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: 1- Whether section 212.1 applies to the sale of the shares of the Canadian subsidiary of a non-resident corporation. 2- Whether subsection 245(2) applies where that sale is preceded by the acquisition of assets from a subsidiary of the Canadian subsidiary. 3) Whether subsection 245(2) applies where the gain realized on the sale of the assets of the subsidiary is not taxable in Canada and the corporate purchaser of the Canadian subsidiary pays for the value of the cash received by the subsidiary of the Canadian subsidiary and uses that cost base to increase the cost base of the shares of the subsidiary under subsection 88(1)(c) on its amalgamation with the Canadian subsidiary.
Position: No.
Reasons: 1 and 2- The proposed transactions were revised so that the increase in the paid-up capital of the shares of the Canadian subsidiary before the sale described in point 1 results in a deemed dividend that is subject to Part XIII tax. 3- The sale of the shares of the subsidiaries described in issue 2 for cash before the transfer of the shares described in issue 1 is not contrary to the scheme evidenced by 55(3.1) (the sale of the shares of the subsidiaries described in issue 2 would have been taxable in a Canadian context) or 88(1)(c)(vi) (the shares of the subsidiaries described in issue 2 were transferred before the amalgamation). It was concluded that the test in subsection 245(4) as changed by the 2005 amendment would not be met as it would not be reasonable to consider that the transactions would result in a misuse or abuse of the provisions of the Act.
XXXXXXXXXX 2006-021138
XXXXXXXXXX, 2007
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
XXXXXXXXXX (Business Number XXXXXXXXXX , XXXXXXXXXX Taxation Centre and XXXXXXXXXX Tax Services Office) XXXXXXXXXX
(collectively, "the Taxpayers").
We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the Taxpayers. We acknowledge receipt of your letters and 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 Taxpayers, none of the issues involved in this ruling are:
(i) 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
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
The Taxpayers have confirmed that the proposed transactions described herein will not affect their ability to pay any of their 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 (the "Act") or to the Income Tax Regulations (the "Regulations") and unless noted otherwise, all references to monetary amounts in dollars result from the conversion of XXXXXXXXXX to Canadian dollars based on the February 12, 2007 exchange rate of XXXXXXXXXX. The fair market value amounts expressed in this letter are approximate and will be revised at closing to reflect the actual fair market values at that time. The withholding tax remittances described in this letter will be based on the updated amounts.
DEFINITIONS
In this letter, unless otherwise expressly stated, the following terms have the meanings specified:
"adjusted cost base" has the meaning assigned to that term by subsection 248(1);
"amalgamation" has the meaning assigned to that term by subsection 87(1);
"Business" means the XXXXXXXXXX;
"Business Segment" means Topco Group's XXXXXXXXXX business in Canada, which currently has an estimated fair market value of $XXXXXXXXXX;
"Business Subsegment" involves the XXXXXXXXXX;
"Buyer" means XXXXXXXXXX, a company that is incorporated in the United States ("US") (or a party related to XXXXXXXXXX). The shareholders of the Buyer are XXXXXXXXXX;
"capital property" has the meaning assigned to that term by subsection 248(1);
"controlled foreign affiliate" has the meaning assigned to that term by subsection 248(1);
"Convention" means the Convention between the Government of Canada and the Government of XXXXXXXXXX;
"Excluded Property" has the meaning assigned to that term by subsection 95(1);
"foreign affiliate" has the meaning assigned to that term by subsection 248(1);
"Foreign Country" means XXXXXXXXXX;
"Holdco1" means XXXXXXXXXX;
"Holdco2" means XXXXXXXXXX;
"Holdco3" means XXXXXXXXXX;
"Keeperco1" means XXXXXXXXXX;
"Keeperco2" means XXXXXXXXXX;
"NewCan" means XXXXXXXXXX;
"non-resident" has the meaning assigned to that term by subsection 248(1);
"paid-up capital" has the meaning assigned by subsection 89(1);
"series of transactions or events" has the extended meaning assigned to that phrase by subsection 248(10);
"Subco1" means XXXXXXXXXX;
"Subco2" means XXXXXXXXXX;
"Subco3" means XXXXXXXXXX;
"subsidiary wholly-owned corporation" has the meaning assigned to that term by subsection 248(1);
"Targetco" means XXXXXXXXXX, a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX that has a registered office located at XXXXXXXXXX. Its principal place of business is located at XXXXXXXXXX;
"Targetco Division" means XXXXXXXXXX , a sales office and a distribution centre of Targetco;
"taxable Canadian corporation" has the meaning assigned to that term by subsection 248(1);
"Topco" means XXXXXXXXXX. Topco's shares are listed on the XXXXXXXXXX Stock Exchange; and
"Topco Group" means the group formed by Topco, Holdco1, Targetco, Subco1, Keeperco1, Subco2, Holdco2, Keeperco2, Holdco3 and Subco3.
FACTS
1. The ultimate parent company in the Topco Group is Topco. Topco is a holding company that owns XXXXXXXXXX% of the issued share capital of Holdco1, Holdco2 and Holdco3. Topco also owns all the issued and outstanding common shares of Keeperco2. The Topco Group carries on the Business. All the companies in the Topco Group but Targetco reside in the Foreign Country for domestic and treaty purposes. All the companies in the Topco Group but Targetco and Subco 2 do not reside, carry on business or have a permanent establishment, under article V of the Convention, in Canada.
2. Holdco1 is a holding company that owns, inter alia, XXXXXXXXXX% of the outstanding share capital of Targetco, which is made up of common shares.
3. Targetco is a resident of Canada under Canadian domestic tax law and for purposes of the Convention. Targetco carries on the Business Segment. The issued and outstanding common shares of Targetco have a paid-up capital of approximately $XXXXXXXXXX. Targetco owns XXXXXXXXXX% of the common shares of Subco1. The shares of Subco1 are capital property to Targetco for Canadian income tax purposes. In addition to the shares of Subco1, Targetco owns other assets, including approximately $XXXXXXXXXX of cash.
4. Subco1 is a foreign affiliate and controlled foreign affiliate of Targetco. Subco1's common shares have an adjusted cost base to Targetco of approximately $XXXXXXXXXX and a fair market value of approximately $XXXXXXXXXX Other than a $XXXXXXXXXX cash investment from Targetco, Subco1's value has been derived as a result of foreign active businesses that were previously carried on. Subco1's significant assets consist of:
a) all the issued and outstanding common and redeemable A preference shares of Keeperco1;
b) all the issued and outstanding class C preference shares of Keeperco2;
c) a $XXXXXXXXXX loan receivable from Holdco2; and
d) an additional $XXXXXXXXXX loan receivable from Holdco2.
5. Keeperco1's only significant asset consists of all the issued and outstanding common shares of Subco2. Keeperco1 is a foreign affiliate and controlled foreign affiliate of Targetco. Keeperco1 has issued and outstanding share capital which is comprised of the following shares, which are Excluded Property of the holder:
a) XXXXXXXXXX common shares. The Keeperco1 common shares are subject to XXXXXXXXXX call options held by Holdco3 and Keeperco2 to respectively acquire XXXXXXXXXX of the common shares;
b) XXXXXXXXXX redeemable A preference shares which carry a XXXXXXXXXX% cumulative dividend entitlement; and
c) XXXXXXXXXX redeemable B preference shares, which carry a XXXXXXXXXX% cumulative dividend entitlement. These shares are XXXXXXXXXX% owned by Holdco3 and XXXXXXXXXX% owned by Keeperco2.
6. Keeperco2 is a foreign affiliate and controlled foreign affiliate of Targetco. Keeperco2's only significant asset consists of its XXXXXXXXXX% interest in Keeperco1 redeemable B preference shares. Keeperco2 has the following issued and outstanding share capital:
a) XXXXXXXXXX common shares; and
b) XXXXXXXXXX C preference shares, which are Excluded Property of Subco1 and carry a XXXXXXXXXX% cumulative dividend entitlement.
7. Holdco2 is a subsidiary wholly-owned corporation of Topco and a group financing company. Holdco2 has loans payable to Subco1 of $XXXXXXXXXX and $XXXXXXXXXX.
8. Holdco3 is a subsidiary wholly-owned corporation of Topco. Holdco3's significant assets include its XXXXXXXXXX% interest in Keeperco1 redeemable B preference shares and its XXXXXXXXXX% share ownership of Subco3.
9. Subco2 is a foreign affiliate and controlled foreign affiliate of Targetco that carries on the Business Subsegment. Subco2 has the following issued share capital:
a) XXXXXXXXXX common shares that are XXXXXXXXXX% owned by Keeperco1; and
b) XXXXXXXXXX redeemable A preference shares which carry a XXXXXXXXX% cumulative dividend entitlement, that are XXXXXXXXXX% owned by Keeperco1.
The common and redeemable A preference shares of Subco2 are Excluded Property of Keeperco1.
10. The Topco Group deals at arm's length with the Buyer, NewCan and all of the third party lenders that are party to the proposed transactions discussed herein. To the best of Targetco's knowledge, none of the third party lenders that are a party to the proposed transactions discussed herein, and their related entities, own any shares of Targetco, nor will they acquire any shares of Targetco as part of the series of transactions discussed herein.
11. None of the entities in the Topco Group currently owns, nor will any such entities acquire, any shares of the Buyer or a party related to the Buyer.
PROPOSED TRANSACTIONS
12. Holdco2 will borrow $XXXXXXXXXX from a third party bank on a short-term facility.
13. Holdco2 will repay the two loans currently owed to Subco1 in the amount of $XXXXXXXXXX and $XXXXXXXXXX.
14. Holdco2 will lend the remaining $XXXXXXXXXX to Holdco1. The loan will be on a limited recourse basis whereby Holdco2 will only have security against the A preference shares of Keeperco1 and the C preference shares of Keeperco2 acquired from Subco1 as described below.
15. Holdco1 will acquire from Subco1 the A preference shares of Keeperco1 and the C preference shares of Keeperco2 for $XXXXXXXXXX.
The A preference shares of Keeperco1 have an adjusted cost base of approximately $XXXXXXXXXX. The C preference shares of Keeperco2 have an adjusted cost base of approximately $XXXXXXXXXX.
16. Subco1 will deposit with a third party bank the proceeds of $XXXXXXXXXX obtained from the repayment of the loans owed by Holdco2 and the sale of the A preference shares of Keeperco1 and the C preference shares of Keeperco2 as described above.
17. Targetco will transfer the Targetco Division to an entity in the Topco Group in consideration for its nominal fair market value and an assumption of all obligations and liabilities relating to the division.
18. Keeperco2 and Holdco3 will exercise their call options to acquire the common shares of Keeperco1 for an amount equal to their fair market value determined without reference to the call options.
19. Targetco will increase its legal stated capital by an amount equal to the following formula:
Total available cash in Targetco and Subco1 ($XXXXXXXXXX)
Less: the paid-up capital of Targetco shares ($XXXXXXXXXX)
Less: XXXXXXXXXX% of the amount determined as follows:
the fair market value of the shares of Targetco ($XXXXXXXXXX) less the fair market value of the shares of Subco1 ($XXXXXXXXXX).
Based on the information at present, the increase to legal stated capital will equal approximately $XXXXXXXXXX.
20. Before the XXXXXXXXXX day of the month following the increase in the legal stated capital of Targetco described above, Holdco1 will provide Targetco with the cash necessary to pay Holdco1's Canadian withholding tax obligation under Part XIII of the Act (estimated to be approximately $XXXXXXXXXX ) and Targetco will remit the same to the Canada Revenue Agency.
21. Buyer will capitalize NewCan with cash.
22. NewCan will acquire all of the common shares of Targetco from Holdco1 for cash consideration of $XXXXXXXXXX. To fund that purchase, NewCan will borrow $XXXXXXXXXX from a third party bank and will use capital provided by Buyer and/or borrow from third parties or related parties in respect of the excess. None of the entities in the Topco Group or any corporation in which Topco or a corporation in which Topco has a direct or indirect controlling interest will provide any undertaking to provide a refund, reimbursement, contribution, allowance or any other form of assistance in respect of the loans described in this paragraph.
23. Holdco1 will repay its $XXXXXXXXXX debt to Holdco2 and will lend $XXXXXXXXXX to Holdco2.
24. Holdco2 will repay its $XXXXXXXXXX debt described above.
25. NewCan and Targetco will be amalgamated in accordance with the requirements set out in subsection 87(1) to form New Targetco. A designation will be filed by New Targetco to increase the cost amount of the Subco1 common shares acquired on the amalgamation of Targetco and NewCan within the limits described in paragraph 88(1)(d).
26. Subco1 will be liquidated and wound-up in accordance with the governing law of the foreign country.
27. Immediately after the initial approval of the winding-up of Subco1, Subco1 will distribute cash of $XXXXXXXXXX and any of its other assets to New Targetco.
28. New Targetco will use the cash acquired from Subco1 to repay the $XXXXXXXXXX debt incurred by NewCan as described in paragraph 22 above.
PURPOSE OF PROPOSED TRANSACTION
Topco has determined that its Canadian XXXXXXXXXX business, which is carried on through its wholly owned subsidiary, Targetco, is no longer a core component of its business strategy. The purpose of the proposed transactions is to enable Topco to dispose of its Canadian XXXXXXXXXX business to NewCan, which will be wholly owned by an arm's length buyer, while retaining its interest in Keeperco1 and Keeperco2.
RULINGS
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. On the amalgamation of Targetco and NewCan to form New Targetco as described in paragraph 25 above, provided that no property acquired by New Targetco 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 Targetco and the "parent" is NewCan) as part of the series of transactions or events that includes the proposed transactions described herein, the cost to New Targetco of the common shares of Subco1 that become property of New Targetco pursuant to the amalgamation will be deemed by paragraph 88(1)(c) to be the cost amount of such property plus the amount designated by New Targetco under paragraph 88(1)(d) in respect of such property.
B. Provided that NewCan and Holdco1 deal at arm's length, section 212.1 will not apply to the disposition of shares described in paragraph 22 above. According to paragraph 251(1)(b), it is a question of fact whether NewCan and Holdco are dealing at arm's length at a particular time. For greater certainty, the proposed transactions in and of themselves, will not be sufficient to result in NewCan and Holdco not dealing at arm's length with regards to the sale of the shares of Targetco.
C. Subsection 95(6) will not apply as a result of the proposed transactions in and of themselves.
D. 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.
E. Subsections 15(1), 56(2) and 246(1) will not apply to any of the proposed transactions described herein.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Revenue Agency provided that the proposed transactions are completed within six months of the date of this letter.
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
OPINION
A. Provided that subsection 88(3) is amended as proposed in the Legislative Proposals released by the Department of Finance on February 27, 2004, subsection 88(3) will apply in respect of the liquidation of Subco1 in paragraph 26 above. As a result, after the commencement of the liquidation procedures for Subco1, it will be deemed to have disposed of the $XXXXXXXXXX of cash distributed to New Targetco for proceeds of disposition equal to the fair market value thereof, pursuant to proposed subparagraph 88(3)(b)(i). Pursuant to proposed subparagraph 88(3)(b)(ii), New Targetco will be deemed to have acquired the cash at a cost equal to the fair market value thereof, being the amount determined under proposed subparagraph 88(3)(b)(i). Moreover, New Targetco will be deemed to have disposed of the shares of Subco1 for proceeds of disposition equal to the cost of the money acquired, being $XXXXXXXXXX , pursuant to paragraph 88(3)(c).
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 Canada Revenue Agency.
Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:
(a) The determination of the fair market value or adjusted cost base of any particular asset or the paid-up capital in respect of any share referred to herein;
(b) Any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
(c) Whether the non-resident corporations described in this letter are foreign affiliates or controlled foreign affiliates;
(d) Whether the shares described in this letter are Excluded Property; or
(e) Whether the amount of the designation referred to in paragraph 25 above will be within the limits described in paragraph 88(1)(d).
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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