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.
* Whether failure to make an offer to purchase debentures in respect of an asset sale are acceptable events of default for purposes of Clause 212(1)(b)(vii)(C).
* Whether the termination or material adverse amendment provisions in respect of the Material Agreements are acceptable events of default for purposes of Clause 212(1)(b)(vii)(C).
* Asset Sales are acceptable.
* The provisions have commercial reality, are beyond the control of the lender and are not contrived.
XXXXXXXXXX , 2000
Advance Income Tax Ruling
This is in response to your letter of XXXXXXXXXX , requesting an advance income tax ruling on behalf of the above-noted taxpayer.
We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request are being considered by a Tax Services Office or a Taxation Centre in connection with any tax return already filed, and none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.
In this letter "the Act" means the Income Tax Act, RSC 1985, Fifth Supplement, c.1, as amended from time to time.
1. XXXXXXXXXX ACO is a corporation governed by the Canada Business Corporations Act and is a "taxable Canadian corporation" within the meaning of subsection 89(1) of the Act. ACO's business number is XXXXXXXXXX .
2. All of the issued and outstanding common shares of ACO are owned by XXXXXXXXXX ( the "Fund"), a trust established under the laws of the Province of XXXXXXXXXX , the units of which are listed and posted for trading on the XXXXXXXXXX Stock Exchange. To the best of ACO's knowledge, the units of the Fund are widely held.
3. Formerly, both ACO and XXXXXXXXXX . ("BCO") were owned by XXXXXXXXXX ("CCO"), a publicly traded Canadian corporation. BCO is XXXXXXXXXX .
4. In XXXXXXXXXX , the shares of CCO were acquired by a private company sponsored by XXXXXXXXXX ("DCO"), a privately owned Canadian corporation, and XXXXXXXXXX ("ECO"), a publicly traded Canadian corporation. Following the acquisition, the management of ACO and BCO was reorganized, with the management of BCO providing services to ACO, as described in paragraphs 5 to 7 below. In XXXXXXXXXX ACO was acquired by the Fund.
5. In connection with the reorganization of the management of the companies and the establishment of the Fund and its acquisition of ACO, BCO and ACO entered into two agreements, a Management Agreement and a Services Outsourcing Agreement (collectively the "Material Agreements").
6. Pursuant to the Management Agreement, BCO agreed to provide strategic management services to ACO, including
* preparing reports to the board of directors of ACO with respect to strategic plans and developments for the business and affairs of ACO;
* assisting in the negotiation of banking and financing arrangements for major acquisitions;
* providing strategic advice on matters pertaining to capital expenditures and major acquisitions and divestitures; and
* developing and implementing all special marketing strategies and initiatives for and on behalf of ACO that BCO considers necessary to maintain and enhance ACO's competitive position in XXXXXXXXXX Canada.
BCO has also provided ACO with other strategic services, such as all required project management and oversight services in connection with a major expansion of ACO's principal operating facility XXXXXXXXXX .
The Management Agreement also contains covenants from BCO not to compete in the XXXXXXXXXX Canadian XXXXXXXXXX business and not to solicit certain of ACO's employees.
The Managment Agreement has an initial term of XXXXXXXXXX years, renewable for further terms of XXXXXXXXXX year.
ACO may terminate the Management Agreement (i) if a substantial deterioration of ACO's business occurs which is not caused by an event of force majeure, (ii) following the default by BCO in the performance of any material obligation under the Management Agreement, otherwise than as a result of force majeure, (iii) if the Services Outsourcing Agreement is terminated, (iv) in the event of insolvency or bankruptcy of BCO, or (v) if ECO and DCO cease to own, directly or indirectly, at least XXXXXXXXXX of BCO's issued and outstanding equity securities.
BCO may terminate the Management Agreement (i) at any time on XXXXXXXXXX months notice, (ii) in the event of insolvency or receivership of ACO, (iii) following the default by ACO in the performance of any material obligation under the Management Agreement, otherwise than as a result of force majeure, or (iv) if the Services Outsourcing Agreement is terminated. In certain circumstances, upon the termination of the Management Agreement ACO may be required to compensate BCO for lost revenues under the Management Agreement.
In consideration for providing the services under the Management Agreement, BCO receives a base fee of $XXXXXXXXXX per annum, and an open-ended incentive fee based on the amount of cash available for distribution by the Fund to its unitholders (which will have been earned by ACO).
7. Under the Services Outsourcing Agreement, BCO provides all selling, general and administrative services necessary for ACO to carry out its business, the costs of which were historically allocated by ACO to selling, general and administrative expenses, other than services relating to distribution and material third party costs which arise as a result of events out of the ordinary course of business. These activities include:
* conducting sales and marketing activities for and on behalf of ACO;
* monitoring the financial and non-financial performance of ACO;
* arranging for the provision of external professional and non-professional services;
* negotiating and monitoring contracts with customers and suppliers of ACO; and
* providing services in carrying out any acquisition, disposition, merger or other business combination strategy and any related financing.
ACO and BCO may terminate the Services Outsourcing Agreement in substantially the same circumstances as the Management Agreement. In certain circumstances, either ACO or BCO may be required to compensate the other in respect of the termination of the Services Outsourcing Agreement.
Under the Services Outsourcing Agreement, BCO receives a fee of $XXXXXXXXXX per annum, adjusted for inflation. BCO reimburses ACO the full amount of those costs associated with employees of ACO involved in selling, general and administrative functions, excluding those employees engaged in distribution.
8. At present, ACO has outstanding approximately $XXXXXXXXXX of term borrowings (the "Term Debt") under financing provided by Canadian financial institutions, and a revolving loan facility of $XXXXXXXXXX provided by the same Canadian financial institutions.
9. Pursuant to a Trust Indenture (the "Trust Indenture"), ACO will issue approximately $XXXXXXXXXX of Senior Secured Debentures (the "Debentures"), at a fixed interest rate to be determined at the time of sale of the Debentures, in private placements pursuant to a Confidential Offering Memorandum. It is anticipated that the offering of Debentures will close XXXXXXXXXX .
10. ACO will use the proceeds from the issuance of the Debentures to repay the Term Debt.
11. The terms of the Trust Indenture will provide that the principal amount of the Debentures is due in a single payment more than XXXXXXXXXX years after the date on which the Debentures are issued.
12. The Trust Indenture will establish the events of default with respect to the Debentures. In addition to other standard commercial events of default, the Trust Indenture will provide that the termination of either of the Material Agreements, or their amendment in a manner that is materially adverse to ACO, will constitute an event of default for the Debentures.
13. The Trust Indenture will also provide that where ACO has made an Asset Sale (as defined in paragraph 14 below) and the net proceeds of Asset Sales in a particular calendar year exceed $XXXXXXXXXX (the "Excess Net Proceeds"), ACO will have the option to reinvest the Excess Net Proceeds in its business. If any Excess Net Proceeds are not reinvested in ACO's business within a fixed number of days of the date of the relevant Asset Sale (the "Excess Amount"), ACO will be required to make an offer in an amount equal to the Excess Amount to all holders of Debentures to purchase Debentures for cash in an amount equal to the greater of their face amount and an amount determined by reference to the then-current yield on Government of Canada debt instruments, plus accrued interest to the date of purchase (an "Asset Sale Offer"). To the extent the amount of Debentures tendered pursuant to an Asset Sale Offer is less than the Excess Amount, ACO will be entitled to use any remaining Excess Amount for general corporate purposes. If the amount of Debentures tendered exceeds the amount that is to be purchased under the Asset Sale Offer, they will be purchased pro rata. Upon completion of an Asset Sale Offer, the excess Amount will be reset to zero.
14. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets (including, without limitation, by way of a sale and leaseback) other than sales of inventory or other current assets in the ordinary course of business consistent with past practices. Notwithstanding the foregoing, certain transfers of assets by ACO or any direct or indirect wholly owned subsidiary of ACO to a direct or indirect wholly owned subsidiary of ACO and sales of property or equipment that have become worn out, obsolete or damaged or otherwise unsuitable for use in connection with the business of ACO will be deemed not to be Asset Sales
15. While an Asset Sale resulting in an Excess Amount will not be an event of default under the terms of the Trust Indenture, the failure of ACO to make an Asset Sale Offer in an amount equal to the Excess Amount to repurchase Debentures in accordance with the Asset Sale Offer provisions will be a defined event of default with respect to the Debentures.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to permit ACO to refinance the Term Debt.
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. The obligation of ACO pursuant to the terms of the Trust Indenture to make an Asset Sale Offer to purchase Debentures out of the Excess Amount in the event of an Asset Sale, as described in paragraph 13, and the provision of the failure to make an Asset Sale Offer where an Excess Amount exists as an event of default under the terms of the Trust Indenture will not, in and by themselves, preclude the application of the exemption from Canadian withholding tax, in subparagraph 212(1)(b)(vii) of the Act, to interest paid by ACO to holders of Debentures who, for purposes of the Act, are non-residents of Canada and deal at arm's length with ACO.
B. The provision of the termination or material adverse amendment of a Material Agreement as an event of default under the terms of the Trust Indenture, as described in paragraph 12, will not, in and by itself, preclude the application of the exemption from Canadian withholding tax, in subparagraph 212(1)(b)(vii) of the Act, to interest paid by ACO to holders of Debentures who, for purposes of the Act, are non-residents of Canada and deal at arm's length with ACO.
These rulings are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R3 dated December 30, 1996, and are binding on the Agency provided the Debentures are issued before XXXXXXXXXX . Also, these rulings are based on the Act and the Income Tax Regulations in their present form and do not take into account the effects of any proposed amendments thereto.
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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