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) Does a person have de jure control of a corporation where its shares only entitle it to elect a minority of the directors but those same shares give it ability, in the future, to elect a majority of the directors? (2) Does GAAR apply on the repayment of a debt of an insolvent predecessor by the amalgamated entity?
Position: (1) Yes, in these circumstances. (2) Not in these circumstances.
Reasons: (1) Consistent with the decision of the SCC in Donald Applicators Ltd. (1969). (2) the repayment of the debt is not against the scheme of the Act.
XXXXXXXXXX , 2012
Dear Sir and Madam:
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX , wherein you requested the re-activation of an advance income tax ruling request filed on XXXXXXXXXX on behalf of the above-noted taxpayers. We also acknowledge your subsequent communications with us in respect of this ruling.
To the best of the knowledge of Parent and Lossco, none of the issues involved in this letter is:
(a) relevant to a tax return previously filed by Parent or Lossco or a related person;
(b) under consideration by a tax services office or taxation centre in connection with a previously filed tax return of Parent or Lossco or a related person;
(c) under objection by Parent or Lossco or a related person;
(d) before the courts, or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(e) the subject of a ruling previously issued by the CRA to Parent or Lossco or a related person.
Except where specifically otherwise indicated, all statutory references in this letter are references to the provisions of the ITA. Except where specifically otherwise indicated, all dollar amounts referred to in this letter are in Canadian dollars.
1. In this letter, unless otherwise expressly stated:
“ACB” means adjusted cost base as that term is defined in subsection 54(1);
“Amalco” means the corporation created by the Amalgamation;
“Amalco Common Share” means a common share in the capital stock of Amalco;
“Amalco Non-Voting Redeemable Share” means a non-voting redeemable share in the capital stock of Amalco;
“Amalgamation” means the amalgamation of Profitco and Lossco as described in paragraph 28;
“Arm’s Length” has the meaning assigned by section 251;
“Business” means the XXXXXXXXXX , carried on primarily through XXXXXXXXXX , a general partnership between Lossco (XXXXXXXXXX %) and XXXXXXXXXX (XXXXXXXXXX %) and through the indirect wholly-owned subsidiary of Lossco, XXXXXXXXXX ;
“CBCA” means the Canada Business Corporations Act, R.S.C. 1985, c. C-44;
“Class A Shareholder” means XXXXXXXXXX ;
“Coupon Notes” means additional promissory notes issued on the Initial Debt as described in Paragraph 15;
“CRA” means the Canada Revenue Agency;
“FMV” means fair market value, which refers to the highest price available in an open and unrestricted market between informed and prudent parties acting at arm’s length and under no compulsion to act, expressed in terms of cash;
“GAAR” means the general anti-avoidance rule set out in section 245;
“Initial Debt” means the aggregate amount of US$XXXXXXXXXX described in Paragraph 14, XXXXXXXXXX:
“ITA” means the Income Tax Act, R.S.C. 1985 c.1, as amended;
“Lossco” means XXXXXXXXXX ;
“Lossco Class A Share” means a class A share in the capital stock of Lossco;
“Lossco Class B Share” means a class B share in the capital stock of Lossco;
“Losses” means the aggregate Non-Capital Losses and Net Capital Losses of Lossco accrued from XXXXXXXXXX to the date of the Amalgamation;
“Net Capital Losses” has the meaning assigned in subsection 111(8);
“Non-Capital Losses” has the meaning assigned in subsection 111(8);
“Mr. A” means XXXXXXXXXX;
“XXXXXXXXXXBCA” means the Business Corporations Act, XXXXXXXXXX;
“Paragraph” refers to a numbered paragraph in this letter;
“Parent” means XXXXXXXXXX ;
“Parent Debt” means the Initial Debt, the Coupon Notes and any accrued and unpaid interest pursuant to the Initial Debt or the Coupon Notes;
“Principal Amount” has the meaning assigned by subsection 248(1);
“Private Corporation” has the meaning assigned by subsection 89(1);
“Profitco” means XXXXXXXXXX ;
“Profitco Common Share” means a common share in the capital stock of Profitco;
“Proposed Transactions” means the transactions described in the Proposed Transactions section in this letter;
“Related persons” has the meaning assigned by subsection 251(2);
“Retirement Compensation Arrangement” has the meaning assigned by subsection 248(1);
“Senior Debt” means the approximately $XXXXXXXXXX indebtedness described in Paragraph 13;
“Specified Obligation” has the meaning assigned by subsection 80.01(6); and
“Taxable Canadian Corporation” has the meaning assigned by subsection 89(1).
2. Parent is a corporation XXXXXXXXXX.
5. Lossco is a Taxable Canadian Corporation and a Private Corporation. XXXXXXXXXX .
6. Lossco carried on the Business through subsidiaries and partnerships until its business terminated and substantially all of its assets were disposed of XXXXXXXXXX.
8. Presently, Lossco has Lossco Class A Shares and Lossco Class B Shares issued and outstanding. The Lossco Class A Shares and Lossco Class B Shares are identical in all respects except for their voting rights. Dividends may be paid on either class of shares, as and when declared by the board of directors, provided that any dividend paid on one class must also be equally paid, on a per share basis, on the other class. Similarly, any distribution of the assets of Lossco on dissolution shall be made, on a per share basis, equally on the Lossco Class A Shares and the Lossco Class B Shares. With respect to voting rights, each Lossco Class A Share and each Lossco Class B Share is allocated one vote per share, except that only Lossco Class A Shares carry votes with respect to the election or removal of directors.
9. Since XXXXXXXXXX the issued and outstanding shares of Lossco have been owned as follows (XXXXXXXXXX ):
Shareholder Class A Class B % Equity
Class A Shareholder XXX XXX XXX %
Mr. A XXX XXX %
Parent XXX XXX XXX %
10. XXXXXXXXXX , Class A Shareholder was the Chief Executive Officer of Predecessor 2, XXXXXXXXXX Lossco. As well, Class A Shareholder has dealt at Arm’s Length with Parent, Profitco and Lossco at all times material hereto.
12. The entitlement of Parent to exercise approximately XXXXXXXXXX % of the votes cast by shareholders on any matter other than the election or removal of directors (or votes that, as a matter of corporate law, are required to occur on a class-by-class basis) entitles it at any time during its ownership of such shares to successfully propose and pass a resolution of the shareholders to approve a stock consolidation and an associated purchase for cash of fractional shares. Such a resolution would have to be approved by at least two-thirds of the votes cast at a meeting of Lossco shareholders. Such an arrangement would permit the consolidation of Lossco Class A shares into fractions of shares that are cancelled for a cash payment as part of the consolidation without any special resolution of the holders of the Lossco Class A shares, voting separately as a class, first being required. XXXXXXXXXX.
13. Lossco formerly owed the Senior Debt to a Canadian financial institution. The Senior Debt was secured as a first ranking charge against all of the assets of Lossco. The Senior Debt was compromised as described in Paragraph 21
14. In addition, Lossco (XXXXXXXXXX) has borrowed the Initial Debt from Parent. The proceeds of the Initial Debt were used by Lossco (XXXXXXXXXX) for the purpose of earning income from its business or for investing in Lossco’s (XXXXXXXXXX) subsidiaries.
15. The documents governing the Initial Debt provide that interest can be paid in cash or in kind by issuing Coupon Notes. In total, Lossco has issued Coupon Notes with an aggregate Principal Amount of $XXXXXXXXXX . For greater certainty, the Coupon Notes are in addition to the Initial Debt.
16. The realizable value of Lossco’s assets is less than the aggregate owing under the Parent Debt.
17. The Initial Debt has never been a Specified Obligation of Lossco.
18. Lossco incurred the Losses.
19. In every taxation year following XXXXXXXXXX , Lossco has reported its provincial income allocation as being XXXXXXXXXX % to XXXXXXXXXX .
20. XXXXXXXXXX, the following transactions have taken place:
(a) Lossco disposed of substantially all of its operating assets, and the shares and/or assets of its subsidiaries, in consideration for (i) the assumption of certain liabilities relating to the business (excluding the Senior Debt and Parent Debt); and (ii) cash consideration.
(b) The cash proceeds realized from this sale were used to repay Lossco’s creditors XXXXXXXXXX.
21. The remaining liabilities of Lossco (including the Senior Debt but excluding the Parent Debt) were compromised XXXXXXXXXX.
22. The disposition by Lossco of its operating assets and subsidiaries occurred on a taxable basis.
23. Profitco is a corporation formed by amalgamation pursuant to the laws of XXXXXXXXXX and is a Taxable Canadian Corporation. Profitco’s tax year-end is XXXXXXXXXX .
25. All of the issued and outstanding shares in Profitco, being Profitco Common Shares, are owned by Parent. Parent has also provided interest bearing debt financing to Profitco.
27. In its XXXXXXXXXX income tax return, Profitco reported its provincial income allocation as follows:
XXXXXXXXXX XXXXXXXXXX %
28. Lossco and Profitco will form Amalco by amalgamating pursuant to section XXXXXXXXXX of the XXXXXXXXXXBCA. On the Amalgamation:
(a) Parent will receive Amalco Common Shares in exchange for all of its shares of Lossco and Profitco;
(b) Class A Shareholder will receive XXXXXXXXXX Amalco Non-Voting Redeemable Shares in exchange for his shares of Lossco. The Amalco Non-Voting Redeemable Shares so received will have an aggregate redemption value equal to the FMV of the Lossco shares surrendered therefor;
(c) Mr. A will receive XXXXXXXXXX Amalco Non-Voting Redeemable Shares in exchange for all of his shares of Lossco. The Amalco Non-Voting Redeemable Shares so received will have an aggregate redemption value equal to the FMV of the Lossco shares surrendered therefor; and
(d) all property and liabilities (including the Parent Debt) of Lossco and Profitco will become property and liabilities of Amalco by virtue of the Amalgamation.
29. Amalco will redeem the Amalco Non-Voting Redeemable Shares owned by Class A Shareholder and Mr. A for cash consideration.
30. Parent will subscribe for additional Amalco Common Shares for cash proceeds equal to the amount outstanding (principal and interest) under the Parent Debt on that date. Amalco will use such cash proceeds to repay the Parent Debt in full.
PURPOSES OF PROPOSED TRANSACTIONS
31. The purpose of the Proposed Transactions is to consolidate future taxable income expected to be realized from Profitco’s operations with the Losses of Lossco, by amalgamating Profitco and Lossco.
32. Immediately following the Amalgamation and at the time that the transactions described in Paragraph 30 above are implemented, the realizable value of Amalco’s assets will be greater than the aggregate amounts owing under the Parent Debt and all other debts then outstanding.
Provided that the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions and purposes of the proposed transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:
A. On the Amalgamation:
(a) The provisions of subsections 87(1) and 87(2.1) will apply;
(b) Provided that the shares of Lossco and Profitco were capital property to their holder immediately before the Amalgamation, the provisions of paragraph 87(4)(a) will apply such that each of Class A Shareholder, Mr. A and Parent, will be deemed to have disposed of his or its Lossco Class A Shares and Lossco Class B Shares, and Parent will be deemed to have disposed of its Profitco Common Shares, for proceeds of disposition equal to the ACB to each of them of such shares immediately before the Amalgamation; and
(c) The provisions of paragraph 87(4)(b) will apply such that each of Class A Shareholder and Mr. A will respectively be deemed to have acquired his Amalco Non-Voting Redeemable Shares, and Parent will be deemed to have acquired its Amalco Common Shares, for an amount equal to the proceeds of disposition described in paragraph 87(4)(a) of his or its Lossco Class A Shares, Lossco Class B Shares and Profitco Common Shares.
B. For the purposes of the provisions of subsection 256(7), the Amalgamation will not, in and by itself, result in an acquisition of control of either Profitco or Lossco, and subsections 111(4) and 111(5) will not be applicable in respect of the Losses.
C. The repayment of the Parent Debt will not, in and by itself, give rise to a "forgiven amount" for the purposes of section 80.
D. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given herein.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided that the Proposed Transactions are implemented within XXXXXXXXXX of the date of this letter.
The above rulings are based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.
In particular, nothing in this letter should be construed as the CRA’s confirmation that interest paid or payable on the Parent Debt has been deductible or will be deductible under paragraph 20(1)(c) or that any Non-capital losses attributable to such interest will be deductible under subsection 111(1).
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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