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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Whether waiving dividends on exchangeable shares results in the application of the benefit provisions.
Position: No.
Reasons: Subsection 15(1) is not applicable since the corporation is not conferring a benefit. Subsection 246(1) is not applicable since the shareholders deal at arm's length with each other.
XXXXXXXXXX
XXXXXXXXXX 2000-000185
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling Request
This is in reply to your letters of XXXXXXXXXX, wherein you requested various advance income tax rulings on behalf of the above-noted taxpayers.
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the requested rulings:
(i) is in an earlier return of XXXXXXXXXX/ACo, XXXXXXXXXX/BCo or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of XXXXXXXXXX/ACo, XXXXXXXXXX/BCo or a related person; or
(iii) is under objection or appeal by XXXXXXXXXX/ACo, XXXXXXXXXX/BCo or a related person.
DEFINITIONS
In this letter, unless otherwise indicated, the following terms have the meanings specified.
Non-Statutory Terms
"Arrangement" means the arrangement involving XXXXXXXXXX/CCo, its shareholders and optionholders, XXXXXXXXXX/BCo and XXXXXXXXXX/ACo, as described in the Circular;
"XXXXXXXXXX/ACo" means XXXXXXXXXX;
"XXXXXXXXXX/BCo" means XXXXXXXXXX;
"XXXXXXXXXX/BCo Common Shares" means common shares in the capital of XXXXXXXXXX/BCo;
"XXXXXXXXXX/ACo Common Shares" means common shares in the capital of XXXXXXXXXX/Aco;
"XXXXXXXXXX/ACo Liquidation Event" means:
(a) any determination by the board of directors of XXXXXXXXXX/Aco to institute voluntary liquidation, dissolution, or winding-up proceedings with respect to XXXXXXXXXX/Aco or to effect any other distribution of assets of XXXXXXXXXX/ACo among its stockholders for the purpose of winding-up its affairs; or
(b) the earlier of XXXXXXXXXX/ACo receiving notice, or otherwise becoming aware of, any threatened or instituted claim, suit, petition or other proceedings with respect to the involuntary liquidation, dissolution or winding-up of XXXXXXXXXX/ACo or to effect any other distribution of assets of XXXXXXXXXX/ACo among its stockholders for the purposes of winding-up its affairs;
"Circular" means the Joint Management Information Circular and Proxy Statement, dated XXXXXXXXXX, which describes the transactions involved in the Arrangement;
"Exchangeable Shares" means the exchangeable shares of XXXXXXXXXX/BCo, the provisions of which are described in the Circular, which were issued as part of the Arrangement;
"Paragraph" refers to a numbered paragraph in this letter;
"Part" means a numbered part of this letter;
"XXXXXXXXXX/CCo" means XXXXXXXXXX; and
"Proposed Transactions" means the transactions described in paragraphs 15 and 16 of this letter;
Statutory Terms
XXXXXXXXXX
"Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, a reference to a part, section, paragraph and sub-paragraph is a reference to the corresponding provision of the Act;
"non-resident" has the meaning assigned by subsection 248(1);
"prescribed stock exchange" has the meaning assigned by section 3200 of the Regulations;
XXXXXXXXXX
"public corporation" has the meaning assigned in subsection 89(1);
"Regulations" refers to the Income Tax Regulations (Canada);
"related person" has the meaning assigned by section 251;
"series of transactions or events" includes the meaning assigned by subsection 248(10);
"taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
"taxable dividend" has the meaning assigned by subsection 89(1).
Our understanding of the statements of facts, proposed transactions and purposes of the proposed transactions is as follows:
FACTS
1. XXXXXXXXXX/ACo is a corporation which is subject to the corporate laws of the State of XXXXXXXXXX and is a non-resident. The common shares of XXXXXXXXXX/ACo are listed and posted for trading on the XXXXXXXXXX Stock Exchange.
2. XXXXXXXXXX/BCo is a corporation which is subject to the XXXXXXXXXX and which is a taxable Canadian corporation, a public corporation and a principal-business corporation. All of the issued shares of XXXXXXXXXX/BCo, other than the Exchangeable Shares, are owned by XXXXXXXXXX/ACo. The Exchangeable Shares are listed and posted for trading on the XXXXXXXXXX Stock Exchange. All or substantially all of the assets of XXXXXXXXXX/BCo are shares or indebtedness of XXXXXXXXXX/CCo.
3. XXXXXXXXXX/CCo is a corporation which is subject to the XXXXXXXXXX and which is a taxable Canadian corporation, a public corporation and a principal-business corporation. As of XXXXXXXXXX, the legal name of XXXXXXXXXX/CCo was changed XXXXXXXXXX. Prior to XXXXXXXXXX, the common shares of XXXXXXXXXX/CCo were listed and posted for trading on the XXXXXXXXXX Stock Exchange and the XXXXXXXXXX Exchange. XXXXXXXXXX/CCo is engaged in the business of XXXXXXXXXX.
4. Pursuant to the Arrangement, on XXXXXXXXXX/BCo acquired all of the outstanding common shares of XXXXXXXXXX/CCo, and thereby acquired control of XXXXXXXXXX/CCo, in exchange for Exchangeable Shares.
5. The Exchangeable Shares are shares in the share capital of XXXXXXXXXX/BCo. However, as indicated in the Circular, the Exchangeable Shares are intended to be the economic equivalent of XXXXXXXXXX/ACo Common Shares. As more particularly described in the Circular, the holders of Exchangeable Shares have the following rights:
(a) a preference over the holders of the XXXXXXXXXX/BCo Common Shares, and any other shares of XXXXXXXXXX/BCo ranking junior to the Exchangeable Shares, with respect to the payment of dividends and distribution of assets of XXXXXXXXXX/BCo;
(b) the right to exchange such shares for XXXXXXXXXX/ACo Common Shares, at any time, on a one-for-one basis;
(c) the right to receive dividends on the same basis as XXXXXXXXXX/ACo shareholders;
(d) the right to vote, on a per share equivalent basis, at all stockholder meetings at which holders of XXXXXXXXXX/ACo Common Shares are entitled to vote; and
(e) the right to participate upon a XXXXXXXXXX/ACo Liquidation Event, on a pro rata basis with the holders of XXXXXXXXXX/ACo Common Shares, in the distribution of assets of XXXXXXXXXX/ACo, through the automatic exchange of Exchangeable Shares for XXXXXXXXXX/ACo Common Shares.
You have agreed that the Exchangeable Shares are "taxable preferred shares" and "short-term preferred shares" as those terms are defined under subsection 248(1) and that the dividends on the Exchangeable Shares will be subject to the provisions in Part VI.I.
6. Immediately following the Arrangement, approximately XXXXXXXXXX Exchangeable Shares were issued by XXXXXXXXXX/BCo to the former holders of XXXXXXXXXX/CCo common shares. As of XXXXXXXXXX, approximately XXXXXXXXXX Exchangeable Shares have been exchanged for XXXXXXXXXX/ACo Common Shares with the result that approximately XXXXXXXXXX Exchangeable Shares were, as of that date, held by persons other than XXXXXXXXXX/ACo, each of whom deals at arm's length with XXXXXXXXXX/ACo.
7. XXXXXXXXXX/CCo has not paid any dividends since XXXXXXXXXX.
8. XXXXXXXXXX/BCo was incorporated in XXXXXXXXXX and, except for the dividend described in Paragraph 10, has never declared or paid a dividend.
9. XXXXXXXXXX/ACo has a policy of declaring and paying dividends on a quarterly basis. The board of directors of XXXXXXXXXX/ACo establishes the amount, if any, of each quarterly dividend, based on profitability, capital expenditures, financing and other factors and, if applicable, fixes the record date and payment date for the dividend on the XXXXXXXXXX/ACo Common Share each quarter. In accordance with this policy, on XXXXXXXXXX/ACo declared a dividend of US$XXXXXXXXXX for each XXXXXXXXXX/ACo Common Share and such dividend was paid on XXXXXXXXXX/ACo anticipates that it will continue to pay quarterly dividends in accordance with its present dividend policy.
10. In accordance with the provisions of the Exchangeable Shares, on XXXXXXXXXX/BCo declared a dividend of US$XXXXXXXXXX for each Exchangeable Share and such dividend was paid on XXXXXXXXXX/BCo anticipates that it will continue to pay quarterly dividends in accordance with the provisions of the Exchangeable Shares until such time as XXXXXXXXXX/ACo is the owner of all of the issued Exchangeable Shares.
11. On XXXXXXXXXX/ACo, by written notice to XXXXXXXXXX/BCo, waived its right to receive any portion of the dividend referred to in Paragraph 10.
12. Payment of the dividend referred to in Paragraph 10 was made by XXXXXXXXXX/BCo out of the proceeds from a loan from XXXXXXXXXX/CCo to XXXXXXXXXX/BCo. Payment of future dividends which are declared by XXXXXXXXXX/BCo is expected to be made out of the proceeds of additional loans made, or dividends paid, by XXXXXXXXXX/CCo to XXXXXXXXXX/BCo.
13. After XXXXXXXXXX/ACo becomes the owner of all of the issued Exchangeable Shares, which is anticipated to occur prior to the end of XXXXXXXXXX/BCo expects that XXXXXXXXXX/ACo will cause the capital of XXXXXXXXXX/BCo to be reorganized such that the Exchangeable Shares will cease to exist. The precise form of such future capital reorganization has not yet been determined.
14. XXXXXXXXXX/CCo requires funding for its present and future capital expenditure programs and, as indicated in Paragraph 12, XXXXXXXXXX/CCo is anticipated to be the source of cash which will be used by XXXXXXXXXX/BCo to pay future dividends on the Exchangeable Shares. If dividends were received by XXXXXXXXXX/ACo on the Exchangeable Shares that it owns, any such dividends would be reinvested in XXXXXXXXXX/BCo which, in turn, would reinvest such funds in XXXXXXXXXX/CCo.
PROPOSED TRANSACTIONS
15. XXXXXXXXXX/ACo will, by written notice to XXXXXXXXXX/BCo, provide a waiver of its right to receive any and all dividends which are declared on the Exchangeable Shares during the period from and including the date of such waiver to and including the date upon which XXXXXXXXXX/ACo provides, by written notice, a revocation of such waiver.
16. Neither XXXXXXXXXX/ACo nor XXXXXXXXXX/BCo will make any entry (including, for greater certainty, any amount receivable, in the case of XXXXXXXXXX/ACo, and any amount payable, in the case of XXXXXXXXXX/BCo) in its financial statements and accounts in respect of any amount of any waived dividend.
PURPOSE OF THE PROPOSED TRANSACTIONS
17. The purpose of the Proposed Transactions is to maximize the retention of funds by XXXXXXXXXX/CCo for use by it in its business operations and to avoid a circular flow of funds which would result from a payment of dividends on the Exchangeable Shares held by XXXXXXXXXX/ACo, a reinvestment of such payment by XXXXXXXXXX/ACo in XXXXXXXXXX/BCo and a corresponding reinvestment of such payment by XXXXXXXXXX/BCo in XXXXXXXXXX/CCo.
RULINGS
Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and purposes of the Proposed Transactions, we confirm the following:
a) The provisions of subsections 15(1), 56(2) and 246(1) will not apply to the waiver of dividends on the Exchangeable Shares held by XXXXXXXXXX/ACo.
b) No taxes under Part XIII of the Act will be payable by XXXXXXXXXX/ACo in respect of any waived dividends on the Exchangeable Shares held by XXXXXXXXXX/ACo.
c) No taxes under Part VI.I of the Act will be payable by XXXXXXXXXX/BCo in respect of any waived dividends on the Exchangeable Shares held by XXXXXXXXXX/ACo.
d) The provisions of section 80 will not apply in respect of any waived dividends on the Exchangeable Shares held by XXXXXXXXXX/ACo.
e) Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given above.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 provided that the written notification described in Paragraph 15 is given by XXXXXXXXXX.
These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.
Nothing in this letter should be construed as confirmation of the tax consequences of any of the transactions described in this letter other than as specifically described.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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