2004 Ruling 2004-0091911R3 - XXXXXXXXXX spin-off

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether a proposed reorganization meets the requirements of paragraph 55(3)(b)?

Position: Yes.

Reasons: It meets the requirements of the law

XXXXXXXXXX 2004-009191

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, and your e-mails of 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 the taxpayer, none of the issues involved in this advance ruling is:

- dealt with in an earlier return of the taxpayer or a related person;

- being considered by a tax services office or a taxation centre in connection with a tax return already filed;

- under objection by the taxpayer or a related person; or

- before the courts.

DEFINITIONS:

In this letter, the following terms have the meanings specified:

(a) "ACo" means XXXXXXXXXX, as more particularly described in paragraph 26;

(b) "Acquiror" has the meaning assigned in the definition of "specified corporation" in subsection 55(1);

(c) "Act" means the Income Tax Act, 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, subparagraph or clause is a reference to the relevant provision of the Act;

(d) "Additional Tax Ruling Request" means the advance tax ruling request submitted on behalf of DC on XXXXXXXXXX, 2004 and assigned control number 2004-009893;

(e) "adjusted cost base" has the meaning assigned by section 54;

(f) "arm's length" has the meaning assigned by section 251;

(g) "Articles of Amendment" has the meaning assigned by paragraph 36;

(h) "BCo" means XXXXXXXXXX, the corporation more particularly described in paragraph 26

(i) "Butterfly Transactions" means the transactions described in paragraphs 34 to 49;

(j) "Canadian corporation" has the meaning assigned by subsection 89(1);

(k) "CanNewco" means XXXXXXXXXX, the Canadian corporation described in paragraph 24 which was incorporated on XXXXXXXXXX;

(l) "CanNewco Common Shares" means the voting common shares of CanNewco, as described in paragraph 24;

(m) "capital property" has the meaning assigned by section 54;

(n) "CBCA" means the Canada Business Corporations Act;

(o) "CCo" means XXXXXXXXXX, a taxable Canadian corporation, all the shares of which are owned by DC;

(p) "cost amount" has the meaning assigned by subsection 248(1);

(q) "CRA" means the Canada Customs and Revenue Agency, and after

December 12, 2003, the Canada Revenue Agency;

(r) "DC" means XXXXXXXXXX, the corporation more particularly described in paragraph 2;

(s) "DC Board" means the Board of Directors of DC;

(t) "DC Class A Common Shares" means the Class A shares of DC described in paragraph 37;

(u) "DC Common Shareholders" means holders of DC Common Shares or DC Class A Common Shares;

(v) "DC Common Shares" means the voting common shares of DC described in paragraph 4;

(w) "DC dissenting shareholders" means the shareholders of DC who dissent from the Plan of Arrangement, as described in paragraph 33.1;

(x) XXXXXXXXXX;

(y) XXXXXXXXXX;

(z) "DC Redemption Note" means the note payable described in paragraph 47;

(aa) XXXXXXXXXX;

(bb) "DC Special Shares" has the meaning assigned by paragraph 38;

(cc) "Distributed Assets" means certain of the shares XXXXXXXXXX;

(dd) "distribution" has the meaning assigned by subsection 55(1);

(ee) "dividend rental arrangement" has the meaning assigned by subsection 248(l);

(ff) "dollars" or "$" means XXXXXXXXXX;

(gg) "Effective Date" means the effective date of the Plan of Arrangement;

(hh) "fair market value" means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length;

(ii) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);

(jj) XXXXXXXXXX;

(kk) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(ll) "paid-up capital" has the meaning assigned by subsection 89(1);

(mm) XXXXXXXXXX;

(nn) XXXXXXXXXX;

(oo) XXXXXXXXXX;

(pp) XXXXXXXXXX;

(qq) "principal amount" has the meaning assigned by subsection 248(1);

(rr) "private corporation" has the meaning assigned by subsection 89(1);

(ss) "Proposed Transactions" means the transactions referred to in paragraphs 24-53;

(tt) XXXXXXXXXX;

(uu) "Regulations" refers to the Income Tax Regulations;

(vv) XXXXXXXXXX;

(ww) "restricted financial institution" has the meaning assigned by subsection 248(1);

(xx) "series of transactions or events" includes the extended meaning assigned to that expression by subsection 248(10);

(yy) "specified class" has the meaning assigned by subsection 55(1);

(zz) "specified corporation" has the meaning assigned by subsection 55(1);

(aaa) "specified financial institution" has the meaning assigned by subsection 248(1);

(bbb) "specified shareholder" has the meaning assigned by subsection 248(1) as modified by subsections 55(3.2) and (3.3);

(ccc) "Spinco" means XXXXXXXXXX, the Canadian corporation described in paragraph 34;

(ddd) "Spinco Board" means the Board of Directors of Spinco;

(eee) "Spinco Common Shareholder" means holders of Spinco Common Shares;

(fff) "Spinco Common Shares" means the voting common shares of Spinco, as described in paragraph 34;

(ggg) "Spinco Redemption Note" means the note payable described in paragraph 46;

(hhh) "Spinco Special Shares" has the meaning assigned by paragraph 34;

(iii) "stated capital account" has the meaning assigned by section 26 of the CBCA;

(jjj) "subsidiary controlled corporation" has the meaning assigned by subsection 248(l);

(kkk) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

(lll) XXXXXXXXXX;

(mmm) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(nnn) "taxable Canadian property" has the meaning assigned by subsection 248(1);

(ooo) "taxable dividend" has the meaning assigned by subsection 89(1); and

(ppp) "Trustee" has the meaning assigned by paragraph 53.

Our understanding of the facts, purposes of the proposed transactions and proposed transactions is as follows:

STATEMENT OF FACTS

Facts Relating to DC

2. XXXXXXXXXX. DC is governed by the CBCA. It is XXXXXXXXXX a taxable Canadian corporation.

3. XXXXXXXXXX.

4. As at XXXXXXXXXX, DC had XXXXXXXXXX common shares issued and outstanding representing all of its issued voting shares (the "DC Common Shares"). The DC Common Shares are listed on XXXXXXXXXX stock exchanges.

5. XXXXXXXXXX.

6. XXXXXXXXXX.

7. XXXXXXXXXX.

8. XXXXXXXXXX.

9. [Reserved].

10. XXXXXXXXXX.

11. XXXXXXXXXX.

XXXXXXXXXX.

12. XXXXXXXXXX.

13. XXXXXXXXXX.

14. XXXXXXXXXX.

14.01 XXXXXXXXXX.

14.1 XXXXXXXXXX.

Other Information

15. XXXXXXXXXX.

16. XXXXXXXXXX.

17. XXXXXXXXXX.

18. None of the DC Special Shares, the Spinco Special Shares or the CanNewco Common Shares is or will be subject to a guarantee agreement, within the meaning referred to in subsection 112(2.2).

19. None of the DC Special Shares, the Spinco Special Shares or the CanNewco Common Shares has been or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

20. None of the DC Special Shares, the Spinco Special Shares or the CanNewco Common Shares is or will be subject to a dividend rental arrangement.

21. Except as described herein, no changes to the share capital structure of DC are contemplated before the date of the commencement of the Proposed Transactions XXXXXXXXXX. Any changes to DC's capital structure resulting from the circumstances described above would be unrelated to the Butterfly Transactions.

22. All of the shares owned by DC, Spinco and CanNewco which are transferred or disposed of in the course of the Proposed Transactions are and will be held as capital property. The DC Special Shares acquired by Spinco and the Spinco Special Shares acquired by DC will not be acquired in the ordinary course of business of either DC or Spinco or their respective related entities.

23. The Spinco Redemption Note and the DC Redemption Note, referred to below, and the agreements pursuant to which they will be set off as discussed below, will be governed by XXXXXXXXXX law.

XXXXXXXXXX.

23.1 XXXXXXXXXX.

23.2 XXXXXXXXXX.

PROPOSED TRANSACTIONS

A. Preliminary Transactions

24. DC incorporated a new corporation ("CanNewco") under the CBCA. CanNewco is a taxable Canadian corporation. The authorized share capital consists of an unlimited number of voting common shares (the "CanNewco Common Shares").

25. XXXXXXXXXX.

26. BCo is a direct wholly-owned subsidiary of ACo. ACo is a direct wholly-owned subsidiary of DC.

27. XXXXXXXXXX.

28. XXXXXXXXXX.

29. XXXXXXXXXX.

30. XXXXXXXXXX.

31. XXXXXXXXXX.

32. XXXXXXXXXX.

32.01 XXXXXXXXXX.

Plan of Arrangement

33. Subject to the appropriate shareholder, regulatory and court approvals, the transactions described in paragraphs 33.1 to 51 will be undertaken pursuant to the Plan of Arrangement in the sequence set forth below. Pursuant to the Plan of Arrangement, among other things, Spinco will have the right to acquire all of the CanNewco common shares owned by DC.

Dissenting Shareholders

33.1 Subject to compliance with the relevant CBCA provisions, each common shareholder of DC will be entitled to dissent from the Plan of Arrangement in accordance with the provisions of the CBCA and from the interim order of the Court under the Plan of Arrangement. Each dissenting shareholder (a "DC dissenting shareholder") will cease to be a shareholder of DC, immediately prior to the transactions described in paragraphs 34 to 51, such that the shares of DC held by the DC dissenting shareholder, will no longer be considered to be outstanding. Pursuant to the Plan of Arrangement, DC dissenting shareholders who:

(a) are ultimately entitled to be paid fair value for their DC Common Shares shall be deemed to have transferred such shares to DC for cancellation on the Effective Date immediately prior to the amendment of DC's articles as set out in paragraph 36, or

(b) are ultimately not entitled, for any reason, to be paid fair value for their DC Common Shares shall be deemed to have participated in the Plan of Arrangement on the same basis as any non-dissenting holder of DC Common Shares as at and from the Effective Date and shall receive DC Class A Common Shares and Spinco Common Shares as set out in paragraphs 39 and 40.

After the completion of the Proposed Transactions which are included in the Plan of Arrangement, each DC dissenting shareholder will be entitled to be paid the fair market value of his shares of DC, determined on the last business day before the day upon which the shareholder vote in relation to the Plan of Arrangement takes place.

XXXXXXXXXX.

33.2 XXXXXXXXXX.

DC Butterfly Transactions

Incorporation of New Corporation

34. Spinco was incorporated under the CBCA on XXXXXXXXXX. The authorized share capital of Spinco consists of an unlimited number of voting common shares (the "Spinco Common Shares") and an unlimited number of special shares (the "Spinco Special Shares"), and an unlimited number of preferred shares issuable in series. No shares of Spinco were issued on incorporation.

35. Spinco Special Shares have the following attributes:

XXXXXXXXXX

Reorganization of DC's Share Capital

36. The articles of DC will be amended to create and authorize the issuance of (in addition to the shares that it is authorized to issue immediately before this amendment) an unlimited number of XXXXXXXXXX DC Special Shares (the "Articles of Amendment").

37. XXXXXXXXXX.

38. The DC Special Shares will have the following terms:

XXXXXXXXXX.

Exchange of DC Common Shares

39. Pursuant to the Articles of Amendment XXXXXXXXXX, each DC Common Shareholder (other than any DC dissenting shareholder) will exchange all of the holder's DC Common Shares for XXXXXXXXXX one DC Special Share. XXXXXXXXXX.

Transfer of DC Special Shares to Spinco

40. Each holder of DC Special Shares will transfer all such shares to Spinco. As consideration for each DC Special Share transferred to it, Spinco will issue XXXXXXXXXX a Spinco Common Share. XXXXXXXXXX.

The fair market value, immediately before the transfer described in paragraph 41 below, of each DC Shareholder's shares of the capital stock of Spinco will be equal to 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).

Transfer of CanNewco Common Shares to Spinco

41. DC will transfer to Spinco all the CanNewco Common Shares held by DC.

42. XXXXXXXXXX.

43. Immediately after the transfer described in paragraph 41, the fair market value of the CanNewco Common Shares owned by Spinco will equal the proportion of the fair market value of the net assets of DC determined before the transfer, that:

(a) the aggregate fair market value of the DC Special Shares owned by Spinco, immediately before the transfer, is of

(b) the aggregate fair market value of all the issued and outstanding shares of DC immediately before the transfer.

44. In consideration for the CanNewco Common Shares, Spinco will issue Spinco Special Shares to DC with an aggregate fair market value and redemption amount equal to the fair market value of the transferred property (i.e., the fair market value of the CanNewco Common Shares) at the time of the transfer.

45. DC will jointly elect with Spinco, in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the CanNewco Common Shares. XXXXXXXXXX.

Elimination of Cross Shareholdings

46. Spinco will redeem the Spinco Special Shares held by DC in consideration for the issuance by Spinco to DC of a non-interest-bearing demand note (the "Spinco Redemption Note") XXXXXXXXXX.

47. DC will redeem the DC Special Shares held by Spinco in consideration for the issuance by DC to Spinco of a non-interest-bearing demand note (the "DC Redemption Note") XXXXXXXXXX.

Set-off of Notes

48. The Spinco Redemption Note will be set off against the DC Redemption Note in full satisfaction of the respective obligation under each note and the notes will be cancelled.

49. [Reserved].

Post-Butterfly Transactions

XXXXXXXXXX.

49.1 XXXXXXXXXX.

49.2 XXXXXXXXXX.

XXXXXXXXXX.

49.3 XXXXXXXXXX.

49.4 XXXXXXXXXX.

Amalgamation of Spinco and CanNewco

50. XXXXXXXXXX.

51. XXXXXXXXXX.

XXXXXXXXXX.

52. XXXXXXXXXX.

53. XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

54. The overall purpose of the proposed transactions is to permit the CanNewco Common Shares owned by DC after the Preliminary Reorganization to be indirectly distributed to the DC Common Shareholders in a tax-deferred manner.

55. XXXXXXXXXX.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, purposes of the proposed transactions and proposed transactions, we confirm the following:

A. XXXXXXXXXX until the completion of the transactions described in paragraph 48, DC and Spinco will not be dealing at arm's length for the purposes of the Act.

Amendments to DC's Articles and Exchange of Shares

B. On the exchange of DC Common Shares by DC Common Shareholders, XXXXXXXXXX,

(a) the provisions of subsection 86(1) will apply and the provisions of subsection 86(2) will not apply to the disposition of each existing DC Common Share by a DC Common Shareholder XXXXXXXXXX

Transfer of DC Special Shares to Spinco

C. XXXXXXXXXX.

Butterfly Transfer

D. XXXXXXXXXX, the provisions of subsection 85(1) will apply to the transfer by DC to Spinco of its CanNewco Common Shares, XXXXXXXXXX.

Elimination of Cross Shareholdings

E. The redemption by Spinco of the Spinco Special Shares described in paragraph 46 will have the following results:

(a) Spinco will be deemed by paragraph 84(3)(a) to have paid, and DC will be deemed by paragraph 84(3)(b) to have received, a dividend equal to the amount by which the amount paid on such redemption exceeds the paid-up capital of the cancelled Spinco Special Shares;

(b) pursuant to section 54, the amount of such deemed dividend will be excluded in determining DC's proceeds of disposition for the Spinco Special Shares;

(c) DC will be entitled, pursuant to subsection 112(1), to deduct the amount of such deemed dividend in computing its taxable income for the taxation year in which such dividend is deemed to be received XXXXXXXXXX ;

(d) no taxes under Part IV.1 of the Act will be payable by DC in respect of such deemed dividend; and

(e) no taxes under Part VI.1 will be payable by Spinco in respect of such deemed dividend.

XXXXXXXXXX.

F. The redemption by DC of the DC Special Shares held by Spinco described in paragraph 47 will have the following results:

(a) DC will be deemed by paragraph 84(3)(a) to have paid, and Spinco will be deemed by paragraph 84(3)(b) to have received, a dividend equal to the amount by which the amount paid on such redemption exceeds the paid-up capital of the cancelled DC Special Shares;

(b) pursuant to section 54, the amount of such deemed dividend will be excluded in determining Spinco's proceeds of disposition for the DC Special Shares;

(c) Spinco will be entitled, pursuant to subsection 112(1), to deduct the amount of such deemed dividend in computing its taxable income for the taxation year in which such dividend is deemed to be received XXXXXXXXXX;

(d) no taxes under Part IV.1 will be payable by Spinco in respect of such deemed dividend; and

(e) no taxes under Part VI.1 will be payable by DC in respect of such deemed dividend.

XXXXXXXXXX

XXXXXXXXXX

G Provided that:

(a) XXXXXXXXXX ; and

(b) XXXXXXXXXX ;

and as part of the series of transactions or events that includes the Proposed Transactions, there is not:

(c) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);

(d) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);

(e) an acquisition of any shares of a distributing corporation in contemplation of the distribution in the circumstances described in subparagraph 55(3.1)(b)(iii); or

(f) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or (d),

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 Rulings E and F above XXXXXXXXXX.

XXXXXXXXXX

Set-off

H. The set-off and cancellation of the Spinco Redemption Note against the DC Redemption Note described in paragraph 48 will not give rise to a "forgiven amount" within the meaning thereof in subsection 80(1) or 80.01(1); and neither Spinco nor DC will realize a gain or incur any loss as a result of such set-off and cancellation.

XXXXXXXXXX.

I. XXXXXXXXXX.

J. XXXXXXXXXX.

XXXXXXXXXX.

K. XXXXXXXXXX.

Other Rulings

L. XXXXXXXXXX.

M. XXXXXXXXXX.

N. XXXXXXXXXX.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by CRA on May 17, 2002 and are binding on the CRA provided that the Proposed Transactions are completed by 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.

COMMENTS

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, adjusted cost base or paid-up capital of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. Without restricting the generality of the foregoing:

(i) we are not confirming the tax consequences of the transactions described in paragraph 25 above; and

(ii) we are not confirming that any transaction that occurs following the proposed transactions will not be part of the series of transactions or events that includes the receipt of the dividends referred to in Rulings E and F.

OPINIONS

A. XXXXXXXXXX.

B. XXXXXXXXXX.

C. XXXXXXXXXX.

The foregoing opinions are not rulings and, as noted in Information Circular 70-6R5, are not binding on the Canada Revenue Agency.

Yours truly,

XXXXXXXXXX
Corporate Reorganizations Section 1
Income Tax Rulings Directorate
Policy and Planning Branch