2012 Ruling 2012-0461881R3 - Supplemental Ruling

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: Amendments to facts and proposed transactions brought to our attention. New facts with respect to the assets and liabilities of DC added for the purpose of obtaining greater certainty.

Position: Confirmation that, subject to the conditions, limitations, qualifications, and comments set out therein, the original Ruling no. 2012-043938 will continue to be binding on the CRA.

Reasons: In compliance with the law.

XXXXXXXXXX 2012-046188

XXXXXXXXXX, 2012

Madam,

RE: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your email of XXXXXXXXXX in which you advised us of additional facts and proposed transactions relating to the advance income tax ruling no. 2012--043938 dated XXXXXXXXXX, and requested a confirmation that these additional facts and proposed transactions will not affect the advance income tax rulings given in Ruling no. 2012--043938 (the “Ruling”). We also acknowledge the information provided in your emails of XXXXXXXXXX.

Capitalized terms not defined herein are as defined in the Ruling.

As a result of your request, the following amendments are made to the Ruling:

1. The following term is added in the DEFINITION section of the Ruling:

“New XXXXXXXXXX” means XXXXXXXXXX. That name was changed for XXXXXXXXXX after the merger with Forco3.

2. In Paragraph 5 of the Ruling, the sentence stating the laws under which Forco3 has been incorporated is changed to read as follows:

Forco3 was incorporated under the laws XXXXXXXXXX.

3. Paragraph 5 of the Ruling is changed to add the following as the last part of that Paragraph:

Forco2 owns all of the issued and outstanding membership interests of New XXXXXXXXXX. New XXXXXXXXXX is XXXXXXXXXX that is a resident of XXXXXXXXXX. New XXXXXXXXXX was incorporated under the laws of XXXXXXXXXX. Until its merger with Forco3, New XXXXXXXXXX was an inactive XXXXXXXXXX.

4. Subparagraph a) in Paragraph 15 of the Ruling is amended to change the number of common shares to XXXXXXXXXX.

5. Subparagraph d) in Paragraph 27 of the Ruling is amended to delete “XXXXXXXXXX”.

6. Paragraph 29.1 is added to the Ruling and reads as follows:

The CRA issued reassessments to DC for the XXXXXXXXXX taxation years. DC has filed notices of objection with the tax authorities regarding these reassessments. DC has paid amounts owing relating to these reassessments. An amount has been recorded as taxes recoverable in DC’s financial statements. The amount that has been recorded as taxes recoverable represents management’s best estimate of taxes recoverable pursuant to a resolution of the objections filed.

An amount has also been recorded in DC’s financial statements as taxes payable and that amount represents management’s best estimate of taxes payable to the tax authorities for taxation years that have not been reassessed to date.

7. Paragraph 29.2 is added to the Ruling and reads as follows:

DC has a post-retirement benefits obligation. The post-retirement benefits consist of a group insurance plan covering all of DC’s retired employees for life insurance, hospital and medical benefits. At retirement, eligible employees maintain a reduced life insurance coverage, hospital and medical benefits. DC commits to the post-retirement benefits through its employee benefits policy. The amount is quantifiable through an actuarial estimate.

8. Paragraph 29.3 is added to the Ruling and reads as follows:

DC sponsors a contributory defined benefit plan (the “DC Plan”) for its eligible employees. The DC Plan is registered under, and governed by XXXXXXXXXX pension standards legislation in addition to the Act. As such, DC has a statutory obligation to make payments to fund any deficit that may exist under the DC Plan. In the case of DC, the funded status of the DC Plan is in a deficit position (“the pension plan liability”).

In accordance with Canadian Generally Accepted Accounting Principles, transitional assets, past service costs as well as actuarial gains or losses that have not yet been charged to earnings are amortized over the expected average remaining service life of the employee group covered by the DC Plan. As such, the application of Canadian Generally Accepted Accounting Principles results in a “smoothing mechanism” for earnings as the unamortized amounts can only be taken into income over an extended period of time. An unamortized amount may either be in an asset or liability position for accounting purposes. In the case of DC, the balance of unamortized amount is shown as an asset on the corporation’s balance sheet.

9. Paragraph 31 of the Ruling is changed to read as follows:

Prior to the incorporation of Foreign Spinco Parent as described in Paragraph 32, Forco1, Forco2 and Forco4 XXXXXXXXXX.

XXXXXXXXXX

10. Paragraph 31.1 is added to the Ruling and reads as follows:

On or around XXXXXXXXXX, Forco3 merged with New XXXXXXXXXX pursuant to the Business Corporation Act of and the Agreement and Plan of Merger. The Agreement and Plan of Merger provided that the separate existence of Forco3 would cease as of the effective date of the merger and that the surviving entity would be New XXXXXXXXXX. The Agreement and Plan of Merger provided that the shares of the capital stock of Forco3 would be cancelled and would cease to exist.

XXXXXXXXXX.

11. Paragraph 31.2 is added to the Ruling and reads as follows:

On or around XXXXXXXXXX, Forco1 distributed the membership interests it held in Forco2 as a dividend in kind to Foreign Pubco.

On or around XXXXXXXXXX, Forco2 distributed the membership interests it held in New XXXXXXXXXX as a dividend in kind to Foreign Pubco.

12. Paragraph 31.3 is added to the Ruling and reads as follows:

XXXXXXXXXX

13. Paragraph 38 of the Ruling is amended to read as follows:

Following the transaction described in Paragraph 37, Forco5 will distribute the DC Shares to Foreign Pubco as a dividend in kind through Forco4 and New XXXXXXXXXX.

The DC Shares do not derive their value principally from real property situated in Canada. Accordingly, the DC Shares will not constitute taxable Canadian property and, therefore, no notice to the Minister under section 116 will be sent in connection with the dispositions of the DC Shares by Forco5, Forco4 and New XXXXXXXXXX.

14. Paragraph 58 of the Ruling is amended to read as follows:

Following the transactions described in Paragraph 57, Forco5 will distribute all of its Foreign Spinco1 shares to Foreign Spinco Parent as a dividend in kind, through Forco4 and New XXXXXXXXXX.

15. Subparagraphs g) and h) are added in Paragraph 72 of the Ruling and read as follows:

g) Any potential refunds of taxes (and interest thereon), estimated by the management of DC as being the amounts of taxes paid that will be recoverable when the objections filed with respect to reassessments of taxes will be resolved (as described in the first part of Paragraph 29.1), will not be considered property until the objections to which they relate are resolved. They will be ignored for purposes of determining the types of property of DC until the resolution of the objections;

h) The balance of any unamortized amounts relating to the DC Plan shown on DC’s balance sheet for accounting purposes (as described in the second part of Paragraph 29.3) will not be considered property.

16. Subparagraphs i), j) and k) are added in Paragraph 73 of the Ruling and read as follows:

i) If the CRA does not issue a reassessment prior to the completion of the Proposed Transactions, any potential tax liability, including interest and penalties recorded in the financial statements of DC with respect to such potential reassessment (as described in the second part of Paragraph 29.1) will be considered to be a deferred income tax as referred in Subparagraph 73 e); however, if the CRA issues a reassessment prior to the completion of the Proposed Transactions, any obligation resulting from the reassessment will be considered to be a current liability allocable to cash or near-cash property;

j) Any current pension plan liability (as determined by the method prescribed by the applicable pension legislation) and current post-retirement benefit liability of DC will be allocated to cash or near-cash property, and any non-current pension plan liability (as determined by the method prescribed by the applicable pension legislation) and non-current post-retirement benefit liability will be allocated to business property;

k) No amount will be considered to be a liability of DC unless it represents a true legal liability which is capable of quantification. For greater certainty, any contingent obligations of DC will not be considered a liability. For the purpose of Paragraph 73, the amounts described in Subparagraph 73 j) will be considered a true legal liability which is capable of quantification, and not a contingent liability.

Considering the above, we hereby confirm that, subject to the conditions, limitations, qualifications and comments set out in the Ruling, as amended by this letter, the advance income tax rulings given in the Ruling will continue to be binding on the Canada Revenue Agency.

An invoice for our fees in connection with this file will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch