1999 Ruling 9902613 - STAPLED SHARES - CROSS-BORDER REORGANIZATION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please rote that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

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

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xxxxxxxxxx 3-990261
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Attention: xxxxxxxxxx

xxxxxxxxxx, 1999

Dear Sirs:

Re: xxxxxXxxxx
Advance Income Tax Ruling

This is in reply to your letter of xxxxxxxxxx in which you requested various advance income tax rulings. We also acknowledge your letter of XXxxxxxxXx and our various telephone conversations.

We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in the requested rulings is being considered by a district office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.

Definitions

In this letter unless otherwise expressly stated:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless Otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provision of the Act;

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

(c) "CBCA" means Canada Business Corporation Act;

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

(e) "capital property" has the meaning assigned by section 54;

(f) "controlled foreign affiliate" has the meaning assigned by subsection 95(1);

(g) "foreign accrual property income' has the meaning assigned by subsection 95(1);

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

(i) "proceeds of disposition" has the meaning assigned by section 54;

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

(k) "qualified investment" has the meaning assigned by subsection 146(1), subsection 146.3(1) and section 204;

(l) "Regulations" means the Income Tax Regulations;

(m) "series of transactions or events" has the meaning assigned by subsection 248(10);

(n) "taxable dividend" has the meaning assigned by subsection 89(1);

(0) "taxable preferred shares" has the meaning assigned by subsection 248(1); and

(p) "trust" has the meaning assigned by subsection 108(1)

FACTS

1.

xxxxxxxxxx

The principal and head office of xxxxxxxxxx is at XXXXXxxXXX federal tax identification number is xxxxxxxxxx.

2. The common shares of xXxxxxxxxx were listed on the xxXXXXXxxx.

3. The authorized share capital of xxxxxxxxxx consists of an unlimited number of common shares with out nominal or par value. xxxxxxxXxx has xxxxxxxxxx common shares issued and outstanding. The paid-up capital of the issued common shares of xxxxxxxxxx is approximately $xxxxxxxxxx.

4. As at xxxxxxxxxx common shares of xxxxxxxxxx were reserved for issue pursuant to options granted under xxxxxxxxxx existing stock option plan (the "Stock Option Plan")

The Stock Option Plan provides for the adjustment of the rights of beneficiaries in the event that the common shares of xxxxxxxxxx are split, consolidated or reclassified, or in the event that there is a declaration of a dividend payable in common shares, or in the event of a merger, reorganization or consolidation of xxXXXXXxxX or sale of all or substantially all of the property or assets of XXXXXxxxxx to any other company.

5. There are no shareholders in XXXXXXXXXx, either alone or together with non-arm's-length parties, who own more than 10% of the common shares of xxxxxxxxxx, with the exception of xxxxxxxxxx.

6. The directors and officers of xxxxxxxxxx and the percentage of shares held by each of them in XXXXXXXXXX are as follows:

Name and Municipality of	Principal Occupation
  Director	Percentage of
Residence	and Position with XXXXXXXXXX	Since common shares
		owned
controlled
	or
directed at	xxxxxxxxxx

xxxxxxxxxx
xxxxxxxxxx

xxxxxxxxxx
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xxxxxxxxxx
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xxxxxxxxxx
xxxxxxxxxx

xxxxxxxxxx
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xxxxxxxxxx

xxxxxxxxxx
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xxxxxxxxxx

xxxxxxxxxx
xxxxxxxxxx

xxxxxxxxxx

7. The fiscal year end of XXXXXXXXxx is xxxxxxxxxx.

8. xxxxxxxxxx and its subsidiaries have business activities in xxxxxxxxxx.

9. xxxxxxxxxx together with its subsidiaries employed xxxxxxxxxx full-time employees at the end of xxxxxxxxxx.

SUBSIDIARIES AND ACTIVITIES

10. The xxxxxxxxxx principal subsidiaries of xxxxxxxxxx are xxxxxxxxxx.

xxxxxxxxxx

Cansub will be wound-up prior to the proposed transactions described herein and as a result XXXXXXXXXX will hold XxxXXxXxxX% of the shares of xxxxxxxxxx.

11.

xxxxxxxxxx

xxxxxxxxxx

xxxxxxxxxx

12.

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xxxxxxxxxx

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13. xxxxxxxxxx was incorporated in XxxxxxxxXx under the XXXXXXXXXx is a non-resident for purposes of the Act and a controlled foreign affiliate of xxxxxxxxxx.

Xxxxxxxxxx has an interest in several real estate holdings in xxxxxxxxxx.

14.

xxxxxxxxxx

The shares of xxxxxxxxxx constitute xxxxxxxxxx principal asset and represent capital property to xxxxxxxxxx. The paid-up capital of the xxxxxxxxxx shares, as at XXxxxxxxXX, was approximately $XXXXXXXXXX U.S.

15. Substantially all the ventures and activities of xxxxxxxxxx carried on outside of Canada are carried on by xxxxxxxxxx (with the exception of current US real estate holdings which are held by xxxxxxxxxx). xxxxxxxxxx holds assets located outside of Canada with a fair market value of approximately US$XXXXXXXXXX.

xXXXXXXxxx carries on a business in the United States and conducts it principally with persons with whom it deals at arm's length.

xxxxxxxxxx

xxxxxxxxxx employs XXXXXXXXXX full time employees in the active conduct of its business and it is anticipated that such employment force will expand in the future. xxxxxxxxxx offices are located at xxxxxxxXxx.

16. In xxxxxxxxxx established xxxxxxxxxx, a fund in which XxxxxxxXXX is a limited partner and to which it provides xxxxxxxxxx.

17. A new company has been or will be incorporated in XXXXXXxXXX under the name of xXXXXxxxxx (1'erein referred to as "XXXXxxxxxx"). XXXXXXXXXX will be a non-resident of Canada for purposes of the Act. The authorized capital of xxxxxxxxxx will consist of xxxxxxxxxx common shares, one special common share having a par value of $XXXXXXXXXX U.S. and xxxxxxxxxx preference shares having a par value of $xxxxxxxxxx U.S. per share. Upon incorporation, one special common share having a par value of $XXXXXXXXXX U.S. will be issued to xxxXxxxxxx, as the incorporator of xxxxxxxxxx. Its initial board of directors will consist of xxxxxxxxxx non-residents of Canada. Shortly after its incorporation, a new board of directors will be appointed, a majority of whom will reside outside of Canada. The one special common share of XXXXXxxxxx will be purchased for cancellation for the price of $XXXXXXXXXX U.S. immediately after the subscription for common shares described in paragraph 24 below.

PROPOSED TRANSACTIONS

18. The proposed transactions described herein will be effected as a plan of arrangement (the "Arrangement") pursuant to section 192 of the CBCA. Each of the transactions will occur by virtue of the Arrangement on the date designated in the Arrangement as the effective date (the "Effective Date") The Arrangement will become effective only after, among other things: (i) the Arrangement is approved by the affirmative vote of not less than two-thirds of the votes cast in respect thereof at the shareholders meeting to be held for such purposes; (ii) the Superior Court of xxxxxxxxxx has issued a final order approving the Arrangement; and (iii) a favourable advance income tax ruling is obtained in respect of the Arrangement.

19. The shareholders of Xxxxxxxxxx who comply with the provisions of the CBCA will be entitled to dissent from the Arrangement. A shareholder of xxxxxxxXxx who dissents will cease to be a shareholder on the Effective Date and will surrender his or her shares in xxxxxxxxXx to xxxxXXXXXx for cancellation. XXXXXXXXXX will pay an amount equal to the fair value of the XXxxxXXXXX shares held by a dissenting shareholder in accordance with section 190 of the CBCA.

20. Following the giving of the notice to dissenting shareholders by XXXXXXxxxx of its intention to proceed with the Arrangement, XXXXXXXXXX will declare a cash dividend on its issued and outstanding common shares held by the nondissenting shareholders in the amount of U.S. $XXXXXXXXXX.

21. Pursuant to the Arrangement, the shareholders of XXXXxxxxxx (other than any shareholder who has exercised his or her right to dissent to the Arrangement) will. on or after the Effective Date, deposit their common shares of xxxxxxxxxx with xxxxxxxxxx (the "Depository"). who will hold such shares on deposit and as the agent of such shareholders (the shareholders will continue to be the owners of such shares). A share certificate of xxxxxxxxxx registered in the name of the holder thereof which is deposited with the Depositary will remain registered in the name of the shareholder with custody of the share certificate in the hands of the Depositary. The Depositary will issue a deposit receipt (the "Deposit Receipt") to each shareholder evidencing the common shares of xxxxxxxxxx held by the Depositary for and on behalf of the shareholder.

22. xxxxxxxxxx, the Depositary and the holders of the Deposit Receipts will enter into an agreement (the "Depositary Agreement") which, among other things, will provide for the rights, privileges and restrictions of the shareholders in the shares of xxxxxXxXxx and the Deposit Receipts. On and from the Effective Date, the shareholders of xxxxxxxxxx, from time to time, will be deemed to be parties to the Depositary Agreement. The Depositary Agreement will provide, among other things, that:

(a) the shareholders of xxxxxxxxxx will trade their shares of xxxxxxxxxx by trading the Deposit Receipts over the XXXXXXXXXx Stock Exchange until the Depositary Agreement is terminated in accordance with its terms;

(b) the shareholders of XXXxxxxxxx will vote their shares by instructing the Depositary how they wish to vote. Where practical, a vote of common shares of xxxxxxxxxx will constitute a vote of xxxxxxxxxx shares;

(c) any dividends that may be paid on the common shares of XXXXXXXXXX will be received by the Depositary as agent for the shareholders of xxxxxxxxxx and will thus be distributed to them or otherwise dealt with in accordance with their instructions;

(d) the Depositary Agreement will terminate at the earliest of the following:

(i) xxxxxxxxxx years after the date it is entered into;

(ii) xxxxxxxxxx is wound-up;

(iii) the preferred shares of Xxxxxxxxxx to be issued to xxxxxxxxxX as described in paragraph 24 below are retracted or redeemed and the proceeds therefrom are distributed by xxxxxxxxxx; or

(iv) Deposit Receipt holders who own at least xXxxxxxXxx of the common shares of xxxXXXXXxx, which are subject to the Depositary Agreement, decide to terminate the agreement.

(e) until the Depositary Agreement is terminated, on any issuance of common shares by xxxxxxxxxx (with the exception of the initial issuance of common shares in accordance with paragraph 24 hereof), common shares of xxxxxxxxxx in the same number shall be issued (to be held on deposit) and shall be evidenced by Deposit Receipts;

(f) if the Depositary Agreement is terminated in accordance with (d) above, the Depositary shall deliver to the holders of the Deposit Receipts the certificates representing xxxxxxxxxx shares registered in the names of the holders of such Deposit Receipts, accompanied by duly completed stock transfer forms transferring such denominations, and at such addresses, as are shown in the register maintained by the Depositary.

23. On the Effective Date, the dividend declared by xxxxxxxxxx as described in paragraph 20 above will be paid to and received by the Depositary as agent for each of the common shareholders of xxxxxxxxxx.

24. The Depositary will use $XXXXXXXXXX U.S. of the dividend to subscribe for the same number of common shares of Xxxxxxxxxx as is the number of common shares of xXXXXXXxxx which are subject to the Depositary Agreement, the whole as agent for and on behalf of the non dissenting shareholders of XXXxxxXxXX. The balance of the dividend will be paid by the Depositary to the shareholders, after any withholding tax in respect of a non-resident shareholder of XXxxxxxxxx who received a dividend has been remitted to Revenue Canada by the Depositary.

25. xxxxxxxxxx will issue, through the Depositary, share certificates representing common shares of its capital stock which each shareholder of xxxxxxxxxx subscribed for through the agency of the Depositary.

26. The Depositary will, as transfer agent for xXXxXxxXxX, deliver to each non-dissenting shareholder of XXXXXXxXxx the share certificate of xXXxxxxxxx representing the number of common shares of xxxxxxxxxx subscribed for by such person through the agency of the Depositary. Such certificates of xxXXxxxxxx will only be delivered to a person after he or she has deposited his or her XXXXXXxxxX shares with the Depositary. Simultaneously with the issuance of the XXXXxxxXXX share certificate, the Depositary will issue the Deposit Receipts for the shares of xxxxxxxxxx held on deposit. It is contemplated that each share certificate of xxxxxxxxxx will have a legend or notation evidencing the Deposit Receipt in respect of xxxxxxxxxx shares. Accordingly, each depositor/shareholder will receive a certificate of xxxxxxxxxx representing the number of common shares that such person holds in XXXXXXXXXX, which share certificate will have a legend or notation evidencing the equivalent number of common shares of xxxxxxxxxx belonging to such shareholder which are held by the Depositary under the terms of the Depositary Agreement. Until the termination of the Depositary Agreement as described in paragraph 22 above, the Deposit Receipts can not be severed from the common shares of xxxxxxxxxx and, in effect, will be dealt with as a unit.

27. A holder of outstanding stock options will be granted the additional right to subscribe for a common share of xxxxxxxxxx for each common share of xxxxXxXXXx subject to the stock option granted to the particular employee. The exercise price to acquire a share of xxxxxxxxxx will be an amount equal to the fair market value of the said share at the time the option is granted. At the time when the existing option holders of XXXXXXXXXX will be granted their rights to acquire stock of XxxXxxxxxx, immediately following the implementation of the Arrangement, a common share of xxxxxxXXXX will have a nominal value.

28. The Stock Option Plan will be amended (the "Amended Stock Option Plan") so that an option to acquire a share in xxxxxxxxxx can not be exercised unless contemporaneously therewith the holder exercises his or her right to acquire the same number of common shares of xxxxxxxxxx under the xxxxxxxxxx stock option plan. The amended plan will require the holder to acquire, under the terms of the Depositary Agreement, one unit consisting of a common share of xxxxxxxxxx and a Deposit Receipt for each Company share that may presently be acquired upon exercise of the stock options. The exercise price of an option to acquire a share of XXXXXXXXXX will not be changed as a result of the Amended Stock Option Plan.

29. The common shares of XXxXxxxxxx will be delisted from the xxxxxxxxxx Stock Exchange. The common shares of xxXXXxxxxx (with attached Deposit Receipt) will be listed and traded over the XXXXXXXXXX Stock Exchange as a unit.

30. To the extent considered necessary, the memorandum and articles of XxXXXXXxXX will be amended to reflect the restrictions, prohibitions and limitations relating to the common shares of xxXXXxxxxx as set forth in the Depositary Agreement and the by Laws of XXXXXXXXXX will similarly reflect the arrangements set forth in the Depositary Agreement.

31. With the assistance of a professional independent valuator, XXXXXXXXXX will determine the fair market value of the issued and outstanding share capital of xxxxxxxxxX, which is estimated to be in the range of $XXXXXXXXXX U.S. to $XXXXXXXXXX U.S.

XXXXXXXXXX will enter into a share exchange agreement with xxxxxxxxxx whereby it will exchange all of the shares that it owns in XXXxxXxXXX for preferred shares of xxxxXxxxxx having a air market value and a redemption/retraction price equal to the fair market value of the common shares of Xxxxxxxxxx at the time of the exchange.

The preferred shares to be issued by xxxxxxxxxx will be nonvoting, with a right to a preferential cumulative dividend of not less than XXxXxxxXxX% per annum of the amount for which they have been issued, will be redeemable at the option of the issuer or holder at a price equal to the consideration for which they have been issued, will have a par value of $XXXXXXXXXX U.S. per share and will provide that XXXXXXXXXX will not pay any dividends on any other class of its shares which would result in the reduction in the fair market value of the preferred shares to an amount that is less than their redemption price. Immediately following xxxxxxxxxx acquisition of such preferred shares of xxxxxxxxxx will be a foreign affiliate of XXXXxXxxxx.

The share exchange agreement to be entered into between XXXXXXXXXX will contain a price adjustment clause such that in the event it is determined for any reason that the fair market value of the consideration paid by XXXXXXXXxx is less than the fair market value of the common shares of Xxxxxxxxxx transferred, then the purchase price and the consideration therefor will be adjusted to reflect the fair market value agreed to by the parties affected and, failing such agreement, as shall be determined by a final decision of a competent tribunal.

32. The board of directors of XXXxXxxxxX may be similar to that of xxxxxxxxxx to the extent practical and except as otherwise required to comply with residency requirements under governing corporate legislation.

33. The Arrangement will be binding upon and relate to any outstanding agreement or arrangement pursuant to which a party, whether or not now a shareholder of xxxxxxxxxx, has the right to buy or sell shares of Xxxxxxxxxx and shall entitle such party to buy or sell, as applicable, shares of xxxxxxxxxx and Deposit Receipts as a unit prior to termination of the Depositary Agreement and shares of XXxxxxxxxx after termination of the Depositary Agreement.

34. After the Effective Date, XXXXxxxxxx material operations and obligations will relate to investments in XXXXXXXXXX and its Canadian operations described above.

PURPOSES OF TIlE PROPOSED TRANSACTION

35. The Purposes of the proposed transactions are:

(a) to allow xxxxxxxxxx, the bulk of whose business operations are carried outside of Canada, to set up a structure that will allow it to raise its main future capital requirements from foreign investors. The use of XXXXxxxxxx allows an investor who is not resident in XXXXXXXXXX to receive dividend income with no withholding tax being imposed; and

(b) to ensure, through the deposit of shares of xxxxxxxxxx with the Depositary, that the shares of xXXxxxxxxx and xxxxxxXxxx are linked and will be traded together so that an orderly market exists for the trading of the xXXXXXXxXX and xxXxxXxXxx shares.

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:

A. Subject to the application of subsection 55(2), a holder of common shares of xxxxxxxxxx who exercises his or her statutory right to dissent to the Arrangement, will be deemed by paragraph 84(3)(b) to have received a taxable dividend equal to the amount by which the consideration received by such dissenting shareholder from XxXxXXXXXx for such shareholder's common shares of XXXXXxxxxx exceeds the paid-up capital thereof. Subject to subsection 55(2), the proceeds of disposition in respect of such common shares received by such dissenting shareholder shall be reduced by the amount of the dividend so deemed to have been received.

B. By virtue of paragraph (f) of the definition of "taxable preferred share", the fact that xxxxxxxxxx may be required by order of the Superior Court of XXXXXXXXxx to purchase for cancellation its common shares owned by dissenting shareholders will not, in and by itself, result in the common shares of xxxxxxxXxx constituting "taxable preferred shares" within the meaning of subsection 248(1).

C. Subsection 85.1(3) will apply to the disposition by xxxxxxxxxx of its common shares of xxxxxxxxxx to xxxxxxxxxx with the result that XxxxxxXxXx proceeds of disposition of the common shares of XXXxxxxxxx will be an amount equal to the adjusted cost base of the common shares of XxxxxxxXxX so disposed of by xxxxxxxxxx.

D. The entering into of the Depositary Agreement and the depositing of the common shares of the capital stock of XXXXXXXXXX with the Depositary pursuant to the Depositary Agreement, as described in paragraphs 21 and 22 above, will not result in a disposition, within the meaning of the definition of '4disposition ~n section 54, of the common shares of xxxxxxxxxx by the beneficial holders thereof.

E. By virtue of paragraph 4900 (1)(b) of the Regulations, the common shares of xxXxxxxxxx will continue to represent a "qualified investment11 provided that XXxxxxxxxx has not elected in prescribed form pursuant to clause (c)(i) of the definition of "public corporationt1 not to be a public corporation or the Minister has not designated xxxxxxxxxx not to be a public corporation pursuant to clause (c) (ii) of the definition of "public corporation".

F. Once the shares of xxxxxxxxxx are listed on the xxxxxxxxxx Stock Exchange, the shares of XXXXXxxxxx will be a qualified investment.

G. The entering into of the Depositary Agreement and the depositing of the common shares of xXXXxxxxxx with the Depositary pursuant to the Depositary Agreement as described in paragraphs 21 and 22 above will not give rise to a trust such that sections 104 to 108 inclusive will not apply to the Depositary or to the common shareholders of xxxxxxxxxx.

H. The provisions of subsection 15(1), 56(2) and 246(1) will not apply to the proposed transactions described herein, in and of themselves.

I. The provisions of subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

J. A holder of an existing option under the Stock Option Plan will not be deemed to have received a benefit for purposes of paragraph 7(1)(b) by virtue of the amendment to the Stock Option Plan as described in paragraph 28 above.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada and are binding provided that the proposed transactions are completed before xxxxxxxxxx.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

OPINIONS

1. In the event that the proposed amendment to the definition of "disposition'1 in subsection 248(1), and the proposed addition of subsection 248(25.1) are enacted in the form of the Legislative Proposals announced by the Department of Finance on December 23, 1998, it is our opinion that the entering into of the Depositary Agreement and the depositing of the xxxxxxxxxx common shares with the Depositary, as described in paragraph 21 and 22 above, will not result in a disposition of such shares.

2. In the event that the proposed amendment to the definition of "trust" in subsection 108(1) is enacted in the form of the Legislative Proposals announced by the Department of Finance on December 23, 1998, it is our opinion that the entering into of the Depositary Agreement and the depositing of the common shares of xxxxxxxxxx with the Depositary pursuant to the Depositary Agreement as described in paragraphs 21 and 22 above will not give rise to a trust.

3. In the event that the proposed amendment to the definition of "disposition" in subsection 248(1), and the proposed addition of subsection 248(25.1) are enacted in the form of the Legislative Proposals announced by the Department of Finance on December 23, 1998, it is our opinion that the amendment to the Stock Option Plan as described in paragraph 28 above will not result in a holder of an existing option in the Stock Option Plan being deemed to have received a benefit for purposes of paragraph 7(1)(b).

The foregoing opinions are not rulings and, in accordance with the practice referred to in Information Circular 70-6R3, are not binding on Revenue Canada.

COMMENTS

1. Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed.

(a) whether the income earned in xxxxxxxxxx constitutes foreign accrual property income of xxxxxxxxxx;

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

(c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically confirmed in the rulings given.

2. Nothing in this letter should be construed as confirming that, for the purposes of any of the rulings given herein, any adjustment to the consideration paid for the XxXXxxxxxx shares, on the share exchange described in paragraph 31 above, will be effective retroactively to the time of the exchange. The rulings in this letter are not intended to apply to the operation of a price adjustment clause, since its coming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of Revenue Canada with respect to price adjustment clauses is as stated in Interpretation Bulletin IT-169.

Yours truly,

for Director
Reorganization and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch