1999 Ruling 9905543 - PAID-UP CAPITAL/ORDINARY COURSE OF BUSINESS

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: Transfer of Paid-Up Capital Between Classes of Shares;
Taxable Preferred Shares; Term Preferred; Ordinary Course of Business

Position: See Issue Sheet

Reasons: See Issue Sheet

XXXXXXXXXX 		990554

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX (the "Fund") - XXXXXXXXXX
XXXXXXXXXX ("Xco") - 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-noted taxpayers. We also acknowledge receipt of your correspondence dated XXXXXXXXXX and the information provided during our telephone conversations and meetings.

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, c. 1 (5th Supp.), as amended at 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) "BCA" means the Business Corporations Act (XXXXXXXXXX ;

(d) "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);

(e) "Fund" means the XXXXXXXXXX, an open-ended mutual fund trust established under the laws of the Province of XXXXXXXXXX;

(f) "Holdco" means XXXXXXXXXX, a corporation incorporated under the BCA and formed to acquire the Old Xco common shares owned by Manageco on XXXXXXXXXX;

(g) "Holdco Common Shares" means common shares of Holdco with the rights, privileges and restrictions set forth in Paragraph 7 hereof;

(h) "Holdco Special Shares" means shares of Holdco with the rights, privileges and restrictions set forth in Paragraph 7 hereof;

(i) "Holdco Unanimous Shareholders Agreement" means the unanimous shareholders agreement applicable to Holdco entered into by the Fund, Holdco and Manageco dated XXXXXXXXXX;

(j) "IT" means the XXXXXXXXXX, an open-ended mutual fund trust established under the laws of the Province of XXXXXXXXXX;

(k) "Manageco" means XXXXXXXXXX, a corporation incorporated under the BCA;

(l) "mutual fund trust" has the meaning assigned by subsection 132(6);

(m) "Old Xco" means XXXXXXXXXX, a corporation continued under the BCA on XXXXXXXXXX;

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

(o) "short-term preferred share" has the meaning assigned by subsection 248(1);

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

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

(r) "taxable preferred share" has the meaning assigned by subsection 248(1);

(s) "Unanimous Shareholders Agreement" means the unanimous shareholders agreement applicable to Xco entered into by the Fund, Manageco, Xco and XXXXXXXXXX dated XXXXXXXXXX;

(t) "unit trust" has the meaning assigned by paragraph 108(2)(a);

(u) "Xco" means XXXXXXXXXX, a corporation formed on the amalgamation of Old Xco with its wholly-owned subsidiaries and Yco on XXXXXXXXXX;

(v) "Xco Common Shares" means common shares of Xco with the rights, privileges and restrictions set forth in Paragraph 3;

(w) "Xco Extraordinary Shares" means shares of Xco with the rights, privileges and restrictions set forth in Paragraph 3 hereof;

(x) "Xco Notes" means the subordinated notes issued by Xco and its predecessor corporations;

(y) "Xco Special Shares" means shares of Xco with the rights, privileges and restrictions set forth in Paragraph 3 hereof;

(z) "Yco" means XXXXXXXXXX, a corporation amalgamated with Old Xco under the BCA on XXXXXXXXXX ; and

(aa) "Yco Common Shares" means common shares of Yco.

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

Facts

1. Xco is a taxable Canadian corporation and a Canadian-controlled private corporation which was created on the amalgamation of Old Xco with Yco and XXXXXXXXXX wholly-owned subsidiaries of Old Xco on XXXXXXXXXX. Xco is the XXXXXXXXXX It is anticipated that the fiscal year of Xco will end on XXXXXXXXXX and subsequent years.

2. The authorized share capital of Xco consists of an unlimited number of Xco Common Shares, Xco Special Shares and Xco Extraordinary Shares. The holders, the adjusted cost base and paid-up capital of the issued shares and the Xco Notes are as follows:

Holdco No. Adjusted Cost Base Paid-Up Capital

Xco Common Shares XXXXXXXXXX $XXXXXXXXXX $XXXXXXXXXX
Xco Special Shares XXXXXXXXXX $XXXXXXXXXX $XXXXXXXXXX

The Fund
Xco Special Shares XXXXXXXXXX $XXXXXXXXXX $XXXXXXXXXX

Xco Notes $XXXXXXXXXX XXXXXXXXXX

IT
Xco Notes $XXXXXXXXXX XXXXXXXXXX

3. The rights, privileges and restrictions attaching to the Xco Common Shares are as follows:

(a) voting;

(b) rank equally with the Xco Special Shares and the Xco Extraordinary Shares as to dividends; and

(c) rank equally with the Xco Special Shares and the Xco Extraordinary Shares on the liquidation, dissolution, winding-up or other distribution by Xco.

The rights, privileges and restrictions attaching to the Xco Special Shares are as follows:

(a) non-voting;

(b) rank equally with the Xco Common Shares and the Xco Extraordinary Shares as to dividends;

(c) rank equally with the Xco Common Shares and the Xco Extraordinary Shares on the liquidation, dissolution, winding-up or other distribution by Xco;

(d) exchangeable at the option of the holder for Xco Extraordinary Shares on the date the Fund is terminated on the basis of one Extraordinary Share for each Special Share exchanged; and

(e) exchangeable at the option of the holder at any time after the Fund is terminated on the basis of one Xco Common Share for each Xco Special Share exchanged.

The rights, privileges and restrictions attaching to the Xco Extraordinary Shares are the same as the Xco Special Shares with the exception that the Xco Extraordinary Shares automatically convert to Xco Special Shares on the termination of the Fund on the basis of one Xco Special Share for each Xco Extraordinary Share exchanged.

The dividend entitlement of each class of shares is subject to the provision that Xco shall not reduce the stated capital of any class of shares to return capital to any holder unless concurrently therewith Xco pays dividends to holders of the other classes of shares and/or reduces the stated capital of the other classes of shares to return capital to their holders such that there shall always be equal amounts per share paid as dividends, return of capital or some combination thereof on all shares outstanding.

4. The Unanimous Shareholders Agreement imposes on the Board of Directors of Xco the obligation to distribute, by way of quarterly cash dividends on its issued shares, all of its available cash subject to:

(a) the provisions of the BCA and other applicable laws;

(b) satisfaction of its bank financing obligations and its interest and other expense obligations; and

(c) retaining such reasonable reserves for working capital and ongoing capital expenditures (other than expenditures in respect of new projects which shall be funded by external financing).

5. The Fund is a unit trust, a mutual fund trust and a specified shareholder of Xco. Pursuant to the terms of the Trust Indenture, the undertaking of the Fund is restricted to investing its funds in securities of corporations engaged in the XXXXXXXXXX business. The Fund has issued and outstanding XXXXXXXXXX trust units and XXXXXXXXXX convertible debentures with an aggregate principal amount of $XXXXXXXXXX. The trust units and the convertible debentures are listed for trading on XXXXXXXXXX Stock Exchange. The convertible debentures bear interest at the rate of XXXXXXXXXX% payable semi-annually and mature on XXXXXXXXXX. The Fund owns all of the issued and outstanding trust units of the IT.

6. Holdco is a taxable Canadian corporation and a Canadian-controlled private corporation. The authorized share capital of Holdco consists of an unlimited number of Holdco Common Shares and Holdco Special Shares. The holders, the adjusted cost base and paid-up capital of the Holdco Common Shares and Holdco Special Shares are as follows:

Manageco No. Adjusted Cost Base Paid-Up Capital

Holdco
Common Shares XXXXXXXXXX $XXXXXXXXXX $XXXXXXXXXX

The Fund No. Adjusted Cost Base Paid-Up Capital

Holdco
Special Shares XXXXXXXXXX $XXXXXXXXXX $XXXXXXXXXX

7. The rights, privileges and restrictions attaching to the Holdco Common Shares are as follows:

(a) voting;

(b) rank equally with the Holdco Special Shares as to dividends; and

(c) rank equally with the Holdco Special Shares on the liquidation, dissolution, winding-up or other distribution by Holdco.

The rights, privileges and restrictions attaching to the Holdco Special Shares are the same as the Holdco Common Shares with the exception that the Holdco Special Shares are non-voting. The Holdco Common Shares and the Holdco Special Shares are not taxable preferred shares or short-term preferred shares.

8. Holdco was formed for the purpose of acquiring the common shares of Old Xco and the Yco Common Shares following the completion of a successful take-over bid of the IT by the Fund. Following the acquisition of IT by the Fund, the IT distributed all of the issued and outstanding Yco Common Shares to the Fund on a taxable basis pursuant to subsection 107(2.1). Due to market conditions at the time of the distribution (XXXXXXXXXX), the fair market value of the Yco Common Shares was substantially less than their paid-up capital such that the Yco Common Shares acquired by the Fund had an adjusted cost base and paid-up capital of $XXXXXXXXXX and $XXXXXXXXXX, respectively. On XXXXXXXXXX, Manageco transferred all of the common shares of Old Xco to Holdco for Holdco Common Shares and the Fund transferred all of its Yco Common Shares to Holdco in exchange for Holdco Special Shares. On the amalgamation of Old Xco and Yco, the paid-up capital which had been attributable to the Yco Common Shares was converted into the paid-up capital of the Xco Special Shares and, as a result, was allocated on a pro rata basis among the Special Shares owned by the Fund and by Holdco. The purpose of the reorganization was to permit the Fund to account for Yco on the same basis as Xco (equity accounting), to enable Manageco to participate in the combined entity and to preserve the accounting treatment that applied to Yco before the takeover.

9. The paid-up capital attached to the Yco Common Shares was created on the transfer of the shares of Old Yco (a predecessor corporation to Yco) by XXXXXXXXXX ("Zco") to a wholly-owned subsidiary of Zco ("Subco"). Zco sold all the issued and outstanding shares of Old Yco to Subco in exchange for interest bearing notes (the "Notes") having an aggregate principal amount of $XXXXXXXXXX and common shares with an aggregate paid-up capital equal to the amount by which the fair market value of the Old Yco shares exceeded the principal amount of the Notes (being approximately $XXXXXXXXXX). Subco and Old Yco then amalgamated to form Yco. The IT issued publicly-traded units which were payable on an instalment basis and used the net proceeds (approximately $XXXXXXXXXX) raised through the sale of its units and from the sale of its entitlement to the final instalment to acquire the Notes and the Yco Common Shares.

Additional Information

10. Except as described herein, no other agreements exist which would modify the terms or conditions of the Xco Common Shares, Xco Special Shares, Xco Extraordinary Shares, Holdco Common Shares or Holdco Special Shares or either require Xco or Holdco, as the case may be, to repurchase, or permit the holder to retract, such shares.

11. There are not, and will not be at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subparagraph (b)(iv) of the definition of "taxable preferred share" in subsection 248(1), in respect of any of the Xco Common Shares, Xco Special Shares, Xco Extraordinary Shares, Holdco Common Shares or Holdco Special Shares.

12. The existence of Xco and Holdco is not limited and, at the time the Xco Common Shares, Xco Special Shares, Xco Extraordinary Shares, Holdco Common Shares and Holdco Special Shares were or will be issued, there was not, and will not be, any arrangement under which Xco or Holdco, as the case may be, could be limited.

13. Holdco is not:

(a) a corporation described in any of paragraphs (a) to (e) of the definition of "specified financial institution" in subsection 248(1);

(b) controlled by one or more corporations described in (a) above;

(c) related to a corporation referred to in (a) or (b) above.

14. The Xco Special Shares and the Xco Extraordinary Shares have not and are not being issued to avoid a limitation imposed by subsection 112(2.1) or 138(6) in respect of a deduction.

15. There are no contemplated amendments to the terms of the Trust Indenture which would affect the status of the Fund as a mutual fund trust.

16. The Xco Special Shares are capital property to the Fund.

Proposed Transactions

17. The Unanimous Shareholders Agreement will be amended to allow Xco to make distributions of its available cash as a dividend or return of capital in the manner that the Board of Directors so determine. Subject to the terms of the Unanimous Shareholders Agreement, the Directors of Xco will distribute all or part of the available cash payable on the Xco Common and Xco Special Shares at the end of each quarter by way of dividends.

18. The Holdco Unanimous Shareholder Agreement will be amended to provide that any distributions by Holdco of its available cash on the Holdco Common Shares and the Holdco Special Shares shall be made by way of dividends.

19. The Fund will exercise its right to exchange all of its Xco Special Shares for Xco Extraordinary Shares having a fair market value equal to the fair market value of the Xco Special Shares so exchanged. On the exchange, the stated capital of the Xco Extraordinary Shares will be increased by $XXXXXXXXXX in accordance with subsection 37(4) of the BCA and the stated capital of the Xco Special Shares will be reduced by the same amount.

20. Pursuant to subsections 26(5) and (7) of the BCA, Xco will reduce the stated capital of the Xco Special Shares and increase the stated capital of the Xco Extraordinary Shares by the amount of $XXXXXXXXXX (the "PUC Transfer"). Immediately prior to the PUC Transfer, the paid-up capital of the Xco Special Shares will equal or exceed $XXXXXXXXXX. As a result of the PUC Transfer, the increase in the stated capital of the Xco Extraordinary Shares will be equal to the decrease in the paid-up capital of the Xco Special Shares.

Purpose of the Proposed Transactions

21. The purpose of the Proposed Transactions is to reallocate a portion of the paid-up capital in respect of the Xco Special Shares to the Xco Extraordinary Shares acquired by the Fund thereby placing Xco in a position to return a greater amount of its paid-up capital to the Fund. In general, where Xco returns paid-up capital to the Fund, the Fund may then distribute an equivalent amount to its unitholders as a tax-free return of trust capital.

Rulings Given

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, our rulings are as follows:

A. The provisions of subsection 51(1) will apply to the exchange of Xco Special Shares for Xco Extraordinary Shares, as described in paragraph 19, such that the Fund will be deemed:

(a) not to have disposed of its Xco Special Shares; and

(b) to have acquired the Xco Extraordinary Shares at a cost equal to the adjusted cost base of the Xco Special Shares so exchanged.

B. Subject to subsection 51(3), the paid-up capital of the Xco Extraordinary Shares which are issued to the Fund in exchange for its Xco Special Shares, as described in Paragraph 19, will be an amount equal to the amount added to the stated capital of the Xco Extraordinary Shares.

C. Pursuant to subsection 84(5), subsection 84(3) will not apply to deem a dividend to be paid by Xco or received by the Fund as a result of the exchange of Xco Special Shares for Xco Extraordinary Shares, as described in Paragraph 19.

D. Provided that Holdco continues to have a substantial interest in Xco within the meaning of subsection 191(2) and provided that it cannot reasonably be considered that the principal purpose for Holdco's acquiring a substantial interest in Xco was to avoid or limit the application of Part I, Part IV.1 or Part VI.1 of the Act, Xco will not be subject to tax under Part VI.1 in respect of the taxable dividends paid by Xco on the Xco Common Shares and Xco Special Shares as described in paragraph 17.

E. For the purposes of applying subsection 84(4.2), the Xco Extraordinary Shares acquired by the Fund will not be considered to have been acquired in the ordinary course of the business carried on by the Fund provided that, at the time of the acquisition of the Xco Extraordinary Shares, the Fund qualifies as a mutual fund trust within the meaning of subsection 132(6).

F. Neither the Holdco Common Shares nor the Holdco Special Shares will, as a result of the implementation of the Proposed Transactions, in and of themselves, be taxable preferred shares or short-term preferred shares.

G. Subsections 15(1), 56(2), 84(1) and 246(2) will not apply as a result of the implementation of the Proposed Transactions, in and of themselves.

H. 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.

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 affect the rulings provided herein.

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.

Caveat

Nothing in this advance 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 the adjusted cost base of any particular asset or the paid-up capital of any shares referred to in this advance ruling;

(b) the status of the Xco Extraordinary Shares and, in particular, whether or not such shares are taxable preferred shares or short-term preferred shares; or

(c) any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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