Principal Issues: Whether transaction qualifies as a "merger" pursuant to ss204.85(3)?
Position: Yes
Reasons: In accordance with the Act and conforms to tax policy described by Department of Finance.
XXXXXXXXXX 2008-028600
XXXXXXXXXX , 2008
Dear XXXXXXXXXX
Re: Advance Income Tax Ruling
XXXXXXXXXX ("Continuing Fund")
XXXXXXXXXX ("Terminating Fund")
We are writing in response to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-named taxpayers.
This letter is based solely on the facts and proposed transactions described below. Any documentation submitted in respect of your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
To the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling request are:
(i) dealt with in an earlier return of the taxpayers or a related person;
(ii) being considered by a Tax Services Office or Taxation Centre of Canada Revenue Agency ("CRA") in connection with a previously filed tax return of the taxpayers or a related person;
(iii) under objection by the taxpayers or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate to the taxpayers or a related person; or
(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.
Unless otherwise stated, statutory references in this letter are to the Income Tax Act, R.S.C. 1985 (5th Suppl.) c. 1, as amended to the date hereof (the "Act").
Our understanding of the facts and proposed transactions is as follows:
Facts
1. Continuing Fund is a corporation incorporated under the XXXXXXXXXX in XXXXXXXXXX and its head office is located at XXXXXXXXXX . Continuing Fund is:
a. a registered labour-sponsored venture capital corporation under the Act;
b. an approved fund under the XXXXXXXXXX and
c. a registered labour-sponsored investment fund corporation under the XXXXXXXXXX
Continuing Fund has approximately $XXXXXXXXXX in net assets and approximately XXXXXXXXXX Canadian shareholders. Continuing Fund's Taxation Centre and Tax Services Office are XXXXXXXXXX , respectively. Continuing Fund has not discontinued its venture capital business.
2. Terminating Fund is a corporation incorporated under the XXXXXXXXXX in XXXXXXXXXX and its head office is located at XXXXXXXXXX . Terminating Fund is:
a. a prescribed labour-sponsored venture capital corporation under the Act; and
b. a registered labour-sponsored investment fund corporation under the XXXXXXXXXX
Terminating Fund has approximately $XXXXXXXXXX in net assets and approximately XXXXXXXXXX Canadian shareholders. Terminating Fund's Taxation Centre and Tax Services Office are XXXXXXXXXX , respectively. Terminating Fund has not discontinued its venture capital business.
3. The authorized capital of Continuing Fund consists of an unlimited number of Class A shares, issuable in series, an unlimited number of Class B shares and an unlimited number of Class C shares, issuable in series. The Class A shares of Continuing Fund are offered by series to members of the public in XXXXXXXXXX
4. The authorized capital of Terminating Fund consists of an unlimited number of Class A shares, an unlimited number of Class B shares, an unlimited number of Class C shares, issuable in series, an unlimited number of Class D shares, issuable in series, an unlimited number of Class E shares, issuable in series, an unlimited number of Class S shares, issuable in series. The Class A shares of Terminating Fund are offered to members of the public in XXXXXXXXXX .
Proposed Transactions
5. Terminating Fund and Continuing Fund will be merged (the "Merger") by effecting the following series of steps (the "Proposed Transactions").
a. In connection with the Merger, the rights and restrictions attached to the Class A shares of Terminating Fund (the "Redeemed Shares") will be amended to incorporate a Merger redemption procedure whereby the Redeemed Shares would be automatically redeemed as at the effective date of the Merger immediately after the purchase of the assets referred to in 5b below.
b. The rights and restrictions attached to the Class A shares of Continuing Fund were amended effective XXXXXXXXXX , pursuant to Articles of Amalgamation filed under the XXXXXXXXXX on that date ("Articles of Amendment"). The Articles of Amendment provided that Continuing Fund may issue Class A shares to another registered or prescribed labour-sponsored venture capital corporation ("Receiving Fund") as payment for the purchase of all or part of Receiving Fund's assets as part of a series of steps to effect a merger of Continuing Fund and Receiving Fund, provided, however, that such shares are in turn promptly transferred by Receiving Fund to its shareholders. The authority to issue Class A shares to Receiving Fund under the Articles of Amendment arises only at the time of completion of the merger transaction and ceases immediately after completion of the merger. As further discussed in 5c and 5d below, under the authority of the Articles of Amendment as described, Continuing Fund will issue its Class A shares to Terminating Fund as consideration for the purchase of Terminating Fund's assets (these are the "Merger Shares") which will be immediately thereafter transferred and distributed to the Class A shareholders of Terminating Fund under the Merger redemption procedure referred to in 5a above. It is expected that the Merger will be completed in one day.
(The provision in the Articles of Amendment as described above would not comply with clause 204.81(1)(c)(ii)(A) and subparagraph 204.81(1)(c)(vii). In such a situation, Continuing Fund would request a comfort letter from the Minister of National Revenue confirming that the Minister will not exercise his powers under subsection 204.81(6) to revoke the fund's registration as a result of those merger specific provisions.)
c. After setting aside sufficient assets to satisfy its estimated liabilities, Terminating Fund will transfer its remaining assets (the "Assets") to Continuing Fund at a value equal to the net asset value of Terminating Fund as at the effective date of the Merger. Terminating Fund will use the retained assets to satisfy its remaining liabilities as soon as practicable after the effective date of the Merger. (Any costs or liabilities that may be incurred by Continuing Fund that pertain to the Terminating Fund will be allocated entirely to the net asset value of the Merger Shares.)
d. As consideration for the Assets, Continuing Fund will issue the Merger Shares to Terminating Fund. The issue price of the Merger Shares will equal their net asset value as at the effective date of the Merger. Pursuant to the merger redemption procedure referred to in 5a above, the Merger Shares issued to Terminating Fund will be immediately transferred to the shareholders of Terminating Fund as payment of the redemption price for the Redeemed Shares of that Fund. The number of Merger Shares transferred to a given holder of Redeemed Shares through the Merger redemption procedure will be determined by applying the ratio obtained by dividing the total Merger Shares by the total Redeemed Shares. The aggregate redemption price of the Redeemed Shares will be equal to the net asset value of the Merger Shares distributed under the merger redemption procedure. As soon as practicable following the effective date of the Merger, Terminating Fund will be wound-up or dissolved in accordance with the provisions of the XXXXXXXXXX . At the end of the steps leading to the Merger, Continuing Fund will be the resulting single corporate entity with the consolidated assets and Class A shareholders of both Continuing Fund and Terminating Fund.
Additional Information
6. The Merger is subject to the prior approval of the shareholders of both Continuing Fund and Terminating Fund. Shareholders of Continuing Fund approved the Merger at a general meeting held on XXXXXXXXXX . Shareholders of Terminating Fund approved the Merger at a general meeting held on XXXXXXXXXX . In connection with those meetings, an information circular with relevant information concerning the Merger and proxy materials were mailed to shareholders of each fund, respectively.
7. The Merger will also be subject to any necessary securities regulatory approvals.
8. Pursuant to subsection 204.85(1) of the Act, Continuing Fund sent a written notification of the Merger, dated XXXXXXXXXX , to the Minister of National Revenue, which was at least 30 days before the Merger.
Purpose of the Proposed Transactions
9. The purpose of the Proposed Transactions is to:
a. improve investment performance by creating a larger, more diversified venture investment portfolio;
b. create a higher profile in the marketplace for the post-Merger Continuing Fund, thereby increasing awareness of the fund among both investors and entrepreneurs;
c. to facilitate the registration of Continuing Fund under XXXXXXXXXX LSVCC legislation, providing greater access to the XXXXXXXXXX market for capital raising;
d. improve liquidity and resources to fund follow-on investments; and
e. to create a larger, more efficient investment pool to improve the prospects for achieving positive returns for investors, providing a significant and stable source of venture capital for eligible businesses and fostering business development, economic growth and job creation in the regions in which the investments are made.
10. The purpose of the Merger is to:
a. substantially reduce transaction costs as compared to those associated with a statutory amalgamation. The materials that must be printed and mailed to the funds' shareholders are far less voluminous than those associated with a statutory amalgamation; and
b. benefit from industry familiarity among investment advisors and back-office administration staff with the merger by purchase of assets structure.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:
A. The Merger will be a "merger" within the meaning of subsection 204.85(3) and subsection 211.7(2).
B. Upon completion of the Merger, Continuing Fund will be the "new corporation" formed by the merger within the meaning of subsection 204.85(3).
C. Pursuant to subsection 204.85(3), Continuing Fund will be the same corporation as, and a continuation of, Terminating Fund for the purposes of subsections 204.83(1) and (2).
D. A Redeemed Share will be "replaced on the amalgamation or merger" by a Merger Share and a Merger Share is the "new share" of the Continuing Fund within the meaning of paragraph 204.85(3)(c).
The rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act and are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5, dated May 17, 2002, issued by the CRA, and is binding on the CRA provided the Merger occurs on or before XXXXXXXXXX .
Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:
(i) the GST implications of any of the Proposed Transactions;
(ii) the fair market value or net asset value of any assets or shares; or
(iii) any other tax consequences of the Proposed Transactions or of related transactions or events that are not described herein.
Opinion
With respect to 5b above, we confirm that the Minister of National Revenue will not exercise his discretion under subsection 204.81(6) of the Act to revoke Continuing Fund's registration as a result of the fact that one LSVCC, Terminating Fund, temporarily holds shares of another LSVCC, Continuing Fund, in the course of the Merger.
Yours truly,
XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
