2004 Ruling 2004-0099081R3 - XXXXXXXXXX

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 the transfer of shares to a voting trust would result in a disposition for the purposes of the Act and whether subsection 248(25.2) of the Act would apply to such a transfer.

Position: No. Yes.

Reasons: Falls within the exception of subparagraph (k)(ii) of the definition "disposition" in subsection 248(1) of the Act.

XXXXXXXXXX 								2004-009908

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, in which you request an Advance Income Tax Ruling on behalf of the above named taxpayer. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues involved in this Ruling request:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a Tax Services Office or Taxation Center in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) is the subject of a Ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c. 1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions in the documents submitted with your request not described below do not form part of the facts and proposed transactions on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader.

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

Definitions

The following definitions apply in respect of this Ruling request:

"Callco" means XXXXXXXXXX, a company incorporated under the XXXXXXXXXX on XXXXXXXXXX, which is a wholly owned subsidiary of USco;

"Canco" means XXXXXXXXXX, a XXXXXXXXXX corporation incorporated under the laws of Canada in XXXXXXXXXX that was continued under the Canada Business Corporations Act (the "CBCA") in XXXXXXXXXX;

"Exchangeco" means XXXXXXXXXX, a corporation incorporated under the CBCA that is an indirect wholly owned subsidiary of USco;

"J-Trust" means the XXXXXXXXXX dated XXXXXXXXXX;

"Kco" means XXXXXXXXXX;

"Mergeco" means USco once it has changed its name to XXXXXXXXXX;

"Mr. K" means XXXXXXXXXX;

"Trustee" means the trustee of the XXXXXXXXXX Voting Trust as more fully described at paragraph 22 below;

"USco" means XXXXXXXXXX, a corporation founded in XXXXXXXXXX that is governed by the laws of the State of XXXXXXXXXX;

"Xco" means XXXXXXXXXX ., a XXXXXXXXXX corporation incorporated under the CBCA on XXXXXXXXXX, all the shares of which are owned by XXXXXXXXXX;

"XSubco" means a corporation to be incorporated under the CBCA as more fully described at paragraph 17 below.

Facts

1. On XXXXXXXXXX, USco, Canco and Exchangeco entered into an agreement XXXXXXXXXX.

2. The XXXXXXXXXX, a copy of which was provided with the Ruling request, provide, among other things, that:

(a) USco will change its name to Mergeco; and

(b) All of Canco's outstanding shares (other than shares of dissenting shareholders or shares owned by non-residents) will be exchanged for shares of Exchangeco (the "Exchangeable Shares") and ancillary rights (the "Ancillary Rights"), including in particular the voting rights (the "Voting Rights") described in paragraph 7 below.

3. The Exchangeable Shares will be issued in two classes, Class XXXXXXXXXX and Class XXXXXXXXXX, and will be substantially the economic equivalent of the corresponding shares of Mergeco Class XXXXXXXXXX (voting) and Class XXXXXXXXXX (non-voting except for the right to elect XXXXXXXXXX out of XXXXXXXXXX directors) common stock that a shareholder of Canco would have received had the shareholder elected to instead receive shares of Mergeco common stock on the combination transaction.

4. The Exchangeable Shares will be non-voting and will generally be exchangeable (at any time before a specified redemption date) at the option of the holder on a one-for-one basis for corresponding shares of Mergeco common stock.

5. Holders of Exchangeable Shares will also be entitled to Ancillary Rights pursuant to two further agreements discussed in paragraphs 6 and 7 below. The Ancillary Rights are of the type that are generally provided in exchangeable share transactions and are more fully described in the draft XXXXXXXXXX Circular, a copy of which was enclosed with the Ruling request.

6. As part of the XXXXXXXXXX, Mergeco, Callco and Exchangeco will enter into an agreement under which, among other things, Mergeco will agree to support certain obligations of Exchangeco and Callco with respect to the Exchangeable Shares. A copy of this agreement was enclosed with the Ruling request.

7. As part of the XXXXXXXXXX, Mergeco, Exchangeco and a trustee (the "Exchangeable Shares Trustee") will enter into an agreement (the "Voting and Exchange Trust Agreement") under which, among other things, the Exchangeable Shares Trustee will be granted certain rights and will agree to certain obligations for the benefit of holders of Exchangeable Shares relating to the voting of Mergeco shares. Pursuant to the Voting and Exchange Trust Agreement, a copy of which was enclosed with the Ruling request:

(a) Mergeco will issue one share of special Class XXXXXXXXXX voting stock and one share of special Class XXXXXXXXXX voting stock to the Exchangeable Shares Trustee for the benefit of the holders (other than Mergeco and its affiliates) of the corresponding Exchangeable Shares;

(b) The shares of Mergeco's special voting stock will have the number of votes, which may be cast at any meeting at which the corresponding Mergeco stockholders are entitled to vote, equal to the number of outstanding Exchangeable Shares (other than Exchangeable Shares held by Mergeco and its affiliates);

(c) Each holder of an Exchangeable Share (other than Mergeco and its affiliates) on the record date for any meeting at which corresponding Mergeco stockholders are entitled to vote will be entitled to instruct the Exchangeable Shares Trustee to exercise the votes attached to the share of corresponding Mergeco special voting stock for each Exchangeable Share held by such holder of Exchangeable Shares;

(d) The Exchangeable Shares Trustee will exercise (either by proxy or in person) each vote attached to the share of corresponding Mergeco special voting stock only as directed by the relevant holder of the Exchangeable Shares and, in the absence of instructions from such a shareholder as to voting, will not exercise such votes; and

(e) A holder of Exchangeable Shares may, upon instructing the Exchangeable Shares Trustee, obtain a proxy from such Trustee entitling the holder to vote directly at the relevant meeting the votes attached to the share of corresponding Mergeco special voting stock to which the holder is entitled.

8. In consideration for USco entering into the XXXXXXXXXX and agreeing to participate in the XXXXXXXXXX, Xco entered into a voting agreement in favor of USco and the J-Trust covering XXXXXXXXXX of the shares of Canco that it currently owns, namely XXXXXXXXXX, a copy of which was enclosed with the Ruling request.

9. Similarly, in consideration for Canco entering into the XXXXXXXXXX and agreeing to participate in the XXXXXXXXXX, Mr. K, individually, and in his capacity as trustee of the J-Trust and Kco, entered into a voting agreement in favor of Canco and Xco covering XXXXXXXXXX of the shares of USco's common stock owned by each of them (collectively XXXXXXXXXX), a copy of which was enclosed with the Ruling request.

10. Pursuant to the voting agreement referred to in paragraph 8 above, Xco agreed to enter into a voting trust agreement with the Trustee and the J-Trust, governed by the laws of the XXXXXXXXXX (the "XXXXXXXXXX Voting Trust Agreement"). A copy of the XXXXXXXXXX Voting Trust Agreement was enclosed with the Ruling request.

11. Pursuant to the XXXXXXXXXX Voting Trust Agreement, Xco will transfer all of its Class XXXXXXXXXX Exchangeable Shares and Ancillary Rights into a voting trust that is a trust governed by the laws of the XXXXXXXXXX (the "XXXXXXXXXX Voting Trust").

12. XXXXXXXXXX.

13. The transfer by Xco (and XSubco) of the property described in paragraph 11 above is mainly intended to assure the performance of Xco's (and XSubco's) obligations, as set forth in an agreement (the "Underlying Voting Agreement") between Xco, for itself and on behalf of XSubco, XXXXXXXXXX, concerning the manner in which the Voting Rights related to such property shall be exercised. A copy of the Underlying Voting Agreement was enclosed with the Ruling request.

14. XXXXXXXXXX.

15. XXXXXXXXXX.

16. In connection with paragraph 15 above, Xco, the J-Trust and the board of directors of XXXXXXXXXX negotiated a procedure for the nomination of directors' candidacy for the board of directors of XXXXXXXXXX. The certificate of incorporation of XXXXXXXXXX will incorporate the agreed procedure.

Proposed Transactions

17. Xco will undertake a series of transactions (the "XXXXXXXXXX Transactions") in order to XXXXXXXXXX. After the XXXXXXXXXX Transactions, Xco will own shares of Canco, and a wholly-owned subsidiary of Xco, XSubco, will also own shares of Canco.

18. Xco and XSubco will each deposit all of the Class "XXXXXXXXXX" common shares of Canco held by them with an escrow agent pursuant to an escrow agreement among Xco, XSubco, the J-Trust, Canco, USco and Exchangeco.

19. Pursuant to the XXXXXXXXXX, the escrowed Canco shares will be exchanged into a combination of Class XXXXXXXXXX Exchangeable Shares and Class XXXXXXXXXX Exchangeable Shares. Coincident therewith and as additional consideration, Xco and XSubco will become entitled to the Ancillary Rights.

20. XXXXXXXXXX.

21. Pursuant to the XXXXXXXXXX Voting Trust Agreement, the XXXXXXXXXX Voting Trust will be created by Xco and XSubco simultaneously transferring XXXXXXXXXX of their Class XXXXXXXXXX Exchangeable Shares and Ancillary Rights into the XXXXXXXXXX Voting Trust. The Exchangeable Shares and Ancillary Rights so transferred by a beneficiary will be maintained in a separate account for such beneficiary. Shares transferred to the XXXXXXXXXX Voting Trust are sometimes hereinafter referred to as "Trust Shares".

22. The XXXXXXXXXX Voting Trust will have a XXXXXXXXXX trustee (the "Trustee"). The Trustee will be a resident of Canada.

23. Xco and XSubco will be the XXXXXXXXXX persons with beneficial interests in property of the XXXXXXXXXX Voting Trust at the time of the XXXXXXXXXX Voting Trust's creation.

24. The XXXXXXXXXX Voting Trust Agreement also provides that members of the XXXXXXXXXX (as those expressions are defined in the XXXXXXXXXX Voting Trust Agreement) who subsequently own Class XXXXXXXXXX Exchangeable Shares will become beneficiaries of the XXXXXXXXXX Voting Trust at the time they transfer such Exchangeable Shares and Ancillary Rights to a segregated account in the XXXXXXXXXX Voting Trust.

25. Xco and the J-Trust will be referred to as "Beneficiaries" under the XXXXXXXXXX Voting Trust regardless of whether they contribute property to the Trust or whether the Trust continues to hold property for them XXXXXXXXXX.

26. The main terms of the XXXXXXXXXX Voting Trust Agreement are as follows:

(a) Legal title to the Trust Shares and Ancillary Rights will be vested at all times in the Trustee on behalf of the beneficiaries.

(b) The Trust Shares and Ancillary Rights transferred to the XXXXXXXXXX Voting Trust by any beneficiary will be held by the Trustee in separately identifiable accounts from the Trust Shares and Ancillary Rights held on behalf of any other beneficiary under the XXXXXXXXXX Voting Trust.

(c) Economic and beneficial ownership of Trust Shares and Ancillary Rights transferred to the XXXXXXXXXX Voting Trust by a particular beneficiary will remain with that particular beneficiary and that beneficiary will receive or have the exclusive benefit of all dividends and other distributions received by the XXXXXXXXXX Voting Trust in respect of the Trust Shares and Ancillary Rights so transferred by that beneficiary to the XXXXXXXXXX Voting Trust, as well as any proceeds from the disposition of any such properties.

(d) The Trustee will exercise the Voting Rights as follows:

XXXXXXXXXX.

(e) Regarding dividends and other distributions upon the Trust Shares, each beneficiary will have the following entitlements in respect of his or her beneficiary account:

(i) to receive from time to time payments equal to the amount of any dividends or other non-stock distributions, if any, collected or received by the Trustee upon that beneficiary's Trust Shares;

(ii) should the Trustee receive, as a dividend or other distribution, any additional Class XXXXXXXXXX Exchangeable Shares or other voting securities of Exchangeco, the Trustee will hold same subject to all of the terms and conditions of the XXXXXXXXXX Voting Trust Agreement for the benefit of that beneficiary; and

(iii) in the event of the dissolution and liquidation of Exchangeco, to receive the money, securities, rights or property to which that beneficiary is entitled in respect of its Trust Shares.

(f) Regarding the disposition or encumbrance of Trust Shares and Ancillary Rights held by each beneficiary in his or her beneficiary account:

(i) each beneficiary may, subject to the terms of the XXXXXXXXXX Voting Trust Agreement, sell or encumber the Trust Shares maintained in its beneficiary account;

(ii) each beneficiary may instruct the Trustee to transfer its interest in its Trust Shares or Ancillary Rights XXXXXXXXXX , so long as the transferee becomes a party to the XXXXXXXXXX Voting Trust Agreement with respect to the transferred property and such property is held, in a separate account, for the exclusive benefit of such transferee under the XXXXXXXXXX Voting Trust; and

(iii) Trust Shares must be converted into Class XXXXXXXXXX Exchangeable Shares before they can be transferred to any persons that are not or do not become beneficiaries under the XXXXXXXXXX Voting Trust Agreement; any shares so converted will no longer be subject to the XXXXXXXXXX Voting Trust Agreement.

(g) The XXXXXXXXXX Voting Trust Agreement provides that the parties to it will be entitled to obtain specific performance of the obligations of each party to the XXXXXXXXXX Voting Trust Agreement and to enforce such performance and prevent any breaches of the XXXXXXXXXX Voting Trust Agreement through immediate injunctive relief.

Purpose of the Proposed Transactions

27. The main purpose for Xco's and XSubco's transfer of the Exchangeco Class XXXXXXXXXX Exchangeable Shares and Ancillary Rights into the XXXXXXXXXX Voting Trust is to provide assurance that the obligations of Xco and XSubco pursuant to the Underlying Voting Agreement XXXXXXXXXX to exercise or vote their Voting Rights or shares, respectively, in the agreed manner are respected.

Rulings given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purposes of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our Rulings are as follows:

We confirm that

A. By reason of subparagraph (k)(ii) of the definition "disposition" in subsection 248(1) of the Act, the transfer by each of Xco and XSubco of their Class XXXXXXXXXX Exchangeable Shares and Ancillary Rights to the XXXXXXXXXX Voting Trust will not, for the purposes of the Act, result in a disposition by Xco and XSubco of their respective Class XXXXXXXXXX Exchangeable Shares and Ancillary Rights.

B. Subsection 248(25.2) of the Act will apply to deem the XXXXXXXXXX Voting Trust to deal with the Class XXXXXXXXXX Exchangeable Shares and Ancillary Rights as agent for Xco and XSubco for the period described in that subsection.

Nothing in this Advance Income Tax Ruling should be construed as implying that we are ruling on any tax consequences relating to the facts and proposed transactions described herein other than those specifically described above. More particularly, no Ruling is provided herein with respect to:

(i) The share exchange described in paragraphs 2(b) and 19 above;

(ii) The XXXXXXXXXX Transactions referred to in paragraph 17 above;

(iii) the status of the trust created pursuant to the Voting and Exchange Trust Agreement;

(iv) The application of section 245 of the Act; and

(v) Any transactions described in paragraph 26(f) above.

(vi) The exchangeable share features of the Exchangeable Shares, the support agreement relating thereto between Mergeco, Callco and Exchangeco, or any Part VI.1 tax consideration

The Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 and are binding on the CRA provided that the proposed transactions are completed within 6 months of the date of issuance of the present letter.

Yours truly,

XXXXXXXXXX
Section Manager
For Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch