2008 Ruling 2008-0268961R3 - Election to cease being a public corporation

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 corporation resulting from a vertical amalgamation can elect to cease being a public corporation under paragraph (c) of the definition of "public corporation" in subsection 89(1) where its shares that were previously listed disappeared on the amalgamation. The purpose of the election is to ensure that the corporation can return capital without being subject to the application of subsection 84(4.1). The intention of the corporation's shareholder is to replace that capital with debt. The corporation is controlled by a foreign corporation.

Reasons: Yes. The corporation is controlled by a foreign corporation and in these circumstances, as in file 2000-0004789, we consider that the words of subparagraph (a)(i) of regulation 4800(2) support that conclusion when read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of Parliament.

XXXXXXXXXX 									2008-026896

XXXXXXXXXX , 2008

Dear Sir:

Re: XXXXXXXXXX (Business Number XXXXXXXXXX ,
XXXXXXXXXX Tax Services Office, XXXXXXXXXX Taxation Centre)

We are writing in response to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge receipt of your emails.

To the best of your knowledge and that of the above-referenced taxpayer, none of the issues involved in this ruling is:

(a) in an earlier return of the above-referenced taxpayer or a related person;
(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the above-referenced taxpayer or a related person;
(c) under objection by the above-referenced taxpayer or a related person;
(d) before the courts; or
(e) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The above-referenced taxpayer has confirmed that the proposed transactions described herein will not affect its ability to pay any of its outstanding tax liabilities.

All statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c. 1, as amended to the date hereof (the "Act") and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

In this letter, the following terms have the meanings specified:

"A Co" means XXXXXXXXXX ., a corporation governed by the laws of XXXXXXXXXX , a non-resident of Canada for purposes of the Act and a resident of XXXXXXXXXX for treaty purposes. All of its issued and outstanding shares are owned by Parentco;

"Acquisition" means XXXXXXXXXX ;

"adjusted cost base" has the meaning assigned by subsection 248(1);

"Amalco" means XXXXXXXXXX , a taxable Canadian corporation formed by the Amalgamation. Amalco is engaged, directly and through subsidiary corporations and partnerships, in the businesses formerly carried on by C Co, D Co and F Co, which are the XXXXXXXXXX ;

"Amalco Common Shares" means issued and outstanding common shares of Amalco;

"Amalgamation" means the amalgamation on XXXXXXXXXX of B Co, C Co, D Co and F Co pursuant to the First Act to form Amalco;

"Amount of the Loan" means an amount expected to be approximately equal to $XXXXXXXXXX ;

"B Co" means XXXXXXXXXX . Prior to the Amalgamation, (i) the only issued and outstanding shares of B Co were common shares and A Co owned all those shares; (ii) B Co was governed by the First Act; and (iii) B Co was a taxable Canadian corporation and a private corporation;

"C Co" means XXXXXXXXXX . Prior to the Amalgamation, (i) the only issued and outstanding shares of C Co were common shares and B Co owned all those shares; (ii) C Co was governed by the First Act; and (iii) C Co was a taxable Canadian corporation and a public corporation;

"D Co" means XXXXXXXXXX . Prior to the Amalgamation, (i) the only issued and outstanding shares of D Co were common shares and C Co owned all those shares; (ii) D Co was governed by the First Act; and (iii) D Co was a taxable Canadian corporation and was neither a private corporation nor a public corporation;

"designated stock exchange" has the meaning assigned by subsection 248(1);

"E Co" means XXXXXXXXXX , a corporation governed by the laws of XXXXXXXXXX and a non-resident of Canada for purposes of the Act. All of its issued and outstanding shares are owned by A Co;

"Exchange" means the XXXXXXXXXX Stock Exchange, a stock exchange prescribed by Regulation 3200;

"F Co" means XXXXXXXXXX . Prior to the Amalgamation, (i) F Co had two classes of shares issued and outstanding, a class of common shares and a class of preferred shares, all of which were owned by E Co; (ii) F Co was governed by the First Act; and (iii) F Co was a taxable Canadian corporation and a private corporation;

"First Act" means XXXXXXXXXX ;

"Loan" means an additional loan of an amount equal to the Amount of the Loan to be made under an already existing credit facility that was entered into by B Co to finance the Acquisition. The Loan will have a maturity date in XXXXXXXXXX , which is the XXXXXXXXXX anniversary of the first advance under the facility. Amalco will have a legal obligation to pay interest on the Loan at a commercial rate that an arm's length lender would charge under similar circumstances at the time the Loan is made. Interest on the whole amount lent under the Loan will be payable quarterly;

"paid-up capital" has the meaning assigned by subsection 248(1);

"Paragraph" means a numbered paragraph in this letter;

"Parentco" means XXXXXXXXXX , a corporation governed by the laws of XXXXXXXXXX resident in XXXXXXXXXX . Parentco is a non-resident of Canada for the purposes of the Act. XXXXXXXXXX ;

"private corporation" has the meaning assigned by subsection 248(1);

"Proposed Transactions" means the transactions set forth in the Proposed Transactions section of this letter;

"public corporation" has the meaning assigned by subsection 248(1);

"Stated Capital" means the stated capital of the Amalco Common Shares established under the provisions of the First Act and estimated to be equal to $XXXXXXXXXX ; and

"taxable Canadian corporation" has the meaning assigned by subsection 248(1).

FACTS

1. Prior to the Acquisition, the common shares of C Co were publicly traded on the Exchange. Shortly thereafter, the C Co common shares were delisted from the Exchange.

2. B Co, C Co, D Co and F Co undertook the Amalgamation to form Amalco. As part of the Amalgamation:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of each of B Co (XXXXXXXXXX ), C Co, D Co and F Co immediately before the Amalgamation became property of Amalco by virtue of the Amalgamation;

(b) all of the liabilities (except amounts payable to any predecessor corporation) of each of B Co, C Co, D Co and F Co immediately before the Amalgamation became liabilities of Amalco by virtue of the Amalgamation;

(c) the issued and outstanding common shares of B Co were converted into Amalco Common Shares;

(d) the issued and outstanding common shares and preferred shares of F Co were converted into preferred shares of Amalco; and

(e) the issued and outstanding common shares of C Co and the issued and outstanding common shares of D Co were cancelled without any repayment of capital in respect thereof and none of such shares were converted into shares of Amalco.

3. Following the Amalgamation, E Co distributed its preferred shares of Amalco to A Co.

4. As a result of the Amalgamation, the businesses carried on by C Co, D Co and F Co are now carried on by Amalco.

5. At the time of the Amalgamation, C Co was a public corporation pursuant to paragraph (a) of the definition of that term in subsection 89(1). Accordingly, pursuant to paragraph 87(2)(ii), Amalco is deemed to have been a public corporation at the commencement of its first taxation year arising as a result of the Amalgamation.

6. At no time subsequent to the Amalgamation has any class of shares in the capital of Amalco been qualified for distribution to the public, as described in Regulation 4800(2)(c), or been listed on a designated stock exchange in Canada. At no time has Amalco filed an election to be a public corporation pursuant to subparagraph (b)(i) of the definition of "public corporation" in subsection 89(1).

7. The adjusted cost base to A Co of the Amalco Common Shares held by it exceeds the amount of the return of capital described in the Proposed Transactions.

PROPOSED TRANSACTIONS

The following transactions will be undertaken. All steps will occur in sequence and in such manner that, once the first step is taken, all other steps must also be completed.

8. Amalco will file an election in prescribed manner not to be a public corporation pursuant to subparagraph (c)(i) of the definition of "public corporation" in subsection 89(1).

9. A Co will make the Loan to Amalco. XXXXXXXXXX Subsection 18(4) will not limit the amount deductible in computing the income of Amalco in respect of interest payable by it on the Loan.

10. Amalco will reduce the Stated Capital by an amount equal to the Amount of the Loan received from A Co and it will thereupon distribute an amount of cash equal to the Amount of the Loan to A Co on that reduction. The Amount of the Loan will be less than both (i) the paid-up capital of the Amalco Common Shares and (ii) the adjusted cost base to A Co of its Amalco Common Shares, in both cases computed immediately prior to the payment.

PURPOSE OF PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to replace a portion of the capital of Amalco with interest-bearing debt to create interest income in A Co and interest expense in Amalco.

RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above:

A. Amalco will cease to be a public corporation at the time that it elects in prescribed manner not to be a public corporation under subparagraph (c)(i) of the definition of "public corporation" under subsection 89(1).

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on the Canada Revenue Agency provided that the Proposed Transactions are completed within 6 months of the date of this letter.

The above ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:

(a) the determination of the fair market value or adjusted cost base of any particular asset or the paid-up capital in respect of any share referred to herein; or

(b) any tax consequences relating to the facts and Proposed Transactions described herein other than those resulting from the fact that Amalco will cease to be treated as a public corporation after Ruling A becomes applicable.

Yours truly,

For Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch