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 subsection 55(2).
Position: Not applicable.
Reasons: No significant increase in interest as part of the series of transactions that includes the dividends.
XXXXXXXXXX 2000-004905
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Madam:
Re: XXXXXXXXXX
Request for Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of XXXXXXXXXX. We also acknowledge the additional information in your letter of XXXXXXXXXX.
We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling request:
(i) is in an earlier tax return of XXXXXXXXXX or of a person related to XXXXXXXXXX;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of XXXXXXXXXX or of a person related to XXXXXXXXXX;
(iii) is under objection by XXXXXXXXXX or by a person related to XXXXXXXXXX; or
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.
Definitions
In this letter, the following terms have the meanings specified:
(a) "ACB" means adjusted cost base as that expression is defined in section 54;
(b) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, and all references to a statute are to the Act, unless otherwise indicated;
(c) "agreed amount" has the meaning assigned by subsection 85(1); and
(d) "eligible property" has the meaning assigned by subsection 85(1.1).
Unless otherwise specified, all references in this letter to currency are to lawful money of Canada.
Facts
1. XXXXXXXXXX.
2. In XXXXXXXXXX acquired all of the common shares of XXXXXXXXXX. The overriding objective of this acquisition was to integrate the activities of XXXXXXXXXX carried out by its subsidiaries into the XXXXXXXXXX activities of XXXXXXXXXX.
3. XXXXXXXXXX.
4. XXXXXXXXXX has approximately $XXXXXXXXXX of preferred shares outstanding. As at the date hereof, the market capitalization of the common shares of XXXXXXXXXX is in excess of $XXXXXXXXXX. There is outstanding approximately $XXXXXXXXXX of subordinated debt issued by XXXXXXXXXX.
5. The XXXXXXXXXX preferred shares of XXXXXXXXXX which are listed on the XXXXXXXXXX are XXXXXXXXXX and, collectively with the XXXXXXXXXX Shares, the "XXXXXXXXXX Preferred Shares"). The XXXXXXXXXX Shares are denominated in Canadian currency and have a redemption amount equal to $XXXXXXXXXX. The XXXXXXXXXX Shares are denominated in U.S. currency and have a redemption amount equal to US$XXXXXXXXXX (approximately $XXXXXXXXXX Canadian).
6. The direct and indirect subsidiaries of XXXXXXXXXX include the following:1
XXXXXXXXXX.
7. The direct and indirect subsidiaries of XXXXXXXXXX include the following:2
XXXXXXXXXX.
8. In order to facilitate the integration of the XXXXXXXXXX Group into the XXXXXXXXXX activities of XXXXXXXXXX has developed a plan (the "Reorganization Plan") to align the legal structures in a manner consistent with the proposed business operations. In summary, the Reorganization Plan provides for the companies in the XXXXXXXXXX Group (other than XXXXXXXXXX) to be transferred to XXXXXXXXXX (and in some cases dissolved into XXXXXXXXXX), and XXXXXXXXXX companies to be transferred to XXXXXXXXXX.
The objective is to have these transactions completed well in advance of the integration of the XXXXXXXXXX operations under the new brand name, XXXXXXXXXX.
9. In order to improve XXXXXXXXXX efficiency, XXXXXXXXXX has developed a plan (the "XXXXXXXXXX Plan") to acquire the XXXXXXXXXX Preferred Shares and the XXXXXXXXXX Debentures. In summary, the XXXXXXXXXX Plan provides for XXXXXXXXXX to acquire the XXXXXXXXXX Preferred Shares and the XXXXXXXXXX Debentures in consideration for preferred shares and debentures, respectively, of XXXXXXXXXX having terms the same in all material respects to the XXXXXXXXXX Preferred Shares and the XXXXXXXXXX Debentures.
10. The following steps have been completed pursuant to the Reorganization Plan:
(a) On XXXXXXXXXX transferred all of the shares of XXXXXXXXXX to XXXXXXXXXX in consideration for (i) cash, and (ii) XXXXXXXXXX classes of preferred shares of XXXXXXXXXX with a fair market value equal to the fair market value of the shares of XXXXXXXXXX transferred to XXXXXXXXXX less the amount of the cash.
XXXXXXXXXX will file an election under subsection 85(1) in respect of this transfer, and the agreed amount in such election will be equal to the ACB to XXXXXXXXXX of the shares of XXXXXXXXXX immediately before the transfer. Elections may also be filed under equivalent provisions of applicable provincial income tax legislation.
(b) On XXXXXXXXXX amalgamated (the corporation continuing on the amalgamation is referred to as "XXXXXXXXXX Amalco").
(c) On XXXXXXXXXX sold its XXXXXXXXXX portfolio to an arm's-length third party in consideration for cash equal to the fair market value of the portfolio. The dissolution of XXXXXXXXXX into XXXXXXXXXX was authorized effective XXXXXXXXXX.
(d) XXXXXXXXXX sold XXXXXXXXXX operations to arm's-length third parties in consideration for cash equal to the fair market value of such assets.
(e) XXXXXXXXXX were amalgamated (the corporation continuing on the amalgamation is referred to as "XXXXXXXXXX Amalco"). On the amalgamation, XXXXXXXXXX received common shares of XXXXXXXXXX Amalco with a fair market value equal to the fair market value of the shares of XXXXXXXXXX, respectively, immediately before the amalgamation.
11. The following additional steps are proposed to be carried out pursuant to the Reorganization Plan commencing on XXXXXXXXXX:
(a) XXXXXXXXXX will be wound-up into XXXXXXXXXX.
(b) XXXXXXXXXX will declare one or more cash dividends or effect one or more increases in the stated capital accounts maintained in respect of its shares in order to capitalize the "safe income" associated with its shares.
(c) XXXXXXXXXX and XXXXXXXXXX will be amalgamated (the corporation continuing on the amalgamation is referred to as "XXXXXXXXXX Amalco"). On the amalgamation, XXXXXXXXXX will receive common shares of XXXXXXXXXX Amalco and XXXXXXXXXX will receive preferred shares of XXXXXXXXXX Amalco with a fair market value equal to the fair market value of the shares of XXXXXXXXXX immediately before the amalgamation.
(d) XXXXXXXXXX will transfer the assets that comprise its XXXXXXXXXX business to XXXXXXXXXX Amalco in consideration for (i) the assumption of liabilities, and (ii) preferred shares of XXXXXXXXXX Amalco with a fair market value equal to the fair market value of the assets transferred to XXXXXXXXXX Amalco immediately before the transfer less the liabilities assumed on the transfer.
XXXXXXXXXX and XXXXXXXXXX Amalco will file an election under subsection 85(1) in respect of the transfer of certain assets that are eligible property, and the agreed amounts in such elections will be within the limits prescribed under subsection 85(1). Elections may also be filed under equivalent provisions of applicable provincial income tax legislation.
(e) XXXXXXXXXX will each declare one or more cash dividends or effect one or more increases in the stated capital accounts maintained in respect of its shares in order to capitalize the "safe income" associated with its shares. XXXXXXXXXX will also redeem the preferred shares in its capital for cash.
(f) XXXXXXXXXX will sell all of the shares of each of XXXXXXXXXX to XXXXXXXXXX in consideration for cash equal to the fair market value of such shares.
(g) XXXXXXXXXX will be wound-up into XXXXXXXXXX.
(h) XXXXXXXXXX will each effect one or more reductions of the stated capital accounts maintained in respect of its shares and distribute cash on such reductions of stated capital.
(i) XXXXXXXXXX will transfer all of the shares of XXXXXXXXXX and all of its shares of XXXXXXXXXX Amalco to XXXXXXXXXX in consideration for preferred shares of XXXXXXXXXX with a fair market value equal to the aggregate fair market value of the shares transferred to XXXXXXXXXX immediately before the transfer.
XXXXXXXXXX will file one or more elections under subsection 85(1) in respect of the transfer of the shares of XXXXXXXXXX, and the agreed amount in any such election in respect of the transfer of the shares of each such corporation will be equal to the ACB to XXXXXXXXXX of the shares of such corporation immediately before the transfer. Elections may also be filed under equivalent provisions of applicable provincial income tax legislation.
(i.1) XXXXXXXXXX will transfer all of its shares of XXXXXXXXXX to XXXXXXXXXX which is a wholly-owned subsidiary of XXXXXXXXXX, in consideration for preferred shares of XXXXXXXXXX with a fair market value equal to the fair market value immediately before the transfer of the shares of XXXXXXXXXX transferred to XXXXXXXXXX.
XXXXXXXXXX will file an election under subsection 85(1) in respect of the transfer of the shares of XXXXXXXXXX. The agreed amount in this election will be equal to the ACB to XXXXXXXXXX of the shares of XXXXXXXXXX immediately before the transfer. An election may also be filed under equivalent provisions of application provincial income tax legislation.
(j) XXXXXXXXXX will transfer all of the shares of XXXXXXXXXX to XXXXXXXXXX in consideration for shares of XXXXXXXXXX with a fair market value equal to the fair market value of the shares of XXXXXXXXXX transferred to XXXXXXXXXX immediately before the transfer.
(k) XXXXXXXXXX will be amalgamated (the corporation continuing on the amalgamation is referred to as "XXXXXXXXXX Amalco"). On the amalgamation, XXXXXXXXXX will receive common shares of XXXXXXXXXX Amalco and XXXXXXXXXX will receive preferred shares of XXXXXXXXXX Amalco with a fair market value equal to the fair market value of its preferred shares of XXXXXXXXXX immediately before the amalgamation.
(l) XXXXXXXXXX will be amalgamated.
(m) XXXXXXXXXX will transfer all of the shares of XXXXXXXXXX and all of the shares and certain of the subordinated indebtedness of each of XXXXXXXXXX to XXXXXXXXXX in consideration for (i) cash, and (ii) common shares of XXXXXXXXXX with a fair market value equal to the aggregate fair market value of the shares and subordinated indebtedness transferred to XXXXXXXXXX immediately before the transfer less the amount of the cash.
XXXXXXXXXX will file one or more elections under subsection 85(1) in respect of the transfer of the shares of XXXXXXXXXX and the shares and subordinated indebtedness of XXXXXXXXXX , and the agreed amount in any such election in respect of the transfer of the shares and subordinated indebtedness of each such corporation will be equal to the ACB to XXXXXXXXXX of the shares and subordinated indebtedness of such corporation immediately before the transfer. Elections may also be filed under equivalent provisions of applicable provincial income tax legislation.
(n) XXXXXXXXXX will sell deposit liabilities to XXXXXXXXXX for prepaid XXXXXXXXXX .
(o) XXXXXXXXXX will redeem the preferred share in its capital held by XXXXXXXXXX Amalco.
(p) XXXXXXXXXX will be amalgamated (the corporation continuing on the amalgamation is referred to as "XXXXXXXXXX Amalco").
(q) XXXXXXXXXX will each be wound-up into XXXXXXXXXX .
(r) XXXXXXXXXX Amalco will redeem the preferred shares in its capital held by XXXXXXXXXX for cash.
(s) XXXXXXXXXX Amalco will redeem the preferred shares in its capital held by XXXXXXXXXX Amalco for cash.
(t) XXXXXXXXXX Amalco will be wound-up into XXXXXXXXXX.
(u) XXXXXXXXXX may each declare one or more dividends or effect one or more reductions in the stated capital accounts maintained in respect of its shares in order to distribute any capital in excess of its needs.
(v) XXXXXXXXXX may be amalgamated.
Proposed Transactions
12. The following steps are proposed to be carried out pursuant to the XXXXXXXXXX Plan:
(a) XXXXXXXXXX.
(b) XXXXXXXXXX.
(c) Following the meetings of the holders of the XXXXXXXXXX Preferred Shares and the XXXXXXXXXX Debentures, assuming shareholders or debentureholders, as the case may be, approve the proposals:
(i) XXXXXXXXXX will give notice to XXXXXXXXXX or its transfer agent in accordance with the XXXXXXXXXX Share Amendments.
(ii) XXXXXXXXXX will acquire the outstanding XXXXXXXXXX Preferred Shares in consideration for, in the case of each of the XXXXXXXXXX Shares and XXXXXXXXXX Shares, an identical number of XXXXXXXXXX Preferred Shares.
(iii) XXXXXXXXXX will acquire the outstanding XXXXXXXXXX Debentures in consideration for, in the case of each of the XXXXXXXXXX Debentures and XXXXXXXXXX Debentures, an equal principal amount of XXXXXXXXXX Debentures.
(d) In order to ensure deductibility of interest in respect of the XXXXXXXXXX Debentures, the interest rate on the XXXXXXXXXX Debentures will be slightly increased after their acquisition by XXXXXXXXXX.
(e) The XXXXXXXXXX Shares may be acquired by XXXXXXXXXX in two tranches. Shares would first be acquired from holders who are financial institutions (who are not eligible for any rollover on the transaction) and next from any other holders of the shares (who may be eligible for a rollover under subsection 85.1(1)). The objective is to avoid an averaging of the cost to XXXXXXXXXX of the XXXXXXXXXX Shares. The shares acquired from financial institutions will be acquired by XXXXXXXXXX at a cost equal to their fair market value. XXXXXXXXXX may redeem these shares before XXXXXXXXXX acquires the shares from the other holders. This would permit XXXXXXXXXX to realize a portion of its inherent loss on the XXXXXXXXXX Shares and thereby match at least in part its gain on its foreign currency hedging with respect to these shares.
13. Based on the recent trading history of XXXXXXXXXX common shares:
(a) the XXXXXXXXXX Preferred Shares issued in exchange for the XXXXXXXXXX Preferred Shares would represent approximately XXXXXXXXXX% of the market capitalization of XXXXXXXXXX XXXXXXXXXX common and preferred shares prior to the issuance of the XXXXXXXXXX Preferred Shares; and
(b) the XXXXXXXXXX Preferred Shares issued in exchange for the XXXXXXXXXX Preferred Shares, together with the XXXXXXXXXX Debentures issued in exchange for the XXXXXXXXXX Debentures, would represent approximately XXXXXXXXXX% of the market capitalization of XXXXXXXXXX common and preferred shares and its subordinated debt prior to the issuance of the XXXXXXXXXX Preferred Shares and XXXXXXXXXX Debentures.
14. The Reorganization Plan and the XXXXXXXXXX Plan are not connected with each other except for the fact that each plan arose as a result of the acquisition of the common shares of XXXXXXXXXX by XXXXXXXXXX. Either plan would proceed if the other did not.
Purpose of the Proposed Transactions
XXXXXXXXXX
Ruling
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:
The issuance of the XXXXXXXXXX Preferred Shares and XXXXXXXXXX Debentures, as contemplated in paragraphs 12(c)(ii) and (iii) above, will not result in the application of subparagraph 55(3)(a)(ii) to the share redemptions in the Reorganization Plan described in paragraphs 11(o), (r) and (s) above.
This ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and is binding provided that the proposed transactions are completed by XXXXXXXXXX.
This ruling is based on the Act as it currently reads and does 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
ENDNOTES
1 The description of the share capital of the various corporations in this paragraph ignores any directors' qualifying shares.
2 Supra, note 1.
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