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: 1. Whether the return of capital to the Class A shareholders is subject to the provisions of subsection 84(2)? 2. Whether the taxable dividends received by the Class C shareholders are subject to the provisions of subsection 55(2)? 3. Whether the proposed transactions will be subject to subsection 245(2)?
Position: 1. Yes. 2. No. 3. No.
Reasons: 1. Meets the requirements of the provision. 2. The dividends will be subject to the exemption under paragraph 55(3)(a). 3. The proposed transactions do not result in a "misuse or abuse".
XXXXXXXXXX 2004-006753
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: XXXXXXXXXX ("Pubco")
This is in reply to your letter of XXXXXXXXXX, and the restated request dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.
To the best of your knowledge and that of Pubco, none of the issues involved in this ruling request is:
1. in an earlier return of Pubco or a related person;
2. being considered by a tax services office or taxation centre in connection with a previously filed tax return of Pubco or a related person;
3. under objection by Pubco or a related person;
4. before the courts; or
5. the subject of a ruling previously issued by the Income Tax Rulings Directorate.
DEFINITIONS
This letter contains references to Canadian dollars and United States dollars. All monetary amounts referred to, unless otherwise indicated, are expressed in Canadian dollars, and United States dollars are referred to as "US$".
The following terms have the meanings specified:
(a) "Acquisitionco" means XXXXXXXXXX, a private corporation incorporated under the laws of the province of XXXXXXXXXX which was a wholly-owned subsidiary of Mco and a predecessor of Amalco;
(b) "Acquisitionco Notes Receivable" means the interest-bearing, secured, subordinated promissory notes in the aggregate principal amount of $XXXXXXXXXX now owed by Amalco and representing a portion of the purchase price receivable in respect of the sale of the common shares of S Co, NewcoA and NewcoB by Pubco described in Paragraphs 22 and 23 below;
(c) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, including the regulations promulgated thereunder, 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;
(d) "adjusted cost base" or "ACB" has the meaning assigned by section 54;
(e) "Amalco" means XXXXXXXXXX, the corporation resulting from the Amalgamation;
(f) "Amalco Notes Receivable" means the Acquisitionco Notes Receivable following the Amalgamation;
(g) "Amalco X-Notes Receivable" means the X-Notes Receivable following the Amalgamation;
(h) "Amalgamation" means the amalgamation on XXXXXXXXXX of Acquisitionco, S Co, NewcoA and NewcoB;
(i) "arm's length" has the meaning assigned by section 251;
(j) "Articles of Amendment" means the articles of amendment which Pubco intends to file as described in Paragraphs 29(i) and 30 below;
(k) "capital property" has the meaning assigned by section 54;
(l) "CRA" means the Canada Revenue Agency;
(m) "Circular" has the meaning set forth in Paragraph 28 below;
(n) "Class A Capital Return" means the distribution of cash, Amalco Notes Receivable, and Amalco X-Notes Receivable to be effected as a reduction of stated capital in respect of the Pubco Class A Common Shares, as described in Paragraph 29(iii) below;
(o) "Class A Common Shares" means the Class A Subordinate Voting Shares of Pubco;
(p) "Class B Common Shares" means the Class B Shares of Pubco;
(q) "Class C Common Shares" means the Class C Shares of Pubco to be authorized, as described in Paragraph 30 below;
(r) "contributed surplus" has the meaning determined under generally accepted accounting principles, which provide that it is a non-capital equity account that may be maintained and is distinguished from the retained earnings account, the share premium account and any other capital accounts;
(s) "disposition" has the meaning assigned by subsection 248(1);
(t) "fair market value" or "FMV" means the highest price payable for a particular property in an open and unrestricted market between informed, prudent parties acting at arm's length and under no compulsion to act;
(u) "F Co" means XXXXXXXXXX, a corporation which was incorporated under the laws of the State of XXXXXXXXXX;
(v) "Group" means a group consisting of certain members of the XXXXXXXXXX families, together with numerous corporations, partnerships and trusts held or controlled by such individuals;
(w) "Mco" means XXXXXXXXXX (operating as XXXXXXXXXX), a private corporation incorporated under the laws of the province of XXXXXXXXXX;
(x) "NewcoA" means XXXXXXXXXX, a corporation which was incorporated under the laws of the province of XXXXXXXXXX and a predecessor of Amalco;
(y) "NewcoB" means XXXXXXXXXX, a corporation which was incorporated under the laws of the province of XXXXXXXXXX and a predecessor of Amalco;
(z) "Numberco1" means XXXXXXXXXX, a corporation which was incorporated under the laws of the province of XXXXXXXXXX, and which is wholly-owned by Pubco;
(aa) "Numberco2" means XXXXXXXXXX, a corporation which was incorporated under the laws of the province of XXXXXXXXXX, and which is wholly-owned by Pubco;
(bb) XXXXXXXXXX;
(cc) "paid-up capital" or "PUC" has the meaning assigned by subsection 89(1);
(dd) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;
(ee) "principal amount" has the meaning assigned by subsection 248(1);
(ff) "Proposed Transactions" means the transactions described in Paragraphs 27 to 31 below;
(gg) "Pubco" means XXXXXXXXXX;
(hh) "Pubco Share" means a Class A Common Share, a Class B Common Share, or a Class C Common Share of Pubco;
(ii) "public corporation" has the meaning assigned by subsection 89(1);
(jj) "S Co" means XXXXXXXXXX, a predecessor corporation of Amalco, a taxable Canadian corporation which was a public corporation;
(kk) "stated capital" means stated capital for purposes of the XXXXXXXXXX;
(ll) "Stated Capital Increase" means the increase in stated capital described in Paragraph 29(vi) below;
(mm) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);
(nn) "taxable dividend" has the meaning assigned by subsection 89(1); and
(oo) "X-Notes Receivable" means the interest-bearing, secured promissory notes in the aggregate principal amount of US$XXXXXXXXXX now owed by Amalco and representing a portion of the purchase price receivable in respect of the sale of the common shares of S Co, NewcoA and NewcoB by Pubco described in Paragraphs 22 and 23 below.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
FACTS
1. Pubco was incorporated under the laws of the province of XXXXXXXXXX on XXXXXXXXXX, and is a public corporation whose Class A Common Shares were listed on the XXXXXXXXXX Stock Exchange prior to XXXXXXXXXX, and are currently listed on the XXXXXXXXXX.
2. Pubco's business number is XXXXXXXXXX and it files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office. Pubco's address is XXXXXXXXXX.
3. Pubco's fiscal year-end is XXXXXXXXXX.
4. Pubco is a taxable Canadian corporation and is resident in Canada for the purposes of the Act.
5. Currently, Pubco's share capital consists of:
(i) unlimited authorized, and XXXXXXXXXX issued and outstanding Class A Common Shares, carrying one vote per share;
(ii) XXXXXXXXXX authorized, issued and outstanding Class B Common Shares, carrying XXXXXXXXXX votes per share, convertible into Class A Common Shares on a one-for-one basis; and
(iii) unlimited authorized, and no issued and outstanding Preference Shares.
6. The stated capital attributable to all of Pubco's shares is:
(i) $XXXXXXXXXX in respect of the issued and outstanding Class A Common Shares; and
(ii) $XXXXXXXXXX in respect of the issued and outstanding Class B Common Shares.
7. PUC attributable to Pubco's shares is at least:
(i) $XXXXXXXXXX in respect of the issued and outstanding Class A Common Shares; and
(ii) $XXXXXXXXXX in respect of the issued and outstanding Class B Common Shares.
The PUC of the Pubco Shares arises from the issuance of shares for cash, the exercise of employee stock options, and the acquisition of certain capital properties by Pubco. The PUC of the Pubco Shares includes any reduction required under subsection 85(2.1) in respect of shares issued as consideration for the transfer of property in a transaction to which subsection 85(1) applied, and any reduction required under subsection 85.1(2.1) in respect of shares issued as consideration for the transfer of shares of S Co in a transaction to which section 85.1 applied. The PUC of the Pubco Shares includes any increase related to the amount of share issuance costs, which were deducted from the stated capital for corporate purposes.
8. The PUC of the Class A Common Shares is, and immediately before the Proposed Transactions is expected to be, at least $XXXXXXXXXX per Class A Common Share.
9. The PUC of the Class B Common Shares is, and immediately before the Proposed Transactions is expected to be, at least $XXXXXXXXXX per Class B Common Share.
10. Pubco is controlled by the Group, through its ownership and/or control of approximately XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class B Common Shares, representing in aggregate approximately XXXXXXXXXX% of the voting rights attached to the issued and outstanding shares in the capital of Pubco. XXXXXXXXXX and their associates beneficially own or control XXXXXXXXXX Class A Common Shares, representing approximately XXXXXXXXXX% of the voting rights attached to the issued and outstanding shares in the capital of Pubco. In addition, Class A Common Shares are also owned by employees and directors of Pubco through an employee stock option plan established by Pubco. The remaining Class A Common Shares are widely held by members of the public.
Operational Structure
11. Pubco previously directly, and indirectly through numerous foreign subsidiaries, carried on an XXXXXXXXXX business. On XXXXXXXXXX, this business, and the related net assets, was sold to an arm's length person for cash consideration. XXXXXXXXXX.
12. Pubco is primarily a holding corporation which recently divested itself of its two principal subsidiaries, S Co and F Co.
13. Pubco previously owned XXXXXXXXXX% of the issued and outstanding common shares of F Co.
14. F Co carried on a XXXXXXXXXX.
15. On XXXXXXXXXX, Pubco relinquished control of F Co to F Co's senior lenders, following F Co's ongoing default under its loan agreements. On XXXXXXXXXX, the lenders finalized and closed the sale of F Co. On XXXXXXXXXX, Pubco received $XXXXXXXXXX representing its share of the net proceeds of the F Co shares. XXXXXXXXXX.
16. Immediately prior to XXXXXXXXXX, all or substantially all of Pubco's remaining business operations were held through direct and indirect investments in S Co.
17. S Co is a taxable Canadian corporation which operates an XXXXXXXXXX business. S Co began a major financial restructuring in XXXXXXXXXX. In XXXXXXXXXX.
18. Immediately prior to XXXXXXXXXX, Pubco directly and indirectly held, in aggregate, XXXXXXXXXX common shares of S Co, representing approximately XXXXXXXXXX% of the issued and outstanding common shares of S Co. The balance of the shares was widely-held by the public.
19. In XXXXXXXXXX, Acquisitionco, an arm's length taxable Canadian corporation, made an offer to buy all the shares of S Co. This offer was accepted by the shareholders of S Co. On XXXXXXXXXX, Pubco passed a resolution to dissolve Numberco1, and the S Co shares owned by Numberco1 were conveyed to Numberco1's sole shareholder, Pubco.
20. On XXXXXXXXXX, Pubco transferred XXXXXXXXXX common shares of S Co to NewcoA in exchange for common shares of NewcoA. Pubco and NewcoA agreed to make and file a joint election to fully defer the gain on the transfer pursuant to subsection 85(1) and have filed the appropriate election form within the time limits provided in the Act.
21. On XXXXXXXXXX, Numberco2 transferred XXXXXXXXXX common shares of S Co to NewcoB in exchange for common shares of NewcoB.
22. On XXXXXXXXXX, pursuant to a plan of arrangement under the XXXXXXXXXX approved by the shareholders of S Co and by the Superior Court of Justice, XXXXXXXXXX, the following transactions, inter alia, were effected:
(i) Acquisitionco acquired from Pubco all of the issued and outstanding shares of NewcoA and NewcoB, which in turn owned an aggregate of XXXXXXXXXX shares of S Co;
(ii) Acquisitionco acquired all of the issued and outstanding shares of S Co from the shareholders of S Co, other than NewcoA and NewcoB; and
(iii) Acquisitionco, S Co, NewcoA and NewcoB amalgamated to form Amalco.
23. The aggregate consideration received by Pubco on the direct and indirect disposition of S Co shares was a combination of cash of approximately $XXXXXXXXXX ($XXXXXXXXXX per S Co share), Acquisitionco Notes Receivable in the aggregate principal amount of approximately $XXXXXXXXXX ($XXXXXXXXXX per S Co share) and X-Notes Receivable in the aggregate principal amount of approximately US$XXXXXXXXXX (US$XXXXXXXXXX per S Co share).
24. Following the sale of the shares of S Co, NewcoA and NewcoB, Pubco ceased to have any direct or indirect equity interest in an active business. Pubco presently does not intend to invest in another active business.
25. XXXXXXXXXX.
26. Pubco does not have a policy of paying regular annual dividends on either the Class A Common Shares or the Class B Common Shares. Pubco's last dividend was paid in XXXXXXXXXX, in the aggregate amount of approximately $XXXXXXXXXX. Pubco has not paid any other dividends since XXXXXXXXXX. None of the dividends paid by Pubco exceeded its retained earnings at the time the dividends were paid.
PROPOSED TRANSACTIONS
27. At a shareholders' meeting or meetings, Pubco will request that its shareholders approve the filing of the Articles of Amendments and other steps as outlined below.
28. Pubco will issue a Notice of Meeting and Management Information Circular (the "Circular") to describe the reorganization steps outlined below and to advise its shareholders that Pubco intends to make a distribution to the shareholders and offer them the opportunity to receive the distribution as either a return of capital or a taxable dividend. The Circular will provide that any holder of Class A Common Shares who wishes to receive the proposed distribution as a taxable dividend rather than as a return of capital must give proper written notice to Pubco, together with an irrevocable direction to Pubco to convert up to XXXXXXXXXX% of their Class A Common Shares into Class C Common Shares in order to facilitate the receipt of the taxable dividend. The notice of conversion would only be effective if the resolution to file the Articles of Amendment, as discussed in Paragraph 29(i) below, is approved by the shareholders.
29. If the necessary shareholder approvals are obtained, the following transactions will be implemented in the following order:
(i) Articles of amendment (the "Articles of Amendment") will be filed for Pubco, inter alia, to reorganize its share capital by creating an unlimited number of Class C Common Shares and attaching a conversion feature to the Class A Common Shares which will allow holders to convert up to XXXXXXXXXX% of their Class A Common Shares (rounded down to the nearest whole number of shares) into Class C Common Shares on a one for one basis, such conversion ratio being subject to adjustment as described in Paragraph 30 (xi) below.
(ii) The holders of Class A Common Shares who give proper notice that they wish to convert up to XXXXXXXXXX% their Class A Common Shares to Class C Common Shares and who indicate the date that they wish for the conversion to be effective (not less than XXXXXXXXXX days following the date notice is given) will have their Class A Common Shares converted into Class C Common Shares on the conversion date in the notice.
(iii) Effective on a date which is after the conversion of certain Class A Common Shares as contemplated by Paragraph 29(ii), Pubco will reduce the stated capital attributable to the Class A Common Shares and make a distribution to the holders of Class A Common Shares (the "Class A Capital Return") to be paid partly in cash and partly in specie. The in specie component will consist of an interest in the Amalco Notes Receivable and Amalco X-Notes Receivable and the aggregate per share amount distributed to holders of Class A Common Shares will be equal to the per share taxable dividend paid on the Class B Common Shares and the Class C Common Shares referred to below in Paragraph 29(v) below.
(iv) The aggregate stated capital account maintained in respect of each of the Class A Common Shares, Class B Common Shares and Class C Common Shares, after giving effect to the foregoing steps, will be reduced to $XXXXXXXXXX per share, without the payment of any amount to the holders of Class B Common Shares and Class C Common Shares or any further amount to the holders of the Class A Common Shares, and with such reduction being transferred to contributed surplus, in accordance with generally accepted accounting principles. The reduction in stated capital is necessary to permit the payment of a dividend on the Class B Common Shares and Class C Common Shares (see Paragraph 29(v) below) which will not contravene the solvency test XXXXXXXXXX.
(v) If declared by the directors of Pubco, Pubco will pay a taxable dividend out of contributed surplus on the Class B Common Shares and the Class C Common Shares in an amount per share up to the Class A Capital Return. The payment will be made partly in cash and partly in specie in the same form as the Class A Capital Return described in Paragraph 29(iii) above.
(vi) Pubco will increase its stated capital by an amount (the "Stated Capital Increase") equal to the amount by which the aggregate reduction in the stated capital made under Paragraph 29(iv) above exceeds the aggregate amount of the taxable dividend paid on the Class B Common Shares and the Class C Common Shares as described in Paragraph 29(v) above. Specifically, the stated capital maintained in respect of the Class A Common Shares will be increased by an amount equal to the reduction in the stated capital maintained in respect of the Class A Common Shares made under Paragraph 29(iv) above and the balance of the Stated Capital Increase will be added to the stated capital maintained in respect of the Class C Common Shares. The contributed surplus will be reduced by an amount equal to the Stated Capital Increase, in accordance with generally accepted accounting principles.
30. The rights, privileges and restrictions attaching to the Class A Common Shares, Class B Common Shares and Class C Common Shares of Pubco after the filing of the Articles of Amendment generally will be as follows:
(i) Holders of Class B Common Shares and Class C Common Shares shall be entitled to receive dividends if, as and when declared by the directors in an amount per share up to the amount per share of any distribution made by Pubco on the Class A Common Shares as a return of capital where Pubco has not made or been authorized to make an equivalent distribution per share as a return of capital on the Class B Common Shares and Class C Common Shares.
(ii) Subject to Paragraph (i) above, the holders of Class A Common Shares, Class B Common Shares and Class C Common Shares shall be entitled to receive dividends as and when declared by the directors and, except as provided in Paragraph (i) hereof, all dividends which the directors may declare on such shares shall be declared and paid in equal amounts per share.
(iii) The shareholders of Pubco by special resolution and otherwise in accordance with the provisions of the XXXXXXXXXX, as amended from time to time, may authorize and Pubco shall make distributions as a return of capital to the holders of Class A Common Shares in an amount payable in the form of cash and/or other property, not exceeding the amount which the holders of Class A Common Shares would have been entitled to receive at such time if the holders of all Class A Common Shares, Class B Common Shares and Class C Common Shares were receiving all of the remaining property and assets of Pubco at that time.
(iv) Where Pubco has made a distribution to the holders of the Class A Common Shares pursuant to Paragraph (iii) above, no further distributions shall be made to the holders of Class A Common Shares until either a dividend, return of capital or other distribution has been paid in an equivalent amount per share to the holders of the Class B Common Shares and Class C Common Shares.
(v) Subject to Paragraphs (iii) and (iv) above, in the event of the liquidation, dissolution or winding-up of Pubco, whether voluntary or involuntary, or any other distribution of assets of Pubco among its shareholders for the purpose of winding-up its affairs, subject to the prior rights of the holders of any shares of Pubco ranking senior to the Class A Common Shares, Class B Common Shares and Class C Common Shares with respect to priority in the distribution of assets upon liquidation, dissolution or winding-up, the holders of the Class A Common Shares, Class B Common Shares and Class C Common Shares shall be entitled to receive the remaining property and assets of Pubco and to participate rateably in any distribution thereof without preference or distinction as to the class of share held.
(vi) The holders of the Class A Common Shares, Class B Common Shares and Class C Common Shares shall be entitled to receive notice of and to attend meetings of the shareholders of Pubco. Except for certain limited circumstances, each Class A Common Share and each Class C Common Share shall be entitled to one vote per share and each Class B Common Share shall be entitled to XXXXXXXXXX votes per share.
(vii) Subject to Paragraph (xi) below, at the option of the holder, the Class B Common Shares shall be convertible into fully paid and non-assessable Class A Common Shares on the basis of one Class A Common Share for each Class B Common Share converted.
(viii) Subject to Paragraph (xi) below, at the option of the holder, up to XXXXXXXXXX% of the holder's Class A Common Shares (rounded down to the nearest whole number of shares) shall be convertible into fully paid and non-assessable Class C Common Shares on the basis of one Class C Common Share for each Class A Common Share converted. If a holder of Class A Common Shares desires to exercise the conversion right, they shall deliver to Pubco, or any registrar or transfer agent for the Class A Common Shares, not less than XXXXXXXXXX days prior to the date the holder desires the conversion to be effective (the "Conversion Date") an irrevocable written notice specifying the number of Class A Common Shares to be converted and requesting the conversion of such shares. Such conversion shall take place on the Conversion Date.
(ix) Subject to Paragraph (xi) below, at the option of the holder, up to XXXXXXXXXX% of the holder's Class C Common Shares (rounded down to the nearest whole number of shares) shall be convertible into fully paid and non-assessable Class A Common Shares on the basis of one Class A Common Share for each Class C Common Share converted. If a holder of Class C Common Shares desires to exercise the conversion right, the holder shall deliver to Pubco, or any registrar or transfer agent for the Class C Common Shares, not less than XXXXXXXXXX days prior to the desired Conversion Date, an irrevocable written notice specifying the number of Class C Common Shares to be converted and requesting the conversion of such shares. Such conversion shall take place on the Conversion Date.
(x) Subject to Paragraph (xi) below, all issued and outstanding Class A Common Shares and Class C Common Shares shall convert automatically into fully paid and non-assessable Class B Common Shares on the basis of one Class B Common Share for each Class A Common Share or Class C Common Share converted, in the event of any transfer or pledge of any issued and outstanding Class B Common Shares or of any interest whatsoever therein by a holder or holders thereof, except for certain related party transfers.
(xi) In the event that a distribution is made, from time to time, to the holders of Class A Common Shares, Class B Common Shares and /or Class C Common Shares whether as a dividend, return of capital or otherwise, without a distribution of an equivalent amount having been authorized and paid to the holders of the other such classes prior to a particular conversion date then the conversion ratios set forth in Paragraphs (vii), (viii), (ix) and (x) above shall be adjusted to take into account the amount of any such inequality so that the holders of Class A Common Shares, Class B Common Shares and Class C Common Shares shall be treated equally in all material respects regarding the amounts which are distributed per share by Pubco from time to time.
(xii) The Class A Common Shares, Class B Common Shares and Class C Common Shares shall not be subdivided, consolidated or reclassified into shares of a different class or series unless contemporaneously therewith all of the other classes of such shares are subdivided, consolidated or reclassified in the same proportion and in the same manner.
(xiii) Except as otherwise expressly provided in the share conditions, the rights, privileges, restrictions and conditions attaching to the Class A Common Shares, Class B Common Shares and Class C Common Shares shall be identical in all respects.
31. Pubco will not jointly elect pursuant to subsection 85(1) with any holder of Class A Common Shares with respect to the conversion of Class A Common Shares into Class C Common Shares.
32. Neither Pubco nor its subsidiaries have any outstanding tax liabilities that could be affected by the Proposed Transactions.
33. The proposed reductions in the stated capital of the Pubco Shares described in Paragraphs 29(iii) and 29(iv) above have not been preceded by an increase in the PUC of those shares that resulted in a dividend in respect of which Pubco elected to treat as having been paid out of Pubco's 1971 capital surplus on hand.
34. The proposed reductions of stated capital of the Pubco Shares described in Paragraphs 29(iii) and 29(iv) above are not in lieu of ordinary course dividends.
35. None of the Class A Common Shares, Class B Common Shares or Class C Common Shares is, or will be at any time during the implementation of the Proposed Transactions:
(i) a term preferred share as that term is defined in subsection 248(1);
(ii) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";
(iii) the subject of a dividend rental arrangement referred to in subsection 112(2.3), as that term is defined in subsection 248(1);
(iv) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or
(v) issued for consideration that is or includes:
a.) an obligation of the type described in subparagraph 112(2.4)(b)(i);
or
b) any right of the type described in subparagraph 112(2.4)(b)(ii).
PURPOSE OF THE PROPOSED TRANSACTIONS
36. Pubco has discontinued all or substantially all of its business represented by its holding in S Co. Since the proceeds are not being reinvested by Pubco in a new business, Pubco wishes to distribute a portion of the net proceeds on the sale of the shares of S Co, and to allow each shareholder of Pubco the choice of receiving its share of the distribution as either a return of capital or as a taxable dividend, depending on the class of shares held by the particular shareholder.
37. The purpose of the Proposed Transactions set out in Paragraph 29(iv) and 29(vi) above is to ensure that the taxable dividend to be paid on the Class B Common Shares and the Class C Common Shares will not contravene the solvency test in subsection 38(3) of the OBCA.
RULINGS
Provided that the above statements constitute a complete and accurate disclosure of all the facts, purposes of the proposed transactions and the proposed transactions, we rule as follows:
A. The filing of the Articles of Amendment which will amend the provisions attaching to the existing Class A Common Shares and Class B Common Shares will not, in itself, result in a "disposition" of any Class A Common Share or Class B Common Share for the purposes of the Act.
B. Where a holder of Class A Common Shares holds such shares as capital property, and converts some, but not all, of the Class A Common Shares owned by the holder at the particular time, the provisions of subsection 51(1) will apply to the conversion of such Class A Common Shares into Class C Common Shares such that:
a) the conversion will be deemed not to be a disposition of the Class A Common Shares; and
b) the cost to the holder of the Class C Common Shares will be equal to the ACB of the Class A Common Shares so exchanged.
C. Pursuant to the definition of "paid-up capital" as set out in subsection 248(1), at the time of the conversion described in Paragraph 29(ii) above, the PUC attributable to the Class C Common Shares will be increased by an amount equal to the amount of PUC that was attributable to the Class A Common Shares so exchanged. Consequently, subsection 51(3) will not result in a reduction in computing the aggregate PUC in respect of the Class C Common Shares issued on the exchange.
D. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to the Class A Capital Return on the Class A Common Shares such that Pubco will be deemed to have paid to a particular holder of Class A Common Shares and such holder will be deemed to have received a dividend only to the extent, if any, that the aggregate FMV of the property distributed by Pubco as a return of capital on such Class A Common Shares exceeds the amount by which the PUC of such holder's shares is reduced on the distribution.
E. Where a holder of Class A Common Shares holds such shares as capital property, the Class A Capital Return received by such holder will be deducted in computing the ACB of the holder's Class A Common Shares by virtue of subparagraph 53(2)(a)(ii), and where the amount of such reduction in the PUC of the Pubco Class A Common Shares exceeds the ACB of the particular holder's Class A Common Shares, the excess will be deemed to be a capital gain of such holder for the year from the disposition of such shares pursuant to subsection 40(3).
F. To the extent that a holder of Class A Common Shares realizes a capital gain on the holder's Class A Common Shares as a result of the application of subsection 40(3), in computing the ACB of such holder's Class A Common Shares, the amount of the gain will be added to the ACB of such shares under paragraph 53(1)(a).
G. Subject to the application of subsection 40(3), the payment of the Class A Capital Return on the Class A Common Shares will not, in itself, result in a disposition of the Class A Common Shares within the meaning of subsection 248(1).
H. The interests in the Amalco Notes Receivable and the Amalco X-Notes Receivable received by holders of Class A Common Shares on the Class A Capital Return will be considered to have been acquired by such holders at a cost equal to the FMV of such interests at the time distributed and will be considered to be disposed of by Pubco at the FMV of such interests.
I. An amount equal to the aggregate of the cash and the FMV, at the time of the distribution, of the interests in the Amalco Notes Receivable and the Amalco X-Notes Receivable received by the holders of the Class B Common Shares and Class C Common Shares as described in Paragraph 29(v) above, will be treated as taxable dividends received by the holders for purposes of subsection 82(1), and will be included in computing the income of the holder who received such dividend, pursuant to subsection 82(1) and paragraph 12(1)(j).
J. The taxable dividends referred to in Ruling I above will be deductible by each corporate recipient of such dividends in computing its respective taxable income pursuant to subsection 112(1) and none of subsections 112(2.1), (2.2), (2.3) or (2.4) will apply to deny the subsection 112(1) deduction in respect of such dividends.
K. None of the Proposed Transactions described in Paragraphs 27 to 31 herein, nor the terms and conditions attaching to the shares in the Articles of Amendment as described in Proposed Transaction 30 above, in and by themselves, will cause any of the Class A Common Shares, Class B Common Shares or Class C Common Shares (including the shares to be issued as described in the Proposed Transactions) to be considered to be a "term preferred share", "short-term preferred share", "taxable preferred share" or "taxable RFI share" as defined under subsection 248(1). Accordingly, none of the taxable dividends described in Ruling I will be subject to tax under Part VI.1 or Part IV.1, as a result of the implementation of the Proposed Transactions or the terms and conditions attaching to the shares in the Articles of Amendment as described in Proposed Transaction 30 above, in and by themselves.
L. Provided that as part of the series of transactions or events that includes the Proposed Transactions described herein, there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v), then by virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends referred to in Ruling I above. For greater certainty, the Proposed Transactions described in Paragraphs 27 to 31 herein, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).
M. Pursuant to subsection 52(2), the interests in the Amalco Notes Receivable and the Amalco X-Notes Receivable received by holders of Class B Common Shares and the Class C Common Shares as taxable dividends, as described in Paragraph 29(v) above, will be considered to have been acquired by such holders at a cost equal to the FMV of such interests at the time the dividend is paid.
N. The amount of any interest income on the Amalco Notes Receivable and the Amalco X-Notes Receivable received by holders of Class A Common Shares, Class B Common Shares or Class C Common Shares that accrued in respect of a period commencing before the time of the transfer of such note receivable to such holders, as described in Paragraph 29(v) above, and ending at that time may be deducted pursuant to subsection 20(14) in computing each holder's income for the taxation year to the extent that the amount is included in computing such holder's income as interest for the taxation year. Further, this amount of interest will be included as interest in computing Pubco's income for the taxation year except to the extent that it was otherwise included in computing Pubco's income for the year or for a preceding taxation year.
O. Pursuant to paragraph 53(2)(l), the ACB of the interests in the Amalco Notes Receivable and the Amalco X-Notes Receivable received by a holder of Class A Common Shares, Class B Common Shares or Class C Common Shares will be reduced by the amount deductible pursuant to subsection 20(14) .
P. The reduction in the stated capital of the Pubco Shares, as described in Paragraph 29(iv) above, by Pubco without any payment will not, in itself, result in any dividend or capital gain.
Q. In determining the amount of paid-up capital in respect of each class of Pubco Shares, the required deductions to be made pursuant to subparagraph (b)(iii) of the definition "paid-up capital" in subsection 89(1) will not exceed the amount of stated capital otherwise determined. For greater certainty, the paid-up capital for tax purposes in respect of each class of Pubco Shares will not be a negative amount immediately after the Proposed Transaction described in Paragraph 29(iv) above.
R. By virtue of subparagraph 84(1)(c.3)(iii), Pubco will not be deemed to have paid a dividend and the holders of Pubco Shares will not be deemed to have received a dividend when Pubco increases its stated capital as described in Paragraph 29(vi) above. For greater certainty, the aggregate paid-up capital of the Pubco Shares after the increase in stated capital described in Paragraph 29(vi) above will be equal to the amount by which the paid-up capital of the Pubco Shares prior to the decrease in stated capital described in Paragraph 29(iv) above exceeds the taxable dividends paid on the Class B common Shares and Class C Common Shares as described in Paragraph 29(v) above.
S. The provisions of subsection 15(1) will not apply to the Proposed Transactions, in and by themselves.
T. Subsection 245(2) will not apply 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 that the Canada Revenue Agency has agreed to or reviewed:
a. the determination of the ACB, PUC or 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.
Yours truly,
XXXXXXXXXX
Manager
Corporate Reorganizations Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
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