2015 Ruling 2015-0565151R3 - Supplemental Ruling

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Amendments to ruling number 2011-041581 ("Ruling").

Position: Ruling modified.

Reasons: Amendments do not affect the validity of the rulings given.

XXXXXXXXXX						2015-056515

XXXXXXXXXX, 2015

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Supplemental Income Tax Ruling Request

This is in reply to your letter (the “Letter”) dated XXXXXXXXXX, and is supplemental to our advance income tax ruling number 2011-041581 (the “Ruling”) and to our supplemental ruling number 2014-054422 (the “2014 Supplemental Ruling”) that were issued to the above-captioned taxpayer on XXXXXXXXXX, 2014 and XXXXXXXXXX, 2014, respectively. We also acknowledge the additional information provided to us in subsequent letters and emails and during our various telephone conversations.

Unless otherwise defined in paragraph 1 below, all capitalized terms in this letter have the meanings assigned to them in the Ruling.

In your Letter, you requested the following amendments (“Amendments”) to the Ruling, as set out in paragraphs 1 to 8 below. In addition, you advised that the Proposed Transactions, as that term is defined in the Ruling, have not yet been implemented due to delay in obtaining a ruling from XXXXXXXXXX.

Additional Definitions

1. The following is added to the list of defined terms contained in the Ruling:

“BCA4” means the Business Corporations Act XXXXXXXXXX;

“Canadian partnership” has the meaning assigned by subsection 102(1);

“GPcos Shares” has the meaning assigned by Paragraph 69.1(n);

“mutual fund trust” has the meaning assigned by subsection 132(6);

“New Transactions” has the meaning assigned by the preamble to Paragraph 69.1;

“Partnership 2” means XXXXXXXXXX, as described in Paragraph 38.7;

“Partnership 3” means XXXXXXXXXX, as described in Paragraph 27.1;

“Partnership 4” means XXXXXXXXXX, as described in Paragraph 27.1;

“Partnership 5” means XXXXXXXXXX, as described in Paragraph 27.1;

“Partnership 6” means XXXXXXXXXX, as described in Paragraph 27.1;

“Partnership 7” means XXXXXXXXXX, as described in Paragraph 27.1;

“Partnership 8” means XXXXXXXXXX, as described in Paragraph 26.1;

“Partnership 9” means XXXXXXXXXX, as described in Paragraph 26.1;

XXXXXXXXXX

“Pubco 1” means XXXXXXXXXX;

“Subco 2-Subco 10 Purchase Price” has the meaning assigned by Paragraph 69.1(e);

“Subco 9” means XXXXXXXXXX;

“Subco 10” means XXXXXXXXXX;

“Subco 11” means XXXXXXXXXX;

“Subco 12” means XXXXXXXXXX;

“Subco 13” means XXXXXXXXXX;

“Subco 14” means XXXXXXXXXX;

“Subco 15” means XXXXXXXXXX;

“Subco 16” means XXXXXXXXXX;

“Subco 17” means XXXXXXXXXX;

“Subco 18” means XXXXXXXXXX;

“Subco 19” means XXXXXXXXXX;

“Trust 1” means XXXXXXXXXX;

“Trust 1 Subscription Amount” has the meaning assigned by Paragraph 69.1(n);

“Trust 1 Trustee” means XXXXXXXXXX;

“Trust 2” means XXXXXXXXXX;

“Trust 2 Subscription Amount” has the meaning assigned by Paragraph 69.1(n);

“unit trust” has the meaning assigned by subsection 108(2).

Additional Facts

2. The following is added to the Ruling immediately following Paragraph 4:

1. 4.1 Parent also owns all of the issued and outstanding shares of each of Subco 10, Subco 11, Subco 12, Subco 13, Subco 14, Subco 15, Subco 16, Subco 17 and Subco 18.
2. Each of Subco 10, Subco 11, Subco 13, Subco 14, Subco 16 and Subco 17 is a TCC incorporated under the BCA2.
3. Each of Subco 12 and Subco 15 is a TCC incorporated under the BCA1.
4. Subco 18 is a TCC incorporated under the BCA2.
5. As at XXXXXXXXXX, Parent had approximately $XXXXXXXXXX of debt issued and outstanding that is widely held by the public and is not traded on a stock exchange.

3. The following is added to the Ruling immediately following Paragraph 12:

12.1 Subco 11 does not and has never carried on any business.

12.2 Subco 12 owns and operates the Parent Group’s XXXXXXXXXX.

The XXXXXXXXXX and related assets form part of the Parent Group’s XXXXXXXXXX.

4. The following is added to the Ruling immediately following Paragraph 25:

Partnership 1

25.1 Partnership 1 is a limited partnership formed under the laws of the State of XXXXXXXXXX. Certain limited partnership units are listed on the XXXXXXXXXX.

XXXXXXXXXX

5. The following is added to the Ruling immediately following Paragraph 26:

XXXXXXXXXX

26.1 The portion of the XXXXXXXXXX situated in the United States is indirectly owned by FA 1 and the portion of the XXXXXXXXXX situated in Canada is operated by Partnership 9.

As described below:

(a) Parent has shareholdings in XXXXXXXXXX;

(b) Pubco 1 and Parent have interests in XXXXXXXXXX;

(c) Trust 1 and Parent have interests in XXXXXXXXXX;

(d) Trust 2 and its wholly-owned corporation Subco 9 own all of the partnership interests in Partnership 2 (as described in Paragraph 38.7);

(e) (i) Partnership 2’s wholly-owned corporation Subco 19, (ii) Subco 2 and (iii) Subco 17 own all of the partnership interests in Partnership 8 (as described in this Paragraph 26.1), and

(f) Partnership 8 and Subco 17 own all of the partnership interests in Partnership 9 (as described in this Paragraph 26.1).

Partnership 9

Partnership 9 is a Canadian partnership. The sole limited partner of Partnership 9 is Partnership 8. The general partner of Partnership 9 is Subco 17.

Partnership 8

Partnership 8 is a Canadian partnership. Subco 2 and Subco 19 are the sole limited partners of Partnership 8. The general partner of Partnership 8 is Subco 17.

XXXXXXXXXX

Subco 19

Subco 19 is a TCC incorporated under the BCA4. Partnership 2 owns all of the issued and outstanding shares of Subco 19.

XXXXXXXXXX

26.2 The portion of the XXXXXXXXXX situated in Canada is held directly by Subco 2. The portion of the XXXXXXXXXX situated in the U.S. is indirectly owned by Partnership 1.

XXXXXXXXXX

26.3 The XXXXXXXXXX held by Subco 2, the XXXXXXXXXX held by Partnership 9 and the XXXXXXXXXX held by Subco 12, collectively form the material portion of the Parent Group’s XXXXXXXXXX.

XXXXXXXXXX

26.4 Subco 2 owns XXXXXXXXXX (the XXXXXXXXXX) that are used to perform XXXXXXXXXX owned by Subco 2 as well as other XXXXXXXXXX owned and operated within the Parent Group including those owned directly or indirectly by Partnership 1.

With respect to the XXXXXXXXXX in the operation of the XXXXXXXXXX but are not owned by Subco 2, Subco 2 receives a fee for the use of the XXXXXXXXXX from such other owners.

6. The following is added to the Ruling immediately following Paragraph 27:

Partnership 3, Partnership 4, Partnership 5, Partnership 6 and Partnership 7

27.1 Subco 2 is the sole limited partner of each of Partnership 3, Partnership 4, Partnership 5, Partnership 6 and Partnership 7.

Each of Subco 13, Subco 14, Subco 15, Subco 16 and Subco 18 is the general partner of Partnership 4, Partnership 5, Partnership 6, Partnership 7 and Partnership 3, respectively.

Each of Partnership 4, Partnership 5, Partnership 6 and Partnership 7 is a Canadian partnership and is in the business of XXXXXXXXXX situated in Canada.

Partnership 3 is a Canadian partnership and is primarily in the business of XXXXXXXXXX that are proposed to be situated in XXXXXXXXXX.

27.2 There are no corporations, partnerships or trusts of which both Subco 2 and FA 1 are shareholders, members or beneficiaries, as the case may be.

7. The following is added to the Ruling immediately following Paragraph 38:

Pubco 1

38.1 Pubco 1 is a public corporation and a TCC. It was incorporated under the BCA1 on XXXXXXXXXX with its head office in XXXXXXXXXX. The common shares of Pubco 1 are listed and traded on the XXXXXXXXXX.

There are XXXXXXXXXX voting common shares of Pubco 1 issued and outstanding of which Parent owns XXXXXXXXXX and XXXXXXXXXX.

Parent does not have de jure control of Pubco 1.

38.2 The material assets of Pubco 1 are comprised of XXXXXXXXXX.

Pubco 1 declares and pays dividends on its common shares on a monthly basis.

Pubco 1 does not have any debt that is issued and outstanding.

Trust 1

38.3 Trust 1 is a unit trust whose units are redeemable on the demand of the holders.

Trust 1 is resident in Canada for purposes of the Act.

There are XXXXXXXXXX ordinary units of Trust 1 issued and outstanding of which XXXXXXXXXX owns XXXXXXXXXX and XXXXXXXXXX owns XXXXXXXXXX.

Trust 1 Trustee, a trust company existing under the laws of Canada, is the sole trustee of Trust 1.

The material assets of Trust 1 are comprised of all of the issued and outstanding common units of Trust 2 and debt issued by Trust 2 which, as of XXXXXXXXXX, was approximately $XXXXXXXXXX.

As at XXXXXXXXXX, Trust 1 had approximately $XXXXXXXXXX of debt issued and outstanding XXXXXXXXXX.

38.4 XXXXXXXXXX

Trust 2

38.5 Trust 2 is a unit trust established under the laws of XXXXXXXXXX on or about XXXXXXXXXX.

Trust 2 is resident in Canada for purposes of the Act. The trustees of Trust 2 consist of XXXXXXXXXX.

XXXXXXXXXX

38.6 The material assets of Trust 2 are comprised of:

(a) a XXXXXXXXXX% limited partnership interest in Partnership 2;

(b) debt issued by Partnership 2, which, as at XXXXXXXXXX, was approximately $XXXXXXXXXX, and

(c) all of the issued and outstanding shares of Subco 9.

Partnership 2

38.7 Partnership 2 is a limited partnership formed under the laws of XXXXXXXXXX. Partnership 2 is a Canadian partnership.

Subco 9 owns a XXXXXXXXXX% interest in Partnership 2 as its general partner, and Trust 2 owns a XXXXXXXXXX% interest in Partnership 2 as a limited partner.

Partnership 2 holds directly and indirectly equity interests in various subsidiary corporations (including Subco 19, as described in Paragraph 26.1) and partnerships. Partnership 2 also holds directly debt issued by certain of these subsidiary corporations and partnerships.

These subsidiaries and partnerships carry on a number of businesses which can be grouped generally into the following business segments:

XXXXXXXXXX

Subco 10

38.8 Subco 10, Pubco 1, Trust 1 and Trust 2 have entered into XXXXXXXXXX agreements, pursuant to XXXXXXXXXX.

XXXXXXXXXX

38.9 XXXXXXXXXX

8. The following is added to the Ruling immediately following Paragraph 69:

69.1 The Parent Group is proposing to undertake the transactions described in Paragraphs 69.1(a)-(n) below (the “New Transactions”).

Transfer of Partnership 3

(a) Parent will borrow on its existing credit facility an amount equal to the amount of cash required by Subco 11 to complete the purchase as described in Paragraph 69.1(b) and will use such funds to subscribe for additional shares of Subco 11.

(b) Subco 2 will transfer to Subco 11 all of its limited partnership interests of Partnership 3 for a purchase price equal to the FMV of such interests at the time of the transfer, which is currently estimated to be approximately $XXXXXXXXXX.

(c) Subco 2 will distribute to Subco 1 as a return of capital on the issued and outstanding voting common shares of Subco 2 an amount by which Subco 2’s proceeds of disposition of its limited partnership interests of Partnership 3 described in Paragraph 69.1(b) exceed the estimated tax liability arising on that disposition.

(d) Subco 1 will distribute to Parent as a return of capital on the issued and outstanding voting common shares of Subco 1 an amount equal to the amount received from Subco 2 as described in Paragraph 69.1(c).

Parent will use the funds to repay a portion of its existing credit facility.

Transfer of XXXXXXXXXX

(e) Subco 2 will transfer to Subco 10 or a newly formed wholly-owned subsidiary of Subco 10 the XXXXXXXXXX at a purchase price equal to the aggregate FMV of the XXXXXXXXXX at the time of the transfer (the “Subco 2-Subco 10 Purchase Price”).

As sole consideration for the transfer, Subco 10 or the newly formed wholly-owned subsidiary of Subco 10, as the case may be, will issue to Subco 2 a number of non-voting, no par value, redeemable and retractable preferred shares having an aggregate FMV equal to the Subco 2-Subco 10 Purchase Price.

The transfer will occur on a tax-deferred basis pursuant to subsection 85(1).

The preferred shares of Subco 10, or the preferred shares of the newly formed wholly-owned subsidiary of Subco 10, as the case may be, held by Subco 2 will remain outstanding.

Following the transfer, Subco 2 and the other entities within the Parent Group that will utilize the XXXXXXXXXX in the operation of their XXXXXXXXXX will pay a fee to Subco 10 or the newly formed wholly-owned subsidiary of Subco 10, as the case may be.

Transfer to XXXXXXXXXX

(f) Parent will transfer to XXXXXXXXXX.

As sole consideration for such transfer, XXXXXXXXXX.

The transfer will occur on a tax-deferred basis pursuant to subsection 85(1).

Following such transfer, Parent will own approximately XXXXXXXXXX% of the issued and outstanding common shares of XXXXXXXXXX.

Control of the assets of XXXXXXXXXX

(g) Parent will

(i) acquire from XXXXXXXXXX a majority of the issued and outstanding shares of XXXXXXXXXX for an amount in cash equal to the aggregate FMV of such shares; or

(ii) make a cash subscription for such number of shares in the capital of XXXXXXXXXX that results in Parent holding a majority of the issued and outstanding shares of XXXXXXXXXX.

Transfer of XXXXXXXXXX

(h) Pubco 1 will undertake a public offering of common shares for subscription proceeds of approximately $XXXXXXXXXX.

(i) Concurrent with the closing of the public offering described in Paragraph 69.1(h), XXXXXXXXXX.

(j) XXXXXXXXXX will subscribe for XXXXXXXXXX having an aggregate subscription price of approximately $XXXXXXXXXX.

(k) XXXXXXXXXX will subscribe for XXXXXXXXXX having an aggregate subscription price of approximately $XXXXXXXXXX.

(l) XXXXXXXXXX will subscribe for XXXXXXXXXX having an aggregate subscription price of approximately $XXXXXXXXXX.

XXXXXXXXXX

(m) XXXXXXXXXX will contribute approximately $XXXXXXXXXX to XXXXXXXXXX. As consideration for such contribution, XXXXXXXXXX will issue XXXXXXXXXX, having an aggregate FMV equal to $XXXXXXXXXX.

XXXXXXXXXX will make a corresponding, pro rata contribution to XXXXXXXXXX in respect of its XXXXXXXXXX% general partnership interest in XXXXXXXXXX.

XXXXXXXXXX will use the approximate $XXXXXXXXXX to fund the cash portion of the purchase consideration as described in Paragraphs 69.1(n) and (o).

(n) XXXXXXXXXX will transfer to XXXXXXXXXX:

(i) all of its Subco 12 shares, and

(ii) all of its shares of each of Subco 13, Subco 14, Subco 15, Subco 16 and Subco 17 (collectively referred to as the “GPcos Shares”).

As consideration for such transfer, XXXXXXXXXX will pay XXXXXXXXXX to XXXXXXXXXX.

For greater certainty,

XXXXXXXXXX

The current intention is that the transfer described in this Paragraph 69.1(n) will occur on a tax-deferred basis pursuant to subsection 97(2). However, Parent may elect to trigger a capital gain with respect to such transfer.

The XXXXXXXXXX of XXXXXXXXXX to be issued by XXXXXXXXXX to XXXXXXXXXX will be exchangeable into XXXXXXXXXX, which XXXXXXXXXX will be a different class of XXXXXXXXXX of XXXXXXXXXX than those held by XXXXXXXXXX.

The exchange of XXXXXXXXXX of XXXXXXXXXX for XXXXXXXXXX of XXXXXXXXXX will occur in the following manner:

XXXXXXXXXX

Each of XXXXXXXXXX, XXXXXXXXXX and XXXXXXXXXX will enter into an agreement to support the future exchange of XXXXXXXXXX in the manner describe above.

(o) Concurrent with the transfer described in Paragraph 69.1(n), XXXXXXXXXX will transfer to XXXXXXXXXX all of its voting common shares of XXXXXXXXXX.

As consideration for such transfer, XXXXXXXXXX will pay XXXXXXXXXX.

For greater certainty,

XXXXXXXXXX

The current intention is that the transfer described in this Paragraph 69.1(o) will occur on a tax-deferred basis pursuant to subsection 97(2). However, XXXXXXXXXX may elect to trigger a capital gain.

Following the transactions described in this Paragraph 69.1(o), XXXXXXXXXX direct and indirect economic interest in XXXXXXXXXX will increase from approximately XXXXXXXXXX% to approximately XXXXXXXXXX%.

Return of capital

(p) Subco 1 will distribute to Parent as a return of capital on the issued and outstanding voting common shares of Subco 1 such amount of the cash received by it from XXXXXXXXXX, as described in XXXXXXXXXX not exceeding the lesser of Parent’s aggregate ACB and PUC of the voting common shares of Subco 1.

For greater certainty, Subco 1 will not distribute any of the cash received by it from XXXXXXXXXX, as described in XXXXXXXXXX, to Parent by way of a dividend.

69.2 The return of capital described in Paragraph 69.1(c) will be in respect of an amount that is derived from the proceeds of disposition realized by Subco 2 from the disposition of all of its partnership interests in Partnership 3 to Subco 11.

Such disposition will have arisen outside the ordinary course of business of Subco 2. In addition, the return of capital described in Paragraph 69.1(c) will occur within XXXXXXXXXX months from the date of such disposition and no amount that can reasonably be considered to be derived from the proceeds of disposition of such property will have been paid by Subco 2 to Subco 1 on a previous reduction of the PUC in respect of any class of shares of Subco 2.

69.3 Subject to obtaining a ruling from XXXXXXXXXX, the Parent Group will undertake the Proposed Transactions and would do so even if the New Transactions were not being undertaken.

The Proposed Transactions will be undertaken prior to the implementation of the New Transactions.

69.4 XXXXXXXXXX

69.5 XXXXXXXXXX

Purposes of the New Transactions

69.6 The purpose of the New Transactions is to enhance value for shareholders of Parent by transferring:

XXXXXXXXXX

69.7 The reason for the transfer by Subco 2 to Subco 11 of its limited partnership interests in Partnership 3, as described in Paragraph 69.1(b), XXXXXXXXXX.

XXXXXXXXXX

69.8 The primary reason for the transfer described in Paragraph 69.1(f) is for XXXXXXXXXX.

69.9 The purpose of the transaction described in Paragraph 69.1(g) is to provide XXXXXXXXXX.

69.10 The purpose of the exchangeable feature of XXXXXXXXXX.

69.11 The reason why Parent will fund its portion of the cash required by XXXXXXXXXX.

Confirmation

Provided that the preceding statements and the statements contained in the Ruling constitute a complete and accurate disclosure of all the relevant facts and proposed transactions and of the purposes of the Proposed Transactions and the New Transactions, notwithstanding the Amendments, we hereby confirm that, subject to the conditions, limitations, qualifications and comments set out in the Ruling and in Information Circular 70-6R6 dated August 29, 2014, the Ruling will continue to be binding on the CRA, provided that the Proposed Transactions are completed on or before XXXXXXXXXX.

For greater certainty, nothing in the Ruling, as amended by this letter, should be construed as implying that the CRA has confirmed, reviewed or made any determination, in respect of any tax consequences relating to any of the New Transactions.

Yours truly,

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