2021 Ruling 2020-0875391R3 - Post-acquisition restructuring

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. Does subsection 212.1(4) apply to the Transactions? 2. Does paragraph 95(2)(c) apply to the Transactions? 3. Does subparagraph 15(1.5)(a)(i) apply to the Proposed Transactions?

Position: 1. Yes. 2. Yes. 3.Yes.

Reasons: 1. Based on the factual representations provided by the Taxpayer, the conditions for the application of subsection 212.1(4) will be met. 2. The conditions for the application of paragraph 95(2)(c) will be met. 3. The conditions for the application of subparagraph 15(1.5)(a)(i) will be met.

XXXXXXXXXX								2020-087539

XXXXXXXXXX, 2021

Dear Sirs:

Re: Advance Income Tax Ruling – XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge the additional information provided to us in your emails in connection with your request.

We understand that, to the best of your knowledge and that of the taxpayer, except to the extent described herein, none of the Transactions and/or issues in this letter are the same as or substantially similar to transactions and/or issues that are:

i. in a previously filed tax return of the taxpayer or a related person and:

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

b. under objection by the taxpayer or a related person; or

c. the subject of a current or completed court process involving the taxpayer or a related person; or

ii. the subject of a Ruling request previously considered by the Directorate.

Unless otherwise expressly stated, every reference herein to the “Act” or to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter. Every reference to “Regulations” is a reference to the Income Tax Regulations, CRC, c.945, as amended.

All terms used herein that are defined in the Act have the meaning given in such definition. All references to monetary amounts are in Canadian dollars, unless otherwise stated.

This Ruling is based solely on the facts, Transactions, and purposes of Transactions as described below.

DEFINITIONS

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Transactions will be referred to as follows:

“Acquisition” means the acquisition of Target by Bidco (funded in part by Pubco) for cash (no other form of consideration was paid);

“Acquisition Date” means XXXXXXXXXX, which is the date on which the Scheme became effective upon a copy of the Court order being delivered to the Registrar of Companies of Country 1;

“Acquisition Time” means XXXXXXXXXX on the Acquisition Date;

“adjusted cost base” has the meaning assigned in section 54;

“arm’s length” has the meaning assigned in subsection 251(1);

“Bidco” means XXXXXXXXXX, a new company established under the laws of Country 1;

“Canada Holdco” means XXXXXXXXXX, a new corporation formed under the laws of XXXXXXXXXX;

“Canada Holdco Note” means a convertible note, otherwise having the same or similar terms and conditions as the Internal Note, issued by Canada Holdco to the Taxpayer in consideration for the assumption of a portion of the Internal Note by the Taxpayer;

“Canada Holdco Preferred Shares” means the redeemable/retractable preferred shares issued by Canada Holdco on the conversion of the Canada Holdco Note, such shares having an aggregate redemption/retraction amount equal to the principal amount of the Canada Holdco Note and a dividend rate slightly exceeding the interest rate on the Internal Note;

“Canada Top Holdco” means XXXXXXXXXX, a corporation formed under the laws of Canada;

“Canada Top Holdco Note” means a note issued by Canada Top Holdco to the Taxpayer on the redemption of the Canada Top Holdco Preferred Shares and a return of capital to the Taxpayer, such note having a principal amount equal to the aggregate principal amount of the Demand Note and the Internal Note;

“Canada Top Holdco Preferred Shares” means the redeemable/retractable preferred shares issued by Canada Top Holdco to the Taxpayer on the transfer of the Canada Holdco Preferred Shares, such shares having a redemption/retraction amount equal to the redemption/retraction amount of the Canada Holdco Preferred Shares and a dividend rate that is the same as the dividend rate on the Canada Holdco Preferred Shares;

“Canadian corporation” has the meaning assigned in subsection 89(1);

“Canco 1” means XXXXXXXXXX, a corporation formed under the laws of Canada;

“Canco 1 Loans” means the interest-bearing loans owed by Canco 1 to Country 1 Finco having an aggregate principal amount of $XXXXXXXXXX that were outstanding as of the Acquisition Time;

“Canco 2” means XXXXXXXXXX, a corporation formed under the laws of Canada;

“Canco 2 Loans” means the interest-bearing loans owed by Canco 2 to Country 1 Finco having an aggregate principal amount of $XXXXXXXXXX that were outstanding as of the Acquisition Time;

“Country 1” means XXXXXXXXXX;

“Country 1 Finco” means XXXXXXXXXX, a company formed under the laws of Country 1;

“Country 1 Holdco” means XXXXXXXXXX, a company formed under the laws of Country 1;

“Country 1 Newco” means XXXXXXXXXX, a company established under the laws of Country 1;

“Country 1 Stock Exchange” means the XXXXXXXXXX;

“Country 1 Subco” means XXXXXXXXXX, a company formed under the laws of Country 1;

“Country 2” means XXXXXXXXXX;

“Country 2 Holdco” means XXXXXXXXXX, a company (XXXXXXXXXX) formed under the laws of Country 2;

“Country 2 Holdco Note” means a note issued by Country 2 Holdco to Country 1 Finco acknowledging a debt having a principal amount equal to approximately $XXXXXXXXXX as of the Acquisition Time;

“Country 2 Holdco Note 2” means a note issued by Country 2 Holdco to Country 2 Opco acknowledging a debt having a principal amount equal to approximately $XXXXXXXXXX as of the Acquisition Time;

“Country 2 Opco” means XXXXXXXXXX, a company (XXXXXXXXXX) formed under the laws of Country 2;

“Country 2 Stock Exchange” means XXXXXXXXXX;

“Country 3” means XXXXXXXXXX;

“Country 4” means XXXXXXXXXX;

“Country 5” means XXXXXXXXXX;

“CRA” means the Canada Revenue Agency;

“Demand Note” means an interest-bearing demand note having a principal amount of $XXXXXXXXXX initially issued by the Taxpayer to Country 1 Subco;

“Demerger” means the division of Country 2 Opco as described in Step 30 that will occur on or after XXXXXXXXXX and be governed by XXXXXXXXXX of Country 2;

“Demerger Time” means the time when the Demerger will take place;

“Demergerco 1” means XXXXXXXXXX, a limited liability company (XXXXXXXXXX) formed under the laws of Country 2 that is a wholly-owned subsidiary of Country 2 Holdco;

“Demergerco 2” means XXXXXXXXXX, a XXXXXXXXXX company XXXXXXXXXX in Country 2, that is a direct subsidiary of Pubco;

“excluded property” has the meaning assigned in subsection 95(1);

“FAPI” means “foreign accrual property income,” as that term is defined in subsection 95(1);

“Fair Market Value” refers to 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 money or money’s worth;

“Foreign Currency” means XXXXXXXXXX;

“Internal Note” means an interest-bearing demand note guaranteed by the Taxpayer and issued by Canada Holdco to Country 1 Subco in consideration for the transfer of the shares of JV Co in Step 15 of the Completed Transactions and having a principal amount equal to the aggregate Fair Market Value of such acquired shares;

“JV Co” means XXXXXXXXXX, a new limited liability company established under the laws of Country 2;

“JV Co 2” means XXXXXXXXXX, a new limited liability company established under the laws of Country 2;

“New Canada Holdco” means XXXXXXXXXX, a corporation established under the laws of Canada;

“Pubco” means XXXXXXXXXX formed under the laws of Country 2, XXXXXXXXXX;

“Scheme” means a Court-sanctioned scheme of arrangement under XXXXXXXXXX of Country 1 pursuant to which Bidco acquired all the issued and outstanding shares in the capital stock of Target;

“SPA” means a share purchase agreement entered into between Pubco and Canada Holdco on XXXXXXXXXX, pursuant to which Pubco agreed to acquire from Canada Holdco shares of JV Co immediately upon Canada Holdco becoming the legal holder of the shares of JV Co, conditional on the Acquisition having been completed;

“Step” refers to a numbered transaction step in this letter;

“Target” means XXXXXXXXXX, a public limited company formed under the laws of Country 1;

“Taxpayer” means XXXXXXXXXX;

“TCP” means taxable Canadian property, as that term is defined in subsection 248(1); and

“Transactions” means the transactions described in the Completed Transactions and Proposed Transactions sections of this letter.

FACTS

1. The Taxpayer is a public corporation and its common shares are listed and actively traded on the XXXXXXXXXX. The Taxpayer was incorporated in Canada and is a Canadian corporation.

2. The shares of the Taxpayer are widely-held and no particular person or group of persons controlled or will control the Taxpayer at the time of the Transactions.

3. No person held or will hold at the time of the Transactions, directly or indirectly, more than 15% of the outstanding shares of the Taxpayer and no non-resident person held or will hold at the time of the Transactions more than 10% of the outstanding shares of the Taxpayer. There was no (and there will not be) at the time of the Transactions aggregation of six or less shareholders of the Taxpayer that own, when their shareholdings are combined (and taking into account the deemed shareholdings pursuant to paragraph 212.1(3)(b)), more than 50% of the shares of the Taxpayer.

4. No non-resident person that does not deal at arm’s length with the Taxpayer held or will hold at the time of the Transactions or as part of a transaction or event or series of transactions or events that includes the Transactions, directly or indirectly, shares of the capital stock of the Taxpayer.

5. Canada Top Holdco is a Canadian corporation all of the shares of which are held by the Taxpayer.

6. The Target group was an XXXXXXXXXX, with strong positions in the XXXXXXXXXX of Country 1, Country 2, Country 3, Country 4, and Canada, together with XXXXXXXXXX in other countries, including Country 5. Prior to the Acquisition, Target’s shares were listed on the Country 1 Stock Exchange.

7. Target holds all of the issued and outstanding shares of Country 1 Holdco. Country 1 Holdco is a holding company that does not carry on any business operations or business activities.

8. Country 1 Holdco holds all of the issued and outstanding shares of Country 1 Finco.

9. Country 1 Finco holds all of the issued and outstanding shares of Country 1 Subco. Country 1 Subco is a holding company that does not carry on any business operations or business activities. Country 1 Subco became a controlled foreign affiliate of the Taxpayer as of the Acquisition Time and will remain a controlled foreign affiliate of the Taxpayer at the time of the Transactions.

10. Prior to the Acquisition Time, Country 1 Subco held all of the issued and outstanding shares of Canco 1. The shares of Canco 1 were not TCP at the time of the Completed Transactions.

11. Prior to the Acquisition Time, Canco 1 held all of the issued and outstanding shares of Canco 2. The shares of Canco 2 were not TCP at the time of the Completed Transactions.

12. Prior to the Acquisition Time, Country 1 Subco also held all of the issued and outstanding shares of Country 2 Holdco. The shares of Country 2 Holdco were capital property to Country 1 Subco. Country 2 Holdco is a holding company that does not carry on any business operations or business activities. Country 2 Holdco has only one class of shares issued and outstanding.

13. Country 2 Holdco holds all of the issued and outstanding shares of Country 2 Opco. Country 2 Opco has only one class of shares issued and outstanding. The shares of Country 2 Opco are excluded property of Country 2 Holdco.

14. Country 2 Opco holds a number of branches and subsidiaries in Country 2, Country 3, Country 4 and Country 5. The assets held by Country 2 Opco are excluded property under paragraphs (a) and (b) of the definition of excluded property in subsection 95(1).

15. Each of the Taxpayer, Canada Holdco, Target, Country 1 Holdco, Country 1 Finco, Country 1 Subco, Country 2 Holdco and Country 2 Opco has a XXXXXXXXXX taxation year-end.

16. Pubco and its subsidiaries have activities in Country 2, Country 3, and Country 4. Pubco is listed on the Country 2 Stock Exchange.

17. The Taxpayer deals at arm’s length with Pubco at the time of the Transactions.

18. Except for its indirect interests in Target through XXXXXXXXXX, with a total value of approximately XXXXXXXXXX, prior to the Acquisition, Pubco did not hold any interest in or right to subscribe for, or had borrowed or lent, any shares of Target or securities convertible or exchangeable into shares of Target.

COMPLETED TRANSACTIONS

A. Preliminary Steps

19. The following preliminary Steps occurred prior to the Acquisition Date:

Step 1. Canada Top Holdco established Canada Holdco. Pubco and Canada Holdco entered into the SPA.

Step 2. Canada Holdco established Bidco.

Step 3. Canada Holdco and Pubco established JV Co with nominal share capital. Canada Holdco and Pubco each held 50% of the common shares of JV Co upon incorporation.

Step 4. Canada Holdco and Pubco established JV Co 2 with nominal share capital. Canada Holdco and Pubco XXXXXXXXXX of the shares of JV Co 2 upon incorporation. JV Co 2 was established with two classes of shares (Class A and Class B) to facilitate an arrangement whereby, during the XXXXXXXXXX year, the Taxpayer (or its subsidiary that holds the JV Co 2 shares) and Pubco will each have XXXXXXXXXX% of the voting rights in respect of JV Co 2. After the XXXXXXXXXX following the Acquisition, the Taxpayer (or its subsidiary that holds the JV Co 2 shares) will increase its votes in JV Co 2 to XXXXXXXXXX% and Pubco will reduce them to XXXXXXXXXX%.

Step 5. The Taxpayer established New Canada Holdco.

Step 6. Bidco established Country 1 Newco. Country 1 Newco elected to use the Canadian dollar as its designated currency for Country 1 tax purposes and is a special purpose vehicle intended to manage foreign exchange exposure of the Country 1 group for Country 1 tax purposes. Bidco owns all issued and outstanding shares of Country 1 Newco. The Demand Note and the Internal Note transferred to Country 1 Newco in Step 22 and the cash from the payment of interest by the Taxpayer in Step 29(a) will be the only assets held by Country 1 Newco.

B. Funding of Bidco and the Acquisition

20. The following Steps occurred on, or shortly prior to, the Acquisition Date and in the sequence described below.

Step 7. The Taxpayer aggregated funds of approximately $XXXXXXXXXX, including funds that were committed to it at the announcement of the Acquisition, that were raised pursuant to a combination of common share, preferred share and debt issuance, as well as cash on hand.

Step 8. Bidco acquired all the issued and outstanding shares of Target for cash consideration of approximately $XXXXXXXXXX as provided for in the Scheme making Bidco the beneficial owner of all such shares as of the Acquisition Time. Under Country 1 law, Bidco had up to XXXXXXXXXX days after the Acquisition Date to pay the acquisition consideration to the shareholders of Target. Target was re-registered as a private limited company under the XXXXXXXXXX of Country 1 prior to the Acquisition Date.

Step 9. Pursuant to the SPA, Pubco remitted to Canada Holdco approximately $XXXXXXXXXX that were applied against the acquisition of the shares of JV Co for Fair Market Value in Step 16.

Step 10. Bidco was capitalized as follows:

a. The Taxpayer subscribed for common shares of Canada Top Holdco for approximately $XXXXXXXXXX and the amount of the subscription price was added to the legal stated capital of the shares of Canada Top Holdco;

b. Canada Top Holdco subscribed for common shares of Canada Holdco for approximately $XXXXXXXXXX and the amount of the subscription price was added to the legal stated capital of the shares of Canada Holdco; and

c. Canada Holdco used the funds received in Step 10(b) and Step 9 to subscribe for common shares of Bidco for approximately $XXXXXXXXXX and the amount of the subscription price was added to the legal stated capital of the shares of Bidco.

Additional funds were contributed by the Taxpayer to fund capital requirements, debt repayments, transaction costs, and other expenses of subsidiary companies.

21. On the Acquisition Date and after the Acquisition Time the following Steps occurred in the sequence described below.

Step 11. The Country 2 Holdco Note was capitalized and settled as follows:

a. Country 1 Finco transferred the Country 2 Holdco Note to Country 1 Subco in exchange for the issuance of common shares of Country 1 Subco having a Fair Market Value equal to the Fair Market Value of the Country 2 Holdco Note; and

b. In satisfaction of its obligations to Country 1 Subco under the Country 2 Holdco Note, Country 2 Holdco issued common shares to Country 1 Subco with a Fair Market Value equal to the current principal amount of the Country 2 Holdco Note, plus any accrued and unpaid interest on that note. The Country 2 Holdco Note was consequently settled and cancelled for no additional consideration.

Step 12. Country 1 Finco capitalized Country 1 Subco with cash-on-hand of $XXXXXXXXXX by subscribing for common shares issued by Country 1 Subco. Country 1 Subco used the cash received from Country 1 Finco to subscribe for common shares of Country 2 Holdco.

Step 13. JV Co cancelled all but two of its shares for nominal cash consideration when JV Co had no material assets. Following the cancellation, Canada Holdco and Pubco held 1 share each in JV Co.

Step 14. Country 1 Subco sold all of its shares of Country 2 Holdco at Fair Market Value to JV Co in exchange for common shares of JV Co. The adjusted cost base of the shares of Country 2 Holdco to Country 1 Subco at the time of the sale was less than the Fair Market Value of the shares. The sale resulted in a year-end for Country 2 Holdco and Country 2 Opco, which file their tax returns in Country 2 on consolidated basis.

Step 15. Country 1 Subco sold all of its common shares of JV Co at Fair Market Value to Canada Holdco in exchange for the Internal Note.

Step 16. Canada Holdco transferred to Pubco the ownership of a portion of its shares of JV Co with a Fair Market Value of approximately $XXXXXXXXXX in satisfaction of its obligation under the SPA.

Step 17. Country 2 Opco declared a dividend and issued a note payable to Country 2 Holdco having a principal amount equal to the principal amount of the Country 2 Holdco Note 2 plus accrued interest. The notes were then legally offset and cancelled.

C. Capitalization of Country 1 - Canada Intercompany Loans

22. The following Steps occurred on the Acquisition Date in the sequence described below subsequent to the preceding Steps.

Step 18. The Canco 1 Loans were capitalized and settled as follows:

a. All accrued and unpaid interest on the Canco 1 Loans was paid by Canco 1 to Country 1 Finco. Any applicable Canadian withholding tax was withheld and timely remitted to the Canadian tax authorities;

b. Country 1 Finco transferred its receivable under the Canco 1 Loans to Country 1 Subco in exchange for the issuance of common shares of Country 1 Subco having an aggregate Fair Market Value equal to the Fair Market Value of the Canco 1 Loans (which was equal to the aggregate principal amount of the Canco 1 Loans);

c. In satisfaction of its obligations to Country 1 Subco under the Canco 1 Loans, Canco 1 issued common shares to Country 1 Subco with a Fair Market Value and legal stated capital equal to the aggregate principal amount of the Canco 1 Loans.

Step 19. The Canco 2 Loans were capitalized and settled as follows:

a. All accrued and unpaid interest under the Canco 2 Loans was paid by Canco 2 to Country 1 Finco. Any applicable Canadian withholding tax was withheld and timely remitted to the Canadian tax authorities;

b. Country 1 Finco transferred its Canco 2 Loans to Country 1 Subco in exchange for the issuance of common shares of Country 1 Subco having a Fair Market Value equal to the Fair Market Value of the Canco 2 Loans (which was equal to the aggregate principal amount of the Canco 2 Loans);

c. Country 1 Subco transferred its Canco 2 Loans to Canco 1 in exchange for the issuance of common shares of Canco 1 having a Fair Market Value equal to the Fair Market Value of the Canco 2 Loans (which was equal to the aggregate principal amount of the Canco 2 Loans);

d. In satisfaction of its obligations to Canco 1 under the Canco 2 Loans, Canco 2 issued common shares to Canco 1 with a Fair Market Value equal to the aggregate principal amount of the Canco 1 Loans. The Canco 1 Loans was consequently settled.

D. Transfer of Canco 1 to the Taxpayer

23. The following Steps occurred on the Acquisition Date in the order they are described below subsequent to the preceding Steps.

Step 20. Country 1 Subco sold all of its shares of Canco 1 to the Taxpayer and received as consideration the Demand Note having a principal amount equal to the Fair Market Value of the Canco 1 shares sold.

Step 21. The Taxpayer transferred its shares of Canco 1 to New Canada Holdco for common shares of New Canada Holdco.

Step 22. Bidco transferred all its shares in Country 1 Newco to Country 1 Subco for nominal consideration and Country 1 Subco transferred the Internal Note and the Demand Note to Country 1 Newco for additional shares with an aggregate Fair Market Value equal to the aggregate principal amount of the Internal Note and the Demand Note.

Step 23. Bidco, Target, Country 1 Holdco, Country 1 Finco, Country 1 Subco and Country 1 Newco each converted share capital, share premium, and/or capital redemption reserve to distributable reserves under Country 1 company law to the extent required in order to undertake the distributions described in Step 29.

E. Reorganization of JV Co

24. The following Steps occurred on the Acquisition Date in the order they are described below subsequent to the preceding Steps.

Step 24. Canada Holdco transferred all of its common shares of JV Co to JV Co 2 in consideration for Class A shares of JV Co 2.

Step 25. Pubco transferred common shares of JV Co with an aggregate Fair Market Value equal to the aggregate Fair Market Value of the JV Co shares transferred by Canada Holdco in the preceding Step to JV Co 2 in consideration for Class B shares of JV Co 2.

Step 26. The Taxpayer assumed the Internal Note from Canada Holdco in consideration for Canada Holdco transferring all of its Class A shares of JV Co 2 to the Taxpayer and issuing the Canada Holdco Note.

Step 27. The Taxpayer converted the Canada Holdco Note into the Canada Holdco Preferred Shares.

Step 28. The Taxpayer transferred the Canada Holdco Preferred Shares to Canada Top Holdco in exchange for the Canada Top Holdco Preferred Shares.

F. Settlement of the Internal Note and the Demand Note

25. The following Steps occurred on XXXXXXXXXX in the order described below.

Step 29. The Internal Note and the Demand Note were distributed and set off and cancelled as follows:

a. The accrued interest on the Internal Note and the Demand Note was paid with cash by the Taxpayer to Country 1 Newco and the applicable Canadian withholding tax was remitted on a timely basis;

b. The Internal Note, Demand Note and the cash received from the Taxpayer in paragraph (a) of this Step were distributed up the corporate chain from Country 1 Newco to Bidco as successive dividends in specie and/or as repayments of existing intercompany debt;

c. Bidco declared a dividend to Canada Holdco, equal to the amount received in previous Step 29(b), that was satisfied by the distribution of the Internal Note, the Demand Note and the cash received from the Taxpayer in paragraph (a) of this Step. Canada Holdco will elect under paragraph 5901(2)(b) of the Regulations for the dividend to be paid out of pre-acquisition surplus for Canadian tax purposes;

d. Canada Holdco used a portion of the cash received from Bidco in paragraph (c) of this Step to pay the accrued dividends on the Canada Holdco Preferred Shares. Canada Top Holdco then used the cash received from Canada Holdco to pay the accrued dividends on the Canada Top Holdco Preferred Shares;

e. Canada Holdco redeemed its Canada Holdco Preferred Shares and transferred to Canada Top Holdco a portion of the Internal Note on the redemption; Canada Holdco transferred the remaining portion of the Internal Note and the Demand Note to Canada Top Holdco as a return of capital on its common shares;

f. Canada Top Holdco issued the Canada Top Holdco Note to the Taxpayer as consideration for the redemption of the Canada Top Holdco Preferred Shares and a return of capital on its common shares; and

g. The Canada Top Holdco Note was legally settled by offset against the Internal Note and the Demand Note. The three notes were cancelled.

h. The remaining cash in Canada Holdco was distributed to Canada Top Holdco as a dividend on its common shares. The cash was then distributed by Canada Top Holdco to the Taxpayer as a dividend on its common shares.

PROPOSED TRANSACTIONS

G. Demerger of Country 2 Opco

26. The following steps will occur subsequent to the preceding steps, following the satisfaction of XXXXXXXXXX, on or after XXXXXXXXXX.

Step 30. The following steps will constitute the Demerger and will occur at the Demerger Time:

a. Country 2 Opco will transfer its assets and liabilities in Country 2, its subsidiaries incorporated in Country 2, and its assets and liabilities related to Country 5 branch business to Demergerco 1. Demergerco 1 will issue to Country 2 Holdco, in respect of the shares of Country 2 Opco owned by Country 2 Holdco, shares of its capital stock having an aggregate Fair Market Value equal to the aggregate Fair Market Value of the property transferred to Demergerco 1 less the liabilities assumed by Demergerco 1. Upon their issuance, Country 2 Holdco will be the legal and beneficial owner of the shares of Demergerco 1.

b. Country 2 Opco will transfer its branch assets and liabilities in Country 3 and Country 4, and its subsidiaries incorporated in Country 3 and Country 4 to Demergerco 2. Demergerco 2 will issue to Country 2 Holdco, in respect of the shares of Country 2 Opco owned by Country 2 Holdco, shares of its capital stock having an aggregate Fair Market Value equal to the aggregate Fair Market Value of the property transferred to Demergerco 2 less the liabilities assumed by Demergerco 2. Upon their issuance, Country 2 Holdco will be the legal and beneficial owner of the shares of Demergerco 2.

c. Country 2 Opco will be dissolved.

Step 31. Country 2 Holdco will distribute its shares of Demergerco 1 to JV Co as a dividend in specie.

Step 32. JV Co will buy back and cancel all of its common shares held by JV Co 2 in exchange for the shares of Demergerco 1.

Step 33. Within XXXXXXXXXX days after the Demerger Time, the shares of Demergerco 1 will be sold to an arm’s length purchaser.

27. For Country 2 tax purposes, in computing its income and/or taxable income, Country 2 Opco will not be including any income, profit or gain in respect of its activities in Country 3 and Country 4 as of XXXXXXXXXX and will not be including any income, profit or gain in respect of its activities in Country 2 and Country 5 as of XXXXXXXXXX. Any income, profit or gain for those periods will be reported by Demergerco 2 and Demergerco 1 respectively. With respect to Demergerco 1, Country 2 Opco’s income, profit or gain in respect of Country 5 branch operations are not subject to Country 2 taxation due to an exemption from tax on those amounts under Country 2’s controlled foreign corporation regime and it is expected that Demergerco 1 will also qualify for that exemption. With respect to Demergerco 2, once it is controlled by Pubco, its activities that are taxable in Country 2 will be taxable to Pubco as part of its joint taxation filing in Country 2.

28. For Canadian tax purpose, the Taxpayer will not elect under paragraph 5901(2)(b) of the Regulations for the subsection 15(1.5) deemed dividend to be deemed to have been paid out of the pre-acquisition surplus of Country 2 Opco. Nevertheless, the portion of such deemed dividend that will be deemed under paragraph 5901(1)(c) to have been paid out of the pre-acquisition surplus of Country 2 Opco is expected to exceed the adjusted cost base of the shares of Country 2 Opco held by Country 2 Holdco.

PURPOSES OF TRANSACTIONS

29. The overall purpose of the Transactions is to permit the Taxpayer, with funding provided by Pubco, to acquire Target and, following such acquisition, to reorganize the organizational structure so that:

1) the Taxpayer will retain Target’s Canadian, Country 1, and other international businesses (other than those referred to below);

2) Pubco will retain 100% of Target’s businesses in Country 3 and Country 4; and

3) the Taxpayer and Pubco will initially co-own Target’s business in Country 2 and Country 5 branch business and subsequently sell them to an arm’s length party.

30. The purpose of structuring the funding of the Acquisition in a manner that Pubco would not acquire any equity interest in Bidco was to comply with various anti-trust and regulatory requirements. As a consequence, the conditions of subsection 212.1(4) were satisfied and Pubco did not control Country 1 Subco immediately before the disposition of the shares of Canco 1.

31. The purpose of the transfer of Canco 1 from Country 1 Subco to the Taxpayer in Step 20 is to simplify the post-Acquisition structure of the Taxpayer and eliminate the “sandwich structure” that would otherwise exist due to the acquired Target Canadian business being owned through Country 1.

32. The purpose of the Demerger is to reorganize the holdings of Country 2 Opco such that its assets and operations in Country 2 and Country 5 are held by Demergerco 1 and its assets and operations in Country 3 and Country 4 are held by Demergerco 2. In this regard, the Demerger is instrumental to the commercial objective of having Pubco retain Target’s businesses in Country 3 and Country 4 and the Taxpayer and Pubco initially co-own Target’s Country 2 business and the Country 5 branch business. The Demerger transfers are intended to qualify as being tax-deferred for tax purposes of Country 2, Country 3 and Country 4.

33. The purpose of the voting rights allocation in respect of JV Co 2 described in Step 4 (specifically the original arrangement whereby the Taxpayer (or its subsidiary that holds the JV Co 2 shares) and Pubco will each have XXXXXXXXXX of the voting rights in respect of JV Co 2 and, after the XXXXXXXXXX year following the Acquisition, the Taxpayer’s (or its subsidiary that holds the JV Co 2 shares) voting rights will be increased to XXXXXXXXXX% and Pubco’s voting rights will be reduced to XXXXXXXXXX%) is to address Country 2 XXXXXXXXXX. In particular, under such requirements, Pubco is permitted to hold XXXXXXXXXX% of the voting rights of JV Co 2 for a maximum of XXXXXXXXXX months after completion of the Acquisition. Therefore, in order to comply with such restrictions, Pubco’s voting rights will be reduced to XXXXXXXXXX% after the XXXXXXXXXX year following the Acquisition.

34. The purpose of the assumption of the Internal Note in Step 26 was to have all the short term debt at the Taxpayer level and to facilitate the Taxpayer’s acquisition and ownership of JV Co 2 shares. The use of the convertible note (the Canada Holdco Note) and the Canada Holdco Preferred Shares in Step 27 and Canada Top Holdco Preferred Shares in Step 28 was for ease of implementation (including from a corporate law perspective) and unwind in the later Steps. The relevant corporate law would not allow the Internal Note to be assumed directly for shares. Consequently, as an initial step the Internal Note was assumed for a convertible note and the convertible note was converted into preferred shares.

35. The purpose of the transfer of Country 1 Newco by Bidco to Country 1 Subco in Step 22 was to make Country 1 Newco a wholly owned subsidiary of Country 1 Subco prior to the transfer of the Internal Note and the Demand Note to Country 1 Newco by Country 1 Subco. Country 1 Newco was formed by Bidco as a matter of expediency and convenience prior to the Acquisition rather than waiting to have Country 1 Subco form Country 1 Newco after the Acquisition.

36. The purpose of the capitalizations of Country 2 Holdco in Step 12 was to equalize working capital/cash positions prior to the Demerger after taking into account various transactions (e.g., dividends and debt repayments) that occurred after the date of the financial statements that were used for valuation purposes and pricing negotiations for the Acquisition (as between the Taxpayer and Pubco).

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, completed and proposed transactions, purposes of the Transactions, and provided further that the Proposed Transactions are completed in the manner described above, and there are no other transactions that may be relevant to the rulings given, we rule as follows:

A. Subsection 212.1(4) will apply to the transfer of the shares of the capital stock of Canco 1 from Country 1 Subco to the Taxpayer described in Step 20 such that the provisions of paragraph 212.1(1.1)(a) will not deem a dividend to be paid by Canco 1 and to be received by Country 1 Subco.

B. Provided that, at the time of the transfer described in Step 14, the shares of the capital stock of Country 2 Holdco owned by Country 1 Subco are capital property to Country 1 Subco and that the adjusted cost base of such shares is not greater than the amount that would, in the absence of paragraph 95(2)(c), be Country 1 Subco’s proceeds of disposition in respect of that transfer, paragraph 95(2)(c) will apply to the sale of shares of the capital stock of Country 2 Holdco by Country 1 Subco to JV Co.

C. Subparagraph 15(1.5)(a)(i) and paragraphs 15(1.5)(b) and (c) will apply to the Demerger, such that:

a. Country 2 Opco will be deemed to have distributed as a dividend in kind the shares of the capital stock of Demergerco 1 and Demergerco 2 to Country 2 Holdco at the Demerger Time;

b. Country 2 Holdco will be deemed to have received as a dividend in kind the shares of the capital stock of Demergerco 1 and Demergerco 2 at the Demerger Time;

c. the amount of the dividend in kind received by Country 2 Holdco in respect of the shares of the capital stock of Country 2 Opco that it holds will be equal to the Fair Market Value, immediately after the Demerger Time, of the shares of the capital stock of Demergerco 1 and Demergerco 2 acquired by Country 2 Holdco at the Demerger Time;

d. any gain or loss of Country 2 Opco from a distribution of the shares of the capital stock of Demergerco 1 and Demergerco 2 as a consequence of the transfers of assets, liabilities and subsidiaries described in Steps 30(a) and 30(b) respectively will be deemed to be nil;

e. each property of Country 2 Opco that becomes property of Demergerco 1 and Demergerco 2 at the Demerger Time as a consequence of the Demerger will be deemed to be disposed of by Country 2 Opco immediately before the Demerger Time for proceeds of disposition equal to the property’s Fair Market Value;

f. each property of Country 2 Opco that becomes property of Demergerco 1 and Demergerco 2 as a consequence of the Demerger will be deemed to be acquired by Demergerco 1 and Demergerco 2 at a cost equal to the amount determined to be Country 2 Opco’s proceeds of disposition of the property; and

g. paragraph 15(1)(b) will apply to the deemed distribution by Country 2 Opco and the deemed receipt by Country 2 Holdco as a dividend in kind of the shares of the capital stock of Demergerco 1 and Demergerco 2, such that Country 2 Holdco will not be required to include the amount or value of a benefit under subsection 15(1) in that respect.

D. The amount of the dividend described in paragraph c. of Ruling C will not be included in computing FAPI of Country 2 Holdco pursuant to paragraph (b) of the description of A in the definition of FAPI in subsection 95(1).

E. Neither subsection 56(2) nor subsection 246(1) will apply to the Demerger, in and by itself.

F. In computing the adjusted cost base at the Demerger Time to Country 2 Holdco of any share of the capital stock of Country 2 Opco, there will be deducted under subsection 92(2), in respect of the dividend in kind described in paragraph b. of Ruling C, an amount equal to such portion of the amount of that dividend in kind as would have been deductible by virtue of paragraph 113(1)(d) from the income of Country 2 Holdco in computing its taxable income for the year that includes the Demerger if Country 2 Holdco had been a corporation resident in Canada.

G. Should the total of all amounts required by subsection 53(2) to be deducted in computing the adjusted cost base at the Demerger Time to Country 2 Holdco of a share of the capital stock of Country 2 Opco (including the amount described in Ruling F) exceed the total of (i) the cost to Country 2 Holdco of the share determined for the purpose of computing the adjusted cost base to Country 2 Holdco of that share at the Demerger Time, and (ii) all amounts required by subsection 53(1) to be added to the cost to Country 2 Holdco of the share in computing the adjusted cost base at the Demerger Time to Country 2 Holdco of that share (which, for greater certainty, does not include an amount under paragraph 53(1)(a) in respect of the Demerger), subsection 40(3) will apply, such that the amount of such excess will be deemed to be a gain of Country 2 Holdco from a disposition at the Demerger Time of the share and the share will be disposed of by Country 2 Holdco at the Demerger Time in the year that includes the Demerger Time.

H. Provided the shares of the capital stock of Country 2 Opco are excluded property of Country 2 Holdco immediately before the time of the deemed disposition referred to in paragraph e. of Ruling C, any taxable capital gain realized by Country 2 Holdco as a result of the Demerger on such shares (including the gain described in Ruling G) will be a gain from a disposition of property that is, at the time of disposition, excluded property of Country 2 Holdco for purposes of Part I, Division B, Subdivision i of the Act.

Comments

The above Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R11 last updated on April 1, 2021 and are binding on the CRA provided that the Proposed Transactions are undertaken prior to XXXXXXXXXX.

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

• the Facts, Transactions, or any transaction or event taking place either prior or subsequent to the implementation of the Transactions, whether described in this letter or not;
• any tax consequences relating thereto other than those specifically described in the Rulings given above;
• without limiting the generality of the foregoing, the net surplus accounts of Country 2 Opco, Country 2 Holdco, JV Co or JV Co 2.

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

Yours truly,

XXXXXXXXXX
Acting Section Manager
for Division Director
International Division
Income Tax Rulings Directorate