30 November 1996 Ruling 9710843 - NORMAL COURSE ISSUER BID RULING

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:

1) Will subsection 84(6) apply to preclude the application of subsection 84(3) on the purchase for cancellation by Canco of its common shares from the minority shareholders pursuant to the normal course issuer bid?

2) Do the purchases by Canco of its common shares held by Holdco taint the application of subsection 84(6) with respect to the purchases of the common shares from the minority shareholders?

3) Will Part II.1 be applicable to the proposed transactions?

4) Does paragraph 55(3)(a), current and proposed, preclude the application of subsection 55(2) to the dividends received by Holdco?

Position: Yes. No. No. Yes.

Reasons:

See Statement of Principal Issues for details

XXXXXXXXXX							971084
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. In your letters of XXXXXXXXXX you provided additional information in respect of the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein:

(i) is in an earlier return of the taxpayers or a related person;

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;

(iii) is under objection by the taxpayers or a related person; and

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.

Unless otherwise stated all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act").

In this letter, the following terms have the meanings specified:

(a) "adjusted cost base" ("ACB") has the meaning assigned to that term in section 54 of the Act;

(b) "Canco" means XXXXXXXXXX, a company with its head office at XXXXXXXXXX. It files its tax returns at, and its head office is within the area served by, the XXXXXXXXXX Taxation Services Office;

(c) "CBCA" means the Canada Business Corporations Act and, where applicable, its predecessor statutes;

(d) "Holdco" means XXXXXXXXXX, a corporation that was incorporated under the XXXXXXXXXX and having its head office at XXXXXXXXXX. It files its tax returns at the XXXXXXXXXX Centre. Its head office is within the area served by XXXXXXXXXX;

(e) "paid-up capital" ("PUC") has the meaning assigned to that term in subsection 89(1) of the Act;

(f) "Parentco" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

(g) "public corporation" has the meaning assigned to that term in subsection 89(1) of the Act;

(h) "taxable Canadian corporation" ("TCC") has the meaning assigned to that term in subsection 89(1) of the Act; and

(i) "taxable dividend" has the meaning assigned to that term in subsection 89(1) of the Act.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

1. Canco is a public corporation and a TCC continued under the CBCA. Canco, through its subsidiaries, carries on the business of XXXXXXXXXX.

2. Holdco is a TCC. All of the issued and outstanding common shares of Holdco are held by Parentco, a corporation which is not a resident of Canada for purposes of the Act. A class of Holdco's preferred shares is listed for trading on the XXXXXXXXXX stock exchanges.

3. As of XXXXXXXXXX, Holdco held approximately XXXXXXXXXX% of the issued and outstanding common shares of Canco. The balance of Canco's common shares are widely held by the public and are listed for trading on the XXXXXXXXXX stock exchanges. As far as can be determined by Canco and Holdco, no other single shareholder holds as much as XXXXXXXXXX% of the outstanding common shares of Canco and no person has indicated its intention to acquire a significant interest in Canco, Holdco or any corporation related to them.

4. XXXXXXXXXX.

5. The ACB of Holdco's shares of Canco exceeds their PUC. The fair market value of Holdco's shares of Canco exceeds their ACB.

6. Canco does not have any formal dividend policy that has been announced to investors.

XXXXXXXXXX.

The proposed transactions described below will not affect Canco's dividend policy or strategy in the years ahead.

PROPOSED TRANSACTIONS

7. Canco will repurchase approximately $XXXXXXXXXX worth of its issued and outstanding common shares (the "Repurchase"). Based on Canco's current capitalization and share price, the Repurchase involves the acquisition of approximately XXXXXXXXXX% of its issued and outstanding common shares.

8. Canco will accomplish the Repurchase, in part, through a normal course issuer bid ("NCIB") filed with the XXXXXXXXXX stock exchanges (the "Exchanges"). A NCIB is an issuer bid which is conducted through the facilities of the stock exchanges, is limited in amount, and follows certain rules set out by the stock exchanges and the securities commissions. In accordance with usual practice, Canco will not prepare a prospectus, offering memorandum or similar material setting out the details of the NCIB. It will, however, prepare a Notice (described in more detail below) to the Exchanges with respect to the NCIB.

The Notice to the XXXXXXXXXX stock exchanges with respect to the NCIB will not be prepared until the Repurchase has been approved by Canco's Board of Directors which is not intended to take place until sometime in XXXXXXXXXX. However, the following information explains how the NCIB will work:

a) Canco will file a notice of intention to acquire shares (as stated above, "Notice") with the Exchanges;

(b) a press release describing the terms of Canco's NCIB will be released and filed at least XXXXXXXXXX days before the commencement of the NCIB;

c) Canco will appoint a representative investment dealer, the approved broker, to effect all purchases on Canco's behalf;

d) The directors of Canco will specify a specific number of shares to be purchased pursuant to the NCIB;

e) The NCIB will not extend for more than XXXXXXXXXX from the date purchase begins;

f) In any XXXXXXXXXX period, not more than XXXXXXXXXX% of the shares of Canco outstanding on the day of acceptance of the Notice of the NCIB by the Exchanges may be purchased;

g) Over a XXXXXXXXXX period from the date in the Notice the purchases made on Canco's behalf pursuant to the NCIB shall not exceed the greater of:

(i) XXXXXXXXXX% of the public float (that is, issued and outstanding shares of Canco less the holdings of senior officers and directors of Canco and shareholders holding over XXXXXXXXXX% of the shares); and

(ii) XXXXXXXXXX% of the issued an outstanding shares of Canco (less those held by or on behalf of Canco);

h) Purchases pursuant to the NCIB can commence two trading days after the later of:

(i) date of acceptance by the Exchanges of the final Notice; or

(ii) the date of issuance of the press release described in (b) above;

i) To prevent the use of a NCIB to abnormally influence market price, purchases made pursuant to Canco's NCIB must be at a price not higher than the last independent trade of a board lot; and

j) Except as described in paragraph 9 below, there will be no pre-arranged trades or private transactions, i.e. all purchases pursuant to the NCIB will be in the open market.

Subsection 84(6) of the Act will apply to the common shares purchased for cancellation from the public on the Exchanges pursuant to the NCIB as described above with the result that the amounts paid by Canco and received by the selling shareholders will be proceeds of disposition to such shareholders, within the meaning of section 54 of the Act, of such common shares and, in particular subsection 84(3) of the Act will not apply to the purchase of such shares.

9. Commercial counsel to Canco has advised that rules of the Exchanges prohibit an issuer from purchasing shares from a control block pursuant to a NCIB. To accomplish the remainder of the Repurchase, Canco will apply to the Exchanges for permission to purchase a portion of the common shares held by Holdco directly from Holdco through the facilities of the Exchanges. Commercial counsel advises that they are confident that the Exchanges will grant such permission.

10. Holdco will maintain its proportionate interest in Canco throughout the course of the Repurchase through the sale of its common shares directly to Canco. The sales to Canco will take place from time to time, but not necessarily on a daily basis, after the normal trading activity of the Exchanges has ceased and they have closed for business.

11. XXXXXXXXXX.

ADDITIONAL INFORMATION

12. Canco and Holdco have not entered into any significant transactions prior to XXXXXXXXXX nor do they plan to undertake any significant transactions up to and subsequent to the proposed transactions described above.

13. Since the Repurchase will not involve a pro-rata acquisition of the shares of each shareholder of Canco, a minority shareholder who does not sell any shares in the course of the Repurchase will have a percentage increase in its interest in Canco, although not an increase in the value of that interest. However, that increase in percentage interest would not be significant. For example, in the extreme case, if there is in fact a XXXXXXXXXX% shareholder and that XXXXXXXXXX% shareholder does not sell and Canco repurchases XXXXXXXXXX% of its shares, then that shareholder's percentage interest would increase by XXXXXXXXXX. As stated in paragraph 3 above, to your knowledge no person other than Holdco holds a shareholding of as much as XXXXXXXXXX% in Canco. Furthermore, because Holdco's interest in Canco will not be less than XXXXXXXXXX%, the collective interest of the minority shareholders will not increase by more than XXXXXXXXXX%.

PURPOSE OF THE PROPOSED TRANSACTIONS

14. The purpose of the Repurchase is to enhance shareholder return. None of Canco's purposes in entering into the Repurchase is to enable its shareholders to receive an amount as proceeds of disposition rather than as a dividend. The Repurchase will take place on the open market, and Canco will not know if the minority shareholders from whom it repurchases shares are individuals or non-residents. The amount that will be paid by Canco to repurchase its shares, being the ordinary trading price, is not in any sense a replacement for a dividend which it would otherwise pay in the normal course. Canco's reasons for purchasing its shares on the open market are purely commercial.

RULINGS GIVEN

Provided that the above statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and that the proposed transactions are carried out as set forth herein, the following rulings are given:

A. By virtue of paragraph 55(3)(a) of the Act, the provisions of subsection 55(2) of the Act will not apply to the taxable dividends that Holdco will be deemed to receive from Canco under subsection 84(3) of the Act as a consequence of the proposed transactions described in paragraph 10 above, provided that there is not:

(i) a disposition of any property to a person with whom Holdco is not related, or

(ii) a significant increase in the interest (whether by means of equity or debt) in any corporation of any person with whom Holdco is not related,

which occurs as part of a transaction or event or a series of transactions or events, determined with reference to subsection 248(10) of the Act, that includes the proposed transactions described in this letter. For greater certainty, the proposed transactions described in paragraphs 7 to 11 above, in and by themselves, will not be considered to result in any of the events described in (i) and (ii) above.

B. Section 183.1 of the Act will not apply to any portion of the amounts paid by Canco to repurchase its common shares from its minority shareholders as part of the NCIB described in paragraphs 7 and 8 above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and are binding on Revenue Canada provided that the proposed transactions are completed by XXXXXXXXXX.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Opinions

Provided that our understanding of the facts and proposed transactions described herein is correct and further provided that proposed paragraph 55(3)(a) and subsection 55(3.01) of the Act are enacted in substantially the same form as proposed in 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 proposed subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events which includes the purchase by Canco of its common shares held by Holdco, the exception in proposed paragraph 55(3)(a) will prevent the application of subsection 55(2) to the taxable dividends that Holdco will be deemed to receive from Canco under subsection 84(3) of the Act as a consequence of the proposed transactions described in paragraph 10 above. For greater certainty, the proposed transactions described in paragraphs 7 to 11 above, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of proposed subparagraphs 55(3)(a)(i) to (v).

COMMENTS

1. Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed:

(a) the determination of the fair market value or ACB of any particular asset 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.

2. The taxable dividends that Holdco will be deemed to receive from Canco pursuant to subsection 84(3) of the Act as a consequence of the proposed transactions described in paragraph 10 above will, by virtue of subsection 112(3) of the Act, reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch