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:
Public company butterfly-stock options, acquisition of shares in contemplation of butterfly
Position: favourable rulings given
Reasons:
XXXXXXXXXX 963488
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter dated XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-referenced taxpayers. In your letters of XXXXXXXXXX you informed us of additional information in respect of, and amendments to, the facts and proposed transactions described in your original letter.
To the best of your knowledge and that of the taxpayers involved, none of the issues contained herein is being considered by a Tax Services Office or a Taxation Centre in connection with any tax return already filed and none of the issues is under objection or appeal.
Definitions
In this letter, the following terms have the meanings specified:
XXXXXXXXXX
“ACB” means adjusted cost base as that expression is defined in section 54 and subsection 248(1).
“Act” means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), as amended.
“Active business” has the meaning assigned by subsection 125(7) of the Act.
“Agreed amount” has the meaning assigned by subsection 85(1) of the Act. All agreed amounts referred to in this letter will be expressed in dollars.
“Amalco” means the corporation created as a result of the Amalgamation, as described in Paragraph 48.
“Amalco Common Shares” means the voting, fully participating common shares of Amalco as described in Paragraph 49.
“Amalco Redemption Amount” means the amount for which each Amalco Special Share will be redeemed or retracted, as described in Paragraph 49.
“Amalco Redemption Note” means the promissory note to be issued in satisfaction of the redemption of the Amalco Special Shares, as described in Paragraph 60.
“Amalco Special Shares” means the preferred shares of Amalco with the terms and conditions described in Paragraph 49.
“Amalco Stock Options” has the meaning assigned in paragraph 48.
“Amalgamation” means the proposed amalgamation of XXXXXXXXXX to form Amalco, as described in Paragraph 48.
“Applicants” means XXXXXXXXXX, Subco, Stockco, Newco1, Newco2, Opco A and Opco B.
“Arm's length” has the meaning assigned by section 251 of the Act.
“Associated Corporations” means XXXXXXXXXX.
“Assumed Debt” means all of the current liabilities and Non-current Debt of XXXXXXXXXX immediately prior to undertaking the Proposed Transactions which is allocable to:
the business property of:
XXXXXXXXXX
Amalco’s directly or indirectly held shares of the Associated Corporations, except for the shares of XXXXXXXXXX;
the cash or near cash which will be transferred by Amalco to Stockco as described in Paragraph 55;
the Investment Assets that will be transferred by Amalco to Stockco as described in Paragraph 55,
in accordance with Paragraph 54.
XXXXXXXXXX, a public corporation.
XXXXXXXXXX, a private corporation.
XXXXXXXXXX, a public corporation.
“Business Proportion” has the meaning assigned in Paragraph 48.
“Capital property” has the meaning assigned by the definition in section 54 of the Act.
“CBCA” means the Canada Business Corporations Act, and, where applicable, its predecessor statutes.
XXXXXXXXXX, a public corporation.
XXXXXXXXXX, a public corporation.
“Computer Equipment” means certain of the computer equipment owned by the XXXXXXXXXX Partnership used in connection with the XXXXXXXXXX.
XXXXXXXXXX, a public corporation.
“Cost amount” has the meaning assigned by subsection 248(1) of the Act.
XXXXXXXXXX
“Depreciable property” has the meaning assigned by subsection 13(21) of the Act.
XXXXXXXXXX business carried out by certain members of the XXXXXXXXXX Group and XXXXXXXXXX, as described in Paragraphs 19 to 23.
“XXXXXXXXXX Partnership” means the XXXXXXXXXX.
“Eligible capital property” has the meaning assigned by section 54 of the Act.
“Eligible property” has the meaning assigned by subsection 85(1.1) of the Act.
XXXXXXXXXX business carried out by certain members of the XXXXXXXXXX Group, as described in Paragraphs 24 to 29.
“FMV” means fair market value.
XXXXXXXXXX, a public corporation.
“Interests in Associated Corporations” means the shares which XXXXXXXXXX owns in the Associated Corporations.
“Investment Assets” means those assets described in Paragraphs 33 and 34.
“Itar” refers to the Income Tax Application Rules.
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
“XXXXXXXXXX Business” means the XXXXXXXXXX business carried out by certain members of the XXXXXXXXXX Group, as described in Paragraphs 15 to 18.
XXXXXXXXXX
XXXXXXXXXX, a public corporation.
“XXXXXXXXXX Shares” means common shares of XXXXXXXXXX.
“Newco1” means the XXXXXXXXXX corporation to which the Transferred Assets will be indirectly transferred, prior to its amalgamation with Stockco to create Newco2.
“Newco2” means the XXXXXXXXXX corporation to be called “XXXXXXXXXX” created as a result of the amalgamation of Stockco and Newco1.
“Newco2 Common Shares” means the voting, fully participating common shares of Newco2 described in Paragraph 62.
“Newco2 Group” means Newco2 and any subsidiary wholly-owned corporation existing at the relevant time.
“Newco2 Stock Options” has the meaning assigned in Paragraph 62.
“Non-Current Debt” means the debt obligations of the XXXXXXXXXX Group and the Associated Corporations other than current liabilities.
“Opco A” means the subsidiary of XXXXXXXXXX to which certain assets will be transferred by XXXXXXXXXX, as described in Paragraph 40.
“Opco A Common Shares” means the voting, fully participating common shares of Opco A, as described in Paragraph 36.
“Opco B” means the subsidiary of XXXXXXXXXX to which certain assets will be transferred by XXXXXXXXXX, as described in Paragraph 43.
“Opco B Common Shares” means the voting, fully participating common shares of Opco B, as described in Paragraph 36.
“Paragraph” refers to a numbered paragraph in this letter.
“Plan of Arrangement” means the proposed plan of arrangement under the XXXXXXXXXX to effect the divisive reorganization described in the Proposed Transactions.
“Prescribed stock exchange” has the meaning assigned by section 3200 of the Income Tax Regulations.
“Private corporation” has the meaning assigned in subsection 89(1).
“Proceeds of disposition” has the meaning assigned by section 54 of the Act.
“Proposed Transactions” means the transactions described in Paragraphs 36 to 66.
“Public corporation” has the meaning assigned in subsection 89(1).
“PUC” means paid-up capital as that expression is defined in subsection 89(1).
“Related person” has the meaning assigned by section 251 of the Act.
“RFI” means restricted financial institution as defined in subsection 248(1).
XXXXXXXXXX
“SFI” means specified financial institution as defined in subsection 248(1).
“Significant influence” has the meaning given by section 3050 of the CICA Handbook.
“Specified Investment Business” (“SIB”) has the meaning assigned by the definition in subsection 125(7).
“Stated Capital” means stated capital as that expression is used in the XXXXXXXXXX or the CBCA, as the case may be.
“Stockco” means a new XXXXXXXXXX corporation which will be utilized in the course of the Proposed Transactions to facilitate the exchange of XXXXXXXXXX Stock Options for Newco2 Stock Options and to facilitate the transfer to Newco2 of its proportionate interest in the Transferred Assets.
“Subco” means a new XXXXXXXXXX corporation which will be utilized in the course of the Proposed Transactions to facilitate the transfer to Newco2 of its proportionate interest in the Transferred Assets.
“Subco Common Shares” means the voting, fully participating common shares of Subco as described in Paragraph 37.
“Subco Preferred Shares” means the preferred shares of Subco with the terms and conditions described in Paragraph 37.
“Subco Redemption Amount” means the amount for which each Subco Preferred Share will be redeemed or retracted, as described in Paragraph 37.
“Subco Redemption Note” means the promissory note to be issued in satisfaction of the redemption of the Subco Preferred Shares, as described in Paragraph 60.
“Subsidiary wholly-owned corporation” has the meaning assigned by subsection 248(1) of the Act.
XXXXXXXXXX, a public corporation.
“Taxable Canadian corporation” has the meaning assigned in subsection 89(1) of the Act.
“Taxable dividend” has the meaning assigned by subsection 89(1) of the Act.
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
“XXXXXXXXXX Common Shares” means the outstanding voting, fully participating common shares of XXXXXXXXXX
“XXXXXXXXXX Group” means XXXXXXXXXX, all of its direct and indirect subsidiaries and its interests in other corporations and entities, excluding the Associated Corporations.
“XXXXXXXXXX Shareholders” means all of the holders of XXXXXXXXXX Common Shares immediately before the Amalgamation.
“Transaction Date” means the date on which the Proposed Transactions in Paragraphs 48 to 63 will occur.
“Transferred Assets” means those assets of Amalco on the Transaction Date the beneficial ownership of which will be transferred by Amalco to Stockco, as described in Paragraph 55.
XXXXXXXXXX, a corporation established under the laws of Barbados.
XXXXXXXXXX, a corporation established under the laws of Barbados.
XXXXXXXXXX
“XXXXXXXXXX Debt” means that debt owing from XXXXXXXXXX to XXXXXXXXXX in the amount of $XXXXXXXXXX.
“XXXXXXXXXX Losses” means the non-capital and current year losses of XXXXXXXXXX described in Paragraph 29.
“XXXXXXXXXX Business” means the XXXXXXXXXX business carried out by certain members of the XXXXXXXXXX Group, as described in Paragraphs 8 to 14.
XXXXXXXXXX
XXXXXXXXXX
“Undepreciated capital cost” has the meaning assigned by subsection 13(21) of the Act.
Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
General Facts Relating to XXXXXXXXXX
XXXXXXXXXX is a public corporation and a taxable Canadian corporation with its head office in XXXXXXXXXX. It was incorporated on XXXXXXXXXX and was continued under the XXXXXXXXXX. XXXXXXXXXX is engaged, through directly and indirectly held subsidiary corporations and affiliates, in XXXXXXXXXX.
As of the date hereof, XXXXXXXXXX has XXXXXXXXXX Common Shares issued and outstanding with an aggregate stated capital and PUC of approximately $XXXXXXXXXX. XXXXXXXXXX has no shares of any other class outstanding.
To the best of the knowledge of the directors and senior officers of XXXXXXXXXX, as of the date hereof no person or related group of persons beneficially owned, directly or indirectly, more than XXXXXXXXXX% of the issued and outstanding XXXXXXXXXX Common Shares, other than those persons outlined below.
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
As at XXXXXXXXXX, the following common shares were reserved for options granted to officers and employees in respect of options which have not expired as of the date of this letter.
Date Granted Expiry Date Price/share Number of shares
XXXXXXXXXX
XXXXXXXXXX assets are comprised of:
the Interests in Associated Corporations (as described below);
a XXXXXXXXXX% interest in the XXXXXXXXXX Partnership;
shares in certain subsidiary wholly-owned corporations;
certain cash and near cash property, including cash, term deposits, accounts receivable, materials and supplies and prepaid expenses;
Investment Assets, as described below; and
certain fixed assets (principally office furnishings and equipment, computers and art) used in XXXXXXXXXX business operations. XXXXXXXXXX.
XXXXXXXXXX
All of the acquisitions or dispositions described in this Paragraph were made in the ordinary course of business and were not made in contemplation of the Proposed Transactions described below.
The fiscal year-end for XXXXXXXXXX and each member of the XXXXXXXXXX Group is XXXXXXXXXX.
General Facts Relating to the XXXXXXXXXX Business
XXXXXXXXXX is a taxable Canadian corporation and a subsidiary wholly-owned corporation of XXXXXXXXXX, the only material assets of which are the shares of XXXXXXXXXX.
XXXXXXXXXX are both taxable Canadian corporations and subsidiary wholly-owned corporations of XXXXXXXXXX.
XXXXXXXXXX conducts the XXXXXXXXXX Business
XXXXXXXXXX
XXXXXXXXXX also owns a XXXXXXXXXX% interest in the XXXXXXXXXX Partnership.
XXXXXXXXXX provides management and administrative services to
XXXXXXXXXX
XXXXXXXXXX is a subsidiary wholly-owned corporation of XXXXXXXXXX is a subsidiary wholly-owned corporation of
XXXXXXXXXX
XXXXXXXXXX are both incorporated under the laws of Barbados. XXXXXXXXXX is a subsidiary wholly-owned corporation of XXXXXXXXXX is a subsidiary wholly-owned corporation of XXXXXXXXXX. XXXXXXXXXX as defined in subsection 248(1) and is an SFI by virtue of paragraph (d) of the definition of that expression in the Act. Amalco will be an SFI at the time of the amalgamation, but will cease to be an SFI when XXXXXXXXXX are transferred to Subco. No member of the XXXXXXXXXX Group nor the Newco2 Group is or will be an RFI. XXXXXXXXXX.
General Facts Relating to the XXXXXXXXXX Business
XXXXXXXXXX is a taxable Canadian corporation and a subsidiary wholly-owned corporation of XXXXXXXXXX, the principal asset of which is its share interest in XXXXXXXXXX.
XXXXXXXXXX is a taxable Canadian corporation and a subsidiary wholly-owned corporation of XXXXXXXXXX.
XXXXXXXXXX
XXXXXXXXXX also owns a XXXXXXXXXX% interest in the XXXXXXXXXX Partnership.
General Facts Relating to the XXXXXXXXXX Business
XXXXXXXXXX
The partners in the XXXXXXXXXX Partnership, together with their respective ACB’s in their partnership interests, are set forth below:
Anticipated
Partnership ACB as at ACB as at
Interest XXXXXXXXXX
$ $
XXXXXXXXXX
The interest in the XXXXXXXXXX Partnership held by each of XXXXXXXXXX was held by the particular partner on February 22, 1994 and has been an excluded interest, within the meaning of subsection 40(3.15), continuously since that time.
XXXXXXXXXX
XXXXXXXXXX
The XXXXXXXXXX Partnership conducts its Canadian operations
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
General Facts Relating to the XXXXXXXXXX Business
In XXXXXXXXXX acquired XXXXXXXXXX% of the outstanding common shares and XXXXXXXXXX convertible preferred shares of
XXXXXXXXXX
Each of XXXXXXXXXX is a taxable Canadian corporation.
XXXXXXXXXX
The only material assets of XXXXXXXXXX are the XXXXXXXXXX Debt, the shares of XXXXXXXXXX and the shares of XXXXXXXXXX
The shares of XXXXXXXXXX have a FMV of approximately $XXXXXXXXXX.
XXXXXXXXXX
XXXXXXXXXX has significant non-capital and estimated current year losses in the amounts of $XXXXXXXXXX, respectively. The outstanding common shares of XXXXXXXXXX owned by XXXXXXXXXX currently have a nominal FMV of $XXXXXXXXXX and following the proposed transfer of the shares of XXXXXXXXXX and the shares of XXXXXXXXXX (currently owned by XXXXXXXXXX) to XXXXXXXXXX, as described in Paragraph 39, will continue to have a nominal FMV of $XXXXXXXXXX
Associated Corporations
The XXXXXXXXXX Group owns the following share interests in the Associated Corporations:
Percentage of
Outstanding Estimated
Shares Held ACB FMV
$ $XXXXXXXXXX
FMV of the shares of the Associated Corporations, other than XXXXXXXXXX, is based on the closing share price on the relevant stock exchange on XXXXXXXXXX. The FMV of the shares of XXXXXXXXXX is based on XXXXXXXXXX management’s assessment of value.
The above percentages represent the percentage of outstanding participating shares held. Such shares are voting, with the exception of XXXXXXXXXX non-voting common shares of XXXXXXXXXX which are convertible at any time into voting common shares. Such non-voting common shares have been included in the amounts described above for XXXXXXXXXX.
XXXXXXXXXX also owns XXXXXXXXXX% of the outstanding shares of XXXXXXXXXX. The remaining XXXXXXXXXX shares are owned by a person with which XXXXXXXXXX deals at arm’s length. Each of XXXXXXXXXX are public corporations. XXXXXXXXXX are private corporations.
Except as otherwise described below, XXXXXXXXXX owns the above share interests in the Associated Corporations.
The shares of XXXXXXXXXX are owned as follows: XXXXXXXXXX is a subsidiary wholly-owned corporation of XXXXXXXXXX. The only assets of XXXXXXXXXX of material value are the XXXXXXXXXX shares of XXXXXXXXXX.
The shares of XXXXXXXXXX are owned by XXXXXXXXXX, which is a subsidiary wholly-owned corporation of XXXXXXXXXX. XXXXXXXXXX expects to acquire a further XXXXXXXXXX% of the outstanding voting common shares of XXXXXXXXXX. Such acquisition will occur in the ordinary course of XXXXXXXXXX business and will not occur in contemplation of the Proposed Transactions.
XXXXXXXXXX owns all of the shares of XXXXXXXXXX which has assets with a FMV of approximately $XXXXXXXXXX which relate to XXXXXXXXXX shareholdings in the Associated Corporations.
XXXXXXXXXX consistently has prepared its consolidated financial statements using the equity method with respect to the Associated Corporations on the basis that it exercises significant influence over these corporations. The determination that XXXXXXXXXX exercises significant influence in each case reflects XXXXXXXXXX percentage shareholding in the particular corporation and the further considerations such as XXXXXXXXXX representation on the boards of directors and committees.
XXXXXXXXXX paid a cash dividend of approximately $XXXXXXXXXX to XXXXXXXXXX as part of the voluntary liquidation and dissolution of XXXXXXXXXX. The voluntary liquidation of XXXXXXXXXX is not being undertaken in contemplation of the Proposed Transactions.
Investment Property Within the XXXXXXXXXX Group
XXXXXXXXXX is of the view that the following assets (“Investment Assets”) are, and will be as at the Transaction Date, the only material investment property held within the XXXXXXXXXX Group, for purposes of determining the types of property of the XXXXXXXXXX Group immediately before the transfer described in Paragraph 59.
XXXXXXXXXX
The Investment Assets also will include XXXXXXXXXX share of the net FMV of any investment property of the Associated Corporations and any other corporation over which XXXXXXXXXX exercises significant influence in accordance with the method described in Paragraphs 53 and 54.
For purposes of looking through the shares of XXXXXXXXXX to the underlying assets and liabilities of that corporation, the assets (other than any current assets) formerly used by XXXXXXXXXX in carrying on its active business operations will be treated as business property,
XXXXXXXXXX
XXXXXXXXXX has cash of approximately $XXXXXXXXXX which is being held by it as part of a performance guarantee related to XXXXXXXXXX business. In XXXXXXXXXX borrowed $XXXXXXXXXX from an arm's length lender; this loan bears interest at a rate of XXXXXXXXXX% and matures XXXXXXXXXX. It is anticipated that $XXXXXXXXXX of cash will continue to be held until the maturity date of the aforementioned long-term debt, at which time that cash will be used to repay the debt. For purposes of calculating the net amount of the cash or near cash type property as described in Paragraph 54 below, the long-term debt which is directly traceable to the pledged cash will be allocated to the cash or near cash property. The amount of pledged cash which exceeds the long-term debt will be classified as cash or near cash property.
35.1
XXXXXXXXXX
Proposed transactions
Newco1 will be an existing shelf corporation or a newly created corporation incorporated under the XXXXXXXXXX. Newco1 will be a taxable Canadian corporation. Prior to the transactions relating hereto, Newco1 will not have had any assets or liabilities or have issued any outstanding shares. Newco1’s Articles of Incorporation will provide that its authorized capital will include Newco1 Common Shares, each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of Newco1.
Opco A will be an existing shelf corporation or a newly created corporation incorporated under the XXXXXXXXXX. Opco A will be a taxable Canadian corporation. Prior to the transactions relating hereto, Opco A will not have had any assets or liabilities or have issued any outstanding shares. Opco A’s Articles of Incorporation will provide that its authorized capital will include Opco A Common Shares, each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of Opco A.
Opco B will be an existing shelf corporation or a newly created corporation incorporated under the XXXXXXXXXX. Opco B will be a taxable Canadian corporation. Prior to the transactions relating hereto, Opco B will not have had any assets or liabilities or have issued any outstanding shares. Opco B’s Articles of Incorporation will provide that its authorized capital will include Opco B Common Shares, each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of Opco B.
Stockco will be an existing shelf corporation or a newly created corporation incorporated under the XXXXXXXXXX. Stockco will be a taxable Canadian corporation. Prior to the transactions relating hereto, Stockco will not have any assets or liabilities or have issued any outstanding shares. Stockco’s Articles of Incorporation will provide that its authorized capital will include Stockco Common Shares, each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of Stockco.
Subco will be an existing shelf corporation or a newly created corporation incorporated under the XXXXXXXXXX. Subco will be a taxable Canadian corporation. Prior to the transactions relating hereto, Subco will not have had any assets or liabilities or have issued any outstanding shares.
Subco’s Articles of Incorporation will provide that its authorized capital will consist of the Subco Common Shares and the Subco Preferred Shares having the following attributes:
each Subco Preferred Share will be redeemable, subject to applicable law, at any time at the option of Subco at the Subco Redemption Amount which will equal the aggregate FMV of the XXXXXXXXXX Stockco Common Shares transferred by Amalco to Subco, divided by the number of Subco Preferred Shares issued as consideration therefor (plus any declared but unpaid dividends);
each Subco Preferred Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the Subco Redemption Amount;
the holder of each Subco Preferred Share will be entitled to a non-cumulative cash dividend as and when declared by the Board of Directors from time to time, which dividend need not also be declared on any other class of shares of Subco;
there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of Subco if the resulting realizable value of the net assets of Subco after payment of the dividends would be less than the aggregate of the Subco Redemption Amounts, of all of the Subco Preferred Shares then outstanding;
the holder of each Subco Preferred Share will be entitled, upon the liquidation, dissolution or winding-up of Subco, to a payment in priority to all other classes of shares of Subco of an amount equal to the Subco Redemption Amount to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment;
the holder of each Subco Preferred Share will not be entitled to vote at meetings of shareholders of Subco, other than as provided under the XXXXXXXXXX; and
each Subco Common Share will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of Subco.
For the purpose of subsection 191(4) of the Act, the terms and conditions of the Subco Preferred Shares to be issued as described herein will specify an amount in respect of each Subco Preferred Share, including an amount for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each of the Subco Preferred Shares, at the time of its issuance by a resolution to be made by the board of directors of Subco, will be expressed as a dollar amount, will not be determined by a formula and will be equal to the FMV of the property received by Subco as consideration for such share.
Utilizing funds borrowed from XXXXXXXXXX, Newco1 will subscribe for one Subco Common Share for $XXXXXXXXXX cash.
The shares of XXXXXXXXXX will be transferred by XXXXXXXXXX to XXXXXXXXXX for consideration comprised of additional shares of XXXXXXXXXX. In addition, the shares of XXXXXXXXXX held by XXXXXXXXXX will be transferred by XXXXXXXXXX to XXXXXXXXXX for consideration comprised of shares of XXXXXXXXXX.
In respect of each such transfer referred to above, each transferor and transferee will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act. The amount agreed upon in each joint election under subsection 85(1) will not be less than the cost amount to the transferor and will not exceed the FMV thereof.
Immediately following these transactions, the shares of XXXXXXXXXX will be sold by XXXXXXXXXX to XXXXXXXXXX for FMV which is estimated to be $XXXXXXXXXX, in each case.
XXXXXXXXXX will transfer to Opco A at FMV all of its business property relating to the XXXXXXXXXX Business and certain of its cash or near cash property in consideration of:
Opco A assuming a portion of the Assumed Debt which is debt of XXXXXXXXXX that is allocable to XXXXXXXXXX business property relating to the XXXXXXXXXX Business and XXXXXXXXXX cash or near cash property which is transferred, determined in accordance with Paragraph 54, not exceeding the aggregate of the amounts agreed upon in the joint elections under subsection 85(1) described in Paragraph 42; and
Opco A issuing to XXXXXXXXXX Opco A Common Shares.
XXXXXXXXXX, the addition to the Stated Capital of Opco A in respect of the issuance of the Opco A Common Shares will equal the amount by which the aggregate of the cost of the property transferred to Opco A as described in Paragraph 40 exceeds the principal amount of the portion of the Assumed Debt assumed by Opco A as described in Paragraph 40(a).
XXXXXXXXXX and Opco A will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act, with respect to the transfer to Opco A of any eligible property of XXXXXXXXXX that has a FMV in excess of its cost amount. Specifically, the amount agreed upon in each joint election will not be less than the least of:
the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii) in the case of eligible capital property,
the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii) in the case of depreciable property of a prescribed class, and
the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii).
In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).
XXXXXXXXXX will transfer to Opco B at FMV all of its business property relating to the XXXXXXXXXX Business and certain of its cash or near cash property in consideration of:
Opco B assuming a portion of the Assumed Debt which is debt of XXXXXXXXXX that is allocable to XXXXXXXXXX business property relating to the XXXXXXXXXX Business and XXXXXXXXXX cash or near cash property which is transferred, determined in accordance with Paragraph 54, not exceeding the aggregate of the amounts agreed upon in the joint elections under subsection 85(1) described in Paragraph 45; and
Opco B issuing to XXXXXXXXXX Opco B Common Shares.
XXXXXXXXXX the addition to the Stated Capital of Opco B in respect of the issuance of the Opco B Common Shares will equal the amount by which the aggregate of the cost of the property transferred to Opco B as described in Paragraph 43 exceeds the principal amount of the portion of the Assumed Debt assumed by Opco B as described in Paragraph 43(a).
XXXXXXXXXX and Opco B will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act, with respect to the transfer to Opco B of any eligible property of XXXXXXXXXX that has a FMV in excess of its cost amount. Specifically, the amount agreed upon in each joint election will not be less than the least of:
the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii) in the case of eligible capital property,
the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii) in the case of depreciable property of a prescribed class, and
the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii).
In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).
Prior to the Amalgamation described in Paragraph 48, XXXXXXXXXX may borrow some amount of cash from one or more of its direct or indirect subsidiary corporations involved in the XXXXXXXXXX Business in consideration of a demand promissory note payable from XXXXXXXXXX to the particular lender. Such cash will be treated as cash or near cash property of XXXXXXXXXX for purposes of Paragraph 53 and the liability of XXXXXXXXXX under the one or more promissory notes will be treated as a current liability for purposes of Paragraph 54(b).
Subject to, among other things, the appropriate shareholder and court approvals, the transactions described in Paragraphs 48 to 63 below will be undertaken pursuant to a plan of arrangement (the "Plan of Arrangement) under XXXXXXXXXX. With the exception of the filing of elections under the Act, these transactions will occur by virtue of the Plan of Arrangement and will be designated in the Plan of Arrangement to occur on the date (the "Effective Date") on which the Plan of Arrangement is effective, and in the order set out below. The Effective Date will be on a date that will be subsequent to the receipt of the advance income tax rulings provided in this letter.
Each public shareholder of XXXXXXXXXX will be entitled to dissent from the Plan of Arrangement pursuant to the provisions of the XXXXXXXXXX. Where a public shareholder so dissents, such dissenting shareholder will cease to be a shareholder of XXXXXXXXXX on the Effective Date referred to herein, and the common shares of XXXXXXXXXX held by such a shareholder will no longer be considered to be outstanding as common shares for the purpose of the corporate law transactions comprising the Plan of Arrangement. After the completion of the proposed transactions comprising the Plan of Arrangement, each such dissenting shareholder will be entitled to be paid the fair value of the common shares of XXXXXXXXXX in respect of which the right of dissent is exercised.
XXXXXXXXXX will be amalgamated with XXXXXXXXXX to form Amalco in such manner that:
all of the property (except amounts receivable from any predecessor corporation or shares of any predecessor corporation) of the predecessor corporations immediately before the merger will become property of Amalco by virtue of the merger;
all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger will become liabilities of Amalco by virtue of the merger; and
all of the shareholders (except any predecessor corporation and any XXXXXXXXXX Shareholder who dissents to the Arrangement) who own shares of any predecessor corporation immediately before the merger will receive shares of Amalco because of the merger. For greater certainty, no person other than a XXXXXXXXXX shareholder will receive shares of Amalco because of the merger.
Amalco’s share capital will be comprised of at least two classes of shares, being Amalco Common Shares and Amalco Special Shares;
each shareholder of XXXXXXXXXX will, in consideration of each XXXXXXXXXX Common Share held, be entitled to receive one Amalco Common Share and one Amalco Special Share;
the aggregate redemption amount of the Amalco Special Shares issued on the Amalgamation will be equal to a proportion (“Business Proportion”) of the FMV of all of the issued XXXXXXXXXX Common Shares immediately before the Amalgamation. The Business Proportion is the proportion that:
the net FMV of the business property of Amalco which will be transferred to Stockco as described in Paragraph 55 below
is of
the net FMV of all of the business property of Amalco,
determined immediately before the transfer to Stockco and by applying the rules in Paragraphs 53 and 54, and
the aggregate Stated Capital of the Amalco Common Shares and the Amalco Special Shares will not exceed the aggregate PUC of the XXXXXXXXXX Common Shares and
the addition to the Stated Capital of the Amalco Special Shares will equal that portion of the aggregate PUC of the XXXXXXXXXX Common Shares that the FMV of the Amalco Special Shares is of the total FMV of the Amalco Common Shares and the Amalco Special Shares; and
the addition to the Stated Capital of the Amalco Common Shares will equal that proportion of the aggregate PUC of the XXXXXXXXXX Common Shares that the FMV of the Amalco Common Shares is of the total FMV of the Amalco Common Shares and the Amalco Special Shares.
Under the Amalgamation, employees of the XXXXXXXXXX Group will exchange all of their rights under the XXXXXXXXXX Stock Options for rights under a stock option plan of Amalco to acquire Amalco Common Shares ("Amalco Stock Options"). Under each of the Amalco Stock Options issued to a particular employee, the total FMV of the Amalco Common Shares issuable thereunder, determined immediately after the completion of the Proposed Transactions, will in most cases exceed the total amount payable by the particular employee to acquire the Amalco Common Shares to be issued under the relevant Amalco Stock Option. However, such excess, if any, will not exceed the amount, if any, by which the total FMV of the XXXXXXXXXX Common Shares issuable under the applicable XXXXXXXXXX Stock Option exceeds the exercise price payable by the option holder to acquire the XXXXXXXXXX Common Shares under the exchanged XXXXXXXXXX Stock Options.
Amalco’s Articles of Amalgamation will provide that its authorized capital will include the Amalco Common Shares and the Amalco Special Shares having the following attributes:
each Amalco Special Share will be redeemable, subject to applicable law, at any time at the option of Amalco at the Amalco Redemption Amount which will equal the aggregate redemption amount of all of the Amalco Special Shares issued on the Amalgamation, as described in Paragraph 48(d), divided by the number of Amalco Special Shares issued on the Amalgamation (plus any declared but unpaid dividends);
each Amalco Special Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the Amalco Redemption Amount;
the holder of each Amalco Special Share will be entitled to a non-cumulative cash dividend as and when declared by the Board of Directors from time to time, which dividend need not also be declared on any other class of shares of Amalco;
there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of Amalco if the resulting realizable value of the net assets of Amalco after payment of the dividends would be less than the aggregate of the Amalco Redemption Amounts of all of the Amalco Special Shares then outstanding;
the holder of each Amalco Special Share will be entitled, upon the liquidation, dissolution or winding-up of Amalco, to a payment in priority to all other classes of shares of Amalco of an amount equal to the Amalco Redemption Amount to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment;
the holder of each Amalco Special Share will be entitled to XXXXXXXXXX Amalco Special Shares held;
each Amalco Common Share will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of Amalco; and
For the purpose of subsection 191(4) of the Act, the terms and conditions of the Amalco Special Shares to be issued as described herein will specify an amount in respect of each share, including an amount for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each of the Amalco Special Shares, at the time of its issuance by a resolution to be made by the board of directors of Amalco, will be expressed as a dollar amount, will not be determined by a formula and will be equal to the FMV of the property received by Amalco as consideration for such share.
In accordance with the Plan of Arrangement, Newco1 will acquire from the XXXXXXXXXX Shareholders all of the issued Amalco Special Shares in exchange for an identical number (currently estimated to be XXXXXXXXXX) of Newco1 Common Shares. Although the XXXXXXXXXX Shareholders will be the beneficial owners of the Amalco Special Shares, the certificates for the Amalco Special Shares which otherwise would be delivered to the XXXXXXXXXX Shareholders instead will be delivered directly to Newco1.
Immediately after the share for share exchange described herein, the FMV of each XXXXXXXXXX Shareholder's shares of the capital stock of Newco1 will be equal to or approximate the amount determined by the formula
(A x B) + D
C
as found in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1) of the Act. In addition, no person who is not a XXXXXXXXXX Shareholder will own any shares of Newco1.
If requested by a particular XXXXXXXXXX Shareholder, Newco1 will execute a joint election as permitted under subsection 85(1) in respect of the disposition by that shareholder of Amalco Special Shares for Newco1 Common Shares. It is anticipated that each member of the XXXXXXXXXX, or the appropriate holding corporation, will jointly elect with Newco1 pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act in respect of the disposition of Amalco Special Shares. The agreed amount in respect of each such election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii). In each case the agreed amount will not exceed the FMV of the Amalco Special Shares, nor will it be less than the amount permitted by paragraph 85(1)(b).
Pursuant to the Plan of Arrangement and XXXXXXXXXX, the addition to the Stated Capital of Newco1 in respect of the issuance of the Newco1 Common Shares will not exceed the aggregate PUC of the Amalco Special Shares transferred to Newco1.
Immediately before the transfers of property described in Paragraph 59 below, the property of Amalco will be determined on a consolidated basis by including the appropriate pro rata share of the assets of any corporation over which Amalco has the ability to exercise significant influence (Amalco and such corporations will hereinafter be referred to as the "Amalco Group") and will be classified into three types of property for the purposes of the definition of "distribution" in subsection 55(1) of the Act, as follows:
cash or near cash property, comprising all of the current assets of the Amalco Group, including any cash, term deposits, accounts receivable, materials and supplies and rights arising from prepaid expenses (hereinafter referred to as "prepaid expenses");
investment property, comprising all of the assets of the Amalco Group, other than cash or near cash property, any income from which would, for purposes of the Act, be income from property or a SIB; and
business property, comprising all of the assets of the Amalco Group, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from a business (other than a SIB).
For greater certainty, any tax accounts, such as the balance of any non-capital losses of the Amalco Group, will not be considered property for purposes of the proposed transactions described herein.
Amounts reported on the financial statements of XXXXXXXXXX as XXXXXXXXXX, will be treated as business property .
For the purposes of this Paragraph, Amalco will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation.
For greater certainty, the FMV of the shares of any corporation over which Amalco has the ability to exercise significant influence and of any indebtedness receivable by Amalco from such a corporation will be allocated between the three types of property by multiplying the FMV of the shares of the particular corporation or amount receivable from the particular corporation, as the case may be, by the proportion that the net FMV of each type of property owned by the particular corporation (as determined in this Paragraph and Paragraph 54 below) is of the aggregate net FMV of all the property owned by such corporation.
For the purpose of calculating the net FMV of the types of property of Amalco, any particular member of the Amalco Group will be considered to own its respective partnership share of each property owned by the XXXXXXXXXX Partnership and the XXXXXXXXXX Partnership.
In determining, on a consolidated basis, the net FMV of each type of property of Amalco immediately before the transfers described in Paragraph 59 below, the liabilities of Amalco and any corporation over which Amalco exercises significant influence will be allocated to, and be deducted in the calculation of, the net FMV of each such type of property of such corporation in the following manner:
In determining the net FMV of each type of property of a corporation over which Amalco exercises significant influence, immediately before the transfers described in Paragraph 59 below, the liabilities of that particular corporation (other than any amount owing by such corporation to Amalco) will be allocated to, and be deducted in the calculation of, the net FMV of each type of property of the particular corporation in the following manner:
Current liabilities of such corporation will be allocated to the cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses and the portion of long-term debt due within one year) of such corporation in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by the particular corporation. To the extent that the allocation of current liabilities as described herein exceeds the aggregate FMV of the cash or near cash property of the particular corporation, such corporation will be considered to have a negative amount of cash or near cash property;
Liabilities, other than current liabilities, of such corporation that relate to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. Liabilities that pertain to a type of property but not to a particular property will then be allocated to that type of property. To the extent that the allocation of liabilities that pertain to a particular type of property as described herein exceeds the aggregate FMV of all that particular type of property of the particular corporation, the particular corporation will be considered to have a negative amount of that type of property;
Any liabilities, other than current liabilities, of such corporation which do not relate to a particular type of property will then be allocated to the cash or near cash property, investment property, and business property of such corporation based on the relative net FMV of each type of property prior to the allocation of such liabilities, but after the allocation of the liabilities described in subparagraphs (a)(i) and (a)(ii) above.
For the purpose of determining the net FMV of the types of property of Amalco, the liabilities of any particular member of the Amalco Group will be considered to include its respective partnership share of each liability of the XXXXXXXXXX Partnership and the XXXXXXXXXX Partnership.
In determining, on a consolidated basis, the net FMV of each type of property of Amalco immediately before the transfers of property described in Paragraph 59, Amalco will include the appropriate pro-rata share of the net FMV of each type of property of any corporation over which Amalco exercises significant influence, as determined in accordance with subparagraph (a) herein, and any liabilities of Amalco will then be allocated to, and be deducted in the calculation of, the net FMV of each type of property of Amalco in the following manner:
Current liabilities of Amalco will be allocated to cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses) of Amalco in the proportion that the FMV of each such property is of the FMV of all cash or near cash property of Amalco. The allocation of current liabilities as described herein will not exceed the aggregate FMV of the cash or near cash property of Amalco;
Liabilities of Amalco, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property as described herein;
If any liabilities remain after the allocations described in steps (b)(i) and (b)(ii) above are made ("excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property, investment property, and business property, if any, of Amalco based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.
For greater certainty, and for the purposes of subparagraph (b)(i) hereof, the amount to be paid to any dissenting shareholders of XXXXXXXXXX for their interest in the common shares of XXXXXXXXXX will represent a current liability of Amalco.
The amount of any deferred income tax will not be considered a liability for the purposes of the Proposed Transactions described herein because such amount does not represent a legal obligation of the particular corporation.
Deferred revenue which represents revenue received in the ordinary course of business, the recognition of which has been deferred due to the legal obligation of the recipient to either provide services or deliver goods to the client or customer from which such revenue was received, will be treated as a liability for the purposes of the Proposed Transactions described herein, to the extent that the amount of such deferred revenue gives rise to a legal obligation to repay such amount should the services not be provided or the goods not be delivered. The amount of any deferred revenue which does not represent such a legal obligation will not be considered a liability for the purposes of the Proposed Transactions described herein.
Amalco will transfer to Stockco at FMV the following assets (“Transferred Assets”):
all of the XXXXXXXXXX Opco A Common Shares, all of the shares of XXXXXXXXXX, all of the XXXXXXXXXX Opco B Common Shares and any business property which may be directly held by Amalco relating to the XXXXXXXXXX Business or the XXXXXXXXXX Business;
all of the business property of the XXXXXXXXXX Business, including the business property represented by the shares of XXXXXXXXXX;
all of its directly held shares of the Associated Corporations, except for the shares of XXXXXXXXXX;
all of the shares of
XXXXXXXXXX
certain cash or near cash property; and
certain of the Investment Assets.
As consideration for the properties of Amalco transferred to Stockco, Stockco will:
assume the Assumed Debt, excluding the portion of the Assumed Debt which was assumed by Opco A on the transfer of the XXXXXXXXXX Business described in Paragraph 40 and the portion of the Assumed Debt which was assumed by Opco B on the transfer of the XXXXXXXXXX Business described in Paragraph 43; and
issue XXXXXXXXXX Stockco Preferred Shares to Amalco having an aggregate Stated Capital of $XXXXXXXXXX and an aggregate redemption value equal to the FMV of the Transferred Assets less the portion of the Assumed Debt assumed by Stockco.
Amalco and Stockco will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act, with respect to the transfer to Stockco of any eligible property of Amalco that has a FMV in excess of its cost amount. Specifically, the amount agreed upon in each joint election will not be less than the least of:
the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii) in the case of eligible capital property,
the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii) in the case of depreciable property of a prescribed class, and
the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii).
In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).
Employees of corporations in the XXXXXXXXXX Group who, following the Proposed Transactions, will be employees of Newco2 or one of its direct or indirect subsidiary corporations will exchange all of their rights under the Amalco Stock Options for rights under a stock option plan of Stockco ("Stockco Stock Options") to acquire Stockco common shares ("Stockco Common Shares"). Under each of the Stockco Stock Options issued to a particular employee, the total FMV of the Stockco Common Shares issuable thereunder may exceed the total amount payable by the option holder to acquire the Stockco Common Shares under the relevant Stockco Stock Option. However, such excess, if any, will not exceed the amount by which the total FMV of the Amalco Common Shares issuable under the applicable exchanged Amalco Stock Option exceeds the exercise price payable by the option holder to acquire the Amalco Common Shares under the exchanged Amalco Stock Option.
Amalco will transfer to Subco at FMV all of the XXXXXXXXXX Stockco Common Shares such that, immediately after the transfer, the net FMV of each of the cash or near cash property, the business property and the investment property, respectively, of Amalco, calculated as described in Paragraphs 53 and 54, which is represented by the Stockco Common Shares transferred to Subco as described herein will approximate that proportion of the net FMV of all of that type of property of Amalco, determined immediately before the transfers referred to herein, that:
the aggregate FMV of the Amalco Special Shares immediately before the transfer
is of
the aggregate FMV of all the issued and outstanding shares in the capital stock of Amalco immediately before the transfer.
For the purpose of this Paragraph and Paragraph 64 below, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX%, determined as a percentage of the FMV of each type of property which Subco has received (or Amalco has retained) as compared to what Subco would have received (or Amalco would have retained) had it received (or retained) its appropriate pro rata share of the FMV of that type of property.
As sole consideration for such transfer Subco will issue to Amalco XXXXXXXXXX Subco Preferred Shares having an aggregate Stated Capital of $XXXXXXXXXX and an aggregate redemption value equal to the FMV of the XXXXXXXXXX Stockco Common Shares.
Amalco and Subco will jointly elect, in prescribed form and within the time referred to in subsection 85(6) of the Act in respect of the disposition of the Stockco Common Shares. The agreed amount in respect of such election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii) and will not exceed the FMV of the Stockco Common Shares, nor will it be less than the amount permitted by paragraph 85(1)(b).
Amalco will redeem at FMV from Newco1 all of its Amalco Special Shares for an amount equal to the aggregate of the Amalco Redemption Amounts of the Amalco Special Shares so redeemed and will issue to Newco1 in consideration therefor the Amalco Redemption Note, being a demand promissory note with a face amount, a principal amount and FMV equal to the aggregate of the foregoing Amalco Redemption Amounts. Newco1 will accept such Amalco Redemption Note as full payment of the Amalco Redemption Amount in respect of each redeemed Amalco Special Share with the risk of the note being dishonoured.
Subco will redeem at FMV from Amalco all of its Subco Preferred Shares for an amount equal to the aggregate of the Subco Redemption Amounts of the Subco Preferred Shares so redeemed and will issue to Amalco in consideration thereof the Subco Redemption Note, being a demand promissory note with a face amount, a principal amount and FMV equal to the aggregate of the foregoing Subco Redemption Amounts. Amalco will accept such note as full and absolute payment of the Subco Redemption Amount in respect of each Subco Preferred Share with the risk of the note being dishonoured.
The Amalco Special Shares owned by Newco1 immediately before the redemption by Amalco of such shares will have more than 10% (but less than 50%) of the voting rights under all circumstances of the issued and outstanding shares of all classes of Amalco and will have a FMV of more than 10% of the FMV of all of the issued and outstanding shares of Amalco, such that Amalco will be connected with Newco1 pursuant to paragraph 186(1)(b) of the Act immediately prior to the redemption of the Amalco Special Shares.
Each of the Amalco Redemption Note and the Subco Redemption Note will be a demand promissory note with interest payable only from the date of demand for payment by the holder to the date of payment of the amount owing under the particular note at a rate equal to the average monthly prime rate of a Canadian chartered bank.
Subco will be wound-up into Newco1 under the applicable provisions of the XXXXXXXXXX, such that Newco1 will receive all of Subco’s interest in the XXXXXXXXXX Stockco Common Shares and will assume all of the liabilities of Subco, including the Subco Redemption Note.
Following receipt by Newco1 of the Stockco Common Shares, Newco1 and Stockco will be amalgamated under the vertical short-form amalgamation provisions of the XXXXXXXXXX to form Newco2. Newco2 will be a public corporation, since the Newco2 Common Shares will be listed for trading on one or more prescribed stock exchanges in Canada.
Newco2’s share capital will include Newco2 Common Shares, each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of Newco2. The Newco1 Common Shares will not be cancelled and will remain outstanding following the amalgamation as Newco2 Common Shares with a Stated Capital equal to the PUC of the Newco1 Common Shares. The Stockco Common Shares will be cancelled on the amalgamation.
As a result of the amalgamation, each employee who held Stockco Stock Options will receive, as consideration for the disposition of that option on the amalgamation, options to acquire Newco2 Common Shares ("Newco2 Stock Options"). Under each of the Newco2 Stock Options issued to a particular employee, the total FMV of the Newco2 Common Shares issuable thereunder determined immediately after the completion of the Proposed Transactions will in most cases exceed the total amount payable by the holder of the option to acquire the Newco2 Common Shares under the relevant Newco2 Stock Option. However, such excess, if any, will not exceed the amount, if any, by which the total FMV of the Stockco Common Shares issuable under the applicable exchanged Stockco Stock Option exceeds the exercise price payable by the option holder to acquire the Stockco Common Shares under the applicable exchanged Stockco Stock Option the particular employee held prior to the exchange of options with Stockco.
Amalco will pay the principal amount of the Amalco Redemption Note by transferring to Newco2 the Subco Redemption Note (which became a liability of Newco2 by virtue of the amalgamation referred to in Paragraph 62 above) which will be accepted by Newco2 in full payment of Amalco’s obligation. Newco2 will pay the principal amount of the Subco Redemption Note by transferring to Amalco the Amalco Redemption Note which will be accepted by Amalco in full payment of Newco2’s obligation. The Amalco Redemption Note and the Subco Redemption Note will both thereupon be marked paid in full and cancelled.
Immediately following the Proposed Transactions described above, the net FMV of each of the types of property retained by Amalco, determined in the manner described in Paragraphs 53 and 54 above, will approximate that proportion of the aggregate FMV of that type of property of Amalco that:
(a) the aggregate FMV, immediately before the transfers of property described in Paragraph 59, of the Amalco Common Shares
is of
(b) the aggregate FMV, immediately before such transfers of property, of all of the issued and outstanding shares of the capital stock of Amalco.
Upon completion of the foregoing transactions, each of Amalco and Newco2 will operate as separate entities. In the course of such operations, Newco2 may transfer to either or both of Opco A and Opco B certain of the Transferred Assets that it received on the amalgamation described in Paragraph 62 above. In addition, either or both of Opco A and Opco B may assume some or all of the portion of the Assumed Debt which is debt of Newco2 following the wind-up of Subco described in Paragraph 62. The shares of the Associated Corporations except XXXXXXXXXX and related debt will be held by Newco2, although it is possible that such shares may be transferred to a subsidiary of Newco2 at a later date.
Opco A or Opco B will acquire from the XXXXXXXXXX Partnership the Computer Equipment at a purchase price equal to the FMV thereof. The FMV of the Computer Equipment will be less than 10% of the FMV, on the Transaction Date, of all of the property (other than money and indebtedness that is not convertible into other property) owned immediately before the transfer described in Paragraph 59 by Amalco and not disposed of by it on such transfer.
No property has or will become property of any member of the XXXXXXXXXX Group and no liabilities have been or will be incurred by any member of the XXXXXXXXXX Group in contemplation of and before the transfer described in Paragraph 59, except in the ordinary course of business, or as described herein. XXXXXXXXXX currently is considering the possible acquisition of XXXXXXXXXX and other related businesses to expand the XXXXXXXXXX Business of Amalco. Such transaction could occur before or after the Proposed Transactions. However, at this time no agreements or other commitments have been entered into in respect of such an acquisition.
Except as outlined herein, no member of the XXXXXXXXXX Group has any specific intention of disposing of any assets currently owned to an unrelated person following the Proposed Transactions and no such corporation will dispose of any of its assets as part of the series of Proposed Transactions.
There are not, and will not be at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a “guarantee agreement”, as defined in subsection 112(2.2), in respect of any of the Amalco Special Shares or Subco Preferred Shares.
None of the members of the XXXXXXXXXX Group nor the Newco2 Group has, or will have, entered into a dividend rental arrangement, as defined in subsection 248(1), in respect of any of the shares to be redeemed as part of the Proposed Transactions.
None of the Amalco Special Shares or the Subco Preferred Shares will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).
None of Amalco, Subco, Newco1, Newco2 or Stockco will be a corporation described in any of paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1).
Each of Amalco and Subco will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.
The persons who, to the knowledge of the directors and senior officers of XXXXXXXXXX, beneficially own or exercise control or direction over more than 10% of the outstanding voting shares of XXXXXXXXXX are XXXXXXXXXX Based on inquiries made of such persons, you have confirmed that no such person has purchased or sold any shares of XXXXXXXXXX since XXXXXXXXXX.
In addition, no discussions were held between XXXXXXXXXX in respect of the Proposed Transactions prior to the purchase of any shares of XXXXXXXXXX and as far as officials of XXXXXXXXXX are aware, XXXXXXXXXX had no knowledge of the Proposed Transactions at the time that any such shares were purchased.
In their letter of XXXXXXXXXX has confirmed that neither they nor any person not dealing at arm's length with them has acquired or disposed of any XXXXXXXXXX shares after XXXXXXXXXX, nor has any such person a present intention to acquire or dispose of XXXXXXXXXX shares prior to completion of the Proposed Transactions. In addition, they have confirmed that they did not acquire the shares of XXXXXXXXXX in contemplation of the proposed butterfly reorganization of XXXXXXXXXX.
In their letter of XXXXXXXXXX has confirmed that XXXXXXXXXX did not, and did not attempt to, exercise any influence over XXXXXXXXXX in respect of the decision of XXXXXXXXXX to proceed with the Proposed Transactions.
Purpose of the proposed transactions
XXXXXXXXXX believes that it is in the best interests of its shareholders that XXXXXXXXXX “spin-off” certain of its business operations on the basis outlined above for the following reasons:
XXXXXXXXXX
XXXXXXXXXX believes that the separation of its business assets into Newco2 and Amalco will enhance the ability of each such corporation to pursue its independent corporate objectives and strategies; and
XXXXXXXXXX
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
Upon the amalgamation of XXXXXXXXXX described in Paragraph 48(a) above:
the provisions of subsection 87(1) will apply;
the provisions of subsection 87(2.1) of the Act will apply, inter alia, to deem Amalco to be the same corporation as, and a continuation of, each of XXXXXXXXXX, for the purposes, and subject to the restrictions, described in subsection 87(2.1) of the Act;
provided that the XXXXXXXXXX Common Shares were capital property to a XXXXXXXXXX Shareholder immediately before the amalgamation, the provisions of subsection 87(4) of the Act, other than paragraphs (c), (d) and (e) thereof, will apply such that:
(i)each such XXXXXXXXXX Shareholder will be deemed by paragraph 87(4)(a) to have disposed of his or her XXXXXXXXXX Common Shares for proceeds equal to their ACB immediately before the amalgamation; and
(ii)each such XXXXXXXXXX Shareholder will be deemed by paragraph 87(4)(b) to have acquired his or her Common Shares and Special Shares of Amalco for an amount equal to that proportion of the proceeds described in (i) above that
the fair market value, immediately after the amalgamation, of all new shares of that particular class so acquired by the XXXXXXXXXX Shareholder,
is of
the fair market value, immediately after the amalgamation, of all new shares so acquired by the XXXXXXXXXX Shareholder.
Subject to the provisions of subsection 26(26) of the Itar and provided that a XXXXXXXXXX Shareholder (other than a XXXXXXXXXX Shareholder who dissents to the Plan of Arrangement) who, immediately before the share exchange described in Paragraph 50 above, holds Amalco Special Shares,
holds those shares as capital property;
deals at arm's length with Newco1 immediately before such share exchange;
does not include any portion of the gain or loss otherwise determined, from the disposition of those shares, in computing his income for the taxation year in which the exchange takes place;
does not file an election under subsection 85(1) or 85(2) of the Act with Newco1 with respect to those shares; and
does not receive any consideration other than Newco1 Common Shares in exchange for those shares;
and further provided, that immediately after the exchange:
no such holder or any person or persons with whom the holder does not deal at arm's length, or no such holder together with any person or persons with whom the holder does not deal at arm's length, will
control Newco1, or
will beneficially own shares of Newco1 having a FMV of more than 50% of the FMV of all of the issued and outstanding shares of the capital stock of Newco1
then, pursuant to paragraph 85.1(1)(a) of the Act such holder shall be deemed
to have disposed of his Special Shares of Amalco for proceeds of disposition equal to the ACB to him of those shares immediately before the share exchange, and
to have acquired the Newco1 Common Shares at a cost to him equal to the ACB to him of the Special Shares of Amalco immediately before the share exchange.
Subject to the application of the provisions of subsections 20(1.2) and 26(5) of the Itar, to the application of the provisions of subsection 69(11) of the Act and of paragraph 88(2.2)(b) of the Act, which applies for the purposes stated in the preamble to subsection 88(2.2) of the Act, and subject also to the application of subsections 85(4) and 85(5.1) of the Act as they may apply to the transfers referred to herein, the provisions of subsection 85(1) will apply to:
the transfer of all Amalco Special Shares to Newco1 by any XXXXXXXXXX Shareholder as described in Paragraph 50 above, who jointly files an election with Newco1 pursuant to subsection 85(1) of the Act in respect of such transfer (including XXXXXXXXXX, or a relevant holding corporation), as described in Paragraph 51 above;
the transfer by XXXXXXXXXX of the shares of XXXXXXXXXX, as described in Paragraph 39 above;
the transfer by XXXXXXXXXX of the shares of XXXXXXXXXX, as described in Paragraph 39 above;
the transfer by XXXXXXXXXX to Opco A of any eligible property relating to the XXXXXXXXXX Business, as described in Paragraph 40, which is the object of the election described in Paragraph 42 above;
the transfer by XXXXXXXXXX to Opco B of any eligible property relating to the XXXXXXXXXX Business, as described in Paragraph 43, which is the object of the election described in Paragraph 45 above;
the transfer by Amalco of any of the Transferred Assets which is an eligible property to Stockco, as described in Paragraph 55, which is the object of the election described in Paragraph 57 above; and
the transfer by Amalco of the XXXXXXXXXX Common Shares of Stockco to Subco as described in Paragraph 59 above;
such that the agreed amount in respect of each transfer will be deemed to be the proceeds of disposition to the transferor and the cost thereof to the transferee. For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to the transfers referred to herein.
For the purposes of subparagraph (b)(iii) of the definition of PUC in subsection 89(1), the paid-up capital of
the Amalco Common Shares and the Amalco Special Shares issued to the XXXXXXXXXX Shareholders as described in Paragraph 48(c);
the Newco1 Common Shares issued to the XXXXXXXXXX Shareholders as described in Paragraph 50;
the Opco A Common Shares issued to XXXXXXXXXX as described in Paragraph 40;
the Opco B Common Shares issued to XXXXXXXXXX as described in Paragraph 43;
the Stockco Common Shares issued to Amalco as described in Paragraph 56; and
the Subco Preferred Shares issued to Amalco as described in Paragraph 59,
computed without reference to the Act will be equal to their Stated Capital as determined for purposes of the XXXXXXXXXX or CBCA, as the case may be.
Subsection 84(3) will apply on the redemption:
as described in Paragraph 60, of the Amalco Special Shares held by Newco1, to deem Amalco to have paid and Newco1 to have received;
as described in Paragraph 60, of the Subco Preferred Shares issued to Amalco, to deem Subco to have paid and Amalco to have received;
a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC in respect of such shares immediately before such redemption, and any such dividend
will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the corporation deemed to have received such dividend;
will be deductible by the recipient pursuant to subsection 112(1) of the Act in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112 (2.1), (2.2), (2.3) or (2.4) of the Act;
will be excluded in determining the proceeds of disposition to the recipient corporation of the shares so redeemed or purchased pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;
will not be subject to tax under Part IV by virtue of the fact that Newco1 is connected with Amalco, in respect of the dividend deemed to have been received by Newco1, and by virtue of the fact that Amalco is a public corporation in respect of the dividend deemed to have been received by Amalco; and
provided that the amount paid on the redemption of the Amalco Special Shares and the Subco Preferred Shares is equal to the amount specified in respect of such shares as described in Paragraphs 37 and 49 above, the dividends referred to in Rulings E(a) and E(b) will not be subject to tax under Parts IV.1 and VI.1 of the Act because they will be dividends deemed by paragraph 191(4)(d) of the Act to be excluded dividends as defined in subsection 191(1) of the Act.
The provisions of subsection 112(3) will apply to reduce any loss which otherwise would be determined for the particular holder as a result of the redemptions and purchases for cancellation of shares described in the Proposed Transactions.
The cost to Newco2 of the Amalco Redemption Note and the cost to Amalco of the Subco Redemption Note will in each case, upon the issuance thereof, be equal to the principal amount of the particular note. Accordingly, no amount will be included in the income of Newco2 or Amalco upon payment of the principal amount of the particular note.
provided that the FMV of the Amalco Stock Options received by a holder of a XXXXXXXXXX Stock Option at the time of the exchange described in Paragraph 48(f) above does not exceed the FMV of the XXXXXXXXXX Stock Options immediately before the exchange, the provisions of subsection 7(1.4) of the Act will apply to the exchanges such that the holders of XXXXXXXXXX Stock Options who exchange them for Amalco Stock Options under the Amalgamation as described in Paragraph 48(f) shall be deemed not to have disposed of the XXXXXXXXXX Stock Options and not to have acquired the Amalco Stock Options, and the Amalco Stock Options shall be deemed to be the same options as, and a continuation of, the XXXXXXXXXX Stock Options;
provided that the FMV of the Stockco Stock Options received by a holder of an Amalco Stock Option at the time of the exchange described in Paragraph 58 above does not exceed the FMV of the Amalco Stock Options immediately before the exchange, the provisions of subsection 7(1.4) of the Act will apply to the exchanges such that the holders of Amalco Stock Options who exchange them for Stockco Stock Options as described in Paragraph 58 shall be deemed not to have disposed of the Amalco Stock Options and not to have acquired the Stockco Stock Options, and the Stockco Stock Options shall be deemed to be the same options as, and a continuation of, the Amalco Stock Options; and
provided that the FMV of the Newco2 Stock Options received by a holder of a Stockco Stock Option at the time of the exchange as described in Paragraph 62 above does not exceed the FMV of the Stockco Stock Options immediately before the exchange, the provisions of subsection 7(1.4) of the Act will apply to the exchanges such that the holders of Stockco Stock Options who exchange them for Newco2 Stock Options as described under the amalgamation described in Paragraph 62 shall be deemed not to have disposed of the Stockco Stock Options and not to have acquired the Newco2 Stock Options, and the Newco2 Stock Options shall be deemed to be the same options as, and a continuation of, the Stockco Stock Options.
For greater certainty, paragraph 7(1)(b) of the Act will not apply in respect of such exchanges.
The provisions of subsection 88(1) of the Act will apply in respect of the wind-up of Subco described in Paragraph 62.
By virtue of subsection 87(1.1), the provisions of subsection 87(1) of the Act will apply to the amalgamation of Stockco and Newco1 as described in Paragraph 62 above.
The repayment of the Amalco Redemption Note held by Newco2 and the Subco Redemption Note held by Amalco as described in Paragraph 63 will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1). Neither Newco2 nor Amalco will realize any gain or incur any loss as a result of the repayment and resultant cancellation of the Amalco Redemption Note and the Subco Redemption Note as described in Paragraph 63 above.
Provided that the XXXXXXXXXX Common Shares constitute capital property to a particular shareholder of XXXXXXXXXX immediately prior to the commencement of the Proposed Transactions, the Proposed Transactions will not, in and by themselves, cause the XXXXXXXXXX Common Shares, Amalco Common Shares and Amalco Special Shares to be received by that shareholder as a result of the Proposed Transactions not to be capital property of that shareholder. Furthermore, the Proposed Transactions will not, in and by themselves, cause the Subco Preferred Shares to be received by Amalco not to be capital property of Amalco.
Interest payable in respect of a year by Newco2 on the portion of the Assumed Debt assumed by it will be deductible by Newco2 in computing its income provided that the assets received by Newco1 as a result of the winding-up of Subco into Newco1 as described in Paragraph 62, or property substituted therefor, continue to be used by Newco2 for the purpose of earning income from a business or property and to the extent that such interest payable:
would have been deductible by Amalco or the particular predecessor to Amalco which was liable for the portion of the Assumed Debt in computing its income pursuant to paragraph 20(1)(c) if the Proposed Transactions were not undertaken; and
does not exceed a reasonable amount.
Interest payable in respect of a year by Opco A on the portion of the Assumed Debt assumed by it will be deductible by Opco A in computing its income provided that the assets received by Opco A as described in Paragraph 40, or property substituted therefor, continue to be used by Opco A for the purpose of earning income from a business or property and to the extent that such interest payable:
would have been deductible by XXXXXXXXXX in computing its income pursuant to paragraph 20(1)(c) if the Proposed Transactions were not undertaken; and
does not exceed a reasonable amount.
Interest payable in respect of a year by Opco B on the portion of the Assumed Debt assumed by it will be deductible by Opco B in computing its income provided that the assets received by Opco B, as described in Paragraph 43, or property substituted therefor, continue to be used by Opco B for the purpose of earning income from a business or property and to the extent that such interest payable:
would have been deductible by XXXXXXXXXX in computing its income pursuant to paragraph 20(1)(c) if the Proposed Transactions were not undertaken; and
does not exceed a reasonable amount.
Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:
a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
an acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);
an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or
an acquisition of property in the circumstances described in paragraph 55(3.1)(d);
which has not been described herein, then by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividends referred to in the Rulings given in E(a) above and, for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.
The provisions of subsections 15(1), 56(2), 56(4) and 246(1) of the Act will not apply to any of the proposed transactions described in Paragraphs 36 through 66 above, in and of themselves.
As a result of the proposed transactions, in and of themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences as described in the rulings given.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 issued by Revenue Canada, Customs, Excise and Taxation on September 28, 1990 and are binding provided that the proposed transactions are completed by XXXXXXXXXX.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein, except as opined below.
Opinions
1.Provided that:
our understanding of the facts and proposed transactions described herein is correct;
the proposed amendment to the definition of "permitted redemption" in subsection 55(1) of the Act is enacted in substantially the same form as proposed in Bill C-69 which received First Reading in the House of Commons on December 2, 1996; and
as part of the series of transactions or events that includes the proposed transactions described herein, there is not:
a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(iv)an acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);
an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or
an acquisition of property in the circumstances described in paragraph 55(3.1)(d);
which has not been described herein,
it is our opinion that by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividends referred to in the rulings given in E(b) above and, for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.
(b)Provided that our understanding of the facts and proposed transactions described herein is correct and further provided that proposed subsection 112(3) is enacted in substantially the same form as proposed in Bill C-69, then it is our opinion that the provisions of subsection 112(3) will apply to reduce any loss which otherwise would be determined for the particular holder as a result of the redemptions of shares described in the Proposed Transactions.
1.Our ruling in N above and Opinion 1 above are given based on your representation in paragraph 74 that none of the specified shareholders of XXXXXXXXXX described in that paragraph has acquired any XXXXXXXXXX shares in contemplation of the Proposed Transactions. Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed the accuracy of the representation.
2.Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:
(a)the determination of the FMV or ACB of any particular asset or share or the PUC of any shares referred to herein; or
(b)any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
3.The Department has not ruled on the applicability of paragraph 87(2)(e.1) and the non-applicability of subsection 100(2.1) to the partnership interests of any predecessor corporation in the XXXXXXXXXX Partnership upon the amalgamation described in Paragraph 48. The impact of subsection 251(3.1) on these provisions is currently under review.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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