2009 Ruling 2009-0320211R3 - Substituted Property

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 Guarantee Rights constitute Substituted Property as described in paragraph 88(1)(c.3)

Position: Favourable Ruling provided.

Reasons: In compliance with the law and previous positions.

XXXXXXXXXX 2009-032021

July 13, 2009

Dear XXXXXXXXXX :

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 above-noted taxpayer. We also acknowledge the information provided in your letters and e-mails of XXXXXXXXXX , and during our various telephone conversations in connection with your ruling request (XXXXXXXXXX ).

We understand that to the best of your knowledge and that of the taxpayer involved, none of the issues described herein is:

(i) dealt with in an earlier return of the taxpayer or a related person,

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,

(iii) under objection by the taxpayer or a related person,

(iv) before the courts or if a judgment has been issued, the time limit for appeal to a higher court has expired, or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise indicated, all references to monetary amounts are in U.S. dollars.

LEGAL ENTITY DEFINITIONS

In this letter, except in paragraph 22, the taxpayers will be referred to as follows:

(a) "Amalco" means XXXXXXXXXX ., a corporation governed by the CBCA and formed as a result of the Amalgamation of Parent and Target as described in Paragraph 14, which is a subsidiary wholly-owned corporation of SubPubco I;

(b) "Asset Sellers" means XXXXXXXXXX , which are indirect subsidiaries of Amalco, as well as XXXXXXXXXX . which is an indirect subsidiary of SubPubco I; these corporations will be selling the Assets to the Purchaser under the Transaction Agreement, as described in XXXXXXXXXX the Transaction Agreement;

(c) "Cross-Group Loan Sellers" means the legal entities that will be selling the Cross-Group Loans to the Purchaser under the Transaction Agreement, as will be further described in XXXXXXXXXX the Transaction Agreement;

(d) "Final Price" means the aggregate final price for the sale and purchase of the shares of the capital stock of Target Holding Companies, the Cross-Group Loans and the Assets, as described in Paragraph 20;

(e) "Group" means a XXXXXXXXXX , combining Pubco I and its group undertakings and Pubco II and its group undertakings in a dual listed companies structure;

(f) "Parent" means XXXXXXXXXX ., a corporation governed by the CBCA;

(g) "Pubco I" means XXXXXXXXXX ., a publicly listed corporation governed by the laws of XXXXXXXXXX and based in the XXXXXXXXXX ;

(h) "Pubco II" means XXXXXXXXXX , a publicly listed corporation that has executive offices in XXXXXXXXXX ;

(i) "Purchaser" means XXXXXXXXXX ., a publicly listed corporation incorporated under the laws of the state of XXXXXXXXXX of the United States of America, and/or one or more of its subsidiary wholly-owned corporations; these corporations will be acquiring the shares of the capital stock of particular Target Holding Companies, the Cross-Group Loans and the Assets from the Relevant Sellers under the Transaction Agreement;

(j) "Relevant Sellers" means the Asset Sellers, the Cross-Group Loan Sellers and the Share Sellers;

(k) "Share Sellers" means XXXXXXXXXX ., which are direct or indirect subsidiaries of Amalco, as well as XXXXXXXXXX . which is an indirect subsidiary of SubPubco I; these corporations will be selling the shares of the capital stock of particular Target Holding Companies to the Purchaser under the Transaction Agreement;

(l) "SubPubco I" means XXXXXXXXXX , a corporation governed by the laws of XXXXXXXXXX , which is a subsidiary wholly-owned corporation of Pubco I;

(m) "Target" means XXXXXXXXXX . which was amalgamated with Parent as described in Paragraph 14;

(n) "Target Holding Companies" means XXXXXXXXXX ., which are all indirect subsidiaries of Amalco; the shares of the capital stock, or interests in, these corporations will be sold by the Share Sellers to the Purchaser under the Transaction Agreement.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified.

(o) "ACB" has the meaning assigned to the expression "adjusted cost base" in section 54;

(p) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c. 1, as amended from time to time and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act;

(q) "Acquisition" means the acquisition by Parent of all the issued and outstanding common shares of the capital stock of Target as described in Paragraph 13;

(r) "Amalgamation" means the amalgamation of Target and Parent to form Amalco, as described in Paragraph 14;

(s) "Assets" means certain specific assets used in the XXXXXXXXXX that will be sold by the Assets Sellers to the Purchaser under the Transaction Agreement, as further described in XXXXXXXXXX the Transaction Agreement and in the definitions thereto;

(t) "Capital Property" has the meaning assigned by section 54;

(u) "CBCA" means the Canada Business Corporations Act, as amended from time to time;

(v) "CRA" means Canada Revenue Agency;

(w) "Cross-Group Loans" means certain specific debts owed by Target Holding Companies or subsidiaries of Target Holding Companies to Cross-Group Loan Sellers that will be sold by the Cross-Group Loan Sellers to the Purchaser under the Transaction Agreement;

(x) "Distributed Property" means all the property of Target, including all the shares of the capital stock of subsidiaries, which became property of Amalco as a result of the Amalgamation, as described in Paragraph 15;

(y) "FMV" means fair market value;

(z) XXXXXXXXXX

(aa) "Guarantee Rights" means the rights of the Purchaser that will be guaranteed by Pubco I upon the issuance of this letter relating to the due and punctual performance and observance by each Relevant Seller of all its obligations, commitments, undertakings, warranties and indemnities under the Transaction Agreement and the related transaction documents, as further described in Paragraph 21;

(bb) XXXXXXXXXX

(cc) "Paragraph" refers to the numbered paragraphs in this letter;

(dd) "Property" has the meaning assigned by subsection 248(1);

(ee) "Proposed Transactions" means the transactions described in Paragraphs 18 to 21 below;

(ff) "Public Corporation" has the meaning assigned by subsection 89(1);

(gg) "Substituted Property" in relation to property distributed to a "parent" referred to in paragraph 88(1)(c) upon the winding-up of a corporation that is described in subsection 88(1) or an amalgamation described in subsection 87(11), means any property acquired by any person in substitution for Distributed Property for the purpose of applying clause 88(1)(c)(vi)(B) and, for greater certainty, includes any property described in paragraph 88(1)(c.3);

(hh) "Taxable Canadian Corporation" has the meaning assigned by subsection 89(1);

(ii) "Transaction Agreement" means the sale and purchase agreement between the Relevant Sellers, the Purchaser and other parties, in respect of the sale and purchase of the XXXXXXXXXX by the Relevant Sellers to the Purchaser, a draft of which, dated XXXXXXXXXX , was submitted on XXXXXXXXXX .

FACTS

1. The Group business is XXXXXXXXXX

2. The common shares of the capital stock of Pubco I are admitted to the XXXXXXXXXX

3. The common shares of the capital stock of Pubco II are listed on the XXXXXXXXXX

4. On XXXXXXXXXX , Pubco I had a market capitalization of $XXXXXXXXXX and Pubco II had a market capitalization of $XXXXXXXXXX .

5. Pubco I and SubPubco I are not residents of Canada and do not carry on business in Canada for the purpose of the Act.

6. Parent was incorporated on XXXXXXXXXX . At all times prior to the Amalgamation, it was a subsidiary wholly-owned corporation of SubPubco I and a Taxable Canadian Corporation.

7. XXXXXXXXXX

8. XXXXXXXXXX

9. On XXXXXXXXXX , Parent made an offer to purchase all the issued and outstanding common shares of the capital stock of Target for $XXXXXXXXXX per common share by way of a take-over bid, for a total cash consideration of approximately $XXXXXXXXXX .

10. The Target directors' circular dated XXXXXXXXXX provided that "XXXXXXXXXX "

11. In XXXXXXXXXX , the Group announced its intention to focus on the integration of its XXXXXXXXXX business operations with those of Target in order to maximize synergies and optimize operational effectiveness. XXXXXXXXXX

12. On XXXXXXXXXX , Target completed the redemption of all of its outstanding preferred shares in accordance with their terms.

13. On XXXXXXXXXX , Parent became the sole holder of all the issued and outstanding common shares of the capital stock of Target. This was as a result of taking-up and paying for all Target common shares tendered into the offer, taking-up and paying for all Target common shares tendered during an extension of the offer, and, finally, acquiring the remaining Target common shares through a compulsory acquisition under the CBCA.

14. On XXXXXXXXXX , Parent and Target amalgamated through a vertical short-form amalgamation pursuant to section 184 of the CBCA to form Amalco.

15. By virtue of the Amalgamation, all of the property of Parent (except any amounts receivable from Target or shares of the capital stock of Target) and Target (except any amount receivable from Parent) held immediately before the Amalgamation became property of Amalco. Subsection 87(1) applied to such Amalgamation.

16. The proportion of value that Amalco represents of Pubco I is generally estimated at XXXXXXXXXX % and the proportion of value that the XXXXXXXXXX represents of Amalco is generally estimated at XXXXXXXXXX %.

17. Pursuant to paragraph 88(1)(d), which is applicable to the Amalgamation by virtue of subsection 87(11), Amalco intends to designate an amount not exceeding the amount permitted by paragraph 88(1)(d) in its return of income for its first taxation year ending after the Amalgamation to increase the ACB of certain Capital Properties, including shares of the capital stock of subsidiaries, acquired by it on the Amalgamation and which were owned by Target at the time that Parent last acquired control of Target, and thereafter without interruption up until the time of the Amalgamation.

PROPOSED TRANSACTIONS

18. The Relevant Sellers and the Purchaser (and the other signatories thereto) propose to enter into the Transaction Agreement.

19. Pursuant to the Transaction Agreement, the Purchaser will purchase, and the Relevant Sellers will sell, the shares of the capital stock of Target Holding Companies, the Cross-Group Loans and the Assets.

20. The aggregate Final Price is estimated at $XXXXXXXXXX , subject to certain adjustments further described in XXXXXXXXXX the Transaction Agreement.

The Final Price will be payable in cash, provided that the Purchaser will have the option to pay a portion of the Final Price up to $XXXXXXXXXX by the issuance of common shares of the capital stock of the Purchaser.

21. Pubco I will guarantee to the Purchaser and to certain of its affiliates the due and punctual performance and observance by each Relevant Seller of all its obligations, commitments, undertakings, warranties and indemnities under the Transaction Agreement and the related transaction agreements and documents (the "Guarantee Rights").

These obligations, commitments, undertakings, warranties and indemnities of the Relevant Sellers are related to, inter alia, the obtaining of all required authorisations, consents and approvals to enter into the Transaction Agreement, the validity of the Transaction Agreement, the ownership of the shares of the capital stock of Target Holding Companies and the Assets, the compliance with applicable laws, performing all closing conditions, acquiring the shares of the capital stock of the Purchaser to be issued to the Relevant Sellers, the delivery of transitional services and the payment on account of various indemnities for all liabilities and costs suffered or incurred by the Purchaser or certain of its affiliates arising from or relating to any breach of any obligations, commitments, undertakings, warranties and indemnities by the Relevant Sellers.

The Guarantee Rights will not allow any party to participate in the return generated after the Amalgamation in respect of any Distributed Property.

ADDITIONAL INFORMATION

22. The federal business number of XXXXXXXXXX ., the location of its tax services office and taxation centre where its returns are filed, and the address of its head office are as follows:

- Business Number: XXXXXXXXXX

- Tax Services Office: XXXXXXXXXX

- Taxation Centre: XXXXXXXXXX

- Head office: XXXXXXXXXX

23. Considering that the properties (i.e. the shares of the capital stock of the Target Holding Companies, the Cross-Group Loans and the Assets) to be acquired by the Purchaser from the Relevant Sellers under the Transaction Agreement are owned by direct or indirect subsidiaries of Amalco (i.e. lower tiers) or by an indirect subsidiary of SubPubco I (the shares of which are indirectly held by a sister corporation of Amalco), and that none of these properties were owned by Target at the time of the Amalgamation, these properties do not constitute Distributed Property or Substituted Property.

24. The obligations of the Relevant Sellers under the Transaction Agreement, which are to be guaranteed by Pubco I, will not constitute Distributed Property or Substituted Property because the Relevant Sellers are direct or indirect subsidiaries of Amalco (i.e. lower tiers) or an indirect subsidiary of SubPubco I (the shares of which are indirectly held by a sister corporation of Amalco).

25. The Guarantee Rights will not be considered as property acquired in substitution for Distributed Property at common law or as a result of the application of subsection 248(5).

26. Following the Proposed Transactions, neither Amalco nor any direct or indirect shareholder of Amalco will be indebted to Purchaser and/or certain of its affiliates in any manner whatever, otherwise than by reason of the Guarantee Rights.

27. The Purchaser deals at arm's length with Amalco, Pubco I and the Relevant Sellers.

PURPOSE OF THE TRANSACTIONS

28. The purpose of the Proposed Transactions is to sell the XXXXXXXXXX to the Purchaser.

29. Since there will be a large number of Relevant Sellers (at least XXXXXXXXXX different entities), and because Pubco I is a more creditworthy entity than each individual Relevant Seller, the Purchaser has required that Pubco I guarantee the obligations of the Relevant Sellers as set out in Paragraph 21.

RULING GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant Facts, Proposed Transactions and the Purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. The Guarantee Rights will not constitute Substituted Property as described in paragraph 88(1)(c.3).

COMMENTS

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

(a) the amount of the designation under paragraph 88(1)(d) that Amalco intends to make, or the availability of such designation;

(b) any provincial tax consequences of the proposed transactions; or

(c) any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically confirmed in the ruling given above.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

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