2002 Ruling 2002-013371A - Conversion-taxable CDN Corp to MF Corp

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:

1. Does the addition of a retraction right to the share conditions attaching to the common shares of a taxable Canadian corporation result in a disposition of those shares?

2. After the addition of the retraction right will the corporation meet the requirements set out in subsection 131(8) and be a mutual fund corporation?

Position:
1. No		 2. Yes

Reasons: The addition of a retraction right or redemption feature to the terms and conditions of the Common shares in this case are not viewed as a significant change to the share attributes so as to cause a disposition of those shares. Based on the facts provided immediately after the addition of the retraction right the corporation satisfies the requirements set out subsection 131(8) and will be mutual fund corporation. However, the determination of whether a corporation meets these requirements at a future time is a question of fact that can only be made following a review of the corporation's activities at that time.

XXXXXXXXXX 2002-013371

Attention: XXXXXXXXXX

XXXXXXXXXX, 2002

Dear Sirs/Mesdames:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayer and your subsequent correspondence of XXXXXXXXXX, in respect of the income tax consequences arising out of the proposed transactions described below.

We understand that to the best of your knowledge, and that of the taxpayer involved, none of the matters considered in this ruling request are:

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

(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayer or related persons;

(c) under objection by the taxpayer or related persons;

(d) before the courts; or

(e) the subject of a ruling previously issued by this Directorate to the taxpayer or related persons.

In this letter, unless otherwise indicated, all statute references are to the Income Tax Act (Canada) (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act"), and the following terms have the meanings specified:

"Aco" means XXXXXXXXXX;

"Bco" means XXXXXXXXXX;

"affiliate" has the meaning ascribed thereto under the BCA;

"Amendment" means the amendment to the conditions attaching to the Common Shares to be effected on the Effective Date by Articles of Amendment of Aco to be filed under the BCA as referred to in 7 below;

"BCA" means the Business Corporations Act (XXXXXXXXXX);

"Board of Directors" means the board of directors of Aco;

"Common Shares" means the common shares without nominal or par value in the capital stock of Aco;

XXXXXXXXXX;

"development" means the renovation of property owned or hereafter acquired by Aco for the purpose of generating or increasing the generation of income therefrom and not for resale;

"Effective Date" means the date on which the Articles of Amendment are filed with the BCA;

"Initial Properties" means those properties in which Aco now has or hereafter acquires an interest which are or will be fully developed at the Effective Date and including those properties listed in Schedule "A" (a copy of which was included with your ruling request);

"Investments" means the investments held by Aco in shares in the capital stock of the corporations and in units of the limited partnerships listed in Schedule "B" (a copy of which was included with your ruling request), each of which corporation and partnership is the beneficial owner of the specific XXXXXXXXXX properties identified in that Schedule;

"Market Price" at any time, means an amount per Common Share equal to the weighted average of the Closing Market Prices for the Common Shares during the XXXXXXXXXX immediately preceding trading days on the principal market on which the Common Shares were quoted for trading; and "Closing Market Price" means the price per share of the Common Shares on any day during the XXXXXXXXXX day period aforesaid on which there was a trade of the Common Shares;

"New Projects" are those XXXXXXXXXX properties in which Aco now has or hereafter acquires an interest (excluding those listed in Schedule "A") that are still under development on the Effective Date;

"Retraction Notes" has the meaning ascribed thereto in 7(b), below;

"Retraction Price" means the lesser of:

(a) XXXXXXXXXX% of the Market Price calculated as at the date of the surrender of Common Shares for retraction; and

(b) XXXXXXXXXX% of the Closing Market Price as at the date of the surrender of Common Shares for retraction; and

XXXXXXXXXX ;

Aco deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre.

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

FACTS

1. Aco is a "taxable Canadian corporation" within the meaning of the Act. It is the successor resulting from the amalgamation under the BCA on XXXXXXXXXX of Aco (incorporated on XXXXXXXXXX) and Bco (incorporated on XXXXXXXXXX), both of which were incorporated under the BCA. Aco the successor is the same company as Aco the predecessor. Aco's fiscal year ends on XXXXXXXXXX each year.

2. The capital stock of Aco consists of XXXXXXXXXX, and XXXXXXXXXX which XXXXXXXXXX are issued and outstanding as fully paid and non-assessable (as at XXXXXXXXXX). No dividends have been paid XXXXXXXXXX.

Less than XXXXXXXXXX% of the registered shareholders are persons who are non-residents of Canada (within the meaning of the Act). Aco was not established nor is it maintained primarily for the benefit of non- resident persons.

3. The Common Shares of Aco were listed and posted for trading on the XXXXXXXXXX Stock Exchange XXXXXXXXXX Aco has not elected not to be a "public corporation" nor has Aco been designated by notice in writing by the Minister not to be a public corporation pursuant to paragraph (c) of the definition of "public corporation" in subsection 89(1) of the Act. Additionally, Aco is not a prescribed labor-sponsored venture capital corporation as set out in Part LXVII of the Income Tax Regulations.

4. Aco's activities consist of the acquisition, holding, development, leasing and management of XXXXXXXXXX properties in XXXXXXXXXX either through direct or beneficial ownership or through investment in shares of other corporations or in units of limited partnerships. In the cases where Aco holds shares of corporations or units of limited partnerships, the corporations or partnerships, as the case may be, are the beneficial owners of the XXXXXXXXXX properties. Aco's assets consist solely of the Initial Properties, the New Projects, the Investments (all of the foregoing being held by Aco as capital property) and cash or near-cash assets.

5. In each case where Aco holds units of a limited partnership, it holds such units as a limited partner under the laws of the province in which the property is situate and is not a general partner of the limited partnership. Aco's liability as a member of such a partnership is limited under the legislation governing the partnership.

PROPOSED TRANSACTIONS

Amendment of the Articles

6. Subject to approval by Aco shareholders, Articles of Amendment will be filed to take effect on the Effective Date amending the capital of Aco so that the Common Shares of Aco are redeemable at the option of the holder. It is anticipated that Aco will meet the requirements to be a mutual fund corporation within the meaning of the Act immediately upon the filing of the Articles of Amendment.

Retraction Rights

7. The amendments to the share conditions as set out in the proposed Articles of Amendment (a copy of which was included with your ruling request) provide that each holder of Common Shares will be granted the right to require Aco to redeem his or her Common Shares for the Retraction Price and:

a) Upon such retraction, all of the shareholder's rights attaching to the Common Shares of Aco tendered for retraction will be surrendered and the shareholder will be entitled to receive a price per Common Share equal to the Retraction Price;

b) The aggregate Retraction Price payable by Aco in respect of any Common Shares tendered for retraction will be satisfied by payment in cash or in specie in the form of promissory notes (the "Retraction Notes"). Whether the Retraction Price is paid in cash or by Retraction Notes shall be at the option of Aco. Because of the illiquid nature of the Aco's assets, the Retraction Notes will allow Aco sufficient time to sell and convert to cash such of its assets as it deems necessary to satisfy the Retraction Price. XXXXXXXXXX. The terms and conditions of the Retraction Notes will also provide that in all circumstances these notes may be prepaid without penalty and that they represent absolute payment of the Retraction Price. The Retraction Notes will not be listed on any stock exchange and no market is expected to develop for them.

Information Circular

8. A management information circular (the "Circular") will be provided to the holders of the Common Shares pursuant to the rules and regulations of the XXXXXXXXXX so that the shareholders of Aco will be able to make an informed decision as to the merits of the Amendment and, in compliance with those rules and regulations, the Circular will be filed with the exchange through XXXXXXXXXX.

PURPOSE OF PROPOSED TRANSACTIONS

9. Aco wishes to convert to a "mutual fund corporation" within the meaning of the Act in order to take advantage of a mutual funds corporation's ability to access the capital gains refund mechanism and to flow through capital gains to its shareholders. After conversion, it is anticipated that trading on the stock exchange, rather than retraction, will continue to be the primary mechanism for shareholders to dispose of their Common shares. However, the Board of Directors is of the view that is reasonable to expect shareholders to redeem their Common Shares in certain circumstances to avoid brokerage fees otherwise applicable or to achieve a measure of liquidity in a thinly traded stock. Similarly, it is anticipated that shareholders may redeem their Common Shares in order to take advantage of the investment offered by the Retraction Notes.

RULINGS GIVEN

Provided that the above statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as described herein, our advance income tax rulings are as follows:

A. At the time immediately following the completion of the proposed transactions described in 6 above, subject to subsection 131(8.1) of the Act, Aco will be a "mutual fund corporation" within the meaning of subsection 131(8) of the Act.

B. The addition of the retraction rights, as set out in 7 above, will not in and of itself result in the disposition by the holders of Common Shares of all or part of their Common Shares for the purposes of the Act.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5, Advance Income Tax Rulings, and are binding on the Canada Customs and Revenue Agency (the CCRA) provided that the proposed transactions are completed within six months of the date of this letter. These rulings are based on the law as it currently 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.

COMMENTS

The determination of whether a corporation qualifies as a mutual fund corporation at a particular time is a question of fact which can only be made following a review of the corporation's activities at that time. Such a determination is a matter for which the local Tax Services Office is responsible. However, it is our opinion that as long as Aco continues to meet the requirements contained in subsection 131(8) of the Act, Aco will qualify as a mutual fund corporation.

Yours truly,

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

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