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: Will subsections 7(1.4) and 7(1.5) of the Act apply to option and share exchanges, as a result of a proposed corporate butterfly spin-off?
Position: Question of Fact.
Reasons: Provided the conditions of paragraphs 7(1.4)(a) to 7(1.4)(c) are satisfied concerning the option exchanges, the provisions of paragraphs 7(1.4)(d) through 7(1.4)(f) will apply. In this particular ruling, provided the conditions of paragraph 7(1.5)(c) are satisfied, the provisions of paragraphs 7(1.5)(d) through (g) will apply to the share exchanges.
XXXXXXXXXX 2004-009893
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This letter is a reply to your letters dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer and further to various telephone conversations (XXXXXXXXXX).
We understand that, to the best of your knowledge and that of the above-referenced taxpayer, none of the issues involved in the ruling request is:
(i) in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or tax 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 if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(v) the subject of a ruling previously issued to the taxpayer or a related person, XXXXXXXXXX, by this Directorate.
Definitions
In this ruling, the following terms shall have the meanings specified below:
(a) "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.
(b) "Affiliate" means an affiliate of DC as that term is defined in paragraph 8 of Canada Revenue Agency's Interpretation Bulletin IT-337R4, Retiring Allowances.
(c) "Board" means those individuals who serve from time to time on the board of directors of DC.
(d) "CanNewco" means XXXXXXXXXX, a taxable Canadian corporation that was incorporated under the CBCA by DC on XXXXXXXXXX.
(e) "CanNewco Common Shares" means the voting common shares of CanNewco, as described in 3 below.
(f) "CBCA" means the Canada Business Corporations Act.
(g) "Committee" means the XXXXXXXXXX Committee of the Board of Directors of DC and any successor committee, or such other persons as may be designated by the Board.
(h) "DC" means XXXXXXXXXX ., the corporation more particularly described in 1 below.
(i) "DC Class A Common Shares" means the Class A shares of DC described in 5 below.
(j) "DC Common Shares " means the voting common shares of DC described in 2 below.
(k) "DC Group" means DC and its subsidiaries, whether held directly or indirectly.
(l) XXXXXXXXXX.
(m) "Deferred Share Unit", or "DSU" means a unit credited by DC to a Member by way of a bookkeeping entry in the books of DC or another employer in the DC Group, pursuant to the XXXXXXXXXX DSUP, XXXXXXXXXX DSUP, XXXXXXXXXX DSUP or the XXXXXXXXXX DSUP, the value of which, as of a particular date, is based on the price of DC Common Shares.
(n) "XXXXXXXXXX DSUP" means the Deferred Stock Unit Plan for Non-Employee Directors of XXXXXXXXXX.
(o) "XXXXXXXXXX DSUP" means the XXXXXXXXXX for Non-Executive Directors (XXXXXXXXXX).
(p) "ESOP" means the XXXXXXXXXX Executive Share Option Plan.
(q) "Existing DC Options" means the existing stock options of DC described in 10 below.
(r) "In the Money Amount" means in relation to a particular stock option, the amount by which the fair market value of the shares that are the subject of the particular option exceeds the exercise price of such option.
(s) "Member" means an individual who has been granted DSUs under the XXXXXXXXXX DSUP, the XXXXXXXXXX DSUP, the XXXXXXXXXX DSUP or the XXXXXXXXXX DSUP.
(t) "New DC Options" means the stock options that DC will grant as described in 23 below.
(u) "Optionholder" means an individual who holds Existing DC Options on the date of the exchanges described in 23 and 24 below.
(v) "XXXXXXXXXX DSUP" means the XXXXXXXXXX for Executives (XXXXXXXXXX).
(w) XXXXXXXXXX.
(x) "Regulations" means the Income Tax Regulations.
(y) "Related Corporation" means a corporation related to DC for the purposes of the Act.
(z) "XXXXXXXXXX DSUP" means the XXXXXXXXXX for Executives, Amended and Restated as of XXXXXXXXXX.
(aa) "Spinco" means XXXXXXXXXX, a new corporation that was incorporated under the CBCA XXXXXXXXXX.
(bb) "Spinco Common Shares" means the voting common shares of Spinco as described in 4 below.
(cc) "Spinco Options" means the stock options that Spinco will grant as described in 24 below.
(dd) "Termination Date" means the earliest date on which both of the following conditions are met: (1) the Member has ceased to be employed by DC or any Affiliate for any reason whatsoever, and (2) the Member is not a member of the Board or of the board of directors of an Affiliate.
(ee) "Transferred Employee" has the meaning ascribed thereto in 24 below.
Facts
1. The predecessor corporation to what is today DC was incorporated on XXXXXXXXXX. DC is governed by the CBCA. It is a public corporation and a taxable Canadian corporation. XXXXXXXXXX.
2. As at XXXXXXXXXX, DC has XXXXXXXXXX common shares issued and outstanding representing all of its issued voting shares (the "DC Common Shares"). The DC Common Shares are listed on the XXXXXXXXXX .
3. As part of the preliminary transactions preceding XXXXXXXXXX, 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").
4. XXXXXXXXXX, 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"), an unlimited number of special shares, and an unlimited number of preferred shares issuable in series. No shares of Spinco were issued on incorporation.
5. XXXXXXXXXX, 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 DC Class A Common Shares and an unlimited number of DC Special Shares. Each DC Class A Common Share will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of DC. The provisions of the DC Class A Common Shares will be slightly different than the provisions of the existing DC Common Shares, but otherwise will have other terms that are the same as the existing DC Common Shares.
6. XXXXXXXXXX.
7. Pursuant to the articles of amendment of DC filed to create the new share classes described in 5 above, each holder of DC Common Shares (XXXXXXXXXX), will exchange each of the holder's DC Common Shares for one DC Class A Common Share and one XXXXXXXXXX. In connection with the exchange:
(a) the additions to the stated capital accounts of the DC Class A Common Shares and the XXXXXXXXXX will reflect the relative aggregate fair market values of such shares;
(b) the DC Common Shares so exchanged will be cancelled; and
(c) from the time of their issuance, the DC Class A Common Shares will be listed on a prescribed stock exchange.
8. XXXXXXXXXX.
9. XXXXXXXXXX.
10. DC has obligations under the ESOP whereby, subject to certain vesting requirements, certain directors, officers and other employees, as well as former employees, of DC and its subsidiaries are entitled to acquire DC Common Shares at specified exercise prices denominated in XXXXXXXXXX dollars that do not exceed the value of the DC Common Shares on the dates that these Existing DC Options were granted. As of XXXXXXXXXX, there were XXXXXXXXXX Existing DC Options that, when vested, will entitle the Optionholders to acquire DC Common Shares. Other than the Existing DC Options, no corporation in the DC Group has granted any stock options to an employee of the DC Group.
11. The terms of the ESOP provide that in the event of any change in outstanding DC Common Shares by reason of any stock dividend, stock split, recapitalization, merger, consolidation, combination or exchange of DC Common Shares or other similar corporate change, an equitable adjustment shall be made in the number or kind of shares issuable under the ESOP or subject to outstanding options under the ESOP. The terms of the ESOP also provide that any such adjustment shall be made by the Committee and shall be binding and conclusive for all purposes of the ESOP.
12. Certain employees in the DC Group have previously exercised employee stock options granted by DC relating to DC Common Shares in respect of which an election under subsection 7(8) has been made. These employees will participate in the share exchanges described in 7 and 8 above and referred to in the Proposed Transactions.
13. The employees described in 12 above and the Optionholders have always dealt at arm's length for purposes of the Act with DC and the other employers in the DC Group and will continue to deal at arm's length for purposes of the Act with DC and the other employers in the DC Group during and after the Proposed Transactions described below. The Transferred Employees will deal at arm's length for purposes of the Act with Spinco during and after the Proposed Transactions described below.
14. DC Common Shares are prescribed shares under section 6204 of the Regulations and will continue to be prescribed shares during the Proposed Transactions described below. DC Class A Common Shares and Spinco Common Shares will be prescribed shares under section 6204 of the Regulations.
15. DC established the XXXXXXXXXX DSUP with effect XXXXXXXXXX. The XXXXXXXXXX DSUP is subject to an advance income tax ruling from the Canada Revenue Agency dated XXXXXXXXXX, 1997 (XXXXXXXXXX). The XXXXXXXXXX DSUP is governed by paragraph 6801(d) of the Regulations. XXXXXXXXXX pursuant to the terms of the XXXXXXXXXX DSUP, in the event of various forms of corporate re-organization, including an exchange involving DC Common Shares, adjustments may be made by the Committee to the number of DSUs outstanding under the XXXXXXXXXX DSUP.
16. DC established the XXXXXXXXXX DSUP effective XXXXXXXXXX. The XXXXXXXXXX DSUP is also governed by paragraph 6801(d) of the Regulations and is subject to an advance income tax ruling from the Canada Revenue Agency dated XXXXXXXXXX pursuant to the terms of the XXXXXXXXXX DSUP, in the event of various forms of corporate re-organization, including an exchange of DC Common Shares, adjustments may be made by the Committee to the number of DSUs outstanding under the XXXXXXXXXX DSUP.
17. DC established the XXXXXXXXXX DSUP, effective XXXXXXXXXX. The XXXXXXXXXX DSUP is governed by paragraph 6801(d) of the Regulations and is subject to an advance income tax ruling from the Canada Revenue Agency dated XXXXXXXXXX pursuant to the terms of the XXXXXXXXXX DSUP, in the event of various forms of corporate re-organization, including an exchange of DC Common Shares, adjustments may be made by the Committee to the number of DSUs outstanding under the XXXXXXXXXX DSUP.
18. XXXXXXXXXX.
19. XXXXXXXXXX.
20. At the time of XXXXXXXXXX the proposed exchange of Existing DC Options for Spinco Options described in 24 below, DC and Spinco will not be dealing at arm's length for the purposes of the Act.
21. At the time of the proposed payment of the value of DSUs to the Transferred Employees described in 26 below, DC and Spinco will be dealing at arm's length for the purposes of the Act.
Proposed Transactions
22. Concurrent with the exchange of DC Common Shares described in 7 above, the value of a DSU under each of the XXXXXXXXXX DSUP, XXXXXXXXXX DSUP, XXXXXXXXXX DSUP and the XXXXXXXXXX DSUP shall be determined based on DC Class A Common Shares and shall be valued based on DC Class A Common Shares thereafter. At the same time, there shall be an adjustment to the number of DSUs credited to Members of the XXXXXXXXXX DSUP, XXXXXXXXXX DSUP, XXXXXXXXXX DSUP and the XXXXXXXXXX DSUP so that the value of the Members' outstanding DSUs based on DC Class A Common Shares immediately after the exchange described in 7 above is the same as the value of the Members' outstanding DSUs based on DC Common Shares immediately before the exchange described in 7 above.
23. Concurrent with the exchange of DC Common Shares described in 7 above, each employee and former employee of DC and its subsidiaries who is at that time an Optionholder, other than the Transferred Employees described in 24 below, will exchange all Existing DC Options held by such Optionholder for New DC Options granted by DC to acquire DC Class A Common Shares. The only consideration such Optionholder will receive for the disposition of his/her Existing DC Options will be New DC Options. The exercise price of the New DC Options will be denominated in Canadian dollars and the aggregate In the Money Amount applicable to the New DC Options determined immediately after the exchange will not exceed the aggregate In the Money Amount determined immediately before the exchange applicable to the Existing DC Options that were the subject of the exchange by the particular Optionholder. In calculating the In the Money Amount applicable to the Existing DC Options, the fair market value of the DC Common Shares will be computed in Canadian dollars as the weighted average trading price on the XXXXXXXXXX Stock Exchange of those shares on the trading day immediately prior to the time of the exchange. For the purposes of calculating the In the Money Amount applicable to the New DC Options, the fair market value of the DC Class A Common Shares will be computed in Canadian dollars as the weighted average trading price on the XXXXXXXXXX Stock Exchange of those shares on the trading day immediately following the time of the exchange.
24. XXXXXXXXXX, each Optionholder who is an employee of DC or its subsidiaries and who will become an employee of Spinco or a subsidiary of Spinco (a "Transferred Employee") will exchange all Existing DC Options held by him or her for Spinco Options granted by Spinco to acquire Spinco Common Shares. The only consideration such Transferred Employee will receive for the disposition of his or her Existing DC Options will be Spinco Options. XXXXXXXXXX. The aggregate In the Money Amount applicable to the Spinco Options (determined as described below) determined immediately after the exchange will not exceed the aggregate In the Money Amount determined immediately before the exchange applicable to the Existing DC Options that were the subject of the exchange by the particular Transferred Employee. In calculating the In the Money Amount applicable to the Existing DC Options, the fair market value of the DC Common Shares will be computed in Canadian dollars as the weighted average trading price of those shares on the XXXXXXXXXX Stock Exchange on the trading day immediately prior to the time of the exchange. For purposes of calculating the In the Money Amount applicable to the Spinco Options, the fair market value of the Spinco Common Shares will be computed as the weighted average trading price of those shares on the XXXXXXXXXX Stock Exchange on the first trading day of the Spinco Common Shares immediately following the time of the exchange XXXXXXXXXX.
25. XXXXXXXXXX.
26. Immediately following the completion of the transactions to be effected XXXXXXXXXX, the employment of the Transferred Employees by DC or its subsidiaries will be terminated and the Transferred Employees will become employees of Spinco or its subsidiaries. In accordance with the terms of the XXXXXXXXXX DSUP, XXXXXXXXXX DSUP, XXXXXXXXXX DSUP and the XXXXXXXXXX DSUP, each Transferred Employee will be entitled to receive a payment of the value of his or her DSUs at a date elected by the Transferred Employee following the Transferred Employee's Termination Date and in any event no later than December 15 of the following calendar year.
Purpose of the Proposed Transactions
27. The purpose of the proposed transactions described above is to put Members and Optionholders in essentially the same economic position with respect to their DSUs and Existing DC Options after XXXXXXXXXX.
28. All members of the DC Group in Canada file their income tax returns at XXXXXXXXXX Taxation Centre. The tax account number of each of the members of the DC Group in Canada is as follows:
XXXXXXXXXX.
The mailing address of DC is:
XXXXXXXXXX.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are as described above, we rule as follows:
A. The provisions of subsection 7(1.4) will apply for the purposes of section 7 to the exchange of the Existing DC Options that are subject to the provisions of subsection 7(1) for New DC Options and Spinco Options, as described in 23 and 24 above, with the result that for the purposes of section 7 and paragraph 110(1)(d):
(i) the Optionholder will be deemed (other than for the purposes of subparagraph 7(9)(d)(ii)) not to have disposed of such Optionholder's Existing DC Options and not to have acquired a New DC Option or a Spinco Option;
(ii) the Optionholder's New DC Options and Spinco Options will be deemed to be the same as, and a continuation of, such holder's Existing DC Options; and
(iii) Spinco will be deemed to be the same person as, and a continuation of, DC.
B. Provided the conditions of paragraph 7(1.5)(c) are satisfied, the provisions of subsection 7(1.5) will apply for the purposes of section 7 and paragraph 110(1)(d) to each taxpayer who is a holder of DC Common Shares and who made an election under subsection 7(8) with respect to the DC Common Shares acquired through the exercise of the taxpayer's stock options granted under the ESOP as a consequence of both the exchange of DC Common Shares for DC Class A Common Shares and DC Special Shares, as described in 7 above, and the exchange of DC Special Shares for Spinco Common Shares, as described in 8 above.
C. The rulings issued by Canada Revenue Agency in its rulings dated XXXXXXXXXX applicable to the XXXXXXXXXX, will continue to be binding on the Canada Revenue Agency in accordance with the practice outlined in Information Circular IC 70-6R5 dated May 17, 2002.
The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general 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 transactions are completed by XXXXXXXXXX.
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 of any property described 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.
Yours truly,
Director
Financial Industries Division
Income Tax Rulings Directorate
Policy & Planning Branch
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