First Capital -- summary under Domestic REITs

Summary Under
Tax Topics - Public Transactions - Offerings - REIT, Trust and LP Offerings - Domestic REITs
conversion to domestic REIT using exchangeable unit structure

Overview

The Company will be converted into a REIT, scheduled to occur on December 30, 2019 under a Plan of Arrangement. The shareholders will transfer their shares of the Company on a taxable basis in exchange for units of a newly-formed Ontario unit trust (the REIT) – except that those who legitimately seek rollover treatment under s. 97(2) can elect to receive exchangeable units of a newly-formed subsidiary Ontario LP of the REIT (FCR LP). The number of exchangeable LP units that may be issued is capped at 20% of the currently outstanding number of common shares of the Company. The REIT and FCR LP then transfer (under s. 85(2) in the case of FCR LP) their common shares of FCR to a Newco in consideration for notes and shares of Newco. In addition to other tidying-up steps, Newco then amalgamates with FCR.

The final structure portrayed in the Circular is of the REIT holding Amalco directly and through FCR LP. The exchangeable units of FCR LP must be exchanged by December 23, 2023.

As part of the steps, the REIT will become bound by the terms of the Company’s Debenture Indenture, with the Company (then Amalco) remaining as a co-principal debtor, but being released from numerous covenants. The common shares held by FCR LP and the REIT in Amalco will be retractable.

The Company

The Company, an OBCA corporation listed on the TSX, is one of Canada’s leading developers, owners and operators of mixed-use urban real estate located in Canada’s most densely populated centres. The Company currently owns interests in 166 properties, totaling approximately 25.1 million square feet of gross leasable area. The Company has one principal subsidiary, First Capital Holdings Trust, a 100% owned trust established under the laws of the Province of Ontario, which had total assets amounting to more than 10% of the consolidated assets of the Company as at June 30, 2019 or total revenues amounting to more than 10% of the consolidated revenues of the Company as at June 30, 2019. Gazit-Globe Ltd. and affiliates reduced its interest in the Company in April 2019 from 31.3% to 9.9% through a secondary offering of 22 million instalment receipts, and from there to 6.7% in December 2019.

The REIT

The REIT is an unincorporated, open-ended real estate investment trust established pursuant to the REIT Declaration of Trust under the laws of the Province of Ontario in order to succeed to the business of the Company following the Arrangement. The Company has formed the REIT and has subscribed for one REIT Unit for $10.

FCR LP and Newco

In order to effect the Arrangement, the REIT incorporated the General Partner of FCR LP, the General Partner and the REIT formed FCR LP (an Ontario limited partnership); and FCR LP formed Newco. The FCR LP Agreement provides for Class A LP Units, which are held by the REIT, and Exchangeable LP Units, which are exchangeable for and intended to be economically equivalent to REIT Units.

Exchangeable LP Units

Any Exchangeable LP Units outstanding on December 29, 2023 will be automatically exchanged for REIT Units, unless the exchange would jeopardize the REIT’s status as a “mutual fund trust” or “real estate investment trust” under the Tax Act or cause or create significant risk that the REIT would be caused to be subject to tax under s. 122(1)(b).

Special Voting Units

Special Voting Units are only issued in tandem with Exchangeable LP Units and are not transferable separately from the Exchangeable LP Units to which they relate, and, upon any valid transfer of Exchangeable LP Units, such Special Voting Units will automatically be transferred to the transferee of the Exchangeable LP Units. As Exchangeable LP Units are exchanged for REIT Units or redeemed or purchased for cancellation by FCR LP, the corresponding Special Voting Units will be cancelled for no consideration.

Ancillary Rights and Exchange and Support Agreement

Ancillary Rights means, in respect of an Exchangeable LP Unit, the rights to exchange that unit under the Exchange and Support Agreement with inter alia the REIT.

Election to receive Exchangeable LP Units

Shareholders (other than Excluded Shareholders and Dissenting Shareholders) may elect, subject to Election Deadline of 5:00 p.m. (Toronto Time) on December 6, 2019 and other limitations, to receive Exchangeable LP Units as consideration for all or a portion of their Common Shares. An Excluded Shareholder is a Shareholder (a) that is not a “taxable Canadian corporation” under the Tax Act; or (b) that would acquire Exchangeable LP Units as a “tax shelter investment” for the purposes of the Tax Act; or (c) an interest in which is a “tax shelter investment” for the purposes of the Tax Act. If the total number of Exchangeable LP Units elected is greater than the Maximum Number of Exchangeable LP Units (of 20% of the number of outstanding Company Common Shares), Exchangeable LP Units will be allocated on a pro rata basis. Any Common Shares not transferred in consideration for Exchangeable LP Units will be transferred to the REIT in consideration for REIT Units.

Distribution policy

The REIT intends to make monthly cash distributions to Unitholders and, through FCR LP, holders of Exchangeable LP Units, initially equal to, on an annual basis, $0.86 per REIT Unit, which is the same annual dividend currently paid by the Company.

Plan of Arrangement steps
  1. The Common Shares held by Dissenting Shareholders shall be transferred to the Company.
  2. Common Shares of the Company in respect of which an Electing Shareholder has validly elected to receive an Exchangeable LP Unit (except any such Common Shares exceeding the Shareholder’s pro rata allocation of the Maximum Number of Exchangeable LP Units of 20% if the outstanding Common Shares) will be transferred to FCR LP in consideration for Exchangeable LP Units and related Ancillary Rights based on the Exchange Ratio.
  3. Common Shares not transferred to the Company or FCR LP above will be transferred to the REIT in exchange for REIT Units issued by the REIT based on the Exchange Ratio of 1-for1.
  4. Upon the transfer of Common Shares to FCR LP, the former Electing Shareholder will be deemed to enter into the Exchange and Support Agreement among the REIT, the General Partner, FCR LP and each such owner of Exchangeable LP Units.
  5. The REIT will become bound by the terms of the Company’s Debenture Indenture, with the Company remaining as a co-principal debtor, but being released from numerous covenants.
  6. The one REIT Unit initially issued by the REIT to the Company will be cancelled for $10.
  7. The REIT will transfer all of the Common Shares held by the REIT to Newco in consideration for Newco Preferred Shares, subordinated non-interest-bearing promissory notes (the REIT NIB Note 1 and REIT NIB Note 2), and a number of Class A voting retractable common shares (“Newco Class A Common Shares”).
  8. FCR LP will transfer all of the Common Shares held by FCR LP to Newco in consideration for a subordinated non-interest-bearing note (the LP NIB Note), and a number of class B non-voting retractable common shares (“Newco Class B Common Shares”).
  9. The REIT will transfer REIT NIB Note 1 to FCR LP in consideration for Class A LP Units.
  10. The Deferred Share Unit Plan and each DSU shall be amended to remove the Company’s right to require the cash settlement of a DSU.
  11. Each Company Option will be exchanged for one Replacement Option of the REIT, and each DSU, RSU and PSU will be exchanged for one replacement unit.
  12. The stated capital of the Common Shares will be reduced to $1.
  13. Newco and the Company shall be amalgamated to form FCR Amalco. FCR Amalco’s share capital will be comprised of (A) Class A voting common shares that are retractable at the option of the shareholder, (B) Class B non-voting common shares that are retractable at the option of the shareholder, and (C) non-voting preferred shares redeemable and retractable at $1,000 per share having discretionary non-cumulative preferential dividends. On the amalgamation, each issued and outstanding share in the capital of the Company immediately prior to the amalgamation will be cancelled, and all of the Newco Class A and B Common Shares and Preferred Shares will become FCR Amalco Class A Common Shares, FCR Amalco Class B Common Shares and FCR Amalco Preferred Shares, respectively.
Canadian tax consequences
Ancillary Rights

A Holder that validly elects to receive Exchangeable LP Units in exchange for Common Shares under the Arrangement will also receive the Ancillary Rights. Such Holder will be required to account for these Ancillary Rights in determining the proceeds of disposition of such Common Shares and, where the Electing Shareholder files a s. 97(2) Tax Election Form, the cost under the Tax Act of the Exchangeable LP Units received in consideration therefor. The Company is of the view that the Ancillary Rights have a nominal fair market value.

S. 97(2) Tax Election

A Holder that validly elects to receive Exchangeable LP Units and the Ancillary Rights in exchange for Common Shares will, unless such Holder files a Tax Election Form under Subsection 97(2) of the Tax Act be considered to have disposed of such Common Shares for proceeds of disposition equal to the aggregate of (i) the fair market value at the Effective Time of any Exchangeable LP Units received by the Holder on the exchange, and (ii) the fair market value at the Effective Time of the Ancillary Rights received by the Holder on the exchange. A Holder that validly elects to receive Exchangeable LP Units and the Ancillary Rights in exchange for Common Shares, and that files a valid Tax Election Form pursuant to Subsection 97(2) of the Tax Act (and any corresponding form under provincial or territorial tax legislation), may thereby obtain a full or partial deferral of a capital gain otherwise arising on the exchange. FCR LP will sign such duly completed forms received from an Electing Shareholder within 30 days after the Effective Date and return them by mail to the Electing Shareholder for filing.

REIT status

Management has advised counsel that, beginning in its 2019 taxation year, the REIT will qualify for the REIT exception and, as currently structured, should qualify for the REIT exception for that taxation year and for each subsequent year.