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 the reverse subsidiary merger, as described below, will be considered an amalgamation in the context of subsection 87(11) within the meaning of that term in subsection 87(1) and whether, on the reverse subsidiary merger, a new corporation (Amalco) will be considered to have acquired each capital property of the subsidiary (Target) within the meaning of paragraph 87(11)(b)?
Position: XXXXXXXXXX , the answer to both questions is yes.
Reasons: See above.
XXXXXXXXXX
2010-035594
XXXXXXXXXX
XXXXXXXXXX , 2012
Dear XXXXXXXXXX :
Re: XXXXXXXXXX
Advance Income Tax Ruling Request
This is in reply to your letter dated XXXXXXXXXX , in which you requested an advance income tax ruling on behalf of the taxpayers referred to above. We also acknowledge the information provided during our telephone conversations (XXXXXXXXXX ) and correspondence concerning your request. The information or documents submitted with your request are part of this letter only to the extent described herein.
To the best of your knowledge, and that of the taxpayers involved, none of the issues involved in this ruling request is:
(i) dealt with in a return of any of the above-referenced taxpayers or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of any of the above-referenced taxpayers or a related person;
(iii) under objection by any of the above-referenced taxpayers 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 of the CRA.
Further, the above-referenced taxpayers have advised that the transactions described herein will not result in any of the taxpayers or any related person described herein being unable to pay its existing outstanding tax liabilities.
DEFINITIONS
In this letter, the following terms have the meanings specified and, where the circumstances so require, words importing the singular include the plural and vice versa and words importing any gender or the neuter include all genders and the neuter.
Unless otherwise noted, all references herein to a currency are a reference to Canadian dollars.
"Acquireco" means XXXXXXXXXX ;
"Act" means the Income Tax Act, R.S.C. 1985, c.1, (5th Suppl.), as amended to the date hereof, and unless otherwise stated, a reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
"adjusted cost base" or "ACB" has the meaning assigned by section 54;
"Amalco" means XXXXXXXXXX , the corporate entity formed on the Amalgamation, as described in Paragraph 12(l). It was previously named XXXXXXXXXX . The name change occurred on XXXXXXXXXX . Amalco deals with the XXXXXXXXXX Tax Services Office and files its federal corporate tax returns at the XXXXXXXXXX Taxation Centre;
"Amalgamation" means the merger of Target and Subco, as described in Paragraph 12(l);
"Arrangement" means the plan of arrangement described in Paragraphs 10 through 13 that was ordered by the Supreme Court of XXXXXXXXXX , pursuant to the provisions of the BCA1 to effect the transactions as described therein;
"BCA1" means the XXXXXXXXXX Business Corporations Act, S.B.C. 2002 c.57, as amended;
"BCA2" means the XXXXXXXXXX Business Corporations Act, R.S.O. 1990, c.B-16, as amended;
"capital property" has the meaning assigned by section 54;
"CRA" means the Canada Revenue Agency;
"fair market value" or "FMV" means the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale expressed in terms of cash;
"Forco" means XXXXXXXXXX ;
"Newco" means XXXXXXXXXX , a corporation incorporated under the BCA1;
"New Forco" means XXXXXXXXXX , a corporation incorporated under the laws of XXXXXXXXXX , which is a wholly-owned subsidiary of Newco;
"New Forco Note" means the non-interest bearing demand promissory note issued by New Forco, having a principal amount of $XXXXXXXXXX , as described in Paragraph 7;
"paid-up capital" or "PUC" has the meaning assigned by subsection 89(1);
"Paragraph" means a numbered paragraph in this letter;
"pre-1972 capital surplus on hand" has the meaning assigned by subsection 88(2.1);
"principal amount" has the meaning assigned by subsection 248(1);
"public corporation" has the meaning assigned by subsection 89(1);
"Regulations" means the Income Tax Regulations, as amended;
"Subco" means XXXXXXXXXX , a wholly-owned subsidiary of Acquireco;
"Subject Transactions" means the completed transactions described in Paragraphs 10 through 13;
"Target" means XXXXXXXXXX ;
"Target Loan" means the $XXXXXXXXXX loaned by Subco to Target, as described in Paragraph 12(b);
"Target Note" means the note issued by Target to Subco, as described in Paragraph 12(b); and
"taxable Canadian corporation" has the meaning assigned by subsection 89(1).
FACTS
General Facts Regarding Acquireco and Target
1. Acquireco is a taxable Canadian corporation and a public corporation governed by the BCA2, the shares of which are widely-held and are listed for trading on XXXXXXXXXX . Acquireco deals with the XXXXXXXXXX Tax Services Office and files its federal corporate tax returns at the XXXXXXXXXX Taxation Centre.
2. Acquireco carries on the XXXXXXXXXX business directly and indirectly through subsidiaries throughout the world. One of Acquireco's significant assets is XXXXXXXXXX , which is owned XXXXXXXXXX , an indirect subsidiary of Acquireco.
3. Acquireco owned all of the issued and outstanding common shares of Subco, which was a taxable Canadian corporation.
Subco was incorporated under the BCA1 on XXXXXXXXXX . Subco dealt with the XXXXXXXXXX Tax Services Office and filed its federal corporate tax returns at the XXXXXXXXXX Taxation Centre.
4. Immediately before the Arrangement, Target was a taxable Canadian corporation and a public corporation governed by the BCA1, the common shares of which were listed for trading on XXXXXXXXXX .
Target's share capital consisted solely of common shares. Target had outstanding warrants and employee stock options that gave holders of the warrants and options the right to acquire common shares of Target. Target dealt with the XXXXXXXXXX Tax Services Office and filed its federal corporate tax returns at the XXXXXXXXXX Taxation Centre.
5. Target owned all of the issued and outstanding shares of Forco. Forco owned several greenfield exploration properties in XXXXXXXXXX , including XXXXXXXXXX
Acquisition of Target by Acquireco
6. The land position of XXXXXXXXXX , and XXXXXXXXXX released by Target, led Acquireco to decide to acquire Target's XXXXXXXXXX . Consequently, on XXXXXXXXXX , Acquireco and Target announced a combination agreement pursuant to which:
(a) Acquireco would acquire all of the Target common shares from the Target shareholders; and
(b) the Target shareholders would receive shares of Acquireco plus shares in a new company ("Newco") as consideration for the sale of their Target common shares to Acquireco.
Newco would own indirectly several of Forco's XXXXXXXXXX exploration properties that Acquireco was not interested in buying. Newco would be listed on XXXXXXXXXX .
7. Following the XXXXXXXXXX announcement, as described in Paragraph 6, Newco was incorporated as a wholly-owned subsidiary of Target under the BCA1. In turn, Newco incorporated a wholly-owned subsidiary ("New Forco") under the laws of XXXXXXXXXX .
Forco then sold all of its properties, except XXXXXXXXXX , at FMV to New Forco in consideration for a non-interest bearing demand promissory note issued by New Forco, having a principal amount of $XXXXXXXXXX (the "New Forco Note"). This sale was subject to income and value-added tax in XXXXXXXXXX .
8. However, the XXXXXXXXXX transaction, as described in Paragraph 6, was not consummated because a competing offer was made for Target by a third party.
On XXXXXXXXXX , Acquireco matched the competing offer on the same terms and conditions as the competing offer. Those terms and conditions were that the Target shareholders would receive all of the shares of Newco on a return of capital by Target after which Acquireco would acquire all of the Target common shares from the Target shareholders in consideration for cash.
9. In response to Acquireco's matching offer, the third party increased its offer for Target. Acquireco matched this offer on XXXXXXXXXX , by increasing the amount of cash that Acquireco would pay for the Target common shares.
SUBJECT TRANSACTIONS
10. On XXXXXXXXXX , at a special shareholders meeting, the Target shareholders approved Acquireco's matching offer, as described in Paragraph 9, to be effected by way of a plan of arrangement (the "Arrangement").
11. On XXXXXXXXXX , the Supreme Court of XXXXXXXXXX made an order giving effect to the Arrangement under the BCA1.
12. On XXXXXXXXXX , Acquireco and Target completed the Arrangement, which included the following transactions:
(a) Each option or warrant to purchase common shares of Target that remained outstanding at the effective time of the Arrangement was deemed to have been transferred by the holder thereof to Target and cancelled in exchange for common shares of Target.
No shareholders, option or warrant holders of Target exercised their dissent rights in respect of the Arrangement.
(b) Acquireco loaned $XXXXXXXXXX to Subco (the "Subco Loan").
Subco used the loan proceeds from Acquireco to make an interest bearing loan to Target in the amount of $XXXXXXXXXX (the "Target Loan"). As consideration for the Target Loan, Target issued a promissory note to Subco, having a principal amount of $XXXXXXXXXX (the "Target Note"). The Target Loan had a term of one year and was repayable prior to maturity by Target without penalty.
(c) Target subscribed for common shares of Newco for total cash consideration of $XXXXXXXXXX .
(d) Newco subscribed for common shares of New Forco for a subscription price of $XXXXXXXXXX .
(e) New Forco repaid the New Forco Note with the proceeds it received on the share subscription by Newco.
(f) Pursuant to a stock split, the number of Newco shares owned by Target was changed to equal the number of issued and outstanding Target common shares (including those shares held by former option and warrant holders).
(g) Target distributed all of its Newco shares to its shareholders on the basis of one Newco share for each Target common share owned by the Target shareholders.
The distribution of the Newco shares was effected by means of a reduction of Target's issued and paid-up share capital of its common shares by an amount that was equal to the aggregate FMV of the Newco shares so distributed to the Target shareholders.
For greater certainty, the reduction in Target's issued and paid-up share capital of its common shares did not exceed the aggregate PUC of the Target common shares issued and outstanding at the time of the distribution.
(h) Each issued and outstanding Target common share owned by a Target shareholder (including former option and warrant holders) was transferred to Acquireco in consideration for cash of $XXXXXXXXXX per share. Following the completion of this transaction, Acquireco was the holder of all of the issued and outstanding Target common shares.
(i) Target declared and paid a dividend on its common shares to Acquireco in an amount that was equal to all of Target's cash (approximately $XXXXXXXXXX ) at the time of the payment.
(j) Acquireco transferred all of its Target common shares at FMV to Subco. As consideration for the transfer, Subco issued its common shares to Acquireco having an aggregate FMV equal to the aggregate FMV of all of the Target common shares so received by Subco. After the transfer, Subco owned all of the issued and outstanding Target common shares.
Pursuant to the provisions of the BCA1, an amount of $XXXXXXXXXX (which represented the aggregate FMV of the Target common shares that Subco acquired in consideration for the issuance of the Subco common shares) was added to the share capital of the Subco common shares so issued.
(k) Target reduced its share capital in respect of its common shares to $XXXXXXXXXX without any repayment of capital in respect of the shares.
(l) Target and Subco merged to form Amalco (the "Amalgamation") with the same effect as if they had amalgamated under section 269 of the BCA1, except that the legal existence of Target did not cease and Target survived the merger.
(m) On the Amalgamation,
(i) Acquireco received one Amalco common share in exchange for each of its Subco common shares. For greater certainty, the aggregate PUC of the issued and outstanding Amalco common shares immediately after the Amalgamation was an amount equal to the aggregate PUC attributable to the issued and outstanding Subco common shares immediately before the Amalgamation;
(ii) all of the issued and outstanding Target common shares and Subco common shares were cancelled without any repayment of capital in respect the shares; and
(iii) the Target Note was settled and extinguished.
13. The effect of the Arrangement, as ordered by the Supreme Court of XXXXXXXXXX , is as follows:
(a) The separate legal existence of Subco ceased without Subco being liquidated or wound-up and Target and Subco continued as one company and the property of Subco became the property of Target.
(b) From and after the time of the Amalgamation described in Paragraph 12(l):
(i) Amalco has owned and held all property of Target and Subco and all rights of creditors or others have been, and will continue to be, unimpaired by the Amalgamation, and all liabilities and obligations of Target and Subco, whether arising by contract or otherwise, may be enforced against Amalco to the same extent as if such obligations had been incurred or contracted by it;
(ii) Amalco continues to be liable for all of the liabilities and obligations of Target and Subco, including the Subco Loan;
(iii) all rights, contracts, permits and interests of Target and Subco continue as rights, contracts, permits and interests of Amalco as if Target and Subco continued and, for greater certainty, the Amalgamation does not constitute a transfer or assignment of the rights or obligations of either of Target or Subco under any such rights, contracts, permits and interests;
(iv) any existing cause of action, claim or liability to prosecution has not been and will not be affected;
(v) a civil, criminal or administrative action or proceeding pending by or against either Subco or Target may be continued by or against Amalco; and
(vi) a conviction against, or ruling, order or judgment in favour of or against either Target or Subco may be enforced by or against Amalco.
14. With respect to the distribution by Target of all of its Newco shares to its shareholders, as described in Paragraph 12(g), no gain or loss was realized or incurred by Target.
15. At all relevant times, Target had no pre-1972 capital surplus on hand.
16. Prior to the Arrangement, Target had never paid a dividend to its shareholders.
17. The Amalgamation under the Arrangement was legally effective under the BCA1.
18. Under the laws of XXXXXXXXXX , the Amalgamation did not give rise to a taxable event for XXXXXXXXXX tax purposes regardless of the presence of the survivor aspect of the "survivor order" under the Arrangement.
PURPOSES OF THE SUBJECT TRANSACTIONS
19. The sole purpose of the Subject Transactions was to allow Acquireco to acquire XXXXXXXXXX in a manner that Acquireco and Target expected that the Target shareholders would approve.
20. At the initial stages of the bidding process, the purpose of having Target "survive" the Amalgamation was that this allowed for the possibility of the share transaction (that Acquireco would issue its shares to the Target shareholders as consideration for their Target common shares, as described in Paragraph 6(b)) being treated as a "reorganization" for U.S. tax purposes, with the result that the share transaction would be tax-deferred for U.S. Target shareholders. This became irrelevant as the deal progressed since the share transaction changed to an all cash transaction, as described in Paragraphs 8 and 12(h), which was taxable to all Target shareholders including U.S. shareholders.
However, the "survivor order" remained in the Arrangement. This was retained in the third party offers and therefore was retained in Acquireco's matching offer under the combination agreement with Target.
21. The purpose of the $XXXXXXXXXX subscription, by Target, of the Newco common shares, as described in Paragraph 12(c), was to:
(a) fund the repayment of the $XXXXXXXXXX purchase price of Forco's XXXXXXXXXX exploration properties, as described in Paragraphs 7 and 12(e); and
(b) to provide $XXXXXXXXXX of working capital to Newco.
The latter purpose stemmed from the business deal struck by Target and Acquireco management.
22. From a tax perspective, there was no difference between having Acquireco purchase the Target common shares and transfer them to Subco, as described in Paragraphs 12(h) and (j), and having Subco acquire the Target common shares from the Target shareholders directly. However, there was a very slight preference by the commercial lawyers for the former structure because it was less complicated from a treasury perspective. That is, the former structure eliminated the need to transfer (by wire) the acquisition funds from Acquireco to Subco and then from Subco to the Target shareholders, which necessarily would have been the case if Subco purchased the Target common shares from the Target shareholders directly.
23. The purpose of the dividend paid by Target to Acquireco, as described in Paragraph 12(i), was to eliminate any possibility that the subsidiary's (Target) property (cash) would become property of the parent (Amalco) on the Amalgamation, such that that cash could find its way into the hands of a person described in subclauses 88(1)(c)(vi)(B)(I) to (III).
24. The purpose of reducing Target's share capital of its common shares to $XXXXXXXXXX , as described in Paragraph 12(k), was to ensure that Subco did not realize a gain as a result of the disposition of its Target common shares on the Amalgamation.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, transactions, and the purposes of the Subject Transactions, our rulings are set forth below:
A. The Amalgamation will be considered an amalgamation in the context of subsection 87(11) within the meaning of that term in subsection 87(1).
B. Pursuant to paragraph 87(2)(a), on the Amalgamation, Amalco will be considered to have acquired each capital property of the subsidiary (Target) within the meaning of paragraph 87(11)(b).
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002 and are binding on the CRA.
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided above.
1. We make no comment as to whether subsection 55(2) would or would not apply to the dividend paid by Target to Acquireco, as described in Paragraph 12(i).
2. Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:
(a) the PUC of any share or the ACB or FMV of any property referred to herein; or
(b) any other tax consequence relating to the facts, Subject Transactions or any transaction or event taking place either prior to the Subject Transactions or subsequent to the Subject Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Subject Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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