2010 Ruling 2010-0355001R3 - Election to cease to be a public corporation

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 an election not to be a public corporation can be made when previously listed shares no longer exist.

Position: Yes

Reasons: Previous positions. Since as a matter of tax policy, a corporation in this situation should not be precluded from electing not to be a public corporation, the condition in Regulation 4800(2)(a) can be read as applying where previously listed shares no longer exist.

XXXXXXXXXX 									2010-035500

XXXXXXXXXX , 2010

Dear Sir,

RE : Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided in your email of XXXXXXXXXX , and during our various telephone conversations in connection with your ruling request (XXXXXXXXXX ).

We understand that to the best of your knowledge and that of the taxpayer involved, none of the issues involved described herein is:

(i) dealt with 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.

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

Legal Entity Definitions

The transactions described in this ruling request involve the following entities:

(a) "Acquisico" means XXXXXXXXXX is a non-resident of Canada for the purposes of the Act;

(b) "Canco" means XXXXXXXXXX a company incorporated under the CBCA and more specifically described in Paragraph 1. Canco's business number is XXXXXXXXXX and it deals with the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre;

(c) "Canadian Subsidiaries" means collectively XXXXXXXXXX

(d) "Forco1" means XXXXXXXXXX , a subsidiary wholly-owned corporation of Canco that is a XXXXXXXXXX . Forco1 is a non-resident of Canada for the purposes of the Act;

(e) "Forco2" means XXXXXXXXXX , a subsidiary wholly-owned corporation of Forco1 that is a XXXXXXXXXX . Forco2 is a non-resident of Canada for the purposes of the Act;

(f) "Foreign Subsidiaries" means Forco1 and Forco2, collectively; and

(g) "Mergeco" means the company resulting from the merger of Forco1 and Forco2, as described in Paragraph 12.

Definitions

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, RSC 1985 (5th supp.), c.1, as amended to the date hereof, and, unless otherwise indicated, all statutory references are to the Act;

(b) "Court" means the XXXXXXXXXX

(c) "CBCA" means the Canada Business Corporations Act RSC 1985, c. C-44 as amended to the date hereof;

(d) "CCAA" means the Companies' Creditors Arrangement Act RSC 1985, c. C-44 as amended to the date hereof;

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

(f) "designated stock exchange" has the meaning assigned by subsection 248(1);

(g) "designated stock exchange in Canada" means a designated stock exchange located in Canada for which a designation under section 262 is in effect;

(h) "DIP Financing Facility" has the meaning described in Paragraph 4;

(i) "Foreign Country" means XXXXXXXXXX ;

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

(k) "Paragraph" means a numbered paragraph in this letter;

(l) "Plan" has the meaning described in Paragraph 6;

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

(n) "Regulations" means the Income Tax Regulations, C.R.C. 1977, c. 945, as amended to the date hereof;

(o) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and

(p) XXXXXXXXXX

Facts

The relevant facts are as follows:

1. Canco is a taxable Canadian corporation and a public corporation. XXXXXXXXXX Canco currently operates, directly or indirectly through subsidiaries, XXXXXXXXXX facilities, principally in Canada and in the Foreign Country.

2. Prior to the implementation of the Plan as described in Paragraph 7, Canco's share capital consisted of an unlimited number of Multiple Voting Shares and Subordinate Voting Shares, and an unlimited number of Preferred Shares, issuable in series.

There were issued and outstanding XXXXXXXXXX Multiple Voting Shares, XXXXXXXXXX Subordinate Voting Shares and no Preferred Share. Prior to XXXXXXXXXX , Canco's Subordinated Voting Shares were listed for trading on the XXXXXXXXXX under the symbol XXXXXXXXXX . The Multiple Voting Shares were not listed for trading on a stock exchange.

3. As a result of industry-wide challenges in Canco's business segments, combined with Canco's leverage and its inability to raise capital in the then prevailing market environment, on XXXXXXXXXX Canco and the Canadian Subsidiaries filed for and obtained creditor protection under the CCAA. The Foreign Subsidiaries obtained similar protection under the safeguard procedure (XXXXXXXXXX ) in the Foreign Country. These steps were initiated to allow Canco to make the necessary changes to ensure its long-term viability.

4. On XXXXXXXXXX , Canco secured a XXXXXXXXXX debtor-in-possession (DIP) financing facility from third party lenders (the "DIP Financing Facility"). This financing was intended to allow Canco to meet its operating needs during its restructuring period. The holders of the DIP Financing Facility subsequently transferred and assigned their claim against Canco to Acquisico prior to the implementation of the Plan.

5. On the close of business on XXXXXXXXXX , Canco's Subordinated Voting Shares were delisted from the XXXXXXXXXX , for failure to meet the continued listing requirements. Canco also announced that it had no intention of listing its Subordinate Voting Shares on any exchange or automated quotation marketplace.

6. On XXXXXXXXXX , Canco filed a plan of reorganization and compromise pursuant to the CCAA and section 191 of the CBCA, which was accepted by the creditors on XXXXXXXXXX , sanctioned by the Court on XXXXXXXXXX , and later amended on XXXXXXXXXX with the consent of the Court and the creditors (the "Plan").

7. On XXXXXXXXXX , the Plan was implemented and the stay of proceedings against Canco, the Canadian Subsidiaries and the Foreign Subsidiaries was lifted. More precisely, the following steps took place pursuant to and in accordance with the terms of the Plan:

a) Canco's authorized share capital was amended to create an unlimited number of Redeemable Preferred Shares, an unlimited number of New Common Shares, an unlimited number of Multiple Voting Redeemable Common Shares and an unlimited number of Subordinate Voting Redeemable Common Shares;

b) All Multiple Voting Shares that were issued and outstanding immediately prior to the implementation of the Plan were exchanged for Multiple Voting Redeemable Common Shares on a one for one basis and all
Subordinate Voting Shares that were issued and outstanding immediately prior to the implementation of the Plan were exchanged for Subordinate Voting Redeemable Common Shares on a one for one basis;

c) XXXXXXXXXX Redeemable Preferred Shares and XXXXXXXXXX New Common Shares were issued to Acquisico in consideration of a subscription amount of the Canadian dollar equivalent of XXXXXXXXXX , consisting of a cash subscription price of XXXXXXXXXX and the conversion of the portion of the DIP Financing Facility;

d) Canco's share capital was amended to cancel all the authorized and unissued Multiple Voting Shares and all the authorized but unissued Subordinated Voting Shares;

e) The Canadian Subsidiaries were wound-up into Canco under subsection 88(1);

f) Canco remitted amounts to its creditors, according to the terms of the Plan and the "Affected Claims" (as defined in the Plan) were settled in accordance with the Plan. As a result, section 80 applied to Canco; and

g) all issued and outstanding Multiple Voting Redeemable Common Shares and all issued and outstanding Subordinate Voting Redeemable Common Shares were redeemed and cancelled for no consideration per share. As a result, Acquisico acquired control of Canco.

8. Since the implementation of the Plan, Acquisico is the sole shareholder of Canco. Acquisico currently holds XXXXXXXXXX Redeemable Preferred Shares and XXXXXXXXXX New Common Shares of Canco.

9. Since the implementation of the Plan, no shares of any of the authorized classes of shares in the capital of Canco have been listed on a designated stock exchange in Canada.

10. The stated capital and the paid-up capital for the purpose of the Act of the Redeemable Preferred Shares exceed the amount of the return of capital contemplated in Paragraph 14 below.

11. At no time has there been a class of shares in the capital of Canco of the type described in subparagraph 4800(2)(a)(ii) of the Regulations.

Proposed Transactions

12. Forco1 and Forco2 will merge under the Foreign Country corporate laws to form Mergeco.

13. Canco will file an election, in prescribed form, not to be a public corporation pursuant to subparagraph 89(1)(c)(i).

14. Thereafter, Canco will reduce the stated capital of its Redeemable Preferred Shares by an amount of approximately XXXXXXXXXX . The return of capital will be satisfied by Canco distributing all of its shares of the capital stock of Mergeco to Acquisico, having a fair market value of XXXXXXXXXX .

Immediately before the acquisition of control of Canco, the adjusted cost base of its investment in Mergeco far exceeded its fair market value. Pursuant to paragraph 111(4)(c), the excess reduced Canco's adjusted cost base of the investment in Mergeco and became a capital loss. No increase in the fair market value of the investment in Mergeco is expected to occur between the moment of the acquisition of control and the time of the realization of the proposed transactions. Therefore, no income tax consequences will arise from the disposition of the shares of the capital stock of Mergeco as a result of the proposed transactions.

Purposes of the Proposed Transactions

15. The purpose of the proposed transactions is to reorganize the corporate structure to allow Acquisico and Mergeco to form a consolidated group for Foreign Country tax purposes. In addition, Canco is currently interposed between two corporations in the Foreign Country. The proposed transactions will eliminate this "sandwich" structure and therefore facilitate the movements of funds between Acquisico and Mergeco.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant Facts, Proposed Transactions and the Purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. Canco will meet the condition in paragraph 4800(2)(a) of the Regulations and will cease to be a public corporation at the time it files an election, in prescribed manner, not to be a public corporation pursuant to subparagraph 89(1)(c)(i).

B. Subsection 84(4.1) will not apply to deem the return of capital by Canco described in Paragraph 14 above to be a dividend paid by Canco or received by Acquisico.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX .

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 ruling should be construed as implying that the CRA has agreed to or reviewed:

(a) any provincial tax consequences of the proposed transactions;

(b) any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically confirmed in the rulings given above;

(c) the determination of the FMV or ACB of any property referred to herein, the PUC in respect of any share referred to herein, or the outstanding balance of various tax accounts for any of the corporate entities described herein.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

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