2007 Ruling 2006-0194321R3 - Purchase of Target and Bump

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: Acquisition of control of a Target. Amalgamation of the Target with the parent, and bump of the cost of capital property (mainly shares of the capital stock of subsidiaries) held by the Target.

Position: Favourable opinion provided.

Reasons: In compliance with the law and a comfort letter issued by the Department of Finance.

XXXXXXXXXX 								2006-019432

XXXXXXXXXX, 2007

Dear Sirs:

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 letter 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.

However, we understand that you have filed a request for advance income tax rulings regarding the application of paragraph 20(1)(c) of the Income Tax Act in respect of the Proposed Transactions described in Paragraphs 42 to 53 below.

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

LEGAL ENTITY DEFINITIONS

In this letter, except in Paragraph 66, the taxpayers will be referred to as follows:

a) "Amalco I" means the corporation resulting from the amalgamation of Newco I and Target, as described in Paragraph 61;

(b) "Amalco II" means the corporation resulting from the amalgamation of Amalco I and Subco, as described in Paragraph 63;

(c) "Bidco" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX, which is a subsidiary wholly-owned corporation of BuyerSubco III;

(d) "Buyerco" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

(e) "Buyerco Group" means Buyerco and its subsidiaries;

(f) "BuyerSubco I" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX, which is a subsidiary wholly-owned corporation of Buyerco;

(g) "BuyerSubco II" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX, which is a subsidiary wholly-owned corporation of BuyerSubco I;

(h) "BuyerSubco III" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX, which is a subsidiary wholly-owned corporation of BuyerSubco II;

(i) "BuyerSubco IV" means XXXXXXXXXX, a corporation incorporated with limited liability in XXXXXXXXXX, which is an indirect wholly-owned subsidiary of Buyerco;

(j) "BuyerSubco V" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX, which is a subsidiary wholly-owned corporation of BuyerSubco III;

(k) "Holdco" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX, which was wound-up into BuyerSubco III on XXXXXXXXXX, as described in Paragraph 21;

(l) "Newco I" means a new corporation to be incorporated by Bidco under the laws of XXXXXXXXXX, as described in Paragraph 41;

(m) "Newco II" means a new corporation to be incorporated by Bidco under the laws of XXXXXXXXXX, as described in Paragraph 42;

(n) "PredecessorCo" means XXXXXXXXXX;

(o) "Subco" means a new corporation to be incorporated by Target under the laws of XXXXXXXXXX, as described in Paragraph 40;

(p) "Target" means XXXXXXXXXX, the corporation that resulted from the amalgamation of PredecessorCo and XXXXXXXXXX on XXXXXXXXXX under the laws of XXXXXXXXXX;

(q) "Vendor" means XXXXXXXXXX;

(r) "VendorSubco I" means XXXXXXXXXX, a corporation incorporated under the laws of Canada, which is a subsidiary wholly-owned corporation of Vendor.

(s) "VendorSubco II" means XXXXXXXXXX, which is a subsidiary wholly-owned corporation of Vendor;

(t) "Wco" 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;

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

(c) "Agreed Amount" has the meaning assigned by subsection 85(1);

(d) "Arm's Length" has the meaning assigned by subsection 251(1);

(e) "Bidco Loan" means the loan of approximately $XXXXXXXXXX to be made by Newco II to Bidco, as described in Paragraph 49;

(f) "Bump Properties" includes XXXXXXXXXX:

XXXXXXXXXX;

(g) "BuyerSubco III Debt A" means the debt originally owed by BuyerSubco III to BuyerSubco I and contributed by BuyerSubco I to BuyerSubco II, as described in Paragraph 9;

(h) "BuyerSubco III Debt B" means the debt originally owed by BuyerSubco III to BuyerSubco IV and assigned by BuyerSubco IV to BuyerSubco II, as described in Paragraph 9;

(i) "capital property" has the meaning assigned by section 54;

(j) XXXXXXXXXX;

(k) "XXXXXXXXXX Debenture" means the XXXXXXXXXX debenture issued by BuyerSubco IV to VendorSubco II, as described in Paragraph 9;

(l) "Cost Amount" has the meaning assigned by subsection 248(1);

(m) "CRA" means the Canada Revenue Agency;

(n) "Dissenting Shareholder" means a registered holder of preferred shares of the capital stock of Target who validly exercises dissent rights in respect of the Plan of Arrangement, as described in Paragraph 58;

(o) "Eligible Property" has the meaning assigned by subsection 85(1.1);

(p) "First Daylight Loan" means the loan of approximately $XXXXXXXXXX to be made by an Arm's Length financial institution to Target, as described in Paragraph 43;

(q) "FMV" means fair market value;

(r) XXXXXXXXXX;

(s) "non-resident" has the meaning assigned by subsection 248(1).

(t) XXXXXXXXXX;

(u) "Paragraph" refers to a numbered paragraph in this letter;

(v) "Plan of Arrangement" means the plan of arrangement described in Paragraph 54;

(w) "Proposed Transactions" means the transactions described in Paragraphs 40 to 63 herein;

(x) "public corporation" has the meaning assigned by subsection 89(1);

(y) "PUC" means "paid-up capital" and has the meaning assigned by subsection 89(1);

(z) "PUC Loan" means the loan of approximately $XXXXXXXXXX to be made by Bidco to Target, as described in Paragraph 45;

(aa) "Second Daylight Loan" means the loan of approximately $XXXXXXXXXX to be made by an Arm's Length financial institution to Target, as described in Paragraph 47;

(bb) "Share Purchase Agreement" means the share purchase agreement entered into between Buyerco, BuyerSubco III, Vendor and VendorSubco I, pursuant to which BuyerSubco III purchased and VendorSubco I sold common shares of the capital stock of Target for a total consideration of approximately $XXXXXXXXXX, as described in Paragraph 9;

(cc) "Specified Shareholder" has the meaning assigned by subparagraph 88(1)(c.2)(iii) and subsection 248(1);

(dd) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

(ee) "Target Loan" means the loan of approximately $XXXXXXXXXX to be made by Bidco to Target, as described in Paragraph 50;

(ff) "taxable Canadian corporation" has the meaning assigned in subsection 89(1);

(gg) "Third Daylight Loan" means the loan of approximately $XXXXXXXXXX to be made by an Arm's Length financial institution to Target, as described in Paragraph 53 b);

(hh) "Transferred Assets" means all of Target's assets, other than the Bump Properties, that will be transferred to Subco, as described in Paragraph 55.

FACTS

Facts relating to the Buyerco Group

1. Buyerco is a publicly held corporation that is listed on the XXXXXXXXXX stock exchanges.

XXXXXXXXXX.

2. The shares of the capital stock of Buyerco are widely held by the public.

To the best of Buyerco's knowledge, no shareholder, other than XXXXXXXXXX, currently owns directly or indirectly 10% or more of the shares of any class of the capital stock of Buyerco. To the best of Buyerco's knowledge, the XXXXXXXXXX largest common shareholders of Buyerco immediately before XXXXXXXXXX were:

			Shareholder				%

        				XXXXXXXXXX 

In XXXXXXXXXX acquired ownership of the shares of the capital stock of Buyerco owned by XXXXXXXXXX.

XXXXXXXXXX was the registered owner of approximately XXXXXXXXXX % of the shares of the capital stock of Buyerco and held these shares for various investors who, through brokerage firms or other investment firms, were the beneficial owners of the said shares.

3. XXXXXXXXXX.

4. BuyerSubco I is a subsidiary wholly-owned corporation of Buyerco. BuyerSubco II is a subsidiary wholly-owned corporation of BuyerSubco I. BuyerSubco III is a subsidiary wholly-owned corporation of BuyerSubco II. Holdco was a subsidiary wholly-owned corporation of BuyerSubco III prior to Holdco's wind-up on XXXXXXXXXX, as described in Paragraph 21. Prior to the wind-up of Holdco on XXXXXXXXXX, Bidco was a subsidiary wholly-owned corporation of Holdco. Since the wind-up of Holdco, Bidco is a subsidiary wholly-owned corporation of BuyerSubco III. BuyerSubco IV is an indirect wholly-owned subsidiary of Buyerco. BuyerSubco V is a subsidiary wholly-owned corporation of BuyerSubco III.

Buyerco, BuyerSubco I, BuyerSubco II and BuyerSubco IV are non-residents. BuyerSubco III, BuyerSubco V, Holdco and Bidco are taxable Canadian corporations.

Facts relating to Target

5. Target is a public corporation XXXXXXXXXX are listed on the XXXXXXXXXX Stock Exchange. Target is a taxable Canadian corporation.

XXXXXXXXXX

6. The authorized share capital of Target consists of an unlimited number of XXXXXXXXXX shares, XXXXXXXXXX.

Upon the acquisition of control of Target on XXXXXXXXXX, Target had issued and outstanding: (i) approximately XXXXXXXXXX shares, XXXXXXXXXX.

As of the date hereof XXXXXXXXXX, Target currently has issued and outstanding: (i) approximately XXXXXXXXXX shares, XXXXXXXXXX.

7. To the best of Target's knowledge, no shareholder, other than Bidco, currently owns directly or indirectly 10% or more of the shares of any class of the issued and outstanding shares of Target. To the best of Target's knowledge, the XXXXXXXXXX largest common shareholders of Target immediately before XXXXXXXXXX were:

			Shareholder					%

			BuyerSubco III			XXXXXXXXXX 

           				 XXXXXXXXXX 

To the best of Target's knowledge, the XXXXXXXXXX largest common shareholders of Target XXXXXXXXXX:

			Shareholder					%

								XXXXXXXXXX 

                 			XXXXXXXXXX 

The above shareholding information was obtained from the non-objecting beneficial owners ("NOBO") lists of Target shares. XXXXXXXXXX.

In accordance with securities law, any shareholder owning more than a 10% interest in a public corporation must disclose its ownership. There have been no such disclosures with respect to Target since XXXXXXXXXX, other than the disclosures made by Vendor and BuyerSubco III.

8. Subject to Paragraph 7 above, Target and Buyerco are not aware that, and have no reason to believe that, at the time of the acquisition of control of Target by Bidco on XXXXXXXXXX or at any time during the preceding XXXXXXXXXX period, any single shareholder of Target, alone or together with persons not dealing at arm's length with such shareholder, owned 10% or more of the shares of the capital stock of Target.

Facts relating to the acquisition of Target

9. On XXXXXXXXXX, Buyerco, XXXXXXXXXX entered into a Share Purchase Agreement pursuant to which BuyerSubco III purchased and VendorSubco I sold XXXXXXXXXX common shares of the capital stock of Target owned by VendorSubco I, representing approximately XXXXXXXXXX % of the then common shares of the capital stock of Target. The purchase price was established at $XXXXXXXXXX per share, or $XXXXXXXXXX in aggregate. XXXXXXXXXX.

XXXXXXXXXX.

10. XXXXXXXXXX.

11. XXXXXXXXXX.

12. On XXXXXXXXXX, Buyerco announced its intention to make an offer to purchase, through its XXXXXXXXXX wholly-owned subsidiary Bidco, all of the common shares of the capital stock of Target not already owned by the Buyerco Group for a cash consideration of $XXXXXXXXXX for each common share.

XXXXXXXXXX.

13. XXXXXXXXXX.

14. XXXXXXXXXX.

15. XXXXXXXXXX.

16. On XXXXXXXXXX and as part of its take-over bid, Bidco paid for XXXXXXXXXX common shares of the capital stock of Target, XXXXXXXXXX.

As a result of this acquisition of shares, Bidco acquired de jure control of Target on XXXXXXXXXX.

At the time Bidco acquired control of Target, Target held the Bumped Properties as capital properties.

17. XXXXXXXXXX.

18. XXXXXXXXXX.

19. XXXXXXXXXX.

Further to this transaction, BuyerSubco III owned XXXXXXXXXX% of the common shares of the capital stock of Target and Bidco owned XXXXXXXXXX% common shares of the capital stock of Target. Thus, BuyerSubco III and Bidco owned together XXXXXXXXXX% of the common shares of the capital stock of Target.

20. XXXXXXXXXX.

Preliminary Transactions

21. On XXXXXXXXXX, Holdco was wound-up into BuyerSubco III in such a manner that all the assets of Holdco were acquired by BuyerSubco III and all of the liabilities of Holdco were assumed by BuyerSubco III. The provisions of subsection 88(1) applied to the wind-up of Holdco.

22. On XXXXXXXXXX, BuyerSubco III transferred all of the common shares of the capital stock of Target it owned to Bidco for FMV consideration. The consideration for this transfer was paid in full by Bidco by the issuance to BuyerSubco III of common shares of Bidco.

BuyerSubco III and Bidco 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 shares of the capital stock of Target to Bidco. The Agreed Amount specified in the election in respect of the shares of the capital stock of Target will be equal to the ACB to BuyerSubco III of the transferred shares immediately before the transfer, which amount will not exceed the FMV of such shares.

The PUC in respect of the common shares of the capital stock of Bidco issued to BuyerSubco III will be subject to the provisions of subsection 85(2.1).

Facts relating to the financing of the Buyerco Group

23. XXXXXXXXXX.

24. The acquisitions of the shares of the capital stock of Target described in Paragraphs 15 to 18 above were financed as described in Paragraphs 25 to 39 below.

25. XXXXXXXXXX, BuyerSubco I made, pursuant to a credit facility between BuyerSubco I and BuyerSubco III, XXXXXXXXXX loan of approximately $XXXXXXXXXX to BuyerSubco III.

26. XXXXXXXXXX, BuyerSubco III used the proceeds of the loan from BuyerSubco I to make XXXXXXXXXX loan of $XXXXXXXXXX to Bidco.

27. On XXXXXXXXXX, BuyerSubco II made, pursuant to a credit facility between BuyerSubco II and BuyerSubco III, a XXXXXXXXXX loan of approximately $XXXXXXXXXX to BuyerSubco III.

On XXXXXXXXXX, BuyerSubco II made, pursuant to the credit facility referred to above, a XXXXXXXXXX loan, payable on demand, of approximately $XXXXXXXXXX to BuyerSubco III.

28. XXXXXXXXXX.

On XXXXXXXXXX, BuyerSubco III used XXXXXXXXXX the proceeds of the loan from BuyerSubco II to make a XXXXXXXXXX loan, payable on demand, of approximately $XXXXXXXXXX to Bidco.

29. Bidco used the proceeds of the loans from BuyerSubco I (approximately $XXXXXXXXXX) and from BuyerSubco II (approximately $XXXXXXXXXX) to pay for the common shares of the capital stock of Target acquired in XXXXXXXXXX.

30. XXXXXXXXXX.

31. XXXXXXXXXX.

32. XXXXXXXXXX.

33. XXXXXXXXXX.

34. XXXXXXXXXX.

35. XXXXXXXXXX.

36. XXXXXXXXXX.

37. XXXXXXXXXX.

38. XXXXXXXXXX.

39. XXXXXXXXXX.

PROPOSED TRANSACTIONS

Incorporations relating to the "Bump" under paragraphs 88(1)(c) and (d)

40. Target will incorporate Subco. Subco will be a taxable Canadian corporation.

41. Bidco will incorporate Newco I. Newco I will be a taxable Canadian corporation.

Proposed transactions relating to the application of paragraph 20(1)(c)

42. Bidco will incorporate Newco II. Newco II will be a taxable Canadian corporation. Bidco will subscribe for common shares of the capital stock of Newco II for a nominal cash consideration.

43. Target will borrow from an Arm's Length financial institution approximately $XXXXXXXXXX on a daylight loan basis (the "First Daylight Loan").

44. Target will reduce by an amount of approximately $XXXXXXXXXX the PUC in respect of the common shares of its capital stock owned by Bidco. As payment for the PUC reduction, Target will distribute the proceeds of the First Daylight Loan.

45. Bidco will use the funds received from Target under the PUC reduction to make an interest-bearing loan of approximately $XXXXXXXXXX to Target (the "PUC Loan").

46. Target will use the proceeds of the PUC Loan to repay the First Daylight Loan.

47. Target will borrow from an Arm's Length financial institution approximately $XXXXXXXXXX on a daylight loan basis (the "Second Daylight Loan").

48. Target will use the proceeds of the Second Daylight Loan to subscribe for $XXXXXXXXXX worth of preferred shares of the capital stock of Newco II.

49. Newco II will use the proceeds from the issuance of the preferred shares to make a non-interest bearing loan of approximately $XXXXXXXXXX to Bidco (the "Bidco Loan").

50. Bidco will use the proceeds of the Bidco Loan to make an interest-bearing loan of approximately $XXXXXXXXXX to Target (the "Target Loan").

51. Target will use the proceeds of the Target Loan to repay the Second Daylight Loan.

52. Bidco will contribute a sufficient amount of money to the capital of Newco II to finance the annual payment of the dividends on the preferred shares of the capital stock of Newco II.

53. The following transactions will be undertaken immediately before the transactions described in Paragraphs 54 to 63 below:

a) Bidco will make a contribution of capital to Newco II in an amount equal to the amount of any accrued and unpaid dividends on the preferred shares of the capital stock of Newco II held by Target. No shares will be issued by Newco II and no amount will be added to its PUC in respect of the contribution. The amount of this contribution of capital, if any, will be recorded as contributed surplus for accounting purposes. The contribution of capital, if any, will not be income of Newco II pursuant to generally accepted accounting principles.

b) Target will borrow from an Arm's-Length financial institution approximately $XXXXXXXXXX on a daylight loan basis (the "Third Daylight Loan").

c) Target will use the proceeds of the Third Daylight Loan to repay the Target Loan to Bidco.

d) Bidco will use the funds received from Target on the repayment of the Target Loan to repay the Bidco Loan to Newco II.

e) Newco II will use the funds received from Bidco on the repayment of the Bidco Loan to redeem the preferred shares of its capital stock held by Target.

f) Target will use the proceeds of the redemption of the preferred shares of the capital stock of Newco II to repay the Third Daylight Loan.

g) Newco II will be wound-up into Bidco in such a manner that all the properties of Newco II will be acquired by Bidco and all of the liabilities of Newco II will be assumed by Bidco. The provisions of subsection 88(1) will apply to the wind-up of Newco II.

h) Bidco will contribute the PUC Loan to Target as a contribution of capital and the PUC Loan will thereby be cancelled.

Proposed transactions relating to the "Bump" under paragraphs 88(1)(c) and (d)

54. XXXXXXXXXX.

55. XXXXXXXXXX.

56. Bidco will transfer all of the common shares of the capital stock of Target to Newco I for FMV consideration. The consideration for this transfer will be paid in full by Newco I by the issuance to Bidco of common shares and debt of Newco I. The principal amount of the debt will not exceed the ACB to Bidco of the transferred shares immediately before the transfer, and will not exceed approximately $XXXXXXXXXX.

The debt issued by Newco I to Bidco will include interest-bearing debt and may include non-interest bearing debt. Furthermore, the debt issued by Newco I to Bidco will be subordinate in right of payment to Newco I's other debt obligations. The non-interest bearing subordinated debt issued by Newco I will be payable on demand. The terms of both the interest-bearing debt and the non-interest bearing debt will provide that the rate of interest payable may be varied in the future in accordance with the terms of the debt.

Bidco and Newco I 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 common shares of the capital stock of Target to Newco I. The Agreed Amount specified in the election in respect of the common shares of the capital stock of Target 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 amount to be added, as a result of the acquisition of the common shares of the capital stock of Target by Newco I, to the stated capital account maintained in respect of the common shares of the capital stock of Newco I will be equal to the difference between the ACB to Bidco of the transferred shares immediately before the transfer and the aggregate principal amount of the debt issued by Newco I.

57. XXXXXXXXXX.

58. XXXXXXXXXX.

Further to the transactions described in Paragraph 57 XXXXXXXXXX, Target will be a subsidiary wholly-owned corporation of Newco I.

59. XXXXXXXXXX.

60. The stated capital of the shares of the capital stock of Target will be reduced to $XXXXXXXXXX, without any payment thereon.

61. Target and Newco I will be amalgamated to form Amalco I. As a consequence, all of the assets and liabilities of Target and Newco I will become assets and liabilities of Amalco I, and all the shares of the capital stock of Target will be cancelled. No shares of the capital stock of Amalco I will be issued such that the issued and outstanding shares of the capital stock of Newco I will become the shares of the capital stock of Amalco I. This amalgamation will be governed by subsection 87(1).

In connection with this amalgamation, in the return of income for its first taxation immediately following the amalgamation, Amalco I will designate an amount under the provisions of subsection 87(11) and paragraph 88(1)(d) to increase, within the limits described in paragraph 88(1)(d), the cost of certain capital property (other than "ineligible property") of Target, being the Bump Properties, that Target owned without interruption at and since the time Bidco acquired control of Target as described in Paragraph 16, and that became property of Amalco I pursuant to the amalgamation described in this Paragraph.

62. XXXXXXXXXX.

63. XXXXXXXXXX.

ADDITIONAL INFORMATION

64. XXXXXXXXXX.

65. XXXXXXXXXX .

66. 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 

XXXXXXXXXX .
-  Business Number: 		XXXXXXXXXX
-  Tax Services Office:  	XXXXXXXXXX
-  Taxation Centre:  		XXXXXXXXXX
-  Address:	XXXXXXXXXX 

PURPOSES OF THE PROPOSED TRANSACTIONS

67. The purposes of the Proposed Transactions are to allow a tax efficient integration of Target into the Buyerco Group, to ensure that the interest payable on the money borrowed for the acquisition of the common shares of the capital stock of Target is deductible against the income from the operations of Target, and to achieve an increase in the tax cost of the Bump Properties.

OPINIONS

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 can provide the following opinions.

Opinions on the application of the "Bump" rules

Between XXXXXXXXXX and XXXXXXXXXX, BuyerSubco III owned 10% or more of the common shares of the capital stock of Target. Since XXXXXXXXXX, Bidco has owned 10% or more of the common shares of the capital stock of Target. Consequently, any entity of the Buyerco Group is a Specified Shareholder of Target since XXXXXXXXXX. As part of the series of transactions or events that includes the amalgamation of Target with Newco I but prior to the incorporation of Newco I, various entities of the Buyerco Group have acquired property that is "substituted property" described in paragraph 88(1)(c.3). It is our view that, between XXXXXXXXXX and prior to the incorporation of Newco I, any entity of the Buyerco Group would technically be a restricted person described in subclause 88(1)(c)(vi)(B)(I) and that the "specified person" exception would not apply. In our opinion and based on the current wording of subparagraph 88(1)(c.2)(i), it cannot be said that, between XXXXXXXXXX and prior to the incorporation of Newco I, the entities of the Buyerco Group were related to Newco I (the "parent") because, during such period, Newco I did not exist. Consequently, any acquisition of "substituted property" by entities of the Buyerco Group before the creation of Newco I would technically cause the "bump denial rules" in subparagraph 88(1)(c)(vi) to apply.

However, we understand that the Department of Finance has issued a comfort letter dated XXXXXXXXXX (the "Comfort Letter"), indicating that it is prepared to recommend to the Minister of Finance that the definition of "specified person" in subparagraph 88(1)(c.2)(i) be amended, applicable to windings-up that begin after 2006, so that, in respect of property acquired before the beginning of the winding-up of the subsidiary, a specified person would include a person that is related to the parent (within the meaning of subparagraph 88(1)(c.2)(i)) from the time the parent was incorporated until the beginning of the winding-up of the subsidiary.

If the recommended amendment in the Comfort Letter is enacted and is effective for the period in which the transactions referred to in the preceding paragraphs took place, we are of the opinion that the provisions of subsections 87(11) and 88(1) would apply to the vertical amalgamation of Target and Newco I to form Amalco I as described in Paragraph 61 such that, for purposes of the Act, and provided that no property that became property of Amalco I on such amalgamation or "any property acquired by any person in substitution therefor" (within the meaning of that phrase for the purposes of clause 88(1)(c)(vi)(B)) is acquired by any person described in any of subclauses 88(1)(c)(vi)(B)(I), (II), or (III) (on the assumption that the "subsidiary" referred to in those subclauses is Target and the "parent" is Newco I) as part of the series of transactions or events that includes the Proposed Transactions described herein, the cost to Amalco I of each property owned by Target at the time Bidco acquired control of Target and that became property of Amalco I pursuant to the amalgamation would be deemed by paragraph 88(1)(c) to be the cost amount of such property plus, provided that such property is capital property, but not depreciable property, the amount designated by Amalco I under paragraph 88(1)(d) in respect of the property as described in Paragraph 61.

For greater certainty, and if the recommended amendment in the Comfort Letter is enacted and is effective for the period in which the transactions referred to in the preceding paragraphs took place, we are of the opinion that property that became property of Amalco I on the vertical amalgamation of Target and Newco I would not be "ineligible property" for the purposes of paragraph 88(1)(c) solely as a result of any of the Facts or Proposed Transactions described herein.

Opinion on the general anti-avoidance rule

If the recommended amendment in the Comfort Letter is enacted and is effective for the period in which the transactions referred to in the preceding paragraphs took place, we are of the opinion that the provisions of subsection 245(2) would not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences of the opinions given above.

COMMENTS

The opinions given above are based on amendments to the Act recommended by the Department of Finance and, as such, are not advance income tax rulings.

Furthermore, nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:

(a) the determination of the FMV or Cost Amount of any property referred to herein, or the PUC in respect of any share referred to herein;

(b) any provincial tax consequences of the Proposed Transactions;

(c) any tax consequences relating to the reduction of PUC described in Paragraph 44;

(d) the impact of the designation that Amalco I will make under paragraph 88(1)(d), as described in Paragraph 61, on the amount of any exempt deficit or taxable deficit of any foreign affiliate (or "lower-tier foreign affiliate") of Target; or

(e) any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically dealt with in the opinions 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