1998 Ruling 9817833 - REORGANIZATION TO SIMPLIFY SHARE STRUCTURE

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: Whether the redemption of shares held by a majority shareholder would result in a significant increase in the total direct interest of unrelated shareholders.

Position: There is no significant increase in the total direct interest of any unrelated shareholders.

Reasons: In this particular case there is no change in the economic value or entitlements of a person in any corporation that is an unrelated person immediately before the redemption of the particular shares.

XXXXXXXXXX
XXXXXXXXXX 3-981783
XXXXXXXXXX

Attention: XXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXX
Advance Income Tax Ruling Request

This is reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings. We also acknowledge your letters of XXXXXXXXXX and our various telephone conversations.

We understand that to the best of the knowledge of the taxpayers involved and XXXXXXXXXX, none of the issues involved in the ruling request:

(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,

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

(v) is the subject of a ruling previously issued by the Rulings Directorate.

The Business Numbers ("BN"), addresses and Taxation Centre serving the taxpayers are as follows:

BN
ADDRESS

TAXATION
CENTRE

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

DEFINITIONS

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 or subparagraph is a reference to the relevant provision of the Act;

(b) XXXXXXXXXX;

(c) "ACB" means "adjusted cost base" as that expression is defined in section 54;

(d) XXXXXXXXXX

(e) "CBCA" means Canada Business Corporations Act;

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

(g) "cost amount" has the meaning assigned under subsection 248(1);

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

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

(j) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

(k) "forgiven amount" has the meaning assigned by subsections 80(1) or 80.01(1);

(l) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(m) "ITAR" means the Income Tax Application Rules;

(n) XXXXXXXXXX;

(o) "paid-up capital" has the meaning assigned by subsection 89(1);

(p) "predecessor corporation" has the meaning assigned by subsection 87(1);

(q) "principal amount" has the meaning assigned by subsection 248(1) except that where the debt or obligation was outstanding at January 1, 1972, for the purposes of section 80, it has the meaning assigned by subsection 26(1.1) of the ITAR;

(r) "public corporation" has the meaning assigned by subsection 89(1);

(s) "series of transactions or events" has the meaning assigned by subsection 248(10);

(t) "specified financial institution" has the meaning assigned under subsection 248(1);

(u) "specified shareholder" has the meaning assigned by subsection 248(1);

(v) "stated capital account" has the meaning assigned by section 26 of the CBCA;

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

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

FACTS

1. XXXXXXXXXX is a public corporation and a taxable Canadian corporation. XXXXXXXXXX was formed by amalgamation on XXXXXXXXXX under the XXXXXXXXXX.

The XXXXXXXXXX Shares of XXXXXXXXXX are listed on the XXXXXXXXXX Stock Exchanges. The XXXXXXXXXX Shares are also listed on the XXXXXXXXXX Stock Exchange.

XXXXXXXXXX

2. The outstanding capital stock of XXXXXXXXXX as at XXXXXXXXXX is as summarized on Appendix I included in your letter of XXXXXXXXXX.

3. On XXXXXXXXXX and its wholly-owned subsidiary XXXXXXXXXX sold all of the shares of XXXXXXXXXX (an indirect wholly-owned subsidiary of XXXXXXXXXX carrying on a XXXXXXXXXX business) to XXXXXXXXXX in a cash and stock transaction valued at approximately $XXXXXXXXXX. Immediately before the disposition, XXXXXXXXXX acquired all of the XXXXXXXXXX of XXXXXXXXXX from its wholly-owned subsidiary XXXXXXXXXX by issuing XXXXXXXXXX Preferred Shares having a redemption amount of $XXXXXXXXXX. The transactions relating to the disposition of the XXXXXXXXXX shares are not part of a transaction or series of transactions that includes the proposed transactions as set out in this document.

4. XXXXXXXXXX and corporations controlled directly and indirectly by him (collectively referred to as the "XXXXXXXXXX Group") own the following shares of XXXXXXXXXX:

NUMBER
CLASS
PERCENTAGE VOTES
PERCENTAGE EQUITY
FIXED REDEMPTION AMOUNT

XXXXXXXXX

XXXXXXXXX

XXXXXXXXX

XXXXXXXXX

XXXXXXXXX

XXXXXXXXX

XXXXXXXXX

XXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

-

-

-

-

-

-

-

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

-

-

-

-

-

-

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

The percentage of equity reflected above represents the percentage of the aggregate outstanding XXXXXXXXXX Shares that are owned by the XXXXXXXXXX Group.

XXXXXXXXXX

As indicated in the table above, the XXXXXXXXXX Group controls XXXXXXXXXX.

5. XXXXXXXXXX is a taxable Canadian corporation and was incorporated as a wholly-owned subsidiary of XXXXXXXXXX. Until the transaction described in paragraph 19 below, the assets of XXXXXXXXXX included the following shares of XXXXXXXXXX:

Number
Class
Redemption Amount
Adjusted
Cost Base
(“ACB”)

Paid-up
Capital
(“PUC”)

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXX

XXXXXXXXX

XXXXXXXXX

XXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

The XXXXXXXXXX Preferred Shares of XXXXXXXXXX having an aggregate redemption amount of $XXXXXXXXXX are hereinafter collectively referred to as (the "Subject Shares"). XXXXXXXXXX may, at its option, satisfy the redemption price for the Subject Shares by delivering certain demand promissory notes held by XXXXXXXXXX and issued by XXXXXXXXXX (the "XXXXXXXXXX Notes"). The XXXXXXXXXX Notes have an aggregate cost, principal amount and fair market value of $XXXXXXXXXX.

6. XXXXXXXXXX is a taxable Canadian corporation and was incorporated as a wholly-owned subsidiary of XXXXXXXXXX. The assets of XXXXXXXXXX include all of the outstanding shares of XXXXXXXXXX.

7. XXXXXXXXXX is a taxable Canadian corporation and was incorporated as a wholly-owned subsidiary of XXXXXXXXXX. The assets of XXXXXXXXXX include XXXXXXXXXX Preference Shares of XXXXXXXXXX having ACB, PUC and fair market value of $XXXXXXXXXX.

8. XXXXXXXXXX is a taxable Canadian corporation and was formed by amalgamation on XXXXXXXXXX directly owns shares representing approximatelyXXXXXXXXXX% of the voting rights of XXXXXXXXXX and therefore controls XXXXXXXXXX. The assets of XXXXXXXXXX include all of the voting shares of XXXXXXXXXX, all of the outstanding shares of XXXXXXXXXX, a demand promissory note issued by XXXXXXXXXX (the "XXXXXXXXXX Note") having a principal amount and fair market value of $XXXXXXXXXX and the following shares of XXXXXXXXXX:

Number
Class
Redemption Amount
ACB
PUC
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

9. XXXXXXXXXX is a taxable Canadian corporation and was incorporated on XXXXXXXXXX directly owns shares representing approximately XXXXXXXXXX % of the voting rights of XXXXXXXXXX and therefore controls XXXXXXXXXX. The assets of XXXXXXXXXX include demand promissory notes receivable from XXXXXXXXXX which have an aggregate cost, principal amount and fair market value of $XXXXXXXXXX (the "XXXXXXXXXX Notes").

10. As described in paragraphs 11 through 18 below, the Subject Shares represent shares substituted for shares of XXXXXXXXXX which were issued as a result of a transfer of an asset within a group of related corporations.

11. On XXXXXXXXXX, transferred the shares of its wholly-owned subsidiary XXXXXXXXXX to XXXXXXXXXX at their fair market value. This transfer was made pursuant to the provisions of subsection 85(1), wherein the transferor and transferee elected on an agreed amount equal to the ACB of the XXXXXXXXXX shares to the transferor immediately before the transfer.

12. At the time of the transfer described in paragraph 11 above, XXXXXXXXXX owned shares of XXXXXXXXXX representing approximately XXXXXXXXXX% of the outstanding shares of XXXXXXXXXX had owned shares representing approximately XXXXXXXXXX% of XXXXXXXXXX. and following the acquisition of the XXXXXXXXXX% owned by XXXXXXXXXX acquired the remaining shares of XXXXXXXXXX. that it had not previously owned.

In unrelated transactions, XXXXXXXXXX sold shares of XXXXXXXXXX representing approximately XXXXXXXXXX% of the equity and XXXXXXXXXX% of the votes as part of offerings of XXXXXXXXXX shares to the public in XXXXXXXXXX.

In consideration for the transfer of the shares of XXXXXXXXXX by XXXXXXXXXX to XXXXXXXXXX:

(a) issued to XXXXXXXXXX Preferred Shares having an aggregate ACB and PUB of $XXXXXXXXXX respectively;

(b) issued toXXXXXXXXXX Preferred Shares with an aggregate redemption amount of $XXXXXXXXXX and an aggregate ACB and PUC of $XXXXXXXXXX respectively; and

(c) paid to XXXXXXXXXX in cash on closing.

13. As part of various separate series of transactions, which allowed for the utilization of losses within the related corporate group XXXXXXXXXX,

(a) XXXXXXXXXX issued:

(i) XXXXXXXXXX

(ii) XXXXXXXXXX

(iii) XXXXXXXXXX

(iv) XXXXXXXXXX

XXXXXXXXXX

(v) XXXXXXXXXX

XXXXXXXXXX

(vi) XXXXXXXXXX

(b) XXXXXXXXXX issued:

(i) XXXXXXXXXX

(ii) XXXXXXXXXX

(iii) XXXXXXXXXX

(iv) XXXXXXXXXX

(c) XXXXXXXXXX issued:

(i) XXXXXXXXXX

(ii) XXXXXXXXXX

(iii) XXXXXXXXXX

XXXXXXXXXX

Over the years from XXXXXXXXXX shares held by XXXXXXXXXX were converted into interest-bearing demand promissory notes which have an aggregate fair market value of $XXXXXXXXXX and ACB to XXXXXXXXXX of $XXXXXXXXXX (these are the XXXXXXXXXX Notes described in paragraph 5 above) and the XXXXXXXXXX shares and debts owned by XXXXXXXXXX were converted into interest-bearing demand promissory notes from XXXXXXXXXX which have an aggregate fair market value of $XXXXXXXXXX and ACB to XXXXXXXXXX of $XXXXXXXXXX (these are the XXXXXXXXXX Notes described in paragraph 9 above).

14. On XXXXXXXXXX, as part of a reorganization of its preferred share capital, XXXXXXXXXX purchased for cancellation XXXXXXXXXX Preferred Shares owned by XXXXXXXXXX. As consideration, XXXXXXXXXX issued to XXXXXXXXXX Preferred Shares and XXXXXXXXXX Preferred Shares having an aggregate redemption amount of $XXXXXXXXXX and an aggregate PUC and ACB to XXXXXXXXXX of $XXXXXXXXXX.

XXXXXXXXXX also purchased for cancellation from XXXXXXXXXX all of its then outstanding XXXXXXXXXX Preferred Shares (which had an aggregate PUC and ACB to XXXXXXXXXX of $XXXXXXXXXX) by issuing XXXXXXXXXX Preferred Shares having PUC and ACB to XXXXXXXXXX of $XXXXXXXXXX and XXXXXXXXXX Preferred Shares having PUC and ACB to XXXXXXXXXX of $XXXXXXXXXX.

The share exchanges described herein were made pursuant to an election under subsection 85(1) wherein the transferor and transferee elected agreed amounts equal to the ACB of the exchanged shares to the transferor immediately before the transfers.

The XXXXXXXXXX Preferred Shares were non-voting, redeemable for $XXXXXXXXXX per share and convertible at the option of the holder into XXXXXXXXXX Shares of XXXXXXXXXX at a conversion rate equal to the redemption amount per XXXXXXXXXX preferred share divided by the market price per XXXXXXXXXX share at the time of the conversion. The XXXXXXXXXX Preferred Shares were entitled to cumulative dividends at a floating rate equal to XXXXXXXXXX% of the bankers' acceptance rate.

15. In XXXXXXXXXX transferred the Subject Shares and the XXXXXXXXXX Preferred Shares of XXXXXXXXXX to XXXXXXXXXX in exchange for common shares of XXXXXXXXXX. These transfers were made pursuant to the provisions of subsection 85(1), wherein the transferor and transferee elected on agreed amounts equal to the ACB of the Subject Shares and the XXXXXXXXXX Preferred Shares to the transferor immediately before the transfers.

Following the transfer described herein, the PUC and ACB of the XXXXXXXXXX common shares held by XXXXXXXXXX was as follows:

Description # of Common Shares ACB PUC

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX subsequently converted the XXXXXXXXXX Preferred Shares into XXXXXXXXXX Shares of XXXXXXXXXX in accordance with the conversion privileges attached to the XXXXXXXXXX Preferred Shares. XXXXXXXXXX continues to own the Subject Shares and XXXXXXXXXX of the XXXXXXXXXX Shares which it received on the conversion.

16. In XXXXXXXXXX redeemed theXXXXXXXXXX Preferred Shares owned by XXXXXXXXXX for cash of $XXXXXXXXXX.

17. On XXXXXXXXXX transferred the common shares of XXXXXXXXXX to XXXXXXXXXX. In consideration for the transfer, XXXXXXXXXX issued to XXXXXXXXXX additional common shares and a convertible demand promissory note having a principal amount and fair market value of $XXXXXXXXXX. This transfer was made pursuant to the provisions of subsection 85(1), wherein the transferor and transferee elected on an agreed amount equal to the ACB of the XXXXXXXXXX shares to the transferor immediately before the transfer. The convertible promissory note was converted in accordance with its terms into XXXXXXXXXX preference shares of XXXXXXXXXX on XXXXXXXXXX.

18. On XXXXXXXXXX transferred to XXXXXXXXXX the XXXXXXXXXX preference shares of XXXXXXXXXX that it held at that time. In satisfaction of the purchase price, XXXXXXXXXX issued an interest-bearing demand promissory note having a principal amount and fair value of $XXXXXXXXXX to XXXXXXXXXX. This transaction was carried out so that XXXXXXXXXX could utilize the non-capital losses of XXXXXXXXXX.

PROPOSED TRANSACTIONS

19. XXXXXXXXXX will redeem the Subject Shares held by XXXXXXXXXX at their aggregate redemption price of $XXXXXXXXXX and will satisfy the redemption price by assigning the XXXXXXXXXX Notes to XXXXXXXXXX.

20. XXXXXXXXXX will pass a special resolution to reduce the stated capital account of the XXXXXXXXXX common shares by an amount of $XXXXXXXXXX and accordingly, the PUC of the XXXXXXXXXX common shares will reduced by $XXXXXXXXXX. The payment with respect to the reduction will be made by the assignment of the XXXXXXXXXX Notes to XXXXXXXXXX.

21. XXXXXXXXXX will redeem at their aggregate redemption price $XXXXXXXXXX of its XXXXXXXXXX preference shares held by XXXXXXXXXX and will satisfy the redemption price by assigning the XXXXXXXXXX Notes to XXXXXXXXXX.

22. XXXXXXXXXX will repay a portion of the XXXXXXXXXX Notes held by XXXXXXXXXX in the amount of $XXXXXXXXXX. The repayment will be made by the assignment of the XXXXXXXXXX Notes to XXXXXXXXXX.

23. The XXXXXXXXXX Notes held by XXXXXXXXXX will then be set off against the XXXXXXXXXX Notes held by XXXXXXXXXX and all such notes will be cancelled.

ADDITIONAL INFORMATION

24. The Subject Shares have not been and will not be, at any time during the implementation of the proposed transactions described herein:

(i) the subject of any undertaking that is referred to in subsection 112(2.2) of the Act as a "guarantee agreement";

(ii) the subject of a dividend rental arrangement as that term is defined in subsection 248(1);

(iii) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

(iv) issued for consideration that is or includes:

(A) an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

(B) any right of the type described in subparagraph 112(2.4)(b)(ii).

25. Neither XXXXXXXXXX nor XXXXXXXXXX is a specified financial institution or a financial intermediary corporation.

PURPOSE OF PROPOSED TRANSACTIONS

26. The purpose of the proposed transactions is to simplify the share capital and inter-company note holdings of XXXXXXXXXX by assigning the XXXXXXXXXX Notes to XXXXXXXXXX on a redemption of the Subject Shares.

RULINGS

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

A. On the redemption of the Subject Shares held by XXXXXXXXXX, as described in paragraph 19 above, subject to the application of subsection 55(2):

(i) XXXXXXXXXX will be deemed, pursuant to paragraph 84(3)(a), to have paid at that time a dividend equal to the amount, if any, by which the amount paid to redeem the Subject Shares exceeds the PUC of the Subject Shares immediately before the redemption;

(ii) XXXXXXXXXX will be deemed, pursuant to paragraph 84(3)(b), to have received at that time a dividend equal to the amount, if any, by which the amount received on the redemption of the Subject Shares exceeds the paid-up capital of the Subject Shares immediately before the redemption;

(iii) to the extent that the dividend described in (ii) above is a taxable dividend, such dividend will, pursuant to subsection 112(1), be deductible in computing the taxable income of XXXXXXXXXX for the year in which the dividend is deemed to have been received, and, for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), (2.2), (2.3) or (2.4);

(iv) by virtue of the application of paragraph (j) of the definition "proceeds of disposition" in section 54, the amount of a deemed dividend described in (ii) above will be excluded from the proceeds of disposition of the share, and any loss arising from the disposition of the share will be reduced by the amount of such dividends pursuant to subsection 112(3);

(v) Part IV.1 of the Act will not apply to the deemed dividend described in (ii) above because the dividend will be an excepted dividend pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1;

(vi) Part VI.1 of the Act will not apply to the deemed dividend described in (i) above because the dividend will be an excluded dividend pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1); and

(vii) no taxes in respect of Part IV will be payable in respect to the dividend described in (ii) above except to the extent of the amount, if any, determined under paragraph 186(1)(b).

B. By virtue of paragraph 55(3)(a), subsection 55(2) will not apply to deem any portion of the dividends described in Ruling A above to be proceeds of disposition, provided that as part of the series of transactions or events as part of which the dividends were received, there is no event described in subparagraphs 55(3)(a)(i) to (v) which has not been described herein.

C. The provisions of subsection 15(1), 56(2), 56(4), and 246(1) of the Act will not apply to the proposed transactions described herein, in and by themselves.

D. The cost of the XXXXXXXXXX Notes assigned to:

(i) XXXXXXXXXX in respect of the redemption described in paragraph 19;

(ii) XXXXXXXXXX in respect of the payment described in paragraph 20;

(iii) XXXXXXXXXX in respect of the redemption described in paragraph 21; and

(iv) XXXXXXXXXX in respect of the repayment of debt described in paragraph 22,

will be equal to the fair market value of the XXXXXXXXXX Notes.

E. The repayment of a portion of the XXXXXXXXXX Notes by assignment of the XXXXXXXXXX Notes as described in paragraph 22 above and the set-off of the XXXXXXXXXX Notes and the XXXXXXXXXX Notes as described in paragraph 23 above, will not give rise to a forgiven amount.

F. 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.

These rulings are based on the Act as it 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 fair market value 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) whether the disposition of the shares of XXXXXXXXXX, described in paragraph 3 above, was part of a transaction or series of transactions that included a reorganization in which a dividend was received to which the provisions of subsection 55(2) would have applied but for the provisions of paragraph 55(3)(b).

Yours truly,

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

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