2002 Ruling 2002-0142113 - Bump on an Amalgamation

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:

Interest deductibility on series of transactions involving amalgamations.

Availability of the "bump" on the second amalgamation.

Position:

Interest is deductible in accordance with our administrative position in Interpretation Bulletin IT315.

The "bump" meets the requirements of the law.

Reasons:

In accordance with the law and our administrative practices.

In accordance with the law.

XXXXXXXXXX 2002-014211

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: XXXXXXXXXX ("ACO")
XXXXXXXXXX ("BCO")
XXXXXXXXXX ("CCO")

This is in reply to your letter of XXXXXXXXXX and your E-mails of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

You have been advised by your clients that to the best of their knowledge, none of the issues involved in this ruling:

(i) is in an earlier return;

(ii) is being considered by a tax services office or taxation center in connection with a previously filed tax return;

(iii) is under objection;

(iv) is before the courts; or

(v) is the subject of a previously issued ruling.

DEFINITIONS

Unless otherwise indicated, all references to a statute are to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof (the "Act") and all monetary amounts are expressed in Canadian dollars.

In this letter, the following terms have the meaning specified:

"Amalco" means the XXXXXXXXXX resulting from the vertical amalgamation of CCO, DCO and GCO under the laws of the Province of XXXXXXXXXX as described in the Proposed Transactions;

"Amalco2" means the XXXXXXXXXX company resulting from the vertical amalgamation of Newco and Amalco under the laws of the Province of XXXXXXXXXX as described in the Proposed Transactions;

XXXXXXXXXX;

"ACO" means XXXXXXXXXX. Its registered head office is XXXXXXXXXX;

"CCO" means XXXXXXXXXX, formerly XXXXXXXXXX, the subsidiary wholly-owned corporation of BCO formed as a result of an amalgamation on XXXXXXXXXX, XXXXXXXXXX. Its registered head office is located at XXXXXXXXXX;

"CCO Acquisition Debt" means the funds borrowed by ACO from FCO and used to subscribe for common shares of BCO;

"CCO Shareholders" means the holders of XXXXXXXXXX shares of CCO, other than BCO or Newco;

"FCO" means XXXXXXXXXX;

"BCO" means XXXXXXXXXX. Its registered head office is located at XXXXXXXXXX;

"USco" means XXXXXXXXXX;

"Partnership", means the general partnership formed under the laws of the province of XXXXXXXXXX, the partners in which are CCO and ACO;

"Partnership II", means XXXXXXXXXX , the general partnership formed under the laws of the province of XXXXXXXXXX, the partners in which are CCO and Newco;

"DCO" means XXXXXXXXXX or the corporation formed by the amalgamation of DCO and any related company;

"GCO" means XXXXXXXXXX, a wholly-owned subsidiary corporation of DCO, formed under the laws of the province of XXXXXXXXXX;

"Newco" means XXXXXXXXXX, a corporation formed under the laws of the province of XXXXXXXXXX;

"Offer" means the Offer to Purchase made by BCO, an indirect wholly-owned subsidiary of USco., to purchase all of the issued and outstanding XXXXXXXXXX shares of CCO XXXXXXXXXX;

"Xco" means XXXXXXXXXX, the corporation formed under the laws of the United States of America, the XXXXXXXXXX shares of which are listed for trading on the XXXXXXXXXX;

"Promissory Note" means the interest-bearing promissory note payable on demand issued by Newco in favour of ACO on the transfer of the XXXXXXXXXX shares of CCO to Newco by ACO that will take place as part of the Proposed Transactions described herein. The note will bear interest at a rate that is in excess of the rate of interest payable by ACO to FCO on the CCO Acquisition Debt;

"Proposed Transactions" means the transactions described in paragraphs 15 through 24 below;

"adjusted cost base" has the meaning assigned by section 54;

"agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in their election under subsection 85(1) in respect of that property;

"capital property" has the meaning assigned by section 54;

"depreciable property" has the meaning assigned by subsection 13(21);

"ineligible property" has the meaning assigned by paragraph 88(1)(c);

"net capital loss" has the meaning assigned by subsection 111(8);

"non-capital loss" has the meaning assigned by subsection 111(8);

"paid-up capital" has the meaning assigned by subsection 89(1);

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

"series of transactions or events" includes the related transactions or events described in subsection 248(10);

"specified person" has the meaning assigned by paragraph 88(1)(c.2);

"subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

"substituted property" includes the meanings assigned by subsection 248(5) and paragraph 88(1)(c.3); and

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

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

FACTS

1. ACO is a taxable Canadian corporation continued under the laws of the province of XXXXXXXXXX. ACO's business is the XXXXXXXXXX All of the shares of ACO are owned directly or indirectly by USco. USco is a corporation formed under the laws of the United States of America, the common shares of which are listed for trading XXXXXXXXXX.

2. BCO is a taxable Canadian corporation and a subsidiary wholly-owned corporation of ACO incorporated on XXXXXXXXXX. On XXXXXXXXXX, BCO made the Offer to acquire all the issued and outstanding CCO XXXXXXXXXX shares XXXXXXXXXX. BCO was incorporated for the sole purpose of making the Offer and has no activity other than in respect of the Offer.

3. CCO is a taxable Canadian corporation and a public corporation. It is a subsidiary wholly-owned corporation of BCO. It is continued under the laws of the province of XXXXXXXXXX as a XXXXXXXXXX corporation. CCO's business is the XXXXXXXXXX. CCO carries on similar businesses in XXXXXXXXXX indirectly through certain of its foreign affiliates. CCO's XXXXXXXXXX business is carried on indirectly through DCO which in turn carries on such business through its foreign affiliates.

4. The authorized share capital of CCO consists of XXXXXXXXXX common shares (the "CCO Common Shares"). Prior to its continuance under the laws of the province of XXXXXXXXXX, CCO's authorized share capital consisted of XXXXXXXXXX.

5. XXXXXXXXXX.

6. DCO is a taxable Canadian corporation and is continued under the laws of the province of XXXXXXXXXX. XXXXXXXXXX. GCO is a taxable Canadian corporation ad a subsidiary wholly-owned corporation of DCO. GCO owns all of the issued and outstanding shares of XXXXXXXXXX, a wholly-owned controlled foreign affiliate of GCO.

7. XXXXXXXXXX.

8. Prior to the acquisitions described above, USco was not a "specified shareholder" of CCO for purposes of subparagraph 88(1)(c)(vi).

9. FCO is a taxable Canadian corporation incorporated under the laws of the province of XXXXXXXXXX. FCO is a subsidiary wholly-owned corporation of USco. FCO financed the acquisition of CCO by issuing third party debt and inter-company debt and equity with USco. FCO lent the funds to ACO in exchange for an interest-bearing demand promissory note and also subscribed for preference shares of ACO. ACO in turn subscribed for common shares in BCO. BCO used the funds from the subscription for its common shares to acquire the issued and outstanding CCO XXXXXXXXXX Shares.

10. XXXXXXXXXX.

11. XXXXXXXXXX.

12. On XXXXXXXXXX, the USco and Xco shareholders approved the merger of USco and Xco. XXXXXXXXXX .

13. On XXXXXXXXXX, CCO announced its intention to make an offer to purchase the outstanding common shares of DCO that are not already owned by CCO for cash consideration of XXXXXXXXXX per common share. In the event CCO does not obtain XXXXXXXXXX% of the issued and outstanding common shares pursuant to such offer or XXXXXXXXXX, CCO will enter into a second stage acquisition transaction as a means of acquiring the remaining issued and outstanding shares (subject to certain requirements being met). USco currently is of the view that it will most likely cause DCO to be amalgamated with a subsidiary wholly-owned corporation of CCO incorporated solely for the purposes of effecting the second stage acquisition transaction. Holders of the issued and outstanding common shares of DCO not tendered pursuant to the offer will have their common shares exchanged for redeemable shares of the amalgamated company which would then be immediately redeemed for cash.

14. Newco was formed under the laws of the province of XXXXXXXXXX. Newco is a taxable Canadian corporation. The authorized share capital of Newco consists of XXXXXXXXXX common shares XXXXXXXXXX. On incorporation, one common share was issued to ACO.

PROPOSED TRANSACTIONS

15. BCO will be liquidated into ACO and dissolved, as a result of which, all of the issued and outstanding CCO Common Shares will be conveyed to ACO.

16. CCO will acquire all of the issued and outstanding common shares of DCO.

17. DCO (or its successor) and GCO will be continued under the laws of the province of XXXXXXXXXX.

18. CCO, DCO (or its successor corporation) and GCO will be amalgamated under the laws of the province of XXXXXXXXXX to form Amalco. Upon the amalgamation, the issued shares of DCO (or its successor corporation) and GCO will be cancelled and the shares of CCO will be converted into shares of Amalco. The authorized share capital of Amalco will mirror that of CCO. ACO will receive common shares of Amalco (the "Amalco Common Shares").

19. ACO will transfer to Newco all of the Amalco Common Shares in exchange for XXXXXXXXXX common shares of Newco and the Promissory Note. ACO will receive share consideration in respect of each Amalco Common Share so transferred.

20. ACO and Newco will jointly elect, in the prescribed form and manner under subsection 85(1) and within the time referred to in subsection 85(6) in respect of the transfer of the Amalco Common Shares such that ACO's proceeds of disposition, and Newco's adjusted cost base, in respect of the Amalco Common Shares will not be less than the lesser of ACO's adjusted cost base and the fair market value of such shares. The agreed amount in respect of each Amalco Common Share will not exceed the greater of (i) the principal amount of the Promissory Note received by ACO as consideration for the Amalco Common Share, and (ii) the fair market value of the Amalco Common Share.

21. The XXXXXXXXXX common shares in the share capital of Newco issued to ACO on the transfer of the Amalco Common Shares will have an aggregate paid-up capital (computed without reference to the Act) equal to the fair market value of the Amalco Common Shares less the principal amount of the Promissory Note. The paid-up capital of the XXXXXXXXXX common shares of Newco will be subject to the application of subsection 85(2.1).

22. The Promissory Note issued by Newco in favour of ACO will have a principal amount equal to the lesser of ACO's adjusted cost base in the Amalco Common Shares and the fair market value of such Amalco Common Shares at the time of the issuance of the Promissory Note.

23. Newco and Amalco will be amalgamated under the laws of the Province of XXXXXXXXXX to form Amalco2. Under the amalgamation, the Amalco XXXXXXXXXX Shares will be cancelled and the shares of Newco will be converted into shares of Amalco2. It is intended that such amalgamation will occur on the same date as the date that Xco and USco are merged.

24. In its tax return for the first taxation year immediately following the amalgamation, Amalco2 will designate in respect of certain capital property (excluding ineligible property) acquired by it on the amalgamation (and owned by CCO or DCO or GCO, as the case may be, at the time that ACO last acquired control of these corporations), an amount not exceeding the amount permitted by paragraph 88(1)(d).

PURPOSES OF THE PROPOSED TRANSACTIONS

The purpose of each of the Proposed Transactions is as follows:

25. CCO, DCO and GCO are being continued under the laws of the province of XXXXXXXXXX to effect the amalgamation of CCO, DCO and GCO and the amalgamation of Amalco (the successor corporation to CCO, DCO and GCO) and Newco to form Amalco2. XXXXXXXXXX.

26. The implementation of the Proposed Transactions will provide a matching of the interest expense incurred with respect to the CCO Acquisition Debt with the taxable income earned by CCO. Notwithstanding the delay in the Proposed Transactions, at the time of the Offer it was, and it remains USco's intention to undertake the transactions necessary to match the interest expense incurred with respect to the CCO Acquisition Debt with the taxable income earned by CCO.

27. USco is continuously evaluating possible acquisition opportunities as part of its overall growth strategy. As a result, it is likely that other acquisitions could follow the acquisition of CCO. To that effect, USco would like to maintain the maximum amount of flexibility with respect to its Canadian structure from both a corporate organizational and cash-flow management perspective. Indeed, it may be undesirable to have future acquisitions or other business ventures occur within the existing corporate entities. As a result, USco would like to establish ACO as a Canadian holding company so that future acquisitions or other business ventures could be carried on through separate and distinct subsidiaries of ACO (which would serve as the Canadian parent corporation of USco's Canadian corporate interests and business operations).

28. The implementation of the Proposed Transactions will allow Amalco2 to increase the adjusted cost base of Amalco's (formerly CCO's , DCO's and GCO's) capital properties (other than ineligible property). In turn, this will give USCo maximum flexibility in reorganizing the holding company structure of CCO and its subsidiaries.

29. ACO no longer requires BCO as an intermediate holding company. When ACO undertook the acquisition of CCO, it did so through BCO to provide a squeeze-out option in the event that more than XXXXXXXXXX% but less than XXXXXXXXXX% of the CCO XXXXXXXXXX Shares were tendered pursuant to the Offer. In that event, ACO would have effected a subsequent acquisition transaction such that CCO and BCO would have been amalgamated and the remaining CCO Shareholders who had not tendered their shares under the Offer would have been issued preference shares of the amalgamated corporation. These redeemable preference shares would have then been immediately redeemed for cash resulting in ACO owning XXXXXXXXXX% of the issued and outstanding XXXXXXXXXX shares of the company formed on the amalgamation of CCO and BCO. This subsequent acquisition transaction was not required as XXXXXXXXXX% of the CCO XXXXXXXXXX shares were tendered pursuant to the Offer. As a result, BCO is no longer a necessary part of USco's Canadian corporate structure.

ADDITIONAL INFORMATION

30. XXXXXXXXXX.

RULINGS

Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, purposes of the proposed transactions and proposed transactions, we rule as follows:

A. Provided that ACO has a legal obligation to pay interest on the CCO Acquisition Debt, and provided that ACO uses the shares of Amalco which it will receive as described in paragraph 18 above, the common shares of Newco and the Promissory Note which it will receive as described in paragraph 19 above, and the shares of Amalco2 which it will receive as described in paragraph 23 above, for the purpose of earning income from a business or property, ACO will be entitled to deduct, pursuant to paragraph 20(1)(c), interest paid or payable on the CCO Acquisition Debt, depending on the method regularly followed by ACO in computing its income for the purposes of the Act:

(i) after the liquidation and dissolution of BCO as described in paragraph 15 above;

(ii) after the transfer of the Amalco Common Shares to Newco as described in paragraph 19 above; and

(iii) after the amalgamation of Newco and Amalco as described in paragraph 23 above;

to the extent that the interest is reasonable in the circumstances.

B. Provided that Newco has a legal obligation to pay interest on the Promissory Note, and provided that Newco holds the Amalco Common Shares, which it acquires as described in paragraph 19 above, for the purpose of producing income from a business or property, Newco will be entitled to deduct, pursuant to paragraph 20(1)(c), interest paid or payable on the Promissory Note, depending on the method regularly followed by Newco in computing its income for the purposes of the Act, to the extent that the interest is reasonable in the circumstances.

C. Provided that Amalco2 continues to use the property acquired on the amalgamation of Newco and Amalco, described in paragraph 23 above, for the purpose of gaining or producing income from such property and provided that Amalco2 has a legal obligation to pay interest on the Promissory Note that it assumed on that amalgamation, Amalco2 will be entitled to deduct, pursuant to paragraph 20(1)(c), interest paid or payable on the Promissory Note, depending on the method regularly followed by Amalco2 in computing its income for the purposes of the Act, to the extent that the interest is reasonable in the circumstances.

D. Provided that no property acquired by Amalco2 on the amalgamation as described in paragraph 23 above, or "any other property acquired by any person in substitution therefor" (within the meaning of the phrase for the purposes of clause 88(1)(c)(vi)(B)) is acquired by any person described in any of subclauses 88(1)(c)(vi)(B)(I), (II) or (III)(on the assumption that the "subsidiary" referred to in those subclauses is Amalco or CCO or DCO or GCO, as the context requires, and the "parent" is Newco) as part of the series of transactions or events, the cost to Amalco2 of each property will be deemed by paragraphs 87(11)(b) and 88(1)(c) to be the cost amount of such property plus, on the assumption that such property is capital, but not, depreciable property, the amount designated by Amalco2 under paragraph 88(1)(d) in respect of the property as described in paragraph 24 above.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

The above 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, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:

(b) the determination of the adjusted cost base, the paid-up capital or fair market value of any shares referred to herein:

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

For example, we have not reviewed and are providing no confirmation as to the tax consequences of the transactions referred to in paragraphs 1 to 14 and 30, above.

Yours truly,

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