2007 Ruling 2006-0217481R3 - Corporate Reorganization

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. Does GAAR apply to the series of transactions described in paragraphs 28, 37, 38, 39, 41, 43 and 44 above? 2. Where (i) a subsidiary (as described in subsection 88(1) of the Act) has a controlling shareholder; (ii) the subsidiary controls another corporation (the "other corporation") that does not have a direct or indirect interest in the subsidiary and (iii) a purchaser with a controlling shareholder directly acquires the other corporation, whether the purchaser would constitute a corporation described in subclause 88(1)(c)(vi)(B)(III) such that the paragraph 88(1)(d) bump would be denied.

Position: 1. Yes. 2. Yes.

Reasons: 1. An almost identical series of transactions was referred to the GAAR committee and they recommended that GAAR be applied to deny the avoidance of subsection 212.1(1). 2. Because the other corporation is a person described in subclause 88(1)(c)(vi)(B)(I) of the Act and the other corporation is a specified shareholder of the purchaser.

XXXXXXXXXX 								2006-021748

XXXXXXXXXX, 2007

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above. We acknowledge receipt of all of the additional information incorporated into the XXXXXXXXXX revised request for an advance income tax ruling. We also acknowledge receipt of the additional information provided to us on XXXXXXXXXX.

Unless otherwise stated, all references herein to a statute are to the Income Tax Act R.S.C. 1985 (5th Supplement), c.1 (the "Act") as amended to the date of this advance income tax ruling and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.

The rulings given herein are based solely on the facts, completed transactions and purposes of the completed transactions described below. Facts and completed transactions in the documents submitted with your request that are not described below do not form part of the facts and completed transactions on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader.

Unless otherwise noted, all references herein to a currency is a reference to Canadian dollars.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

(a) "CRA" means Canada Revenue Agency;

(b) "Non-Residentco #1" means XXXXXXXXXX;

(c) "Non-Residentco #2" means XXXXXXXXXX;

(d) "Non-Residentco #3" means XXXXXXXXXX;

(e) "FA#1" means XXXXXXXXXX;

(f) "Foreignco #1" means XXXXXXXXXX;

(g) "Foreignco #2" means XXXXXXXXXX;

(h) "Foreignco #3" means XXXXXXXXXX;

(i) "Foreignco #4" means XXXXXXXXXX;

(j) "Foreignco #5" means XXXXXXXXXX;

(k) "Foreignco #6" means XXXXXXXXXX;

(l) "Foreignco #7" means XXXXXXXXXX;

(m) "Foreignco #8" means XXXXXXXXXX;

(n) "Foreignco #9" means XXXXXXXXXX;

(o) "Canco #1" means XXXXXXXXXX;

(p) "Canco #2" means XXXXXXXXXX;

(q) "Canco #3" means XXXXXXXXXX;

(r) "Amalco" means the company formed upon the merger of Foreignco #5 and Foreignco #2;

(s) "Exchange" is the XXXXXXXXXX Stock Exchange;

(t) "Foreign Country #1" means XXXXXXXXXX;

(u) "Foreign Country #2" means XXXXXXXXXX;

(v) "Foreign Country #3" means XXXXXXXXXX;

(w) "Foreign Country #4" means XXXXXXXXXX;

(x) "Province" is XXXXXXXXXX;

(y) "State" is the State of XXXXXXXXXX;

(z) "Completed Transactions" means the transactions described in paragraphs 23 to 50 below;

(aa) "fair market value" ("FMV") means the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm's length and under no compulsion to act, expressed in terms of cash;

(bb) "legal stated capital" means the amount included in the capital account of a corporation under applicable corporate law;

(cc) "Treaty" means the 1980 Convention between Canada and the United States of America with Respect to Taxes on Income and Capital as amended by subsequent protocols;

(dd) "adjusted cost base" ("ACB") has, by virtue of subsection 248(1), the meaning assigned by section 54 of the Act;

(ee) "arm's length" has the meaning assigned by subsection 251(1) of the Act;

(ff) "cost amount" has the meaning assigned by subsection 248(1) of the Act;

(gg) "exempt surplus" has the meaning assigned by subsection 5907(1) of the Income Tax Regulations (the "Regulations");

(hh) "foreign accrual property income" ("FAPI") has the meaning assigned by subsection 95(1) of the Act;

(ii) "foreign affiliate" has, by virtue of subsection 248(1), the meaning assigned by subsection 95(1) of the Act;

(jj) "non-resident" has the meaning assigned by subsection 248(1) of the Act;

(kk) "paid-up capital" ("PUC") has, by virtue of subsection 248(1), the meaning assigned by subsection 89(1) of the Act;

(ll) "principal amount" has the meaning assigned by subsection 248(1) of the Act;

(mm) "private corporation" has, by virtue of subsection 248(1), the meaning assigned by subsection 89(1) of the Act;

(nn) "proceeds of disposition" has the meaning assigned by section 54 of the Act;

(oo) "related persons" or "persons related to each other" has the meaning assigned by subsection 251(2) of the Act;

(pp) "series of transaction or events" has the meaning assigned in subsection 248(10) of the Act;

(qq) "specified shareholder" has the meaning assigned by subsection 248(1) of the Act and, where applicable, as modified by subparagraph 88(1)(c.2)(iii) of the Act;

(rr) "taxable Canadian corporation" has, by virtue of subsection 248(1), the meaning assigned by subsection 89(1) of the Act;

(ss) "taxable Canadian property" has the meaning assigned by subsection 248(1) of the Act;

(tt) "taxable dividend" has the meaning assigned by subsection 89(1) of the Act; and

(uu) "taxable surplus" has the meaning assigned by subsection 5907(1) of the Regulations.

Facts

1. Non-Residentco #1 is a company incorporated under the laws of Foreign Country #1, is a resident of Foreign Country #1 for the purposes of the Act and has a XXXXXXXXXX taxation year-end. Non-Residentco #1 has approximately XXXXXXXXXX issued and outstanding shares. These shares are publicly traded on a number of exchanges, including the Exchange.

2. Foreignco #1 was a limited liability company formed under the laws of Foreign Country #4, was a resident of Foreign Country #4 for the purposes of the Act and had a XXXXXXXXXX taxation year-end. As a limited liability company, the capital of Foreignco #1 was in the form of membership interests. On XXXXXXXXXX , all of the membership interests of Foreignco #1 were held by Non-Residentco #1.

3. Foreignco #2 was a limited liability company formed under the laws of Foreign Country #4, was a resident of Foreign Country #4 for the purposes of the Act and had a XXXXXXXXXX taxation year-end. As a limited liability company, the capital of Foreignco #2 was in the form of membership interests. Foreignco #1 owned all of the membership interests in Foreignco #2 immediately before the commencement of the series of transactions described in paragraphs 19 to 22 below.

4. Foreignco #3 is a company incorporated under the laws of Foreign Country #4, is a resident of Foreign Country #4 for the purposes of the Act and has a XXXXXXXXXX taxation year-end. Non-Residentco #1 indirectly owns all of the issued and outstanding shares of Foreignco #3.

5. Non-Residentco #2 is a company incorporated under the laws of Foreign Country #1, is a resident of Foreign Country #1 for the purposes of the Act and has a XXXXXXXXXX taxation year-end. Foreignco #3 owns all of the issued and outstanding shares of Non-Residentco #2. Non-Resident #2 is a disregarded entity for purposes of computing income tax in Foreign Country #4.

6. Foreignco #4 is a company formed under the laws of Foreign Country #4, is a resident of Foreign Country #4 for the purposes of the Act and has a XXXXXXXXXX taxation year-end. On XXXXXXXXXX, Foreignco #3 owned all of the issued and outstanding shares of Foreignco #4.

7. Foreignco #5 was a company formed under the laws of Foreign Country #4, was a resident of Foreign Country #4 for the purposes of the Act and had a XXXXXXXXXX taxation year-end. On XXXXXXXXXX the shares of Foreignco #5 were publicly traded on the Exchange.

8. Canco #1 was a company with unlimited liability and was governed by the laws of the Province. Canco #1 was created in XXXXXXXXXX by virtue of the amalgamation of two predecessor companies. Canco #1 was a taxable Canadian corporation and a private corporation. Canco #1 was a resident of Canada for the purposes of the Act and had a XXXXXXXXXX taxation year-end. Canco #1's business identification number was XXXXXXXXXX and it filed its federal income tax returns at the XXXXXXXXXX Taxation Center. Canco #1 was a disregarded entity for purposes of computing income tax in Foreign Country #4. On XXXXXXXXXX , Foreignco #5 held all of the issued and outstanding shares of Canco #1.

9. Foreignco #6 is a company formed under the laws of Foreign Country #4, is a resident of Foreign Country #4 for the purposes of the Act and has a XXXXXXXXXX taxation year-end. Foreignco #6 holds the shares of approximately XXXXXXXXXX subsidiaries. On XXXXXXXXXX, Foreignco #5 owned XXXXXXXXXX% of the issued and outstanding shares of Foreignco #6. Canco #1 owned the remaining XXXXXXXXXX% of the issued and outstanding shares of Foreignco #6.

10. FA#1 is a company incorporated under the laws of Foreign Country #2, is a non-resident of Canada for the purposes of the Act and has a XXXXXXXXXX taxation year-end. On XXXXXXXXXX, Canco #1 owned all of the issued and outstanding shares of FA#1.

11. Non-Residentco #3 is a company that is domiciled in Foreign Country #3 and is not a related person of Non-Residentco #1. Non-Residentco #3 was initially formed as a XXXXXXXXXX joint venture between Non-Residentco #1 and a corporation dealing at arm's length with Non-Residentco #1.

Transactions Involving Canco #1

12. Prior to the completed transactions described below, the adjusted cost base of the shares of Canco #1 held by Foreignco #5's was $XXXXXXXXXX and the paid-up capital of the shares of Canco #1 held by Foreignco #5 was a nominal amount.

13. Canco #1, and its predecessor corporations, held all of the shares of a corporation ("ACO"), which ownership had originally been established in XXXXXXXXXX. The shares of ACO were transferred to FA#1 on XXXXXXXXXX in exchange for consideration that consisted solely of shares of FA#1. This transaction was executed pursuant to subsection 85.1(3) of the Act such that Canco #1's ACB in the shares of FA#1, that it received in exchange for the ACO shares, was equal to Canco #1's ACB in the shares of ACO. The ACB of the ACO shares to Canco #1 was their value at December 31, 1971 ("valuation day" as defined in paragraph 24(b) of the Income Tax Application Rules ("V-Day")). The V-Day value of the ACO shares was $XXXXXXXXXX. Accordingly, the ACB of the shares of FA#1 was also $XXXXXXXXXX at the time of the exchange of shares.

14. On XXXXXXXXXX, FA#1 sold the shares of ACO to Foreignco #5 in exchange for an interest-bearing note. The estimated fair market value of the shares of ACO at that time was approximately $XXXXXXXXXX, which was equal to the principal amount of the note ("Note A"). The interest earned by FA#1 on Note A has been considered FAPI to Canco #1. Pursuant to subsection 93(1.1) of the Act, a portion of the proceeds of disposition realized by FA#1 was considered to be a dividend of the surplus from ACO to FA#1. On December 2, 2002, the Department of Finance issued a Technical Amendments Bill proposing to amend the Act. Included in these proposals was the introduction of proposed

paragraphs 95(2)(c.1) to (c.6). On February 27, 2004, a revised version of the Technical Amendments, including revisions to proposed paragraphs 95(2)(c.1)-(c.6), was released. For transactions completed after December 2, 2002 but prior to February 27, 2004, the taxpayer could elect to use either the February 27, 2004 or the December 2, 2002 proposals. The key difference between the Feb. 2004 and the Dec. 2002 legislative proposals is the generation, or non-generation, of surplus on a sale of assets by a "specified vendor" to a "specified purchaser". FA#1 was, under both sets of proposals, a "specified vendor". However, Foreignco #5 was not a "specified purchaser" in relation to FA#1, pursuant to the definition of that term in the December 2, 2002 proposals, whereas Foreignco #5 would be a "specified purchaser" in relation to FA#1 pursuant to the revised definition provided in the February 27, 2004 proposals. The effect of a sale of the assets from a specified vendor to a specified purchaser would be that surplus otherwise created is not created until such time as there was a "triggering disposition". Canco #1 filed a statement with its 2004 tax return that it intended to rely on the December 2, 2002 version of these proposals, permitting the recognition of surplus on the sale of the ACO shares by FA#1 to Foreignco #5.

15. On XXXXXXXXXX, the shares of Canco #1 derived their value from the shares of FA#1 held by it (approximately $XXXXXXXXXX) and from Canco #1's XXXXXXXXXX% interest in Foreignco #6 (approximately $XXXXXXXXXX). The shares of Canco #1 did not derive their value principally from real or immovable property situated in Canada. Canco #1 also had a loan payable to Foreignco #5 with a principal amount and fair market value of approximately $XXXXXXXXXX ("Note B"). Canco #1 had no other significant assets or liabilities. On XXXXXXXXXX, Canco #1's ACB of the Foreignco #6 shares held by it was a nominal amount and Canco #1's ACB of the shares of FA#1 held by it was approximately $XXXXXXXXXX , being equal to the amount of previously taxed FAPI in Canco #1 (approximately $XXXXXXXXXX ) plus Canco #1's original ACB of the shares of FA#1 ($XXXXXXXXXX ).

16. The shares of FA#1 derive their value from its only asset, an interest-bearing loan receivable having a principal amount of $XXXXXXXXXX. As of XXXXXXXXXX, Canco #1 has reported all of the interest income earned by FA#1, in respect of Note A, as FAPI.

Initial Borrowing

17. On XXXXXXXXXX Non-Residentco #1 borrowed approximately XXXXXXXXXX Non-Residentco #1 invested approximately XXXXXXXXXX of the borrowed money in Foreignco #1. The remainder of the proceeds (approximately XXXXXXXXXX) was invested in another entity.

18. Foreignco #1 used the XXXXXXXXXX of subscription proceeds (approximately $XXXXXXXXXX) received from Non-Residentco #1 to increase its investment in Foreignco #2.

Acquisition of Foreignco #5

19. On XXXXXXXXXX , through an offering made to all the holders of the common shares of Foreignco #5, Foreignco #2 acquired approximately XXXXXXXXXX% of the issued and outstanding common shares of Foreignco #5 for consideration consisting solely of cash. Upon the completion of a subsequent offering period, Foreignco #2 had acquired more than XXXXXXXXXX% of the issued and outstanding common shares of Foreignco #5. At no time prior to the XXXXXXXXXX offering was Foreignco #2 related to any of the vending shareholders of Foreignco #5.

20. On XXXXXXXXXX, Foreignco #2 paid the cash consideration due to the shareholders who had tendered their shares of Foreignco #5. On that same day, Foreignco #5 and Foreignco #2 merged. Pursuant to the corporate law of the State, the separate existence of Foreignco #2 ceased upon the merger as Foreignco #5 was the surviving corporation of the merger. Foreignco #5 was therefore required to acquire its common shares, which had not been acquired by Foreignco #2 prior to the merger, for cash consideration. As a result of this acquisition, these shareholders ceased to be shareholders of Foreignco #5. The corporation formed upon the amalgamation of Foreignco #2 and Foreignco#5 is hereinafter referred to as Amalco.

21. The total amount paid by Foreignco #2 for the acquisition of, and by Foreignco #5 for the redemption of, all of the shares of Foreignco #5 amounted to approximately XXXXXXXXXX (which is estimated to be $XXXXXXXXXX) plus acquisition costs. Immediately after the merger, Foreignco #1's adjusted cost base in the shares of Amalco was approximately XXXXXXXXXX ($XXXXXXXXXX). The remaining XXXXXXXXXX invested in Foreignco #2 by Foreignco #1 was loaned to Foreignco #3.

Additional Borrowing

22. Non-Residentco #2 borrowed approximately XXXXXXXXXX from Non-Residentco #1 and used XXXXXXXXXX of the funds to acquire all of the membership interests of Foreignco #1 from Non-Residentco #1 in XXXXXXXXXX.

Corporate Reorganization and Other Completed Transactions

23. On XXXXXXXXXX, Amalco formed Foreignco #7 as a limited liability company under the laws of Foreign Country #4. Foreignco #7 was a resident of Foreign Country #4 for the purposes of the Act and had a XXXXXXXXXX taxation year-end. As a limited liability company, the capital of Foreignco #7 was in the form of membership interests. Foreignco #7 was a disregarded entity for purposes of computing income tax in Foreign Country #4.

24. On XXXXXXXXXX, Amalco sold its investment in Canco #1 (its shares with a fair market value of $XXXXXXXXXX and Note B with a fair market value of $XXXXXXXXXX ) to Foreignco #7 for consideration which included the assumption by Foreignco #7 of Note A of $XXXXXXXXXX and the issuance of additional membership interests in Foreignco #7 having a fair market value of $XXXXXXXXXX. This sale of the shares of Canco #1 was exempt from tax in Canada pursuant to paragraph 4 of Article XIII of the Treaty. On XXXXXXXXXX, a section 116 certificate was obtained in respect of the disposition reporting the $XXXXXXXXXX proceeds of disposition.

25. On XXXXXXXXXX, Amalco was converted to a limited liability company and was thereafter a disregarded entity for income tax purposes in Foreign Country #4.

The following transactions or events occurred in the sequence presented, each after any other that preceded it, such that there was no material opportunity for their consequences to be affected by fluctuations in market or foreign exchange conditions between the beginning and the end of the series.

26. On XXXXXXXXXX, Non-Residentco #2 formed Foreignco #8 and owned all of the membership interests in Foreignco #8. Foreignco #8 is a limited liability company formed under the laws of Foreign Country #4. As a limited liability company, the capital of Foreignco #8 is in the form of membership interests. Foreignco #8 is a resident of Foreign Country #4 for the purposes of the Act.

27. On XXXXXXXXXX, FA#1 incorporated a new company, Foreignco #9, in Foreign Country #4. FA#1 was Foreignco #9's sole incorporating shareholder.

28. Foreignco #8 formed Canco #2 on XXXXXXXXXX. Canco #2 was formed as a company with unlimited liability and was governed by the laws of the Province. All of the issued and outstanding shares of Canco #2 were issued to Foreignco #8 on that date.

29. On XXXXXXXXXX, Foreignco #3 transferred all of the issued and outstanding shares of Foreignco #4 to Non-Residentco #2 as a contribution of capital. The fair market value of the shares of Foreignco #4 was estimated to be nil at the time, and therefore no amount was added to the capital accounts of Non-Residentco #2.

30. On XXXXXXXXXX , Non-Residentco #2 transferred all of the issued and outstanding shares of Foreignco #4 to Foreignco #8 as a contribution of capital. The fair market value of the shares of Foreignco #4 was estimated to be nil at the time, and therefore no amount was added to Non-Residentco #2's membership interest in Foreignco #8.

31. On XXXXXXXXXX, FA#1 assigned Note A to Foreignco #4 in exchange for four notes receivable from Foreignco #4. These four notes receivable from Foreignco #4 had a total principal amount equal to the estimated FMV of Note A (including accrued but unpaid interest) of $XXXXXXXXXX and bore interest at the same rate as Note A. The principal and FMV of the four notes issued by Foreignco #4 on XXXXXXXXXX are:

Note #1: principal amount and FMV of $XXXXXXXXXX;

Note #2: principal amount and FMV of $XXXXXXXXXX;

Note #3: principal amount and FMV of $XXXXXXXXXX; and

Note #4: principal amount and FMV of $XXXXXXXXXX.

32. On XXXXXXXXXX, FA#1 declared a dividend on its shares and paid the dividend from its exempt surplus ($XXXXXXXXXX), from its taxable surplus ($XXXXXXXXXX) and from its pre-acquisition surplus ($XXXXXXXXXX) by distributing Note #1 and Note #2 to Canco #1 as a dividend-in-kind. Canco #1 repaid Note B, owing to Foreignco #7, by assigning its right to Note #2 to Foreignco #7. Foreignco #7 used Note #2 to repay a portion of Note A payable to Foreignco #4. The principal amount of Note A was reduced to $XXXXXXXXXX.

33. On XXXXXXXXXX, Foreignco #4 assigned Note A to Foreignco #8 in exchange for a note receivable from Foreignco #8 ("Note C") with a principal amount and FMV equal to the principal amount and FMV of Note A.

34. On XXXXXXXXXX, FA#1 transferred Note #3 to Foreignco #9 in exchange for shares of Foreignco #9. The PUC of the shares of Foreignco #9 issued to FA#1 was equal to the FMV of Note #3, being $XXXXXXXXXX.

35. On XXXXXXXXXX, Non-Residentco #2 transferred all of its membership interests in Foreignco #1 to Foreignco #8 as a contribution of capital. An amount equal to the fair market value of Non-Residentco #2's membership interest in Foreignco #1 (estimated to be $XXXXXXXXXX) was added to Non-Residentco #2's membership interest in Foreignco #8.

36. On XXXXXXXXXX, Foreignco #8 transferred its rights to Note A to Foreignco #1 as a contribution of capital. An amount equal to the fair market value of Note A (including accrued but unpaid interest) of $XXXXXXXXXX was added to Foreignco #8's membership interest in Foreignco #1.

37. On XXXXXXXXXX, Foreignco #8 and Foreignco #1 entered into an agreement to create two different classes of membership interests in Foreignco #1. As a result of this agreement, Foreignco #8 exchanged its existing membership interest in Foreignco #1 for two new membership interests. The first was a Class A voting membership interest with a FMV equal to the FMV of the shares of Canco #1 (estimated to be $XXXXXXXXXX) and the second was a Class B non-voting membership interest with a FMV estimated to be $XXXXXXXXXX, being the FMV of Foreignco #1's interest in Amalco (estimated to be $XXXXXXXXXX) plus the FMV of Note A (estimated to be $XXXXXXXXXX) minus the FMV of the shares of Canco #1 (estimated to be $XXXXXXXXXX).

38. On XXXXXXXXXX , Foreignco #8 transferred the Class A voting membership interest in Foreignco #1 to Canco #2 in exchange for shares of Canco #2. The legal stated capital of the Canco #2 shares issued to Foreignco #8 was equal to the value of the Class A voting membership interest in Foreignco #1 ($XXXXXXXXXX).

39. On XXXXXXXXXX , Amalco distributed all of its membership interests in Foreignco #7 to Foreignco #1 as a dividend-in-kind (estimated FMV of $XXXXXXXXXX ).

40. On XXXXXXXXXX , Foreignco #1 transferred Note A, which was due from Foreignco #7, to Foreignco #7 as a contribution of capital. An amount equal to the FMV of Note A ($XXXXXXXXXX ) was added to Foreignco #1's membership interest in Foreignco #7. Note A was cancelled as a result of this contribution.

41. On XXXXXXXXXX XXXXXXXXXX, Foreignco #7 distributed all of the shares of Canco #1 held by it to Foreignco #1 as a dividend-in-kind ($XXXXXXXXXX). On XXXXXXXXXX, a section 116 certificate was obtained in respect of the disposition. Foreignco #7 realized a capital gain ($XXXXXXXXXX) on the disposition of its shares of Canco #1.

42. On XXXXXXXXXX , Foreignco #1 redeemed its Class B non-voting membership interest from Foreignco #8. Foreignco #1 transferred its membership interest in Amalco as payment for the redemption.

43. On XXXXXXXXXX, Foreignco #1 distributed all of the shares of Canco #1 held by it to Canco #2 as a dividend-in-kind ($XXXXXXXXXX). On XXXXXXXXXX, a section 116 certificate was obtained in respect of the disposition.

44. On XXXXXXXXXX, Canco #1 and Canco #2 combined by means of a short-form vertical amalgamation to form Canco #3. Canco #3 is a company with unlimited liability and is governed by the laws of the Province. Canco #3 is a resident of Canada for the purposes of the Act. As a result of this amalgamation:

(a) all of the property (except any amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the amalgamation became property of Canco #3 by virtue of the amalgamation;

(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation, became liabilities of Canco #3 by virtue of the amalgamation;

(c) the shares of the capital stock of Canco #1 held by Canco #2 immediately prior to the amalgamation were cancelled by virtue of the amalgamation; and

(d) the shares of the capital stock of Canco #2, held by the shareholders of Canco #2 immediately prior to the amalgamation, became shares of the capital stock of Canco #3 held by those shareholders immediately after the amalgamation.

45. In connection with the amalgamation described in paragraph 44 above, in its first taxation year commencing at the time of the amalgamation, Canco #3 will file a designation pursuant to paragraph 88(1)(d) of the Act to increase, within the limits described therein, the ACB of the shares of FA#1 and the shares of Foreignco #6 that Canco #1 owned without interruption at and since the time that Canco #2 last acquired control of Canco #1 and that became property of Canco #3 pursuant to the amalgamation.

The designation in respect of the shares of FA#1 will be computed in the manner specifically set out in paragraph 57 below.

46. On XXXXXXXXXX, FA#1 distributed all of the shares of Foreignco #9 held by it to Canco #3 as a dividend-in-kind ($XXXXXXXXXX).

47. On XXXXXXXXXX, Canco #3 sold all of the shares of FA#1 held by it to Foreignco #8. Canco #3 received a note from Foreignco #8 as payment for the shares of FA#1 sold by it to Foreignco #8.

48. On XXXXXXXXXX, Foreignco #7 was merged into Foreignco #1 to form a new limited liability company ("New LLC").

49. On XXXXXXXXXX, New LLC and Canco #3 approved a Plan of Liquidation pursuant to which New LLC distributed and transferred all of its assets to Canco #3.

50. On XXXXXXXXXX, Foreignco #8 sold the shares of FA#1 to Non-Residentco #3 for approximately $XXXXXXXXXX. Foreignco #8 received cash as payment for the shares of FA#1.

Additional Facts - Corporate Reorganization and Other Completed Transactions

51. The shares of Foreignco #6 and the shares of FA#1 constitute capital property to Canco #1.

52. FA#1 had never paid any dividends prior to Non-Residentco #1's acquisition of control of Foreignco #5.

53. Any property that became property of Canco #3 on the amalgamation of Canco #1 and Canco #2 or any property acquired by any person in substitution therefor was not, and will not be, acquired by any person described in any of subclauses 88(1)(c)(vi)(B)(I), (II) or (III) of the Act as part of the series of transactions or events that includes the amalgamation of Canco #1 and Canco #2 to form Canco #3.

54. Non-Residentco #3 is a corporation described in subclause 88(1)(c)(vi)(B)(III) of the Act on the assumption that the "subsidiary" referred to in that subclause is Canco #1 and that the "parent" referred to in that subclause is Canco #2. However, without considering Foreignco #8's sale of the shares of FA#1 to Non-Residentco #3, as described in paragraph 50 above, Non-Residentco #3 would not be a person described in any of subclauses 88(1)(c)(vi)(B)(I) or (III).

55. Canco #3 does not intend to sell any of the shares of Foreignco #6 held by it to a person that is not a related person of Canco #3. Canco #3 has never paid any dividends to Foreignco #8.

56. None of the taxable dividends received by the recipients described in paragraphs 32, 43 and 46 above would be deductible, pursuant to subsection 112(1), 112(2) or 138(6) of the Act, in computing the income of such recipients.

57. In the designation to be filed pursuant to paragraph 88(1)(d) of the Act, as described in paragraph 45 above, the amount designated by Canco #3 in respect of the shares of FA#1 will not exceed the following amount:

(a) the limit described in subparagraph 88(1)(d)(ii) of the Act with respect to the shares of FA#1, computed without reference to proposed paragraph 88(1)(d.4) of the Act;

minus

(b) the full amount of the dividends that FA#1 declared on its shares and paid to Canco #1, as described in paragraph 32 above;

plus

(c) the portion of the capital gain that Foreignco #7 realized (and reported as taxable income earned in Canada) on its disposition of the shares of Canco #1 to Foreignco #1 as a dividend-in-kind, as described in paragraph 41 above.

Purposes of the Completed Transactions

58. Non-Residentco #1 acquired Foreignco #5 with the strategic objective of becoming a XXXXXXXXXX.

59. Upon the acquisition of Foreignco #5, Non-Residentco #1 determined that it had inherited various organizational and tax inefficiencies within the structure of Foreignco #5. Non-Residentco #1 also had existing operations in most of the countries where Foreignco #6 has affiliates. The Completed Transactions were part of a global restructuring plan to simplify and combine the corporate structure of Foreignco #5 with that of Non-Residentco #1 in a tax efficient manner. For example, Canco #1 had had no operations of its own for at least XXXXXXXXXX years and none were planned. Under the pre-acquisition structure, any taxes that might have been paid by Canco #1 would have been creditable by Foreignco #5 against its taxes payable in Foreign Country #4 such that the organizational structure did not impose significant global tax inefficiencies. Subsequent to Non-Residentco #1's acquisition of control of Foreignco #5, any future taxes payable by Canco #1 could not be utilized as foreign tax credits in Foreign Country #4. Canco #1 was therefore a redundant entity and its continued existence was unnecessary to Non-Residentco #1. The Completed Transactions facilitate similar ongoing operational efficiencies. Similarly, the Completed Transactions provide efficiencies in certain countries' tax regimes, such as jurisdictional tax consolidation.

60. Due to tax considerations in Foreign Country #1, it was imperative that the shares of FA#1 be transferred to an arm's length person prior to XXXXXXXXXX. In particular, failure to do so would have resulted in all of the income earned by FA#1 in calendar XXXXXXXXXX being taxed at an effective rate of approximately XXXXXXXXXX%, as this income would have been fully taxable both in Canada and in Foreign Country #1, with no offsetting foreign tax credits available in Foreign Country #1.

61. The conversion of Amalco to a limited liability company, as described in paragraph 25 above, was undertaken to ensure that Non-Residentco #1's acquisition of Foreignco #5 was tax efficient from a tax perspective in Foreign Country #4. Amalco was converted to a limited liability company so that subsequent transactions would, for Foreign Country #4 income tax purposes, be treated as dispositions of assets, rather than shares, thereby avoiding deemed dividends and the dividend withholding tax related thereto, in Foreign Country #4. The use of a limited liability company also permitted Amalco's operations to remain as part of the consolidated group for Foreign Country #4's income tax purposes.

62. The Completed Transactions described in paragraphs 29, 30 and 35 above were completed to address income tax issues in Foreign Country #1.

Rulings

Provided that:

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, completed transactions and the purposes for the completed transactions; and

(b) there are no other transactions which may be relevant to the rulings requested, our rulings are as follows:

A. Pursuant to the provisions of paragraph 95(2)(f) of the Act, for the purposes of subdivision i of Part I of the Act, the portion of the capital gain that may reasonably be considered to have accrued prior to the time that Foreignco #7 became a foreign affiliate of Canco #2, as a result of the transaction described in paragraph 38 above, will not be included in the capital gain realized by Foreignco #7 from the XXXXXXXXXX disposition of its shares of Canco #1, as described in paragraph 41 above.

B. For the purposes of determining the cost to Canco #3 of each property of Canco #1 that became property of Canco #3 on the amalgamation of Canco #1 and Canco #2 to form Canco #3, as described in paragraph 44 above, each such property will be, for the purposes of paragraph 88(1)(c) of the Act, "ineligible property".

However, without considering Foreignco #8's sale of the shares of FA#1 to Non-Residentco #3, as described in paragraph 50 above, the provisions of subsections 87(11) and 88(1) will apply to the vertical amalgamation of Canco #1 and Canco #2 to form Canco #3 as described in paragraph 44 above such that, for purposes of the Act, the cost to Canco #3 of the shares of the capital stock of FA #1 and Foreignco #6 that Canco #1 owned without interruption at and since the time Canco #2 last acquired control of Canco #1 and that became property of Canco #3 pursuant to the amalgamation, will be deemed to be the amount deemed by paragraph 88(1)(a) to be the proceeds of disposition of the property to Canco #1, plus, subject to the provisions of subparagraphs 88(1)(d)(ii) and (iii), and provided that no such property acquired by Canco #3 on the 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 Canco #1 and the "parent" referred to in those subclauses is Canco #2) as part of the series of the transactions or events that includes the amalgamation, and, on the assumption that such property is capital property, but not depreciable property, such portion of the amount, if any, by which:

(a) the aggregate of the ACB to Canco #2 of each Canco #1 share immediately before the amalgamation

		exceeds

(b) the aggregate of the amounts determined under subparagraphs 88(1)(d)(i) and (i.1),

as is designated by Canco #3 under paragraph 88(1)(d) in respect of the property in its return of income under Part I for the taxation year in which the amalgamation occurred.

C. Subsection 245(2) of the Act will not be applied as a result of the Completed Transactions, in and by themselves, to re-determine the tax consequences confirmed in Rulings A and B above.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding on the CRA in respect of the Completed Transactions described herein.

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or completed transactions described herein.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

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

(a) the FMV or ACB of any property referred to herein;

(b) the PUC of any shares referred to herein;

(c) the principal amount or FMV of any of the indebtedness referred to herein; or

(d) whether or not Non-Residentco #3 is dealing at arm's length with Foreignco #8 at the time that it acquires the shares of FA#1 from Foreignco #8.

Opinions

I. Provided that the proposed amendment to paragraph 95(2)(f) of the Act is enacted in substantially the same form as proposed in the draft legislation released by the Department of Finance on February 27, 2004, we are of the opinion that the portion of the capital gain that may reasonably be considered to have accrued prior to the time that Foreignco #7 became a foreign affiliate of Canco #2, as a result of the transaction described in paragraph 38 above, will not be included in the capital gain realized by Foreignco #7, for purposes of subdivision i of Part I of the Act, from the XXXXXXXXXX disposition of its shares of Canco #1, as described in paragraph 41 above.

II. Provided that the proposed amendment to paragraph 88(1)(d.4) of the Act is enacted in substantially the same form as proposed in the draft legislation released by the Department of Finance on February 27, 2004, we are of the opinion that, for the purposes of subparagraph 88(1)(d)(ii) of the Act, there shall be added to the cost amount to Canco #1, immediately before the amalgamation of Canco#1 and Canco #2, of each of the shares of FA#1 and each of the shares of Foreignco #6, the amount determined by the formula "A x B/C" as described in proposed paragraph 88(1)(d.4) of the Act.

III Subsection 245(2) of the Act will apply to the series of transactions described in paragraphs 28, 37, 38, 39, 41, 43 and 44 above to deduct, in computing the PUC of the shares of Canco #3, the amount by which such PUC, prior to the application of subsection 245(2) of the Act, exceeds the PUC of the shares of Canco #1 at the time of the transaction described in paragraph 43 above.

IV. Paragraph 95(6)(b) of the Act may apply to Canco #3's disposition of the shares of FA#1 to Foreignco #8, as described in paragraph 47 above, such that Canco #3's disposition of the shares of FA#1 to Foreignco #8 is deemed not to have taken place.

Yours truly,

XXXXXXXXXX
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch