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: Where a three-party share exchange would result in the non-application of paragraph 55(3.2)(h), whether GAAR should apply to that share exchange?
Position: No.
Reasons: That share exchange would not appear to result directly or indirectly in a misuse or an abuse having regard to the provisions of the Income Tax Act (in particular, paragraph 55(3.1)(b)) when read as a whole.
XXXXXXXXXX 2006-021575
XXXXXXXXXX , 2007
Dear XXXXXXXXXX :
Re: XXXXXXXXXX Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. In your subsequent letters you provided additional information concerning the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
To the best of your knowledge, and that of the taxpayer involved, none of the issues involved in this ruling request is:
(i) in an earlier return of the 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 taxpayer or a related person;
(iii) under objection by the taxpayer 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.
Definitions
In this letter, the following terms have the meanings specified:
"ACB" means adjusted cost base, as defined in section 54;
"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 or clause is a reference to the relevant provision of the Act;
"agreed amount" means the amount agreed on by the transferor and transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1);
XXXXXXXXXX;
XXXXXXXXXX;
XXXXXXXXXX;
"arm's length" has the meaning assigned by Section 251;
XXXXXXXXXX;
"XXXXXXXXXX Services Business" means the XXXXXXXXXX services business of Foreign Pubco and its subsidiaries, as more particularly described in Paragraph 5;
"Butterfly Percentage" means the proportion, expressed as a percentage that the net FMV of the business property owned (directly and indirectly) by Newco is of the net FMV of all the business property of the Canada Group, determined (i) immediately before the transfer by Canco of the Newco Common Shares to TCo described in Paragraph 44; and (ii) using the principles set out in Paragraphs 33 to 37 and, for greater certainty, applying these principles on the assumption that XXXXXXXXXX;
"Canada Group" means Canco and its Canadian subsidiary corporations, as more particularly described in Paragraph 9;
"Canadian XXXXXXXXXX Services Business" means the XXXXXXXXXX Services Business carried on in Canada through Canco, Subco 1 and Subco 2;
"Canco" means XXXXXXXXXX, as more particularly described in Paragraph 1;
"Canco Common Shares" means common shares in the capital of Canco;
"Canco Purchase Note" has the meaning set out in Paragraph 45;
"capital property" has the meaning assigned by section 54;
"CBCA" means Canada Business Corporations Act, R.S.C. 1985;
"CDA" means capital dividend account as defined in section 89;
XXXXXXXXXX;
XXXXXXXXXX;
"connected" has the meaning assigned by subsection 186(4);
"cost amount" has the meaning assigned by subsection 248(1);
"CRA" means the Canada Revenue Agency;
"XXXXXXXXXX Services Business" means the XXXXXXXXXX services business of Foreign Pubco and its subsidiaries, as more particularly described in Paragraph 5;
"depreciable property" has the meaning assigned by subsection 13(21);
XXXXXXXXXX;
XXXXXXXXXX;
"distribution" has the meaning assigned by subsection 55(1);
"dividend rental arrangement" has the meaning assigned by subsection 248(1);
"eligible capital property" has the meaning assigned by section 54;
"eligible property" has the meaning assigned by subsection 85(1.1);
"XXXXXXXXXX Services Business" means the XXXXXXXXXX services businesses of Foreign Pubco and its subsidiaries, as more particularly described in Paragraph 5;
"Excess Cash" means the cash of the Canada Group, as more particularly described in Paragraph 14;
"External Debt" means the third party debt that will be issued by Foreign Spinco, as more particularly described in Paragraph 50;
"financial intermediary corporation" has the meaning assigned by subsection 191(1);
XXXXXXXXXX;
"FMV" means fair market value, being the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and without compulsion to act, expressed in term of cash;
"Foreign Pubco" means XXXXXXXXXX, as more particularly described in Paragraph 3;
"Foreign Spinco" means XXXXXXXXXX, a United States LLC established under the laws of XXXXXXXXXX (which will be converted to a XXXXXXXXXX "C" corporation as XXXXXXXXXX described in Paragraph 47) as a wholly-owned subsidiary of Foreign Pubco, as more particularly described in Paragraph 24;
"Foreign Subco 1" means XXXXXXXXXX, a XXXXXXXXXX "C" corporation that is a wholly-owned subsidiary of Foreign Pubco;
"Foreign Subco 2" means XXXXXXXXXX, a United States corporation that is a subsidiary wholly-owned corporation of Foreign Subco 1;
"Foreign Subco 3" means XXXXXXXXXX, a United States corporation that is a subsidiary wholly-owned corporation of Foreign Subco 1;
"Foreign Subco 4" means XXXXXXXXXX, a United States corporation that is a subsidiary wholly-owned corporation of Foreign Subco 1;
"Foreign Subco 5" means XXXXXXXXXX, a United States corporation that is a subsidiary wholly-owned corporation of Foreign Subco 4;
"Foreign Subco 6" means XXXXXXXXXX, a XXXXXXXXXX corporation which is indirectly controlled by Foreign Pubco through its controlling interest in XXXXXXXXXX, a company formed as a XXXXXXXXXX under the laws of the XXXXXXXXXX;
"forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);
"guarantee agreement" has the meaning assigned by subsection 112(2.2);
"inventory" has the meaning assigned by subsection 248(1);
"IRS" means the Internal Revenue Service;
"ITAR" means the Income Tax Application Rules;
"legal capital" in respect of a share of an NSULC means the capital of the company for the purposes of XXXXXXXXXX;
"LLC" means a limited liability company;
XXXXXXXXXX;
"Newco" means XXXXXXXXXX, a corporation incorporated under the provisions of the CBCA as a subsidiary wholly-owned corporation of Canco, as more particularly described in Paragraph 29;
"Newco Common Shares" means common shares in the capital of Newco;
"New Holdco" means XXXXXXXXXX, an NSULC that will be a subsidiary wholly-owned corporation of Foreign Pubco, as more particularly described in Paragraph 30;
XXXXXXXXXX;
XXXXXXXXXX;
XXXXXXXXXX;
"Paragraph" refers to a numbered paragraph in this Ruling Request;
"prepaid expenses" means the rights arising out of the prepayment of expenses;
"principal amount" has the meaning assigned by subsection 248(1);
"private corporation" has the meaning assigned by subsection 89(1);
"proceeds of disposition" has the meaning assigned by section 54;
"Proposed Transactions" means the transactions described in Paragraphs 21 to 53;
"PUC" means paid-up capital which has the meaning assigned by subsection 89(1);
"RDTOH" means refundable dividend tax on hand, within the meaning of subsection 129(3);
"Redemption Amount" has the meaning set out in Paragraph 27;
"Regulations" means the Income Tax Act Regulations promulgated under the Act;
"related persons" has the meaning assigned by subsection 251(2);
"Retained Businesses" means the XXXXXXXXXX Services Business and the XXXXXXXXXX Services Business;
"RFI" means restricted financial institution which has the meaning assigned by subsection 248(1);
"short-term preferred share" has the meaning assigned by subsection 248(1);
"significant influence" has the meaning assigned by section 3050 of the CICA Handbook;
"Subco 1" means XXXXXXXXXX;
"Subco 2" means XXXXXXXXXX;
"Subco 3" means XXXXXXXXXX;
"Subco 4" means XXXXXXXXXX;
"Subco 5" means XXXXXXXXXX;
"Sub-Subco 1" means XXXXXXXXXX;
"Sub-Subco 2" means XXXXXXXXXX;
"Sub-Subco 3" means XXXXXXXXXX;
"Sub-Subco 4" means XXXXXXXXXX;
"Sub-Subco 5" means XXXXXXXXXX;
"specified financial institution" has the meaning assigned by subsection 248(1);
"specified investment business" has the meaning assigned by subsection 125(7);
"Spin-Out" means the distribution of the shares of Foreign Spinco as a dividend-in-kind to the shareholders of Foreign Pubco, as more particularly described in Paragraph 53;
"stated capital" in respect of the share capital of a corporation (other than an XXXXXXXXXX) has the meaning assigned by the statute by which the corporation is governed;
"substantial interest" has the meaning assigned by subsection 191(2);
"taxable Canadian corporation" has the meaning assigned by subsection 89(1);
"taxable dividend" has the meaning assigned by subsection 89(1);
"taxable preferred share" has the meaning assigned by subsection 248(1);
"term preferred share" has the meaning assigned by subsection 248(1);
"TCo" means XXXXXXXXXX, an XXXXXXXXXX which will be a subsidiary wholly-owned corporation of Foreign Spinco following the Proposed Transactions, as more particularly described in Paragraph 27.
"TCo Common Shares" means the common shares of TCo, as more particularly described in Paragraph 27;
"TCo Preferred Shares" means the preferred shares in the capital stock of TCo, as more particularly described in Paragraph 27;
"TCo Redemption Note" has the meaning set out in Paragraph 45;
"Three-Party Share Exchange" means the share exchange described in Paragraph 31;
"Transfer Date" means the date of the transfer of the Newco Common Shares described in Paragraph 44;
"U.S. Treaty" means the Canada - United States Income Tax Convention (1980).
Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
Canco
1. Canco is a corporation amalgamated pursuant to the laws of XXXXXXXXXX and is a taxable Canadian corporation and a private corporation for the purposes of the Act. The amalgamation took place on XXXXXXXXXX among XXXXXXXXXX. Canco's business number is XXXXXXXXXX and Canco files its annual income tax return at the XXXXXXXXXX Taxation Centre. Canco is audited by the XXXXXXXXXX Tax Services Office (XXXXXXXXXX). Canco's financial year-end is XXXXXXXXXX.
2. The authorized share capital of Canco consists of XXXXXXXXXX Canco Common Shares. The Canco Common Shares are not short-term preferred shares or taxable preferred shares. All of the issued and outstanding Canco Common Shares (being XXXXXXXXXX Canco Common Shares) are owned by Foreign Pubco.
Foreign Pubco
3. Foreign Pubco is a corporation governed by the laws of the State of XXXXXXXXXX. The outstanding common stock of Foreign Pubco is publicly traded and listed on the XXXXXXXXXX (as well as on the XXXXXXXXXX). The current market capitalization of Foreign Pubco is approximately US$XXXXXXXXXX. Foreign Pubco is widely held, and, to the best of Foreign Pubco's knowledge, no one shareholder or group of related shareholders of Foreign Pubco owns more than 5% of the common stock of Foreign Pubco.
4. Foreign Pubco has implemented an employee stock option plan whereby employees of Foreign Pubco and its subsidiaries (including Canco) are granted options to acquire shares of common stock of Foreign Pubco, having an exercise price not less than the FMV of the stock at the time the options are granted. XXXXXXXXXX Foreign Pubco has now determined that such options and stock owned by XXXXXXXXXX Services Business employees will be replaced by similar options and stock that will be granted by Foreign Spinco at the time of, or immediately prior to, the Spin-Out.
XXXXXXXXXX
5. Foreign Pubco is engaged, through its subsidiaries, in three primary businesses around the world:
(i) XXXXXXXXXX (the "XXXXXXXXXX Services Business");
(ii) XXXXXXXXXX (the "XXXXXXXXXX Services Business" and, together with the XXXXXXXXXX Services Business, the "Retained Businesses"); and
(iii) XXXXXXXXXX (the "XXXXXXXXXX Services Business").
6. [Reserved]
Canadian Businesses
7. The Canadian Retained Businesses and the Canadian XXXXXXXXXX Services Business are operated in Canada directly by Canco and indirectly through its subsidiary corporations as described below. Canco itself directly carries on both the Canadian XXXXXXXXXX Services Business and the Canadian Retained Businesses.
8. Canco directly owns all of the issued and outstanding shares of:
(a) Subco 1, which is a corporation amalgamated under the laws of XXXXXXXXXX, a taxable Canadian corporation and a private corporation. Subco 1 is engaged only in the Canadian XXXXXXXXXX Services Business;
(b) Subco 2, which is a corporation incorporated under the laws of XXXXXXXXXX, a taxable Canadian corporation and a private corporation. Subco 2 is engaged in the Canadian XXXXXXXXXX Services Business;
(c) Subco 3, which is a corporation incorporated under the laws of XXXXXXXXXX, a taxable Canadian corporation and a private corporation. Subco 3 is currently dormant;
(d) Subco 4, which is a corporation incorporated under the laws of Canada, a taxable Canadian corporation and a private corporation. Subco 4 is engaged only in the Canadian XXXXXXXXXX Services Business; and
(e) Subco 5, which is a corporation incorporated under the laws of Canada, a taxable Canadian corporation and a private corporation. Subco 5 is engaged (directly and indirectly) only in the Canadian XXXXXXXXXX Services Business.
9. Subco 5 owns all of the issued and outstanding shares of the following Canadian corporations that are engaged only in the Canadian XXXXXXXXXX Services Businesses:
(a) Sub-Subco 1, which is a corporation incorporated under the laws of XXXXXXXXXX, a taxable Canadian corporation and a private corporation;
(b) Sub-Subco 2, which is a corporation incorporated under the laws of Canada, a taxable Canadian corporation and a private corporation;
(c) Sub-Subco 3, which is a corporation incorporated under the laws of XXXXXXXXXX, a taxable Canadian corporation and a private corporation;
(d) Sub-Subco 4, which is a corporation incorporated under the laws of XXXXXXXXXX, a taxable Canadian corporation and a private corporation; and
(e) Sub-Subco 5, which is a corporation incorporated under the laws of XXXXXXXXXX, a taxable Canadian corporation and a private corporation.
Canco and its XXXXXXXXXX subsidiary corporations described in Paragraphs 8 and 9 are collectively referred to hereinafter as the "Canada Group".
10. In addition to the shares of the subsidiaries described in Paragraphs 8 and 9, the assets of the Canada Group include (i) assets used to carry on the Canadian XXXXXXXXXX Services Business, the Canadian XXXXXXXXXX Services Business and the Canadian XXXXXXXXXX Services Business (including cash, accounts receivables, trade receivables, inventory, prepaid expenses, machinery and equipment, furniture and fixtures, and leasehold improvements); (ii) XXXXXXXXXX, and (iii) the Excess Cash, as described in Paragraph 14 below.
11. The liabilities of the Canada Group include (i) accounts payable and other accrued expenses incurred in connection with the Canadian XXXXXXXXXX Services Business, the Canadian XXXXXXXXXX Services business and the Canadian XXXXXXXXXX Services Business; (ii) XXXXXXXXXX; and (iii) XXXXXXXXXX.
12. The Canada Group does not own any property (other than property that should be classified as cash or near cash property) the income from which, for purposes of the Act, would be income from property or income from a specified investment business.
13. XXXXXXXXXX.
14. Earnings of the Canada Group have historically been retained in Canada and have not been distributed to Foreign Pubco. Accordingly, the Canada Group currently holds a significant cash balance, in the form of debt securities including XXXXXXXXXX (the "Excess Cash").
Under the investment guidelines of Canco, the maximum maturity/life of the marketable securities is XXXXXXXXXX months, although the majority of the marketable securities held have a maturity/life of less than XXXXXXXXXX days. Funds are continuously reinvested as investments mature. None of the investments currently owned has a maturity that will extend more than one year after the Transfer Date. It is expected that the Excess Cash will equal approximately US$XXXXXXXXXX at the time the Proposed Transactions are undertaken.
15. XXXXXXXXXX.
16. XXXXXXXXXX.
17. [Reserved]
United States Businesses
18. The Retained Businesses are operated in the United States through approximately XXXXXXXXXX directly and indirectly owned subsidiaries of Foreign Subco 1.
19. The XXXXXXXXXX Services Business is operated in the United States through Foreign Subco 2, Foreign Subco 3, Foreign Subco 4, and Foreign Subco 5.
20. [Reserved]
Proposed Transactions
21. It is currently contemplated that Foreign Pubco will transfer its Canadian, XXXXXXXXX , United States and XXXXXXXXXX Services Businesses to Foreign Spinco, followed by the distribution of the shares of Foreign Spinco to the shareholders of Foreign Pubco, resulting in one United States public company which will (indirectly) carry on the XXXXXXXXXX Services Business (Foreign Spinco) and one United States public company which will (indirectly) carry on the Retained Businesses (Foreign Pubco).
22. [Reserved]
23. [Reserved]
24. Foreign Pubco will form Foreign Spinco as a new LLC under the laws of the State of XXXXXXXXXX. Membership interests in Foreign Spinco will be issued to Foreign Pubco.
25. [Reserved]
26. [Reserved]
Canadian "Butterfly" Restructuring
27. TCo has been formed under the laws of the Province of XXXXXXXXXX as an XXXXXXXXXX. TCo is a private corporation and a taxable Canadian corporation. The authorized capital of TCo consists of the following:
(a) XXXXXXXXXX voting, fully participating common shares (the "TCo Common Shares"); and
(b) XXXXXXXXXX preferred shares ("TCo Preferred Shares") having the following attributes:
(i) each TCo Preferred Share will be redeemable, subject to applicable law, at any time at the option of TCo at a redemption amount (the "Redemption Amount") equal to the aggregate FMV of the consideration paid to TCo on issuance thereof divided by the number of TCo Preferred Shares issued as consideration therefore, plus any declared but unpaid dividends;
(ii) each TCo Preferred Share will be retractable, subject to applicable law, at any time at the option of the holder for an amount equal to the Redemption Amount;
(iii) the holder of each TCo Preferred Share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors of TCo from time to time, which dividend need not also be declared on any other class of shares of TCo;
(iv) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of TCo if the resulting realizable value of the net assets of TCo after payment of the dividends would be less than the aggregate Redemption Amount of all of the TCo Preferred Shares then outstanding;
(v) the holder of each TCo Preferred Share will be entitled, upon the liquidation, dissolution or winding-up of TCo, to a payment in priority to all other classes of shares of TCo of an amount equal to the Redemption Amount therefore to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and
(vi) the holder of each TCo Preferred Share will not be entitled to vote at meetings of shareholders of TCo, other than as provided under the XXXXXXXXXX.
28. On the incorporation of TCo, Foreign Spinco subscribed for 1 common share of TCo for nominal consideration.
29. Newco has been incorporated under the laws of Canada. Newco is a private corporation and a taxable Canadian corporation. The authorized capital of Newco consists of an unlimited number of Newco Common Shares. New Holdco will be incorporated under the laws of XXXXXXXXXX. The authorized capital will consist of XXXXXXXXXX common shares.
30. On the incorporation of Newco, Canco subscribed for 1 Newco Common Share for nominal consideration. On the incorporation of New Holdco, Foreign Pubco will subscribe for 1 common share of New Holdco.
31. Prior to the transactions described below, the number of issued and outstanding Canco Common Shares will be increased from XXXXXXXXXX to XXXXXXXXXX to enable TCo to acquire a number of Canco Common Shares which will give Tco a percentage ownership of all of the issued and outstanding Canco Common Shares which will be equal to the Butterfly Percentage. This increase is authorized by a special shareholder resolution, which is filed with the Registrar. This increase does not affect the total capital of Canco nor does it change the interests, rights or privileges of its shareholder, Foreign Pubco.
In the context of a three-party transfer agreement (the "Three-Party Share Exchange") between Foreign Pubco, Foreign Spinco and TCo:
(a) TCo will agree to pay the purchase price for the Canco Common Shares by issuing the TCo Common Shares to Foreign Spinco having an aggregate FMV at that time equal to the aggregate FMV of the Canco Common Shares so transferred by Foreign Pubco to Tco described in Paragraph 31(b). TCo and Foreign Spinco both will agree that the TCo Common Shares will be issued to Foreign Spinco in respect of and by virtue of the disposition by Foreign Pubco of the Canco Common Shares to TCo;
(b) Foreign Pubco will pay the purchase price for the Foreign Spinco membership interests described in Paragraph 31(c) by transferring a particular number of its Canco Common Shares having an aggregate FMV equal to the Butterfly Percentage of the aggregate FMV of all of its Canco Common Shares to TCo; and
(c) Foreign Spinco will agree to pay the purchase price for the TCo Common Shares by issuing the Foreign Spinco membership interests to Foreign Pubco having an aggregate FMV at that time equal to the aggregate FMV of the Tco Common Shares so issued by Tco to Foreign Spinco described in Paragraph 31(a).
Pursuant to the XXXXXXXXXX, the legal capital of the TCo Common Shares will be increased by an amount equal to the aggregate FMV of the Canco Common Shares at the time they are transferred by Foreign Pubco to TCo as described in Paragraph 31(a).
Immediately following the Three-Party Share Exchange, Foreign Pubco will transfer the remaining Canco Common Shares (that were not acquired by TCo above) to New Holdco in exchange for common shares of New Holdco having an aggregate FMV at that time equal to the aggregate FMV of the Canco Common Shares so transferred to New Holdco.
Pursuant to the XXXXXXXXXX, the legal capital of the New Holdco common shares will be increased by an amount equal to the aggregate FMV of the Canco Common Shares at the time they are transferred by Foreign Pubco to New Holdco as described above.
The Canco Common Shares do not derive their value principally from real property situated in Canada. Accordingly, Foreign Pubco will apply for a clearance certificate under section 116 in respect of the transfers of the Canco Common Shares to Tco and to New Holdco described above, on the basis that any gain realized by Foreign Pubco is not subject to taxation in Canada by virtue of Article XIII of the U.S. Treaty.
Following these transactions, Foreign Spinco will own all of the issued and outstanding shares of TCo. No other person will acquire shares of TCo (except for the TCo Preferred Shares which are issued by Tco to Canco as described in Paragraph 44 and redeemed as described in Paragraph 45) as part of a series of transactions that includes the transfer of the Newco Common Shares described in Paragraph 44.
32. The aggregate FMV, immediately before the transfer of the Newco Common Shares by Canco to Tco described in Paragraph 44, of the Foreign Spinco membership interests owned by Foreign Pubco will be equal to or approximate the amount determined by the formula, on the assumption that Foreign Pubco is the participant, Canco is the distributing corporation and Foreign Spinco is the acquiror,
(A x B/C) + D
as found in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1).
33. Immediately before the transfer of property described in Paragraph 44, the property of Canco will be determined on a consolidated basis by including the appropriate pro rata share of the assets of any corporation over which Canco has the ability to exercise significant influence (being Subco 1, Subco 2, Subco 3, Subco 4, Subco 5, Sub-Subco 1, Sub-Subco 2, Sub-Subco 3, Sub-Subco 4 and Sub-Subco 5), which assets will be classified into the following three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:
(a) cash or near-cash property, comprising all of the current assets of the Canada Group, including cash, marketable securities, accounts receivable, trade receivables, inventory and prepaid expenses;
(b) business property, comprising all of the assets of the Canada Group, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from an active business (other than a specified investment business) including goodwill; and
(c) investment property, comprising all of the assets of the Canada Group, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or from a specified investment business.
For greater certainty, for purposes of this distribution:
(d) any tax accounts such as the balance of any non-capital losses of the Canada Group or the balance of any RDTOH or CDA of the Canada Group, if any, will not be considered property;
(e) XXXXXXXXXX the Excess Cash will be considered cash or near-cash property;
(f) advances to related persons (other than by Canco which advances are described in (h) below) will be considered cash or near-cash property;
(g) Canco will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation, or if Canco in combination with corporations over which it has significant influence have significant influence over that corporation; and
(h) the FMV of the shares of any corporation over which Canco has the ability to exercise significant influence and of any indebtedness receivable by Canco from such a corporation will be allocated among the three types of property described above by multiplying the FMV of the shares of the particular corporations or the amount of indebtedness receivable therefrom, as the case may be, by the proportion that the net FMV of each type of property owned by the particular corporation (determined in accordance herewith) is of the aggregate net FMV of all property owned by such corporation.
34. Since the Canada Group has no property (other than cash and near cash property), the income from which would be considered income from property, nor does the Canada Group carry on any specified investment business, the Canada Group is not expected to have any investment property for the purposes of this distribution. For greater certainty, each investment comprising the Excess Cash will be treated as cash or near cash property.
35. In determining, on a consolidated basis, the net FMV of each of the three types of property of the Canada Group immediately before the transfers of property described in Paragraph 44, the liabilities of Canco and any corporation over which Canco exercises significant influence will be allocated to, and will be deducted in the calculation of the net FMV of, each type of property of Canco or such corporation, as the case may be, in the following manner:
(a) in determining the net FMV of each type of property of a corporation over which Canco exercises significant influence immediately before the transfer described in Paragraph 44, the liabilities of that corporation (other than any amount owing by such corporation to Canco) will be allocated to, and deducted in the calculation of, the net FMV of each type of property of that particular corporation as follows:
(i) current liabilities of such corporation will be allocated to each cash or near-cash property of the corporation in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by such corporation. To the extent that the total amount of current liabilities to be allocated to the cash or near cash property exceeds the total FMV of all the cash or near cash property, such corporation will be considered to have a negative amount of cash or near cash property;
(ii) following the allocation of current liabilities to cash or near-cash property as described in Paragraph 35(a)(i), provided that the net FMV of the cash or near cash property of such corporation is positive, any remaining net FMV of any accounts receivable, trade receivables, inventories and prepaid expenses of such corporation will be reclassified as business property of such corporation and excluded from the net FMV of the cash or near-cash property, to the extent that such property will be collected, sold, used or consumed in the ordinary course of business to which such property relates;
(iii) liabilities, other than current liabilities, of such corporation that relate to a particular property will be allocated to that particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property and liabilities that pertain to a particular type of property, but not to a particular property, will then be allocated to that particular type of property. To the extent that the total amount of liabilities that are to be allocated to a particular type of property as described herein exceeds the total FMV of that type of property, such corporation will be considered to have a negative amount of that type of property; and
(iv) if any liabilities remain after the allocations described above are made, such excess unallocated liabilities will then be allocated to the cash or near cash property, investment property and business property of such corporation, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities. However, where a corporation is considered to have a negative amount of a type of property because of Paragraph 35(a)(i) or (iii), for the purposes of allocating those remaining liabilities, the net FMV of that type of property will be deemed to be nil resulting in none of those remaining liabilities being allocated to that type of property.
(b) in determining, on a consolidated basis, the net FMV of each type of property of Canco immediately before the transfer of property described in Paragraph 44, Canco will include the appropriate pro rata share of the net FMV of each type of property of any corporation over which Canco exercises significant influence and, for greater certainty, the appropriate negative amount of such type of property of any such entity, as determined in accordance with (a) above, and any liabilities of Canco will be allocated to, and be deducted in the calculation of, the net FMV of each type of property of Canco in the following manner:
(i) current liabilities of Canco will be allocated to the cash or near-cash property of Canco in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property of Canco. The allocation of current liabilities as described herein will not exceed the FMV of all the cash or near-cash property of Canco;
(ii) following the allocation of current liabilities to each cash or near-cash property in Paragraph 35(b)(i), any remaining net FMV of any accounts receivable, trade receivable, inventories and prepaid expenses of Canco will be reclassified as business property and excluded from the cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of the business to which such property relates;
(iii) liabilities of Canco, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property but not to a particular property will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property as described herein; and
(iv) if any liabilities remain after the allocations described in Paragraph 35(b)(i) and (iii) are made, such excess unallocated liabilities will then be allocated to the cash or near-cash property, investment property and business property of Canco, on the basis of the relative net FMV of each type of property prior to the allocation of such excess, but after the allocation of the liabilities described in Paragraph 35(b)(i) and (iii).
(c) For greater certainty, for purposes of this distribution:
(i) [Reserved];
(ii) the amount of any deferred income tax will not be considered a liability for the purposes of the Proposed Transactions described herein because such amount does not represent a legal obligation;
(iii) amounts owing to related persons will be considered current liabilities; and
(iv) current liabilities will include amounts normally classified as current liabilities, including accounts payable, bonuses payable, and the current portion of any long term debt.
36. XXXXXXXXXX.
37. XXXXXXXXXX will be considered to relate to the cash or near-cash property of the Canada Group and will be allocated to the cash or near-cash property of the Canada Group for the purposes of Paragraphs 35 and 38. XXXXXXXXXX
38. Canco will transfer property (described in Paragraph 39) to Newco such that, immediately after the transfer by Canco of the Newco Common Shares to Tco described in Paragraph 44, the net FMV of each type of property so transferred to TCo will approximate that proportion of the net FMV of all property of the Canada Group of that type (after allocating and deducting, in the manner described in Paragraphs 33 to 37, the amount of the liabilities assumed by Newco described in Paragraph 39(a) and (b)), determined immediately before the transfer by Canco of the Newco Common Shares to Tco described in Paragraph 44, that:
(i) the aggregate FMV, immediately before the transfer, of all of the Canco Common Shares owned by TCo
is of
(ii) the aggregate FMV, immediately before the transfer, of all the issued and outstanding Canco Common Shares.
The expression "approximate that proportion" described above means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the net FMV of each type of property which TCo has received (or Canco has retained) as compared to what TCo would have received (or Canco would have retained) had it received (or retained) its appropriate pro-rata share of the net FMV of that type of property.
39. The property transferred by Canco to Newco in Paragraph 38 will include any accounts receivable, trade receivables, inventories, prepaid expenses and business assets related to the Canadian XXXXXXXXXX Services Business, the shares of Subco 1 and Subco 2, and a portion of the Excess Cash. XXXXXXXXXX. As consideration for such property, Newco will:
(a) XXXXXXXXXX;
(b) assume an amount of Canco's current liabilities which relate to the Canadian XXXXXXXXXX Services Business; and
(c) issue additional Newco Common Shares to Canco, having an aggregate FMV at that time equal to the amount by which the aggregate FMV of all the property transferred to Newco exceeds the amount of the liabilities assumed by Newco in (a) and (b) above.
XXXXXXXXXX
40. XXXXXXXXXX.
41. [Reserved]
42. Newco will jointly elect with Canco, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to each transfer of eligible property to Newco and in respect of which the Newco Common Shares have been issued as full or partial consideration therefore as described in Paragraph 38. The agreed amount in each election will be as follows:
(a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
(c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).
In addition, in each case, the agreed amount will not exceed the FMV of the property transferred, nor will it be less than the amount permitted under Paragraph 85(1)(b). The amount of any liabilities assumed by Newco which are allocated to a particular property that is the subject of an election under subsection 85(1) as described herein will not exceed the agreed amount for that particular property. XXXXXXXXXX
The amount of the XXXXXXXXXX will not exceed the amount by which the FMV of all of the assets transferred to Newco described in Paragraph 39 exceeds the cost amount of those assets to Newco.
The amount added to the stated capital account maintained for the Newco Common Shares will equal the amount by which the aggregate cost to Newco (determined pursuant to subsection 85(1), where relevant) of the properties transferred to Newco exceeds the aggregate amount of the liabilities assumed by Newco described in Paragraph 39(a) and (b).
43. For the purposes of the joint elections described in Paragraph 42, the reference in subparagraph 85(1)(e)(i) to the "undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" shall be interpreted to mean that proportion of the undepreciated capital cost to Canco of all of the property of that class immediately before the disposition that the FMV at that time of the asset that is transferred is of the FMV at that time of all property of that class.
44. Canco will transfer all of the Newco Common Shares to TCo in consideration for TCo Preferred Shares having an aggregate FMV at that time equal to the aggregate FMV of the Newco Common Shares so transferred to Tco. TCo will jointly elect with Canco, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the Newco Common Shares to TCo. The agreed amount in the election will equal the ACB to Canco of the Newco Common Shares.
45. Immediately following the transfer of the Newco Common Shares described in Paragraph 44, on a contemporaneous basis:
(a) Canco will purchase for cancellation the Canco Common Shares owned by TCo for an amount equal to their FMV. In satisfaction of the purchase price for such shares, Canco will issue to TCo a promissory note, payable to TCo on demand without interest or fixed terms of repayment, having a principal amount and FMV equal to the aggregate FMV of the common shares so purchased for cancellation (the "Canco Purchase Note"). TCo will accept the Canco Purchase Note in full payment of the purchase price of the XXXXXXXXXX Common Shares owned by TCo; and
(b) TCo will redeem all the TCo Preferred Shares owned by Canco for an amount equal to their aggregate Redemption Amount. In satisfaction of the Redemption Amount for such shares, TCo will issue a promissory note, payable to Canco on demand without interest or fixed terms of repayment, having a principal amount and FMV equal to the aggregate Redemption Amount of the TCo Preferred Shares so redeemed (the "TCo Redemption Note"). Canco will accept the TCo Redemption Note in full payment of the redemption price of the TCo Preferred Shares.
46. Immediately following the transactions described in Paragraph 45, the principal amount owing by Canco to TCo under the Canco Purchase Note and the principal amount owing by TCo to Canco under the TCo Redemption Note will be set off in full against each other and each such note will be marked paid in full and cancelled.
47. Prior to the declaration of the First Tco Dividend described in Paragraph 49, Foreign Spinco will be converted from a XXXXXXXXXX LLC into a XXXXXXXXXX "C" corporation XXXXXXXXXX, and its membership interests will become shares of common stock by virtue of such conversion.
The conversion of Foreign Spinco from a XXXXXXXXXX LLC into a XXXXXXXXXX "C" corporation is a continuation type of conversion and it does not result in a disposition of the assets of the LLC.
XXXXXXXXXX, the corporation shall be deemed to be the same entity as the converting LLC and the conversion shall constitute a continuation of the existence of the LLC in the form of such corporation.
XXXXXXXXXX, the corporation shall, for all purposes of the laws of XXXXXXXXXX, be deemed to be the same entity as the LLC, and all the rights, privileges and powers of the LLC, and all property of and debts due to the LLC (including all things and causes of action), shall remain vested in the corporation and shall be the property of such corporation.
XXXXXXXXXX, the existence of the corporation shall be deemed to commence on the date the LLC commenced its existence.
Immediately after Foreign Spinco becomes a "C" corporation, it will be an entity wholly liable to taxation under U.S. tax laws.
Foreign Spinco will remain a "C" corporation for U.S. tax purposes following the Spin-Out.
48. Newco will declare and pay a cash dividend (the "First Newco Dividend") to TCo in an amount equal to a portion of the Excess Cash, transferred to Newco in paragraph 38, less applicable working capital needs (if any) and transfer taxes incurred by Newco on the transfer of property described in Paragraph 38, and less the Canadian dollar equivalent of the amount owing by Foreign Subco 6 to XXXXXXXXXX (the "Foreign Subco 6 Amount").
XXXXXXXXXX. When such transactions occur, it is then expected that Newco will pay that amount as a cash dividend (the "Second Newco Dividend") to TCo.
The purpose of the First Newco Dividend is to enable the cash to be distributed to Foreign Pubco in a manner which does not adversely affect the application of paragraph 55(3)(b). The purpose of these other transactions is to XXXXXXXXXX have the Second Newco Dividend paid by Newco to TCo subsequent to the Spin-Out. The funds relating to the Second Newco Dividend will not be distributed to Foreign Pubco.
Tco will hold the Newco Common Shares as long-term capital investments. There is no current intention for TCo to dispose of the Newco Common Shares. None of the purposes of these dividends is to effect a significant reduction in the portion of the capital gain that, but for such dividends, would have been realized on a disposition at FMV of any share of capital stock immediately before the dividends.
If necessary to fund the First Newco Dividend or the Second Newco Dividend, Subco 1 and Subco 2 will pay dividends to Newco out of the cash which is currently held by them, and which reflects retained earnings in these companies.
49. Prior to the Spin-Out, TCo will declare and pay a cash dividend (the "First TCo Dividend") to Foreign Spinco in an amount equal to the amount of the First Newco Dividend received from Newco as described in paragraph 48. TCo will withhold 5% of the amount of the First Newco Dividend and will remit such amount to the Receiver General for Canada.
Subsequent to the Second Newco Dividend, TCo will declare and pay a cash dividend (the "Second TCo Dividend") to Foreign Spinco equal to the amount of the Second Newco Dividend received from Newco as described in paragraph 48. TCo will withhold 5% of the amount of the Second Tco Dividend and will remit such amount to the Receiver General for Canada.
50. Foreign Spinco will borrow an amount of money from one or more third party lenders (the "External Debt"). Foreign Spinco will declare and pay a dividend to Foreign Pubco equal to the amount of the External Debt plus the amount of the First TCo Dividend described in paragraph 49.
51. Foreign Pubco will utilize the funds received in Paragraph 50 to:
XXXXXXXXXX.
Foreign Pubco represents that, as part of any series of transactions or events which includes the dividends described in ruling D below, no cash will be directly or indirectly contributed to or transferred to Canco or its subsidiaries.
52. Canco, Foreign Pubco, Foreign Spinco and certain subsidiaries thereof (which may include Newco, Subco 1, Subco 2 and TCo) will enter into certain intercompany agreements which will govern the ongoing relationships between Foreign Pubco and its subsidiaries, and Foreign Spinco and its subsidiaries, after the completion of the Proposed Transactions. These agreements will include agreements related to the Proposed Transactions, including a XXXXXXXXXX (which will contain the key provisions required to effect the separation of Foreign Pubco into two separate public entities) and a XXXXXXXXXX (which will allocate the responsibilities of Foreign Spinco and Foreign Pubco with respect to liabilities for taxes, the preparation and filing of tax returns, and tax disputes), as well as transitional services agreements (which will address services to be provided by Foreign Pubco to Foreign Spinco on an interim basis consistent with past practice).
Foreign Pubco and Foreign Spinco will also enter into agreements respecting XXXXXXXXXX. All agreements will be on arm's-length terms.
Except for the XXXXXXXXXX (which must be signed on or around XXXXXXXXXX), no agreements will be entered into by Canco or its subsidiaries prior to the completion of Paragraph 44 of the Proposed Transactions. The only parties to the XXXXXXXXXX are Foreign Pubco and Foreign Spinco and, therefore, Canco or its subsidiaries will not acquire any rights pursuant to this agreement as a party thereto. Further, pursuant to the XXXXXXXXXX, the decision to proceed with the Proposed Transactions remains in the sole discretion of the board of directors of Foreign Pubco (sections XXXXXXXXXX) and Foreign Pubco reserves the right to unilaterally terminate this agreement in its sole discretion (section XXXXXXXXXX).
53. Foreign Pubco will distribute the common stock of Foreign Spinco pro rata to the shareholders of Foreign Pubco as a dividend-in-kind (the "Spin-Out").
54. No property has or will become property of Canco or its subsidiaries, and no liabilities have been or will be incurred by Canco or its subsidiaries, in contemplation of and before the transfer described in Paragraph 44, otherwise than as described herein or as part of the ordinary course of business. Canco will continue to reinvest the Excess Cash in a manner consistent with past practice.
55. None of the shares of Canco, Newco or TCo has been or will be, at any time prior to the completion of the Proposed Transactions described herein:
(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";
(b) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or
(c) the subject of a dividend rental arrangement.
56. Each of Canco (and its subsidiaries), Newco and TCo is or will be a specified financial institution. None of these corporations is a "financial intermediary corporation". The TCo Preferred Shares are not taxable RFI shares.
Each of Canco and Tco will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.
Purposes of the Proposed Transactions
57. Foreign Pubco has made the strategic decision to separate its XXXXXXXXXX Services Business from its Retained Businesses. XXXXXXXXXX
The purpose of transferring property to Newco described in Paragraph 39 (instead of transferring property described in Paragraph 39 directly to TCo) is to ensure that the Canadian component of the reorganization satisfies U.S. tax planning objectives, which require the property of Canco to be transferred to a subsidiary wholly-owned corporation of Canco.
The purpose of Foreign Pubco transferring its remaining Canco Common Shares to New Holdco in exchange for common shares of New Holdco as described in Paragraph 31 is to satisfy U.S. tax planning objectives.
The purpose of establishing Foreign Spinco as a XXXXXXXXXX LLC was to facilitate the U.S. tax planning in respect of the Proposed Transactions. In particular, for U.S. tax purposes, it was considered preferable that Foreign Spinco not initially be treated as a corporation at the time the Canadian XXXXXXXXXX subsidiaries were contributed to Foreign Spinco.
The purpose for converting Foreign Spinco from a XXXXXXXXXX LLC into a XXXXXXXXXX "C" corporation is to ensure that the Spin-Out occurs on a U.S. tax-free basis. In addition, as an independent U.S. public corporation after the worldwide spinout, it is important that Foreign Spinco be a "C" corporation. Further, as a XXXXXXXXXX "C" corporation and a U.S. taxable corporation for U.S. tax purposes, Foreign Spinco will be entitled to a reduced dividend withholding tax rate of 5% under the U.S. Treaty.
Rulings
Provided that the preceding statements constitute complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:
A. (a) The provisions of paragraph 212.1(1)(a) or subsection 84(1) will not apply to deem a dividend to be paid by TCo or to be received by
Foreign Pubco as a result of the Three-Party Share Exchange described in Paragraph 31;
(b) the provisions of paragraph 212.1(1)(b) will apply to reduce
(i) the PUC of the TCo Common Shares that Tco issued to Foreign Spinco to an amount equal to the PUC, immediately before the transfer, of the Canco Common Shares that Foreign Pubco transferred to Tco described in Paragraph 31; and
(ii) the PUC of the New Holdco common shares that New Holdco issued to Foreign Pubco to an amount equal to the PUC, immediately before the transfer, of the Canco Common Shares that Foreign Pubco transferred to New Holdco described in Paragraph 31;
(c) the aggregate ACB to Tco of the Canco Common Shares that Tco acquired from Foreign Pubco on the Three-Party Share Exchange described in Paragraph 31 will be equal to the aggregate FMV at that time of the Canco Common Shares that Tco acquired from Foreign Pubco.
B. The provisions of subsection 85(1) will apply to:
(a) the transfer by Canco of the property to Newco described in Paragraph 38; and
(b) the transfer by Canco of the Newco Common Shares to TCo described in Paragraph 44;
such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof by virtue of paragraph 85(1)(a). In respect of depreciable property, to the extent that the transferor's capital cost exceeds the transferor's proceeds of disposition of the property, the transferee's capital cost of each such property will be determined in accordance with subsection 85(5).
For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfers.
C. [Reserved]
D. Subsection 84(3) will apply:
(a) on the purchase for cancellation, as described in Paragraph 45(a), of the Canco Common Shares owned by TCo, to deem Canco to have paid and TCo to have received; and
(b) on the redemption, as described in Paragraph 45(b), of the TCo Preferred Shares owned by Canco, to deem TCo to have paid and Canco to have received;
a dividend on such class of shares equal to the amount, if any, by which the aggregate amount paid upon such purchase for cancellation or redemption (as the case may be) exceeds the aggregate PUC in respect of such shares immediately before such purchase for cancellation or redemption (as the case may be):
(c) will be included, pursuant to subsection 82(1) and paragraph 12(1)(j), in computing the income of the corporation which received or deemed to have received such dividend;
(d) will be deductible by each recipient of such dividend in computing its respective taxable income pursuant to subsection 112(1);
(e) will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) or (2.4) apply to deny the subsection 112(1) deduction described in (d) above;
(f) will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining the proceeds of disposition to the recipient corporation of the shares which are redeemed or purchased for cancellation;
(g) will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b); and
(h) will not be subject to tax under Part IV.1 or VI.1.
E. The provisions of subsection 112(3) will apply to reduce any loss which would otherwise be determined for the particular holder as a result of the purchase for cancellation of the Canco Common Shares and the redemption of the TCo Preferred Shares described in ruling D.
F. By virtue of the provisions of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in ruling D, provided that
(I) 10% or more of the FMV of the Foreign Spinco Common Shares that Foreign Pubco owns was not, at any time during the course of any series of transactions or events that includes the dividends described in ruling D, derived from the Tco Common Shares that Foreign Spinco owns;
(II) XXXXXXXXXX ; and
(III) as part of the series of transactions or events that includes the dividends described in ruling D(a) and (b) described above, there is not
(a) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(b) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(c) an acquisition of shares of Canco in the circumstances described in subparagraph 55(3.1)(b)(iii); or
(d) an acquisition of property in the circumstances described in subparagraph 55(3.1)(c) or 55(3.1)(d);
which has not been described herein and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
For the purposes of subclause 55(3.1)(b)(i)(A)(II), in determining whether 10% or more of the FMV of the Foreign SpinCo Common Shares that Foreign Pubco owns was derived from the Tco Common Shares that Foreign SpinCo owns as described in ruling F(I) above, the External Debt of Foreign Spinco described in Paragraph 50 will be considered to reduce the FMV of each property of Foreign Spinco pro rata in proportion to the relative FMV of all property of Foreign Spinco.
G. The set-off and cancellation of the Canco Purchase Note held by TCo and the TCo Redemption Note held by Canco described in Paragraph 46 will not give rise to a forgiven amount and neither Canco nor TCo will realize any gain or incur any loss therefrom.
H. XXXXXXXXXX
I. By virtue of subsection 1102(14) of the Regulations, each property which immediately before the transfer described in Paragraph 38, is depreciable property of a prescribed class or separate prescribed class of Canco and which is acquired by Newco on the transfer described in Paragraph 38 will be deemed to be depreciable property of the same prescribed class or separate prescribed class, as the case may be, of Newco.
J. Provided that the condition specified in paragraph 1100(2.2)(f) or (g) of the Regulations is satisfied, paragraph 1100(2.2)(h) of the Regulations will apply so that no amount will be included by Newco under paragraph 1100(2)(a) of the Regulations in respect of depreciable property of a prescribed class that is property acquired by Newco from Canco, on the transfer described in Paragraph 38.
K. Foreign Spinco will not be considered to have disposed of its assets as a result of the conversion of Foreign Spinco from a XXXXXXXXXX LLC to a XXXXXXXXXX "C" corporation, as described in Paragraph 47.
L. The First TCo Dividend and the Second TCo Dividend paid by TCo to Foreign Spinco, as described in paragraph 49, will be subject to withholding tax at a rate of 5% of the gross amount of the dividends under subsection 212(2), Article X of the U.S. Treaty and subsection 10(6) of the ITAR.
M. The provisions of subsections 15(1), 56(2), 56(4), 69(4) or 246(1) will not apply to any of the Proposed Transactions described in Paragraphs 27 to 39 and 42 to 47 XXXXXXXXXX, in and of themselves.
N. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given above.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by CRA on May 17, 2002 and are binding on the CRA provided that the Proposed Transactions (XXXXXXXXXX and the transactions described in paragraphs 48 and 49 which do not take place before the Spin-Out) are completed by XXXXXXXXXX. However, if the First TCo Dividend or the Second TCo Dividend described in paragraph 49 is not effected by XXXXXXXXXX, ruling L will not apply to the First TCo Dividend or the Second TCo Dividend, as the case may be, unless such ruling is expressly extended by CRA.
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.
Opinion
Assuming that proposed subsection 143.3(3) is enacted in substantially the same form as proposed in 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, and provided that the FMV at that time of the Tco Common Shares that Tco issued to Foreign Spinco does not exceed the FMV at that time of the Canco Common Shares that Tco acquired from Foreign Pubco described in Paragraph 31, proposed paragraph 143.3(3)(a) will not apply to reduce the ACB to Tco of its Canco Common Shares.
The foregoing opinion is not ruling and, in accordance with the practice referred to in Information Circular 70-6R5, is not binding on the CRA.
1. We confirm that the CRA's response to Question 16 of the 1996 Corporate Management Tax Conference regarding the word "reorganization" in the context of section 55 still represents our position.
2. XXXXXXXXXX
3. Nothing in this ruling should be construed as implying that CRA has agreed to or reviewed:
(a) the determination of the FMV or the cost amount of any particular asset or the PUC of any shares referred to herein. XXXXXXXXXX ; and
(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. For greater certainty, we are not commenting on any tax consequences relating to the proposed transactions described in Paragraph 48.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Branch
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