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: Sequential Spin-off Butterfly Reorganization - Several Issues.
Position: All issues identified and resolved.
Reasons: The law.
XXXXXXXXXX 2005-011142
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
RE: XXXXXXXXXX ("DC")
XXXXXXXXXX ("DC Sub")
Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX, and your subsequent correspondence wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. You have advised us that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request are:
(i) in an earlier return of any of the taxpayers or a related person;
(ii) being considered by a tax services office ("TSO") or taxation centre ("TC") in connection with a previously filed tax return of any of the taxpayers or a related person;
(iii) under objection by any of the taxpayers 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 by the Income Tax Rulings Directorate.
The taxpayers have also represented that the proposed transactions described herein will not result in any of the taxpayers described herein being unable to pay its existing outstanding tax liabilities.
DEFINITIONS
In this letter, the following terms or expressions have the meaning specified:
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision, and the Income Tax Regulations thereunder are referred to as the "Regulations";
(b) "adjusted cost base" ("ACB") has the meaning assigned by subsection 248(1);
(c) "agreed amount" has the meaning assigned by subsection 85(1);
(d) "BCA" means the XXXXXXXXXX Business Corporations Act, XXXXXXXXXX;
(e) "BN" refers to the Business Number assigned to a corporation, trust or estate by CRA;
(f) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);
(g) "capital dividend account" ("CDA") has the meaning assigned by subsection 89(1);
(h) "capital property" has the meaning assigned by section 54;
(i) "cost amount" has the meaning assigned by subsection 248(1);
(j) "CRA" means the Canada Revenue Agency;
(k) "DC Special Shares" means the special shares of DC, as described in Paragraph 32;
(l) "DC Sub Special Shares" means the special shares of DC Sub, as described in Paragraph 15;
(m) "disposition" has the meaning assigned by subsection 248(1);
(n) "dividend refund" has the meaning assigned by subsection 129(1);
(o) "dividend rental arrangement" has the meaning assigned by subsection 248(1);
(p) "eligible property" has the meaning assigned by subsection 85(1.1);
(q) "fair market value" ("FMV") means the highest price available in an open and unrestricted market between informed, prudent parties acting at arm's length (within the meaning assigned by subsection 251(1)) under no compulsion to act and contracting for a taxable purchase and sale;
(r) "financial intermediary corporation" has the meaning assigned by subsection 191(1);
(s) "guarantee agreement" has the meaning assigned by subsection 112(2.2);
(t) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;
(u) "predecessor corporation" has the meaning assigned by subsection 87(1);
(v) "proceeds of disposition" ("POD") has the meaning assigned by section 54;
(w) "Proposed Transactions" means the transactions described in Paragraphs 8 to 45;
(x) "paid-up capital" ("PUC") has the meaning assigned by subsection 89(1);
(y) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);
(z) "restricted financial institution" has the meaning assigned by subsection 248(1);
(aa) "safe income on hand" in respect of a particular share of a corporation at a particular time means the portion of the unrealized gain inherent in such share of the corporation at that time that cannot reasonably be considered to be attributable to anything other than income earned or realized (as determined pursuant to subsection 55(5)), to the extent that it is on hand, by any corporation after 1971 and before the safe-income determination time for the transaction, event or series of transactions or events that includes the Proposed Transactions described herein;
(bb) "safe income determination time" has the meaning assigned to that term by subsection 55(1);
(cc) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);
(dd) "significant influence" has the meaning assigned by section 3050 of the CICA Handbook;
(ee) "specified financial institution" has the meaning assigned by subsection 248(1);
(ff) "specified investment business" has the meaning assigned by subsection 125(7);
(gg) "stated capital" means the amount of capital determined in respect of a class or series of shares in accordance with the BCA;
(hh) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);
(ii) "taxable Canadian corporation" ("TCC") has the meaning assigned by subsection 89(1);
(jj) "taxable dividend" has the meaning assigned by subsection 89(1); and
(kk) "TC" means the transferee corporation to be established as described in Paragraph 34.
Our understanding of the relevant facts, the Proposed Transactions, and the purpose of the Proposed Transactions, is as follows:
FACTS
1. DC Sub is a TCC and a CCPC. DC Sub was formed on XXXXXXXXXX under the provisions of the BCA by the amalgamation of its predecessor corporations XXXXXXXXXX. DC Sub's fiscal period and taxation year ends on XXXXXXXXXX and its head office is in XXXXXXXXXX. DC Sub's BN is XXXXXXXXXX and it files its corporate income tax return at the XXXXXXXXXX TC. DC Sub is serviced by the XXXXXXXXXX TSO.
2. The issued and outstanding share capital of DC Sub consists of XXXXXXXXXX common shares ("DC Sub Common Shares"), all of which are owned by DC. The aggregate PUC of the DC Sub Common Shares is approximately $XXXXXXXXXX. DC has held the DC Sub Common Shares since XXXXXXXXXX. The DC Sub Common Shares are held by DC as capital property and were not acquired by DC in contemplation of the Proposed Transactions.
3. DC Sub is engaged in the business of XXXXXXXXXX. At the date of the Proposed Transactions, DC Sub's assets will consist of accounts receivable, trade receivables, inventories, prepaid expenses, goodwill and other assets. In addition, DC Sub will also own land and buildings (the "DC Sub Spin-Off Property") having the following municipal addresses:
XXXXXXXXXX.
At the date of the Proposed Transactions, DC Sub's liabilities will consist of current liabilities, including bank indebtedness, accounts payable and sundry liabilities and an amount due to DC. DC Sub has no balance in its CDA or its RDTOH.
DC Sub does not own shares of, or exercise control or significant influence over, any other corporation.
4. DC is a TCC and a CCPC. DC was incorporated under the provisions of the BCA by Articles of Incorporation dated XXXXXXXXXX, as amended by Articles of Amendment dated XXXXXXXXXX. DC's fiscal period and taxation year ends on XXXXXXXXXX and its head office is in XXXXXXXXXX. DC's BN is XXXXXXXXXX and it files its corporate income tax return at the XXXXXXXXXX TC. DC is serviced by the XXXXXXXXXX TSO.
5. The issued and outstanding share capital of DC consists of XXXXXXXXXX Class A voting, non-participating shares (the "DC Class A Shares") and XXXXXXXXXX Class B non-voting, participating shares (the "DC Class B Shares"), which are owned by the following persons who are collectively, referred to as the "DC Shareholders":
Family 1
DC Class A Shares
(voting)
DC Class B Shares
(non-voting)
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Family 2
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Family 3
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
The authorized capital of DC also includes Class C Shares (the "DC Class C Shares"), none of which are presently issued and outstanding.
The DC Class A Shares have the following terms and conditions:
(a) the holders of the Class A Shares shall not be entitled as such to receive dividends;
(b) in the event of the dissolution, liquidation or winding-up of DC or other distribution of assets of DC among its shareholders for the purpose of winding-up its affairs, subject to the prior rights of holders of any shares ranking senior to the Class A Shares with respect to priority in the distribution of assets upon dissolution, liquidation or winding up, the holders of the Class A Shares shall be entitled to receive from the assets and property of DC for each Class A Share held by them respectively, $XXXXXXXXXX before any amount shall be paid or any property or assets of DC distributed to the holders of Class B Shares or any other shares ranking junior to the Class A Shares. After payment to the holders of the Class A Shares of the amount so payable to them as above provided, they shall not be entitled to share in any further distribution of the property or assets of DC; and
(c) the holders of the Class A Shares shall be entitled to receive notice of and to attend all meetings of the shareholders of DC and shall have XXXXXXXXXX vote for each Class A Share held at all meetings of the shareholders of DC, except meetings at which only holders of another specified class or series of shares of DC are entitled to vote separately as a class or series.
The DC Class B Shares have the following terms and conditions:
(a) subject to the rights of holders of any shares ranking senior to the Class B Shares, the holders of Class B Shares shall be entitled to receive dividends and DC shall pay dividends thereon, as and when declared by the board of directors out of monies properly applicable to the payment of dividends, in such amount and in such form as the board of directors may from time to time determine and all dividends which the directors may declare on the Class B Shares shall be declared and paid in equal amounts per share on all Class B Shares at the time outstanding;
(b) in the event of the dissolution, liquidation or winding-up of DC or other distribution of assets of DC among its shareholders for the purpose of winding-up its affairs, subject to the prior rights of the holders of the Class A Shares and of any other shares ranking senior to the Class B Shares with respect to priority in the distribution of assets upon dissolution, liquidation or winding-up, the holders of the Class B Shares shall be entitled to receive the remaining property and assets of DC; and
(c) the holders of the Class B Shares shall not be entitled as such (except as otherwise required under the BCA) to receive notice of or to attend any meeting of the shareholders of DC and shall not be entitled to vote at any such meeting. The holders of the Class B Shares shall, however, be entitled to notice of meetings of the shareholders called for the purpose of authorizing the dissolution of DC or a sale, lease or exchange of all or substantially all the property of DC other than in the ordinary course of business.
6. XXXXXXXXXX.
The aggregate PUC of the DC Class A Shares is approximately $XXXXXXXXXX. The aggregate PUC of the DC Class B Shares is approximately $XXXXXXXXXX. The DC Class A and Class B Shares were not acquired by any of the DC Shareholders in contemplation of the Proposed Transactions described below. Each of the DC Shareholders holds their DC Class A and Class B Shares as capital property. Each of the DC Shareholders is a person resident in Canada for the purposes of the Act.
7. DC is engaged in the business of XXXXXXXXXX. At the date of the Proposed Transactions, DC's assets will consist of accounts receivable, inventories, prepaid expenses, all of the issued and outstanding shares of DC Sub and XXXXXXXXXX ("DC USA"), goodwill and other assets, machinery and equipment, furniture and fixtures, vehicles and computer hardware and software. In addition, DC will also own land and buildings having the following municipal addresses:
XXXXXXXXXX
(collectively, the "DC XXXXXXXXXX Property")
XXXXXXXXXX
(The above properties, other than the DC XXXXXXXXXX Property, are referred to as the "DC Real Property").
At the date of the Proposed Transactions, DC's liabilities will consist of current liabilities, (including a bank line of credit, accounts payables, the current portion of notes payable to shareholders and related parties, and deferred revenue) and long term liabilities (including the long term portion of term bank loans and the long term portion of notes payable to shareholders and related parties).
DC has a balance in its CDA of approximately $XXXXXXXXXX and has no balance in its RDTOH.
Other than the shares of DC Sub and DC USA, DC does not own shares of, or exercise control or significant influence over, any other corporation.
PROPOSED TRANSACTIONS
8. Three new holding corporations ("HC1", "HC2" and "HC3", respectively, and collectively referred to as the "Holdcos") will be incorporated pursuant to the BCA. Each of the Holdcos will be a TCC and a CCPC. The authorized capital of each of the Holdcos will include one class of an unlimited number of common shares.
9. Contemporaneously with the share transfers described in Paragraphs 10 and 11, each DC Shareholder that is a member of Family 1 will transfer all their DC shares to HC1 in consideration for the issuance by HC1 of a number of common shares to each transferor having an aggregate FMV equal to the aggregate FMV of the DC shares so transferred to HC1 by the particular transferor.
Each DC Shareholder that is a member of Family 1 will jointly elect with HC1, 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 their DC shares. The agreed amount in respect of each such transfer of DC shares will be an amount not less than the cost amount of such class of shares to the particular transferor and not greater than the FMV of such class of shares at the time of such transfer.
For purposes of the BCA, the aggregate amount to be added to the stated capital account maintained for the common shares that will be issued by HC1 as consideration for the DC shares transferred to it as described above, will not exceed the aggregate paid-up capital attributable to the DC shares so received by HC1.
10. Contemporaneously with the share transfers described in Paragraph 9 and Paragraph 11, each DC Shareholder that is a member of Family 2 will transfer all their DC shares to HC2 in consideration for the issuance by HC2 of a number of common shares to each transferor having an aggregate FMV equal to the aggregate FMV of the DC shares so transferred to HC2 by the particular transferor.
Each DC Shareholder that is a member of Family 2 will jointly elect with HC2, 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 their DC shares. The agreed amount in respect of each such transfer of DC shares will be an amount not less than the cost amount of such class of shares to the particular transferor and not greater than the aggregate FMV of such class of shares at the time of such transfer.
For purposes the BCA, the aggregate amount to be added to the stated capital account maintained for the common shares that will be issued by HC2 as consideration for the DC shares transferred to it as described above, will not exceed the aggregate paid-up capital attributable to the DC shares so received by HC2.
11. Contemporaneously with the share transfers described in Paragraphs 9 and 10, each DC Shareholder that is a member of Family 3 will transfer all their DC shares to HC3 in consideration for the issuance by HC3 of a number of common shares having an aggregate FMV equal to the aggregate FMV of the DC shares so transferred to HC3 by the particular transferor.
Each DC Shareholder that is a member of Family 3 will jointly elect with HC3, 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 their DC shares. The agreed amount in respect of each such transfer of DC shares will be an amount not less than the cost amount of such class of shares to the particular transferor and not greater than the FMV of such class of shares at the time of such transfer.
For purposes of the BCA, the aggregate amount to be added to the stated capital account maintained for the common shares that will be issued by HC3 as consideration for the DC shares transferred to it as described above, will not exceed the aggregate paid-up capital attributable to the DC shares so received by HC3.
Incorporation of Bare Trusteeco and Transfers of Legal Title
12. Prior to the implementation of any of the transactions described below, a new corporation ("Bare Trusteeco") will be incorporated pursuant to the provisions of the BCA. Bare Trusteeco will be a TCC and a CCPC. The authorized capital of Bare Trusteeco will consist of an unlimited number of common shares. On the incorporation of Bare Trusteeco, each of the Holdcos will subscribe for common shares in Bare Trusteeco in the same proportion that it holds DC Class A Shares, for nominal consideration.
You have advised that Bare Trusteeco will have no other property other than the property described in this Paragraph and will have no purpose or activity other than to acquire legal title (but not beneficial title) to the DC Sub Spin-Off Property (other than the XXXXXXXXXX Property); the DC Real Property; and the DC XXXXXXXXXX Property, and to hold such title to all such property solely as nominee, agent and bare trustee for the beneficial owner of such property.
Specifically, DC Sub will transfer legal title to the DC Sub Spin-Off Property (other than the XXXXXXXXXX Property) to Bare Trusteeco and DC will transfer legal title to the DC Real Property and the DC XXXXXXXXXX Property to Bare Trusteeco. DC Sub will enter into a bare trust agreement with Bare Trusteeco in respect of the DC Sub Spin-Off Property (other than the XXXXXXXXXX Property), and DC will enter into a separate bare trust agreement with Bare Trusteeco in respect of the DC Real Property, the DC XXXXXXXXXX Property. The terms of the respective bare trust agreements to be entered into will include the following:
(a) Bare Trusteeco will hold legal title to the DC Sub Spin-Off Property (other than the XXXXXXXXXX Property) as nominee, agent and bare trustee for the sole benefit and account of DC Sub, and for greater certainty, DC Sub will be the only beneficiary of such trust and will remain the beneficial owner of such property;
(b) Bare Trusteeco will hold legal title to the DC Real Property and the DC XXXXXXXXXX Property as nominee, agent and bare trustee for the sole benefit and account of DC, and for greater certainty, DC will be the only beneficiary of such trust and will remain the beneficial owner of such property; and
(c) Bare Trusteeco, as agent for DC Sub, will deal with the property described in (a) exclusively as directed by DC Sub, and Bare Trusteeco at all times, as agent for DC, will deal with the property described in (b) exclusively as directed by DC at all times.
As contemplated by the Proposed Transactions described in Paragraphs 25, 28, 41 and 45, a bare trust agreement between each new beneficial owner of such property described above and Bare Trusteeco will be entered into with terms identical to those described above.
Reorganization of DC Sub's Capital
13. DC Sub will file Articles of Amendment under the BCA to create and authorize the issuance of an unlimited number of DC Sub New Common Shares and an unlimited number of DC Sub Special Shares.
14. The provisions of the DC Sub New Common Shares will be the same as the provisions of the DC Sub Common Shares, except that holders of the DC Sub New Common Shares will be entitled to XXXXXXXXXX votes per share.
15. The DC Sub Special Shares will have the following terms and conditions:
(a) each DC Sub Special Share will be redeemable, subject to applicable law, at any time at the option of DC Sub at a redemption amount equal to the amount obtained by the formula (A/B x C), where
A equals the net FMV of the DC Sub Spin-Off Property immediately before the distribution described in Paragraph 23;
B equals the net FMV of all of the business property of DC Sub immediately before the distribution described in Paragraph 23; and
C equals the aggregate FMV of a DC Sub Common Share determined immediately before the DC Sub share exchanges described in Paragraph 16;
plus any declared but unpaid dividends;
(b) each DC Sub Special Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described above;
(c) the holder of each DC Sub Special Share will be entitled to a non-cumulative XXXXXXXXXX % cash dividend as and when declared by the board of directors from time to time, which dividend need not also be declared on any other class of shares of DC Sub;
(d) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of DC Sub if the resulting realizable value of the net assets of DC Sub after payment of the dividends would be less than the aggregate of the redemption amounts of all of the DC Sub Special Shares then outstanding;
(e) the holder of each DC Sub Special Share will be entitled, upon the liquidation, dissolution or winding-up of DC Sub, to a payment in priority to all other classes of shares of DC Sub ranking junior to the DC Sub Special Shares of an amount equal to the redemption amount thereof to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and
(f) the holder of each DC Sub Special Share will not be entitled to vote at meetings of shareholders of DC Sub.
DC Sub Share Exchanges
16. Pursuant to the Articles of Amendment filed to create the new share classes as provided in Paragraph 13, DC will exchange all of its DC Sub Common Shares for an equal number of DC Sub New Common Shares and an equal number of DC Sub Special Shares.
Immediately following the share exchanges described in this Paragraph (the "DC Sub share exchanges"), the aggregate FMV of the DC Sub New Common Shares and the DC Sub Special Shares issued on the DC Sub share exchanges will be equal to the FMV of the DC Sub Common Shares issued and outstanding immediately before the DC Sub share exchanges.
In connection with the DC Sub share exchanges:
(a) the aggregate of the additions to the stated capital accounts of the DC Sub New Common Shares and the DC Sub Special Shares will not exceed the paid-up capital of the DC Sub Common Shares immediately prior to the DC Sub share exchanges. For greater certainty, the respective paid-up capital of the DC Sub New Common Shares and the DC Sub Special Shares, will be based on the proportion that the fair market value of such class of shares at the time of issuance is of the fair market value of all DC Sub shares issued on the DC Sub share exchanges; and
(b) the DC Sub Common Shares will be cancelled.
DC will not file an election under subsection 85(1) with respect to the shares received by each on the DC Sub share exchanges described herein.
DC will hold its DC Sub New Common Shares and DC Sub Special Shares as capital property.
DC Sub Spin-Off
17. A new corporation ("Subco") will be incorporated pursuant to the provisions of the BCA. Subco will be a TCC and a CCPC. The authorized capital of Subco will consist of an unlimited number of common shares ("Subco Common Shares") and an unlimited number of special shares ("Subco Special Shares"). No shares of Subco will be issued on incorporation.
18. The Subco Special Shares will have the following terms and conditions:
(a) each Subco Special Share will be redeemable, subject to applicable law, at any time at the option of Subco at a redemption amount equal to the aggregate FMV of the consideration for which such share was issued (plus any declared but unpaid dividends);
(b) each Subco Special Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described above;
(c) the holder of each Subco Special Share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors from time to time, which dividend need not also be declared on any other class of shares of Subco;
(d) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of Subco if the resulting realizable value of the net assets of Subco after payment of the dividends would be less than the aggregate of the redemption amounts of all of the Subco Special Shares then outstanding;
(e) the holder of each Subco Special Share will be entitled, upon the liquidation, dissolution or winding-up of Subco, to a payment in priority to all other classes of shares of Subco ranking junior to the Subco Special Shares of an amount equal to the redemption amount thereof to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and
(f) the holder of each Subco Special Share will not be entitled to vote at meetings of shareholders of Subco.
19. Immediately following the DC Sub share exchanges described in Paragraph 16, DC will transfer to Subco all of its DC Sub Special Shares. For greater certainty, the DC Sub Special Shares transferred by DC under this Paragraph will have an aggregate FMV equal to that proportion of the aggregate FMV of the DC Sub Common Shares, at the time immediately before the DC Sub share exchanges, that:
(a) the aggregate net FMV of the DC Sub Spin-Off Property determined by applying the rules in Paragraph 22 immediately before the transfer described in Paragraph 23,
is of
(b) the aggregate net FMV of all of the business property of DC Sub determined by applying the rules in Paragraph 22 immediately before the transfer described in Paragraph 23.
As sole consideration, Subco will issue to DC a number of Subco Common Shares having an aggregate FMV at that time equal to the aggregate FMV of the DC Sub Special Shares that DC transferred to Subco.
Immediately after the share exchanges described in this Paragraph, the aggregate FMV of the Subco Common Shares owned by DC will be equal to or approximate the amount determined by the formula, as found in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1), on the assumption that DC is a participant, DC Sub is the distributing corporation and Subco is the acquirer. In addition, no person other than DC will own any shares of Subco.
20. In respect of DC's transfer of DC Sub Special Shares to Subco as described in Paragraph 19, Subco and DC will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply. The agreed amount in respect of the DC Sub Special Shares so transferred to Subco will be equal to the cost amount to DC of its DC Sub Special Shares at the time of such transfer. For greater certainty, the agreed amount will not exceed the FMV of the DC Sub Special Shares so transferred, nor will it be less than the amount permitted under paragraph 85(1)(b).
For the purposes of the BCA, the addition to the stated capital of the Subco Common Shares issued by Subco to DC, as described in Paragraph 19, will be equal to the aggregate cost determined pursuant to subsection 85(1) of the DC Sub Special Shares transferred to Subco as described in Paragraph 19.
21. Immediately before the transfer of property described in Paragraph 23, the property owned by DC Sub will be classified into the following three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:
(a) cash or near-cash property, comprising all of the current assets of DC Sub, including cash, accounts receivable, trade receivables, inventory and prepaid expenses;
(b) investment property, comprising all of the assets of DC Sub, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or from a specified investment business; and
(c) business property, comprising all of the assets of DC Sub, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from an active business carried on by DC Sub (other than a specified investment business) including the goodwill and other assets and the DC Sub Spin-Off Property.
For greater certainty, for purposes of this distribution:
(d) any tax accounts such as the balance of any non-capital losses of DC Sub or the balance of any RDTOH or CDA of DC Sub, will not be considered property;
(e) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and
(f) the amount of any deferred income tax will not be considered a liability for the purposes of the proposed transactions described herein because such amount does not represent a legal obligation of DC Sub.
22. In determining the net FMV of each of the three types of property of DC Sub immediately before the transfers of property described in Paragraph 23, the liabilities of DC Sub will be allocated to, and will be deducted in the calculation of the net FMV of each type of property of DC Sub in the following manner:
(a) current liabilities of DC Sub (including the current portion of any long-term debt) will be allocated to each cash or near-cash property in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by DC Sub. The amount of current liabilities so allocated will not exceed the aggregate FMV of all cash or near-cash property of DC Sub;
(b) following the allocation of current liabilities to cash or near-cash property of DC Sub as described in (a), any remaining net FMV of any accounts receivable, trade receivables, inventories and prepaid expenses of DC Sub will be reclassified as business property and excluded from the net FMV of DC Sub's cash or near-cash property, to the extent that such property will be collected, sold, used or consumed in the ordinary course of business to be carried on by DC Sub;
(c) liabilities, other than current liabilities, of DC Sub that relate to a particular property will be allocated to that particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property and liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and
(d) if any liabilities remain after the allocations described in (a) and (c) are made ("excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property, investment property and business property, if any, of DC Sub, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.
Based on the types of property classifications described in Paragraph 21 and after the reclassification of accounts receivable, trade receivables, inventory and prepaid expenses as business property as described in Paragraph 22(b), it is anticipated that DC Sub will not have any cash or near cash property or investment property at the time of the transfers of property described in Paragraph 23 and will only have business property.
23. Immediately following the determination of the net FMV of DC Sub's three types of property as described in Paragraphs 21 and 22, and the transfer of the DC Sub Special Shares described in Paragraph 19, DC Sub will transfer the DC Sub Spin-Off Property to Subco. As consideration for the transfer of the DC Sub Spin-Off Property, Subco will issue Subco Special Shares having an aggregate FMV, redemption amount and retraction amount equal to the aggregate FMV of the DC Sub Spin-Off Property.
DC Sub and Subco will elect, jointly and in prescribed form and within the time referred to in subsection 85(6) to have the rules in subsection 85(1) apply to the transfer of the DC Sub Spin-Off Property. The agreed amount specified in each election will be equal to the cost to DC Sub of the particular transferred property at the time of such transfer. For greater certainty, the agreed amount will not exceed the FMV of the particular transferred property, nor will it be less than the amount permitted under paragraph 85(1)(b).
For the purposes of the BCA, the addition to the stated capital of the Subco Special Shares issued by Subco to DC Sub as consideration for the DC Sub Spin-Off Property, as described in this Paragraph, will be equal to the aggregate cost of such property transferred to Subco determined pursuant to subsection 85(1).
24. Immediately after the transfer of the DC Sub Spin-Off Property described in Paragraph 23, the net FMV of each type of property acquired by Subco from DC Sub at that time, determined in the manner described in Paragraphs 21 and 22, will approximate that proportion of the net FMV of all the property of that type owned by DC Sub, determined immediately before the transfer referred to herein that:
(a) the aggregate FMV of the DC Sub Special Shares owned by Subco immediately before the transfer,
is of
(b) the aggregate FMV of all of the issued and outstanding shares of DC Sub immediately before the transfer.
For the purpose of this Paragraph and Paragraph 27 below, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the net FMV of each type of property which Subco has received (or DC Sub has retained) as compared to what Subco would have received (or DC Sub would have retained) had it received (or retained) its appropriate pro-rata share of the net FMV of that type of property.
25. Subco will enter into a bare trust agreement with Bare Trusteeco in respect of the DC Sub Spin-Off Property (other than the XXXXXXXXXX Property) which will include the terms described in Paragraph 12.
26. Immediately after the transfer of the DC Sub Spin-Off Property by DC Sub to Subco as described in Paragraph 23:
(a) Subco will redeem all of the Subco Special Shares held by DC Sub and will issue to DC Sub, as payment therefor, a demand, non-interest bearing, promissory note (the "Subco Note") having a principal amount and FMV equal to the aggregate redemption amount and FMV of the Subco Special Shares so redeemed. DC Sub will accept the Subco Note as full payment for the redemption price of its Subco Special Shares with the risk of the note being dishonoured; and
(b) DC Sub will redeem all of the DC Sub Special Shares held by Subco for an amount equal to their FMV and will issue to Subco, as payment therefor, a demand, non-interest bearing, promissory note (the "DC Sub Note") having a principal amount and FMV equal to the aggregate FMV of the DC Sub Special Shares. Subco will accept the DC Sub Note as full payment for the redemption price of the DC Sub Special Shares so purchased with the risk of the note being dishonoured.
The principal amount and FMV of the Subco Note and the principal amount and FMV of the DC Sub Note will be equal to each other. Each of DC Sub and Subco will have the financial capacity to honour, upon presentation for payment, the amount payable under its promissory note issued by it as described above.
DC Sub will pay the principal amount of the DC Sub Note by transferring to Subco the Subco Note, which will be accepted by Subco in full payment of DC Sub's obligation. Concurrently, Subco will pay the principal amount of the Subco Note by transferring to DC Sub the DC Sub Note, which will be accepted by DC Sub in full payment of Subco's obligation. The Subco Note and the DC Sub Note will both be marked paid in full and cancelled.
27. Immediately following the completion of transactions described in Paragraph 26, the net FMV of each type of property retained by DC Sub, determined in the manner described in Paragraphs 21 and 22, will approximate that proportion of the aggregate net FMV of property of that type owned by DC Sub, immediately before the transfer of the DC Sub Spin-Off Property described in Paragraph 23, that:
(a) the aggregate FMV, immediately before the transfer of the DC Sub Spin-Off Property described in Paragraph 23, of the DC Sub New Common Shares owned by DC
is of
(b) the aggregate FMV, immediately before the transfer of the DC Sub Spin-Off Property described in Paragraph 23, of all of the issued and outstanding shares of DC Sub.
Transfer of DC XXXXXXXXXX Property to Subco
28. Following the completion of the transactions described above, DC will transfer to Subco its beneficial ownership of the DC XXXXXXXXXX Property in consideration for the issuance by Subco of that number of Subco Common Shares having an aggregate FMV at that time equal to the aggregate FMV of the DC XXXXXXXXXX Property that DC transferred to Subco.
Subco will enter into a bare trust agreement with Bare Trusteeco that will include the terms described in Paragraph 12 with respect to the DC XXXXXXXXXX Property.
29. In respect of DC's transfer of the DC XXXXXXXXXX Property to Subco as described in Paragraph 28, Subco and DC will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply. The agreed amount in respect of the DC XXXXXXXXXX Property so transferred to Subco will be equal to the cost amount to DC of the DC XXXXXXXXXX Property at the time of such transfer. For greater certainty, the agreed amount will not exceed the FMV of the DC XXXXXXXXXX Property so transferred, nor will it be less than the amount permitted under paragraph 85(1)(b).
For the purposes of the BCA, the addition to the stated capital of the Subco Common Shares issued by Subco to DC, as described in Paragraph 28, will be equal to the aggregate cost determined pursuant to subsection 85(1) of the DC XXXXXXXXXX Property transferred to Subco as described in Paragraph 28.
Reorganization of DC's Capital
30. DC will file Articles of Amendment under the BCA to:
(a) create and authorize the issuance of an unlimited number of DC New Class B Shares and an unlimited number of DC Special Shares; and
(b) delete the existing authorized but unissued DC Class C Shares.
31. The terms and conditions of the DC New Class B Shares will be the same as the terms and conditions of the DC Class B Shares, except that holders of the DC New Class B Shares will be entitled to receive not less than XXXXXXXXXX days notice in writing of any proposal to appoint a Managing Director of DC.
32. The DC Special Shares will have the following terms and conditions:
(a) each DC Special Share will be redeemable, subject to applicable law, at any time at the option of DC at a redemption amount equal to the amount obtained by the formula (A/B x C)/D, where
A equals the net FMV of the DC Real Property and the Subco Common Shares immediately before the distribution described in Paragraph 41;
B equals the net FMV of all of the business property of DC immediately before the distribution described in Paragraph 41;
C equals the aggregate FMV of all DC's issued and outstanding shares determined immediately before the DC share exchanges described in Paragraph 33; and
D equals the number of DC Special Shares issued on the DC share exchanges described in Paragraph 33.
plus any declared but unpaid dividends;
(b) each DC Special Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described above;
(c) the holder of each DC Special Share will be entitled to a non-cumulative XXXXXXXXXX% cash dividend as and when declared by the board of directors from time to time, which dividend need not also be declared on any other class of shares of DC;
(d) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of DC if the resulting realizable value of the net assets of DC after payment of the dividends would be less than the aggregate of the redemption amounts of all of the DC Special Shares then outstanding;
(e) the holder of each DC Special Share will be entitled, upon the liquidation, dissolution or winding-up of DC, to a payment in priority to all other classes of shares of DC ranking junior to the DC Special Shares of an amount equal to the redemption amount thereof to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and
(f) the holder of each DC Special Share will not be entitled to vote at meetings of shareholders of DC.
DC Share Exchanges
33. Pursuant to the Articles of Amendment filed to create the new share classes as provided in Paragraph 30, each Holdco will exchange all of its DC Class B Shares for an equal number of DC New Class B Shares and an equal number of DC Special Shares.
Immediately following the share exchanges described in this Paragraph (the "DC share exchanges"), the aggregate FMV of the DC New Class B Shares and the DC Special Shares issued on the DC share exchanges will be equal to the FMV of the DC Class B Shares issued and outstanding immediately before the DC share exchanges.
In connection with the DC share exchanges:
(a) the aggregate of the additions to the stated capital accounts of the DC New Class B Shares and the DC Special Shares will not exceed the paid-up capital of the DC Class B Shares immediately prior to the DC share exchanges. For greater certainty, the respective paid-up capital of the DC New Class B Shares and the DC Special Shares, will be based on the proportion that the fair market value of such class of shares at the time of issuance is of the fair market value of all DC shares issued on the DC share exchanges; and
(b) the DC Class B Shares will be cancelled.
None of the Holdcos will file an election under subsection 85(1) with respect to the DC shares received by it on the DC share exchanges described herein.
Each Holdco will hold its DC New Class B Shares and DC Special Shares as capital property.
DC Spin-off
34. A new corporation ("TC") will be incorporated pursuant to the provisions of the BCA. TC will be a TCC and a CCPC. The authorized capital of TC will consist of an unlimited number of voting, non-participating shares identical in all material respects to the DC Class A Shares ("TC Class A Shares"), an unlimited number of participating, non-voting shares identical in all material respects to the DC Class B Shares ("TC Class B Shares") and an unlimited number of special shares ("TC Special Shares"). No shares of TC will be issued on incorporation.
35. The TC Special Shares will have the following terms and conditions:
(a) each TC Special Share will be redeemable, subject to applicable law, at any time at the option of TC at a redemption amount equal to the aggregate FMV of the consideration for which such share was issued divided by the total number of issued TC Special Shares (plus any declared but unpaid dividends);
(b) each TC Special Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described above;
(c) the holder of each TC Special Share will be entitled to a non-cumulative XXXXXXXXXX % cash dividend as and when declared by the board of directors from time to time, which dividend need not also be declared on any other class of shares of TC;
(d) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of TC if the resulting realizable value of the net assets of TC after payment of the dividends would be less than the aggregate of the redemption amounts of all of the TC Special Shares then outstanding;
(e) the holder of each TC Special Share will be entitled, upon the liquidation, dissolution or winding-up of TC, to a payment in priority to all other classes of shares of TC ranking junior to the TC Special Shares of an amount equal to the redemption amount thereof to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and
(f) the holder of each TC Special Share will not be entitled to vote at meetings of shareholders of TC.
36. Immediately following the DC share exchanges described in Paragraph 33, each of the Holdcos will contemporaneously transfer to TC all of its DC Special Shares. For greater certainty, the DC Special Shares transferred by each of the Holdcos to TC will, at the time of each such transfer, have an aggregate FMV equal to that proportion of the aggregate FMV of all of the issued and outstanding shares of DC, at the time immediately prior to the DC share exchanges that:
(a) the aggregate net FMV of the DC Real Property and the Subco Common Shares (collectively, the "DC Spin-Off Property") determined by applying the rules in Paragraph 40 immediately before the transfer of property described in Paragraph 41,
is of
(b) the aggregate net FMV of all of the business property of DC determined by applying the rules in Paragraph 40 immediately before the transfer of property described in Paragraph 41.
As sole consideration for each transfer of DC Special Shares by a Holdco, TC will issue to such Holdco a number of its TC Class A Shares and TC Class B Shares having an aggregate FMV at that time equal to the aggregate FMV of the DC Special Shares that such particular Holdco so transferred to TC. Specifically, HC1 will receive XXXXXXXXXX TC Class A Shares; HC2 will receive XXXXXXXXXX TC Class A Shares; and HC3 will receive XXXXXXXXXX TC Class A Shares.
Immediately after the share transfers described in this Paragraph, the aggregate FMV of the TC Class A Shares and TC Class B Shares owned by each Holdco will be equal to or approximate the amount determined by the formula, as found in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1), on the assumption that each Holdco is a participant, DC is the distributing corporation and TC is the acquirer. In addition, no person other than each particular Holdco will own any shares of TC.
37. TC will jointly elect with each particular Holdco, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of shares described in Paragraph 36. The agreed amount in respect of the each of the DC Special Shares so transferred will be equal to the cost amount to the applicable Holdco of its DC Special Shares at the time of the transfer. For greater certainty, the agreed amount in respect of the DC Special Shares so transferred will not exceed the FMV of each DC Special Share so transferred, nor will it be less than the amount permitted under paragraph 85(1)(b).
For the purposes of the BCA, the additions to the stated capital of the TC Class A Shares and the TC Class B Shares issued by TC as consideration for the DC Special Shares transferred to it as described in Paragraph 36 will, in the aggregate, be equal to the aggregate cost determined pursuant to subsection 85(1) of such shares transferred to TC.
38. Immediately before the transfer of property described in Paragraph 41, the property of DC will be determined on a consolidated basis by including the appropriate pro-rata share of the assets of any corporation over which DC has the ability to exercise significant influence (DC and any such corporation, more particularly DC Sub, Subco and DC USA, will hereinafter sometimes collectively be referred to as the "DC Group"), which assets will be classified into the following three types of property for the purposes of the definition of "distribution" in subsection 55(1):
(a) cash or near cash property, comprising all of the current assets of the DC Group including any cash, accounts receivable, inventories, prepaid expenses and loans and advances to related corporations;
(b) investment property, comprising all of the assets of the DC Group, other than cash or near cash property, any income from which would, for purposes of the Act, be income from property or from a SIB.
(c) business property comprising all of the assets of the DC Group, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from a business (other than a SIB); and
For the purposes of this Paragraph, a corporation will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation. For greater certainty, DC will not have significant influence over any corporation other than DC Sub, Subco and DC USA.
39. For the purposes of determining the net FMV of the types of property of DC as described in Paragraph 38 and Paragraph 40:
(a) any tax accounts such as the balance of any non-capital losses of the DC Group or the balance of any RDTOH or CDA of the DC Group, will not be considered property;
(b) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and
(c) the amount of any deferred income tax will not be considered a liability for the purposes of the proposed transactions described herein because such amount does not represent a legal obligation of the DC Group.
In addition, the FMV of the shares of DC Sub, Subco and DC USA and of any indebtedness receivable by DC from DC Sub, Subco and DC USA will be allocated between the three types of property described in Paragraph 38 by multiplying the FMV of the shares of DC Sub, Subco and DC USA, or the amount of any indebtedness receivable from DC Sub, Subco and DC USA, as the case may be, by the proportion that the net FMV of each type of property owned by DC Sub, Subco and DC USA (as determined by Paragraph 38 and Paragraph 40) is of the aggregate net FMV of all of the property owned by the particular corporation.
40. For the purpose of determining, on a consolidated basis, the net FMV of DC's three types of property immediately before the transfer of property described in Paragraph 41:
(a) in determining the net FMV of each type of property held by DC Sub, Subco and DC USA, as the case may be, the liabilities of DC Sub, Subco and DC USA, as the case may be, (other than any amount owing to DC) will be allocated to, and be deducted in the calculation of, the net FMV of a type of property owned by such corporation as follows:
(i) current liabilities of the particular corporation will be allocated to the cash or near cash property of that corporation in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by that corporation to the extent that such allocation does not exceed the total FMV of such type of property. To the extent that the total current liabilities so allocated exceeds the total FMV of all cash or near cash property of that particular corporation, that corporation will be considered to have a negative amount of cash or near cash property;
(ii) provided that the net FMV of the cash or near cash property of the particular corporation is positive, the net FMV of all accounts receivable, inventory and prepaid expenses of that corporation that are initially classified in as cash or near cash property that relate to a business that is carried on by that corporation and that will be collected or consumed in the ordinary course of carrying on that business by the particular corporation will be reclassified as business property. Consequently, the resulting net FMV of all cash or near cash property of that corporation will be reduced by the total net FMV (where such amount is positive) of such accounts receivable, inventory and prepaid expenses;
(iii) liabilities, other than current liabilities, of the particular corporation that relate to a particular property will then be allocated to the particular property (and effectively to the type of property to which the property belongs) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property and liabilities that pertain to the same type of property but not to a particular property will then be allocated to that particular type of property to the extent that such allocation does not exceed the total FMV of that type of property. To the extent that the liabilities pertaining to a particular type of property exceeds the total FMV of that type of property of that corporation, that corporation will be considered to have a negative amount of that type of property; and
(iv) any other remaining liabilities of the particular corporation will then be allocated to the cash or near cash property, investment property and business property of that corporation based on the relative net FMV of each type of property prior to the allocation of such liabilities but after the allocation of the liabilities described in subparagraphs (a)(i) and (iii). However, where a corporation is considered to have a negative amount of a type of property because of subparagraph (a)(i) or (iii), for the purposes of allocating those remaining liabilities, the net FMV of that type of property will be deemed to be nil resulting in none of those remaining liabilities being allocated to that type of property; and
(b) in determining the net FMV of each type of property of DC, immediately before the transfers of property, DC will include the appropriate pro-rata share of the net FMV of each type of property of DC Sub, Subco and DC USA (or such negative amount), as determined in accordance with subparagraph (a) herein, and any liabilities of DC will then be allocated to, and be deducted in the calculation of, the net FMV of each type of property of DC in the following manner:
(i) current liabilities of DC (including the current portion of any long-term debt or loans to any shareholders, if any) will be allocated to cash or near cash property of DC in the proportion that the FMV of each such property is of the FMV of all cash or near cash property of DC. The amount of current liabilities so allocated as described herein will not exceed the aggregate FMV of all cash or near cash property of the cash or near cash property of DC;
(ii) following the allocation of current liabilities to cash or near-cash property of DC as described in (i), any remaining net FMV of accounts receivable, inventories, prepaid expenses of DC will be reclassified as business property and excluded from the net FMV of DC's cash or near cash property, to the extent that such property will relate to a business that will be carried on by DC and will be collected, sold, used or consumed in the ordinary course of that business;
(iii) liabilities of DC, other than current liabilities, that relate to a particular property will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property and liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and
(iv) if any liabilities remain after the allocations described in (i) and (iii) are made ("excess DC unallocated liabilities"), such excess DC unallocated liabilities will then be allocated to the cash or near cash property, investment property and business property, if any, of DC based on the relative net FMV of each type of property prior to the allocation of such excess DC unallocated liabilities.
Based on the above, it is anticipated that DC will not have any cash or near cash property or investment property at the time of the transfer of property described in Paragraph 41 and more specifically, will only have business property.
41. Immediately following the determination of the net FMV of DC's three types of property as described in Paragraphs 38 and 40, and the transfer of DC Special Shares as described in Paragraph 36, DC will transfer the DC Spin-Off Property to TC. As consideration for the transfer of the DC Spin-Off Property, TC will issue TC Special Shares having a FMV, redemption and retraction amount equal to the FMV of the DC Spin-Off Property so transferred to TC.
DC and TC will elect, jointly and in prescribed form and within the time referred to in subsection 85(6) to have the rules in subsection 85(1) apply to the transfer of the DC Spin-Off Property. The agreed amount specified in each election will be equal to the cost to DC of the particular transferred property at the time of such transfer. For greater certainty, the agreed amount will not exceed the FMV of each particular transferred property, nor will it be less than the amount permitted under paragraph 85(1)(b).
For the purposes of the BCA, the addition to the stated capital of the TC Special Shares issued by TC to DC as consideration for the DC Spin-Off Property, as described above, will be equal to the aggregate cost of such property determined pursuant to subsection 85(1).
TC will enter into a bare trust agreement with Bare Trusteeco in respect of the DC Real Property which will include the terms described in Paragraph 12.
42. Immediately after the transfer of the DC Spin-Off Property to TC as described in Paragraph 41, the net FMV of each type of property acquired by TC from DC at that time, determined in the manner described in Paragraphs 38 and 40, will approximate that proportion of the net FMV of all the property of that type owned by DC, determined immediately before the transfer referred to herein that:
(a) the aggregate FMV of the DC Special Shares owned by TC immediately before the transfer,
is of
(b) the aggregate FMV of all of the issued and outstanding shares of DC immediately before the transfer.
For the purpose of this Paragraph and Paragraph 44 below, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the net FMV of each type of property which TC has received (or DC has retained) as compared to what TC would have received (or DC would have retained) had it received (or retained) its appropriate pro-rata share of the net FMV of that type of property.
43. Immediately after the transfer of the DC Spin-Off Property by DC to TC as described in Paragraph 41:
(a) TC will redeem all of the TC Special Shares held by DC and will issue to DC, as payment therefor, a demand, non-interest bearing, promissory note (the "TC Note") having a principal amount and FMV equal to the aggregate redemption amount and FMV of the TC Special Shares so redeemed. DC will accept the TC Note as full satisfaction for the redemption price of its TC Special Shares so redeemed.
(b) DC will redeem all of the DC Special Shares held by TC for an amount equal to their aggregate FMV at that time and will issue to TC, as payment therefor, a demand, non-interest bearing, promissory note (the "DC Note") having a principal amount and FMV equal to the aggregate redemption amount and FMV of the DC Special Shares. TC will accept the DC Note as full satisfaction for the redemption price of its DC Class Special Shares so redeemed.
The principal amount and FMV of the DC Note and TC Note will be equal to each other. DC will satisfy the principal amount of the DC Note by transferring to TC the TC Note, which will be accepted by TC in full payment of DC's obligation. Concurrently, TC will satisfy the principal amount of the TC Note by transferring to DC the DC Note, which will be accepted by DC in full payment of TC's obligation. The DC Note and the TC Note will both be marked paid in full and cancelled.
44. Immediately following the completion of transactions described in Paragraph 43, the net FMV of each type of property retained by DC, determined in the manner described in Paragraphs 38 and 40, will approximate that proportion of the aggregate net FMV of all the property of that type owned by DC, immediately before the transfer of the DC Spin-Off Property described in Paragraph 41, that:
(a) the aggregate FMV, immediately before the transfer of DC Spin-Off Property described in Paragraph 41, of the DC Class A Shares and the DC Class New Class B Shares owned by the Holdcos
is of
(b) the aggregate FMV, immediately before the transfer of DC Spin-Off Property described in Paragraph 41, of all of the issued and outstanding shares of DC.
Amalgamation of TC and Subco
45. Following the completion of the transactions described above, under the applicable provisions of the BCA, TC will undergo a short-form amalgamation with Subco, its subsidiary wholly-owned corporation, to form a new corporate entity ("Amalco") such that:
(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of TC and Subco immediately before the amalgamation will become property of Amalco by virtue of the amalgamation;
(b) all of the liabilities (except amounts payable to any predecessor corporation) of TC and Subco will become liabilities of Amalco by virtue of the amalgamation; and
(c) the Subco Common Shares owned by TC immediately prior to the amalgamation will be cancelled on the amalgamation and the TC Class A Shares and the TC Class B Shares owned prior to the amalgamation by the TC shareholders will remain outstanding as Amalco Class A Shares and Amalco Class B Shares, respectively.
Amalco will enter into a bare trust agreement with Bare Trusteeco, that will include the terms described in Paragraph 12, with respect to the DC Sub Spin-Off Property (other than the XXXXXXXXXX Property), the DC Real Property and the DC XXXXXXXXXX Property that became property of Amalco on the amalgamation. Amalco will be a TCC and a CCPC.
46. The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, as described in Paragraphs 9, 10, 11, 20, 23, 29 and 37, which will be filed within the applicable due date following the completion of the Proposed Transactions.
47. After the completion of the Proposed Transactions described above, Amalco, as landlord, will enter into commercial leases with DC, as tenant, to lease the DC Real Property, the DC Sub Spin-Off Property and the DC XXXXXXXXXX Property to DC so DC can continue to use the leased property in its business.
48. None of the corporations referred to herein (including the corporations to be incorporated as described in the proposed transactions) is or will be, at any time during the series of transactions herein described, a specified financial institution or a restricted financial institution.
49. No property has been or will be acquired by DC, its predecessor corporations or DC Sub and no liabilities have been or will be incurred by DC or its predecessor corporations in contemplation of and before the transfers of property described in Paragraphs 23 and 41, except as described herein.
50. There will not be at any time prior to the completion of the Proposed Transactions, any agreements or undertakings that constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions).
51. None of DC Sub, Subco, DC, TC or Amalco will have entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions).
52. None of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions) 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).
53. None of the corporations described above (including the corporations to be incorporated as described in the Proposed Transactions) is or will be, at any time before the completion of the Proposed Transactions described above, a corporation described in any of paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1).
Purpose of the Proposed Transactions
54. The purpose of the Proposed Transactions is to protect the DC Real Property, the DC XXXXXXXXXX Property and the DC Sub Spin-Off Property from being exposed to the potential commercial liabilities associated with the business of DC Sub and DC, by transferring such property to Subco and TC (now Amalco).
55. The purpose of the transfers by DC Sub and DC of registered legal title to the DC Sub Spin-Off Property (other than the XXXXXXXXXX Property) and the DC Real Property, respectively, to Bare Trusteeco, as described in Paragraph 12, is to allow the subsequent transfers of the beneficial ownership of those properties, as described in Paragraphs 23, 41 and 45, that are located in XXXXXXXXXX to be exempt from XXXXXXXXXX land transfer tax. Registered title to the XXXXXXXXXX properties is being transferred to Bare Trusteeco for the purpose of keeping registered title to all of the real property (other than the XXXXXXXXXX Property) in one corporation.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.
A. Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to:
(a) the transfer by each DC Shareholder of their shares of DC to their respective Holdco as described in Paragraphs 9 to 11;
(b) the transfer by DC of its DC Sub Special Shares to Subco as described in Paragraph 19;
(c) the transfer by DC Sub of the DC Sub Spin-Off Property to Subco as described in Paragraph 23;
(d) the transfer by DC of the DC XXXXXXXXXX Property to Subco as described in Paragraph 28;
(e) the transfer by each Holdco of its DC Special Shares to TC as described in Paragraph 36; and
(f) the transfer by DC of the DC Spin-Off Property to TC as described in Paragraph 41,
such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor's proceeds of disposition of the particular property and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.
B. The transfers by DC Sub of the legal title to the DC Sub Spin-Off Property (other than the XXXXXXXXXX Property) and by DC of the legal title to the DC Real Property and the DC XXXXXXXXXX Property, respectively, to Bare Trusteeco as described in Paragraph 12 will not constitute a disposition for the purposes of the Act provided Bare Trusteeco can reasonably be considered to act as agent for all beneficiaries with respect to all dealings with all of the trust property, and each such trust will, except for the purposes of subsection 104(1), subsection 104(1.1), subparagraph (b)(v) of the definition of disposition in subsection 248(1) and paragraph (k) of that definition, not be a trust for the purposes of the Act.
C. Subsection 84(3) will apply on the redemption or purchase for cancellation, as the case may be, of:
(a) the Subco Special Shares held by DC Sub described in Paragraph 26(a), to deem Subco to have paid and DC Sub to have received;
(b) the DC Sub Special Shares held by Subco described in Paragraph 26(b), to deem DC Sub to have paid and Subco to have received;
(c) the TC Special Shares held by DC described in Paragraph 43(a), to deem TC to have paid and DC to have received; and
(d) the DC Special Shares held by TC described in Paragraph 43(b), to deem DC to have paid and TC to have received;
a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption or purchase for cancellation, as the case may be, exceeds the aggregate PUC in respect of such shares immediately before such redemption or purchase for cancellation, and any such dividend:
(e) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(l)(j), of the person deemed to have received such dividend;
(f) will be deductible by each recipient of such dividend in computing its respective taxable income pursuant to subsection 112(1) and, for greater certainty, the provisions of subsections 112 (2.1), (2.2), (2.3) or (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividend;
(g) will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54;
(h) by virtue of subsection 112(3), will reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received; and
(i) will not be subject to tax under Part IV.1 and Part VI.1 on the basis that such dividend will be an "excepted dividend" under section 187.1 and an "excluded dividend" under subsection 191(1).
D. Provided that the particular corporation that is deemed to have paid a dividend in Ruling C is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay that dividend, the corporation that is deemed to have received such dividend will not be subject to Part IV tax under subsection 186(1).
E. Provided that as part of the series of transactions or events that includes the Proposed Transactions, there is not:
(a) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(b) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(c) an acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii); or
(d) an acquisition of property in the circumstances described in subparagraph 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 Ruling D and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
F. The repayment of the DC Sub Note held by Subco and the Subco Note held by DC Sub described in Paragraph 26 will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).
G. On the amalgamation of TC and Subco described in Paragraph 45, the provisions of:
(a) subsection 87(1) will, by virtue of subsection 87(1.1), apply;
(b) provided the shares of TC were capital property to the holders thereof immediately before the amalgamation, the provisions of subsection 87(4) other than paragraphs (c), (d) and (e) thereof will apply, such that:
(i) each shareholder of TC will be deemed by paragraph 87(4)(a) to have disposed of its shares of TC for proceeds of disposition equal to the ACB to that shareholder of such shares immediately before the amalgamation and will be deemed by paragraph 87(4)(b) to have acquired its shares of the new corporation formed on the amalgamation at an aggregate cost equal to those proceeds of disposition;
(c) the cancellation of the Subco shares held by TC by virtue of the amalgamation will not give rise to a gain or loss to TC; and
(d) subsection 87(7) will apply to a debt or other obligation of TC that was outstanding immediately before the amalgamation and became a debt or other obligation of the corporation formed on the amalgamation where the amount payable by the new corporation on the maturity of the debt or other obligation, as the case may be, is the same as the amount that would have been payable by TC on its maturity.
H. The provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply in respect of the exchange of DC Sub Common Shares for DC Sub New Common Shares and DC Sub Special Shares as described in Paragraph 16; such that
(a) the cost of each of the DC Sub New Common Shares and DC Sub Special Shares received by DC on the exchange will be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the aggregate ACB to DC, immediately before the exchange, of the DC Sub Common Shares held by DC, that:
(i) the fair market value, immediately after the exchange, of the DC Sub New Common Shares or the DC Sub Special Shares, as the case may be, received by DC
is of
(ii) the fair market value, immediately after the exchange, of all of the shares in the capital of DC Sub received by DC; and
(b) pursuant to paragraph 86(1)(c), DC will be deemed to have disposed of its DC Sub Common Shares for aggregate POD equal to the aggregate cost to DC of the DC Sub New Common Shares and DC Sub Special Shares received by DC, as determined in (a) above.
I. The provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply in respect of the exchange of DC Class B Shares for DC New Class B Shares and DC Special Shares as described in Paragraph 33; such that
(a) the cost of each of the DC New Class B Shares and DC Special Shares received by such holder on the exchange will be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the aggregate ACB to such holder, immediately before the exchange, of the DC Class B Shares held by such holder, that:
(i) the fair market value, immediately after the exchange, of the DC New Class B Shares or DC Special Shares, as the case may be, received by such holder
is of
(ii) the fair market value, immediately after the exchange, of all of the shares in the capital of DC received by such holder; and
(b) pursuant to paragraph 86(1)(c), each holder of DC Class B Shares will be deemed to have disposed of its DC Class B Shares for aggregate POD equal to the aggregate cost to such holder of the DC New Class B Shares and DC Special Shares received by such holder, as determined in (a) above.
J. The repayments of the DC Note held by TC and the TC Note held by DC described in Paragraph 43 will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).
K. The provisions of subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to any of the Proposed Transactions described herein, in and by themselves.
L. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions described herein, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.
The above Rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA provided that the Proposed Transactions are completed by XXXXXXXXXX. The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.
We have not been provided with a copy of any proposed bare trust agreement referred to in Paragraph 12 and as such, the determination as to whether the terms of any such bare trust agreement will be as described in Paragraph 12 and Ruling B, will be subject to future scrutiny by audit.
Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:
(a) the paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;
(b) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that include other transactions or events that are not described in this letter.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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