January 30, 2018
Mr. XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
Dear XXXXX:
I am writing further to your request that section 9002.1 of the Income Tax Regulations (the "Regulations'') be amended so that shares of Interac Corp. ("Newco") that will be held by financial institutions as the result of a corporate reorganization will be prescribed payment card corporation shares for the purposes of paragraph (b) of the definition "excluded property" in subsection 142.2(1) of the Income Tax Act.
Our understanding of the request for relief and the facts relevant to the request is based on correspondence, and discussions, between you and officials of the Department of Finance, including with respect to the Amended and Restated Consent Agreement of the Competition Tribunal dated October 20, 2017 (the "Consent Agreement'') and XXXXX.
You describe a scenario in which your clients, Interac Inc., Acxsys Corporation, and ACX Corporation (the "Entities''), intend to participate in a proposed reorganization permitted under the terms of the Consent Agreement. As part of the reorganization, current shareholders of the Entities will exchange their shares of the Entities for common shares of a new corporation, Newco. In addition, members of the Interac Association (the "Association") will exchange certain rights as members of the Association for common shares of Newco. Common shares will be the only class of share issued by Newco.
The current shareholders of the Entities, and a number of the other taxpayers that will become shareholders of Newco, are financial institutions as defined in subsection 142.2(1). You have advised that, in the absence of the requested relief, the shares of Newco will be mark-to-market property of certain shareholders following the proposed reorganization.
You indicate that the Entities, together with the Association, develop and provide network services that facilitate payments, and develop and license software related thereto. XXXXX. None of the shares of any of the Entities have ever been listed on a stock exchange.
You also indicate that Newco will generally be restricted to carrying on the same business as that carried on by the Entities and the Association prior to the reorganization. The initial shareholders of Newco will consist of the members of the Association immediately prior to the reorganization. The shares of Newco will be subject to ongoing transfer restrictions and will neither be listed on a stock exchange nor exchangeable for shares listed on a stock exchange. XXXXX.
In your view, based on the above, including the restrictions imposed on Newco and its shareholders by the Consent Agreement and XXXXX shares of the capital stock of Newco will form part of the organizational infrastructure of its shareholders and will not be acquired or held by those shareholders in the ordinary course of their business. Your view is that the shares of Newco should be excluded property as defined in subsection 142.2(1).
As a result of your submissions and our own analysis, we have concluded that the proposed amendment would be consistent with the tax policy behind the mark-to-market rules. Therefore, we are prepared to recommend to the Minister of Finance that paragraph 9002.1(a) of the Regulations be amended so that a share of Newco may qualify as a "prescribed payment card corporation share" for purposes of the definition "excluded property'' in subsection 142.2(1). The current requirements in paragraph 9002.1(b) of the Regulations would apply to the shares of Newco.
While we cannot offer any assurance that either the Minister of Finance or Parliament will agree with our recommendation in respect of this matter, we hope that this statement of our intention is helpful.
Brian Ernewein
General Director – Legislation
Tax Policy Branch
