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: If a public corporation wishes to elect not to be a public corporation and, at the time of the election, its insiders do not own shares of a class that was publicly listed at any time after the corporation last became a public corporation, can it satisfy Regulation 4800(2)(a)?
Position: Yes, in the circumstances considered in this ruling.
Reasons: The circumstances of this corporation are substantially similar to those in respect of which a favorable ruling was given in Document 2015-0577141R3, following the liberal interpretation first taken in Document 2000-0004783.
XXXXXXXXXX 2018-075253
XXXXXXXXXX, 2018
Dear XXXXXXXXXX:
Re: XXXXXXXXXX (the “Applicants”)
Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX seeking an advance income tax ruling on behalf of the Applicants. We also acknowledge the additional information provided in our various other communications in respect of this matter. The information provided in such communications form part of this letter only to the extent described herein.
The Applicants for the advance income tax ruling are:
XXXXXXXXXX (herein also defined as “Pubco”) whose XXXXXXXXXX; its address is XXXXXXXXXX; its Tax Services Office is in XXXXXXXXXX and its Tax Centre is XXXXXXXXXX.
XXXXXXXXXX (herein also defined as “Subco”) whose XXXXXXXXXX; its address is XXXXXXXXXX; its Tax Services Office is in XXXXXXXXXX and its Tax Centre is XXXXXXXXXX.
We understand that to the best of your knowledge and that of each of the Applicants none of the issues involved in this advance income tax ruling:
(a) is in a previously filed tax return of an Applicant or person related to an Applicant;
(b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of an Applicant or a person related to an Applicant;
(c) is under objection by an Applicant or a person related to an Applicant;
(d) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(e) is the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate of the CRA in connection with an Applicant or a person related to an Applicant.
To the best of the knowledge of each of the Applicants, the Subject Transactions have not had, and will not have, any impact on the outstanding tax liabilities, if any, of any of the Applicants.
DEFINITIONS
In this letter, unless otherwise expressly stated, the terms set forth below have the meanings specified (and the singular shall be read as plural and vice versa, and words importing any gender or the neuter include all genders and the neuter, all as the circumstances require).
“XXXXXXXXXX Amalgamation” means the amalgamation of Pubco Predecessor 1 and Pubco Predecessor 2 on XXXXXXXXXX under the BC1 to form Pubco.
“ACB” means “adjusted cost base” as that term is defined in section 54.
“Act” means the Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended to the date of this letter and, unless otherwise indicated, all statutory references in this letter are to the Act.
“Applicants” means Pubco and Subco and “Applicant” refers to any one of them.
“Amalco” means the corporation to be formed upon the amalgamation of Pubco and Subco pursuant to the Plan of Arrangement.
“BC1” means the XXXXXXXXXX (as amended).
“BC2” means the XXXXXXXXXX (as amended).
“BN” means the “business number” as that term is defined in subsection 248(1).
“CCPC” means a “Canadian-controlled private corporation” as that term is defined in subsection 125(7).
“CRA” means the Canada Revenue Agency.
“Designated stock exchange” has the meaning assigned by subsection 248(1).
“Designated stock exchange in Canada” means a designated stock exchange located in Canada for which a designation under section 262 is in effect.
“Effective Date” means XXXXXXXXXX.
“Election” means an election in prescribed manner not to be a public corporation pursuant to subparagraph (c)(i) of the definition of “public corporation” in subsection 89(1).
“Election Date” means the date the Election will be filed and the effective date at which Pubco will cease to be a public corporation.
“FMV” means “fair market value”, which refers to the amount, expressed in money terms, that is the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm's length and under no compulsion to act and contracting for a taxable purchase and sale, expressed in terms of cash.
“FS1” means XXXXXXXXXX, an individual and non-resident of Canada for purposes of the Act.
“FS2” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX. FS2 is a non-resident of Canada for purposes of the Act.
“FS3” means XXXXXXXXXX, an individual and non-resident of Canada for purposes of the Act.
“FS4” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX. FS4 is a non-resident of Canada for purposes of the Act.
“FS5” means XXXXXXXXXX, an individual and non-resident of Canada for purposes of the Act.
“FS6” means XXXXXXXXXX, an individual and non-resident of Canada for purposes of the Act.
“FS7” means XXXXXXXXXX, an individual and non-resident of Canada for purposes of the Act.
“paid-up capital” has the meaning assigned to that term in subsection 89(1).
“Paragraph” means a numbered or lettered paragraph of this letter.
“Plan of Arrangement” means the plan of arrangement referred to in the Order of the Supreme Court of XXXXXXXXXX dated XXXXXXXXXX.
“prescribed labour-sponsored venture capital corporation” means a corporation described in section 6701 of the Regulations.
“Pubco” means the Applicant “XXXXXXXXXX”, a corporation formed upon the XXXXXXXXXX Amalgamation.
“Pubco Predecessor 1” means XXXXXXXXXX, a predecessor corporation of Pubco.
“Pubco Predecessor 1 Trading Shares” means the common shares of Pubco Predecessor 1 that were listed on the XXXXXXXXXX prior to the XXXXXXXXXX Amalgamation.
“Pubco Predecessor 2” means XXXXXXXXXX, a predecessor corporation of Pubco.
XXXXXXXXXX
“public corporation” has the meaning assigned by subsection 89(1).
“Regulation” and “Regulations” is a reference to the Income Tax Regulations.
“series of transactions or events” has the meaning assigned by subsection 248(10).
“Subco” means the Applicant “XXXXXXXXXX”
“Subco Class B Share” means a Class B share without par value in the share capital of Subco, having all the same rights, privileges, restrictions and conditions as the Subco common shares except that the holders of such shares have no right to vote at any meeting of the shareholders of Subco except only as expressly provided in the BC2.
“Subco Minority Share” means each common share of Subco held by the Subco Minority Shareholders.
“Subco Minority Shareholders” means collectively FS2, FS3, FS4, FS5, FS6 and FS7.
XXXXXXXXXX
“Subject Transactions” means the transactions described in Paragraphs 19 to 22.
“subsidiary wholly-owned corporation” has the meaning assigned by subsection 248(1).
“taxable Canadian corporation” has the meaning assigned by subsections 89(1) and 248(1).
“XXXXXXXXXX Agreement” means the agreement described in Paragraph 13.
“XXXXXXXXXX” means XXXXXXXXXX, a designated stock exchange pursuant to subsection 262(4).
FACTS
The relevant facts are set forth below.
1. Pubco Predecessor 1 was a corporation formed by an amalgamation under the BC1 on XXXXXXXXXX. Pubco Predecessor 1 was a taxable Canadian corporation and a public corporation. The only issued and outstanding shares of Pubco Predecessor 1 were common shares that became listed on the XXXXXXXXXX.
2. Pubco Predecessor 2 was a corporation incorporated under the BC1 on XXXXXXXXXX. It was a taxable Canadian corporation for the purposes of the Act.
3. Pubco is a corporation that was continued under the BC2 on XXXXXXXXXX and was, since then, governed by the laws of XXXXXXXXXX. At all times material hereto, Pubco was a taxable Canadian corporation and a public corporation.
4. None of Pubco Predecessor 1, Pubco Predecessor 2 or Pubco has ever been a prescribed labour-sponsored venture capital corporation.
The XXXXXXXXXX Amalgamation
5. On XXXXXXXXXX, Pubco Predecessor 1 and Pubco Predecessor 2 were amalgamated under the BC1 to form Pubco (the “XXXXXXXXXX Amalgamation”).
6. Immediately prior to the XXXXXXXXXX Amalgamation, approximately XXXXXXXXXX% of the Pubco Predecessor 1 Trading Shares then issued and outstanding and listed on the XXXXXXXXXX were held by Pubco Predecessor 2 with the remaining shares held by third party minority shareholders.
7. Immediately prior to the XXXXXXXXXX Amalgamation, the only issued and outstanding shares in the share capital of Pubco Predecessor 2 were common shares. No shares in the share capital of Pubco Predecessor 2 had ever been listed on a Designated stock exchange in Canada.
8. As a result of the XXXXXXXXXX Amalgamation:
(a) all of the Pubco Predecessor 1 Trading Shares held by Pubco Predecessor 2 were cancelled without any repayment of capital in respect thereof;
(b) each Pubco Predecessor 1 Trading Share held by a third party minority shareholder referred to in Paragraph 6 was converted into one issued and fully paid Class A preferred share of Pubco;
(c) each Pubco Predecessor 2 common share was converted into one issued and fully paid common share of Pubco; and
(d) Pubco became the XXXXXXXXXX of Pubco Predecessor 1 and Pubco Predecessor 2 as such existed immediately prior to the XXXXXXXXXX Amalgamation.
Because Pubco Predecessor 1 was not a subsidiary wholly-owned corporation of Pubco Predecessor 2, the amalgamation was not a vertical amalgamation referred to in subsection 87(2.11).
9. As Pubco succeeded Pubco Predecessor 1 by reason of the XXXXXXXXXX Amalgamation, the Pubco Predecessor 1 Trading Shares were delisted from the XXXXXXXXXX shortly after that time.
10. Shortly after the XXXXXXXXXX Amalgamation, the Class A preferred shares of Pubco referred to in Paragraph 8(b) were redeemed, leaving as the only shareholders of Pubco the persons referred to in Paragraph 8(c), being those who had held the Pubco Predecessor 2 common shares immediately before the XXXXXXXXXX Amalgamation.
11. At no time subsequent to the XXXXXXXXXX Amalgamation was any class of shares in the share capital stock of Pubco qualified for distribution to the public, as described in Regulation 4800(2)(c), or listed on a Designated stock exchange in Canada. Pubco did not file an election to be a public corporation pursuant to subparagraph (b)(i) of the definition of “public corporation” in subsection 89(1). Nevertheless, because Pubco Predecessor 1 was a public corporation immediately before the XXXXXXXXXX Amalgamation, pursuant to paragraph 87(2)(ii) Pubco was deemed to be a public corporation at the commencement of its first taxation year and, pursuant to paragraph (c) of the definition of “public corporation” in subsection 89(1), it has continued to be a public corporation since that time.
The Plan of Arrangement
12. Pubco was previously engaged in XXXXXXXXXX. Its current strategy was focused on furthering its investment in Subco. Pubco is engaged in XXXXXXXXXX to those of Subco (see Paragraphs 13 through 15 below) and, as a qualified operator, Pubco had recently acquired XXXXXXXXXX in which the Subco XXXXXXXXXX was deployed and, through inter-company arrangements, provided services that Subco would otherwise have had to obtain from third parties.
13. On XXXXXXXXXX Pubco entered into an agreement with a third party for the XXXXXXXXXX (the “XXXXXXXXXX Agreement”).
14. Subco was incorporated on XXXXXXXXXX under the BC2 as a subsidiary wholly-owned corporation of Pubco for the purpose of acquiring the rights of Pubco under the XXXXXXXXXX Agreement. At all times material hereto, Subco was a taxable Canadian corporation that was neither a private corporation nor a public corporation for the purposes of the Act.
15. On XXXXXXXXXX, Pubco transferred all of its rights, title and interest in the XXXXXXXXXX Agreement, together with other related property, to Subco in consideration for the issuance of common shares of Subco.
16. At all times material hereto following the transfer of property described in Paragraph 15, Pubco’s only material assets, aside from its ownership of Subco shares, were cash balances and certain receivables in an amount estimated to be approximately equal to Pubco’s current and future payment obligations.
17. Between XXXXXXXXXX and XXXXXXXXXX Subco raised funds for the development of the XXXXXXXXXX by means of the issuance of additional common shares to the Subco Minority Shareholders.
18. On XXXXXXXXXX, Pubco and Subco filed an interim application with the Supreme Court of XXXXXXXXXX in respect of the Plan of Arrangement to approve, inter alia, the amalgamation of Pubco and Subco.
SUBJECT TRANSACTIONS
Following the receipt by the CRA of the request of the Applicants for an advance income tax ruling but prior to the date of this letter the following transactions that had been proposed to take place were undertaken and executed at the times and in the manner set forth below, including the filing of the election described in Paragraph 20.
19. On XXXXXXXXXX, the Applicants obtained an order of the Supreme Court of XXXXXXXXXX approving a Plan of Arrangement that provided for a series of the transactions to be completed sequentially that ended with the amalgamation described in Paragraph 22.
20. On XXXXXXXXXX, being a time prior to the Effective Date, Pubco filed an election in prescribed manner not to be a public corporation pursuant to subparagraph (c)(i) of the definition of “public corporation” in subsection 89(1) (the “Election”).
21. Immediately before the amalgamation of Pubco and Subco on the Effective Date, the issued and outstanding shareholdings in the share capital of Pubco and Subco were as follows:
(a) in Pubco:
Shareholder Common Shares
FS1 XXXXXX (XXXXXX%) XXXXXX
FS2 XXXXXX (XXXXXX%)
(b) in Subco:
Shareholder Common Shares Class B Shares
Pubco XXXXXX XXXXXX
Subco Minority XXXXXX
Shareholders
22. At XXXXXXXXXX on the Effective Date, Pubco and Subco amalgamated to form Amalco pursuant to the Plan of Arrangement and in the manner described in subsection 87(1) of the Act, whereby:
(a) all of the assets of Pubco and Subco immediately before the amalgamation (except amounts receivable between Pubco and Subco and all shares of Subco held by Pubco) became property of Amalco by virtue of the merger;
(b) all of the liabilities of Pubco and Subco immediately before the amalgamation (except amounts payable between Pubco and Subco) became liabilities of Amalco by virtue of the merger;
(c) all of the shareholders (except for Pubco), who owned shares of the share capital stock of Pubco and Subco immediately before the merger, received shares of the capital stock of Amalco because of the merger;
(d) each Pubco common share outstanding immediately before the amalgamation was continued as a fully paid and non-assessable Amalco common share;
(e) each Subco Class B share outstanding immediately before the amalgamation was converted into XXXXXXXXXX fully paid and non-assessable Amalco common shares;
(f) XXXXXXXXXX; and
(g) the stated capital account for the Amalco common shares was comprised of: (i) the full amount of the stated capital of the Pubco common shares immediately before the amalgamation, which was retained as the stated capital account maintained for the Amalco common shares; plus (ii) the full amount of the stated capital of the Subco Class B shares immediately before the amalgamation.
23. Immediately following the amalgamation described in Paragraph 22, Amalco was a taxable Canadian corporation that, because it was controlled by persons who were not residents of Canada, was not a CCPC.
24. Amalco may distribute its paid-up capital at some time in the future.
PURPOSES OF THE SUBJECT TRANSACTIONS
The purpose of the Subject Transactions set out in Paragraphs 19 to 22 was to simplify the corporate structure of Pubco and Subco and eliminate significant commercial inefficiencies and related costs resulting from the separate legal existence of Pubco and Subco, while preserving the relative equity ownership interests of the shareholders.
The purpose of the Election is to ensure that Amalco can return capital to its shareholders without being subject to the application of subsection 84(4.1), although such distributions are not currently contemplated. If Subco did not amalgamate with Pubco, the shareholders of Subco would be able to receive distributions of paid-up capital from Subco without such distributions being deemed to be a dividend. However, upon amalgamation, if the Election is not permitted, such distributions by Amalco would be deemed to be a dividend under subsection 84(4.1) since Amalco would be deemed, by virtue of paragraph 87(2)(ii), to be a public corporation at its commencement.
Furthermore, if Amalco continues to be a public corporation pursuant to the Act, attracting new investment will be challenging since such investors may not be able to receive tax-free distributions of their capital contributions.
RULINGS
Provided the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, transactions, additional information and purposes of the Subject Transactions, and provided that the Subject Transactions were completed in the manner described above, we confirm the following:
A. Pubco will cease to be a public corporation at the time it filed the election described in Paragraph 20, in prescribed manner, not to be a public corporation pursuant to subparagraph (c)(i) of the definition of “public corporation” under subsection 89(1).
B. Paragraph 87(2)(ii) will not apply to deem Amalco to be a public corporation at the commencement of its first taxation year.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R8 issued on November 1, 2018, and are binding on the CRA.
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.
Unless otherwise confirmed herein, nothing in the Rulings should be construed as implying that the CRA has confirmed, reviewed or made any determination, or accepted any method for the determination in respect of:
1. the stated capital or paid-up capital of any share, or the ACB or FMV of any property, referred to herein;
2. any other tax account of any corporation referred to herein;
3. the characterization of any property described herein to the holder thereof;
4. any other tax consequences relating to the facts, transactions or any transaction or event taking place either prior to the Subject Transactions or subsequent to the Subject Transactions, whether described in this letter or not, other than those specifically described in the Rulings, including whether any of the Subject Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
Yours truly,
XXXXXXXXXX
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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