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:
Application of paragraph 55(3)(a) - significant increase in interest.
Position:
In these circumstances increase not significant.
Reasons:
XXXXXXXXXX 3-970402
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX and certain other taxpayers referred to therein. We also acknowledge our meeting and your letters of XXXXXXXXXX and our telephone conversations in connection therewith.
We understand that to the best of the knowledge of the responsible officers of XXXXXXXXXX and the shareholders of XXXXXXXXXX none of the issues involved in the requested rulings is being considered by a District Office or Taxation Centre in connection with an income tax return already filed and none of the issues involved is subject to a Notice of Objection under section 165 of the Act or is otherwise under appeal.
I. DEFINITIONS
"Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended as at the date hereof, and unless otherwise stated every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
"adjusted cost base" has the meaning assigned by section 54;
"capital gain" has the meaning assigned by section 39;
"capital property" has the meaning assigned by section 54;
"dividend rental arrangement" has the meaning assigned by subsection 248(1);
"fair market value" means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale;
"guarantee agreement" has the meaning assigned by subsection 112(2.2);
"paid-up capital" has the meaning assigned by subsection 89(1);
"Proposed Transactions" means the transactions described in paragraphs 5 to 15 of this letter;
"public corporation" has the meaning assigned by subsection 89(1);
"specified financial institution" has the meaning assigned by subsection 248(1); and
"taxable Canadian corporation" has the meaning assigned by subsection 89(1).
II. FACTS
1. XXXXXXXXXX is a taxable Canadian corporation. The fiscal period of XXXXXXXXXX ends on XXXXXXXXXX in each year. XXXXXXXXXX was incorporated under the Canada Business Corporations Act (the "CBCA") in XXXXXXXXXX. XXXXXXXXXX owns approximately XXXXXXXXXX% of the issued and outstanding Class “XXXXXXXXXX” Common Shares of XXXXXXXXXX ("XXXXXXXXXX Common Shares") and all of the Cumulative Redeemable Preference Shares of XXXXXXXXXX ("XXXXXXXXXX Preferred Shares"). XXXXXXXXXX holds its shares of XXXXXXXXXX as capital property. All of the issued and outstanding shares of XXXXXXXXXX are owned by XXXXXXXXXX, a corporation which was incorporated under the laws of the Netherlands and is not a taxable Canadian corporation.
XXXXXXXXXX was formed as part of a butterfly reorganization in XXXXXXXXXX which was the subject of an advance income tax ruling from Revenue Canada dated XXXXXXXXXX.
2. XXXXXXXXXX is a public corporation and a taxable Canadian corporation. The fiscal period of XXXXXXXXXX ends on XXXXXXXXXX in each year. XXXXXXXXXX is subject to the CBCA and resulted from the merger of XXXXXXXXXX. XXXXXXXXXX is engaged in the business of
XXXXXXXXXX.
The issued and outstanding shares of XXXXXXXXXX consist of XXXXXXXXXX Common Shares and XXXXXXXXXX Preferred Shares. The issued and outstanding XXXXXXXXXX Shares have an aggregate fair market value of approximately $XXXXXXXXXX.
3. The XXXXXXXXXX Common Shares are listed on the XXXXXXXXXX Stock Exchange and the XXXXXXXXXX Exchange. There are approximately XXXXXXXXXX issued and outstanding XXXXXXXXXX Common Shares, of which XXXXXXXXXX are owned by XXXXXXXXXX and XXXXXXXXXX are owned by corporations related to XXXXXXXXXX. The remaining XXXXXXXXXX Common Shares are owned by various persons who deal at arm's length with XXXXXXXXXX. To the best of XXXXXXXXXX knowledge, the largest holder of XXXXXXXXXX common shares, other than XXXXXXXXXX, owns less than XXXXXXXXXX% of the total amount of issued and outstanding XXXXXXXXXX common shares.
4. The XXXXXXXXXX Common Shares have recently been trading in the range of $XXXXXXXXXX. The paid-up capital of each XXXXXXXXXX Common Share is estimated to be approximately $XXXXXXXXXX. The adjusted cost base to XXXXXXXXXX of each of its XXXXXXXXXX Common Shares is approximately $XXXXXXXXXX.
III. PROPOSED TRANSACTIONS
5. XXXXXXXXXX will offer (the "Offer") to purchase for cash a specified number (the "Target Number") of the XXXXXXXXXX Common Shares. The Target Number will range from XXXXXXXXXX of the issued and outstanding XXXXXXXXXX Common Shares (ie. a Target Number of approximately XXXXXXXXXX Common Shares). XXXXXXXXXX will not repurchase more than the Target Number of shares but may, in certain circumstances as described below, repurchase less than the Target Number.
6. The price at which XXXXXXXXXX will repurchase XXXXXXXXXX Common Shares pursuant to the Offer, as determined by the auction procedure described below, will be within a specified price range (the "Price Range") indicated to shareholders. The trading price of the XXXXXXXXXX Common Shares immediately prior to the announcement of the Offer will be within the Price Range.
7. A holder of XXXXXXXXXX Common Shares may respond to the Offer as follows:
(a) by tendering one or more of his or her XXXXXXXXXX Common Shares by way of one or more tenders to the Offer in which the shareholder specifies the price, within the Price Range, at which such shareholder is willing to have such shares purchased by XXXXXXXXXX (an "Auction Tender"). A shareholder may submit more than one Auction Tender but can only select one price for each Auction Tender. A holder is not required to include all shares owned by him or her in an Auction Tender (unless the holder owns an odd lot of fewer than XXXXXXXXXX shares) if such holder chooses to make an Auction Tender;
(b) by tendering all of his or her XXXXXXXXXX Common Shares by way of a single tender to the Offer in which the shareholder elects to have XXXXXXXXXX purchase, at the purchase price determined under the auction procedure described below, that number of XXXXXXXXXX Common Shares necessary to maintain such holder's proportionate ownership interest in the XXXXXXXXXX Common Shares after giving effect to the consummation of the Offer (with adjustments to avoid the purchase by XXXXXXXXXX of fractional shares) (a "Proportionate Tender"); or
(c) by not tendering one or more of his or her XXXXXXXXXX Common Shares to the Offer.
In summary, a shareholder could choose to dispose of none of his or her shares, part of his or her shares or all of his or her shares. However, if the shareholder tenders shares by Auction Tender, the actual number of his or her shares which will be repurchased will depend on the results of the auction procedure. If a shareholder tenders to the Offer by way of Proportionate Tender he or she will be assured of maintaining his or her proportionate interest in the XXXXXXXXXX Common Shares (subject to adjustments to avoid fractional shares).
8. XXXXXXXXXX will tender its XXXXXXXXXX Common Shares to the Offer by way of Proportionate Tender.
9. After the deadline for receiving tenders into the Offer by shareholders, XXXXXXXXXX will determine the purchase price (the "Purchase Price") at which it will repurchase XXXXXXXXXX Common Shares pursuant to the Offer. XXXXXXXXXX will select the Purchase Price which will allow it to buy the "Auction Tender Limit Number" (as defined below) of XXXXXXXXXX Common Shares tendered pursuant to Auction Tenders pursuant to the Offer (or such lesser number of XXXXXXXXXX Common Shares as are properly tendered pursuant to Auction Tenders at prices within the Price Range). The Auction Tender Limit Number is the number determined by the following formula:
Auction Tender Limit Number = X(1 - Y/Z)
where: X = the total number of XXXXXXXXXX Common Shares which XXXXXXXXXX offers to repurchase under the Offer
Y = the number of XXXXXXXXXX Common Shares tendered pursuant to Proportionate Tenders
Z = the total number of XXXXXXXXXX Common Shares outstanding prior to the Offer
If the number of XXXXXXXXXX Common Shares tendered by Auction Tenders at or below the Purchase Price is less than or equal to the Auction Tender Limit Number, XXXXXXXXXX will repurchase at the Purchase Price all XXXXXXXXXX Common Shares tendered pursuant to Auction Tenders. If the number of XXXXXXXXXX Common Shares tendered pursuant to Auction Tenders at prices at or below the Purchase Price is greater than the Auction Tender Limit Number, XXXXXXXXXX will repurchase at the Purchase Price the Auction Tender Limit Number of XXXXXXXXXX Common Shares so tendered in the following order of priority: (i) odd lots of fewer than XXXXXXXXXX shares, and (ii) XXXXXXXXXX Common Shares tendered pursuant to Auction Tenders at or below the Purchase Price on a pro rata basis (with adjustments to avoid the purchase of fractional Shares).
10. XXXXXXXXXX will then repurchase at the Purchase Price from shareholders who tender by way of Auction Tender the Auction Tender Limit Number of XXXXXXXXXX Common Shares (or such lower number of shares tendered by way of Auction Tender) and will repurchase at the Purchase Price from each shareholder who tenders by way of Proportionate Tender such number of XXXXXXXXXX Common Shares as will maintain its proportionate interest in the XXXXXXXXXX Common Shares (with adjustments to avoid the purchase of fractional shares).
11. By way of example, if 90% of the XXXXXXXXXX Common Shares are tendered by way of Proportionate Tender (which would include all of XXXXXXXXXX Common Shares) and the Target Number is XXXXXXXXXX, the Auction Tender Limit Number would be XXXXXXXXXX. If XXXXXXXXXX Common Shares were tendered by way of Auction Tender at or less than $XXXXXXXXXX and XXXXXXXXXX Common Shares were tendered at or less than $XXXXXXXXXX, the Purchase Price would be determined to be $XXXXXXXXXX. Assuming no odd lot holders or adjustments with respect to fractional shares, XXXXXXXXXX Common Shares would be repurchased at $XXXXXXXXXX as follows:
• holders who tendered XXXXXXXXXX Common Shares at prices less than or equal to the Purchase Price will have their shares so tendered purchased in the following ratio XXXXXXXXXX
XXXXXXXXXX
• holders who tendered XXXXXXXXXX Common Shares by way of Proportionate Tender would have XXXXXXXXXX% of such shares repurchased (XXXXXXXXXX total shares).
12. At no time during the series of transactions which comprise the Proposed Transactions will any of the XXXXXXXXXX Common Shares held by XXXXXXXXXX or a related party be:
(a) the subject of a guarantee agreement or a dividend rental arrangement; or
(b) a share that is issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).
13. XXXXXXXXXX is not, and will not be, at the time of the proposed repurchase of the XXXXXXXXXX Common Shares on the basis described in the Proposed Transactions, a specified financial institution.
14. Minority corporate shareholders will be advised that they will be subject to the potential application of subsection 55(2) if they tender into the bid.
15. The increase in the total direct interest in ownership of the issued shares of XXXXXXXXXX of one or more persons, after the repurchase of the XXXXXXXXXX common shares described in paragraphs 9 and 10 above, will not exceed XXXXXXXXXX% based on the relative total number of issued and outstanding common shares of XXXXXXXXXX before and after the repurchase.
V. PURPOSE OF THE PROPOSED TRANSACTIONS
16. XXXXXXXXXX has significant excess cash which it wishes to distribute to its shareholders. XXXXXXXXXX has received advice from its outside financial advisors that the proposed substantial issuer bid transaction is preferable to alternative means of distributing such cash, such as by way of a special dividend, from the perspective of maximizing shareholder value and offering shareholders increased choices.
VI. RULINGS
Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the Proposed Transactions we confirm the following:
A. On the repurchase by XXXXXXXXXX from XXXXXXXXXX of XXXXXXXXXX Common Shares on the basis described in the Proposed Transactions:
(a) paragraph 84(3)(b) will apply to deem XXXXXXXXXX to have received a dividend of an amount equal to the amount by which the Purchase Price multiplied by the number of XXXXXXXXXX Common Shares repurchased from XXXXXXXXXX exceeds the aggregate paid-up capital of such shares immediately prior to their repurchase; and
(b) paragraph (j) of the definition of "proceeds of disposition" in section 54 will apply to exclude the amount of the deemed dividend referred to in paragraph A(a) hereof from the proceeds of disposition of XXXXXXXXXX Common Shares realized by XXXXXXXXXX as a result of the repurchase of such shares by Newco.
B. The full amount of the deemed dividend referred to in Ruling A:
(a) will be a taxable dividend that will, by virtue of subparagraph 82(1)(a)(ii), be included in computing the income of XXXXXXXXXX for the year in which it is received;
(b) will, by virtue of subsection 112(1), be deductible in computing the income of XXXXXXXXXX in the year in which it is received and, for greater certainty, such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) and (2.4);
(c) will be an "excepted dividend" for purposes of Part IV.1 of the Act by virtue of paragraph (b) of the definition "excepted dividend" in section 187.1; and
(d) will be an "excluded dividend" for purposes of Part VI.1 of the Act by virtue of paragraph (a) of the definition "excluded dividend" in subsection 191(1).
C. Subsection 55(2) will apply to the dividend referred to in Ruling A hereof unless its application is prevented by paragraph 55(3)(a) as described in the Opinion below.
D. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions to redetermine the tax consequences described herein.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding provided that the Proposed Transactions are completed before XXXXXXXXXX.
These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.
Nothing in this letter should be construed as confirmation of the tax consequences of any of the transactions described in this letter other than as specifically described.
Opinion
Provided that our understanding of the facts and proposed transactions described herein is correct and provided that the Act is amended in accordance with Bill C-69 which received first reading on December 2, 1996, it is our opinion that, provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions which includes the payment of the dividend described in Ruling A above, other than as described herein, the exception in proposed paragraph 55(3)(a) will prevent the application of subsection 55(2) to the dividend referred to in Ruling A above.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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