2001 Ruling 2001-0086333 - Deposit Receipts

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 the creation of deposit receipts evidencing ownership of shares of a corporation represents a disposition of those shares when so deposited or when the deposit agreement is cancelled.

Position: No - based on the particular facts in this situation.

Reasons: The custodian is only acting as an agent for the particular shareholders under the deposit agreement such that the arrangement is not a trust under the Act (except for certain purposes) pursuant to subsection 104(1). Beneficial ownership of the shares remains with the shareholders not the custodian.

XXXXXXXXXX 2001-008633

XXXXXXXXXX, 2001

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. You have advised us that to the best of your knowledge and that of the taxpayer involved none of the issues involved in this ruling request:

(a) is in an earlier return of the taxpayer or a related person;

(b) is 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;

(c) is under objection by the taxpayer or a related person;

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

(e) is the subject of a ruling previously issued by the Directorate.

In this letter, unless otherwise indicated, all dollar amounts referred to herein are in Canadian dollars and unless otherwise indicated:

(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant

(b) provision of the Act and the regulations thereunder are referred to as the "Regulations";

(c) "CCRA" means the Canada Customs and Revenue Agency;

(d) "PUBCO" means XXXXXXXXXX;

(e) "PUBCO DEPOSIT RECEIPT" means a Holding Company Depositary Receipt issued for a PUBCO Share and after the completion of the PUBCO Reorganization, for the Successor Companies Shares received for a PUBCO Share;

(f) "PUBCO Reorganization" means the plan of reorganization announced by PUBCO XXXXXXXXXX;

(g) "PUBCO Shares" means the common shares of PUBCO which are currently listed on the Canadian Stock Exchange (as defined below) and the US Stock Exchange (as defined below);

(h) "Custodian" means a Canadian corporation to be retained to act as custodian under the Deposit Agreement (as defined below);

(i) "Deposit Agreement" means the agreement among the Custodian, the owners of PUBCO DEPOSIT RECEIPTS and the Subscription Agent (as defined below), governing the terms of the deposit of the PUBCO Shares and the Successor Companies Shares (as defined below) after the completion of the PUBCO Reorganization;

(j) "Minister" means the Minister of National Revenue;

(k) "US Stock Exchange" means the XXXXXXXXXX Stock Exchange;

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

(m) "Registered Plans" means trusts governed by registered retirement savings plans, registered retirement income funds, registered education savings plans and deferred profit sharing plans;

(n) "Shareholder" means a common shareholder of PUBCO, and after the completion of the PUBCO Reorganization, a shareholder owning Successor Companies Shares of each of the Successor Companies;

(o) "Subscription Agent" means XXXXXXXXXX for subscriptions of PUBCO DEPOSIT RECEIPTS in Canada and XXXXXXXXXX for subscriptions of PUBCO DEPOSIT RECEIPTS in the United States;

(p) "Subscription Period" mean the period expected to commence XXXXXXXXXX prior to the anticipated completion date of the PUBCO Reorganization and end shortly before the completion date of the PUBCO Reorganization;

(q) "Successor Companies" means PUBCO and the XXXXXXXXXX new holding corporations (the shares of which are expected to be listed on the Canadian Stock Exchange and the US Stock Exchange and issued to a Shareholder in exchange for their PUBCO Shares under the PUBCO Reorganization) which will directly or indirectly own all of the outstanding common shares of XXXXXXXXXX;

(r) "Successor Companies Shares" means shares of the Successor Companies;

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

(t) "Canadian Stock Exchange" means XXXXXXXXXX Stock Exchange.

FACTS

1. Both the Subscription Agent for Canadian subscriptions of PUBCO DEPOSIT RECEIPTS and the Custodian are taxable Canadian corporations. The Subscription Agent is a registered securities dealer in Canada whose CCRA business number is XXXXXXXXXX. The Subscription Agent deals with the XXXXXXXXXX Tax Services Office.

2. On XXXXXXXXXX, PUBCO, a taxable Canadian corporation and a public corporation whose shares are listed on the Canadian Stock Exchange and US Stock Exchange, announced the PUBCO Reorganization. The Canadian Stock Exchange is a "prescribed stock exchange" for the purposes listed in section 3200 of the Regulations and the US Stock Exchange is a "prescribed stock exchange" for the purposes listed in section 3201 of the Regulations. As a result of the PUBCO Reorganization, each Shareholder (other than a dissenting shareholder) at the time the PUBCO Reorganization is effective, will hold a proportionate number of shares of each of the Successor Companies.

PROPOSED TRANSACTIONS

3. The Subscription Agent will make PUBCO DEPOSIT RECEIPTS available to Shareholders during the Subscription Period. After the end of the Subscription Period, PUBCO DEPOSIT RECEIPTS will only be issued pursuant to an exemption from prospectus and registration requirements of applicable securities law or pursuant to a valid prospectus. The Subscription Agent will apply to have PUBCO DEPOSIT RECEIPTS listed for trading on the Canadian Stock Exchange and US Stock Exchange.

4. The Subscription Agent and Custodian will enter into the Deposit Agreement which will govern, among other things, the deposit and withdrawal of PUBCO Shares and Successor Companies Shares owned by a Shareholder, the issuance of PUBCO DEPOSIT RECEIPTS, and the duties of the Custodian with respect to the PUBCO Shares, PUBCO DEPOSIT RECEIPTS and Successor Companies Shares. The Deposit Agreement will provide that:

(a) the Custodian will accept deposits of PUBCO Shares from a Shareholder and the Custodian will hold such PUBCO Shares as agent on behalf of the particular Shareholder who will continue to be the beneficial owner of the PUBCO Shares;

(b) the Custodian will issue one PUBCO DEPOSIT RECEIPT for each PUBCO Share deposited by a Shareholder that will represent the PUBCO Share so deposited and, after the completion of the PUBCO Reorganization, will represent the number and type of the Successor Companies Shares owned by such Shareholder as a result of the PUBCO Reorganization;

(c) after the completion of the PUBCO Reorganization, the Custodian may accept deposits of Successor Companies Shares from a Shareholder and the Custodian will hold such Successor Companies Shares as agent on behalf of the particular Shareholder who will continue to be the beneficial owner of the Successor Companies Shares after such deposit;

(d) in the circumstance described in paragraph (c), the Custodian will issue a PUBCO DEPOSIT RECEIPT to a Shareholder for the Successor Companies Shares that were received by such Shareholder for each PUBCO Share under the PUBCO Reorganization and so deposited by the Shareholder;

(e) each Shareholder will vote their respective PUBCO Shares or Successor Companies Shares represented by their PUBCO DEPOSIT RECEIPTS by instructing the Custodian on how they wish the Custodian to vote on their behalf;

(f) the Custodian will have no power to vote any PUBCO Shares or Successor Companies Shares except as directed by a Shareholder as described in (e) above;

(g) after a Shareholder has deposited PUBCO Shares or Successor Companies Shares with the Custodian, any distributions of cash (including dividends), securities or property, if any, made on the particular shares evidenced by the PUBCO DEPOSIT RECEIPTS will be received by the Custodian on behalf of the particular Shareholder and will be distributed (net of annual custodian fees and any governmental charges) by the Custodian to the particular Shareholder;

(h) after a Shareholder has deposited PUBCO Shares or Successor Companies Shares with the Custodian, the Shareholder will be able to trade the shares as evidenced by the PUBCO DEPOSIT RECEIPTS by trading the PUBCO DEPOSIT RECEIPTS on the Canadian Stock Exchange or US Stock Exchange, as the case may be, once the PUBCO DEPOSIT RECEIPTS have been listed for trading on the Canadian Stock Exchange and US Stock Exchange; and

(i) a disposition of PUBCO DEPOSIT RECEIPTS by a Shareholder will be a disposition of the particular PUBCO Shares or the Successor Companies Shares as evidenced by the PUBCO DEPOSIT RECEIPTS and the acquisition of PUBCO DEPOSIT RECEIPTS by a Shareholder will be an acquisition of a PUBCO Share or the Successor Companies Shares as evidenced by the particular PUBCO DEPOSIT RECEIPTS.

5. A Shareholder who deposits PUBCO Shares with the Custodian and receives PUBCO DEPOSIT RECEIPTS will be required to pay a subscription fee of up to US$XXXXXXXXXX or US$XXXXXXXXXX per PUBCO Share, depending on the total number of PUBCO Shares so deposited. A Shareholder who deposits the Successor Companies Shares and receives PUBCO DEPOSIT RECEIPTS after the Subscription Period may also be required to pay a fee to the Custodian. A Shareholder will also be required to pay an annual custodian fee of up to US$XXXXXXXXXX per PUBCO DEPOSIT RECEIPT to the Custodian, which will be deducted from cash dividends paid on the PUBCO Shares or Successor Companies Shares prior to such dividends being distributed to the Shareholder. If the cash dividends paid on the PUBCO Shares or Successor Companies Shares in any year are not sufficient to pay the annual custodian fee, the Custodian will waive the unpaid portion of its fee.

6. At any time, a Shareholder may surrender a PUBCO DEPOSIT RECEIPT to the Custodian and receive from the Custodian the PUBCO Share or the Successor Companies Shares, as the case may be, evidenced by each PUBCO DEPOSIT RECEIPT at that time. A Shareholder will be required to pay a cancellation fee to the Custodian on the surrender of a PUBCO DEPOSIT RECEIPT.

7. The Deposit Agreement will provide for the resignation of the Custodian as custodian and the removal of the Custodian in certain circumstances, including, if the Custodian is in material breach of its obligations under the Deposit Agreement. In the event that the Custodian resigns or is removed, the Subscription Agent may appoint a successor Custodian who will be a Canadian corporation having an office in Canada.

8. If the Deposit Agreement is terminated in accordance with its terms, each Shareholder must surrender their PUBCO DEPOSIT RECEIPTS (plus any applicable fees) to the Custodian and the Custodian must deliver the appropriate number of PUBCO Shares or Successor Companies Shares, as the case may be, as evidenced by the particular Shareholder's PUBCO DEPOSIT RECEIPTS so surrendered at that time.

PURPOSE OF PROPOSED TRANSACTIONS

9. The purpose of the proposed transactions is to provide Shareholders with the opportunity to hold a single, exchange-traded instrument that will represent the ownership of the XXXXXXXXXX Successor Companies Shares that will be spun off in connection with the PUBCO Reorganization, thereby providing an alternative for Shareholders who prefer to continue to hold a single instrument representing their investment in PUBCO rather than shares of XXXXXXXXXX separate companies.

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 described above, our rulings are as set forth below.

A. A deposit by a Shareholder of a PUBCO Share or the Successor Companies Shares, as the case may be, with the Custodian and the issue of a PUBCO DEPOSIT RECEIPT to such Shareholder in respect of such deposit pursuant to the terms of the Deposit Agreement, as described in paragraph 4 above, will not, by itself, result in a disposition of the particular PUBCO Share or the Successor Companies Shares, as the case may be, for the purposes of the Act.

B. The surrender by a Shareholder of a PUBCO DEPOSIT RECEIPT to the Custodian and the return of a PUBCO Share or the Successor Companies Shares as evidenced by the particular PUBCO HOLDER as a result of such surrender pursuant to the terms of the Deposit Agreement to such Shareholder, as described in paragraph 4 above, will not, by itself, result in a disposition of the PUBCO DEPOSIT RECEIPT or the particular PUBCO Share or Successor Companies Shares as evidenced by such PUBCO DEPOSIT RECEIPT for the purposes of the Act.

C. By virtue of paragraph 4900(1)(b) of the Regulations, the PUBCO Shares described in paragraph 2 above will continue to represent a qualified investment for Registered Plans provided that PUBCO has not elected pursuant to subparagraph (c)(i) of the definition of public corporation not to be a public corporation or the Minister has not designated PUBCO to be a public corporation pursuant to subparagraph (c)(ii) of the definition of public corporation.

D. By virtue of paragraph 4900(1)(b) of the Regulations, the Successor Companies Shares once listed on the Canadian Stock Exchange (or another prescribed exchange listed in section 3200 of the Regulations) as described in paragraph 4(h) above will represent a qualified investment for Registered Plans provided that the Successor Companies do not elect pursuant to subparagraph (c)(i) of the definition of public corporation not to be a public corporation or the Minister does not designate the Successor Companies to be a public corporation pursuant to subparagraph (c)(ii) of the definition of public corporation.

E. The entering into of the Deposit Agreement and the depositing of PUBCO Shares or the Successor Companies Shares with the Custodian pursuant to the terms of the Deposit Agreement as described in paragraph 4 above will not be a trust described in any of paragraphs (a) to (e.1) of the definition of "trust" in subsection 108(1) and will constitute an arrangement described in subsection 104(1) that will not constitute a trust for purposes of the Act other than for the purposes of that subsection, subsection 104(1.1) and paragraph (k) of the definition of "disposition" in subsection 248(1).

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 and are binding on the CCRA provided that the proposed transactions are completed by XXXXXXXXXX. These 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 have an effect on the rulings provided herein.

Opinion

Based on our understanding of the facts described above, it is our opinion that the replacement of the Custodian with another Custodian pursuant to the terms of the Deposit Agreement in circumstances described in paragraph 7 above will not, by itself, constitute a disposition of a Shareholder's PUBCO Shares or Successor Companies Shares that are evidenced by the particular PUBCO DEPOSIT RECEIPTS for purposes of the Act.

The opinion is provided in accordance with the practice described in paragraph 22 of IC-70-6R4.

Yours truly,

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