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: Application of subparagraph 88(1)(c.3)(ii) - meaning of "substituted property" for the purposes of subparagraph 88(1)(c)(vi)
Position: Shares acquired by the specified shareholder will not be "substituted property" as defined in subparagraph 88(1)(c.3)(ii)
Reasons: Fair market value of the shares acquired by the specified shareholder will not be determinable primarily by reference to the fair market value or proceeds of disposition of distributed property
XXXXXXXXXX 2000-004585
Attention: XXXXXXXXXX
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: 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 taxpayer. We acknowledge receipt of your correspondence dated XXXXXXXXXX, as well as the information provided to us during our various telephone conversations.
To the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein is:
(i) dealt with in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or
(v) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.
In this letter, unless otherwise expressly stated:
(a) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, and unless otherwise stated, every reference herein to a section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
(b) "ACO" means XXXXXXXXXX;
(c) "adjusted cost base" has the meaning assigned by section 54;
(d) "agreed amount" has the meaning assigned by subsection 85(1);
(e) "arm's length" has the meaning assigned by subsection 251(1);
(f) "BCA1" means the Canada Business Corporations Act;
(g) "BCA2" means the Companies Act (XXXXXXXXXX);
(h) "BCO" means a new corporation to be incorporated by XCO under the BCA1 as described in Paragraph 17;
(i) "capital property" has the meaning assigned by section 54;
(j) "DCO" means XXXXXXXXXX, a subsidiary wholly-owned corporation of XCO;
(k) "depreciable property" has the meaning assigned by subsection 13(21);
(l) "eligible capital property" has the meaning assigned by section 54;
(m) "eligible property" has the meaning assigned by subsection 85(1.1);
(n) "Excluded Assets" means the following property owned by ACO immediately prior to the Proposed Transactions (i) shares of XXXXXXXXXX, (ii) an interest in XXXXXXXXXX and (iii) the assets of XXXXXXXXXX;
(o) "fair market value" means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale;
(p) "First Note" means the demand promissory note issued by ACO, as described in Paragraph 16;
(q) "Fourth Note" means the demand promissory note issued by ACO, as described in Paragraph 16;
(r) "Multiple Voting Shares" means the multiple voting shares of Targetco, as described in Paragraph 5;
(s) "New Offers" means the offers made by Parentco on XXXXXXXXXX to purchase all of the XXXXXXXXXX Shares and XXXXXXXXXX Shares;
(t) "New Targetco" means a new corporation formed on the amalgamation of Targetco, Target Subco1 and Target Subco2 as described in Paragraph 27;
(u) "Offers" means the Original Offers and the New Offers;
(v) "Original Offers" means the offers made by Parentco on XXXXXXXXXX to purchase all of the XXXXXXXXXX Shares and XXXXXXXXXX Shares other than shares owned, directly or indirectly, by ZCO and YCO1;
(w) "Paragraph" means a numbered paragraph in this letter;
(x) "Parentco" means XXXXXXXXXX, a corporation incorporated by YCO1 under the BCA2;
(y) "private corporation" has the meaning assigned by subsection 89(1);
(z) "Proposed Transactions" means the transactions described in Paragraphs 16 to 32;
(a.1) "public corporation" has the meaning assigned by subsection 89(1);
(b.1) XXXXXXXXXX;
(c.1) "Second Note" means the demand promissory note issued by ACO, as described in Paragraph 16;
(d.1) "series of transactions or events" includes the transactions or events described in subsection 248(10);
(e.1) "stated capital" has the meaning assigned to that term in the BCA2;
(f.1) "substituted property" includes the meanings assigned by subsection 248(5) and paragraph 88(1)(c.3);
(g.1) "XXXXXXXXXX Shares" means the XXXXXXXXXX shares of Targetco as described in Paragraph 5;
(h.1) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 87(1.4);
(i.1) "Targetco" means XXXXXXXXXX;
(j.1) "Target Subco1" means XXXXXXXXXX, a subsidiary wholly-owned corporation of Targetco;
(k.1) "Target Subco2" means XXXXXXXXXX, a subsidiary wholly-owned corporation of Targetco;
(l.1) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);
(m.1) "Third Note" means the demand promissory note issued by ACO to XCO, as described in Paragraph 18;
(n.1) "VCO1" means XXXXXXXXXX, a corporation controlled by XXXXXXXXXX;
(o.1) "VCO2" means XXXXXXXXXX, a corporation controlled by XXXXXXXXXX;
(p.1) "VCO Group" means XXXXXXXXXX, VCO1 and VCO2;
(q.1) "WCO" means XXXXXXXXXX, a subsidiary wholly-owned corporation of XCO;
(r.1) "XCO" means XXXXXXXXXX;
(s.1) "YCO1" means XXXXXXXXXX, a subsidiary wholly-owned corporation of ZCO;
(t.1) "YCO2" means XXXXXXXXXX. a subsidiary wholly-owned corporation of ZCO; and
(u.1) "ZCO" means XXXXXXXXXX.
Our understanding of the facts, Proposed Transactions and purpose of the Proposed Transactions is as set forth below.
Facts
1. XCO is a taxable Canadian corporation and a public corporation. XCO is engaged in a number of business activities through directly and indirectly held subsidiary corporations including XXXXXXXXXX. XCO's shares are listed on XXXXXXXXXX Stock Exchange.
2. XXXXXXXXXX.
3. YCO1 and YCO2 are subsidiary wholly-owned corporations of ZCO and are exempt from tax.
4. Targetco is a taxable Canadian corporation and a public corporation engaged in a number of business activities through directly and indirectly held subsidiary corporations involved in, XXXXXXXXXX.
5. Targetco has four (4) authorized classes of shares: XXXXXXXXXX Shares; XXXXXXXXXX Shares; XXXXXXXXXX Shares; XXXXXXXXXX Shares. The only issued shares of Targetco as of the date hereof are the XXXXXXXXXX Shares and the XXXXXXXXXX Shares. Each XXXXXXXXXX Share carries XXXXXXXXXX votes and each XXXXXXXXXX Share carries one vote. Each XXXXXXXXXX Share may, at any time at the holder's option, be converted into one XXXXXXXXXX Share.
The XXXXXXXXXX Shares of Targetco have been listed on XXXXXXXXXX Stock Exchange since XXXXXXXXXX. The XXXXXXXXXX Shares were listed on XXXXXXXXXX Stock Exchange at the close of trading on XXXXXXXXXX.
6. Target Subco1 and Target Subco2 are taxable Canadian corporations and subsidiary wholly-owned corporations of Targetco.
7. As of the date of this letter, ZCO owns XXXXXXXXXX. Through these holdings, ZCO exercises control over approximately XXXXXXXXXX% of the XXXXXXXXXX Shares and approximately XXXXXXXXXX% of the XXXXXXXXXX Shares, giving ZCO control over approximately XXXXXXXXXX% of the voting rights attached to the shares of Targetco.
WCO owns XXXXXXXXXX Shares of Targetco, representing approximately XXXXXXXXXX% of the shares of that class.
VCO1 owns XXXXXXXXXX Shares and VCO2 owns XXXXXXXXXX Shares which, in aggregate represent approximately XXXXXXXXXX% of the voting rights attached to the shares of Targetco. XXXXXXXXXX is the owner of XXXXXXXXXX Shares.
YCO1, YCO2 and each member of the VCO Group are specified shareholders of Targetco.
8. Parentco is a taxable Canadian corporation not engaged in any material activities other than those incidental to its organization and the making of the Offers.
Transactions Completed Prior to the Proposed Transactions
9. YCO1 incorporated Parentco on XXXXXXXXXX under the BCA2. The authorized share capital of Parentco consists of an unlimited number of common shares. No shares of Parentco were issued at the time of incorporation. As the incorporator of Parentco, YCO1 appointed the first directors of Parentco.
10. On XXXXXXXXXX, YCO1 and XCO entered into a framework agreement whereby they agreed to enter into a further agreement concerning the acquisition of the shares of Targetco and a shareholder's agreement. On that same day, YCO1 and XCO announced their intention to make the Original Offers, through Parentco, for all of the shares of Targetco, other than shares owned, directly or indirectly, by ZCO and YCO1, at a price of $XXXXXXXXXX per share.
11. On XXXXXXXXXX, Parentco issued XXXXXXXXXX common shares, XXXXXXXXXX of which were issued to YCO1 and XXXXXXXXXX of which was issued to XCO.
12. On XXXXXXXXXX, Parentco made the Original Offer to purchase all of the issued and outstanding XXXXXXXXXX Shares and XXXXXXXXXX Shares of Targetco (other than the Targetco shares owned by ZCO and YCO1) at a price of $XXXXXXXXXX per share in cash. One of the conditions of the Original Offers was that at least XXXXXXXXXX% of each class of the shares of Targetco be tendered thereunder.
13. On XXXXXXXXXX, Parentco purchased for cancellation all of its common shares owned by YCO1, for cash, at the price the shares were issued. As a result, Parentco became a subsidiary wholly-owned corporation of XCO.
14. On XXXXXXXXXX, the board of directors of Targetco approved in principle the terms of the New Offers to be made by Parentco. In addition, the VCO Group executed a lock-up agreement in favour of Parentco, YCO1 and XCO pursuant to which each member of the VCO Group agreed to irrevocably and unconditionally surrender all of the XXXXXXXXXX Shares of Targetco held by such member.
15. On XXXXXXXXXX Parentco made the New Offers to purchase all the XXXXXXXXXX Shares and XXXXXXXXXX Shares of Targetco for a cash amount of $XXXXXXXXXX per share. Upon and after the completion of the New Offers, XCO will have an interest of approximately XXXXXXXXX% in Parentco and YCO1 will have an interest of approximately XXXXXXXXXX%.
Proposed Transactions
16. ACO, a subsidiary wholly-owned corporation of XCO, will sell the Excluded Assets to XCO for a price equal to fair market value, which is estimated to be $XXXXXXXXXX. The purchase price will be satisfied by way of a set-off against debt owing to XCO by ACO. The balance of such debt, which is estimated to be approximately $XXXXXXXXXX, will be evidenced by three demand promissory notes. The first note (the "First Note") will have a principal amount and fair market value equal to the total of XCO's costs relating to the acquisition of Targetco and the amount that XCO previously loaned to ACO for the acquisition of the shares of DCO. Another note ("the Fourth Note") will have a principal amount and fair market value of $XXXXXXXXXX. An additional note (the "Second Note") will have a principal amount and fair market value equal to the gross amount owing to XCO by ACO (after the set-off in respect of the Excluded Assets), less the principal amount of the First Note and the Fourth Note.
17. XCO will incorporate a new corporation ("BCO") under the BCA1 and will subscribe for XXXXXXXXXX common shares of BCO at $XXXXXXXXXX per share. BCO will use the subscription proceeds to subscribe for common shares of Parentco.
18. ACO will redeem its XXXXXXXXXX preferred shares at their redemption amount of $XXXXXXXXXX and reduce the stated capital of its XXXXXXXXXX shares by $XXXXXXXXXX. No deemed dividend will arise as a result of the reduction in stated capital of the multiple voting shares. The total amount owing by ACO to XCO as a result of the share redemption and reduction of stated capital will be paid by the issuance of a demand promissory note to XCO (the "Third Note") in the amount of $XXXXXXXXXX.
19. XCO will transfer the Third Note and the Fourth Note to BCO in consideration for common shares of BCO with a fair market value equal to the aggregate fair market value of the Third Note and the Fourth Note.
20. XCO will subscribe for common shares of BCO at $XXXXXXXXXX per share for consideration consisting of approximately $XXXXXXXXXX in cash. BCO will then subscribe for common shares of Parentco at $XXXXXXXXXX per share for consideration consisting of approximately $XXXXXXXXXX in cash, the Third Note and the Fourth Note.
21. XCO will transfer to Parentco all of its shares of ACO and the Second Note in consideration for common shares of Parentco. XCO and Parentco will jointly elect, pursuant to subsection 85(1), in prescribed form and within the time determined under subsection 85(6), with respect to the transfer of the shares of ACO and the Second Note. The agreed amount in respect of each property will not be less than the lesser of amounts specified in subparagraphs 85(1)(c.1)(i) or (ii) and will not exceed the fair market value of each property. ACO will henceforth be a subsidiary wholly-owned corporation of Parentco.
22. WCO will transfer to Parentco its shares of Targetco in consideration for common shares of Parentco with a fair market value equal to the fair market value of the transferred property. WCO and Parentco will jointly elect, pursuant to subsection 85(1), in prescribed form and within the time determined under subsection 85(6), with respect to the transfer of the shares of Targetco to Parentco. The agreed amount will not be less than the lesser of amounts specified in subparagraphs 85(1)(c.1)(i) or (ii) and will not exceed the fair market value of the property.
23. XCO will sell the First Note to Parentco for cash equal to the fair market value of the First Note.
24. Parentco will contribute the First Note, the Second Note and the Third Note to the capital of ACO.
25. YCO1 will contribute cash of approximately $XXXXXXXXXX to Parentco in consideration for common shares of Parentco. Following the share subscription by YCO1, XCO will continue to control Parentco.
26. Parentco will borrow approximately $XXXXXXXXXX from various financial institutions, which funds will be used to acquire shares of Targetco.
27. Targetco, Target Subco1 and Target Subco2 will amalgamate in accordance with subsection 87(1) to form New Targetco, such that:
(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of a particular predecessor corporation immediately before the amalgamation will become property of the amalgamated corporation by virtue of the amalgamation;
(b) all of the liabilities (except amounts payable to any predecessor corporation) of a particular predecessor corporation will become liabilities of the amalgamated corporation by virtue of the amalgamation; and
(c) all of the shareholders (except any predecessor corporation) of the predecessor corporations immediately before the merger will receive shares of the capital stock of the new corporation because of the amalgamation.
28. New Targetco will transfer all of the assets and liabilities of the business formerly operated by Target Subco2 to a newly-incorporated subsidiary wholly-owned corporation ("New Subco2"). New Targetco and New Subco2 will elect, jointly, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to such transfers. Specifically, the agreed amount in each joint election will not be less than the least of:
(a) the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii) in the case of eligible capital property;
(b) the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii) in the case of depreciable property of a prescribed class; and
(c) the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii), in the case of property described in paragraph 85(1)(c.1).
In respect of any other eligible property not included in (a) to (c) above, New Targetco and New Subco2 will elect an amount greater than nil but not exceeding the fair market value of the property at the time of the transfer.
29. The shareholders of New Targetco, other than Parentco, will tender their shares of New Targetco under the New Offers.
30. Parentco expects to acquire at least XXXXXXXXXX% of the shares of each class of New Targetco. Following this acquisition, it will then exercise its right to acquire the remaining shares of each class pursuant to the BCA2.
31. After Parentco becomes the sole shareholder of New Targetco, Parentco and New Targetco will be amalgamated under the BCA2 to form New Parentco. On the amalgamation:
(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of a particular predecessor corporation immediately before the amalgamation will become property of the amalgamated corporation by virtue of the amalgamation;
(b) all of the liabilities (except amounts payable to any predecessor corporation) of a particular predecessor corporation will become liabilities of the amalgamated corporation by virtue of the amalgamation; and
(c) all of the shareholders (except any predecessor corporation) of the predecessor corporations immediately before the merger will receive shares of the capital stock of the new corporation because of the amalgamation.
New Parentco will elect to increase the adjusted cost base of capital property acquired on the amalgamation to the extent permitted by subsection 87(11) and paragraph 88(1)(d).
32. Immediately following the acquisition of control of New Targetco by Parentco and throughout the series of transactions or events which includes the Proposed Transactions, the portion of the fair market value of the shares of Parentco or New Parentco owned by YCO1 that will be attributable to property of New Targetco to be acquired by New Parentco on the amalgamation of Parentco and New Targetco will not exceed approximately XXXXXXXXXX% of the fair market value of such shares.
Subsequent Transactions
33. Following the Proposed Transactions, XXXXXXXXXX may require New Parentco to divest itself of certain assets acquired by it on the amalgamation referred to in Paragraph 31. To the extent possible, New Parentco will not sell any property acquired as a consequence of the amalgamation to a person who was a specified shareholder of New Targetco or its predecessor, Targetco, at any time during the series of transactions which includes such amalgamation and before control of New Targetco was acquired by Parentco.
Purposes of the Proposed Transactions
34. The main purpose of the Proposed Transactions is to effect a takeover of Targetco by Parentco. The purpose of the amalgamation of Parentco with its subsidiary wholly-owned corporation, New Targetco is to obtain a bump to the non-depreciable capital property owned by New Targetco immediately before the acquisition of control of New Targetco to the extent permitted by paragraph 88(1)(c) and (d).
Rulings Given
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 and in the order described above, our rulings are as set forth below.
A. The shares of Parentco (later New Parentco) acquired by YCO1, XCO, BCO and WCO, as described in this letter, will not be property the fair market value of which is determinable primarily by reference to the fair market value of, or to any proceeds of disposition of any property acquired by New Parentco on the amalgamation of Parentco and New Targetco for the purposes of subparagraph 88(1)(c.3)(ii).
B. Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine any of the tax consequences confirmed in ruling A.
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 into law, could affect the rulings provided herein.
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.
Caveat
Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has reviewed or is making a determination or ruling in respect of:
(a) whether any property acquired by any person in the circumstances described in this letter is property substituted for property acquired by New Parentco on the amalgamation of Parentco and New Targetco, except as specifically described in ruling A above;
(b) the fair market value or the adjusted cost base of any particular asset or the paid-up capital of any shares referred to in this advance income tax ruling; or
(c) 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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