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: Reduction of PUC by a public corporation. Whether the reduction occurs in the course of a reorganization of its business.
Position: Yes.
Reasons: The law.
XXXXXXXXXX 2002-016860
XXXXXXXXXX, 2002
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX ("Pubco")
This is in reply to your letter of XXXXXXXXXX, as revised by your letters dated 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 ("TSO") or taxation centre ("TC") 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 Income Tax Rulings Directorate.
DEFINITIONS
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 provision of the Act and the regulations thereunder are referred to as the "Regulations"; and all monetary amounts are expressed in Canadian dollars;
(b) "adjusted cost base" ("ACB") has the meaning assigned by subsection 248(1);
(c) "FMV" means fair market value;
(d) "CBCA" means the Canada Business Corporations Act, R.S., 1985, c. C-44, as amended;
(e) "paid-up capital" ("PUC") has the meaning assigned by subsection 89(1);
(f) "public corporation" has the meaning assigned by subsection 89(1);
(g) "Proposed Transactions" (also "Reorganization") means the transactions described in paragraphs 10 to 17 of this letter;
(h) "special resolution" has the meaning assigned by subsection 2(1) of the CBCA;
(i) "stated capital" has the meaning assigned by section 26 of the CBCA;
(j) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
(k) "taxable dividend" has the meaning assigned by subsection 89(1).
FACTS
Canadian Holding Company Structure
1. Pubco was incorporated under the CBCA and is a public corporation and a taxable Canadian corporation. Pubco's CCRA business number is XXXXXXXXXX and it files its income tax returns with the XXXXXXXXXX TC but otherwise deals with the XXXXXXXXXX TSO. Pubco acts as a holding corporation that owns direct and indirect interests in several corporations in Canada and the United States of America ("US"). XXXXXXXXXX. Pubco's direct revenue is derived almost exclusively from interest and dividends from its investments in these corporations.
2. Currently, Pubco's share capital consists of:
i) XXXXXXXXXX authorized, issued and outstanding Class XXXXXXXXXX (the "Class XXXXXXXXXX Shares"), bearing a cumulative dividend rate of XXXXXXXXXX%;
ii) XXXXXXXXXX authorized and XXXXXXXXXX issued and outstanding Class XXXXXXXXXX (the "Class XXXXXXXXXX shares"), bearing a cumulative dividend rate of XXXXXXXXXX% of bank prime;
iii) XXXXXXXXXX;
iv) XXXXXXXXXX;
v) XXXXXXXXXX;
vi) XXXXXXXXXX; and
vii) An unlimited number authorized and XXXXXXXXXX issued and outstanding voting common shares (the "Common Shares").
3. XXXXXXXXXX.
The PUC attributable to all of Pubco's issued and outstanding shares is approximately $XXXXXXXXXX, which also approximates the stated capital of all such shares. The PUC and stated capital attributable to all the Common Shares is approximately $XXXXXXXXXX.
Canadian Operational Structure
4. Pubco's Canadian operations are held through direct and indirect investments in XXXXXXXXXX ("Canco 1") (XXXXXXXXXX), XXXXXXXXXX ("Canco 2") (XXXXXXXXXX) and XXXXXXXXXX ("Canco 3") (XXXXXXXXXX). Each of Canco 1, Canco 2 and Canco 3 is a taxable Canadian corporation. Canco 1 is XXXXXXXXXX and Pubco owns approximately XXXXXXXXXX% of the voting shares of Canco 1.
U.S. Corporate Structure
5. Pubco's operational interests in the US are held through XXXXXXXXXX ("US Holdco"), which is a wholly-owned US corporation. Pubco's investment in US Holdco is held indirectly through three wholly-owned subsidiaries as follows: XXXXXXXXXX ("Canco 4"), as to XXXXXXXXXX%, XXXXXXXXXX ("Canco 5"), as to XXXXXXXXXX% and Canco 2, as to XXXXXXXXXX%. Canco 4 and Canco 5 are taxable Canadian corporations.
6. US Holdco directly owns five US subsidiaries; XXXXXXXXXX ("USco 1"); XXXXXXXXXX ("USco 2"); XXXXXXXXXX ("USco 3"); XXXXXXXXXX ("USco 4"); and XXXXXXXXXX ("USco 5").
7. Pubco's US XXXXXXXXXX operations are carried on principally by USco 1 and USco 2 and their respective subsidiary corporations, while Pubco's US XXXXXXXXXX is carried on by USco 3 and USco 4 and their respective subsidiary corporations (which subsidiary corporations are referred to in the aggregate as "Group A"). USco 5 carries on a XXXXXXXXXX business and is not part of the Proposed Transactions.
8. In particular, Group A consists of the following subsidiaries of USco 3 and USco 4 and certain entities or subsidiaries owned by XXXXXXXXXX ("USco 6"), which is a direct subsidiary of USco 3:
i) XXXXXXXXXX ("US Subco"), a direct subsidiary of USco 4;
ii) XXXXXXXXXX ("USco 7"), a direct subsidiary of USco 3;
iii) XXXXXXXXXX ("USco 8"), XXXXXXXXXX ("USco 9"), XXXXXXXXXX ("USco 10"), XXXXXXXXXX ("USco 11") and the XXXXXXXXXX (USco 12") (collectively, the "Group A-1 Assets"). The Group A-1 Assets are held by XXXXXXXXXX ("USco 13"), a direct subsidiary of USco 6; and
iv) XXXXXXXXXX ("USco 14"), XXXXXXXXXX ("USco 15"), XXXXXXXXXX ("USco 16") and XXXXXXXXXX (USco 17") (collectively, the "Group A-2 Assets"). The Group A-2 Assets are held by XXXXXXXXXX ("USco 18"), a direct subsidiary of USco 6.
In addition to the above, XXXXXXXXXX ("USco 19"), XXXXXXXXXX ("USco 20"), and XXXXXXXXXX ("USco 21") and their respective subsidiary corporations are held, directly or indirectly, by USco 6 but are not part of the Proposed Transactions described below.
9. In anticipation of the Reorganization, XXXXXXXXXX ("Newco US") was recently incorporated in order to consolidate the Group A operations (i.e. US XXXXXXXXXX) within a single company. Newco US will act as the holding company for the Group A operations. Newco US is a XXXXXXXXXX corporation, incorporated on XXXXXXXXXX, and has unlimited authorized share capital. Presently, XXXXXXXXXX common shares of Newco US have been issued, all of which are owned by USco 6. Newco US is a resident of the US for income tax purposes. Newco US XXXXXXXXXX.
PROPOSED TRANSACTIONS
Pre-Distribution Reorganization
10. US Subco will amend its Articles to increase the authorized number of its common shares to XXXXXXXXXX , authorize the issuance of non-voting preferred shares and split the currently issued stock so that the current sole shareholder, USco 4, will own XXXXXXXXXX common shares of US Subco with an approximate FMV of US$XXXXXXXXXX .
11. US Subco will also undertake the following financing transactions:
i) US Subco will issue a note with a principal amount of US$XXXXXXXXXX to USco 3 in exchange for US$XXXXXXXXXX in cash from USco 3;
ii) US Subco will lend US$XXXXXXXXXX in cash to Newco US; and
iii) US Subco will receive US$XXXXXXXXXX in cash from a related party as consideration for the assumption by US Subco of a liability with an outstanding principal amount equal to US$XXXXXXXXXX .
12. On or before XXXXXXXXXX , and immediately before the transactions described below, US Subco will purchase the following assets from various members of Group A at their FMV and issue the following FMV consideration:
i) shares of USco 7 from USco 3 for sole consideration consisting of US$XXXXXXXXXX in cash;
ii) the Group A-1 Assets from USco 13 for sole consideration consisting of XXXXXXXXXX newly issued common shares of US Subco with a FMV of US$XXXXXXXXXX ; and
iii) the Group A-2 Assets from USco 18 for consideration consisting of XXXXXXXXXX newly issued common shares of US Subco with a FMV of US$XXXXXXXXXX , US$XXXXXXXXXX in cash and US$XXXXXXXXXX newly issued non-voting preferred shares of US Subco with a FMV of US$XXXXXXXXXX
As a result of the above, the aggregate purchase price for the above assets acquired by US Subco will be equal to their aggregate FMV of US$XXXXXXXXXX and the aggregate FMV consideration to be paid by US Subco in respect of these assets will consist of US$XXXXXXXXXX of common shares of US Subco, US$XXXXXXXXXX of non-voting preferred shares of US Subco and cash of US$XXXXXXXXXX .
13. Newco US will then purchase all the issued and outstanding common shares of US Subco for their FMV in exchange for cash and/or common shares of Newco US that have a FMV equal to the US Subco shares so acquired by Newco US as follows:
i) USco 13 will transfer its XXXXXXXXXX common shares of US Subco to Newco US for sole consideration consisting of XXXXXXXXXX newly issued common shares of Newco US with a FMV of US$XXXXXXXXXX ;
ii) USco 18 will transfer its XXXXXXXXXX common shares of US Subco to Newco US for sole consideration consisting of XXXXXXXXXX newly issued common shares of Newco US with a FMV of US$XXXXXXXXXX ; and
iii) USco 4 will transfer its XXXXXXXXXX common shares of US Subco to Newco US for sole consideration consisting of US$XXXXXXXXXX in cash.
As a result of the above, the aggregate purchase price for the above common shares of US Subco acquired by Newco US will be equal to their aggregate FMV of US$XXXXXXXXXX and the aggregate FMV consideration to be paid by Newco US in respect of these common shares will consist of US$XXXXXXXXXX of common shares of US Subco and cash of US$XXXXXXXXXX . In addition to the above, the non-voting preferred shares of US Subco held by USco 18 will be sold to an arm's-length party for their FMV of US$XXXXXXXXXX .
14. Newco US will issue an additional number of its common shares to Pubco for FMV consideration to ensure that Newco US will have approximately XXXXXXXXXX common shares issued and outstanding that have an aggregate FMV of US$XXXXXXXXXX by XXXXXXXXXX . Pubco will pay the subscription price of approximately US$XXXXXXXXXX per share in cash (approximately US$XXXXXXXXXX in total).
15. On XXXXXXXXXX , Pubco will purchase all the issued and outstanding common shares of Newco US that it does not already own for their FMV. As sole consideration therefor, Pubco will issue notes payable with an aggregate principal amount and FMV of US$XXXXXXXXXX (the "Pubco Notes"). This transaction will allow Pubco to separate the Group A operations from Pubco's XXXXXXXXXX operations in the manner described in 17, below.
16. The Pubco Notes will have a XXXXXXXXXX -year term and annual interest rate of approximately XXXXXXXXXX %, payable semi-annually.
Distribution to Pubco's Common Shareholders
17. Pending shareholder approval, Pubco will pass a special resolution to reduce the stated capital of all its Common Shares by an amount equal to the FMV of the Newco US shares held by it, which amount for greater certainty, will not exceed the aggregate PUC of the Common Shares. The FMV of Newco US is expected to be approximately US$XXXXXXXXXX . This reduction of stated capital will be for the purposes of distributing the common shares of Newco US to the shareholders of Pubco's Common Shares as payment on the reduction. The common shares of Newco US will then be distributed as payment thereof.
ADDITIONAL INFORMATION
18. Neither Pubco nor its subsidiaries have any outstanding tax liabilities that could be affected by the Proposed Transactions.
19. The proposed reduction in the stated capital of Pubco's Common Shares described in 17 above has not been preceded by an increase in the PUC of those shares that resulted in a dividend in respect of which Pubco elected to treat as having been paid out of Pubco's 1971 capital surplus on hand.
20. The proposed reduction of stated capital of Pubco's Common Shares described in 17 above is not in lieu of ordinary course dividends. Pubco pays a quarterly dividend of US$XXXXXXXXXX per share. The next quarterly dividend is to be paid on XXXXXXXXXX with a record date of XXXXXXXXXX .
21. Immediately following the Reorganization, the only XXXXXXXXXX business carried on by US Holdco or any of its directly or indirectly held subsidiary corporations will be the XXXXXXXXXX assets remaining in USco 21 which consist of a XXXXXXXXXX . US Holdco and its subsidiaries will exit the XXXXXXXXXX business completely when the XXXXXXXXXX in USco 21 has been completed and those assets are sold which is expected to take place over the next few years.
PURPOSE OF THE PROPOSED TRANSACTIONS
22. Pubco believes that it is in the best interests of its shareholders that Pubco "spin-off" the Group A operations to the holders of its Common Shares on the basis outlined above for the following reasons:
i) the Proposed Transactions will allow the Pubco corporate group, and the US Holdco group in particular, to exit XXXXXXXXXX business by XXXXXXXXXX ;
ii) the separation of the Group A operations from the Pubco corporate group will facilitate Group A's access to additional financing for ongoing and future projects;
iii) the Proposed Transactions will allow existing shareholders of Pubco to make independent investment decisions concerning their respective beneficial interests in Group A;
iv) the separation of Group A operations from Pubco's other operations may increase shareholder value, since it is anticipated that Pubco and Group A will each achieve higher valuations operating independently of each other; and
v) the pre-distribution transactions, as described in paragraphs 10 to 16 above, are necessary to ensure the US income tax attributes associated with Group A operations are not lost as a result of the spin-off of these operations to the holders of Pubco's Common Shares.
RULINGS
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. Subject to the application of subsection 40(3), the reduction of the stated capital of the Common Shares of Pubco, described in 17 above, will not, in and by itself, result in a disposition, within the meaning of subsection 248(1), of Pubco's Common Shares.
B. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to the distribution made by Pubco in respect of the reduction to the stated capital account maintained in respect of its Common Shares, as described in 17 above, such that Pubco will be deemed to have paid, and each of the holders of Pubco's Common Shares will be deemed to have received, a dividend only to the extent that the amount so distributed by Pubco to each particular holder on the reduction exceeds the amount by which the PUC in respect of such shares is reduced on the distribution.
C. Where a taxpayer holds their Pubco Common Shares as capital property, the amount received by each such person on the reduction of the PUC of their particular shares, as described in 17 above, will be deducted in computing the ACB of that particular shareholder's Pubco Common Shares by virtue of subparagraph 53(2)(a)(ii) to the extent that the amount received, or such portion thereof, is not otherwise deemed by subsection 84(2) to be a dividend received by such person.
D. Subject to the application of section 47, the cost of a Newco US common share to be received by a shareholder of Pubco Common Shares on the distribution of such shares by Pubco, as described in 17 above, will be equal to the FMV of the Newco US common share at that time.
The above rulings are given subject to the limitations and qualifications set out in IC 70-6R5 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.
OTHER COMMENTS
Nothing in this letter should be construed as implying that the CCRA has confirmed, reviewed or has made any determination in respect of:
(a) the PUC of any share or the ACB or FMV of any property referred to herein;
(b) the amount of any non-capital loss or any other amount of any corporation referred to herein;
(c) the income tax consequences to Pubco on its disposition of the shares of Newco US for their fair market value; or
(d) any other tax consequence relating to the facts, proposed transactions or any transaction or event taking place either prior to the proposed transactions or subsequent to the proposed transactions, whether described in this letter or not 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 Branch
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