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 restructuring of the proposed transactions to obtain favourable rulings on subsections 95(6) and 245(2) is acceptable?
Position: Restructuring is acceptable
Reasons: Class B and Class C ordinary shares with no limitation on the entitlement of the growth of the company will be issued by U.K. Holdco, instead of preferred shares.
Re: XXXXXXXXXX ("Canco")
Supplementary Advance Income Tax Ruling
We are writing in reply to your letter of XXXXXXXXXX in which you requested certain changes to the advance income tax ruling #2004-007954 issued on XXXXXXXXXX, 2004 (the "Original Ruling"). Capitalized terms used in this letter have the meanings given to them in the Original Ruling.
The Original Ruling is amended as follows:
The following paragraph is added immediately before the "Definitions" in the Original Ruling:
"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."
Changes to Proposed Transactions
1. A new paragraph following paragraph 22 is added as follows:
"22.1 U.S. Subco will subscribe for a preferred share of CanSubco."
2. New paragraphs 24.1 to 24.4 are added after paragraph 24 as follows:
"24.1 U.K. Holdco will reorganize its authorized share capital by adding Class A, Class B, Class C, and Class D ordinary shares. Each of the Class A, Class B and Class C shares will have the same entitlement to dividends and to assets on a return of capital (actual or in the case of the Class A shares, actual plus "notional" (see below)) on winding-up or otherwise. The sole distinction amongst the first XXXXXXXXXX series of ordinary shares relates to their paid-up capital and voting rights. More particularly, the paid-up capital accounts will be specific to each series and thus reflect only those transactions with the owner of that series. The Class B and C ordinary shares will have a paid-up capital of XXXXXXXXXX British pounds each and, in aggregate, XXXXXXXXXX% of all the votes, allocated in proportion to the number of the shares issued and outstanding in each class. The Class A ordinary shares will have XXXXXXXXXX% of all the votes. The Class D shares carry insignificant rights, have nominal value, and have a separate paid-up capital account different from that of Class A, Class B and Class C ordinary shares.
24.2 The existing U.K. Holdco shares held by US Holdco will be exchanged for that number of Class A ordinary shares of U.K. Holdco that the fair market value of the Class A shares is of the aggregate fair market value of all the Class A, Class B and Class C ordinary shares that will be issued as a result of the proposed transactions described in this ruling letter. Since the paid-up capital of the existing U.K. Holdco shares is less than their fair market value, the actual paid-up capital of each Class A ordinary share so exchanged is less than XXXXXXXXXX British pounds each, being XXXXXXXXXX British pound each. However, "notional" capital of XXXXXXXXXX British pounds for each Class A share will be inferred for purposes of the pari passu entitlements noted above.
24.3 One Class D share having a paid-up capital of XXXXXXXXXX will be issued to CanSubco solely to accommodate the U.K. corporate prohibition that a company cannot redeem or purchase all its shares but must have a non-redeemable share left outstanding. The issuance of one Class D share will therefore permit future share retirement of U.K Holdco.
24.4 U.S. Parent will sell its entire interest in Hungary Newco to CanSubco for cash consideration equal to the fair market value of such interest."
3. The first subparagraph of paragraph 25 is deleted and replaced with the following:
"25. Canco will transfer its business share representing all its interest in Hungarian LLC to U.K Holdco in exchange for that number of Class C ordinary shares of U.K. Holdco having an aggregate fair market value and paid-up capital equal to the fair market value of the interest in Hungarian LLC so transferred, that the fair market value of the Class C shares is of the aggregate fair market value of all the Class A, Class B and Class C ordinary shares that will be issued as a result of the proposed transactions described in this ruling letter."
4. Paragraph 26 is deleted and replaced with the following:
"26. CanSubco will transfer its entire interest in Hungary Newco to U.K. Holdco in exchange for that number of Class B ordinary shares of U.K. Holdco having an aggregate fair market value and paid-up capital equal to the fair market value of the interest in Hungary Newco so transferred, that the fair market value of the Class B shares is of the aggregate fair market value of all the Class A, Class B and Class C ordinary shares that will be issued as a result of the proposed transactions described in this ruling letter.
The transaction will occur under subsection 85.1(3) such that the Class B shares of U.K. Holdco received by CanSubco will have an adjusted cost base equal to the adjusted cost base of the share held by CanSubco in Hungary Newco. U. K. Holdco will not dispose of the share of Hungary Newco to a person with whom CanSubco does not deal at arm's length as part of the series of transactions or events that includes the proposed transactions described herein."
5. New paragraphs 26.1 to 26.3 are added after paragraph 26 as follows:
"26.1 CanSubco will incorporate a corporation under the laws of the U.K. ("New UK Holdco") having an authorized share capital of ordinary shares, and will subscribe for one ordinary share of New UK Holdco for a nominal amount. The ordinary share subscribed for by CanSubco will be insignificant in number compared to the number of the ordinary shares that will be issued by New UK Holdco to each of CanSubco and Canco referred to in new paragraph 26.2 below.
26.2 CanSubco and Canco will transfer their respective Class B and Class C ordinary shares of U.K. Holdco to New UK Holdco in exchange for additional ordinary shares of New UK Holdco having a fair market value equal to the fair market value of the respective Class B and Class C ordinary shares of U.K. Holdco so transferred.
These transactions will occur under subsection 85.1(3) such that the shares of New UK Holdco received by each of CanSubco and Canco will have an adjusted cost base equal to the adjusted cost base of the Class B and Class C ordinary shares, as the case may be, held by CanSubco and Canco in U.K. Holdco. New UK Holdco will not dispose of the shares of U.K. Holdco to a person with whom CanSubco and Canco does not deal at arm's length as part of the series of transactions or events that includes the proposed transactions described herein.
26.3 Ordinary share dividends from time to time declared and paid by U.K Holdco will be paid pro-rata on all outstanding ordinary shares (other than Class D shares) (i.e., each share other than the Class D share will receive the same amount of dividend). Such dividends received by New UK Holdco will then be:
(a) promptly distributed by way of dividend or return of capital, pro-rata on all outstanding ordinary shares of New UK Holdco;
(b) invested by New UK Holdco in an interest-bearing demand note issued by U.K. Holdco. The note will have a term not exceeding XXXXXXXXXX years and bear market rates of interest. Demand may be made at any time during the XXXXXXXXXX year term, without penalty, so as to fund distributions by New UK Holdco on its outstanding ordinary shares, such distributions to be made no less frequently than triennially; or
(c) put on deposit by New UK Holdco, earning market rates of interest, then used to fund distributions by New UK Holdco on its outstanding ordinary shares, such distributions to be made no less frequently than triennially."
6. The following sentence is added to the end of Paragraph 27: "This merger is anticipated to occur in XXXXXXXXXX."
7. New paragraph 27.1 is added after paragraph 27 as follows:
"27.1 CanSubco will amalgamate with Canco. The amalgamation is anticipated to occur in XXXXXXXXXX."
Change to Additional Information
8. The date "XXXXXXXXXX" referred to in Paragraph 28 is changed to "XXXXXXXXXX".
Change to Purpose of the Proposed Transactions
9. The word "modify" in paragraph (c) is replaced with the word "reduce".
Changes to Rulings Given
10. Rulings B is deleted and replaced with the following:
"B. Each of Hungarian LLC and Hungary Newco is considered to be a corporation for the purposes of the Act."
11. The words "paragraphs 23 and 25" in Ruling D are deleted and replaced with "paragraphs 23, 24.2, 25, 26, 26.1 and 26.2".
12. The word "and" at the end of subparagraph (ii)(a) is deleted and such word is added to the end of subparagraph (ii)(b).
13. A new subparagraph (ii)(c) is added after subparagraph (ii)(b) as follows:
"(c) the tax consequences of any income earned by New UK Holdco described in paragraph 26.3 above."
We confirm that the rulings given in the Original Ruling, as amended by this letter, will continue to be binding on the Canada Revenue Agency subject to the same limitations and qualification set out therein provided that the proposed transactions (other than those described in paragraph 27 of the Original Ruling and new paragraph 27.1 referred to in this letter) are completed by XXXXXXXXXX.
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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