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: Will the conversion from preferred shares into common shares result in a foreign exchange gain or loss pursuant to 39(2) of the Act?
Position: No
Reasons: There is no change in the patrimony of the company as a result of the conversion.
XXXXXXXXXX
2011-039577
XXXXXXXXXX , 2011
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above-referenced entity.
The ruling given herein is based solely on the facts, proposed transactions and the purposes of the proposed transactions described below. Facts and proposed transactions in the documents submitted with your request not described below do not form part of the facts and proposed transactions on which this ruling letter is based and any reference to these documents is provided solely for the convenience of the reader.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Definitions:
"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date of this advance income tax ruling;
"CAD" means Canadian dollars;
"CBCA" means the Canada Business Corporations Act, as amended to the date of this advance income tax ruling;
"Common Shares" means the common shares of the capital stock of Corp A;
"Convention" means XXXXXXXXXX ;
"Corp Group" means XXXXXXXXXX ;
"Corp A" means XXXXXXXXXX , a corporation governed by the CBCA;
"Corp B" means XXXXXXXXXX , a corporation resident in Country 1 for purposes of the Convention;
"Corp C" means XXXXXXXXXX , a corporation governed by the laws of Country 1;
"Corp D" means XXXXXXXXXX ;
"Corp E" means XXXXXXXXXX ;
"Corp F" means XXXXXXXXXX ;
"Country 1" means XXXXXXXXXX ;
"CRA" means the Canada Revenue Agency;
"Exchange Rate" means the "noon rate" published by the Bank of Canada and used to convert the value of CAD into USD;
"Preferred Shares" means the Series 1 preferred shares of the capital stock of Corp A, as described in paragraph 10;
"Stated Capital" has the meaning assigned by section 26 of the CBCA;
"taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act; and
"USD" means United States dollars.
Facts:
1. Corp Group is a leading international XXXXXXXXXX group headquartered in Country 1, combining Corp C and its group undertakings and Corp D and its group undertakings XXXXXXXXXX .
2. Corp C is a publicly listed corporation based in Country 1. Corp C is not a resident of Canada and does not carry on business in Canada for the purposes of the Act.
3. Corp B is a wholly-owned subsidiary of Corp C. Corp B is not a resident in Canada and does not carry on business in Canada for the purposes of the Act.
4. Corp A is a corporation resulting from the vertical short-form amalgamation of Corp E (then a wholly-owned subsidiary of Corp B) and Corp F on XXXXXXXXXX .
5. Corp A is a corporation resident in Canada and a direct wholly-owned subsidiary of Corp B.
6. The issued share capital of Corp A consists of XXXXXXXXXX Common Shares and XXXXXXXXXX Preferred Shares as described below.
7. As of XXXXXXXXXX , Corp A was indebted to Corp B for an amount in excess of USD XXXXXXXXXX (the "Outstanding Debt").
8. On XXXXXXXXXX , Corp A repaid the Outstanding Debt (the "Repayment") equal to USD XXXXXXXXXX .
9. To give effect to the Repayment, Corp A issued to Corp B XXXXXXXXXX Preferred Shares for an aggregate consideration of USD XXXXXXXXXX .
10. The Preferred Shares are non-voting, entitle their holder to receive fixed preferential non-cumulative dividends of XXXXXXXXXX % per month of the Redemption Amount (as defined below). The Preferred Shares are redeemable/retractable at the option of Corp A and their holder for an aggregate redemption amount per share equal to USD XXXXXXXXXX , together with all dividends declared thereon and unpaid ("Redemption Amount").
11. At the time of the Repayment, the Exchange Rate in effect was XXXXXXXXXX (i.e. a CAD could be exchanged for USD XXXXXXXXXX ).
12. An amount of approximately CAD XXXXXXXXXX was added to the Stated Capital of the Preferred Shares, such amount representing the full amount of the consideration received by Corp A on the issuance of the Preferred Shares in USD converted to CAD, based on the Exchange Rate in effect at the time of the Repayment.
13. At the time of the Repayment and during the entire time between the Repayment and the Proposed Transactions set out below, Corp B was the owner of all the issued shares of Corp A.
Proposed Transactions:
14. Corp A will file articles of amendment to amend the rights and privileges of the Preferred Shares by adding a conversion right (the "Conversion Right") to the Preferred Shares. This Conversion Right will allow Corp B to convert the Preferred Shares into Common Shares based on a conversion ratio that will attempt to reflect the fair market value of the Corp A Common Share(s) at the time of the conversion. The conversion ratio will be based on either the most recent valuation of Corp A and its shares or the book value thereof. Book value would be used to determine the conversion ratio on the basis that it is a good indication of fair market value and also because Corp B is the sole shareholder of Corp A.
15. Corp B will use the Conversion Right added to the Preferred Shares to convert the Preferred Shares into Common Shares (the "Conversion"). Pursuant to subsection 39(4) of the CBCA the CAD amount equal to the Stated Capital of Preferred Shares of Corp A will be added to the Stated Capital of the Corp A Common Shares.
16. The prevailing exchange rate at the time of the Conversion will most likely be different from the Exchange Rate at the time of the Repayment.
Purpose of the Proposed Transactions:
17. Since the Preferred Shares are redeemable at the option of their holder, for financial reporting purposes, the redemption value of the Preferred Shares must be reflected as a liability of Corp A for financial accounting purposes and cannot be presented on the balance sheet as shareholders' equity.
18. The purpose of the transaction is to allow Corp A to eliminate the existing liability arising from the Preferred Shares from its balance sheet and reflect their value at the time of issuance as shareholders' equity.
Ruling Given:
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transaction is completed in the manner described above, our Ruling is as follows:
We confirm that:
The Conversion will not result in a gain or loss under subsection 39(2) of the Act or otherwise for Corp A.
This Ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the Canada Revenue Agency ("CRA") provided the proposed transaction is carried out before XXXXXXXXXX .
Nothing in this letter should be construed as implying that the Canada Revenue Agency has reviewed, accepted or otherwise agreed to any tax consequences relating to the Facts and Proposed Transactions described herein other than that specifically described in the Ruling given above.
The above noted Ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the Ruling provided herein.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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