30 November 1997 Ruling 9731893 - 88(1)(D) BUMP - XXXXXXXXXX

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: Availability of bump where sub sells assets prior to purchase by parent.

Position: Bump available.

Reasons: GAAR not applicable.

XXXXXXXXXX
XXXXXXXXXX 3-973189
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Madam:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of March 2, 1998 in which you requested various advance income tax rulings on behalf of the above-noted taxpayer. We also acknowledge your letters of XXXXXXXXXX and our related telephone conversations.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the requested rulings is being considered by a taxation services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.

I. DEFINITIONS

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

"Act" means the Income Tax Act (Canada) R.S.C. 1985, 5th supp. c.1 as amended. Unless otherwise indicated, all statutory references are to the Act;

"adjusted cost base" has the meaning assigned by section 54;

"arm's length" has the meaning assigned by section 251;

"capital property" has the meaning assigned by section 54;

"CBCA" means the Canada Business Corporations Act;

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

"paid-up capital" has the meaning assigned by subsection 89(l);

"Paragraph" refers to a numbered paragraph in this letter;

"proceeds of disposition" has the meaning assigned by section 54;

"Proposed Transactions" means the transactions described in Paragraphs 17 to 29;

"public corporation" has the meaning assigned by subsection 89(l);

"Purchaser" means XXXXXXXXXX;

"related persons" has the meaning assigned by section 251;

"stated capital" means stated capital as that expression is used in the CBCA; and

"taxable Canadian corporation" has the meaning assigned in subsection 89(l).

II. FACTS

A. DESCRIPTION OF PARTIES

XXXXXXXXXX

1.

XXXXXXXXXX

2.

XXXXXXXXXX

3. The XXXXXXXXXX Common Shares are publicly traded on the XXXXXXXXXX Stock Exchange. The XXXXXXXXXX Common Shares have full voting rights under all circumstances, are fully participating, are not liable to any calls or assessments and have no conversion rights or redemption or sinking fund provisions.

4.

XXXXXXXXXX

5. The descendants of the late XXXXXXXXXX currently hold in the aggregate approximately XXXXXXXXXX% of the XXXXXXXXXX Common Shares as more particularly set out in Schedule "A" to this letter.

6. It is believed that, as of XXXXXXXXXX, the ten largest holders of XXXXXXXXXX Common Shares, excluding the XXXXXXXXXX family, were as follows:

Current

Position Est.

Percent of Shares Outstanding

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

Each of the foregoing shareholders (XXXXXXXXXX) appears to hold its XXXXXXXXXX common shares on behalf of multiple holders, most of whom are investment funds.

It is believed that the XXXXXXXXXX Shares are widely held.

XXXXXXXXXX

7. XXXXXXXXXX is a corporation formed by amalgamation pursuant to the CBCA. A description of XXXXXXXXXX business operations and assets is set out more fully below. A detailed description of XXXXXXXXXX corporate history is set out in Schedule "B" to this letter.

8. XXXXXXXXXX files its annual corporate income tax returns at the XXXXXXXXXX Tax Services Office and its corporate and business tax numbers are XXXXXXXXXX, respectively. Its fiscal period ends on XXXXXXXXXX and its registered office is located in XXXXXXXXXX is a taxable Canadian corporation.

9. The authorized capital of XXXXXXXXXX consists of an unlimited number of Class A Shares, Class B Shares, Class C Shares, Class D Shares and Class E Shares the terms of which are described in Schedule “B.1” to this letter. All XXXXXXXXXX of the issued and outstanding Class A shares and all XXXXXXXXXX of the issued and outstanding Class D shares of XXXXXXXXXX are directly owned by XXXXXXXXXX, and all XXXXXXXXXX of the issued and outstanding Class C shares are owned by XXXXXXXXXX. There are no Class B shares or Class E shares outstanding. XXXXXXXXXX is a taxable Canadian corporation and all of its issued and outstanding shares are directly owned by XXXXXXXXXX.

10. The adjusted cost base, paid-up capital, stated capital and redemption amount of the XXXXXXXXXX Class D Shares are $XXXXXXXXXX.

10.1 If the shares of XXXXXXXXXX owned by XXXXXXXXXX were disposed of on the date of this letter by XXXXXXXXXX, any resulting gain would be exempt from tax under the Act by virtue of Article XIII of the Canada - United States Income Tax Convention, 1980.

XXXXXXXXXX/The Purchaser

11.

XXXXXXXXXX

12.

XXXXXXXXXX

As described below, the exit strategy with respect to the XXXXXXXXXX Shares (as defined in Paragraph 16) to be acquired pursuant to the Proposed Transactions, is to sell them on a "bought deal" basis.

13.

XXXXXXXXXX

14.

XXXXXXXXXX

B. OWNERSHIP OF ASSETS BY XXXXXXXXXX

15. Prior to XXXXXXXXXX, the activities of XXXXXXXXXX and of its corporate predecessors included, among other things,

XXXXXXXXXX

16. At the current time, all of the assets of XXXXXXXXXX consist of the following:

(a)

XXXXXXXXXX

(b)

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

(c)

XXXXXXXXXX

(d)

XXXXXXXXXX

(e)

XXXXXXXXXX

(f)

XXXXXXXXXX

(g)

XXXXXXXXXX

(h) miscellaneous minority investments (the "Investments"), comprised of all the assets of XXXXXXXXXX not specifically enumerated in (a) to (g) above including, without limitation, those described in Schedule "I" to this letter;

(the above items (b), (f) to (h) (and the shares of the XXXXXXXXXX (defined in Paragraph 18) for which items (c), (d) and (e) will be exchanged, as described below) are herein referred to as the "Retained Assets").

III. PROPOSED TRANSACTIONS

A. REORGANIZATION OF XXXXXXXXXX AND DISTRIBUTION OF RETAINED ASSETS

It is contemplated that the following transactions will be implemented prior to the date (the "Closing Date") of the acquisition by the Purchaser of all of the then issued and outstanding shares of XXXXXXXXXX from XXXXXXXXXX.

17. Pursuant to a share capital reorganization, XXXXXXXXXX will file articles of amendment in accordance with the provisions of the CBCA to provide for: (i) the creation of two new classes of non-voting shares; and (ii) the exchange of the Class D Shares for these newly created shares. In particular, the Class D Shares will be exchanged for one Class F Share (the "Retained Asset Share") and one Class G Share (the "Residual Share"). The terms of the Retained Asset Share will provide, among other things, for the redemption of the Retained Asset Share for an amount determined by the Board of Directors of XXXXXXXXXX (or its successor), or by Revenue Canada or a court of competent jurisdiction pursuant to a price adjustment clause to be contained within the terms of the Retained Asset Share, to be the net fair market value of the Retained Assets. The terms will also provide that the redemption amount may be satisfied by the transfer of the Retained Assets in kind. The terms of the Residual Share will provide, among other things, for the redemption of the Residual Share for an amount equal to the aggregate redemption amount of the Class D Shares less the redemption amount of the Retained Asset Share, as finally determined. In accordance with the provisions of the CBCA, the stated capital of the Class D Shares ($XXXXXXXXXX) will be allocated to the Retained Asset Share and the Residual Share on the basis of their respective redemption amounts, as finally determined. At the time of exchange, the Board of Directors will determine the redemption amount and the stated capital of the shares, having regard to the net fair market value of the Retained Assets. In accordance with the price adjustment clause, the redemption amount and stated capital of the shares will be adjusted, nunc pro tunc, if it is established that the initial determination was inaccurate. An election under subsection 85(1) will not be filed in respect of this share capital reorganization. Prior to the completion of this reorganization, XXXXXXXXXX will obtain a certificate in accordance with the provisions of section 116.

18. XXXXXXXXXX will be transferred by XXXXXXXXXX to two subsidiary corporations (the "XXXXXXXXXX"), which will be unlimited liability companies under the laws of XXXXXXXXXX.

19. As described in Paragraph 20, the shares of XXXXXXXXXX will be transferred by XXXXXXXXXX to XXXXXXXXXX. This transfer will be effected on a fully taxable basis, subject to XXXXXXXXXX intention to make an election under subsection 93(1) to reduce its proceeds of disposition by an amount equal to the amount which XXXXXXXXXX may be entitled to deduct under subsection 113(1).

20. The Class C Shares of XXXXXXXXXX will be transferred to XXXXXXXXXX by XXXXXXXXXX by way of reduction of the paid-up capital of the common shares of XXXXXXXXXX owned by XXXXXXXXXX.

The Retained Asset Share held by XXXXXXXXXX will be redeemed. XXXXXXXXXX will then contribute its right to receive part of the redemption proceeds to USCO in exchange for stock of USCO. Such part of the redemption proceeds will then be paid by the transfer, on a fully taxable basis, of the shares of the XXXXXXXXXX (the “XXXXXXXXXX Shares”) to USCO. The other Retained Assets consisting of:

(i) the equity interest in XXXXXXXXXX;

(ii) the XXXXXXXXXX Interests;

(iii) the XXXXXXXXXX interests; and

(iv) the Investments,

will simultaneously be transferred to XXXXXXXXXX in satisfaction of the balance of the redemption proceeds.

In connection with the redemption of the Retained Asset Share, XXXXXXXXXX will obtain a certificate in accordance with the provisions of section 116.

B. ACQUISITION OF XXXXXXXXXX BY THE PURCHASER

21. The Purchaser will be a newly-formed corporation established for the purpose of acquiring XXXXXXXXXX. The shareholder of the Purchaser will be XXXXXXXXXX and, possibly, other persons whom XXXXXXXXXX may invite to participate in the Share Acquisition (as defined in Paragraph 21.1). Any other shareholders of the Purchaser will deal at arm's length with XXXXXXXXXX and XXXXXXXXXX. The shareholders of the Purchaser will not constitute a group of persons described in subclause 88(1)(c)(vi)(B)(II) on the assumption that, in applying that provision, the subsidiary is XXXXXXXXXX and the parent is the Purchaser.

21.1 The Purchaser will acquire, for cash consideration, all of the issued and outstanding shares of XXXXXXXXXX (the "Share Acquisition"), being the Class A and C Shares and the Residual Share (the “Acquired Shares”), from XXXXXXXXXX. A letter of intent, dated XXXXXXXXXX between XXXXXXXXXX, has been executed confirming the parties' mutual understanding concerning the Share Acquisition. The letter of intent does not give any party, including the Purchaser, any absolute or contingent right, either immediately or in the future, to acquire the Acquired Shares.

22. The Share Acquisition is contingent upon receipt of this letter and will be implemented shortly thereafter in accordance with a definitive share purchase agreement that is currently being negotiated by the parties.

The share purchase agreement will not be signed until the Closing Date with the result that the signing of such agreement and the purchase of the Acquired Shares by the Purchaser will occur simultaneously. Accordingly, no party, including the Purchaser, will have any absolute or contingent right, either immediately or in the future, to acquire the Acquired Shares before the acquisition actually occurs. The Purchaser will therefore not be related to XXXXXXXXXX until the share purchase agreement is signed on the Closing Date.

The share purchase agreement will be unconditional and will set out a purchase price for the Acquired Shares which will be determined following the outcome of the Purchaser's due diligence with respect to XXXXXXXXXX and its assets. This due diligence process is currently ongoing and involves a financial and legal review of XXXXXXXXXX and of the Acquired Assets (defined in Paragraph 24). In particular, this process entails a review of the documentation relating to the business and affairs of XXXXXXXXXX (including the reorganization of XXXXXXXXXX share capital described in Paragraph 17) and an investigation of the liabilities of XXXXXXXXXX (contingent or otherwise) with respect to such matters as environmental liability, tax, financial liabilities, collective agreements and other labour related matters.

23. The Share Acquisition will also be subject to the parties' obtaining, prior to the Closing Date, all required third party consents to the transaction and making all necessary filings and obtaining all necessary consents or approvals under applicable antitrust legislation (both U.S. and Canada) and applicable securities legislation. In connection with the Share Acquisition, XXXXXXXXXX will obtain a certificate under section 116.

24. The only assets of XXXXXXXXXX on the Closing Date will be the XXXXXXXXXX Shares (the "Acquired Assets").

C. WINDING-UP OF XXXXXXXXXX INTO THE PURCHASER

25. Following the Share Acquisition, the aggregate paid-up capital of each class of the Acquired Shares will be reduced to one dollar without any payment on such reduction. XXXXXXXXXX will then be wound up into the Purchaser in accordance with the provisions of the CBCA. Pursuant to this wind-up, all of the property of XXXXXXXXXX (that is, the Acquired Assets) will become property of the Purchaser.

D. SUBSEQUENT TRANSACTIONS

26. Shortly after the Share Acquisition and the wind-up of XXXXXXXXXX into the Purchaser, the Purchaser will enter into a "bought deal" underwriting agreement (the "Underwriting Agreement") with XXXXXXXXXX, as lead underwriter, and a syndicate of other underwriters (collectively, the "Underwriting Group"). None of the members of the Underwriting Group will be a person described in any of subclauses 88(1)(c)(vi)(B)(I),(II) or (III) (on the assumption that the subsidiary referred to in those provisions is XXXXXXXXXX and the parent is the Purchaser).

Pursuant to the terms of the Underwriting Agreement, it is anticipated that the Underwriting Group will agree to purchase the XXXXXXXXXX Shares, as principal, for the purpose of distributing the XXXXXXXXXX Shares to the public. XXXXXXXXXX will use its best efforts to:

(a) ascertain the identity of those persons who beneficially own XXXXXXXXXX% or more of the XXXXXXXXXX Shares or XXXXXXXXXX Shares; and

(b) ensure that no XXXXXXXXXX Shares will be offered to any person so identified.

27. It is anticipated that the Underwriting Agreement will contain standard terms and conditions for a bought deal transaction, including "disaster-out" and "material change" clauses that permit the Underwriting Group not to close the purchase of the XXXXXXXXXX Shares if certain conditions exist. The purchase price to be paid by the Underwriting Group to the Purchaser in respect of the XXXXXXXXXX Shares will be determined at the time that the Underwriting Agreement is entered into.

28. Because the XXXXXXXXXX Shares form a "Control Block" for securities law purposes, the Purchaser will be able to sell those shares to the public only pursuant to a prospectus or certain specific exemptions from the prospectus requirements. XXXXXXXXXX is a "POP" issuer for securities law purposes and the XXXXXXXXXX Shares may therefore be distributed to the public by way of short-form prospectus. It is anticipated that a preliminary prospectus, which will contain information about XXXXXXXXXX and which will have to be certified by XXXXXXXXXX, the Purchaser and the members of the Underwriting Group, would be filed with the securities commissions across Canada within approximately two days following the execution of the Underwriting Agreement. Depending upon the comments received from the securities commissions in respect of the preliminary prospectus (which comments are unlikely to be significant), it is anticipated that a final prospectus would be filed within a week following the filing of the preliminary prospectus. Thereafter, it is anticipated that the final distribution of the XXXXXXXXXX Shares to the public would take place approximately XXXXXXXXXX trading days following the filing of a final prospectus. Accordingly, the distribution of the XXXXXXXXXX Shares will likely occur approximately XXXXXXXXXX weeks after the Closing Date.

29. As a matter of securities law, from the time at which the members of the Underwriting Group believe that a distribution of XXXXXXXXXX Shares is likely to take place until the Underwriting Agreement has been entered into, they will not be permitted to "pre-market", or solicit purchase commitments from the public for, the XXXXXXXXXX Shares. Furthermore, notwithstanding that purchase commitments may thereafter be obtained, each of the purchasers will have the legal right to rescind its purchase commitment for a period of up to XXXXXXXXXX hours following the delivery to it of a copy of the final prospectus.

IV. PURPOSE OF THE PROPOSED TRANSACTIONS

On XXXXXXXXXX announced that its board of directors had approved a corporate repositioning plan that will result in debt reduction in excess of $XXXXXXXXXX (US). In addition to the Proposed Transactions, this repositioning will also include the monetization of XXXXXXXXXX XXXXXXXXXX operations and sale or monetization of certain other assets. The Proposed Transactions are designed to allow XXXXXXXXXX to retain certain assets belonging to XXXXXXXXXX and to permit the sale of XXXXXXXXXX to the Purchaser. In furtherance of these intentions, it is envisaged that XXXXXXXXXX will reorganize its issued share capital and transfer the Retained Assets, directly and indirectly, to XXXXXXXXXX. The transfer of the Retained Assets of XXXXXXXXXX to XXXXXXXXXX, as described more fully above, will be accomplished by way of the payment in kind of a redemption price owing by XXXXXXXXXX to XXXXXXXXXX as a result of the redemption of preferred share equity of XXXXXXXXXX held by XXXXXXXXXX.

The Proposed Transactions are designed to allow XXXXXXXXXX to effect the aforementioned debt deduction while indirectly retaining the XXXXXXXXXX operations currently carried on by XXXXXXXXXX and to allow XXXXXXXXXX to take advantage of an investment opportunity that is in line with its XXXXXXXXXX activities.

More specifically, the purpose of the salient steps in the Proposed Transactions is as follows.

The purpose of the transfer of the XXXXXXXXXX to the XXXXXXXXXX, as described in Paragraph 18, is to allow XXXXXXXXXX to carry on these businesses through a Canadian subsidiary rather than through a branch. The XXXXXXXXXX will be unlimited liability companies in order for them to be treated as flow-through entities for U.S. tax purposes and will effectively allow the XXXXXXXXXX operations to be consolidated with those of XXXXXXXXXX for such purposes.

XXXXXXXXXX

The purpose of the share capital reorganization described in Paragraph 17 is to allow for the transfer of the Retained Assets to XXXXXXXXXX on a fair market value basis. In particular, the purpose is to allow for the value of the Retained Asset Share to be adjusted, by way of a price adjustment clause, should the value of the Retained Assets ultimately be determined to be different from the value originally ascribed to such assets by XXXXXXXXXX for such purposes.

The purpose of XXXXXXXXXX transferring the XXXXXXXXXX shares to USCO in satisfaction of the redemption proceeds transferred by XXXXXXXXXX to USCO, as described in Paragraph 20, is to ensure that XXXXXXXXXX never directly owns the XXXXXXXXXX shares since the XXXXXXXXXX will be unlimited liability companies.

The purpose of the transfer of the Class C Shares of XXXXXXXXXX to XXXXXXXXXX by XXXXXXXXXX, as described in Paragraph 20, is to have all the shares of XXXXXXXXXX owned by one entity - XXXXXXXXXX - and to therefore simplify the share purchase agreement to be entered into with the Purchaser by having only one vendor of shares.

The purpose of winding-up XXXXXXXXXX is to allow the Purchaser to take advantage of the cost base “bump” provided for in paragraph 88(1)(d).

V. 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. The provisions of section 88 will apply to the wind-up of XXXXXXXXXX into the Purchaser (described in Paragraph 25) and, more specifically:

(1) pursuant to paragraph 88(1)(b), the Purchaser will be treated as having disposed of the shares of XXXXXXXXXX immediately before the wind-up for proceeds of disposition equal to the adjusted cost base to the Purchaser of those shares immediately before the wind-up; and

(2) the cost to the Purchaser of the Acquired Assets will be equal to the cost amount of those assets immediately before the winding-up of XXXXXXXXXX, provided that the Acquired Assets are capital property to XXXXXXXXXX, such additional amount as is determined under paragraph 88(1)(d) in respect of the assets.

B. Assuming the Acquired Assets are capital property to XXXXXXXXXX, none of the transactions described herein will cause the Acquired Assets to cease to be capital property to XXXXXXXXXX.

C. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences described herein.

D. The provisions of subsections 15(1), 56(2) and 246(1) will not apply as a consequence of the Proposed Transactions.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 provided that the Proposed Transactions are completed by 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.

VI. OPINIONS

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and purposes of the Proposed Transactions and provided that the Act is amended substantially in accordance with Bill C-28 which was passed by the House of Commons on April 21, 1998:

1. The execution of the XXXXXXXXXX letter of intent referred to in Paragraph 21.1 will not result in XXXXXXXXXX, the Purchaser, or any shareholder of the Purchaser, being considered to have a direct or indirect interest in any shares of the capital stock of XXXXXXXXXX within the meaning of proposed subparagraph 88(1)(c.2)(iii); and

2. The Acquired Assets will not be considered to be ineligible property, within the meaning of paragraph 88(1)(c), by virtue only of the share capital reorganization (described in Paragraph 17) or the transfer of the Class C Shares to XXXXXXXXXX (described in Paragraph 20).

VII. COMMENTS

1. If any of the XXXXXXXXXX Shares are acquired, on the distribution of those shares to the public as described in Paragraph 26, by a person or persons described in any of subclauses 88(1)(c)(vi)(B)(I),(II) or (III) (on the assumption that the subsidiary referred to in those provisions is XXXXXXXXXX and the parent is the Purchaser), the Acquired Assets will only be considered to be ineligible property for the purposes of paragraph 88(1)(c) if such XXXXXXXXXX Shares are acquired as part of the series of transactions or events that includes the winding-up of XXXXXXXXXX. Whether such an acquisition would be considered to be part of the series of transactions or events that includes the winding-up of XXXXXXXXXX is a question of fact that will depend on all of the surrounding circumstances including, inter alia, the interrelationship between the winding-up and the acquisition of the XXXXXXXXXX Shares.

2. Nothing in this letter should be construed as implying acceptance of the effectiveness of the price adjustment clause referred to in Paragraph 16. The general position of the Department with respect to price adjustment clauses is stated in Interpretation Bulletin IT-169.

3. Nothing in this letter should be construed as confirmation that Revenue Canada has accepted that any institutional shareholder of XXXXXXXXXX, including those described in Paragraph 6, does not own such shares for the purposes of applying any of subclauses 88(1)(c)(vi)(B)(I),(II) or (III).

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.

Yours truly,

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

XXXXXXXXXX
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Error! Main Document Only.

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