2006 Ruling 2006-0201051R3 - Paid-up capital reduction - public 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: Exchange by a public corporation of an interest in a partnership for units of a mutual fund trust. Subsequent distribution of the trust units to shareholders on a paid-up capital reduction. Does 84(4.1) deem a dividend to have been paid by the corporation and received by the shareholder?

Position: No.

Reasons: The transaction meets the exceptions of subsection 84(4.1) as proposed to be amended

XXXXXXXXXX 							2006-020105

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (XXXXXXXXXX TSO; XXXXXXXXXX Taxation Centre; Business No. XXXXXXXXXX)

We are writing in response to your letter of XXXXXXXXXX and your amended letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge receipt of your emails as well as our telephone conversations. The documents submitted with your request are only part of this document to the extent described herein.

To the best of your knowledge and that of the above-referenced taxpayer, none of the issues involved in this ruling is:

(i) in an earlier return of the above-referenced taxpayer 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 above-referenced taxpayer or a related person;

(iii) under objection by the above-referenced taxpayer or a related person;

(iv) before the courts; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The above-referenced taxpayer has confirmed that the proposed transactions described herein will not affect its ability to pay any of its outstanding tax liabilities.

All statutory references herein are to provisions of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c. 1, as amended to the date hereof and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

In this letter, the following terms have the meanings specified:

"ACo" means XXXXXXXXXX, a corporation incorporated and existing under the XXXXXXXXXX;

"Agent" means XXXXXXXXXX;

"Agreement" means the Investor Liquidity Agreement entered into between ACo, the Fund, the Trust, the Partnership and the GP whereby, among other things, ACo is entitled to effectively liquidate all or any portion of its LP Units and GP Shares;

"Capital" means the stated capital account of each Class of Shares under the XXXXXXXXXX;

"Capital Reduction" means the reduction of the Paid-up Capital of each of the Classes of Shares by the Reduction Amount;

"Class of Shares" collectively referred to as the "Classes of Shares" means the issued and outstanding XXXXXXXXXX;

"CRA" means the Canada Revenue Agency;

"Fund" means XXXXXXXXXX, an open-ended trust established under the laws of the Province of XXXXXXXXXX;

"Fund Units" means trust units of the Fund;

"GP" means XXXXXXXXXX, a corporation XXXXXXXXXX and acting as general partner of the Partnership;

"GP Shares" means the shares of GP;

"LP Units" means the limited partnership units of the Partnership;

"Mutual Fund Trust" means "mutual fund trust" as defined in subsection 132(6);

"New Structure" means the structure resulting from XXXXXXXXXX;

"Non-Qualified U.S. Shareholder" means a Shareholder who resides in the United States, including any partnership or corporation organized or incorporated under the laws of the United States, an estate or trust of which any executor or administrator or trustee, respectively, is a U.S. Person as defined in Rule 902(k) of Regulation S promulgated under the U.S. Securities Act of 1933, or any other such U.S. Person;

"Paid-up Capital" means paid-up capital as defined in subsection 89(1);

"Paragraph" means a numbered paragraph in this letter;

"Partnership" means XXXXXXXXXX, a limited partnership established under the laws of XXXXXXXXXX;

"Pre-1972 CSOH" means pre-1972 capital surplus on hand as that expression is defined in subsection 88(2.1);

"Proposed Transactions" means the transactions described in the "proposed transactions" section of this letter;

"Reduction Amount" means the fair market value of the LP Units exchanged by ACo as described in the Proposed Transactions (which fair market value will be between $XXXXXXXXXX and $XXXXXXXXXX);

"Shareholder" means a holder of a share of a Class of Shares;

"Subco" means XXXXXXXXXX, a corporation amalgamated and existing under the XXXXXXXXXX. Subco is XXXXXXXXXX;

"Trust" means XXXXXXXXXX, an unincorporated, open-ended trust established under the laws of the Province of XXXXXXXXXX.

FACTS

1. ACo is a "public corporation" and a "taxable Canadian corporation" as defined in section 89.

2. Under the New Structure, ACo's activities can be summarized as follows:

a. Holding on account of capital of:

i. shares of Subco;

ii. shares of GP;

iii. interests in the Partnership, including XXXXXXXXXX% of the LP Units; and

iv. other strategic investments in businesses related to its core activities.

b. Managing and supervising the operation of the entities described in point a. above and carrying on extensive managerial, legal and treasury services for them on a cost-recovery basis.

3. The Paid-up Capital of the Classes of Shares is made up of the sum of the amounts of cash and of the fair market value of the property contributed in favour of ACo in consideration for the issuance of the shares of any of the Classes of Shares, which amounts were added to the Capital, reduced by the amount of any reduction of Capital effected by ACo in favour of the Shareholders XXXXXXXXXX None of the Paid-up Capital of the Classes of Shares is derived from the capitalization of Pre-1972 CSOH in respect of which an election has been made in accordance with the provisions of subsection 83(1) as it read with respect to dividends which became payable before 1979.

4. The Fund is a Mutual Fund Trust. The Fund completed an initial public offering of Fund Units on XXXXXXXXXX. The Fund holds units and notes of the Trust.

5. The Trust was established to acquire and hold LP Units. Following the initial public offering by the Fund, the Trust acquired XXXXXXXXXX% of the LP Units. The Trust currently owns XXXXXXXXXX% of the LP Units. ACo holds the remaining LP Units.

6. ACo, the Fund, the Trust, the Partnership and GP have entered into the Agreement. Under the terms of the Agreement, ACo or any entity controlled by it has the right to effectively liquidate all or any portion of its LP Units and the GP Shares. The liquidation rights may be exercised by ACo at any time, at its discretion, so long as all of the following conditions have been met: (a) the liquidation would not cause the Fund to breach the restrictions respecting non-resident ownership contained in the Fund Declaration of Trust or otherwise cause the Fund to cease to be a Mutual Fund Trust, (b) the Fund is legally entitled to issue the Fund Units in connection with the exercise of the liquidation rights, and (c) upon the exercise of the liquidation rights, the person receiving the Fund Units complies with all applicable securities laws.

7. On XXXXXXXXXX, Shareholders of record as of that date received XXXXXXXXXX Fund Units by way of a return of capital on the Classes of Shares. Due to U.S. securities law restrictions and other terms of the distribution, XXXXXXXXXX of the XXXXXXXXXX Fund Units were distributed to the Agent, acting as agent for Non-Qualified U.S. Shareholders, registered Shareholders holding less than XXXXXXXXXX Class A Variable Voting Shares or Class B Voting Shares and registered Shareholders otherwise entitled to a fractional interest in a Fund Unit, and were sold on the XXXXXXXXXX Stock Exchange and the proceeds were remitted to such Shareholders. XXXXXXXXXX.

8. XXXXXXXXXX.

9. In a Notice of Special Meeting of Shareholders and Management Proxy Circular dated XXXXXXXXXX, ACo proposed a special resolution to the Shareholders to approve XXXXXXXXXX one or more special distributions the aggregate of which shall not exceed $XXXXXXXXXX by way of a reduction of the Paid-up Capital maintained in respect of the Classes of Shares. The Shareholders adopted that Special Shareholders' Resolution on XXXXXXXXXX.

PROPOSED TRANSACTIONS

10. XXXXXXXXXX, the directors of ACo will authorize ACo to, and ACo will:

a. make a one-time exchange of LP Units, having a value equal to the Reduction Amount, for Fund Units;

b. proceed with the Capital Reduction by way of a distribution as of the date of the Capital Reduction of the said Fund Units to Shareholders of record; and

c. distribute to the Agent on the date of the Capital Reduction (i) fractional interests in Fund Units to which a registered Shareholder is entitled; (ii) Fund Units to which Non-Qualified U.S. Shareholders are entitled and (iii) Fund Units to which registered Shareholders of small interests of less than a minimum number of shares of a Class of Shares are entitled. The Agent will sell the aggregate of such Fund Units and distribute an amount of cash in Canadian dollars to such Shareholders equivalent to their pro rata portion of the net proceeds after expenses to which they would otherwise be entitled.

The Paid-up Capital of each of the Classes of Shares exceeds the Reduction Amount in respect of that Class of Shares.

PURPOSES OF THE PROPOSED TRANSACTIONS

The distribution of the Fund Units forms part of a plan implemented to:

(i) create an independent business;

(ii) create a public entity independent from ACo and Subco;

(iii) increase shareholder value in an orderly fashion through the distribution of Fund Units to Shareholders through a series of capital distributions.

The distribution of capital made to Non-Qualified Shareholders will be made through the Agent to address securities law restrictions and other terms of the distribution.

RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions and purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our ruling is as follows:

A. The Shareholders who receive the Fund Units as described in paragraph 10 above will be considered to have acquired them at a cost equal to their fair market value at the time of the Capital Reduction.

OPINION

Provided that section 85 of the Notice of Ways and Means Motion to introduce an Act to amend the Income Tax Act released by the Minister of Finance on November 9, 2006 (the "Ways and Means Motion") is enacted in substantially the same form as proposed therein, proposed subsection 84(4.1) of the Income Tax Act will not apply to the distribution on the Capital Reduction described in Paragraph 10 above, such that ACo will not be deemed to have paid a dividend to a particular Shareholder, and such Shareholder will not be deemed to have received a dividend, provided that the amount of the distribution does not exceed the amount by which the Paid-up Capital in respect of the Classes of Shares is reduced on the Capital Reduction. The adjusted cost base of each share of a Class of Shares will be reduced pursuant to subparagraph 53(2)(a)(ii) by the amount of the Capital Reduction attributable to that share.

As indicated in paragraph 22 of Information Circular 70-6R5, an expression of opinion is not an advance income tax ruling and, accordingly, is not binding on the CRA.

COMMENTS

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

(i) the determination of the fair market value of any property or the Paid-up Capital in respect of any shares;

(ii) any tax consequences relating to the facts and Proposed Transactions described herein, other than those described in the ruling above, including, without restricting the generality of the foregoing:

a. the tax consequences of any Paid-up Capital reduction other than the Paid-up Capital reduction described in the Proposed Transactions in respect of the one-time exchange of LP Units having a value equal to the Reduction Amount; and

b. the tax consequences of the exchange of the LP Units and GP Shares.

In the event that subsection 84(4.1) is not amended in substantially the same form as proposed in the Ways and Means Motion, the directors of ACo may avail themselves of the subsection 227.1(3) exception to subsection 227.1(1) in respect of the Capital Reduction.

Yours truly,

for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch