
(c) XXXXXXXXXX will contribute the assets used in or held in connection with Business A Segment 2 to Newco 1 in exchange for shares or membership interests, as the case may be, of Newco 1 and the assumption of certain liabilities. XXXXXXXXXX will distribute the shares, or membership interests, as the case may be, of Newco 1 to XXXXXXXXXX. The shares or membership interests, as the case may be, of Newco 1 will be distributed by XXXXXXXXXX to Foreign Pubco Sub 1. The shares or membership interests, as the case may be, of Newco 1 will be transferred up the chain from Foreign Pubco Sub 1 to Partnership 5 through a series of intercompany distributions, sales, interest payments and/or contributions among the relevant XXXXXXXXXX entities. As part of the distribution of the shares or membership interests, as the case may be, of Newco 1 up the chain, Foreign Pubco Sub 1 will transfer the shares or membership interests, as the case may be, of Newco 1 to Canlp Partner in exchange for additional Canlp Partner shares and the shares or membership interests, as the case may be, of Newco 1 will then be transferred by Canlp Partner to Foreign Pubco Sub 9 in exchange for a promissory note. None of the corporations or partnerships in the corporate chain is part of the Canada Group.
(d) The shares or membership interests, as the case may be, of Newco 1 acquired by Partnership 5 will be distributed up the corporate chain to Foreign Spinco. The distribution by Partnership 5 may be made to one or both of its partners in exchange for a partial redemption of the ownership interest in Partnership 5 held by the relevant partner or partners.
Foreign Pubco Sub 2 XXXXXXXXXX Restructuring
65. Newco 2 will be formed as an LLC under the laws of XXXXXXXXXX as a subsidiary wholly-owned corporation of Foreign Pubco Sub 2. The authorized capital of Newco 2 will consist only of membership interests. On the incorporation of Newco 2, Foreign Pubco Sub 2 will subscribe for one or more membership interests of Newco 2 for nominal consideration.
66. Foreign Pubco Sub 2 will transfer XXXXXXXXXX to Newco 2 in exchange for membership interests of Newco 2 and the assumption of certain liabilities.
67. Foreign Pubco Sub 2 will distribute the membership interests of Newco 2 to Foreign Spinco.
Canadian "Butterfly" Restructuring
68. TCo will be incorporated as a ULC under the laws of XXXXXXXXXX. TCo will reside in Canada, be a private corporation and a taxable Canadian corporation. The authorized capital of TCo will consist of an unlimited number of common shares. On the incorporation of TCo, Forco will subscribe for one or more common shares of TCo for nominal consideration.
69. Newco 3 will be formed as an LLC under the laws of XXXXXXXXXX. The authorized capital of Newco 3 will consist only of membership interests. On the formation of Newco 3, Forco will subscribe for membership interests in Newco 3 for nominal consideration.
70. TSub will be formed as a ULC under the laws of XXXXXXXXXX. TSub will reside in Canada, be a private corporation and a taxable Canadian corporation. The authorized capital of TSub will consist of the following:
(a) an unlimited number of voting, fully participating common shares; and
(b) XXXXXXXXXX preferred shares having the following attributes:
(i) each TSub Preferred Share will be redeemable, subject to applicable law, at any time at the option of TSub at the Redemption Amount;
(ii) each TSub Preferred Share will be retractable, subject to applicable law, at any time at the option of the holder for an amount equal to the Redemption Amount;
(iii) the holder of each TSub Preferred Share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors of TSub from time to time, which dividend need not also be declared on any other class of shares of TSub;
(iv) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of TSub if the resulting realizable value of the net assets of TSub after payment of the dividends would be less than the aggregate Redemption Amount of all of the TSub Preferred Shares then outstanding;
(v) the holder of each TSub Preferred Share will be entitled, upon the liquidation, dissolution or winding-up of TSub, to a payment in priority to all other classes of shares of TSub of an amount equal to the Redemption Amount therefor to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and
(vi) the holder of each TSub Preferred Share will not be entitled to vote at meetings of shareholders of TSub, other than as provided under the statute by which TSub will be governed.
On the incorporation of TSub, TCo will subscribe for one or more common shares of TSub for nominal consideration.
71. Prior to the transactions described below, the number of issued and outstanding Canco Common Shares will be increased XXXXXXXXXX to enable TCo to acquire a number of Canco Common Shares that will give TCo a percentage ownership of all of the issued and outstanding Canco Common Shares which will be equal to the Butterfly Percentage. This increase will be authorized by a special shareholder resolution. This increase will not affect the total capital of Canco nor will it change the interests, rights or privileges of its shareholder, Forco.
Immediately after the transfer described in Paragraph 61, Forco will:
(a) transfer a particular number of its Canco Common Shares having an aggregate FMV equal to the Butterfly Percentage of the aggregate FMV of all of its Canco Common Shares to TCo; and
(b) transfer the remaining Canco Common Shares (that were not acquired by TCo above) to Newco 3.
In consideration for the transfer in (a) above, TCo will issue common shares in its capital to Forco having an aggregate FMV at that time equal to the aggregate FMV at that time of such Canco Common Shares so transferred by Forco to TCo.
By virtue of the disposition described in (a) above, and subject to the application of paragraph 212.1(1)(b), the legal capital of the common shares of TCo will be increased by an amount equal to the aggregate FMV of the Canco Common Shares at the time they are transferred by Forco to TCo.
In consideration for the transfer in (b) above, Newco 3 will issue common shares in its capital having an aggregate FMV at that time equal to the aggregate FMV at that time of the Canco Common Shares so transferred by Forco to Newco 3.
At the moment of the transfer, the Canco Common Shares will not derive their value, and will not have derived their value at any time in the XXXXXXXXXX period preceding that moment, principally from real or immovable property situated in Canada. Accordingly, Forco will not apply for a clearance certificate under section 116 in respect of the transfers of the Canco Common Shares to TCo and to Newco 3 described above, on the basis that the Canco Common Shares are not taxable Canadian property.
Following these transactions, Forco will own all of the issued and outstanding shares of TCo. No other person will acquire shares of TCo as part of a series of transactions that includes the transfer of the Newsub Common Shares by Canco to TSub described in Paragraph 80.
72. The aggregate FMV, immediately before the transfer of the Newsub Common Shares by Canco to TSub described in Paragraph 80, of the common shares of TCo owned by Forco will be equal to or approximate the amount determined by the formula, on the assumption that Forco is the participant, Canco is the distributing corporation and TCo is the acquiror,
(A × B/C) + D
as found in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1).
73. Immediately before the transfer of the Newsub Common Shares by Canco to TSub, the property of Canco will be determined on a consolidated basis by including the appropriate pro rata share of the assets of any corporation and LLP over which Canco has the ability to exercise significant influence (being the companies and LLP in the Canada Group), which assets will be classified into the following three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:
(a) cash or near-cash property, comprising all of the current assets of the Canada Group, including cash, marketable securities, accounts receivable (including HST/GST/PST receivables), trade receivables, inventory and prepaid expenses;
(b) business property, comprising all of the assets of the Canada Group, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from an active business (other than a specified investment business) including goodwill; and
(c) investment property, comprising all of the assets of the Canada Group, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or from a specified investment business.
For greater certainty, for purposes of this distribution:
(d) any tax accounts such as the balance of any non-capital losses of the Canada Group or the balance of any RDTOH or CDA of the Canada Group, if any, will not be considered property;
(e) advances to related persons that are due within the next 12 months or those with no fixed term of repayment (other than by Canco which advances are described in (g) below) will be considered cash or near-cash property;
(f) Canco will be considered to have significant influence over a corporation or LLP if it has significant influence over that corporation or LLP or over any other corporation or LLP that has significant influence over that corporation or LLP, or if Canco in combination with corporations or LLPs over which it has significant influence have significant influence over that corporation or LLP;
(g) the FMV of the shares of any corporation and limited partnership interest in any LLP over which Canco has the ability to exercise significant influence and of any indebtedness receivable by Canco or any corporation or LLP over which Canco has the ability to exercise significant influence from such a corporation or LLP will be allocated among the three types of property described above by multiplying the FMV of the shares of the particular corporations or LLP interest in the particular LLP or the amount of indebtedness receivable therefrom, as the case may be, by the proportion that the net FMV of each type of property owned by the particular corporation or LLP (determined in accordance herewith) is of the aggregate net FMV of all property owned by such corporation or LLP (determined in accordance herewith);
(h) XXXXXXXXXX will be considered to be business property for the purposes of the characterization of the property of Canco.
(i) the shareholdings held by Canco Sub 2 described in Paragraph 43 will be considered to be a business property; and
(j) any pension plan asset (i.e., actuarial plan assets in excess of actuarial plan liabilities) of Canco will not be considered property of Canco.
74. The Canada Group does not own any property (other than cash and near cash property), the income from which would be income from property or income from a specified investment business.
75. In determining, on a consolidated basis, the net FMV of each of the three types of property of the Canada Group immediately before the transfer of the Newsub Common Shares by Canco to TSub described in Paragraph 80, the liabilities of Canco and any corporation and LLP over which Canco exercises significant influence will be allocated to, and will be deducted in the calculation of the net FMV of, each type of property of Canco or such corporation and LLP, as the case may be, in the following manner:
(a) in determining the net FMV of each type of property of a corporation and LLP over which Canco exercises significant influence immediately before the transfer of the Newsub Common Shares by Canco to TSub described in Paragraph 80, the liabilities of that corporation and LLP (other than any amount owing by such corporation or partnership to Canco or any corporation or LLP over which Canco has the ability to exercise significant influence described in Paragraph 73(g)) will be allocated to, and deducted in the calculation of, the net FMV of each type of property of that particular corporation or LLP as follows:
(i) current liabilities of such corporation or LLP will be allocated to each cash or near-cash property of the corporation or LLP in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by such corporation or LLP. To the extent that the total amount of current liabilities to be allocated to the cash or near cash property exceeds the total FMV of all the cash or near cash property, such corporation or LLP will be considered to have a negative amount of cash or near cash property;
(ii) following the allocation of current liabilities to cash or near-cash property as described in Paragraph 75(a)(i), provided that the net FMV of the cash or near cash property of such corporation or LLP is positive, any remaining net FMV of any accounts receivable (including HST/GST/PST receivables), trade receivables, inventories and prepaid expenses of such corporation or LLP will be reclassified as business property of such corporation or LLP and excluded from the net FMV of the cash or near-cash property, to the extent that such property will be collected, sold, used or consumed in the ordinary course of business to which such property relates;
(iii) liabilities, other than current liabilities, of such corporation or LLP that relate to a particular property will be allocated to that particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property and liabilities that pertain to a particular type of property, but not to a particular property, will then be allocated to that particular type of property. To the extent that the total amount of liabilities that are to be allocated to a particular type of property as described herein exceeds the total FMV of that type of property, such corporation or LLP will be considered to have a negative amount of that type of property; and
(iv) if any liabilities remain after the allocations described above are made, such excess unallocated liabilities will then be allocated to the cash or near cash property, investment property and business property of such corporation or LLP, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities. However, where a corporation or LLP is considered to have a negative amount of a type of property because of Paragraph 75(a)(i) or (iii), for the purposes of allocating those remaining liabilities, the net FMV of that type of property will be deemed to be nil resulting in none of those remaining liabilities being allocated to that type of property.
(b) in determining, on a consolidated basis, the net FMV of each type of property of Canco immediately before the transfer of the Newsub Common Shares by Canco to TSub described in Paragraph 80, Canco will include the appropriate pro rata share of the net FMV of each type of property of any corporation or LLP over which Canco exercises significant influence and, for greater certainty, the appropriate negative amount of such type of property of any such entity, as determined in accordance with (a) above, and any liabilities of Canco will be allocated to, and be deducted in the calculation of, the net FMV of each type of property of Canco in the following manner:
(i) current liabilities of Canco will be allocated to the cash or near-cash property of Canco in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property of Canco. The allocation of current liabilities as described herein will not exceed the FMV of all the cash or near-cash property of Canco;
(ii) following the allocation of current liabilities to each cash or near-cash property in Paragraph 75(b)(i), any remaining net FMV of any accounts receivable (including HST/GST/PST receivables), trade receivables, inventories and prepaid expenses of Canco will be reclassified as business property and excluded from the cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of the business to which such property relates;
(iii) liabilities of Canco, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property but not to a particular property will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property as described herein; and
(iv) if any liabilities remain after the allocations described in Paragraph 75(b)(i) and (iii) are made, such excess unallocated liabilities will then be allocated to the cash or near-cash property, investment property and business property of Canco, on the basis of the relative net FMV of each type of property prior to the allocation of such excess, but after the allocation of the liabilities described in Paragraph 75(b)(i) and (iii).
(c) For greater certainty, for purposes of this distribution:
(i) the amount of any deferred income tax will not be considered a liability for the purposes of the Proposed Transactions described herein because such amount does not represent a legal obligation;
(ii) [Reserved];
(iii) current liabilities will include amounts normally classified as current liabilities, including accounts payable, bonuses payable, and the current portion of any long term debt;
(iv) [Reserved]
(v) any current pension plan liability (i.e., the current portion of the statutorily created pension plan liability), current post retirement benefit liability and current liability insurance liabilities of Canco will be allocated to cash or near-cash property, and any non-current pension plan liability (i.e. non-current portion of the statutorily created pension plan liability), non-current post retirement benefit liability and non-current liability insurance liabilities of Canco will be allocated to business property
(vi) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification.
76. [Reserved]
77. [Reserved]
78. [Reserved]
79. [Reserved]
80. Immediately following the transfer described in Paragraph 71, Canco will transfer all of the Newsub Common Shares to TSub and will be legally obligated to transfer to TSub cash or near-cash property in an amount referred to in Paragraph 84.1. As consideration for such property, TSub will issue to Canco TSub Preferred Shares having an aggregate FMV at that time equal to the aggregate FMV of the property so transferred to TSub or that Canco is legally obligated to transfer to TSub. TSub will jointly elect with Canco, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the Newsub Common Shares to TSub. The agreed amount in the election will equal the ACB to Canco of the Newsub Common Shares.
81. Immediately following the transfer of the Newsub Common Shares described in Paragraph 80, on a contemporaneous basis:
(a) Canco will purchase for cancellation the Canco Common Shares owned by TCo for an amount equal to their FMV. In satisfaction of the purchase price for such shares, Canco will issue to TCo the Canco Purchase Note. TCo will accept the Canco Purchase Note in full payment of the purchase price of the Canco Common Shares owned by TCo; and
(b) TSub will redeem all the TSub Preferred Shares owned by Canco for an amount equal to their aggregate Redemption Amount. In satisfaction of the Redemption Amount for such shares, TSub will issue to Canco the TSub Redemption Note. Canco will accept the TSub Redemption Note in full payment of the redemption price of the TSub Preferred Shares.
82. Immediately following the transactions described in Paragraph 81, TCo will pass a resolution authorizing the winding-up of TSub and enter into a winding-up agreement with respect to TSub. Pursuant to the winding-up agreement, all of the property of TSub will be distributed to TCo and TCo will assume all of the liabilities of TSub (including TSub's liability under the TSub Redemption Note).
83. Immediately following the transaction described in Paragraph 82, the principal amount owing by Canco to TCo under the Canco Purchase Note and the principal amount owing by TCo to Canco under the TSub Redemption Note will be set off in full against each other and each such note will be marked paid in full and cancelled.
84. The number of issued and outstanding Canco Common Shares will be increased to XXXXXXXXXX.
84.1. No later than XXXXXXXXXX days after the date of the transfer of the Newsub Common Shares by Canco to TSub described in Paragraph 80, Canco will transfer to TCo any required additional cash or near-cash property such that the net FMV of each type of property transferred directly or indirectly to TCo will approximate that proportion of the net FMV of all property of the Canada Group of that type (after allocating and deducting, in the manner described in Paragraphs 73 and 75, the amount of the liabilities assumed by Newsub described in Paragraphs 61(a) and (b)), determined immediately before the transfer by Canco of the Newsub Common Shares to TSub described in Paragraph 80, that:
(a) the aggregate FMV of all of the Canco Common Shares owned by TCo immediately before the transfer of the Newsub Common Shares by Canco to TSub described in Paragraph 80,
is of
(b) the aggregate FMV of all the issued and outstanding Canco Common Shares immediately before such transfer.
The expression "approximate that proportion" described above means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the net FMV of each type of property which TCo has received (or Canco has retained) as compared to what TCo would have received (or Canco would have retained) had it received (or retained) its appropriate pro-rata share of the net FMV of that type of property.
Transfer of Newco 3
85. Forco will transfer all of the issued and outstanding membership interests in Newco 3 to Foreign Pubco. In satisfaction of the purchase price for such membership interests, Foreign Pubco will issue to Forco the Foreign Pubco Note. Forco will accept the Foreign Pubco Note in full payment of the purchase price of the Newco 3 membership interests.
The membership interests in Newco 3 will not be taxable Canadian property. Accordingly, Forco will not apply for a clearance certificate under section 116 in respect of their transfer to Foreign Pubco on the basis that they are not taxable Canadian property.
86. Immediately following the transaction described in Paragraph 85, the Foreign Pubco Note will be distributed up the corporate chain to Foreign Pubco. The distribution will be made first by Forco to Foreign Pubco Sub 1. The Foreign Pubco Note will be transferred up the chain from Foreign Pubco Sub 1 to Partnership 5, and then successively by each of the Forco Companies above Partnership 5 and then by Foreign Spinco to Foreign Pubco. As part of the distribution of the Foreign Pubco Note up the chain, Foreign Pubco Sub 1 will transfer the Foreign Pubco Note to Canlp Partner in exchange for additional Canlp Partner shares and the Foreign Pubco Note will then be transferred by Canlp Partner to Partnership 5 in exchange for a promissory note. The distribution by Partnership 5 may be made to one or both of its partners in exchange for a partial redemption of the ownership interest in Partnership 5 held by the relevant partner or partners.
87. Newco 4 will be formed. The authorized capital of Newco 4 will consist only of membership interests. On the formation of Newco 4, Foreign Spinco will subscribe for membership interests in Newco 4 for nominal consideration. Foreign Spinco will be the only member of Newco 4 until the Spin-Out.
88. As part of the Three-Party Share Exchange:
(a) Newco 4 will agree to pay the purchase price for the membership interests in Newco 3 by issuing membership interests in the capital of Newco 4 to Foreign Spinco having an aggregate FMV at that time equal to the aggregate FMV of the membership interests in Newco 3 so transferred by Foreign Pubco to Newco 4 as described in Paragraph 88(b). Newco 4 and Foreign Spinco both will agree that the membership interests in Newco 4 will be issued to Foreign Spinco in respect of and by virtue of the disposition by Foreign Pubco of the membership interests in Newco 3 to Newco 4;
(b) Foreign Pubco will pay the purchase price for the Foreign Spinco common shares described in Paragraph 88(c) by transferring all of the issued and outstanding membership interests in Newco 3 to Newco 4; and
(c) Foreign Spinco will agree to pay the purchase price for the membership interests in Newco 4 by issuing common shares of Foreign Spinco to Foreign Pubco having an aggregate FMV at that time equal to the aggregate FMV of the membership interests in Newco 4 so issued by Newco 4 to Foreign Spinco described in Paragraph 88(a).
89. Immediately following the transactions described in Paragraph 88, Newco 4 will pass a resolution authorizing the winding-up of Newco 3 and enter into a winding-up agreement with respect to Newco 3. Pursuant to the winding-up agreement, all of the property of Newco 3 (including the shares of Canco) will be distributed to Newco 4 and Newco 4 will assume all of the liabilities of Newco 3.
90. New Holdco will be incorporated under the laws of Country 5. The authorized capital of New Holdco will consist only of common shares. On the incorporation of New Holdco, Newco 4 will subscribe for one or more common shares of New Holdco for nominal consideration.
91. Newco 4 will transfer all of the issued and outstanding Canco Common Shares and all of its issued and outstanding shares or membership interests, as the case may be, of Newco 1 to New Holdco (a portion of the shares or membership interests, as the case may be, of Newco 1 will first be transferred by Foreign Spinco to Newco 4). In consideration for the transfer, New Holdco will issue common shares in its capital to Newco 4 having an aggregate FMV at that time equal to the aggregate FMV of such Canco Common Shares and shares or membership interests, as the case may be, of Newco 1 so transferred by Newco 4 to New Holdco.
92. New Partnerco will be formed as an LLC under the laws of XXXXXXXXXX. The authorized capital of New Partnerco will consist only of membership interests. On the formation of New Partnerco, Foreign Spinco or an affiliate will subscribe for membership interests in New Partnerco for nominal consideration. Foreign Spinco will transfer to New Partnerco a portion of the shares or membership interests, as the case may be, of Newco 1. New Partnerco will transfer all of its issued and outstanding shares or membership interests, as the case may be, of Newco 1 to New Holdco). In consideration for the transfer, New Holdco will issue common shares in its capital to New Partnerco having an aggregate FMV at that time equal to the aggregate FMV of such shares or membership interests as the case may be, of Newco 1 so transferred by New Partnerco to New Holdco.
93. New Partnership will be formed as a XXXXXXXXXX under the laws of Country 5. On the formation of New Partnership, Newco 4 and New Partnerco will respectively subscribe for a XXXXXXXXXX% and a XXXXXXXXXX% membership interests in New Partnership for nominal consideration.
94. Newco 4 and New Partnerco will transfer all of the issued and outstanding shares of New Holdco to New Partnership. In consideration for the transfer, New Partnership will issue membership interests to Newco 4 and New Partnerco having an aggregate FMV at that time equal to the aggregate FMV of such shares of New Holdco so transferred by Newco 4 and New Partnerco to New Partnership.
95. Foreign Spinco will create a promissory note in favor of Newco 4 and New Partnerco. Newco 4 and New Partnerco will contribute the note to New Partnership. New Partnership will then transfer the note to New Holdco in consideration for a promissory note of New Holdco. New Holdco will borrow funds and will lend the borrowed funds to Canco in consideration for a promissory note of Canco. Canco will use the funds borrowed from New Holdco to purchase the note of Foreign Spinco held by New Holdco. New Holdco will use the funds to repay its borrowing.
96. Foreign Spinco will create two promissory notes in favor of Newco 4. Newco 4 will borrow funds and will lend the borrowed funds to Canco in consideration for a promissory note of Canco. Canco will use the funds borrowed from Newco 4 to purchase the two notes of Foreign Spinco held by Newco 4. Newco 4 will use the funds to repay its borrowing.
97. Canco will pay the accrued interest on its outstanding indebtedness to Canlp and Canco Creditor 1. Canco will repay its outstanding indebtedness to Canlp by transferring to Canlp one of the promissory notes of Foreign Spinco received from Newco 4 and the promissory note of Foreign Spinco received from New Holdco. Canco will repay its outstanding indebtedness to Canco Creditor 1 by transferring to Canco Creditor 1 one of the promissory notes of Foreign Spinco received from Newco 4.
98. Canlp will be wound-up and, on the winding-up, all of the property of Canlp will be distributed to its partners and one or both of its partners will assume all of the liabilities of Canlp. Acquired Corporation may transfer its interest in the property received on the dissolution of Canlp down the chain to Canlp Partner. Canco Creditor 1 will declare and pay a dividend (to be satisfied in cash or property). Foreign Pubco Sub 1 will pass a resolution authorizing the winding-up of Canco Creditor 1 and enter into a winding-up agreement with respect to Canco Creditor 1. Pursuant to the winding-up agreement, all of the property of Canco Creditor 1 will be distributed to Foreign Pubco Sub 1 and Foreign Pubco Sub 1 will assume all of the liabilities of Canco Creditor 1. Foreign Pubco Sub 1 will transfer the note of Foreign Spinco received on the winding-up of Canco Creditor 1 to Canlp Partner in repayment of an outstanding obligation, including accrued interest, to Canlp Partner. Any excess of the accrued interest may be paid in some other manner and any excess of the note will be contributed to Canlp Partner in exchange for shares. Certain preferred shares in the capital of Canlp Partner will be converted into common shares. Canlp Partner will transfer its interest in the three promissory notes of Foreign Spinco to Partnership 5 in exchange for a promissory note. Any remainder of the notes will be distributed to Partnership 5.
99. The three promissory notes of Foreign Spinco will then be transferred up the chain by Partnership 5, and then successively by each of the Forco Companies above Partnership 5 to Foreign Spinco. The distribution by Partnership 5 may be made to one or both of its partners in exchange for a partial redemption of the ownership interest in Partnership 5 held by the relevant partner or partners.
Business B Restructuring
100. New Employeeco 1 will be formed as an LLC under the laws of XXXXXXXXXX. The authorized capital of New Employeeco 1 will consist only of membership interests. On the formation of New Employeeco 1, Foreign Spinco will subscribe for membership interests in New Employeeco 1 for nominal consideration.
101. XXXXXXXXXX, a corporation wholly-owned by Foreign Spinco, will merge into New Employeeco 1 under the laws of XXXXXXXXXX. Pursuant to the merger, XXXXXXXXXX and all of the shares of XXXXXXXXXX will be cancelled for no consideration.
102. New Employeeco 1 will transfer employees to XXXXXXXXXX, which is a corporation wholly-owned by Foreign Spinco.
103. New Employeeco 2 will be formed as an LLC under the laws of XXXXXXXXXX. The authorized capital of New Employeeco 2 will consist only of membership interests. On the formation of New Employeeco 2, Foreign Spinco will subscribe for one or more membership interests of New Employeeco 2 for nominal consideration.
104. Foreign Spinco will transfer all of the issued and outstanding membership interests in New Employeeco 1 to New Employeeco 2. In consideration, New Employeeco 2 will issue membership interests in its capital to Foreign Spinco having an aggregate FMV at that time equal to the aggregate FMV of the membership interests in New Employeeco 1 so transferred by Foreign Spinco to New Employeeco 2.
105. Newco 5 will be formed as an LLC under the laws of XXXXXXXXXX. The authorized capital of Newco 5 will consist only of membership interests. On the formation of Newco 5, Foreign Spinco will subscribe for membership interests in Newco 5 for nominal consideration.
106. Newco 5 and XXXXXXXXXX will merge under the laws of XXXXXXXXXX. Pursuant to merger, XXXXXXXXXX and all of the shares of XXXXXXXXXX will be cancelled for no consideration.
107. Newco 6 will be formed as an LLC under the laws of XXXXXXXXXX. The authorized capital of Newco 6 will consist only of membership interests. On the formation of Newco 6, Brandco will subscribe for membership interests in Newco 6 for nominal consideration.
108. Brandco will transfer certain intellectual property and rights in intellectual property to Newco 6. In consideration, Newco 6 will issue membership interests in its capital to Brandco having an aggregate FMV at that time equal to the aggregate FMV of the property and rights so transferred by Brandco to Newco 6. Certain licenses to use intellectual property will be entered into between Brandco and Newco 6.
109. Brandco will distribute the membership interests in Newco 6 to Newco 5 which will distribute them to Foreign Spinco.
110. Newco 9 will be incorporated as a corporation or formed as an LLC under the laws of XXXXXXXXXX. The authorized capital of Newco 9 will consist only of common shares or membership interests, as the case may be. On the incorporation or formation, as the case may be, of Newco 9, Foreign Spinco will subscribe for one or more common shares of or membership interests in, as the case may be, Newco 9 for nominal consideration.
111. Foreign Spinco will transfer to Newco 9 the assets and subsidiaries used in or held in connection with Business B Segment 2, all of the issued and outstanding shares of XXXXXXXXXX and all of the issued and outstanding membership interests in Newco 5. In consideration, Newco 9 (i) may assume all or part of the debt owed by Foreign Spinco to Foreign Pubco and other liabilities of Foreign Spinco and (ii) will issue common shares in its capital or membership interests, as the case may be, to Foreign Spinco having an aggregate FMV at that time equal to the amount by which the aggregate FMV of the shares, membership interests and assets so transferred by Foreign Spinco to Newco 9 exceeds the amount of the liabilities, if any, assumed by Newco 9 in (i) above.
112. [Reserved]
113. Newco 8 will be incorporated as a corporation or formed as an LLC under the laws of XXXXXXXXXX. The authorized capital of Newco 8 will consist only of common shares or membership interests. On the incorporation or formation, as the case may be, of Newco 8, Foreign Spinco will subscribe for one or more common shares of or membership interests in, as the case may be, Newco 8 for nominal consideration.
114. [Reserved]
115. Foreign Spinco will transfer all of the issued and outstanding membership interests in Newco 6 to Newco 8. In consideration, Newco 8 will issue common shares or membership interests, as the case may be, in its capital to Foreign Spinco having an aggregate FMV at that time equal to the aggregate FMV of the membership interests in Newco 6 so transferred by Foreign Spinco to Newco 8.
116. Newco 10 will be incorporated as a corporation or formed as an LLC under the laws of XXXXXXXXXX. The authorized capital of Newco 10 will consist only of common shares or membership interests, as the case may be. On the incorporation or formation, as the case may be, of Newco 10, Newco 9 will subscribe for one or more common shares of or membership interests in, as the case may be, Newco 10 for nominal consideration.
117. Newco 10 and Foreign Pubco Sub 2 will merge under the laws of XXXXXXXXXX. Pursuant to merger, XXXXXXXXXX and all of the shares of Foreign Pubco Sub 2 will be cancelled for no consideration.
118. Foreign Spinco may borrow the External Debt. Foreign Parent may also borrow an amount of money from one or more arm's length lenders.
119. Foreign Spinco will use the proceeds of the External Debt to make a distribution to Foreign Pubco.
120. Foreign Pubco will use all or part of the cash received from Foreign Spinco to repay a portion of its outstanding debt.
121. XXXXXXXXXX.
122. Foreign Spinco will distribute the shares of or membership interests in, as the case may be, Newco 9 to Foreign Pubco.
Separation Agreements
123. It is anticipated that Canco, Foreign Pubco, Foreign Spinco and certain subsidiaries thereof (which may include Newsub, Forco and TCo) will enter into certain intercompany agreements as necessary in connection with the implementation of the Proposed Transactions and/or to govern the ongoing relationships between Foreign Pubco and its subsidiaries, and Foreign Spinco and its subsidiaries, after the completion of the Proposed Transactions. These agreements will include:
(a) a separation and distribution agreement, which will contain the key provisions required to effect the separation of Foreign Pubco into two separate public entities, including with respect to the allocation of assets and liabilities and the rights and obligations of Foreign Pubco and its subsidiaries and Foreign Spinco and its subsidiaries with respect to the Spin-Out;
(b) one or more tax XXXXXXXXXX agreements, which will allocate the responsibilities of Foreign Pubco and its subsidiaries and Foreign Spinco and its subsidiaries with respect to liabilities for taxes (including payments between the parties with respect to certain tax liabilities and tax benefits realized by one party but attributable to the other party), the preparation and filing of tax returns, and tax disputes;
(c) one or more XXXXXXXXXX agreements, which will provide for the XXXXXXXXXX by Foreign Pubco and its subsidiaries to Foreign Spinco and its subsidiaries (and by Foreign Spinco and its subsidiaries to Foreign Pubco and its subsidiaries) after implementation of the Proposed Transactions (with respect to XXXXXXXXXX);
(d) one or more XXXXXXXXXX agreements, which will address XXXXXXXXXX to be provided by Foreign Pubco and its subsidiaries to Foreign Spinco and its subsidiaries (and by Foreign Spinco and its subsidiaries to Foreign Pubco and its subsidiaries) XXXXXXXXXX;
(e) one or more XXXXXXXXXX agreements, which will set forth the agreements of Foreign Pubco and its subsidiaries and Foreign Spinco and its subsidiaries with respect to certain XXXXXXXXXX (including the allocation of responsibility for XXXXXXXXXX); and
(f) one or more XXXXXXXXXX agreements, which will set forth the agreements of Foreign Pubco and its subsidiaries and Foreign Spinco and its subsidiaries with respect to certain XXXXXXXXXX, including the XXXXXXXXXX by Foreign Pubco and its subsidiaries to Foreign Spinco and its subsidiaries (and by Foreign Spinco and its subsidiaries to Foreign Pubco and its subsidiaries) after implementation of the Proposed Transactions.
Foreign Pubco and Foreign Spinco (and their respective subsidiaries) may also enter into: (i) one or more XXXXXXXXXX agreements, which would set forth the agreements of Foreign Pubco and Foreign Spinco with respect to XXXXXXXXXX, (ii) one or more XXXXXXXXXX agreements, which would govern the XXXXXXXXXX matters, (iii) one or more XXXXXXXXXX agreements, (iv) one or more XXXXXXXXXX agreements, and (v) one or more XXXXXXXXXX agreements to XXXXXXXXXX.
124. Except for contracts entered into in the ordinary course of business and the agreements referred to in Paragraph 123 (which must be signed before implementation of the Proposed Transactions), no agreements will be entered into by Canco or its subsidiaries prior to the completion of Paragraph 80 of the Proposed Transactions.
Business A Spin-Out
125. The number of Foreign Spinco shares will be increased (through the issuance of additional shares or through another mechanism) such that the total number of outstanding Foreign Spinco shares reflects the public trading of such shares following the Spin-Out.
126. Foreign Pubco will proceed with the Spin-Out.
126.1. The following additional transactions may be undertaken:
(a) TCo may elect to become a limited company under the statute by which the corporation is governed;
(b) TCo may continue as a corporation governed by the First Act;
(c) TCo and Newsub may XXXXXXXXXX under the First Act; and
(d) Newco 4 and/or New Holdco may transfer all or some of the shares of New Holdco and/or all or some of the shares of Canco, as the case may be, to one or more existing or new direct or indirect wholly-owned subsidiaries of Foreign Spinco.
XXXXXXXXXX
127. No property has or will become property of Canco or its subsidiaries, and no liabilities have been or will be incurred by Canco or its subsidiaries, in contemplation of and before the transfer described in Paragraph 80, otherwise than as described herein.
128. None of the shares of Canco, Newsub, TCo or TSub has been or will be, at any time prior to the completion of the Proposed Transactions:
(a) the subject of any guarantee agreement;
(b) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or
(c) the subject of a dividend rental arrangement.
129. Each of Canco (and its subsidiaries), Newsub, TCo and TSub is or will be a specified financial institution. None of these corporations is a financial intermediary corporation. The TSub Preferred Shares are not taxable RFI shares.
130. Each of Canco, TCo and TSub will have the financial capacity to honor, upon presentation for payment, the amount payable under the promissory note issued or assumed by it as part of the Proposed Transactions.
131. [Reserved]
Purposes of the Proposed Transactions
Foreign Pubco undertook a series of steps XXXXXXXXXX to integrate the XXXXXXXXXX structures and organizations. These steps included a series of steps intended to integrate Foreign Pubco and Acquired Corporation in XXXXXXXXXX. These steps included the acquisition by Canco of the shares of Canco Predecessor 2, Amalgamation 1 and the acquisition by Canco of XXXXXXXXXX.
Foreign Pubco has made the strategic decision to separate its Business A from its Business B. Foreign Pubco believes that creating two public companies would offer a number of opportunities. In particular:
(a) the Spin-Out will allow XXXXXXXXXX to focus on its XXXXXXXXXX and strategic priorities, with XXXXXXXXXX;
(b) the Spin-Out will allow XXXXXXXXXX to allocate resources and deploy capital in a manner XXXXXXXXXX; and
(c) the Spin-Out will allow investors to value XXXXXXXXXX.
The transactions described in Paragraphs 3, 4, 5, 6, 7 and 10 were undertaken in connection with the integration of the Foreign Pubco and Acquired Corporation businesses in XXXXXXXXXX, and, in particular, to combine the Foreign Pubco and Acquired Corporation businesses and assets in XXXXXXXXXX. These integration transactions were completed independently of the proposed butterfly reorganization and would have been completed irrespective of whether or not the Canadian butterfly reorganization occurs.
The intention of Foreign Pubco was to integrate the Foreign Pubco and Acquired Corporation businesses in XXXXXXXXXX, but the integration of these businesses was delayed due to XXXXXXXXXX. In XXXXXXXXXX(and prior to the Foreign Pubco Board meetings described in Paragraphs 9.1 to 9.3 above) it was determined that the integration of the Foreign Pubco and Acquired Corporation businesses in XXXXXXXXXX would probably not deliver the previously hoped for business advantages, and a decision to not integrate these two businesses was made. Accordingly, since XXXXXXXXXX the XXXXXXXXXX business has operated in XXXXXXXXXX; which are reflective of the spun off businesses (as described in Paragraph 55(c) above). The Foreign Pubco and Acquired Corporation businesses in XXXXXXXXXX represent XXXXXXXXXX. The Foreign Pubco and Acquired Corporation businesses were integrated in XXXXXXXXXX, which represents XXXXXXXXXX.
The purpose of the transactions described in Paragraph 48 was to increase the amount of the debt of Canco held by Canlp, and reduce the amount of the debt of Canco held by Canco Creditor 1 by a corresponding amount. This reduced costs in relation to the holding of Canco's indebtedness. The restructuring was completely unrelated to the Proposed Transactions (including the Canadian butterfly reorganization) and would have occurred whether or not the Proposed Transactions (including the Canadian butterfly reorganization) occur.
The purpose of the transactions described in Paragraphs 52 to 54 was to distribute excess cash in the Forsub Group and Canco. The distributions of such excess cash are consistent with corporate practice. The distributions are entirely unrelated to the Proposed Transactions (including the Canadian butterfly reorganization) and would have occurred whether or not the Proposed Transactions (including the Canadian butterfly reorganization) occur.
The transactions described in Paragraph 55(a), (b) and (c) are driven solely by business considerations. They are entirely unrelated to the Proposed Transactions (including the Canadian butterfly reorganization) and will occur whether or not the Proposed Transactions (including the Canadian butterfly reorganization) occur.
The transactions described in Paragraph 55(a) were undertaken to achieve a couple of XXXXXXXXXX objectives. One was to reduce the overall indebtedness in Forlp to comply with XXXXXXXXXX. The other was to put new debt in place between Canco Sub 9 and Forlp to correct an error XXXXXXXXXX. The restructuring was completely unrelated to the Proposed Transactions (including the Canadian butterfly reorganization) and would have occurred whether or not the Proposed Transactions (including the Canadian butterfly reorganization) occur.
The purpose of transferring property to Newsub described in Paragraphs 61 (instead of transferring property described in Paragraphs 61 directly to TSub) is to minimize the corporate compliance with multiple transfers of the property and to provide flexibility to allow Business B Segment 1 to operate in a separate subsidiary prior to the Spin-Out.
The purpose of effecting the distribution involving Canco prior to transferring the shares of Canco to Foreign Pubco (and the steps that facilitate this, such as Forco transferring its remaining Canco Common Shares to Newco 3 in exchange for membership interests in Newco 3 as described in Paragraph 71) is to preserve the existing Foreign Pubco foreign holding company structure with respect to the retained Canadian business.
Rulings
Provided that the preceding statements constitute complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above:
Ruling A
(a) The provisions of paragraph 212.1(1)(a) will not apply to deem a dividend to be paid by TCo or to be received by Forco as a result of the exchange described in Paragraph 71;
(b) the provisions of paragraph 212.1(1)(b) will apply to reduce the PUC of the common shares of TCo that TCo issues to Forco to an amount equal to the PUC, immediately before the transfer, of the Canco Common Shares that Forco transfers to TCo described in Paragraph 71;
(c) the aggregate ACB to TCo of the Canco Common Shares that TCo acquires from Forco on the exchange described in Paragraph 71 will be equal to the aggregate FMV at that time of the Canco Common Shares that TCo acquires from Forco; and
(d) the aggregate ACB to Newco 3 of the Canco Common Shares that Newco 3 acquires from Forco on the exchange described in Paragraph 71 will be equal to the aggregate FMV at that time of the Canco Common Shares that Newco 3 acquires from Forco.
Ruling B
The provisions of subsection 85(1) will apply to:
(a) the transfer by Canco of eligible property to Newsub described in Paragraph 61; and
(b) the transfer by Canco of the Newsub Common Shares to TSub described in Paragraph 80;
such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof by virtue of paragraph 85(1)(a). In respect of depreciable property, to the extent that the transferor's capital cost exceeds the transferor's proceeds of disposition of the property, the transferee's capital cost of each such property will be determined in accordance with subsection 85(5).
For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfers described in Paragraphs 61 and 80.
Ruling C
Subsection 84(3) will apply:
(a) on the purchase for cancellation, as described in Paragraph 81(a), of the Canco Common Shares owned by TCo, to deem Canco to have paid and TCo to have received; and
(b) on the redemption, as described in Paragraph 81(b), of the TSub Preferred Shares owned by Canco, to deem TSub to have paid and Canco to have received;
a dividend on such class of shares equal to the amount, if any, by which the aggregate amount paid upon such purchase for cancellation or redemption (as the case may be) exceeds the aggregate PUC in respect of such shares immediately before such purchase for cancellation or redemption (as the case may be); and any such dividend:
(c) will be included, pursuant to subsection 82(1) and paragraph 12(1)(j), in computing the income of the corporation which received or was deemed to have received such dividend;
(d) will be deductible, pursuant to subsection 112(1), by the corporation deemed to have received such dividend;
(e) will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) or (2.4) apply to deny the subsection 112(1) deduction described in (d) above;
(f) will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining the proceeds of disposition to the recipient corporation of the shares which are redeemed or purchased for cancellation;
(g) will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b); and
(h) will not be subject to tax under Part IV.1 or VI.1.
Ruling D
The provisions of subsection 112(3) will apply to reduce any loss which would otherwise be determined for the particular holder as a result of the purchase for cancellation of the Canco Common Shares and the redemption of the TSub Preferred Shares described in ruling C.
Ruling E
By virtue of the provisions of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in ruling C, provided that
(a) XXXXXXXXXX% or more of the FMV of the common shares of Foreign Spinco that Foreign Pubco owns was not, at any time during the course of any series of transactions or events that includes the dividends described in ruling C, derived from the shares of Canco, TCo, Newco 3, Forco, Foreign Pubco, Newco 4 and New Holdco;
(b) as part of the series of transactions or events that includes the dividends described in ruling C(a) and (b) described above, there is not
(i) an acquisition of property in circumstances described in paragraph 55(3.1)(a) and in particular, provided that the Acquisition was not in contemplation of the Proposed Transactions described in Paragraphs 60 to 63 and 68 to 84.4;
(ii) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(iii) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
which has not been described herein, and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
For the purposes of subclause 55(3.1)(b)(i)(A)(II), in determining whether XXXXXXXXXX% or more of the FMV of the common shares of Foreign Spinco that Foreign Pubco owns was derived from the shares of Canco, TCo, Newco 3, Forco, Foreign Pubco, Newco 4 and New Holdco as described in ruling E(a) above, the External Debt of Foreign Spinco described in Paragraph 118 will be considered to reduce the FMV of each property of Foreign Spinco pro rata in proportion to the relative FMV of all property of Foreign Spinco.
Ruling F
The set-off and cancellation of the Canco Purchase Note held by TCo and the TSub Redemption Note held by Canco described in Paragraph 83 will not give rise to a forgiven amount and neither Canco nor TCo will realize any gain or incur any loss therefrom.
Ruling G
By virtue of subsection 1102(14) of the Regulations, each property which immediately before the transfer described in Paragraph 61, is depreciable property of a prescribed class or separate prescribed class of Canco and which is acquired by Newsub on the transfer described in Paragraph 61, as the case may be, will be deemed to be depreciable property of the same prescribed class or separate prescribed class, as the case may be, of Newsub.
Ruling H
Provided that the condition specified in paragraph 1100(2.2)(f) or (g) of the Regulations is satisfied, paragraph 1100(2.2)(h) of the Regulations will apply so that no amount will be included by Newsub under paragraph 1100(2)(a) of the Regulations in respect of depreciable property of a prescribed class that is property acquired by Newsub from Canco, on the transfer described in Paragraph 61.
Ruling I
The provisions of subsections 15(1), 56(2), 56(4), 69(4) or 246(1) will not apply to any of the Proposed Transactions described in Paragraphs 60 to 63 and 68 to 84.1.
Ruling J
The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to re-determine the tax consequences confirmed in the rulings given above.
Our rulings are given subject to the limitations set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided the Proposed Transactions are completed within six months of the date of this letter. Our rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act or Regulations.
Opinions
It is our opinion that if section 212.3 is enacted as worded in the legislative proposals relating to the Income Tax Act and Regulations released for consultation by the Department of Finance on August 14, 2012 and provided that no joint election is made and filed under subsection 25(3) as worded in such proposals in respect of the acquisition of the shares of the capital stock of Forsub, the deemed acquisition of shares of the capital stock of Canco Sub 3 as a result of the acquisition of the partnership interest in Forlp, and the acquisition of certain other corporations, by Newsub from Canco as described in Paragraph 61 above, subsection 212.3(2) would not apply to such acquisitions.
Assuming that proposed subsection 143.3(3) is enacted in substantially the same form as proposed in the July 16, 2010 draft legislation, and provided that the FMV at that time of the TCo Common Shares that TCo issued to Forco does not exceed the FMV at that time of the Canco Common Shares that TCo acquired from Forco described in Paragraph 71,
proposed paragraph 143.3(3)(a) will not apply to reduce the ACB to TCo of its Canco Common Shares.
Nothing in this ruling should be construed as implying that CRA has reviewed any tax consequences relating to the facts or the Proposed Transactions other than those described in the rulings given above, or has agreed:
(a) to the fair market value or adjusted cost base of any asset, paid-up capital of any share and taxable Canadian property of any share or other property;
(b) to the tax treatment of the agreements described in Paragraph 123(e) and the XXXXXXXXXX described in XXXXXXXXXX; and
(c) to any tax consequences relating to any transaction described herein other than those specifically described in the rulings given above.
Yours truly,
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2012
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2012
Email this Content