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 TRANSACTION MEETS LEGISLATIVE AND ADMINISTRATIVE REQUIREMENTS.
Position: TRANSACTION MEETS REQUIREMENTS.
Reasons: CONSISTENT WITH LAW AND ADMINISTRATIVE REQUIREMENTS.
XXXXXXXXXX
2013-049165
XXXXXXXXXX, 2013
Attention: XXXXXXXXXX
Re: Advance Income Tax Ruling
XXXXXXXXXX,
XXXXXXXXXX Taxation Centre,
XXXXXXXXXX Taxation Services Office
We are writing in response to your letter of XXXXXXXXXX, (and related emails) in which you requested an advance income tax ruling on behalf of XXXXXXXXXX (the "taxpayer"). The documents submitted as part of your request are part of this document only to the extent described herein.
You have advised that, to the best of your knowledge, and that of the taxpayer, none of the issues involved in this ruling request:
i. is in an earlier return of the taxpayer 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 the taxpayer or a related person;
iii. is under objection by the taxpayer 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 not expired; or
v. is the subject of a ruling previously issued by this directorate.
Unless otherwise noted, (i) all references herein to sections or components thereof are references to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, or the Income Tax Regulations, C.R.C., c. 945, as appropriate; (ii) all references to monetary amounts are in Canadian dollars; and (iii) all references to Paragraphs are references to the numbered paragraphs in this letter.
ENTITIES INVOLVED
Throughout this letter, the entities below will be referred to as follows:
"A Co" refers to XXXXXXXXXX, as more particularly described in Paragraph 31.
"B Co" refers to XXXXXXXXXX, as more particularly described in Paragraph 26.
"C Co" refers to XXXXXXXXXX, as more particularly described in Paragraph 36.
"D Co" refers to XXXXXXXXXX, as more particularly described in Paragraph 39.
"DC" refers to XXXXXXXXXX, as more particularly described in Paragraph 1.
"E Co" refers to XXXXXXXXXX, as more particularly described in Paragraph 47.
"F Co" refers to XXXXXXXXXX, as more particularly described in Paragraph 20.
"ForCo 1" refers to XXXXXXXXXX, as more particularly described in Paragraph 14.
"ForCo 2" refers to XXXXXXXXXX, as more particularly described in Paragraph 15.
"ForCo 3" refers to XXXXXXXXXX, as more particularly described in Paragraph 17.
"ForCo 4" refers to XXXXXXXXXX, as more particularly described in Paragraph 18.
"ForCo 5" refers to XXXXXXXXXX, as more particularly described in Paragraph 78. XXXXXXXXXX.
"ForCo 6" refers to XXXXXXXXXX, as more particularly described in Paragraph 22. XXXXXXXXXX.
"ForCo 7" refers to XXXXXXXXXX, as more particularly described in Paragraph 23.
"ForCo 8" refers to XXXXXXXXXX, as more particularly described in Paragraph 61.
"ForCo 9" refers to XXXXXXXXXX, as more particularly described in Paragraph 61.
"ForCo 10" refers to XXXXXXXXXX, as more particularly described in Paragraph 61.
"ForCo 11" refers to XXXXXXXXXX, as more particularly described in Paragraph 28.
"ForCo 12" refers to XXXXXXXXXX, as more particularly described in Paragraph 71.
"ForCo 13" refers to XXXXXXXXXX.
"ForCo 14" refers to XXXXXXXXXX.
"ForCo 15" refers to XXXXXXXXXX.
"ForCo 16" refers to XXXXXXXXXX.
"ForCo 17" refers to XXXXXXXXXX.
"ForCo 18" refers to XXXXXXXXXX.
"ForCo 19" refers to XXXXXXXXXX.
"ForCo 20" refers to XXXXXXXXXX.
"ForCo 21" refers to XXXXXXXXXX.
"ForCo 22" refers to XXXXXXXXXX.
"ForCo 23" refers to XXXXXXXXXX.
"ForCo 24" refers to XXXXXXXXXX.
"ForCo 25" refers to XXXXXXXXXX.
"ForCo 26" refers to XXXXXXXXXX.
"ForCo 27" refers to XXXXXXXXXX.
"ForCo 28" refers to XXXXXXXXXX.
"ForCo 29" refers to XXXXXXXXXX.
"ForCo 30" refers to XXXXXXXXXX.
"ForCo 31" refers to XXXXXXXXXX.
"ForCo 32" refers to XXXXXXXXXX.
"ForCo 33" refers to XXXXXXXXXX.
"ForCo 34" refers to XXXXXXXXXX.
"ForCo 35" refers to XXXXXXXXXX.
"ForCo 36" refers to XXXXXXXXXX.
"ForCo 37" refers to XXXXXXXXXX.
"ForCo 38" refers to XXXXXXXXXX.
"ForCo 39" refers to XXXXXXXXXX.
"ForCo 40" refers to XXXXXXXXXX.
"ForCo 41" refers to XXXXXXXXXX.
"ForCo 42" refers to XXXXXXXXXX.
"ForCo 43" refers to XXXXXXXXXX.
"ForCo 44" refers to XXXXXXXXXX.
"ForCo 45" refers to XXXXXXXXXX.
"ForCo 46" refers to XXXXXXXXXX.
"ForCo 47" refers to XXXXXXXXXX.
"ForCo 48" refers to XXXXXXXXXX.
"ForCo 49" refers to XXXXXXXXXX.
"ForCo 50" refers to XXXXXXXXXX.
"ForCo 51" refers to XXXXXXXXXX.
"ForCo 52" refers to XXXXXXXXXX.
"ForCo 53" refers to XXXXXXXXXX.
"ForCo 54" refers to XXXXXXXXXX.
"ForCo 55" refers to XXXXXXXXXX.
"ForCo 56" refers to XXXXXXXXXX.
"ForCo 57" refers to XXXXXXXXXX.
"ForCo 58" refers to XXXXXXXXXX.
"ForCo 59" refers to XXXXXXXXXX.
"ForCo 60" refers to XXXXXXXXXX.
"ForCo 61" refers to XXXXXXXXXX.
"ForCo 62" refers to XXXXXXXXXX.
"ForCo 63" refers to XXXXXXXXXX.
"ForCo 64" refers to XXXXXXXXXX.
"ForCo 65" refers to XXXXXXXXXX.
"Foreign PubCo" refers to XXXXXXXXXX, as more particularly described in Paragraph 6.
"Foreign SpinCo" refers to XXXXXXXXXX, as more particularly described in Paragraph 16. XXXXXXXXXX.
"G Co" refers to XXXXXXXXXX, as more particularly described in Paragraph 21.
"LP 1" refers to XXXXXXXXXX, as more particularly described in Paragraph 42.
"Shareholder A" refers to XXXXXXXXXX of Country 1.
"TC" refers to the corporation to be formed under the laws of Province 2, as more particulary described in Paragraph 3.
DEFINITIONS
Unless otherwise noted, the following terms have the meanings ascribed to them below:
"A Co Common Shares" means the common shares which A Co is authorized to issue.
"ACB" means adjusted cost base, as defined in section 54.
"Accumulated Profits" at any time means accumulated profits determined at that time as that term is described in paragraph 23 of Interpretation Bulletin IT-533, entitled "Interest Deductibility and Related Issues".
"Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date of the letter.
"Act 1" means the Business Corporations Act, XXXXXXXXXX.
"Act 2" means the Business Corporations Act, XXXXXXXXXX.
"agreed amount" means the amount agreed on by the transferor and transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1).
"arm's length" has the meaning assigned by subsection 251(1).
"Butterfly Percentage" means the proportion, expressed as a percentage, that the net FMV of the business property owned (directly and indirectly) by DC that relates to the DC Spin-Off Business is of the net FMV of all the business property of DC, determined (i) immediately before the transfer of property by DC to TC described in Paragraph 92, and (ii) using the principles set out in Paragraphs 88 and 90.
"Canada Group" means, collectively, DC and the Canadian Subsidiaries.
"Canadian partnership" has the meaning assigned by subsection 102(1).
"Canadian Subsidiaries" means, collectively, B Co, A Co, C Co, D Co, E Co, and LP 1.
"Capital of the A Co Common Shares" at any time means the aggregate of the Contributed Capital of the A Co Common Shares and the Accumulated Profits of A Co determined at that time.
"capital property" has the meaning assigned by section 54.
"Capital Reorganization" has the meaning set out in Paragraph 80.
"CBCA" means Canada Business Corporations Act, R.S.C. 1985, c. C-44.
"CDA" means capital dividend account, within the meaning of subsection 89(1).
"Closing Date" means the closing date of the Spin-Out transactions described in this application.
"connected" has the meaning assigned by subsection 186(4).
"Contributed Capital" at any time means contributed capital determined at that time as that term is described in paragraph 23 of Interpretation Bulletin IT-533, entitled "Interest Deductibility and Related Issues".
"cost amount" has the meaning assigned by subsection 248(1).
"Country 1" means XXXXXXXXXX.
"Country 2" means XXXXXXXXXX.
"Country 3" means XXXXXXXXXX.
"Country 4" means XXXXXXXXXX.
"CRA" means the Canada Revenue Agency.
"DC Cash Pool" means the cash management arrangement described in Paragraphs 49 to 51.
"DC Cash Pool Bank Account" means the bank account of DC dedicated for the deposit and withdrawal of funds under the DC Cash Pool.
"DC Cash Pool Participants" means the Canadian entities that have joined the DC Cash Pool and consist of LP 1, A Co, B Co, and C Co.
"DC Common Shares" means the common shares which DC is currently authorized to issue, as described in Paragraph 2.
"DC New Common Shares" means the common shares which DC will be authorized to issue, as described in Paragraph 80(a).
"DC Redemption Amount" has the meaning set out in Paragraph 80(b)(i).
"DC Redemption Note" means the demand promissory note issued by DC in favour of TC, as described in Paragraph 95(b), having a in the principal amount equal to the aggregate DC Redemption Amount.
"DC Retained Business" refers to DC's Retained Business, carried on through the XXXXXXXXXX brands, as more particularly described in Paragraph 24.
"DC Shares" means the DC New Common Shares and the DC Special Shares as described in Paragraph 80.
"DC Special Shares" means the special shares which DC will be authorized to issue, as described in Paragraph 80(b).
"DC Spin-Off Business" refers to DC's Spin-Off Business, carried on through the XXXXXXXXXX brand.
"distribution" has the meaning assigned by subsection 55(1).
"Distribution Property" has the meaning set out in Paragraph 92.
"eligible property" has the meaning assigned by subsection 85(1.1).
"Exchange 1" means the Securities Exchange of Country 1.
"FMV" means fair market value, being the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and without compulsion to act, expressed in term of cash.
"Foreign PubCo Group" means Foreign PubCo and the direct and indirect subsidiaries that are controlled by Foreign PubCo.
"Foreign PubCo Treasury Policy" means the treasury policy implemented by Foreign PubCo as more particularly described in Paragraph 64.1.
"Foreign SpinCo Group" means Foreign SpinCo and the direct and indirect subsidiaries that are controlled by Foreign SpinCo.
"forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1).
"ITAR" means the Income Tax Application Rules, R.S.C. 1985, c. 2 (5th Supp.).
"legal capital" in respect of a share of a corporation means the capital of the corporation for the purposes of the statute by which the corporation is governed.
"Offshore Spin-Off Business" means the Spin-Off Business carried on in the Other Countries.
"Other Countries" means XXXXXXXXXX, Country 3, and XXXXXXXXXX, including Country 2, XXXXXXXXXX.
"Paragraph" refers to a numbered paragraph in this letter.
"principal amount" has the meaning assigned by subsection 248(1).
"private corporation" has the meaning assigned by subsection 89(1).
"proceeds of disposition" has the meaning assigned by section 54.
"Proposed Transactions" means the transactions described in the Proposed Transactions section of this letter.
"Province 1" means XXXXXXXXXX.
"Province 2" means XXXXXXXXXX.
"Province 3" means XXXXXXXXXX.
"Province 4" means XXXXXXXXXX.
"PUC" means paid-up capital which has the meaning assigned by subsection 89(1).
"RDTOH" means refundable dividend tax on hand, within the meaning of subsection 129(3).
"Regulations" means the Income Tax Regulations, C.R.C., c. 945, promulgated under the Act.
"related person" means, in relation to a particular person, another person who is related to the particular person by virtue of subsection 251(2), as modified, for the purposes of section 55, by paragraph 55(5)(e).
"Retained Business" refers to the XXXXXXXXXX. Leading trade names in this segment include XXXXXXXXXX. For the fiscal year ended XXXXXXXXXX, the net sales in this business segment amounted to US$XXXXXXXXXX and represented XXXXXXXXXX% of Foreign PubCo's consolidated net sales.
"Retained Earnings" at any time means the unconsolidated retained earnings of A Co determined at that time with investments accounted for on the cost basis. For greater certainty, the Retained Earnings of A Co reflect income/losses from A Co's business operations. There are no amounts included in A Co's Retained Earnings that resulted from profits or gains from transactions between A Co and non-arm's length parties.
XXXXXXXXXX.
"safe-income determination time" has the meaning assigned by subsection 55(1).
"safe income on hand" in respect of a particular share of a corporation at a particular time means the portion of the unrealized gain inherent in such share of the corporation at that time that cannot reasonably be considered to be attributable to anything other than income earned or realized (as determined pursuant to subsection 55(5)), to the extent that it is on hand, by any corporation after 1971 and before the safe-income determination time for the transaction, event or series of transactions or events that includes the Proposed Transactions.
"scheme of arrangement" in the context of the Spin-Out, means an arrangement under the laws of Country 1 whereby the value of Foreign SpinCo shares is debited to Foreign PubCo's retained earnings and share capital.
"Securities Exchange" means the XXXXXXXXXX.
"series of transactions or events" has the meaning assigned by subsection 248(10).
"short-term preferred share" has the meaning assigned by subsection 248(1).
"significant influence" has the meaning assigned by section 3051.04 of the Accounting Standards for Private Enterprises or by IAS 28 of the International Financial Reporting Standards.
"specified financial institution" has the meaning assigned by subsection 248(1).
"specified investment business" has the meaning assigned by subsection 125(7).
"Spin-Off Business" refers to the XXXXXXXXXX business segment, trading under the name XXXXXXXXXX, involves XXXXXXXXXX. For the fiscal year ended XXXXXXXXXX, the net sales for this business segment amounted to US$XXXXXXXXXX and represented XXXXXXXXXX% of Foreign PubCo's consolidated net sales.
"Spin-Out" means the distribution of the shares of Foreign SpinCo to the shareholders of Foreign PubCo under a scheme of arrangement as described in Paragraph 99.
"stated capital" in respect of the share capital of a corporation, has the meaning assigned by the statute by which the corporation is governed.
"substantial interest" has the meaning assigned by subsection 191(2).
"taxable Canadian corporation" has the meaning assigned by subsection 89(1).
"taxable Canadian property" has the meaning assigned by subsection 248(1).
"taxable dividend" has the meaning assigned by subsection 89(1).
"taxable preferred share" has the meaning assigned by subsection 248(1).
"TC Common Shares" means the common shares which TC will be authorized to issue, as described in Paragraph 4(a).
"TC Preferred Shares" means the preferred shares which TC will be authorized to issue, as described in Paragraph 4(b).
"TC Redemption Amount" has the meaning set out in Paragraph 4(b)(i).
"TC Redemption Note" means the demand promissory note in the principal amount of the aggregate TC Redemption Amount issued by TC in favour of DC, as described in Paragraph 95(a).
"TC Shares" means, collectively, the TC Common Shares and TC Preferred Shares.
"term preferred share" has the meaning assigned by subsection 248(1).
"Three-Party Share Exchange" has the meaning described in Paragraph 85.
FACTS
1. DC is a corporation amalgamated pursuant to the laws of Province 1 and is a taxable Canadian corporation and a private corporation. The amalgamation took place on XXXXXXXXXX among predecessor XXXXXXXXXX and XXXXXXXXXX. XXXXXXXXXX was a wholly-owned subsidiary of ForCo 2, and XXXXXXXXXX was a wholly-owned subsidiary of predecessor XXXXXXXXXX. DC's year end for tax reporting purposes is XXXXXXXXXX, as it is for all of the Canada Group.
2. The authorized share capital of DC consists of an unlimited number of DC Common Shares. Currently, there are XXXXXXXXXX DC Common Shares issued and outstanding, each of which is entitled to one vote per share. All of the issued and outstanding DC Common Shares are owned by ForCo 2.
3. Prior to the Proposed Transactions, TC will be incorporated as a corporation under the laws of Province 2. TC will be a taxable Canadian corporation and a private corporation.
4. TC will be authorized to issue:
(a) an unlimited number of common shares (the "TC Common Shares"), each of which is a fully participating voting common share with the holder being entitled to one vote at each meeting of the shareholders of TC; and
(b) XXXXXXXXXX preferred shares (the "TC Preferred Shares") having the following attributes:
(i) each TC Preferred Share will be redeemable, subject to applicable law, at any time, at the option of TC and at a redemption amount (the "TC Redemption Amount") equal to the amount by which the aggregate FMV of the Distribution Property at the time of its transfer to TC, as described in Paragraph 92 divided by the number of TC Preferred Shares issued as consideration for such transfer, plus the amount of all declared unpaid dividends thereon;
(ii) each TC Preferred Share is retractable, subject to applicable law, at any time at the option of the holder thereof for an amount equal to the TC Redemption Amount;
(iii) the holder of each TC Preferred Share is entitled to a non-cumulative cash dividend as and when declared by the directors of TC from time to time, which dividend need not also be declared on any other class of shares of TC;
(iv) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of TC if the resulting realizable value of the net assets of TC after payment of the dividends would be less than the aggregate TC Redemption Amount of all of the TC Preferred Shares then outstanding;
(v) the holder of each TC Preferred Share is entitled, upon the liquidation, dissolution or winding-up of TC, to a payment in priority to all other classes of shares of TC of an amount equal to the TC Redemption Amount thereon to the extent of the amount of value of property available under applicable law for the payment to the shareholders of TC upon liquidation, dissolution or winding-up, but will be entitled to no more than the amount of that payment; and
(vi) the holder of each TC Preferred Share is not entitled to vote at any meeting of the shareholders of TC, other than as provided under the statute by which TC will be governed.
5. On the incorporation of TC, Foreign SpinCo will subscribe for one or more common shares of TC for nominal consideration.
6. Foreign PubCo is a corporation formed under the laws of Country 1. The outstanding ordinary shares of the capital stock of Foreign PubCo are publicly traded and listed on Exchange 1. Currently, there are in excess of XXXXXXXXXX ordinary shares of Foreign PubCo issued. As of close on XXXXXXXXXX, the market capitalization of Foreign PubCo was approximately US$XXXXXXXXXX. Foreign PubCo is widely held, and, to the best of Foreign PubCo's knowledge, at XXXXXXXXXX, the only shareholder owning more than XXXXXXXXXX% of the ordinary shares of Foreign PubCo is Shareholder A XXXXXXXXXX%.
7. Foreign PubCo has a fiscal year that ends on XXXXXXXXXX.
8. Foreign PubCo has organized its businesses into the following two main business segments:
(a) Spin-Off Business.
(b) Retained Business.
9. Under Foreign PubCo's XXXXXXXXXX Share Plan and its contribution and matching share plan called XXXXXXXXXX, eligible executives and employees of the Foreign PubCo Group are granted share rights that carry no dividend or voting rights, and also matching awards for every Foreign PubCo ordinary share purchased, respectively. These awards generally vest based on time and performance hurdles or a combination thereof.
10. Eligible executives and employees of the Foreign PubCo Group in certain jurisdictions are also provided with cash incentives calculated by reference to the awards under the share-based remuneration schemes.
11. The share-based compensation costs are charged to the entity in which such individuals are employees. The charge is based on a XXXXXXXXXX day volume weighted average price prior to exercise of an award by an employee.
12. All executives and employees in respect of the Spin-Off Business will cease to participate in Foreign PubCo's incentive plans prior to or on the Closing Date.
13. [Reserved].
14. ForCo 1 is a company incorporated under the laws of Country 1 and is a wholly-owned subsidiary of Foreign PubCo.
15. ForCo 2 is a company incorporated under the laws of Country 1 and is a wholly-owned subsidiary of ForCo 1.
16. Foreign SpinCo is a company incorporated under the laws of Country 1 and is a wholly-owned subsidiary of ForCo 2. It is a holding company, holding only the shares of ForCo 3, and does not carry on any business activities.
17. ForCo3 is a company incorporated under the laws of Country 1 and is a wholly-owned subsidiary of Foreign SpinCo. It is a holding company, holding only the shares of ForCo 4, and does not carry on any business activities.
18. ForCo 4 is a company incorporated under the laws of Country 1 and is a wholly-owned subsidiary of ForCo 3. It is a holding company, holding only the shares of ForCo 5, ForCo 13 and ForCo 14, and does not carry on any business activities.
19. ForCo 5 is a corporation formed under the laws of Country 1 and is a wholly-owned subsidiary of ForCo 4. It is a holding company, holding only the shares of F Co and does not carry on any business activities.
20. F Co is a company incorporated under the laws of Province 2 and is a wholly-owned subsidiary of ForCo 5. It operates part of the Spin-Off Business in Canada.
21. G Co is a company incorporated under the laws of Province 2 and is a wholly-owned subsidiary of F Co. It operates part of the Spin-Off Business in Canada.
22. ForCo 6 is a company incorporated under the laws of Country 2 and is an indirect wholly-owned subsidiary of ForCo 2.
23. ForCo 7 is a company incorporated under the law of Country 3 and is an indirect wholly-owned subsidiary of ForCo 10.
24. DC, through its subsidiaries, carries on business activities in Canada that involve the DC Retained Business, as well as the DC Spin-Off Business. A Co directly carries on the activities that relate to the DC Spin-Off Business and will become the indirect subsidiary of Foreign SpinCo in preparation for the Spin-Out. All other activities directly carried on in Canada by B Co, C Co, D Co, and LP 1 will be referred to as the "DC Retained Business" and are to be retained by DC after the Spin-Out.
In the taxation year ended on XXXXXXXXXX, revenue earned by DC and its subsidiaries totalled $XXXXXXXXXX, with XXXXXXXXXX% of the revenue attributable to the DC Spin-Off Business and XXXXXXXXXX% to the DC Retained Business. In the same period, DC had a presence in Province 1, Province 3, and Province 4.
25. DC has an ownership interest in the following entities:
(a) XXXXXXXXXX% of the issued and outstanding common shares of B Co;
(b) XXXXXXXXXX% of the issued and outstanding common shares of A Co;
(c) XXXXXXXXXX% of the issued and outstanding common shares of C Co;
(d) XXXXXXXXXX% of the limited partnership interest in LP 1; and
(e) XXXXXXXXXX% of the issued and outstanding common shares of E Co.
26. B Co is a corporation formed under the laws of Canada on XXXXXXXXXX, a taxable Canadian corporation and a private corporation.
27. B Co is engaged primarily in the Retained Business.
28. B Co has only one class of issued and outstanding common shares. B Co's XXXXXXXXXX issued and outstanding common shares are held XXXXXXXXXX% by DC and XXXXXXXXXX% by ForCo 11, a company incorporated under the laws of the Country 2 and an indirect wholly-owned subsidiary of Foreign PubCo. ForCo 11 is not resident in Canada for purposes of the Act.
29. B Co's fiscal year ends XXXXXXXXXX.
30. B Co is the sponsor of the following deferred income plans:
(a) registered pension plan (CRA registration XXXXXXXXXX), which is a defined contribution plan for employees of B Co to participate. There is no asset or liability associated with this registered pension plan.
(b) defined profit sharing plan (CRA registration XXXXXXXXXX), which is a deferred profit sharing plan for employees of B Co where contributions are made by B Co based on the amount of contributions made by employees of B Co to the registered pension plan, as described in Paragraph 30(a), up to a maximum percentage of employee contribution. There is no asset or liability associated with this defined profit sharing plan.
(c) registered pension plan, which is a defined benefit plan for a former senior executive of B Co who is the sole member of this plan. There is a liability associated with this registered pension plan of approximately $XXXXXXXXXX.
31. DC acquired A Co and amalgamated under the laws of Province 2 on XXXXXXXXXX. It is a taxable Canadian corporation and a private corporation.
32. On XXXXXXXXXX, DC transferred the assets related to a portion of its Spin-Off Business to A Co pursuant to subsection 85(1) in exchange for the assumption of liabilities in respect of the business transferred and additional common shares of A Co.
33. On XXXXXXXXXX, DC transferred its remaining assets related to its Spin-Off Business, which were managed by A Co, to A Co in order to consolidate the Spin-Off Business into one entity. The transfer occurred pursuant to subsection 85(1) in exchange for the assumption of liabilities in respect of the business transferred and additional common shares of A Co.
34. DC represents that the acquisition, referred to in Paragraph 31, and subsequent transfers of properties from DC to A Co, referred to in Paragraph 32 to 33, were not entered into in contemplation of and do not form part of a series of transactions that includes the transfer described in Paragraph 92.
35. A Co's fiscal year ends XXXXXXXXXX.
36. C Co is a corporation formed on XXXXXXXXXX under the laws of Province 1 and is a taxable Canadian corporation and a private corporation.
37. C Co's business is part of the Retained Business.
38. C Co's fiscal year ends XXXXXXXXXX.
39. D Co is a corporation formed on XXXXXXXXXX under the laws of Province 2 and is a taxable Canadian corporation and a private corporation. It is a wholly-owned subsidiary of C Co.
40. D Co's business is part of the Retained Business.
41. D Co's fiscal year ends XXXXXXXXXX.
42. LP 1 is a limited partnership formed under the laws of Province 1 and is a Canadian partnership for purposes of the Act.
43. The partnership interest in LP 1 was acquired by DC on XXXXXXXXXX for total proceeds of $XXXXXXXXXX. LP 1's business is part of the Retained Business. DC represents the following:
(a) the acquisition of LP 1 from an arm's length party, allowed DC to expand the Retained Business;
(b) the acquisition enhanced DC's overall capabilities and offerings by leveraging the infrastructure, knowledge base and capabilities of both LP 1 and B Co to better serve customers' needs;
(c) at the time DC acquired the partnership interest in LP 1, the directors of DC had no knowledge or expectation of the Proposed Transactions;
(d) the acquisition of LP 1 was not entered into in contemplation of and does not form part of a series of transactions that includes the transfer described in Paragraph 92;
(e) the acquisition of LP 1 would have taken place regardless of whether the Proposed Transactions were undertaken because of strategic business objectives; and
(f) the Proposed Transactions would have been undertaken regardless of whether the acquisition of LP 1 occurred.
44. The acquisition of the interest in LP 1, referred to in Paragraph 43, reflects DC's strategy of growing the range of products and services offered. The intent is for DC to maintain and support LP 1's existing operations and to continue to operate LP 1 as a separate brand.
45. DC represents that the acquisition of LP 1 was not entered into in contemplation of and does not form part of a series of transactions that includes the transfer described in Paragraph 92. The acquisition of LP 1 would have taken place regardless of whether the Proposed Transactions were undertaken. The Proposed Transactions would have been undertaken regardless of whether the acquisition of LP 1 occurred.
46. LP 1's fiscal period ends XXXXXXXXXX.
47. E Co is a corporation formed in XXXXXXXXXX, under the laws of Province 1 and is a taxable Canadian corporation and a private corporation. E Co is a wholly-owned subsidiary of DC and is the general partner of LP 1.
48. E Co has a fiscal year of XXXXXXXXXX.
49. DC is the cash pool leader for Canada Group (the "DC Cash Pool"). The participants of the DC Cash Pool are the DC Cash Pool Participants.
50. Under the DC Cash Pool agreement, cash balances in each DC Cash Pool Participant's operating bank account are transferred from time to time into the DC Cash Pool Bank Account in the name of DC. Any amounts transferred from a particular DC Cash Pool Participant's bank account to the DC Cash Pool Bank Account represent a current receivable by the particular DC Cash Pool Participant from DC and a current liability of DC to the particular DC Cash Pool Participant as all amounts in the DC Cash Pool Bank Account are due on demand to the relevant DC Cash Pool Participant.
51. Should a particular DC Cash Pool Participant's operating account become negative, an amount is transferred from the DC Cash Pool Bank Account sufficient to bring the particular DC Cash Pool Participant's bank account balance to nil. The amount transferred from the DC Cash Pool Bank Account to the DC Cash Pool Participant's bank account reduces the balance owing by DC to the particular DC Cash Pool Participant or creates an amount receivable by DC from that particular DC Cash Pool Participant.
52. As at XXXXXXXXXX, DC has the following intercompany balances governed by the DC Cash Pool:
(a) $XXXXXXXXXX receivable from B Co;
(b) $XXXXXXXXXX receivable from LP 1;
(c) $XXXXXXXXXX payable to A Co; and
(d) $XXXXXXXXXX payable to C Co.
53. The intercompany balances are all payable on demand and are interest bearing.
54. DC will use its cash on hand to repay the intercompany loan between DC and A Co prior to the Proposed Transactions.
55. [Reserved].
56. [Reserved].
57. [Reserved].
58. On XXXXXXXXXX, Foreign PubCo announced its intention to focus on its Retained Business. As part of the XXXXXXXXXX strategy, Foreign PubCo began to manage its Retained Business as one global business unit. XXXXXXXXXX. The purpose of the XXXXXXXXXX strategy was to enable Foreign PubCo to operate with more strategic precision as it evaluates growth and development with the Retained Business. As a result, Foreign PubCo announced to undertake a divestment process of the Spin-Off Business.
59. In XXXXXXXXXX, after a rigorous and extensive process and amid challenging capital market conditions, Foreign PubCo's board of directors concluded that offers from bidders did not reflect the value of the Spin-Off Business. It was decided that in the best interest of the shareholders of Foreign PubCo, the Spin-Off Business would be retained.
60. No share or membership interest of the Canada Group (including (i) the issued and outstanding shares of DC, and (ii) the shares of DC and the shares of TC that will be issued as part of the Proposed Transactions) will constitute taxable Canadian property. For greater certainty, at no time during the Proposed Transactions will there be a disposition of shares or membership interests that constitutes taxable Canadian property.
61. XXXXXXXXXX.
62. XXXXXXXXXX.
63. The following transactions occurred to settle the loans to B Co:
(a) ForCo 10 repaid the amount owing to B Co in the amount of $XXXXXXXXXX.
(b) B Co declared a dividend in the aggregate amount of $XXXXXXXXXX on its issued and outstanding common shares, XXXXXXXXXX of which was payable to DC and the other to ForCo 11.
(c) B Co paid cash in the amount of $XXXXXXXXXX to DC to settle a portion of its dividend payable.
(d) DC advanced $XXXXXXXXXX back to B Co in exchange for a note payable in the amount of $XXXXXXXXXX.
(e) B Co paid $XXXXXXXXXX to DC to settle the remaining portion of the dividend payable.
(f) B Co withheld $XXXXXXXXXX (XXXXXXXXXX% of the dividend paid) as Part XIII tax payable on the dividend to ForCo 11.
(g) DC declared a dividend payable to ForCo 2 in the amount of $XXXXXXXXXX and settled the dividend payable by transferring the note receivable from B Co in the amount of $XXXXXXXXXX and paying cash in the amount of $XXXXXXXXXX to ForCo 2, less Part XIII tax of $XXXXXXXXXX.
64. DC represents that:
(a) the repayment of the intercompany loans and dividend payments as described in Paragraph 63 on XXXXXXXXXX were not done in contemplation of and do not form part of a series of transactions that includes any of the Proposed Transactions; and
(b) the repayment of the intercompany loans and dividend payments would have taken place regardless of whether the Proposed Transactions were undertaken.
DC further represents that when the dividend payments were made by B Co to DC and DC to ForCo 2, on XXXXXXXXXX, the Proposed Transactions were not contemplated by the parties. XXXXXXXXXX. The essential features of the Proposed Transactions were only determined at or immediately prior to the time that DC applied for an Advance Income Tax Ruling in respect of the Proposed Transactions on XXXXXXXXXX.
64.1. Foreign PubCo Treasury Policy was last updated by Foreign PubCo in XXXXXXXXXX. The purpose of Foreign PubCo Treasury Policy is to manage foreign exchange risk to reduce volatility in the value of the foreign currency cash flows and assets of the business. XXXXXXXXXX.
64.2. Foreign PubCo's Group XXXXXXXXXX represents the following:
(a) XXXXXXXXXX;
(b) compliance with the Foreign PubCo Foreign Exchange Risk Policy is actively monitored by the treasury department of Foreign PubCo; and
(c) XXXXXXXXXX.
65. [Reserved].
66. [Reserved].
67. [Reserved].
PRELIMINARY TRANSACTIONS
68. [Reserved].
69. A Co made a distribution to DC in the form of a dividend. The amount of the dividend did not exceed the safe income on hand of the A Co shares held by DC at the safe income determination time.
70. [Reserved].
71. Foreign SpinCo will incorporate ForCo 12 under the laws of Country 1. ForCo 12 will act as Country 1's finance company which will lend funds to entities within the Spin-Off Business.
72. ForCo 6 will incorporate ForCo 15 under the laws of the Country 2. ForCo 15 will act as the new XXXXXXXXXX finance company for the XXXXXXXXXX entities carrying on the Spin-Off Business.
73. ForCo 7 will incorporate ForCo 16 under the laws of the Country 3. ForCo 16 will act as the new Country 3 finance company for the Country 3 entities within the Spin-Off Business.
In order to facilitate the implementation of the Spin-Out, the formation of entities listed in Paragraphs 71 to 73 above, are to take place prior to the Proposed Transactions. Activities of the companies prior to the Proposed Transactions would be limited to initial set up activities such as incorporation, appointment of directors and officers, creation of general ledger and other accounting records, opening bank accounts, opening accounts with various federal and provincial tax authorities, initiating discussions with landlords where the assignment of leases is anticipated, initiating discussions with unions where employees covered by a collective bargaining agreement are to be transferred to a new employer, initiating discussions with bonding agencies, and initiating discussions with clients where contracts may need to be assigned. For greater certainty, activities would not include any of the Proposed Transactions.
74. [Reserved].
75. [Reserved].
76. [Reserved].
77. Foreign SpinCo will hold the entities that carry on the Spin-Off Business in Country 1 and Country 4.
78. ForCo 5 will be the Country 1 holding company that will own, after various transfers, distributions and/or sales, the entities that carry on the operations of the Offshore Spin-Off Business in Other Countries.
79. The XXXXXXXXXX restructuring steps as outlined in Paragraph 79 occurred prior to the Canadian butterfly reorganization and do not have an impact on any of the Canadian entities as no properties are being transferred to DC or a corporation controlled by it, and no properties are being acquired by DC, TC, or any entities in which it has an interest. All of the global restructuring steps will occur outside of Canada and therefore, they will have no impact on the types of property analysis of DC.
XXXXXXXXXX
(a) ForCo 1, a corporation resident in XXXXXXXXXX, will transfer its XXXXXXXXXX% interest in ForCo 17, a corporation resident in XXXXXXXXXX, to ForCo 2 in exchange for cash;
(b) ForCo 2 will transfer ForCo 18 to ForCo 13 in exchange for cash;
XXXXXXXXXX
(c) ForCo 2 will transfer ForCo 19 to ForCo 5 in exchange for equity in ForCo 5;
(d) ForCo 63 will transfer its XXXXXXXXXX% interest in ForCo 21 to ForCo 20 in exchange for cash;
(e) ForCo 20 will transfer ForCo 21 to ForCo 19 and receive as consideration from ForCo 19 debt receivable from ForCo 2 and cash;
XXXXXXXXXX
(f) ForCo 2 will transfer ForCo 22, which owns ForCo 23, to ForCo 5 in exchange for equity in ForCo 5;
(g) ForCo 5 will transfer ForCo 22 to ForCo 19 in exchange for equity in ForCo 19;
XXXXXXXXXX
(h) ForCo 2 will transfer ForCo 24, which owns ForCo 25, to ForCo 5 in exchange for equity in ForCo 5;
(i) ForCo 5 will transfer ForCo 24 to ForCo 19 in exchange for equity in ForCo 19;
(j) XXXXXXXXXX;
XXXXXXXXXX
(k) ForCo 2 will transfer its XXXXXXXXXX% interest in ForCo 26 to ForCo 5 in exchange for equity in ForCo 5;
(l) ForCo 2 will transfer its loan to ForCo 27 to ForCo 5 in exchange for equity in ForCo 5;
(m) ForCo 5 will transfer its XXXXXXXXXX% interest in ForCo 26 to ForCo 19 in exchange for equity in ForCo 19;
(n) ForCo 5 will transfer its loan to ForCo 27 to ForCo 19 in exchange for equity in ForCo 19;
XXXXXXXXXX
(o) ForCo 2 will transfer ForCo 5 to Foreign SpinCo in exchange for equity in Foreign SpinCo;
(p) Foreign SpinCo will transfer ForCo 5 to ForCo 3 in exchange for equity in ForCo 3;
(q) ForCo 3 will transfer ForCo 5 to ForCo 4 in exchange for equity in ForCo 4;
XXXXXXXXXX
(r) ForCo 56 will transfer ForCo 28 to ForCo 5 in exchange for debt of ForCo 5;
(s) ForCo 56 and ForCo 28 (as joint holders) will transfer one share in ForCo 29 to ForCo 5 and ForCo 28 (as joint holders) for book value;
(t) ForCo 20 will transfer its XXXXXXXXXX shares in ForCo 30 to ForCo 28 in exchange for cash;
(u) ForCo 11 will transfer its XXXXXXXXXX shares in ForCo 30 to ForCo 28 in exchange for cash;
(v) XXXXXXXXXX;
XXXXXXXXXX
(w) ForCo 11 will transfer ForCo 31 to ForCo 19 in exchange for cash;
XXXXXXXXXX
(x) ForCo 13 will subscribe for shares of ForCo 32;
(y) ForCo 32 will redeem the redeemable preference shares held by ForCo 33;
XXXXXXXXXX
(z) XXXXXXXXXX 6;
(aa) ForCo 34 will transfer ForCo 6 to ForCo 5 in exchange for cash;
(bb) ForCo 35 will transfer ForCo 34 to ForCo 61 in exchange for cash;
(cc) ForCo 61 will distribute, by way of a dividend, ForCo 34 to ForCo 58;
(dd) ForCo 58 will distribute, by way of a dividend, ForCo 34 to ForCo 59;
(ee) ForCo 59 will distribute, by way of a dividend, ForCo 34 to ForCo 2, ForCo 56, and ForCo 60;
(ff) ForCo 56 will transfer its interest in ForCo 34 to ForCo 2 in exchange for debt of ForCo 2;
(gg) ForCo 60 will transfer its interest in ForCo 34 to ForCo 2 in exchange for debt of ForCo 2;
(hh) ForCo 2 will transfer ForCo 34 to Foreign SpinCo in exchange for equity in Foreign SpinCo;
(ii) Foreign SpinCo will transfer ForCo 34 to ForCo 3 in exchange for equity in ForCo 3;
(jj) ForCo 3 will transfer ForCo 34 to ForCo 4 in exchange for equity in ForCo 4;
(kk) ForCo 4 will transfer ForCo 34 to ForCo 5 in exchange for equity in ForCo 5;
(ll) ForCo 5 will transfer ForCo 34 to ForCo 6 in exchange for equity in ForCo 6;
(mm) ForCo 11 will transfer ForCo 36 to ForCo 34 in exchange for cash;
XXXXXXXXXX
(nn) ForCo 64 will transfer XXXXXXXXXX shares in ForCo 37 to ForCo 42 for book value;
(oo) XXXXXXXXXX will return 1 share in ForCo 38 to ForCo 37 pursuant to a loan agreement;
(pp) ForCo 37 will transfer 1 share in ForCo 38 to ForCo 36 in exchange for cash;
(qq) ForCo 42 will transfer 1 share in ForCo 38 to ForCo 6 in exchange for cash;
(rr) ForCo 35 will transfer 1 share in ForCo 38 to ForCo 65 in exchange for cash;
(ss) ForCo 42 will transfer ForCo 37, which holds ForCo 38, ForCo 39, ForCo 40 and ForCo 41, to ForCo 6 in exchange for cash;
XXXXXXXXXX
(tt) ForCo 44 and ForCo 35 will transfer their respective interests in ForCo 43 to ForCo 6 in exchange for cash;
XXXXXXXXXX
(uu) ForCo 11 will transfer ForCo 45 and ForCo 46, which holds ForCo 47, ForCo 48 and ForCo 49, to ForCo 6 in exchange for cash;
(vv) XXXXXXXXXX;
XXXXXXXXXX
(ww) ForCo 35 will transfer ForCo 50 to ForCo 6 in exchange for cash;
XXXXXXXXXX
(xx) ForCo 2 will transfer ForCo 51 to Foreign SpinCo in exchange for shares of Foreign SpinCo;
XXXXXXXXXX
(yy) ForCo 52 will distribute, by way of a dividend, its interest in ForCo 53 and ForCo 54, to ForCo 2 and ForCo 10;
(zz) ForCo 10 will distribute, by way of a dividend, its interest in ForCo 53 and ForCo 54 to ForCo 56;
(aaa) ForCo 56 will distribute, by way of a dividend, its interest in ForCo 53 and ForCo 54 to ForCo 17;
(bbb) ForCo 17 will distribute, by way of a dividend, its interest in ForCo 53 and ForCo 54 to ForCo 2;
(ccc) ForCo 2 will transfer its interest in ForCo 53 and ForCo 54 to Foreign SpinCo in exchange for shares of Foreign SpinCo;
(ddd) Foreign SpinCo will transfer its interest in ForCo 53 and ForCo 54 to ForCo 3 in exchange for shares of ForCo 3;
(eee) ForCo 3 will transfer its interest in ForCo 53 and ForCo 54 to ForCo 4 in exchange for shares of ForCo 4;
(fff) ForCo 4 will transfer its interest in ForCo 53 and ForCo 54 to ForCo 5 in exchange for shares of ForCo 5;
XXXXXXXXXX
(ggg) ForCo 55 will distribute, by way of dividend, the shares of ForCo 7 to ForCo 10;
(hhh) ForCo 10 will distribute, by way of dividend, the shares of ForCo 7 to ForCo 56;
(iii) ForCo 56 will distribute, by way of dividend, the shares of ForCo 7 to ForCo 17;
(jjj) ForCo 17 will distribute, by way of dividend, the stock of ForCo 7 to ForCo 2;
(kkk) ForCo 2 will transfer ForCo 7 to Foreign SpinCo in exchange for shares of Foreign SpinCo;
(lll) Foreign SpinCo will transfer ForCo 7 to ForCo 3 in exchange for shares of ForCo 3;
(mmm) ForCo 3 will transfer ForCo 7 to ForCo 4 in exchange for shares of ForCo 4; and
(nnn) ForCo 4 will transfer ForCo 7 to ForCo 5 in exchange for shares of ForCo 5.
PROPOSED TRANSACTIONS
80. Pursuant to Act 2, DC will reorganize its capital (the "Capital Reorganization") by amending its articles of incorporation to create a new class of common shares (the "DC New Common Shares") and a new class of special shares (the "DC Special Shares") (collectively referred to as the "DC Shares") and will change the issued and outstanding DC Common Shares into an equivalent number of DC New Common Shares and XXXXXXXXXX DC Special Shares. Such shares will have the rights and conditions as described below:
(a) each of the DC New Common Shares will be a fully participating voting common share with the holder thereof entitled to one vote per share at each meeting of the shareholders of DC; and
(b) the DC Special Shares will have the following attributes:
(i) each DC Special Share will be redeemable, subject to applicable law, at any time at the option of DC at an amount equal to the amount (such amount being the "DC Redemption Amount") obtained by multiplying the aggregate fair market value of the outstanding DC Common Shares immediately prior to the Capital Reorganization by the Butterfly Percentage and then dividing such product by the number of DC Special Shares issued on the Capital Reorganization, plus the amount of all declared but unpaid dividends thereon;
(ii) each DC Special Share will be retractable, subject to applicable law, at any time at the option of the holder thereof for an amount equal to the DC Redemption Amount;
(iii) the holder of each DC Special Share will be entitled to a non-cumulative cash dividend as and when declared by the directors of DC from time to time, which dividend need not also be declared on any other class of shares of DC;
(iv) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of DC if the resulting realizable value of the net assets of DC after payment of the dividends would be less than the aggregate DC Redemption Amount of all of the DC Special Shares then outstanding;
(v) the holder of each DC Special Share is entitled, upon the liquidation, dissolution or winding-up of DC, to a payment in priority to all other classes of shares of DC of an amount equal to the DC Redemption Amount thereon to the extent of the amount of value of property available under applicable law for the payments to the shareholders of DC upon liquidation, dissolution or winding-up, but will be entitled to no more that the amount of that payment; and
(vi) the holder of each DC Special Share will not be entitled to vote at any meeting of the shareholders of DC, other than as provided under the statute by which DC is governed.
81. The aggregate FMV of the DC Shares immediately following the Capital Reorganization will be equal to the aggregate FMV of the DC Common Shares immediately before the Capital Reorganization.
82. ForCo 2 will hold the DC New Common Shares as capital property. No election under subsection 85(1) will be filed in respect of the Capital Reorganization.
83. The aggregate addition to the stated capital in respect of the DC Shares issued by DC on the Capital Reorganization will not exceed the aggregate PUC of the DC Common Shares at the time of the Capital Reorganization. Such aggregate stated capital will be apportioned between the DC New Common Shares and the DC Special Shares in proportion to the relative aggregate FMV of such shares.
The FMV of each class of shares of the capital stock of DC will not be less than the PUC of those shares.
84. ForCo 2 will transfer all of the issued and outstanding DC Special Shares to TC.
85. As part of the transfer in Paragraph 84, ForCo 2, TC, and Foreign SpinCo will enter into a three-party agreement (the "Three-Party Share Exchange"), whereby:
(a) TC will agree to pay the purchase price for the DC Special Shares transferred to it by ForCo 2 by issuing TC Common Shares to Foreign SpinCo having an aggregate FMV at that time equal to the aggregate FMV of the DC Special Shares so transferred to it by ForCo 2 as described in Paragraph 84. TC and Foreign SpinCo both will agree that TC Common Shares will be issued to Foreign SpinCo in respect of and by virtue of the disposition by ForCo 2 of the DC Special Shares to TC;
(b) ForCo 2 will pay the purchase price for the Foreign SpinCo common shares issued to it by Foreign SpinCo as described in Paragraph 85(c), by transferring all of the DC Special Shares to TC; and
(c) Foreign SpinCo will agree to pay the purchase price for the TC Common Shares by issuing common shares of Foreign SpinCo to ForCo 2 having an aggregate FMV at that time equal to the aggregate FMV of the DC Special Shares transferred to TC by ForCo 2 as described in Paragraph 84.
86. The DC Special Shares and the DC Common Shares will not constitute taxable Canadian property. Therefore, in respect of the transfers described in Paragraph 84, ForCo 2 will (i) not apply for a clearance certificate under section 116, and (ii) not file a Canadian corporate income tax return to report the disposition of those shares.
87. The aggregate FMV, immediately before the transfer of property by DC to TC described in Paragraph 92, of the common shares of Foreign SpinCo owned by ForCo 2 will be equal to or approximate the amount determined by the formula, on the assumption that ForCo 2 is the participant, DC is the distributing corporation and Foreign SpinCo is the acquiror,
(A × B/C) + D
as found in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1).
88. Immediately before the transfer of property by DC to TC described at Paragraph 92, the property of DC will be determined on a consolidated look-through basis by including the appropriate pro rata share of the assets of any corporation and a partnership over which DC has the ability to exercise significant influence (being the Canadian Subsidiaries). This look-through approach will be applied to every tier of corporations and partnerships in the Canada Group as long as "significant influence" is being exercised. The assets of DC, determined on a consolidated basis as described herein, will be classified into the following three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:
(a) cash or near-cash property, comprising all of the current assets of the Canada Group, including cash, marketable securities, accounts receivable, trade receivables, inventory and prepaid expenses;
(b) business property, comprising all of the assets of the Canada Group, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from an active business (other than a specified investment business) including goodwill; and
(c) investment property, comprising all of the assets of the Canada Group, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or from a specified investment business.
For greater certainty, for purposes of this distribution:
(d) any tax accounts such as the balance of any non-capital losses of the Canada Group or the balance of any RDTOH or CDA of the Canada Group, if any, will not be considered property;
(e) advances that are due within the next 12 months or those with fixed terms of repayment (other than as described in (g) below) will be considered cash or near-cash property;
(f) DC will be considered to have significant influence over a corporation or a partnership if it has significant influence over that corporation or that partnership or over any other corporation that has significant influence over that corporation or that partnership, or if DC in combination with corporations over which it has significant influence have significant influence over that corporation or that partnership, and for greater certainty the following corporations have significant influence over the other:
(i) DC will be considered to have significant influence over all of the Canada Group; and
(ii) C Co will be considered to have significant influence over D Co; and
(g) for the purposes of determining the FMV of each type of property of DC, the FMV of the shares of any corporation or the partnership interest of any partnership over which any of the above mentioned corporations or partnership has the ability to exercise significant influence and of any indebtedness receivable by any such corporation from a corporation or a partnership over which it has significant influence will be allocated among the three types of property described above, by multiplying the FMV of the shares of the particular corporation or the partnership interest of the particular partnership or amount receivable from the particular corporation or the particular partnership, as the case may be, by the proportion that the net FMV of each type of property owned by the particular corporation or by the particular partnership (as determined in accordance with the methodologies described herein) is of the aggregate net FMV of all the property owned by such corporation or partnership(as determined in accordance with the methodologies described herein).
89. The Canada Group has no property (other than cash and near-cash property) the income from which would be considered income from property, nor does the Canada Group carry on any specified investment business.
90. In determining, on a consolidated basis, the net FMV of each of the three types of property of the Canada Group immediately before the transfer of property by DC to TC described in Paragraph 92, the liabilities of DC and any corporation or any partnership over which DC exercises significant influence will be allocated to, and will be deducted in the calculation of the net FMV of, each type of property of DC or such corporation or such partnership, as the case may be, in the following manner:
(a) in determining the net FMV of each type of property of a corporation or of a partnership over which DC exercises significant influence immediately before the transfer of property by DC to TC described in Paragraph 92, the liabilities of that corporation or that partnership (other than any amount owing by such corporation or such partnership to another corporation that has significant influence over the debtor corporation or debtor partnership) will be allocated to, and deducted in the calculation of, the net FMV of each type of property of that particular corporation or partnership as follows:
(i) current liabilities of such corporation or such partnership will be allocated to each cash or near-cash property of the corporation or partnership in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by such corporation or such partnership. To the extent that the total amount of current liabilities to be allocated to the cash or near-cash property exceeds the total FMV of all the cash or near-cash property, such corporation or partnership will be considered to have a negative amount of cash or near-cash property;
(ii) following the allocation of current liabilities to cash or near-cash property as described in Paragraph 90(a)(i), provided that the net FMV of the cash or near-cash property of such corporation or such partnership is positive, any remaining net FMV of any accounts receivable, trade receivables, inventories and prepaid expenses of such corporation or such partnership will be reclassified as business property of such corporation or such partnership and excluded from the net FMV of the cash or near-cash property, to the extent that such property will be collected, sold, used or consumed in the ordinary course of business to which such property relates;
(iii) liabilities, other than current liabilities, of such corporation or of such partnership that relate to a particular property will be allocated to that particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property and liabilities that pertain to a particular type of property, but not to a particular property, will then be allocated to that particular type of property. To the extent that the total amount of liabilities that are to be allocated to a particular type of property as described herein exceeds the total FMV of that type of property, such corporation or such partnership will be considered to have a negative amount of that type of property; and
(iv) if any liabilities remain after the allocations described above are made, such excess unallocated liabilities will then be allocated to the cash or near-cash property, investment property and business property of such corporation or of such partnership, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities. However, where a corporation or a partnership is considered to have a negative amount of a type of property because of Paragraph 90(a)(i) or (iii), for the purposes of allocating those remaining liabilities, the net FMV of that type of property will be deemed to be nil resulting in none of those remaining liabilities being allocated to that type of property.
(b) in determining, on a consolidated basis, the net FMV of each type of property of DC immediately before the transfer of property by DC to TC described in Paragraph 92, DC will include the appropriate pro rata share of the net FMV of each type of property of any corporation or partnership over which DC exercises significant influence and, for greater certainty, the appropriate negative amount of such type of property of any such entity, as determined in accordance with (a) above, and any liabilities of DC will be allocated to, and be deducted in the calculation of, the net FMV of each type of property of DC in the following manner:
(i) current liabilities of DC will be allocated to the cash or near-cash property of DC in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property of DC. The allocation of current liabilities as described herein will not exceed the FMV of all the cash or near-cash property of DC;
(ii) following the allocation of current liabilities to each cash or near-cash property in Paragraph 90(b)(i), any remaining net FMV of any accounts receivable, trade receivables, inventories and prepaid expenses of DC will be reclassified as business property and excluded from the cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of the business to which such property relates;
(iii) liabilities of DC, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property but not to a particular property will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property as described herein; and
(iv) if any liabilities remain after the allocations described in Paragraph 90(b)(i) and (iii) are made, such excess unallocated liabilities will then be allocated to the cash or near-cash property, investment property and business property of DC, on the basis of the relative net FMV of each type of property prior to the allocation of such excess, but after the allocation of the liabilities described in Paragraph 90(b)(i) and (iii).
(c) For greater certainty, for purposes of this distribution:
(i) the amount of any deferred income tax will not be considered a liability for the purposes of the Proposed Transactions described herein because such amount does not represent a legal obligation;
(ii) income and other taxes due and payable within a year will be classified as current liabilities;
(iii) [Reserved];
(iv) current liabilities will include amounts normally classified as current liabilities, including accounts payable, bonuses payable, and the current portion of any long term debt;
(v) any current pension plan liability (as determined by the method prescribed by the applicable pension legislation), current post retirement benefit liability, and current liability insurance liabilities 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), non-current post retirement benefit liability, and non-current liability insurance liabilities of DC will be allocated to business property;
(vi) any current liabilities in respect of the employee incentive plans, as described in Paragraphs 9 to 11 will be allocated to cash or near-cash property, and any non-current liabilities in respect of the employee incentive plans, as described in Paragraphs 9 to 11, will be allocated to business property;
(vii) any amounts collected from customers and set up as deferred revenue will be considered a liability if there is a legal obligation to repay the amount or provide further services;
(viii) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and
(ix) a contingent obligation will not be considered a liability.
91. Based on the methodologies described above, it is anticipated that DC will have cash or near-cash property and business property at the time of the transfer of property described in Paragraph 92.
92. DC will transfer a proportionate share of each type of its property (as described in Paragraph 88) to TC (the "Distribution Property") such that, immediately following such transfer, the net FMV of each type of property so transferred to TC will approximate that proportion of the net FMV of all property of DC of that type (after allocating, in the manner described in Paragraph 90, the amount of the liabilities assumed by TC), determined immediately before such transfer that:
(a) the aggregate FMV, immediately before the transfer, of all the DC Special Shares owned by TC at that time
is of
(b) the aggregate FMV, immediately before the transfer, of all the issued and outstanding DC Shares.
In this Paragraph and Paragraph 92.1 the expression "approximate that proportion" described above means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX%, determined as a percentage of the net FMV of each type of property of DC which TC has received (or DC has retained) as compared to what TC would have received (or DC would have retained) had it received (or retained) its appropriate pro rata share of the net FMV of that type of property of DC.
92.1. No later than XXXXXXXXXX days after the date of the transfer by DC to TC described in Paragraph 92, DC will transfer to TC any required additional cash or near-cash property such that the net FMV of each type of property of DC transferred directly or indirectly to TC will approximate that proportion of the net FMV of all property of DC of that type, determined immediately before the transfer by DC to TC described in Paragraph 92, that:
(a) the aggregate FMV of all of the DC Special Shares owned by TC immediately before the transfer described in Paragraph 92,
is of
(b) the aggregate FMV, immediately before the transfer, of all the issued and outstanding DC Shares.
93. As consideration for the Distribution Property, TC will issue TC Preferred Shares to DC having an aggregate FMV at that time equal to the aggregate FMV of the Distribution Property transferred to TC.
94. TC will jointly elect with DC, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each eligible property to TC and in respect of which the TC Preferred Shares have been issued as full consideration for the transfer of the Distribution Property as described in Paragraph 92. The agreed amount in each election will be as follows:
(a) in the case of capital property (other than depreciable property) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
(c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).
For the purposes of the joint elections described in Paragraph 94, the reference in subparagraph 85(1)(e)(i) to the "undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" shall be interpreted to mean that proportion of the undepreciated capital cost to DC of all of the property of that class immediately before the disposition that the FMV at that time of the asset that is transferred is of the FMV at that time of all property of that class.
For the purposes of the joint elections described in Paragraph 94, if DC and TC so indicate in their joint election, the reference in subparagraph 85(1)(d)(i) to "4/3 of the taxpayer's cumulative eligible capital in respect of the business immediately before the disposition" shall be interpreted to mean the proportion of 4/3 of DC's cumulative eligible capital in respect of its business immediately before the transfer to TC that the transferred eligible capital property in respect of the business (based on FMV at that time or the amount of the cumulative eligible capital that is attributable to those assets) is of all of DC's eligible capital property in respect of the business (based on FMV at that time or the amount of the cumulative eligible capital that is attributable to those assets).
The amount that will be added under the Act 1 to the stated capital of the TC Preferred Shares issued by TC as described in Paragraph 93 will not exceed the aggregate of the cost amount of the property transferred by DC to TC determined pursuant to subsection 85(1) and the cash and near-cash property transferred by DC to TC.
95. Immediately following the transfer of the Distribution Property described in Paragraph 92, the following transactions will occur in the following order:
(a) TC will redeem all the TC Preferred Shares owned by DC for an amount equal to their aggregate TC Redemption Amount. In satisfaction of the TC Redemption Amount for such shares, TC will issue a promissory note, payable to DC on demand without interest or fixed terms of repayment, having a principal amount and FMV equal to the aggregate TC Redemption Amount of the TC Preferred Shares so redeemed (the "TC Redemption Note"). DC will accept the TC Redemption Note in full payment of the redemption price of the TC Preferred Shares.
(b) DC will redeem all the DC Special Shares owned by TC for an amount equal to their aggregate DC Redemption Amount. In satisfaction of the DC Redemption Amount for such shares, DC will issue a promissory note, payable to TC on demand without interest or fixed terms of repayment, having a principal amount and FMV equal to the aggregate DC Redemption Amount of the DC Special Shares so redeemed (the "DC Redemption Note"). TC will accept the DC Redemption Note in full payment of the redemption price of the DC Special Shares.
96. Immediately following the transactions described in Paragraph 95, the principal amount owing by TC under the TC Redemption Note and the principal amount owing by DC under the DC Redemption Note will be set off in full against each other and each such note will be marked paid in full and cancelled.
96.1. DC will make a loan to B Co, payable to DC on demand.
96.2. TC will make a loan to A Co, payable to TC on demand.
97. Subsequent to the transaction described in Paragraph 96, ForCo 2 will sell all of its issued and outstanding shares in Foreign SpinCo to Foreign PubCo for book value in exchange for an intercompany loan.
98. Subsequent to the transaction described in Paragraph 97, ForCo 2 will declare a dividend to ForCo 1, which will be settled with an intercompany loan.
98.1. Subsequent to the transaction described in Paragraph 98, ForCo 1 will declare a dividend to Foreign PubCo, which will be settled with an intercompany loan.
99. Foreign PubCo has determined that it will not distribute shares of Foreign SpinCo to two categories of shareholders. The first category captures the shareholders who are domiciled in countries where Foreign SpinCo shares cannot be offered through the proposed Spin-Out, and the second category captures the shareholders who hold a small number of Foreign SpinCo shares (collectively referred to as the "ineligible shareholders"). Instead, it will issue the shares of Foreign SpinCo to which such shareholders would otherwise have been entitled to an independent trustee who will sell such shares, in the open market at prevailing market prices, and distribute the aggregate net cash proceeds of the sales pro-rata to such ineligible shareholders. Foreign PubCo will distribute the remaining issued and outstanding shares in Foreign SpinCo pro rata to shareholders other than ineligible shareholders under a scheme of arrangement in the proportion consistent with the ruling obtained from the XXXXXXXXXX Taxation Office by Foreign PubCo.
100. No property has or will become property of DC or its subsidiaries, and no liabilities have been or will be incurred by DC or its subsidiaries, in contemplation of and before the transfer described in Paragraph 92, otherwise than as described herein.
100.1 As part of the series of transactions or events that includes the Proposed Transactions, the DC and Foreign Pubco Group do not intend to cause:
(a) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(b) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii); and
(c) an acquisition in the circumstances described in subparagraph 55(3.1)(b)(iii).
101. None of the corporations referred to herein are or will be, at any time prior to the completion of the Proposed Transactions:
(a) a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1);
(b) a "restricted financial institution" as defined in subsection 248(1); or
(c) a "specified financial institution" as defined in subsection 248(1).
102. At no time, during the course of a series of transactions that includes the dividends described in this Ruling, will:
(a) XXXXXXXXXX% or more of the FMV of the Foreign Spinco common shares be derived from the DC Special Shares or the TC Common Shares; and
(b) the shares of the capital stock of Foreign Pubco, Forco1, and Forco2, be acquired by any person or partnership who was not related to the vendor or as part of the series, ceased to be related to the vendor (taking into consideration paragraph 55(3.2)(c), if applicable).
103. None of the shares of DC or TC has been or will be, at any time prior to the completion of the Proposed Transactions described herein:
(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";
(b) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or
(c) the subject of a dividend rental arrangement.
104. Each of DC and TC will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued or assumed by it as part of the Proposed Transactions.
105. The aggregate PUC of the DC Common Shares at the time of the Capital Reorganization is comprised only of funds provided by the shareholders of DC to commence, or otherwise further, the carrying on of the business of DC.
106. Immediately following completion of the Proposed Transactions, the net FMV of each type of property retained by DC, determined in the manner described in Paragraph 90, will approximate the proportion of the net FMV of all property of DC of that type (after allocating and deducting liabilities, in the manner described in Paragraph 90), determined immediately before the transfer described in Paragraph 92, that:
(a) the aggregate FMV, immediately before the transfer described in Paragraph 92, of all the shares in the capital stock of DC owned by all shareholders of DC other than TC, is of
(b) the aggregate FMV, immediately before the transfer, of all of the issued and outstanding DC Shares.
107. [Reserved].
PURPOSE OF THE PROPOSED TRANSACTIONS
108. Management of Foreign PubCo has made the strategic decision to separate its two distinct business segments; Spin-Off Business and Retained Business. Foreign PubCo Group concluded that creating two independent, public companies will provide, among other things, financial, operational and managerial benefits to each of the companies and its shareholders, including but not limited to the following expected benefits:
(a) The new standalone companies will have greater flexibility to pursue their own focused strategies for growth, both organic and through acquisitions, than they would under Foreign PubCo Group's current corporate structure. Each business also will be able to further sharpen its focus on serving its own distinctive customer base. This flexibility and focus is expected to increase investor understanding of each company and its respective position in the industry it serves.
(b) The separation will enable management of each company to devote its time and attention to the development and implementation of corporate strategies and policies that are based solely on the specific business characteristics of such company, and to design more tailored performance measures that better reflect these strategies, policies, and business characteristics.
(c) The separation will enable each company to adopt an appropriate capital structure based on the company's profile and cash flow generation.
(d) Accordingly:
(i) the worldwide business operations in the Spin-Off Business (not already owned directly or indirectly by Foreign SpinCo) will be transferred directly or indirectly to Foreign SpinCo; and
(ii)Foreign PubCo will retain the current Retained Business segments.
SUBSEQUENT TRANSACTIONS
109. [Reserved].
110. XXXXXXXXXX.
111. XXXXXXXXXX.
112. XXXXXXXXXX.
RULINGS
Provided that the preceding statements constitute complete and accurate disclosure of all of the relevant facts, Proposed Transactions, additional information and the purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.
A. As a result of the transfer of the DC Special Shares described in Paragraph 84:
(a) The provisions of paragraph 212.1(1)(a) will not apply to deem a dividend to be paid by TC or to be received by ForCo 2 as a result of the exchange described in Paragraph 84;
(b) the provisions of paragraph 212.1(1)(b) will apply such that the PUC of the TC Common Shares that TC issues to Foreign SpinCo will not exceed the PUC, immediately before the transfer, of the DC Special Shares that ForCo 2 transferred to TC as described in Paragraph 84; and
(c) the aggregate ACB to TC of the DC Special Shares that TC acquired from ForCo 2 on the exchange described in Paragraph 84 will be equal to the aggregate FMV at that time of the DC Special Shares that TC acquired from ForCo 2.
B. The provisions of subsection 85(1) will apply to the transfer by DC of eligible property to TC described in Paragraph 92 such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof by virtue of paragraph 85(1)(a).
For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfer of property as described in Paragraph 92.
C. Subsection 84(3) will apply:
(a) on the redemption, as described in Paragraph 95(a), of the TC Preferred Shares owned by DC, to deem TC to have paid, and DC to have received; and
(b) on the redemption, as described in Paragraph 95(b), of the DC Special Shares owned by TC, to deem DC to have paid, and TC to have received
a dividend on the TC Preferred Shares and the DC Special Shares, respectively, equal to the amount, if any, by which the aggregate amount paid upon redemption exceeds the aggregate PUC in respect of such shares immediately before such redemption and such dividend:
(c) will be included, pursuant to subsection 82(1) and paragraph 12(1)(j), in computing the income of the corporation deemed to have received such dividend;
(d) will be deductible, pursuant to subsection 112(1), by the corporation deemed to have received such dividend;
(e) will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) or (2.4) apply to deny the subsection 112(1) deduction described in (d) above;
(f) will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining the proceeds of disposition to the recipient corporation of the shares which are redeemed;
(g) will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b); and
(h) will not be subject to tax under Parts IV.1 or VI.1.
D. The provisions of subsection 112(3) will apply to reduce any loss which would otherwise be determined for the particular holder as a result of the redemption of the TC Preferred Shares and the redemption of the DC Special Shares described in Paragraph 95
E. By virtue of the provisions of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling C, provided that:
(a) 10% or more of the FMV of the Foreign SpinCo shares was not, at any time, during the course of the series of transactions or events that includes the dividends described in Ruling C, derived from the DC Special Shares or derived from the TC Common Shares; and
(b) as part of a series of transactions or events that includes the dividends described in Ruling C there is not:
(i) an acquisition of property in the circumstances described in paragraph 55(3.1)(a);
(ii) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(iii) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii); or
(iv) an acquisition of shares in the capital stock of DC in the circumstances described in subparagraph 55(3.1)(b)(iii);
which has not been described herein and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
For the purposes of subclause 55(3.1)(b)(i)(A)(II), in determining whether 10% or more of the FMV of the common shares of Foreign SpinCo was derived from the DC Special Shares that TC owns or derived from the TC Common Shares that Foreign SpinCo owns, as described in Ruling E(a) above, any indebtedness of Foreign SpinCo will be considered to reduce the FMV of each property of Foreign SpinCo pro rata in proportion to the relative FMV of all property of Foreign SpinCo.
F. The set-off and cancellation of the TC Redemption Note held by DC and the DC Redemption Note held by TC, as described in Paragraph 96, will not give rise to a forgiven amount and neither TC nor DC will realize any gain or incur any loss therefrom.
G. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not apply to any of the Proposed Transactions described in Paragraphs 84 to 96.
H. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to re-determine the tax consequences confirmed in the rulings given above.
Our rulings are given subject to the limitations set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided the Proposed Transactions are completed within six months of the date of this letter. Our rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act or Regulations.
Nothing in this ruling should be construed as implying that CRA has reviewed any tax consequences relating to the facts or the Proposed Transactions other than those described in the rulings given above, or has agreed:
(a) to the FMV or ACB of any asset, PUC of any share or the characterization of any share or other property as taxable Canadian property; and
(b) to any tax consequences relating to any transaction described herein other than those specifically described in the rulings given above.
Yours truly,
XXXXXXXXXX
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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