Killam REIT/ KPI -- summary under Corporate Sub s. 132.2 Merger

Overview

At the beginning of 2016, Killam Properties Inc. (KPI) effectively converted to a REIT under a Plan of Arrangement pursuant to which most of its shareholders exchanged their KPI shares for units of the REIT on a taxable basis, but with some electing to receive rollover treatment by transferring their shares on a s. 97(2) rollover basis for exchangeable units of a subsidiary LP (Killam MLP) - into which the REIT also contributed the KPI shares acquired by it on a taxable basis.

Starting with 2003-0053981R3, CRA issued various rulings permitting an income fund or REIT to eliminate a corporate subsidiary by creating a mutual fund corporation (MFC) through a distribution of shares of the MFC, having a nominal value, to its unitholders, then amalgamating the corporate subsidiary with the MFC to form Amalgamated MFC, and then effecting a s. 132.2 merger of Amalgamated MFC into the income fund or REIT.

On October 11, 2024, CRA issued a ruling letter confirming the tax consequences of transactions of this general character for the elimination of KPI, including the application of the s. 132.2 rules, and the REIT is now proposing to implement. A complicating factor is that KPI is held by the REIT through Killam MLP rather than directly. Accordingly, the proposed transactions include a renunciation by Killam MLP of the receipt of redemption proceeds for its 99.999%+ shareholding in Amalco MFC, somewhat similar to that ruled on in 2016-0660321R3.

The REIT

An Ontario open-ended unit trust based in Halifax with an indirect $5.3 billion portfolio of apartments and manufactured home communities.

Killam MLP

Killam Apartment Limited Partnership, an Ontario limited partnership which serves as a holding company and whose only limited partners are the REIT (holding Class A LP units) and the holders of its Exchangeable LP units.

Killam GP I

Killam Apartment General Partner Ltd., wholly-owned by the REIT, and the OBCA general partner of Killam MLP.

KPI

A CBCA corporation, which was the predecessor entity to the REIT and which is wholly-owned by Killam MLP and holds the Class A LP units of Killam SLP.

Killam SLP

Killam Apartment Subsidiary Limited Partnership, an Ontario limited partnership holding Canadian real property directly and through subsidiary trusts, and whose only limited partners are Killam MLP and KPI.

Killam GP II

Killam Properties SGP Ltd., the OBCA general partner of Killam SLP and of Killam Apartment Subsidiary II Limited Partnership (“Killam Sub II LP”), and wholly-owned by Killam MLP.

Killam MFC

A CBCA corporation that was incorporated on October 9, 2024 by the REIT with a view to it qualifying as a mutual fund corporation for purposes of ITA s. 131(8) and facilitating the Arrangement transactions.

New LP

Killam Apartment Subsidiary 2024 Limited Partnership, an Ontario LP formed on October 10, 2024 solely to facilitate the Arrangement transactions.

Transactions

Steps 2 to 13 below will occur pursuant to a CBCA Plan of Arrangement:

1. KPI will contribute its Class A units of SLP to New LP in consideration for a note (the New LP Note) and units of New LP.
2. Dissenting units will be transferred to the REIT.
3. The REIT will contribute to Killam MLP the $101M note owing to it by KPI.
4. KPI will transfer the New LP Note (from 1) to Killam MLP in partial or full repayment of the $362M note owing by it to Killam MLP and, if there is any excess, in partial repayment of the $101M note from 3 above.
5. The REIT will subscribe for that number of Class A preferred shares of Killam MFC equal to the number of outstanding REIT units for a cash subscription price of $0.01 per share.
6. The Class A preferred shares from 5 will be distributed by the REIT pro rata to its unitholders as a return of capital (with applicable tax under s. 218.3(2) being remitted by it).
7. Killam MLP will transfer all the shares of KPI and the notes acquired by it in 3 to Killam MFC in consideration for 100 Class B preferred shares of Killam MFC.
8. Killam MFC and KPI will amalgamate to form Killam Amalco MFC.
9. Killam Amalco MFC will transfer its assets (being the units of New LP and the cash subscription proceeds from 5) to the REIT in consideration for 100 Special Units having an FMV and redemption amount equal to the FMV of the transferred New LP units and in consideration for REIT units having an FMV equal to the redemption amount of the Class A preferred shares issued in 5 (with the REIT units being deemed to subordinate their entitlements to distributions on the REIT units to the Special Units).
10. Killam Amalco MFC will redeem all the Class A preferred shares through a pro rata distribution of the REIT units acquired in 9.
11. Killam Amalco MFC also will redeem all the Class B shares through a transfer of its 100 Special Units.
12. However, concurrently with the transfer of such Special Units, Killam MLP will be deemed to have renounced its right to receive the Special Units, and those units will be cancelled for no consideration.
13. The outstanding REIT units will be consolidated such that their number will be restored to that before the Arrangement.
14. New LP and Killam MFC will be wound up.

Canadian tax considerations

On October 11, 2024, CRA issued a ruling letter confirming the tax consequences of the transactions including the application of the s. 132.2 rules including in relation to the renunciation. There are essentially no tax consequences to the REIT unitholders nor adverse consequences to the REIT or KPI.