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 reduction of paid-up capital of a public corporation qualifies as a reorganization under 84(2) so that 84(4.1) does not apply.
Position: Yes.
Reasons: Complies with the law and CRA administrative positions.
XXXXXXXXXX
2012-047028
XXXXXXXXXX, 2013
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-named taxpayer. In your subsequent letters and emails, you provided additional information concerning the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX). The information or documents submitted with your request are part of this letter only to the extent described herein.
We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:
(i) in an earlier return of the taxpayer or a related person,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,
(iii) under objection by the taxpayer or a related person,
(iv) before the courts, or
(v) the subject of a ruling previously considered by the Directorate involving the taxpayer or a related person.
DEFINITIONS
In this letter, the following terms have the meaning specified:
"Aco" means XXXXXXXXXX;
"Bco" means XXXXXXXXXX;
"Act" means the Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th supp.), as amended to the date hereof. Unless stated otherwise, all statutory references in this letter are to the Act;
"Annual Meeting" means the XXXXXXXXXX Pubco annual meeting held on XXXXXXXXXX.
"Board" means Pubco's board of directors;
"CRA" means Canada Revenue Agency;
"Distribution#1" means Pubco's future distribution on a pro rata basis to the Shareholders as a return of capital on the common shares of Pubco to occur concurrently with PUC Reduction#1, where the amount of the distribution is equal to or less than the amount of PUC Reduction#1 and is derived from proceeds of disposition of the sale of the XXXXXXXXXX Business.
"Distribution#2" means Pubco's one or more future distributions on a pro rata basis to the Shareholders as a return of capital on the common shares of Pubco to occur concurrently with PUC Reduction#2, where the amount of the distribution is equal to or less than the amount of PUC Reduction#2 and derived from the cash or near cash on hand of Pubco or its subsidiaries.
"Facts" means the facts provided in paragraphs 1 to 24, and 29 to 35 below.
XXXXXXXXXX;
"Proposed Transactions" means the proposed transactions described under paragraphs 25 to 28 below.
"PUC" means paid-up capital and has the meaning assigned by subsection 89(1);
"PUC Reduction#1" means the reduction of the PUC of the common shares of the capital stock of Pubco in an amount equal to or less than the proceeds of disposition of the sale of the XXXXXXXXXX Business.
"PUC Reduction#2" means one or more reductions of the PUC of the common shares of the capital stock of Pubco in an amount equal to or less than the cash or near cash on hand of Pubco and its subsidiaries.
"Pubco" means XXXXXXXXXX;
"Public corporation" has the meaning assigned by subsection 89(1);
"Reorganization" includes the series of transactions and events pursuant to the new corporate strategy and plans of Pubco to reorganize its business operations in order for Pubco to concentrate its resources on its XXXXXXXXXX;
"Shareholders" mean the holders of the common shares of Pubco;
"Share Repurchase" means Pubco's announcement to repurchase up to XXXXXXXXXX common shares of its capital stock through the XXXXXXXXXX, the XXXXXXXXXX exchange, and other Canadian marketplaces over the course of XXXXXXXXXX months commencing on XXXXXXXXXX and ending on or before XXXXXXXXXX;
"SPA" means the asset purchase agreement for the XXXXXXXXXX Business between Aco as the purchaser and Pubco and Subco, as the vendors, dated XXXXXXXXXX (the closing of the transaction occurred on XXXXXXXXXX);
"Subco" means Pubco's indirectly held wholly-owned subsidiary, XXXXXXXXXX, which is a company incorporated under the laws of XXXXXXXXXX and resident in XXXXXXXXXX;
"Taxable Canadian corporation" has the meaning assigned by subsection 89(1);
XXXXXXXXXX;
XXXXXXXXXX;
XXXXXXXXXX; and
"XXXXXXXXXX Business" means all the assets of the XXXXXXXXXX business including XXXXXXXXXX and other assets related to XXXXXXXXXX, owned by Pubco and Subco as applicable.
FACTS
1. Pubco was formed under the laws of the Province of XXXXXXXXXX and is a listed public corporation. Pubco's shares are traded on the XXXXXXXXXX under the ticker symbol "XXXXXXXXXX" and the XXXXXXXXXX exchange under the ticker symbol "XXXXXXXXXX."
2. Pubco is a Taxable Canadian corporation and a Public corporation.
3. Pubco is a XXXXXXXXXX company. The principal business activities of Pubco involve the development and commercialization of innovative XXXXXXXXXX products XXXXXXXXXX.
4. Pubco has an indirectly held wholly-owned subsidiary, Subco, which is a XXXXXXXXXX corporation that participated in the commercialization of XXXXXXXXXX.
5. Pubco's authorized share capital consists of XXXXXXXXXX first preference shares without par value, issuable in series and XXXXXXXXXX common shares without par value. No preference shares are issued and outstanding. XXXXXXXXXX common shares were issued and outstanding as of XXXXXXXXXX.
6. The PUC of the issued and outstanding common shares of the capital stock of Pubco is estimated to be approximately CAD $XXXXXXXXXX per share, or CAD XXXXXXXXXX as at XXXXXXXXXX for the entire class of issued and outstanding common shares of the capital stock of Pubco.
7. The PUC in respect of the common shares of the capital stock of Pubco is supported by amounts paid to Pubco pursuant to public offerings, the exercise of common share options, the issuance/exercise of common shares warrants, and through other issuances of Pubco common shares for fair value. No material amount of Pubco's PUC is the result of Pubco's acquisition of shares of previously unaffiliated corporations for FMV that was significantly less than the aggregate PUC of such corporations or the result of an acquisition that involved non-capital losses, for purposes of the Act, being made available to Pubco.
The accumulated retained earnings of Pubco as reported on its Canadian income tax return for the period ending XXXXXXXXXX was approximately CAD $XXXXXXXXXX. The accumulated deficit of Pubco as reported on its Canadian income tax return for the period ending XXXXXXXXXX was approximately XXXXXXXXXX $XXXXXXXXXX. The vast majority of Pubco's deficit was generated from an arm's length loss on sale of the shares of the capital stock of a wholly-owned controlled foreign affiliate (previously acquired under the name of XXXXXXXXXX in an arm's length transaction). The only acquisitions of corporations by Pubco in Pubco's recent history (since XXXXXXXXXX) by either Pubco or affiliates of Pubco were arm's length outright acquisitions of XXXXXXXXXX (a Canadian corporation), XXXXXXXXXX (a XXXXXXXXXX corporation with no Canadian operations), and XXXXXXXXXX (a XXXXXXXXXX corporation with no Canadian operations).
Pubco has a balance of non-capital loss carryforwards amounting to approximately XXXXXXXXXX $XXXXXXXXXX at XXXXXXXXXX and such losses were generated from the active business activities of Pubco and not from the acquisition of other corporations. Pubco made no acquisitions of corporations in XXXXXXXXXX.
8. The PUC of the issued and outstanding common shares of the capital stock of Pubco exceeds the aggregate amount to be returned under Distribution #1 and Distribution #2 combined.
9. Pubco's cash and cash equivalents at XXXXXXXXXX amount to approximately XXXXXXXXXX $XXXXXXXXXX.
10. On XXXXXXXXXX, Pubco announced that its Annual Meeting would be postponed in response to XXXXXXXXXX.
11. The Annual Meeting was held on XXXXXXXXXX. XXXXXXXXXX.
12. Pubco publically announced, and began to implement, the Reorganization on XXXXXXXXXX. The purpose of the Reorganization was for Pubco to concentrate its resources on its XXXXXXXXXX.
13. In connection with the Reorganization plans announced XXXXXXXXXX, Pubco initiated a significant reduction in its workforce of approximately XXXXXXXXXX employees, with the remaining XXXXXXXXXX employees XXXXXXXXXX focused on the development of Pubco's XXXXXXXXXX. Pubco also publicly announced XXXXXXXXXX to explore the sale or spin-out of Pubco's XXXXXXXXXX and XXXXXXXXXX Business.
14. The Board authorized a $XXXXXXXXXX return of capital to the Shareholders, to be implemented as soon as practicable, in connection with the Reorganization.
15. XXXXXXXXXX.
16. XXXXXXXXXX.
17. On XXXXXXXXXX, Pubco publicly announced that it proposes a Share Repurchase. The maximum number of shares permitted to be purchased under the XXXXXXXXXX rules in respect of the Share Repurchase is limited to XXXXXXXXXX% of the public float.
18. Pubco's XXXXXXXXXX Business was disposed of to Aco pursuant to the SPA. Under the SPA, Aco was the purchaser, and Pubco and Subco were the vendors.
19. Under the terms of the SPA, Pubco and Subco each received their agreed proportion of the upfront payment of XXXXXXXXXX (the "Purchase Price"), (less their respective proportions of XXXXXXXXXX that is being held in escrow) at closing. Pubco is eligible to receive additional future amounts in contingent payments.
20. Of the Purchase Price, XXXXXXXXXX was paid to Pubco in respect of the right to receive royalties from Bco on XXXXXXXXXX sales outside of XXXXXXXXXX under the terms of a license agreement with Bco, and the right to supply XXXXXXXXXX to Bco for sales outside of XXXXXXXXXX. XXXXXXXXXX of the Purchase Price was paid to Pubco in respect of the rights and assets of the XXXXXXXXXX Business in XXXXXXXXXX. In respect of the future contingent payments, Pubco is eligible to receive up to XXXXXXXXXX relating to the XXXXXXXXXX in XXXXXXXXXX, and up to XXXXXXXXXX relating to future Bco non-XXXXXXXXXX royalties. Pubco is also eligible to receive a royalty on net sales of XXXXXXXXXX.
21. In connection with the SPA, Pubco and Subco entered into a temporary XXXXXXXXXX agreement with Aco to facilitate and transition the XXXXXXXXXX Business to XXXXXXXXXX. Except in connection with such agreement, Pubco and Subco have discontinued all of their prior activity in the XXXXXXXXXX Business following its sale. Pubco and Subco no longer have any XXXXXXXXXX products, and Pubco has XXXXXXXXXX.
22. Pursuant to the SPA, Pubco was allocated approximately XXXXXXXXXX of the XXXXXXXXXX in proceeds received from Aco for the sale of the XXXXXXXXXX Business, and Subco was allocated approximately XXXXXXXXXX, as follows:
Allocation to Pubco (approximate, in XXXXXXXXXX):
| Patent Rights |
XXXXXXXXXX |
Know-how,
trademarks |
XXXXXXXXXX,
XXXXXXXXXX |
| Inventory |
XXXXXXXXXX |
| Equipment |
XXXXXXXXXX |
Other assets/assumed
liabilities |
XXXXXXXXXX |
| Total |
XXXXXXXXXX |
Allocation to Subco (approximate, in XXXXXXXXXX):
| Inventory |
XXXXXXXXXX |
Other assets/assumed
liabilities |
XXXXXXXXXX |
| Total |
XXXXXXXXXX |
The above allocations do not include contingent earn-out payments to Pubco and Subco that have not yet been received, which may total up to XXXXXXXXXX plus a contingent royalty percentage for net sales of XXXXXXXXXX.
23. On XXXXXXXXXX, the Board announced a XXXXXXXXXX% reduction of its workforce to better align its resource with Pubco's corporate objectives following the recent sale of the XXXXXXXXXX Business. Pubco expects the reduction in workforce to result in approximately $XXXXXXXXXX in reduced annualized expenses once the reduction is fully implemented in the first half of XXXXXXXXXX.
24. On XXXXXXXXXX, the Board announced its corporate progress related to activities surrounding the Reorganization, including entering into an XXXXXXXXXX agreement with XXXXXXXXXX regarding the XXXXXXXXXX divestment of the XXXXXXXXXX. The Board also reconfirmed its commitment to return capital to the Shareholders.
PROPOSED TRANSACTIONS
25. Pending receipt of an approval from the Shareholders by way of a special resolution or an approval by a court order, the grant of the rulings herein, and any other regulatory approvals, for each approved reduction of capital, Pubco will reduce the stated capital of the common shares of its capital stock in accordance with the XXXXXXXXXX Business Corporations Act and such reduction(s) of capital will reflect either or a combination of the following:
a. an amount equal to or less than the proceeds of disposition of the sale of the XXXXXXXXXX Business (i.e. PUC Reduction #1); and
b. an amount equal to or less than the cash or near cash on hand of Pubco and its subsidiaries (i.e. PUC Reduction #2), resulting in the reduction of the PUC of the common shares of the capital stock of Pubco by the same amounts.
26. Pubco will effect either Distribution#1, Distribution #2, or both, either separately or concurrently.
27. Distribution#1 will occur within XXXXXXXXXX months after the sale of the XXXXXXXXXX Business (by XXXXXXXXXX), after approval is granted by the Shareholders or by court order, and after a grant of the rulings herein.
28. Distribution#2 will occur within XXXXXXXXXX months after the sale of the XXXXXXXXXX Business (by XXXXXXXXXX), after approval is granted by the Shareholders or by court order, and after a grant of the rulings herein.
ADDITIONAL FACTS
29. Pubco does not ordinarily pay dividends on its shares. Distribution #1 and Distribution #2 are both intended to represent a special transaction in connection with the Reorganization. The proposed reduction(s) of stated capital of the Pubco Shares described above is not in lieu of ordinary course dividends.
30. Neither PUC Reduction#1 nor PUC Reduction #2, nor Distribution#1 nor Distribution #2, will be made as a result of a redemption, acquisition or cancellation of any shares of Pubco or by way of a transaction described in section 86.
31. The amount of Distribution #1 will be derived from the sale proceeds of the XXXXXXXXXX Business realized by Pubco and by Subco; Pubco had an indirect XXXXXXXXXX% interest in Subco at the time that the proceeds were realized from the sale of the XXXXXXXXXX Business.
32. The sale of the XXXXXXXXXX Business was a transaction that occurred outside the ordinary course of the business of both Pubco and Subco.
33. In the period following the divestment of the XXXXXXXXXX Business and prior to the ruling herein, Pubco may return additional capital to shareholders (e.g. in the form of an expanded share repurchase program which would be in addition to the capital returned under the Share Repurchase), however, Pubco does not expect to pass a special resolution or seek a court order to reduce the stated capital of the common shares of its capital stock in accordance with the XXXXXXXXXX Business Corporations Act. As such, no amount of Distribution #1 should reasonably be considered to have been derived from an amount paid by Pubco on a previous reduction of the PUC in respect of any class of shares of Pubco's capital stock.
34. Neither Pubco nor Subco has any outstanding tax liabilities that could be affected by the Proposed Transactions.
35. Pubco was incorporated after XXXXXXXXXX and neither PUC Reduction #1 nor PUC Reduction #2 has been preceded by an increase in the PUC of that class that resulted in a dividend in respect of which Pubco elected to treat as having been paid out of Pubco's XXXXXXXXXX capital surplus on hand.
PURPOSE OF PROPOSED TRANSACTIONS
36. The Board determined that it was in the best interest of Pubco and the Shareholders to sell the XXXXXXXXXX Business and to discontinue its activities in the XXXXXXXXXX Business, and maximize the potential of Pubco's XXXXXXXXXX through the Reorganization. In connection with the scope of future XXXXXXXXXX business activities that are currently envisioned with respect to such program, the Board believes that Pubco is over capitalized. The purpose of the Proposed Transactions is to provide a return of capital to the Pubco Shareholders with respect to the XXXXXXXXXX Business that has been sold and with respect to a portion of Pubco's cash or near cash on hand.
RULINGS
A. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to Pubco's Distribution #1 and Distribution #2, such that Pubco will only be deemed to have paid to a particular holder of Pubco common shares and such holder will only be deemed to have received a dividend to the extent, if any, that the fair market value of such holder's Pubco common share return exceeds the amount by which the paid-up capital of such holder's Pubco common shares is reduced on the distribution.
B. Where a holder of Pubco common shares holds the shares as capital property, the amount received by each such person upon the reduction of the PUC of the common shares, as described in Paragraph 25 above, will be deducted in computing the particular holder's ACB of such common shares by virtue of subparagraph 53(2)(a)(ii), and where the amount of such reduction in the PUC of the common shares exceeds the particular holder's ACB thereof, the excess will be deemed to be a gain of such holder for the year from the disposition of such shares under subsection 40(3).
C. To the extent that a holder of Pubco common shares realizes a capital gain on his common shares as a result of the application of subsection 40(3), in computing the particular holder's ACB of such common shares, as the case may be, the amount of the gain will be added to the ACB of such shares under paragraph 53(1)(a).
D. Provided that Distribution #1 and Distribution #2 do not give rise to a deemed dividend under subsection 84(2), Part XIII will not apply to Distribution #1 and Distribution #2 and consequently subsection 212(2) will not apply to such distributions.
Subsection 15(1) will not apply to require any amount distributed to a Pubco shareholder as a return of capital, as described in Paragraph 25 above, to be included in computing the income of such shareholder.
The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the Proposed Transactions are completed by XXXXXXXXXX. The above rulings are based on the law at it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.
Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:
a) The PUC of any share or the adjusted cost base or fair market value of any property referred to herein; or
b) Any tax consequences relating to the facts and Proposed Transactions described herein other that those confirmed in the rulings given above.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
Yours truly,
Section Manager
For Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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