2006 Ruling 2005-0152611R3 - Qualification as a foreign merger

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: i) Is a membership in the XXXXXXXXXX a share? ii) Is a partnership a taxpayer for purposes of subsection 87(8.1)? iii) Does consideration that includes preferred shares that are redeemed within XXXXXXXXXX of issue for cash throw it offside 87(4) of 87(8.1)?

Position: i) Yes. ii) Yes. iii) No.

Reasons: i) In the context of foreign entities, we take an expansive view as to what constitutes a share. ii) Yes, for computation of income. iii) Not for 87(8.1), because with stock value satisfies the all or substantially all test in 87(8.1).

XXXXXXXXXX 							2005-015261

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Request for an Advance Income Tax Ruling for XXXXXXXXXX (collectively referred to as the "Group")

This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced entities with respect to the transactions described herein. We also acknowledge the additional information provided in various subsequent letters and e-mail transmissions. To the best of your knowledge and that of the members of the Group, none of the issues involved in this ruling request:

a) is in an earlier return of any member of the Group, a partner thereof or a related person;

b) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of any member of the Group, a partner thereof or a related person;

c) is under objection by any member of the Group, a partner thereof or a related person;

d) is before the courts; or

e) is the subject of a ruling request previously considered by the Income Tax Rulings Directorate.

In this letter, unless otherwise stated, all references to the "Act" mean the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof and unless otherwise stated, statutory references in this letter are to the Act.

This document is based solely on the facts, proposed transactions and the purpose of the proposed transactions described below. The documentation submitted with your request does not form part of the facts, proposed transactions and the purpose of the proposed transactions and any references thereto are provided solely for the convenience of the reader.

Definitions

In this letter, unless otherwise expressly stated:

a) "Aco" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

b) "Bco" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

c) "Cco" means XXXXXXXXXX;

d) "CRA" means Canada Revenue Agency;

e) "Constitution" means the constitution of Xco;

f) XXXXXXXXXX;

g) "Xco" meansXXXXXXXXXX;

h) "Yco" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX by Xco and Bco;

i) "Fund A" means the XXXXXXXXXX, a trust established under the laws of XXXXXXXXXX;

j) "Fund B" means the XXXXXXXXXX, a trust established under the laws of XXXXXXXXXX;

k) "Fund C" means the XXXXXXXXXX, a trust established under the laws of XXXXXXXXXX;

l) "LP 1" means the XXXXXXXXXX;

m) "LP 2" means the XXXXXXXXXX;

n) "LP 3" means the XXXXXXXXXX;

o) "LP 4" means XXXXXXXXXX;

p) "LP 5" means XXXXXXXXXX;

q) "Group" means the group of entities described in paragraph 18 below;

r) XXXXXXXXXX;

s) "Merger #1" means the merger described in paragraphs 26 to 41 and 50 below;

t) "Merger #2" means the merger described in paragraphs 42 to 47 and 50 below;

u) "Merger #3" means the merger described in paragraphs 48 to 49 below;

v) "XXXXXXXXXX Preference Shares" means the preferred shares described in paragraphs 30, 33, 34, 35, 38, 39 and 40 below;

w) "Mergers" means Merger #1, Merger #2 and Merger #3, collectively;

x) "Mergerco 1" means XXXXXXXXXX, a corporation incorporated under the laws of the state of XXXXXXXXXX;

y) "Mergerco 2" means XXXXXXXXXX, a regular corporation incorporated under the laws of the state of XXXXXXXXXX;

z) "MergerLLC" means XXXXXXXXXX, a limited liability company governed by the laws of the state of XXXXXXXXXX; and

aa) XXXXXXXXXX.

Facts

1. Aco is a public corporation and a taxable Canadian corporation as defined in subsection 89(1).

2. Cco is a taxable Canadian corporation as defined in subsection 89(1).

3. Fund A is a trust resident in Canada and a "mutual fund trust" as defined in subsection 132(6).

4. Fund B is a trust resident in Canada and a "unit trust" as defined in subsection 108(2).

5. Fund C is a unit trust as defined in subsection 108(2).

6. LP1, LP2, LP3, LP4, and LP5 are limited partnerships formed under the laws of XXXXXXXXXX.

7. Xco is a corporation not resident in Canada for purposes of the Act.

8. XXXXXXXXXX.

9. Xco operates as a member-owned, organization that is not operated for profit and is governed by an elected board of directors. A board of executives is appointed by the board of directors that advises the chief executive officer on the management of the operations of the XXXXXXXXXX.

10. Xco is a corporation formed without share capital and has memberships instead of shares. The Constitution of Xco describes the rights and obligations of the XXXXXXXXXX members XXXXXXXXXX Pursuant to XXXXXXXXXX of the Constitution, Xco has different classes of members including the following:

• XXXXXXXXXX;
• XXXXXXXXXX;
• XXXXXXXXXX; and
• XXXXXXXXXX.

11. XXXXXXXXXX members are XXXXXXXXXX "equity holders" of Xco All other members XXXXXXXXXX but, other than having some limited voting rights, do not have an equity-like interest in Xco

12. XXXXXXXXXX members have certain voting rights and other rights pursuant to the Constitution. XXXXXXXXXX members are entitled to vote at the annual meeting to elect the members of the board of directors or any other elected position. They are also entitled to vote regarding any other matter involving Xco, including a sale, lease or other disposition of all or substantially all of the assets of Xco, a merger of the Xco with another entity and the dissolution or liquidation of Xco.

13. Pursuant to XXXXXXXXXX of the Constitution, each XXXXXXXXXX member would be entitled to a pro-rata share of the net assets of Xco upon the dissolution, liquidation, or winding-up of Xco

14. XXXXXXXXXX.

15. XXXXXXXXXX memberships are transferable to another party upon the approval of the board of directors of Xco Memberships held by XXXXXXXXXX are not transferable.

16. XXXXXXXXXX.

17. There are XXXXXXXXXX memberships in Xco Persons who are not residents of Canada for purposes of the Act legally and beneficially own more than XXXXXXXXXX% of these memberships. Xco is not, and will not at any time be, a foreign affiliate of any member of the Group.

18. Aco, Cco, Fund A, Fund B, Fund C, LP1, LP2, LP3, LP4 and LP5 comprise a group (the "Group") of entities that are either resident in Canada or are owned, in whole in part, by person(s) resident in Canada for the purposes of the Act, which holds approximately XXXXXXXXXX of the XXXXXXXXXX memberships of Xco.

19. Each member of the Group beneficially owns one or more XXXXXXXXXX memberships. XXXXXXXXXX , each membership is held on account of capital.

20. XXXXXXXXXX. Bco is not a resident of Canada for purposes of the Act.

21. Yco is not a resident of Canada for purposes of the Act.

22. Yco currently has XXXXXXXXXX shares issued and outstanding. Xco owns XXXXXXXXXX shares and Bco owns XXXXXXXXXX.

Proposed Transactions

23. Xco will incorporate Mergerco 1, a wholly-owned subsidiary corporation. Mergerco 1 will not be a resident of Canada for purposes of the Act.

24. Yco will form Merger LLC, a wholly-owned subsidiary corporation. MergerLLC will not be a resident of Canada for purposes of the Act.

25. Yco will incorporate Mergerco 2, a wholly-owned subsidiary corporation. Mergerco 2 will not be a resident of Canada for purposes of the Act.

26. MergerLLC will incorporate XXXXXXXXXX, a wholly-owned subsidiary corporation. XXXXXXXXXX will not be a resident of Canada for purposes of the Act.

27. Merger LLC will incorporate XXXXXXXXXX, a wholly-owned not-for-profit subsidiary corporation. XXXXXXXXXX will not be a resident of Canada for purposes of the Act.

28. Xco will pay a dividend of $XXXXXXXXXX to each XXXXXXXXXX member.

29. Xco will then merge (Merger #1) with and into Mergerco 1 under the laws of XXXXXXXXXX. Mergerco 1 will be the corporation surviving the merger.

30. In Merger #1, each outstanding XXXXXXXXXX membership will be exchanged for a combination of common shares and XXXXXXXXXX Preference Shares of Mergerco 1, unless the member makes an election to receive either only common shares or only XXXXXXXXXX Preference Shares. On Merger #1, a XXXXXXXXXX member of Xco may receive fractional common shares and/or fractional XXXXXXXXXX Preference Shares of Mergerco 1.

31. Each member of the Group will elect to receive only common shares of Mergerco 1.

32. Where an election to receive only common shares of Mergerco 1 is made, a member's XXXXXXXXXX membership will be exchanged for that number of common shares equal to the sum of:

a) the number of common shares of Mergerco 1 that would otherwise be received under paragraph 30 above, if no election had been made; and

b) the number of common shares equal to $XXXXXXXXXX divided by the projected fair market value of the common shares XXXXXXXXXX.

33. It is anticipated that the value of XXXXXXXXXX Preference Shares of Mergeco 1 will be less than 10% of the total value of all the shares of Xco.

34. XXXXXXXXXX Value of each common share of Yco is equal to XXXXXXXXXX immediately prior to the date of the completion of the Mergers. If the aggregate of the elections to receive only common shares would require payment on the redemption of XXXXXXXXXX Preference Shares of less than $XXXXXXXXXX, the number of common shares to be received by each such member would be reduced pro rata and the number of XXXXXXXXXX Preference Shares to be received would be correspondingly increased.

XXXXXXXXXXXXXXXXXXXX

35. If an election to receive only XXXXXXXXXX Preference Shares is made by a particular member, its XXXXXXXXXX membership will be exchanged for a number of XXXXXXXXXX Preference Shares having an aggregate redemption price equal to the sum of (1) $XXXXXXXXXX and (2) the XXXXXXXXXX Value per common share (XXXXXXXXXX) multiplied by the number of common shares that would have been received if no election were made. If the aggregate of the elections to receive only XXXXXXXXXX Preference Shares would require payment on the redemption of XXXXXXXXXX Preference Shares in excess of $XXXXXXXXXX, the number of XXXXXXXXXX Preference Shares to be received by each member which elected to receive only XXXXXXXXXX Preference Shares would be reduced pro rata and the number of common shares to be received would be increased.

36. Upon Merger #1, all property and liabilities of Xco and Mergerco 1 will become the property and liabilities of Mergerco 1.

37. Upon Merger #1, the shares of Mergerco 1 held by Xco will be cancelled by operation of law. Immediately following or coincident with the effective time of Merger #1, the XXXXXXXXXX membership interests in Xco will cease to exist.

38. Each XXXXXXXXXX Preference Share will have a fixed redemption amount, a term of XXXXXXXXXX, and will be mandatorily redeemed for cash or a right to receive cash in an amount equal to its redemption amount at the end of the XXXXXXXXXX period.

39. Merger #1 will be completed and legally effective more than XXXXXXXXXX prior to the effective time for Merger #2. At the effective time of Merger #1 the common shares and XXXXXXXXXX Preference Shares will be issued and outstanding.

40. XXXXXXXXXX following the completion of Merger #1, the XXXXXXXXXX Preference Shares will be redeemed for their redemption amount. Mergerco 1 will either pay the redemption proceeds in cash or provide the holders of the XXXXXXXXXX Preference Shares with a right to receive cash. The XXXXXXXXXX Preference Shares will cease to be outstanding following the redemption and the holders of the XXXXXXXXXX Preference Shares will thereafter hold only cash or the right to receive cash in the stated amount.

41. Mergerco 1 will have a liability of that amount until the cash is paid. Such obligation will remain solely a liability of Mergerco 1 and that liability will become a liability of MergerLLC on Merger #2.

42. Mergerco 1 will merge with and into MergerLLC (to be renamed XXXXXXXXXX), with Merger LLC surviving the merger.

43. In Merger #2, each common share of Mergerco 1 will be exchanged for one common share of Yco Immediately after Merger #2, Merger LLC will be controlled by Yco.

44. All property and liabilities of Mergerco 1 and MergerLLC will become the property and liabilities of MergerLLC. If the obligation with respect to the redemption of XXXXXXXXXX Preference Shares referred to in paragraph 41 above has not been satisfied prior to the effective time of Merger #2, such obligation will become the liability of MergerLLC by operation of law.

45. The shares of MergerLLC will remain outstanding and will not be cancelled.

46. Merger #2 will be completed and legally effective as at the effective time specified in the certificate of merger. At that time, common shares of Yco will be issued to the shareholders of Mergerco 1.

47. No fractional common shares will be issued by Yco on Merger #2. On Merger #2, a shareholder of Mergeco 1 will be entitled to receive cash in lieu of fractional shares of Yco The fractional shares of Yco that shareholders would otherwise have received will be sold on the market to generate the cash required to fund the cash in lieu of fractional shares. The amount of any such cash received by a particular shareholder will not exceed $200.

48. Mergerco 2 will merge with and into Bco, with Bco surviving the merger. Each common share of Bco will be exchanged for one common share of YcoXXXXXXXXXX.

49. The total number of common shares of Yco to be received by the XXXXXXXXXX members of Xco and shareholders of Bco will be approximately XXXXXXXXXX% and XXXXXXXXXX%, respectively, of the issued and outstanding common shares of Yco

50. No member of the Group will elect that subsection 87(8) not apply to the disposition of its XXXXXXXXXX membership interests in Xco on Merger #1 or its common shares of Mergerco 1 on Merger #2.

51. Common shares of Yco issued to the former XXXXXXXXXX members of Xco will be subject to a lock-up period during which time these shares may not be directly or indirectly assigned, sold, transferred, pledged, hypothecated or otherwise disposed. XXXXXXXXXX.

52. XXXXXXXXXX.

Purpose of the Proposed Transactions

53. Xco and Bco are proposing to combine their businesses under Yco to join within a single company the XXXXXXXXXX. The purpose behind certain aspects of the Proposed Transactions is to effect the combination of the two businesses on a tax-deferred basis for XXXXXXXXXX members of Xco subject to taxation in XXXXXXXXXX.

54. The purpose for having XXXXXXXXXX Preference Shares issued as partial consideration to the XXXXXXXXXX members of Xco is to enable members of the Group and other residents of Canada to bring themselves within the provisions of subsections 87(4), 87(8) and 87(8.1). The issuance of the XXXXXXXXXX Preference Shares in Merger #1 was introduced at the request of the Group. But for this request, cash would have been provided to XXXXXXXXXX members instead of XXXXXXXXXX Preference Shares in Merger #1. Persons resident in XXXXXXXXXX could obtain tax-deferred treatment even if they were to receive cash as partial consideration.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purposes of the proposed transaction, and provided that the proposed transactions are completed in the manner described above, and subject to the comments set out below, our rulings are as follows:

A. Merger #1 will qualify as a "foreign merger" as defined in subsection 87(8.1).

B. Subsections 87(8) and 87(4) will apply to the disposition by each member of the Group of its XXXXXXXXXX membership in Xco on Merger #1. Each member of the Group will be deemed to have disposed of its membership in Xco for proceeds equal to the adjusted cost base thereof and to have acquired common shares of Mergerco 1 and XXXXXXXXXX Preference Shares for a total cost of the same amount. The cost to the member of the common and XXXXXXXXXX Preference Shares will be determined by apportioning the adjusted cost base of the XXXXXXXXXX membership between the two classes of shares based upon the fair market value of each class of shares relative to the fair market value of all shares received by the member for its XXXXXXXXXX membership.

C. Merger #2 will qualify as a "foreign merger" as defined in subsection 87(8.1).

D. Subsections 87(8) and 87(4) will apply to the disposition by each member of the Group of its common shares of Mergerco 1 on Merger #2. Each member of the Group will be deemed to have disposed of its common shares of Mergerco 1 for proceeds equal to the adjusted cost base thereof and to have acquired common shares of Yco for a total cost of the same amount, less any cash received in lieu of fractional shares.

E. In the case of a member of the Group that is a partnership, the reference to "taxpayer" in subsection 87(8) is a reference to the partnership and not to the partners thereof.

F. The provisions of subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.

Comments

The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 and are binding on the CRA as long as the proposed transactions are completed before XXXXXXXXXX. Nothing in this letter should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions other than those specifically set out in the rulings given.

Yours truly,

XXXXXXXXXX
Manager
For Director
International Tax and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

XXXXXXXXXX