2013 Ruling 2013-0501811R3 - Internal Reorganization - 55(3)(a)

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: Internal reorganization involving subsidiaries of a public corporation.

Position: Favourable rulings provided.

Reasons: In compliance with the law and previous positions.

XXXXXXXXXX
2013-050181

XXXXXXXXXX, 2013

Dear Sirs:

Re: Advance Income Tax Ruling

XXXXXXXXXX
Business Number: XXXXXXXXXX
Tax Services Office: XXXXXXXXXX
Taxation Centre: XXXXXXXXXX

XXXXXXXXXX
Business Number: XXXXXXXXXX
Tax Services Office: XXXXXXXXXX
Taxation Centre: XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX and your email of XXXXXXXXXX in which you requested certain changes to the advance income tax ruling issued to the above-noted taxpayers on XXXXXXXXXX (our file number 2013-048557 and referred to as the "Previous Ruling"). We also acknowledge the information provided during our various telephone conversations in connection with your ruling request (XXXXXXXXXX).

You also confirm that none of the proposed transactions described in the Previous Ruling have been entered into.

Further to your request, this letter cancels and replaces the Previous Ruling in its entirety.

We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues described herein is:

(i) dealt with in an earlier return of the taxpayers or a related person;

(ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayers or a related person;

(iii) under objection by the taxpayers or a related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v) other than as noted above, the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

DEFINITIONS

(a) "ACB" means adjusted cost base, as defined in section 54;

(b) "Aco" means XXXXXXXXXX, a corporation described in Paragraph 2;

(c) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof. Unless otherwise stated, all statutory references are to the Act and all terms and conditions used herein that are defined in the Act have the meaning given in such definition;

(d) "affiliated persons" has the meaning assigned by subsection 251.1(1);

(e) "arm's length" has the meaning assigned by subsection 251(1);

(f) "Bco" means XXXXXXXXXX, the corporation described in Paragraph 3;

(g) XXXXXXXXXX;

(h) "Cco" means XXXXXXXXXX, the corporation described in Paragraph 4;

(i) "Cco Loan" means the loan described in Paragraph 12;

(j) "CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c C-44;

(k) "Class B Preferred Shares" means the Class B preferred shares of the capital stock of Cco issued to Bco and further described in Paragraphs 4 and 5;

(l) "CRA" means Canada Revenue Agency;

(m) "designated stock exchange" has the meaning assigned by subsection 248(1);

(n) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

(o) "excepted dividend" has the meaning assigned by section 187.1;

(p) "excluded dividend" has the meaning assigned by subsection 191(1);

(q) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

(r) "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 terms of cash;

(s) "foreign affiliate" has the meaning assigned by subsection 95(1);

(t) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(u) "Management" means the management of Pubco;

(v) "non-resident" has the meaning assigned by subsection 248(1);

(w) "XXXXXXXXXXCA" means the XXXXXXXXXX Corporations Act, XXXXXXXXXX;

(x) "Optionholders" means any holder of options of Pubco;

(y) "paid-up capital" or "PUC" has the meaning assigned by subsection 89(1);

(z) "Paragraph" means a numbered paragraph in this letter;

(aa) "ParentAco" means XXXXXXXXXX, a subsidiary wholly-owned corporation of Pubco incorporated under the laws of XXXXXXXXXX. ParentAco is a non-resident of Canada for the purposes of the Act;

(bb) "ParentBco" means XXXXXXXXXX, a subsidiary wholly-owned corporation of Pubco incorporated under the laws of XXXXXXXXXX. ParentBco is a non-resident of Canada for the purposes of the Act;

(cc) "ParentCco" means XXXXXXXXXX, a subsidiary wholly-owned corporation of Pubco incorporated under the laws of XXXXXXXXXX. ParentCco is a non-resident of Canada for the purposes of the Act;

(dd) "permanent establishment" has the meaning assigned by rule 400(2) of the Income Tax Regulations, CRC, c 945 (Income Tax Act);

(ee) "private corporation" has the meaning assigned by subsection 89(1);

(ff) "Proposed Transactions" means the transactions that are described under the heading "Proposed Transactions" in this letter;

(gg) "Pubco" means XXXXXXXXXX, the corporation described in Paragraph 1;

(hh) "Pubco Affiliated Group" means Pubco and its subsidiaries;

(ii) "refundable dividend tax on hand" (also referred to as "RDTOH") has the meaning assigned by subsection 129(3);

(jj) "related person" means, in relation to a particular person, another person which is related to the particular person by virtue of subsection 251(2), as modified for the purpose of section 55 by paragraph 55(5)(e);

(kk) "restricted financial institution" has the meaning assigned by subsection 248(1);

(ll) "series of transactions or events" has the meaning assigned by subsection 248(10);

(mm) "specified financial institution" has the meaning assigned by subsection 248(1);

(nn) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

(oo) "substantial interest" has the meaning assigned by subsection 191(2);

(pp) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(qq) "taxable Canadian property" has the meaning assigned by subsection 248(1);

(rr) "taxable dividend" has the meaning assigned by subsection 89(1); and

(ss) "unrelated person" has the meaning assigned by paragraph 55(3.01)(a).

FACTS

1. Pubco is governed by the laws of XXXXXXXXXX. Pubco is a non-resident corporation whose shares are listed on the XXXXXXXXXX, a designated stock exchange, under the symbol "XXXXXXXXXX." The market capitalization of Pubco is approximately XXXXXXXXXX as of XXXXXXXXXX. Pubco has a XXXXXXXXXX year-end. XXXXXXXXXX.

2. Aco is a subsidiary wholly-owned corporation of ParentAco incorporated under the XXXXXXXXXX. Aco is a taxable Canadian corporation and a private corporation with a XXXXXXXXXX year-end. XXXXXXXXXX. The PUC (stated capital) of the shares of the capital stock of Aco held by ParentAco is approximately $XXXXXXXXXX. Aco does not hold directly or indirectly shares of a foreign affiliate.

3. Bco is a subsidiary wholly-owned corporation of ParentBco governed by the XXXXXXXXXX and the corporation XXXXXXXXXX had been acquired by Pubco in XXXXXXXXXX. Bco is a taxable Canadian corporation and a private corporation with a XXXXXXXXXX year-end. At XXXXXXXXXX, Bco's RDTOH balance was XXXXXXXXXX. Bco has permanent establishments in XXXXXXXXXX. Bco offers XXXXXXXXXX XXXXXXXXXX. The share capital of Bco is comprised of XXXXXXXXXX common shares with a PUC of $XXXXXXXXXX.

4. Cco is a taxable Canadian corporation and a private corporation incorporated under the XXXXXXXXXXCA and continued under the XXXXXXXXXX. At XXXXXXXXXX, Cco's RDTOH balance was XXXXXXXXXX. Cco is XXXXXXXXXX. Cco has permanent establishments in XXXXXXXXXX.

The share capital of Cco is comprised of:

(a) XXXXXXXXXX Class B Preferred Shares issued to Bco with a redemption price of $XXXXXXXXXX, which exceeds their respective PUC and ACB; and

(b) XXXXXXXXXX common shares issued to ParentCco with a PUC of $XXXXXXXXXX.

5. The Class B Preferred Shares of the capital stock of Cco have the following attributes:

(a) Non-voting;

(b) Non-participating;

(c) Subject to applicable law, redeemable at the option of the holder and of Cco for an amount equivalent to the value of the net consideration received at their issuance plus any declared, but unpaid dividends. The redemption price of the Class B Preferred Shares is subject to a price adjustment clause; and

(d) Entitlement to non-cumulative preferential dividends, payable annually, calculated annually and accruing by reference to the redemption price at a fixed rate per annum of XXXXXXXXXX%.

The Class B Preferred Shares of the capital stock of Cco held by Bco have been issued as consideration for the transfer of Bco's former XXXXXXXXXX business assets, including XXXXXXXXXX in the course of a related party transaction governed by the provisions of subsection 85(1) that occurred on XXXXXXXXXX.

6. Cco currently has approximately $XXXXXXXXXX in cash derived through its ordinary business operations.

PROPOSED TRANSACTIONS

7. ParentCco will acquire all the issued and outstanding shares of the capital stock of Aco from ParentAco at FMV. In consideration for the Aco shares transferred, ParentCco will pay to ParentAco $XXXXXXXXXX in cash.

The Aco shares will not constitute taxable Canadian property and, therefore, no notice to the Minister under section 116 will be sent in connection with the disposition of the shares of the capital stock of Aco by ParentAco.

8. Cco will redeem all of its Class B Preferred Shares held by Bco for proceeds equivalent to the redemption price and FMV of the Class B Preferred Shares. The redemption price of the Class B Preferred Shares will exceed their ACB and PUC. Cco will use its available cash on hand in order to satisfy the redemption price towards Bco.

9. The directors of Bco will pass a resolution authorizing a reduction of the stated capital of the common shares of the capital stock of Bco equivalent to their PUC of $XXXXXXXXXX and the payment of such amount to ParentBco as a return of capital.

Pursuant to the directors' resolution, Bco will reduce the PUC of its common shares by $XXXXXXXXXX and will pay to ParentBco in respect of such reduction of PUC, $XXXXXXXXXX in cash with a portion of the proceeds from Paragraph 8. The FMV and the ACB, to ParentBco, of the common shares of the capital stock of Bco exceeds, and will exceed at the time of the reduction of PUC, the amount that will be paid to ParentBco on the reduction of PUC.

10. The directors of Bco will pass a resolution declaring a dividend of $XXXXXXXXXX on the common shares of the capital stock of Bco equivalent to the remaining portion of the proceeds from Paragraph 8 and authorizing the payment of such amount to ParentBco as a taxable dividend.

Pursuant to the directors' resolution, Bco will pay ParentBco a $XXXXXXXXXX dividend on its common shares in cash with the remaining portion of the proceeds from Paragraph 8. Such dividend will be subject to Canadian withholding tax at a XXXXXXXXXX% rate pursuant to subparagraph XXXXXXXXXX of article XXXXXXXXXX of the Canada-XXXXXXXXXX Treaty.

11. Cco will acquire all the issued and outstanding shares of the capital stock of Aco from ParentCco at FMV. In consideration for the Aco shares transferred, Cco will pay to ParentCco $XXXXXXXXXX in cash, and will issue to ParentCco one common share of its capital stock. Cco will use its available cash on hand and cash borrowed from related entities to fund the $XXXXXXXXXX cash consideration paid to ParentCco.

For corporate law purposes, the addition to the stated capital account of the common share issued by Cco as consideration for the shares of the capital stock of Aco transferred by ParentCco to Cco, will be equal to the fair market value of the Aco shares less $XXXXXXXXXX.

Any excess amount of the FMV of the consideration (other than any share of the capital stock of Cco) paid by Cco to ParentCco over the PUC of the shares of the capital stock of Aco held by ParentCco will be deemed to be a dividend in accordance with section 212.1 and will be subject to Canadian withholding tax.

The Aco shares will not constitute taxable Canadian property and, therefore, no notice to the Minister under section 116 will be sent in connection with the disposition of the shares of the capital stock of Aco by ParentCco.

Pursuant to paragraph 212.1(1)(b), there will be no increase in the PUC of the common shares of the capital stock of Cco in connection with the disposition of the shares of the capital stock of Aco by ParentCco to Cco.

12. Cco will borrow approximately $XXXXXXXXXX from a related entity on an interest-bearing basis (the "Cco Loan").

13. Cco will use the proceeds of the Cco Loan to declare and pay a taxable dividend of $XXXXXXXXXX to ParentCco. Such dividend will be subject to Canadian withholding tax at a XXXXXXXXXX% rate pursuant to subparagraph XXXXXXXXXX of article XXXXXXXXXX of the Canada-XXXXXXXXXX Treaty.

ADDITIONAL INFORMATION

14. None of the issued Class B Preferred Shares of the capital stock of Cco will be, at any time during the series of transactions or events that includes the Proposed Transactions:

(a) the subject of any undertaking that is a guarantee agreement;

(b) the subject of a dividend rental agreement;

(c) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

(d) issued for consideration that is or includes:

i. an obligation of the type described in subparagraph112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

ii. any right of the type described in subparagraph 112(2.4)(b)(ii).

15. At all relevant times during the Proposed Transactions, Bco and Cco are neither "restricted financial institutions" nor "specified financial institutions".

16. Bco and Cco are not "financial intermediary corporations".

17. The reduction of capital as described in Paragraph 9 and the payments of dividends as described in Paragraphs 10 and 13 will be considered in computing the thin-capitalization limits of Bco and Cco, as provided for under subsection 18(4).

18. Management is not aware and has no reason to believe that, as at XXXXXXXXXX, any person, alone or together with persons not dealing at arm's length, held, owned or exercised control or direction over more than XXXXXXXXXX% of the common shares of the capital stock of Pubco.

19. More than XXXXXXXXXX% of the FMV of the shares of the capital stock of Pubco is derived from shares of the capital stock of Cco and Bco before the Proposed Transactions.

20. It is not the intent of Management to ultimately distribute the proceeds received respectively by ParentAco (Paragraph 7), ParentBco (Paragraphs 9 and 10) and ParentCco (Paragraphs 11 and 13) up to the shareholders of Pubco by way of a special dividend, capital reduction or share redemption or cancellation. In addition, it is also not the intent of Management to use the aforementioned proceeds for acquisition purposes. The proceeds will be used for general business purposes.

21. XXXXXXXXXX.

22. Management is not aware and has no reason to believe that any person holding, owning or exercising control or direction over any of the shares of the capital stock of Pubco is aware of the Proposed Transactions.

23. The Proposed Transactions are not going to be publicly disclosed to the shareholders of Pubco.

24. Management has no reason to believe that any of the Proposed Transactions will have any material impact on the trading price of the shares of the capital stock of Pubco or the value of the options in Pubco held by the Optionholders.

25. The Pubco Affiliated Group intends on completing the Proposed Transactions notwithstanding any transaction on the XXXXXXXXXX on the shares of the capital stock of Pubco by an arm's length investor.

26. None of the parties involved in the above Proposed Transactions intend, as part of a series of transactions or events which includes the redemption of the Class B Preferred Shares described in Paragraph 8 above, to dispose of any property to, or to increase any interest in any corporation of any person or partnership that is an unrelated person to Bco, in any of the ways described in subparagraphs 55(3)(a)(i) to (v).

27. None of the parties intend to designate a dividend resulting from the completion of the above Proposed Transactions to be an eligible dividend, as provided by subsection 89(14).

PURPOSES OF THE PROPOSED TRANSACTIONS

28. The purposes of the Proposed Transactions is to:

(a) simplify the Canadian corporate structure of the Pubco Affiliate Group by eliminating the ownership of the Class B Preferred Shares in Cco;

(b) reposition Aco for business reasons; and

(c) repatriate funds from Canada to XXXXXXXXXX.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all 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, we confirm the following:

A. As a result of the redemption by Cco of the Class B Preferred Shares held by Bco as described in Paragraph 8:

(a) Cco will be deemed by paragraph 84(3)(a) to have paid, and Bco will be deemed by paragraph 84(3)(b) to have received, a dividend equal to the amount by which the amount paid to redeem the Class B Preferred Shares exceeds the PUC of such shares immediately prior to the redemption;

(b) the amount of such dividend, as described in Ruling A(a), will be included in Bco's income pursuant to subsection 82(1) and paragraph 12(1)(j);

(c) the amount of such dividend, as described in Ruling A(a), will be excluded, pursuant to paragraph (j) of the definition of proceeds of disposition in section 54, in determining Bco's proceeds of disposition for the Class B Preferred Shares; and

(d) the amount of such dividend, as described in Ruling A(a), will, by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the Class B Preferred Shares.

B. To the extent that the dividend described in Ruling A is a taxable dividend, such dividend will be deductible pursuant to subsection 112(1) in computing the taxable income of Bco for the year in which the dividend is deemed to have been received and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4).

C. By virtue of paragraph 191(2)(a), Bco will have a substantial interest in Cco at the time the deemed dividend arising from the redemption of the Class B Preferred Shares held by Bco, as provided for in Paragraph 8, and, consequently, the amount of such dividend will not be subject to part IV.1 tax under section 187.2 or Part VI.1 tax under section 191.1, since such dividend will be an "excepted dividend" and will be an "excluded dividend."

D. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividend referred to in Ruling A provided there is not a disposition of property or an increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) which is part of the series of transactions or events that includes the Proposed Transactions. For greater certainty, the Proposed Transactions, in and by themselves, will not be considered to result in any disposition to, or increase in interest by, an unrelated person described in subparagraphs 55(3)(a)(i) to (v).

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this ruling should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

(a) any other tax consequences relating to the Facts, Proposed Transactions and Additional Information 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; and

(b) the determination of the FMV or ACB of any property referred to herein, the PUC in respect of any share referred to herein, or the outstanding balance of various tax accounts for any of the corporate entities described herein.

Furthermore, we make no comment as to whether the shares of the capital stock of Aco would or would not constitute taxable Canadian property.

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 and issuance of shares. Furthermore, none of the rulings given in this letter are intended to apply to or in the 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 Income Tax 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.

Yours truly,

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