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 subsection 84(2) applies to a reduction of stated capital.
Reasons: Complies with the law and CRA administrative positions.
XXXXXXXXXX , 2012
Dear XXXXXXXXXX :
Advance Income Tax Ruling Request
We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of Pubco. We also acknowledge the information provided in correspondence and telephone conversations concerning your request. The information contained in documents submitted with your request forms part of this ruling only to the extent it is expressly referred to or described herein.
To the best of your knowledge and that of Pubco, none of the issues involved in this ruling is:
(a) dealt with in an earlier return of Pubco or a related person,
(b) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of Pubco or a related person,
(c) under objection or appeal by Pubco 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 expired, or
(e) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Further, Pubco has advised that the Proposed Transactions described herein will not result in it or any related person being unable to pay its outstanding tax liabilities.
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 Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter (the “Act”), and the Income Tax Regulations thereunder are referred to as the “Regulations”.
Unless otherwise noted, all references to currency are to Canadian dollars.
In this letter, the following terms or expressions have the meanings specified:
“adjusted cost base” has the meaning assigned by section 54;
“amount” has the meaning assigned by subsection 248(1);
“BCA” means the Business Corporations Act XXXXXXXXXX;
“capital property” has the meaning assigned by section 54;
“CRA” means the Canada Revenue Agency;
“disposition” has the meaning assigned by subsection 248(1);
“fair market value” 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, expressed in terms of cash;
“paid-up capital” has the meaning assigned by subsection 89(1);
“Paragraph” means a numbered paragraph in this letter;
“principal-business corporation” has the meaning assigned in subsection 66(15);
“Proposed Transaction” means the transaction described in Paragraph 10;
“Pubco” means XXXXXXXXXX , a corporation described in Paragraph 1;
“public corporation” has the meaning assigned by subsection 89(1);
“stated capital” has the meaning assigned by the BCA;
“Subco” means XXXXXXXXXX , a corporation described in Paragraph 6;
“Subco Common Share Distribution” has the meaning described in Paragraph 10;
“Subco Shares” has the meaning described in Paragraph 7;and
“taxable Canadian corporation” has the meaning assigned in subsection 89(1).
1. Pubco was incorporated on XXXXXXXXXX under the BCA. Pubco is a public corporation, a taxable Canadian corporation and a principal-business corporation. The fiscal period of Pubco ends on XXXXXXXXXX. Pubco files its tax returns at the XXXXXXXXXX Tax Centre and its income tax affairs are administered by the XXXXXXXXXX Tax Services Office.
2. The authorized share capital of Pubco consists of an unlimited number of common shares of which there are XXXXXXXXXX common shares and XXXXXXXXXX warrants to purchase common shares issued and outstanding. XXXXXXXXXX.
3. The business of Pubco is the XXXXXXXXXX . Pubco’s XXXXXXXXXX activities are conducted by a number of subsidiary corporations incorporated under the laws of XXXXXXXXXX.
4. Pubco has direct ownership in the following subsidiary corporations in the following percentages:
- Subco (XXXXXXXXXX %)
- XXXXXXXXXX (This subsidiary provides services to other companies in the group.)
- XXXXXXXXXX (This subsidiary is inactive.)
5. Pubco has indirect ownership in the following subsidiary corporations:
- XXXXXXXXXX owned by Subco.
- XXXXXXXXXX owned by XXXXXXXXXX
- XXXXXXXXXX owned by XXXXXXXXXX and is currently inactive.
6. Subco was incorporated on XXXXXXXXXX under the BCA. Subco is a taxable Canadian corporation and a principal-business corporation. The fiscal period of Subco ends on XXXXXXXXXX . Subco files its tax returns at the XXXXXXXXXX Tax Centre and its income tax affairs are administered by the XXXXXXXXXX Tax Services Office.
7. The authorized share capital of Subco consists of an unlimited number of common shares and special shares of which there are XXXXXXXXXX common shares (the “Subco Shares”) and no special shares issued and outstanding.
8. Subco was incorporated for the purpose of acquiring Pubco’s XXXXXXXXXX owned directly and indirectly by XXXXXXXXXX , with the intention of being spun out as a separately traded public corporation.
9. On XXXXXXXXXX , Subco entered into a share purchase agreement with Pubco pursuant to which it purchased, from Pubco, XXXXXXXXXX shares in the capital of XXXXXXXXXX , representing XXXXXXXXXX % of the issued and outstanding shares of XXXXXXXXXX in consideration for the issuance of the Subco Shares.
10. Subject to the final approval of Pubco shareholders, Pubco will reduce its stated capital in accordance with the BCA by an amount that will be equal to the fair market value of the Subco Shares at such time. Concurrently with the reduction of its stated capital, Pubco will make a pro-rata distribution of the Subco Shares to the Pubco shareholders (the “Subco Common Share Distribution”). For greater certainty, the reduction in Pubco’s stated capital will not exceed the aggregate paid-up capital of the Pubco common shares issued and outstanding at such time.
11. The proposed reduction in the capital of Pubco’s common shares has not been preceded by any other transaction that resulted in an increase in the paid-up capital of those shares, except for increases attributable to the exercise of options or warrants and attributable to subscriptions received for private placements or public offerings of Pubco common shares.
12. The proposed reduction in capital and distribution of Subco Shares is not in lieu of ordinary dividends. Pubco has never paid dividends to its shareholders.
13. The Subco Common Share Distribution is intended to be a one-time transaction, leaving Pubco with none of the Subco Shares.
14. On XXXXXXXXXX , the Board of Directors and management of Pubco mailed a Notice of Special Meeting of Shareholders and Management Information Circular to its shareholders describing the Proposed Transactions. Shareholder approval was obtained on XXXXXXXXXX .
15. The fair market value of the Subco Shares will be determined on the basis of a valuation opinion provided by an independent financial advisor. Such financial advisor will not be an insider, associate or affiliate of either Pubco or Subco and will have no financial interest, directly or indirectly, in Pubco or Subco or any related person.
16. Subco intends to file a long-form prospectus with one or more securities regulatory authorities in certain provinces of Canada in connection with a planned offering of securities of Subco, qualifying the Subco Shares to be eligible for distribution to the Pubco shareholders under the relevant securities law and to enable Subco to become a reporting issuer in one or more provinces or territories of Canada.
17. Subco intends to apply to list the Subco Shares on the XXXXXXXXXX .
18. By press release dated XXXXXXXXXX , Pubco announced that it has accepted an offer from XXXXXXXXXX to build a new company focused on XXXXXXXXXX . It is anticipated that the new company, which is expected to be named XXXXXXXXXX , will apply for listing on the XXXXXXXXXX . It is expected that XXXXXXXXXX will acquire XXXXXXXXXX % of Pubco’s interest in XXXXXXXXXX
PURPOSE OF THE PROPOSED TRANSACTION
19. Pubco’s Board of Directors has determined that, going forward, it will be challenging for Pubco to manage and secure the financing necessary to continue to develop all of its current projects. In addition, Pubco has decided to focus its efforts and resources on its projects that are not XXXXXXXXXX projects (ie. XXXXXXXXXX ). This streamlined focus is intended to improve the availability of future financing for Pubco and allow it to optimize the future development of its remaining projects. Furthermore, the Proposed Transaction is intended to enable Pubco’s shareholders to become shareholders, without the payment of any additional consideration, of a new public XXXXXXXXXX company focused on XXXXXXXXXX that will finance itself independently of Pubco.
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the Proposed Transaction and provided further that the Proposed Transaction is carried out as described above, we rule as follows:
A. Subject to the application of subsection 40(3), the Subco Common Share Distribution will not, in and of itself, result in a disposition of a Pubco common share by a Pubco common shareholder.
B. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to the Subco Common Share Distribution, described in Paragraph 10, such that Pubco will be deemed to have paid and the holders of the common shares of Pubco will be deemed to have received, a dividend only to the extent, if any, that the fair market value of the Subco Shares, at the time of the Subco Common Share Distribution, exceeds the amount by which the paid-up capital in respect of the common shares of Pubco is reduced.
C. Where a Pubco shareholder holds Pubco common shares as capital property, by virtue of subparagraph 53(2)(a)(ii), the amount received by such Pubco shareholder on the Subco Common Share Distribution will be deducted in computing the adjusted cost base of the shareholder’s Pubco common shares. To the extent such amount exceeds the adjusted cost base of the Pubco common shares to such shareholder, the shareholder will be deemed to have a capital gain pursuant to subsection 40(3).
D. Subject to the application of section 47, the cost of the Subco Shares received by a Pubco shareholder on the Subco Common Share Distribution will be equal to the fair market value of the Subco Shares at the time of the Subco Common Share Distribution and Pubco will be considered to have disposed of the Subco Shares for an amount equal to their aggregate fair market value at that time.
E. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transaction, in and by themselves, to redetermine the tax consequences of the rulings requested above.
The above rulings are 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 Transaction is completed prior to XXXXXXXXXX . 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 herein.
1. Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:
(a) the paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;
(b) the amount of any tax account of any corporation referred to herein;
(c) any other tax consequence relating to the facts, Proposed Transaction or any transaction or event taking place either prior to the Proposed Transaction or subsequent to the Proposed Transaction, whether described in this letter or not, other than those specifically described in the rulings given above, including whether the Proposed Transaction would also be included in a series of transactions or events that include other transactions or events that are not described in this letter.
for Division Director
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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