2007 Ruling 2007-0241351R3 - butterfly reorganization

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether Canco's distribution, for the purpose of paragraph 55(3)(b), would include the First Canadian Dividend (as described below)?

Position: No.

Reasons: Because the First Canadian Dividend would not be part of the Butterfly Reorganization (as referred to in paragraph 55(3)(b)) under the circumstances.

XXXXXXXXXX 									2007-024135

XXXXXXXXXX , 2007

Dear XXXXXXXXXX :

Re: Supplemental Advance Income Tax Ruling Request XXXXXXXXXX (Business No. XXXXXXXXXX ) ("Canco")

This is in reply to your letter of XXXXXXXXXX, and is supplemental to our advance income tax ruling number 2006-021575 that was issued to Canco on XXXXXXXXXX, 2007 (the "Ruling").

Unless otherwise defined, all capitalized terms in this letter have the meanings assigned to them in the Ruling.

In your letter, you have advised us that all of the Proposed Transactions, including the transfer by Canco of the Newco Common Shares to TCo described in Paragraph 44, and the cross-redemption of TCo's Canco Common Shares and Canco's TCo Preferred Shares described in Paragraph 45 (which transfer and cross-redemption are collectively referred to as the "Butterfly Reorganization"), other than those described in Paragraphs 40, 48 and 49, were implemented and completed in XXXXXXXXXX.

Further, you have advised us that Foreign Pubco has expended all of the funds it received from Foreign Spinco as described in Paragraph 50 on the repurchase of shares of its capital stock described in Paragraph 51 and, given current favourable market conditions, Foreign Pubco would like to buy back additional shares of its capital stock (the "Share Buy-Back"). As Canco has significant cash balances, Foreign Pubco would like to withdraw cash from Canco through New Holdco. It is anticipated that Canco would pay a dividend ("First Canadian Dividend") of approximately US$XXXXXXXXXX to New Holdco which would pay the same amount as a dividend ("Second Canadian Dividend") to Foreign Pubco (the Second Canadian Dividend and the First Canadian Dividend are collectively referred to as the "Proposed Dividends"). New Holdco will withhold 5% of the Second Canadian Dividend and will remit that amount to the Receiver General for Canada. You have also indicated that Foreign Pubco has confirmed that the representation described in Paragraph 3 that "no one shareholder or group of related shareholders of Foreign Pubco owns more than 5% of the common stock of Foreign Pubco" remains correct.

As well, you have provided the following additional information.

1. Foreign Pubco believed that the Share Buy-Back would reflect a prudent investment decision XXXXXXXXXX.

2. Foreign Pubco had considered over the past several years whether the funds held in Canco should be distributed to Foreign Pubco. However, until recently, Foreign Pubco XXXXXXXXXX.

3. Foreign Pubco XXXXXXXXXX.

4. The change in XXXXXXXXXX Foreign Pubco has no relation to the Butterfly Reorganization.

5. The Proposed Dividends were not pre-ordained, in the sense that there was no "firm intention" that they be paid at the time of the Butterfly Reorganization or after it was completed. The Butterfly Reorganization and the Proposed Dividends are not linked in order to produce a given result. Rather, the Proposed Dividends and the Butterfly Reorganization are independent transactions with a separate existence and business purpose. The Proposed Dividends would be currently contemplated notwithstanding the implementation of the Butterfly Reorganization, and the Butterfly Reorganization would have been implemented notwithstanding the Proposed Dividends. These are not two pre-planned events which were intended to take place in any ordained order.

6. The Proposed Dividends are not being contemplated "because of" or "in relation to" the Butterfly Reorganization. The Proposed Dividends are contemplated as a result of current market conditions and would be paid (assuming the Share Buy-Back takes place) even if the Butterfly Reorganization had not been implemented.

Lastly, you have asked that Foreign Pubco be permitted to contribute or transfer, directly or indirectly, additional funds to Canco in the future, up to the amount of the Second Canadian Dividend. Any such future contribution (if and when undertaken) would take place by way of loan, share subscription or contribution to capital, as may be determined at the applicable time. Consequently, you have requested that the last sentence in Paragraph 51 be amended as follows:

Foreign Pubco represents that, as part of any series of transactions or events which includes the dividends described in ruling D below, cash will not be, directly or indirectly, contributed to or transferred to Canco or its subsidiaries in excess of the amount of the Second Canadian Dividend that New Holdco will pay to Foreign Pubco as referred to in the supplemental ruling issued to Canco on XXXXXXXXXX.

Confirmation

Notwithstanding the above changes and the additional information, we hereby confirm that, subject to the conditions, limitations, qualifications and comments set out in the Ruling, the Ruling will continue to be binding on CRA. In addition, we confirm that the last sentence of Paragraph 51 is hereby amended in the manner that you have requested above. For greater certainty, we are not providing any assurance relating to the tax consequences of the Proposed Dividends as described in this letter including as to whether subsection 55(2) will be applicable to the First Canadian Dividend.

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch