2007 Ruling 2006-0176081R3 - XXXXXXXXXX - advance tax 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: (i) What is the cost to a corporation of the cash in U.S. currency contributed to the corporation by way of capital? (ii) Would there be a capital gain or loss as a result of the application of the cash by the corporation for the payment of the purchase price for shares of a target company?

Position: (i) The cost of cash is equal to the equivalent amount of cash in Canadian currency contributed. (ii) Subject to subsection 39(2), no gain or loss is realized when the cash in U.S, currency is applied to pay for the purchase price of the shares of the target company.

Reasons: Based on text, context and purpose of provisions of the Act and our understanding that immediate application of contributed cash is not intended to give rise to income, gain or loss.

XXXXXXXXXX 								2006-017608

Attention: XXXXXXXXXX

XXXXXXXXXX, 2007

Dear Sirs/Mesdames:

Re: XXXXXXXXXX ("Pubco")
XXXXXXXXXX ("Canco")
Advance Income Tax Ruling

We are writing in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayers.

The tax affairs of both of Pubco and Canco are administered by the XXXXXXXXXX Tax Services Office and the taxpayers file their tax returns at the XXXXXXXXXX Tax Centre under Account Numbers XXXXXXXXXX and XXXXXXXXXX, respectively.

To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this request:

(i) is involved in an earlier return of the taxpayers or a related person;

(ii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayers or a related person;

(iii) is under objection; or

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.

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

Definitions

In this letter the following terms have the meanings specified:

(a) "Act" means the Income Tax Act R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act;

(b) "adjusted cost base" has the meaning assigned by section 54 of the Act;

(c) "controlled foreign affiliate" has the meaning assigned by subsection 95(1) of the Act;

(d) XXXXXXXXXX;

(e) "FA Acquisitionco" means XXXXXXXXXX;

(f) "FA Holdco" means XXXXXXXXXX;

(g) "foreign affiliate" is defined under subsection 95(1) of the Act;

(h) "Foreign Target" means XXXXXXXXXX;

(i) XXXXXXXXXX;

(j) "Proposed Transactions" means the transactions described in paragraphs 8 to 10 below which were completed by XXXXXXXXXX;

(k) "public corporation" has the meaning assigned by subsection 89(1) of the Act;

(l) "Regulations" means the Income Tax Regulations; and

(m) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.

Facts

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

1. Pubco is a public corporation and a taxable Canadian corporation. XXXXXXXXXX.

2. Canco is a wholly-owned subsidiary of Pubco and is a taxable Canadian corporation.

3. Foreign Target is a company formed and governed under the laws of XXXXXXXXXX.

4. Pubco and Canco, and each member of the Pubco corporate group, deals at arm's length with the shareholders of Foreign Target from whom Foreign Target shares will as described below be acquired, namely, XXXXXXXXXX.

5. After the transaction described in paragraph 7 below, FA Acquisitionco is an indirect wholly-owned foreign affiliate and a controlled foreign affiliate of Canco (and of Pubco). It is resident in XXXXXXXXXX for the purposes of the Act, the Regulations and the XXXXXXXXXX Convention.

6. FA Holdco is a corporation formed and governed under the laws of XXXXXXXXXX. It is an indirect wholly-owned foreign affiliate and a controlled foreign affiliate of Canco (and of Pubco). FA Holdco is resident in XXXXXXXXXX for the purposes of the Act, the Regulations and the XXXXXXXXXX Convention.

7. Prior to the Proposed Transactions described below, Canco transferred all of the issued and outstanding shares of FA Acquisitionco that it held to FA Holdco in exchange for shares of FA Holdco such that FA Holdco became the immediate parent corporation of FA Acquisitionco.

Proposed Transactions

8. FA Holdco and FA Acquisitionco will enter into a Contribution Agreement, pursuant to which FA Holdco will commit to making an additional cash contribution of capital to FA Acquisitionco, in the amount of US $XXXXXXXXXX (the "Capital Contribution"), and FA Acquisitionco will commit to (i) accepting the Capital Contribution, (ii) booking as share premium the equivalent amount in euros, determined at the exchange rates prevailing on the date of the Capital Contribution, and (iii) applying the proceeds of the Capital Contribution (in U.S. currency) toward the payment of the purchase price for shares of Foreign Target.

9. FA Holdco will make the Capital Contribution to FA Acquisitionco in accordance with the terms and conditions of the Contribution Agreement.

10. FA Acquisitionco will apply the proceeds of the Capital Contribution (in U.S. currency) toward the payment of the purchase price for shares of Foreign Target.

Purpose of the Proposed Transactions

11. The purpose of the Proposed Transactions is to capitalize FA Acquisitionco with sufficient cash funding in order to facilitate the arm's length acquisition of Foreign Target which is considered to be a strategic acquisition for Pubco. The reasons why no additional shares of FA Acquisitionco would be issued in exchange for the Capital Contribution, as well as why, as a consequence, it was decided to book the Capital Contribution as share premium, rather than as legal capital, relate to the potential implications of, and efforts to ensure all entities comply with, "financial assistance" rules applicable under relevant foreign corporate laws.

Rulings Given

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. By virtue of the Capital Contribution described in paragraph 9 above, an amount equal to the Capital Contribution (in equivalent Canadian currency at the time of the Capital Contribution) will be added in computing the adjusted cost base to FA Holdco of its shares in FA Acquisitionco under paragraph 53(1)(c) of the Act.

B. Subject to subsection 39(2), no income, gain or loss will be recognized by FA Acquisitionco for the purposes of the Act or the Regulations when it applies the proceeds of the Capital Contribution toward the payment of the purchase price for shares of Foreign Target as described in 10 above. The cost and initial adjusted cost base to FA Acquisitionco of the shares in Foreign Target will equal the amount paid (in equivalent Canadian currency) for such shares by FA Acquisitionco.

C. As a result of the Proposed Transactions, in and by themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences described in Rulings A and B above.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002.

These rulings are based on the Act in the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Other Comments

Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular, nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed the tax consequences of:

(i) the transfer of the shares of FA Acquisitionco from Canco to FA Holdco as described in paragraph 7 above; and

(ii) the application or non-application of subsection 39(2) to the transaction described in paragraph 10 above.

Yours truly,

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