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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Shareholder benefits on redeeming shares for a nominal amount pursuant to a unanimous shareholder's agreement.
Position: The benefit, if any, excluded from 15(1).
Reasons: exception in paragraph 15(1)(a).
XXXXXXXXXX 2002-012816
XXXXXXXXXX, 2002
Dear XXXXXXXXXX:
Re: ADVANCE INCOME TAX RULING
XXXXXXXXXX (the "Company")
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above named taxpayers. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request.
We understand that, to the best of your knowledge and that of the Company, the issues involved in the ruling request are not:
a) in an earlier return of the Company, the Shareholders or a person related to the Company or the Shareholders;
b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Company, the Shareholders or a person related to the Company or the Shareholders;
c) under objection by the Company, the Shareholders or a person related to the Company or the Shareholders;
d) before the courts, or the subject of a judgment to which the time limit for appeal to a higher court has not expired; or
e) the subject of a ruling previously considered by the Income Tax Rulings Directorate.
You advised that the proposed transactions described herein, will not affect the ability of the Company or the Shareholders to pay any outstanding tax liabilities.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
FACTS
1. XXXXXXXXXX ("the Company") was incorporated under the laws of Canada on XXXXXXXXXX . The Company is located at XXXXXXXXXX and deals with the XXXXXXXXXX Tax Services Office and files its corporate income tax returns at the XXXXXXXXXX Taxation Centre.
On incorporation, the Company was capitalized with $XXXXXXXXXX in share capital and $XXXXXXXXXX of XXXXXXXXXX debt. Each Shareholder initially contributed $XXXXXXXXXX for XXXXXXXXXX share and $XXXXXXXXXX in XXXXXXXXXX debt. Since incorporation, the issued and outstanding share capital of the Company has consisted of XXXXXXXXXX common shares ("Common Shares"), as summarized in Paragraph 4.
XXXXXXXXXX
2. XXXXXXXXXX.
3. Since the inception of the Company, the Shareholders have contributed additional financing by way of XXXXXXXXXX loans. To date, XXXXXXXXXX financing provided has not been proportionate to share ownership (with the exception of the initial investment). This disproportionate financial contribution is attributable to XXXXXXXXXX. The current financial requirements necessitate a change in this informal process (see discussion below in paragraphs 9 and 10).
4. There are XXXXXXXXXX Shareholders XXXXXXXXXX of the Company. The ownership of share capital and XXXXXXXXXX debt of the Company as at XXXXXXXXXX is summarized as follows (the group collectively is referred to herein as "the Shareholders" and any of the following is referred to herein as a "Shareholder"):
Shareholder # of Shares XXXXXXXXXX Debt
XXXXXXXXXX
The Shareholders of the Company are not related to any other Shareholder within the meaning of "related persons" provided in subsection 251(2) of the Act.
5. XXXXXXXXXX.
6. The Company and its Shareholders are party to a Unanimous Shareholders Agreement ("USA") dated XXXXXXXXXX. The sections of the USA that are particularly relevant to this advance income tax ruling are summarized below:
(a) Restrictions Imposed by USA - The USA restricts certain corporate activities that would impact the business and ownership of the Company either by requiring unanimous consent of the shareholders or through prohibition of the activity.
(i) Section XXXXXXXXXX of the USA restricts the business activities of the Company by requiring unanimous consent prior to any material change XXXXXXXXXX.
(ii) Section XXXXXXXXXX of the USA also restricts the ownership of the Company XXXXXXXXXX.
(iii) Article XXXXXXXXXX of the USA restricts the ownership and transfer of the Common Shares.
XXXXXXXXXX
(b) Obligations imposed by the USA - The USA obligates Shareholders to provide financial XXXXXXXXXX support to the Company as follows:
(i) Section XXXXXXXXXX of the USA provides the board of directors of the Company (herein referred to as the "Board"), by majority vote, with the authority to impose financial obligations equally upon all Shareholders.
(i) XXXXXXXXXX requires the Shareholders to provide financing to the Company in proportion to ownership XXXXXXXXXX.
(ii) XXXXXXXXXX.
(ii) XXXXXXXXXX.
(c) Shareholder penalties provided for under the USA - XXXXXXXXXX, the USA provides for the repurchase of Common Shares should any Shareholder not fulfill its responsibilities under the USA.
(i) XXXXXXXXXX Company may repurchase the Common Share held by the Shareholder XXXXXXXXXX.
(ii) XXXXXXXXXX.
(iii)XXXXXXXXXX.
(d) XXXXXXXXXX.
XXXXXXXXXX
7. XXXXXXXXXX.
8. XXXXXXXXXX. The Company requires capital to pursue a growth strategy XXXXXXXXXX.
XXXXXXXXXX
9. XXXXXXXXXX the Company does not have the capital required to pursue its growth strategy. XXXXXXXXXX. Under the present USA the Company must raise capital internally to finance growth (through equal contribution by all Shareholders). XXXXXXXXXX.
10. The financing required to pursue an appropriate growth strategy cannot likely be raised internally (i.e., from the existing Shareholders) under the current terms of the USA for the following reasons:
XXXXXXXXXX.
(b) Section XXXXXXXXXX of the USA requires that Shareholders respond to a formal financing request in proportion to their Common Share ownership. XXXXXXXXXX smaller Shareholders would have difficulty contributing their proportionate share of such financing. XXXXXXXXXX.
(c) XXXXXXXXXX.
11. The Company is restricted from raising additional debt or equity capital externally for the following reasons:
XXXXXXXXXX.
12. XXXXXXXXXX.
13. XXXXXXXXXX.
PROPOSED TRANSACTIONS
14. The Shareholders propose to make an amendment to section XXXXXXXXXX of the USA to replace the provision allowing for a XXXXXXXXXX repurchase of Common Shares for failure of a Shareholder to meet its obligations under the USA.
(a) The punitive provision providing for a XXXXXXXXXX repurchase of Common Shares will be removed and replaced with a provision allowing for a partial repurchase of Common Shares held by a Shareholder.
(b) The percentage of Common Shares to be repurchased under section XXXXXXXXXX of the USA for a Shareholder's failure to meet its obligations under the USA will be determined by XXXXXXXXXX.
XXXXXXXXXX
(c) XXXXXXXXXX.
15. XXXXXXXXXX. To allow for a partial repurchase of shares, if required, the amount of Common Shares outstanding would be increased by way of a XXXXXXXXXX for one share split.
16. In XXXXXXXXXX, the Company will make a formal capital call pursuant to section XXXXXXXXXX of the USA to the Shareholders. XXXXXXXXXX.
17. The Company will repurchase some of the Common Shares held by any Shareholder that does not, in response to the capital call, agree to contribute the full amount of its proportionate financing obligations to the Company. XXXXXXXXXX.
18. [Reserved]
PURPOSE OF THE PROPOSED TRANSACTIONS
19. The overall purpose of the amendments to the USA is to remove or alleviate some of the provisions in the USA that restrict the ability of the Company to raise additional debt or equity financing XXXXXXXXXX% XXXXXXXXXX. The purposes of the proposed capital call and partial share repurchase under the terms of the USA, as amended, are to enable the Company to raise additional financing now and in the future to enable it to pursue its growth strategy.
(a) An amendment to the USA allowing a partial repurchase of Common Shares would enable the Company to raise capital without a punitive consequence for those Shareholders that cannot contribute under the current XXXXXXXXXX proportions.
(b) XXXXXXXXXX.
(c) XXXXXXXXXX.
(d) XXXXXXXXXX.
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. Subsection 15(1) will not apply to require that an amount be included in the income of any of the Shareholders of the Company as a result of the proposed transactions and, in particular, the repurchase of Common Shares pursuant to paragraph 17.
B. Paragraph 69(1)(b) will not apply to provide that a Shareholder that disposes of Common Shares of the Company pursuant to paragraph 17 be deemed to have received proceeds of disposition in excess of the amount of cash paid to it by the Company on the repurchase of Common Shares.
C. Subsection 56(2) will not apply to require that any Shareholder include any amount in its income in connection with the proposed 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 any tax consequences relating to the proposed transactions described herein other than those specifically described in the rulings given above.
The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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.../cont'd
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