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: Whether a proposed spin-off is exempt from the application of subsection 55(2)
Position: Yes
Reasons: It meets the requirements of 55(3)(b)
XXXXXXXXXX Marc Edelson
XXXXXXXXXX , 2008
Dear XXXXXXXXXX :
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge your subsequent communications with us in respect of this ruling.
Preliminary Matters
To the best of your knowledge and that of the officers of the taxpayers, none of the issues involved in this ruling request is:
(a) in an earlier return of the taxpayers or any related person;
(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or any related person;
(c) under objection by the taxpayers or any related person;
(d) before the courts; or
(e) the subject of a ruling previously considered by the Directorate.
Except as otherwise stated, a reference in this ruling application to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act.
DEFINITIONS:
In this letter, the following terms have the meanings specified and, where the circumstances so require, the singular should be read as plural and vice versa:
"acquiror" has the meaning assigned in the definition of "specified corporation" in subsection 55(1);
"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended;
"adjusted cost base" has the meaning assigned by section 54;
"agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in an election under subsection 85(1);
"Amalco" means the corporation resulting from the amalgamation of Spinco and Bco as set out in Paragraph 32;
"Amalco Common Shares" means the common shares of Amalco;
"Amalco Stock Option" has the meaning assigned by Paragraph 32(f);
"arm's length" has the meaning assigned by section 251;
"BCA" means the XXXXXXXXXX Business Corporations Act, XXXXXXXXXX , as amended;
"Bco" means XXXXXXXXXX ., as described in Paragraph 5;
"Bco Shares" means the common shares of XXXXXXXXXX ., as described in Paragraph 6;
"Butterfly Proportion" means the fraction A/B where:
A is the net fair market value of the Spin-off Property to be transferred by DC to Spinco as described in Paragraph 28 determined immediately before such transfer; and
B is the net fair market value of all property owned by DC immediately before the transfer of the Spin-off Property to Spinco as described in Paragraph 28;
"capital property" has the meaning assigned by section 54;
"Cco" means XXXXXXXXXX , a corporation existing under the laws of XXXXXXXXXX ;
"controlled foreign affiliate" has the meaning assigned in subsection 95(1);
"cost amount" has the meaning assigned by subsection 248(1);
"CRA" means the Canada Revenue Agency;
"DC" means XXXXXXXXXX ., a corporation existing under the BCA, as described in Paragraphs 1 to 3;
"DC Butterfly Share Redemption Amount" has the meaning assigned by Paragraph 23(b)(i);
"DC Butterfly Shares" means the new class of special shares in the capital of DC described in Paragraph 23(b);
"DC Common Shares" means the common shares in the capital of DC described in Paragraph 3;
"DC DSU" means a deferred share unit under the DC DSU Plan, as described in Paragraph 14;
"DC DSU Plan" means the deferred share unit plan of DC, as described in Paragraph 14;
"DC New Common Shares" means the new common shares of DC described in Paragraph 23(a);
"DC Redemption Note" means the promissory note to be issued by DC as described in Paragraph 30;
"DC Shareholder" means a holder of DC Common Shares;
"DC Stock Option" means a right to acquire one DC Common Share under the DC Stock Option Plan, as described in Paragraph 13;
"DC Stock Option Plan" means the existing stock option plan of DC as described in Paragraph 13;
"Dco" means XXXXXXXXXX ., a corporation existing under the laws of XXXXXXXXXX ;
"designated stock exchange" has the meaning assigned in subsection 248(1);
"disposition" has the meaning assigned in subsection 248(1);
"Dissenting Shareholder" means a shareholder of DC who dissents from the Plan of Arrangement, as described in Paragraph 22;
"distribution" has the meaning assigned by subsection 55(1);
"Eco" means XXXXXXXXXX ., a corporation existing under the laws of XXXXXXXXXX ;
"Effective Date" means the effective date of the Plan of Arrangement;
"excluded property" has the meaning assigned by subsection 95(1);
"exempt surplus" has the meaning assigned by subsection 5907(1) of the Regulations;
"fair market value" means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length;
"Holdco" means XXXXXXXXXX ., a corporation existing under the laws of XXXXXXXXXX ;
"In the Money Amount" means, in relation to a particular stock option in respect of which the fair market value of the shares that are the subject of the option exceeds the exercise price of the option, the amount of such excess;
"Keepco 1" means XXXXXXXXXX ., a corporation existing under the laws of XXXXXXXXXX ;
"Keepco 2" means XXXXXXXXXX ., a corporation existing under the laws of XXXXXXXXXX ;
"Keepco 3" means a corporation to be established by Holdco under the laws of XXXXXXXXXX ;
"New DC Stock Options" has the meaning assigned by Paragraph 26;
"paid-up capital" has the meaning assigned by subsection 89(1);
"Paragraph" refers to a numbered paragraph in this letter;
"Participant" means a DC Shareholder, other than a Dissenting Shareholder;
"Plan of Arrangement" means the proposed plan of arrangement under the BCA to effect the divisive reorganization described in Paragraphs 23 to 26 and 28 to 32;
"Proposed Transactions" means the transactions referred to in Paragraphs 15 to 32;
"public corporation" has the meaning assigned by subsection 89(1);
"recognized stock exchange" has the meaning assigned by subsection 248(1);
"Regulations" refers to the Income Tax Regulations;
"related person" has the meaning assigned by subsection 251(2);
"restricted financial institution" has the meaning assigned by subsection 248(1);
"series of transactions or events" has the extended meaning assigned by subsection 248(10);
"short-term preferred share" has the meaning assigned by subsection 248(1);
"Spinco" means the taxable Canadian corporation described in Paragraph 19;
"Spinco Common Shares" means the common shares of Spinco, as described in Paragraph 19(a);
"Spinco Redemption Note" means the promissory note to be issued by Spinco as described in Paragraph 29;
"Spinco Reorganization Share Redemption Amount" has the meaning assigned by Paragraph 19(b)(i);
"Spinco Reorganization Shares" means the class of preferred shares in the capital of Spinco described in Paragraph 19(b);
"Spinco Stock Options" has the meaning assigned by Paragraph 26;
"Spin-off Property" means all of the Bco Shares held by DC immediately prior to the implementation of the Plan of Arrangement;
"stated capital account" has the meaning assigned by section 26 of the BCA;
"Stock Exchange" means the XXXXXXXXXX Stock Exchange;
"subject corporation" has the meaning assigned by subsection 186(3);
"subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);
"taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
"taxable preferred share" has the meaning assigned by subsection 248(1).
FACTS
General Facts Relating to DC
1. DC is a public corporation and a taxable Canadian corporation and is governed by the BCA. DC is not a subject corporation. DC files its corporate tax returns at the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office of the CRA. Its business number is XXXXXXXXXX . DC's head office is located in XXXXXXXXXX .
2. DC is the successor corporation to XXXXXXXXXX ., which was incorporated under the BCA in XXXXXXXXXX .
3. The authorized capital of DC consists of an unlimited number of common shares and an unlimited number of preferred shares. As of XXXXXXXXXX , the outstanding capital of DC consisted of XXXXXXXXXX DC Common Shares. The DC Common Shares trade on the Stock Exchange under the symbol "XXXXXXXXXX ". Based on the closing price of the DC Common Shares on the Stock Exchange on XXXXXXXXXX of $XXXXXXXXXX , the aggregate fair market of all of the DC Common Shares was approximately $XXXXXXXXXX .
4. To the knowledge of the directors and senior officers of DC, as of the date hereof, no person or related group of persons beneficially owns, directly or indirectly, 10% or more of the DC Common Shares. However, based on the most recent publicly available information and on statutory notices filed as required under applicable securities regulation, DC has determined that:
XXXXXXXXXX
General Facts Relating to Bco, Cco, Dco, Eco, Holdco, Keepco 1 and Keepco 2
5. Bco is a taxable Canadian corporation and a subsidiary wholly-owned corporation of DC. Bco files its corporate tax returns at the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office of the CRA. Its business number is XXXXXXXXXX .
6. The authorized capital of Bco consists of an unlimited number of common shares (the "Bco Shares") and an unlimited number of preferred shares issuable in series. The outstanding capital of Bco consists of XXXXXXXXXX Bco Shares, all of which are held by DC.
7. Cco is a controlled foreign affiliate and a subsidiary wholly-owned corporation of DC.
8. Holdco is a subsidiary wholly-owned corporation and controlled foreign affiliate of DC.
9. Dco, Eco, Keepco 1 and Keepco 2 are controlled foreign affiliates of DC and subsidiary wholly-owned corporations of Holdco.
Description of DC's Business Operations
10. XXXXXXXXXX
11. DC intends to spin-off the XXXXXXXXXX business in Bco, Cco, Dco and Eco and, except as described in paragraph 14.1 below, it intends to retain the XXXXXXXXXX businesses.
12. XXXXXXXXXX
DC Stock Options and DC DSUs
13. DC has a stock option plan (the "DC Stock Option Plan") for directors, officers and employees of DC. Under the terms of the DC Stock Option Plan, each DC Stock Option entitles the holder upon vesting (and other than in a "blackout period") to acquire one DC Common Share at an exercise price equal to the weighted average trading price of the DC Common Shares on the Stock Exchange during the five trading days preceding the date such DC Stock Option was granted. As of XXXXXXXXXX , there were XXXXXXXXXX DC Stock Options outstanding.
14. DC has a deferred share unit plan (the "DC DSU Plan") for directors of DC and certain key employees and U.S. employees. Each DC DSU is represented by a bookkeeping entry in the books of DC. Upon a holder of DC DSU's ceasing to be an employee of DC, such holder's DSU's are redeemed for a cash payment equal to the number of DSUs credited to the notional account of the holder on the books of DC multiplied by the weighted average trading price of the DC Common Shares on the Stock Exchange during the five trading days preceding the date of payment. The DC DSU Plan is a prescribed plan or arrangement as described in paragraph 6801(d) of the Regulations. As of XXXXXXXXXX , there were XXXXXXXXXX DC DSU's outstanding.
Possible Sale of Keepco 1 Shares
14.1 XXXXXXXXXX
PROPOSED TRANSACTIONS
Packaging of DC's XXXXXXXXXX Business Under Bco
15. If the sale of the Keepco 1 shares has not occurred as described above in paragraph 14.1, Holdco will establish Keepco 3 and will transfer its shares of Keepco 1 and Keepco 2 to Keepco 3 in exchange for additional shares of Keepco 3. Keepco 3 will upon its formation be a controlled foreign affiliate of DC and a subsidiary wholly-owned corporation of Holdco.
16. Holdco will distribute to DC, as a dividend, either (i) all of its shares of Keepco 3, if the sale of the Keepco 1 shares as described above in paragraph 14.1 has not occurred and the transactions described above in paragraph 15 have occurred, or (ii) all of its shares of Keepco 2, if the sale of the Keepco 1 shares has occurred as described above in paragraph 14.1. As a result, Holdco's only material assets will be its shares of Dco and Eco, both of which form part of DC's XXXXXXXXXX business.
17. Holdco currently has exempt surplus of approximately $XXXXXXXXXX . The Keepco 1 and Keepco 2 shares are excluded property and currently have an aggregate adjusted cost base to Holdco of approximately $XXXXXXXXXX and a fair market value that is no greater than the exempt surplus amount of Holdco.
18. DC will transfer all of its shares of Holdco and Cco to Bco in exchange for Bco Shares. DC and Bco will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of the Holdco and Cco shares to Bco. The agreed amount will not exceed the fair market value of the transferred property, nor will it be less than the amount permitted under paragraph 85(1)(c.1). As a result, Bco will own all of DC's XXXXXXXXXX business including the parts of that business carried on through Cco and Holdco (the latter, through Dco and Eco).
Incorporation of Spinco
19. A new corporation ("Spinco") will be incorporated under the BCA and will be a taxable Canadian corporation. Prior to the remaining Proposed Transactions, Spinco will not have any assets or liabilities. No shares of Spinco will be issued on incorporation or prior to the issue of Spinco Common Shares as described in Paragraph 25. Spinco's Articles of Incorporation will provide that its authorized capital will include:
(a) common shares ("Spinco Common Shares"), each of which will be a fully participating voting common share with the holder thereof being entitled to one vote at each meeting of the shareholders of Spinco; and
(b) preferred shares ("Spinco Reorganization Shares") having the following attributes:
(i) each Spinco Reorganization Share will be redeemable, subject to applicable law, at any time at the option of Spinco at a redemption amount equal to the aggregate fair market value of the Spin-off Property at the time of its transfer to Spinco as described in Paragraph 28 less the value of the non-share consideration to be provided by Spinco, divided by the number of Spinco Reorganization Shares issued as consideration for such transfer, plus any declared but unpaid dividends thereon (the "Spinco Reorganization Share Redemption Amount");
(ii) each Spinco Reorganization Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the Spinco Reorganization Share Redemption Amount;
(iii) the holder of each Spinco Reorganization Share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors of Spinco from time to time, which dividend need not also be declared on any other class of shares of Spinco;
(iv) there will be a provision restricting the payment of dividends on other classes of shares so that no dividends may be paid on any other class of shares of Spinco if the resulting realizable value of the net assets of Spinco after the payment of the dividends would be less than the aggregate of the Spinco Reorganization Share Redemption Amount relating to all of the Spinco Reorganization Shares then outstanding;
(v) for the purpose of subsection 191(4), the terms and conditions of the Spinco Reorganization Shares to be issued as described in Paragraph 28 will, at the time of their issue, specify an amount in respect of each Spinco Reorganization Share. The amount to be specified in respect of each Spinco Reorganization Share will:
(A) be pursuant to a resolution of the board of directors of Spinco;
(B) be expressed as a dollar amount;
(C) not be determined by a formula; and
(D) not exceed the net fair market value of the property received by Spinco in consideration for its issue;
(vi) the holder of each Spinco Reorganization share will be entitled, upon the liquidation, dissolution or winding-up of Spinco, to a payment of an amount equal to the Spinco Reorganization Share Redemption Amount to the extent of the amount of value of property available under applicable law for payment to shareholders upon such liquidation, dissolution or winding-up, but will be entitled to no more than the amount of that payment; and
(vii) the holder of each Spinco Reorganization Share will not be entitled to vote at meetings of shareholders of Spinco, other than as provided by the BCA.
Shareholder Approval and Dissent Rights
20. A management information circular will be mailed to holders of DC Common Shares in contemplation of a meeting of those holders to, among other things, approve the Plan of Arrangement.
21. Subject to, among other things, the required shareholder and court approvals, the Proposed Transactions described in Paragraphs 23 to 27 and 29 to 32 will be undertaken pursuant to the Plan of Arrangement under the BCA. With the exception of the filing of any elections under the Act, these transactions will occur by virtue of the Plan of Arrangement and will be designated in the Plan of Arrangement to occur on the Effective Date.
22. Each DC Shareholder will be entitled to dissent from the Plan of Arrangement in accordance with the provisions of the Plan of Arrangement and the BCA. Under the Plan of Arrangement, any DC Shareholder who so dissents (a "Dissenting Shareholder") will be considered to have ceased to be a shareholder of DC, at the time that the Plan of Arrangement becomes effective, but immediately before any other transactions that will occur under the Plan of Arrangement. Accordingly, the DC Common Shares held by a Dissenting Shareholder will be considered to have been purchased by DC pursuant to the exercise of a statutory right of dissent by the Dissenting Shareholder and will no longer be considered to be outstanding for the purpose of the remaining corporate law transactions under the Plan of Arrangement. After the completion of the Plan of Arrangement, each such Dissenting Shareholder will be entitled to be paid the fair value of its DC Common Shares in respect of which the right of dissent was exercised.
Reorganization of DC's Share Capital
23. The articles of DC will be amended to increase the voting rights of the DC Common Shares to two votes per share (the purpose of which is to create a distinction between the DC Common Shares and the newly authorized DC New Common Shares in order to support their being treated as separate classes of shares under the BCA) and to create the following new classes of shares:
(a) common shares ("DC New Common Shares"), each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of the shareholders of DC, but which otherwise will have attributes the same as the DC Common Shares; and
(b) special shares ("DC Butterfly Shares") with the following attributes:
(i) each DC Butterfly Share will be redeemable, subject to applicable law, at any time at the option of DC at a redemption amount equal to the aggregate fair market value of all of the DC Common Shares outstanding immediately before the exchange of DC Common Shares described in Paragraph 24, multiplied by the Butterfly Proportion, then divided by the number of issued and outstanding DC Butterfly Shares, plus any declared but unpaid dividends thereon (the "DC Butterfly Share Redemption Amount");
(ii) each DC Butterfly Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the DC Butterfly Share Redemption Amount;
(iii) the holder of each DC Butterfly Share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors of DC from time to time, which dividend need not also be declared on any other class of shares of DC;
(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 DC if the resulting realizable value of the net assets of DC after payment of the dividends would be less than the aggregate of the DC Butterfly Share Redemption Amount relating to all of the DC Butterfly Shares then outstanding;
(v) for the purpose of subsection 191(4), the terms and conditions of the DC Butterfly Shares to be issued as described in Paragraph 24 will, at the time of their issue, specify an amount in respect of each DC Butterfly Share. The amount to be specified in respect of each DC Butterfly Share will:
(A) be pursuant to a resolution of the board of directors of DC;
(B) be expressed as a dollar amount;
(C) not be determined by a formula; and
(D) will not exceed the fair market value of the property received by DC in consideration for its issuance;
(vi) the holder of each DC Butterfly Share will be entitled, upon the liquidation, dissolution or winding-up of DC, to a payment in priority to all other classes of shares of an amount equal to the DC Butterfly Share Redemption Amount to the extent of the amount of value of property available under applicable law for payment to shareholders upon such liquidation, dissolution or winding-up, but will be entitled to no more than the amount of that payment; and
(vii) the holder of each DC Butterfly Share will not be entitled to vote at meetings of shareholders of DC, other than as provided by the BCA.
Exchange of DC Common Shares and Share Consolidation
24. Each Participant will exchange each of the Participant's DC Common Shares for consideration consisting of XXXXXXXXXX a DC New Common Share and XXXXXXXXXX a DC Butterfly Share. Each Participant will receive an aggregate number of DC New Common Shares and DC Butterfly Shares rounded down to the nearest whole number. Fractional shares will not be issued to any Participant. Any participant entitled to a fractional share will, following completion of the Plan of Arrangement, receive an amount of cash from DC in lieu of the fractional share, equal to the fair market value of the fractional share. In connection with the exchange:
(a) the DC Common Shares so exchanged will be cancelled;
(b) the aggregate addition to the stated capital in respect of the DC New Common Shares and the Butterfly Shares to be issued by DC on the exchange described in this Paragraph will not exceed the paid-up capital of the DC Common Shares (excluding any DC Common Shares owned by the Dissenting Shareholders) immediately before the exchange, less the amount of cash paid in lieu of fractional shares. For greater certainty, the aggregate paid-up capital of the DC Common Shares, less the amount of cash paid for fractional shares, will be allocated between the DC New Common Shares and the DC Butterfly Shares based on the proportion that the fair market value of the DC New Common Shares or the DC Butterfly Shares, as the case may be, is of the fair market value of all new shares issued by DC in the exchange;
(c) DC will not file a joint election under the provisions of subsection 85(1) with any Participant in respect of this exchange; and
(d) the DC New Common Shares will be listed for trading on the Stock Exchange.
Transfer of DC Butterfly Shares to Spinco
25. Each Participant will transfer all of such Participant's DC Butterfly Shares to Spinco in exchange for Spinco Common Shares. As sole consideration for the DC Butterfly Shares transferred to it, Spinco will issue Spinco Common Shares to each Participant, on the basis of one Spinco Common Share for each DC Butterfly Share transferred by the particular Participant. In connection with such exchange:
(a) It is not contemplated that Spinco will file a joint election under the provisions of subsection 85(1) with any Participant in respect of this transfer;
(b) Pursuant to the BCA, the amount added to the stated capital of the Spinco Common Shares on such transfer will be an amount equal to the aggregate paid-up capital of the transferred DC Butterfly Shares; and
(c) The Spinco Common Shares will be listed on a designated stock exchange at the time of their issue.
The fair market value, immediately before the transfer described in Paragraph 28, of each Participant's Spinco Common Shares will equal or approximate the amount determined by the formula: (A x B/C) + D in respect of such Participant, as set out in subparagraph (b)(iii) of the definition "permitted exchange" in subsection 55(1). In this paragraph, "approximate the amount" means that the discrepancy of the amount, if any, between the fair market value of the Spinco Common Shares received by a particular Participant and the fair market value of the Spinco Common Shares that the particular Participant would have received had the Participant received its proportionate number of Spinco Common Shares, will not exceed 1% of the amount so determined under such formula.
Replacement of Existing DC Stock Options
26. Immediately after the transfer of the DC Butterfly Shares to Spinco described in Paragraph 25, the DC Stock Options will be exchanged for new stock options issued by DC and Spinco. In particular, each holder of DC Stock Options will dispose of a portion of such holder's respective rights under the DC Stock Options to each of DC and Spinco in consideration for the issuance to the particular holder of new stock options granted by DC ("New DC Stock Options") to acquire DC New Common Shares and new stock options granted by Spinco ("Spinco Stock Options") to acquire Spinco Common shares in such a manner that:
(a) the particular holder will receive no consideration for the exchange of such DC Stock Options other than New DC Stock Options and Spinco Stock Options;
(b) the original exercise price of a holder's DC Stock Options will be allocated to the New DC Stock Options and the Spinco Stock Options acquired by such holder on the exchange, taking into account the XXXXXXXXXX described in Paragraph 24, such that an amount equal to the Butterfly Proportion of such original exercise price, XXXXXXXXXX , will be payable to Spinco under the Spinco Stock Options and an amount equal to the remainder of the original exercise price, XXXXXXXXXX , will be payable to DC under the New DC Stock Options;
(c) the other material financial terms and conditions of the New DC Stock Options and the Spinco Stock Options will parallel those of the DC Stock Options, taking into account the adjustments to reflect the XXXXXXXXXX resulting from the share exchange described in Paragraph 24, and in particular, the number of New DC Common Shares and Spinco Shares to be issued in each case will be such that, for each DC Common Share that the holder would have been entitled to acquire under the DC Stock Option, the holder will become entitled to acquire one New DC Common Share under the corresponding New DC Stock Options and one Spinco Common Share under the corresponding Spinco Stock Options; and
(d) the DC Stock Options will be cancelled upon the foregoing transfers.
The issuance by Spinco of the Spinco Stock Options will be in anticipation of the transfer of the Spin-off Property as described in Paragraph 28 and will form part of the non-share consideration relating to such transfer.
Adjustment to the Number of DC DSUs
27. Pursuant to the terms of the DC DSU Plan, the number of the DC DSUs recorded in the account of each participant in the DC DSU Plan will be proportionately adjusted to reflect the difference in the fair market value of a DC Common Share that will arise solely as a result of the Proposed Transactions. The adjustments will reflect (i) the XXXXXXXXXX described in Paragraph 24 (which will result in a corresponding XXXXXXXXXX in the number of DC DSUs), and (ii) the spin-off by DC of the Spin-off Property to Spinco (which will result in a corresponding increase in the number of DC DSUs). The difference in the fair market value of a DC Common Share will be determined by comparing the weighted average trading price of a DC New Common Share on the Stock Exchange for a five day trading period beginning immediately after the Effective Date with the weighted average trading price of a DC Common Share on the Stock Exchange for a five day trading price before the Effective Date. There will be no other changes to the DC DSU Plan.
Transfer of Spin-off Property to Spinco
28. Immediately before the transfer by DC of the Spin-off Property to Spinco as described in this Paragraph, the fair market value of the property of DC will be determined as though there was only one type of property, as contemplated by subsection 55(3.02), on a net fair market value basis. For greater certainty:
(a) any tax accounts, such as the balance of any non-capital losses, net capital losses and tax pools, will not be considered to be property of DC for the purposes of determining the net fair market value of the property of DC as described herein; and
(b) no amount will be considered to be a liability of DC unless it represents a true legal liability which is capable of quantification.
DC will then transfer the Spin-off Property to Spinco. As consideration for the transfer of the Spin-off Property, Spinco:
(a) will have issued the Spinco Stock Options, as described in Paragraph 26; and
(b) will issue Spinco Reorganization Shares, having an aggregate fair market value and redemption amount equal to the fair market value, at the time of the transfer, of the Spin-off Property less an amount equal to the aggregate fair market value at such time of the Spinco Stock Options so issued.
As a result of the transfer of the Spin-off Property to Spinco, the net fair market value of the property received by Spinco will be equal to or approximate the Butterfly Proportion of the net fair market value of all property owned by DC immediately before the transfer. Any difference between the fair market value of the Spin-off Property transferred to Spinco and the Butterfly Proportion of the net fair market value of all property owned by DC immediately before such transfer will not exceed 1% of the Butterfly Proportion of the net fair market value of all property owned by DC immediately before the transfer.
DC and Spinco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the Spin-off Property. The agreed amount in respect of the election will not exceed the fair market value of the Spin-off Property. The agreed amount will be an amount equal to the greater of the cost amount of the Spin-off Property to DC and the fair market value of the non-share consideration, being the issuance of the Spinco Stock Options.
Pursuant to the BCA, the amount added to the stated capital of the Spinco Reorganization shares to be issued by Spinco to DC as described herein will be equal to the agreed amount for the Spin-off Property less the value of the non-share consideration.
Elimination of Cross Shareholdings
29. Spinco will redeem all of the Spinco Reorganization Shares held by DC and will issue to DC, as payment therefor, a non-interest-bearing demand promissory note (the "Spinco Redemption Note") having a principal amount and fair market value equal to the aggregate of the Spinco Reorganization Share Redemption Amounts of the Spinco Reorganization Shares so redeemed. DC will accept the Spinco Redemption Note as full payment of the Spinco Reorganization Share Redemption Amounts of the Spinco Reorganization Shares so redeemed, with the risk of the Spinco Redemption Note being dishonoured.
30. DC will redeem the DC Butterfly Shares held by Spinco and will issue to Spinco, as payment therefor, a non-interest-bearing demand promissory note (the "DC Redemption Note") having a principal amount and fair market value equal to the aggregate of the DC Butterfly Share Redemption Amounts of the DC Butterfly Shares so redeemed. Spinco will accept the DC Redemption Note as full payment of the DC Butterfly Share Redemption Amounts of the DC Butterfly Shares so redeemed, with the risk of the DC Redemption Note being dishonoured.
Set-off of Notes
31. DC will satisfy its obligations under the DC Redemption Note by transferring the Spinco Redemption Note to Spinco and Spinco will accept the Spinco Redemption Note in full satisfaction of DC's obligations under the DC Redemption Note. Similarly, Spinco will satisfy its obligations under the Spinco Redemption Note by transferring the DC Redemption Note to DC and DC will accept the DC Redemption Note in full satisfaction of Spinco's obligations under the Spinco Redemption Note. The DC Redemption Note and the Spinco Redemption Note will both be cancelled.
Amalgamation of Spinco and Bco
32. Spinco and Bco will amalgamate under the provisions of the BCA to form Amalco, in such a manner that on and by virtue of the amalgamation:
(a) all of the property (except any amounts receivable from, or shares of the capital stock of, any predecessor corporation) of the predecessor corporations immediately before the merger will become property of Amalco;
(b) all the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger will become liabilities of Amalco;
(c) all the shares in the capital stock of Bco that are owned or held by Spinco immediately prior to the merger will be cancelled for no consideration;
(d) each holder of Spinco Common Shares will exchange such shares for Amalco Common Shares;
(e) the stated capital of the Amalco Common Shares immediately after the amalgamation will be equal to the aggregate of the paid-up capital of the Spinco Common Shares; and
(f) each outstanding Spinco Stock Option will become an option to acquire the same number of Amalco Common Shares, for the same aggregate exercise price and will become subject to an employee stock option plan to be established on behalf of Amalco pursuant to the Plan of Arrangement (an "Amalco Stock Option").
33. Each of the DC New Common Shares, the Spinco Common Shares and the Amalco Common Shares will be listed on a designated stock exchange. The listing of the DC New Common Shares will occur concurrent with the issuance of the DC New Common Shares as described in Paragraph 24 above. The listing of the Spinco Common Shares will occur concurrent with the issuance of the Spinco Common Shares as described in Paragraph 25 above. The listing of the Amalco Common Shares will occur concurrent with the exchange of Spinco Common Shares for Amalco Common Shares as described in Paragraph 32 above. Spinco will, pursuant to the post-amble in the definition of public corporation in subsection 89(1), make the election in its return of income for its first taxation year to have been a public corporation from the beginning of such taxation year.
34. Neither DC nor Spinco is, or will be, at any time during the Proposed Transactions, a specified financial institution or a restricted financial institution.
35. Except as described herein, no debts have been or will be incurred or paid and no property has been or will be acquired by DC or any corporation controlled by DC in contemplation of the distribution, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).
36. Neither DC nor Amalco will sell or transfer any property, as part of a series of transactions or events that includes the Proposed Transactions, to an unrelated person or partnership subsequent to the Proposed Transactions.
37. None of the shares of DC, Bco or Spinco described herein is or will be, at any time during the implementation of the Proposed Transactions:
(a) the subject of any undertaking or agreement 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" as that term is defined in subsection 248(1).
38. Following completion of the Proposed Transactions, certain management services will be provided by DC to Amalco for a transitional period in consideration for an arm's length management fee to be paid to DC.
PURPOSE OF THE PROPOSED TRANSACTIONS
DC believes that it is in the best interests of the DC Shareholders that DC spin off its XXXXXXXXXX business in the form of Amalco Common Shares for the following reasons:
1. The separation of DC's business between DC and Amalco will enhance the ability of each separate public corporation to pursue its independent objectives and strategies.
2. The spin-off will result in DC and Amalco having dedicated management teams focused on the core assets of the respective company.
3. The spin-off will allow the separate businesses to access capital for growth on the basis of their individual visions and strategies.
4. The spin-off of Amalco as a separate public corporation should increase shareholder value for the DC Shareholders since DC's remaining businesses and Amalco's business should ultimately achieve a higher valuation on a stand-alone basis.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions, purposes of the Proposed Transactions and additional information, we confirm the following:
Transfer of Holdco and Cco Shares to Bco
A. Provided that the requisite joint elections are filed in prescribed form and within the prescribed time and subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfer of the Holdco shares and Cco shares described in Paragraph 18 with result that the agreed amount in respect of the Holdco shares and Cco shares will be deemed pursuant to paragraph 85(1)(a) to be proceeds of disposition thereof to DC and the cost thereof to Bco.
For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfer described in Paragraph 18.
Dissenting Shareholders
B. On the purchase by DC of DC Common Shares held by a Dissenting Shareholder as described in Paragraph 22:
(a) subject to the application of subsection 55(2), the Dissenting Shareholder will be deemed by paragraph 84(3)(b) to have received a dividend equal to the amount by which any payment from DC to the Dissenting Shareholder in respect of the purchase of such person's DC Common Shares exceeds the paid-up capital of such shares immediately prior to their purchase;
(b) subsections 212(2) and 215(1) will apply (subject to the provisions of any applicable income tax convention) to require DC to withhold and remit 25% of the amount of any such dividend deemed to have been paid to a Dissenting Shareholder who is a non-resident person of Canada; and
(c) paragraph (j) of the definition of "proceeds of disposition" in section 54 will apply to exclude the amount of such deemed dividend from the proceeds of disposition of the DC Common Shares recognized by the Dissenting Shareholder as a result of the purchase of such shares by DC, provided that the shares were held as capital property by the Dissenting Shareholder.
Reorganization of DC Capital
C. The amendment to the terms of the DC Common Shares to increase the voting rights, as described in Paragraph 23, will not result in a disposition of the DC Common Shares, in and of itself.
D. On the exchange of DC Common Shares by a Participant, as described in Paragraph 24, the provisions of subsection 86(1) will apply and the provisions of subsections 86(2) and (2.1) will not apply to the disposition of each DC Common Share by a Participant for XXXXXXXXXX a DC New Common Share and XXXXXXXXXX a DC Butterfly share provided that:
(a) the particular Participant holds the DC Common Shares as capital property; and
(b) the particular Participant and DC do not file an election under subsection 85(1) or (2) in respect of the exchange,
such that:
(c) the Participant will be deemed by paragraph 86(1)(b) to have acquired the DC New Common Shares and the DC Butterfly Shares at a cost equal to the proportion of the adjusted cost base to the Participant of such DC Common Shares immediately before the exchange (less the amount of any cash received for a fractional share) that:
(A) the fair market value, immediately after the exchange, of the DC New Common Shares or the DC Butterfly Shares, as the case may be, received by the particular Participant;
is of
(B) the fair market value, immediately after that exchange, of all the shares of DC acquired by the Participant on the exchange; and
(d) pursuant to paragraph 86(1)(c), such Participant will be deemed to have disposed of the Participant's DC Common Shares for aggregate proceeds of disposition equal to the aggregate cost to the Participant of the DC New Common Shares and DC Butterfly Shares received by the Participant as determined in (c) above, plus the amount of any cash received for a fractional share.
Transfer of DC Butterfly Shares to Spinco
E. Provided that a Participant who, immediately before the exchange of DC Butterfly Shares as described in Paragraph 25:
(a) holds such DC Butterfly Shares as capital property;
(b) does not receive any consideration other than the Spinco Common Shares in exchange for the DC Butterfly Shares;
(c) deals at arm's length with Spinco immediately before the exchange;
(d) does not file an election under subsections 85(1) or (2) with respect to the exchange; and
(e) does not include any portion of the gain or loss otherwise determined in computing his or her income for that year;
and further provided that immediately after such exchange:
(f) the particular Participant or persons with whom such Participant does not deal at arm's length, or the particular Participant together with any other person or persons with whom such Participant does not deal at arm's length, will not control Spinco or beneficially own shares of Spinco having an aggregate fair market value representing more than 50% of the aggregate fair market value of all outstanding shares of Spinco;
then pursuant to paragraph 85.1(1)(a):
(g) such Participant will be deemed to have disposed of such DC Butterfly Shares for proceeds of disposition equal to the aggregate adjusted cost base of such DC Butterfly Shares to the particular Participant immediately before the exchange; and
(h) such participant will be deemed to have acquired such Spinco Common Shares at an aggregate cost equal to the aggregate adjusted cost base to such Participant of the DC Butterfly Shares immediately before the exchange;
and pursuant to paragraph 85.1(1)(b):
(i) the cost to Spinco of each DC Butterfly Share acquired from each such Participant will be deemed to be the lesser of its fair market value immediately before the exchange and the paid-up capital of such DC Butterfly Share immediately before the exchange.
Exchange of Existing DC Stock Options
F. The provisions of subsection 7(1.4) will apply with respect to each exchange by a particular holder of DC Stock Options that are subject to the provisions of subsection 7(1) for New DC Stock Options and Spinco Stock Options, as described in Paragraph 26, provided that the aggregate In The Money Amount of the New DC Stock Options and Spinco Stock Options received by the holder does not exceed the aggregate In The Money Amount of the DC Stock Options exchanged by the holder, with the result that for the purposes of section 7:
(a) such holder will be deemed (other than for the purposes of subparagraph 7(9)(d)(ii)) not to have disposed of the DC Stock Options and not to have acquired the New DC Stock Options and the Spinco Stock Options;
(b) the New DC Stock Options and the Spinco Stock Options will be deemed to be the same as, and a continuation of the corresponding DC Stock Options; and
(c) Spinco will be deemed in respect of such stock options to be the same person as, and a continuation of, DC.
Increase in Number of DC DSUs
G. The increase in the number of outstanding DC DSUs as described in Paragraph 27 will not, in and by itself, cause the DC DSU Plan not to be a prescribed plan or arrangement as described in paragraph 6801(d) of the Regulations.
Transfer of Spin-off Property to Spinco
H. Provided that the requisite joint elections are filed in prescribed form and within the prescribed time and subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfer of the Spin-off Property by DC to Spinco described in Paragraph 28 with the result that the agreed amount in respect of the Spin-off Property will be deemed pursuant to paragraph 85(1)(a) to be the proceeds of disposition thereof to DC and the cost thereof to Spinco.
For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfer described in Paragraph 28.
Elimination of Cross-Shareholdings
I. As a result of the redemption by Spinco of the Spinco Reorganization Shares described in Paragraph 29:
(a) Spinco will be deemed by paragraph 84(3)(a) to have paid, and DC will be deemed by paragraph 84(3)(b) to have received, a dividend equal to the amount by which the amount paid on such redemption exceeds the paid-up capital of the Spinco Reorganization Shares;
(b) the amount of such deemed dividend will be included in DC's income pursuant to subsection 82(1) and paragraph 12(1)(j);
(c) the amount of such deemed dividend will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining DC's proceeds of disposition for the Spinco Reorganization Shares;
(d) DC will be entitled, pursuant to subsection 112(1), to deduct the amount of such deemed dividend, in computing its taxable income for the taxation year in which such dividend is deemed to be received and, for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3) and (2.4) will not apply to deny the deduction of such deemed dividend;
(e) to the extent that the amount paid by Spinco to DC on the redemption of the Spinco Reorganization Shares does not exceed the amount specified in respect of those shares for the purposes of subsection 191(4), the deemed dividend referred to in (a) above will not be subject to tax under Part IV.1 or Part VI.1 on the basis that the dividend will be deemed to be an excepted dividend and an excluded dividend, as the case may be, pursuant to subsection 191(4); and
(f) the provisions of subsection 112(3) will apply to reduce any loss that would otherwise be realized by DC as a result of the redemption of the Spinco Reorganization Shares.
J. As a result of the redemption by DC of the DC Butterfly Shares held by Spinco described in Paragraph 30:
(a) DC will be deemed by paragraph 84(3)(a) to have paid, and Spinco will be deemed by paragraph 84(3)(b) to have received, a dividend equal to the amount by which the amount paid on such redemption exceeds the paid-up capital of the DC Butterfly Shares;
(b) the amount of such deemed dividend will be included in Spinco's income pursuant to subsection 82(1) and paragraph 12(1)(j);
(c) the amount of such deemed dividend will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining Spinco's proceeds of disposition for the DC Butterfly Shares;
(d) Spinco will be entitled, pursuant to subsection 112(1), to deduct the amount of such deemed dividend in computing its taxable income for a taxation year in which such dividend is deemed to be received and, for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3) and (2.4) will not apply to deny the deduction of such deemed dividend;
(e) to the extent that the amount paid by DC to Spinco on the redemption of the DC Butterfly Shares does not exceed the amount specified in respect of those shares for the purposes of subsection 191(4), the deemed dividend referred to in (a) above will not be subject to tax under Part IV.1 or Part VI.1 on the basis that the dividend will be deemed to be an excepted dividend and an excluded dividend, as the case may be, pursuant to subsection 191(4); and
(f) the provisions of subsection 112(3) will apply to reduce any loss that would otherwise be realized by Spinco as a result of the redemption of the DC Butterfly Shares.
K. Provided that:
(a) there is not a distribution by DC to a corporation that is not an acquiror before the day that is three years after the Effective Date; and
(b) there is not a distribution by Spinco or Amalco before the day that is three years after the Effective Date;
and as part of the series of transactions or events that includes the Proposed Transactions, there is not:
(c) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(d) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(e) an acquisition of any shares of DC in contemplation of the distribution in the circumstances described in subparagraph 55(3.1)(b)(iii); or
(f) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or (d);
which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings I and J above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
Set-off of Notes
L. The cost to DC of the Spinco Redemption Note issued to DC as described in Paragraph 29 and the cost to Spinco of the DC Redemption Note issued to Spinco as described in Paragraph 30 will in each case, upon the issuance thereof, be equal to its principal amount and, as such, neither DC nor Spinco will realize any gain or incur any loss therefrom.
M. The payment and cancellation of the Spinco Redemption Note and the DC Redemption Note described in Paragraph 30 will not, in either case, give rise to a "forgiven amount" within the meaning thereof in subsection 80(1) or subsection 80.01(1).
Amalgamation of Spinco and Bco
N. The amalgamation of Spinco and Bco referred to in Paragraph 32 will be an amalgamation described in subsection 87(1) and, upon the amalgamation,
(a) provided that the Spinco Common Shares are held by a particular holder thereof as capital property, the provisions of subsections 87(4), other than paragraphs 87(4)(c) to (e), will apply to such holder; and
(b) provided that Spinco makes the election to be a public corporation as described in Paragraph 33, Amalco will be deemed to be a public corporation at the commencement of its first taxation year pursuant to paragraph 87(2)(ii).
O. The provisions of subsection 7(1.4) will apply on the amalgamation of Spinco and Bco as described in Paragraph 32 with respect to each outstanding Spinco Stock Option that is subject to the provisions of subsection 7(1) and that becomes an Amalco Stock Option on the amalgamation, provided that the aggregate In The Money Amount of the Amalco Stock Options received by the holder does not exceed the aggregate In The Money Amount of the Spinco Stock Options held by the holder immediately before the amalgamation, with the result that for the purposes of section 7:
(a) such holder will be deemed (other than for the purposes of subparagraph 7(9)(d)(ii)) not to have disposed of the Spinco Stock Options and not to have acquired the Amalco Stock Options;
(b) the Amalco Stock Options will be deemed to be the same as, and a continuation of the Spinco Stock Options and hence, by virtue of Ruling F(b), a continuation of the corresponding DC Stock Options; and
(c) Amalco will be deemed in respect of such stock options to be the same person as, and a continuation of, Spinco and, by virtue of Ruling F(c), of DC.
Qualified Investment
P. The DC New Common Shares, the Spinco Common Shares and the Amalco Common Shares will be "qualified investments" pursuant to paragraph 4900(1)(b) of the Regulations:
(a) for a registered retirement savings plan by virtue of paragraph (a) of the definition of "qualified investment" in subsection 146(1);
(b) for a registered education savings plan by virtue of paragraph (a) of the definition of "qualified investment" in subsection 146.1(1);
(c) for a registered retirement income fund by virtue of paragraph (a) of the definition of "qualified investment" in subsection 146.3(1);
(d) for a deferred profit sharing plan by virtue of paragraph (d) of the definition of "qualified investment" in section 204; and
(e) for a registered disability savings plan by virtue of paragraph (a) of the definition of "qualified investment" in subsection 205(1).
Q. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
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 provided that the Proposed Transactions are completed by XXXXXXXXXX .
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.
Nothing in this ruling should be construed as implying that the CRA has reviewed or accepted:
(a) that XXXXXXXXXX . and/or its affiliate XXXXXXXXXX . or XXXXXXXXXX . or any other investment manager or fund manager who holds shares of DC, Spinco or Amalco does not own such shares for purposes of determining whether it is a specified shareholder of any such corporation;
(b) the determination of the fair market value, adjusted cost base or paid-up capital of any shares or rights referred to herein; or
(c) any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the rulings given above.
OPINIONS
Provided that the amendment to the Act concerning the proposed addition to subsection 256(7) contained in Bill C-10, Income Tax Amendments Act, 2006, is enacted substantially as drafted, by virtue of clause 256(7)(a)(i)(E), no acquisition of control of Bco will be considered to have occurred as a result of the Proposed Transactions, in and of themselves.
The foregoing opinion is not a ruling and as noted in Information Circular 70-6R5 is not binding on the CRA.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2008
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2008