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: (1) Whether transaction constitutes reorganization of the taxpayer's business for purposes of subsection 84(2)? (2) Whether subsection 84(4.1) [as proposed to be amended by Bill C-10] applies?
Position: (1) Yes. (2) Yes.
Reasons: (1) Taxpayer is able to make a reasonable argument, based on the particular facts of this case, that the transaction in question should be considered a reorganization of the taxpayer's business for purposes of subsection 84(2). (2) In this particular case, it is our opinion that subsection 84(4.1) [as proposed to be amended by Bill C-10] applies.
XXXXXXXXXX 2008-028933
XXXXXXXXXX , 2008
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayer referred to above. We also acknowledge our subsequent telephone conversations and email correspondence concerning your request. The documents submitted with your request are part of this document only to the extent described herein.
We understand that to the best of your knowledge and that of the taxpayers on whose behalf this ruling was requested, none of the issues involved in this ruling are:
(a) in an earlier return of the taxpayers 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 taxpayers or a related person;
(c) under objection by the taxpayers or a related person;
(d) in relation to the taxpayers or a related person, before the courts or the subject of a judgment the time limit for appeal from which has not expired; or
(e) the subject of a ruling previously considered by the Directorate in relation to the taxpayers or a related person.
Definitions
In this letter, unless otherwise indicated or the context otherwise requires, the following terms have the meanings specified:
"Act" means the Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th supp.), as amended to the date hereof. Unless stated otherwise, all statutory references in this letter are to the Act;
"adjusted cost base" ("ACB") has the meaning assigned by section 54 of the Act;
"Allocated Funds" has the meaning described in paragraph 12 below;
"BCA" means the XXXXXXXXXX
"CAD" means Canadian dollars;
"Closing Date" means XXXXXXXXXX ;
"Distributed Property" means the aggregate net amount of after-tax cash received by Subco as proceeds from the sale of its Forco 1 shares and from the repayment of the XXXXXXXXXX Loan, plus the Remaining Allocated Funds;
"Distribution" has the meaning described in paragraph 23 below;
XXXXXXXXXX ;
"XXXXXXXXXX Loan" has the meaning described in paragraph 11 below;
"Forco 1" means XXXXXXXXXX .;
"Forco 2" means XXXXXXXXXX .;
"paid-up capital" ("PUC") has the meaning assigned by subsection 89(1) of the Act;
"Project" means Forco 1's XXXXXXXXXX ;
"Proposed Transactions" (also "Reorganization") means the transactions described in that section of this letter;
"Prospectus" has the meaning described in paragraph 12 below;
"Pubco" means XXXXXXXXXX ;
"public corporation" has the meaning assigned by subsection 89(1) of the Act;
"Purchase Price" means XXXXXXXXXX ;
"Purchaser" means XXXXXXXXXX ;
"Remaining Allocated Funds" has the meaning described in paragraph 14 below;
XXXXXXXXXX
"SPA" means the Share Purchase Agreement between Subco, Forco 2 and the Purchaser, dated XXXXXXXXXX ;
"stated capital" has the meaning assigned by the BCA;
"Subco" means XXXXXXXXXX .;
"Subco Loan" has the meaning described in paragraph 5 below;
"taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act; and
"USD" means United States of America dollars.
Facts
1. Pubco's address is XXXXXXXXXX . Its Business Number is XXXXXXXXXX . Pubco files its return at the XXXXXXXXXX Taxation Centre located at XXXXXXXXXX and its Tax Services Office is the XXXXXXXXXX Tax Services Office.
2. The principal business of Pubco is the XXXXXXXXXX
3. Pubco was incorporated under the BCA and is a public corporation. Pubco's shares are traded on the XXXXXXXXXX Stock Exchange under the ticker symbol XXXXXXXXXX . Pubco is a taxable Canadian corporation and is resident only in Canada for the purposes of the Act and is not resident in any other country. Pubco's authorized share capital consists of XXXXXXXXXX common shares without par value, of which XXXXXXXXXX common shares were issued and outstanding as of XXXXXXXXXX . The paid-up capital of the issued and outstanding shares of Pubco is approximately CAD $ XXXXXXXXXX .
4. Subco was incorporated by Pubco under the BCA and is, and always has been, wholly-owned by Pubco. Subco is a taxable Canadian corporation and is resident only in Canada.
5. Pubco's ACB in Subco's shares is CAD $XXXXXXXXXX and the paid-up capital of Subco's shares is CAD $XXXXXXXXXX . From XXXXXXXXXX to XXXXXXXXXX , Pubco advanced to Subco approximately CAD $XXXXXXXXXX in additional funds on an interest-free basis (the "Subco Loan").
6. Forco 1 was incorporated under the laws of XXXXXXXXXX . It is resident in XXXXXXXXXX for purposes of the Act and does not carry on business in Canada for purposes of the Act. The authorized share capital of Forco 1 consists of XXXXXXXXXX common shares of XXXXXXXXXX each, of which XXXXXXXXXX are issued and outstanding. Forco 1 is in the business of XXXXXXXXXX
7. Subco owns XXXXXXXXXX of the issued and outstanding common shares of Forco 1, representing approximately XXXXXXXXXX %.
8. Forco 2 was incorporated under the laws of XXXXXXXXXX and owns XXXXXXXXXX of the issued and outstanding common shares of Forco 1, representing approximately XXXXXXXXXX %.
9. Two issued and outstanding common shares of Forco 1 are not owned by either Subco or Forco 2. XXXXXXXXXX .
10. Subco's ACB in the shares of Forco 1 is approximately CAD $XXXXXXXXXX .
11. From XXXXXXXXXX to XXXXXXXXXX , Subco advanced USD $XXXXXXXXXX to Forco 1 on an interest-free basis ("XXXXXXXXXX Loan"). In XXXXXXXXXX , Forco 1 repaid USD $XXXXXXXXXX . As a result, the remaining balance payable to Subco is USD $XXXXXXXXXX .
12. In XXXXXXXXXX , Pubco raised CAD $XXXXXXXXXX net of underwriters' fees from the private placement of XXXXXXXXXX special warrants, as described in the short form prospectus of Pubco dated XXXXXXXXXX (the "Prospectus"). The warrants were exchanged for common shares on a XXXXXXXXXX basis in XXXXXXXXXX . The Prospectus states that CAD $XXXXXXXXXX of the funds raised from this private placement would be allocated to, and used to complete the first two phases of, the Project (the "Allocated Funds").
13. By the Closing Date, CAD $XXXXXXXXXX of the Allocated Funds had been spent on plant and equipment to complete the first two phases of the Project, as follows:
Year Amount (CAD)
XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
$XXXXXXXXXX
14. At the Closing Date, CAD $XXXXXXXXXX of the Allocated Funds had not been spent on the Project and remained on hand (the "Remaining Allocated Funds").
15. Pursuant to the SPA, Subco and Forco 2 sold all of their respective shares of Forco 1 to the Purchaser for the Purchase Price on the Closing Date, and conditions for release from escrow were met on XXXXXXXXXX .
16. Subco's share of the Purchase Price (i.e., proceeds from the sale of the Forco 1 common shares) is approximately CAD $XXXXXXXXXX (depending on exchange rates at the time of closing).
17. As a condition of the SPA, Forco 1 repaid the XXXXXXXXXX Loan due to Subco in the amount of USD $XXXXXXXXXX . Thus, the aggregate cash that will be received by Subco is approximately CAD $XXXXXXXXXX .
18. Also as a condition of the SPA, the Purchaser entered into an agreement (XXXXXXXXXX ) with Pubco or one of its subsidiaries prior to the Closing Date. The XXXXXXXXXX provides Pubco with a continued supply of XXXXXXXXXX currently provided by Forco 1. In addition, the XXXXXXXXXX provides that Pubco will act as a XXXXXXXXXX for the sale of the Purchaser's XXXXXXXXXX and will have the first opportunity to negotiate contractual arrangements for other XXXXXXXXXX with the Purchaser XXXXXXXXXX .
19. [Deleted]
Proposed Transactions
20. The Proposed Transactions will occur after shareholder approval has been granted, possibly during the month of XXXXXXXXXX .
21. With the CAD $XXXXXXXXXX proceeds from the sale of Forco 1 shares (less any Canadian and XXXXXXXXXX taxes payable) and the repayment by Forco 1 of the USD $XXXXXXXXXX Loan, Subco will repay its CAD $ XXXXXXXXXX Subco Loan to Pubco and the remaining balance of the proceeds will be paid to Pubco as a return of capital.
22. Pending shareholder approval, the grant of the rulings herein, and any other regulatory approvals, Pubco will pass a special resolution to reduce the stated capital of its common shares in accordance with the BCA by an amount equal to the amount of the Distributed Property.
23. Concurrently with the reduction of its stated capital, Pubco will distribute the Distributed Property on a pro rata basis to the holders of its common shares (the "Distribution").
24. Concurrently with the reduction of its stated capital and with the Distribution, Pubco will also declare and pay a one-time special taxable dividend of approximately US$XXXXXXXXXX per share in order to distribute additional cash that is not related to the sale of Forco 1 and that is not Distributed Property.
25. Cash received from the repayment of the Subco Loan will form a significant portion of the Distributed Property.
26. The amount of the Distribution will not exceed the PUC of the Pubco common shares.
27. The proposed reduction in the stated capital of Pubco's common shares has not been preceded by an increase in the PUC of that class that resulted in a dividend in respect of which Pubco elected to treat as having been paid out of Pubco's 1971 capital surplus on hand.
28. The reduction of stated capital and Distribution by Pubco are not being made in lieu of ordinary course dividends. Pubco has never paid dividends to its shareholders and the Distribution is intended to represent a one-time transaction.
29. Neither Pubco nor Subco has any outstanding tax liabilities that could be affected by the Proposed Transactions.
30. The repayment of the XXXXXXXXXX Loan and the Subco Loan is intended to compensate the holders of those loans for their investments in each of Forco 1 and Subco, and the repayment of these loans is being made as a direct result of, and in order to facilitate, the purchase of the Forco 1 shares by the Purchaser.
31. XXXXXXXXXX , a sale of the XXXXXXXXXX Loan would have required additional government approvals and may have also triggered certain XXXXXXXXXX tax consequences.
Purpose of Proposed Transactions
32. As a result of various factors, including unfavourable governmental regulations, Forco 1 had been underperforming for several years. Forco 1's underperformance was putting a strain on Pubco's financial results. Therefore, Pubco believes that it is in the best interests of the shareholders of Pubco for Subco to sell its shares of Forco 1. Selling the shares of Forco 1 would provide a significant infusion of cash into Subco and ultimately into Pubco and would also give Pubco the opportunity to continue as a XXXXXXXXXX of XXXXXXXXXX through the XXXXXXXXXX with the Purchaser.
33. The sale of Forco 1 shares and the repayment of the XXXXXXXXXX Loan and the Subco Loan infused Pubco with a significant amount of cash. After careful consideration of the cash requirements of Pubco, Pubco determined that the cash remaining after the Distribution would be adequate to support any potential growth of Pubco. Therefore, Pubco believes that it is in the best interests of its shareholders to distribute the funds to its common shareholders by way of a reduction in stated capital.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, the Proposed Transactions, and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed as described, our rulings are as follows:
A. Subject to the potential application of subsection 40(3), the reduction of the stated capital of the common shares of Pubco will not, in and by itself, result in a disposition within the meaning of subsection 248(1) of Pubco shareholders common shares.
B. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to the Distribution.
C. Where a common shareholder of Pubco holds his or her shares as capital property, by virtue of subparagraph 53(2)(a)(ii) of the Act, an amount equal to his or her proportionate share of the Distributed Property will be deducted in computing the ACB of his or her shares. To the extent such amount exceeds the ACB to such shareholder of the shares, the shareholder will be deemed to have a capital gain pursuant to subsection 40(3).
D. Subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.
Our rulings are given subject to the limitations set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided the Proposed Transactions are completed within six months of the date of this letter. Our rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act or Regulations.
Opinion
Provided that our understanding of the facts and proposed transactions described herein is correct, and provided that proposed subsection 84(4.1) of the Act is enacted in the form proposed by Bill C-10 which received second reading in the Senate on December 4, 2007 and which subsequently died on the Order Paper, and also provided that:
(i) the sale of the Forco 1 shares is outside of the ordinary course of the businesses of Pubco and Subco;
(ii) the Distribution is made within 24 months of the sale of Forco 1's shares; and
(iii) no amount that could reasonably be considered to have been derived from the amounts described herein was paid by Pubco on a previous reduction of the paid-up capital in respect of any class of shares of Pubco's capital stock;
it is our opinion that proposed subsection 84(4.1) will not apply to deem the Distribution to be a dividend.
Nothing in this ruling should be construed as implying that CRA has reviewed any tax consequences relating to the facts or the Proposed Transactions other than those described in the rulings given above, or has agreed:
(a) to the fair market value or adjusted cost base of any asset or to the paid-up capital of any share; or
(b) to any tax consequences relating to any transaction described herein other than those specifically described in the rulings given above.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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