2008 Ruling 2008-0297681R3 - PUC return by 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 ss. 84(4.1) would apply to return of paid-up capital by public corporation

Position: No.

Reasons: SS. 84(2) will apply.

XXXXXXXXXX 								2008-029768

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: XXXXXXXXXX ("Pubco")

This letter is in reply to your letters of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.

You have advised that to the best of your knowledge and that of Pubco, none of the issues involved in this ruling request is:

1. reflected in an earlier return of Pubco or a related person;

2 being considered by a tax services office or taxation centre in connection with a previously filed tax return of Pubco or a related person;

3. under objection by Pubco or a related person;

4. before the courts; or

5. the subject of a ruling previously issued by the Income Tax Rulings Directorate, other than the advance income tax ruling issued on XXXXXXXXXX , 2005 (our reference 2004-006753).

DEFINITIONS

This letter contains references to Canadian dollars and United States dollars. All monetary amounts referred to, unless otherwise indicated, are expressed in Canadian dollars, and United States dollars are referred to as "USD$".

The following terms or expressions have the meaning specified:

a) "adjusted cost base" or "ACB" has the meaning assigned by section 54;

b) "capital property" has the meaning assigned by section 54;

c) "Class A Capital Return" means the distribution of cash to be effected as a reduction of stated capital in respect of the Pubco Class A Common Shares, as described in Paragraph 26(i) below;

d) "Class B Capital Return" means the distribution of cash to be effected as a reduction of stated capital in respect of the Pubco Class B Common Shares, as described in Paragraph 26(ii) below;

e) "Class A Common Shares" means the Class A subordinate voting shares of Pubco;

f) "Class B Common Shares" means the Class B shares of Pubco;

g) [Intentionally left blank];

h) "F Co" means XXXXXXXXXX , a corporation which was incorporated under the laws of the State of XXXXXXXXXX ;

i) "XXXXXXXXXX Group" means a group consisting of certain members of the XXXXXXXXXX families (XXXXXXXXXX ), together with numerous corporations, partnerships and trusts held or controlled by such individuals;

j) [Intentionally left blank];

k) XXXXXXXXXX

1) "paid-up capital" or "PUC" has the meaning assigned by subsection 89(1);

m) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;

n) "Previous AITR" means document # 2004-006753;

o) "Previous Proposed Transactions" means the proposed transactions outlined in the Previous AITR;

p) "private corporation" has the meaning assigned by subsection 89(1);

q) "Proposed Transactions" means the transactions described in Paragraphs 25 and 26 below;

r) "Pubco" means XXXXXXXXXX ;

s) "public corporation" has the meaning assigned by subsection 89(1);

t) "S Co" means XXXXXXXXXX ., a taxable Canadian corporation which was a public corporation;

u) "stated capital" means stated capital for purposes of the XXXXXXXXXX ;

v) "subject corporation" has the meaning assigned by subsection 186(3);

w) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

x) "taxable dividend" has the meaning assigned by subsection 89(1); and

y) "W Co" means XXXXXXXXXX

Our understanding of the facts, Proposed Transactions, the purpose of the Proposed Transactions and relevant additional information is as follows:

FACTS

1. Pubco was incorporated under the laws of the province of XXXXXXXXXX on XXXXXXXXXX , and is a public corporation whose Class A Common Shares were listed on the XXXXXXXXXX Stock Exchange prior to XXXXXXXXXX , and are currently listed on the XXXXXXXXXX .

2. Pubco's business number is XXXXXXXXXX and it files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office. Pubco's address is XXXXXXXXXX

3. Pubco's fiscal year-end is XXXXXXXXXX .

4. Pubco is a taxable Canadian corporation and is resident in Canada for the purposes of the Act.

5. Currently, Pubco's share capital consists of:

(i) unlimited authorized, and XXXXXXXXXX issued and outstanding Class A Common Shares, carrying one vote per share;

(ii) XXXXXXXXXX authorized, issued and outstanding Class B Common Shares, carrying XXXXXXXXXX votes per share, convertible into Class A Common Shares on a one-for-one basis, and

(iii) unlimited authorized, and no issued and outstanding Preference Shares.

6. The stated capital attributable to all of Pubco's shares is:

(i) $ XXXXXXXXXX in respect of the issued and outstanding Class A Common Shares; and

(ii) $ XXXXXXXXXX in respect of the issued and outstanding Class B Common Shares.

7. PUC attributable to Pubco's shares is at least:

(i) $ XXXXXXXXXX in respect of the issued and outstanding Class A Common Shares; and

(ii) $ XXXXXXXXXX in respect of the issued and outstanding Class B Common Shares.

The PUC of the Pubco shares arises from the issuance of shares for cash, the exercise of employee stock options, and the acquisition of certain capital properties by Pubco. The PUC of the Pubco shares includes any reduction required under subsection 85(2.1) in respect of shares issued as consideration for the transfer of property in a transaction to which subsection 85(1) applied, and any reduction required under subsection 85.1(2.1) in respect of shares issued as consideration for the transfer of shares of S Co in a transaction to which section 85.1 applied. The PUC of the Pubco shares includes any increase related to the amount of share issuance costs, which were deducted from share capital for financial statement purposes.

8. The stated capital and PUC of the Class A Common Shares is, and immediately before the Proposed Transactions is expected to be, at least $XXXXXXXXXX and $XXXXXXXXXX per Class A Common Share, respectively.

9. The stated capital and PUC of the Class B Common Shares is, and immediately before the Proposed Transactions is expected to be, at least $XXXXXXXXXX and $XXXXXXXXXX per Class B Common Share, respectively.

10. Pubco is controlled by the members of the XXXXXXXXXX Group, through their ownership and/or control of approximately XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class B Common Shares, representing in aggregate approximately XXXXXXXXXX % of the voting rights attached to the issued and outstanding shares in the capital of Pubco. The remaining Class A Common Shares are held by members of the public.

11. Pubco previously directly, and indirectly through numerous foreign subsidiaries, carried on an XXXXXXXXXX business. On XXXXXXXXXX , this business, and the related net assets, was sold to an arm's-length person for cash consideration.

12. Over a period of time, Pubco divested itself of its two principal subsidiaries, S Co and F Co, both of which had operated active businesses.

13. Pubco previously owned, directly and indirectly, XXXXXXXXXX common shares of S Co in aggregate, representing approximately XXXXXXXXXX % of the then issued and outstanding common shares of S Co. S Co began a major financial restructuring in XXXXXXXXXX , and divested itself of its foreign operations on a piecemeal basis over the period from XXXXXXXXXX . On XXXXXXXXXX , Pubco disposed of its direct and indirect holdings of S Co shares for aggregate consideration consisting of a combination of cash of approximately $XXXXXXXXXX ($XXXXXXXXXX per S Co share), and two notes receivable in the principal amounts of approximately $XXXXXXXXXX ($XXXXXXXXXX per S Co share) and USD $XXXXXXXXXX (USD $XXXXXXXXXX per S Co share).

14. Pubco previously owned XXXXXXXXXX % of the issued and outstanding common shares of F Co. In XXXXXXXXXX , F Co disposed of its XXXXXXXXXX business for gross proceeds of approximately USD $XXXXXXXXXX . During XXXXXXXXXX , F Co reached an agreement with its lenders that addressed F Co's ongoing default under its loan agreements. Under the terms of an amendment to F Co's loan agreements, Pubco relinquished its control of F Co, but retained its equity position. On XXXXXXXXXX , the lenders finalized and closed the sale of F Co. On XXXXXXXXXX , Pubco received $XXXXXXXXXX from the lenders, representing its XXXXXXXXXX % share of the net proceeds of the F Co shares as defined under the terms of the amendment.

15. Following the divesture of the shares of S Co and F Co, Pubco ceased to have any direct or indirect equity interest in an active business. Pubco has not invested in another active business, nor does Pubco presently intend to recommence any active business.

16. Immediately following the sale of the S Co shares, Pubco decided to distribute the net proceeds on the sale of the shares of S Co, subject to the retention of a cash reserve pending the resolution of potential claims in respect of F Co. On XXXXXXXXXX , Pubco filed a request for an advance income tax ruling related to the Previous Proposed Transactions, in order to allow each shareholder of Pubco the choice of receiving its share of the distribution as either a return of capital or as a taxable dividend, depending on the class of shares held by the particular shareholder.

17. XXXXXXXXXX

18. XXXXXXXXXX

19. XXXXXXXXXX

20. XXXXXXXXXX

21. XXXXXXXXXX

22. XXXXXXXXXX

23. XXXXXXXXXX

24. Pubco does not have a policy of paying regular annual dividends on either the Class A Common Shares or the Class B Common Shares. Pubco's last dividend was paid in XXXXXXXXXX , in the aggregate amount of approximately $XXXXXXXXXX . Pubco has not paid any other dividends since XXXXXXXXXX . None of the dividends paid by Pubco exceeded its retained earnings at the time the dividends were paid.

PROPOSED TRANSACTIONS

25. Pubco will convene a special meeting of shareholders to consider and, if acceptable, pass a special resolution to authorize the Board of Directors to reduce the stated capital attributable to each Class A Common Share and each Class B Common Share, in such equal amount per share as the Board shall determine and make a cash distribution to the shareholders equal to such reduction, provided that such reduction shall not exceed $XXXXXXXXXX per share.

26. If the necessary shareholder approvals are obtained, the following transactions will be implemented in the following order:

i) Pubco will reduce the stated capital attributable to the Class A Common Shares and make a distribution of up to $XXXXXXXXXX per Class A Common Share to the holders of the Class A Common Shares (the "Class A Capital Return") to be paid in cash.

ii) Pubco will reduce the stated capital attributable to the Class B Common Shares by an equal amount per share as that determined in Paragraph 26(i) above, and make a distribution of such amount to the holders of the Class B Common Shares (the "Class B Capital Return") to be paid in cash.

ADDITIONAL INFORMATION

27. Pubco does not have any outstanding tax liabilities that could be affected by the Proposed Transactions.

28. The proposed reductions of stated capital of the Pubco Shares described in Paragraph 26 above are not in lieu of ordinary course dividends.

29. None of the Class A Common Shares and Class B Common Shares is, or will be at any time during the implementation of the Proposed Transactions:

(i) a term preferred share as that term is defined in subsection 248(1);

(ii) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";

(iii) the subject of a dividend rental arrangement referred to in subsection 112(2.3), as that term is defined in subsection 248(1);

(iv) the subject of any secured undertaking of the type described in paragraph 112(2.4); or

(v) issued for consideration that is or includes:

a) an obligation of the type described in subparagraph 112(2.4)(b)(i); or

b) any right of the type described in subparagraph 112(2.4)(b)(ii).

PURPOSES OF THE PROPOSED TRANSACTIONS

30. Since Pubco's cash and other investments are not being reinvested in a new business, Pubco wishes to distribute a portion of its cash holdings to its shareholders.

31. It is incumbent upon Pubco's board members to effect this special distribution in the most tax-efficient manner possible to the majority of its shareholders. In consultation with its professional advisers, the directors of Pubco have determined that the contemplated distribution to the holders of its Class A Common Shares and Class B Common Shares should be undertaken as a return of the stated capital of the respective shares, in accordance with XXXXXXXXXX . Pubco's directors have satisfied themselves that the quantum of the contemplated stated capital return will not violate XXXXXXXXXX , namely that the contemplated return of stated capital will not cause Pubco to be unable to pay its liabilities as they come due, nor will it cause the realizable value of its assets to be less than the aggregate of its liabilities.

RULINGS

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

A. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to the Class A Capital Return on the Class A Common Shares or the Class B Capital Return on the Class B Common Shares, as the case may be, such that Pubco will be deemed to have paid to a particular holder of Class A Common Shares or Class B Common Shares, as the case may be, and such holder will be deemed to have received a taxable dividend only to the extent, if any, that the aggregate fair market value of the property distributed by Pubco as a return of capital on such holder's Class A Common Shares or Class B Common Shares, as the case may be, exceeds the amount by which the PUC of such holder's Class A Common Shares or Class B Common Shares, as the case may be, is reduced on the distribution.

B. The taxable dividends, if any, referred to in Ruling A above, will be deductible by each corporate recipient of such dividends in computing its respective taxable income pursuant to subsection 112(1) and, for greater certainty, subsections 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividends.

C. To the extent that the dividend recipient corporation is a private corporation, and such corporation is connected with Pubco, in accordance with subsection 186(4), the taxable dividends, if any, referred to in Ruling A above, will not give rise to Part IV tax to the dividend recipient corporation, in the event that Pubco is a subject corporation at the time of the Class A Capital Return or Class B Capital Return unless Pubco receives a dividend refund for its taxation year in which such taxable dividends arise.

D. Provided that as part of the series of transactions or events that includes the Proposed Transactions described herein, there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v), then by virtue of paragraph 55(3)(a), subsection 55(2) will not apply to the taxable dividends referred to in Ruling A above. For greater certainty, the Proposed Transactions described in paragraphs 25 and 26 herein, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).

E. Where a holder of Class A Common Shares or Class B Common Shares holds such shares as capital property, the Class A Capital Return or Class B Capital Return, as the case may be, received by such holder will be deducted in computing the ACB of the holder's Class A Common Shares or Class B Common Shares, as the case may be, by virtue of subparagraph 53(2)(a)(ii), except to the extent that a dividend is deemed to have been received by the holder on such class of shares by virtue of subsection 84(2).

F. Where the amount of the reduction in the ACB of the particular holder's Class A Common Shares or Class B Common Shares exceeds the ACB of the particular holder's Class A Common Shares or Class B Common Shares, as the case may be, the excess will be deemed to be a capital gain of such holder for the year from the disposition of such shares, pursuant to subsection 40(3).

G. To the extent that a holder of the Class A Common Shares or Class B Common Shares realizes a capital gain on such holder's Class A Common Shares or Class B Common Shares, as the case may be, as a result of the application of subsection 40(3), in computing the ACB of such holder's Class A Common Shares or Class B Common Shares, as the case may be, the amount of the gain will be added to the ACB of such shares by virtue of paragraph 53(1)(a).

H. Subject to the application of subsection 40(3), the payment of the Class A Capital Return or Class B Capital Return will not, in and by itself, result in a disposition of the Class A Common Shares or Class B Common Shares, as the case may be, within the meaning of subsection 248(1).

I. In determining the amount of PUC in respect of each class of Pubco shares, the required deductions to be made pursuant to subparagraph (b)(iii) of the definition "paid-up capital" in subsection 89(1), will not exceed the amount of stated capital otherwise determined. For greater certainty, the PUC for tax purposes in respect of each class of Pubco shares will not be a negative amount immediately after the Proposed Transactions described in Paragraph 26.

J. Subsection 15(1) will not apply to the Proposed Transactions, in and by themselves.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed on or before XXXXXXXXXX .

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

COMMENTS

Unless otherwise confirmed, nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:

a) the determination of the ACB, PUC or fair market value of any shares referred to herein; or

b) any tax consequences relating to the facts and Proposed Transactions described herein other than those described in the rulings given above.

Yours truly,

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