2000 Ruling 2000-0033353 - Vertical Short-Form Amalgamation

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: Transfer of all the shares of a corporation held by an individual to a wholly-owned holding company and the subsequent vertical short-form amalgamation of the holding company and its wholly-owned subsidiary corporations.

Position: This is a standard vertical short-form amalgamation.

Reasons: See issue sheet.

XXXXXXXXXX 2000 - 003335

Attention: XXXXXXXXXX

XXXXXXXXXX , 2000

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge receipt of your facsimiles.

Throughout this letter, the corporate and individual taxpayers will be referred to as follows:

XXXXXXXXXX Mr. B

XXXXXXXXXX Holdco
XXXXXXXXXX Investco
XXXXXXXXXX Provco
XXXXXXXXXX Opco

The Tax Services Office of Mr. B, Holdco, Investco and Provco is XXXXXXXXXX Their individual and corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.

To the best of your knowledge, and that of any of the taxpayers, none of the issues involved in this ruling request is:

(i) involved in an earlier return of any of the taxpayers or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a tax return previously filed by any of the taxpayers or a related person;

(iii) under objection by any of the taxpayers or a related person;

(iv) before the courts and there is no judgment that has been issued in which the time limit for appeal to a higher court has not expired; and

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

(a) "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, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "adjusted cost base" ("ACB") has the meaning assigned to that term by section 54 of the Act;

(c) "agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in an election under subsection 85(1) of the Act;

(d) "BCA" means the Business Corporations Act (XXXXXXXXXX) and, where applicable, its predecessor statutes;

(e) "capital property" has the meaning assigned to that term by section 54 of the Act;

(f) "cost amount" has the meaning assigned to that term by subsection 248(1) of the Act;

(g) "eligible property" has the meaning assigned to that term by subsection 85(1.1) of the Act;

(h) "private corporation" has the meaning assigned to that term by subsection 89(1) of the Act;

(i) "stated capital" has the meaning assigned to that term by the BCA;

(j) "subsidiary wholly-owned corporation" has the meaning assigned to that term by subsection 87(1.4) of the Act; and

(k) "taxable Canadian corporation" ("TCC") has the meaning assigned to that term by subsection 89(1) of the Act.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

1. Mr. B, Holdco, Investco and Provco are resident in Canada for the purposes of the Act.

2. Holdco is a private corporation and a taxable Canadian corporation incorporated under the provisions of the BCA. Holdco's activities consist primarily of XXXXXXXXXX. The issued and outstanding share capital of Holdco consists of XXXXXXXXXX Voting Common shares, all of which are held by Mr. B as capital property. The total of the adjusted cost bases to Mr. B of the Holdco XXXXXXXXXX Voting Common shares may exceed the aggregate fair market value of such shares.

Mr. B also holds, as a capital property, an interest-bearing note payable by Holdco. The cost amount to Mr. B of the note is equal to the principal amount of the note.

3. Investco is a private corporation and a taxable Canadian corporation incorporated under the provisions of the BCA. Investco's activities consist primarily of XXXXXXXXXX. The issued and outstanding share capital of Investco consists of XXXXXXXXXX Voting Common shares, and XXXXXXXXXX Preferred shares, all of which are held by Holdco as capital property.

4. Provco is a private corporation and a taxable Canadian corporation incorporated under the provisions of the BCA. Provco's activities consist primarily of XXXXXXXXXX. The issued and outstanding share capital of Provco consists of XXXXXXXXXX Voting Common shares, all of which are held by Mr. B as capital property. The aggregate fair market value of the Provco Voting Common shares exceeds the total of the adjusted cost bases to Mr. B of such shares.

Provco also holds, as capital property, two non-interest-bearing notes payable by Holdco (the "Holdco Debt"). The principal amount of the Holdco Debt is equal to the cost amount of that indebtedness to Provco as computed in accordance with paragraphs 80.01(3)(a) and (b) of the Act.

5. Opco is a private corporation and a taxable Canadian corporation incorporated under the provisions of the BCA, and is in the process of being wound up. The issued and outstanding share capital of Opco consists of XXXXXXXXXX Voting Common shares and XXXXXXXXXX Non-Voting Common shares. Mr. B holds XXXXXXXXXX of the XXXXXXXXXX Voting Common shares (XXXXXXXXXX%) as capital property. The other XXXXXXXXXX Voting Common shares are held by Mr. B's brother. Provco holds XXXXXXXXXX of the XXXXXXXXXX Non-Voting Common shares (XXXXXXXXXX%) as capital property. The other XXXXXXXXXX Non-Voting Common shares are held by a private holding company controlled by Mr. B's brother.

Opco also holds, as capital property, a non-interest-bearing promissory note payable on demand by Holdco in the amount of $XXXXXXXXXX.

6. In an advance income tax ruling (File No. 9825863, dated XXXXXXXXXX, 1998) and supplemental ruling (File No. 9901461, dated XXXXXXXXXX, 1999), the Canada Customs and Revenue Agency (the "Agency") ruled on certain consequences under the Act with respect to, inter alia, the winding-up of Opco.

The Agency confirmed in a letter (File No. 9932145, dated XXXXXXXXXX, 1999) that the advance income tax ruling and supplemental ruling would not be affected if Opco did not distribute its remaining property to its shareholders and file Articles of Dissolution on or before XXXXXXXXXX. The time extension was granted because a clearance certificate for the winding-up of Opco had not yet been received from the XXXXXXXXXX Tax Services Office. As of the date of this letter, the clearance certificate is still outstanding. Consequently, the dissolution of Opco has not yet occurred and it is expected that Opco will not be dissolved until after XXXXXXXXXX.

PROPOSED TRANSACTIONS

7. Prior to the dissolution of Opco, Mr. B will transfer all of the issued and outstanding Provco Voting Common shares to Holdco. In consideration for such transfer, Mr. B will receive Holdco XXXXXXXXXX Voting Common shares.

8. Mr. B and Holdco will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfer of the Provco Voting Common shares to Holdco as described in paragraph 7 above. The agreed amount specified in the election in respect of the property transferred will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii) of the Act, and will not exceed the fair market value of the Provco Voting Common shares immediately before the transfer. Pursuant to XXXXXXXXXX of the BCA, the amount to be added to the stated capital of the Holdco XXXXXXXXXX Voting Common shares on the issuance of such shares will be equal to the paid-up capital of the XXXXXXXXXX Provco Voting Common shares.

9. Immediately after the transfer described in paragraph 7 above (and prior to the dissolution of Opco), Holdco, Investco and Provco will amalgamate to form Amalco pursuant to XXXXXXXXXX of the BCA whereby:

(a) all the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the merger becomes property of Amalco by virtue of the merger;

(b) all of the liabilities (except amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger become liabilities of Amalco by virtue of the merger;

(c) the shares of Provco and Investco will be cancelled without any repayment of capital in respect of those shares; and

(d) the shares of Holdco will not be cancelled on the merger and no shares of the capital stock of Amalco will be issued by Amalco in connection with the amalgamation.

Mr. B, being the only shareholder of Holdco immediately before the merger, will be the only shareholder of Amalco immediately after the merger. Upon the amalgamation, the Holdco Debt, referred to in paragraph 4 above, will be cancelled. Amalco will be a private corporation and a taxable Canadian corporation governed by the provisions of the BCA.

PURPOSE OF THE PROPOSED TRANSACTIONS

10. The purpose of the proposed transfer of the Provco Voting Common shares to Holdco by Mr. B is to facilitate a short-form vertical amalgamation, as described in XXXXXXXXXX of the BCA, of Holdco, Provco and Investco. After the transfer of the Provco Voting Common shares to Holdco, Provco and Investco will be wholly-owned subsidiaries of Holdco.

11. The purpose of the amalgamation of Holdco, Provco and Investco is to simplify Mr. B's corporate holdings and eliminate redundant corporate costs. Holdco, Provco and Investco are all wholly-owned directly or indirectly by Mr. B and the existence of three separate corporations is no longer necessary.

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. The provisions of subsection 85(1) of the Act will apply to the transfer of the Provco Voting Common shares to Holdco by Mr. B, as described in paragraph 7 above, such that the agreed amount in respect of the transfer will be deemed to be Mr. B's proceeds of disposition and Holdco's cost thereof pursuant to paragraph 85(1)(a) of the Act, provided that Mr. B and Holdco jointly elect in prescribed form within the time determined under subsection 85(6) of the Act. For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to the transfer referred to herein.

B. On the amalgamation of Holdco, Investco and Provco, as described in paragraph 9 above:

(a) the provisions of subsection 87(1) of the Act will apply, by virtue of subsection 87(1.1); and

(b) the provisions of subsection 87(4) of the Act, other than paragraphs (c), (d) and (e) thereof, will apply, such that:

(i) Mr. B will be deemed by paragraph 87(4)(a) to have disposed of his shares of the capital stock of Holdco for proceeds equal to the total of the adjusted cost bases to Mr. B of those shares immediately before the amalgamation; and

(ii) Mr. B will be deemed by paragraph 87(4)(b) of the Act to have acquired the shares of Amalco at a cost to Mr. B equal to the proceeds described in paragraph 87(4)(a) of the Act.

C. Pursuant to the provisions of subsection 80.01(3) of the Act, the settlement and cancellation of the Holdco Debt upon the amalgamation of Holdco, Investco and Provco, as described in paragraph 9 above, will be deemed to have been settled immediately before the time that is immediately before the amalgamation by a payment made by Holdco and received by Provco of an amount equal to the amount that would have been Provco's cost amount of the Holdco Debt at that time as computed in accordance with paragraphs 80.01(3)(a) and (b) of the Act.

D. Subsection 245(2) of the Act will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

1. The Proposed Transactions will not affect the rulings given in the advance income tax ruling and supplemental ruling referred to in paragraph 6 above. In addition, the time extension granted in the letter referred to in paragraph 6 will still be applicable.

2. Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:

(a) the determination of the fair market value or ACB of any particular asset or the paid-up capital of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those 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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