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: Whether certain amendments to the facts and proposed transactions affect the rulings given in the Ruling.
Supplemental Ruling Request
This letter is in reply to your letters of XXXXXXXXXX, wherein you requested amendments to the advance income tax ruling which was issued on XXXXXXXXXX, 2003 (our reference 2003-003182) (the "Ruling").
References herein to capitalized terms are to terms defined in the Ruling, unless otherwise noted. References to paragraph numbers are to the Ruling, except as otherwise noted.
(a) "Arrangement Agreement" means the agreement between Aco and XCO which forms the basis for the Plan of Arrangement;
(b) "Bank Loan" means the Aco loan facility from the XXXXXXXXXX described in paragraph 14;
(c) "Bid Price" means the price per Aco Class A Common Share under the offer, which price shall be not less than the average of the fair market value of an Aco Class A Common Share as determined by two nationally recognized securities dealers retained by the Offeror for purposes of making the offers;
(d) "Effective Date" and "Effective Time" mean the date or time, respectively, at which various transactions will occur in accordance with, and as defined in, the Plan of Arrangement;
(e) "Escrowed Redemption Amount" means the escrowed funds described in paragraph 38;
(f) "Group" means persons who would constitute a group for the purposes of subsection 111(5) of the Act;
(g) "MOU" means the memorandum of understanding described in paragraph 15;
(h) "MOU Amendment" means the amendment to the memorandum of understanding described in paragraph 15;
(i) "Offer to Acquire" includes, (a) an offer to purchase, or a solicitation of an offer to sell, securities, (b) the receipt of an offer to sell securities, whether or not such offer to sell has been solicited, or any combination thereof, and the person receiving an offer to sell shall be deemed to be making an offer to acquire to the person that made the offer to sell;
(j) "Plan of Arrangement" means the plan of arrangement to be proposed under XXXXXXXXXX; and
(k) "Pco MOU" means the memorandum of understanding described in paragraph 16.
1. A final sentence is added to the first subparagraph of paragraph 3 which states as follows:
"BusinessA does not include the following XCO operations or assets: XXXXXXXXXX
The first four operations or assets, while included in the financial statements of BusinessA, are ancillary or distinct from the XXXXXXXXXX business. The latter two operations have never been included in the financial statements for BusinessA."
2. The second sentence of the second subparagraph of paragraph 3 is deleted and replaced with the following:
"XCO has always maintained separate accounting records for the XXXXXXXXXX business reflecting the results of BusinessA and the operations identified as (i) through (iv) in the preceding paragraph."
3. A new paragraph 4.1 is added which will state the following:
" The following warrants to acquire Aco common shares are also outstanding.
4. Paragraph 7 is deleted and replaced with the following:
" XCO and Aco will continue to negotiate the FMV of Aco."
5. Paragraph 10 is amended to note that XXXXXXXXXX.
6. Paragraph 15 is amended and replaced with the following:
7. Paragraph 16 is deleted and replaced with the following:
"In XXXXXXXXXX, Aco reduced its workforce to approximately XXXXXXXXXX employees and has significantly reduced its cash expenditure rate.
On XXXXXXXXXX Aco announced the completion of a special warrant offering. Aco issued XXXXXXXXXX special warrants to the public at $XXXXXXXXXX each for total proceeds of $XXXXXXXXXX. Each special warrant entitled the holder, at no additional cost, to acquire one Aco common share and XXXXXXXXXX of a warrant. Each whole warrant entitled the holder to acquire one Aco common share for $XXXXXXXXXX. Aco filed its final prospectus XXXXXXXXXX , and the special warrants were deemed to be exercised on XXXXXXXXXX. On the deemed exercise the former special warrant holders received XXXXXXXXXX Aco common shares and XXXXXXXXXX warrants to acquire Aco common shares. Neither XCO nor any person related to XCO purchased any special warrants.
The special warrant offering did not result in an acquisition of control of Aco.
On XXXXXXXXXX Aco announced it had signed a binding memorandum of understanding ("Pco MOU") setting out the principal terms of a strategic alliance with XXXXXXXXXX ("Pco") and XXXXXXXXXX.
On XXXXXXXXXX Aco filed a preliminary short form prospectus with the XXXXXXXXXX to qualify the distribution of the common shares and warrants underlying the offering of special warrants that was completed on XXXXXXXXXX.
Notwithstanding the special warrant financing and the Pco MOU, Aco continues to rely on the XCO loan guarantee. While the preceding developments enhance Aco's future opportunities, it needs to raise financing, which is provided through the proposed transaction with XCO, to pursue the opportunities created by the Pco strategic alliance XXXXXXXXXX."
8. Paragraph 20 is removed from the proposed transactions and included with the statement of facts. The first sentence of paragraph 20 is deleted and replaced with the following:
"Subco was incorporated as XXXXXXXXXX . Subco's business number is XXXXXXXXXX."
9. Paragraph 21 is deleted and replaced with the following.
"On XXXXXXXXXX XCO subscribed for one common share of Subco for nominal consideration which was satisfied by the transfer of the goodwill associated with the employees of BusinessA which were transferred to Subco as described in paragraph 28."
10. Paragraph 22 is deleted and replaced with the following:
"XCO will arrange for the XXXXXXXXXX to be issued to PartnershipA. XXXXXXXXXX."
11. Paragraph 24 is deleted and replaced with the following.
"XCO and Subco will form a limited partnership ("PartnershipA") under XXXXXXXXXX law. XCO and Subco will enter into a limited partnership agreement (the "PartnershipA Agreement") and a declaration will be filed XXXXXXXXXX. Subject to an Event of Dissolution, PartnershipA may continue indefinitely, but will have a minimum term of XXXXXXXXXX years, subject to negotiation between Aco and XCO. An "Event of Dissolution" will arise where (i) the general partner is removed or resigns without being replaced, (ii) PartnershipA suffers an event of insolvency, or (iii) the partners unanimously agree to a premature termination of PartnershipA. PartnershipA will select a fiscal period ending XXXXXXXXXX. The year-end has been selected to facilitate the bookkeeping required to consolidate the financial results of PartnerhsipA with those of XCO, as required under Canadian GAAP."
12. Paragraph 27 is amended by inserting the following as the first subparagraph:
For the reasons which follow, XCO will not transfer the existing receivables or payables of BusinessA to PartnershipA. The working capital of BusinessA will be funded by XCO through a non-interest-bearing loan of approximately $XXXXXXXXXX to PartnershipA.
13. A new paragraph 27.1 is added as follows:
"Except for distributions relating to the special income allocation to the general partner described in paragraph 28.1, PartnershipA will not distribute any property prior to XXXXXXXXXX. It is currently proposed that any cash-flow needs of Aco will be satisfied by having PartnershipA lend funds to Aco. Cash distributions from PartnershipA are being temporarily restricted to avoid negative U.S. tax consequences for U.S. resident holders of Aco shares."
14. A new paragraph 27.2 is added as follows:
"XCO will grant a license to PartnershipA to use the XCO name and trademarks for fair market value consideration."
15. The first sentence of paragraph 28 is deleted and replaced with the following:
" Approximately XXXXXXXXXX employees have been transferred to Subco. It is now contemplated that certain senior employees who are involved with BusinessA and other businesses of XCO will remain employees of XCO. XXXXXXXXXX The employees, XXXXXXXXXX, were transferred to Subco effective XXXXXXXXXX."
16. A new paragraph 28.1 is added to state the following:
"Pursuant to the PartnershipA Agreement, and as the general partner and agent of PartnershipA, Subco will employ the persons described in paragraph 28 and will make such employees available to PartnershipA for the purpose of conducting BusinessA. To compensate Subco for the costs it incurs in relation to the employees, the net income of PartnershipA will be first allocated to Subco in an amount equal to the sum of all reasonable expenses and costs incurred by Subco in connection with the performance of its duties under the PartnershipA Agreement, including the provision of its employees to PartnershipA. Subco, as general partner, will determine the timing and distributions of PartnershipA, in its sole discretion."
17. Paragraph 30 is replaced with the following:
"A new corporation ("Newco") will be incorporated under the XXXXXXXXXX. The authorized share capital of Newco will consist of an unlimited number of common shares and an unlimited number of preference shares which may be issued in series. The incorporating share with a nominal value will be acquired by Aco."
18. A new paragraph 30.1 is added to the Ruling as follows:
"All existing Aco employee stock options with an exercise price below the trading price of the Aco shares on the second day prior to the Effective Date will be cancelled and exchanged for options of Newco ("Newco Options") as follows:
a. each vested Aco option will be exchanged for one vested Newco option;
b. each unvested Aco option will be exchanged for one unvested Newco option; and
c. the amount by which the total FMV of the Newco shares under the Newco Options immediately after the exchange exceeds the total amount payable by the option holder to acquire the Newco shares under the Newco Options will not exceed the amount by which the total FMV of the old securities immediately before the exchange exceeds the amount payable by the option holder to acquire the old securities under the Aco option plan. For greater certainty, this will also be true following the transaction in paragraph 40.
Employee stock options not described in this paragraph will be dealt with as provided for in paragraph 41."
19. New paragraph 30.2 is added to the Ruling as follows:
"Following the exchange described in paragraph 30.1 XXXXXXXXXX, the incorporating share of Newco held by Aco will be repurchased for cancellation immediately before the exchange of Aco Class C Preferred Shares for common shares of Newco referred to in paragraph 37."
20. Paragraph 31 is deleted and replaced with the following:
"Aco and Newco will form a limited partnership ("PartnershipB"). Aco will be both a general partner and a limited partner and Newco will be a general partner. Newco will have a call right, exercisable where the units held by Aco represent less than XXXXXXXXXX% of the income or loss of PartnershipB, for cash or Newco common shares equal to the fair market value thereof. Aco will have a "tag-along" right to participate, and Newco will have a "drag-along" right to compel Aco to participate, on like terms in any potential sale by Newco of its interest in PartnershipB to a third party. Newco will have a right of first offer, which may be satisfied in cash, debt or in Newco common shares, in respect of any proposed disposition by Aco of its interest in PartnershipB.
21. The first subparagraph of paragraph 33 is deleted and replaced with the following:
"Aco will transfer its intellectual property, remaining cash and fixed assets (including the XXXXXXXXXX Building) to PartnershipB and as consideration therefor, PartnershipB will assume all of Aco's liabilities, including its Bank Loan, and issue to Aco a limited partnership interest and a general partnership interest entitling it to approximately XXXXXXXXXX% and approximately XXXXXXXXXX% of the income or loss of PartnershipB, respectively. XXXXXXXXXX."
22. The last subparagraph of paragraph 33 is deleted and replaced with the following:
"The Aco scientists, production, administrative and other employees will be transferred to PartnershipB and the Aco senior management team, including the Chief Scientist, will be transferred to Newco."
23. Paragraph 34 is deleted.
24. Paragraph 35 is deleted and replaced with the following:
"The articles of incorporation of Aco will be amended by creating the following three new classes of shares:
a) An unlimited number of another class of voting common shares ("Aco Class A Common Shares"). The holders of the Class A Common Shares will be entitled to one vote per shares.
b) An unlimited number of a class of non-voting common shares ("Aco Class B Common Shares").
c) Non-voting preferred shares ("Aco Class C Preferred Shares").
Dividends will be paid in equal amounts on a per share basis on the Aco Class A Common Shares and the Aco Class B Common Shares. Dividends on the Aco Class B Common Shares will be declared and paid monthly. For administrative ease, dividends on the Aco Class A Common Shares will be payable when declared by the directors of Aco but in any event not more frequently than monthly and not less frequently than annually.
No holder of any class of common shares will be entitled to receive dividends in priority to any holder of any class of common shares.
The articles will provide that Aco Class A Common Shares may only be issued in connection with a stock dividend, a stock split or similar event that affects all holdings of Aco Class A Common Shares in the same manner, on a per share basis.
The number of Aco Class C Preferred Shares which will be authorized will be equal to the number of Aco Class C Preferred Shares to be issued on the share exchange described in paragraph 36. The Aco Class C Preferred Shares will have a cumulative dividend rate of XXXXXXXXXX% per month, and will be redeemable at the option of the issuer for an amount equal to the FMV of the consideration received in exchange for the issuance of the shares plus any unpaid dividend.
The articles of amendment will also provide that (a) the business of Aco will be restricted to holding the limited partnership interests in PartnershipB and PartnershipA, to performing its obligations under the Plan of Arrangement, and to certain incidental corporate powers and (b) its available cash after providing for the redemption of the Aco Class C Preferred Shares will be distributed to its shareholders."
25. A new paragraph 35. 1 should be added as follows:
"In the event of a transaction where a person or persons makes (or receives) an offer to purchase (or sell) Aco Class A Common Shares which could, if completed, result in an acquisition of control of Aco, the articles of Aco will require such person(s) to extend the offer on identical terms to all holders of Aco Class B Common Shares for the same percentage of Aco Class B Common Shares that the person(s) would hold or control (including through any group) of the Aco Class A Common Shares if all shares subject to the offer were tendered and acquired. The articles of Aco will also require that such offers comply with securities rules applicable to formal takeover bids and be made at a price not less than the average fair market value of an Aco Class A Common Share, as determined by two securities dealers. Where shares are acquired in violation of these provisions of the articles, the votes attaching to the shares acquired in violation of the articles will be restricted to avoid an acquisition of control of Aco. If the votes are so restricted XCO will not have a right to exercise more than 50% of the votes attaching to the shares of Aco at that time.
26. The second sentence of paragraph 36 is deleted and replaced with the following:
"The Aco Class C Preferred Shares will have a redemption value in aggregate equal to the FMV of Aco excluding the following: the approximate XXXXXXXXXX% limited partnership interest in PartnershipB, a XXXXXXXXXX% general partnership interest in PartnershipB, and an amount equal to the value of the obligation to issue warrants and employee stock options to be assumed by Newco as described in paragraphs 30.1, 39 and 41. The aggregate redemption value of the Aco Class C preferred shares will be reduced by the amount of the Escrowed Redemption Amount which may be paid to Aco, as described in paragraph 38."
27. A new paragraph 36.1 is added to the Ruling as follows:
"The Plan of Arrangement will provide that the legal stated capital of the Aco Class A Common Shares and the Aco Class C Preferred Shares is restricted to the paid-up capital thereof for purposes of the Act."
28. Paragraph 38 is deleted and replaced with the following:
"Aco will redeem the Aco Class C Preferred Shares held by Newco at the Effective Time. At that time, Aco will assume the obligation to issue the warrants and the employee stock options as described in paragraphs 30.1, 39 and 41. In consideration for the assumption of the obligation to issue warrants and options, and in satisfaction of the redemption price for the Class C Preferred Shares, Aco will transfer the approximate XXXXXXXXXX% general partnership interest and cash to Newco. Aco will fund the cash component of the redemption price with a borrowing from PartnershipA which will be on commercial terms and will bear a commercial rate of interest. Approximately XXXXXXXXXX of the cash component of the redemption price (the "Escrowed Redemption Amount") will be held in escrow for Newco. At the conclusion of the escrow period, the escrow agent will pay to Aco an amount equal to the lesser of the Escrowed Redemption Amount and the amount of certain defined liabilities of Aco not borne by PartnershipB. The balance of the Escrowed Redemption Amount, together with any income earned thereon, will be paid by the escrow agent to Newco."
29. A new paragraph 38.1 is added to state the following:
"Newco will transfer the cash component of the redemption price, described in paragraph 38, to PartnershipB as a contribution for additional units. The portion of the Escrowed Redemption Amount received by Newco will also be contributed to PartnershipB for additional units. It is expected that following the infusion of this additional capital Newco's percentage interest in PartnershipB will increase to approximately XXXXXXXXXX%."
30. Paragraph 39 is deleted and replaced with the following.
31. Paragraph 40 is deleted.
32. Paragraph 41 is replaced with the following:
"Except for the employee stock options described in paragraph 30.1, the existing employee stock options will be cancelled for no consideration and Newco will issue to such employees options to acquire common shares of Newco. The exercise price of such Newco employee stock options will not be less than the trading price of the Newco common shares at the time the options are granted. Newco will issue employee stock options to its employees and to the employees of PartnershipB. There will be no agreements in place which provide for an employee of PartnershipB to be employed only by a particular partner of PartnershipB."
33. Paragraph 42 is amended to delete "XXXXXXXXXX%" and replace it with "XXXXXXXXXX%".
34. A new Paragraph 42.1 should be added as follows:
"Following the completion of the proposed transactions Aco expects to change its name to avoid confusion with Newco, which will adopt a name which includes the term "XXXXXXXXXX".
Aco will request the consent of CCRA to change its year-end from XXXXXXXXXX to XXXXXXXXXX so that it coincides with the year-end of PartnershipA, its largest business. The change will reduce the audit costs which would otherwise be incurred by Aco.
35. Paragraph 43 is amended to delete the reference to the redemption of the Aco Class C Preferred Shares. The cash income from PartnershipA initially will be used to repay the working capital loan from XCO described in paragraph 27 and then to retire the loan from XCO relating to the redemption of the Aco Class C Preferred Shares described in paragraph 38. After XXXXXXXXXX the cash income of PartnershipA may be distributed to Aco in respect of its limited partnership interest. It is anticipated that such cash distributions will be distributed to the holders of Aco Class A Common Shares and Aco Class B Common Shares as dividends.
36. Paragraph 45 is deleted and replaced with the following:
"XCO will have no rights to repurchase an interest in PartnershipA other than a right of first refusal if Aco receives an offer to purchase its partnership interest in PartnershipA, if steps are taken to wind-up PartnershipA, or if PartnershipA proposes to sell its assets, otherwise than in the ordinary course of business."
Provided that the Facts and Proposed Transactions set out in the Ruling, as modified by paragraphs 1 through 36 herein, constitute complete and accurate disclosure of all the relevant facts and proposed transactions and provided that the transactions are completed as proposed, we confirm the following:
AA. Rulings B to J given in the Ruling will continue to apply.
BB. With reference to ruling F, the reference to "Aco" in the second line will be to "XCO" and the reference to "shares" will be to "shares of Aco".
CC. A new Ruling K will be provided as follows:
"The actions of XCO in arranging and facilitating the issuance of the BusinessA XXXXXXXXXX to PartnershipA, as described in paragraph 22, will constitute a transfer of eligible property for purposes of ruling B."
DD. Ruling K given in the Ruling concerning subsection 245(2) is re-designated as Ruling L and will continue to apply.
The above rulings are given subject to the limitations and qualifications set forth in the Ruling and are binding on the Canada Revenue Agency provided that the Proposed Transactions are completed before XXXXXXXXXX.
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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