2017 Ruling 2016-0643931R3 - PUC reinstatement on emigration

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: 1. Whether the PUC that has been reduced as a result of the foreign affiliate dumping rules can be reinstated immediately prior to emigration; 2. Whether administrative position to not require calculation of tax-free surplus balance applies; 3. Whether 88(1)(d) applies.

Position: 1. PUC reinstatement applies upon emigration; 2. Administrative position does not apply; 3. Paragraph 88(1)(d) applies.

Reasons: 1. In compliance with law; 2. Tax-free surplus balance already computed by taxpayer; 3. Application of subsections 87(11) and 88(1).

XXXXXXXXXX								2016-064393

XXXXXXXXXX, 2017

Dear XXXXXXXXXX

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX and subsequent amended submissions, the most recent dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information provided to us by telephone and email.

To the best of your knowledge, and that of the above-noted taxpayer, none of the issues involved in this advance income tax ruling are:

(i) in an earlier tax return of the above-noted taxpayer or of a related person;

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

(iii) under objection by the above-noted taxpayer or by 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) the subject of a ruling previously considered by the Income Tax Rulings Directorate in connection with the above-noted taxpayer or a related person.

Unless otherwise stated, all references in this letter to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (the “Act”) or the Income Tax Regulations (the “Regulations”). All references to currency are to the Canadian dollar, unless otherwise stated. This document is based solely on the Facts, Proposed Transactions, Purposes of the Proposed Transactions, and Additional Information described below. Any documentation submitted in respect of your request does not form part of the Facts, Proposed Transactions, Purposes of the Proposed Transactions or Additional Information and any references thereto are provided solely for the convenience of the reader.

Definitions

In this letter, the following terms have the meanings specified:

a. “adjusted cost base” has the meaning ascribed thereto in section 54;

b. “arm's length” has the meaning ascribed thereto in subsection 251(1);

c. “Amalco” means XXXXXXXXXX, the company formed under the laws of XXXXXXXXXX as a result of the Amalgamation;

d. “Amalgamation” means the amalgamation as described in paragraph 26 hereof;

e. “Arrangement” means the arrangement as described in paragraph 9 hereof;

f. “Arrangement Agreement” means the arrangement agreement described in paragraph 9 hereof;

g. “Assignor” means XXXXXXXXXX, a company incorporated XXXXXXXXXX under the laws of XXXXXXXXXX;

h. “BCA” means the XXXXXXXXXX as amended;

i. “Bump” means the designation and resulting increase in adjusted cost base described in paragraph 30 hereof;

j. “capital property” has the meaning ascribed thereto in section 54;

k. “Continuation” means the continuation of Amalco out of XXXXXXXXXX and into XXXXXXXXXX, as described in paragraph 31 hereof;

l. “CRA” means the Canada Revenue Agency;

m. “depreciable property” has the meaning assigned by subsection 13(21);

n. “Effective Date” means XXXXXXXXXX, the date on which all of the transactions contemplated by the Arrangement (other than those described in paragraph 23 hereof) were consummated;

o. “Effective Time” means XXXXXXXXXX on the Effective Date, the time at which the transactions contemplated by the Arrangement (other than those described in paragraph 23 hereof) were consummated, sequentially, in the order set out in the Plan;

p. “Forco” means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX and a non-resident of Canada for purposes of the Act;

q. “Forco Group” means Forco and all of those corporations, partnerships and entities over which Forco has the ability to exercise control, which include Partnership 1, Partnership 2 and, following the Effective Time, Parent, Target, Amalco, Subco 1 and Subco 2;

r. “Foreignco” means XXXXXXXXXX, a XXXXXXXXXX company that acts as a trustee for a trust settled for the benefit of Mr. B and his family, all non-residents of Canada for purposes of the Act;

s. “ineligible property” has the meaning assigned by paragraph 88(1)(c);

t. “Mr. A” means XXXXXXXXXX, a resident of XXXXXXXXXX and a non-resident of Canada for purposes of the Act;

u. “Mr. B” means XXXXXXXXXX, a non-resident of Canada for purposes of the Act;

v. “paid-up capital” has the meaning assigned by subsection 89(1);

w. “Parent” means XXXXXXXXXX, a company incorporated under the BCA on XXXXXXXXXX;

x. “Parent Shares” means the shares of Parent issued to Significant Shareholder as described in paragraph 23 hereof;

y. “Partnership 1” means XXXXXXXXXX, the interests in which are not publicly traded;

z. “Partnership 2” means in XXXXXXXXXX, a partnership established under the laws of XXXXXXXXXX;

aa. “Plan” means the plan of arrangement as described in paragraph 9 hereof;

bb. “Proposed Transactions” are the transactions described in paragraphs 31 to 33 hereof;

cc. “public corporation” has the meaning assigned by subsection 89(1);

dd. “Significant Shareholder” means XXXXXXXXXX, a resident of XXXXXXXXXX and a non-resident of Canada for purposes of the Act;

ee. “Specified Shareholder” has the meaning assigned by subsection 248(1), as modified by subparagraph 88(1)(c.2)(iii);

ff. “Subco 1” means XXXXXXXXXX, a company organized under the laws of XXXXXXXXXX. It is the result of a merger in XXXXXXXXXX of XXXXXXXXXX companies incorporated between XXXXXXXXXX and XXXXXXXXXX;

gg. “Subco 2” means XXXXXXXXXX, a company organized under the laws of XXXXXXXXXX. It is the result of a merger in XXXXXXXXXX of XXXXXXXXXX companies incorporated between XXXXXXXXXX and XXXXXXXXXX;

hh. “Subco Shares” means all of the issued and outstanding shares of Subco 1 and Subco 2, collectively;

ii. “Target” means XXXXXXXXXX (pre-Amalgamation predecessor of Amalco), a company incorporated under the BCA;

jj. “Target Shares” means the common shares of Target;

kk. “taxable Canadian corporation” has the meaning assigned by subsection 89(1); and

ll. “taxable Canadian property” has the meaning ascribed thereto in subsection 248(1).

FACTS

Target Facts

1. Target was originally incorporated under the BCA on XXXXXXXXXX under the name XXXXXXXXXX. At all relevant times prior to the Effective Time, Target was a “public corporation” and a “taxable Canadian corporation.” Target filed its income tax returns with the XXXXXXXXXX Tax Centre and dealt with the XXXXXXXXXX Tax Services Office of the CRA.

2. At all relevant times prior to de-listing effective at the close of business on XXXXXXXXXX, Target’s common shares were traded on the XXXXXXXXXX.

3. At all relevant times prior to the Effective Time, Target’s assets consisted of two wholly-owned subsidiaries, Subco 1 and Subco 2, as well as certain intellectual property rights (trademarks and trade names) relating to the XXXXXXXXXX business operated by Subco 1 and Subco 2. At the Effective Time, the fair market value of the Subco 1 shares was approximately $XXXXXXXXXX, the fair market value of the Subco 2 shares was approximately $XXXXXXXXXX and the fair market value of the intellectual property rights held by Target was approximately $XXXXXXXXXX.

4. At all relevant times, Target held the Subco Shares as capital property for purposes of the Act.

5. At all relevant times prior to the Effective Time, Target was not carrying on a business in Canada and most of its value was derived from the Subco Shares.

6. Target historically operated as a XXXXXXXXXX corporation under the name XXXXXXXXXX. It was listed on the XXXXXXXXXX for financing purposes and was engaged in financing XXXXXXXXXX located in XXXXXXXXXX, Canada. However, Target’s business changed in XXXXXXXXXX when it acquired the XXXXXXXXXX and XXXXXXXXXX described below and changed its name to XXXXXXXXXX.

7. Prior to the Arrangement, only one shareholder of Target was a Specified Shareholder: Significant Shareholder legally and beneficially owned XXXXXXXXXX Target Shares, representing approximately XXXXXXXXXX% of the issued and outstanding Target Shares. The remaining issued and outstanding Target Shares were widely held (no other shareholder, either individually or as part of a group of persons, held XXXXXXXXXX% or more of the issued and outstanding Target Shares) and no shares of Target of any other class were issued and outstanding. No person or group of persons controlled Target at any relevant time prior to the Arrangement. At no time during the 60-month period ending on the Effective Date did Significant Shareholder or any person not dealing at arm’s length with Significant Shareholder hold XXXXXXXXXX% or more of the issued and outstanding shares of any class of Target’s shares.

8. Subco 1 operates XXXXXXXXXX in XXXXXXXXXX. Subco 2 operates XXXXXXXXXX in XXXXXXXXXX. Neither Subco 1 nor Subco 2 has carried on business activities in Canada.

Arrangement Facts

9. On XXXXXXXXXX, Assignor and Target entered into an arrangement agreement (the “Arrangement Agreement”) pursuant to which the Assignor and Target agreed, subject to the terms and conditions thereof, to propose (to shareholders of Target) a statutory plan of arrangement under XXXXXXXXXX of the BCA (as amended, the “Plan”) and pursuant to which the Assignor would acquire all of the Target Shares (the “Arrangement”). The Plan could not be given effect without the approval of the Target's shareholders and subsequent court approval.

10. On XXXXXXXXXX, Assignor's sole shareholder was Mr. B, who held XXXXXXXXXX of Assignor issued for XXXXXXXXXX. Mr. B had full legal control of Assignor. As Mr. B lacked the funds necessary to consummate the acquisition of Target as contemplated by the Arrangement Agreement, he sought to co-invest with Partnership 1. Due to Partnership 1’s preference to consummate the transaction using a new entity, Parent was incorporated under the BCA on XXXXXXXXXX by an affiliate of XXXXXXXXXX for and on behalf of Partnership 1. To this date, Assignor remains a dormant company with Mr. B as its sole shareholder and director, and is in the process of being wound up. Mr. B and his family never owned any shares of Target.

11. On XXXXXXXXXX, Assignor, Target and Parent entered into an assignment and assumption agreement, pursuant to which Assignor agreed to assign to Parent and Parent agreed to assume all of the rights and obligations of Assignor under the Arrangement Agreement, such that Parent would, at the Effective Time and in accordance with the provisions of the Arrangement Agreement and the Plan, inter alia, acquire all of the Target Shares and amalgamate with Target. No consideration was paid by either Parent or Assignor for said assignment/assumption. The obligations pursuant to the Arrangement Agreement assumed by Parent included, inter alia:

(a) paying the amount of consideration for Target Shares stipulated in the Arrangement Agreement (and to satisfy financing conditions in respect thereof);

(b) participating in obtaining regulatory approvals;

(c) participating in preparation of regulatory filings in respect of the Arrangement and Plan; and

(d) not hindering the ability of the acquiror (under the Arrangement Agreement) to consummate the transactions contemplated thereby.

The Arrangement Agreement was simultaneously amended, inter alia, to reflect the foregoing assignment/assumption and to reflect Parent as the new acquiror thereunder.

12. Other than as described in paragraphs 10 to 11 above, Assignor was not a party to the Arrangement or any of the transactions contemplated by the Arrangement Agreement or Plan. Partnership 1 was otherwise dealing at arm's length with Target prior to the assignment of the Arrangement Agreement contemplated in paragraph 11 above and Partnership 1 was otherwise dealing at arm's length with Assignor at all relevant times.

13. On XXXXXXXXXX, the shareholders of Target approved the Arrangement and Plan. The Supreme Court of XXXXXXXXXX issued its final order approving the Plan on XXXXXXXXXX, which became legally effective under the BCA.

14. On XXXXXXXXXX, Partnership 1 subscribed for XXXXXXXXXX class A common shares and XXXXXXXXXX preferred shares of Parent in consideration for an aggregate subscription price of XXXXXXXXXX (equivalent of $XXXXXXXXXX, of which $XXXXXXXXXX was in respect of the class A common shares and $XXXXXXXXXX was in respect of the preferred shares). The funding for this investment was the result of a capital call to its existing investors pursuant to their pre-existing capital commitments.

15. The class A common shares of Parent were entitled to one vote per share, pro-rata dividends as and when declared by the directors of Parent, as well as to pro-rata distributions in the event of a liquidation of Parent.

16. The preferred shares of Parent were non-voting, were entitled to fixed dividends (in preference to class A and B common shares of Parent), and were only entitled to the amount of their original issue price plus accrued and unpaid dividends upon a liquidation of Parent (in preference to any pro-rata distributions in respect of class A and B common shares of Parent).

17. Partnership 1 was the legal and beneficial owner of the foregoing shares of Parent described in paragraph 14 hereof. To the knowledge of Partnership 1’s management, no investors holding a direct or indirect interest in Partnership 1 held any interest in Target prior to the Effective Time as part of a series of transactions or events that includes the Arrangement.

18. Forco controls Partnership 1 indirectly as follows: it holds the sole general partner interest in Partnership 2, which in turn holds the sole general partner interest in Partnership 1. Partnership 1 held the majority voting shares in Parent (being the XXXXXXXXXX class A common shares of Parent), as described in paragraph 14 hereof. XXXXXXXXXX individuals (all non-residents of Canada for purposes of the Act) indirectly control Forco. At all relevant times, each of these XXXXXXXXXX non-resident individuals was dealing at arm’s length with Significant Shareholder. To the best of Partnership 1’s management’s knowledge, all investors of Partnership 1 were dealing at arm’s length with Significant Shareholder at all relevant times.

19. Partnership 2 and Partnership 1 are partnerships established under the laws of XXXXXXXXXX and are treated as such for purposes of the Act.

20. On XXXXXXXXXX, Mr. A subscribed for XXXXXXXXXX class B common shares of Parent in consideration for an aggregate subscription price of XXXXXXXXXX (equivalent of $XXXXXXXXXX). The class B common shares of Parent were non-voting, were entitled to pro-rata dividends as and when declared by the directors of Parent, and were entitled to pro-rata distributions in the event of a liquidation of Parent. Mr. A was the legal and beneficial owner of the foregoing shares of Parent. Mr. A subscribed for shares of Parent for his own investment purposes. On XXXXXXXXXX, Mr. A held approximately XXXXXXXXXX shares of Target (representing less than XXXXXXXXXX% of the shares of the issued and outstanding shares of Target) through XXXXXXXXXX, his wholly-owned company incorporated under the laws of XXXXXXXXXX. At all relevant times, Mr. A was dealing at arm’s length with Significant Shareholder.

21. On XXXXXXXXXX, Foreignco subscribed for XXXXXXXXXX class A common shares and XXXXXXXXXX class B common shares of Parent in consideration for an aggregate subscription price of XXXXXXXXXX (equivalent of $XXXXXXXXXX, of which $XXXXXXXXXX was in respect of the class A common shares and $XXXXXXXXXX was in respect of the class B common shares). Foreignco is the trustee of a trust settled for the benefit of Mr. B and his family members and it subscribed for shares of Parent and held them in that capacity. On the settlement of the trust, Mr. B and his family members acquired beneficial interests in the trust. The trust had beneficial ownership in the shares of Parent that Foreignco held. Foreignco is ultimately held and controlled by a private equity fund, XXXXXXXXXX, which is managed in XXXXXXXXXX by XXXXXXXXXX and its affiliates. At all relevant times, Foreignco, the trust settled for the benefit of Mr. B and his family members, Mr. B himself and Mr. B’s family members all dealt at arm's length with Significant Shareholder.

22. The total investment in Parent described in paragraphs 14 to 21 above amounted to XXXXXXXXXX (equivalent of $XXXXXXXXXX).

23. On XXXXXXXXXX, Significant Shareholder transferred XXXXXXXXXX Target Shares to Parent in consideration for $XXXXXXXXXX and the issuance by Parent of XXXXXXXXXX class A common shares and XXXXXXXXXX class B common shares (collectively, the “Parent Shares”) valued at $XXXXXXXXXX and $XXXXXXXXXX respectively. The aggregate value was equal to $XXXXXXXXXX (based on the $XXXXXXXXXX per share purchase price for Target Shares described in paragraph 24 hereof). The Parent Shares entitled Significant Shareholder to approximately XXXXXXXXXX% of the voting rights in respect of the issued and outstanding shares of Parent and represented approximately XXXXXXXXXX% of the aggregate subscription price of all issued and outstanding shares of Parent (as at the Effective Time). No tax-deferred “rollover” applied to the foregoing exchange of shares. At all relevant times, Significant Shareholder was dealing at arm's length with Parent.

24. At the Effective Time, as part of the Arrangement and as explicitly contemplated by the Arrangement Agreement and the Plan, each Target Share held by a shareholder of Target (other than those Target Shares acquired by Parent from Significant Shareholder as described in paragraph 23 hereof) was transferred to Parent in exchange for a cash payment equal to $XXXXXXXXXX per share. As a result of such transfers, Parent acquired control of Target. The aggregate cash used to acquire the Target Shares (other than those Target Shares acquired by Parent from Significant Shareholder as described in paragraph 23 hereof) was approximately $XXXXXXXXXX.

25. The aggregate fair market value of all of the Target Shares acquired by Parent as described in paragraphs 23 and 24 was approximately $XXXXXXXXXX.

26. At the Effective Time, immediately following the transfers described in paragraph 24 hereof, as part of the Arrangement and as explicitly contemplated by the Arrangement Agreement and the Plan, Parent and Target amalgamated with the same effect as if they were amalgamated under the provisions of the BCA (the “Amalgamation”) to form Amalco. The Plan and the Arrangement Agreement explicitly provided that the legal existence of Target did not cease and survived the Amalgamation. The reason for which the Arrangement Agreement provided that only the legal existence of Target would survive the Amalgamation was to avoid a deemed disposition of the Subco 1 and/or Subco 2 shares for XXXXXXXXXX tax purposes. The Plan and Arrangement Agreement explicitly provided that the Amalgamation would be governed by subsection 87(1), and that with effect from the time of the Amalgamation:

(a) the separate legal existence of Parent will cease without Parent being liquidated or wound-up, Parent and Target shall continue as one company, and the property of Parent and Target immediately before the Amalgamation shall become the property of Amalco (such that Amalco will own and hold all such property from and after the time of the Amalgamation);

(b) all rights of creditors or others will be unimpaired by the Amalgamation, all obligations of Parent and Target immediately before the Amalgamation, whether arising by contract or otherwise, may be enforced against Amalco to the same extent as if such obligations had been incurred or contracted by it, and all liabilities of Parent and Target immediately before the Amalgamation shall become liabilities of Amalco;

(c) all rights, contracts, permits and interests of Parent and Target immediately before the Amalgamation will continue as rights, contracts, permits and interests of Amalco and, for greater certainty, the Amalgamation will not constitute a transfer or assignment of the rights or obligations of Parent or Target under any such rights, contracts, permits and interests;

(d) any existing cause of action, claim or liability to prosecution of Parent or Target shall be unaffected;

(e) a civil, criminal, quasi-criminal, administrative or regulatory action or proceeding being prosecuted or pending by or against Parent or Target immediately before the Amalgamation may be prosecuted or its prosecution may be continued by or against Amalco;

(f) a conviction against, or ruling, order or judgment in favour of or against, Parent or Target may be enforced by or against Amalco;

(g) the notice of articles and articles (within the meaning of the BCA) of Parent immediately before the Amalgamation, including, for greater certainty, all descriptions of share capital therein, shall become the notice of articles and articles of Amalco;

(h) the authorized share structure of Parent immediately before the Amalgamation shall be the authorized share structure of Amalco and, for greater certainty, the issued and outstanding Class A common shares, Class B common shares and preference shares of Parent shall become issued and outstanding Class A common shares, Class B common shares and preference shares of Amalco, and the shares of Target held by Parent immediately before the Amalgamation will be cancelled without any repayment of capital;

(i) the name of Amalco shall be the name of Target; and

(j) the registered office and records office of Amalco shall be the registered office of Target.

No new shares of Amalco were issued pursuant to the Amalgamation and the shares of Parent were not cancelled and were deemed to be shares of Amalco received by the shareholders of Parent by virtue of the Amalgamation pursuant to subsection 87(1.1). Upon the Amalgamation, the paid-up capital in respect of the shares of Parent became the paid-up capital in respect of the shares of Amalco. Prior to the Amalgamation, the aggregate paid-up capital in respect of all of the issued and outstanding shares of Parent (without taking into account the application of “foreign affiliate dumping” rules) was approximately $XXXXXXXXXX (of which $XXXXXXXXXX was in respect of the class A common shares, $XXXXXXXXXX was in respect of the class B common shares, and $XXXXXXXXXX was in respect of the preferred shares). This amount represents the sum of the investments in Parent described in paragraphs 22 and 23 hereof. Following the application of the “foreign affiliate dumping” rules and the filing of the notice described in paragraph 29 hereof, the paid-up capital in respect of all of the issued and outstanding shares of Parent was $XXXXXXXXXX. All Target shares outstanding prior to the Amalgamation were cancelled without consideration or repayment of capital upon the Amalgamation.

27. The aggregate adjusted cost base of Parent's Target Shares was equal to or greater than their aggregate paid-up capital immediately before the Amalgamation, and as such the Amalgamation did not give rise to any gain in respect of the disposition of the Target Shares by Parent pursuant to the provisions of paragraph 88(1)(b).

28. Amalco filed an election, pursuant to paragraph (c) of the definition of “public corporation” in subsection 89(1), and effective XXXXXXXXXX, to not be a public corporation for purposes of the Act. This election was filed as a matter of standard practice and as a precaution to avoid the application of subsection 84(4.1) following the consummation of the transactions contemplated by the Arrangement and the de-listing of Amalco.

Foreign Affiliate Dumping Notice Facts

29. On XXXXXXXXXX, the form described in subparagraph 212.3(7)(d)(i) was filed in connection with the transactions contemplated by the Arrangement, specifically the acquisition of the Target Shares by Parent. The form was subsequently revised and refiled. The foregoing gave rise to a reduction of the deemed dividend that would otherwise result from the Arrangement pursuant to paragraph 212.3(2)(a), as well as a commensurate reduction of the paid-up capital in respect of the shares of Parent.

Bump Designation Facts

30. In its tax return for its first taxation year ending XXXXXXXXXX, Amalco designated an amount under subsection 87(11) and paragraph 88(1)(d) to increase the adjusted cost base of the Subco Shares and any other capital property (that was not ineligible property of Target and that was owned without interruption since Parent last acquired control of Target) that Amalco acquired on the Amalgamation (the “Bump”). Such designation is within the limits described in paragraph 88(1)(d), taking into account the prescribed amount in respect of the Subco Shares described in element C of the formula in subparagraph 88(1)(d)(ii).

PROPOSED TRANSACTIONS

Continuation

31. Amalco will file an application under XXXXXXXXXX of the BCA to continue out of XXXXXXXXXX and into XXXXXXXXXX, as if the company had been incorporated under the laws of XXXXXXXXXX (the “Continuation”). XXXXXXXXXX.

32. Concurrently with the Continuation, all Canadian resident directors of Amalco will resign and will be replaced by directors that are not resident in Canada for purposes of the Act.

33. On the effective date of the Continuation, or shortly thereafter, Amalco will convene and hold its first post-Continuation board meeting outside of Canada.

ADDITIONAL INFORMATION

34. At all relevant times, Assignor and Foreignco are or were non-residents of Canada for purposes of the Act.

35. At all relevant times, the Subco Shares, the shares of Parent, the shares of Target and the shares of Amalco are not or were not “taxable Canadian property” for purposes of the Act.

36. Following the Continuation, pursuant to the laws of XXXXXXXXXX:

(a) the property, rights and interest of Amalco (pre-Continuation) continue to be the property, rights and interests of Amalco (post-Continuation);

(b) Amalco (post-Continuation) continues to be liable for the obligations of Amalco (pre-Continuation);

(c) an existing cause of action, claim or liability to prosecution is unaffected by the Continuation;

(d) a legal proceeding being prosecuted or pending by or against Amalco (pre-Continuation) may be prosecuted or its prosecution may be continued, as the case may be, by or against Amalco (post-Continuation); and

(e) a conviction against, or a ruling, or judgment in favour of or against, Amalco (pre-Continuation) may be enforced by or against Amalco (post-Continuation).

37. Additionally, in connection with the Continuation:

(a) XXXXXXXXXX law will not deem Amalco to be a new legal entity as a result of the Continuation;

(b) XXXXXXXXXX law does not require any new shares of Amalco or any new class of shares of Amalco to be issued as a result of the Continuation (and no such new shares or class will be issued);

(c) XXXXXXXXXX law does not deem nor require any material change in attributes of Amalco shares to take place as a result of the Continuation (and no such change in attributes will be effected);

(d) XXXXXXXXXX law does not deem or require any redemption, acquisition, cancellation or reissuance of Amalco shares to take place as a result of the Continuation; and

(e) XXXXXXXXXX law does not affect the stated capital and/or contributed surplus of Amalco as a result of the Continuation.

38. Amalco’s directors and officers do not anticipate any material increase or decrease in the fair market value of its assets (including the Subco Shares) between the Effective Time and the Continuation.

39. No dividends have been received by Parent or by any corporation not dealing at arm's length with Parent on the Target Shares that Parent disposed of on the Amalgamation, and as such no amount would be included pursuant to subparagraph 88(1)(d)(i.1) for purposes of the Bump.

40. At all relevant times following the Continuation, none of the directors of Amalco will be resident in Canada for purposes of the Act and no meetings of the board of directors of Amalco will take place in Canada. Following the Continuation, Amalco’s central management and control will be located in XXXXXXXXXX and not in Canada.

41. The BCA and the applicable laws of XXXXXXXXXX do not provide for a deemed disposition/acquisition by Amalco’s shareholders of their Amalco shares as a result of the Continuation. In fact, XXXXXXXXXX of the BCA acknowledges that, pursuant to a continuation, Amalco will be XXXXXXXXXX and that a continuation will not be valid unless, under the laws of the importing jurisdiction, the conditions enumerated in paragraph 37 hereof are all met.

42. At all relevant times following the Continuation, Amalco will be a resident of XXXXXXXXXX and a non-resident of Canada for the purposes of the Act.

43. Any transfer or distribution of the Subco Shares by Amalco to Partnership 1 or another entity of the Forco Group would result in significant XXXXXXXXXX and XXXXXXXXXX taxes for Amalco in respect of the accrued gains on those shares. As the Subco Shares derive virtually all their value from real property situated in XXXXXXXXXX and XXXXXXXXXX and XXXXXXXXXX capital gains taxes would apply by virtue of the Canada-XXXXXXXXXX and Canada-XXXXXXXXXX Tax Treaties. Moreover, the Arrangement did not give rise to any step-up in the historical cost of the Subco Shares for XXXXXXXXXX and XXXXXXXXXX tax purposes. Amalco’s directors and officers, based on advice from Canadian, XXXXXXXXXX and XXXXXXXXXX tax counsels, anticipate that the total such XXXXXXXXXX and XXXXXXXXXX capital gains taxes, which apply at a rate of XXXXXXXXXX%, would exceed the amount of any Canadian income taxes it would incur upon a transfer or distribution of the Subco Shares (even without the increase in adjusted cost base to Amalco of the Subco Shares pursuant to paragraph 88(1)(d)).

44. Following the Continuation, the directors of Amalco have no intention to cause a transfer or distribution of the Subco Shares by Amalco to Partnership 1 or another entity of the Forco Group, so as to avoid the significant XXXXXXXXXX and XXXXXXXXXX taxes described in paragraph 43 hereof.

45. No election under subsection 256(9) was made in respect of the acquisition of control of Target by Parent resulting from the Arrangement, as the deeming rule under subsection 256(9) does not result in adverse tax consequences to Target or Parent.

46. In relation to the Bump, and to the best of Partnership 1’s management’s knowledge, no person described in any of subclauses 88(1)(c)(vi)(B)(I), (II) or (III) has acquired, or will acquire, as part of a series of transactions or events that includes the Amalgamation, any property described under clause 88(1)(c)(vi)(B).

PURPOSES OF THE PROPOSED TRANSACTIONS

47. The main purpose of the Proposed Transactions is to eliminate the entirely superfluous Canadian component of the Forco Group structure. As mentioned in paragraphs 5 to 8 hereof, the Forco Group has no commercial/economic connection to Canada other than through Amalco’s ownership of the intangible assets described in paragraph 3 hereof.

48. A transfer or distribution of the Subco Shares by Amalco to Partnership 1 or another entity of the Forco Group would trigger the significant XXXXXXXXXX and XXXXXXXXXX taxes described in paragraph 43 hereof. By proceeding by way of the Continuation, as opposed to a transfer or distribution of the Subco Shares, Amalco would avoid the significant XXXXXXXXXX and XXXXXXXXXX taxes described in paragraph 43 hereof, since there is no deemed disposition of the Subco Shares for XXXXXXXXXX and XXXXXXXXXX tax purposes.

49. The Bump is intended to step-up the cost of the Subco Shares so as to minimize Canadian taxes upon the Continuation.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Additional Information, Proposed Transactions and Purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we rule as follows, in reliance on such statements:

A. Provided that subsection 212.3(9) has not applied in respect of any reduction of the paid-up capital in respect of a class of the capital stock of Amalco or Parent, pursuant to subsection 219.1(4) and for purposes of the tax described in subsection 219.1(1), the Continuation will give rise to a paid-up capital reinstatement in respect of Amalco's shares that is equal to the lesser of: (i) the aggregate of the fair market value of the shares of Subco 1 and Subco 2 immediately before the emigration time and (ii) the aggregate of the paid-up capital reduction in respect of Parent's (subsequently Amalco’s) shares resulting from the application of paragraph 212.3(7)(c) and the paid-up capital reduction in respect of Parent’s (subsequently Amalco’s) shares resulting from the application of paragraph 212.3(2)(b) in connection with the share exchange described in paragraph 23.

B. The provisions of subsections 87(11) and 88(1) will apply to the Amalgamation such that, for purposes of the Act, the cost, pursuant to paragraphs 88(1)(c) and (d), to Amalco of each property of Target that did not constitute ineligible property that Target owned without interruption at and since the time Parent last acquired control of Target and that became property of Amalco on the Amalgamation, will be deemed to be the amount deemed by paragraph 88(1)(a) to be the proceeds of disposition of the property to Target, plus:

(a) subject to the provisions of subparagraphs 88(1)(d)(ii), (ii.1) and (iii),

(b) provided that no such property acquired by Amalco on the Amalgamation, or “any property acquired by any person in substitution therefor” (within the meaning of that phrase for the purposes of clause 88(1)(c)(vi)(B)) is acquired by any person described in subclause 88(1)(c)(vi)(B)(I), (II) or (III) (on the assumption that the “subsidiary” referred to in those subclauses is Target and the “parent” is Parent), as part of a series of transactions or events that includes the Amalgamation, and

(c) on the assumption that such property is capital property, but not depreciable property,

such portion of the amount, if any, by which:

(d) the aggregate adjusted cost base to Parent of each of its Target shares immediately before the Amalgamation,

exceeds

(e) the aggregate amount determined under subparagraphs 88(1)(d)(i) and (i.1),

as is designated by Amalco under paragraph 88(1)(d) in respect of the property in its return of income under Part I for the taxation year in which the Amalgamation occurred.

For greater certainty, the Continuation will not, in and by itself, cause the Subco Shares to be ineligible property for purposes of subparagraph 88(1)(c)(vi).

C. Subject to the caveat below, the provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine any of the tax consequences confirmed in the rulings given herein.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R7 and are binding on the CRA provided that the Proposed Transactions above are completed before XXXXXXXXXX.

Caveats

• Nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the Rulings given above and, in particular, without limiting the generality of the foregoing, in respect of: any income tax considerations associated with the transfer or issuance of shares or the transfer of property or any of the intermediary transaction steps which give rise to the final proposed structure;
• the application of subsection 245(2) in respect of the creation of the cross-border paid-up capital as a result of the incorporation of Parent for the purposes of the acquisition of Target;
• the fair market value or adjusted cost base of any property or shares, or the paid-up capital of any shares referred to herein, or any other tax attribute of any corporation referred to herein;
• the representations concerning the arm’s length nature of the dealings between the relevant parties in the transactions described herein;
• the residency of Amalco;
• the characterization of Partnership 1 or Partnership 2 as partnerships for purposes of the Act; or
• the characterization of any property described herein to the holder thereof.

For greater certainty, the CRA makes no comment as to whether any acquisition, by any of the investors (other than the Forco Group), of partnership interests in Partnership 1 would or would not result in the application of subparagraph 88(1)(c)(vi).

Yours truly,

XXXXXXXXXX
For Director
International Division
Income Tax Rulings Directorate