30 November 1997 Ruling 9816323 - REPLACEMENT PROPERTY RULES

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: Replacement property rules - see issue sheet

Position: n/a

Reasons: n/a

XXXXXXXXXX
XXXXXXXXXX 3-981632
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge your letters of XXXXXXXXXX and our telephone conversations in connection herewith.

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 tax services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.

Definitions

Non-Statutory Terms

In this letter unless otherwise expressly stated:

(a) "XXXXXXXXXX Transactions" means the closing under the XXXXXXXXXX Agreement, the execution of the XXXXXXXXXX Agreement and the XXXXXXXXXX Agreement and any ancillary transactions;

(b) "XXXXXXXXXX Agreement" means an agreement, which bears the date of XXXXXXXXXX, among XXXXXXXXXX, as amended;

(c) "Dissent Rights" means the rights of holders of XXXXXXXXXX Common Shares to dissent with respect to the Plan of Arrangement, as described in XXXXXXXXXX;

(d) "Dissent Compensation" means the amount and value of the consideration to which a Dissenting Shareholder is entitled as a result of having exercised Dissent Rights, as determined in accordance with XXXXXXXXXX;

(e) "Dissenting Shareholder" means any holder of XXXXXXXXXX Common Shares who has the statutory right to vote on the Plan of Arrangement and the opportunity to dissent pursuant toXXXXXXXXXX and exercises such Dissent Rights;

(f) "Effective Date" means the effective date of the Plan of Arrangement;

(g) "XXXXXXXXXX Business" means the business of XXXXXXXXXX, or any portion of such business;

(h) "XXXXXXXXXX Shares" means shares of XXXXXXXXXX which are expected to have the following terms and conditions:

XXXXXXXXXX

XXXXXXXXXX

(i) "FMV" means fair market value, being that amount at which property would be transferred by a willing buyer to a willing seller, in an open and unrestricted market, between informed parties under no compulsion to act;

(j) XXXXXXXXXX

(k) XXXXXXXXXX

(l) XXXXXXXXXX

(m) "Paragraph" refers to a numbered paragraph in this letter;

(n) "Participant" means each holder of XXXXXXXXXX Common Shares, other than a Dissenting Shareholder;

(o) "Plan of Arrangement" means a plan of arrangement pursuant to XXXXXXXXXX to effect the acquisition of XXXXXXXXXX Common Shares by XXXXXXXXXX;

(p) "Proposed Transactions" means the transactions described in Paragraphs 19, 20 and 21;

(q) "XXXXXXXXXX Agreement" means an agreement, which bears the date of XXXXXXXXXX;

(r) "XXXXXXXXXX Agreement" means an agreement, which bears the date of XXXXXXXXXX;

(s) XXXXXXXXXX;

(t) "XXXXXXXXXX Common Shares" means common shares in the capital of XXXXXXXXXX;

(u) "XXXXXXXXXX Debenture" means a Senior Subordinated Debenture, with a principal amount of $XXXXXXXXXX, which was issued by XXXXXXXXXX, pursuant to the XXXXXXXXXX Agreement;

(v) "Partnership" means XXXXXXXXXX;

(w) XXXXXXXXXX;

(x) XXXXXXXXXX;

(y) XXXXXXXXXX;

(z) XXXXXXXXXX;

(aa) XXXXXXXXXX;

(bb) "XXXXXXXXXX GAAP" means generally accepted accounting principles in effect XXXXXXXXXX, from time to time;

(cc) XXXXXXXXXX;

(dd) XXXXXXXXXX;

(ee) XXXXXXXXXX;

Statutory Terms

In this letter unless otherwise expressly stated:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provision of the Act;

(b) XXXXXXXXXX;

(c) "ACB" means adjusted cost base as defined in section 54 and subsection 248(1);

(d) "affiliated person" has the meaning assigned by subsection 251.1(1);

(e) "agreed amount" has the meaning assigned by subsection 85(1);

(f) "Canadian partnership" has the meaning assigned by subsection 102(1);

(g) XXXXXXXXXX;

(h) "capital property" has the meaning assigned by section 54;

(i) "depreciable property" has the meaning assigned by subsection 248(1);

(j) "eligible property" has the meaning assigned by subsection 85(1.1);

(k) XXXXXXXXXX;

(l) "prescribed stock exchange in Canada" has the meaning assigned by Regulation 3200;

(m) XXXXXXXXXX;

(n) "private corporation" has the meaning assigned in subsection 89(1);

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

(p) "public corporation" has the meaning assigned in subsection 89(1);

(q) "PUC" means paid-up capital as defined in subsection 89(1);

(r) "Regulations" means the Income Tax Regulations (Canada);

(s) "related person" has the meaning assigned in subsection 251(2);

(t) "replacement property" has the meaning assigned in subsection 44(5);

(u) "safe income" means income earned or realized by a corporation within the meaning of paragraph 55(5)(b);

(v) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(w) "taxable dividend" has the meaning assigned by subsection 89(1).

(x) "taxation year" has the meaning assigned by subsection 249(1), in respect of any taxpayer referred to herein which is a corporation, and the meaning assigned by paragraph 96(1)(b), in respect of the Partnership; and

(y) "Treaty" means the XXXXXXXXXX Income Tax Convention, XXXXXXXXXX.

FACTS

XXXXXXXXXX

1. XXXXXXXXXX is a corporation that is not resident in Canada, for the purposes of the Act, and is a resident of XXXXXXXXXX, for the purposes of the Treaty. Shares of XXXXXXXXXX are listed for trading on the XXXXXXXXXX Stock Exchange and certain other stock exchanges in XXXXXXXXXX is engaged in a number of businesses, including the XXXXXXXXXX Business, directly and indirectly, throughout the world, but does not directly carry on any business in Canada.

2. XXXXXXXXXX is a corporation that is not resident in Canada, for the purposes of the Act, and is a resident of XXXXXXXXXX, for the purposes of the Treaty. XXXXXXXXXX is, indirectly, a wholly-owned subsidiary of XXXXXXXXXX is engaged in a number of businesses, including the XXXXXXXXXX Business, directly and indirectly, throughout the world, but does not directly carry on any business in Canada.

3. XXXXXXXXXX is a taxable Canadian corporation, XXXXXXXXXX and a public corporation incorporated under the XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX is engaged in the XXXXXXXXXX Business, directly and indirectly, in Canada and elsewhere in the world.

The taxation year of XXXXXXXXXX in each calendar year. XXXXXXXXXX files its income tax returns at the XXXXXXXXXX Tax Services Office under account number XXXXXXXXXX.

4. XXXXXXXXXX is a taxable Canadian corporation and XXXXXXXXXX incorporated under the XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX is engaged in the XXXXXXXXXX Business, directly and through an interest in the Partnership, only in Canada.

The taxation year of XXXXXXXXXX in each calendar year. XXXXXXXXXX files its income tax returns at the XXXXXXXXXX Tax Services Office under account number XXXXXXXXXX.

5. XXXXXXXXXX is a taxable Canadian corporation and XXXXXXXXXX incorporated under the XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX is engaged in the XXXXXXXXXX Business, through an interest in the Partnership, only in Canada.

The taxation year of XXXXXXXXXX in each calendar year. XXXXXXXXXX files its income tax returns at the XXXXXXXXXX Tax Services Office under account number XXXXXXXXXX.

6. The Partnership is a Canadian partnership which is a general partnership formed under the laws of the province of XXXXXXXXXX. The Partnership is engaged in the XXXXXXXXXX Business only in Canada. The members of the Partnership, and their respective interests therein, are as follows:

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

The gross amount of dividends received by the Partnership from taxable Canadian corporations are allocated to each member in proportion to the respective partnership interest of each member.

XXXXXXXXXX

XXXXXXXXXX

7. XXXXXXXXXX is a taxable Canadian corporation, XXXXXXXXXX and a public corporation incorporated under the XXXXXXXXXX. The common shares of XXXXXXXXXX are listed for trading on XXXXXXXXXX is engaged in the XXXXXXXXXX Business, directly and indirectly, in Canada and XXXXXXXXXX.

The taxation year of XXXXXXXXXX ends on XXXXXXXXXX in each calendar year. XXXXXXXXXX files its income tax returns at the XXXXXXXXXX Tax Services Office under account number XXXXXXXXXX.

The XXXXXXXXXX Transactions

8. On XXXXXXXXXX, the following transactions (the "XXXXXXXXXX Transactions") occurred:

(a) closing under the XXXXXXXXXX Agreement occurred with the result that XXXXXXXXXX transferred substantially all of their XXXXXXXXXX properties, which consisted primarily of XXXXXXXXXX property and depreciable property, to XXXXXXXXXX in exchange for XXXXXXXXXX Common Shares and the XXXXXXXXXX Debenture with a principal amount of $XXXXXXXXXX, which are owned as follows:

Number of XXXXXXXXXX Principal Amount of
Beneficial Owner Common Shares XXXXXXXXXX Debenture

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

There will be minor cash adjustments pursuant to the XXXXXXXXXX Agreement. Immediately after their issuance, the XXXXXXXXXX Common Shares constituted approximately XXXXXXXXXX% of the total number of issued and outstanding XXXXXXXXXX Common Shares. XXXXXXXXXX will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsections 85(1) or 85(2) apply to the transfers of certain properties which are eligible property. The XXXXXXXXXX Common Shares constitute capital property to each of XXXXXXXXXX and the FMV of such shares is, in each case, greater than the ACB of such shares to the respective holder;

(b) the XXXXXXXXXX Agreement was executed with the result that XXXXXXXXXX (collectively) became entitled to representation on the board of directors of XXXXXXXXXX and to participate in certain future equity offerings by XXXXXXXXXX and became subject to certain limitations in relation to the exercise of the full voting rights attached to their XXXXXXXXXX Common Shares, the transferability of such shares and to their ability to engage in future business combinations and transactions with XXXXXXXXXX. The XXXXXXXXXX Agreement provides that XXXXXXXXXX and its affiliates, which hold approximately XXXXXXXXXX% of the issued and outstanding shares of XXXXXXXXXX, are entitled to vote at its discretion only up to the number of shares that is equal to XXXXXXXXXX% of the issued and outstanding shares of XXXXXXXXXX and are obliged to vote the balance in the same proportion for or against a resolution as the shares of other shareholders are voted at any time; and

(c) the XXXXXXXXXX Agreement was executed with the result that XXXXXXXXXX agreed, in certain circumstances, to make all necessary filings (e.g. XXXXXXXXXX) to allow XXXXXXXXXX to make certain public distributions of their XXXXXXXXXX Common Shares on a basis consistent with the provisions of the XXXXXXXXXX Agreement.

9. The XXXXXXXXXX Transactions were undertaken as a means of restructuring the ownership of the XXXXXXXXXX assets and operations of XXXXXXXXXX and of combining such assets and operations with those of XXXXXXXXXX. The XXXXXXXXXX% level of ownership of XXXXXXXXXX will allow XXXXXXXXXX to use the XXXXXXXXXX method of accounting, for financial reporting purposes under XXXXXXXXXX GAAP.

XXXXXXXXXX

XXXXXXXXXX

10.

XXXXXXXXXX

11.

XXXXXXXXXX

12. XXXXXXXXXX is a taxable Canadian corporation and a private corporation incorporated under the XXXXXXXXXX is indirectly through XXXXXXXXXX. a wholly-owned subsidiary of XXXXXXXXXX.

The XXXXXXXXXX Transaction

13.

XXXXXXXXXX

14. As a result of XXXXXXXXXX, occurring on the basis contemplated by the Plan of Arrangement, XXXXXXXXXX will

XXXXXXXXXX

15. XXXXXXXXXX have agreed to undertake the Plan of Arrangement and the transactions which are comprised therein. No rulings are being requested in relation to such transactions.

Plan of Arrangement

16. An information circular and proxy solicitation materials, which will provide detailed information in relation to the proposed takeover of XXXXXXXXXX, by means of the Plan of Arrangement, were mailed by XXXXXXXXXX to its shareholders and a meeting of XXXXXXXXXX shareholders for the purpose of voting on the Plan of Arrangement is expected to be held on or before XXXXXXXXXX.

The Plan of Arrangement provides for the acquisition of all issued and outstanding XXXXXXXXXX Common Shares, XXXXXXXXXX options and special warrants in exchange for XXXXXXXXXX Shares. Upon the completion of the Arrangement, XXXXXXXXXX security holders will effectively receive, in exchange for each XXXXXXXXXX share (or entitlement thereto), at their election, $XXXXXXXXXX cash or XXXXXXXXXX Shares having a market value of $XXXXXXXXXX based on the average closing price, or some combination thereof.

17. Each shareholder of XXXXXXXXXX will have the right to dissent with respect to the Plan of Arrangement in accordance with the provisions of XXXXXXXXXX, as such right may be modified by the court. Each Dissenting Shareholder will cease to be a shareholder of XXXXXXXXXX on the Effective Date and immediately before the transactions contemplated by the Plan of Arrangement are implemented. After the completion of such transactions, each Dissenting Shareholder will be entitled to receive the fair value of the XXXXXXXXXX Common Shares in respect of which the Dissent Rights have been exercised, determined as of the close of business on the last business day before the day upon which the shareholder vote in relation to the Plan of Arrangement takes place.

18. Provided that the requisite shareholder, regulatory and court approvals are obtained, and any other applicable conditions are satisfied, XXXXXXXXXX will, pursuant to the Plan of Arrangement, acquire all of the XXXXXXXXXX Common Shares of each Participant, on the Effective Date, in exchange for XXXXXXXXXX Shares. The XXXXXXXXXX Shares may be sold to XXXXXXXXXX., a wholly-owned subsidiary of XXXXXXXXXX, at the option of each such Participant if such Participant wants to sell its shares for cash. If requested by a Participant, XXXXXXXXXX will execute a joint election on the basis provided for in either of subsections 85(1) or (2), in prescribed form and with the time permitted by the Act, in respect of the disposition of XXXXXXXXXX Common Shares by such Participant.

PROPOSED TRANSACTIONS

Dissent and Replacement Property Acquisition

19. The Partnership will sell, at FMV, approximately XXXXXXXXXX Common Shares to XXXXXXXXXX. As a result of such disposition, the XXXXXXXXXX Common Shares will then be beneficially owned as follows:

Number of XXXXXXXXXX
Beneficial Owner Common Shares

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

The disposition of the approximately XXXXXXXXXX Common Shares will result in the Partnership holding no more than XXXXXXXXXX% of the issued and outstanding shares of XXXXXXXXXX at the Effective Date.

20. The Partnership will exercise its Dissent Rights and receive the Dissent Compensation from XXXXXXXXXX, which will be a cash amount equal to the fair value paid by XXXXXXXXXX in respect of the XXXXXXXXXX Common Shares owned by the Partnership determined at the close of business on the last business day before the day upon which the shareholders resolution to approve the Plan of Arrangement is adopted. The Partnership will vote all of its shares against the shareholders' resolution approving the Plan of Arrangement.

21. The Partnership will acquire shares of one or more taxable Canadian corporations each of which will be XXXXXXXXXX as replacement property for the XXXXXXXXXX Common Shares which were taken from it by virtue of the exercise of its Dissent Rights.

XXXXXXXXXX

ADDITIONAL INFORMATION

22. The XXXXXXXXXX Common Shares acquired pursuant to the XXXXXXXXXX Transactions and held by each of XXXXXXXXXX will have no material amount of "safe income" at the time the Plan of Arrangement becomes effective.

23. No designation pursuant to paragraph 55(5)(f) will be made by any of XXXXXXXXXX in relation to any deemed dividend which arises out of the exercise of Dissent Rights on the basis described in Paragraph 20.

PURPOSE OF THE PROPOSED TRANSACTIONS

24. The purpose of the Proposed Transactions is to enable the Partnership to acquire replacement property for the XXXXXXXXXX Common Shares which are taken from it pursuant to statutory authority as a consequence of the exercise of its Dissent Rights.

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the overall purposes of the proposed transactions, we confirm the following:

A. The amount, if any, by which the Dissent Compensation received by the Partnership exceeds the paid-up capital of its shares of XXXXXXXXXX immediately before the acquisition

(i) will be deemed pursuant to paragraph 84(3)(a) to be a dividend paid by XXXXXXXXXX on such shares and

(ii) will be deemed pursuant to paragraph 84(3)(b) to be a dividend received by the Partnership on such shares.

B. The provisions of subsection 55(2) will apply to a dividend described in Ruling A above, to deem such dividend not to be a dividend and to be proceeds of disposition of the particular shares.

C. Provided that the XXXXXXXXXX Common Shares are capital property to the Partnership, the Dissent Compensation received by it will constitute an amount that has become receivable by a taxpayer as proceeds of disposition which are described in paragraph (d) of the definition "proceeds of disposition" in section 54, for the purposes of subsection 44(1).

D. For the purposes of the Act, the time at which the Partnership has disposed of its XXXXXXXXXX Common Shares by virtue of the exercise of its Dissent Rights and the time at which an amount in respect of the proceeds from such dispositions has become receivable by the Partnership will be deemed to be the earliest of the times referred to in paragraphs 44(2)(a) to (e).

E. Provided that the Partnership acquires a capital property that is a replacement property for the XXXXXXXXXX Common Shares which have been disposed of by virtue of the exercise of its Dissent Rights, and that it makes an election in its return of income for the year in which it acquires the replacement property, the gain of the Partnership from the disposition of such XXXXXXXXXX Common Shares will be determined in accordance with the provisions of paragraph 44(1)(e) and the cost to it of its replacement property will be determined in accordance with the provisions of paragraph 44(1)(f).

F. For the purposes of subsection 44(5), the shares of any taxable Canadian corporation that is XXXXXXXXXX the shares of which are listed on a prescribed stock exchange in Canada, which are acquired by the Partnership to replace the XXXXXXXXXX Common Shares which are disposed of by virtue of the exercise of its Dissent Rights, will constitute replacement property where the shares so acquired are used by the Partnership for a use which is the same as or similar to the use to which it put its XXXXXXXXXX Common Shares. In particular, shares of any such corporation which have been so acquired will constitute replacement property where such shares, on an aggregate basis constitute less than XXXXXXXXXX% of the voting securities of such corporation (taking into account all shares of such corporation which are immediately after such acquisition owned by the Partnership, by XXXXXXXXXX or by any person related to XXXXXXXXXX).

G. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada and are binding provided that the proposed transactions are completed before XXXXXXXXXX except for the transactions described in Paragraph 21.

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.

COMMENTS

Nothing in this letter should be construed as confirmation that Revenue Canada has reviewed or accepted

(a) the determination of the FMV or adjusted cost base of any property referred to herein, or the paid-up capital of any shares;

(b) any tax consequences arising from the facts or proposed transactions described herein other than those specifically confirmed in the rulings given; or

(c)
XXXXXXXXXX

In the event that the Partnership has identified a particular property as replacement property within the time provided for in paragraph 44(1)(c), in respect of the transactions described in paragraph 21 above, the Department will consider the issuance of a supplementary to this letter to amend Ruling F.

Yours truly,

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

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