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 a vertical merger qualifies as a foreign merger under subsection 87(8.1)
Position: Yes
Reasons: Existing position.
XXXXXXXXXX
XXXXXXXXXX 2000-002395
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX Advance Income Tax Ruling
This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above referenced taxpayers. We also acknowledge our telephone conversations.
Definitions
In this letter the following terms have the meanings specified:
a) "Act" means the Income Tax Act R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act.
b) "N/R Grandparent" means XXXXXXXXXX.
c) "N/R Parent" means XXXXXXXXXX.
d) "Subco 1" means XXXXXXXXXX.
e) "Subco 2" means XXXXXXXXXX.
f) "Subco 3" means XXXXXXXXXX.
g) "Subco 4" means XXXXXXXXXX.
h) "Absorbco" means XXXXXXXXXX.
i) "Manco" means XXXXXXXXXX.
Facts
1. To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this request:
a) is under objection or,
b) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired, and except as described in paragraphs 16,17, 23 and 24 below,
c) is involved in an earlier return of one of the taxpayers or a related person or,
d) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by one of the taxpayers or a related person.
2. N/R Grandparent is a public company resident in the United States.
3. N/R Grandparent owns XXXXXXXXXX% of the shares of N/R Parent. N/R Parent is resident in the United States for the purposes of the Act and the Canada - U.S. Income Tax Convention (the "Convention").
4. N/R Parent owns XXXXXXXXXX% of the shares of each of Subco 1, Subco 2, Subco 3, and Subco 4. All have a XXXXXXXXXX year-end. Subco 1, Subco 2, Subco 3 and Subco 4 are resident in the United States for the purposes of the Act and the Convention.
5. Subco 3 owns XXXXXXXXXX% of the shares of Absorbco. Absorbco also has a XXXXXXXXXX year-end and is resident in the United States for the purposes of the Act and the Convention.
6.
XXXXXXXXXX
7.
XXXXXXXXXX
8.
XXXXXXXXXX
9. A corporation not dealing at arm's length with Subco 2 owns, directly or indirectly, approximately a XXXXXXXXXX% interest in the XXXXXXXXXX and a person who deals at arm's length with Subco 2 owns the remaining interest.
10.
XXXXXXXXXX
11. Subco 4 has a reserve for deferred revenues of approximately CDN $XXXXXXXXXX. This deferred revenue is in complete symmetry with the deferred charge in Absorbco. In other words, the net amount included in income by Subco 4 in a particular taxation year is always equal to the amount deducted by Absorbco in that same taxation year. This deferred revenue resulted from the payment made by Absorbco to Subco 4 in advance of future service costs to be rendered to Absorbco.
12. Subco 1, Subco 2, Subco 3, and Subco 4 have no employees.
13. The Canadian branch assets of Subco 2, Absorbco, and Subco 4 include appreciated real and tangible personal property.
14. Subco 1 and Subco 3, do not have Canadian branches, but own appreciated intangible personal property, namely 1) contracts with Subco 2 and Absorbco respectively to XXXXXXXXXX, 2) contracts with a related XXXXXXXXXX corporation to XXXXXXXXXX, and 3) sales contracts with customers.
15.
XXXXXXXXXX
16.
XXXXXXXXXX
17.
XXXXXXXXXX
18. On XXXXXXXXXX have submitted to the Canadian Competent Authority, a request to defer the gain, income and profit resulting from the proposed transactions for income and branch tax purposes. The request was presented pursuant to Article XIII, paragraph 8 of the Convention.
Proposed Transactions
19. On XXXXXXXXXX, Absorbco will merge into its parent corporation Subco 3 pursuant toXXXXXXXXXX, with Absorbco surviving the merger. No new shares will be issued. N/R Parent will exchange its shares in Subco 3 for shares of Absorbco when those corporations merge. The shares of Subco 3 will simply be cancelled.
20. Immediately after, onXXXXXXXXXX, Subco 1, Subco 2, and Subco 4 will merge into Absorbco pursuant to XXXXXXXXXX, with Absorbco as the surviving corporation. No new shares will be issued. The shares of Subco 1, Subco 2 and Subco 4 will simply be cancelled and the corporations will be dissolved by operation of the XXXXXXXXXX.
21. N/R Parent, Subco 1, Subco 2, Subco 3 and Subco 4 will comply with section 116 in respect of any disposition of taxable Canadian property by them in the course of the proposed transactions described in paragarphs 19 and 20 above.
22. In the event tax under Part I, but for the Convention, would be payable by N/R Parent, it will file a return of income as required by subparagraph 150(1)(a)(ii).
Purposes of Proposed Transactions
23.
XXXXXXXXXX
24. It is desirable for Subco 1, Subco 2, Subco 3, and Subco 4 to merge into Absorbco. This is consistent with N/R Grandparent's policy to minimize the number of legal entities and to integrate the business functions.
XXXXXXXXXX.
25. The business purposes of these mergers include the elimination of four corporations, the simplification of the accounting XXXXXXXXXX and the simplification of management procedures. These business purposes are achieved while continuing the business enterprise of the merged corporations in the surviving corporation and continuing the proprietary interests of N/R Grandparent and N/R Parent as shareholders of the merged corporations in the form of the surviving corporation.
26. There are no specific tax and legal reasons for this transaction to occur on a two step basis other than to ease the administrative legal procedures.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of 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. Subco 3, as the non-surviving corporation in the merger described in paragraph 19 above, will be considered to have disposed of all of its assets and liabilities. The assets and liabilities of Subco 3, other than the shares of Absorbco, will be disposed of to Absorbco and the shares of Absorbco will be disposed of to N/R Parent Paragraph 69(1)(b) will deem Subco 3 to have received fair market value proceeds of disposition for all of the assets disposed of to Absorbco.
B. The merger of Absorbco and Subco 3 described in paragraph 19 above is a reorganization described in paragraph 8 of Article XIII of the Convention and is therefore a transaction in reference to which the competent authority of Canada may enter into an agreement under section 115.1.
C. Absorbco, as the surviving corporation, will continue and will maintain its existing taxation year through the merger described in paragraph 19 above.
D. The transaction described in paragraph 19 above is a "foreign merger" as defined in subsection 87(8.1). Therefore unless N/R Parent elects in its return of income under Part I for the taxation year in which the foreign merger takes place not to have subsection 87(8) apply, subsections 87(8) and 87(4) will apply
a) to deem N/R Parent to have disposed of its shares in Subco 3 for proceeds equal to the total of the adjusted cost bases of those shares to N/R Parent immediately before the merger and,
b) to deem N/R Parent to have acquired the shares of Absorbco at a cost to N/R Parent equal to the proceeds described in ruling Da) above.
E. As a result of the merger described in paragraph 20 above, Subco 1, Subco 2 and Subco 4, as the non-surviving corporations, will be considered to have disposed of their assets and liabilities to Absorbco. Paragraph 69(1)(b) will deem Subco 1, Subco 2 and Subco 4 to have received fair market value proceeds of disposition for all of the assets disposed of to Absorbco.
F. Absorbco, as the surviving corporation, will continue and will maintain its existing taxation year through the merger described in paragraph 20 above.
G. The merger of Absorbco, Subco 1, Subco 2 and Subco 4 described in paragraph 20 above is a reorganization described in paragraph 8 of Article XIII of the Convention and is therefore a transaction in reference to which the competent authority of Canada may enter into an agreement under section 115.1.
H. The transaction described in paragraph 20 above is a "foreign merger" as defined in subsection 87(8.1). Therefore unless N/R Parent elects in its return of income under Part I for the taxation year in which the foreign merger takes place not to have subsection 87(8) apply, subsections 87(8) and 87(4) will apply to that merger and the shares of the capital stock of Subco 1, Subco 2, and Subco 4 that will be cancelled on the merger and the shares of Absorbco which remain in place, will, pursuant to paragraph 87(4)(a), each be considered to have been disposed of by N/R Parentco for proceeds of disposition equal to their respective adjusted cost base and the shares of Absorbco will, pursuant to paragraph 87(4)(b) be considered to have been reacquired by N/R Parentco for an amount equal to the aggregate proceeds of disposition determined in paragraph 87(4)(a).
I. Upon the merger described in paragraph 20 above, Subco 4 will be deemed to have settled the indebtedness associated with the deferred revenue referred to in paragraph 11 above (i.e. resulting from the advance received from Absorbco) pursuant to subsection 80.01(3). Such settlement will be considered a repayment for the purposes of the application of paragraph 20(1)(m.2) and the amount of the repayment will be equal to the cost amount of the advance to Absorbco at that time.
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on Revenue Canada provided that the proposed transactions are completed by XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this letter should be construed as implying that Revenue Canada has agreed to any other tax consequences relating to any facts or proposed transactions referred to herein other than those as specifically described in the rulings given above.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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