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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
whether the conversion right attached to the Preferred Shares results in them being term preferred shares
Whether the acquisition of Preferred Shares results in an acquisition of control of XXXXXXXXXX
Position:
no
no
Reasons:
The conversion formula does not provide any guarantee or indemnity Because of the restrictions attached to the conversion feature on the non-voting shares
XXXXXXXXXX 961084
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re: XXXXXXXXXX
This is reply to your letters of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above noted taxpayer concerning the transactions described below (the "Restructuring") involving the proposed conversion of all or part of XXXXXXXXXX outstanding indebtedness which is represented by its XXXXXXXXXX Notes (the "Notes") into preferred shares of XXXXXXXXXX. We also acknowledge our numerous telephone conversations (XXXXXXXXXX).
For the purposes of this letter:
a."Act" means the Income Tax Act, chapter 63, S.C. 1970-71-72, as amended to the date of this application;
b."Regulations" means the Income Tax Regulations promulgated under the Act, as amended to the date of this application;
c. XXXXXXXXXX;
d."public corporation" has the meaning assigned by subsection 89(1) of the Act;
e."taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;
f."SFI" refers to the term "specified financial institution" as defined in subsection 248(1) of the Act;
g."term preferred share" has the meaning assigned by subsection 248(1) of the Act;
h."arm's length" has the meaning assigned by subsection 251(1) of the Act; and
i."related persons" has the meaning assigned by subsection 251(2) of the Act.
Our understanding of the statements of facts and proposed transactions is as follows:
FACTS
1.XXXXXXXXXX is a public corporation incorporated under the XXXXXXXXXX and is a taxable Canadian corporation. XXXXXXXXXX files its T2 Corporation Income Tax Returns with the XXXXXXXXXX Taxation Centre.
2.On XXXXXXXXXX a consolidation of the company's XXXXXXXXXX shares on XXXXXXXXXX.
As a result of the XXXXXXXXXX share consolidation, XXXXXXXXXX authorized share capital consists of XXXXXXXXXX common shares without par value ("common shares"), XXXXXXXXXX convertible non-voting shares without par value ("non-voting shares"), and XXXXXXXXXX preference shares with a par value of $XXXXXXXXXX, of which there are outstanding as at XXXXXXXXXX common shares and XXXXXXXXXX convertible non-voting shares. No preference shares are issued and outstanding as at the date of this application.
The common shares are listed on XXXXXXXXXX.
To the knowledge of XXXXXXXXXX management and directors, no one person or related group of persons owns more than XXXXXXXXXX% of the outstanding shares of XXXXXXXXXX other than the following shareholders (as at XXXXXXXXXX):
Total Shares Interest in
Shareholder of XXXXXXXXXX Held Class of Shares (%)
Common Shares
XXXXXXXXXX
The remaining outstanding common shares of XXXXXXXXXX are widely held by the general public.
Total Shares Interest in
Shareholder of XXXXXXXXXX Held Class of Shares (%)
Non-Voting Shares
XXXXXXXXXX
3.The non-voting shares are convertible into common shares on a one-for-one basis, subject to the restriction that the conversion right is not exercisable by a particular shareholder unless as a result of the conversion of non-voting shares, the total number of common shares beneficially owned (either alone or together with persons with whom the shareholder does not deal at arm's length) would not exceed XXXXXXXXXX% of the number of the then outstanding common shares.
4. XXXXXXXXXX.
5.On XXXXXXXXXX were amalgamated under the provisions of the Company Act and continued as one company under the name of XXXXXXXXXX.
6.The Notes were created under an indenture (the "Note Indenture") in XXXXXXXXXX as part of a substantial reorganization of XXXXXXXXXX (the "XXXXXXXXXX Reorganization").
As at XXXXXXXXXX was indebted to XXXXXXXXXX (the "Lenders") in the XXXXXXXXXX (including accrued interest) (the "XXXXXXXXXX Debt"). On XXXXXXXXXX a taxable Canadian corporation incorporated under the Company Act, acquired the XXXXXXXXXX Debt from the Lenders for approximately $XXXXXXXXXX
XXXXXXXXXX
The XXXXXXXXXX Reorganization was the subject of an advance income tax ruling (our reference 940709).
7.XXXXXXXXXX is a taxable Canadian corporation incorporated under the XXXXXXXXXX, and is a wholly-owned subsidiary of XXXXXXXXXX a member of the XXXXXXXXXX which is comprised of XXXXXXXXXX and its affiliates.
8.XXXXXXXXXX is a taxable Canadian corporation incorporated under the XXXXXXXXXX, and is a wholly-owned subsidiary of XXXXXXXXXX.
9.Pursuant to a shareholders' agreement between XXXXXXXXXX common shares, XXXXXXXXXX non-voting shares and $XXXXXXXXXX principal amount of Notes of XXXXXXXXXX previously held by XXXXXXXXXX were transferred in XXXXXXXXXX on a pro rata basis, to its shareholders, being
XXXXXXXXXX
10. XXXXXXXXXX.
11.The Notes have a XXXXXXXXXX term expiring XXXXXXXXXX at which time the outstanding principal amount and accrued interest are to be paid in full. For the first XXXXXXXXXX years, interest on the Notes is waived (other than in certain limited situations) with interest payable during years XXXXXXXXXX at XXXXXXXXXX% per annum if XXXXXXXXXX cash resources allow, failing which the interest will be capitalized and repayable at the end of the term.
Principal repayment obligations with respect to the Notes are determined based on the excess cash flow available from XXXXXXXXXX (defined broadly as cash flow from continuing operations which is in excess of XXXXXXXXXX working capital needs, permitted capital expenditures and debt service requirements). With respect to cash flow generated in the period from XXXXXXXXXX the amount of principal repayment on the Notes was $XXXXXXXXXX A further $XXXXXXXXXX in respect of the cash flow generated in the period from XXXXXXXXXX is due to be paid to holders of Notes (the "Noteholders") on or about XXXXXXXXXX. The principal payment obligation in future periods will depend on the future excess cash flow available and will be paid XXXXXXXXXX.
XXXXXXXXXX requirement to repay the Notes on XXXXXXXXXX is limited in that XXXXXXXXXX will not be obligated to borrow more than $XXXXXXXXXX (less any senior debt which is then outstanding) in order to repay the Notes. To the extent such borrowing is insufficient to repay the Notes, the remaining amount may be satisfied by the issuance of preference shares. Substantially all of XXXXXXXXXX assets are provided as security for the Notes.
12.As at XXXXXXXXXX there are Notes outstanding in the principal amount of $XXXXXXXXXX To the knowledge of XXXXXXXXXX management and directors, no one person or related group of persons owns more than XXXXXXXXXX% of the outstanding Notes other than the following Noteholders (as at XXXXXXXXXX):
Total Principal Amount Interest in
Noteholder of Notes Held ($) XXXXXXXXXX Notes (%)
XXXXXXXXXX
As at XXXXXXXXXX there were in excess of XXXXXXXXXX registered Noteholders.
PROPOSED TRANSACTIONS
13.Under the Restructuring, XXXXXXXXXX proposes to retire the outstanding principal balance of the Notes by making to all Noteholders a cash payment in full satisfaction of the Notes at a discounted percentage of the principal amount of Notes outstanding. In lieu of all or a portion of the cash payment, Noteholders will be given the option to receive new preference shares ("Preferred Shares") of XXXXXXXXXX upon retirement of the Notes. The cash amount will be the estimated present value of the stream of payments on the Notes which the Noteholders would otherwise receive in the future. If a Noteholder elects to receive Preferred Shares in lieu of all or a portion of the cash payment to which the Noteholder is entitled, the number of Preferred Shares to be received by the Noteholder will be determined by dividing the portion of the cash payment to be so substituted by $XXXXXXXXXX the redemption value of the Preferred Shares. Cash will be paid except to the extent that the Noteholder specifically elects to receive Preferred Shares.
It is estimated that the principal balance of the Notes outstanding as at XXXXXXXXXX will be approximately $XXXXXXXXXX The present value of the Notes as at XXXXXXXXXX (which is currently estimated at $XXXXXXXXXX) will be subject to an independent valuation to be conducted under the supervision of the independent directors of XXXXXXXXXX. The amount of the cash payment to be made to Noteholders will be the subject of negotiation on the basis of the valuation.
The conversion of the Notes to cash or Preferred Shares will trigger a forgiveness of debt under the provisions of section 80 of the Act to the extent that the outstanding principal balance of the Notes as at XXXXXXXXXX exceeds that aggregate amount of the cash amount paid and the redemption value of the Preferred Shares issued to satisfy the Notes (based on the estimated present value of the Notes, this will be in the range of $XXXXXXXXXX). It is anticipated that, in accordance with the terms of section 80, this amount will reduce the available non-capital and net capital loss carryforwards of XXXXXXXXXX.
14.Noteholders will be provided the option to jointly elect with XXXXXXXXXX to effect the exchange of the Notes into the Preferred Shares on a tax-deferred basis pursuant to subsection 85(1) of the Act.
15.The terms and conditions of the Preferred Shares will be as follows:
-issued at no par value
-redeemable by XXXXXXXXXX at any time after XXXXXXXXXX years after their issue
-no mandatory redemption requirements
-no retraction privileges
-cumulative dividends paid XXXXXXXXXX at a percentage of the average prime rate of a major Canadian chartered bank for the quarter. It is estimated that the percentage will be between XXXXXXXXXX% of prime rate.
-convertible into non-voting shares of XXXXXXXXXX at any time based on dividing the "fair value" of the Preferred Shares by the market value of the common share at the time of conversion (market value determined by reference to the 20 day average market price of the common shares prior to the date of conversion), unless the market cap of the common and non-voting shares is below $XXXXXXXXXX whereupon the Preferred Shares are not convertible.
-the "fair value" of the Preferred Shares is defined as follows:
i) Redemption value of the Preferred Shares if the market cap of common and non-voting shares exceed $XXXXXXXXXX
ii) XXXXXXXXXX% of the redemption value of the Preferred Shares if the market cap of the common and non-voting shares is between $XXXXXXXXXX
iii)XXXXXXXXXX% of the redemption value of the Preferred Shares if the market value of the common shares and non-voting shares is between $XXXXXXXXXX
(market cap of common and non-voting shares is to be based on the market value of the common shares)
Without the conversion feature, it is expected that the Preferred Shares could not be listed on any stock exchange or quoted on any organized market because there would not be a sufficiently wide distribution of the Preferred Shares. Accordingly, the conversion feature of the Preferred Shares will be the only means of providing liquidity to the holders thereof.
16.It is represented that there are no other agreements relating to the Preferred Shares.
17.The aggregate amount of cash payments required to retire the Notes will be funded primarily by third party borrowings of XXXXXXXXXX.
18.The XXXXXXXXXX are not related persons and they will not be related persons at any time during or after the proposed transactions. The XXXXXXXXXX proposes to elect to receive Preferred Shares in the amount of at least $XXXXXXXXXX has represented that none of the main purposes of any proposed acquisition of Preferred Shares is to avoid any limitation on the deductibility of any non-capital or net capital losses of XXXXXXXXXX.
19.To the best of the knowledge of the taxpayers involved, none of the issues involved in the requested rulings is being considered by a taxation service office or a taxation centre in connection with a tax return already filed and none of the issues is under objection or appeal.
PURPOSE OF THE PROPOSED TRANSACTIONS
20.The proposed transactions complete XXXXXXXXXX debt restructuring. It removes the onerous cash flow principal repayment requirements of the Notes. With this restriction lifted, XXXXXXXXXX can focus on new opportunities.
21.XXXXXXXXXX aim is to have no more than $XXXXXXXXXX of debt outstanding following the Restructuring. To that end, the terms of the Preferred Shares must be sufficiently attractive that at least $XXXXXXXXXX of the amount required to satisfy the Notes be in the form of Preferred Shares. For this to occur, there must be some means of providing liquidity to the holders of Preferred Shares.
22.By excluding a retraction feature on the Preferred Shares and by providing convertibility into non-voting shares at a level equal to the then market value rather than at a fixed amount, XXXXXXXXXX will be capable under generally accepted accounting principles of reporting the Preferred Shares as equity, rather than debt, thereby supporting the balance sheet of the company and further enhancing its ability to borrow the balance of funds required in the Restructuring.
23.To make the option to receive Preferred Shares attractive to the Noteholders, the Preferred Shares must have some liquidity comparable to that of the Notes, which are currently listed on XXXXXXXXXX. The only viable option is to provide the indirect right to convert the Preferred Shares via non-voting shares into common shares, other than for any shareholder who would acquire control on the subsequent conversion to common shares. As indicated previously, the common shares are currently listed on XXXXXXXXXX. The smaller Noteholders currently have liquidity as the Notes are listed, however, they would lose this liquidity if simple non-retractable preference shares were offered.
24.The directors of XXXXXXXXXX are not prepared to approve a debt restructuring transaction which would result in an acquisition of control and thereby eliminate the available non-capital and net capital loss carryforwards which still represent a significant corporate asset.
RULINGS
Provided that the above statements of facts and proposed transactions constitute complete and accurate disclosure of all the relevant facts and proposed transactions, we rule as follows:
A.The conversion feature described in paragraph 15 above will not, in and of itself, cause the Preferred Shares to be term preferred shares as defined in subsection 248(1) of the Act provided that the common shares and non-voting shares of XXXXXXXXXX are not term preferred shares;
B.Provided that the restriction on the conversion rights attached to the non-voting shares described above in paragraph 3 is enforceable under the relevant corporate law, the acquisition of Preferred Shares as described in paragraph 18 above will not, in and of itself, result in an acquisition of control for purposes of section 111 of the Act; and
C.As a result of the proposed transactions, in and by themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the rulings given.
The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R2 dated September 28, 1990, and are binding on Revenue Canada, Taxation, provided that the proposed transactions described herein are completed before XXXXXXXXXX. Our rulings are based on the Act in its present form and do not take into consideration any proposed amendments to the Act.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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