Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether the Canadian "spin-off butterfly" transactions in the context of a cross-border butterfly described below meet legislative and administrative requirements.
Position: Transactions meet requirements.
Reasons: Consistent with law and administrative requirements
XXXXXXXXXX
2014-053096
XXXXXXXXXX, 2014
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information provided to us in subsequent letters and during our various telephone conversations.
To the best of your knowledge, and that of the taxpayer involved, none of the issues involved in this 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, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
I. DEFINITIONS
Unless otherwise expressly stated, every reference herein to the "Act" or to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and the Income Tax Regulations thereunder are referred to as the "Regulations."
Unless otherwise noted, all references herein to a currency are a reference to Canadian dollars.
In this letter, the following terms have the meanings specified and, where the circumstances so require, the singular should be read as plural and vice versa:
"ACB" means adjusted cost base, as defined in section 54;
"Additional Cash Transfer" has the meaning set out in Paragraph 58.1;
"agreed amount" in respect of a property means the amount that a transferor and transferee have agreed upon in a joint election under subsection 85(1) in respect of a transfer of an eligible property;
"Amalgamation" means the amalgamation of Canada Holding and Canco to form DC, as more particularly described in Paragraph 43;
XXXXXXXXXX;
"arm's length" has the meaning assigned by subsection 251(1);
"XXXXXXXXXX Note 1" means the unsecured, non-convertible and non-interest bearing promissory note having a principal amount of $XXXXXXXXXX and due on XXXXXXXXXX, issued by an unrelated third party to Canco as part of the consideration payable to Canco in respect of the XXXXXXXXXX Sale, as more particularly described in Paragraph 17;
"XXXXXXXXXX Note 2" means the unsecured, non-convertible and non-interest bearing promissory note having a principal amount of $XXXXXXXXXX and due on XXXXXXXXXX, issued by an unrelated third party to Canco as part of the consideration payable to Canco in respect of the XXXXXXXXXX Sale, as more particularly described in Paragraph 17;
"XXXXXXXXXX Notes" means XXXXXXXXXX Note 1 and XXXXXXXXXX Note 2;
"XXXXXXXXXXCo 1" means XXXXXXXXXX, which is an indirect wholly-owned XXXXXXXXXX subsidiary of LLC 1 engaged in the Transferred Services Business in XXXXXXXXXX;
"XXXXXXXXXXCo 2" means XXXXXXXXXX, which is a direct wholly-owned XXXXXXXXXX subsidiary of BXXXXXXXXXX engaged in the Retained Services Business in XXXXXXXXXX;
"Butterfly Percentage" means the proportion, expressed as a percentage that, the net FMV of the business property owned by Newco is of the net FMV of all of the business property of DC, in each case determined (i) immediately before the transfer of the Newco Common Shares to TCo described in Paragraph 57, and (ii) using the principles set out in Paragraphs 47 to 50;
"BXXXXXXXXXX" means XXXXXXXXXX, a company formed as XXXXXXXXXX, all of the shares of the capital of which are owned by Holding XXXXXXXXXX;
"Canada Group" means Canada Holding and its subsidiary corporations, as more particularly described in Paragraphs 9 to 11, which (for greater certainty) includes Canada Holding and Canco prior to the Amalgamation, Subco 1, Subco 2, Subco 3, Subco 4, Subco 5, Subco 6, Subco 7 and Subco 8, and includes DC following the Amalgamation, but does not include CanSub;
"Canada Holding" means XXXXXXXXXX, as more particularly described in Paragraph 3;
"Canada Holding Common Shares" means common shares in the capital of Canada Holding;
"Canadian Transferred Services Business" means the Transferred Services Business carried on in Canada through Canco, Subco 1, Subco 2, Subco 3 and Subco 6;
"Canco" means XXXXXXXXXX, as more particularly described in Paragraph 1;
"Canco Common Shares" means common shares in the capital of Canco;
"CanSub" means XXXXXXXXXX, which was a direct wholly-owned Canadian subsidiary of LLC 2, as more particularly described in Paragraph 21;
"CanSub Shares" means common shares in the capital of CanSub;
"capital property" has the meaning assigned by section 54;
"Capital Account" means the capital account described in subsection XXXXXXXXXX of the XXXXXXXXXX;
"Capital Reorganization" has the meaning set out in Paragraph 44;
"CBCA" means Canada Business Corporations Act, R.S.C. 1985, c. C-44;
"CDA" means "capital dividend account", as defined in section 89;
XXXXXXXXXX;
XXXXXXXXXX;
"connected" has the meaning assigned by subsection 186(4);
"cost amount" has the meaning assigned by subsection 248(1);
"CRA" means the Canada Revenue Agency;
"DC" means the corporation formed pursuant to the amalgamation of Canada Holding and Canco, as more particularly described in Paragraph 43;
"DC Common Shares" means common shares in the capital of DC;
"DC New Common Shares" has the meaning set out in Paragraph 44;
"DC Redemption Amount" has the meaning set out in Paragraph 44(b)(i);
"DC Redemption Note" has the meaning set out in Paragraph 59(a);
"DC Shares" has the meaning set out in Paragraph 44;
"DC Special Shares" has the meaning set out in Paragraph 44;
"DC-CanSub Intercompany Amount" has the meaning set out in Paragraph 22;
"depreciable property" has the meaning assigned by subsection 13(21);
"designated stock exchange" has the meaning assigned by subsection 248(1);
XXXXXXXXXX;
"distribution" has the meaning assigned by subsection 55(1);
"dividend rental arrangement" has the meaning assigned by subsection 248(1);
XXXXXXXXXX;
"eligible capital property" has the meaning assigned by section 54;
"eligible distribution" has the meaning assigned by subsection 86.1(2);
"eligible property" has the meaning assigned by subsection 85(1.1);
"Excess Cash" means the excess cash of the Canada Group, as more particularly described in Paragraph 18;
"External Debt" means the third party debt that will be issued by Foreign Spinco, as more particularly described in Paragraph 65;
"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 terms of cash;
"XXXXXXXXXX Sale" has the meaning set out in Paragraph 17;
"First Dividend" has the meaning set out in Paragraph 81;
"Foreign Pubco" means XXXXXXXXXX, as more particularly described in Paragraph 5;
"Foreign Spinco" means XXXXXXXXXX established as an LLC on XXXXXXXXXX, that was wholly-owned by Foreign Pubco. Foreign Spinco was originally established under the name XXXXXXXXXX. Foreign Spinco was formed as an LLC in order for the transactions described in Paragraphs 43 to 60 to qualify as a tax-free spin-off for US federal income tax purposes, but converted to a corporation (XXXXXXXXXX) on XXXXXXXXXX, prior to the Spin-Out in order for its shares to be distributed to the public shareholders of Foreign Pubco;
"Foreign Spinco Shares" means common shares in the capital of Foreign Spinco following the conversion of Foreign Spinco into a XXXXXXXXXX corporation described in Paragraph 64;
"Foreign Spinco Interests" means membership interests in the capital of Foreign Spinco prior to its conversion into a XXXXXXXXXX corporation described in Paragraph 64;
"forgiven amount" has the meaning assigned by subsection 80(1) and subsection 80.01(1);
"guarantee agreement" has the meaning assigned by subsection 112(2.2);
"Holding XXXXXXXXXX" means XXXXXXXXXX, a company formed as XXXXXXXXXX that was owned XXXXXXXXXX% by Foreign Pubco and XXXXXXXXXX% by LLC 3;
"IRS" means the Internal Revenue Service;
"inventory" has the meaning assigned by subsection 248(1);
"ITAR" means the Income Tax Application Rules;
XXXXXXXXXX;
"LLC" means a limited liability company;
"LLC 1" means XXXXXXXXXX, a XXXXXXXXXX LLC that is wholly-owned by Foreign Pubco. Prior to XXXXXXXXXX, LLC 1 was a XXXXXXXXXX corporation; on XXXXXXXXXX, it filed a XXXXXXXXXX to convert to an LLC, in order to facilitate the Spin-Out for US tax purposes;
"LLC 2" means XXXXXXXXXX, a XXXXXXXXXX LLC that is wholly-owned by LLC 1. Prior to XXXXXXXXXX, LLC 2 was a XXXXXXXXXX corporation; on XXXXXXXXXX, it filed a XXXXXXXXXXXXXXXXXXXX in accordance with the XXXXXXXXXX to convert to an LLC, in order to facilitate the Spin-Out for US tax purposes;
"LLC 3" means XXXXXXXXXX, a XXXXXXXXXX LLC that is wholly-owned by LLC 1. Prior to XXXXXXXXXX, LLC 3 was a XXXXXXXXXX corporation; on XXXXXXXXXX, it filed a XXXXXXXXXX in accordance with the XXXXXXXXXX to convert to an LLC, in order to facilitate the Spin-Out for US tax purposes;
"XXXXXXXXXXCo" means XXXXXXXXXX, which is an indirect XXXXXXXXXX subsidiary of BXXXXXXXXXX engaged in the Transferred Services Business in XXXXXXXXXX;
"XXXXXXXXXXCo Minority Shares" means the nominal number of shares in the capital of XXXXXXXXXXCo owned by LLC 2;
"Minister" means the Minister of National Revenue;
"Newco" means XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX, under the provisions of the CBCA as a wholly-owned subsidiary of Canco, as more particularly described in Paragraph 40;
"Newco Common Shares" means common shares in the capital of Newco;
"Newco Dividend" has the meaning set out in Paragraph 62;
XXXXXXXXXX;
XXXXXXXXXX;
XXXXXXXXXX;
"Paragraph" refers to a numbered paragraph in this letter;
"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;
"PUC" means paid-up capital, as defined in subsection 89(1);
"RDTOH" means refundable dividend tax on hand, within the meaning of subsection 129(3);
"Regulations" means the Income Tax Act Regulations promulgated under the Act;
"related persons" means, in relation to a particular person, another person who is related to the particular person by virtue of subsection 251(2), as modified for the purposes of section 55 by paragraph 55(5)(e);
XXXXXXXXXX;
XXXXXXXXXX;
XXXXXXXXXX;
"Retained Services Business" means the XXXXXXXXXX business of Foreign Pubco and its subsidiaries, as more particularly described in Paragraph 7;
"Second Dividend" has the meaning set out in Paragraph 81;
XXXXXXXXXX;
"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, as more particularly described in Paragraph 47(g);
"specified financial institution" has the meaning assigned by subsection 248(1);
"specified investment business" has the meaning assigned by subsection 125(7);
"specified shareholder" has the meaning assigned by subsection 248(1), as modified by subsections 55(3.2), (3.3) and (3.4);
"Spin-Out" means the distribution of the Foreign Spinco Shares as a dividend-in-kind to the shareholders of Foreign Pubco, as more particularly described in Paragraph 67;
"stated capital" in respect of the share capital of a corporation has the meaning assigned by the statute by which the corporation is governed at the relevant time, other than the XXXXXXXXXX;
"Subco 1" means XXXXXXXXXX, which was a direct wholly-owned Canadian subsidiary of Canco and a member of the Canada Group;
"Subco 2" means XXXXXXXXXX, which was a direct wholly-owned Canadian subsidiary of Canco and a member of the Canada Group;
"Subco 3" means XXXXXXXXXX, which was a direct wholly-owned Canadian subsidiary of Canco and a member of the Canada Group;
"Subco 4" means XXXXXXXXXX, which was a direct wholly-owned Canadian subsidiary of Canco and a member of the Canada Group;
"Subco 5" means XXXXXXXXXX, which was a direct wholly-owned Canadian subsidiary of Canco and a member of the Canada Group;
"Subco 6" means XXXXXXXXXX, which is a direct wholly-owned Canadian subsidiary of Subco 1 and a member of the Canada Group;
"Subco 7" means XXXXXXXXXX, as more particularly described in Paragraph 11(a);
"Subco 8" means XXXXXXXXXX, as more particularly described in Paragraph 11(b);
"Subject Transactions" means the transactions described in Paragraphs 26 to 68;
"substantial interest" has the meaning assigned by subsection 191(2);
XXXXXXXXXX;
"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);
"taxable RFI share" has the meaning assigned by subsection 248(1);
"TCo" means XXXXXXXXXX, a XXXXXXXXXX formed on XXXXXXXXXX, as a subsidiary of Foreign Spinco, as more particularly described in Paragraph 38;
"TCo Common Shares" means the common shares in the capital of TCo, as more particularly described in Paragraph 38(a);
"TCo Dividend" has the meaning set out in Paragraph 63;
"TCo Preferred Shares" means the preferred shares in the capital of TCo, as more particularly described in Paragraph 38(b);
"TCo Redemption Amount" has the meaning set out in Paragraph 38(b)(i);
"TCo Redemption Note" has the meaning set out in Paragraph 59(b);
"term preferred share" has the meaning assigned by subsection 248(1);
"Three-Party Share Exchange" means the three-party share exchange between Foreign Pubco, Foreign Spinco and TCo, as more particularly described in Paragraph 45;
"Transfer Date" means XXXXXXXXXX, the date of the transfer, by DC, of the property to TCo, as more particularly described in Paragraph 57;
"Transfer" means the transfer by DC of: (a) all of its Newco Common Shares to TCo, and (b) its legal obligation to transfer any cash or near-cash property to TCo, as described in Paragraph 57;
"Transferred Note Interest" has the meaning set out in Paragraph 52;
"Transferred Services Business" means the XXXXXXXXXX businesses previously carried on by Foreign Pubco and its subsidiaries, as more particularly described in Paragraph 7;
"US Holding" means XXXXXXXXXX, a US corporation that is a wholly-owned subsidiary of LLC 2. XXXXXXXXXX;
"US Treaty" means the Canada United States Tax Convention (1980), as amended by the Protocols thereto.
II. FACTS
Canco
1. Prior to the Amalgamation, Canco was a company amalgamated pursuant to the laws of XXXXXXXXXX and was a taxable Canadian corporation and a private corporation for purposes of the Act. Canco was formed on XXXXXXXXXX, on the amalgamation of XXXXXXXXXX, XXXXXXXXXX and XXXXXXXXXX.
Canco was audited by the XXXXXXXXXX Tax Services Office, and its business number was XXXXXXXXXX. Canco filed its annual income tax return electronically. Canco's financial year-end was XXXXXXXXXX.
Canco was a XXXXXXXXXX. Canco elected to be treated as a corporation under US Treasury Reg. Sec. 301.7701-3(c) and was therefore not a fiscally transparent entity for US federal income tax purposes.
2. The authorized share capital of Canco consisted of XXXXXXXXXX Canco Common Shares. The Canco Common Shares were not short-term preferred shares or taxable preferred shares.
All of the issued and outstanding Canco Common Shares (being XXXXXXXXXX Canco Common Shares) were owned by Canada Holding.
Canada Holding
3. Prior to the Amalgamation, Canada Holding was a company incorporated pursuant to the laws of XXXXXXXXXX and was a taxable Canadian corporation and a private corporation for purposes of the Act. Canada Holding was audited by the XXXXXXXXXX Tax Services Office, and its business number was XXXXXXXXXX. Canada Holding filed its annual income tax return electronically. Canada Holding's financial year-end was XXXXXXXXXX.
Canada Holding was a XXXXXXXXXX. Canada Holding elected to be treated as a corporation under US Treasury Reg. Sec. 301.7701-3(c) and was therefore not a fiscally transparent entity for US federal income tax purposes.
4. The authorized share capital of Canada Holding consisted of XXXXXXXXXX Canada Holding Common Shares. The Canada Holding Common Shares were not short-term preferred shares or taxable preferred shares.
All of the issued and outstanding Canada Holding Common Shares (being XXXXXXXXXX Canada Holding Common Shares) were owned by Foreign Pubco.
The PUC of the Canada Holding Common Shares was equal to or less than the PUC of the Canco Common Shares.
Foreign Pubco
5. Foreign Pubco is a corporation governed by the laws of the State of XXXXXXXXXX. Foreign Pubco has one class of common stock outstanding. The outstanding common stock of Foreign Pubco is publicly traded and listed on the XXXXXXXXXX. The market capitalization of Foreign Pubco prior to the Spin-Out was approximately US$XXXXXXXXXX.
Foreign Pubco is widely held, and, to the best of Foreign Pubco's knowledge, no one shareholder or group of related shareholders of Foreign Pubco owns XXXXXXXXXX% or more of the common stock of Foreign Pubco.
6. Foreign Pubco has implemented an employee stock option plan, whereby employees of Foreign Pubco and employees of its subsidiaries (including Canco and DC following the Amalgamation) are granted options to acquire shares in the capital of Foreign Pubco, having an exercise price not less than the FMV of the stock at the time the options are granted.
Foreign Pubco has also implemented an employee stock purchase plan, whereby employees of Foreign Pubco and employees of its subsidiaries (including Canco and DC following the Amalgamation) are entitled to acquire shares in the capital of Foreign Pubco at a discounted price. (In addition, certain employees of Canco (and DC following the Amalgamation) and certain employees of its subsidiaries have rights under other employee plans, including a group RRSP.)
7. Prior to the Spin-Out, Foreign Pubco was engaged, through its subsidiaries, in two primary businesses around the world:
(a) XXXXXXXXXX (the "Retained Services Business"). XXXXXXXXXX; and
(b) XXXXXXXXXX (the "Transferred Services Business"). XXXXXXXXXX.
Canadian Businesses
8. The Retained Services Business in Canada and the Canadian Transferred Services Business were operated directly by Canco and indirectly through its subsidiary corporations, as described below.
9. Canco directly owned all of the issued and outstanding shares in the capital of:
(a) Subco 1, which is a corporation incorporated under the laws of XXXXXXXXXX, a taxable Canadian corporation and a private corporation. Subco 1 is engaged only in the Canadian Transferred Services Business;
(b) Subco 2, which is a corporation incorporated under the laws of Canada, a taxable Canadian corporation and a private corporation. Subco 2 is engaged only in the Canadian Transferred Services Business;
(c) Subco 3, which is a corporation incorporated under the laws of Canada, a taxable Canadian corporation and a private corporation. Subco 3 is engaged only in the Canadian Transferred Services Business;
(d) Subco 4, which is a corporation incorporated under the laws of XXXXXXXXXX, a taxable Canadian corporation and a private corporation. Subco 4 is engaged only in the Retained Services Business in Canada; and
(e) Subco 5, which is a corporation incorporated under the laws of Canada, a taxable Canadian corporation and a private corporation. Subco 5 is engaged only in the Retained Services Business in Canada.
10. Subco 1 owns all of the issued and outstanding shares in the capital of Subco 6, which is a corporation amalgamated under the laws of XXXXXXXXXX, a taxable Canadian corporation and a private corporation.
The amalgamation of Subco 6 took place on XXXXXXXXXX. Its predecessor corporations were XXXXXXXXXX and XXXXXXXXXX.
Subco 6 is engaged only in the Canadian Transferred Services Business.
11. Subco 4 owns all of the issued and outstanding shares in the capital of the following corporations, which previously were engaged in the Retained Services Business in Canada, but are now dormant:
(a) Subco 7, which is a corporation incorporated under the laws of XXXXXXXXXX and a controlled foreign affiliate of Subco 4; and
(b) Subco 8, which is a corporation incorporated under the laws of XXXXXXXXXX and a controlled foreign affiliate of Subco 4.
12. In addition to the shares in the capital of the subsidiaries described in Paragraphs 9 to 11, the assets of the Canada Group included:
(a) assets used to carry on the Retained Services Business in Canada and the Canadian Transferred Services Business (including cash, accounts receivables, trade receivables, inventory, prepaid expenses, machinery and equipment, furniture and fixtures, XXXXXXXXXX and leasehold improvements);
(b) XXXXXXXXXX;
(c) the Excess Cash, as described in Paragraph 18; and
(d) the XXXXXXXXXX Notes as described in Paragraph 17.
13. The liabilities of the Canada Group included:
(a) accounts payable and other accrued expenses incurred in connection with the Retained Services Business in Canada and the Canadian Transferred Services Business, and
(b) XXXXXXXXXX.
14. The Canada Group did not own any property (other than property that should be classified as cash and near-cash property) the income from which, for purposes of the Act, would be income from property or income from a specified investment business, other than XXXXXXXXXX Note 2.
15. XXXXXXXXXX.
16. Earnings of the Canada Group have periodically been distributed to Foreign Pubco. The last dividend paid by Canada Holding to Foreign Pubco was in XXXXXXXXXX in the amount of US$XXXXXXXXXX.
17. On XXXXXXXXXX, Canco sold a group of XXXXXXXXXX Canadian corporations (the "XXXXXXXXXX Sale") to an unrelated purchaser for consideration of US$XXXXXXXXXXXXXXXXXXXX, comprised of $XXXXXXXXXX in cash paid by the purchaser on closing and the issuance of XXXXXXXXXX Note 1 and XXXXXXXXXX Note 2.
XXXXXXXXXX.
18. On XXXXXXXXXX, the Canada Group held a significant cash balance (including the proceeds of the XXXXXXXXXX Sale), in the form of bank time deposits (the "Excess Cash"). Under the investment guidelines of Canco (and DC following the Amalgamation), investments of Excess Cash can include other investment grade securities, although the maximum maturity/life of such investments is XXXXXXXXXX months. The funds are continuously reinvested as investments mature and none of the current investments have a maturity in excess of one year.
19. XXXXXXXXXX.
20. XXXXXXXXXX.
CanSub
21. CanSub is a taxable Canadian corporation and a private corporation incorporated under the laws of XXXXXXXXXX. All of the shares in the capital of CanSub were owned by LLC 2.
CanSub is engaged only in the Transferred Services Business in Canada.
22. Prior to XXXXXXXXXX, Canco owed approximately $XXXXXXXXXX to CanSub (the "DC-CanSub Intercompany Amount") XXXXXXXXXX.
The DC-CanSub Intercompany Amount owing on XXXXXXXXXX was repaid on XXXXXXXXXX.
International Businesses
23. [Reserved]
24. The Retained Services Business and the Transferred Services Business were operated in XXXXXXXXXX principally through Holding XXXXXXXXXX, which owned all of the issued and outstanding shares in the capital of BXXXXXXXXXX. In particular, the Transferred Services Business was operated in XXXXXXXXXX and XXXXXXXXXX through approximately XXXXXXXXXX direct and indirect subsidiaries of BXXXXXXXXXX, in XXXXXXXXXX through XXXXXXXXXX indirect subsidiaries of BXXXXXXXXXX, and in XXXXXXXXXX through a XXXXXXXXXX branch of an indirect XXXXXXXXXX subsidiary of BXXXXXXXXX. BXXXXXXXXXX also directly owns all of the shares of XXXXXXXXXXCo 2, and indirectly owned all of the shares of XXXXXXXXXXCo (through a direct XXXXXXXXXX subsidiary of BXXXXXXXXXX) other than the XXXXXXXXXXCo Minority Shares.
25. The Retained Services Business and the Transferred Services Business were operated in XXXXXXXXXX principally through LLC 1. In particular, the Transferred Services Business was operated in the United States through XXXXXXXXXX direct and indirect subsidiaries of LLC 1. LLC 1 also operated the Transferred Services Business in XXXXXXXXXX through an indirect XXXXXXXXXX subsidiary that is wholly-owned by US Holding and in XXXXXXXXXX through XXXXXXXXXXCo 1. LLC 1 also indirectly owned (through LLC 2) all of the issued and outstanding shares in the capital of CanSub, as described above in Paragraph 21.
III. SUBJECT TRANSACTIONS
26. Foreign Pubco transferred its worldwide Transferred Services Business to Foreign Spinco, and distributed the Foreign Spinco Shares to the shareholders of Foreign Pubco on XXXXXXXXXX, resulting in one United States public company (Foreign Spinco) indirectly carrying on the Transferred Services Business and one United States public company (Foreign Pubco) indirectly carrying on the Retained Services Business.
International Restructuring
27. Through a series of transactions, the worldwide Transferred Services Business (other than the Canadian Transferred Services Business) was transferred to Foreign Spinco on XXXXXXXXXX. On XXXXXXXXXX, the Canadian Transferred Services Business was transferred by DC to TCo as described in Paragraphs 43 through 60.
28. [Reserved]
29. [Reserved]
30. [Reserved]
31. [Reserved]
32. [Reserved]
33. [Reserved]
34. [Reserved]
35. [Reserved]
36. [Reserved]
37. [Reserved]
38. TCo was formed as a XXXXXXXXXX on XXXXXXXXXX. As a XXXXXXXXXX, TCo was automatically a fiscally disregarded entity for US federal income tax purposes. TCo is a private corporation and a taxable Canadian corporation. The authorized capital of TCo consists of the following:
(a) an unlimited number of voting, fully participating common shares (the "TCo Common Shares"); and
(b) XXXXXXXXXX preferred shares ("TCo Preferred Shares") having the following attributes:
(i) each TCo Preferred Share is redeemable, subject to applicable law, at any time at the option of TCo at a redemption amount equal to the aggregate FMV of the consideration paid to TCo on issuance thereof (i.e., the Newco Common Shares, and TCo's right to receive additional cash or near-cash property from DC, as described in Paragraphs 57 and 58.1) divided by the number of TCo Preferred Shares issued as consideration therefor, plus any declared but unpaid dividends thereon (the "TCo Redemption Amount");
(ii) each TCo Preferred Share is retractable, subject to applicable law, at any time at the option of the holder for an amount equal to the TCo Redemption Amount;
(iii) the holder of each TCo Preferred Share is entitled to a non-cumulative cash dividend as and when declared by the board of directors of TCo from time to time, which dividend need not also be declared on any other class of shares in the capital of TCo;
(iv) there is a provision restricting the payment of dividends on other classes of shares in the capital of TCo such that no such dividends may be paid on such other shares if the resulting realizable value of the net assets of TCo after payment of such dividends would be less than the aggregate TCo Redemption Amount of all of the TCo Preferred Shares then outstanding;
(v) the holder of each TCo Preferred Share is entitled, upon the liquidation, dissolution or winding-up of TCo, to a payment in priority to all other classes of shares in the capital of TCo of an amount equal to the TCo Redemption Amount therefor to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but is entitled to no more than the amount of that payment; and
(vi) the holder of each TCo Preferred Share is not entitled to vote at meetings of shareholders of TCo, other than as provided under the XXXXXXXXXX.
39. On the incorporation of TCo, Foreign Spinco subscribed for one TCo Common Share for $XXXXXXXXXX.
40. Newco was incorporated under the laws of Canada on XXXXXXXXXX. Newco is a private corporation and a taxable Canadian corporation. The authorized capital of Newco consists of an unlimited number of Newco Common Shares.
41. On the incorporation of Newco, Canco subscribed for one Newco Common Share for $XXXXXXXXXX.
XXXXXXXXXX
42. XXXXXXXXXX.
Amalgamation of Canada Holding and Canco
43. On XXXXXXXXXX, Canada Holding and Canco amalgamated ("Amalgamation") under the laws of XXXXXXXXXX through a vertical amalgamation to form DC. Immediately following the Amalgamation, the issued share capital of DC consisted of XXXXXXXXXX DC Common Shares held by Foreign Pubco, which shares were considered to be newly issued shares of DC under the XXXXXXXXXX.
DC elected to be treated as a corporation under US Treasury Reg. Sec. 301.7701-3(c) effective as of XXXXXXXXXX, and therefore it is not a fiscally transparent entity for US federal income tax purposes.
Canadian "Butterfly" Restructuring
44. On XXXXXXXXXX, following the Amalgamation, DC reorganized its capital pursuant to the XXXXXXXXXX (the "Capital Reorganization") by amending its articles of association by passing a special resolution and filing a certified copy of such resolution to (i) create a new class of common shares (the "DC New Common Shares") and a new class of preferred shares (the "DC Special Shares") (collectively referred to as the "DC Shares") and (ii) exchange each issued and outstanding DC Common Share for one DC New Common Share and one DC Special Share. The DC Shares have the rights and conditions as described below:
(a) each DC New Common Share is a fully participating voting common share with the holder thereof entitled to XXXXXXXXXX votes per share at each meeting of the shareholders of DC; and
(b) the DC Special Shares have the following attributes:
(i) each DC Special Share is redeemable, subject to applicable law, at any time at the option of DC for an amount equal to: (I) the amount obtained by multiplying the aggregate FMV of the issued and outstanding DC Common Shares immediately prior to the Capital Reorganization by the Butterfly Percentage and then dividing such product by the number of DC Special Shares issued on the Capital Reorganization, plus (II) the amount of all declared but unpaid dividends thereon (the "DC Redemption Amount");
(ii) each DC Special Share is retractable, subject to applicable law, at any time at the option of the holder thereof for an amount equal to the DC Redemption Amount;
(iii) the holder of each DC Special Share is entitled to non-cumulative cash dividends as and when declared by the directors of DC from time to time, which dividends need not also be declared on any other class of shares of DC;
(iv) there is a provision restricting the payment of dividends on other classes of shares of DC such that no such dividends may be paid on any other class of shares of DC if the resulting realizable value of the net assets of DC after payment of the dividends would be less than the aggregate DC Redemption Amount of all of the DC Special Shares then outstanding;
(v) the holder of each DC Special Share is entitled, upon the liquidation, dissolution or winding-up of DC, to a payment in priority to all other classes of shares of DC of an amount equal to the DC Redemption Amount thereon to the extent of the amount of the value of property available under applicable law for payments to the shareholders of DC upon liquidation, dissolution or winding-up, but is entitled to no more than the amount of that payment; and
(vi) the holder of each DC Special Share is not entitled to vote at any meeting of the shareholders of DC, other than as provided under applicable law.
The aggregate FMV of the DC New Common Shares and DC Special Shares immediately following the Capital Reorganization was equal to the aggregate FMV of the DC Common Shares immediately before the Capital Reorganization.
Foreign Pubco held the DC Common Shares as capital property. No election under subsection 85(1) will be filed in respect of the Capital Reorganization.
The aggregate addition to the Capital Account in respect of the DC Shares issued by DC on the Capital Reorganization did not exceed the aggregate PUC of the DC Common Shares at the time of the Capital Reorganization. Such aggregate capital was apportioned between the DC New Common Shares and the DC Special Shares in proportion to the relative aggregate FMV of such shares.
The DC Common Shares were not taxable Canadian property. Accordingly, Foreign Pubco did not and will not apply for a clearance certificate under section 116 in respect of the exchange of the DC Common Shares on the Capital Reorganization.
45. On XXXXXXXXXX, following the Capital Reorganization, in the context of a three-party transfer agreement (the "Three-Party Share Exchange") between Foreign Pubco, Foreign Spinco and TCo:
(a) TCo paid the purchase price for the DC Special Shares by issuing the TCo Common Shares to Foreign Spinco having an aggregate FMV at that time equal to the aggregate FMV of the DC Special Shares so transferred by Foreign Pubco to TCo described in Paragraph 45(b). TCo and Foreign Spinco both agreed that the TCo Common Shares were issued to Foreign Spinco in respect of and by virtue of the disposition by Foreign Pubco of the DC Special Shares to TCo;
(b) Foreign Pubco paid the purchase price for the Foreign Spinco Interests described in Paragraph 45(c) by transferring the DC Special Shares to TCo described in Paragraph 45(a); and
(c) Foreign Spinco paid the purchase price for the TCo Common Shares by issuing the Foreign Spinco Interests to Foreign Pubco having an aggregate FMV at that time equal to the aggregate FMV of the TCo Common Shares so issued by TCo to Foreign Spinco described in Paragraph 45(a).
The amount added to the Capital Account of TCo in respect of the issuance of the TCo Common Shares was an amount equal to the aggregate FMV at that time of the DC Special Shares acquired by TCo.
The DC Special Shares were not taxable Canadian property. Accordingly, Foreign Pubco did not and will not apply for a clearance certificate under section 116 in respect of the transfer of such shares.
Following these transactions, Foreign Spinco owned all of the issued and outstanding shares in the capital of TCo. No person other than Foreign Spinco acquired or will acquire shares in the capital of TCo as part of a series of transactions that includes any of the Subject Transactions (except for the TCo Preferred Shares that were issued as described in Paragraph 57 and redeemed as described in Paragraph 59(b)).
46. The aggregate FMV, immediately before the transfer described in Paragraph 57, of the Foreign Spinco Interests owned by Foreign Pubco was equal to or approximated the amount determined by the formula in (b)(iii) of the definition of "permitted exchange" in subsection 55(1) (on the assumption that Foreign Pubco was the participant, DC was the distributing corporation and Foreign Spinco was the acquiror).
In particular, Foreign Pubco owned all of the issued and outstanding DC Shares immediately before the acquisition of the DC Special Shares by TCo described in Paragraph 45(b), and Foreign Pubco owned all of the issued and outstanding Foreign Spinco Interests immediately after the Three-Party Share Exchange and all of the issued and outstanding Foreign Spinco Shares immediately before the Spin-Out.
47. Immediately before the transfer of property described in Paragraph 57, the property of DC was determined on a consolidated basis by including the appropriate pro rata share of the assets of any corporation over which DC had the ability to exercise significant influence (namely, Subco 1, Subco 2, Subco 3, Subco 4, Subco 5, Subco 6, Subco 7 and Subco 8). Such assets were classified into the following three types of property for the purposes of the definition of distribution as follows:
(a) cash or near-cash property, comprising all of the current assets of DC, including cash, marketable securities, accounts receivable, trade receivables, inventory and prepaid expenses;
(b) business property, comprising all of the assets of DC, 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 DC, 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 DC or the balance of any RDTOH or CDA of DC, if any, were not considered property;
(e) XXXXXXXXXX the Excess Cash were considered to be cash or near-cash property;
(f) advances that had a term of less than XXXXXXXXXX months or are due on demand (other than advances owing to DC which are described in (h) below) were considered cash or near-cash property;
(g) DC was considered to have significant influence over a corporation if DC had significant influence over that corporation or over any other corporation that had significant influence over that corporation, or if DC, in combination with corporations over which it had significant influence, had significant influence over that corporation;
(h) the FMV of the shares in the capital of any corporation over which DC had the ability to exercise significant influence, and of any indebtedness receivable by DC from such a corporation, was allocated among the three types of property described above by multiplying the FMV of the shares in the capital of such corporations 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 (determined in accordance herewith) is of the net FMV of all property owned by such corporation;
(i) XXXXXXXXXX
(j) XXXXXXXXXX.
48. Since the Canada Group had no property (other than cash or near-cash property), the income from which would be considered income from property, and since the Canada Group did not carry on any specified investment business, DC did not have any investment property for the purposes of this distribution, other than XXXXXXXXXX Note 2, a portion of which was transferred to Newco as described in Paragraph 52. For greater certainty, each investment comprising the Excess Cash was treated as cash or near-cash property.
49. In determining, on a consolidated basis, the net FMV of each of the three types of property of DC immediately before the transfer of property described in Paragraph 57, the liabilities of DC and any corporation over which DC exercised significant influence were allocated to, and were deducted in the calculation of the net FMV of, each type of property of DC or such corporation, as the case may be, in the following manner:
(a) in determining the net FMV of each type of property of a corporation over which DC exercised significant influence immediately before the transfer described in Paragraph 57, the liabilities of that corporation (other than any amount owing by such corporation to DC) were allocated to, and deducted in the calculation of the net FMV of, each type of property of that particular corporation in the following manner:
(i) current liabilities of that particular corporation were allocated to each cash or near-cash property of the corporation in the proportion that the FMV of each such property was of the FMV of all cash or near-cash property owned by that particular corporation. To the extent that the total amount of current liabilities to be allocated to the cash or near-cash property exceeded the total FMV of all of the cash or near-cash property, that particular corporation was 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 (i) above, provided that the net FMV of the cash or near-cash property of that particular corporation was positive, any remaining net FMV of any accounts receivable, trade receivables, inventories and prepaid expenses of that particular corporation were reclassified as business property of that particular corporation and excluded from the net FMV of the cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of business to which such property relates;
(iii) liabilities, other than current liabilities, of that particular corporation that related to a particular property were allocated to that particular property (and effectively to the type of property to which the particular property belonged) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property and liabilities that pertained to a particular type of property, but not to a particular property, was then allocated to that particular type of property. To the extent that the total amount of liabilities allocated to a particular type of property as described herein exceeded the total FMV of that type of property, that particular corporation was considered to have a negative amount of that type of property; and
(iv) any liabilities that remained after the allocations described in Paragraphs 49(a)(i) and (iii) were made were then allocated to the cash or near-cash property, investment property and business property of that particular corporation, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities. However, where that particular corporation was considered to have a negative amount of a type of property because of Paragraph 49(a)(i) or (iii), for the purposes of allocating those remaining liabilities, the net FMV of that type of property was 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 DC immediately before the transfer of property described in Paragraph 57, DC included the appropriate pro rata share of the net FMV of each type of property of any corporation over which DC exercised significant influence, and, for greater certainty, the appropriate negative amount of such type of property of any such corporation, and any liabilities of DC were allocated to, and deducted in the calculation of the net FMV of, each such type of property of DC in the following manner:
(i) current liabilities of DC were allocated to the cash or near-cash property of DC in the proportion that the FMV of each such property was of the FMV of all cash or near-cash property of DC. The allocation of current liabilities, as described herein, did not exceed the FMV of all of the cash or near-cash property of DC;
(ii) following the allocation of current liabilities to each cash or near-cash property in (b)(i) above, any remaining net FMV of any accounts receivable, trade receivable, inventories and prepaid expenses of DC was 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 DC, other than current liabilities, that related to a particular property were allocated to the particular property (and effectively to the type of property to which the particular property belonged) to the extent of its FMV. The liabilities that pertain to a type of property but not to a particular property were allocated to that type of property, but not in excess of the net FMV of such type after the allocation of liabilities to a particular property, as described herein; and
(iv) any liabilities that remained after the allocations described in Paragraphs 49(b)(i) and (iii) were made were then allocated to the cash or near-cash property, investment property and business property of DC, on the basis of the relative net FMV of each type of property immediately prior to the allocation of such excess, but after the allocation of liabilities as described in Paragraphs 49(b)(i) and (iii).
(c) For greater certainty, for purposes of the determination described in this Paragraph 49:
(i) the amount of any deferred income tax was not considered to be a liability for the purposes of the Subject Transactions described herein because such amount did not represent a legal obligation;
(ii) amounts owing that had a term of less than XXXXXXXXXX months or are due on demand were considered current liabilities;
(iii) current liabilities included amounts normally classified as current liabilities, including accounts payable, bonuses payable, and the current portion of any long term debt; and
(iv) no amount was considered to be a liability unless it represented a true legal liability that was capable of quantification. XXXXXXXXXX.
50. XXXXXXXXXX.
51. [Reserved]
52. On XXXXXXXXXX, following the Three-Party Share Exchange described in Paragraph 45, DC transferred property to Newco that included the accounts receivable, trade receivables, inventories, prepaid expenses and business assets related to the Canadian Transferred Services Business, the shares in the capital of Subco 1, Subco 2 and Subco 3, a portion of the Excess Cash and the Butterfly Percentage of DC's beneficial interest in each of XXXXXXXXXX Note 1 and XXXXXXXXXX Note 2 (the "Transferred Note Interest"). XXXXXXXXXX.
As consideration for such property, Newco:
(a) assumed the amount of DC's liabilities that related to the Canadian Transferred Services Business; and
(b) issued additional Newco Common Shares to DC, having an aggregate FMV equal to the amount by which the aggregate FMV of all of the property transferred to Newco (without taking into account any of the liabilities referred to in Paragraph 52(a)) exceeded the amount of the liabilities assumed by Newco as described in Paragraph 52(a).
53. Newco will jointly elect with DC, 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 Newco and in respect of which the Newco Common Shares have been issued as full or partial consideration therefor, as described in Paragraph 52. The agreed amount in each election will be as follows:
(a) in the case of capital property (other than depreciable property of a prescribed class) 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 property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b).
The amount of any liabilities assumed by Newco that are allocated to a particular 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 of any liabilities assumed by Newco that are allocated to a particular property that is not the subject of an election under subsection 85(1), as described herein, will not exceed the FMV of such particular property.
The amount added to the stated capital account maintained for the Newco Common Shares was equal to the amount by which the aggregate cost to Newco (determined pursuant to subsection 85(1), where relevant) of the properties transferred to Newco exceeded the aggregate amount of the liabilities assumed by Newco as described in Paragraph 52(a).
54. For the purposes of the joint elections described in Paragraph 53, 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 DC of all of the property of that class immediately before the disposition, that the FMV at that time of the particular property that was transferred was of the FMV at that time of all property of that class.
55. Newco and DC will file a joint election in prescribed form and within the prescribed time period in section 22 in respect of any accounts receivables owing by DC that were transferred to Newco.
56. For the purpose of Paragraphs 57, 58 and 58.1, the expression "approximate the proportion" means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX%, determined as a percentage of the net FMV at that time of each type of property that TCo has received (or DC has retained), as compared to the amount of property that TCo would have received (or DC would have retained) had TCo received (or had DC retained) its appropriate pro rata share of the net FMV of that type of property.
57. On XXXXXXXXXX, following the transfer of property to Newco as described in Paragraph 52, DC transferred all of the Newco Common Shares to TCo and became legally obligated to transfer to TCo any cash or near-cash property in an amount referred to in Paragraph 58.1 (the "Transfer").
Immediately following the Transfer, the net FMV of each type of property of DC transferred to TCo approximated the proportion of the net FMV of that type of property of DC, determined immediately before the Transfer, (in each case, determined on the basis of the principles set out in Paragraphs 47 to 50) that:
(a) the aggregate FMV, immediately before the Transfer, of all of the DC Special Shares owned by TCo,
was of
(b) the aggregate FMV, immediately before the Transfer, of all of the issued and outstanding DC Shares.
As consideration for such property, TCo issued TCo Preferred Shares to DC having an aggregate FMV equal to: (a) the aggregate FMV of the Newco Common Shares so transferred to TCo at that time, and (b) the Additional Cash Transfer that DC is legally obligated to transfer to TCo as described in Paragraph 58.1.
TCo will jointly elect with DC, 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 Newco Common Shares to TCo. The agreed amount in the election will equal the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).
The amount added to the Capital Account of TCo in respect of the issuance of the TCo Preferred Shares was an amount equal to the aggregate FMV at that time of the total consideration paid to TCo for the issuance of the TCo Preferred Shares. For greater certainty, the provisions of subsection 85(2.1) will apply to reduce the PUC of the TCo Preferred Shares in accordance with that subsection.
The Newco Common Shares were eligible property at the time of the Transfer.
58. Immediately following the transactions described in Paragraphs 57, 58.1, 59 and 60, the net FMV of each type of property retained by DC (in each case, determined on the basis of the principles set out in Paragraphs 47 to 50) approximated the proportion of the net FMV of that type of property of DC, determined immediately before the Transfer, that:
(a) the aggregate FMV, immediately before the Transfer, of all of the DC New Common Shares owned by Foreign Pubco
was of
(b) the aggregate FMV, immediately before the Transfer, of all of the issued and outstanding DC Shares.
58.1 No later than XXXXXXXXXX days after the date of the Transfer, DC will transfer to TCo any cash or near-cash property (the "Additional Cash Transfer") that is required to ensure that the net FMV of the cash or near-cash property of DC transferred to TCo as described in Paragraph 57, approximated that proportion, as described in paragraphs (a) and (b) of Paragraph 57, of the net FMV of all cash or near-cash property of DC, determined immediately before the Transfer.
59. Immediately following the transfer of the Newco Common Shares described in Paragraph 57, on a contemporaneous basis:
(a) DC redeemed all of the DC Special Shares owned by TCo for an amount equal to the aggregate DC Redemption Amount. In satisfaction of the DC Redemption Amount, DC issued to TCo 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 DC Redemption Amount of the DC Special Shares so redeemed (the "DC Redemption Note").
TCo accepted the DC Redemption Note in full payment of the redemption price of the DC Special Shares owned by TCo, with the risk of the note being dishonoured; and
(b) TCo redeemed all of the TCo Preferred Shares owned by DC for an amount equal to the aggregate TCo Redemption Amount. In satisfaction of the TCo Redemption Amount for such TCo Preferred Shares, TCo issued a promissory note, payable to DC on demand without interest or fixed terms of repayment, having a principal amount and FMV equal to the aggregate TCo Redemption Amount of the TCo Preferred Shares so redeemed (the "TCo Redemption Note").
DC accepted the TCo Redemption Note in full payment of the redemption price of the TCo Preferred Shares owned by DC, with the risk of the note being dishonoured.
60. Immediately following the transactions described in Paragraph 59, the principal amount owing under the DC Redemption Note and the principal amount owing under the TCo Redemption Note were set off in full against each other, and each such note was marked paid in full and cancelled.
61. TCo filed an entity classification election under IRS Form 8832 to be regarded as a corporation for US federal income tax purposes effective on XXXXXXXXXX, which election was effective before the Newco Dividend and the TCo Dividend were paid as described in Paragraphs 62 and 63.
62. On XXXXXXXXXX, Newco declared and paid a dividend (the "Newco Dividend") to TCo comprised of:
(i) cash in the amount of $XXXXXXXXXX, being the portion of the Excess Cash transferred to Newco in Paragraph 52 less applicable amounts for working capital needs and transfer taxes (including, for example, provincial sales tax and land transfer tax) incurred by Newco on the transfer of property described in Paragraph 52, and
(ii) the Transferred Note Interest.
63. On XXXXXXXXXX, prior to the Spin-Out and following the payment of the Newco Dividend, TCo declared and paid a dividend (the "TCo Dividend") to Foreign Spinco comprised of:
(a) cash in the amount of $XXXXXXXXXX, being the amount of the cash received from Newco as part of the Newco Dividend,
(b) the Transferred Note Interest, and
(c) its right to the payment of the Additional Cash Transfer.
TCo withheld XXXXXXXXXX% of the amount of the TCo Dividend and will remit such amount to the Receiver General for Canada, in accordance with subsection 212(2), Articles IV(6) and X(2) of the US Treaty, and subsection 10(6) of the ITAR.
Following the TCo Dividend, Foreign Spinco distributed to Foreign Pubco:
(i) the funds received from TCo,
(ii) the Transferred Note Interest, and
(iii) the right to the payment of the Additional Cash Transfer.
64. On XXXXXXXXXX, following the transactions described in Paragraph 63, Foreign Spinco converted from a XXXXXXXXXX LLC into a XXXXXXXXXX corporation by filing a XXXXXXXXXX, and its membership interests became shares of common stock ("Foreign Spinco Shares") by virtue of such conversion.
Upon conversion into a XXXXXXXXXX corporation, the Foreign Spinco Interests were converted for US federal income tax purposes into the appropriate number of Foreign Spinco Shares necessary to effect the Spin-Out.
65. Following the transactions described in Paragraph 64 and prior to the Spin-Out, Foreign Spinco borrowed an amount of money from third party lenders or issued bonds (the "External Debt"). The External Debt does not relate to any particular assets of Foreign Spinco.
Foreign Spinco distributed to Foreign Pubco as a distribution intended to qualify as a tax-free distribution, pursuant to section 361(b) of the Internal Revenue Code, an amount of such External Debt that was eligible to so qualify.
Foreign Pubco will utilize the funds received to XXXXXXXXXX.
66. DC, Foreign Pubco, Foreign Spinco and certain subsidiaries thereof (which included TCo, Newco, Subco 1, Subco 2 and Subco 3) entered into certain intercompany agreements that govern the ongoing relationships between Foreign Pubco and its subsidiaries, and Foreign Spinco and its subsidiaries, after the completion of the Subject Transactions.
These agreements included agreements related to the Subject Transactions, including:
(a) an agreement containing the key provisions required to effect the separation of Foreign Pubco into two separate public entities (the "XXXXXXXXXX"),
(b) a tax matters agreement allocating the responsibilities of Foreign Spinco and Foreign Pubco with respect to liabilities for taxes, the preparation and filing of tax returns, and tax disputes (the "XXXXXXXXXX"), and
(c) transitional services agreements addressing services to be provided by Foreign Pubco to Foreign Spinco (or by Foreign Spinco to Foreign Pubco) on an interim basis consistent with past practice.
Foreign Pubco and Foreign Spinco also entered into agreements XXXXXXXXXX. All agreements were entered into on arm's-length terms.
Except for the XXXXXXXXXX (which had to be signed prior to the Transfer Date), Canco and its subsidiaries (and DC following the Amalgamation) did not enter into any agreements in contemplation of and before the transfer of property described in Paragraph 57.
The only parties to the XXXXXXXXXX are Foreign Pubco and Foreign Spinco and, therefore, Canada Holding or its subsidiaries (or DC following the Amalgamation) did not acquire any rights pursuant to this agreement as a party thereto.
The decision to proceed with the Subject Transactions was in the sole discretion of the board of directors of Foreign Pubco (as set out in the Separation and Distribution Agreement) and, in accordance with the XXXXXXXXXX, Foreign Pubco had the right to unilaterally terminate the agreement in its sole discretion.
Spin-Out Transactions
67. On XXXXXXXXXX, following the Transactions set out in Paragraph 65, Foreign Pubco distributed the Foreign Spinco Shares pro rata to the shareholders of Foreign Pubco as a dividend-in-kind (the "Spin-Out").
The Foreign Spinco Shares are listed and traded on the XXXXXXXXXX.
68. To comply with section 86.1 in respect of the Spin-Out:
(a) Foreign Pubco will provide the Minister with the information set out in paragraph 86.1(2)(e); and
(b) the Canadian resident shareholders of Foreign Pubco will elect in writing (which election will include the information set out in paragraph 86.1(2)(f)) for section 86.1 to apply to the Spin-Out.
69. At such time as any amounts owing under XXXXXXXXXX Note 1 or XXXXXXXXXX Note 2 are repaid, DC will collect and hold on behalf of Foreign Pubco any amount paid in respect of the Transferred Note Interest, and will pay such amounts to Foreign Pubco.
70. No property became property of Canada Holding, Canco, DC, or their subsidiaries, and no liabilities were incurred by Canada Holding, Canco, DC or their subsidiaries, in contemplation of and before the Transfer described in Paragraph 57, otherwise than as described herein or in the ordinary course of business.
71. None of the shares in the capital of DC or TCo were, at any time during the implementation of the Subject Transactions described herein:
(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";
(b) a share that was 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.
72. Each of Canada Holding, Canco (and its subsidiaries), DC, Newco and TCo was or is a specified financial institution. None of these corporations was or is a "financial intermediary corporation". The TCo Preferred Shares were not taxable RFI shares.
The TCo Preferred Shares and DC Special Shares were term preferred shares. However, the TCo Preferred Shares were not acquired by DC in the ordinary course of its business, and the DC Special Shares were not acquired by TCo in the ordinary course of its business.
73. At the time of the Spin-Out:
(a) the common shares in the capital stock of Foreign Pubco were widely held and were actively traded on a designated stock exchange in the United States;
(b) under the provisions of the Internal Revenue Code of 1986 of the United States, as amended from time to time, that apply to the Spin-Out, the shareholders of Foreign Pubco who are resident in the US are not taxable in respect of the Spin-Out; and
(c) both Foreign Spinco and Foreign Pubco were resident in the US and were never resident in Canada.
74. As part of a series of transactions or events that includes the Subject Transactions, no specified shareholder of Foreign Pubco disposed or will dispose of any shares of Foreign Pubco.
75. At no time during a series of transactions or events that includes any of the Subject Transactions, will XXXXXXXXXX% or more of the FMV of the Foreign Spinco Interests or Foreign Spinco Shares owned by Foreign Pubco be derived from the TCo Common Shares or the DC Special Shares.
76. XXXXXXXXXX.
77. Foreign Pubco has not and will not directly or indirectly contribute or transfer to DC or its subsidiaries by any means whatever (for example, through the acquisition of shares, a capital contribution or otherwise):
(a) any cash received from Foreign Spinco,
(b) the Transferred Note Interest (or the proceeds therefrom),
(c) the right to the payment of the Additional Cash Transfer (or the proceeds therefrom), or
(d) any property that is reasonably considered to be property substituted for property described in Paragraphs 77(a) to (c).
78. Each of DC and TCo had the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Subject Transactions.
79. The Subject Transactions did not and will not result in DC or a related person described herein being unable to pay its existing tax liabilities.
80. To the best of Foreign Pubco's knowledge, it is not aware of any anticipated or expected acquisition of control or takeover of Foreign Spinco, Foreign Pubco, DC or TCo.
81. Foreign Pubco is always evaluating, on a global basis, opportunities to repatriate cash on an efficient basis from a tax, accounting and treasury perspective. DC intends to pay a dividend to Foreign Pubco during its XXXXXXXXXX taxation year after the completion of the Subject Transactions, in the amount of between approximately $XXXXXXXXXX-$XXXXXXXXXX (the "First Dividend").
The First Dividend will be considered to be paid out of previously taxed income, for US tax purposes, that can be distributed to Foreign Pubco without additional US tax. XXXXXXXXXX. The First Dividend and the Canadian "butterfly" transactions described in Paragraphs 43 to 60 are completely unrelated to each other.
XXXXXXXXXX. As a result, DC may pay an additional dividend to Foreign Pubco (the "Second Dividend"). The Second Dividend relates entirely to the XXXXXXXXXX of Foreign Pubco and is unrelated to the Canadian "butterfly" transactions described in Paragraphs 43 to 60.
Other non-Canadian foreign subsidiaries of Foreign Pubco may pay similar dividends to Foreign Pubco.
Further, the First Dividend and the Second Dividend (if paid) XXXXXXXXXX.
Canco paid the following cash amounts (through Canada Holding) to Foreign Pubco in the last several taxation years as follows: in XXXXXXXXXX, US$XXXXXXXXXX; in XXXXXXXXXX, US$XXXXXXXXXX and in XXXXXXXXXX, US$XXXXXXXXXX.
V. PURPOSES OF SUBJECT TRANSACTIONS
82. Foreign Pubco has made the strategic decision to separate its Transferred Services Business from its Retained Services Business XXXXXXXXXX.
83. TCo was initially a fiscally disregarded entity for US federal income tax purposes in order for the transactions described in Paragraphs 43 to 60 to qualify as a tax-free spin-off for US federal income tax purposes; however, it converted to a fiscally regarded entity, as described in Paragraph 64, in order to qualify for benefits under the US Treaty.
84. The purpose of the Newco Dividend, as described in Paragraph 62, was to enable the cash and the Transferred Note Interest transferred to Newco, as described in Paragraph 52, to be distributed to Foreign Pubco.
None of the purposes of the Newco Dividend was to reduce the gain inherent in the Newco Common Shares, as TCo has no current or future intention to dispose of the Newco Common Shares.
85. The purpose of the Amalgamation described in Paragraph 43 was to facilitate the butterfly transaction, given that Retained Services Business assets in Canada and Canadian Transferred Services Business assets were held by Canco; without this Amalgamation, two butterfly transactions would have been required.
86. Foreign Spinco was formed as an LLC in order for the transactions described in Paragraphs 43 to 60 to qualify as a tax-free spin-off for US federal income tax purposes. However, Foreign Spinco converted to a XXXXXXXXXX corporation prior to the Spin-Out in order for the distribution of Foreign Pubco's Foreign Spinco Shares to its public shareholders described in Paragraph 67 to comply with the rules of the US Internal Revenue Code.
87. The purpose of the External Debt described in Paragraph 65 was to place an appropriate amount of leverage in Foreign Spinco.
VI. RULINGS
Provided that the preceding statements constitute complete and accurate disclosure of all of the relevant facts, Subject Transactions and the purposes of the Subject Transactions, and provided that the Subject Transactions were completed in the manner described above, our rulings are as follows:
A. The provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the exchange by Foreign Pubco of the DC Common Shares pursuant to the Capital Reorganization, as described in Paragraph 44.
B.
(a) The provisions of paragraph 212.1(1)(a) and subsection 84(1) will not
apply to deem a dividend to have been paid by TCo or to have been received by Foreign Pubco or Foreign Spinco as a result of the Three-Party Share Exchange, as described in Paragraph 45;
(b) the provisions of paragraph 212.1(1)(b) will apply to reduce the aggregate PUC of the TCo Common Shares that TCo issued to Foreign Spinco to an amount equal to the aggregate PUC, immediately before the transfer, of the DC Special Shares acquired by TCo from Foreign Pubco, as described in Paragraph 45; and
(c) the aggregate cost to TCo of the DC Special Shares that TCo acquired from Foreign Pubco on the Three-Party Share Exchange will be equal to the aggregate FMV at that time of those DC Special Shares. For greater certainty, subsection 143.3(3) will not apply to reduce that aggregate cost.
C. The provisions of subsection 85(1) will apply to:
(a) the transfer, by DC, of the property to Newco as described in Paragraph 52, and
(b) the transfer, by DC, of the Newco Common Shares to TCo as described in Paragraph 57,
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).
For greater certainty, paragraph 85(1)(e.2) will not apply to such transfers.
D. Subsection 84(3) will apply:
(a) on the redemption, as described in Paragraph 59(a), of the DC Special Shares owned by TCo, to deem DC to have paid and TCo to have received;
(b) on the redemption, as described in Paragraph 59(b), of the TCo Preferred Shares owned by DC, to deem TCo to have paid and DC to have received;
a dividend on such class of shares equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeded the aggregate PUC in respect of such shares immediately before such redemption, and any such dividend:
(c) will be included, pursuant to subsection 82(1) and paragraph 12(1)(j), in computing the income of the recipient corporation;
(d) will be deductible, pursuant to subsection 112(1), by the recipient corporation;
(e) will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) or (2.4) apply;
(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 that are so redeemed;
(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.
E. The provisions of subsection 112(3) will apply to reduce any loss that would otherwise be determined for the particular holder as a result of the redemption of the DC Special Shares and the redemption of the TCo Preferred Shares described in Ruling D.
F. By virtue of the provisions of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling D, provided that:
(a) 10% or more of the FMV of the Foreign Spinco Interests or Foreign Spinco Shares that Foreign Pubco owned was not, at any time during the course of any series of transactions or events that includes the dividends described in Ruling D, derived from the TCo Common Shares that Foreign Spinco owned, or the DC Special Shares that TCo owned; and
(b) as part of the series of transactions or events that includes the dividends described in Ruling D, there was not:
(i) an acquisition of property in the circumstances described in subparagraph 55(3.1)(a);
(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); or
(iv) an acquisition of shares in the capital of DC in the circumstances described in subparagraph 55(3.1)(b)(iii);
that 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), the External Debt of Foreign Spinco will be considered to reduce the FMV of each property of Foreign Spinco pro rata in the proportion that the FMV of that property was to the aggregate FMV of all property of Foreign Spinco.
G. The set-off and cancellation of the DC Redemption Note held by TCo and the TCo Redemption Note held by DC, as described in Paragraph 60, will not give rise to a forgiven amount, and neither DC nor TCo will realize any gain or incur any loss therefrom.
H. Subject to subsections 1102(14.11) and (14.12) of the Regulations, by virtue of subsection 1102(14) of the Regulations, each property that, immediately before the transfer described in Paragraph 52, was depreciable property of a prescribed class or separate prescribed class of DC and that was acquired by Newco on the transfer described in Paragraph 52 will be depreciable property of the same prescribed class or separate prescribed class, as the case may be, of Newco.
I. Provided that the conditions specified in paragraph 1100(2.2)(f) or (g) of the Regulations are satisfied, paragraph 1100(2.2)(h) of the Regulations will apply such that no amount will be included by Newco under paragraph 1100(2)(a) of the Regulations in respect of depreciable property of a prescribed class that is property acquired by Newco from DC, on the transfer described in Paragraph 52.
J. Provided that all of the conditions of paragraphs 86.1(2)(e) and (f) are met, pursuant to subsection 86.1(2), the Spin-Out described in Paragraph 67 is an eligible distribution for a particular shareholder of Foreign Pubco for the purposes of section 86.1.
K. The TCo Dividend paid by TCo to Foreign Spinco, as described in Paragraph 63 is subject to withholding tax at a rate of 5% of the gross amount of such dividend under subsection 212(2), Articles IV(6) and X(2) of the US Treaty and subsection 10(6) of the ITAR.
L. The provisions of subsections 15(1), 56(2), 56(4), 69(4) or 246(1) will not apply to the Subject Transactions, in and of themselves.
M. The provisions of subsection 245(2) will not be applied, as a result of the Subject Transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given above.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R6 issued by the CRA on August 29, 2014 and are binding on the CRA.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:
(a) the PUC of any share or the ACB or FMV of any property referred to herein;
(b) any other tax account of any corporation referred to herein;
(c) the characterization of any share or other property as taxable Canadian property; or
(d) any other tax consequence relating to the facts, Subject Transactions or any transaction or event taking place either prior to the Subject Transactions or subsequent to the Subject Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Subject Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter. For greater certainty, we are not commenting on any tax consequences relating to the Subject Transaction described in Paragraph 62.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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