2002 Ruling 2002-0119173 - No Acquisition of Cont. by Shareholder Grp.

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:

1. Whether a shareholder group of a widely held public company can be considered to be a group acting in concert to control a company as a result of supporting a decision (i.e. voting on the acceptance of an acquisition of another company).

2. Confirmation of tax consequences if paragraph 55(3.1)(c) applied to a particular series of transactions.

Position:

1. No.

2. 55(3.1)(c) would only apply to a particular transferee corporation.

Reasons:

1. the voting by shareholders to approve a particular transaction does not, in and of itself, constitute acting in concert.

2. Paragraph 55(3.1)(c) applies on a transferee by transferee basis. In this particular case, if certain acquisitions of property in the proposed transactions constitute an acquisition of property in the circumstances described in 55(3.1)(c) then 55(2) would only apply to a certain transferee corporation and not to others.

XXXXXXXXXX 2002-011917

XXXXXXXXXX, 2002

Dear Sirs:

Re: ADVANCE INCOME TAX RULING
XXXXXXXXXX ("Bco")

This is in reply to your letters of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above named taxpayer. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request.

To the best of the knowledge of the responsible officers of Bco and yourselves, none of the issues involved in this Ruling Request:

(i) is in an earlier tax return of Bco or a related person;

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of Bco or a related person;

(iii) is under objection by Bco or a related person;

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

(v) is the subject of a ruling previously issued by the Income Tax Rulings Directorate of the CCRA.

You advised that to the best of the knowledge of the responsible officers of Bco, the Transactions will not have any impact on outstanding tax liabilities of Bco.

All statutory references herein are to provisions of the Act, unless stated otherwise.

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

DEFINITIONS

The following definitions apply in respect of this Ruling. Throughout the Ruling, the singular should be read as plural and vice versa where the circumstances so require and the masculine should be read as the feminine or neuter and vice versa where the circumstances so require.

(a) XXXXXXXXXX.

(b) "ACB" means "adjusted cost base" and has the meaning assigned by section 54.

(c) "Act" means the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended to the date hereof.

(d) "Agreed Amount" means, in relation to an asset, the amount that the transferor and transferee of the asset agree upon in the applicable election under section 85 in respect of the asset.

(e) "Aco Preferred Shares" means the preferred shares of the capital stock of Aco, XXXXXXXXXX.

(f) "Aco Voting Shares" means the common voting shares of the capital stock of Aco, XXXXXXXXXX.

(g) "Aco" means the new corporation described in Paragraph 33.

(h) "Arrangement" means the arrangement under the XXXXXXXXXX on the terms and conditions set forth in the Plan of Arrangement.

(i) "Arrangement Transactions" means the transactions described in Paragraphs 45 to 50.

(i.1) "beneficial owner" does not include a beneficiary of a trust where the beneficiary is not required to report the transactions of the trust for the purposes of the Act, but does include such a trust;

(j) "Bco" means XXXXXXXXXX, a Canadian Public Corporation that deals at arm's length with Tco.

(k) "Bco Group" means Bco and all of those corporations, partnerships and entities with which Bco does not deal at arm's length.

(l) "Bco Shareholder" means a holder of Bco Shares.

(m) "Bco Shares" means the common shares of the capital stock of Bco, each of which is a fully participating common share with the holder thereof entitled to one (1) vote at meetings of shareholders of Bco.

(n) "Bco Stock Option" means a stock option of Bco as described in Paragraph 9.

(o) "CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended.

(p) "CCRA" means the Canada Customs and Revenue Agency.

(q) "Combination Agreement" means the agreement referred to in Paragraph 36.

(r) "Court" means the XXXXXXXXXX.

(r.1) "Distribution" has the meaning assigned by subsection 55(1).

(s) "Effective Date" means the date on which the Arrangement Transactions will occur.

(s.1) "Effective Time" means the time at which the Articles of Arrangement relating to the Plan of Arrangement are filed with the Registrar of Corporations under the XXXXXXXXXX on the Effective Date.

(t) XXXXXXXXXX.

(u) "Exchange Ratio" means XXXXXXXXXX, which is the ratio of the number of Bco Shares to be received by a Tco Shareholder for each Tco Share owned by him immediately before the Arrangement Transactions become effective, pursuant to the sequence of exchanges forming part of the Arrangement Transactions, all as determined by Bco and Tco in advance of the public announcement of the matters described herein.

(v) "FMV" means fair market value.

(w) "Paragraph" means a numbered paragraph in this advance income tax ruling.

(x) "Plan of Arrangement" means the proposed plan of arrangement under the applicable corporate law to effect the Arrangement Transactions.

(y) "Post-Arrangement Transactions" means the transactions described in Paragraphs 51 to 52.

(z) "Pre-Arrangement Transactions" means the transactions described in Paragraphs 37 to 44.1.

(aa) XXXXXXXXXX.

(bb) "Public Corporation" has the meaning assigned by subsection 89(1).

(cc) "PUC" means "paid-up capital" and has the meaning assigned by subsection 89(1).

(dd) "Series of Transactions" means "series of transactions or events" for purposes of the Act as modified by subsection 248(10).

(ee) "Tco" means XXXXXXXXXX, a Canadian Public Corporation that deals at arm's length with Bco.

(ee.1) XXXXXXXXXX.

(ff) [Reserved]

(gg) "Tco Group" means Tco and all of those corporations, partnerships and entities with which Tco does not deal at arm's length.

(hh) "Tco Shareholder" means a holder of a Tco Share immediately before the Effective Time.

(ii) "Tco Shares" means the common shares of the capital stock of Tco, XXXXXXXXXX.

(jj) "Tco Stock Option" means a stock option of Tco as described in Paragraph 20.

(kk) "Taxable Canadian Corporation" has the meaning assigned by subsection 89(1).

(ll) "Transactions" means the Pre-Arrangement Transactions, the Arrangement Transactions and the Post-Arrangement Transactions.

FACTS

Bco

1. Bco is a Public Corporation and a Taxable Canadian Corporation with its head office at XXXXXXXXXX. Bco deals with the XXXXXXXXXX Tax Services Office and files its corporate income tax returns at the XXXXXXXXXX Taxation Centre.

2. Bco conducts a XXXXXXXXXX business directly and through the other entities in the Bco Group.

3. XXXXXXXXXX.

4. Bco has a XXXXXXXXXX fiscal and taxation year end.

5. As of XXXXXXXXXX the issued and outstanding share capital of Bco consisted of XXXXXXXXXX Bco Shares.

6. The Bco Shares are listed and posted for trading on XXXXXXXXXX.

7. Some Bco Shares are held by persons who are not resident in Canada for purposes of the Act.

8. Based upon the closing trading price on the XXXXXXXXXX Stock Exchange on XXXXXXXXXX of $XXXXXXXXXX XXXXXXXXXX, the aggregate FMV of all of the issued and outstanding Bco Shares as of that date was approximately $XXXXXXXXXX dollars.

9. Bco has granted Bco Stock Options to certain officers, employees, and directors of the Bco Group (and to certain officers, employees, and directors of corporations that did not deal at arm's length with Bco at the time the applicable options were granted). As of XXXXXXXXXX, approximately XXXXXXXXXX Bco Stock Options were outstanding for an equivalent number of Bco Shares.

10. To the best of the knowledge of the directors and senior officers of Bco, as of the date hereof no person or related group of persons beneficially owns, directly or indirectly, more than XXXXXXXXXX% of the Bco Shares. The Bco Shares are very widely held.

11. Other than the Bco Stock Options and rights under a shareholder rights plan, there are not outstanding, as of the date hereof, any options, warrants or other rights that are convertible into or exchangeable for Bco Shares. Except as disclosed herein, or the possible issuance of some additional Bco Stock Options, Bco will not enter into any agreements to issue any such instruments between the date hereof and the Effective Date.

12. XXXXXXXXXX.

Tco

13. Tco is a Public Corporation and a Taxable Canadian Corporation with its head office at XXXXXXXXXX. Tco deals with the XXXXXXXXXX Tax Services Office and files its corporate income tax returns at the XXXXXXXXXX Taxation Centre.

14. Tco conducts a XXXXXXXXXX business directly and through the other entities in the Tco Group.

15. Tco subsists under the XXXXXXXXXX.

16. Tco has a XXXXXXXXXX fiscal and taxation year end.

17. The Tco Shares are listed and posted for trading on XXXXXXXXXX.

18. Some Tco Shares are held by persons who are not resident in Canada for purposes of the Act.

19. Based upon the closing trading price on the XXXXXXXXXX Stock Exchange on XXXXXXXXXX, the aggregate FMV of all of the issued and outstanding Tco Shares as of that date was approximately $XXXXXXXXXX dollars.

20. Tco has granted Tco Stock Options to certain officers, employees, and directors of the Tco Group (and of corporations that did not deal at arm's length with Tco at the time the applicable options were granted). As of XXXXXXXXXX, approximately XXXXXXXXXX Tco Stock Options were outstanding for an equivalent number of Tco Shares.

21. To the best of the knowledge of the directors and senior officers of Tco, as of the date hereof no person or related group of persons beneficially owns, directly or indirectly, more than approximately XXXXXXXXXX% of the Tco Shares. The Tco Shares are very widely held.

22. Some of the Bco Shareholders also are Tco Shareholders.

23. Other than the Tco Stock Options, rights under a shareholder rights plan and as described in Paragraph 24, there are not outstanding as of the date hereof any options, warrants or other rights that are convertible into or exchangeable for Tco Shares. Except as disclosed herein and the possible issuance of some additional Tco Stock Options, Tco will not enter into any agreements to issue any such instruments between the date hereof and the Effective Date.

24. XXXXXXXXXX.

25. Tco has various debt instruments outstanding.

Combination

26. Bco and Tco desire to combine their businesses to achieve operational and other commercial synergies and to increase shareholder value.

27. XXXXXXXXXX.

28. [Reserved]

29. XXXXXXXXXX.

30. The proposed combination of the businesses of Bco and Tco into or as one economic entity will occur pursuant to the Arrangement.

31. The implementation of the Arrangement Transactions will be conditional upon the receipt of certain approvals, including the approval of the Bco Shareholders, Tco Shareholders and the Court, and Bco and Tco being satisfied with the tax consequences of the Arrangement Transactions.

PROPOSED TRANSACTIONS

PRE-RULING TRANSACTIONS

Aco Articles of Incorporation

32. The transactions in the Paragraphs below that precede the Pre-Arrangement Transactions may precede the date hereof.

33. Aco will be a newly created XXXXXXXXXX, incorporated by or on behalf of Bco.

34. The authorized share capital of Aco will include the Aco Voting Shares and the Aco Preferred Shares.

35. Bco will subscribe for XXXXXXXXXX Aco Voting Shares for $XXXXXXXXXX.

Announcement

36. On XXXXXXXXXX, Bco and Tco entered into the Combination Agreement, which will govern certain matters relating to the Transactions XXXXXXXXXX.

PRE-ARRANGEMENT TRANSACTIONS

Reorganization Transactions

37. Tco may enter into transactions with other or new entities within the Tco Group to restructure its holdings of assets and operations prior to the Effective Date.

Other

38. An interim application with respect to the Plan of Arrangement will be made to the Court.

39. A Joint Management Proxy Circular will be prepared by Bco and Tco and sent to, inter alia, each registered shareholder of Bco and Tco, as of a particular date, in accordance with applicable law, regulation, custom and practice. This document will, inter alia, describe the Combination Agreement and Plan of Arrangement, and will solicit voting proxies from such shareholders.

40. Tco will convene a special meeting to consider and, if acceptable, pass a resolution authorizing and approving the Plan of Arrangement and ratifying, confirming and approving the Combination Agreement. Holders of Tco Shares and holders of Tco Stock Options will be entitled to vote at this meeting together, and not as separate classes, with the holders of Tco Shares being entitled to one vote for each Tco Share held and the holders of Tco Stock Options being entitled to one vote for each Tco Share issuable pursuant to the Tco Stock Options. The requisite majority will be XXXXXXXXXX of the votes cast.

41. Bco will convene a special shareholders' meeting to consider matters relating to the Transactions and, if acceptable, pass one or more shareholders' resolutions approving matters relating to the combination of the businesses of Bco and Tco as contemplated in the Combination Agreement as follows:

(a) approving by simple majority the Combination Agreement, XXXXXXXXXX;

(b) XXXXXXXXXX;

(c) approving by simple majority amendments to the Bco stock option plans, XXXXXXXXXX.

42. A final application will be made to the Court for an Order approving the Arrangement. The Court will conduct a fairness hearing, and if acceptable, issue a final Order approving the Arrangement.

43. XXXXXXXXXX.

44. XXXXXXXXXX.

44.1. XXXXXXXXXX.

ARRANGEMENT TRANSACTIONS

45. Subject to inter alia, the appropriate approvals and except as indicated below, the Arrangement Transactions will be undertaken pursuant to the Plan of Arrangement and will be designated in the Plan of Arrangement to occur on the Effective Time in the order set out below without any further act or action. Except as described below, the Plan of Arrangement will cease to have any effect on future actions of Aco, Bco, Tco or the Tco Shareholders after the transactions governed thereby (as described below) are implemented.

46. [Reserved]

47. XXXXXXXXXX.

48. All Tco Shares shall be exchanged on the following basis (with the transactions in subparagraphs (a) and (b) occurring simultaneously):

(a) all of the XXXXXXXXXX Shares and all of the issued and outstanding Tco Shares beneficially owned by XXXXXXXXXX at the Effective Time shall be transferred, free and clear of any encumbrances or claims, to Bco, solely in exchange for the issue by Bco to the Tco Shareholders in respect of such Tco Shares of fully paid and non-assessable Bco Shares on the basis of the Exchange Ratio;

(b) all of the issued and outstanding Tco Shares, other than the XXXXXXXXXX Shares and other than Tco Shares beneficially owned by XXXXXXXXXX at the Effective Time, shall be transferred, free and clear of any encumbrances or claims, to Aco, solely in exchange for the issue by Bco to the Tco Shareholders in respect of such Tco Shares of fully paid and non-assessable Bco Shares on the basis of the Exchange Ratio, in consideration for which Aco shall issue to Bco XXXXXXXXXX Aco Preferred Shares; and

(c) upon completion of the exchanges referred to in this Paragraph, each Tco Shareholder shall cease to be such a holder of Tco Shares, shall, if a registered holder, have such holder's name removed from the register of holders of Tco Shares and shall be a holder of the number of Bco Shares to which such holder is entitled as a result of such exchanges and, if a registered holder, such holder's name shall be added to the register of holders of Bco Shares accordingly; and Bco shall be the legal and beneficial owner of the Tco Shares transferred pursuant to paragraph (a) above and Aco shall be the legal and beneficial owner of the Tco Shares transferred pursuant to paragraph (b) above and Bco and Aco shall be added to the register of holders of Tco Shares accordingly.

48.1 XXXXXXXXXX.

49. XXXXXXXXXX.

50. Tco Shareholders will receive cash in lieu of the issuance of fractional interests in Bco Shares.

POST-ARRANGEMENT TRANSACTIONS

51. If XXXXXXXXXX requests in writing before a specific date, Bco may agree to jointly elect with that holder to have the provisions of section 85 of the Act and the corresponding provisions of any applicable provincial legislation apply to the exchange described in subparagraph 48(a) above with the Agreed Amount to be specified by the holder (subject to the limitations in the Act and any applicable provincial legislation).

52. Bco may dispose of the Tco Shares acquired by it in the Arrangement Transactions to Aco in consideration of shares of the capital stock of Aco. A joint election pursuant to subsection 85(1) may be made and filed in prescribed form and within the time contemplated in subsection 85(6) with an Agreed Amount that is within the limits in subsection 85(1).

PURPOSE OF THE PROPOSED TRANSACTIONS

The main purpose underlying the Transactions is to effect an economic, accounting and ownership combination of the businesses of Bco and Tco.

ADDITIONAL INFORMATION

53. If all of the Bco Shares that will be acquired by Tco Shareholders pursuant to the Arrangement were acquired, at such time, by one person, that person would own less than 50% of the issued and outstanding Bco Shares.

54. In the event Bco reaches an agreement with one or more third parties in the future to dispose of significant Tco assets, it is possible that Tco may be amalgamated with its acquiror to obtain a "bump" to the ACB of appropriate property. The use of Aco as the acquiror in the Transactions is intended to accommodate this possibility without having to involve Bco in an amalgamation.

55. It is intended that section 85.1 apply to XXXXXXXXXX and holders of Tco XXXXXXXXXX Shares (unless they request to make, and do so make, a joint election under subsection 85(1) with Bco (which may be appropriate if, for example, such persons do not hold Tco Shares as capital property)). Tco Shareholders who are not XXXXXXXXXX or holders of Tco XXXXXXXXXX Shares will dispose of their Tco Shares to Aco and so preclude the application of section 85.1 to such dispositions.

56. The addition to the stated capital account maintained for the Bco Shares in respect of the issuance of Bco Shares in the Arrangement Transactions (for greater certainty, excluding any Bco Shares issued pursuant to the exercise of any stock options) will not exceed the stated capital of the Tco Shares immediately before the Arrangement Transactions.

RULINGS REQUESTED AND GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, our rulings are as follows:

A. Provided that there is not at any time in or as part the Transactions, a person, or persons who are acting in concert with each other that, taken together, own a majority of the Bco Shares and provided that if all the Bco Shares that were acquired by the Tco Shareholders as a result of the Arrangement were acquired at that time by one person, the person would not control Bco, the Transactions in and of themselves will not result in an acquisition of control of Bco by any person or group of persons for the purposes of the Act, including subparagraph 55(3.1)(b)(ii). For greater certainty, the mere acts and actions relating to voting by any Bco Shareholder, Tco Shareholder or holder of Tco Stock Options in respect of matters relating to the Transactions and participation in the implementation of the Arrangement will not, in and of themselves, constitute acting in concert.

B. If the acquisition of Bco Shares and Bco Stock Options by persons in the Transactions constitutes an acquisition of property in the circumstances described in paragraph 55(3.1)(c) XXXXXXXXXX then subsection 55(3.1) will apply to deny the exemption under paragraph 55(3)(b) and, for greater certainty, subsection 55(2) will apply only to those taxable dividends XXXXXXXXXX.

C. The acquisition of Bco Shares and Bco Stock Options by persons in the Transactions will not constitute an acquisition of property in the circumstances described in paragraph 55(3.1)(c) XXXXXXXXXX.

The 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 Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

OTHER COMMENTS

You have requested a ruling concerning whether the Transactions and XXXXXXXXXX would be part of the same Series of Transactions. We are not able to grant a ruling on this matter because it involves an issue that is largely dependent on all of the facts. It is our opinion, however, that the Transactions and XXXXXXXXXX are not necessarily part of the same Series of Transactions.

Nothing in this ruling should be construed as implying that Canada Customs and Revenue Agency is making a determination or ruling in respect of:

(a) the cost or fair market value of any particular asset;

(b) the paid-up capital of any shares referred to herein; or

(c) any tax consequences relating to the proposed transactions 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 Brach