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: Pubco will incorporate Newco. Pubco will transfer shares of the capital stock of various corporations to Newco. Pubco will distribute as a dividend in kind, the shares of the capital stock of Newco to its shareholders. Whether subsection 85(1) will apply to the transfer and whether 245(2) will apply to re-determine the consequences of subsection 85(1).
Position: Subject to subsection 69(11), subsection 85(1) will apply with respect to the transfer. Subsection 245(2) will not be applied to re-determine the consequences of subsection 85(1).
Reasons: The conditions to apply subsection 85(1) are met. The conditions to apply subsection 245(2) are not met.
Re: Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX in which you requested certain advance income tax rulings regarding the proposed transactions described herein. We also acknowledge your emails of XXXXXXXXXX.
We understand that to the best of your knowledge and that of PUBCO, none of the issues described herein:
i. is in an earlier return of PUBCO or a related person;
ii. is being considered by a tax services office or taxation centre in connection with a previously filed tax return of PUBCO or a related person;
iii. is under objection by PUBCO or a related person;
iv. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
v. is the subject of a ruling previously considered by the Income Tax Rulings Directorate.
Unless otherwise noted, all references to monetary amounts are in Canadian dollars.
Unless otherwise noted, the following terms have the meanings ascribed to them below:
"Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, Division, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provision of the Act;
"CANCO" means XXXXXXXXXX;
"FMV" means fair market value;
"FORCO1" means XXXXXXXXXX;
"FORCO2" means XXXXXXXXXX;
"FORCO3" means XXXXXXXXXX;
"LRIP" means "low rate income pool", as defined in subsection 89(1);
"Newco" means a new corporation described in Paragraph 17;
"Paragraph" refers to a numbered paragraph in this letter;
"Preferred Shares" means the Preferred Shares of the capital stock of Newco described in Paragraph 17;
"Proposed Transactions" means the transactions described in Paragraphs 17 to 22;
"PUBCO" means XXXXXXXXXX;
"public corporation" has the meaning assigned by subsection 89(1);
"subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1); and
"taxable Canadian corporation" has the meaning assigned by subsection 89(1).
1. PUBCO is a Canadian public company listed on the XXXXXXXXXX engaged in XXXXXXXXXX activities in XXXXXXXXXX. PUBCO also holds an indirect interest in a property in XXXXXXXXXX through its XXXXXXXXXX% interest in the capital stock of CANCO. The FMV of the XXXXXXXXXX% interest is approximately $XXXXXXXXXX.
CANCO was incorporated pursuant to the XXXXXXXXXX in XXXXXXXXXX and was continued under the XXXXXXXXXX in XXXXXXXXXX. PUBCO owns XXXXXXXXXX of the issued and outstanding shares of the capital stock of CANCO. The estimated amounts as of XXXXXXXXXX of the ACB and the PUC of the shares held by PUBCO in the capital stock of CANCO are respectively equal to $XXXXXXXXXX and $XXXXXXXXXX.
XXXXXXXXXX owns the other XXXXXXXXXX issued and outstanding shares of the capital stock of CANCO.
2. FORCO1 is a subsidiary wholly-owned corporation of PUBCO and was incorporated pursuant to the XXXXXXXXXX on XXXXXXXXXX. The capital stock of FORCO1 consists of XXXXXXXXXX ordinary shares of a single class with no par value. The ACB and PUC of those shares are equal to $XXXXXXXXXX.
3. FORCO2 is a subsidiary wholly-owned corporation of FORCO1 and was incorporated pursuant to the XXXXXXXXXX on XXXXXXXXXX.
4. FORCO3 was incorporated pursuant to the XXXXXXXXXX on XXXXXXXXXX and is XXXXXXXXXX% indirectly owned by PUBCO through FORCO1 (XXXXXXXXXX%) and FORCO2 (XXXXXXXXXX%).
5. FORCO3 holds XXXXXXXXXX in XXXXXXXXXX.
6. PUBCO has retained an investment banking entity to provide a fairness opinion with respect to the XXXXXXXXXX properties associated with the XXXXXXXXXX. The investment banking entity will also provide an opinion as to the FMV of these assets.
7. At this time, XXXXXXXXXX.
8. Other than the costs associated with XXXXXXXXXX activity conducted to date, there is not expected to be anything other than a nominal value related to the XXXXXXXXXX.
9. On XXXXXXXXXX, FORCO3 executed a definitive option agreement for the XXXXXXXXXX located in XXXXXXXXXX. The option agreement provides FORCO3 an option for a XXXXXXXXXX year term to acquire XXXXXXXXXX% interest in XXXXXXXXXX for US$XXXXXXXXXX subject to a XXXXXXXXXX% XXXXXXXXXX. The offer is subject to XXXXXXXXXX and regulatory approvals.
10. PUBCO will arrange to have a fairness opinion provided by an independent third party which will include an opinion as to the FMV of the XXXXXXXXXX option. However, at this time, XXXXXXXXXX. Therefore, the FMV of the XXXXXXXXXX option is assumed to be nominal.
11. As of XXXXXXXXXX, PUBCO has XXXXXXXXXX common shares issued and outstanding with XXXXXXXXXX shares (XXXXXXXXXX%) held by non-residents.
12. As at XXXXXXXXXX, PUBCO had $XXXXXXXXXX of non-capital losses (expiry: XXXXXXXXXX and beyond).
PUBCO has no LRIP balance as of the date hereof.
13. PUBCO has a loan receivable from FORCO1 in the amount of $XXXXXXXXXX.
14. PUBCO has been advised that it and the majority of shareholders would be strategically better placed to focus on the XXXXXXXXXX Properties, and to permit the XXXXXXXXXX Properties to be subject to operation through a separate public entity.
15. PUBCO has also been advised that it would be difficult to conduct this spin-off through a "traditional" spin-out mechanism which involves a Plan of Arrangement. In the present circumstances, the "traditional" spin-off would not be an economically viable transaction. A spin-off would have to be structured as a plan of arrangement, which would require shareholder approval and extensive regulatory disclosure, as well as high transaction fees and a long implementation period. XXXXXXXXXX, the cost of such a transaction would have been prohibitive, and the transaction would not have been economically viable.
16. Subject to final confirmation from the XXXXXXXXXX authorities, you have assumed that there are no XXXXXXXXXX tax implications for the proposed spin-off transaction.
17. PUBCO will incorporate a new subsidiary wholly-owned corporation ("Newco") under the XXXXXXXXXX. Newco will be a taxable Canadian corporation, and its fiscal period will end on XXXXXXXXXX.
It is intended that Newco will be a public corporation.
Newco's authorized share capital will consist of two classes of shares, as follows:
(a) Common shares – voting, participating; and
(b) Preferred Shares – non-voting, non-participating, redeemable/retractable at $XXXXXXXXXX/share, and subject to a price adjustment clause.
18. PUBCO will subscribe for XXXXXXXXXX common shares of the capital stock of Newco, with an aggregate value of $XXXXXXXXXX ($XXXXXXXXXX/share) which PUBCO will pay for in cash.
19. PUBCO will transfer to Newco, the (a) shares of the capital stock of CANCO, (b) the shares of the capital stock of FORCO1, and (c) the loan receivable from FORCO1 in the amount of $XXXXXXXXXX.
As consideration for the transfer of the shares of the capital stock of CANCO, PUBCO will receive from Newco an interest bearing note (bearing a commercial rate of interest) with a principal amount equal to the FMV of the shares of the capital stock of CANCO (less a nominal amount equal to the value of the Preferred Shares issued as part of such consideration) and a nominal number of Preferred Shares.
As consideration for the transfer of the shares of the capital stock of FORCO1, PUBCO will receive from Newco an interest bearing note (bearing a commercial rate of interest) with a principal amount equal to the FMV of the shares of the capital stock of FORCO1 (less a nominal amount equal to the value of the Preferred Shares issued as part of such consideration) and a nominal number of Preferred Shares.
As consideration for the transfer of the loan receivable from FORCO1, PUBCO will receive from Newco an interest bearing note (bearing a commercial rate of interest) with a principal amount equal to the principal amount of the loan receivable from FORCO1 (less a nominal amount equal to the value of the Preferred Shares issued as part of such consideration) and a nominal number of Preferred Shares.
PUBCO and Newco will elect, jointly and in prescribed form and within the limits referred to in subsection 85(6) to have the rules in subsection 85(1) apply to each eligible property transferred by PUBCO to Newco as described above. The agreed amount for purposes of each such election will be equal to the FMV of the assets being transferred.
20. PUBCO will simultaneously lend cash in an amount not exceeding $XXXXXXXXXX to Newco in exchange for an interest bearing note.
21. PUBCO will declare a dividend in kind to its common shareholders of record on an agreed upon date, such date to coincide with the date of the Proposed Transactions described in Paragraphs 17 to 19 above, with each shareholder of PUBCO receiving 1 common share of the capital stock of Newco for each 1 share of the capital stock of PUBCO that it holds on such record date.
22. To facilitate the payment of the Part XIII tax associated with the dividend in kind, PUBCO will cause Newco to repurchase shares of its capital stock from the affected shareholder with a value equal to the amount of the withholding tax owing, which will then be remitted to the CRA.
23. The transactions described above will take place consecutively in the order described, with all transactions being completed on the same agreed upon date.
PURPOSE OF THE PROPOSED TRANSACTIONS
24. The primary objective of the Proposed Transactions is to permit PUBCO to spin out its XXXXXXXXXX assets under a new entity with nominal tax in the hands of the shareholders.
25. The purpose of the $XXXXXXXXXX loan from PUBCO to Newco is to provide the company with operating cash. XXXXXXXXXX. However, the Board of Directors wishes to seed the XXXXXXXXXX assets with sufficient capital to continue to attract activity to the properties held in XXXXXXXXXX.
26. It should not be necessary to obtain shareholder approval in connection with the Proposed Transactions. The Board of Directors has determined that it is in the best interest of the shareholders to undergo this less expensive structure but full disclosure in accordance with corporate and securities law will be implemented.
27. The shareholders of PUBCO will be informed by means of a letter circulated with the details of the Proposed Transactions, including the information that the FMV of their Newco common shares may be affected by the existence of a price adjustment clause with respect to the Newco preferred shares. The Board is expecting to receive a fairness opinion from their financial advisers with respect to the proposed reorganization and full disclosure and release in accordance with securities law will be followed. XXXXXXXXXX.
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:
A. Immediately after their subscription by PUBCO, the ACB of the XXXXXXXXXX common shares of the capital stock of Newco held by PUBCO will be equal to the price paid by PUBCO to acquire them.
B. Provided that the shares of the capital stock of CANCO and of FORCO1, transferred by PUBCO to Newco, are eligible property of PUBCO, provided the requisite election is made by PUBCO and Newco in the prescribed form and within the prescribed time, with respect to each transfer of such shares, and subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfers of such shares of the capital stock of CANCO and of FORCO1, as described in Paragraph 19. Subject to paragraphs 85(1)(b), (c) and (c.1), the agreed amount in respect of such transfers will be deemed to be PUBCO's proceeds of disposition and Newco's cost of such shares pursuant to paragraph 85(1)(a).
C. The payment of the dividend in kind by PUBCO described in Paragraph 21 will result in PUBCO being deemed to have disposed of its common shares of the capital stock of Newco at their FMV pursuant to subsection 52(2).
D. The shareholders of PUBCO will be deemed to have acquired the common shares of the capital stock of Newco, received as a dividend in kind as described in Paragraph 21, at a cost equal to the FMV of such shares at the time they are received, pursuant to subsection 52(2). The taxable dividend resulting from such dividend in kind will be equal to the FMV of the common shares of the capital stock of Newco at the time they are received by the shareholders of PUBCO.
E. Part XIII withholding tax will apply to all dividends in kind paid to non-resident shareholders.
F. With respect to the repurchase of the shares described in Paragraph 22, Newco will be deemed by paragraph 84(3)(a) to have paid, and the affected shareholder will be deemed by paragraph 84(3)(b) to have received, a dividend equal to the amount, if any, by which the amount paid to repurchase the shares exceeds the PUC of such shares immediately prior to the repurchase.
G. Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed herein.
The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 date May 17, 2002 and are binding on CRA provided that the Proposed Transactions are completed by 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, could have an effect on the rulings provided herein.
Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination, or accepted any method for the determination in respect of:
a) the PUC of any share or the ACB or FMV of any property referred to herein, and in particular the FMV of the Preferred Shares of the capital stock of Newco;
b) the amount of any non-capital loss, net capital loss, capital loss or capital gain of PUBCO or the outstanding balance of various tax accounts for any of the corporate entities described herein; or
c) any other tax consequences relating to the Facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above.
Nothing in this letter should be construed as a confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively
to the time of the transfer or issuance of shares. Furthermore, none of the rulings given in this letter are intended to apply to or in event of the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Folio S4-F3-C1, Price Adjustment Clauses, which replaces and cancels Interpretation Bulletin IT-169.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
for Division Director
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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