2006 Ruling 2006-0171471R3 - labour sponsored venture capital corporation

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 a series of transactions is a "merger" for purposes of section 204.85

Position: Yes

Reasons: Caselaw, corporate law, and two similar previous rulings given

XXXXXXXXXX  						2006-017147

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, as well as additional information supplied via email, wherein you requested an advance income tax ruling on behalf of the above-named taxpayers. We also acknowledge information provided during various telephone conversations (XXXXXXXXXX).

To the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling request are:

• dealt with in an earlier return of the taxpayers or a related person;
• being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;
• under objection by the taxpayers or a related person;
• subject to a ruling previously issued by the Income Tax Rulings Directorate to the taxpayers or a related person; or
• before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.

DEFINITIONS

In this letter, unless otherwise indicated, all statutory references are to the Act, and the following terms have the meanings specified:

a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c. 1, as amended to the date hereof. All statutory references in this letter are to the Act, unless stated otherwise;

b) "Canco1" means XXXXXXXXXX.;

c) "Canco2" means XXXXXXXXXX.;

d) "CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended;

e) "CRA" means the Canada Revenue Agency;

f) "LSVCC" means a registered labour-sponsored venture capital corporation within the meaning of subsection 248(1);

g) "Merger Share" and "Merger Shares" mean, respectively, a share and the shares referred to in Paragraph 11(d);

h) "Net Asset Value" means the net asset value as determined in accordance with Canco1's and Canco2's valuation policies and procedures and Canadian generally accepted accounting principles;

i) "Paragraph" means a numbered paragraph in this advance income tax ruling;

j) "Proposed Transactions" means the transactions described in Paragraphs 11 to 13; and

k) "Redeemed Share" and "Redeemed Shares" mean, respectively, a share and the shares referred to in Paragraph 11(a).

FACTS

1. Canco1 is a corporation incorporated under the CBCA on XXXXXXXXXX.

2. Canco2 is a corporation incorporated under the CBCA on XXXXXXXXXX.

3. Canco1 and Canco 2 are LSVCCs.

4. Canco1's and Canco2's address is XXXXXXXXXX. Canco1's and Canco2's taxation centre and taxation services office are the XXXXXXXXXX Taxation Centre and XXXXXXXXXX Tax Services Office, respectively.

5. Canco1 currently has approximately $XXXXXXXXXX in net assets and approximately XXXXXXXXXX class A shareholders. Canco1 has XXXXXXXXXX class A shares issued and outstanding.

6. Canco2 has approximately $XXXXXXXXXX in net assets and approximately XXXXXXXXXX class A shareholders. Canco2 has XXXXXXXXXX class A shares issued and outstanding.

7. The authorized capital of Canco1 consists of an unlimited number of class A shares, XXXXXXXXXX class B shares and an unlimited number of class C shares, issuable in series.

8. The authorized capital of Canco2 consists of an unlimited number of class A shares, issuable in series, and XXXXXXXXXX class B shares.

9. The class A shares of Canco1 are offered to members of the public in XXXXXXXXXX. Investors are eligible to receive a labour sponsored funds tax credit under section 127.4 of the Act. Investors must generally repay those tax credits if they redeem their shares within XXXXXXXXXX years of purchasing them.

10. The class A shares of Canco2 are offered by series to members of the public in XXXXXXXXXX. Investors are eligible to receive a labour sponsored funds tax credit under section 127.4 of the Act. Investors must generally repay those tax credits if they redeem their shares within XXXXXXXXXX years of purchasing them.

PROPOSED TRANSACTIONS

11. Canco1 and Canco2 will be merged (the "Merger") by effecting the following series of steps:

(a) In connection with the Merger, the rights and restrictions attached to all the class A shares of Canco1 (the "Redeemed Shares") will be amended to incorporate a Merger redemption procedure whereby the Redeemed Shares would be automatically redeemed as at the effective date of the Merger immediately after the purchase of the assets referred to below in Paragraph 11(b).

(b) In connection with the Merger, the rights and restrictions attached to the class A shares of Canco2 will be amended to allow them to be issued to, among others, Canco1 as consideration for the purchase of Canco1's assets and to be immediately thereafter transferred and distributed to the class A shareholders of Canco1 under the Merger redemption procedure referred to above in Paragraph 11(a). It is expected that the Merger will be completed in one day.

(These amendments would result in Canco2's articles of incorporation containing Merger specific provisions that would not comply with clause 204.81(1)(c)(ii)(A) and subparagraph 204.81(1)(c)(vii). In such a situation, Canco2 would request a comfort letter from the Minister of National Revenue confirming that the Minister will not exercise her powers under subsection 204.81(6) of the Act to revoke the fund's registration as a result of those Merger specific amendments.)

(c) After setting aside sufficient assets to satisfy its estimated liabilities, if any, Canco1 will transfer its remaining assets (the "Assets") to Canco2 at a value equal to the Net Asset Value of Canco1, including such adjustments as the independent directors of Canco1 determine are appropriate in the circumstances, which may involve a discount of between XXXXXXXXXX% to XXXXXXXXXX% (the "Discount") of the Net Asset Value of Canco1, as at the effective date of the Merger. Canco2 will not assume the liabilities of Canco1. The Discount is as a result of negotiation between the independent directors of Canco1 and Canco2. The range is based on the perceived risk of the investments, including the fact that many of the investments are illiquid. It is expected that the Discount will be effectively recouped by the shareholders within the first XXXXXXXXXX months of the Merger due to the lower operating costs of the combined fund. Canco1 will use the retained assets to satisfy its remaining liabilities as soon as practicable after the effective date of the Merger.

(d) As consideration for the Assets, Canco2 will issue class A shares of Canco2 (the "Merger Shares") to Canco1. The fair market value of the Merger Shares will equal the fair market value of the Assets. The issue price of the Merger Shares will be equal to their Net Asset Value as at the effective date of the Merger.

(e) Pursuant to the Merger redemption procedure referred to in Paragraph 11(a), the Merger Shares will be immediately transferred to the shareholders of Canco1 as payment of the redemption price for the Redeemed Shares. The number of Merger Shares transferred to a given holder of Redeemed Shares through the Merger redemption procedure will be determined by multiplying the number of Redeemed Shares held by the shareholder by the ratio obtained by dividing the total Merger Shares by the total Redeemed Shares. Fractional Shares will be issued (rounded to the nearest XXXXXXXXXX of a share). The redemption price of the Redeemed Shares will be equal to the Net Asset Value of the Merger Shares distributed under the Merger redemption procedure.

(f) As soon as practicable following the effective date of the Merger, Canco1 will be wound-up or dissolved in accordance with the provisions of the CBCA.

12. The Merger will be subject to the prior approval by "special resolution" of each of the shareholders of Canco1 and Canco2. An information circular with relevant information concerning the Merger and proxy materials was mailed to each shareholder of Canco1 and Canco2.

13. Pursuant to subsection 204.85(1), Canco1 and Canco2 will send written notification of the Merger to the Minister of National Revenue at least 30 days before the Merger. (This notification was, in fact, received on XXXXXXXXXX).

14. The Merger will also be subject to any necessary securities regulatory approvals.

PURPOSE OF PROPOSED TRANSACTIONS

15. The purpose of the Merger is to:

(a) achieve cost savings by combining Canco1's and Canco2's management, administration, marketing and back office functions and realizing increased economies of scale;

(b) improve investment performance by creating a larger, more diversified venture investment portfolio; and

(c) improve liquidity and resources to fund investments.

16. The Merger structure specifically seeks to:

(a) substantially reduce transaction costs as compared to those associated with a statutory amalgamation. The materials that must be printed and mailed to the funds' shareholders are far less voluminous than those associated with a statutory amalgamation;

(b) reduce "unfunded" risks associated with unknown, unanticipated claims that may arise after the Merger date and were not accounted for in the Net Asset Value of Canco1 that determined the Merger share exchange ratio. As no indemnity will be available to compensate for such unknown or contingent liabilities, it would be unfair to the pre-Merger shareholders of Canco2 to have to bear the burden of such costs attributable to Canco1's pre-Merger history; and

(c) benefit from industry familiarity among investment advisors and administration staff with the merger by purchase of assets structure.

RULINGS REQUESTED

Provided that the preceding statements constitute a complete and accurate disclosure of all 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. The Merger described in Paragraph 11 will be a "merger" within the meaning of subsection 204.85(3) and subsection 211.7(2).

B. Upon the completion of the Merger described in Paragraph 11, Canco2 will be the "new corporation" formed by the merger within the meaning of subsection 204.85(3).

C. Pursuant to paragraph 204.85(3), Canco2 will be the same corporation as, and a continuation of, Canco1 for the purposes of, inter alia, subsections 204.83(1) and (2).

D. A Redeemed Share will be "replaced on the amalgamation or merger" by a Merger Share and a Merger Share will be a "new share" of Canco2 within the meaning of paragraph 204.85(3)(c).

CAVEAT

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 (the "Circular") issued by the CRA on May 17, 2002, and are binding provided the Proposed Transactions in Paragraphs 11 and 12 above are completed on or before XXXXXXXXXX.

The rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:

(i) the GST implications of any of the proposed transactions;

(ii) the fair market value of any assets or shares; or

(iii) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein.

OPINION

With respect to Paragraph 11(b), we confirm that the Minister of National Revenue will not exercise her discretion under subsection 204.81(6) of the Act to revoke Canco2's registration as a result of the fact that one LSVCC, Canco1, temporarily holds shares of another LSVCC, Canco2.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch