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 paragraph 85(1)(b), as modified by paragraph 97(2)(a) applies to adjust agreed amount.
Reasons: Amount of consideration, other than an interest in the partnership, does not exceed amount agreed upon by the parties
Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge receipt of your e-mails as well as the information provided in various telephone conversations.
Throughout this letter, certain corporations and partnerships will be referred to as follows:
Parentco (the "taxpayer") files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office. The taxpayer is resident in Canada for the purposes of the Act.
On XXXXXXXXXX, 2003, XXXXXXXXXX, a corporation related to Parentco, received an advance income tax ruling (2003-005401) on an issue that is similar to the rulings requested in this letter. Other than that ruling, to the best of your knowledge and that of the taxpayer, none of the issues in this ruling request is:
(i) involved in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) before the courts; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
The taxpayer has represented that the transactions described in this letter will not affect the ability of any corporation identified in this letter to pay any of its outstanding tax liabilities.
Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.
In this letter, unless otherwise expressly stated, the following terms have the meanings specified:
(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference in this letter to a statutory provision is a reference to the relevant provision of the Act;
(b) "adjusted cost base" ("ACB") has the meaning assigned by section 54;
(c) "agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in an election under subsection 97(2);
(d) "ATA" refers to the Asset Transfer Agreement described in Paragraph 10 below;
(e) "Canadian partnership" has the meaning assigned by subsection 102(1);
(f) "cost amount" has the meaning assigned by subsection 248(1);
(g) "Credit Agreement" refers to the syndicated bank credit agreement entered into by Parentco;
(j) "Indentures" refers to the agreements governing the terms of certain of Parentco's indebtedness entered into with the Indenture Trustees;
(k) "Indenture Trustees" refers to XXXXXXXXXX;
(l) "paid-up capital" has the meaning assigned by subsection 89(1);
(m) "Paragraph" refers to a numbered paragraph in this letter;
(n) "Parentco Agreement" refers to the agreement entered into by Parentco described in Paragraph 11 below;
(o) "Parentco Debt" refers to Parentco's debt obligations issued to holders in the United States under the Indentures and its obligations under the Credit Agreement;
(p) "proposed transactions" means the transactions described in Paragraphs 7 to 13 below;
(q) "XXXXXXXXXX Subsidiary" refers to a subsidiary of Parentco (including a non-corporate entity) that is designated by Parentco as a XXXXXXXXXX Subsidiary (as the term is defined in the XXXXXXXXXX, the Indentures, or the Credit Agreement);
(r) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
(s) "Transfer" refers to the transfer of assets described in Paragraph 10 below.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
1. Parentco is a taxable Canadian corporation formed on XXXXXXXXXX by amalgamation under the laws of Canada.
2. POP is XXXXXXXXXX general Canadian partnership formed on XXXXXXXXXX . Substantially all of the business assets of Parentco will be transferred to POP, as more fully described below.
3. CDco was incorporated on XXXXXXXXXX under the laws of Canada. On XXXXXXXXXX, Parentco acquired control of CDco by acquiring approximately XXXXXXXXXX. Parentco acquired the balance of the shares of CDco under the compulsory acquisition provisions of the Canada Business Corporations Act. As a result of these transactions, Parentco owns XXXXXXXXXX% of the outstanding shares of CDco.
CDco's name was legally changed to Holdco on XXXXXXXXXX. Therefore, Parentco owns XXXXXXXXXX% of the outstanding shares of Holdco. Holdco is the holding corporation of Opco.
4. Opco is a taxable Canadian corporation formed on XXXXXXXXXX by amalgamation under the laws of Canada. Opco is the wholly-owned subsidiary of Holdco.
As described in Paragraph 1 above, Opco and Parentco operate a XXXXXXXXXX.
5. As soon as possible following Parentco's acquisition of Holdco, as described in Paragraph 3 above, Holdco and Opco were each designated by Parentco as a XXXXXXXXXX Subsidiary under the XXXXXXXXXX, the Indentures and the Credit Agreement. As a result of being so XXXXXXXXXX, Holdco and Opco each delivered to the XXXXXXXXXX a guarantee of Parentco's obligations under the XXXXXXXXXX and provided a debenture pledging substantially all of its assets, subject to certain exceptions and prior liens, to secure such guarantee. The designation of each of Holdco and Opco as a XXXXXXXXXX Subsidiary, and the delivery by each of Holdco and Opco of the guarantee, were independent of, and not part of the proposed transactions relating to the Transfer.
There are a number of reasons for making a subsidiary a XXXXXXXXXX Subsidiary. The key reason for designating a subsidiary as a XXXXXXXXXX Subsidiary is the ability to include its cash flow for the purposes of calculating compliance with the financial covenants set out in the Credit Agreement and the Indentures. Another reason is the flexibility it offers within the covenant pattern of the Parentco Debt documents. The covenants of the Credit Agreement and the Indentures for many purposes treat Parentco and the XXXXXXXXXX Subsidiaries as one entity, within which transactions otherwise restricted (such as investments and distributions) can be freely made. From the subsidiary's perspective, there are benefits that arise from its status as a XXXXXXXXXX Subsidiary, one being its ability to have unrestricted access to credit support from Parentco when Parentco determines that is appropriate.
6. As at XXXXXXXXXX, the Parentco Debt totalled approximately $XXXXXXXXXX. This amount represents indebtedness under the Indentures. As at XXXXXXXXXX, no amount was outstanding under the Credit Agreement.
A large portion of the Parentco Debt is secured pursuant to the XXXXXXXXXX are issued under the XXXXXXXXXX to evidence each secured party's interest in the security. The XXXXXXXXXX issued under the XXXXXXXXXX are secured by a fixed and floating charge over all of the assets of Parentco, and Parentco's obligations under the XXXXXXXXXX are guaranteed by its XXXXXXXXXX Subsidiaries. The guarantee given by each XXXXXXXXXX Subsidiary is such that, in the event that the creditor cannot realize from such subsidiary as a guarantor, the creditor may realize from such subsidiary as a primary obligor.
If Parentco proposes to transfer substantially all of its assets to another person, the XXXXXXXXXX and Indentures provide that the transferee will ordinarily be required to assume Parentco's obligations under the XXXXXXXXXX and the Indentures, and Parentco will be discharged from its obligations thereunder. Notwithstanding this general mechanism, the terms of the XXXXXXXXXX and the Indentures will also allow for alternatives such as that which is described in Paragraph 9 below.
7. As described in Paragraph 2 above, Parentco and Opco have formed POP, a general partnership. Parentco and Opco have each acquired 1 partnership unit for $XXXXXXXXXX.
8. Prior to the Transfer described in Paragraph 10 below, Parentco will designate POP as a XXXXXXXXXX Subsidiary under the XXXXXXXXXX, the Indentures and the Credit Agreement. As a result of being so designated, and in order to make the designation effective, POP will deliver to the XXXXXXXXXX a guarantee of Parentco's obligations under the XXXXXXXXXX and will provide a debenture pledging substantially all of its assets, subject to certain exceptions and prior liens, to secure such guarantee.
9. Prior to or contemporaneously with the Transfer described in Paragraph 10 below, Parentco, POP and various trustees will execute a XXXXXXXXXX and various Supplemental Indentures under which POP will assume all obligations under the XXXXXXXXXX and the Indentures as co-obligor on a joint and several basis with Parentco. Notwithstanding this assumption of obligations by POP, Parentco will not be discharged from any of its obligations under the XXXXXXXXXX or any of the Indentures.
10. Parentco will transfer substantially all of its operating assets to POP (the "Transfer") pursuant to the terms of an Asset Transfer Agreement ("ATA"). Parentco and Opco will jointly elect in prescribed form and within the time required by subsection 96(4) to have the rules in subsection 97(2) apply to the Transfer of Parentco's operating assets. The agreed amount specified in each election in respect of an eligible property so transferred will be an amount determined by Parentco, subject to the limitations of subsection 85(1). The consideration for the Transfer will be comprised of: (i) the assumption of liabilities (other than "Excluded Liabilities") in the approximate amount of $XXXXXXXXXX; and (ii) the issuance of partnership units of POP. The ATA will provide that liabilities under the Parentco Debt are Excluded Liabilities and will therefore not be assumed by POP as consideration for the Transfer. The ATA will further provide that Parentco will indemnify POP from and against all liabilities, losses, actions, claims and demands suffered or incurred by POP by reason of any failure on the part of Parentco to fully discharge, perform or fulfill any of the Excluded Liabilities.
At the time of the proposed transactions, the amount of the Parentco Debt will be approximately $XXXXXXXXXX, and the cost amount of the assets that will be transferred by Parentco to POP pursuant to the Transfer will be approximately $XXXXXXXXXX.
11. Contemporaneously with the Transfer described in Paragraph 10 above, Parentco and POP will execute an agreement (the "Parentco Agreement") under which Parentco will agree to make all payments of the Parentco Debt in the ordinary course of business (i.e., to act as the primary obligor under the Parentco Debt). The Parentco Agreement will state that the source of funds for such payments may be derived from POP in the form of distributions from POP. The Parentco Agreement will also grant to POP a specific and irrevocable right to recover any payments by POP under the Parentco Debt by set off against amounts owing to Parentco by POP pursuant to the partnership agreement which governs the affairs of POP, or to otherwise recover such amounts by reimbursement from Parentco.
12. Immediately following the Transfer and execution of the Parentco Agreement, as described in Paragraphs 10 and 11 above, Parentco will transfer approximately XXXXXXXXXX% of the POP partnership units to Holdco, and will receive XXXXXXXXXX Common shares in the capital of Holdco as consideration. Parentco and Holdco will jointly elect in prescribed form and within the time required by subsection 85(6) to have the rules in subsection 85(1) apply to the transfer of POP partnership units. The agreed amount specified in the election in respect of the POP partnership units so transferred will be an amount determined by Parentco, subject to the limitations of subsection 85(1).
13. Immediately following the transfer of the POP partnership units to Holdco, as described in Paragraph 12 above, Holdco will transfer the same partnership units to Opco, and will receive XXXXXXXXXX Common shares in the capital of Opco as consideration. Holdco and Opco will jointly elect in prescribed form and within the time required by subsection 85(6) to have the rules in subsection 85(1) apply to the transfer of Partnership units. The agreed amount specified in the election in respect of the POP partnership units so transferred will be an amount determined by Holdco, subject to the limitations of subsection 85(1).
PURPOSES OF THE PROPOSED TRANSACTIONS
14. Parentco wishes to retain the existing debt structure (under which virtually all indebtedness is issued by Parentco only) for several reasons:
(a) Having POP fully assume the Parentco Debt would require the amendment of Parentco's $XXXXXXXXXX bank loan agreement whereas the proposed transactions require no amendment.
(b) If Parentco were discharged from its obligations under the Indentures, POP would be a "new debt issuer" for various securities law purposes. This would impose significant securities law disclosure and filing requirements on POP that are not otherwise required under the proposed structure.
(c) The holders of the Parentco Debt are entirely unaffected by the proposed transactions. The existing securities remain virtually unchanged, there are no new securities issued, and there is no requirement to register or re-register the existing securities with any regulatory authorities in Canada or in the United States.
15. The existing terms of the XXXXXXXXXX and the Indentures require that any transferee of substantially all of Parentco's assets must assume Parentco's obligations under the XXXXXXXXXX and the Indentures (the "Assumption Requirement"). After such assumption by the transferee, Parentco would normally be discharged from its obligations.
The Assumption Requirement is intended to protect the creditors and prevent the assets (that are subject to a fixed and floating security charge) from being transferred out from under the security arrangement to a third party. The XXXXXXXXXX and the Indentures do not contemplate a transfer of substantially all of the assets of Parentco to a XXXXXXXXXX Subsidiary and therefore it is desirable to comply with the Assumption Requirement in respect of the Transfer of Parentco's assets. Failure to comply with the Assumption Requirement in connection with the Transfer to POP could be seen to be an event of default under the XXXXXXXXXX and the Indentures. In order to have any such default waived, it would otherwise have been necessary to hold meetings of bondholder groups for XXXXXXXXXX separate Indentures and that is not a practical solution.
16. The proposed transactions are part of a reorganization intended to allow Opco's non-capital loss carry-forwards to be utilized against the business income of POP.
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. Paragraph 85(1)(b), as modified by paragraph 97(2)(a), will not apply to deem the agreed amounts in the election described in Paragraph 10, above, to be amounts other than the amounts actually agreed on by Parentco and Opco in such election.
B. Paragraph 85(1)(b) will not apply to deem the agreed amounts in the election described in Paragraph 12, above, to be amounts other than the amounts actually agreed on by Parentco and Holdco in such election.
C. Paragraph 85(1)(b) will not apply to deem the agreed amounts in the election described in Paragraph 13, above, to be amounts other than the amounts actually agreed on by Holdco and Opco in such election.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
1. Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:
(a) the determination of the fair market value or ACB of any particular asset, the paid-up capital in respect of any shares referred to herein, or the non-capital losses or net capital losses of any corporation; or
(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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