30 November 1997 Ruling 9821803 - AMALGAMATIONS

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 Section 87 to an amalgamation of Cooperative Corporations

Position: Section 87 applies; membership interests treated as shares for purposes of applying subsections 87(3) and (4)

Reasons: See Issue Sheet

XXXXXXXXXX
XXXXXXXXXX 982180
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling Request

We are writing in response to your letter of XXXXXXXXXX as amended by your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

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

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

(ii) 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) under objection by the taxpayers or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings & Interpretations Directorate; or

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

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

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.), 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) "adjusted cost base" has the meaning assigned by section 54;

(c) "allocation in proportion to patronage" has the meaning assigned by subsection 135(4);

(d) "Amalco" means the cooperative corporation formed as a result of the amalgamation of Coop #1 and Coop #2;

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

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

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

(h) "Coop #1" means XXXXXXXXXX;

(i) "Coop #2" means XXXXXXXXXX;

(j) "cooperative corporation" has the meaning assigned by subsection 136(2);

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

(l) "private corporation" has the meaning assigned by subsection 89(1);

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

(n) "share" has the meaning assigned by subsection 248(1);

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

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

(q) "year" or “taxation year” has the meaning assigned by section 249.

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

Facts

1. Coop #1 was created by the XXXXXXXXXX.

2. Coop #1 is a cooperative corporation, a Canadian corporation and a taxable Canadian corporation.

3. The principal business of Coop #1 is the XXXXXXXXXX.

4. As a cooperative corporation, Coop #1 is entitled to make, and typically each year makes allocations in proportion to patronage to its members. In XXXXXXXXXX, Coop #1 instituted a Members' Equity Plan under which a portion of each year's allocation in proportion to patronage is loaned by the members to Coop #1 and credited to one of two equity accounts, as follows:

(a) The revolving equity accounts are credited with XXXXXXXXXX% of each year's allocation in proportion to patronage, after deduction of withholding tax. For 1998 and subsequent years, installment payments from the revolving equity account, in the form of Class B shares, will be made at a rate of XXXXXXXXXX% per year commencing in the year subsequent to the allocation to the revolving equity account. At XXXXXXXXXX Coop #1 owed approximately $XXXXXXXXXX to its members in respect of its revolving equity accounts.

(b) The long-term equity accounts are credited with XXXXXXXXXX% of each year's allocation in proportion to patronage, after deduction of withholding tax. Installment payments from the long-term equity accounts, in the form of Class B shares, will be made in equal annual amounts over a XXXXXXXXXX period commencing in XXXXXXXXXX. At XXXXXXXXXX Coop #1 owed approximately $XXXXXXXXXX to its members in respect of long-term equity accounts. Upon attaining age XXXXXXXXXX, a member’s long-term equity account is automatically transferred to his revolving equity account.

The remainingXXXXXXXXXX% of each year's allocation in proportion to patronage is paid in cash to the members.

5. At XXXXXXXXXX Coop #1 had approximately XXXXXXXXXX members.

6. In XXXXXXXXXX, the by-laws of Coop #1 were amended to allow the corporation to issue shares and to implement the revolving and long-term equity plans.

7. The authorized capital of Coop #1 is comprised of the following:

(a) Class A, non-voting, redeemable, retractable, preferred shares with no par value, having a cumulative annual dividend entitlement equal to the bank prime interest rate less XXXXXXXXXX%, such dividends being payable quarterly in cash.

(b) Class B, non-voting, redeemable, retractable, preferred shares with no par value, having a cumulative annual dividend entitlement equal to the bank prime interest rate less XXXXXXXXXX%, such dividends being payable quarterly in stock.

(c) Class C, non-voting, redeemable, retractable, preferred shares with no par value, having a cumulative annual dividend entitlement equal to the bank prime interest rate, such dividends being payable monthly in cash.

(d) Membership interests issuable at $XXXXXXXXXX.

Each of the Class A, B and C preferred shares have a redemption value and paid-up amount of $XXXXXXXXXX per share, the aggregate amount of which is reflected as a credit to the members equity account. The amounts paid by the members to obtain their memberships are recorded under retained earnings as the Coop #1 Act does not provide for paid-up capital in respect of a membership interest. No portion of any membership fee in respect of any member of Coop #1 immediately before the amalgamation described in paragraph 23 below, will be refunded or repaid prior to such amalgamation.

8. At XXXXXXXXXX, the number of Class A, B and C shares of Coop #1 and their paid-up amounts were as follows:

Class
# of Shares
Paid-Up Amount
A
XXXXXXXXXX
XXXXXXXXXX
B
XXXXXXXXXX
XXXXXXXXXX
C
XXXXXXXXXX
XXXXXXXXXX

9. The distribution of the Class A, B and C shares as of XXXXXXXXXX, is as follows (some members owned shares of more than one class; many members do not own shares of any class):

Class
# of Members
A
XXXXXXXXXX
B
XXXXXXXXXX
C
XXXXXXXXXX

The Class A shares have been issued only to members and employees of Coop #1 on the conversion of an existing loan account. The Class B shares have been issued only in satisfaction of long-term or revolving equity accounts. The Class C shares have been issued only to members XXXXXXXXXX years of age and older or to members who have ceased active participation in the business of farming in satisfaction of a revolving equity account. Upon attaining age XXXXXXXXXX, a member may make a one-time election to have all of the member's revolving equity converted to Class C shares.

10. The by-laws of Coop #1 provide that:

(a) Except upon the dissolution of Coop #1, no member, upon ceasing to be a member, is entitled to any amount other than a refund of the amount paid by the member to become a member, plus any allocated but unpaid patronage allocations.

(b) In the event of the dissolution of Coop #1 any unpaid patronage allocations are to be paid first, then the Class A, B and C shares are to be redeemed. Each member will receive a portion of the remaining net assets of Coop #1, computed on the basis of the proportion that the aggregate of the member's revolving equity and long-term equity accounts are to the aggregate of these accounts for all members of Coop #1.

(c) There areXXXXXXXXXX districts and XXXXXXXXXX subdistricts for each district. One member of the Board of Directors is elected from each district and one delegate is elected from each subdistrict. The by-laws of Coop #1 provide that each member has one vote in the election or recall of the delegate in the member's subdistrict, and each delegate has one vote with respect to the election or recall of the member to the Board of Directors in the delegate's district.

11. Coop #1 has a Loan Program, under which its members and employees may make loans to Coop #1. At XXXXXXXXXX Coop #1 owed its members and employees a total of approximately $XXXXXXXXXX under the Loan Program.

12. Section XXXXXXXXXX of the Coop #1 Act authorizes Coop #1 to be continued under an Act of the Legislature of another province in Canada provided the application for continuance is approved by XXXXXXXXXX of the delegates. At the time the continuance becomes effective, Coop#1 becomes a body corporate subject to and governed by the Act under which it is continued.

13. Coop #2 was created in XXXXXXXXXX.

14. Coop #2 is a cooperative corporation, a Canadian corporation and a taxable Canadian corporation.

15. The principal business of Coop #2 is the XXXXXXXXXX.

16. At XXXXXXXXXX Coop #2 had approximately XXXXXXXXXX members.

17. The capital of Coop #2 consists of membership interests, all of which were issued for $XXXXXXXXXX. No portion of any membership fee of any member of Coop #2 immediately before the amalgamation described in paragraph 23 below, will be refunded or repaid prior to such amalgamation. The amounts paid by the members to acquire their membership interest are recorded in the financial records of Coop #2 as equity, reflecting the fact that Coop #2 was created as a corporation without share capital. The statute under which XXXXXXXXXX is governed does not provide for paid-up capital in respect of a membership interest.

18. Coop #2 has a Patronage Loan Plan, under which the Board of Directors may require that members loan all or a portion of their allocations in proportion to patronage, net of withholding tax, to Coop #2. At XXXXXXXXXX the amount owing to members under the Patronage Loan Plan was approximately $XXXXXXXXXX.

19. Coop #2 has a Members' Savings Plan under which members may make loans to Coop #2 evidenced by Savings Certificates. At XXXXXXXXXX the amount owing under the Savings Plan was approximately $XXXXXXXXXX.

20. The by-laws of Coop #2 provide that:

(a) Except upon the dissolution of Coop #2, no member, upon ceasing to be a member, is entitled to any amount other than a refund of the amount paid by the member to become a member, plus any allocated but unpaid patronage allocations.

(b) In the event of the dissolution of Coop #2, members' patronage loans will be paid, and following such payment, each member will receive a portion of the remaining net assets of Coop #2, ratably with each other member of Coop #2.

(c) There are XXXXXXXXXX districts and XXXXXXXXXX subdistricts for each district. One member of the Board of Directors is elected from each district and two delegates are elected from each subdistrict. The by-laws of Coop #2 provide that each member has one vote in the election of councilors, who in turn have one vote in the election of delegates, and each delegate has one vote with respect to the election of the Board of Directors and other matters of significant importance.

21. On XXXXXXXXXX the delegates of Coop #1 and Coop #2 voted unanimously to proceed with an amalgamation of the two corporations to create a new cooperative corporation. Certain regulatory and other approvals, including receipt of an advance income tax ruling, must be XXXXXXXXXX 1998.

Proposed Transactions

22. Coop #1 and Coop #2 will be continued as cooperative corporations under the XXXXXXXXXX)(the “Amalco Act”). The articles and by-laws of each corporation immediately following the continuance will be identical to the articles and by-laws of each corporation immediately before the continuance.

23. Coop #1 and Coop #2 will amalgamate and continue as one cooperative on XXXXXXXXXX. The amalgamated corporation (“Amalco”) will be a cooperative corporation, a Canadian corporation and a taxable Canadian corporation.

24. The by-laws of Amalco will provide for an equity structure based on the equity structure of Coop #1. Specifically, Amalco will be authorized to issue an unlimited number of Class A, B and C preferred shares with a redemption value and par value of $XXXXXXXXXX per share. Amalco will also be authorized to issue membership interests to qualifying persons. Such memberships interests will carry a right to vote and a right to share in the assets of Amalco on dissolution, following the satisfaction of prior claims, based on the balance in the members equity accounts.

25. All of the assets, liabilities and obligations of Coop #1 and Coop #2 will becomeassets, liabilities and obligations of Amalco upon the amalgamation.

26. The holders of the Class A, B and C preferred shares of Coop #1 will exchange their shares for Class A, B and C preferred shares of Amalco upon the amalgamation on a one-for-one basis. The paid-up amount of each of the Class A, B and C shares (currently credited to the members’ equity account) of Coop #1 immediately before the amalgamation in respect of these shares will be reflected in the members’ equity account of Amalco.

27. Each member of Coop #1 and Coop #2 immediately before the amalgamation will become a member of Amalco upon the amalgamation. The amount credited to the members’ equity and retained earnings accounts in respect of the membership interests in each of the predecessor cooperative corporations will be credited to a long-term equity account of Amalco as the Amalco Act does not provide for paid-up capital in respect of a membership interest.

28. The revolving and long-term equity accounts of the Coop #1 members will become revolving and long-term equity accounts of Amalco upon the amalgamation.

29. The Patronage Loan accounts of Coop #2 members will become revolving and longterm equity accounts of Amalco in the same ratio that pertains immediately before the amalgamation in respect of the long-term and revolving equity accounts of Coop #1.

Purpose of the Proposed Transactions

30. The Boards of Directors and delegates of each of Coop #1 and Coop #2 believe that Amalco will more successfully serve the needs of the members of Coop #1 and Coop #2 than will the existing cooperative corporations. It is expected that Amalco will have the financial strength and diversity to compete in the global marketplace more effectively than Coop#1 and Coop#2 operating individually.

Additional Information

31. XXXXXXXXXX on behalf of Coop #1 and XXXXXXXXXX on behalf of Coop #2, have determined that the proportionate fair market value of Coop #1 relative to Coop #2 varies from the proportion of the various equity and patronage accounts of the members of Coop #1 relative to the members of Coop #2. The variance is estimated to be approximately $XXXXXXXXXX at XXXXXXXXXX (the "Valuation Difference").

32. The Valuation Difference will be equalized by an adjustment to the respective members' equity and patronage loan accounts in proportion to the relative valuations of the cooperative corporations. This amount, referred to as the "Notional Premium", will be allocated to each of the members of Coop #1 in proportion to their members' equity accounts as an attribute of membership in Amalco. However, the Notional Premium can be realized only in very limited circumstances. The by-laws of Amalco will provide that the Notional Premium will be transferred from the retained earnings of Amalco to the members' revolving and long-term equity accounts at the time either of the following events occur:

(a) the dissolution of Amalco;

(b) the completion of an offering of shares of Amalco, which offering is not limited to members and/or employees of Amalco; or

(c) the sale or exchange of all or substantially all of Amalco's assets.

The by-laws of Amalco will provide that any member having a Notional Premium will have such Notional Premium reduced by XXXXXXXXXX% of the original amount thereof on each succeeding anniversary date of the day on which Coop #1 and Coop #2 are amalgamated.

33. Coop #1 and Coop #2 deal with each other at arm's length. In addition, each member of Coop #1 and Coop #2 deals with each corporation at arm's length. In respect of each of Coop #1 and Coop #2 there is no member or related group of members or delegates that control either corporation.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as set forth below.

A. The provisions of subsections 87(1) and (2) will apply to the amalgamation of Coop #1 and Coop #2.

B. A membership interest in Amalco issued to a member of Coop #1 and Coop #2 on the amalgamation will be a “share” and each member of Amalco immediately following the amalgamation will be a “shareholder” thereof.

C. Subject to subsections 87(3) and (3.1), the paid-up capital in respect of:

(a) the Class A, B and C shares of Amalco immediately after the amalgamation will be equal to the par value of each class of shares; and

(b) the membership interests in Amalco immediately after the amalgamation will be equal to the total of the amounts received by Coop #1 and Coop #2 from the members of each predecessor corporation (who became members of Amalco as a consequence of the amalgamation) as consideration for issuing the membership interests.

D. Each member of Coop #1 and Coop #2 who, immediately before the amalgamation, owned any of the Class A, B or C shares of Coop #1 and a membership interest in either Coop #1 or Coop #2 as capital property and who receives no consideration other than shares of the capital stock of Amalco on the amalgamation will be deemed, subject to subsection 26(21) of the Income Tax Application Rules:

(a) to have disposed of any Class A, B and C shares of Coop#1 owned by the member and the member’s membership interest in either of Coop#1 or Coop#2 pursuant to paragraph 87(4)(a) for proceeds of disposition equal to the adjusted cost base thereof to the member immediately before the amalgamation; and

(b) to have acquired, pursuant to paragraph 87(4)(b)

(i) the Class A shares of Amalco, if applicable, for an amount equal to the amount deemed to be the proceeds of disposition to the member of the Class A shares of Coop#1,

(ii) the Class B shares of Amalco, if applicable, for an amount equal to the amount deemed to be the proceeds of disposition to the member of the Class B shares of Coop#1,

(iii) the Class C shares of Amalco, if applicable, for an amount equal to the amount deemed to be the proceeds of disposition to the member of the Class C shares of Coop#1, and

(iv) a membership interest in Amalco for an amount equal to the amount deemed to be the proceeds of disposition to the member of the membership interest in Coop#1 and Coop#2, whichever is applicable.

For greater certainty, paragraphs 87(4)(c), (d) and (e) will not apply to redetermine the proceeds of disposition of the Class A, B or C shares of Coop#1 or the membership interests of Coop #1 or Coop #2 or the cost to a member of any shares of Amalco received on the amalgamation.

E. The proposed transactions will not result in the acquisition of control of Coop #1 for the purpose of the provisions listed in the preamble to subsection 256(7).

F. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to the proposed transactions, in and by themselves.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada Customs, Excise and Taxation 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.

Caveat

Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:

(a) the determination of the fair market value or adjusted cost base of any particular asset referred to herein; or

(b) any tax consequences relating to the proposed transactions described herein other than those specifically described in the rulings given above.

Revenue Canada, Customs, Excise and Taxation is of the view that the amalgamation of Coop #1 and Coop #2 as described in the proposed transactions will result in an acquisition of control of Coop#2 immediately before the amalgamation.

Yours truly,

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

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