2021 Ruling 2021-0911211R3 - Foreign Takeover

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. Cost of shares acquired as a result of a merger 2. Any gain realized (or loss incurred) on contributions of capital. 3. Any deemed dividend as a result of the contributions of capital. 4. Computation of ACB of shares after a contribution of capital. 5. Any income inclusion under s.9 or 12(1)(x) in respect of the contributions of capital.

Position: 1. Cost of shares includes an amount equal to the fair market value of the consideration given to acquire such shares and an amount equal to costs incurred for the purpose of acquiring such shares to the extent that such costs are not deductible in the year or any subsequent year in computing its income. 2. No. 3. No. 4. ACB increase by an amount equal to the FMV of the shares contributed as a capital contribution. 5. No.

Reasons: 1. Cost of property acquired is equal to what was given up to acquire such property. 2. ACB of shares is equal to the FMV of the shares at the time of the contributions of capital. 3. Paragraph 84(1)(b) applies. 4. Paragraph 53(1)(c). 5. This is a capital transaction and is not an amount received in the course of earning income from business or property.

XXXXXXXXXX							2021-091121	

Dear XXXXXXXXXX:

RE: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, updated on 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 numerous 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 recently completed 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, c.1 (5th Supp.), as amended (the “Act”), or the Income Tax Regulations, C.R.C., c.945 (the “Regulations”) as amended, as appropriate, and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

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

“Act1” means the XXXXXXXXXX, including the regulations thereunder;

“Acquisition” means the indirect acquisition by XXXXXXXXXX of all of the issued and outstanding shares of Target, on the terms and conditions agreed by the parties in the Merger Agreement, as was completed on the Closing Date;

“Additional Merger Sub1 Shares” means the additional common shares of Merger Sub1 that were issued to XXXXXXXXXX, as described in Paragraph 33.iii, in consideration for XXXXXXXXXX issuing the XXXXXXXXXX Common Shares to satisfy the Share Consideration;

“adjusted cost base” or “ACB” has the meaning assigned by subsection 248(1) and section 54;

“arm’s length” has the meaning assigned by subsection 251(1), and, unless otherwise stated, references to “arm's length” herein do not take into account any rights referred to in paragraph 251(5)(b);

“Canadian Holdco” means XXXXXXXXXX, a corporation existing under Act1 which is a taxable Canadian corporation and a direct wholly-owned subsidiary of Opco;

“Canadian Holdco Capital Contribution” means the capital contribution made by Opco to Canadian Holdco by way of the transfer by Opco of all of the issued and outstanding shares of XXXXXXXXXX Holdco to Canadian Holdco, which occurred as part of the Internal Transactions, as further described in Paragraph 36.iv;

“capital property” has the meaning assigned by subsection 248(1) and section 54;

“Cash Consideration” means the aggregate amount of XXXXXXXXXX, which was comprised of:

i. in respect of each issued and outstanding share of Target common stock immediately prior to the First Merger (subject to certain exceptions set forth in the Merger Agreement), XXXXXXXXXX, and

ii. in respect of each issued and outstanding share of Target preferred stock immediately prior to the First Merger (subject to certain exceptions set forth in the Merger Agreement), XXXXXXXXXX;

“Closing Date” means the closing date of the Acquisition, including the Recently Completed Transactions, which was XXXXXXXXXX;

XXXXXXXXXX;

“controlled foreign affiliate” has the meaning assigned by subsections 248(1) and 95(1);

“CRA” means the Canada Revenue Agency, and a reference to the CRA in this correspondence includes, where necessary and appropriate, a reference to either the Canada Customs and Revenue Agency or to Revenue Canada;

“disposition” has the meaning assigned by subsection 248(1);

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

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

“First Effective Time” means the effective time of the First Merger, XXXXXXXXXX;

“First Merger” means the merger, XXXXXXXXXX, of Merger Sub2 with and into Target, with the entity surviving the merger being Target, and the separate corporate existence of Merger Sub2 ceasing, as described in Paragraph 35.i;

“foreign affiliate” has the meaning assigned by subsections 248(1) and 95(1);

“foreign merger” has the meaning assigned by subsection 87(8.1), as modified by subsection 87(8.2);

XXXXXXXXXX;

“FMV of the Share Consideration” means the aggregate FMV of the XXXXXXXXXX Common Shares issued in satisfaction of the Share Consideration as of the First Effective Time, XXXXXXXXXX;

“Funding Agreement” means the Funding and Directions Agreement entered into by XXXXXXXXXX, Opco, Merger Sub1 and Merger Sub2 on XXXXXXXXXX, as further described in Paragraphs 32 to 34;

“Intercompany Debt” means the XXXXXXXXXX interest bearing debt that was owing by Merger Sub1 to Opco as of the First Effective Time, arising as described in Paragraph 25, with a principal amount equal to the aggregate Cash Consideration XXXXXXXXXX, which was comprised of the Intercompany Term Debt and the Intercompany Revolving Debt, the liability under which was assumed by XXXXXXXXXX Holdco as part of the Internal Transactions described in Paragraph 36.iii;

“Intercompany Revolving Debt” means the portion of the Intercompany Debt consisting of an interest-bearing revolving loan with a principal amount of XXXXXXXXXX, which, following the Recently Completed Transactions is owing by XXXXXXXXXX Holdco to Opco;

“Intercompany Term Debt” means the portion of the Intercompany Debt consisting of an interest-bearing term loan with a principal amount of XXXXXXXXXX, which, following the Recently Completed Transactions is owing by XXXXXXXXXX Holdco to XXXXXXXXXX;

“Internal Transactions” means the internal reorganization transactions described in Paragraph 36, which took place on the Closing Date, in sequential order, immediately following the Second Merger;

XXXXXXXXXX;

“Merger Agreement” means the Agreement and Plan of Merger dated as of XXXXXXXXXX by and among XXXXXXXXXX, Merger Sub1, Merger Sub2, and Target, together with all schedules, exhibits, and amendments relating thereto, and which is the definitive agreement governing the Acquisition;

“Merger Consideration” means, in aggregate, the Share Consideration plus the Cash Consideration, which Merger Consideration was issued or paid, as applicable, on behalf of Merger Sub1, to former holders of shares of Target (subject to the exceptions set forth in the Merger Agreement) following the First Merger;

“Merger Sub1” means XXXXXXXXXX which is a non-resident and, immediately prior to the Recently Completed Transactions, a direct wholly-owned subsidiary of XXXXXXXXXX, and is the corporation which is the surviving corporation in the Second Merger, XXXXXXXXXX, and the share certificates in respect of which were, as part of the Recently Completed Transactions, deposited with the Trustee;

“Merger Sub2” means XXXXXXXXXX, which, immediately prior to the Recently Completed Transactions, XXXXXXXXXX and a non-resident and a direct wholly-owned subsidiary of Merger Sub1, and whose separate corporate existence ceased on the occurrence of the First Merger;

XXXXXXXXXX;

“non-resident” means a person who is not a resident of Canada for purposes of the Act;

“Opco” means XXXXXXXXXX, a corporation existing under Act1, which is a taxable Canadian corporation and a direct wholly-owned subsidiary of XXXXXXXXXX;

“Opco Capital Contribution” means the capital contribution made by XXXXXXXXXX to Opco by way of the transfer by XXXXXXXXXX of all of the issued and outstanding shares of Merger Sub1 to Opco, which occurred as part of the Internal Transactions, as further described in Paragraph 36.i;

“paid-up capital” or “PUC” has the meaning assigned by subsections 248(1) and 89(1);

“Paragraph” refers to a numbered paragraph in this letter;

“person” has the meaning assigned by subsection 248(1);

XXXXXXXXXX;

“XXXXXXXXXX” means XXXXXXXXXX, a taxable Canadian corporation and XXXXXXXXXX;

“XXXXXXXXXX Common Shares” means the XXXXXXXXXX common shares in the capital stock of XXXXXXXXXX;

“XXXXXXXXXX Group” means XXXXXXXXXX and its direct and indirect subsidiaries;

XXXXXXXXXX;

“Recently Completed Transactions” means the transactions which are described in Paragraphs 32 to 39, which occurred on the Closing Date, and the transaction described in Paragraph 39.1, which occurred on XXXXXXXXXX;

“Second Effective Time” means the effective time of the Second Merger, XXXXXXXXXX on the Closing Date;

“Second Merger” means the merger, XXXXXXXXXX, of Target (as the surviving corporation from the First Merger) with and into Merger Sub1, with the entity surviving the merger being Merger Sub1, and the separate corporate existence of Target ceasing, as described in Paragraph 35.ii;

“Share Consideration” means an aggregate of XXXXXXXXXX XXXXXXXXXX Common Shares, comprised of XXXXXXXXXX Common Shares for each issued and outstanding share of Target common stock immediately prior to the First Merger (other than certain excluded shares set out in the Merger Agreement);

XXXXXXXXXX;

“Target” means XXXXXXXXXX, a XXXXXXXXXX corporation, which, immediately prior to the Recently Completed Transactions, dealt at arm's length with the XXXXXXXXXX Group, and which, following the Second Merger, is represented by Merger Sub1;

“taxable Canadian corporation” has the meaning assigned by subsections 248(1) and 89(1);

“taxable Canadian property” has the meaning assigned by subsection 248(1);

“Trustee” means XXXXXXXXXX;

“XXXXXXXXXX Holdco” means XXXXXXXXXX, a XXXXXXXXXX corporation which is a non-resident and, immediately prior to the Recently Completed Transactions, a direct wholly-owned subsidiary of Opco and, following the Recently Completed Transactions, a direct wholly-owned subsidiary of Canadian Holdco;

“XXXXXXXXXX Holdco Capital Contribution” means the capital contribution made by Opco to XXXXXXXXXX Holdco by way of the transfer by Opco of all of the issued and outstanding shares of Merger Sub1 to XXXXXXXXXX Holdco, which occurred as part of the Internal Transactions, as further described in Paragraph 36.ii;

“Voting Trust” means the independent irrevocable voting trust formed pursuant to the Voting Trust Agreement XXXXXXXXXX; and

“Voting Trust Agreement” means the Voting Trust Agreement, dated as of Closing Date, by and among XXXXXXXXXX, XXXXXXXXXX Holdco, and the Trustee, XXXXXXXXXX.

FACTS

Relevant Parties to the Recently Completed Transactions

1. XXXXXXXXXX is a corporation incorporated and existing under Act1, which is a taxable Canadian corporation and a XXXXXXXXXX is a resident of Canada for the purposes of the Act. XXXXXXXXXX.

2. Opco is a XXXXXXXXXX corporation existing under Act1, which is a taxable Canadian corporation and a direct wholly-owned subsidiary of XXXXXXXXXX. Opco is the primary Canadian operating company and holding vehicle within the XXXXXXXXXX Group, and it owns, directly and indirectly, various subsidiaries, including foreign affiliates. Opco XXXXXXXXXX has issued, and will continue to issue, various debt to the public. The shares of Opco owned by XXXXXXXXXX constitute capital property to XXXXXXXXXX.

3. Each of XXXXXXXXXX and Opco are XXXXXXXXXX.

4. Canadian Holdco is a corporation incorporated and existing under Act1, which is a taxable Canadian corporation and a direct wholly-owned subsidiary of Opco. Canadian Holdco was incorporated solely for the purpose of participating in the Acquisition (XXXXXXXXXX). The shares of Canadian Holdco owned by Opco constitute capital property to Opco.

5. XXXXXXXXXX Holdco is a corporation incorporated and existing under the laws of XXXXXXXXXX. XXXXXXXXXX Holdco is a non-resident which does not carry on business in Canada. Prior to the Recently Completed Transactions, all of the issued and outstanding shares of XXXXXXXXXX Holdco were owned by Opco and, following the Recently Completed Transactions, all of the issued and outstanding shares of XXXXXXXXXX Holdco are owned by Canadian Holdco. XXXXXXXXXX Holdco was incorporated solely for the purpose of participating in the Acquisition (XXXXXXXXXX). The shares of XXXXXXXXXX Holdco owned by Opco or owned by Canadian Holdco, as applicable, constitute capital property to the holder thereof.

6. Merger Sub1 is a corporation incorporated and existing under the laws of XXXXXXXXXX. Merger Sub1 is a non-resident which does not carry on business in Canada. Prior to the Recently Completed Transactions, all of the issued and outstanding shares of Merger Sub1 were owned by XXXXXXXXXX and such shares had a nominal ACB and FMV. Prior to the First Merger, Merger Sub1 was a controlled foreign affiliate of XXXXXXXXXX. Immediately prior to the First Effective Time, the shares of Merger Sub1 were not taxable Canadian property. Immediately prior to the Second Merger, XXXXXXXXXX did not own options to acquire the shares of Merger Sub1. Merger Sub1 was incorporated solely for the purpose of participating in the Acquisition (XXXXXXXXXX). At all relevant times, the shares of Merger Sub1, owned by any of XXXXXXXXXX, Opco, or XXXXXXXXXX Holdco, as the case may be, constitute capital property to the holder thereof.

7. Prior to the Recently Completed Transactions, Merger Sub2 was a corporation incorporated and existing under the laws of XXXXXXXXXX. Merger Sub2 was a non-resident which did not carry on business in Canada and prior to the First Merger, all of the issued and outstanding shares of Merger Sub2 were owned by Merger Sub1, such shares having a nominal ACB and FMV. Prior to the First Merger, Merger Sub2 was a controlled foreign affiliate of XXXXXXXXXX and the shares of Merger Sub2 may not have constituted excluded property. Immediately prior to the First Effective Time, the shares of Merger Sub2 were not taxable Canadian property. The shares of Merger Sub2 owned by Merger Sub1 constituted capital property to the holder thereof. The separate corporate existence of Merger Sub2 terminated on the First Merger. Merger Sub2 was incorporated solely for the purpose of participating in the Acquisition (XXXXXXXXXX).

8. Prior to the Recently Completed Transactions, Target was a corporation incorporated and existing under the laws of XXXXXXXXXX. Target was a non-resident which, to the knowledge of the XXXXXXXXXX Group, did not carry on business in Canada. XXXXXXXXXX. Target was a multi-national corporation which, through its subsidiaries, XXXXXXXXXX. XXXXXXXXXX. Target dealt at arm’s length with the XXXXXXXXXX Group. The separate corporate existence of Target terminated on the Second Merger and, following the Recently Completed Transactions, Target is represented by Merger Sub1, which continues to operate XXXXXXXXXX. Immediately prior to the First Effective Time, the shares of Target did not constitute taxable Canadian property to the holders thereof. Upon completion of the First Merger, the shares of Target held by Merger Sub1 constituted excluded property. Immediately prior to the Second Merger, XXXXXXXXXX did not own options to acquire the shares of Target.

9. The Trustee is an individual XXXXXXXXXX who does not carry on business or perform any duties of employment in Canada. XXXXXXXXXX. At all times, the Trustee deals at arm’s length with the XXXXXXXXXX Group.

10. XXXXXXXXXX is a non-resident which does not carry on business in Canada. XXXXXXXXXX is an indirect wholly-owned subsidiary of Opco and is a foreign affiliate and a controlled foreign affiliate of Opco and XXXXXXXXXX

11. XXXXXXXXXX.

12. XXXXXXXXXX.

13. XXXXXXXXXX.

14. XXXXXXXXXX.

15. XXXXXXXXXX.

16. XXXXXXXXXX.

17. XXXXXXXXXX.

Merger Agreement

18. On XXXXXXXXXX, XXXXXXXXXX, Target, Merger Sub1, and Merger Sub2 entered into the Merger Agreement.

19. XXXXXXXXXX.

20. XXXXXXXXXX.

21. Pursuant to the Merger Agreement, as described in Paragraph 35, the Acquisition was completed through a two-step merger XXXXXXXXXX and the former holders of Target shares received the Merger Consideration. The Merger Agreement also sets out the parties’ agreements with respect to the Internal Transactions described in Paragraph 36.

22. The Merger Agreement provided that the transactions set out therein could close as early as the XXXXXXXXXX business day after the satisfaction or waiver of certain conditions, which included approval of the shareholders of both XXXXXXXXXX and Target, XXXXXXXXXX. Such conditions were satisfied in XXXXXXXXXX and the transactions closed on the Closing Date.

Payment of Merger Consideration and Financing of the Acquisition

23. The former holders of Target shares received the Merger Consideration as soon as practicable after the Closing Date. As required by the Merger Agreement, prior to the First Effective Time, XXXXXXXXXX, on behalf of Merger Sub1, caused to be deposited, XXXXXXXXXX, in trust for the benefit of holders of Target shares, the Merger Consideration, XXXXXXXXXX sufficient to pay the aggregate Cash Consideration and evidence of XXXXXXXXXX Common Shares in book-entry form representing the number of XXXXXXXXXX Common Shares sufficient to deliver the aggregate Share Consideration.

24. On XXXXXXXXXX, XXXXXXXXXX, Opco, Merger Sub1 and Merger Sub2 entered into the Funding Agreement XXXXXXXXXX. The Recently Completed Transactions implemented pursuant to the Funding Agreement are described in Paragraphs 32 to 34.

25. The aggregate Cash Consideration was borrowed by Merger Sub1 from Opco pursuant to the Intercompany Debt, which Intercompany Debt is interest-bearing and has terms and conditions complying with arm’s length transfer pricing principles. To obtain all or a portion of the funds necessary to make the loan to Merger Sub1, Opco borrowed funds from third-parties, XXXXXXXXXX. As further described in Paragraph 32, effective as of the First Effective Time, Opco loaned these funds to Merger Sub1 as reflected in the Intercompany Debt and Merger Sub1 XXXXXXXXXX, in trust for the benefit of holders of Target shares.

26. XXXXXXXXXX.

27. XXXXXXXXXX.

28. XXXXXXXXXX. The Voting Trust is a mechanism that allows for the transfer of beneficial ownership of the shares of XXXXXXXXXX.

29. Under this XXXXXXXXXX voting trust structure, the acquiring parent entity (XXXXXXXXXX) directly or indirectly acquires the shares of the target XXXXXXXXXX (Target) following satisfaction or waiver of customary closing conditions, and then deposits the target shares (or certificates representing such shares) with the voting trust XXXXXXXXXX. This type of structure XXXXXXXXXX has the effect of providing the acquiror the economic benefits of ownership (i.e., dividends and growth) while the trust is in place.

30. XXXXXXXXXX.

31. XXXXXXXXXX.

RECENTLY COMPLETED TRANSACTIONS

Funding Agreement

32. Pursuant to the Funding Agreement, to enable Merger Sub1 to satisfy its obligation under the Merger Agreement to deliver the aggregate Cash Consideration to the former holders of Target shares:

i. Merger Sub1 irrevocably authorized and directed Opco to pay to, or as directed by, XXXXXXXXXX, an amount in US dollars equal to the aggregate Cash Consideration.

ii. Upon Opco paying such amount to, or as directed by, XXXXXXXXXX, Merger Sub1 acknowledged and agreed that it received an equal amount as an advance from Opco under the Intercompany Debt as described in Paragraph 25, effective as of the First Effective Time.

iii. XXXXXXXXXX irrevocably authorized and directed Opco to deposit, on behalf of and as agent for Merger Sub1, with the exchange agent, in trust for the benefit of the holders of the Target shares, the cash amount specified in Paragraph 32.i.

33. Pursuant to the Funding Agreement, to enable Merger Sub1 to satisfy its obligation under the Merger Agreement to deliver the aggregate Share Consideration to the former holders of Target common shares:

i. XXXXXXXXXX confirmed its agreement to issue a number of XXXXXXXXXX Common Shares sufficient to satisfy the aggregate Share Consideration in such manner as is directed by Merger Sub1, and in consideration of the issuance by Merger Sub1 of the Additional Merger Sub1 Shares as described in Paragraph 33.iii.

ii. Merger Sub1 irrevocably authorized and directed XXXXXXXXXX to deposit, on behalf of and as agent for Merger Sub1, the XXXXXXXXXX Common Shares representing the aggregate Share Consideration, as described in Paragraph 33.i, with the exchange agent, in trust for the benefit of the holders of the Target common shares.

iii. Upon the First Effective Time occurring and XXXXXXXXXX issuing the XXXXXXXXXX Common Shares as described in Paragraph 33ii, Merger Sub1, effective as of the First Effective Time, issued a number of additional common shares (the “Additional Merger Sub1 Shares”) having an agreed FMV equal to the FMV of the aggregate Share Consideration. Merger Sub1 and XXXXXXXXXX acknowledged and agreed that XXXXXXXXXX purchase price for the Additional Merger Sub1 Shares and Merger Sub1’s purchase price for the XXXXXXXXXX Common Shares issued as the aggregate Share Consideration are both equal to the aggregate FMV of the aggregate Share Consideration.

34. Upon the issuance of the XXXXXXXXXX Common Shares as the aggregate Share Consideration as described in Paragraph 33.ii, XXXXXXXXXX, added to the stated capital account maintained for such common shares an amount equal to the aggregate FMV of the Share Consideration. XXXXXXXXXXs agreement to add such amount to the applicable stated capital account was reflected in the Funding Agreement.

First Merger and Second Merger

35. Under the terms of the Merger Agreement, the following transactions occurred on the Closing Date such that XXXXXXXXXX indirectly acquired all of the issued and outstanding shares of Target:

i. XXXXXXXXXX, at the First Effective Time, pursuant to the First Merger, Merger Sub2 was merged with and into Target, with the separate corporate existence of Merger Sub2 ceasing and Target being the surviving entity and a direct wholly-owned subsidiary of Merger Sub1. By virtue of the First Merger, each common and preferred share of Target was converted into the right to receive the applicable Merger Consideration and all such Target shares were automatically cancelled and ceased to exist. On the First Merger, each share of common stock of Merger Sub2 was converted into and became a share of the surviving corporation (being Target). Immediately following the First Merger, XXXXXXXXXX was the sole shareholder of Merger Sub1, Merger Sub1 was the sole shareholder of the surviving corporation (Target), and the former shareholders of Target held either cash or a combination of cash and XXXXXXXXXX Common Shares.

ii. Immediately following the First Effective Time, XXXXXXXXXX, at the Second Effective Time, and pursuant to the Second Merger, Target merged with and into Merger Sub1, with the separate corporate existence of Target ceasing and Merger Sub1 being the surviving corporation (and a direct wholly-owned subsidiary of XXXXXXXXXX). By virtue of the Second Merger, the shares of common stock of Merger Sub1 remained outstanding and were held by XXXXXXXXXX and each share of Target was cancelled and ceased to exist. Merger Sub1, as the surviving corporation, owns properties (except amounts receivable from or shares in the capital stock of Target) representing all of the FMV of all such properties owned by each of Merger Sub1 and Target immediately prior to the Merger. No election will be made not to have subsection 87(8) apply in respect of the Second Merger.

Internal Transactions

36. Pursuant to the Merger Agreement, the following Internal Transactions took place in sequential order immediately after the Second Merger:

i. XXXXXXXXXX transferred, as a contribution of capital, all of the shares of Merger Sub1 to Opco (the “Opco Capital Contribution”), and Opco agreed to accept such Merger Sub1 shares as a contribution of capital (in an amount equal to the aggregate FMV of such shares) in respect of the issued and outstanding Opco common shares. Opco did not issue any additional shares to XXXXXXXXXX on the making of such Opco Capital Contribution. Opco acknowledged that the Opco Capital Contribution constitutes a transaction by which the value of Opco’s assets less its liabilities has been increased and agreed to take all necessary steps to ensure that an amount equal to such increase, being an amount equal to the FMV of the shares of Merger Sub1 is added to the stated capital account maintained for the Opco common shares XXXXXXXXXX.

ii. Opco immediately thereafter transferred, as a contribution of capital, all of the shares of Merger Sub1 to XXXXXXXXXX Holdco (the “XXXXXXXXXX Holdco Capital Contribution”). XXXXXXXXXX Holdco agreed to accept such Merger Sub1 shares as a contribution of capital (in an amount equal to the aggregate FMV of such shares) in respect of the issued and outstanding XXXXXXXXXX Holdco common shares. XXXXXXXXXX Holdco did not issue any additional shares to Opco on the making of such XXXXXXXXXX Holdco Capital Contribution.

iii. XXXXXXXXXX Holdco assumed the indebtedness of Merger Sub1 owing to Opco (being the Intercompany Debt borrowed by Merger Sub1 to pay the aggregate Cash Consideration). This step occurred as a two-step transaction whereunder: (i) XXXXXXXXXX Holdco assumed any indebtedness of Merger Sub1 owing to Opco in consideration of a promissory note issued by Merger Sub1 in favour of XXXXXXXXXX Holdco having a principal amount equal to the indebtedness assumed, and (ii) XXXXXXXXXX Holdco then contributed the promissory note to Merger Sub1 as a contribution of capital by XXXXXXXXXX Holdco to Merger Sub1. Merger Sub1 agreed to accept such promissory note as a contribution of capital (in an amount equal to the aggregate FMV of such promissory note) in respect of the issued and outstanding Merger Sub1 common shares. Merger Sub1 did not issue any additional shares to XXXXXXXXXX Holdco on the making of such contribution.

iv. Opco immediately thereafter transferred, as a contribution of capital, all of the shares of XXXXXXXXXX Holdco to Canadian Holdco (the “Canadian Holdco Capital Contribution”), and Canadian Holdco agreed to accept such XXXXXXXXXX Holdco shares as a contribution of capital (in an amount equal to the aggregate FMV of such shares) in respect of the Canadian Holdco common shares. Canadian Holdco did not issue any additional shares to Opco on the making of such Canadian Holdco Capital Contribution. Canadian Holdco acknowledged that the Canadian Holdco Capital Contribution constitutes a transaction by which the value of Canadian Holdco’s assets less its liabilities has been increased and agreed to take all necessary steps to ensure that an amount equal to such increase, being the amount equal to the FMV of the shares of XXXXXXXXXX Holdco is added to the stated capital account maintained for the Canadian Holdco common shares XXXXXXXXXX.

Immediately following the implementation of the Internal Transactions, XXXXXXXXXX directly owns Opco which, in turn, owns Canadian Holdco, which, in turn, owns XXXXXXXXXX Holdco, which, in turn owns Merger Sub1, which is the merger successor of Target.

Voting Trust

37. On the Closing Date, XXXXXXXXXX, XXXXXXXXXX Holdco, and the Trustee entered into the Voting Trust Agreement, XXXXXXXXXX. The terms of the Voting Trust Agreement include the following:

i. XXXXXXXXXX and XXXXXXXXXX Holdco appointed the Trustee. XXXXXXXXXX.

ii. Immediately upon the completion of the transactions under the Merger Agreement (including the Internal Transactions), XXXXXXXXXX Holdco deposited the certificates representing all of the outstanding common shares of Merger Sub1 with the Trustee and received voting trust certificates. The share certificates of Merger Sub1 were duly endorsed or accompanied by proper instruments for transfer thereof to the Trustee. If any of XXXXXXXXXX or its affiliates acquire additional shares (or other voting securities) of Merger Sub1, the certificates representing such additional shares or securities will be deposited with the Trustee. The Voting Trust Agreement does not contemplate any property other than shares or securities of Merger Sub1 being deposited with the Trustee, and the parties do not intend for any such property to be so deposited.

iii. The recital clauses provide that the purpose of the deposit of the Merger Sub1 shares (by XXXXXXXXXX Holdco) with the Trustee is XXXXXXXXXX.

iv. The parties agreed that the deposit of the shares of Merger Sub1 with the Trustee shall not result in a change in the beneficial ownership of the shares and shall not result in a sale, disposition, lease, or exchange of such shares.

v. The beneficiary of the Voting Trust is the holder of the voting trust certificates, being XXXXXXXXXX Holdco. Those certificates are fully transferable.

vi. The parties agreed to treat, XXXXXXXXXX, each beneficiary under the Voting Trust (being XXXXXXXXXX Holdco) as the beneficial owner of the underlying shares of Merger Sub1 held by the Voting Trust.

vii. XXXXXXXXXX.

viii. The Voting Trust is irrevocable for its term.

ix. The Trustee is entitled to exercise all voting rights in respect of the shares of Merger Sub1, including the election or removal of directors having due regard for the interests of XXXXXXXXXX Holdco as an investor in Merger Sub1, with a limited number of exceptions XXXXXXXXXX. The Trustee is obligated to exercise voting rights consistently with the provisions of the Merger Agreement and cannot participate or interfere with the management of Target.

x. Notwithstanding the above, the holder of a voting trust certificate (XXXXXXXXXX) is entitled to instruct the Trustee in writing as to the manner in which the shares of Merger Sub1 are to be voted, XXXXXXXXXX.

xi. The Trustee is not permitted to sell, lease, assign, transfer, alienate, pledge, encumber or hypothecate the shares of Merger Sub1 or any major assets of Merger Sub1 or any right or interest therein and is not permitted to cause Merger Sub1 to merge or consolidate with any other entity, in each case without the prior written consent of XXXXXXXXXX.

xii. All cash dividends or cash distributions received by the Voting Trust on the shares of Merger Sub1 are to be paid to, or as directed by, XXXXXXXXXX Holdco. Any non-cash dividends or distributions are to be held by the Trustee on the same terms and conditions as the shares of Merger Sub1.

xiii. XXXXXXXXXX reserves the right to cause XXXXXXXXXX Holdco to sell or make any other disposition of all or a portion of the shares of Merger Sub1 XXXXXXXXXX. Any proceeds received by the Trustee in respect of such a disposition are to be paid to XXXXXXXXXX Holdco.

xiv. XXXXXXXXXX, the Trustee is to transfer all of its right, title and interest in and to the shares of Merger Sub1 to or upon the order of XXXXXXXXXX Holdco, and the Voting Trust shall terminate.

xv. XXXXXXXXXX.

xvi. If the Voting Trust is still in existence on XXXXXXXXXX and not yet terminated pursuant to the terms of the Voting Trust Agreement, the Voting Trust is to terminate on that date (subject to extension by the parties pursuant to the Voting Trust Agreement) and all shares of Merger Sub1 and any other property then held by the Trustee are to be distributed to the holder of the voting trust certificates (XXXXXXXXXX).

xvii. The Voting Trust Agreement may from time to time be modified or amended by an agreement executed by the Trustee and XXXXXXXXXX Holdco: XXXXXXXXXX.

xviii. The Voting Trust Agreement is governed by the laws of XXXXXXXXXX.

38. Immediately following the Internal Transactions described in Paragraph 36, XXXXXXXXXX Holdco deposited the share certificates of Merger Sub1 with the Trustee and received the voting trust certificates. It is intended that, at all times, the sole holder of the voting trust certificates will be XXXXXXXXXX Holdco.

Transfer of Intercompany Term Debt

39. Following the implementation of the transactions described above, XXXXXXXXXX Holdco was indebted to Opco in an amount equal to the aggregate Cash Consideration, as reflected in the Intercompany Debt. The following transactions were then implemented to transfer the receivable under the Intercompany Term Debt XXXXXXXXXX:

i. Opco borrowed the principal amount of XXXXXXXXXX from an arm’s length lender XXXXXXXXXX;

ii. Opco loaned the proceeds from the XXXXXXXXXX borrowing to XXXXXXXXXX on a non-interest bearing basis;

iii. XXXXXXXXXX purchased the Intercompany Term Debt from Opco, and paid the XXXXXXXXXX purchase price to Opco in cash utilizing the proceeds from the loan from Opco described in (ii) above; and

iv. Opco repaid the XXXXXXXXXX loan using the proceeds received from XXXXXXXXXX as described in (iii) above.

Payment of Dividend by Merger Sub1

39.1 On XXXXXXXXXX, Merger Sub1 paid a dividend of approximately XXXXXXXXXX to its shareholder, XXXXXXXXXX Holdco, pursuant to a direction by the Trustee.

ADDITIONAL INFORMATION

40. XXXXXXXXXX.

41. XXXXXXXXXX.

Funding Agreement

42. The Funding Agreement also provided that the various transactions contemplated therein, including the issuance of the Additional Merger Sub1 Shares, occurred at FMV, with a retroactive automatic adjustment mechanism which applies where the CRA or a court of competent jurisdiction determines that the FMV of such transaction is different from the amounts recorded by the parties.

Voting Trust

43. The Voting Trust structure XXXXXXXXXX.

44. The current management and board of directors of Target will continue to steward Merger Sub1 (being the merger successor of Target) while the Voting Trust arrangement is in place, pursuing its independent business plan and growth strategies.

45. As noted in Paragraph 37.xviii, the Voting Trust Agreement XXXXXXXXXX:

i. Under XXXXXXXXXX law, a voting trust is an equitable trust provided that (i) at least one stockholder deposits or transfers the capital stock of the corporation held in trust to an authorized trustee for the purpose of vesting the trustee with the right to vote the trust stock by a written agreement, and (ii) after delivering a copy of the trust agreement to the registered office or principal place of business of the trust corporation, certified or uncertified stock is transferred to the trustee, cancelled, and replaced by new certificates or uncertificated stock. This must also be stated in the trust corporation’s stock ledger. The Voting Trust as contemplated under the Voting Trust Agreement satisfies these requirements and thus constitutes a trust under XXXXXXXXXX.

ii. The deposit of the shares of Merger Sub1 by XXXXXXXXXX Holdco with the Trustee did not result in a change of beneficial ownership and XXXXXXXXXX Holdco remains the beneficial owner of the shares of Merger Sub1.

iii. XXXXXXXXXX, the Voting Trust should be disregarded for purposes of determining beneficial ownership of the share certificates of Merger Sub1 deposited therein.

46. XXXXXXXXXX.

47. [Reserved]

48. XXXXXXXXXX.

49. [Reserved]

V. PURPOSES OF THE RECENTLY COMPLETED TRANSACTIONS

50. The purpose of the Acquisition, and each of the Recently Completed Transactions which facilitate such Acquisition, is to XXXXXXXXXX.

50.1 The purpose of the two-step merger transactions is to mitigate any entity-level XXXXXXXXXX.

51. The purpose of the Funding Agreement is to ensure that Merger Sub1 is appropriately capitalized, in a way that is commercially feasible, in respect of the Merger Consideration so as to complete the acquisition of Target as contemplated in the Merger Agreement. In particular:

i. The directions in the Funding Agreement relating to the deposit of the aggregate Cash Consideration with the exchange agent permitted the relevant funds to flow directly from Opco, on behalf of Merger Sub1, to the exchange agent, without the requirement for Merger Sub1 to open a new bank account.

ii. The directions in the Funding Agreement relating to the deposit of the aggregate Share Consideration with the exchange agent permitted the XXXXXXXXXX Common Shares to be deposited directly by XXXXXXXXXX, on behalf of Merger Sub1, with the exchange agent, without Merger Sub1 directly acquiring a beneficial interest in such XXXXXXXXXX Common Shares. XXXXXXXXXX.

iii. The agreement of Merger Sub1 to issue the Additional Merger Sub1 Shares to XXXXXXXXXX in consideration of XXXXXXXXXX issuance of the XXXXXXXXXX Common Shares comprising the aggregate Share Consideration is intended to ensure that XXXXXXXXXX obtains the appropriate cost amount of its shares of Merger Sub1, XXXXXXXXXX.

52. The purposes of the Internal Transactions are to:

i. Ensure that Merger Sub1 (as the merger successor to Target) is held within the XXXXXXXXXX Group under the Opco chain XXXXXXXXXX.

ii. Facilitate the insertion of a XXXXXXXXXX holding corporation (XXXXXXXXXX Holdco) and a Canadian holding corporation (Canadian Holdco) above Merger Sub1. Specifically, the XXXXXXXXXX Holdco Capital Contribution described in Paragraph 36.ii was completed for the purpose of inserting a XXXXXXXXXX holding corporation above Merger Sub1 and the Canadian Holdco Capital Contribution described in Paragraph 36.iv was completed for the purpose of inserting a Canadian holding corporation above XXXXXXXXXX Holdco and Merger Sub1.

iii. Fulfill certain requirements of the Merger Agreement. Specifically, XXXXXXXXXX Holdco’s assumption of the indebtedness of Merger Sub1 owing to Opco as described in Paragraph 36.iii is to ensure that Target (or a merger successor thereto) XXXXXXXXXX.

XXXXXXXXXX.

52.1 The purpose of the transactions involving the Intercompany Term Debt, as described in Paragraph 39 are to transition XXXXXXXXXX of the Intercompany Debt from Opco (as lender) to XXXXXXXXXX (as lender) XXXXXXXXXX.

53. The purpose of the remaining Recently Completed Transactions, being the deposit of the shares of Merger Sub1 by XXXXXXXXXX Holdco with the Trustee XXXXXXXXXX The Voting Trust structure is being utilized so that the acquisition of Target by XXXXXXXXXX can close XXXXXXXXXX.

54. The purpose of the dividend described in Paragraph 39.1 is to permit Merger Sub1 to make a distribution of earnings to its shareholders XXXXXXXXXX while the Voting Trust Structure is in place. This dividend payment was made pursuant to the provisions in the Voting Trust Agreement. As described in Paragraph 37.xii, all cash dividends received by the Voting Trust on the shares of Merger Sub1 are to be paid to, or as directed by, XXXXXXXXXX Holdco.

RULINGS GIVEN

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

A. For the purposes of computing the ACB of the Merger Sub1 shares held by XXXXXXXXXX immediately after the issuance of the Additional Merger Sub1 Shares, as described in Paragraph 33iii, the cost of such shares to XXXXXXXXXX includes an amount equal to the aggregate of: (a) an amount equal to the FMV of the aggregate Share Consideration, and (b) an amount equal to the costs incurred by XXXXXXXXXX for the purpose of acquiring the Additional Merger Sub1 Shares to the extent such costs are not deductible by XXXXXXXXXX in the year or any subsequent year in computing its income for purposes of the Act. For greater certainty, section 143.3 will not apply to reduce the ACB of the Merger Sub1 shares to XXXXXXXXXX.

B. On the First Merger, Merger Sub1 disposed of the shares of Merger Sub2 for proceeds of disposition equal to the FMV of the Merger Sub2 shares immediately before the First Merger.

C. [intentionally deleted]

D. XXXXXXXXXX disposed of the shares of Merger Sub1 to Opco pursuant to the Opco Capital Contribution, as described in Paragraph 36.i, for deemed proceeds of disposition equal to their FMV and, for greater certainty, XXXXXXXXXX did not realize a gain and was not deemed to have received a dividend as a result of the disposition.

E. The Opco Capital Contribution, as described in Paragraph 36.i, resulted in an increase in the ACB to XXXXXXXXXX of its shares in Opco, in accordance with paragraph 53(1)(c), in an amount equal to the FMV of the aggregate Share Consideration.

F. No amount will be included in the income of Opco pursuant to section 9 or paragraph 12(1)(x) in respect of the Opco Capital Contribution.

G. Opco did not realize any gain as a result of the transfer by Opco of the Merger Sub1 shares to XXXXXXXXXX Holdco pursuant to the XXXXXXXXXX Holdco Capital Contribution, as described in Paragraph 36.ii.

H. Opco did not realize any gain and was not deemed to have received a dividend, as a result of the transfer by Opco of the XXXXXXXXXX Holdco shares to Canadian Holdco pursuant to the Canadian Holdco Capital Contribution, as described in Paragraph 36.iv.

I. No amount will be included in the income of Canadian Holdco pursuant to section 9 or paragraph 12(1)(x) in respect of the Canadian Holdco Capital Contribution.

J. The deposit by XXXXXXXXXX Holdco of the shares of Merger Sub1 with the Trustee, as described in Paragraphs 37 and 38, is a transaction described in subparagraph (k)(ii) of the definition of “disposition” in subsection 248(1), such that such deposit will not constitute a disposition by XXXXXXXXXX Holdco of such shares.

K. Subsection 248(25.2) will apply to deem the Voting Trust described in Paragraph 37 to deal with the shares of Merger Sub1 as agent for XXXXXXXXXX Holdco for the period described in that subsection.

L. Pursuant to subsection 104(1), and except for the limited purposes specified in that provision, the Voting Trust will not be treated as a trust for the purposes of the Act for the period described in subsection 248(25.2).

M. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) do not apply as a result of the Recently Completed Transactions described in Paragraphs 32 to 38 and 39.1, in and by themselves.

N. [intentionally deleted]

These rulings are subject to the limitations and qualifications set out in Information Circular IC 70-6R11 dated April 1, 2021. 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 PUC of any share or the ACB or FMV of any share or property referred to herein;

(b) any other tax consequence relating to the facts, additional information, Recently Completed Transactions or any transaction or event taking place either prior to the Recently Completed Transactions or subsequent to the Recently Completed Transactions, whether described in this letter or not, including

i. whether any of the Recently Completed Transactions would form part of the same series of transactions or events that includes other transactions or events, whether described in this letter or not;

ii. any foreign accrual property income and surplus implications relating to the Second Merger and the period thereafter, including the period during which the Voting Trust is in place; and

iii. any Canadian income tax consequences relating to the Transfer of the Intercompany Term Debt as described in Paragraph 39.

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, 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 an adjustment made as a result of the operation of a price adjustment clause. 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, Reorganizations Section II
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch