2020 Ruling 2019-0817051R3 - Reorganization

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: (i) Whether amounts could be added to paid-up capital as a result of the described transactions; (ii) whether GAAR should apply to deny the increases in paid-up capital.

Position: See below.

Reasons: See below.

XXXXXXXXXX									2019-081705

XXXXXXXXXX, 2020

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information provided in your letters and in various email correspondence as well as information provided in our telephone conversations (XXXXXXXXXX).

PRELIMINARY MATTERS

To the best of your knowledge, and that of the responsible officers of the above-noted taxpayer, none of the proposed transactions or issues involved in this ruling request are the same as or substantially similar to transactions or issues that are:

(a) in a previously filed tax return of the above-noted taxpayer or a related person and:

i. being considered by the CRA in connection with such return;

ii. under objection by the above-noted taxpayer or a related person; or

iii. the subject of a current or completed court process involving the above-noted taxpayer or a related person; or

(b) the subject of a ruling request previously considered by the Income Tax Rulings Directorate in relation to the taxpayer or a related person.

Unless otherwise stated, all references herein to a part, section, subsection, paragraph, subparagraph, clause or subclause is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof (the “Act”), or the Income Tax Regulations, C.R.C., c.945 (the “Regulations”), as appropriate, and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

In this ruling application, unless otherwise specified, the following terms have the meanings specified below:

“adjusted cost base” or “ACB” has the meaning assigned by section 54 and subsection 248(1);
“Amalco 1” means the corporation formed on the vertical, short-form amalgamation of Canco 7 and Canco 1 described in Paragraph 33;

“Amalco 2” means the corporation formed on the vertical, short-form amalgamation of Amalco 1 and Canco 2 described in Paragraph 34;

“Arrangement” means the plan of arrangement of Parent Amalco pursuant to XXXXXXXXXX of Corporate Law 2 effective at XXXXXXXXXX, described in Paragraphs 41 to 43;

“Canco 1” means XXXXXXXXXX, a corporation formed under Corporate Law 3;

“Canco 2” means XXXXXXXXXX, a corporation formed under Corporate Law 3;

“Canco 3” means XXXXXXXXXX, a corporation formed under Corporate Law 1;

“Canco 4” means XXXXXXXXXX, a corporation formed under Corporate Law 3;

“Canco 5” means XXXXXXXXXX, a corporation formed under Corporate Law 3;

“Canco 6” means XXXXXXXXXX, a corporation formed under Corporate Law 2;

“Canco 7” means XXXXXXXXXX, a corporation formed under Corporate Law 3;

“Canco 8” means XXXXXXXXXX, a corporation formed under Corporate Law 3;

“Canco 9” means XXXXXXXXXX, a corporation formed under Corporate Law 2;

“Canco 10” means XXXXXXXXXX, a corporation formed under Corporate Law 2;

“Canco 10 Note” means the demand promissory note evidencing Parent Amalco’s debt to Canco 10 in the principal amount of XXXXXXXXXX$XXXXXXXXXX, bearing interest at XXXXXXXXXX%, and as described in Paragraph 51;

“Canco 11” means XXXXXXXXXX, a corporation formed under Corporate Law 3;

“Canco 12” means XXXXXXXXXX, a corporation formed under Corporate Law 3;

“Canco 13” means XXXXXXXXXX, a corporation formed under Corporate Law 3;

“Class A Preferred Shares” have the meaning given in Paragraph 52(a)(i);

“Class A Redemption Price” means the estimated paid-up capital of all of the issued shares of Corporation immediately prior to implementing the Recently Completed Transactions, being $XXXXXXXXXX;

“Class B Preferred Shares” have the meaning given in Paragraph 52(a)(ii);

“Class B Redemption Price” means the estimated total FMV of Corporation’s issued and outstanding shares immediately prior to implementing the Recently Completed Transactions, less the Class A Redemption Price, and less $XXXXXXXXXX (subject to a price adjustment clause), being $XXXXXXXXXX;

“Class C Preferred Shares” have the meaning given in Paragraph 52(a)(iii);

“Class C Transferred Assets” are the assets transferred by Parent Amalco to Corporation referred to in paragraph 54;

“Controlled foreign affiliate” has the meaning assigned in subsection 95(1);

“Corporate Law 1” means the XXXXXXXXXX;

“Corporate Law 2” means the XXXXXXXXXX;

“Corporate Law 3” means the XXXXXXXXXX, as amended;

“Corporation” means XXXXXXXXXX, a corporation formed under Corporate Law 1;

“Corporation Amalco” means the corporation formed on the vertical, short-form amalgamation of Corporation, Canco 3 and Canco 6 described in Paragraph 60;

“CRA” means the Canada Revenue Agency;

“Excess Cash Note” means the promissory note evidencing Parent Amalco’s debt to Corporation in the initial principal amount of $XXXXXXXXXX, due XXXXXXXXXX and bearing interest at XXXXXXXXXX% as described in Paragraph 59.1;

“FMV” means “fair market value” or more specifically the highest price available in an open and unrestricted market, between informed prudent parties, acting at arm’s length and with no compulsion to act, expressed in terms of money or money’s worth;

“F/X Loans” means certain loans owing to Canco 8 by various controlled foreign affiliates of Parent in the aggregate principal amount of XXXXXXXXXX;

“Forcos” means XXXXXXXXXX;

“Foreign Parent” means XXXXXXXXXX a corporation formed under XXXXXXXXXX law;

“loss restriction event” has the meaning assigned by section 251.2;

“NIB Note” means the non-interest bearing, demand promissory note with a principal amount equal to the Class B Redemption Price issued by Corporation to Parent Amalco as described in Paragraph 54;

“Note Balance” means the total of all principal and interest owing under the Canco 10 Note from time to time;

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

“Paragraph” means a numbered paragraph in this letter;

“Parent” means XXXXXXXXXX, a corporation formed under Corporate Law 2 until the completion of the transaction described in Paragraph 35;

“Parent Amalco” means the corporation formed on the vertical, short-form amalgamation of Parent and Amalco 2, described in Paragraph 35;

“Partnership” means the XXXXXXXXXX, a general partnership governed by XXXXXXXXXX law;

“Pre-Closing Reorganization” means the transactions described in Paragraphs 28 to 40;

“Preferred Shares” means XXXXXXXXXX Series 1 Preferred Shares of the capital of Corporation, having a redemption price of $XXXXXXXXXX per share;

“Project 1” means the XXXXXXXXXX;

“Project 2” means the XXXXXXXXXX;

“Project 3” means the XXXXXXXXXX;

“Project 4” means the XXXXXXXXXX;

“Project 5” means the XXXXXXXXXX;

“Project 6” means the XXXXXXXXXX;

“Proposed Transactions” means the transactions described in the Paragraphs 61 to 63;

“Recently Completed Transactions” means the transactions described in Paragraphs 51 to 60.4;

“Royalty” means the XXXXXXXXXX% net smelter returns royalty in respect of Project 4; and

“TCC” means a “taxable Canadian corporation” as defined under subsection 89(1).

FACTS

General Background

The Recently Completed Transactions, described below, follow from the acquisition of all of the shares of Parent Amalco by Foreign Parent pursuant to the Arrangement that was effected on XXXXXXXXXX and the Pre-Closing Reorganization of Parent Amalco’s subsidiary group that was completed in the days immediately prior to the Arrangement.

Relevant Parties

The following describes the parties that are relevant to the Recently Completed Transactions as they existed prior to the Arrangement and the Pre-Closing Reorganization:

1. Foreign Parent is a non-resident of Canada for the purposes of the Act, and is a resident of XXXXXXXXXX for the purposes of the XXXXXXXXXX. Shares of Foreign Parent’s common stock are listed on the XXXXXXXXXX.

2. Parent was a TCC. Its common shares were listed on the XXXXXXXXXX. The paid-up capital of Parent’s common shares was approximately $XXXXXXXXXX. The paid-up capital of Parent’s common shares exceeded the FMV of Parent’s assets, net of its liabilities by approximately $XXXXXXXXXX.

3. Canco 7 was a TCC, all of the shares of which were owned by Parent.

4. Canco 1 was a TCC, all of the shares of which were owned by Parent.

5. Canco 2 was a TCC, all of the shares of which were owned by Canco1. Canco 2 owned shares of the Forcos. Each of the Forcos was a controlled foreign affiliate of Canco 2.

6. Corporation is a TCC and is not a public corporation for the purposes of the Act. From XXXXXXXXXX until the transaction described in Paragraph 29, Canco 1 owned the Preferred Shares. Otherwise, all of the issued and outstanding shares in the capital stock of Corporation were owned by Parent. The FMV of the shares of Corporation exceeded the paid-up capital of the shares of Corporation.

7. Canco 3 is a TCC. Its’ common shares were owned by Parent (as to XXXXXXXXXX%) and Corporation (as to XXXXXXXXXX%). Canco 3 had no other shares issued and outstanding. The FMV of the shares of Canco 3 held by Parent was less than the paid-up capital of those shares.

8. Canco 5 is a TCC, all of the shares of which were owned by Parent. The FMV of the shares of Canco 5 exceed the paid-up capital of the shares.

9. Canco 6 is a TCC, all of the shares of which were owned by Parent. The FMV of the shares of Canco 6 exceeded the paid-up capital of the shares.

10. Canco 4 is a TCC, all of the shares of which were owned by Parent. The FMV of the shares of Canco 4 is less than the paid-up capital of those shares.

11. Canco 8 is a TCC, all of the shares of which were owned by Parent. Canco 8 has elected to report its Canadian tax results in XXXXXXXXXX pursuant to section 261.

12. Canco 9 is a TCC, all of the shares of which were owned by Parent.

13. Canco 10 is a TCC, all of the shares of which were owned by Parent.

14. Canco 11 is a TCC. It was formed on XXXXXXXXXX. All of the issued and outstanding shares of Canco 11 were owned by Parent Amalco.

15. Canco 12 is a TCC. It was formed on XXXXXXXXXX. All of the issued and outstanding shares of Canco 12 were owned by Corporation.

16. Canco 13 is a TCC. It was formed on XXXXXXXXXX. All of the issued and outstanding shares of Canco 13 were owned by Corporation.

Operations

The following describes the principal operations of Parent and its subsidiaries prior to the Arrangement and the Pre-Closing Reorganization:

17. The Partnership owned and operated Project 1. Parent owned a XXXXXXXXXX% general partnership interest in the Partnership. Corporation owned the remaining XXXXXXXXXX% general partnership interest in the Partnership.

18. Parent owned a XXXXXXXXXX% co-ownership interest in Project 2. Corporation owned the remaining XXXXXXXXXX% co-ownership interest.

19. Parent owned a XXXXXXXXXX% co-ownership interest in Project 3. Corporation owned the remaining XXXXXXXXXX% co-ownership interest.

20. Canco 3 owned and operated Project 4.

21. Parent owned the Royalty. The Royalty constitutes Canadian resource property as defined in subsection 66(15).

22. Canco 5 owned and operated Project 5.

23. Canco 6 owned and operated Project 6.

24. Parent employed most of the head office staff and conducted a business common to most corporate head offices.

25. Canco 1, Canco 2 and Canco 7 were holding corporations that did not carry on an active business.

26. Canco 8 owned the F/X Loans.

27. Various corporations in the Parent group, including Parent (and after the amalgamation described in Paragraph 35 below, Parent Amalco), Corporation, Canco 1, Canco 2 and Canco 4, owned shares of controlled foreign affiliates. Through the Forcos, Canco 2 indirectly owned and operated XXXXXXXXXX. Through its controlled foreign affiliates, Corporation owned and operated XXXXXXXXXX. Through several other controlled foreign affiliates, Parent indirectly owned operating or development assets in XXXXXXXXXX.

Pre-Closing Reorganization

28. On XXXXXXXXXX, Canco 1, Canco 2 and Canco 7 continued under Corporate Law 2.

29. On XXXXXXXXXX, Corporation redeemed the Preferred Shares owned by Canco 1. Thereafter, all of the issued and outstanding shares of Corporation were owned by Parent and its successors.

30. On XXXXXXXXXX, Parent transferred to Canco 12 its registered (but not beneficial) title to all surface rights only fee simple property interests in respect of Project 1. A nominee agreement that constitutes a bare trust arrangement was executed to reflect this split between registered and beneficial ownership.

31. On XXXXXXXXXX, Parent transferred to Canco 13 its registered (but not beneficial) title to all surface rights only fee simple property interests in respect of Project 2. A nominee agreement that constitutes a bare trust arrangement was executed to reflect this split between registered and beneficial ownership.

32. On XXXXXXXXXX, Parent transferred all of the shares of Canco 1 to Canco 7 as a capital contribution.

33. On XXXXXXXXXX, Canco 7 and Canco 1 amalgamated, forming Amalco 1.

34. On XXXXXXXXXX, Amalco 1 and Canco 2 amalgamated, forming Amalco 2.

35. On XXXXXXXXXX, Parent and Amalco 2 amalgamated, forming Parent Amalco.

36. On XXXXXXXXXX, the following transactions were implemented in order to repay indebtedness owing by Parent Amalco to Canco 9:

(a) Canco 9 paid a dividend in the amount of $XXXXXXXXXX. Parent Amalco directed Canco 9 to retain this amount in partial satisfaction of its indebtedness owing to Canco 9.

(b) The stated capital of Canco 9’s common shares was increased by $XXXXXXXXXX.

(c) Canco 9 distributed $XXXXXXXXXX to Parent Amalco on a reduction of stated capital. Parent Amalco directed Canco 9 to retain this amount in full payment and satisfaction of its remaining indebtedness.

37. On XXXXXXXXXX, the following transactions were implemented in order to repay indebtedness owing between Parent Amalco and Corporation:

(a) Amounts owing between Parent Amalco and Corporation were mutually set off, with the result that Parent Amalco owed Corporation the net amount, being $XXXXXXXXXX.

(b) Corporation declared a dividend in the amount of $XXXXXXXXXX. Parent Amalco directed Corporation to retain that amount in full satisfaction of its indebtedness.

38. On XXXXXXXXXX, Parent Amalco subscribed for common shares of Canco 3, Canco 5 and Canco 6, and paid the subscription price by reducing to nil the amounts owing by those corporations to Parent Amalco.

39. On XXXXXXXXXX, Parent Amalco sold to Corporation beneficial ownership in respect of (i) its XXXXXXXXXX% co-ownership interest in Project 3, (ii) its XXXXXXXXXX% co-ownership interest in Project 2, and (iii) all but XXXXXXXXXX% of its general partnership interest in the Partnership. Nominee agreements that constitute bare trust arrangements were executed to support the split between registered and beneficial ownership. Corporation paid the purchase price for these assets by issuing common shares to Parent Amalco. Parent Amalco and Corporation intend to elect pursuant to subsection 85(1) in respect of this transaction.

40. At this point, the paid-up capital of Corporation’s issued shares exceeded the Class A Redemption Price, being $XXXXXXXXXX.

The Arrangement

41. On XXXXXXXXXX, a XXXXXXXXXX affiliate of Foreign Parent lent funds to Parent Amalco. This loan was used by Parent Amalco to repay its bank debt.

42. At XXXXXXXXXX, Foreign Parent directly acquired all of the issued and outstanding shares of Parent Amalco pursuant to the Arrangement by issuing consideration having a FMV of approximately $XXXXXXXXXX to the shareholders and option holders of Parent Amalco. At this point, the paid-up capital of the shares of Parent Amalco (approximately $XXXXXXXXXX) exceeded the FMV of the shares of Parent Amalco (approximately $XXXXXXXXXX) by approximately $XXXXXXXXXX.

43. On or after XXXXXXXXXX, pursuant to a tender offer, Foreign Parent acquired XXXXXXXXXX% of the publicly issued bonds of Parent Amalco. After this step, Parent Amalco was indebted to Foreign Parent in the amount of approximately $XXXXXXXXXX.

Post-Closing Transactions

44. Parent Amalco elected to report its Canadian tax results in XXXXXXXXXX pursuant to section 261 for all taxation years commencing after the loss restriction event arising from the Arrangement.

45. At XXXXXXXXXX, Canco 8 dissolved. On this dissolution, it distributed the F/X Loans to Parent Amalco.

46. On XXXXXXXXXX, Parent Amalco elected to cease to be a public corporation pursuant to subparagraph (c)(i) of the definition of “public corporation” contained in subsection 89(1).

47. On XXXXXXXXXX, Parent Amalco distributed the F/X Loans to Foreign Parent on a reduction of stated capital. Based on the prevailing exchange rate on that day, Parent Amalco reduced its paid-up capital by $XXXXXXXXXX. Thereafter, the paid-up capital of Parent Amalco’s common shares was approximately $XXXXXXXXXX.

48. On XXXXXXXXXX, Parent Amalco transferred its XXXXXXXXXX% general partnership interest in the Partnership to Canco 11. Canco 11 paid the purchase price for this transaction by issuing common shares to Parent Amalco. Parent Amalco and Canco 11 intend to elect pursuant to subsection 85(1).

49. On XXXXXXXXXX, Parent Amalco amended its articles to consolidate its issued and outstanding common shares into XXXXXXXXXX common shares.

50. On XXXXXXXXXX, Parent Amalco transferred certain assets that relate to its head office activities to Canco 10. As part of this transfer, all Parent Amalco employees became employees of Canco 10. Canco 10 paid the purchase price for this transaction by assuming certain liabilities of Parent Amalco and issuing common shares to Parent Amalco. Parent Amalco and Canco 10 intend to elect pursuant to subsection 85(1) in respect of this transaction.

50.1 Immediately following Paragraph 50, all of Corporation’s issued shares consisted of preferred shares and common shares owned by Parent Amalco. The preferred shares and the common shares have the following tax attributes:

Class FMV ACB PUC
Common Shares XXXXXX XXXXXX XXXXXX (subject to amount elected under section 85 in respect of transaction described in Paragraph 39)
Preferred Shares XXXXXX XXXXXX XXXXXX

50.2 Immediately following Paragraph 50, Corporation’s financial statements reflected the following amounts in respect of its Shareholders Equity:

Preferred share capital XXXXXXXXXX
Common share capital XXXXXXXXXX
Contributed Surplus XXXXXXXXXX
Retained Earnings XXXXXXXXXX
Shareholder’s Equity XXXXXXXXXX

RECENTLY COMPLETED TRANSACTIONS

51. On XXXXXXXXXX, Canco 10 effectively assumed the net negative balance of Parent Amalco’s treasury accounts. Specifically, Canco 10 withdrew XXXXXXXXXX from its XXXXXXXXXX treasury account. XXXXXXXXXX of such amount was loaned to Parent Amalco, which loan is evidenced by the Canco 10 Note, and the remainder of such amount was transferred in consideration of the transfer by Parent Amalco of $XXXXXXXXXX from its Canadian dollar treasury account to Canco 10’s Canadian dollar operating account, such being the Canadian dollar equivalent of the balance on the date of transfer.

52. Corporation filed articles of amendment, with the following effect:

(a) The following new classes of shares were authorized:

(i) an unlimited number of Class A Preferred Shares, being non-voting, redeemable/retractable for $XXXXXXXXXX per share, and bearing a non-cumulative fixed dividend of XXXXXXXXXX%;

(ii) an unlimited number of Class B Preferred Shares, being non-voting, redeemable/retractable for $XXXXXXXXXX per share (subject to a price adjustment clause), and bearing a non-cumulative fixed dividend of XXXXXXXXXX%;

(iii) an unlimited number of Class C Preferred Shares, being non-voting, redeemable/retractable for $XXXXXXXXXX per share (subject to a price adjustment clause), and bearing a non-cumulative fixed dividend of XXXXXXXXXX%; and

(iv) an unlimited number of new common shares; and

(b) the rights of holders of the Class A Preferred Shares rank in priority to the rights of the holders of Class B Preferred Shares, which rank in priority to the rights of holders of the Class C Preferred Shares, which rank in priority to the holders of the new common shares.

53. Pursuant to a capital reorganization agreement among Parent Amalco and Corporation, Parent Amalco exchanged all of its shares of Corporation into:

(a) XXXXXXXXXX Class A Preferred Shares that have an aggregate redemption price equal to the Class A Redemption Price, being $XXXXXXXXXX. Corporation’s board determined that an amount equal to the Class A Redemption Price was added to the stated capital of the Class A Preferred Shares so issued;

(b) XXXXXXXXXX Class B Preferred Shares that have an aggregate redemption price equal to the Class B Redemption Price, being $XXXXXXXXXX (subject to a price adjustment clause). Corporation’s board determined that $XXXXXXXXXX was added to the stated capital of the Class B Preferred Shares so issued; and

(c) XXXXXXXXXX new common share having a stated capital of $XXXXXXXXXX.

Immediately subsequent to the capital reorganization, the shares of Corporation (all of which were owned by Parent Amalco) had the following tax attributes:

Number and Class			      FMV	      ACB	      PUC
XXXXXX Class A Preferred Shares	XXXXXX	XXXXXX	XXXXXX
XXXXXX Class B Preferred Shares	XXXXXX	XXXXXX	XXXXXX
XXXXXX Common Shares			XXXXXX	XXXXXX	XXXXXX

53.1. Immediately following Paragraph 53, Corporation’s financial statements reflected the following amounts in respect of its Shareholders Equity:

Class A preferred share capital	XXXXXXXXXX
Class B preferred share capital	XXXXXXXXXX
Common share capital			XXXXXXXXXX
Contributed Surplus			XXXXXXXXXX
Retained Earnings			      XXXXXXXXXX
Shareholder’s Equity			XXXXXXXXXX

54. Corporation redeemed the Class B Preferred Shares and paid the Class B Redemption Price by issuing the NIB Note to Parent Amalco. The terms of the NIB Note included a price adjustment clause embedded in the Class B Redemption Price.

54.1 As a consequence of the transaction described in Paragraph 54 and for purposes of the financial statements of Corporation, an amount of $XXXXXXXXXXwas deducted from the amount of Corporation’s contributed surplus and an amount of $XXXXXXXXXX was added to the amount of Corporation’s deficit. Immediately following Paragraph 54, Corporation’s financial statements reflected the following amounts:

Note payable				      XXXXXXXXXX
Class A preferred share capital	      XXXXXXXXXX
Common share capital			      XXXXXXXXXX
Contributed surplus			      XXXXXXXXXX
Deficit					      XXXXXXXXXX
Shareholder’s Equity				XXXXXXXXXX
Shareholder’s Equity and Note payable	XXXXXXXXXX	

55. Parent Amalco subscribed for additional common shares of Corporation and paid the subscription price by tendering the NIB Note to Corporation. Corporation’s board determined that an amount equal to the Class B Redemption Price (as modified by a price adjustment clause that mirrors the price adjustment clause embedded in the Class B Redemption Price and the NIB Note) was added to the stated capital of the common shares.

Immediately subsequent to the subscription of additional common shares of Corporation by Parent Amalco, the shares of Corporation (all of which were owned by Parent Amalco) had the following tax attributes:

Number and Class					            FMV		      ACB		      PUC
XXXXXXXXXX Class A Preferred Shares			      XXXXXX		XXXXXX		XXXXXX
Common Shares (subject to price adjustment clause)	XXXXXX		XXXXXX		XXXXXX

56. Parent Amalco transferred the Royalty and all of the common shares of Canco 3, Canco 5, Canco 6 and Canco 11 to Corporation. Corporation paid the purchase price for this transaction by issuing Class C Preferred Shares having an aggregate redemption value equal to the estimated FMV of the transferred assets, being $1XXXXXXXXXX (and subject to a price adjustment clause) to Parent Amalco. Parent Amalco and Corporation intend to elect pursuant to subsection 85(1) in respect of this transaction. Corporation’s board determined that the amount added to the stated capital amount maintained for the Class C Preferred Shares was equal to the amount elected (or deemed to be elected) under subsection 85(1) in respect of the Class C Transferred Assets.

Immediately subsequent to the Class C transfer of assets by Parent Amalco to Corporation, the shares of Corporation (all of which were owned by Parent Amalco) had the following tax attributes:

Number and Class					            FMV		      ACB		      PUC
XXXXXXXXXX Class A Preferred Shares			      XXXXXX		XXXXXX		XXXXXX
XXXXXXXXXX Class C Preferred Shares			      XXXXXX		XXXXXX		XXXXXX
Common Shares (subject to price adjustment clause)	XXXXXX		XXXXXX		XXXXXX

56.1 For purposes of its financial statements, Corporation reflected the Class C transferred assets as having a cost of $XXXXXXXXXX, being Parent Amalco’s cost of these assets for its financial statement purposes. The excess (of the cost amount $XXXXXXXXXX) was credited to Corporation’s contributed surplus. Immediately following Paragraph 56, Corporation’s financial statements reflected the following Shareholder equity amounts:

Table 7

Share capital
		Class A preferred shares	XXXXXX
		Class C preferred shares 	XXXXXX
		Common shares			XXXXXX
		Total share capital		XXXXXX
Contributed surplus				XXXXXX
Deficit						XXXXXX
Net assets (book value)				XXXXXX

57. Pursuant to XXXXXXXXXX of Corporate Law 2 and the relevant provisions of XXXXXXXXXX law, Parent Amalco continued out from Corporate Law 2 and ceased to be governed by Corporate Law 2 and re-domesticated in XXXXXXXXXX and became a corporation governed by the laws of XXXXXXXXXX. We understand that, at this time, Parent Amalco ceased to be a resident of Canada and became a non-resident of Canada for the purposes of the Act and specifically, subsection 128.1(4) of the Act.

58. On XXXXXXXXXX, Partnership distributed its excess cash (XXXXXXXXXX$XXXXXXXXXX) to Corporation and Canco 11 (in amounts proportionate to their respective interest in the Partnership), which exceeded the Note Balance.

59. On XXXXXXXXXX, Canco 11 distributed the cash received by it in Paragraph 58 to Corporation by way of dividend.

59.1 On XXXXXXXXXX, Corporation loaned an amount, being $XXXXXXXXXX and evidenced by the Excess Cash Note, to Parent Amalco equal to the amount by which the amounts received by Corporation in Paragraph 58 and 59 exceed the Note Balance .

60. On XXXXXXXXXX, Corporation, Canco 3 and Canco 6 amalgamated, forming Corporation Amalco.

60.1 On XXXXXXXXXX, Corporation Amalco redeemed XXXXXXXXXX Class A Preferred Shares held by Parent Amalco for aggregate redemption proceeds of $XXXXXXXXXX.

Parent Amalco directed Corporation Amalco to retain the amount owed to it pursuant to such redemption in repayment of $XXXXXXXXXX of the amount owing under the Excess Cash Note.

60.2 On XXXXXXXXXX, Partnership sold Project 1 and all of the shares of Canco 12 in consideration for cash of $XXXXXXXXXX, subject to certain post-closing adjustments.

60.3 On XXXXXXXXXX, Partnership loaned the proceeds received in Paragraph 60.2 to Corporation Amalco pursuant to a non-interest bearing note due XXXXXXXXXX.

60.4 On XXXXXXXXXX, Corporation Amalco redeemed XXXXXXXXXX Class A Preferred Shares held by Parent Amalco in consideration for $XXXXXXXXXX, and used the amount it was loaned in Paragraph 60.3 to satisfy such redemption proceeds.

PROPOSED TRANSACTIONS

61. Corporation Amalco will reduce the stated capital of its common shares by an amount equal to the Note Balance of approximately $XXXXXXXXXX and will pay this amount to Parent Amalco as the sole holder of its common shares.

62. Parent Amalco will use the cash received by Corporation Amalco in Paragraph 61 to repay the Canco 10 Note.

63. The cash payments described in Paragraphs 61 and 62 will be effected by direction, such that Corporation Amalco will make a single cash payment in the amount of the Note Balance to Canco 10 in satisfaction of all such cash payments.

63.1 Corporation Amalco will reduce the stated capital account of its common shares by approximately $XXXXXXXXXX and will pay this amount in cash to Parent Amalco as the sole holder of its common shares.

ADDITIONAL INFORMATION

64. In filing Parent Amalco’s tax return for the taxation year ending on the loss restriction event that arose when the Arrangement became effective, Parent Amalco, (i) was required to write-down each of its capital properties having an accrued capital loss to the FMV of such capital property; and (ii) made a designation pursuant to paragraph 111(4)(e) electing to dispose of each of its capital properties with an accrued capital gain for proceeds equal to the FMV of such property.

The result of the loss restriction event and the designation pursuant to paragraph 111(4)(e) is that each capital property owned by Parent Amalco at that time was deemed to be disposed of for proceeds of disposition equal to each property’s FMV, and Parent Amalco was deemed to reacquire each such property at a cost equal to that same FMV. Accordingly, each such capital property has an adjusted cost base equal to its FMV immediately following the loss restriction event. Specifically, Parent Amalco’s adjusted cost base in respect of the shares of Corporation, Canco 3, Canco 4, Canco 5, Canco 6 and the Forcos is equal to the FMV of such properties immediately following the loss restriction event.

65. The adjusted cost base of Corporation’s interest in Partnership at the time of the distribution described in Paragraph 58 exceeded the amount of such distribution at such time.

PURPOSES OF THE RECENTLY COMPLETED TRANSACTIONS AND PROPOSED TRANSACTIONS

The transactions described in this Ruling Request are designed to facilitate the integration of Parent and its subsidiaries into the Foreign Parent global group.

66. The purpose of the transaction described in Paragraph 51 was to remove Parent Amalco from the Parent group treasury function prior to Parent Amalco ceasing to be a Canadian resident in Paragraph 57. No ruling is sought in respect of this transaction.

67. The specific purpose of the transactions described in Paragraphs 52 through 56 was to increase the paid-up capital of the shares of Corporation to the adjusted cost base of the shares. Once Parent Amalco ceased to be a Canadian resident in Paragraph 57, the Corporation’s shares were owned by a non-resident of Canada. Higher paid-up capital in respect of these now non-resident owned shares will facilitate future withholding tax free distributions pursuant to subsection 84(4), constitute paid-up capital which may be reduced pursuant to section 212.3, or constitute an “equity amount” as defined in subsection 18(5), thus permitting Corporation (and its successors, including Corporation Amalco) to borrow a greater amount of interest-bearing debt from specified non-residents before the limitations contained in subsection 18(4) would apply.

68. The specific purpose of the transaction described in Paragraph 57 was for Parent Amalco to become a tax resident of XXXXXXXXXX. It is more efficient from a XXXXXXXXXX tax perspective for Foreign Parent to own the shares of the Forcos in a corporation that has access to the benefits of the tax convention between XXXXXXXXXX Certain other controlled foreign affiliates also ceased to be owned by a Canadian resident as a consequence of this transaction. No ruling is sought in respect of this transaction.

69. The specific purpose of the transactions described in Paragraphs 58 and 59 is to remove cash from the Partnership, and the specific purpose of the transactions described in Paragraph 59.1 and 60.1 was to distribute a portion of this cash to Parent Amalco.

70. The specific purpose of the amalgamation of Corporation, Canco 3 and Canco 6 described in Paragraph 60 is to combine the income-producing assets and tax attributes of these three corporations. No tax ruling is sought in respect of this transaction.

70.1 The specific purpose of the transactions described in Paragraphs 60.3 and 60.4 was to distribute the proceeds from the sale of Project 1 and Canco 12 to Parent Amalco.

71. The specific purpose of the transactions described in Paragraphs 61 and 62 is to repay the Canco 10 Note.

72. The specific purpose of the transactions described in Paragraph 63.1 is to distribute cash from Corporation Amalco to Parent Amalco.

REPRESENTATIONS

The Corporation (and all of its successors) will not convert any amount of its contributed surplus described in Paragraph 56.1 into paid-up capital in respect of a class of shares of its capital stock.

In light of the particular accounting treatment and entries described in this letter and their unpredictable future fluctuation, the Corporation (and all of its successors) will not, without first obtaining a positive ruling from the CRA: include in calculating its “equity amount”, as defined in subsection 18(5), any amount in respect of its:

(a) retained earnings referred to in subparagraph 18(5)(a)(i), or

(b) contributed surplus referred to in subparagraph 18(5)(a)(ii);

RULINGS GIVEN

Provided that the above statements of Facts, Recently Completed Transactions, Proposed Transactions, Additional Information, Purposes of the Recently Completed Transactions and Proposed Transactions, and Representations are accurate and constitute a complete disclosure of all the relevant information, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A. An amount equal to the Class A Redemption Price, was added to the paid-up capital of the Class A Preferred Shares as a consequence of the transaction described in Paragraph 53.

B. An amount equal to the principal amount of the NIB Note, being the Class B Redemption Price, was added to the paid-up capital of the common shares of Corporation as a consequence of the transaction described in Paragraph 55.

C. Pursuant to subsection 85(2.1) and the definition of “paid-up capital” contained in subsection 89(1), an amount equal to the amount elected under subsection 85(1) in respect of the transaction described in Paragraph 56 was added to the paid-up capital of the Class C Preferred Shares issued in such transaction.

D. The transactions described in Paragraphs 61 and 63.1 will not result in Corporation Amalco being deemed to pay, or Parent Amalco being deemed to receive, a dividend pursuant to subsection 84(4).

E. Subsection 245(2) will not apply as a result of the Recently Completed Transactions and the Proposed Transactions, in and of themselves, to re-determine the tax consequences in the rulings given above.

These rulings are subject to the limitations and qualifications set out in Information Circular IC 70-6R10 dated September 29, 2020, and are binding on the CRA provided that the Proposed Transactions are completed no later than XXXXXXXXXX after the date of this letter. The above rulings are based on the law as it reads at the date of this letter and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

OTHER COMMENTS

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

(a) the paid-up capital of any share or the adjusted cost base or FMV of any share or property referred to herein; and

(b) the application of subsection 15(2.6) and any subsequent loans and transactions or repayments;

(c) any other tax consequence relating to the Facts, Recently Completed Transactions, Proposed Transactions, Additional Information or any transaction or event taking place either prior to the Recently Completed Transactions and the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, including, whether any of the Recently Completed Transactions and Proposed 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; and

(d) the application of subsection 245(2) to a tax benefit that, but for subsection 245(2), would result, directly or indirectly, from the accounting treatment and entries described in Paragraphs 54.1 and 56.1 or from a series of transactions that includes it.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purposes 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

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours Truly,

XXXXXXXXXX
Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch