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: Routine public butterfly.
Position: Favourable rulings given.
Reasons: Meets the requirements under paragraph 55(3)(b).
XXXXXXXXXX 2004-006071
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.
To the best of the knowledge of the responsible officers of the existing taxpayer and yourselves, none of the issues involved in this Ruling:
(a) is in an earlier tax return of the existing taxpayer 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 the existing taxpayer or a related person;
(c) is under objection by the existing taxpayer or a related person;
(d) is before the courts; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate.
I. DEFINITIONS
In this letter, the following terms or expressions have the meaning specified:
XXXXXXXXXX.
"ACB" means "adjusted cost base" as that expression is defined in section 54 and subsection 248(1).
"Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended and unless otherwise stated, all statutory references in this letter are to the Act.
"Aco" means XXXXXXXXXX which is a taxable Canadian corporation. Aco is a XXXXXXXXXX company, whose shares trade on the XXXXXXXXXX Stock Exchange. Aco holds approximately $XXXXXXXXXX in direct investments in other public corporations. XXXXXXXXXX, a director of C, exercises control of approximately XXXXXXXXXX % of the voting interests of Aco. XXXXXXXXXX is a resident of Canada for purposes of the Act.
"agreed amount" in respect of a property means the amount that the transferor and transferee of the property agree upon in their election under subsection 85(1) in respect of that property.
"Amalco" means the corporation formed upon the amalgamation of XXXXXXXXXX.
XXXXXXXXXX.
"BCO" means XXXXXXXXXX.
XXXXXXXXXX.
"C" means XXXXXXXXXX.
"C Group" means C and all of those corporations and the partnership in which C has a direct or indirect interest, and over which C has significant influence.
"C Redemption Note" means a promissory note to be issued in satisfaction of the redemption of the C Special Shares, as described in Paragraph 50.
"C Shareholders" means all of the holders of Existing C Shares immediately before the Transaction Date.
"C Special Shares" means the preferred shares of C with the terms and conditions described in Paragraph 37, to be issued to C Shareholders as described in Paragraph 38.
"Canadian XXXXXXXXXX Assets" means the assets used in the Canadian XXXXXXXXXX Business (except the Excluded Property), the beneficial ownership of which will be transferred by C to NewCo as described in Paragraph 44.
XXXXXXXXXX.
"Canadian XXXXXXXXXX Business" means the XXXXXXXXXX business carried on by C in Canada as described in Paragraphs 14, 15 and 16.
"capital property" has the meaning assigned in section 54 and subsection 248(1).
"XXXXXXXXXX Permit" means the XXXXXXXXXX Permit which is an XXXXXXXXXX permit for XXXXXXXXXX.
"CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended.
"depreciable property" has the meaning assigned in subsection 248(1).
XXXXXXXXXX.
"Dissenting Shareholder" means an C shareholder who exercises the shareholder's right to dissent from the Plan of Arrangement.
"Distribution" means the transactions described in Paragraphs 44 and 45 whereby C will transfer to NewCo the Canadian XXXXXXXXXX Assets for the consideration described in Paragraph 46.
XXXXXXXXXX.
"eligible capital property" has the meaning assigned in section 54.
"Excluded Property" means the property described in Paragraph 16 that is used in the Canadian XXXXXXXXXX Business which will not be transferred to NewCo as part of the Distribution.
"Existing C Shares" means the existing outstanding common shares of C.
"Existing C Stock Options" means the existing stock options of C described in Paragraph 8.
"FMV" means fair market value.
XXXXXXXXXX.
"In The Money Amount" means, in relation to a particular stock option, the amount by which the FMV of the shares that are subject of the particular option exceeds the exercise price in such option.
XXXXXXXXXX.
XXXXXXXXXX.
"LP" means XXXXXXXXXX Limited Partnership.
"New C Shares" means the new common shares of C with the terms and conditions described in Paragraph 37 which C will be authorized to issue pursuant to the amendment to its Articles as described in Paragraph 37.
"New C Stock Options" means the stock options that C will issue as described in Paragraph 40.
"NewCo" means the new corporation described in Paragraph 32 to which the Canadian XXXXXXXXXX Assets will be transferred.
"New Employees" means the XXXXXXXXXX employees of NewCo as described in paragraph 33.1.
"NewCo Redemption Note" means the promissory note to be issued in satisfaction of the redemption of the NewCo Special Shares as described in Paragraph 49.
"NewCo Shares" means the common shares of NewCo as described in Paragraph 33, to be issued to holders of C Special Shares as described in Paragraph 41.
"NewCo Special Shares" means the preferred shares of NewCo with the terms and conditions described in Paragraph 33, to be issued to C as described in Paragraph 46.
"NewCo Stock Options" means the stock options that NewCo will issue as described in Paragraphs 33.1, 40 and 55.
"Paragraph" refers to a numbered paragraph in this letter.
"Participant" means an C Shareholder, other than a Dissenting Shareholder.
"Plan of Arrangement" means the proposed plan of arrangement under the CBCA to effect the divisive reorganization of C as described in the Proposed Transactions.
"private corporation" has the meaning assigned in subsection 89(1).
"Proposed Transactions" means the proposed transactions described in Paragraphs 33 to 56.
"public corporation" has the meaning assigned in subsection 89(1).
"PUC" means "paid-up capital" as that expression is defined in subsection 89(1).
"SCO" means XXXXXXXXXX.
"significant influence" has the meaning assigned in the CICA Handbook.
"SFI" means "specified financial institution" as defined in subsection 248(1).
XXXXXXXXXX.
"stated capital" means stated capital as that expression is used in the CBCA.
"subject corporation" has the meaning assigned in subsection 186(3).
"subsidiary wholly-owned corporation" has the meaning assigned in subsection 248(1).
"taxable Canadian corporation" has the meaning assigned in subsection 89(1).
XXXXXXXXXX.
XXXXXXXXXX.
"Transaction Date" means the date on which the Proposed Transaction in Paragraphs 34 to 56 will occur.
Our understanding of the facts, proposed transactions and the purposes of the proposed transactions is as follows:
II. FACTS
1. C is a public corporation and a taxable Canadian corporation with its head office in XXXXXXXXXX.
2. XXXXXXXXXX.
3. C was incorporated under the laws of the Province of XXXXXXXXXX. On XXXXXXXXXX, C amended its memorandum to change its name to XXXXXXXXXX. On XXXXXXXXXX, C was continued under the CBCA and was authorized to issue an unlimited number of common shares. On XXXXXXXXXX, the articles of C were amended to change its name to XXXXXXXXXX, to authorize C to issue an unlimited number of first preference shares, issuable in series, and to consolidate the then outstanding common shares on a XXXXXXXXXX basis. On XXXXXXXXXX, the articles of C were amended to change its name to XXXXXXXXXX and to consolidate the then outstanding common shares on a XXXXXXXXXX basis.
4. On XXXXXXXXXX, C acquired all of the outstanding common shares of Amalco. On XXXXXXXXXX, C, Amalco and Amalco's wholly-owned subsidiary, XXXXXXXXXX, were amalgamated by way of a short-form vertical amalgamation.
5. A receipt for a prospectus was issued by the XXXXXXXXXX. This was for the first distribution to the public of the Existing C Shares. On XXXXXXXXXX, the Existing C Shares were listed on the XXXXXXXXXX Stock Exchange. On XXXXXXXXXX, the Existing C Shares were listed on the XXXXXXXXXX. The Existing C Shares continue to be listed on the XXXXXXXXXX.
6. The authorized share capital of C consists of an unlimited number of common shares and an unlimited number of preferred shares that are issuable in series.
7. As of XXXXXXXXXX, the outstanding share capital of C consisted of XXXXXXXXXX Existing C Shares. Based upon a closing trading price on the XXXXXXXXXX on XXXXXXXXXX of $XXXXXXXXXX the aggregate FMV of all the Existing C Shares was in the range of $XXXXXXXXXX.
8. C has obligations under the Existing C Stock Options whereby, subject to certain vesting requirements, certain directors, officers and other employees of C are entitled to acquire Existing C Shares at specified exercise prices. These exercise prices did not exceed the value of the Existing C Shares on the date that the relevant Existing C Stock Options were granted. As of XXXXXXXXXX, there were XXXXXXXXXX Existing C Stock Options outstanding that, when vested, will entitle the holders thereto to acquire Existing C Shares. Other than the Existing C Stock Options, no corporation in the C Group has granted any stock options to an employee of the C Group.
9. To the best of the knowledge of the directors and senior officers of C, as of the date hereof no person or related group of persons beneficially owns, directly or indirectly, more than 10% of the Existing C Shares other than Aco which as of the date hereof owns, directly or indirectly XXXXXXXXXX Existing C Shares which represents approximately XXXXXXXXXX%, on a fully diluted basis, of the outstanding Existing C Shares.
10. XXXXXXXXXX is the Chairman of the Board and the Chief Executive Officer of C. XXXXXXXXXX is the President and Chief Operating Officer of C. XXXXXXXXXX is the Vice-President of XXXXXXXXXX of C.
11. XXXXXXXXXX is the President of BCO and XXXXXXXXXX is the chairman of the Board of BCO.
12. XXXXXXXXXX is a corporation created under the XXXXXXXXXX that is the general partner of and manages LP. XXXXXXXXXX is a Subsidiary Wholly-owned Corporation of C. As general partner, XXXXXXXXXX has a XXXXXXXXXX % interest in LP.
13. XXXXXXXXXX.
The Canadian XXXXXXXXXX Business
14. The Canadian XXXXXXXXXX Business carried on by C utilizes the Canadian XXXXXXXXXX Assets and the Excluded Property and involves the XXXXXXXXXX.
15. The Canadian XXXXXXXXXX Assets include interests in XXXXXXXXXX properties. XXXXXXXXXX of the producing properties are operated by C while the remainder of the properties are either non-operated or royalty interests.
16. XXXXXXXXXX.
The Activities in XXXXXXXXXX
17. LP is a limited partnership formed under the XXXXXXXXXX of which C owns XXXXXXXXXX% of the XXXXXXXXXX% interest in LP held by the limited partners. The remaining XXXXXXXXXX% of the XXXXXXXXXX % interest held by the limited partners in LP is owned by XXXXXXXXXX other individuals and private corporations who are all unrelated to C.
18. SCO is a XXXXXXXXXX all of the outstanding shares of which are owned by LP.
19. XXXXXXXXXX.
20. XXXXXXXXXX.
The Activities in XXXXXXXXXX
21. BCO is a corporation formed under the laws of, and is resident in, XXXXXXXXXX. All of the outstanding voting common shares of BCO are owned by C.
22. BCO holds permits for the XXXXXXXXXX.
23. The fiscal year-end of C, SCO, BCO and LP is XXXXXXXXXX.
24. No property has or will become property of any corporation in the C Group in contemplation of and before the Distribution, except as described herein, and no liabilities have been, or will be, incurred or discharged by any member of the C Group in contemplation of and before the Distribution, except as described herein.
25. Except as specifically outlined herein, there is no expectation or intention of NewCo or any person in the C Group to dispose of any property in the foreseeable future, including as part of any of the Proposed Transactions, other than in the ordinary course of business, or as described herein.
26. C's undertaking of the Proposed Transactions is conditional upon the approval of its shareholders and the Court of Queen's Bench of XXXXXXXXXX.
27. There are not, and will not be at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any of the outstanding shares of C or NewCo.
28. Neither C nor NewCo has, or will have, entered into a dividend rental arrangement, as defined in subsection 248(1), in respect of any of the shares to be repurchased or redeemed as part of the Proposed Transactions.
29. None of the shares issued by C or NewCo will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).
30. None of NewCo or any other member of the C Group will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).
31. Each of C and NewCo will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.
32. NewCo was incorporated under the CBCA on XXXXXXXXXX, and is a taxable Canadian corporation. Prior to the transactions relating hereto, NewCo will not have had any assets or liabilities or have issued any shares.
III. PROPOSED TRANSACTIONS
NewCo Articles of Incorporation
33. NewCo's Articles of Incorporation will provide, as at the time of the Plan of Arrangement, or will be amended as part of the Plan of Arrangement to provide, that its authorized capital will include:
(a) NewCo Shares, each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of NewCo; and
(b) NewCo Special Shares having the following attributes:
(i) each NewCo Special Share will be redeemable, subject to applicable law, at any time at the option of NewCo at a redemption amount equal to the aggregate FMV of the consideration paid to NewCo on issuance thereof (i.e., the Canadian XXXXXXXXXX Assets as described in Paragraph 44) divided by the number of NewCo Special Shares issued as consideration therefor (plus any declared but unpaid dividends);
(ii) each NewCo Special Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described above;
(iii) the holder of each NewCo Special Share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors from time to time, which dividend need not also be declared on any other class of shares of NewCo;
(iv) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of NewCo if the resulting realizable value of the net assets of NewCo after payment of the dividends would be less than the aggregate of the redemption amounts of all of the NewCo Special Shares then outstanding;
(v) for the purpose of subsection 191(4), the terms and conditions of the NewCo Special Shares to be issued as described herein will, at the time of their issue, specify an amount in respect of each NewCo Special Share. The amount to be specified in respect of each NewCo Special Share, will be pursuant to a resolution of the board of directors of NewCo, will be expressed as a dollar amount, will not be determined by a formula and will not exceed the FMV of the property received by NewCo in consideration for its issuance;
(vi) the holder of each NewCo Special Share will be entitled, upon the liquidation, dissolution or winding-up of NewCo, to a payment in priority to all other classes of shares of NewCo of an amount equal to the redemption amount therefor to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and
(vii) the holder of each NewCo Special Share will not be entitled to vote at meetings of shareholders of NewCo, other than as provided under the CBCA.
33.1 Prior to the approval of the Plan of Arrangement as described below, NewCo will hire New Employees. Each of the New Employees will deal at arm's length with C and Aco. Prior to the time of the Plan of Arrangement, each New Employee may be granted NewCo Stock Options to acquire from treasury a number of NewCo Shares that is less than XXXXXXXXXX percent of the number of NewCo Shares that will be outstanding immediately following the Proposed Transactions. None of these NewCo Stock Options will be exercisable until after completion of the Proposed Transactions. The exercise price under these NewCo Stock Options will not be less than the estimated FMV of a NewCo Share at the time such options are granted, which amount will anticipate the successful completion of the Proposed Transactions.
Reorganization of C Share Capital
34. A Management Information Circular will be mailed to all holders of Existing C Shares in contemplation of a meeting of those shareholders to, inter alia, approve the proposed Plan of Arrangement. This document also will be filed with the XXXXXXXXXX Securities Commission in compliance with XXXXXXXXXX Policy requiring "prospectus level disclosure" regarding NewCo and the NewCo Shares and it also will be filed with the appropriate provincial securities administrators. There is no legal requirement for this document to be accepted by the XXXXXXXXXX or any other public authority in Canada.
35. Subject to, among other things, the appropriate shareholder and court approvals, the Proposed Transactions generally will be undertaken pursuant to the Plan of Arrangement. With the exception of the actual filing of elections under the Act, the transactions involving stock options, the public listing of NewCo Shares and any subsequent private placement, the following Proposed Transactions will occur by virtue of the Plan of Arrangement and will be designated in the Plan of Arrangement to occur on the Transaction Date in the order set out below. The Transaction Date will be on a date that will be subsequent to the date of receipt of the rulings requested herein.
36. Each C Shareholder will be entitled to dissent from the Plan of Arrangement pursuant to the provisions of the Plan of Arrangement. For the purposes of the transactions comprising the Plan of Arrangement, any Dissenting Shareholder who ultimately is entitled to be paid the fair value of its Existing C Shares will be deemed, under the Plan of Arrangement, to have transferred its Existing C Shares to C and such shares will be deemed to have been cancelled by C, immediately prior to the Transaction Date.
37. C's Articles of Incorporation will be amended to create two new classes of shares as follows:
(a) New C Shares, each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of C, the provisions of which will be slightly different than the Existing C Shares, but which otherwise will have other terms which parallel the terms of the Existing C Shares; and
(b) C Special Shares with the following attributes:
(i) each C Special Share will be redeemable, subject to applicable law, at any time at the option of C at a redemption amount equal to the FMV of all of the issued and outstanding shares of C multiplied by the proportion that the FMV of the Canadian XXXXXXXXXX Assets is of the FMV of all of the property of C then divided by the number of C Special Shares issued on the reorganization of capital (plus any declared but unpaid dividends);
(ii) each C Special Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described above;
(iii) the holder of each C Special Share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors from time to time, which dividend need not also be declared on any other class of shares of C;
(iv) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of C if the resulting realizable value of the net assets of C after payment of the dividends would be less than the aggregate of the redemption amounts of all of the C Special Shares then outstanding;
(v) for the purpose of subsection 191(4), the terms and conditions of the C Special Shares to be issued as described herein will, at the time of their issue, specify an amount in respect of each C Special Share. The amount to be specified in respect of each of the C Special Shares will be pursuant to a resolution of the board of directors of C, will be expressed as a dollar amount, will not be determined by a formula and will not exceed the FMV of the property received by C in consideration for its issuance;
(vi) the holder of each C Special Share will be entitled, upon the liquidation, dissolution or winding-up of C, to a payment in priority to all other classes of shares of C, of an amount equal to the redemption amount thereof to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and
(vii) the holder of each C Special Share will be entitled to one vote for every XXXXXXXXXX shares held at meetings of shareholders of C, except as may be otherwise provided under the CBCA.
38. Each Participant will, in exchange for each Existing C Share held, receive one New C Share and one C Special Share.
39. The additions to the stated capital of the New C Shares and the C Special Shares will reflect the relative aggregate FMV's of such shares and, in the aggregate, will not exceed the aggregate PUC of the Existing C Shares immediately prior to the reorganization of capital. The Existing C Shares will be cancelled.
Existing C Stock Options
40. Concurrent with the transfer of the C Special Shares described in Paragraph 41, each employee of C will exchange each Existing C Stock Option held by such employee for one New C Stock Option granted by C to acquire New C Shares and XXXXXXXXXX NewCo Stock Options granted by NewCo to acquire NewCo Shares. The aggregate In The Money Amount applicable to the New C Stock Options and the NewCo Stock Options issued to a particular employee will not exceed the aggregate In The Money Amount applicable to the Existing C Stock Options that were the subject of the transfer by the particular holder. Consistent with the policy of the XXXXXXXXXX, for this purpose, the existing exercise price in respect of the Existing C Stock Options will be allocated among the New C Stock Options and the NewCo Stock Options by means of a formula based on the existing exercise price and the weighted average trading price over a specified period (expected to be in the range of XXXXXXXXXX days) of the NewCo Shares.
Transfer of C Special Shares to NewCo
41. NewCo will acquire from the Participants all of the C Special Shares in exchange for NewCo Shares. Each Participant will receive XXXXXXXXXX NewCo Share for each C Special Share transferred to NewCo (no fractional NewCo Shares will be issued to the Participants as any fractional NewCo Shares will be rounded up). The certificates for the C Special Shares which otherwise would be delivered to the Participants instead will be delivered directly to NewCo. Immediately after the exchange, the FMV of each Participant's share of the capital stock of NewCo will approximate the amount determined by the formula (A * B/C) + D as set out in subparagraph (b)(iii) of the definition "permitted exchange" in subsection 55(1).
42. If requested by a particular Participant, NewCo will execute a joint election under subsection 85(1) in respect of the disposition by that Participant of C Special Shares for NewCo Shares. It is anticipated that Aco will execute and file a valid election with NewCo in respect of the dispositions of the C Special Shares.
43. Pursuant to subsection 26(3) of the CBCA, the addition to the stated capital of NewCo in respect of the issuance of the NewCo Shares will not exceed the aggregate PUC of the C Special Shares transferred to NewCo.
Transfer of the Canadian XXXXXXXXXX Assets
44. C will transfer to NewCo all of the Canadian XXXXXXXXXX Assets and NewCo will assume all the related liabilities with respect to the Canadian XXXXXXXXXX Assets. Immediately before the transfer of property, the property of C will be determined as though there was one type of property, as contemplated by subsection 55(3.02) of the Act, on a net basis.
45. Immediately after the transfer described in Paragraph 44, the net FMV of the Canadian XXXXXXXXXX Assets will equal the proportion of the net FMV of all the property of C determined before the transfer, that:
(a) the aggregate FMV of the C Special Shares owned by NewCo, immediately before the transfer, is of
(b) the aggregate FMV of all the issued and outstanding shares of C immediately before the transfer.
46. In consideration for the transfer of the Canadian XXXXXXXXXX Assets, NewCo will issue NewCo Special Shares to C which will have an aggregate redemption amount equal to the net FMV of the Canadian XXXXXXXXXX Assets transferred.
47. C and NewCo will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of the Canadian XXXXXXXXXX Assets to NewCo. Specifically, the agreed amount in each joint election will not be less than:
(a) the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii) in the case of eligible capital property;
(b) the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii) in the case of depreciable property of a prescribed class; and
(c) the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii) in case of property described in paragraph 85(1)(c.1).
In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).
48. Pursuant to subsection 26(3) of the CBCA, the addition to the stated capital of NewCo in respect of the issuance of the NewCo Special Shares to C will not exceed the aggregate agreed amounts under subsection 85(1) in respect of the transfer of the Canadian XXXXXXXXXX Assets to NewCo.
Cross-Redemption
49. NewCo will redeem from C all of the NewCo Special Shares for an amount equal to the aggregate of the redemption amounts of the shares so redeemed, and will issue to C in consideration therefor the NewCo Redemption Note, being a demand promissory note with a principal amount equal to the aggregate of the foregoing redemption amounts. C will accept such note as full and absolute payment of the redemption amounts in respect of all such redeemed shares, with the risk of the note being dishonoured.
50. C will redeem from NewCo all of the C Special Shares for an amount equal to the aggregate of the redemption amounts of the shares so redeemed, and will issue to NewCo in consideration therefor the C Redemption Note, being a demand promissory note with a principal amount equal to the aggregate of the foregoing redemption amounts. NewCo will accept such C Redemption Note as full payment of the redemption amounts in respect of such redeemed shares, with the risk of the note being dishonoured.
51. Each of the NewCo Redemption Note and the C Redemption Note will have interest payable only from the date of demand for payment by the holder to the date of payment of the amount owing under the particular note at a rate equal to the average monthly prime rate of a Canadian chartered bank.
Set-Off
52. C will pay the principal amount of the C Redemption Note by transferring to NewCo the NewCo Redemption Note which will be accepted by NewCo in full payment of C's obligation. NewCo will pay the principal amount of the NewCo Redemption Note by transferring to C the C Redemption Note which will be accepted by C in full payment of NewCo's obligation. The C Redemption Note and the NewCo Redemption Note both will be marked thereupon "paid in full" and cancelled.
NewCo
53. The NewCo shares will be listed for trading on either the XXXXXXXXXX or the XXXXXXXXXX.
54. Discussions are underway to formalize an independent management team for NewCo. The directors of NewCo will consist of XXXXXXXXXX members including XXXXXXXXXX together with XXXXXXXXXX unrelated directors. Only XXXXXXXXXX of the directors of NewCo will also be directors of C.
55. In addition to the NewCo Stock Options issued in Paragraph 40, NewCo may issue NewCo Stock Options to enable certain directors, officers and other employees of NewCo to acquire NewCo Shares from treasury at exercise prices that will not be less than the FMV of the NewCo Shares on the day on which the particular NewCo Stock Options are granted.
Share Certificates
56. The share certificates in connection with the various share transactions outlined above will be handled as set forth below.
(a) Recognizing that all of the C Special Shares issued to the Participants will immediately be acquired by NewCo in exchange for NewCo Shares, no C Special Share certificates will be issued or delivered to the Participants. However, NewCo will be issued a certificate for all of the C Special Shares upon NewCo's acquisition thereof.
(b) As soon as practicable following the later of the completion of the Plan of Arrangement and the date of deposit by a former holder of Existing C Shares of a duly completed letter of transmittal and the certificates representing Existing C Shares, certificates representing the number of NewCo Shares and New C Shares issuable to a Participant shall be forwarded, or otherwise made available to the Participant.
(c) From and after the time of the exchange described in Paragraph 38, share certificates representing Existing C Shares held by a Participant shall for all purposes be deemed to be share certificates representing New C Shares, and no new share certificates shall be issued with respect to the New C Shares issued in connection with the Plan of Arrangement.
(d) From the time of the exchange described in Paragraph 41, to the close of business on the record date described in subparagraph (b) hereof, share certificates representing Existing C Shares held by a Participant shall be deemed, pursuant to the Plan of Arrangement, for all purposes to also represent NewCo Shares.
Post-Proposed Transactions
57. Upon completion of the Proposed Transactions, each of C and NewCo will operate as separate entities.
58. Following the Proposed Transactions, NewCo may raise additional capital by an issuance of NewCo Shares to the public as part of a public offering or through private placement, provided that such issuance would be limited to not more than 50% of the NewCo Shares issued in the Proposed Transactions.
IV. PURPOSE OF THE PROPOSED TRANSACTIONS
C believes that it is in the best interests of the C Shareholders that C "spin-off" its Canadian XXXXXXXXXX Business on the basis outlined above for the following reasons:
1. The creation of NewCo as a separate public corporation should increase shareholder value because the Canadian XXXXXXXXXX Business ultimately should achieve a higher valuation as a stand-alone business.
2. The separation of C's businesses between C and NewCo will enhance the ability of each separate public corporation to pursue its independent corporate objectives and strategies.
3. It is preferable to give the C Shareholders a choice to make an independent investment decision in respect of their value-based investment in the Canadian XXXXXXXXXX Business on the one hand, and the international XXXXXXXXXX activities of C (i.e., the activities in XXXXXXXXXX and in XXXXXXXXXX) on the other.
4. The "spin-off" will allow the separate businesses to access capital for growth on the basis of their individual visions and strategies and the Canadian XXXXXXXXXX Business will not be encumbered by the financing activities of LP in XXXXXXXXXX.
5. The separation also will enhance shareholder liquidity.
6. The "spin-off" will result in C and NewCo having dedicated management teams focused on the core assets of the respective company.
V. RULINGS
Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, purposes of the proposed transactions and the proposed transactions, we rule as follows:
A. With regard to the purchase by C of Existing C Shares held by a Dissenting Shareholder as described in Paragraph 36:
(a) subject to the application of subsection 55(2), the Dissenting Shareholder will be deemed by paragraph 84(3)(b) to have received a dividend equal to the amount by which any payment from C to the Dissenting Shareholder in respect of the purchase of such person's shares exceeds the PUC of such shares immediately prior to their purchase;
(b) subsections 212(2) and 215(1) will apply (subject to the provisions of any applicable income tax convention) to require C to withhold and remit 25% of the amount of any such dividend deemed to have been paid to a Dissenting Shareholder who is a non-resident person; and
(c) paragraph (j) of the definition of "proceeds of disposition" in section 54 will apply to exclude the amount of such deemed dividend from the proceeds of disposition of the Existing C Shares recognized by the Dissenting Shareholder as a result of the purchase of such shares by C provided that the shares were held as capital property by the Dissenting Shareholder.
B. The provisions of subsection 86(1) will apply and the provisions of subsections 86(2) and (2.1) will not apply to the disposition of each Existing C Share by each Participant for one New C Share and one C Special Share provided that:
(a) the particular Participant holds the Existing C Share as capital property; and
(b) the particular Participant and C do not file an election under subsection 85(1) in respect of the particular share exchange,
such that:
(c) the cost of the New C Shares and C Special Shares received on the exchange by each particular Participant will be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the aggregate ACB to the particular Participants, immediately before the exchange, of the Existing C Shares, that
(i) the FMV, immediately after the exchange, of the New C Shares or the C Special Shares, as the case may be, received by the particular Participant
is of
(ii) the FMV, immediately after the exchange, of all of the shares of C received by the particular Participant for the Existing C Shares; and
(d) pursuant to paragraph 86(1)(c), such Participant will be deemed to have disposed of its Existing C Shares for aggregate proceeds of disposition equal to the aggregate cost to the Participant of the New C Shares and C Special Shares received by it as determined in (c) above.
C. Provided that a particular Participant who, immediately before the exchange of C Special Shares for an identical number of NewCo Shares:
(a) holds the C Special Shares as capital property;
(b) deals at arm's length with NewCo immediately before the exchange;
(c) does not file an election under subsection 85(1) with respect to the exchange; and
(d) does not include any portion of the gain or loss otherwise determined in computing his or her income for that year;
and further provided that immediately after the exchange:
(e) no such Participant or persons with whom the Participant does not deal at arm's length, or the particular Participant together with any other person or persons with whom such Participant does not deal at arm's length, will control NewCo or beneficially own shares of NewCo having a FMV of more than 50% of the FMV of all of the outstanding shares of NewCo;
then pursuant to paragraph 85.1(1)(a) such Participant will be deemed:
(f) to have disposed of such C Special Shares for proceeds of disposition equal to the ACB to such Participant of those shares immediately before the exchange; and
(g) to have acquired the NewCo Shares at a cost to such person equal to the ACB to such Participant of such C Special Shares immediately before the exchange;
and
(h) the cost to NewCo of each C Special Share acquired from each such Participant will be deemed to be the lesser of its FMV immediately before the Exchange and the PUC of the C Special Shares immediately before the Exchange.
D. Provided that the requisite elections are made in the prescribed form and within the prescribed time period, and provided that the property transferred is eligible property within the meaning of subsection 85(1.1), subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfer:
(a) by C of the Canadian XXXXXXXXXX Assets to NewCo as described in Paragraphs 44 to 47, and
(b) by any holder of C Special Shares (including Aco) of all such shares to NewCo as described in Paragraphs 41 and 41.
such that the agreed amounts in respect of each transfer will be deemed to be the proceeds of disposition for the particular transferred property to each transferor and the cost to each transferee for the particular transferred property. For purposes of the joint elections described in Paragraph 47, the reference to "undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition " in subparagraph 85(1)(e)(i) will be read to mean the proportion of the undepreciated capital cost to the taxpayer of all the property of that class that the capital cost of the property immediately before the disposition is of the capital cost of all property of that class immediately before the disposition. For greater certainty, paragraph 85(1)(e.2) will not apply to any of the transfers.
E. For the purposes of subparagraph (b)(iii) of the definition of PUC in subsection 89(1), the PUC of:
(i) the New C Shares and C Special Shares issued to the holders of Existing C Shares as described in Paragraph 38;
(ii) the NewCo Shares issued to holders of C Special Shares exchanged therefor as described in Paragraph 41;
(iii) the NewCo Special Shares issued to C as described in Paragraph 46;
computed without reference to the Act will be equal to their stated capital as determined for purposes of the CBCA.
F. On the transfer of any depreciable assets by C as described in Paragraph 44:
(i) the provisions of Regulation 1102(14) will apply to deem each Depreciable Property transferred to NewCo to be property of the same prescribed class as that of C immediately before the transfer; and
(ii) in respect of each Depreciable Property acquired by NewCo in respect of which the conditions described in Regulation 1100(2.2)(f) or (g) are met, no amount will be included under Regulation 1100(2)(a) in respect of that property.
G. Subsection 84(3) will apply:
(a) on the redemption, as described in Paragraph 49, of the NewCo Special Shares owned by C, to deem NewCo to have paid and C to have received; and
(b) on the redemption, as described in Paragraph 50, of the C Special Shares owned by NewCo, to deem C to have paid and NewCo to have received;
a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC in respect of such shares immediately before such redemption, and any such dividend:
(c) will be included, pursuant to subsection 82(1) and paragraph 12(1)(j), in computing the income of the corporation deemed to have received such dividend;
(d) will be deductible pursuant to subsection 112(1) by the corporation deemed to have received the dividend;
(e) will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) or (2.4) apply;
(f) will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining the proceeds of disposition to the recipient corporation of the shares so redeemed;
(g) will not be subject to tax under Part IV; and
(h) will not be subject to tax under Parts IV.1 or VI.1.
H. The provisions of subsection 112(3) will apply to reduce any loss which otherwise would be determined for the particular holder as a result of the redemptions of shares described in the Proposed Transactions.
I. Provided that, as part of the series of transactions or events that includes the Proposed Transactions described above, there is not:
(a) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(b) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(c) an acquisition of shares of C in the circumstances described in subparagraph 55(3.1)(b)(iii); or
(d) an acquisition of property in the circumstances described in subparagraph 55(3.1)(c) or 55(3.1)(d);
(e) a distribution by C to a corporation that is not an "acquiror" within the meaning of the definition of "specified corporation" before the day that is three years after the day that the transaction described in paragraph 44 above is implemented; or
(f) a distribution by NewCo or any acquiror in relation to C before the day that is XXXXXXXXXX years after the date that the transaction described in paragraph 44 above is implemented;
which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in the rulings given in Ruling (g) above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
J. The cost to NewCo of the C Redemption Note and the cost to C of the NewCo Redemption Note will in each case, upon the issuance thereof, be equal to the principal amount of the particular note. Accordingly, no amount will be included in the income of NewCo or C upon payment of the principal amount of the particular note.
K. The repayment of the C Redemption Note held by NewCo and the NewCo Redemption Note held by C as described in Paragraph 52 will not, in and of itself, result in an income inclusion or the application of the provisions of section 80.
L. Provided that the Existing C Shares constitute capital property to a particular Participant prior to the commencement of the Proposed Transactions, the Proposed Transactions will not, in and by themselves, cause the New C Shares, the C Special Shares, the NewCo Shares and the NewCo Special Shares to be received by that Participant as a result of the Proposed Transactions not to be capital property to that Participant.
M. Control, for purposes of the Act, of C will not be considered to be have been acquired by a person or group of persons by reason only of the Proposed Transactions.
N. Provided that the New C Shares and the NewCo Shares are listed on a prescribed stock exchange in Canada, such shares will be a "qualified investment":
(a) for a deferred profit sharing plan by virtue of paragraph (d) of the definition "qualified investment" in section 204;
(b) for a registered retirement savings plan by virtue of paragraph (a) of the definition "qualified investment" in subsection 146(1);
(c) for a registered retirement income fund by virtue of paragraph (a) of the definition "qualified investment" in subsection 146.3(1); and
(d) for a registered education savings plan by virtue of paragraph (a) of the definition "qualified investment" in subsection 146.1(1).
O. The Proposed Transactions, in and of themselves, will not result in the application of subsections 15(1), 56(2), 56(4) or 246(1).
P. Subsection 7(1.4) will apply in respect of the exchange of Existing C Stock Options for New C Stock Options and NewCo Stock Options as described in Paragraph 40 provided that the aggregate In The Money Amount applicable to the New C Stock Options and the NewCo Stock Options issued to the holder of the New C Stock Options and the NewCo Stock Options does not exceed the aggregate In The Money Amount applicable to the Existing C Stock Options that were the subject of the transfer by the particular holder with the result that for the purpose of section 7 and paragraph 110(1)(d):
(a) such holder of an Existing C Stock Option will be deemed not to have disposed of his Existing C Stock Option and not to have acquired a New C Stock Option and a NewCo Stock Option; and
(b) such holder's New C Stock Options and NewCo Stock Options will be deemed to be the same as, and a continuation of his Existing C Stock Options.
For greater certainty, a holder of an Existing C Stock Option will not be deemed to have received a benefit pursuant to paragraph 7(1)(b).
Q. Subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.
Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:
(a) the determination of the ACB, PUC of FMV of any shares referred to herein; or
(b) any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above.
OPINION
Provided that the amendment to the Act concerning the proposed addition of subsection 55(6) contained in the Revised Draft Technical Amendments to the Income Tax Act released by the Minister of Finance on February 27, 2004 is enacted substantially as drafted, and provided that immediately before the exchange the Existing C Shares are not "taxable Canadian property", we confirm that the C Special Shares will be deemed, for the purposes of subsection 116(6) and the definition "taxable Canadian property" in subsection 248(1) to be listed on a prescribed stock exchange.
The foregoing opinion is not a ruling and, as noted in Information Circular 70-6R5, is not binding on the Canada Revenue Agency.
Yours truly,
XXXXXXXXXX
Manager
Corporate Reorganizations Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
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