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: Spin-off of shares of a subsidiary owned by a public corporation. Whether subsection 84(4.1) applies or subsection 84(2).
Position: Favourable rulings issued.
Reasons: In compliance with the law.
XXXXXXXXXX 2003-003701
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX, and your other correspondence, 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 taxpayers involved none of the issues involved in this ruling request are:
(i) in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office ("TSO") or taxation centre ("TC") in connection with a previously filed tax return of the taxpayers or a related person;
(iii) under objection by the taxpayers or a related person;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
The taxpayers have also represented that the proposed transactions described herein will not result in any taxpayer described herein being unable to pay its existing outstanding tax liabilities.
DEFINITIONS
In this letter all monetary amounts are expressed in Canadian dollars and the following terms have the meanings specified:
(a) "A Co" means XXXXXXXXXX;
(b) "A Co Common Share" means a common share of A Co, as described in Paragraph 2, XXXXXXXXXX;
(c) "A Co Shareholder" means a holder of A Co Common Shares;
(d) "A Co Options" means the options under A Co's stock option plans and options otherwise granted by A Co to acquire A Co Common Shares;
(e) "Act" means the Income Tax Act, R.S.C. 1986 (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 herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act;
(f) "adjusted cost base" has the meaning assigned by section 54;
(g) "arm's length" has the meaning assigned by section 251;
(h) "Arrangement" means an arrangement under XXXXXXXXXX on the terms and subject to the conditions set out in the Plan of Arrangement, as it may be amended in accordance with the terms of the Plan of Arrangement and the Arrangement Agreement;
(i) "Arrangement Agreement" has the meaning ascribed in Paragraph 8;
(j) "C Co" means XXXXXXXXXX;
(k) "C Co Shares" means the common shares of C Co;
(l) "B Co" means XXXXXXXXXX and any successor thereto by amalgamation;
(m) "B Co Common Shares" means common shares of B Co;
(n) XXXXXXXXXX;
(o) "capital property" has the meaning assigned by section 54;
(p) "Consideration Election" has the meaning ascribed in Paragraph 11(e);
(q) "Dissenting Shareholder" means a holder of A Co Common Shares who dissents in respect of the Plan of Arrangement in strict compliance with the dissent rights in the Plan of Arrangement;
(r) "Distribution" means the distribution of B Co Common Shares effected as a reduction of stated capital on the A Co Common Shares, as described in Paragraph 11(c);
(s) "Effective Date" means the effective date of the Plan of Arrangement;
(t) "Effective Time" means 1:00 p.m. (Eastern Standard Time) on the Effective Date;
(u) "Holdco Alternative" means the option exercisable by all, but not less than all, of the holders of shares in the capital of a Holding Company to XXXXXXXXXX;
(v) "Holding Company" means a corporation which is a holder of A Co Common Shares (or of a wholly-owned subsidiary which is a holder of A Co Common Shares) that is resident in Canada, a taxable Canadian corporation and a XXXXXXXXXX corporation, that, unless otherwise approved by C Co, meets certain requirements set out in the Plan of Arrangement, and in respect of which all of the holders of shares in the capital of such company have validly exercised the Holdco Alternative.
(w) XXXXXXXXXX;
(x) "paid-up capital" has the meaning assigned by subsection 89(1);
(y) "Paragraph" refers to a numbered paragraph in this letter;
(z) "Plan of Arrangement" means the arrangement in respect of which the application will be made for the final court order approving the Proposed Transactions described in Paragraph 11, as it may be amended in accordance with the terms of the Plan of Arrangement and the Arrangement Agreement;
(aa) "Proposed Transactions" means the transactions described in Paragraphs 10 to 13;
(bb) "public corporation" has the meaning assigned by subsection 89(1);
(cc) "stated capital" means stated capital for purposes of section XXXXXXXXXX;
(dd) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
(ee) XXXXXXXXXX.
FACTS
1. A Co is the corporation resulting from an amalgamation of XXXXXXXXXX on XXXXXXXXXX. A Co is a public corporation and a taxable Canadian corporation. A Co's federal tax business number is XXXXXXXXXX and it files its income tax returns with the XXXXXXXXXX TC.
2. A Co has XXXXXXXXXX classes of issued and outstanding shares, being A Co Common Shares and XXXXXXXXXX. Currently, approximately XXXXXXXXXX A Co Common Shares and XXXXXXXXXX are issued and outstanding, representing all of the issued shares of its capital stock. XXXXXXXXXX. Currently, approximately XXXXXXXXXX A Co Common Shares are issuable under the stock option plans of, and other stock option arrangements entered into by, A Co. The A Co Common Shares are listed on the XXXXXXXXXX.
3. XXXXXXXXXX.
4. The stated capital account maintained in respect of A Co Common Shares and the paid-up capital of these shares is approximately $XXXXXXXXXX. The paid-up capital of the A Co Common Shares has arisen on issuances of A Co Common Shares for cash or other consideration, being XXXXXXXXXX. Neither A Co nor its predecessors has at any time increased the paid-up capital of any class of its shares and elected to treat such amount as a dividend paid out of its "pre-1972 capital surplus on hand" as that term is defined in subsection 88(2.1).
5. A Co's business operations are carried on both directly and indirectly through XXXXXXXXXX subsidiary corporations. Those business operations are comprised of two principal business units:
(a) its XXXXXXXXXX business unit, which operates XXXXXXXXXX; and
(b) its XXXXXXXXXX business unit, which operates XXXXXXXXXX.
A Co directly holds the shares of a number of subsidiaries that are involved in its XXXXXXXXXX operations and holds all of the shares of B Co and certain other subsidiaries involved in its XXXXXXXXXX operations. XXXXXXXXXX.
6. B Co is a corporation incorporated under the XXXXXXXXXX and is a taxable Canadian corporation and a wholly-owned subsidiary of A Co. B Co has one class of issued and outstanding shares, being B Co Common Shares. On XXXXXXXXXX, B Co acquired from A Co all the shares of XXXXXXXXXX.
7. C Co is a corporation incorporated under the XXXXXXXXXX, and is a public corporation and a taxable Canadian corporation. XXXXXXXXXX. C Co Shares are listed on the XXXXXXXXXX.
8. On XXXXXXXXXX, A Co, C Co and B Co entered into an arrangement agreement (the "Arrangement Agreement") which provides, on the terms and subject to the conditions contained therein, that the parties will implement the Plan of Arrangement. XXXXXXXXXX.
9. Reserved.
PROPOSED TRANSACTIONS
10. Prior to the Effective Date, the following transactions will occur:
(a) XXXXXXXXXX.
(b) All A Co Options, whether vested or unvested, will become vested as at the date of mailing of the notice and information circular in respect of the A Co shareholders and optionholders meeting to consider the Plan of Arrangement.
(c) The XXXXXXXXXX business operations carried on by A Co and A Co's subsidiaries will be further reorganized, so that they are held by B Co and B Co's subsidiaries, by the following: XXXXXXXXXX.
(d) The B Co Common Shares held by A Co will be split so that A Co will hold a number of B Co Common Shares equal to the total of the number of issued and outstanding A Co Common Shares immediately before the Effective Date.
11. On the Effective Date, subject to the requisite shareholder and regulatory approvals and the satisfaction or waiver of other conditions precedent, the following transactions will occur under the Plan of Arrangement in the order listed below:
(a) XXXXXXXXXX.
(b) Each unexercised A Co Option will be exchanged for the following and will thereafter be cancelled:
XXXXXXXXXX.
(c) The aggregate stated capital of the A Co Common Shares will be reduced by an amount equal to the aggregate fair market value of the B Co Common Shares held by A Co (the amount of such reduction is expected to be approximately $XXXXXXXXXX), and all of such B Co Common Shares will be distributed pro rata to holders of A Co Common Shares, provided that B Co Common Shares that would otherwise be distributed to Dissenting Shareholders, if any, will be retained by A Co.
(d) XXXXXXXXXX.
(e) Subject to certain pro-ration adjustments, each A Co Common Share that is not held by (i) a Dissenting Shareholder, or (ii) C Co or any affiliate thereof, will be transferred to and acquired by C Co, in exchange for, at the holder's election or deemed election (each a "Consideration Election"): (x) $XXXXXXXXXX, in cash, without interest; (y) XXXXXXXXXX of a fully paid and non-assessable C Co Share (as such fraction may be amended by the relevant anti-dilution clause); or (z) any combination of the foregoing.
(f) Each holder of an A Co Common Share in respect of which no effective Consideration Election has been made (other than A Co Common Shares held by (i) a Dissenting Shareholder, or (ii) C Co or any affiliate thereof) will be deemed to have made a Consideration Election to receive, XXXXXXXXXX, subject to pro-ration in accordance with the provisions of the Plan of Arrangement.
(g) The cash and/or C Co Shares which each holder of A Co Common Share has elected or been deemed to have elected to receive pursuant to such holder's Consideration Election in exchange for such holder's A Co Common Shares being transferred to C Co will be subject to adjustment and pro-rated in accordance with the provisions of the Plan of Arrangement, so that the aggregate amount of cash payable to all holders will be equal to the total cash consideration available as specified under the Plan of Arrangement and so that the aggregate number of C Co Shares issuable to all holders will be equal to the total number of C Co Shares available as specified under the Plan of Arrangement.
(h) For greater certainty, a pro rata portion of the total number of C Co Shares and the total amount of cash received by any particular holder of A Co Common Shares will be allocated to every A Co Common Share held by that holder, so that such holder will receive for each A Co Common Share held by such holder the same combination of C Co Shares and cash as is received for every other A Co Common Share held by that holder, and neither the C Co Shares nor cash will be considered to have been received for any specific portion or fraction of such A Co Common Share.
12. Holders of A Co Common Shares who are Canadian residents, other than any such holder who is exempt from tax under the Act, and who receive any C Co Shares as consideration for the transfer of their A Co Common Shares to C Co, will be entitled to make an income tax election pursuant to section 85 (and the analogous provisions of provincial income tax law) with respect to the transfer of their A Co Common Shares to C Co. XXXXXXXXXX.
13. Holders of A Co Common Shares may exercise rights of dissent with respect to such shares, and Dissenting Shareholders who are ultimately determined to be entitled to be paid fair value for their A Co Common Shares will be deemed to have transferred such A Co Common Shares as of the Effective Time to C Co. Provided A Co receives the approval of the court, a Dissenting Shareholder will be paid fair value for its A Co Common Shares by XXXXXXXXXX. Dissenting Shareholders who are ultimately determined not to be entitled, for any reason, to be paid fair value for their A Co Common Shares, will be deemed to have participated in the Arrangement, as of the Effective Time, on the same basis as a non-dissenting holder of A Co Common Shares who did not make a Consideration Election, XXXXXXXXXX.
14. XXXXXXXXXX.
15. XXXXXXXXXX.
PURPOSE OF THE PROPOSED TRANSACTIONS
16. C Co wishes to acquire only the XXXXXXXXXX operations of A Co. Accordingly, A Co has determined that it will reorganize its business and distribute B Co, XXXXXXXXXX, by the distribution of B Co Common Shares to A Co Shareholders on the reduction of capital of the A Co Common Shares prior to the acquisition by C Co of the A Co Common Shares. C Co will, by virtue of its current holdings of A Co Common Shares, acquire its current pro rata share of the B Co Common Shares as a result of the Distribution.
XXXXXXXXXX
RULINGS GIVEN
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. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to the Distribution, such that A Co will be deemed to have paid, and the A Co Shareholders will be deemed to have received, a dividend only to the extent, if any, that the amount of the Distribution exceeds the amount by which the paid-up capital in respect of the A Co Common Shares is reduced.
B. Subject to the application of subsection 40(3), the Distribution, will not, in and by itself, result in a disposition of the A Co Common Shares within the meaning of section 54.
C. The B Co Common Shares received by an A Co Shareholder on the Distribution will be considered to have been acquired by such A Co Shareholder at a cost equal to their fair market value at the time of the Distribution.
D. Subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to redetermine the tax consequences described in rulings A, B and C above.
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.
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 paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein; or
(b) 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, including for greater certainty any tax consequences pertaining to any stock option described in this letter.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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