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: Whether a subsidiary that becomes a co-obligor of a parent's debts on a subsection 85(1) transfer of property from the parent to the subsidiary, but is fully indemnified by the parent, is considered to have assumed the parent's liabilities as consideration for the transfer.
Position: No.
Reasons: The parent will remain liable for the debt and the subsidiary will be fully indemnified by the parent for any liabilities it sustains as a result of agreeing to become a co-obligor of the parents debts. This position is consistent with a previous ruling.
XXXXXXXXXX 2003-005401
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge receipt of your facsimiles and emails as well as the information provided in various telephone conversations.
Throughout this letter, the corporate taxpayers will be referred to as follows:
XXXXXXXXXX . Aco
XXXXXXXXXX . Bco
Aco files its corporate tax returns at the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.
To the best of your knowledge and that of the parties to this ruling, none of the issues in this ruling request is:
(i) in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) before the courts; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Aco has confirmed that the proposed transactions described herein will not result in Aco or any of its subsidiaries being unable to pay its outstanding tax liabilities.
Unless otherwise indicated, all reference to monetary amounts are in Canadian dollars.
DEFINITIONS
In this letter, unless otherwise expressly stated, the following terms have the meanings specified:
(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act;
(b) "agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in an election under subsection 85(1);
(c) "eligible property" has the meaning assigned by subsection 85(1.1);
(d) "Paragraph" means a numbered paragraph in this letter;
(e) "proposed transactions" means the transactions described in Paragraphs 5 to 8 below; and
(f) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
FACTS
1. Aco is a taxable Canadian corporation formed on XXXXXXXXXX by amalgamation under the laws of the Province of XXXXXXXXXX.
2. Aco and its wholly owned subsidiaries (collectively the "Aco Group") operate XXXXXXXXXX The operations of Aco represent roughly XXXXXXXXXX% of the operations of the Aco group.
3. Bco is a wholly owned subsidiary of Aco, incorporated under the laws of the Province of XXXXXXXXXX on XXXXXXXXXX. Bco is a taxable Canadian corporation.
4. Aco presently has indebtedness of approximately $XXXXXXXXXX owing under various public debt instruments and a bank loan (collectively the "Aco Debt"). Individual debt instruments are generally evidenced by public debt indentures and bank loan agreements.
A large portion of the Aco Debt is secured debt and is secured pursuant to a XXXXXXXXXX are issued under the XXXXXXXXXX to evidence each secured party's share of the security. The XXXXXXXXXX issued under the XXXXXXXXXX are secured by a fixed and floating charge over all of the assets of Aco and are guaranteed by those subsidiaries of Aco that are "XXXXXXXXXX Subsidiaries" as this term is defined in the XXXXXXXXXX . Bco and other subsidiaries of Aco are XXXXXXXXXX Subsidiaries. The guarantee given by each XXXXXXXXXX Subsidiary is such that, in the event that the creditor cannot realize from such subsidiary as a guarantor, the creditor may realize from such subsidiary as a primary obligor.
If Aco proposes to transfer substantially all of its assets to another person, the XXXXXXXXXX and the public debt indentures provide that the transferee will ordinarily be required to assume the obligations of Aco under the XXXXXXXXXX and the public debt indentures, and Aco will be discharged from its obligations thereunder. Notwithstanding this general mechanism, the terms of the XXXXXXXXXX and the public debt indentures also allow for alternatives such as that which is described in Paragraph 5 below.
PROPOSED TRANSACTIONS
5. On XXXXXXXXXX, prior to or contemporaneously with the transfer described in Paragraph 6 below, Aco, Bco and various trustees will execute a XXXXXXXXXX and various supplemental public debt indentures (the "Supplemental Indentures") under which Bco will assume all obligations under the XXXXXXXXXX and public debt indentures as co-obligor on a joint and several basis with Aco. Notwithstanding the assumption by Bco, Aco will not be discharged from any of its obligations under the XXXXXXXXXX or any public debt indentures. It is anticipated that the final forms of the XXXXXXXXXX and the Supplemental Indentures will be the same in all material respects as the drafts attached to the ruling request.
6. On XXXXXXXXXX , Aco will transfer substantially all of its operating assets to Bco pursuant to the terms of an asset transfer agreement ("ATA"). Aco and Bco will jointly elect in prescribed form and within the time required by subsection 85(6) to have the rules in subsection 85(1) apply to the transfer of Aco's assets. The agreed amount specified in each election in respect of an eligible property so transferred will be an amount determined by Aco, subject to the limitations of subsection 85(1). The consideration for the transfer of Aco's assets will be comprised of (i) the assumption of liabilities (other than "Excluded Liabilities"); (ii) the issuance of a promissory note payable by Bco to Aco (the "Note"); and (iii) the issuance of common shares of Bco. The fair market value of the consideration will be equal to the fair market value of the assets transferred. Section XXXXXXXXXX of the ATA provides that liabilities under the Aco Debt are Excluded Liabilities and are therefore not assumed by Bco as consideration for the transfer. The ATA further provides that Aco will indemnify Bco from and against all liabilities, losses, actions, claims and demands suffered or incurred by Bco by reason of any failure on the part of Aco to fully discharge, perform or fulfill any of the Excluded Liabilities.
7. Also on XXXXXXXXXX and contemporaneously with the transactions described in Paragraphs 5 and 6 above, Aco and Bco will execute an agreement (the "Aco Agreement") under which Aco will agree to make all payments of the Aco Debt in the ordinary course of business (i.e. to act as the primary obligor under the Aco Debt). The Aco Agreement also grants to Bco a specific and irrevocable right to recover any amounts paid by Bco under the Aco Debt by set off against amounts owing by Bco to Aco under the Note, or to otherwise recover such amounts by reimbursement from Aco.
8. As set out in the ATA and the Aco Agreement, Aco and Bco do not intend that the Aco Debt be fully assumed by Bco. This intention is demonstrated by the following:
(a) Aco is not discharged from any of its obligations under the Aco Debt.
(b) While both Aco and Bco are obligated under the XXXXXXXXXX and the public debt indentures, where the context of those documents requires that a reference to "the Company" refer to a single entity, any such reference is deemed to be a reference to Aco only.
(c) Aco remains the issuer of the Aco Debt for all purposes under the XXXXXXXXXX and the public debt indentures. No new debt instruments are issued as a result of these transactions, nor is there any requirement to register or re-register the existing securities with any regulatory authorities in Canada or in the United States.
(d) Bco does not become a reporting issuer or a registrant under Canadian or U.S. securities laws in respect of the public debt indentures.
(e) Bco is not permitted to issue XXXXXXXXXX under the XXXXXXXXXX and all XXXXXXXXXX issued thereunder must be issued in the name of, certified, executed and delivered solely by Aco.
(f) Aco specifically agrees to make all payments of Aco Debt in the ordinary course of business.
(g) Aco indemnifies Bco in respect of the Aco Debt.
(h) Bco has a right to set off any payments that it may make under the Aco Debt against the amount of the Note. This demonstrates that the parties view the Note as being the only obligation of Bco, and that the parties treat the Aco Debt as an obligation of Aco and not of Bco.
(i) The accounting for the new debt arrangements in accordance with generally accepted accounting principles will be to continue to reflect the Aco Debt as an obligation on the balance sheet of Aco and not on the balance sheet of Bco.
9. Aco wishes to retain the existing debt structure (under which virtually all indebtedness is issued by Aco only) for several reasons that are outlined below:
(a) Having Bco fully assume the Aco Debt would require the amendment of Aco's $XXXXXXXXXX bank loan agreement - the proposed arrangements require no amendment.
(b) Aco will retain some investment assets and its non-capital loss balance of roughly $XXXXXXXXXX. If Aco were to be removed from the borrowing group, the assets that are currently available to creditors (including the value of any tax shield provided by Aco's non-capital losses) would be reduced and this is not desirable.
(c) If Aco were discharged from its obligations under the public debt indentures, Bco would be a "new debt issuer" for various securities law purposes. This would impose significant securities law disclosure and filing requirements for Bco that are not otherwise required under the proposed structure.
(d) The holders of the Aco Debt are entirely unaffected by the transactions as structured. The existing securities remain virtually unchanged, there are no new securities issued, and there is no requirement to register or re-register the existing securities with any regulatory authorities in Canada or in the United States.
(e) Aco has significant non-capital losses available for carryforward. Continuing to maintain Aco within the same borrowing group as Bco allows loss consolidation transactions to be effected without creditor approval or revision of existing arrangements.
(f) The sole shareholder of Aco's capital stock wishes to retain the flexibility of a holding company/operating company structure.
PURPOSE OF THE PROPOSED TRANSACTIONS
10. The proposed transactions are part of a reorganization intended to simplify the structure of the Aco Group so that Aco becomes a pure holding company with one primary operating subsidiary.
The existing terms of the XXXXXXXXXX and the public debt indentures require any purchaser of substantially all of Aco's assets to assume the obligations of Aco under the XXXXXXXXXX and the public debt indentures (the "Assumption Requirement"). After such assumption by the purchaser, Aco would normally be discharged from its obligations.
The Assumption Requirement is a measure for the protection of the creditors to prevent the assets (that are subject to a fixed and floating security charge) from being sold out from under the security arrangement to a third party. The XXXXXXXXXX and the public debt indentures do not contemplate a transfer of substantially all of the assets of Aco to a XXXXXXXXXX Subsidiary and therefore it is necessary to comply with the Assumption Requirement in respect of the transfer of Aco's assets. Failure to comply with the Assumption Requirement would have been an event of default under the XXXXXXXXXX and the public debt indentures. In order to have such default waived it would otherwise have been necessary to hold meetings of the bondholder groups for XXXXXXXXXX separate public debt indentures. This was not a practical alternative.
The execution by Bco of the XXXXXXXXXX and the various Supplemental Indentures to become co-obligor of the Aco Debt will not provide the creditors with any additional security or protection beyond that contained in the existing agreements.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our ruling is as follows:
A. The execution by Bco of the XXXXXXXXXX and the various Supplemental Indentures to become co-obligor of the Aco Debt, as described in paragraph 5 above, will not constitute consideration received by Aco for the transfer described in Paragraph 6 above and will therefore not affect the amount that Aco and Bco will agree on in their election pursuant to subsection 85(1) in respect of the transfer.
The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
The above ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.
1. Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to, reviewed or has made any determination in respect of:
(a) the fair market value or adjusted cost base of any property or the paid-up capital of any shares referred to herein;
(b) the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein; and
(c) any other tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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