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.
Principal Issues: (a) Whether a royalty qualifies as a XXXXXXXXXX ; (b) Whether a royalty granted in exchange, in part, for another royalty that was a "specified royalty" will itself be a specified royalty; (c) Whether dividends received by a trust can be designated under 104(19) to be dividends of the beneficiary on a redemption of trust units; (d) Whether a corporation will be considered "connected" with itself for the purposes of Part IV tax; (e) Whether Part VI.1 tax is exigible in respect of a dividend deemed to be received by a corporation from itself.
Position: (a) Question of fact; (b) Question of fact; (c) Yes, in these circumstances; (d) Yes, in these circumstances; (e) Yes
Reasons: (a) Yes, in these circumstances and based on proposed legislation; (b) The answer does not depend on whether the new royalty is granted as part of a series of transactions or events that includes the disposition of a specified royalty; rather, it depends on whether the new royalty is granted as part of a series of transactions or events as a consequence of which depreciable property was acquired at a capital cost that was less than its fair market value; (c) In this case the trust agreement allowed the trustee to designate that amounts paid on a redemption of trust units could be from the income of the trust; (d) Yes, in these circumstances where more than 50% of the issued share capital (having full voting rights under all circumstances) of the corporation is owned by a person with whom the corporation does not deal at arm's length; (e) A dividend that is deemed to be received by a corporation from itself as a result of a designation under 104(19) is not considered to have been paid to the corporation as a shareholder of itself and, accordingly, is not an excluded dividend. Relief from Part VI.1 tax in these circumstances must rely on a specified amount under 191(4).
XXXXXXXXXX 2003-005095
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of XXXXXXXXXX. We also acknowledge the additional information provided thereafter in connection with your requests, both in further correspondence and in our various telephone conversations.
We understand that to the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein:
(a) is in an earlier tax return of any of the taxpayers or a related person;
(b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of any of the taxpayers or a related person;
(c) is under objection by any of the taxpayers or a related person;
(d) is before the Courts or, if a judgment has been issued, the time limit for appeal to a higher Court has expired;
(e) is the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate (except Ruling 1, Ruling 2, Ruling 3 and Ruling 4, each as defined below); or
(f) will have any impact on the existing tax liabilities of the taxpayers.
Definitions
In addition to terms and expressions defined in the text of this letter, and unless otherwise stated, in this letter the following terms and expressions have the meanings specified below:
(a) "A Co." means XXXXXXXXXX.
(b) "ACB" means "adjusted cost base" as defined in section 54 of the Act.
(c) "Act" means the Income Tax Act R.S.C. 1985 (5th Supp.), c. 1 as amended to the date of this letter.
(d) "BCA" means the Business Corporations Act (XXXXXXXXXX).
(e) "B Co." means XXXXXXXXXX , the corporation formed on the amalgamation described in paragraph 10 below. B Co.'s tax returns are handled by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.
(f) "C Co." means XXXXXXXXXX, a taxable Canadian corporation.
(g) XXXXXXXXXX.
(h) "capital property" has the meaning assigned by section 54 of the Act.
(i) "CBCA" means the Canada Business Corporations Act.
(j) "Combination" means the transactions described in paragraph 25 below.
(k) "Crown Agreement" means the agreement entitled the XXXXXXXXXX.
(l) "CEC" has the meaning assigned to the phrase "cumulative eligible capital" by subsection 14(5) of the Act.
(m) "D Co." means XXXXXXXXXX, a taxable Canadian corporation.
(n) "E Co." means XXXXXXXXXX, a taxable Canadian corporation.
(o) "eligible property" has the meaning assigned by subsection 85(1.1) of the Act.
(p) "GORR" means a XXXXXXXXXX% gross overriding royalty which Partnership 2 is obligated to pay on its XXXXXXXXXX % undivided interest in the Project. The GORR is payable pursuant to an agreement known as the XXXXXXXXXX.
(q) "mutual fund trust" has the meaning assigned by subsection 132(6) of the Act.
(r) "New Trust" means XXXXXXXXXX, a trust settled under the laws of the Province of XXXXXXXXXX pursuant to a trust indenture dated XXXXXXXXXX.
(s) "Option" means the option described in paragraph 27 below.
(t) "private corporation" has the meaning assigned to that expression by subsection 89(1) of the Act.
(u) "Partnership 1" means XXXXXXXXXX (also referred to as the "XXXXXXXXXX" in correspondence relating to this matter), a limited partnership formed under the laws of the Province of XXXXXXXXXX.
(v) "Partnership 2" means XXXXXXXXXX (also referred to as the "XXXXXXXXXX" in correspondence relating to this matter), a limited partnership formed under the laws of the Province of XXXXXXXXXX.
(w) "Partnership 3" means XXXXXXXXXX, a limited partnership formed under the laws of the Province of XXXXXXXXXX.
(x) "Partnership 4" means XXXXXXXXXX, a limited partnership formed under the laws of the Province of XXXXXXXXXX.
(y) "proceeds of disposition" has the meaning assigned to that expression by section 54 of the Act.
(z) "Project" means the XXXXXXXXXX.
(aa) "Projectco 1" means XXXXXXXXXX.
(ab) "Projectco 2" means XXXXXXXXXX.
(ac) "public corporation" has the meaning assigned to that expression by subsection 89(1) of the Act.
(ad) "PUC" means "paid-up capital" as defined in subsection 89(1) of the Act.
(ae) "Reclamation Trust" means the XXXXXXXXXX established by B Co. as described in paragraph 63 below.
(af) "Regulations" means the Income Tax Regulations as amended to the date of this letter.
(ag) "Royalty 1" means the royalty described in paragraph 45 below.
(ah) "Royalty 2" means the royalty described in paragraph 46 below.
(ai) "Royalty 3" means the royalty described in paragraph 47 below.
(aj) "Royalty 4" means the royalty described in paragraph 52 below and following.
(ak) "Ruling 1" means the advance income tax ruling 9519083 issued to X Co., et al, dated XXXXXXXXXX, including any amendments thereto.
(al) "Ruling 2" means the advance income tax ruling 9606513 issued to Y Co., et al, dated XXXXXXXXXX, including any amendments thereto.
(am) "Ruling 3" means the advance income tax ruling 2001-011367 issued to Trust 1, et al, dated XXXXXXXXXX, 2002, including any amendments thereto.
(an) "Ruling 4" means the advance income tax ruling 2003-0003283 issued to Trust 1, et al, dated XXXXXXXXXX, 2003, including any amendments thereto.
(ao) "taxable Canadian corporation" has the meaning assigned to that expression by subsection 89(l) of the Act.
(ap) "Trust 1" means the trust originally established as the XXXXXXXXXX. Its tax returns are handled by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.
(aq) "Trust 2" means the trust originally established as the XXXXXXXXXX which, following the Combination, was wound up pursuant to the trust indenture which had governed its existence.
(ar) "Trustee 1" means XXXXXXXXXX, a corporation which has been a taxable Canadian corporation at all times relevant to this letter.
(as) "Trustee 2" means XXXXXXXXXX, a corporation which has been a taxable Canadian corporation at all times relevant to this letter.
(at) "UCC" has the meaning assigned to the phrase "undepreciated capital cost" by subsection 13(21) of the Act.
(au) "X Co." means XXXXXXXXXX, a predecessor corporation to B Co.
(av) "Y Co." means XXXXXXXXXX, a predecessor corporation to B Co.
(aw) "Z Co." means XXXXXXXXXX, a predecessor corporation to B Co.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
FACTS
The Project
1. The Project is located XXXXXXXXXX and is a joint venture owned in undivided interests, by XXXXXXXXXX participants (each a "Participant").
2. XXXXXXXXXX.
3. XXXXXXXXXX.
4. XXXXXXXXXX (the "Leases").
5. XXXXXXXXXX.
6. The Project is operated and managed by Projectco 1, a single purpose corporation having no significant assets, which corporation is owned by the Participants in the same proportion as their ownership of the Project. Projectco 2 also is a single purpose corporation owned by the Participants which was established XXXXXXXXXX. Each of these corporations is a taxable Canadian corporation.
7. The "Ownership and Management Agreement", to which all of the Participants are parties, sets forth the management structure of the Project.
The Project is governed by XXXXXXXXXX.
XXXXXXXXXX.
8. XXXXXXXXXX.
The Parties
9. A Co. is a taxable Canadian corporation and a public corporation. A Co. is organized and existing under the CBCA. Its head office is located in XXXXXXXXXX. A Co.'s taxation year for the purposes of the Act ends on XXXXXXXXXX. A Co. markets, for and on behalf of B Co. and its affiliates, XXXXXXXXXX attributable to the Working Interest (other than if the owner of "Royalty 1", "Royalty 2" or "Royalty 3", which are described below, were to take its royalty share of the XXXXXXXXXX in kind, as it is entitled to do in certain special circumstances) pursuant to a marketing agreement (the "Marketing Agreement") between A Co. and B Co.
10. B Co. is a private corporation and a taxable Canadian corporation and a Canadian controlled private corporation governed by the provisions of the BCA. It has an authorized share capital consisting of an unlimited number of common shares and an unlimited number of preferred shares, issuable in one or more series. B Co.'s taxation year for the purposes of the Act ends on XXXXXXXXXX.
B Co. was formed pursuant to a short-form amalgamation of X Co., Y Co. and Z Co., in accordance with the provisions of XXXXXXXXXX . This amalgamation was completed in the manner described in subsection 87(1) of the Act.
The issued share capital of B Co. consists of XXXXXXXXXX voting common shares, all of which are owned by Trust 1. These shares are held by Trust 1 as capital property. These shares have an aggregate ACB and an aggregate PUC of $XXXXXXXXXX to Trust 1. As well, there are XXXXXXXXXX non-voting preferred shares, designated as Series 4, that have been issued and all of which are presently owned by New Trust.
11. The principal asset of B Co. is a XXXXXXXXXX% undivided interest in the assets of the Project (the "Working Interest") and working capital relating to that operation. B Co. carries on business as a Participant entitled to, in aggregate, the Working Interest share of the production, and bearing, in aggregate, the Working Interest share of the expenses, relating to the operations of the Project.
12. By virtue of the Working Interest, B Co. is a Participant, is subject to the Ownership and Management Agreement, XXXXXXXXXX. B Co.'s representative to this committee is selected by the Board of Directors of B Co. and is the individual who is the President and Chief Executive Officer of B Co. (with that person also being the current Chairman of the Project Management Committee). The individual referred to in the preceding sentence deals at arm's length for purposes of the Act with Trustee 1, Trust 1, Trustee 2 and New Trust.
13. The business activities of B Co. also include the provision of management services to Trust 1 and New Trust for which it receives a management fee. Prior to termination on XXXXXXXXXX, an arrangement had existed under which A Co. had provided administrative services to Trust 1. At present, B Co. employs its own staff, leases office space and retains third parties (that deal at arm's length with Trustee 1, Trust 1, Trustee 2, New Trust and B Co. for purposes of the Act) to provide services previously provided by A Co. under the above arrangement.
14. Under the Marketing Agreement, B Co. has appointed A Co. as its agent to market and sell B Co. and its affiliates' share of production from the Project. Each of the Participants markets its own share of production from the Project plant. There is no common marketing arrangement. As such, A Co. makes all arrangements for the marketing of B Co. and its affiliates' share of production, including entering into sales agreements on behalf of B Co., arranging for storage and transportation of the product where necessary, and collecting the proceeds of sale and delivering same to B Co.
15. The board of directors of B Co. consists of XXXXXXXXXX members. The directors of B Co. are all individuals with experience in the XXXXXXXXXX industry that deal at arm's length with each of Trustee 1, Trust 1, Trustee 2 and New Trust for purposes of the Act. The directors of B Co. are not, and will not be, the agents of the holder of the common shares or of the preferred shares of B Co. in managing the business and affairs of B Co. No shareholder agreements have been, and it is not intended that any such agreements will be, entered into concerning the shares of B Co. In addition, the directors of B Co. are not, and will not be, bound by any instructions or orders from the shareholders (Trustee 1, and unitholders of Trust 1) who have elected them. While Trustee 1 has the ability to appoint all of the directors (upon the consent of the unitholders of Trust 1 pursuant to a resolution of such unitholders), it otherwise has no ability to manage or affect the management of B Co.
16. B Co. may enter into transactions (referred to as "Swap Transactions") for the purposes of managing risks associated with fluctuations in interest rates, foreign exchange rates and commodity prices. The purpose and intent of any such transactions will not be to speculate but to preserve the Canadian dollar value of B Co. and its affiliates' share of production from the Project and mitigate against changes in interest rates.
17. Financial projections relating to B Co.'s ownership of the Working Interest indicate that, based upon reasonable assumptions (including those with regard to quantity of XXXXXXXXXX produced, price obtained therefor and expenses incurred to produce same), B Co. will derive income from those Working Interests after deducting all costs related thereto, including amounts arising under Royalty 1, Royalty 2 and Royalty 3. The business activities of B Co. will continue to include the provision of management services to Trust 1, as well as to the New Trust, for which B Co. will receive management fees. There is currently no intention by B Co. to sell, now or in the foreseeable future, all or any portion of the Working Interest.
18. Subject to the Royalty 1, Royalty 2 and Royalty 3, the Working Interest entitles B Co. to the following:
(a) an undivided XXXXXXXXXX% participating interest in the Project, being the right, title and interest in and to the Project of a Participant, including agreements relating to operations of the Project, XXXXXXXXXX shares in the capital stock of Projectco 1, and XXXXXXXXXX shares in the capital stock of Projectco 2;
(b) an undivided XXXXXXXXXX% interest in the "Project Technology" being, essentially, all information, inventions, and patents conceived, developed or obtained in connection with the operations of the Project at the expense of all of the Participants; and
(c) certain other assets relating to the Project.
19. B Co. provides management services to Trust 1 pursuant to a management agreement (the "Management Agreement"). The primary duties of B Co. under the Management Agreement are:
(a) ensuring that Trust 1 complies with continuous disclosure obligations;
(b) providing investor relations services on behalf of Trust 1;
(c) providing unitholders with the information required to be provided to them under Trust Indenture 1, including income tax information;
(d) arranging for meetings of unitholders on behalf of Trust 1; and
(e) arranging for distributions by Trust 1 to unitholders.
The Management Agreement may be terminated by Trust 1 at any time.
20. Trust 1 is an open-ended investment trust governed by the laws of the Province of XXXXXXXXXX with the sole beneficiaries of Trust 1 being the holders of the units thereof. The units of Trust 1 are listed for trading on the XXXXXXXXXX Stock Exchange and are widely held by the public.
Trust 1 is, and at all times relevant hereto has been, a mutual fund trust having a trustee that is a taxable Canadian corporation. The current trustee of Trust 1 is Trustee 1.
21. Trust 1 was formed under the laws of the Province of XXXXXXXXXX pursuant to a trust indenture dated XXXXXXXXXX ("Trust Indenture 1"). It was originally established as a closed-ended investment trust but was converted into an open-ended investment trust on XXXXXXXXXX.
Trust Indenture 1 originally provided that Trust 1 was formed for the purpose of holding Royalty 1, as well as the common shares of X Co., and issuing trust units. Trust Indenture 1 was amended as a consequence of the Combination to also permit Trust 1 to hold Royalty 2 and all of the common shares of Y Co. The undertaking of Trust 1 has primarily been restricted to: its ownership of Royalty 1 and XXXXXXXXXX% of the common shares of X Co.; subsequently, its ownership of Royalty 1, Royalty 2 and all of the common shares of each of X Co., Y Co. and Z Co.; and, at present, its ownership of the properties described in paragraph 22 below. In particular, Trust 1 does not carry on any business and the only undertaking of Trust 1 is as described in paragraph 132(6)(b) of the Act.
Trust Indenture 1 provides that at no time may non-residents of Canada for purposes of the Act be the beneficial owner of a majority of the units of the Trust. If the trustee thereof becomes aware that XXXXXXXXXX% or more of such trust units are owned by non-residents of Canada for purposes of the Act, the trustee can force a sale of such units as necessary to ensure that not more than XXXXXXXXXX % of such trust units are beneficially owned by non-residents of Canada for purposes of the Act.
22. The assets of Trust 1 consist of the GORR, Royalty 1, Royalty 2, all the issued shares of B Co. (being XXXXXXXXXX common shares), indebtedness of B Co. (in the amount of approximately $XXXXXXXXXX at present) and all of the issued ordinary units of New Trust.
Notwithstanding the amalgamation referred to in paragraph 26 below, each of Royalty 1 and Royalty 2 has remained a separate property of Trust 1 and a separate obligation of B Co. B Co. is obligated to make separate quarterly payments to Trust 1 pursuant to the provisions of Royalty 1 and Royalty 2, respectively.
Since the respective reservations of Royalty 1 and Royalty 2, no amendments have been made to the terms and conditions relevant to either such royalty which have materially impacted the calculation or payment of either of Royalty 1 or Royalty 2.
The terms of Royalty 1 and Royalty 2 remain as detailed below. In the view of the management of B Co., to date there have been no significant differences in the calculation or in the administration of Royalty 1 or Royalty 2, nor will there be any significant differences in the foreseeable future.
23. The New Trust is an inter vivos commercial trust which was settled on XXXXXXXXXX. The interests of the beneficiaries in the New Trust are described by reference to units thereof and there are no persons other than the holders of the units that are beneficiaries of the trust. The trustee of the New Trust is Trustee 2.
The New Trust is authorized to issue an unlimited number of ordinary units (the "Ordinary Units") and special units (the "Special Units"). The Ordinary Units are entitled to quarterly and other distributions subject to the preferential rights of the Special Units; are entitled to receive the net assets of the New Trust upon the liquidation, winding up or dissolution of the New Trust, subject to the preferential rights of the Special Units and are voting (each Ordinary Unit being entitled to one vote). The Ordinary Units may be redeemed by the holder and may be redeemed by the issuer, in each case for an amount determined by formula that is intended to be equal to the fair market value of the unit at the time of such redemption.
The Special Units are issuable in series and the trustee may fix the rights and privileges of each series from time to time. All series, however, will rank in priority to the Ordinary Units (the Special Units of each series ranking on a parity with the Special Units of every other series) with respect to payment of distributions and distributions of assets upon a liquidation, dissolution or winding up of the New Trust.
Distributions or amounts payable to holders of Ordinary Units and Special Units in certain defined circumstances, including on a redemption of a unit, are deemed to be distributions of income, net realized capital gains, trust capital or other items of the New Trust in such amounts as Trustee 2 shall, in its discretion, determine.
Trustee 2 has authorized two series of Special Units of which only Series 1 and 2 are issued and outstanding. The terms of the Series 2 Special Units are the same as those described in this paragraph for the Series 1 Special Units. The terms of the Series 1 Special Units provide that each unit has a redemption amount of $XXXXXXXXXX and is entitled to a cumulative preferential distribution of XXXXXXXXXX% per annum, payable monthly, on such redemption amount (the Series 1 Special Units are not otherwise entitled to distributions). The holders are entitled to a preference on the liquidation, winding up or dissolution of the New Trust up to the amount of such redemption amount and may require the New Trust to redeem a Series 1 Special Unit on five days notice. The New Trust may also redeem a Series 1 Special Unit on five days notice. No payment or other distributions may be made to the holders of any other units of the New Trust if the effect would be that the net realizable value of the New Trust's assets would be less than the redemption amount of the Series 1 Special Units outstanding. No amendment may be made to the terms of the Series 1 Special Units without the approval of 66 2/3% of the holders of Series 1 Special Units voting separately (the Series 1 Special Units are otherwise non-voting).
The trust indenture pursuant to which the New Trust was created provides that at no time may non-residents of Canada for purposes of the Act be the beneficial owner of more than XXXXXXXXXX% of the Ordinary Units or more than XXXXXXXXXX% of the Special Units. If the trustee of the New Trust becomes aware that XXXXXXXXXX% or more of the Ordinary Units or the Special Units, as the case may be, are owned by non-residents of Canada for purposes of the Act, the trustee can force a sale of such units as necessary to ensure that not more than XXXXXXXXXX% of such trust units are beneficially owned by non-residents of Canada for purposes of the Act.
The New Trust is not a mutual fund trust, is not a registered investment under the Act, and units of the New Trust are "foreign property" as defined in subsection 206(1) of the Act.
The activities of the New Trust are restricted, essentially, to holding direct and indirect ownership and royalty interests in the Project and all activities ancillary and incidental thereto.
History of B Co.
24. As outlined in more detail in Ruling 1, X Co. acquired its working interest in the Project in XXXXXXXXXX pursuant to an arrangement whereby XXXXXXXXXX sold to X Co. its XXXXXXXXXX% undivided working interest in the Project ("Working Interest I") reserving a XXXXXXXXXX% net profit interest (the royalty so reserved being "Royalty 1 "). Trust 1 had acquired Royalty 1 and all of the common shares of X Co. in XXXXXXXXXX.
As outlined in more detail in Ruling 2, Y Co. acquired its working interest in the Project on XXXXXXXXXX pursuant to an arrangement whereby A Co. sold to Y Co. its XXXXXXXXXX% undivided working interest in the Project reserving a XXXXXXXXXX% net profit interest (the royalty so reserved being "Royalty 2"). Trust 2 had acquired Royalty 2 and all of the common shares of Y Co. in XXXXXXXXXX. No party to Royalty 2 has elected that it be treated as a "specified royalty", pursuant to the transitional provisions to the definition of that term in subsection 1206(1) of the Regulations.
Accordingly, respective XXXXXXXXXX and XXXXXXXXXX % undivided working interests in the Project were owned by X Co. and Y Co. prior to the corporate amalgamation described below.
Combination
25. On XXXXXXXXXX, the Combination occurred whereby Trust 1 acquired all of the assets of Trust 2 (including Royalty 2 and all of the common shares in Y Co.) and assumed all of Trust 2's liabilities in exchange for Trust 1 issuing a number of units of Trust 1 equal to the number of units of Trust 2 outstanding immediately prior to that time.
In addition, on that date and as part of the Combination, Trust 2 acquired all of its outstanding units from the unitholders thereof (except for certain unitholders resident in the United States) for cancellation in exchange for units of Trust 1 on a one-for-one basis. No other consideration was given by Trust 2 to such unitholders for their units of Trust 2.
Trust 1 and Trust 2 jointly filed an election in respect of the Combination pursuant to paragraph (c) of the definition of "qualifying exchange" in subsection 132.2(2) of the Act within the time required in that paragraph.
Corporate Amalgamation
26. Z Co. was a new corporation that Trust 1 caused to be incorporated under the BCA on XXXXXXXXXX. It was a private corporation and a taxable Canadian corporation. Z Co. was incorporated to facilitate the borrowing of certain funds and its establishment was a requirement imposed by the lenders to consolidate the borrowings related to the operations of X Co. and Y Co. in one entity.
Pursuant to an agreement dated XXXXXXXXXX, between Trustee 1 (as trustee of Trust 1) and Z Co., all of the common shares of each of X Co. and Y Co. (collectively the "Shares") were sold by Trust 1 to Z Co. for consideration consisting solely of XXXXXXXXXX common shares of Z Co.
Trustee 1, as trustee of Trust 1, and Z Co. jointly elected under subsection 85(1) of the Act, within the time required under subsection 85(6) thereof, in respect of the above transfer at an aggregate elected amount of $XXXXXXXXXX which amount was equal to the aggregate ACB of the Shares to Trust 1 at the time of the transfer.
The issued share capital of Z Co. consisted of XXXXXXXXXX common shares, all of which were owned by Trust 1. These shares were held by Trust 1 as capital property having an aggregate ACB and an aggregate PUC of $XXXXXXXXXX.
As stated in paragraph 10 above, on XXXXXXXXXX, X Co., Y Co. and Z Co. were amalgamated to form B Co. On the amalgamation all of the issued and outstanding shares of X Co. and Y Co. were cancelled (without any amount being paid in respect of such cancellation), and the issued and outstanding shares of Z Co. (being solely common shares) were unaffected. In particular, the shares of Z Co. were not cancelled on the merger and no shares of the capital stock of B Co. (the amalgamated corporation) were issued in connection with the amalgamation.
Purchase From A Co.
27. Following a bidding process pursuant to which A Co. had originally indicated that it would entertain bids for its partnership interests, rather than the underlying assets in the Project, B Co. entered into a purchase and sale agreement (the "Purchase and Sale Agreement") with A Co. dated XXXXXXXXXX. Under the Purchase and Sale Agreement the base purchase price was $XXXXXXXXXX, subject to certain adjustments on closing. At the same time, B Co. and A Co. entered into an option agreement pursuant to which B Co. obtained the right to acquire certain additional interests as described below for a total purchase price of $XXXXXXXXXX subject to certain adjustments (the "Option").
At all relevant times, A Co. dealt at arm's length for purposes of the Act with each of B Co., Trust 1, Trustee 1 and Trustee 2.
28. At the time the Purchase and Sale Agreement was entered into, A Co. held its interest in the Project as follows:
(a) A Co. held a XXXXXXXXXX% interest, as a limited partner, in Partnership 1;
(b) C Co., a wholly-owned subsidiary of A Co., held the remaining XXXXXXXXXX% interest in Partnership 1 and was the general partner thereof;
(c) Partnership 1 held a XXXXXXXXXX% undivided interest in the Project as well as a XXXXXXXXXX% interest, as the general partner, in Partnership 2;
(d) D Co., a corporation which deals at arm's length with A Co. for purposes of the Act, held, and continues to hold, the remaining XXXXXXXXXX% interest, as a limited partner, in Partnership 2;
(e) Partnership 2 held a XXXXXXXXXX% undivided interest in the Project;
(f) Partnership 2's interest in the Project was (and remains) subject to its obligation to pay the GORR (which at that time was payable to A Co.).
29. B Co. had indicated to A Co. that it was bidding to acquire an indirect XXXXXXXXXX% interest in the Project but at that time was not prepared to purchase the interest that was held through Partnership 2. Accordingly, A Co. restructured its holdings to facilitate the sale of an indirect XXXXXXXXXX% interest and to separate Partnership 2 and the GORR.
In particular, prior to the closing of the Purchase and Sale Agreement, A Co.:
(a) caused Partnership 3 to be formed, with it as the limited partner having a XXXXXXXXXX% interest and with a newly incorporated corporation ("Newco", a taxable Canadian corporation all the issued shares of which are owned by A Co.) being the general partner having a XXXXXXXXXX% interest; and
(b) sold, at fair market value, a XXXXXXXXXX% interest in the GORR to Newco (for consideration consisting solely of shares of Newco), with A Co. and Newco then selling, at fair market value, all of their respective interests in the GORR to Partnership 3 for consideration consisting solely of units of Partnership 3;
Pursuant to the Purchase and Sale Agreement, A Co. undertook certain transactions prior to the closing of that agreement as follows:
(a) A Co. caused the settlement of the New Trust;
(b) A Co. sold, at fair market value, its XXXXXXXXXX % interest in Partnership 1 to the New Trust in exchange for consideration consisting of debt (being the "New Trust Debt") having a principal amount of $XXXXXXXXXX , XXXXXXXXXX ordinary units in the New Trust (the "New Trust Ordinary Units", estimated to have an aggregate fair market value and redemption amount of approximately $XXXXXXXXXX ); XXXXXXXXXX Series 1 special units of the New Trust (the "New Trust Series 1 Special Units") having an aggregate redemption amount of $XXXXXXXXXX; and a promissory note, payable on demand, having a principal amount and fair market value of $XXXXXXXXXX (such amount being equal to the fair market value, at the time of the sale, of A Co.'s XXXXXXXXXX% interest in Partnership 1 less the aggregate fair market value at that time of all the other consideration given by the New Trust on such sale). This note was amended as part of the price adjustment.
The New Trust Debt was issued under a note indenture and is evidenced by a promissory note, payable on demand, and bearing interest at a rate of XXXXXXXXXX % per annum.
(c) C Co. and the New Trust caused Partnership 1 to be dissolved pursuant to subsection 98(3) of the Act with a XXXXXXXXXX% and a XXXXXXXXXX% undivided interest in all the property and liabilities of Partnership 1 being distributed to or assumed by New Trust and C Co. (i.e., in proportion to their relative interests). One of the properties distributed to the New Trust and C Co. was a receivable from A Co. in the amount of $XXXXXXXXXX.
(d) A Co. caused Partnership 4 to be formed, with it as the limited partner having a XXXXXXXXXX% interest and with E Co. (a taxable Canadian corporation all the issued shares of which were owned by A Co.) being the general partner having a XXXXXXXXXX% interest.
(e) The New Trust transferred, at fair market value, its undivided interest in Partnership 2, to Partnership 4 for consideration consisting of a promissory note, payable on demand, having a principal amount and fair market value of $XXXXXXXXXX. This obligation of Partnership 4 to the New Trust was settled in full, along with the obligation of the New Trust to A Co. evidenced by the promissory note issued to A Co. in part (b) of this paragraph and the obligation of A Co. to the New Trust described in (c) above, through transactions within the corporate group.
(f) C Co. transferred, at fair market value, its undivided interest in Partnership 2 to Partnership 4 for consideration consisting of a promissory note, payable on demand, having a principal amount and fair market value of $XXXXXXXXXX. This obligation of Partnership 4 to C Co. was settled in full through transactions within the corporate group.
As a result of the above transactions, the New Trust acquired a XXXXXXXXXX% undivided interest in the Project. As a result of the negotiations that led to the Purchase and Sale Agreement being entered into, B Co. was able to specify that the entity to hold the above interest would be a trust rather than a partnership or a corporation.
The reason for the choice of a trust was that it was considered to provide better limited liability protection than a partnership (including a limited partnership) and that a trust was considered more suited to a situation involving an income fund than a corporation as the trust allows for the flow through of income.
Also as a result of the negotiations that led to the Purchase and Sale Agreement being entered into, B Co. was able to specify the debt\equity ratio and the types of equity of the New Trust.
31. In the Purchase and Sale Agreement, the assets being sold to B Co. were referred to as the "Purchased Interests" which were defined to mean, essentially: i) all of the New Trust Debt, the New Trust Ordinary Units and the New Trust Series 1 Special Units owned by A Co. such property being received by A Co. as partial consideration for the sale described in part (b) of paragraph 30 above; ii) all of the issued shares of C Co.; and iii) the rights arising under an option agreement (the "Option"; see paragraph 39 below).
The Purchase and Sale Agreement closed on XXXXXXXXXX with the base purchase price being adjusted and allocated as follows:
New Trust Ordinary Units
XXXXXXXXXX
New Trust Series 1 Special Units
XXXXXXXXXX
New Trust Debt
XXXXXXXXXX
C Co. shares
XXXXXXXXXX
Option
XXXXXXXXXX
XXXXXXXXXX
Pursuant to the Purchase and Sale Agreement, there have been adjustments to the purchase price in the XXXXXXXXXX day period following the closing of that agreement and further adjustments are still under discussion.
32. The obligation of B Co. to pay the purchase price under the Purchase and Sale Agreement was satisfied on closing through a payment, in cash, from B Co. to A Co. in the amount of such purchase price.
In order to finance the above acquisition (including transaction costs and the provision of working capital), B Co. and Trust 1 undertook the following financing transactions:
(a) Trust 1 issued units pursuant to a private placement and a public offering for proceeds (net of expenses) of approximately $XXXXXXXXXX;
(b) Trust 1 advanced the net proceeds to B Co. against a promissory note, payable on demand and bearing interest at a rate of XXXXXXXXXX% per annum (a rate slightly higher than that payable by B Co. on its third party bank borrowings);
(c) B Co. borrowed approximately $XXXXXXXXXX from a syndicate of banks and lending institutions with which it deals at arm's length for purposes of the Act. This indebtedness was not secured but B Co. granted a negative pledge (which restricts its ability to grant security to any other party). The indebtedness was also secured by guarantees from the New Trust and C Co. after closing of the Purchase and Sale Agreement.
Under normal circumstances the equity raised by Trust 1 could have been used to directly acquire Special Units, Ordinary Units and debt of the New Trust. However, because of B Co.'s arrangements with its creditors this was not possible. B Co. is bound by a financing arrangement that requires a debt to equity ratio calculation. For these purposes the equity is considered to be the equity of Trust 1 (rather than B Co. itself) but the equity is limited to the equity that can be traced to Trust 1's investment in B Co. Accordingly, if Trust 1 were to raise equity funds and apply them to purchase securities of the New Trust directly, arguably the equity so raised would not count for purposes of the debt/equity ratio. Because of this problem equity funds raised by Trust 1 were contributed to B Co. by way of demand debt bearing interest at the rate of XXXXXXXXXX% per annum and those funds were then used by B Co. to purchase securities of the New Trust. As this particular financing arrangement is long term (approximately XXXXXXXXXX years), it had been anticipated that B Co. would hold the Series 1 Special Units indefinitely.
33. Following the closing of the Purchase and Sale Agreement, B Co.:
(a) sold, at fair market value, all of the New Trust Ordinary Units to Trust 1 for a purchase price of $XXXXXXXXXX. The proceeds thus arising to B Co. were credited against the debt owing by B Co. to Trust 1 as evidenced by the promissory note described in part (b) of the preceding paragraph; and
(b) sold, at fair market value, all of the issued shares of C Co. to the New Trust for a purchase price of $XXXXXXXXXX. The consideration received by B Co. for this sale was a promissory note, payable on demand, having a principal amount and fair market value equal to the above purchase price and, after demand, bearing interest at a rate equal to the XXXXXXXXXX prime rate. The New Trust acquired the shares of C Co. as B Co. was not permitted to have any subsidiaries pursuant to its banking arrangements in force at the time of the sale. The principal asset of C Co. was a XXXXXXXXXX% undivided interest in the assets of the Project and working capital relating to that operation.
Each of these two transactions was subject to a price adjustment clause pursuant to which the parties agreed that if the price is determined to be greater or less than fair market value by bona fide agreement between the parties, by agreement with the Canada Revenue Agency or by a court of competent jurisdiction, the price will be adjusted to reflect the fair market value so determined.
The cost amount to Trust 1 of the New Trust Ordinary Units has not at any time exceeded XXXXXXXXXX% of the total cost amount of all of its property. In addition, the shares of B Co. have not at any time derived their value, directly or indirectly, primarily from units in the New Trust.
Reorganization
34. On XXXXXXXXXX, New Trust sold, at fair market value, all of the XXXXXXXXXX% undivided interest in the Project it held directly to B Co., reserving a royalty ("Royalty 3"), for a purchase price of approximately $XXXXXXXXXX.
In particular, under the "Working Interest Purchase Agreement" entered into between Trustee 2 and B Co., the New Trust agreed to sell to B Co., reserving Royalty 3 to the New Trust in accordance with the royalty provisions attached as a schedule to that agreement, and B Co. agreed to purchase and acquire from the New Trust, subject to Royalty 3, the following:
(a) an undivided XXXXXXXXXX% "Participating Interest" in the Project (being the right, title and interest in and to the Project of a Participant) including the "Project Agreements" (being, essentially, all other agreements relating to the operations of the Project) and XXXXXXXXXX shares in the capital stock of Projectco 1;
(b) an undivided XXXXXXXXXX% interest in the "Project Technology" (being, essentially, all information, inventions, and patents conceived, developed or obtained in connection with the operations of the Project at the expense of all of the Participants);
(c) XXXXXXXXXX shares in the capital stock of Projectco 2; and
(d) the "Other Assets" (being, essentially, all of the interest of the New Trust at closing in all assets, properties and rights pertaining to the Project which are not specifically listed above).
35. The purchase price for the XXXXXXXXXX% undivided interest, being the price after the reservation of Royalty 3, was paid by B Co.:
(a) by the assumption of indebtedness of New Trust and by the issuance to the New Trust of a promissory note, payable on demand and having a fair market value and principal amount of $XXXXXXXXXX ("Note 1"), the aggregate amount of which did not exceed the aggregate of the New Trust's UCC of capital property which is depreciable property, and its CEC, in respect of property forming part of the XXXXXXXXXX % undivided interest immediately before the sale); and
(b) by the issuance to the New Trust of Series 4 Preferred shares in its capital stock having a fair market value and a redemption amount, in each case in aggregate, equal to the fair market value at the time of the sale of the XXXXXXXXXX% undivided interest (as burdened by Royalty 3) less the principal amount of Note 1. The estimated fair market value for this purpose was $XXXXXXXXXX.
The Series 4 Preferred Shares are redeemable by the holder and retractable by B Co. for the redemption amount and bear a non-cumulative preferential dividend of XXXXXXXXXX% per annum on such redemption amount. The Series 4 Preferred Shares are entitled to a priority on the winding-up of B Co. for the redemption amount. The redemption amount was fixed at $XXXXXXXXXX per Series 4 Preferred Share by the directors of B Co. at the time of issue of the Series 4 Preferred Shares. However, under the terms of the Series 4 Preferred Shares the redemption amount of such shares are subject to adjustment if it is determined by bona fide agreement between B Co. and the New Trust, by agreement between the New Trust, B Co. and the Canada Revenue Agency or by a court of competent jurisdiction, that the redemption amount was greater or less than the estimated fair market value of the XXXXXXXXXX% undivided interest (burdened by the Royalty 3) less the principal amount of Note 1. In the event of such determination any amounts paid on such shares (or payable) will be adjusted as required. The amount specified for the purposes of subsection 191(4) of the Act in respect of the Series 4 Preferred Shares at the time of their issue was $XXXXXXXXXX per share, an amount equal to their redemption amount. This amount specified did not exceed the fair market value of the consideration for which the Series 4 Preferred Shares were issued. Although the redemption amount of the Series 4 Preferred Shares is subject to adjustment as described herein, any such adjustment will not result in an adjustment to the amount specified in respect of the Series 4 Preferred Shares.
36. The New Trust and B Co. jointly elected under subsection 85(1) of the Act, within the time referred to in subsection 85(6) of the Act, to transfer a property transferred as part of the sale of the XXXXXXXXXX% undivided interest described in paragraph 34 which constitutes an "eligible property", at an amount which was:
(a) in the case of a XXXXXXXXXX property, $XXXXXXXXXX;
(b) in the case of a capital property (other than depreciable property of a prescribed class) or inventory, an amount equal to the lesser of the amounts referred to in subparagraphs 85(1)(c.1)(i) and (ii) of the Act;
(c) in the case of a depreciable property of a prescribed class of the New Trust, an amount equal to the least of the amounts referred to in subparagraphs 85(1)(e)(i) to (iii) of the Act; and
(d) in the case of an eligible capital property of the New Trust, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i) to (iii) of the Act.
The amount so agreed upon in respect of a particular asset was not less than the fair market value, at the time of the sale, of the consideration (other than Series 4 Preferred Shares) received by the New Trust therefor. However, in no case did the amount so agreed upon in respect of a particular asset exceed the fair market value of that asset at the time of the transfer.
The addition to the PUC of the Series 4 Preferred Shares did not exceed the amount by which the aggregate agreed amounts under subsection 85(1) of the Act in respect of the eligible property exceeded the aggregate fair market value, and principal amount, of the consideration (other than Series 4 Preferred Shares) received by the New Trust therefor.
As a result of the above joint election, depreciable property was acquired by B Co. at a capital cost less than its fair market value (determined without regard to Royalty 3).
37. The liability of the New Trust to B Co. under the New Trust Debt (which became a debt owing to B Co. upon its sale from A Co. as described in paragraph 33 above), and the liability of B Co. to the New Trust, evidenced by Note 1 issued as described in paragraph 35 above, were settled in full through the set-off of such promissory notes and both such notes were cancelled.
38. New Trust sold at fair market value all of the shares of C Co. to B Co. and C Co. was wound-up into B Co. pursuant to the provisions of subsection 88(1) of the Act.
Exercise of Option
39. Under the Option, B Co., subject to certain terms and conditions, acquired from A Co. its XXXXXXXXXX% interest in Partnership 3 and all of the issued shares of Newco, as well as the XXXXXXXXXX% interest in Partnership 2 held by Partnership 4, for a base price of $XXXXXXXXXX subject to adjustments in respect of interest and effective date working capital. The Option was effective XXXXXXXXXX. A Co. and B Co. agreed to an allocation of $XXXXXXXXXX of the base price to the interest in Partnership 2 and $XXXXXXXXXX to the interest in Partnership 3 and the shares of Newco.
40. B Co. gave notice to exercise the Option on XXXXXXXXXX and closed the transaction XXXXXXXXXX to thereby acquire from A Co. its XXXXXXXXXX% interest in Partnership 3 and all of the issued shares of Newco, as well as the XXXXXXXXXX% interest in Partnership 2 held by Partnership 4.
41. Trust 1 financed the Option acquisition with equity issued on XXXXXXXXXX (the proceeds of which were loaned to B Co. against a demand note bearing interest at the rate of XXXXXXXXXX%) and with debt having a net borrowing cost of approximately XXXXXXXXXX%.
42. After closing of the Option on XXXXXXXXXX, B Co. sold XXXXXXXXXX% of its interest in the Partnership 2 to the New Trust at a price equal to the price paid under the Option that was attributable to the Partnership 2 interest (i.e. approximately $XXXXXXXXXX). The New Trust satisfied the price with XXXXXXXXXX Series 2 Special Units having an aggregate redemption amount of $XXXXXXXXXX . B Co. also sold its XXXXXXXXXX% interest in Partnership 3 to Trust 1 for $XXXXXXXXXX, being the estimated fair market value thereof and credited the proceeds against its debt to Trust 1. Each of these two transactions was subject to a price adjustment clause pursuant to which the parties agreed that if the price is determined to be greater or less than fair market value by bona fide agreement between the parties, by agreement with the Canada Revenue Agency or by a court of competent jurisdiction, the price will be adjusted to reflect the fair market value so determined.
43. After closing of the option on XXXXXXXXXX, Partnership 3 was dissolved and an undivided interest in the XXXXXXXXXX% Gross Overriding Royalty was distributed as to XXXXXXXXXX% to Trust 1 and as to XXXXXXXXXX% to B Co. A subsection 98(3) election was made on the dissolution. B Co. caused Newco to be wound up pursuant to the provisions of subsection 88(1) of the Act and as a result its XXXXXXXXXX% undivided interest in the XXXXXXXXXX% Gross Overriding Royalty was acquired by B Co. B Co. sold its XXXXXXXXXX% undivided interest in the XXXXXXXXXX% Gross Overriding Royalty to Trust 1 for fair market value (i.e. $XXXXXXXXXX) such that Trust 1 became the sole owner of the XXXXXXXXXX% Gross Overriding Royalty. This sale was subject to a price adjustment clause pursuant to which the parties agreed that if the price is determined to be greater or less than fair market value by bona fide agreement between the parties, by agreement with the Canada Revenue Agency or by a court of competent jurisdiction, the price will be adjusted to reflect the fair market value so determined.
44. On XXXXXXXXXX, B Co. issued US $XXXXXXXXXX of senior notes in the United States under a private placement. The senior notes bear interest at the rate of XXXXXXXXXX%, payable XXXXXXXXXX in arrears on XXXXXXXXXX of each year commencing on XXXXXXXXXX. The senior notes mature on XXXXXXXXXX. The proceeds of this note issuance was used to repay a portion of the bank debt that had been incurred to finance the transactions.
The Royalties
45. The terms of Royalty 1 (the "Royalty 1 Provisions"), remain as detailed in Ruling 1 and entitle Trust 1 to receive, each calendar quarter, a payment from B Co. equal to XXXXXXXXXX% of the sale proceeds of XXXXXXXXXX products produced from the leases in respect of the relevant portion of the working interest during that quarter ("Royalty 1 Production Revenue") less XXXXXXXXXX% of the production expenses and costs attributable to Working Interest 1 during that quarter ("Royalty 1 Production Costs").
Royalty 1 also entitles the holder to XXXXXXXXXX% of other revenue (the "Royalty 1 Other Revenues") in respect of Working Interest 1 in each quarter. Trust 1's entitlement to XXXXXXXXXX% of the Royalty 1 Production Revenue and XXXXXXXXXX% of the Royalty 1 Other Revenues in respect of Working Interest 1 in each quarter is subject to the following:
(a) if Trust 1 elects to take XXXXXXXXXX in kind for the quarter, as it is entitled to do under the Royalty 1 Provisions in certain special circumstances, the Royalty 1 Production Revenue amount will not include the sale proceeds of such XXXXXXXXXX taken in kind; and
(b) the amount of the Royalty 1 Other Revenues will be reduced so that the Royalty 1 Other Revenues which would be included in Royalty 1 for the quarter would not exceed XXXXXXXXXX% of the total of the Royalty 1 Other Revenues for the quarter and the Royalty 1 Production Revenue for the quarter (any excess being "Royalty 1 Excess Revenues").
Any Royalty 1 Excess Revenues from the immediately preceding quarter are paid by B Co. into a reserve it established solely to fund the payment of the Royalty 1 Production Costs. This reserve is owned by B Co. and Trust 1 has no interest therein.
46. The terms of Royalty 2 (the "Royalty 2 Provisions") remain as detailed in Ruling 2 and entitle Trust 1 to receive, each calendar quarter, a payment from B Co. equal to the amount by which the "Royalty Revenues" for that quarter exceed the "Deductible Production Costs" for that quarter.
Royalty Revenues are defined in Ruling 2, essentially, as XXXXXXXXXX% of the sum of the relevant portion of the working interest share of: (i) the proceeds from the sale of XXXXXXXXXX products produced from the Leases during the quarter in question (the "Royalty 2 Production Revenues"); and (ii) other revenues for that quarter (these latter revenues being the "Royalty 2 Other Revenues").
Deductible Production Costs are defined in Ruling 2, essentially, as XXXXXXXXXX % of costs and expenses attributable to relevant working interest during the quarter in question that are deductible under the Royalty 2 Provisions (the "Royalty 2 Production Costs").
Trust 1's entitlement to XXXXXXXXXX% of the above Royalty Revenues in respect of the relevant working interest in each quarter is subject to the following:
(a) if Trust 1 elects to take XXXXXXXXXX in kind during a particular calendar quarter, as it is entitled to do under the Royalty 2 Provisions in certain special circumstances, the Royalty Revenues for that quarter will not include the gross sale proceeds receivable from the sale of such XXXXXXXXXX during that quarter; and
(b) the amount of Royalty 2 Other Revenues included in Royalty Revenues for any particular calendar quarter will not exceed XXXXXXXXXX% of the total of the Royalty 2 Other Revenues for that quarter and the Royalty 2 Production Revenues for that quarter.
The amount of any excess arising due to the limitation in (b) from the immediately preceding quarter is paid by B Co. into a reserve it established solely to fund the payment of the Royalty 2 Production Costs. This reserve is owned by B Co. and Trust 1 has no interest therein.
47. As noted in paragraph 34 above, Royalty 3 was reserved by the New Trust on the sale of the XXXXXXXXXX% undivided interest to B Co. in accordance with the royalty provisions attached as a schedule to the Working Interest Purchase Agreement. The terms and provisions of Royalty 3 are essentially the same as the terms and conditions of Royalty 2. The terms of Royalty 3 (the "Royalty 3 Provisions") remain as detailed in Ruling 4 and entitle Trust 1 to receive, each calendar quarter, a payment from B Co. equal to the amount by which the "Royalty Revenues" for that quarter exceed the "Deductible Production Costs" for that quarter.
Royalty Revenues are defined in Ruling 3, essentially, as XXXXXXXXXX% of the sum of the relevant working interest share of: (i) the proceeds from the sale of XXXXXXXXXX products produced from the Leases during the quarter in question (the "Royalty 3 Production Revenues"); and (ii) other revenues for that quarter (these latter revenues being the "Royalty 3 Other Revenues").
Deductible Production Costs are defined in Ruling 3, essentially, as XXXXXXXXXX% of costs and expenses attributable to the relevant working interest during the quarter in question that are deductible under the Royalty 3 Provisions (the "Royalty 3 Production Costs").
The New Trust's entitlement to XXXXXXXXXX% of the above Royalty Revenues in respect of the relevant working interest in each quarter is subject to the following:
(a) if New Trust elects to take XXXXXXXXXX in kind during a particular calendar quarter, as it is entitled to do under the Royalty 3 Provisions in certain special circumstances, the Royalty Revenues for that quarter will not include the gross sale proceeds receivable from the sale of such XXXXXXXXXX during that quarter; and
(b) the amount of Royalty 3 Other Revenues included in Royalty Revenues for any particular calendar quarter will not exceed XXXXXXXXXX% of the total of the Royalty 3 Other Revenues for that quarter and the Royalty 3 Production Revenues for that quarter.
The amount of any excess arising due to the limitation in (b) from the immediately preceding quarter is paid by B Co. into a reserve it established solely to fund the payment of the Royalty 3 Production Costs. This reserve is owned by B Co. and the New Trust has no interest therein.
48. Historically, the Royalty 1 Other Revenues, the Royalty 2 Other Revenues and the Royalty 3 Other Revenues have always been under the XXXXXXXXXX% limitations contained in part (b) to paragraphs 45, 46 and 47, respectively. Furthermore, given the magnitude of revenues from the XXXXXXXXXX% interest which is not subject to a royalty, sales of XXXXXXXXXX products, the prospect of exceeding those respective limitations in the future is unlikely.
49. B Co. and Trust 1 may agree to increase the interest rate on the indebtedness owing by B Co. to Trust 1 provided that the rate will not exceed a reasonable rate and provided that financial projections as noted in paragraph 17 above will continue to indicate that B Co. will derive income.
If the government relaxes or amends the rules which restrict non-resident ownership of interests in mutual fund trusts, it is likely that Trust 1 will seek amendment of its terms to take advantage of such legislative changes.
49.1 Royalty 3 is a "specified royalty" within the definition of that term contained in subsection 1206(1) of the Regulations.
49.2 From the time of their creation to the time that Royalty 1 and Royalty 2 are exchanged for Royalty 4, as provided in paragraph 50 below, and from the time of its creation to the time that Royalty 3 is acquired by B Co., as provided in paragraph 66 below, Royalty 1, Royalty 2 and Royalty 3 will continue to satisfy the conditions represented in Rulings 1, 2 and 4, respectively, to qualify thereunder as a XXXXXXXXXX.
49.3 No transaction or event proposed in any of paragraphs 50 through 74 below is a transaction or event that is part of a transaction or event or series of transactions or events described in any of paragraphs 24 through 48 above, either as determined at law or as determined within the extended meaning of that phrase contained in subsection 248(10) of the Act.
Proposed Transactions
50. Pursuant to a Royalty Exchange Agreement, Trust 1 will surrender Royalty 1 and Royalty 2 to B Co., as well as reduce the indebtedness of B Co. to Trust 1, all in exchange for Royalty 4. It is intended that the fair market value of Royalty 1 and Royalty 2, together with the amount of the reduction of the indebtedness of B Co. to Trust 1, will equal the fair market value of Royalty 4. Royalty 4 will effectively create a royalty over the XXXXXXXXXX% working interest held by B Co. which is not currently subject to a royalty and the amount of debt reduction will be estimated to be equal to the value of such additional royalty. The Royalty Exchange agreement will be subject to a price adjustment clause pursuant to which the parties agree that if the price is determined to be greater or less than fair market value by bona fide agreement between the parties, by agreement with the Canada Revenue Agency or by a court of competent jurisdiction, the price will be adjusted to reflect the fair market value so determined.
51. The terms and provisions of Royalty 4 will be substantially the same as Royalty 2 but will be modernized and will generally be comparable to the form of royalties or net profits interests issued by public XXXXXXXXXX royalty trusts in Canada. The chief differences of Royalty 4 (as compared to Royalty 2) will be:
(a) it will be payable on any XXXXXXXXXX property working interests held by B Co. from time to time;
(b) such interests will not be restricted to interests in the Project;
(c) the royalty will provide for a deferred purchase price (see paragraph 65 below);
(d) subject to amendment of Trust 1's Trust Indenture, the royalty will not provide the holder any rights to take products in kind; and
(e) the royalty will be expressly subordinate to certain indebtedness and obligations including preferred shares.
52. The terms of Royalty 4 will entitle the "Royalty Owner", being Trust 1 and its successors and assigns, to receive, each calendar quarter, a payment from the "Working Interest Owner" (being B Co. and its successors and assigns) equal to the "Royalty Revenues" for that quarter.
53. "Royalty Revenues" are defined in the "Royalty Provisions" (contained in an agreement defining the terms and conditions of Royalty 4) to mean, in respect of a particular calendar quarter, XXXXXXXXXX% of the sum of the following:
(a) the "Production Revenues" less the "Deductible Production Costs" for that quarter; and
(b) the "Excess Other Revenues" for that quarter;
provided that there will not be included in the Royalty Revenues for a quarter the portion of the Excess Other Revenues for the quarter that are in excess of the amount determined by the formula
(the amount in (a)/ )/.9001) - the amount in (a).
54. "Production Revenues" are defined in the Royalty Provisions to mean, in respect of a particular quarter, the gross sale proceeds receivable from the sale of the XXXXXXXXXX attributed to all working interests in Canada of the Working Interest Owner during that quarter. The term will not include any such sale proceeds as may be allocable to the Working Interest Owner in its capacity as a partner of any partnership of which it may be a member.
55. "Other Revenues" are defined in the Royalty Provisions to mean, in respect of a particular quarter, the Working Interest Owner's share of all revenues which accrue during that quarter (other than revenues included in Production Revenues), including proceeds from:
(a) the sale or licensing of Project Technology;
(b) XXXXXXXXXX;
(c) the sale of XXXXXXXXXX Products obtained from XXXXXXXXXX purchased from third parties and processed in the Project facilities or other facilities;
(d) any commodity, currency or interest rate hedge or Swap Transaction;
(e) the sale of used or replaced equipment;
(f) insurance proceeds;
(g) licensing XXXXXXXXXX and similar data;
(h) take or pay and similar payments in lieu of a buyer purchasing production or as compensation for a buyer not purchasing production;
(i) incentives, rebates and credits in respect of Production Costs;
(j) fees receivable pursuant to any management agreement; and
(k) amounts paid out of the Reserve which are reasonably attributable to amounts that had been previously contributed to the Reserve by reason of being Excess Other Revenues that were not included in Royalty Revenues.
It is anticipated that revenues from Swap Transactions will make up the largest proportion of any Other Revenues that accrue to B Co.
56. "Excess Other Revenues" are defined in the Royalty Provisions to mean the excess, if any, of Other Revenues over the cost and expenses of generating such Other Revenues (to the extent that such costs and expenses are not already recognized in the determination of the Other Revenues).
57. At an exchange rate of $0.75 U.S. to $1.00 Cdn., it is estimated that the total amount of Excess Other Revenues will be well under the limitation contained in the proviso following subparagraph 53(b) above. Furthermore, given the magnitude of revenues expected from sales of XXXXXXXXXX Products, the prospect of exceeding such limitation in the future is unlikely.
58. "XXXXXXXXXX Substances" are defined in the Royalty Provisions to mean XXXXXXXXXX Products.
59. "Other XXXXXXXXXX Products" are defined in the Royalty Provisions to mean the Working Interest Owner share of marketable products, other than XXXXXXXXXX, obtained from XXXXXXXXXX or produced in association therewith, including XXXXXXXXXX. However, for greater certainty, proceeds from the sale of XXXXXXXXXX Products will only be included in the determination of Production Revenues XXXXXXXXXX.
60. "Deductible Production Costs" are defined in the Royalty Provisions to mean, in respect of a particular quarter and without duplication, (i) XXXXXXXXXX% of all "Production Costs" which are incurred in or relate to that quarter (including those paid by Projectco 1 on behalf of the Working Interest Owner) which exceed funds received pursuant to borrowings by the Working Interest Owner, distributions from the Reclamation Trust, funds paid out from the Reserve (defined in the Royalty Provisions) that are not included in Other Revenues; and (ii) Deductible Production Costs which are carried forward from a preceding quarter.
61. "Production Costs" are defined in the Royalty Provisions to mean, in respect of a particular quarter and without duplication, the following items:
(a) the Working Interest Owner's share of all costs and expenses (including both operating costs and capital costs) in respect of working interests, which are incurred or are attributable to that quarter, including:
(i) XXXXXXXXXX;
(ii) XXXXXXXXXX;
(iii) XXXXXXXXXX;
(iv) payments made pursuant to the Crown Agreement as well as lessor royalty payments and other amounts payable (if any) pursuant to the Leases;
(v) XXXXXXXXXX;
(vi) XXXXXXXXXX;
(vii) cost of sale of XXXXXXXXXX and Other XXXXXXXXXX Products, including marketing fees;
(viii) insurance premiums, costs for surety bonds and similar items and property, municipal, production, XXXXXXXXXX taxes and assessments in respect of lands subject to the Leases or operations thereon or the facilities relating to the Project;
(ix) all costs, expenses and other amounts payable in respect of third party claims arising in connection with working interests;
(x) amounts paid during that quarter in respect of the cost of acquiring interests in leases in XXXXXXXXXX properties in Canada to the extent that the same is not a deferred purchase price (defined in paragraph 65 below);
(xi) all other operating costs and expenses which are payable pursuant to the leases, the Ownership and Management Agreement or the other title or operating agreements;
(xii) costs and expenses of XXXXXXXXXX and other data;
(xiii) costs and expenses of power generation;
(xiv) amounts paid in respect of XXXXXXXXXX, including bonuses and rentals;
(xv) costs and expenses of XXXXXXXXXX; and
(xvi) costs and expenses of XXXXXXXXXX;
(b) contributions to the Reclamation Trust made during that quarter;
(c) Debt Service Costs for the quarter;
(d) income taxes, capital taxes and other direct taxes which accrue during that quarter;
(e) payments to the Reserve made during that quarter, other than payments made to the Reserve that represent Excess Other Revenues for the quarter that are not included in the Royalty Revenues for that quarter; and
(f) all costs and expenses not listed above related to the working interests incurred by the Working Interest Owner during that quarter,
but, notwithstanding the foregoing, shall not include depreciation or deferred taxes, the overhead and administration expenses of the Working Interest Owner incurred for its own account and not reasonably attributable to amounts included in the calculation of Royalty 4 and any costs or expenses reasonably attributable to generating the Other Revenue.
62. The Reserve is established pursuant to the Royalty Provisions, by B Co., to fund the payment of Production Costs and, if required under financing facilities, to pay Debt Service Costs and costs related to Swap Transactions. The Reserve is owned by B Co. and Trust 1 (being the owner of Royalty 4) shall have no interest therein. Interest earned on funds in the Reserve do not form part of the Reserve and will be for the account of the Working Interest Owner.
The following amounts are to be paid into the Reserve:
(a) any amounts held in reserves in respect of Royalty 1 or 2 and, after the acquisition of Royalty 3, any amounts held in the reserve in respect of Royalty 3;
(b) the Excess Other Revenues for a quarter not included in Royalty Revenues will be paid into the Reserve XXXXXXXXXX; and
(c) additional amounts will be paid into the Reserve if, as and when the Working Interest Owner determines, in its reasonable discretion, that it is prudent to do so in accordance with prudent business practices to provide for payment of Production Costs or working capital.
The Working Interest Owner may pay Production Costs or fund other working capital requirements with funds in the Reserve when, in the reasonable opinion of such owner, it is prudent to do so. The Working Interest Owner will not use the Reserve for any other purposes.
63. Pursuant to the Royalty Provisions B Co. will be required to establish a Reclamation Trust.
The Reclamation Trust will be formed under the laws of the Province of XXXXXXXXXX and will be a trust resident in that province. It will be established and maintained for the sole purpose of funding the Working Interest Owner's share of reclamation costs of the XXXXXXXXXX comprising the Project and any other XXXXXXXXXX interests that it may own from time to time. If permitted, B Co. will contribute any relevant funds from reclamation trusts relevant to Royalty 1, 2 and (after its acquisition) Royalty 3.
64. "Debt Service Costs" will be defined in the Royalty 4 provisions to mean all interest and other costs in respect of loans, indebtedness or preferred shares, the proceeds of which are used to acquire or pay for working interests, future acquisition costs, production costs and working capital, and provided that Debt Service Costs shall only include Debt Service Costs allocable to Royalty 3 upon the acquisition of Royalty 3 by B Co.
65. Royalty 4 will not be specific to a particular property but will be payable with respect to XXXXXXXXXX in which B Co. has an interest or may acquire an interest from time to time. For greater certainty, an interest shall not include any interest that B Co. may have as a beneficiary under a trust or as a member of a partnership.
In the event that B Co. or its successors and assigns disposes of all or any portion of a XXXXXXXXXX property that is subject to Royalty 4, the owner(s) of Royalty 4 shall be obligated to concurrently dispose of a proportionate part of Royalty 4 and they shall be entitled to receive XXXXXXXXXX% of the net proceeds of sale of the XXXXXXXXXX property.
The owner(s) of Royalty 4 will be required to pay for any portion of the royalty acquired over property to be acquired in the future by B Co. and its successors and assigns when such property is acquired (a "deferred purchase price") subject to the following rules:
(a) the payment for the royalty over the "XXXXXXXXXX property" component of an acquisition will be deferred until the property is acquired, will be subject to a fair market value price adjustment clause and will be net of the financing applicable to the acquisition. The amount payable on account of the "XXXXXXXXXX property" component of an acquisition will not include the tangible component;
(b) the payment for the royalty over property created or expanded through capital costs XXXXXXXXXX will be deferred until the expenditure, will be subject to a fair market value price adjustment clause and the amount payable will be net of the financing applicable to the expenditure;
(c) property acquired in tax deferred transactions will be treated as if it had been acquired for fair market value and financing costs in respect of shares will be treated as the financing costs of underlying properties when the shares are cancelled or exchanged upon acquisition of the underlying properties;
(d) where Trust 1 has received proceeds from the sale of equity, B Co. may request that such amount be paid as a deferred purchase price for Royalty 4 where B Co. will be applying the proceeds to reduce indebtedness which, had it not been incurred, would have required the payment by Trust 1 as noted in (a) and /or (b) above.
66. New Trust will sell to B Co. Royalty 3 for a purchase price equal to the fair market value thereof to be satisfied by issuance of Series 5 Preferred Shares in the capital of B Co. having an aggregate fair market value and redemption amount equal to such purchase price. Upon its acquisition by B Co., Royalty 3 will be extinguished by operation of law.
67. New Trust will sell all of its interests in Partnership 2 to B Co. for a purchase price equal to the fair market value thereof to be satisfied by issuance of
(a) a demand promissory note (the "Note") having a principal amount equal to the cost amount to New Trust of its interest in Partnership 2, and
(b) Series 6 Preferred Shares in the capital of B Co. having an aggregate fair market value and a redemption amount, respectively, equal to the greater of the (i) purchase price less the amount of the Note and (ii) $XXXXXXXXXX.
68. Each of the Series 5 Preferred Shares and the Series 6 Preferred Shares will be redeemable on demand by the holder and retractable at any time by B Co. for the redemption amount, will bear non-cumulative preferential dividends of XXXXXXXXXX per cent per annum on such redemption amount and will be entitled to a priority on the winding-up of B Co. for the redemption amount. For the purposes of subsection 191(4) of the Act, the terms and conditions of the Series 5 Preferred Shares and the Series 6 Preferred Shares to be issued as described herein will, at the time of their issue, specify an amount in respect of each such share, including an amount for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each Series 5 Preferred Share and Series 6 Preferred Share will be pursuant to a resolution of the board of Directors of B Co., will be expressed as a Canadian dollar amount, will not be determined by a formula and will be equal to the fair market value of the property received by B Co. as consideration for the issuance of such share. The redemption amount, but not the specified amount, will be subject to adjustment if it is determined by bona fide agreement between B Co. and the New Trust, by agreement between the New Trust, B Co. and the Canada Revenue Agency or by a court of competent jurisdiction, that the redemption amount was greater or less than the estimated fair market value of Royalty 3 or, as applicable, the purchase price of the New Trust's interest in Partnership 2 less the principal amount of the Note. In the event of such determination, any amounts paid on such shares (or payable) will be adjusted as required.
69. The New Trust and B Co. will jointly elect under subsection 85(1) of the Act, within the time referred to in subsection 85(6) of the Act, to transfer the interests in Partnership 2 at an amount equal to the lesser of the amounts referred to in subparagraphs 85(1)(c.1)(i) and (ii) of the Act, and to transfer Royalty 3 at an amount of $XXXXXXXXXX.
The amount so agreed upon in respect of a particular asset will not be less than the fair market value, at the time of the sale, of the consideration (other than Preferred Shares) received by the New Trust therefor. However, in no case will the amount so agreed upon in respect of a particular asset exceed the fair market value of that asset at the time of the transfer.
The addition to the PUC of the Preferred Shares will not exceed the amount by which the aggregate agreed amounts under subsection 85(1) of the Act in respect of the eligible property transferred to B Co. as described in paragraph 67 above exceeds the fair market value of the Note.
70. DELETED.
71. The New Trust will endorse the Note in favour of B Co. and deliver the same to B Co. on the redemption of such number of Series 2 Special Units of the New Trust held by B Co. as have an aggregate redemption amount equal to the principal amount of the Note.
72. The New Trust will exercise its rights of redemption in respect of the Series 4, Series 5 and Series 6 Preferred Shares of B Co. and B Co. will issue demand promissory notes (the "Redemption Notes") to the New Trust having an aggregate principal amount and fair market value equal to the redemption amount of such Preferred Shares.
73. New Trust will redeem its Series 1 and 2 Special Units then outstanding and will endorse in favour of and deliver to B Co. such portion of the Redemption Notes as have an aggregate principal amount and fair market value equal to the aggregate redemption amount of such Series 1 and Series 2 Special Units. To the extent that the New Trust would, but for a designation under subsection 104(19) of the Act, be deemed to have received taxable dividends in respect of the redemption of the Series 4, Series 5 and Series 6 Preferred Shares of B Co., Trustee 2 will exercise its discretion in order to designate that an amount equal to the lesser of the amount of such taxable dividends and the amount paid on the redemption of the Series 1 and 2 Special Units of the New Trust be deemed to be paid as a distribution of income of the New Trust in respect of the redemption of the Series 1 and 2 Special Units and the New Trust will also designate such dividends, in its tax return for the taxation year in which such dividends are deemed to have been received, pursuant to the provisions of subsection 104(19) of the Act in respect of B Co.
74. If New Trust then holds any further Redemption Notes, it will endorse them in favour of and deliver the same to Trust 1. To the extent that the taxable dividends that New Trust would, but for a designation under subsection 104(19) of the Act, be deemed to have received in respect of the redemption of the Series 4, Series 5 and Series 6 Preferred Shares of B Co. exceed the amount of the dividends designated in respect of B Co. as described in paragraph 73 above, Trustee 2 will exercise its discretion in order to designate that an amount equal to the lesser of the amount of such excess taxable dividends and the principal amount of such further Redemption Notes be deemed to be paid as a distribution of income of the New Trust on the Ordinary Units and the New Trust will also designate such dividends, in its tax return for the taxation year in which such dividends are deemed to have been received, pursuant to the provisions of subsection 104(19) of the Act, in respect of Trust 1. In the event the amount designated is less than the principal amount of the Redemption Notes endorsed in favour of and delivered to Trust 1, Trustee 2 will exercise its discretion in order to designate that such excess amount be deemed to be paid as a distribution of capital of the New Trust on the Ordinary Units.
74.1 Following the completion of the foregoing proposed transactions, the New Trust will be wound up.
PURPOSE OF PROPOSED TRANSACTIONS
75. The main purpose of the proposed transactions is to substantially reduce complexity of accounting, legal, reporting and income tax compliance required by the existing structure. The existing structure requires calculation and reporting in respect of 3 separate royalties, preferred shares and two classes of units of New Trust. The proposed structure will eliminate most of this burden and require calculation in respect of a single royalty.
76. Additionally, the proposed transactions will result in a structure which is desirable for a number of reasons:
(a) the structure will be substantially similar to other XXXXXXXXXX royalty trusts and should therefore be more acceptable to a wider public;
(b) the structure will facilitate the acquisition of future working interests in the Project and other XXXXXXXXXX interests without added complexity;
(c) all the Project working interests will be held by B Co. such that any liabilities from the Project including environmental liabilities will accrue to B Co. and will not become liabilities of Trust 1 or its unitholders;
(d) the resulting structure will mirror as closely as possible the original Trust 1/B Co. structure;
(e) the proposed structure has the advantage of being familiar to the Trust's unitholders and analysts who follow the trading of the Trust's units; and
(f) it is believed that this structure will be of considerable assistance in maintaining the Trust's public profile.
RULINGS
Provided the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we confirm the following:
A. On the disposition of Royalty 1 and Royalty 2 by Trust 1 to B Co., as described in paragraph 50 above, Trust 1 will, pursuant to paragraph 69(1)(b) of the Act, be considered to have received proceeds of disposition not less than the fair market value thereof and Trust 1 will include such proceeds in the amount described in XXXXXXXXXX.
B. On the grant of Royalty 4 by B Co. in favour of Trust 1, as described in paragraph 50 above, B Co. will, pursuant to paragraph 69(1)(b) of the Act, be considered to have received proceeds of disposition not less than the fair market value thereof and B Co. will include such proceeds in the amount described in XXXXXXXXXX.
C. Provided that each of Royalty 1 and Royalty 2 constitutes a XXXXXXXXXX, on the acquisition of Royalty 1 and Royalty 2 by B Co. from Trust 1, as described in paragraph 50 above, B Co. will be considered to have incurred a XXXXXXXXXX the cost of which, pursuant to paragraph 69(1)(a) of the Act, will be an amount not greater than the fair market value thereof and B Co. will include such amount in the amount described in XXXXXXXXXX;
D. Provided that Royalty 4 constitutes a XXXXXXXXXX, on the acquisition of Royalty 4 by Trust 1 from B Co., as described in paragraph 50 above, Trust 1 will be considered to have incurred a XXXXXXXXXX, the cost of which, pursuant to paragraph 69(1)(a) of the Act, will be an amount not greater than the fair market value thereof and Trust 1 will include such amount in the amount described in XXXXXXXXXX;
E. Provided that Royalty 4 is not created as part of a transaction or event or series of transactions or events as a consequence of which depreciable property was acquired at a capital cost that was less than its fair market value (determined without regard to the royalty), Royalty 4 will not constitute a "specified royalty" within the meaning of that term as defined in subsection 1206(1) of the Regulations;
F. Provided that Royalty 3 and the interests in Partnership 2 represent eligible property of the New Trust and that New Trust and B Co. jointly elect, under subsection 85(1) of the Act and within the time referred to in subsection 85(6) thereof, in the manner described in paragraph 69 above, the provisions of subsection 85(1) of the Act will apply to the transfer by New Trust to B Co. of Royalty 3 and the interests in Partnership 2, as described in paragraphs 66 and 67 above, such that the agreed amount in respect of each such transfer will be deemed to be New Trust's proceeds of disposition and B Co.'s cost of such transferred property under paragraph 85(1)(a) of the Act. For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to such transfers;
G. The proceeds of disposition to B Co. of the Series 2 Special Units redeemed by New Trust, as described in paragraph 71 hereof, will be equal to their aggregate redemption amount provided that the fair market value of such units is not greater than that aggregate redemption amount;
H. At the time of the redemption of the Series 4, Series 5 and Series 6 Preferred Shares of B Co., B Co. will be deemed to have paid and New Trust will be deemed to have received, pursuant to subsection 84(3) of the Act, a taxable dividend on such shares equal to the amount, if any, by which the amount paid on the redemption exceeds the paid-up capital of such shares immediately before the purchase;
I. Pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act, the taxable dividends which New Trust is deemed to have received as confirmed in Ruling H above will be excluded from the determination of the proceeds of disposition of the Series 4, Series 5 and Series 6 Preferred Shares of B Co. so redeemed;
J. Subject to subsection 55(2) of the Act as it may apply to any dividend deemed to have been received by B Co., the amount of a taxable dividend confirmed in Ruling H above that is designated by New Trust in favour of B Co. or Trust 1, as the case may be, in accordance with subsection 104(19) of the Act and as described in paragraph 73 and 74 hereof, shall be deemed, for the purposes of paragraph 82(1)(b) and section 112 of the Act, not to have been received by the New Trust, and for the purposes of the Act (other than Part XIII), to be a taxable dividend received by B Co. or Trust 1, as the case may be;
K. For the purposes of subsection 186(1), B Co., as a payer corporation, will be connected with B Co., as the particular corporation, pursuant to subsection 186(2) and paragraph 186(4)(a) of the Act. Consequently, provided that B Co. is not entitled to a dividend refund (within the meaning of subsection 129(1) of the Act) in respect of its taxation year in which it is deemed to have paid the dividends confirmed in Ruling H above, B Co. will not be subject to tax under Part IV of the Act in respect of such dividends;
L. The taxable dividends which are deemed to be received by B Co., as confirmed in Ruling J above, will not be subject to tax under Part IV.1 of the Act on the basis that such dividends will be "excepted dividends" pursuant to paragraph 187.1(c) of the Act;
M. The taxable dividends which are deemed to arise as a result of the redemption of the Series 4, Series 5 and Series 6 Preferred Shares of B Co. and which are deemed to be received by B Co., as confirmed in Ruling J above, will, to the extent they do not exceed the amount by which the specified amount referred to in paragraph 68 above exceeds the paid-up capital of the shares immediately before the redemption, be deemed to be excluded dividends by virtue of subsection 191(4) of the Act and, therefore, will not be subject to tax under Part VI.1 of the Act;
N. The taxable dividends which are deemed to be received by B Co., as confirmed in Ruling J above, will, pursuant to subsection 112(1) of the Act, be deductible in computing the taxable income of B Co. for the year in which the dividends are deemed to have been received provided that such deductions are not denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4) of the Act;
O. Provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events that includes the proposed transactions described above, then, by virtue of paragraph 55(3)(a) of the Act, the provisions of subsection 55(2) of the Act will not apply to the taxable dividends deemed to have been received by B Co. as described in Ruling J above. For greater certainty, the proposed transactions described in paragraphs 50 to 74.1 above, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).
P. B Co. will include its share of revenue and expenses from Working Interests in respect of the Project and its share of the income of Partnership 2 in computing its income for a taxation year pursuant to section 9 and subsection 96(1) of the Act, respectively. Provided that the facts concerning B Co.'s prospects for deriving income from the Working Interests are as stated in paragraph 17 above, and that B Co. continues to carry on business as a Participant in the Project, B Co. will also be entitled to a deduction, in computing its income for a taxation year pursuant to section 9 of the Act, for the amounts paid or payable by it to Trust 1 under Royalty 4 for that year;
Q. The provisions of subsections 15(1), 56(2) and 246(1) of the Act will not apply to the proposed transactions described above, in and by themselves.
R. The provisions of subsection 245(2) of the Act will not be applied as a result of the proposed transactions described above, in and of themselves, to re-determine the tax consequences confirmed in the rulings given above.
The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 issued by the CRA on May 17, 2002 and are binding on the CRA provided that the proposed transactions described in 17 above are completed before XXXXXXXXXX.
The rulings are based on the Act in its present form and, except as expressly otherwise provided, do not take into account the effect of any proposed amendments thereto.
OPINIONS
Provided that the above statements of facts, proposed transactions and purpose of the proposed transactions are accurate and constitute complete disclosure thereof, and that the proposed transactions are carried out as set forth herein, it is our opinion that:
1. XXXXXXXXXX
2. provided that draft subsection 12(2.01) is enacted in substantially the same form as proposed in the Draft Legislation, the amounts of Royalty 4 received or receivable by Trust 1 in a taxation year will be included in computing its income for the year pursuant to section 9 and, pursuant to the said subsection 12(2.01), will not otherwise be deferred by application of paragraph 12(1)(g).
The foregoing opinions are not advance income tax rulings and, as explained in paragraph 22 of Information Circular 70-6R5 referred to above, are not binding on the CCRA.
1. In the event that there are future acquisitions that give rise to additional interests being included in Royalty 4, those additional interests will be regarded as additional royalties for the purpose of determining, inter alia, whether Royalty 4 is a specified royalty.
2. Except as expressly stated, our rulings and opinions do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly:
i) the reasonableness or deductibility of any expenditures referred to in this letter;
ii) the determination of fair market value or adjusted cost base of any property referred to in this letter;
iii) that a particular transaction or event will not be part of a series of transactions or events, or
iv) that the Reclamation Trust is a "qualifying environmental trust" within the meaning of subsection 248(1) of the Act such that contributions to it will be deductible pursuant to paragraph 20(1)(ss) of the Act.
3. Our rulings should not be considered as an indirect approval of any kind with respect to the possible operation of price adjustment clauses. Advance income tax rulings are not given in respect of price adjustment clauses as the possible operation of such a clause is not a proposed transaction. Our position on price adjustment clauses is stated in Interpretation Bulletin IT-169, dated August 6, 1974.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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