2005 Ruling 2005-0139911R3 - Supplemental Ruling

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: Changes to Ruling to introduce a second series of unsubordinated exchangeable shares and the delivery of Class A Units and such unsubordinated exchangeable shares to the Vendors to enable each of the Vendors to hold a portion of its retained interest in the Fund as an unsubordinated interest.

Position: Changes do not affect the validity of rulings given.

XXXXXXXXXX 2005-013991

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Supplementary Advance Income Tax Ruling - XXXXXXXXXX

This is in response to your letter dated XXXXXXXXXX requesting certain changes to the Advance Income Tax Ruling 2005-012680 issued on XXXXXXXXXX, 2005 (the "Original Ruling"). Capitalized terms used in this Letter have the meanings given to them in the Original Ruling.

The Original Rulings is amended as follows:

Changes to PROPOSED TRANSACTIONS

1. In Subparagraph 20(a), change "$XXXXXXXXXX" to "$XXXXXXXXXX".

2. In Paragraph 22 at B, change "$XXXXXXXXXX per share" to "$XXXXXXXXXX per unit".

3. In Subparagraph 24(a), add the following to the end of this subparagraph: ", provided that if the termination or winding up of the Fund occurs prior to the end of the XXXXXXXXXX Period, the Class B Exchange Formula described in paragraph 22 will be adjusted so that A equals the average quarterly per unit cash distributions paid on the Class B Units after the Closing Date;".

4. In Paragraph 25, delete the last sentence and replace it with "The authorized share capital of Acquireco 1 will also include an unlimited number of exchangeable shares issuable in two series, Series 1 Exchangeable Shares and Series 2 Exchangeable Shares (such shares, together with any shares of any successor corporation with substantially similar terms are collectively referred to in this letter as "Exchangeable Shares").

5. Paragraph 25.1 is added and states that:

"A Series 1 Exchangeable Share is intended to have substantially the same economic value as a Class A Unit. The terms of the Series 1 Exchangeable Shares will provide that:

(a) at any time, a holder of Series 1 Exchangeable Shares will be entitled to cause all or a portion of the holder's Series 1 Exchangeable Shares to be redeemed in consideration for that number of Class A Units which is equal to (a) the product of the exchange ratio (the "Series 1 Exchange Ratio") in effect under the terms at the time of the exchange and (b) the number of Series 1 Exchangeable Shares being redeemed (subject to customary anti-dilution adjustments);

(b) a holder's rights of retraction referred to in (a) above are subject, however, to the Fund's or Exchangeco's overriding right to acquire the Series 1 Exchangeable Share from the holder in consideration for that number of Class A Units deliverable upon the redemption;

(c) holders of Series 1 Exchangeable Shares will be entitled to receive a monthly cash dividend if, as and when declared by the board of directors of Acquireco 1, in an amount per share equal to the cash distributions paid in respect of such month on the Class A Units that the Series 1 Exchangeable Share is then exchangeable for. To the extent such amounts are not declared and paid as dividends on the Series 1 Exchangeable Shares, Acquireco 1 will set aside and retain such amounts and the Series 1 Exchange Ratio will be adjusted to account for distributions paid on the Class A Units. On closing of the Offering (as defined below in paragraph 27), the Series 1 Exchange Ratio will be XXXXXXXXXX. The Series 1 Exchange Ratio will be increased on each date that the Fund pays distributions on the Class A Units by an amount, rounded to the nearest four decimal places, equal to a fraction (a) having as its numerator, the amount of the distribution paid per Class A Unit on such date multiplied by the Series 1 Exchange Ratio in effect immediately prior to the distribution, and (b) having as its denominator, the market price of a Class A Unit on such date;

(d) Acquireco 1 will be entitled to acquire all but not less than all of the issued and outstanding Series 1 Exchangeable Shares at any time in consideration for Class A Units based on the Series 1 Exchange Ratio in effect at such time if the Exchangeable Shares represent XXXXXXXXXX% or less of the Class A Units on a fully diluted basis. Acquireco's right of redemption is subject, however, to the Fund's and Exchangeco's right to acquire all but not less than all of the Series 1 Exchangeable Shares then outstanding in consideration for that number of Class A Units deliverable upon the redemption;

(e) in the event of the liquidation, dissolution or winding-up of Acquireco 1, a holder of Series 1 Exchangeable Shares will be entitled to receive from Acquireco 1, in respect of each such Series 1 Exchangeable Share, an amount per share (the "Series 1 Liquidation Amount") equal to the amount determined by multiplying the Series 1 Exchange Ratio on the last business day prior to the effective date of such liquidation, dissolution or winding-up by the fair market value of a Class A Unit, which payment shall be satisfied by Acquireco 1 delivering that number of Class A Units equal to the Series 1 Exchange Ratio as at the effective date of such event. The holder's right to receive the Series 1 Liquidation Amount is subject to the Fund's and Exchangeco's overriding right to purchase from all but not less than all of the holders of Series 1 Exchangeable Shares (other than the Fund and Exchangeco) all but not less than all of the Series 1 Exchangeable Shares then outstanding on payment to each holder of an amount per Series 1 Exchangeable Share equal to the Series 1 Liquidation Amount, to be satisfied by the delivery of that number of Class A Units equal to the Series 1 Exchange Ratio on such last business day and in accordance with the provisions governing the Series 1 Exchangeable Shares, and upon the exercise of this right, the holders thereof will be obligated to sell such Series 1 Exchangeable Shares to Exchangeco."

6. In Paragraph 26, add "Series 2" immediately before all occurrences of "Exchangeable Share", "Exchangeable Shares", "Exchange Ratio" and "Liquidation Amount", except for (i) the second occurrence of "Exchangeable Shares" in subparagraph (e), where the word "such" is to be replaced with the word "the", and (ii) the first occurrence of "Exchange Ratio" in subparagraph (f), where no change is required. Furthermore, in subparagraph 26(d), "XXXXXXXXXX" should be changed to "XXXXXXXXXX" and "five decimal places" should be changed to "four decimal places".

After the changes, Paragraph 26 should read as follows:

"A Series 2 Exchangeable Share is intended to have substantially the same economic value as a Class B Unit. The terms of the Series 2 Exchangeable Shares will provide that:

(a) at any time on or after the Subordination End Date defined above in paragraph 20, a holder of Series 2 Exchangeable Shares will be entitled to cause all or a portion of the holder's Series 2 Exchangeable Shares to be redeemed in consideration for that number of Class A Units which is equal to (a) the product of the exchange ratio (the "Series 2 Exchange Ratio") in effect under the terms at the time of the exchange and (b) the number of Series 2 Exchangeable Shares being redeemed (subject to customary anti-dilution adjustments);

(b) at any time prior to the Subordination End Date:

(i) a holder of Series 2 Exchangeable Shares will be entitled to redeem all or a portion of the holder's Series 2 Exchangeable Shares for Class B Units on the basis of the Series 2 Exchange Ratio in effect at the time of the exchange; and

(ii) a holder of Series 2 Exchangeable Shares will be entitled to redeem a portion of the holder's Series 2 Exchangeable Shares for Class A Units on the basis of the Series 2 Exchange Ratio in effect at the time of the exchange, provided that immediately following the redemption of such portion, the aggregate of:

(A) the number of Class B Units held by the holder (such Class B Units having been acquired upon the exchange of the Series 2 Exchangeable Shares); and

(B) the number of Series 2 Exchangeable Shares held by the holder multiplied by the Series 2 Exchange Ratio in effect at the time of the exchange;
is equal to or greater than the number of Series 2 Exchangeable Shares held by such holder on the completion of the Offering (as defined below in paragraph 27);

(c) a holder's rights of redemption referred to in (a) and (b) above are subject, however, to the Fund's or Exchangeco's overriding right to acquire the Series 2 Exchangeable Share from the holder in consideration for that number of Class A or Class B Units deliverable upon the redemption;

(d) holders of Series 2 Exchangeable Shares will be entitled to receive a quarterly cash dividend if, as and when declared by the board of directors of Acquireco 1, in an amount per share equal to the cash distributions paid in respect of such quarter on the Class B Units that the Series 2 Exchangeable Share is then exchangeable for. To the extent such amounts are not declared and paid as dividends on the Series 2 Exchangeable Shares, Acquireco 1 will set aside and retain such amounts and the Series 2 Exchange Ratio will be adjusted to account for distributions paid on the Class B Units. On closing of the Offering (as defined below in paragraph 27), the Series 2 Exchange Ratio will be XXXXXXXXXX. The Series 2 Exchange Ratio will be increased on each date that the Fund pays distributions on the Class B Units by an amount, rounded to the nearest four decimal places, equal to a fraction (a) having as its numerator, the amount of the distribution paid per Class B Unit on such date multiplied by the Series 2 Exchange Ratio in effect immediately prior to the distribution, and (b) having as its denominator, the market price of a Class A Unit on such date;

(e) Acquireco 1 will be entitled to acquire all but not less than all of the issued and outstanding Series 2 Exchangeable Shares at any time in consideration for Class B Units based on the Series 2 Exchange Ratio in effect at such time if the Exchangeable Shares represent XXXXXXXXXX% or less of the Class A Units on a fully diluted basis. Acquireco's right of redemption is subject, however, to the Fund's and Exchangeco's right to acquire all but not less than all of the Series 2 Exchangeable Shares then outstanding in consideration for that number of Class B Units deliverable upon the redemption;

(f) if the Subordination End Date has not occurred by the XXXXXXXXXX anniversary of the Closing Date, a holder of Series 2 Exchangeable Shares will have the option, at any time after such date and before the Subordination End Date, to terminate the subordination of any or all of its Series 2 Exchangeable Shares by redeeming at that time all or any portion of its Series 2 Exchangeable Shares for Class A Units at an Exchange Ratio that is reduced proportionately to reflect any shortfall from the target cash distribution (described in paragraph 20(b)). Specifically, the number of Class A Units for which such Series 2 Exchangeable Shares may be redeemed will be determined by the following formula:

A
×
C
×
D
B

1.

1.

1.

1.

where:

A = the average quarterly per unit cash distributions paid on the Class B Units for the XXXXXXXXXX period ending on the last day of the fiscal quarter immediately preceding such time;

B = the amount of $XXXXXXXXXX per share, being XXXXXXXXXX times the Monthly Target, the target average quarterly per unit distributions payable on the Class B Units;
C = the number of Series 2 Exchangeable Shares being redeemed in consideration for Class A Units by the holders of Series 2 Exchangeable Shares at that time; and

D = the Series 2 Exchange Ratio then in effect;

provided that the Series 2 Exchangeable Shares may not, in any event, be redeemable for Class A Units on the basis of a ratio that is higher than the Series 2 Exchange Ratio then in effect. The purpose of the foregoing adjustment to the Series 2 Exchange Ratio is to proportionately reduce the entitlement of the holders of Series 2 Exchangeable Shares to Class A Units in the event they redeem Series 2 Exchangeable Shares in consideration for Class A Units after the XXXXXXXXXX anniversary of the Closing Date but before the Subordination End Date to the extent that average quarterly distributions made on the Class B Units are less than the target average quarterly distributions of $XXXXXXXXXX per unit (i.e. XXXXXXXXXX times the Monthly Target); and

(g) in the event of the liquidation, dissolution or winding-up of Acquireco 1, a holder of Series 2 Exchangeable Shares will be entitled to receive from Acquireco 1, in respect of each such Series 2 Exchangeable Share, an amount per share (the "Series 2 Liquidation Amount") equal to the amount determined by multiplying the Series 2 Exchange Ratio on the last business day prior to the effective date of such liquidation, dissolution or winding-up by the fair market value of a Class B Unit, which payment shall be satisfied by Acquireco 1 delivering that number of Class B Units equal to the Series 2 Exchange Ratio as at the effective date of such event. The holder's right to receive the Series 2 Liquidation Amount is subject to the Fund's and Exchangeco's overriding right to purchase from all but not less than all of the holders of Series 2 Exchangeable Shares (other than the Fund and Exchangeco) all but not less than all of the Series 2 Exchangeable Shares then outstanding on payment to each holder of an amount per Series 2 Exchangeable Share equal to the Series 2 Liquidation Amount, to be satisfied by the delivery of that number of Class B Units equal to the Series 2 Exchange Ratio on such last business day and in accordance with the provisions governing the Series 2 Exchangeable Shares, and upon the exercise of this right, the holders thereof will be obligated to sell such Series 2 Exchangeable Shares to Exchangeco.

7. In Paragraph 29, change the expression "special voting units" in the last sentence to "Special Voting Units".

8. In Paragraph 30, delete the first sentence and replace it with "XXXXXXXXXX will sell all of the issued and outstanding shares of XXXXXXXXXX to Acquireco 1 for a purchase price satisfied by the issuance by Acquireco 1 of Series 1 and Series 2 Exchangeable Shares (and a corresponding number of Special Voting Units) and a note (the "XXXXXXXXXX Note")."

9. In Paragraph 31, delete the first sentence and replace it with "Each of the Tax-Deferred Shareholders will sell a portion of its common shares in Holdings to Acquireco 1 in consideration for Series 1 and Series 2 Exchangeable Shares of Acquireco 1 (and corresponding Special Voting Units), which will reflect the retained interest of the Tax-Deferred Shareholders in the Fund."

10. Delete the Paragraph 34 and replace it with "XXXXXXXXXX will sell its common shares in Holdings to the Fund for cash, Class A Units and Class B Units."

11. In Paragraph 39, delete the last sentence and replace it with "It is expected that XXXXXXXXXX and/or a trust established for his benefit will subscribe for approximately XXXXXXXXXX Class B Units at $XXXXXXXXXX per unit".

12. Delete Paragraph 40 and replace it with "As a result of the foregoing transactions, the Initial Class B Unitholders will hold both Class A Units and Class B Units of the Fund."

13. In Paragraph 41, delete "Class B" immediately before "Units", change "XXXXXXXXXX%" to "XXXXXXXXXX%" and add the following sentence at the end of the paragraph: "Except for XXXXXXXXXX and XXXXXXXXXX, each Vendor will hold approximately XXXXXXXXXX of its retained interest in unsubordinated interests (i.e. either Class A Units or Series 1 Exchangeable Shares) and approximately XXXXXXXXXX in subordinated interests (i.e. Class B Units or Series 2 Exchangeable Shares). XXXXXXXXXX will not hold any unsubordinated interests (his retained interest will be comprised of Class B Units only) but XXXXXXXXXX will hold additional Series 1 Exchangeable Shares so that their combined unsubordinated interest and their combined subordinated interest will be approximately XXXXXXXXXX and XXXXXXXXXX, respectively, of their total combined retained interest.

14. In Paragraph 42, change "XXXXXXXXXX%" to "XXXXXXXXXX%", "XXXXXXXXXX%" to "approximately XXXXXXXXXX", "Class B Units" to "Class A Units" immediately before "held by each Initial Class B Unitholder", add "Series 1" immediately before "Exchangeable Shares" and change "XXXXXXXXXX%" to "XXXXXXXXXX%".

15. Paragraph 42.1 is added and states that:

"In order to provide greater assurance that funds will be available to satisfy the indemnification obligations of the Vendors with respect to certain representations and warranties made by the Vendors in connection with the sale of the shares of Holdings and the Offering of the Class A Units, escrow arrangements will be established pursuant to which a total of $XXXXXXXXXX of cash will be deposited with an escrow agent to be held for up to XXXXXXXXXX years following the Offering. The escrow funds of $XXXXXXXXXX would be deducted from cash amounts payable to the Vendors pursuant to the transactions described above, except in the case of XXXXXXXXXX, whose portion of the escrow funds will be funded with amounts that would otherwise be payable as remuneration."

16. In Paragraph 44(a), add "Series 1" immediately before all occurrences of "Exchangeable Shares".

17. Subparagraph 44(a.1) is added and states that:

"each holder of Series 2 Exchangeable Shares of Acquireco 1 will receive exchangeable shares of Amalco with substantially similar terms (also referred to hereinafter as the "Series 2 Exchangeable Shares") on a one-for-one basis in consideration for Series 2 Exchangeable Shares of Acquireco 1;"

Changes to PURPOSE OF PROPOSED TRANSACTIONS

18. In Paragraph 47, add "Series 1 and Series 2" immediately before the first occurrence of "Exchangeable Shares", add "Class A Units and" immediately before the first occurrence of "Class B Units" and add "Series 2" immediately before the second and the third occurrences of "Exchangeable Shares" and before "Exchange Ratio" in the parentheses.

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 qualifications set out therein.

Nothing in this Supplementary Advance Income Tax Ruling should be construed as implying that we are ruling on, or have considered, or discussed with you any tax consequences relating to the changes to proposed transactions. More particularly, no Supplementary Ruling is provided herein with respect to the allocation between XXXXXXXXXX and XXXXXXXXXX of Series 1 Exchangeable Shares or Class A Units and of Series 2 Exchangeable Shares or Class B Units as described in paragraph 13 above.

Yours truly,

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