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 New Common shares be Short-term or Taxable Preferred Share?
Position: No.
Reasons: The definitions of Short-term and Taxable Preferred Share in subsection 248(1) of the Income tax Act will not be met.
XXXXXXXXXX
2011-043148
XXXXXXXXXX
XXXXXXXXXX , 2012
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX (amended XXXXXXXXXX ), wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information provided to us in your emails, the last of which was dated XXXXXXXXXX .
This letter is based solely on the facts, Proposed Transactions and additional information described below. Any documentation submitted in respect of your request does not form part of the facts, Proposed Transactions and additional information, and any references thereto are provided solely for the convenience of the reader.
To the best of your knowledge, and that of the above-noted taxpayer, none of the issues involved in this advance income tax ruling are:
(i) in an earlier tax return of the above-noted taxpayer or of a related person;
(ii) being considered by a Tax Services Office or a Taxation Centre in connection with a previously-filed tax return of the above-noted taxpayer or of a related person;
(iii) under objection by the above-noted taxpayer or by 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 considered by the Income Tax Rulings Directorate in connection with the above-noted taxpayer or a related person.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (the "Act") or the Income Tax Regulations (the "Regulations"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, Proposed Transactions and the purpose of the Proposed Transactions is as follows:
Definitions
In this letter, the following terms have the meanings specified:
a. XXXXXXXXXX ;
b. "CBCA" means the Canada Business Corporations Act;
c. "Conversion Resolution" means the Shareholders' resolution described in 13 a) below;
d. "Corporation" means XXXXXXXXXX ;
e. "Final Distribution" means the amount to be paid to the Shareholders equal to the net assets remaining in the Corporation after it has discharged all of its debts and liabilities;
f. "Meeting" means the Shareholders' meeting of the holders of the Shares which will be convened in order to consider and approve the winding-up of the Corporation;
g. "New Common Shares" means the single class of common shares resulting from the Conversion Resolution described in 13 a) below. The terms and conditions of the New Common Shares will be identical to the terms and conditions of the Shares, with the exception that the New Common Shares will not be convertible or exchangeable into any other class of shares nor will they be subject to any of the voting restrictions currently contained in the Corporation's articles. Furthermore, there will be no "debt obligation" as referred to in paragraph (d) of the definition of Short-Term Preferred Share in subsection 248(1) of the Act, and no "guarantee agreement" as referred to in paragraphs (h) and (b) of the definitions of Short-Term Preferred Share and Taxable Preferred Share, respectively, in subsection 248(1) of the Act, in relation to the New Common Shares;
h. "Proposed Transactions" means the transactions described in 11 to 14 below;
i. "Shares" means, collectively, the Variable Voting Shares and Voting Shares;
j. "Shareholders" means shareholders of the Corporation;
k. "Short-Term Preferred Share" has the meaning assigned by subsection 248(1) of the Act;
l. "Subsidiary" means XXXXXXXXXX , a publicly-traded corporation whose shares are listed on the XXXXXXXXXX ;
m. "Taxable Preferred Share" has the meaning assigned by subsection 248(1) of the Act;
n. XXXXXXXXXX ;
o. "Variable Voting Shares" means the outstanding XXXXXXXXXX Variable Voting Shares of the Corporation;
p. "Voting Shares" means the outstanding XXXXXXXXXX Voting Shares of the Corporation; and
q. "Winding-up Resolution" means the Shareholders' resolution described in 13 b) below.
Facts
1. The Corporation is incorporated under the CBCA and is a "taxable Canadian corporation" within the meaning of the Act. Its Tax Services Office is XXXXXXXXXX and its Taxation Center is XXXXXXXXXX .
2. The authorized share capital of the Corporation consists of an unlimited number of Variable Voting Shares, an unlimited number of Voting Shares and XXXXXXXXXX Preferred Shares. As of the close of business on XXXXXXXXXX , there were approximately XXXXXXXXXX Variable Voting Shares, approximately XXXXXXXXXX Voting Shares and no Preferred Shares issued and outstanding. The Variable Voting Shares and the Voting Shares are listed on the XXXXXXXXXX .
3. The Corporation's articles of incorporation contain a description of the share capital of the Corporation. XXXXXXXXXX .
4. The provisions referred to in 3 above provide that the Variable Voting Shares may only be owned or controlled by XXXXXXXXXX . As a result, an issued and outstanding Variable Voting Share is automatically converted into one Voting Share without any further act of the Corporation or of the holder, if such Variable Voting Share becomes owned or controlled by XXXXXXXXXX . The Voting Shares may only be owned and controlled by XXXXXXXXXX . An issued and outstanding Voting Share is automatically converted into one Variable Voting Share without any further act of the Corporation or the holder, if such Voting Share becomes owned or controlled by XXXXXXXXXX . Hence, upon a transfer of Variable Voting Shares to XXXXXXXXXX , such Variable Voting Shares will automatically be converted into Voting Shares and upon a transfer of Voting Shares to a XXXXXXXXXX , such Voting Shares will automatically be converted into Variable Voting Shares.
5. The provisions referred to in 3 above further provide that the Variable Voting Shares are entitled to one vote per Variable Voting Share unless (i) the number of Variable Voting Shares outstanding, as a percentage of the total number of voting shares outstanding exceeds XXXXXXXXXX % or (ii) the total number of votes cast by or on behalf of holders of Variable Voting Shares at any meeting exceeds XXXXXXXXXX % of the total number of votes that may be cast at such meeting. If either of the above-noted thresholds would otherwise be surpassed at any time, the vote attached to each Variable Voting Share will decrease proportionately such that (i) the Variable Voting Shares as a class do not carry more than XXXXXXXXXX % of the aggregate votes attached to all issued and outstanding voting shares of the Corporation and (ii) the total number of votes cast by or on behalf of holders of Variable Voting Shares at any meeting does not exceed XXXXXXXXXX % of the votes that may be cast at such meeting. The Voting Shares are entitled to one vote per Voting Share.
6. Since XXXXXXXXXX , the Corporation has monetized most of its assets with a view to surfacing shareholder value and advance income tax rulings were sought and obtained in connection with each such monetization (Rulings 2005-012728, 2005-014497 and 2006-020194).
7. The Corporation's remaining assets currently consist of an approximately XXXXXXXXXX % equity interest (as at XXXXXXXXXX ) in, and XXXXXXXXXX warrants for the purchase of additional XXXXXXXXXX voting shares of the Subsidiary and a significant amount of cash and cash equivalents (approx. $XXXXXXXXXX as at XXXXXXXXXX ).
8. As a consequence of the various in-kind distributions effected as returns of capital since XXXXXXXXXX , the paid-up capital of the Shares has been almost fully repaid to the Shareholders.
9. On XXXXXXXXXX , the Corporation filed a request for clearance certificates with the Canada Revenue Agency with a view to ultimately winding-up the Corporation. The ensuing income tax, GST, non-resident withholding tax and payroll audits have either been completed or are expected to be completed before the end of the current month.
10. Upon the issuance of the clearance certificates, the Corporation intends to seek Shareholders approval for the winding-up and ultimate dissolution of the Corporation as further described below.
Proposed Transactions
The proposed winding-up of the Corporation is scheduled to follow the following process:
11. XXXXXXXXXX prior to the Meeting, the Corporation will announce the date of the Meeting and the general intention to proceed with an initial distribution of an estimated amount of between $XXXXXXXXXX , and will confirm that the eventual Final Distribution is expected to be made XXXXXXXXXX after the initial distribution.
12. A management proxy circular will be mailed to the Shareholders approximately XXXXXXXXXX prior to the Meeting.
13. At the Meeting, the following matters will be submitted for approval to the Shareholders and, if approved, will become effective at the times set forth below:
a) As a preliminary step to the winding-up, the Corporation will propose that the articles of incorporation of the Corporation be amended in order to convert the Shares into New Common Shares (the "Conversion Resolution"). The Conversion Resolution will need to be approved by the vote of Shareholders representing two thirds of each of the classes of the Shares present or represented at the meeting, voting as separate classes.
Pursuant to the CBCA, Shareholders will be entitled to exercise their right of dissent against the proposed conversion, which would then entitle them to be paid fair value in cash for their Shares. As is customary in similar matters, the circular described in 12 above will expressly provide that the Corporation may, at its discretion, decide not to proceed with the proposed conversion should any dissent rights be exercised. It is not expected that the Corporation will have to use this discretion.
The articles of amendment will state that the conversion is effective at the first moment of the day on the date of the Meeting. The Conversion Resolution will also state that the conversion is effective as at the first moment of the day on the date of the Meeting.
The Corporation has arranged with XXXXXXXXXX to ensure that the certificate of amendment resulting from the Conversion Resolution will be issued and sent to the Corporation's counsel or agent by electronic communication shortly following the vote to approve the Conversion Resolution.
b) Following the approval of the Conversion Resolution and the Corporation's receipt of the certificate of amendment referred to in a) above, the Corporation will propose the winding-up of the Corporation for approval by the Shareholders (the "Winding-up Resolution"). The Winding-up Resolution will need to be approved by the vote of Shareholders which represent two thirds of each of the classes of the Shares which had been present or represented at the meeting, voting as separate classes.
As part of the Winding-up Resolution, the Corporation will propose that the Corporation be dissolved once its contingencies have been dealt with and the Final Distribution has been made to the Shareholders. All of the New Common Shares will be cancelled in consideration for an amount equal to the Final Distribution. It is currently expected that a final dissolution will take place XXXXXXXXXX after the initial distribution.
The Winding-up Resolution will refer specifically to the following:
i. A delegation to the board of directors of the authority to declare the initial distribution to be paid on the New Common Shares in an amount to be determined by the board of directors. It is currently expected that the initial distribution will be completed within approximately XXXXXXXXXX of the Meeting. The exact timing of the initial distribution will depend, to a large extent, on the time required to complete a thorough claims process; and
ii. The right of the board of directors to appoint a liquidator after such distribution.
The Winding-up Resolution will state that it will become effective the day after the filing of the articles of amendment converting the Shares into New Common Shares.
14. It is expected that, at some stage after the Shareholders' approval of the winding-up, the XXXXXXXXXX will delist the New Common Shares and transfer them to the XXXXXXXXXX .
Additional Information
15. The articles of amendment described in 13 a) above will provide for a specified amount that satisfies the requirements of subsection 191(4) of the Act.
Purpose of the Proposed Transactions
16. The overall purpose of the Proposed Transactions is to liquidate the Corporation and distribute its assets to the Shareholders in the manner the Corporation considers is in the best interest of the Shareholders.
Ruling
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided further that the Proposed Transactions are completed in the manner described above, we rule as follows:
By virtue of the exceptions provided for in subparagraphs (a)(i) and (e)(i) of the definition of "Short-Term Preferred Share" and in paragraph (f) of the definition of "Taxable Preferred Share", in subsection 248(1) of the Act, the Proposed Transactions will not, in and of themselves, cause the New Common Shares issued to the Shareholders to be Short-Term Preferred Shares or Taxable Preferred Shares.
The above 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 CRA provided that the Proposed Transactions, excluding the payments of the initial distribution as described in 11 above and the Final Distribution, are commenced by XXXXXXXXXX .
The above ruling is 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 ruling provided herein.
Nothing in this ruling letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:
(a) the GST implications of any of the Proposed Transactions;
(b) the reasonableness of any amount;
(c) the fair market value or adjusted cost base of any property or the paid-up capital of any shares referred to herein; nor,
(d) any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the ruling given above.
Yours truly,
XXXXXXXXXX
For Director
Financial Industries Division
Income Tax Rulings Directorate
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