8 October 2009 External T.I. 2008-0298641E5 - Conversion from Georgia corp. to Delaware LLC

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) Is a Georgian corporation (Georgia Co.) who holds shares of a Canadian corporation (Canco) deemed to have disposed of the shares of Canco when it converts to a Delaware LLC? (2) If not, would the Delaware LLC inherit Georgia Co.'s cost in the Canco shares?

Position: (1) Question of Fact.(2) Yes.

Reasons: (1)Relevant foreign law needs to be analyzed. (2)With no disposition there is no taxable event on the conversion.

								2008-029864
XXXXXXXXXX 							Shelley Lewis
(613) 957-2118
October 8, 2009

Dear XXXXXXXXXX ,

Re: The Conversion of a Georgia Corporation to a Delaware Limited
Liability Company

We are responding to your inquiry of October 23, 2008, wherein you inquired whether the CRA would consider the conversion of a Georgia Corporation to a Delaware Limited Liability Company a taxable event.

Specifically you inquired whether a Georgian corporation ("Georgia Co."), which holds shares of a Canadian corporation ("Canco") that constitute taxable Canadian property, would be deemed to have disposed of the shares of Canco when it converts to a Delaware LLC. If there would not be a disposition on such a conversion, you further requested that we confirm that Delaware LLC will inherit Georgia Co.'s cost of the shares of Canco. In the event that there would be a disposition you requested that we: (1) address whether Georgia Co. would require a clearance certificate; (2) determine whether the cost basis of the Canco shares to the LLC would be equal to the fair market value of the shares at the time of the conversion; (3) and determine whether the stop-loss rule in subsection 40(3.4) would apply to Georgia Co.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject of an advance income tax ruling request submitted in a manner set out in Information Circular 70-6R5. However, we do provide technical interpretations to general queries and we are prepared to provide the following comments which, as indicated in paragraph 22 of Information Circular 70-6R5, do not constitute an advance income tax ruling and are not binding on the CRA.

To determine whether a disposition of property has occurred on a conversion from one type of entity into another type of entity, we need to examine many factors including, among other things, the classification of the relevant entities for Canadian commercial and tax purposes, the relevant corporate laws, the details of the plan of conversion and the provisions of the Canadian Income Tax Act (especially the definition of disposition in subsection 248(1)).

With respect to the classification of the relevant entities you have advised that both the Georgia Co and the Delaware LLC are corporations for the purposes of Act. In such case, the CRA would generally rely on the relevant corporate or company law and the details of the plan of conversion to determine whether a disposition of property has occurred.

In determining whether there is a disposition, the definition of "disposition" in subsection 248(1) is instructive. The definition of "disposition" in subsection 248(1) of the Act is not an exhaustive definition but pursuant to paragraph (e) excludes any transfer of property as a consequence of which there is no change in the beneficial ownership of the property, except in certain circumstances involving trusts which are not present here.

It is our view that there would not be a disposition of the Canco shares for the purposes of the Act if under the relevant corporate law Delaware LLC is considered to be the same corporation as the corporation that was converted, i.e. if Georgia Co. did not cease to exist. This is because if Georgia Co. becomes a Delaware LLC the same person would be considered to continuously hold the Canco shares for the purposes of the Act and as such, the transaction would be excluded from paragraph (e) of the definition of "disposition" in subsection 248(1) as there would be no change in beneficial ownership.

It is our understanding that a conversion of Georgia Co. to a Delaware LLC may occur without Georgia Co. ceasing to exist if the plan of conversion does not provide for Georgia Co. to cease to exist 1 . Provided the plan of conversion does not provide for the Georgia Co. to cease to exist, (i.e. that the converted entity is the same entity as the entity that existed before the conversion), it is our view that there would be no disposition of the Canco shares on the conversion. Consequently, the cost of the shares of Canco to Delaware LLC would be equal to Georgia Co.'s cost of the shares of Canco.

If the plan of conversion provides for Georgia Co. to cease to exist there would be a disposition of the shares of Canco by the Georgia Co to the Delaware LLC which may give rise to a gain or loss and affect the cost basis of the Canco shares to the Delaware LLC. However, without the specific details pertaining to a factual case we are unable to comment on such consequences.

We trust these comments are of assistance.

Olli Laurikainen
for Director
International Tax and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES

1 Paragraph (b) of section 1109.3 of Chapter 14 of Title 2 of the Georgia Code provides that to effect a conversion the corporation must adopt a plan of conversion and paragraph (g) provides that the conversion shall be effected as provided in, and shall have the effect provided by, the law of the state or jurisdiction under whose law the resulting entity is formed and by the plan of conversion, to the extent not inconsistent with such law. Paragraph (g) of section 18-214 of the Delaware Limited Liability Company Act provides, inter alia, that unless otherwise agreed, the conversion of one entity shall be deemed not to constitute a dissolution of the other entity. The limited liability company shall be deemed to be the same entity as the converting other entity and the conversion shall constitute a continuation of the existence of the converting entity in the form of an LLC.