2007 Ruling 2007-0255931R3 - 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: Minor amendments to ruling.

DC proposes to transfer the legal title to (but not beneficial ownership of) PlantC to Aco for the purposes of avoiding the land transfer tax under the Land Transfer Tax Act (Ontario). XXXXXXXXXX .

Position: 1) This is acceptable.

Reasons: 1) We have accepted this type of arrangement in previous butterflies. (See 2005-011142).

2) XXXXXXXXXX . Further, since DC, Parent and Aco will be related immediately after the reorganization, subparagraph 55(3.1)(b)(i), paragraphs 55(3.1)(b) and (c) will not be applicable.

XXXXXXXXXX                                      2007-025593

XXXXXXXXXX , 2007

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling 2007-022737 dated XXXXXXXXXX , 2007
on behalf of XXXXXXXXXX (the "Ruling")

This is reply to your letters of XXXXXXXXXX , wherein you requested certain amendments to the Ruling.

All capitalized terms are as defined in the Ruling. All statutory references are to the Income Tax Act (Canada).

You have requested the following amendments to the Ruling:

a) The Definitions section will be amended to insert the following terms:

"Fixed Assets" has the meaning assigned by Paragraph 6;

"Intellectual Property" has the meaning assigned by Paragraph 4;

b) Paragraph 4 will be amended by adding the following:

DC is the beneficial owner of intellectual property developed in the course of its business, including various patents and patent applications (the "Intellectual Property"). DC has entered into confidentiality agreements with third parties outside of the DC group pursuant to which the third parties have been given access to aspects of the Intellectual Property in order to evaluate the Intellectual Property. No consideration is payable by such third parties under the confidentiality agreements. The confidentiality agreements would have been undertaken irrespective of the Proposed Transactions and the decision to undertake the Proposed Transactions would have been made irrespective of entering into of the confidentiality agreements. DC does not receive any royalties from third parties outside of the DC group in respect of the Intellectual Property.

c) A new paragraph 4A will be added to state as follows:

In connection with the Proposed Transactions, DC has learned that some of the patents developed and beneficially owned by DC XXXXXXXXXX (rather than DC)).

d) Paragraph 5 will be amended to read as follows:

DC had outstanding long term debt of approximately $XXXXXXXXXX as at

XXXXXXXXXX under a secured group credit facility with a financial institution as lender (the "Facility"). Other members of Parent's group are parties to the Facility and have indebtedness outstanding thereunder. All parties to the Facility may draw down under the Facility (subject to its terms). The Facility is cross-collateralized; every party to the Facility is a guarantor of all other parties' indebtedness under the Facility. Generally, under the terms of the Facility any new member of Parent's group is required to become a party to the Facility.

e) A new Paragraph 5A will be added as follows:

DC's balance sheet as at XXXXXXXXXX , reflected additional amounts owing of $ XXXXXXXXXX . Such amounts are due within the next XXXXXXXXXX months. DC does not have any balance in its RDTOH or CDA.

f) Paragraph 6 will be amended by replacing the last sentence with the following:

Forco purchases XXXXXXXXXX from an arm's length third party for sale to DC and another third-party customer. DC maintains fixed assets in XXXXXXXXXX (including machinery and equipment) (the "Fixed Assets") which Forco utilizes in the conduct of its business. The Fixed Assets are not subject to a lease and DC does not receive any rent from Forco for the use of the Fixed Assets; DC may remove the Fixed Assets at any time. DC does not own the shares of any other corporation.

g) Paragraph 15 will be amended by replacing the term "intellectual property" with the defined term "the Intellectual Property".

h) The second paragraph of Paragraph 17 will be amended to read as follows:

Each TechCo Reorganization Share will be redeemable at any time at the option of the issuer and retractable at any time at the option of the holder for an aggregate amount equal to the fair market value of the property received for the issuance of the shares, net of any liabilities assumed by the issuer at the time of issuance and the value of any other non-share consideration provided by the issuer by virtue of entering into the Facility (as described in Paragraph 44A), divided by the number of TechCo Reorganization Shares issued as consideration for such property.

i) The second paragraph of Paragraph 18 will be amended to read as follows:

Each PlantCo Reorganization Share will be redeemable at any time at the option of the issuer and retractable at any time at the option of the holder for an aggregate amount equal to the fair market value of the property received for the issuance of the shares, net of any liabilities assumed by the issuer at the time of issuance and the value of any other non-share consideration provided by the issuer by virtue of entering into the Facility (as described in Paragraph 44A), divided by the number of PlantCo Reorganization Shares issued as consideration for such property.

j) The fourth sentence in Paragraph 19 will be amended by replacing the words "without nominal or par value" with the words "with nominal par value".

k) The following new Paragraph 29A will be added after Paragraph 29:

DC will transfer its legal title to (but not beneficial ownership of) PlantC to Aco as bare trustee for no consideration. DC will enter into a bare trust agreement with Aco the terms of which will include the following:

(a) Aco will hold legal title to PlantC as nominee, agent and bare trustee for the sole benefit and account of DC as principal and beneficial owner; and

(b) Aco will not deal with PlantC in any way, or execute any instrument, document or encumbrance in respect of PlantC without prior written consent or direction of DC.

For greater certainty, DC will be the only beneficiary of such bare trust arrangement and will remain the beneficial owner of such property and Aco will deal with such property exclusively as directed by DC at all time. On the subsequent transfer of the beneficial ownership of PlantC by DC to PlantCo as contemplated, a similar bare trust agreement between Aco and PlantCo will be executed.

l) The first sentence of Paragraph 33 will use the defined term "the Intellectual Property" rather than "intellectual property".

m) The last sentence of the first paragraph of Paragraph 33 will be amended by the following:

In consideration for the transfer, TechCo may assume liabilities of DC and may provide non-share consideration to TechCo by virtue of its becoming a party to the Facility (as described in Paragraph 44A) and will issue TechCo Reorganiztion Shares, with an aggregate fair market value and redemption amount equal to the fair market value of the property transferred to TechCo, as described herein, net of any liabilities assumed by TechCo in respect thereof and the value of any non-share consideration provided by TechCo by virtue of TechCo becoming a party to the Facility (the "TechCo Redemption Amount").

n) The first sentence of Paragraph 34 will be amended to refer to beneficial ownership of PlantC and the Fixed Assets, such that the sentence reads:

Immediately after the transfer of the DC PlantCo Reorganization Shares to PlantCo, DC will transfer to PlantCo, certain business assets including beneficial ownership of PlantC and related equipment, the Fixed Assets and cash or near-cash property (collectively the "PlantCo Butterflied Assets") such that the net fair market value of each type of property so transferred to PlantCo (after allocating and deducting, in the manner described in Paragraph 16 above, the liabilities of DC that are to be assumed by PlantCo) will approximate the PlantCo Butterfly Proportion of the net fair market value of all of the property of that type owned by DC immediately before the transfer.

o) The last sentence of the first paragraph of Paragraph 34 should be amended to read as follows:

In consideration for the transfer, PlantCo may assume liabilities of DC and may provide non-share consideration to PlantCo by virtue of its becoming a party to the Facility (as described in Paragraph 44A) and will issue PlantCo Reorganization Shares, with an aggregate fair market value and redemption amount equal to the fair market value of the property transferred to PlantCo, as described herein, net of any liabilities assumed by PlantCo in respect thereof and the value of any non-share consideration provided by PlantCo by virtue of PlantCo becoming a party to the Facility (the "PlantCo Redemption Amount").

p) The first sentence of Paragraph 44 will be amended as follows:

Parent will transfer its DC New Common Shares to Blocker for shares of Blocker having a fair market value not exceeding the value of the DC New Common Shares so transferred.

q) The following two Paragraphs will be added after Paragraph 44.

44A. PlantCo, TechCo and Blocker will become parties to the Facility (referred to in Paragraph 5) as required by the terms of the Facility.

44B. XXXXXXXXXX

We hereby confirm that notwithstanding the amendments to the Facts and Proposed Transactions relating to the Ruling as described herein and subject to the conditions, limitations, qualifications and comments set out in the Ruling, the advance income tax rulings given in the Ruling will continue to be binding on the Canada Revenue Agency.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislation Policy and Regulatory Affairs Branch