2001 Ruling 2001-0068223 - Adjusted cost base-shares acquired on merger

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: Cost of shares acquired as a result of a foreign merger

Position: Cost of shares includes an amount equal to the fair market value of the consideration given to acquire such shares.

Reasons: Cost of property acquired is equal to what was given up to acquire the property

XXXXXXXXXX  							2001-006822

XXXXXXXXXX, 2001

Dear Sirs:

Re: XXXXXXXXXX (“Canco”)
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayer.

To the best of your knowledge, and that of the taxpayer involved (i.e. Canco), none of the issues contained herein is:

1. dealt with in an earlier return of the taxpayer or related person;

2. 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;

3. under objection by the taxpayer or a related person; or

4. before the courts.

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

a) “Act” means the Income Tax Act, 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” (also referred to as “ACB”) has the meaning assigned by section 54;

c) “amount” has the meaning assigned by subsection 248(1) and, unless otherwise stated, any amount referred to herein is in Canadian dollars;

d) “Canadian corporation” has the meaning assigned by subsection 89(1);

e) “capital property” has the meaning assigned by section 54;

f) “proceeds of disposition” has the meaning assigned by section 54;

g) “public corporation” has the meaning assigned by subsection 89(1); and

h) “taxable Canadian corporation” has the meaning assigned by subsection 89(1).

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

Facts

1. Canco is a Canadian corporation, public corporation and taxable Canadian corporation. Canco’s shares are listed and posted for trading on the XXXXXXXXXX.

2. Targetco is a United States corporation incorporated under and governed by the laws of XXXXXXXXXX. The shares of Targetco are not listed for trading on a public stock exchange.

3. On XXXXXXXXXX, Canco incorporated Subco, a wholly-owned subsidiary of Canco, under the laws of the state of XXXXXXXXXX, and Canco subscribed for XXXXXXXXXX common shares of Subco at an aggregate price of $XXXXXXXXXX (U.S.). Subco is resident in the United-States. The outstanding share capital of Subco is XXXXXXXXXX common shares with a par value of $XXXXXXXXXX (U.S.) per share.

4. Canco, Subco and Targetco entered into a business combination agreement (the “Merger Agreement”) under XXXXXXXXXX law dated as of XXXXXXXXXX. According to the terms of the Merger Agreement:

a) Subco will merge into Targetco at the "Effective Time". The "Effective Time" is defined as the time at which a certificate of merger is filed with the Secretary of State for the State of XXXXXXXXXX, which filing shall be made on the "Closing Date" or such subsequent date as may be agreed by the parties. The "Closing Date" is defined, XXXXXXXXXX.

b) At the Effective Time, Targetco will continue to exist as the same legal entity as existed before the merger (the merged entity is hereafter referred to as “New Targetco”).

c) At the Effective Time, all of the assets and undertakings of Subco will be transferred to, and all of the liabilities of Subco will be assumed by New Targetco as a result of the merger, and Subco will cease to exist as a separate corporation.

d) At the Effective Time, all of the issued and outstanding shares of Targetco owned by its shareholders (other than shares held by Targetco or any wholly-owned subsidiary of Targetco or held by Canco or any wholly-owned subsidiary of Canco) prior to the merger will be cancelled and converted into an entitlement to receive a rateable portion of the "Consideration". The "Consideration" is defined to include Canco common shares and a Note. The number of Canco common shares shall be equal to XXXXXXXXXX minus the "Note Share Number". The "Note Share Number" is defined to be XXXXXXXXXX for Canco common shares. The amount of the Note shall be $XXXXXXXXXX (U.S.) provided that such amount shall be reduced so as not to exceed XXXXXXXXXX% of the Consideration based upon the Closing Average Price of Canco common shares. The Note shall be held in escrow and shall be payable in full by Canco XXXXXXXXXX days after the Closing Date in the form of Canco common shares or cash.

d.1) In the event that Canco pays the Note only in the form of Canco common shares, Canco shall issue that number of Canco common shares equal to the Note Share Number described above. In the event that Canco pays any cash in respect of the Note, the Note Share Number shall be reduced to the extent of the amount of cash divided by the Closing Average Price for the Canco common shares and increased, in the event that the price of Canco common shares increases after the closing date and before the Note Repayment Date (as defined in XXXXXXXXXX the Merger Agreement), by an amount determined by the formula described in XXXXXXXXXX the Merger Agreement. In the event that Canco pays any cash it shall also issue that number of Canco common shares equal to the Note Share Number (amended as described above) provided that the total amount of common shares issued at Closing and on the repayment of the Note shall not exceed XXXXXXXXXX.

e) Each Targetco stock option outstanding immediately prior to the Effective Time will be assumed by Canco and deemed to constitute an option to acquire common shares of Canco on the same terms and conditions, except that the number of common shares of Canco to be issued upon the exercise and the exercise price of such options will be adjusted to reflect the "Exchange Ratio". The "Exchange Ratio" is defined as XXXXXXXXXX divided by the number of Targetco shares outstanding immediately before the Closing Date.

f) At the Effective Time, each Subco common share (held by Canco) will be cancelled and converted into one newly issued, fully-paid and non-assessable voting preferred share of New Targetco with a redemption amount and fair market value equal to $XXXXXXXXXX (U.S.).

g) At the Effective Time, New Targetco, as successor to Subco, will issue common shares (the “New Targetco Shares”) to Canco in consideration for Canco’s issuing its common shares and the Note (i.e. the Consideration) to the Targetco shareholders, on behalf of Subco. The number of New Targetco Shares issued to Canco will be equal to the number of Targetco common shares outstanding immediately before the Effective Time (other than such Targetco common shares held in Targetco’s treasury, immediately before the effective time, which shall be cancelled).

h) The fair market value of the Canco common shares issued by Canco to the former Targetco shareholders under the terms of the merger will be an amount equal to the fair market value of the New Targetco Shares issued by New Targetco to Canco (that is, an amount equal to the fair market value of the Targetco common shares outstanding immediately before the Effective Time) less any amounts paid by Canco to the former Targetco shareholders.

i) Canco will add to the stated capital account of the Canco common shares issued to the former Targetco shareholders an amount equal to the fair market value of the New Targetco Shares acquired by Canco under the terms of the merger less any amounts paid by Canco to such shareholders.

4.1 Each of the former Targetco shareholders will accept his/her/its rateable portion of the Note in full satisfaction of the portion of the Consideration represented by the Note.

Proposed Transactions

5. The following transactions or events must be completed or occur prior to the consummation of the merger:

a) All regulatory approvals required to consummate the transactions contemplated by the Merger Agreement must be obtained.

b) The shares of Canco which are to be issued in the merger and, if required, on the exercise of the outstanding stock options, must be listed for trading on the XXXXXXXXXX.

c) Various conditions set out in the Merger Agreement as a precondition to the consummation of the merger must be fulfilled or waived.

6. Subject to paragraph 5, Subco will merge into Targetco pursuant to the terms of the Merger Agreement described in paragraph 4, at the Effective Time.

7. Immediately following the merger, Canco will be the sole shareholder of New Targetco and the former shareholders of Targetco will be shareholders of Canco.

Purpose of the Proposed Transactions

8. The purpose of the proposed transactions is to facilitate the acquisition of Targetco by Canco by means of a “reverse triangular merger”. The form of reorganization is intended, among other things, to permit a deferral of U.S. taxation for the shareholders of Targetco to the extent such shareholders receive shares of Canco.

Rulings

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 we confirm the following:

A. For the purposes of computing the ACB of the New Targetco Shares issued to Canco, as described in paragraph 4(g), the cost of such shares to Canco will include an amount equal to the aggregate of:

a) an amount equal to the fair market value, at the Effective Time, of the Canco common shares issued to the shareholders of Targetco;

b) an amount equal to the fair market value of the Note determined as at the Effective Time; and

c) an amount equal to the costs incurred by Canco for the purpose of acquiring the New Targetco Shares to the extent that such costs are not deductible by Canco in the year or any subsequent year in computing its income for purposes of the Act.

B. For the purposes of computing the ACB of the New Targetco preferred shares, described in paragraph 4(f), the cost of such shares to Canco immediately after the Effective Time will be an amount equal to the ACB to Canco of the Subco common shares immediately before the Effective Time.

C. For the purpose of computing the cost of the Canco common shares issued by Canco to the former shareholders of Targetco, as described in paragraph 4(d), the cost of such shares to a particular shareholder will be an amount equal to the fair market value, at the Effective Time, of the Canco common shares issued to that particular shareholder.

Limitations

The rulings provided herein are:

a) subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 and are binding on Canada Customs and Revenue Agency (the "CCRA") provided that the proposed transactions are completed by XXXXXXXXXX; and

b) 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.

Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed:

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

b) the application of the law of any foreign jurisdiction; or

c) the tax consequences relating to the facts and proposed transaction described herein other than those specifically described in the rulings given above.

Yours truly,

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