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: Various rulings requested with respect to the financing of the acquisition of a Target.
Position: Favourable rulings provided.
Reasons: In compliance with the law.
XXXXXXXXXX 2006-018243
XXXXXXXXXX, 2006
Dear Sir:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in your letters and e-mails of XXXXXXXXXX, and during our various telephone conversations in connection with your ruling request (XXXXXXXXXX).
We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling is:
(i) involved in an earlier return of the taxpayers 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 taxpayers or a related person,
(iii) under objection by the taxpayers or a related person,
(iv) before the courts or if a judgment has been issued, the time limit for appeal to a higher court has expired, or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.
LEGAL ENTITY DEFINITIONS
In this letter, except in Paragraph 32, the taxpayers will be referred to as follows:
(a) "Amalco" means the corporation resulting from the amalgamation of Newco and Target, as described in Paragraph 30;
(b) "Bidco" means XXXXXXXXXX, a corporation incorporated by Parent under the CBCA, as described in Paragraph 4;
(c) "CanSub" means XXXXXXXXXX, a corporation incorporated under the CBCA, which was a wholly-owned subsidiary of Target before its winding-up as described in Paragraph 22;
(d) "Finance" means XXXXXXXXXX, a "Société en Commandite par Actions" formed under the laws of XXXXXXXXXX , which is indirectly a wholly-owned subsidiary of Parent;
(e) "Foreignco" means XXXXXXXXXX;
(f) XXXXXXXXXX;
(g) "Investment Managers" means XXXXXXXXXX;
(h) "InvestmentCo" means XXXXXXXXXX;
(i) "Newco" means a new corporation to be incorporated by Bidco under the CBCA, as described in Paragraph 28;
(j) "Opco" means XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX XXXXXXXXXX;
(k) "Parent" means XXXXXXXXXX, a "Société Anonyme" incorporated under the laws of XXXXXXXXXX;
(l) "Parent Group" means Parent and its subsidiaries;
(m) "ParentSub" means XXXXXXXXXX, formerly XXXXXXXXXX, a "Société Anonyme" incorporated under the laws of XXXXXXXXXX, which is a wholly-owned subsidiary of Parent;
(n) "Target" means XXXXXXXXXX, a public corporation that was continued under the CBCA;
(o) "Xco" means XXXXXXXXXX.
DEFINITIONS
In this letter, unless otherwise expressly stated, the following terms have the meanings specified.
(a) "ACB" has the meaning assigned to the expression "Adjusted Cost Base" in section 54 of the Act;
(b) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c. 1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act;
(c) "CBCA" means the Canada Business Corporations Act;
(d) "CRA" means the Canada Revenue Agency;
(e) "FMV" means fair market value;
(f) "non-resident" has the meaning assigned by subsection 248(1).
(g) "Offer" means the offer formally launched on XXXXXXXXXX, by Parent, through Bidco, to acquire all of the Target Shares, as amended on
XXXXXXXXXX, as described in Paragraphs 11, 15, 16 and 20;
(h) "paid-up capital" has the meaning assigned by subsection 89(1);
(i) "private corporation" has the meaning assigned by subsection 89(1);
(j) "public corporation" has the meaning assigned by subsection 89(1);
(k) XXXXXXXXXX;
(l) "Report" means the report filed on XXXXXXXXXX with Canadian securities commissions by the Investment Managers under XXXXXXXXXX;
(m) "Specified Shareholder" has the meaning assigned by subparagraph 88(1)(c.2)(iii) and subsection 248(1);
(n) "Target Shares" means all of the issued and outstanding common shares of the capital stock of Target;
(o) "taxable Canadian corporation" has the meaning assigned in subsection 89(1);
(p) XXXXXXXXXX;
(q) "Treaty" means the Convention Between The Government of Canada and XXXXXXXXXX.
FACTS
Facts relating to the Parent Group
1. Parent is a publicly held corporation that is listed on the XXXXXXXXXX Stock Exchanges.
The shares of the capital stock of Parent are widely held by the public. Between XXXXXXXXXX and XXXXXXXXXX when Bidco acquired control of Target, the only person that owned more than XXXXXXXXXX% of the shares of the capital stock of Parent was the XXXXXXXXXX, which owned XXXXXXXXXX% of the said shares.
Parent is the holding company of a group of companies located in numerous jurisdictions.
The Parent Group is a XXXXXXXXXX.
Parent is not resident in Canada and does not carry on business in Canada for purposes of the Act. Parent does not have a permanent establishment in Canada as defined under Article 5 of the Treaty.
2. XXXXXXXXXX.
3. ParentSub is a wholly-owned subsidiary of Parent.
ParentSub owns a XXXXXXXXXX% interest in Finance. The remaining XXXXXXXXXX% interest in Finance is held by indirectly wholly-owned subsidiaries of Parent.
Finance is a corporation subject to tax in XXXXXXXXXX and is resident of XXXXXXXXXX for the purposes of the Treaty.
Neither Finance nor ParentSub are resident in Canada or carry on business in Canada for purposes of the Act, and neither has a permanent establishment in Canada as defined under Article 5 of the Treaty.
4. Bidco was incorporated on XXXXXXXXXX and, until the transfer of shares made on XXXXXXXXXX and described in Paragraph 23, was a wholly-owned subsidiary of Parent. Bidco is a private corporation and a taxable Canadian corporation. Bidco has authorized capital of an unlimited number of common shares.
Facts relating to Target
5. Target is a public corporation and a taxable Canadian corporation.
Target has authorized share capital consisting of XXXXXXXXXX Class A preferred shares, and an unlimited number of Class B preferred shares, Class C preferred Shares and common shares. As at XXXXXXXXXX, the issued and outstanding share capital consisted of XXXXXXXXXX common shares. On XXXXXXXXXX, options issued by Target to purchase XXXXXXXXXX common shares were outstanding.
The Target Shares were traded on the XXXXXXXXXX. Subsequent to the acquisition of the Target Shares by Bidco as described in Paragraphs 19 to 21, Bidco applied to de-list the Target Shares from the XXXXXXXXXX.
XXXXXXXXXX
6. XXXXXXXXXX.
7. Based on the Report, the Investment Managers "controlled," as at XXXXXXXXXX Target Shares, representing approximately XXXXXXXXXX% of all Target Shares.
XXXXXXXXXX
8. On XXXXXXXXXX, the Investment Managers filed a second report under XXXXXXXXXX indicating that their combined securityholding percentage in Target had decreased to less than XXXXXXXXXX%.
9. Opco has authorized capital consisting of an unlimited number of voting common shares, Class A preferred shares, Class B preferred shares and Class C preferred shares. As at XXXXXXXXXX, the issued and outstanding capital consisted of XXXXXXXXXX common shares.
Target currently owns XXXXXXXXXX% of all of the issued and outstanding shares of the capital stock of Opco. Prior to its winding-up as described in Paragraph 22, CanSub, a wholly-owned subsidiary of Target, owned XXXXXXXXXX % of all of the issued and outstanding shares of the capital stock of Opco. Prior to its winding-up, CanSub held the shares of the capital stock of Opco as capital property.
The remaining XXXXXXXXXX% interest in Opco is held by InvestmentCo.
Target acquired a XXXXXXXXXX% interest in Opco in XXXXXXXXXX from a third party for fair market value consideration consisting of cash. Shortly after, Target transferred its interest in Opco to CanSub.
In XXXXXXXXXX, Opco experienced serious financial problems. CanSub sold its XXXXXXXXXX% interest in Opco to InvestmentCo for nominal cash consideration. CanSub then converted a $XXXXXXXXXX shareholder loan that it had made to Opco into preferred shares of the capital stock of Opco. XXXXXXXXXX other shareholders also acquired a $XXXXXXXXXX preferred share interest in Opco at that time.
On XXXXXXXXXX, CanSub acquired the preferred share interests in Opco held, directly or indirectly, by the other shareholders for fair market value consideration consisting of cash. CanSub's preferred share interest in Opco was then converted into XXXXXXXXXX common shares of the capital stock of Opco, giving CanSub the ownership of XXXXXXXXXX% of all of the issued and outstanding shares of the capital stock of Opco.
Facts relating to the acquisition of Target
10. On XXXXXXXXXX, Foreignco and Target announced that they had entered into a support agreement under which Foreignco would make an offer to acquire all of the issued and outstanding Target Shares at a price of $XXXXXXXXXX per share with the support of the board of directors of Target.
11. On XXXXXXXXXX, Parent announced its intention to make an offer to acquire all of the Target Shares at a price of $XXXXXXXXXX per share.
On XXXXXXXXXX, Parent formally launched, through Bidco, its Offer to acquire all of the Target Shares at a price of $XXXXXXXXXX per share.
12. On XXXXXXXXXX, Foreignco announced its intention to increase the price of its offer to acquire all of the Target Shares to $XXXXXXXXXX per share.
On XXXXXXXXXX, Foreignco announced its intention to increase the price of its offer to acquire all of the Target Shares to $XXXXXXXXXX per share.
13. On XXXXXXXXXX, Parent through Bidco, announced its intention to increase the price of its offer to acquire all of the Target Shares to $XXXXXXXXXX per share.
14. On XXXXXXXXXX, Foreignco announced that it would not increase its $XXXXXXXXXX offer.
15. On XXXXXXXXXX, Parent and Target announced that they had entered into a support agreement under which Bidco would amend its Offer and would offer $XXXXXXXXXX per share with the support of the board of directors of Target.
On XXXXXXXXXX, Bidco formally amended its Offer to acquire all of the Target Shares at $XXXXXXXXXX per share.
16. The Offer was made only for the Target Shares and was not made for any stock options, warrants or other rights to acquire Target Shares. Holders of such stock options, warrants or other rights that wished to participate in the Offer had to fully exercise their rights in order to obtain Target Shares that could be deposited in accordance with the terms of the Offer.
In connection with the Offer, Target made amendments to its stock option plans and agreed to take steps to allow all persons holding stock options to exercise their stock options (i) on an accelerated vesting basis solely for the purpose of tendering under the Offer all Target Shares issued in connection with such exercise; and (ii) on a cashless basis for the purpose of tendering under the Offer all Target Shares issued in connection with such cashless exercise.
17. On XXXXXXXXXX, Xco announced that it had made an unsolicited offer to acquire all of the shares of the capital stock of Parent for consideration consisting of cash and shares of the capital stock of Xco. Xco also announced that it had entered into an agreement with Foreignco pursuant to which, in the event Xco's offer for parent was completed, Parent would sell to Foreignco all of the Target Shares acquired under the Offer.
On XXXXXXXXXX, the board of directors of Parent rejected the offer from Xco.
18. On XXXXXXXXXX, Bidco was financed through a common share equity contribution from Parent for an amount of $XXXXXXXXXX and a loan of $XXXXXXXXXX from Finance, for a total of $XXXXXXXXXX . The loan granted by Finance to Bidco bears interest at the rate of CA$ XXXXXXXXXX.
Bidco used the funds provided by the share subscription from Parent and the loan from Finance to acquire the Target Shares under the Offer for $XXXXXXXXXX as described in Paragraphs 19 to 21.
Bidco may borrow additional funds from Finance in order to further capitalize Target. These additional funds would be used by Target to refinance its debt to third parties. The additional funds borrowed by Bidco from Finance will represent approximately $XXXXXXXXXX, thereby increasing the total funds borrowed by Bidco from Finance to $XXXXXXXXXX.
Upon completion of an interest rate determination transfer pricing study, the loan between Finance and Bidco will be repaid and a new interest-bearing loan will be made by Finance to Bidco pursuant to a new loan agreement to be entered into by the parties.
At any relevant time, Finance will be the beneficial owner of the interest received from Bidco.
19. On XXXXXXXXXX, Parent and Target jointly announced that XXXXXXXXXX Target Shares, representing XXXXXXXXXX% of all Target Shares, were deposited to Bidco's Offer and that, effective at XXXXXXXXXX, Bidco had taken up and acquired ownership of such shares.
All Target Shares acquired as a result of the exercise of stock options, as described in Paragraph 16, were taken up and acquired by Bidco at that time.
20. On XXXXXXXXXX, Parent announced that an additional XXXXXXXXXX Target Shares had been deposited to Bidco's Offer between XXXXXXXXXX and XXXXXXXXXX, the final expiry date of the offer, which brought the total number of Target Shares deposited to XXXXXXXXXX, representing XXXXXXXXXX% of all Target Shares.
At the same time, Parent announced its intention to acquire, as soon as permitted, the remaining Target Shares by means of a statutory compulsory acquisition procedure under the applicable provisions of the CBCA at the same price as the Offer price and, upon acquiring a sufficient number of Target Shares, to de-list the Target Shares from the XXXXXXXXXX .
21. On XXXXXXXXXX, Bidco commenced the process required to permit Bidco to acquire the remaining Target Shares by means of the statutory compulsory acquisition procedure under Section 206 of the CBCA at the same price as the Offer price. Such process was successfully completed on XXXXXXXXXX and Target was, at such date, a wholly-owned subsidiary of Bidco.
Preliminary Transactions
22. Pursuant to section 210 of the CBCA, Target caused CanSub to be wound up and dissolved on XXXXXXXXXX, prior to the acquisition of control of Target by Bidco, as described in Paragraph 19. In the process, all of the properties of CanSub, including the shares of the capital stock of Opco owned by CanSub, were acquired by Target, and all of the liabilities of CanSub were assumed by Target.
At the time Bidco acquired control of Target, Target held the shares of the capital stock of Opco as capital property.
23. On XXXXXXXXXX , Parent transferred legal title to XXXXXXXXXX% of the outstanding shares of the capital stock of Bidco to XXXXXXXXXX.
Parent has complied with the provisions of section 116 to obtain from the Minister a certificate in prescribed form in respect of the disposition of the shares of the capital stock of Bidco.
At any relevant time, the shares of the capital stock of Bidco transferred did not derive their value principally from immovable property.
24. XXXXXXXXXX.
Xco's Offer
25. On XXXXXXXXXX, after long discussions between Xco and Parent, the board of directors of Parent decided to recommend that the shareholders of Parent approve an improved version of Xco's offer described in Paragraph 17. A memorandum of understanding was entered into by Xco and Parent on the same date.
In the memorandum of understanding entered into on XXXXXXXXXX, Xco and Parent were unable to reach an agreement as to the retention or disposal of Target. Xco and Parent agreed that if the revised offer of Xco is consummated, Xco will submit the question of Target to Parent's new board of directors for consideration and decision solely in light of the corporate interest of Parent.
Xco's offer remains subject to the approval of the shareholders of Parent.
PROPOSED TRANSACTIONS
26. In connection with the acquisition of control of Target described in Paragraph 19, Target will elect, in its return of income for its taxation year ending immediately before its acquisition of control by Bidco, not to have subsection 256(9) apply.
27. Target will elect in prescribed form and manner, pursuant to subparagraph (c)(i) of the definition of public corporation in subsection 89(1), not to be a public corporation.
28. Bidco will incorporate Newco. Newco will be a private corporation and a taxable Canadian corporation. Bidco will subscribe for shares of the capital stock of Newco for a nominal cash consideration.
29. Bidco will transfer all of the Target Shares to Newco for FMV consideration. The consideration for this transfer will be paid in full by Newco by the issuance to Bidco of common shares and two interest-bearing promissory notes (the NoteA and the NoteB). The principal amount of the NoteA will be approximately $XXXXXXXXXX. The principal amount of the NoteB will be set at an amount that will allow Bidco to receive enough interest income to offset the interest expenses incurred on the loan from Finance up to the date of the transfer of the Target Shares. The NoteA and the NoteB will bear interest at a rate slightly higher than the rate on the loan from Finance to Bidco.
Bidco and Newco will elect, jointly and in prescribed form and within the time limit referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the Target Shares to Newco. The "agreed amount" specified in the election in respect of the Target Shares will be equal to the ACB to Bidco of the transferred shares immediately before the transfer, which amount will not exceed the FMV of such shares.
The paid-up capital in respect of the common shares of the capital stock of Newco issued to Bidco will be subject to the provisions of subsection 85(2.1).
30. Target and Newco will be amalgamated to form Amalco. As a consequence, all of the assets and liabilities of Target and Newco will become assets and liabilities of Amalco, and all the Target Shares will be cancelled. No shares of the capital stock of Amalco will be issued such that the issued and outstanding shares of the capital stock of Newco will become the shares of the capital stock of Amalco. This amalgamation will be governed by subsection 87(1).
XXXXXXXXXX
31. Once Bidco will have earned sufficient interest income from NoteB to offset the interest expenses incurred on the loan from Finance up to the date of the transfer of the Target Shares, the NoteB will be contributed to Amalco in exchange for the issuance of additional common shares of the capital stock of Amalco.
32. The federal business number of the parties referred to herein, the location of the tax services office and taxation centre where their returns are filed, and the address of their head office are as follows:
XXXXXXXXXX
- Business Number: XXXXXXXXXX
- Tax Services Office: XXXXXXXXXX
- Taxation Centre: XXXXXXXXXX
- Address: XXXXXXXXXX
XXXXXXXXXX
- Business Number: XXXXXXXXXX
- Tax Services Office: XXXXXXXXXX
- Taxation Centre: XXXXXXXXXX
- Address: XXXXXXXXXX
PURPOSES OF THE PROPOSED TRANSACTIONS
33. The purposes of the proposed transactions are as follows:
- to consolidate profits and losses within a related group by enabling Bidco to earn sufficient interest income on the NoteA and the NoteB issued by Amalco, in order to eliminate losses that Bidco would otherwise incur on its acquisition debt. Effectively, the proposed transactions permit the application of interest charges with respect to the NoteA and the NoteB against income of Target; and
- to permit Parent to reorganize its corporate structure following the acquisition of Target in a more efficient manner.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant Facts, Proposed Transactions and the Purposes of the Proposed Transactions, and provided that the proposed transactions are completed in the manner described above, we confirm the following:
A. Subsection 18(6) will not apply, as a consequence of the Proposed Transactions, in and by themselves, to deem NoteA and NoteB (as described in Paragraph 29) to be a debt incurred by Amalco to Finance.
B. Provided that Bidco has a legal obligation to pay interest on the loan from Finance described in Paragraph 18, and provided that Bidco continues to hold the common shares of the capital stock of Amalco, as described in Paragraph 30, for the purposes of producing income (other than exempt income), Bidco will, subject to subsection 18(4) and pursuant to paragraph 20(1)(c), be entitled to deduct, in computing its income for a taxation year, the lesser of the interest paid or payable (depending on the method regularly followed by Bidco in computing its income for purposes of the Act) in respect of that year on the loan from Finance, or a reasonable amount in respect thereof.
C. Provided that Amalco has a legal obligation to pay interest on the NoteA and the NoteB described in Paragraph 29, and provided that the property acquired as a result of the amalgamation of Newco and Target, as described in Paragraph 30, continues to be used by Amalco for the purposes of gaining or producing income therefrom (other than exempt income), Amalco will, pursuant to paragraph 20(1)(c), be entitled to deduct, in computing its income for a taxation year, the lesser of the interest paid or payable (depending on the method regularly followed by Amalco in computing its income for purposes of the Act) in respect of that year on the NoteA and the NoteB, or a reasonable amount in respect thereof.
D. Provided that at the time the interest paid by Bidco to Finance on the loan described in Paragraph 18, Finance is the beneficial owner of such interest received from Bidco and a resident of XXXXXXXXXX for the purposes of the Treaty, the said interest paid by Bidco to Finance will be subject to Part XIII withholding tax at a 10% rate pursuant to XXXXXXXXXX the Treaty.
E. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.
The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.
Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed:
(a) the determination of the FMV or ACB of any property referred to herein, or the paid-up capital in respect of any share referred to herein;
(b) with respect to Ruling D, that Finance is, at any relevant time, the beneficial owner of the interest received from Bidco and a resident of XXXXXXXXXX for the purposes of the Treaty;
(c) any provincial tax consequences of the proposed transactions; or
(d) any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically confirmed in the rulings given above.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
Yours truly,
XXXXXXXXXX
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2006
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2006
Email this Content