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: Will the proposed issuance of shares and debt to a private investor, in and of itself, cause a municipal subsidiary to cease to be tax exempt?
Position: No.
Reasons: In and of itself, the shares and debt proposed to be issued will not result in the municipality holding less than 90% of the capital of the corporation.
XXXXXXXXXX 2007-022474
XXXXXXXXXX , 2007
Dear Sirs:
Re: XXXXXXXXXX
Request for Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX in which you requested an Advance Income Tax Ruling on behalf of the above named taxpayer. We also acknowledge the information provided in subsequent correspondence dated XXXXXXXXXX and during our various conversations in connection with your request (XXXXXXXXXX ).
We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues involved in the Ruling request:
(i) is in an earlier return of the taxpayer or a related person;
(ii) is 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) is under objection by the taxpayer or by a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(v) is the subject of a Ruling previously issued by this Directorate to the taxpayer or a related person.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp,), c. 1, as amended (the "Act") and all terms and conditions used therein that are defined in the Act have the meaning given in such definition unless otherwise indicated. Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Definitions
"A Co" means XXXXXXXXXX ., more particularly described in 1 herein;
"Additional Funding Transaction" means a transaction described in Section XXXXXXXXXX of the Agreement which is intended to allow B Co to invest additional funds in A Co or its businesses including, but not limited to, allowing B Co to make Shareholder Loans and/or B Co entering into an operating lease with A Co to partially finance the assets of a XXXXXXXXXX Business in XXXXXXXXXX ;
"Agreement" means the shareholders' agreement to be entered into by the Municipality and by B Co, more particularly described in 9 and in 15-26 herein;
"B Co" means XXXXXXXXXX ., more particularly described in 3 herein;
XXXXXXXXXX
XXXXXXXXXX
"By-laws" means By-law 1 of A Co dated XXXXXXXXXX ;
"C Co" means XXXXXXXXXX ;
"Customer Service Business" means the business of XXXXXXXXXX ;
"XXXXXXXXXX Business" means the business of XXXXXXXXXX ;
"Interest Rate Determination Time" in respect of a Shareholder Loan means XXXXXXXXXX of each year or the business day immediately prior to XXXXXXXXXX , if XXXXXXXXXX is not a business day;
"Loan Term Sheet" means a term sheet between A Co and B Co outlining the principal terms and conditions of each of the Shareholder Loans to be made by B Co to A Co pursuant to the Agreement and being Schedule D to the Agreement and more particularly described in 10-14 herein;
XXXXXXXXXX
XXXXXXXXXX
"Municipality" means the Municipality of XXXXXXXXXX , more particularly described in 2 herein;
XXXXXXXXXX
"XXXXXXXXXX Business" means the owning and/or operating, directly or indirectly through one or more subsidiaries:
(a) XXXXXXXXXX , and/or
(b) XXXXXXXXXX ;
and includes the provision of XXXXXXXXXX ;
XXXXXXXXXX
"Proposed Transactions" means the proposed transactions set out in 7 to 26 herein;
"Province" means XXXXXXXXXX ;
XXXXXXXXXX
"ROFR" means the right of first refusal set out in Section XXXXXXXXXX of the Agreement and more particularly described in 24 herein;
"Shareholder Loans" means loans to be made by B Co to A Co on terms and conditions consistent with the Loan Term Sheet;
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Facts
1. A Co is a body corporate existing under the laws of the Province and governed by the XXXXXXXXXX . A Co files its tax return as a corporation exempt from taxation under Part I pursuant to paragraph 149(1)(d.5). A Co's business number is XXXXXXXXXX and it files its T2 returns at the XXXXXXXXXX Taxation Centre. A Co's fiscal year end is XXXXXXXXXX . A Co's business currently consists of (and will continue to consist of) the XXXXXXXXXX Business, the Customer Service Business, and the XXXXXXXXXX Business.
2. The Municipality is a municipal corporation created under the laws of the Province, and is exempt from taxation under Part I pursuant to paragraph 149(1)(c). Until the completion of the Proposed Transactions, the Municipality will be the sole shareholder of A Co.
3. B Co is a wholly-owned subsidiary of C Co, both of which are headquartered in XXXXXXXXXX . C Co is a private company involved in XXXXXXXXXX . B Co and C Co each deal at arms length with A Co.
4. All of the shares of A Co that are currently issued and outstanding, being XXXXXXXXXX voting shares, are owned by the Municipality.
5. Pursuant to the By-laws, the annual meeting of the shareholders of A Co shall be held from time to time at the discretion of the board of directors of A Co in accordance with the XXXXXXXXXX . Special meetings of the shareholders of A Co may also be held on such day and at such time as is determined by the board of directors. Shareholders holding not less than XXXXXXXXXX % of the issued voting shares of A Co are entitled to requisition a special meeting of shareholders. Any shareholder entitled to vote at a meeting of shareholders may submit to A Co notice of any proposal that the shareholder wishes to raise at the meeting, and may discuss at the meeting any matter in respect of which that person would have been entitled under the XXXXXXXXXX to present a proposal.
6. All business at any meeting of shareholders is to be decided by majority vote. In general, votes are to be by show of hands, with each hand constituting one vote. However, any person present is entitled, before or after a show of hands, to demand a ballot on any issues. When a ballot is cast, each person is entitled to one vote for each voting share held.
Proposed Transactions
7. A Co will issue XXXXXXXXXX voting shares to B Co making the total number of outstanding voting shares equal to XXXXXXXXXX . The Municipality will continue to hold the remaining XXXXXXXXXX voting shares of A Co.
8. A Co will not be issuing non-voting shares to B Co or to any other person. As such, the Municipality and B Co will be the only shareholders of A Co. However, A Co may, in the future, issue shares to another municipality or to a corporation described in paragraph 149(1)(d.5), although no specific transaction of such nature is contemplated at this time.
9. A Co, B Co and the Municipality will enter into the Agreement. Pursuant to the Agreement, the Municipality and B Co agree to exercise any and all voting rights attaching to the shares owned by them, and to otherwise exercise their influence, in accordance with the Agreement unless the shareholders otherwise expressly and unanimously agree in writing to not do so.
10. B Co will make Shareholder Loans as provided for in the Agreement. The Shareholder Loans will have terms and conditions consistent with the Loan Term Sheet.
11. B Co may demand repayment, on XXXXXXXXXX days notice, of principal amounts outstanding (together with accrued and unpaid interest thereon) under the Shareholder Loans in accordance with a defined schedule. B Co may also demand repayment, on XXXXXXXXXX days notice, of all amounts outstanding under the Shareholder Loans if
a) there is a change in control of A Co for purposes of the Agreement;
b) the Municipality should default in its obligations under the Agreement; or,
c) in the event that the Municipality and B Co are not the only shareholders of A Co, A Co should repay more than XXXXXXXXXX of the principal amount outstanding on loans from other shareholders.
12. A Co may not prepay Shareholder Loans until the XXXXXXXXXX anniversary of a loan. If a prepayment is made after the XXXXXXXXXX anniversary, B Co is entitled to a "top-up" payment equal to the non-discounted value of the interest that would otherwise have been payable from the prepayment date until the XXXXXXXXXX anniversary of the loan.
13. The Shareholder Loans are unsecured and subordinate to senior indebtedness of A Co. A Shareholder Loan is considered to be in default in the event that A Co should default in repayment of its senior indebtedness (or in repayment of loans made to A Co by other shareholders).
14. A Co is to pay interest on the outstanding principal balance of Shareholder Loans in accordance with a formula, XXXXXXXXXX .
15. XXXXXXXXXX
16. A Co shall have XXXXXXXXXX directors for so long as the Municipality and B Co are the only shareholders of A Co.
17. B Co's Interest in A Co will be no more than XXXXXXXXXX % of the total shareholders' Interests in A Co. As such, B Co will be entitled to appoint a maximum of XXXXXXXXXX of the directors of A Co.
18. Pursuant to the Agreement, a quorum for the purposes of a meeting of the board of directors means a majority of directors present, provided that at least one director appointed by each of the Municipality and B Co are present. As such, at any meeting of the board of directors of A Co, B Co would, if its Interest entitled it to appoint XXXXXXXXXX directors, have a minimum of XXXXXXXXXX % (i.e., XXXXXXXXXX of XXXXXXXXXX directors present) and a maximum of XXXXXXXXXX % of the votes (i.e., XXXXXXXXXX of XXXXXXXXXX directors present).
19. The Agreement governs the circumstances under which shares of A Co may be transferred by the Municipality or by B Co. Where an offer is made to any shareholder ("the Offeror") of A Co to purchase all but not less than all of the shares and all but not less than all of the loans held by the shareholder (a "Third Party Offer"), the Offeror shall, before accepting the Third Party Offer, deliver a notice in writing (a "Sale Notice") to the other shareholders of A Co ("the Offerees") and offering to sell such shares and loans (collectively, the "Offered Shares/Loans") to the Offerees, for the price per Share, and per face dollar amount of loans set out in the Third Party Offer and on and subject to the other terms and conditions of the Third Party Offer. If there is more than one Offeree, the Offered Shares/Loans shall be offered to Offerees in proportion to their then current shareholding in A Co. Each Offeree shall have the right, exercisable by giving notice (an "Acceptance Notice") in writing within XXXXXXXXXX days after receipt of the Sale Notice ("the Acceptance Period") to purchase all, but not less than all of the Offered Shares/Loans in accordance with the terms set out in the Sale Notice.
20. In the event that no Acceptance Notice is received from an Offeree within the Acceptance Period, the Offeree is deemed to have refused the Offered Shares/Loans offered in the Sale Notice and the Offered Shares/Loans offered to that Offeree shall be offered to any Offerees who have given an Acceptance Notice. If there is more than one Offeree who has delivered an Acceptance Notice, such offer shall be made in proportion to their then current shareholdings.
21. If no Acceptance Notices are given during the Acceptance Period, the Offeror may sell the Offered Shares/Loans to the third party at a price not less than the price set forth in the Sale Notice and on terms not more favourable to the third party than the terms set forth in the Sale Notice. If no such sale is completed within XXXXXXXXXX days following the expiration of the Acceptance Period, the Offeror shall be required, before transferring any of the Offered Shares/Loans, to again offer such Offered Shares/Loans in accordance with the steps set out in 19 and 20, above.
22. In any event, a shareholder of A Co may not accept any offer from a third party for less than all of the shares and shareholder loans owned by the shareholder.
23. If an Offeror delivers a Sale Notice, the Offerees may, during the Acceptance Period, as an alternative to delivering an Acceptance Notice, deliver notice in writing to the Offeror that they wish to sell all of their shares and shareholder loans to the third party (a "Come-Along Notice"). Upon receipt of a Come-Along Notice, the Offeror may sell the Offered Shares/Loans to the third party only if the third party also makes an offer to the Offerees who have given a Come-Along Notice to purchase all of the shares and shareholder loans owned by such Offeree(s), on terms and conditions no less favourable than the terms set out in the Sale Notice.
24. The Agreement includes the ROFR in favour of B Co which provides that B Co shall have the right to purchase shares or loans of A Co held by the Municipality in the following circumstances and pursuant to the following terms and conditions:
XXXXXXXXXX
25. The Agreement provides further provisions governing the ability or requirement of shareholders to sell their shares and shareholder loans in circumstances where there has been a material change or material default for purposes of the Agreement, or in the event that a shareholder would become bankrupt or insolvent.
26. If A Co issues additional voting shares, non-voting shares and/or shareholder loans, then each then existing shareholder shall have the right to subscribe for such number of additional voting shares, non-voting shares and/or shareholder loans to maintain their pro-rata holding of the voting shares, non-voting shares and shareholder loans, as applicable, in A Co.
Purpose of the Proposed Transactions
The purpose of the Proposed Transactions is to allow B Co to invest in A Co by way of the acquisition of voting shares and the making of Shareholder Loans, and to set out the respective rights and responsibilities arising from the ownership of voting shares of A Co by the Municipality and by B Co and the holding of Shareholder Loans by B Co.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our rulings are as follows:
We confirm that
A. A Co's issuance to B Co of the voting shares as described in 7 and the Shareholder Loans as described in 10 will not, in and of itself, preclude A Co from being a corporation described in paragraph 149(1)(d.5); and
B. Subsection 149(1.1) would not, solely by virtue of the ROFR described in 24, apply at a particular time to deem A Co not to be a person described in paragraph 149(1)(d.5).
Opinions
The following opinion is given provided that subsection 148(5) of the proposed legislation contained in Bill C-33 tabled in the House of Commons on November 22, 2006 (now Bill C-10), which amends subsection 149(1.3) as applicable to taxation years that begin after December 20, 2002 is enacted as proposed:
We confirm that paragraph 149(1.3)(b) will not apply to cause paragraph 149(1)(d.5) not to apply to the taxable income of A Co solely by virtue of B Co holding an Interest in A Co as described in 15, provided such Interest does not exceed XXXXXXXXXX % of all Interests in A Co and provided further that the preceding statements comprise a complete and accurate disclosure of all relevant facts and proposed transactions.
Nothing in this Advance Income Tax Ruling should be construed as implying that we are confirming that A Co is, or has been for any particular period, an entity described in paragraph 149(1)(d.5). In particular, the question as to what income of A Co, if any, for a particular period is income from activities carried on outside the geographical boundaries of the municipality is a question of fact which must be determined on an on-going basis. Such determination is the responsibility of the Canada Revenue Agency Compliance Programs Branch.
The above Advance Income Tax Rulings, which are based on the Act in its present form and does not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and is binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX .
This letter is based solely on the facts and proposed transactions described above. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
Yours truly,
XXXXXXXXXX
Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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