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: (1) foreign exchange gain realized when debt assumed by purchaser as part consideration for assets; (2) addition of purchaser as debtor to the existing agreement under State of XXXXXXXXXX law would result in a disposition of debt by the creditor for purposes of subparagraph 212(1)(b)(vii); (3) proposed transactions caused interest previously deductible to no longer be deductible under paragraph 20(1)(c); (4) the suspended loss rules applied; (5) general anti-avoidance provision applied?
Position: (1) yes; (2) no; (3); no; (4) no; (5) no
Reasons: (1) the debt that was assumed represented part of proceeds of disposition for the assets sold and a foreign exchange gain crystallized vis-a-vis the transferor of the debt at that time; under State of XXXXXXXXXX law, no disposition occurred; (2) under the laws of the State of XXXXXXXXXX , there was no novation or disposition of the debt; (3) to extent interest was deductible for purposes of paragraph 20(1)(c), proposed transactions did not cause interest expense to no longer be deductible under that provision; (4) exception contained in paragraph 40(3.3)(a) applied; (5) although the transactions are avoidance transactions, there is no misuse or abuse.
XXXXXXXXXX 2007-023929
XXXXXXXXXX , 2007
Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX and the meeting of XXXXXXXXXX at our offices wherein you requested an advance income tax ruling on behalf of the above-named taxpayers. We also acknowledge our various telephone conversations (XXXXXXXXXX) in furtherance of this matter.
To the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling request are:
(i) dealt with in an earlier return of the taxpayers or a related person;
(ii) being considered by a tax services office or taxation centre of the Canada Revenue Agency ("CRA") in connection with a previously filed tax return of the taxpayers or a related person;
(iii) under objection by the taxpayers or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate to the taxpayers or a related person; nor
(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.
Unless otherwise stated, statutory references in this letter are to the Income Tax Act, R.S.C. 1985 (5th Suppl.) c. 1, as amended to the date hereof (the "Act"). Our understanding of the facts and proposed transactions is as follows:
Facts
1. XXXXXXXXXX ("Parentco") is a public corporation governed by the Canada Business Corporations Act and a taxable Canadian corporation the shares of which are traded on the XXXXXXXXXX. Parentco is the holding company of, inter alia, XXXXXXXXXX. ("Subco 1"), XXXXXXXXXX ("Subco 2"), XXXXXXXXXX ("Subco 3") and a newly incorporated company, Newco, as described in 10 below (collectively, the "Parentco Group"). Parentco also carries on the Canadian and international (XXXXXXXXXX) sales activities for itself and its related companies, including Subco 2. The Parentco Group operates XXXXXXXXXX business XXXXXXXXXX The Parentco Group's facilities in Canada are located in the provinces of XXXXXXXXXX. Parentco resulted from the amalgamation on XXXXXXXXXX of XXXXXXXXXX, which were both public corporations. As at XXXXXXXXXX, Parentco's issued and outstanding share capital consisted of approximately XXXXXXXXXX, widely held, common shares. No single person or related group owns more than 50% of the issued and outstanding common shares of Parentco. Parentco and Subco 2 are served by the XXXXXXXXXX Tax Services Office and XXXXXXXXXX Tax Centre.
2. Subco 1 is a taxable Canadian corporation governed by the CBCA resulting from the amalgamation of XXXXXXXXXX. on XXXXXXXXXX. Subco 1 is a subsidiary wholly-owned corporation of Parentco. Subco 1's sole asset consists of XXXXXXXXXX share and XXXXXXXXXX share in the share capital of Subco 2 which were issued by Subco 2 in exchange for Subco 1's partnership interests in XXXXXXXXXX. The XXXXXXXXXX share has a fair market value of $XXXXXXXXXX while the fair market value of the XXXXXXXXXX share is $XXXXXXXXXX. XXXXXXXXXX
3. Subco 2, XXXXXXXXXX is a taxable Canadian corporation governed by the Companies Act (XXXXXXXXXX). Except for XXXXXXXXXX share and XXXXXXXXXX share held by Subco 1, Parentco owns all of the issued and outstanding shares of Subco 2. Parentco, Subco 1 and Subco 2 are thus related and affiliated to each other. Subco 2 resulted from the amalgamation on XXXXXXXXXX of XXXXXXXXXX. Subco 2 became part of the Parentco Group further to the acquisition, by Parentco, of the shares of XXXXXXXXXX on XXXXXXXXXX, which, at the time, held all the shares of Subco 2 through its wholly-owned subsidiary corporation, XXXXXXXXXX were dissolved in XXXXXXXXXX. Subco 2 XXXXXXXXXX. These activities constitute a single, integrated operation.
4. Further to the acquisition of XXXXXXXXXX and its subsidiaries by Parentco, a number of transactions were undertaken to achieve the integration of all the manufacturing operations of the Parentco Group. XXXXXXXXXX In the course and as part of these integration transactions, on XXXXXXXXXX, Subco 2 acquired all of Parentco's manufacturing assets in consideration for which Subco 2 assumed, without novation, the then outstanding US dollar notes and debentures of Parentco. As a result, Subco 2 and Parentco entered into an assignment and assumption agreement and supplemental indentures were entered into to add Subco 2 as a debtor of Parentco's then outstanding US debt. These supplemental indentures did not remove Parentco as a debtor and Subco 2 and Parentco became jointly and severally liable for the entirety of Parentco's then outstanding US debt. Under the laws of the State of XXXXXXXXXX, which governed all of Parentco's then outstanding US debt, the execution of the supplemental indentures and the addition of Subco 2 as a debtor did not result in:
a. novation in respect of any portion of Parentco's debt;
b. substitution of all or any portion of Parentco's debt by a new debt; or
c. discharge, rescission or extinguishment of all or any portion of the debt.
5. On XXXXXXXXXX, Subco 2 entered into a partnership (the "XXXXXXXXXX") with a subsidiary of XXXXXXXXXX with respect to Subco 2's XXXXXXXXXX assets, consisting of XXXXXXXXXX. Subco 2 retained a XXXXXXXXXX % interest in the XXXXXXXXXX while XXXXXXXXXX, through a subsidiary, acquired a XXXXXXXXXX% interest thereof. XXXXXXXXXX provided XXXXXXXXXX with a XXXXXXXXXX-year unsecured non-recourse term loan of $XXXXXXXXXX.
6. Subco 3 is a company governed by the laws of the State of XXXXXXXXXX and was incorporated as a subsidiary wholly-owned corporation of Subco 2 (at the time, XXXXXXXXXX) in XXXXXXXXXX to serve as holding company for all US activities. Parentco,
Subco 1, Subco 2 and Subco 3 are thus related and affiliated to each other.
7. Subco 2 owns all the issued and outstanding shares of Subco 3. The adjusted cost base to Subco 2 of Subco 3 shares is approximately $XXXXXXXXXX while their fair market value is currently estimated at $XXXXXXXXXX, which results in an unrealized capital loss of approximately $XXXXXXXXXX (the "Subco 3 Loss"). Subco 2 also owns certain other non-depreciable capital assets the adjusted cost base of which may exceed their fair market value, which could result in additional unrealized capital losses.
8. As part of its long-term financing strategy, Subco 2 has issued and/or assumed US dollar notes and debentures in the aggregate of about US$XXXXXXXXXX (the "US Debt"), as documented under several indenture agreements all of which are governed by the laws of the State of XXXXXXXXXX. Under the laws of the State of XXXXXXXXXX, the assumption by Subco 2 of any of the US Debt did not result in a novation or cause repayment of any part of the US Debt or the creation of a new obligation in its place. Under the laws of the State of XXXXXXXXXX, the assumption only resulted in a modification of the existing US Debt which continued to exist. More particularly, the US Debt (which was, as of XXXXXXXXXX, trading at a discount to face value) includes the following:
a. unsecured notes in the principal amount of US $XXXXXXXXXX issued by Subco 2 on XXXXXXXXXX under an indenture dated XXXXXXXXXX between Subco 2, Parentco, as guarantor, and XXXXXXXXXX, as trustee. The notes bear interest at the rate of XXXXXXXXXX% per annum and mature on XXXXXXXXXX. At the time of issuance, the rate of exchange of the Canadian dollar to the US dollar was XXXXXXXXXX;
b. unsecured notes in the outstanding principal amount of US $XXXXXXXXXX issued by Parentco on XXXXXXXXXX under an indenture dated XXXXXXXXXX between Parentco and XXXXXXXXX as trustee, and assigned and assumed (without novation) by Subco 2 on XXXXXXXXXX. The notes bear interest at the rate of XXXXXXXXXX =% per annum and mature on XXXXXXXXXX. At the time of the assignment and assumption of these notes by Subco 2, the rate of exchange of the Canadian dollar to the US dollar was XXXXXXXXXX.
c. unsecured notes in the outstanding principal amount of US $XXXXXXXXXX issued by Parentco on XXXXXXXXXX under an indenture dated XXXXXXXXXX between, inter alia, Parentco and XXXXXXXXXX, as trustee, and assigned and assumed (without novation) by Subco 2 on XXXXXXXXXX . The notes bear interest at the rate of XXXXXXXXXX % per annum and mature on XXXXXXXXXX. At the time of the assignment and assumption of these notes by Subco 2, the rate of exchange of the Canadian dollar to the US dollar was XXXXXXXXXX; and
d. unsecured notes in the principal amount of US $XXXXXXXXXX issued by Subco 2 on XXXXXXXXXX under an indenture dated XXXXXXXXXX between Subco 2, Parentco, as guarantor, and XXXXXXXXXX, as trustee. The notes bear interest at floating rates and mature on XXXXXXXXXX. At the time of issuance, the rate of exchange of the Canadian dollar to the US dollar was XXXXXXXXXX.
9. As the Canadian currency has increased in value against other currencies, notably the US dollar, Subco 2 has unrealized foreign exchange gains exceeding $XXXXXXXXXX with respect to the US Debt, which gains are on account of capital.
10. XXXXXXXXXX ("Aco 1") is a Canadian public corporation the exchangeable shares of which are traded on the XXXXXXXXXX Stock Exchange. The exchangeable shares of Aco 1 are currently exchangeable for shares of XXXXXXXXXX ("Aco"), a XXXXXXXXXX company the shares of which are listed on the XXXXXXXXXX Stock Exchange.
On XXXXXXXXXX, Parentco and Aco announced a definite agreement to combine their activities in an all-stock merger of equals (the "Combination Transaction"). The combined company will be a XXXXXXXXXX company called XXXXXXXXXX . ("CCo") and will apply to list its shares on the XXXXXXXXXX stock exchanges. The Combination Transaction has been approved unanimously by the Boards of Directors of both Parentco and Aco based, inter alia, on fairness opinions received from their respective financial advisors. The Combination Transaction is subject to approval by the shareholders of both companies, regulatory approvals, and customary closing conditions. The combination is expected to take place in XXXXXXXXXX. The Parentco Group and Aco will continue to operate separately until the Combination Transaction closes. There will be an acquisition of control of the Parentco Group for purposes of the Act on the effective date of the Combination Transaction.
11. Under the terms of the Combination Transaction, each common share of Parentco will be exchanged for XXXXXXXXXX common share of CCo, and each Aco common share will be exchanged for XXXXXXXXXX common share of CCo. As a result of the Combination Transaction,
a. the exchangeable shares of Aco 1 will be exchangeable for CCo shares;
b. former Parentco shareholders will hold approximately XXXXXXXXXX%, in the aggregate, of all the issued and outstanding common shares of CCo and all the issued and outstanding exchangeable shares of Aco 1;
c. approximately XXXXXXXXXX% of all the issued and outstanding common shares of CCo and all the issued and outstanding exchangeable shares of Aco 1 will be held by former shareholders of Aco and Aco 1.
12. Parentco and Subco 2 anticipate that each will realize non-capital losses for its fiscal period ending immediately before the acquisition of control described in 19 below.
Proposed Transactions
13. The proposed transactions described below ("Proposed Transactions") will follow sequentially.
14. Subco 2 will incorporate a new unlimited liability company under the XXXXXXXXXX Companies Act ("Newco"). Newco will be a taxable Canadian corporation. Newco's authorized capital will consist of an unlimited number of common shares. Subco 2 will subscribe for XXXXXXXXXX common shares of Newco for $XXXXXXXXXX payable in cash.
15. Subco 2 will transfer legal and beneficial ownership in the shares of Subco 3 to Newco at fair market value in consideration for the assumption by Newco of a portion of the US Debt (the "Assumed Debt") and the issuance by Newco of common shares of its share capital with an aggregate fair market value equal to the excess of the fair market value of the shares of Subco 3 transferred, over the principal amount, as measured in Canadian dollars at the time of transfer, of the Assumed Debt. The Assumed Debt will consist of the unsecured notes described in 8a, 8b, 8c (a portion thereof) and 8d above, for an aggregate amount of approximately US$XXXXXXXXXX. The foreign exchange gain on the Assumed Debt is currently estimated at $XXXXXXXXXX.
16. The assumption by Newco of the Assumed Debt will not result in a novation or rescission of any portion of the US Debt, including the Assumed Debt. Newco will be added as a co-obligor without Subco 2 and Parentco being removed as co-obligors or guarantors, as the case may be, under an Assignment and Assumption Agreement between Subco 2 and Newco. Newco will agree to be fully liable for the Assumed Debt. As such, Subco 2, Parentco and Newco will be jointly and severally liable for the entirety of the Assumed Debt. All covenants and undertakings other than liability for the principal of the debt and interest thereon will remain solely those of Parentco, on a consolidated basis, as they are now.
17. Under the laws of XXXXXXXXXX, the assumption of the Assumed Debt and the addition of Newco as a debtor, as described, under the Assumed Debt will not result in:
(i) a novation in respect of any portion of the US Debt including the Assumed Debt;
(ii) a substitution of all or any portion of the US Debt including the Assumed Debt by a new debt; or
(iii) a discharge, rescission or extinguishment of all or any portion of the US Debt including the Assumed Debt.
18. Subsequent to the transfers and assumptions described in 15, 16 and 17 above, Newco will be wound up into Subco 2 under the provisions of the XXXXXXXXXX Companies Act and all the shares of Subco 3 owned by Newco will be distributed to Subco 2. The shares in the capital of Newco held by Subco 2 will be cancelled as a result of the wind-up of Newco into Subco 2.
19. Within XXXXXXXXXX days after the disposition by Subco 2 of Subco 3 shares as described in 16 above, CCo will acquire the control of Parentco, Subco 1, Subco 2, Subco 3 as part of the Combination Transaction.
Purpose of the Proposed Transactions
20. The purpose of the proposed transactions is to realize capital gains on the Assumed Debt prior to the Combination Transaction.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:
A. The Proposed Transactions as described in 13 to 19 above, will not, in and by themselves, cause any portion of the interest expense payable by Subco 2 on the Assumed Debt to no longer be deductible under paragraph 20(1)(c) of the Act.
B. The assumption by Newco of the Assumed Debt described in 15 above, will not, in and by itself, result in the disposition of the Assumed Debt by the holders thereof for the purposes of subsection 248(1) or the issuance of new indebtedness for the purposes of subparagraph 212(1)(b)(vii).
C. To the extent that the value of the US dollar relative to the Canadian dollar fell between the time that any portion of the Assumed Debt was issued or assumed by Subco 2, as the case may be, and the time it is assumed by Newco, Subco 2 has made a gain for the purposes of subsection 39(2) in reference to the Assumed Debt.
D. The provisions of subsection 40(3.3) to (3.6) will not apply to deem the Subco 3 Loss to be nil.
E. As a result of the proposed transactions, in and by themselves, subsection 245(2) will not be applied to re-determine the tax consequences confirmed in the rulings given.
The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 (the "Circular") issued by the CRA on May 17, 2002, and is binding provided the proposed transactions are completed on or before XXXXXXXXXX.
The ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments to the Act.
Nothing in this letter should be construed as implying that the CRA has reviewed or is making a determination or ruling in respect of:
a) the determination of the adjusted cost base, paid-up capital or fair market value of any shares referred to herein;
b) the transfer of beneficial ownership of shares in Subco 3 as described in 15 above;
c) whether acquisition of control will occur in reference to the Parentco Group as a consequence of the Combination Transaction;
d) whether the provisions of subsection 111(4) would apply to the Parentco Group;
e) any transaction that was completed prior to the date of this ruling, including, in particular, the issuance or assumption of any of the US Debt as detailed in 8 above and whether the interest thereon qualifies for a deduction under the provisions of paragraph 20(1)(c);
f) the law governing the US Debt, specifically whether the Proposed Transactions result in the extinguishment or discharge of any part of the Assumed Debt and its substitution by new obligations under such law;
g) any tax consequences with respect to the Assumed Debt other than specifically described in the rulings given above including whether interest paid on the Assumed Debt to a non-resident prior to the proposed transactions qualifies for the exemption from Part XIII tax payable pursuant to subparagraph 212(1)(b)(vii);
h) any tax consequences in respect of the Combination Transaction; nor
i) any tax consequences in relation to any facts or proposed transactions referred to herein other than those specifically described in the rulings given.
Yours truly,
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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