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: Does the deemed dividend that arises on a PUC reduction by a public company under subsection 84(4.1) qualify for the "reorganization of its business" exemption under subsection 84(2).
Position: Yes.
Reasons: Consistent with our position in previous rulings and with Department of Finance policy.
XXXXXXXXXX 2004-006378
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge receipt of your facsimiles and emails as well as the information provided in various telephone conversations.
Throughout this letter, the following corporations will be referred to as follows:
XXXXXXXXXX . Holdco
XXXXXXXXXX . Opco
Holdco files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office. Holdco and Opco are resident in Canada for the purposes of the Act.
To the best of your knowledge and that of the taxpayer, none of the issues in this ruling request is:
(i) involved 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.
Holdco has confirmed that the proposed transaction described herein will not result in Holdco or any of its subsidiaries being unable to pay its outstanding tax liabilities.
Unless otherwise indicated, all references 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 provision of the Act;
(b) "adjusted cost base" ("ACB") has the meaning assigned by section 54;
(c) "BCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended and, where applicable, its predecessor statutes;
(d) "Distributed Opco Shares" means all the Opco Shares to be distributed to holders of Holdco Common Shares on the Distribution;
(e) "Distribution" means the proposed distribution to holders of Holdco Common Shares of the Distributed Opco Shares and cash in lieu of fractional Opco Shares, to be effected on a reduction of stated capital of the Holdco Common Shares, as described in Paragraph 15 below;
(f) "Holdco Common Shares" means the common shares in the capital stock of Holdco, as described in Paragraph 3 below;
(g) "Opco Shares" means the common shares in the capital stock of Opco that are held directly and indirectly by Holdco, as described in Paragraph 6 below;
(h) "paid-up capital" ("PUC") has the meaning assigned by subsection 89(1);
(i) "Paragraph" means a numbered paragraph in this advance income tax ruling;
(j) "proposed transaction" means the transaction described in Paragraph 15 below;
(k) "public corporation" has the meaning assigned by subsection 89(1);
(l) "special resolution" has the meaning assigned by subsection 2(1) of the BCA;
(m) "stated capital" has the meaning assigned by section 26 of the BCA;
(n) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
(o) "taxable dividend" has the meaning assigned by subsection 89(1).
Our understanding of the facts, proposed transaction and purpose of the proposed transaction is as follows:
FACTS
1. Holdco is the corporation resulting from the amalgamation of XXXXXXXXXX (which was originally incorporated under the BCA in XXXXXXXXXX), XXXXXXXXXX, which amalgamation was effective on XXXXXXXXXX. Holdco is governed by the BCA and is a public corporation and a taxable Canadian corporation.
2. Holdco is a strategic management and holding corporation. For financial and management reporting purposes, Holdco's business operations consist of the following XXXXXXXXXX segments:
XXXXXXXXXX.
These segments are organized by products and services offered and are treated separately for planning purposes and for measuring performance.
3. As at XXXXXXXXXX, Holdco had XXXXXXXXXX common shares issued and outstanding, representing all of its issued voting shares (the "Holdco Common Shares"). The Holdco Common Shares are listed on the XXXXXXXXXX Stock Exchange and other stock exchanges in XXXXXXXXXX.
4. Holdco also has XXXXXXXXXX issued and outstanding Cumulative Redeemable First Preferred Shares issued in various series. The relevant terms and conditions of the Cumulative Redeemable First Preferred Shares vary somewhat from series to series, but in all cases the shares are non-voting and are redeemable for a fixed amount. The Cumulative Redeemable First Preferred Shares are listed on the XXXXXXXXXX Stock Exchange.
5. Holdco has paid regular quarterly dividends on the Holdco Common Shares. Taxable dividend payments by Holdco on the Holdco Common Shares in the XXXXXXXXXX taxation years were approximately $XXXXXXXXXX and $XXXXXXXXXX, respectively. The current dividend policy of Holdco is that it will pay dividends on the Holdco Common Shares of approximately $XXXXXXXXXX per quarter.
6. Opco is governed by the BCA and is a public corporation and a taxable Canadian corporation. The only class of shares in the capital stock of Opco that is issued and outstanding is common shares. As at XXXXXXXXXX, Holdco directly held approximately XXXXXXXXXX% of the common shares of Opco, and indirectly held a further XXXXXXXXXX% for a total of XXXXXXXXXX%. Holdco's indirect shareholding is through XXXXXXXXXX, a taxable Canadian corporation wholly owned by Holdco that holds XXXXXXXXXX% of the common shares of Opco, and through XXXXXXXXXX and XXXXXXXXXX, two taxable Canadian corporations wholly-owned by XXXXXXXXXX that hold XXXXXXXXXX% and XXXXXXXXXX% of the common shares of Opco, respectively. Directly and indirectly, Holdco holds a total of approximately XXXXXXXXXX Opco Shares, which represents approximately XXXXXXXXXX of an Opco Share for every Holdco Common Share outstanding. The remaining XXXXXXXXXX% of the outstanding common shares of Opco are held by the public.
7. XXXXXXXXXX.
8. On XXXXXXXXXX, Opco announced that it will sell its XXXXXXXXXX. The transaction is expected to close in XXXXXXXXXX.
9. The Holdco Group first acquired an interest in Opco in XXXXXXXXXX in consideration for the transfer of its XXXXXXXXXX business services division to Opco. Since then, Holdco has invested in excess of $XXXXXXXXXX in Opco to fund its growth strategies.
10. Opco has entered into a XXXXXXXXXX transaction with XXXXXXXXXX, another subsidiary of Holdco, which transaction was the subject of an advance income tax ruling dated XXXXXXXXXX, 2003 (Reference Number XXXXXXXXXX). This arrangement will be unwound and terminated prior to the Distribution.
11. As of XXXXXXXXXX , the market capitalization of Holdco was approximately $XXXXXXXXXX and the fair market value of the Opco Shares (based on the market capitalization of Opco) was approximately $XXXXXXXXXX. At one time, the fair market value of Holdco's investment in Opco exceeded $XXXXXXXXXX.
12. Holdco estimates that the paid-up capital of the Holdco Common Shares is no less than $XXXXXXXXXX per Holdco Common Share.
13. Holdco estimates that the aggregate adjusted cost base of the Opco Shares held directly and indirectly by Holdco exceeds $XXXXXXXXXX.
14. Holdco will undertake to reorganize its direct and indirect interests in Opco such that Holdco will hold all of its interest in the Opco Shares directly.
PROPOSED TRANSACTION
15. Holdco common shareholders will be asked at Holdco's annual and special shareholder meeting to consider a special resolution approving a reduction in the stated capital of the Holdco Common Shares. This reduction of stated capital will be for the purposes of distributing the Distributed Opco Shares and cash in lieu of fractional Opco Shares to the holders of Holdco's Common Shares on the reduction of capital.
If the special resolution is approved, Holdco common shareholders will receive a pre-determined fraction of an Opco Share for each Holdco Common Share held as of the record date for the Distribution, provided that no fractional interests in Opco Shares will be distributed. To the extent that a holder of Holdco Common Shares would be entitled to a fraction of an Opco Share, Holdco will retain such fraction and, on the Distribution, will pay to such holder in cash an amount equal to the product of such fraction and the fair market value of an Opco Share on the date of the Distribution. Such cash payments will be funded from Holdco's cash resources. Holdco intends to dispose of any Opco Shares it retains as a result of fractional entitlements in an orderly manner so as to avoid disruption to the public markets.
As a consequence of the Distribution, the amount of the reduction in the stated capital of the Holdco Common Shares will be an amount equal to the aggregate of the fair market value, on the date of the Distribution, of the Distributed Opco Shares and the total cash paid in lieu of fractions of Opco Shares. For greater certainty, such aggregate amount will not exceed the aggregate paid-up capital of the Holdco Common Shares. The Opco Shares and cash in lieu of fractions will then be distributed to Holdco common shareholders in satisfaction of the payment of the reduction of capital.
16. The proposed reduction in the stated capital of the Holdco Common Shares, described in Paragraph 15 above, has not been preceded by an increase in the paid-up capital of those shares that resulted in a dividend which Holdco elected to treat as having been paid out of its 1971 capital surplus on hand.
17. The proposed reduction in the stated capital of the Holdco Common Shares, described in Paragraph 15 above, is not in lieu of ordinary course dividends. Holdco has a history of paying, and intends to continue to pay, regular quarterly dividends on the Holdco Common Shares in accordance with its current dividend policy.
PURPOSE OF THE PROPOSED TRANSACTION
18. Holdco has determined that it is in the best interests of its shareholders to distribute the Opco Shares to the holders of Holdco Common Shares on the basis outlined above for a number of reasons, including the following:
(a) the proposed transaction will allow Holdco to exit from the Opco business segment, which will enable Holdco to further its objective of focusing on its XXXXXXXXXX business segment;
(b) the proposed transaction will enable existing Holdco common shareholders to make independent investment decisions concerning their respective interests in Opco; and
(c) the proposed transaction reflects the best means of ensuring the growth of Opco's business independent of Holdco.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transaction and purpose of the proposed transaction, and provided that the proposed transaction is completed in the manner described above, our rulings are as follows:
A. Subject to the application of subsection 40(3), the Distribution will not, in and by itself, result in a disposition, within the meaning of subsection 248(1), of Holdco's Common Shares.
B. Where a shareholder holds Holdco Common Shares as capital property, the amount received by each such shareholder on the reduction of the paid-up capital of such shareholder's shares, as described in Paragraph 15 above, will be deducted in computing the adjusted cost base of such shareholder's Holdco Common Shares by virtue of subparagraph 53(2)(a)(ii).
C. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to the Distribution such that Holdco will not be deemed to have paid, and the Holdco common shareholders will not be deemed to have received, a dividend on the reduction of paid-up capital and the distribution of the Distributed Opco Shares and cash in lieu of fractional shares, as described in Paragraph 15 above.
D. The Opco Shares received by a Holdco common shareholder on the Distribution will be considered to have been acquired by such shareholder at a cost equal to their fair market value at the time of the Distribution.
E. Subsection 15(1) will not apply to require any amount distributed to a Holdco common shareholder as a return of capital, as described in Paragraph 15 above, to be included in computing the income of such shareholder.
F. Subsection 245(2) will not be applied to the Distribution, in and by itself, to re-determine the tax consequences confirmed in the rulings given above.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Revenue Agency provided that the proposed transaction is completed by XXXXXXXXXX.
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
1. Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:
(a) the determination of the fair market value or ACB of any particular asset, the paid-up capital in respect of any shares referred to herein, or the non-capital losses or net capital losses of any corporation; or
(b) any tax consequences relating to the facts and proposed transaction described herein other than those specifically described in the rulings given above.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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