2001 Ruling 2001-0076353 - Cross-border Triangular 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: various issues on cross-border triangular merger

Position: see issue sheet

Reasons: see issue sheet

XXXXXXXXXX 		2001-007635

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX ("Canco")
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-referenced taxpayer. In your letters dated XXXXXXXXXX additional information was provided regarding the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

Canco files its T2 Return with the XXXXXXXXXX Tax Centre.

Definitions

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 unless otherwise specified;

(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;

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

(b) "capital property" has the meaning assigned by section 54;

(c) "disposition" has the meaning assigned by subsection 248(1);

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

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

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

(g) "specified financial institution" has the meaning assigned by subsection 248(1).

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

Facts

1. Canco is a XXXXXXXXXX. It is a Canadian corporation, public corporation, taxable Canadian corporation and XXXXXXXXXX for purposes of the Act. Canco's shares are listed and posted for trading on the XXXXXXXXXX.

2. XXXXXXXXXX ("Targetco") is a corporation incorporated under and governed by the laws of the State of XXXXXXXXXX. The shares of Targetco trade on the XXXXXXXXXX. Targetco is a XXXXXXXXXX holding company that holds all of the issued and outstanding shares of its XXXXXXXXXX subsidiary, XXXXXXXXXX ("Targetsub").

3. Targetsub is a XXXXXXXXXX corporation incorporated under and governed by the laws of the State of XXXXXXXXXX and having its principal place of business in XXXXXXXXXX. Targetsub provides XXXXXXXXXX.

4. XXXXXXXXXX ("US Subco1") is a XXXXXXXXXX company incorporated under and governed by the laws of the State of XXXXXXXXXX and having its principal place of business in the United States. All of the issued and outstanding shares of US Subco1 are owned directly by Canco. US Subco1 holds directly and indirectly all of the equity interests in Canco's U.S. operating subsidiaries, including XXXXXXXXXX ("US Subco2").

5. US Subco2 is a XXXXXXXXXX company incorporated under and governed by the laws of the State of XXXXXXXXXX and having its principal place of business in the United States. All of the issued and outstanding shares of US Subco2 are owned directly by US Subco1.

6. Canco, US Subco1 and Targetco entered into an Agreement and Plan of Merger (the "Merger Agreement") under XXXXXXXXXX law dated as of XXXXXXXXXX. Canco, US Subco1 and Targetco subsequently entered into the First Amendment to Agreement and Plan of Merger (the "First Amending Agreement") under XXXXXXXXXX law, dated as of XXXXXXXXXX, which amended certain of the terms of the Merger Agreement. Any reference herein to the Merger Agreement is a reference to the Merger Agreement as amended by the First Amending Agreement.

7. Under the terms of the Merger Agreement, the acquisition of Targetco will occur as a "forward triangular merger" in which Targetco will be merged with and into US Subco1, with US Subco1 continuing as the surviving corporation (the "XXXXXXXXXX Merger"), provided that Canco provides Targetco with a written notice at least XXXXXXXXXX prior to the Closing (as defined in the Merger Agreement) of Canco's decision to proceed with the XXXXXXXXXX Merger (the "XXXXXXXXXX Merger Notice"). The XXXXXXXXXX Merger is described in greater detail under the heading "Proposed Transactions" (see below). However, if Canco does not provide Targetco with the XXXXXXXXXX Merger Notice, the acquisition of Targetco will occur instead as a forward triangular merger in which Targetco will be merged with and into a new U.S. subsidiary of Canco ("Newsub"), with Newsub continuing as the surviving corporation (the "XXXXXXXXXX Merger").

8. A request for an advance income tax ruling was submitted to the U.S. Internal Revenue Service (the "IRS") in respect of the XXXXXXXXXX Merger and the ruling requested has been issued by the IRS. The ruling issued by the IRS confirms that a contribution by Canco of the shares of Newsub after the XXXXXXXXXX Merger to US Subco1 followed by a contribution by US Subco1 of those shares to US Subco2, will not adversely affect the tax deferred nature of the XXXXXXXXXX Merger for U.S. tax purposes.

9. 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; or

(iv) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.

Proposed Transactions

10. The following transactions or events must be completed or occur prior to the consummation of the XXXXXXXXXX Merger:

(a) The shareholders of Targetco and the sole shareholder of US Subco1 must approve the XXXXXXXXXX Merger in accordance with the laws of XXXXXXXXXX.

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

(c) The shares of Canco which are to be issued in the XXXXXXXXXX Merger must be approved for listing, subject to official notice of issuance, on the XXXXXXXXXX.

(d) Various conditions set out in the Merger Agreement as a condition to the consummation of the XXXXXXXXXX Merger must be fulfilled or waived.

11. Subject to the completion or occurrence of the transactions and events described in paragraph 10 above and subject to Canco having provided the XXXXXXXXXX Merger Notice to Targetco, the XXXXXXXXXX Merger will occur under the terms and conditions of the Merger Agreement as follows (a reference in this paragraph 11 to a Section is a reference to the relevant Section of the Merger Agreement):

(a) Under XXXXXXXXXX, Targetco will merge at the effective time (the "Effective Time") with and into US Subco1, which will be the corporation surviving the XXXXXXXXXX Merger (the "Surviving Corporation"). The Effective Time is defined, subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, as the date and time set forth in the articles of merger to be filed with the Secretary of State of XXXXXXXXXX and the certificate of merger to be filed with the Secretary of State of XXXXXXXXXX which shall occur XXXXXXXXXX calendar days following the date on which all regulatory approvals required under the Merger Agreement are received, unless otherwise mutually agreed to by the parties.

(b) Under XXXXXXXXXX, at the Effective Time, Targetco will cease to exist as a separate corporation and be merged with and into US Subco1 as the Surviving Corporation (the Surviving Corporation is referred to herein as "Mergeco"). All of the assets and undertakings of Targetco will be vested in Mergeco at the Effective Time and Mergeco will be responsible and liable for all of the liabilities of Targetco thenceforth as a result of the XXXXXXXXXX Merger.

(c) Under XXXXXXXXXX, the certificate of incorporation of US Subco1 in effect immediately prior to the Effective Time will be the certificate of incorporation of Mergeco at and after the Effective Time (until otherwise amended in accordance with the provisions of the relevant XXXXXXXXXX law).

(d) Under XXXXXXXXXX, the by-laws of US Subco1 in effect immediately prior to the Effective Time will be the by-laws of Mergeco at and after the Effective Time (until otherwise amended in accordance with their terms or the certificate of incorporation of Mergeco).

(e) Under XXXXXXXXXX, each common share, $XXXXXXXXXX par value, of US Subco1 which is issued and outstanding immediately prior to the Effective Time will remain outstanding as one (1) common share, $XXXXXXXXXX par value, of Mergeco.

(f) Under XXXXXXXXXX which provides for adjustments for dilution and other matters, each share of Targetco issued and outstanding immediately prior to the Effective Time, other than "Dissenting Company Shares" (as defined in XXXXXXXXXX), will be converted at the Effective Time into either (i) the right to receive US$XXXXXXXXXX in cash (the "per share cash consideration") or (ii) the right to receive the whole number of Canco common shares determined by XXXXXXXXXX Although the Merger Agreement permits the per share cash consideration to be paid by either Canco or US Subco1, the aggregate per share cash consideration will be paid by US Subco1 from its own cash reserves and sources without any funding or contribution from Canco. Under XXXXXXXXXX, in general terms, at least XXXXXXXXXX% of the aggregate value of the merger consideration received by shareholders of Targetco will be in the form of Canco common shares.

(g) Under XXXXXXXXXX, each of the shares of Targetco, if any, held by Canco or any of its wholly-owned subsidiaries, XXXXXXXXXX, will be cancelled and retired at the Effective Time. No consideration will be issued in exchange for such shares.

(h) Under XXXXXXXXXX no fractional shares of Canco will be issued in the XXXXXXXXXX Merger. Instead, each holder of Targetco shares, who would otherwise be entitled to a fractional share, will receive an amount of cash from US Subco1 in lieu of such fractional share of Canco. Any such cash paid by US Subco1 in lieu of fractional shares of Canco will be paid from its own cash reserves and sources without any contribution from Canco.

(i) Under XXXXXXXXXX, Mergeco will issue additional common shares (the "Mergeco Shares") at the Effective Time to Canco in consideration for the issuance by Canco of its common shares to the Targetco shareholders. The Mergeco Shares issued to Canco will have an aggregate fair market value equal to the fair market value at the Effective Time of the Targetco common shares that are exchanged for such Canco common shares less any cash that was paid by Mergeco in lieu of fractional shares of Canco.

12. On the issuance of the Canco shares to the former Targetco shareholders, Canco will add to the stated capital account maintained for the Canco common shares an amount equal to the fair market value of the Mergeco Shares issued by Mergeco to Canco under the terms of the Merger Agreement, which amount will also equal the fair market value of the Targetco common shares that are exchanged for Canco common shares less any cash paid by Mergeco in lieu of fractional shares of Canco.

13. Immediately following the XXXXXXXXXX Merger, Canco will be the sole shareholder of Mergeco and the former shareholders of Targetco will hold either cash, shares of Canco or a combination of cash and shares of Canco.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to facilitate the acquisition of Targetco by Canco by means of a "forward triangular merger". The form of the transaction 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 and to ensure Mergeco is a part of US Subco1's U.S. consolidated group of companies for U.S. tax filing purposes.

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 XXXXXXXXXX Merger involving the forward merger of Targetco with and into US Subco1 will, by virtue of subsection 51(1), not result in a disposition of the shares of US Subco1 held by Canco immediately before the Effective Time.

B. For the purposes of computing the ACB of the Mergeco Shares issued to Canco, as described in paragraph 11(i), the cost of such shares to Canco will include an amount equal to the aggregate of:

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

(ii) an amount equal to the costs incurred by Canco for the purpose of acquiring the Mergeco 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.

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

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Comments

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 or adjusted cost base of any property referred to herein, or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.

Yours truly,

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