2000 Ruling 2000-0049543 - Internal Reorganization

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 an internal reorganization is subject to the exemption under paragraph 55(3)(a)?

Position: Yes

Reasons: Meets all the conditions.

XXXXXXXXXX 								2000-004954

Attention: XXXXXXXXXX

XXXXXXXXXX , 2000

Dear Sirs:

Re: XXXXXXXXXX ("XCo")

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.

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 income tax return of the taxpayer or a related person;

ii) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed income tax return of the taxpayers or a related person;

iii) is under objection by the taxpayers or a related person; or

iv) is before the Courts.

Definitions

In this letter, the following terms have the meanings specified:

"Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof. Unless otherwise stated, statutory references in this letter are to the Act;

"adjusted cost base" (also "ACB") has the meaning assigned by section 54;

"controlled foreign affiliate" has the meaning assigned by subsection 95(1);

"capital property" has the meaning assigned by section 54;

"dividend rental arrangement" has the meaning assigned by subsection 248(1);

" FMV" means fair market value;

"guarantee agreement" has the meaning assigned by subsection 112(2.2);

XXXXXXXXXX

"paid-up capital" has the meaning assigned by subsection 89(1);

"proceeds of disposition" has the meaning assigned by section 54;

"public corporation" has the meaning assigned by subsection 89(1);

"stated capital" has the meaning assigned by the XXXXXXXXXX;

"taxable Canadian corporation" has the meaning assigned by subsection 89(1);

"taxable dividend" has the meaning assigned by subsection 89(1);

and

"unrelated person" has the meaning assigned by subsection 55(3.01).

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

Facts

1. XCo is a corporation governed by the XXXXXXXXXX. XCo is a taxable Canadian corporation and a public corporation. XCo's XXXXXXXXXX shares are listed on XXXXXXXXXX Stock Exchange. XCo's Business Number is XXXXXXXXXX.

XXXXXXXXXX

2. XXXXXXXXXX ("XCo XXXXXXXXXX") is a corporation governed by the laws of the State of XXXXXXXXXX. XCo XXXXXXXXXX is a direct wholly-owned subsidiary of XCo, and a controlled foreign affiliate of XCo. XCo XXXXXXXXXX is resident in the United States.

3. XXXXXXXXXX ("XCo XXXXXXXXXX") is a corporation governed by the XXXXXXXXXX. XCo XXXXXXXXXX is a taxable Canadian corporation and a direct, wholly-owned subsidiary of XCo. XCo XXXXXXXXXX Business Number is XXXXXXXXXX. In addition to owning the shares of various subsidiaries, XCo XXXXXXXXXX is the principal Canadian operating company in the XCo group, and owns substantial fixed and other operating assets in Canada.

4. The authorized share capital of XCo XXXXXXXXXX consists of an unlimited number of common shares and an unlimited number of Preferred Shares, issuable in XXXXXXXXXX. The issued share capital of XCo XXXXXXXXXX, as of XXXXXXXXXX, consisted of XXXXXXXXXX common shares, with an aggregate adjusted cost base and paid-up capital of approximately $XXXXXXXXXX. XCo holds the common shares of XCo XXXXXXXXXX as capital property.

5. XXXXXXXXXX ("XCo XXXXXXXXXX") is a corporation governed by the laws of the State of XXXXXXXXXX. XCo XXXXXXXXXX is a direct, wholly-owned subsidiary and a controlled foreign affiliate of XCo XXXXXXXXXX. XCo XXXXXXXXXX holds the shares of XCo XXXXXXXXXX as capital property.

6. XXXXXXXXXX is a corporation governed by the XXXXXXXXXX. XXXXXXXXXX is a taxable Canadian corporation and a direct, wholly-owned subsidiary of XCo XXXXXXXXXX Business Number is XXXXXXXXXX.

7. XXXXXXXXXX ("XCo XXXXXXXXXX" is a corporation governed by the XXXXXXXXXX. XCo XXXXXXXXXX is a taxable Canadian corporation and a direct, wholly-owned subsidiary of XCo XXXXXXXXXX. XCo XXXXXXXXXX Business Number is XXXXXXXXXX.

8. XXXXXXXXXX is a corporation governed by the XXXXXXXXXX. XXXXXXXXXX is a taxable Canadian corporation and a direct, wholly-owned subsidiary of XCo XXXXXXXXXX Business Number is XXXXXXXXXX.

9. XXXXXXXXXX ("XCo XXXXXXXXXX") is a corporation governed by the XXXXXXXXXX. XCo XXXXXXXXXX is a taxable Canadian corporation and a direct, wholly-owned subsidiary of XCo XXXXXXXXXX. XCo XXXXXXXXXX Business Number is XXXXXXXXXX.

10. XXXXXXXXXX ("XCo XXXXXXXXXX") is a corporation governed by the XXXXXXXXXX. XCo XXXXXXXXXX is a taxable Canadian corporation and a direct, wholly-owned subsidiary of XCo XXXXXXXXXX. XCo XXXXXXXXXX Business Number is XXXXXXXXXX.

11. [Reserved].

12. The shares of XCo XXXXXXXXXX are not and will not be the subject of a guarantee agreement or a dividend rental arrangement.

13. The shares of XCo XXXXXXXXXX have not been and will not be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

Proposed Transactions

14. XCo will incorporate a wholly owned subsidiary ("Newco") under the XXXXXXXXXX. Newco will be a taxable Canadian corporation. The share capital of Newco will consist of an unlimited number of common shares ("Newco Common Shares") and an unlimited number of non-voting, redeemable, retractable preference shares bearing a non-cumulative, fixed dividend ("Newco Preferred Shares"). XCo will then subscribe $XXXXXXXXXX for 1 Newco Common Share.

15. XCo XXXXXXXXXX will create XXXXXXXXXX, unlimited in number, of its Preferred Shares (the "XCo XXXXXXXXXX Preferred Shares") that are non-voting, redeemable and retractable shares bearing a non-cumulative, fixed dividend.

16. XCo will convert XXXXXXXXXX of its XCo XXXXXXXXXX common shares, or such number as is appropriate based on the number of outstanding common shares of XCo XXXXXXXXXX at the time the transaction is executed, into XCo XXXXXXXXXX Preferred Shares with an aggregate redemption amount that approximates, and is not less than, the fair market value of the Transferred Shares, as defined in paragraph 19 below. The amount added to the stated capital account of the XCo XXXXXXXXXX preferred shares will be an equal amount to the amount deducted from the stated capital account of the XCo XXXXXXXXXX common shares as a result of the conversion.

17. XCo will transfer all of the XCo XXXXXXXXXX Preferred Shares to Newco. As consideration for the transfer, Newco will issue to XCo XXXXXXXXXX Newco Common Shares. The addition to the stated capital of the Newco Common Shares will equal $XXXXXXXXXX.

18. XCo and Newco will make and file a joint election under subsection 85(1) in the prescribed form and within the time required by subsection 85(6) in connection with the transfer of the XCo XXXXXXXXXX Preferred Shares. The elected amount for the purposes of the election will be the adjusted cost base of the XCo XXXXXXXXXX Preferred Shares to Xco which will not exceed their fair market value at the time of the transfer.

19. XCo XXXXXXXXXX will transfer all of the shares (the "Transferred Shares") of XXXXXXXXXX, XCo XXXXXXXXXX, XCo XXXXXXXXXX, XCo XXXXXXXXXX and XCo XXXXXXXXXX to Newco. As consideration for the transfer, Newco will issue, to XCo XXXXXXXXXX, Newco Preferred Shares with an aggregate redemption and retraction amount equal to the aggregate fair market value of the Transferred Shares. The addition to the stated capital of the Newco Preferred Shares will be equal to or less than the elected amount which is described in paragraph 20 below.

20. XCo XXXXXXXXXX and Newco will make and file a joint election under subsection 85(1) in the prescribed form and within the time required by subsection 85(6) in connection with the transfer of the Transferred Shares. The elected amount for the purposes of the election will be the adjusted cost base of the Transferred Shares to XCo XXXXXXXXXX which will not exceed their fair market value at the time of the transfer.

21. Newco will redeem the Newco Preferred Shares held by XCo XXXXXXXXXX in consideration for the issuance by Newco to XCo XXXXXXXXXX of a non-interest-bearing demand note (the "Newco Note") having a principal amount equal to the redemption amount of the Newco Preferred Shares redeemed.

22. XCo XXXXXXXXXX will redeem the XCo XXXXXXXXXX Preferred Shares held by Newco in consideration for the issuance by XCo XXXXXXXXXX to Newco of a non-interest-bearing demand note (the "XCo XXXXXXXXXX Note") having a principal amount equal to the redemption amount of the XCo XXXXXXXXXX Preferred Shares redeemed.

23. The Newco Note will be set off against the XCo XXXXXXXXXX Note in full satisfaction of the respective obligation under each note (the two notes will have identical principal amounts) and the notes will be cancelled.

24. Newco will be wound up into XCo. The Transferred Shares will be transferred to XCo on the wind-up.

25. Thereafter, XCo will transfer the shares of XCo XXXXXXXXXX acquired by it on the wind-up of Newco to XCo XXXXXXXXXX. As consideration for the transfer, XCo will receive additional common shares of XCo XXXXXXXXXX.

26. Following the transfer of the shares of XCo XXXXXXXXXX to XCo XXXXXXXXXX by XCo, XCo XXXXXXXXXX will be merged into XCo XXXXXXXXXX, with XCo XXXXXXXXXX being the surviving corporation ("Successor"). As a result of the merger, all or substantially all of the property of XCo XXXXXXXXXX and XCo XXXXXXXXXX will become property of Successor and all or substantially all of the liabilities of XCo XXXXXXXXXX and XCo XXXXXXXXXX will become liabilities of Successor. The shares of XCo XXXXXXXXXX held by XCo will remain outstanding and unchanged through the merger and will be considered to become shares of Successor. XCo will not elect not to have subsection 87(8) apply.

Successor will, after the merger, be a controlled foreign affiliate of XCo. XCo's surplus entitlement in respect of XCo XXXXXXXXXX and XCo XXXXXXXXXX immediately before the merger and in respect of Successor immediately after the merger will not be less than XXXXXXXXXX%. There will be no gain or loss recognized under the income tax law of the United States in respect of any capital property of XCo XXXXXXXXXX or XCo XXXXXXXXXX that becomes property of Successor in the course of the merger.

Other Transactions

XCo does not consider any of the transactions described in paragraphs 27 to 33 below to be part of the series of transactions described in paragraphs 14 to 26 above, but is providing this information in order to ensure complete disclosure of all potentially relevant facts. The implementation of these transactions will be undertaken regardless of whether the proposed transactions are undertaken. Similarly, the proposed transactions will be undertaken regardless of whether the transactions described in paragraphs 27 to 33 are implemented.

27. XXXXXXXXXX.

28. XXXXXXXXXX.

29. XXXXXXXXXX.

30. XXXXXXXXXX.

31. XXXXXXXXXX.

32. XXXXXXXXXX.

33. XXXXXXXXXX..

Purpose of Proposed Transactions

34. The purpose of the proposed transactions is (i) to facilitate the combination of XCo XXXXXXXXXX and XCo XXXXXXXXXX into a single consolidated US corporate group (XXXXXXXXXX), and (ii) to convert XCo XXXXXXXXXX from a combined operating and holding corporation to an operating corporation by extracting its non-operating assets.

Rulings

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, purposes of the proposed transactions and proposed transactions, we confirm the following:

A. The provisions of subsection 51(1) will apply to the conversion of XCo XXXXXXXXXX common shares into XCo XXXXXXXXXX Preferred Shares as described in paragraph 16 above such that:

(a) except for the purpose of subsection 20(21), the conversion will be deemed not to be a disposition of the XCo XXXXXXXXXX common shares that are converted; and

(b) the cost to XCo of the XCo XXXXXXXXXX Preferred Shares will be equal to the adjusted cost base of the XCo XXXXXXXXXX common shares that are converted.

For greater certainty, subsection 51(2) will not apply to the transaction. The provisions of subsection 51(3) will apply to ensure that the paid-up capital of the XCo XXXXXXXXXX preferred shares will be limited to an amount equal to the paid-up capital of the XCo common shares converted as described in paragraph 16 above.

B. Provided that the requisite elections are filed in the prescribed form and within the prescribed time period, the provisions of subsection 85(1) will apply to:

(a) the transfer of the Transferred Shares by XCo XXXXXXXXXX to Newco, as described in paragraph 19 above such that, subject to paragraphs 85(1)(c) and (c.1), the elected amounts in respect of each transfer will be deemed to be XCo XXXXXXXXXX proceeds of disposition and Newco's cost thereof pursuant to paragraph 85(1)(a); and

(b) the transfer of the XCo XXXXXXXXXX Preferred Shares by XCo to Newco, as described in paragraph 17 above such that, subject to paragraphs 85(1)(c) and (c.1), the elected amounts in respect of each transfer will be deemed to be XCo's proceeds of disposition and Newco's cost thereof pursuant to paragraph 85(1)(a).

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

C. The provisions of subsection 84(3) will apply:

(a) as a result of the redemption of the Newco Preferred Shares as described in paragraph 21 above, to deem Newco to have paid and XCo XXXXXXXXXX to have received a taxable dividend equal to the amount by which the redemption price of the Newco Preferred Shares exceeds the paid-up capital of those shares immediately before the redemption; and

(b) as a result of the redemption of the XCo XXXXXXXXXX Preferred Shares as described in paragraph 22 above, to deem XCo XXXXXXXXXX to have paid and Newco to have received a taxable dividend equal to the amount by which the redemption price of the XCo XXXXXXXXXX Preferred Shares exceeds the paid-up capital of those shares immediately before the redemption.

D. The taxable dividend described in:

(a) Ruling C above will be deductible by XCo XXXXXXXXXX pursuant to subsection 112(1) in computing its taxable income for the year in which the dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4); and

(b) Ruling C will be deductible by Newco pursuant to subsection 112(1) in computing its taxable income for the year in which the dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4).

E. The deemed dividends described in Ruling C above will be excluded in computing the proceeds of disposition on the redemption of the relevant shares by virtue of paragraph (j) of the definition "proceeds of disposition" in section 54.

F. The deemed dividends described in Ruling C will not be subject to tax under Part IV.1 or Part VI.1 of the Act.

G. Provided that as part of the series of transactions or events that include the proposed transactions described herein, there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v), then by virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends referred to in ruling C above. For greater certainty, the proposed transactions described in paragraphs 14 to 26 herein, in and by themselves, will not be considered to result in any disposition or increase in interest to an unrelated person as described in any of subparagraphs 55(3)(a)(i) to (v).

H. The provisions of subsection 88(1) will apply to the wind-up of Newco into XCo as described in paragraph 24 above. In particular, the provisions of paragraph 88(1)(c) and (d) will apply in the following manner:

(a) XCo will be treated as having disposed of the Newco Common Shares immediately before the wind-up for proceeds of disposition equal to the greater of the paid-up capital of the Newco Common Shares and their adjusted cost base to XCo ; and

(b) the cost to XCo of the Transferred Shares will be equal to their adjusted cost base to Newco immediately prior to the wind-up of Newco into XCo.

I. There will not be any "forgiven amount" for purposes of the provisions of sections 80 to 80.04 as a result of the extinguishment of either the Newco Note or the XCo XXXXXXXXXX Note, as described in paragraph 23 above. Further, the extinguishment of the Newco Note and the XCo XXXXXXXXXX Note will not result in any gain or loss.

J. Provided that the common shares of XCo XXXXXXXXXX represent capital property to XCo, the provisions of subsection 85.1(3) will apply to the transfer of the common shares of XCo XXXXXXXXXX by XCo to XCo XXXXXXXXXX, as described in paragraph 25 above. In particular, the provisions of subsection 85.1(3) will apply in the following manner:

(a) XCo will be treated as having disposed of the shares of XCo XXXXXXXXXX for proceeds of disposition equal to their adjusted cost base to XCo;

(b) the cost to XCo of the shares of XCo XXXXXXXXXX received on the transfer will be equal to the adjusted cost base to XCo of the XCo XXXXXXXXXX shares immediately before the transfer; and

(c) the cost of the XCo XXXXXXXXXX shares to XCo XXXXXXXXXX will be equal to the adjusted cost base of the XCo XXXXXXXXXX shares to XCo immediately before the transfer.

For greater certainty, the provisions of subsection 85.1(4) will not apply to this transfer as a result of the proposed transactions described in paragraphs 14 to 26.

K. Provided that the shares of XCo XXXXXXXXXX represent capital property to XCo, the merger of XCo XXXXXXXXXX into XCo XXXXXXXXXX, described in paragraph 26 above, will be a "foreign merger" for the purposes of subsection 87(8). As a result, the provisions of subsection 87(4) will apply in the following manner:

(a) XCo will be deemed to have disposed of the shares of XCo XXXXXXXXXX that it owns immediately before the merger for proceeds of disposition equal to the adjusted cost base to XCo of the XCo XXXXXXXXXX shares at that time; and

(b) the cost to XCo of the shares of Successor will be equal to the adjusted cost base of the XCo XXXXXXXXXX shares to XCo immediately before the merger.

L. The provisions of paragraph 95(2)(d.1) will apply to the merger of XCo XXXXXXXXXX into XCo XXXXXXXXXX, as described in paragraph 26 above. In particular, the provisions of paragraph 95(2)(d.1) will apply such that for purposes of subdivision (i) of Division B of Part I of the Act:

(a) XCo XXXXXXXXXX will be deemed to have disposed of each capital property held by it immediately before the merger for proceeds of disposition equal to its cost amount of such properties at that time;

(b) XCo XXXXXXXXXX will be deemed to have disposed of each capital property held by it immediately before the merger for proceeds of disposition equal to its cost amount of such properties at that time; and

(c) Successor will, with respect to any disposition by it of the properties referred to in paragraphs (a) and (b) above, be deemed to be the same corporation as, and a continuation of, XCo XXXXXXXXXX or XCo XXXXXXXXXX, as the case may be, for the purposes set out in subparagraph 95(2)(d.1)(ii).

M. The provisions of subsections 15(1) or 56(2) or section 246 will not apply to any of the proposed transactions.

N. Subsection 245(2) will not apply as a result of the proposed transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R3 issued on December 30, 1996, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into any proposed amendments to the Act which if enacted could have an effect on the rulings given.

Comments

Nothing in this letter should be construed as implying that the Canada Customs and Revenue Agency has reviewed, accepted or otherwise agreed to:

(a) the determination of the adjusted cost base, the fair market value 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. In particular, we are not commenting on the tax consequences described in the transactions described in paragraphs 27 to 33 above.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch