1999 Ruling 9908523 - INTERNAL REORGANIZATION -SPIN-OFF

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.

XXXXXXXXXX 990852

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letters 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 involved in this advance ruling request is being considered by a Tax Services Office or Taxation Centre in connection with a tax return already filed and none of these issues is under objection or appeal.

STATUTORY DEFINITIONS

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

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

(c) "paid-up capital" has the meaning assigned in subsection 89(1);

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

(e) "taxable Canadian corporation" has the meaning assigned in subsection 89(1); and

(f) "Regulations" means the Income Tax Regulations..

NON-STATUTORY DEFINITIONS

a) "Distributing" means XXXXXXXXXX;

b) "Parent" means XXXXXXXXXX;

c) "Opco" means XXXXXXXXXX;

d) "Canholdco" means XXXXXXXXXX, a wholly owned Canadian resident general purpose subsidiary corporation of Distributing;

e) "Holdco" means XXXXXXXXXX, a wholly owned United States resident general purpose subsidiary corporation of Canholdco; and

f) "Subco" means XXXXXXXXXX, a wholly owned Canadian resident general purpose subsidiary corporation of Distributing. Subco's major holding is all of the common shares of XXXXXXXXXX.

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

STATEMENT OF FACTS

1. Parent is a federally-incorporated Canadian resident corporation that holds securities of Distributing. Parent is a public corporation. All classes of its shares are listed on the XXXXXXXXXX Stock Exchanges. Parent is a taxable Canadian corporation.. In addition to its holdings of shares of Distributing, at XXXXXXXXXX, Parent owned approximately $XXXXXXXXXX in cash and short term investments. Parent's corporate income tax returns are filed with the XXXXXXXXXX Tax Services Office.

2. Distributing is a Canadian resident XXXXXXXXXX. Its corporate income tax returns are filed with the XXXXXXXXXX Tax Services Office. XXXXXXXXXX Distributing is a public corporation and a taxable Canadian corporation. Distributing is not a financial intermediary corporation within the meaning of that term in subsection 191(1). Distributing has outstanding XXXXXXXXXX common shares, with paid up capital of $XXXXXXXXXX. Of these common shares XXXXXXXXXX are owned by Parent. The remaining XXXXXXXXXX% are owned by unrelated parties some of whom are non-residents of Canada. The common shares have an approximate fair market value of $XXXXXXXXXX each (total $XXXXXXXXXX). The XXXXXXXXX common shares owned by Parent have an adjusted cost base of approximately $XXXXXXXXXX. Distributing also has outstanding XXXXXXXXXX preferred shares owned by Parent and XXXXXXXXXX preferred shares, which are owned by unrelated parties. The XXXXXXXXXX non-voting XXXXXXXXXX% Non-Cumulative Preferred Shares are redeemable at the option of Distributing for an aggregate redemption amount of $XXXXXXXXXX and are convertible to XXXXXXXXXX Preferred Shares at the option of the holder, in each case on XXXXXXXXXX.

3. In XXXXXXXXXX, Distributing acquired all of the outstanding shares of Opco. Subsequently, from time to time Distributing has subscribed for further shares in Opco. Prior to XXXXXXXXXX, Opco conducted a XXXXXXXXXX business and XXXXXXXXXX business. Commencing in XXXXXXXXXX, Opco actively entered the XXXXXXXXXX business in the United States, XXXXXXXXXX. This business comprises XXXXXXXXXX.

4.

XXXXXXXXXX

5. Prior to XXXXXXXXXX, Distributing owned all of the outstanding common shares of Opco. Opco has outstanding XXXXXXXXXX common shares with a stated value of $XXXXXXXXXX each against which Opco has recorded additional paid in surpluses of $XXXXXXXXXX U.S. and retained earnings at XXXXXXXXXX of $XXXXXXXXXX U.S. The fair market value of each common share is in the range of $XXXXXXXXXX to $XXXXXXXXXX Cdn. (total $XXXXXXXXXX to $XXXXXXXXXX Cdn.). The paid-up capital of the common shares is $XXXXXXXXXX U.S. Distributing's adjusted cost base of the common shares immediately prior to XXXXXXXXXX was $XXXXXXXXXX U.S.

6.

XXXXXXXXXX

7. XXXXXXXXXX:

(a) XXXXXXXXXX:

(i) XXXXXXXXXX.

(ii) XXXXXXXXXX.

(iii) XXXXXXXXXX.

(iv) XXXXXXXXXX;

(b) XXXXXXXXXX:

(i) XXXXXXXXXX.

(ii) XXXXXXXXXX.

(iii) XXXXXXXXXX;

(c) XXXXXXXXXX;

(d) XXXXXXXXXX;

(e) XXXXXXXXXX.

8.

XXXXXXXXXX

9. On XXXXXXXXXX, Opco redeemed all its outstanding preferred shares held by Distributing for their paid-up capital U.S. $XXXXXXXXXX.

10. On XXXXXXXXXX, Distributing redeemed all its XXXXXXXXXX Preferred Shares held by Parent for their redemption amount of $XXXXXXXXXX.

11. On XXXXXXXXXX, Distributing incorporated Holdco and subscribed for common shares for U.S.$XXXXXXXXXX consideration. XXXXXXXXXX.

12. On XXXXXXXXXX, Distributing incorporated Canholdco and subscribed for common shares for $XXXXXXXXXX consideration.

13. On XXXXXXXXXX the transactions described in paragraphs 12 and 13 of Proposed Transactions in advance ruling 981171 issued to Distributing on XXXXXXXXXX, 1998 were completed, namely:

(a) Distributing disposed of the all of the common shares of Opco which Distributing owned and the shares of Holdco acquired as a result of paragraph 11 above to Canholdco in exchange for additional common shares of Canholdco;

and

(b) Immediately thereafter, Canholdco disposed of all of the common shares of Opco received from Distributing to Holdco in exchange for common shares of Holdco.

14.

XXXXXXXXXX

15. At XXXXXXXXXX, Distributing's non-consolidated balance sheet showed ($XXXXXXXXXX):

XXXXXXXXXX

16. At XXXXXXXXXX, Canholdco's balance sheet, prepared in accordance with Canadian accounting standards, showed (U.S. $ XXXXXXXXXX):

XXXXXXXXXX.

PROPOSED TRANSACTIONS

The parties propose to enter into the following transactions on a date (the "Transaction Date") as early as practical after receiving the rulings given in this letter, provincial tax rulings, United States tax rulings and XXXXXXXXXX:

17. Parent will incorporate "Newco", a wholly-owned Canadian resident general purpose subsidiary corporation and subscribe for common shares for nominal consideration. Newco will then incorporate a wholly-owned Canadian resident general purpose subsidiary corporation, "Subnewco", and will subscribe for common shares for nominal consideration.

18. XXXXXXXXXX:

(a) XXXXXXXXXX;

(b) XXXXXXXXXX;

(c) XXXXXXXXXX;

(d) XXXXXXXXXX;

(e) XXXXXXXXXX.

19.

XXXXXXXXXX

20. The directors of Distributing will pass a resolution to create a new series of Preferred Shares, XXXXXXXXXX (the "XXXXXXXXXX Preferred Shares"), with the following attributes:

(a) On and after Transaction Date each share will be retractable and redeemable for an amount (or property with a fair market value) equal to the quotient obtained when:

(i) XXXXXXXXXX,

XXXXXXXXXX

(ii) XXXXXXXXXX Date;

(b) the shares will be entitled to non-cumulative dividends at a rate reasonably determined to be a market dividend rate;

and

(c) the shares will be non-voting.

21. Prior to the transaction described in paragraph 20 above, Distributing will obtain a formal valuation that will result in a range of fair market values of the common shares of each of Canholdco and Distributing.

XXXXXXXXXX

22. The directors of Distributing will pass a resolution to take effect on Transaction Date to pay a stock dividend equal to one XXXXXXXXXX Preferred Share for each common share outstanding after the transactions described in paragraph 18 above. Distributing will record no increase in paid-up capital as a result of this dividend.

23. On Transaction Date, Parent will transfer XXXXXXXXXX% of the outstanding common shares of Distributing and all of its XXXXXXXXXX Preferred Shares to Newco in exchange for a fixed number of Newco common shares. Newco will increase the paid-up capital of the Newco common shares by an amount defined as being equal to the subsection 85(1) elected amount for this transfer. Parent and Newco will file a joint election in respect of the transfer pursuant to subsection 85(1) electing an agreed amount equal to the adjusted cost base of the Distributing common shares and XXXXXXXXXX Preferred Shares transferred by Parent to Newco.

24. On Transaction Date, Distributing will transfer the Canholdco Shares to Subnewco. As sole consideration for the Canholdco Shares, Subnewco will issue to Distributing a fixed number of redeemable and retractable preferred shares having an aggregate redemption price defined as being equal to the fair market value of the Canholdco Shares. Subnewco will record aggregate stated capital equal to the value of the Canholdco Shares as recorded in Distributing's financial statements on Transaction Date. Distributing and Subnewco will file a joint election in respect of the transfer pursuant to subsection 85(1) electing an agreed amount equal to

XXXXXXXXXX

25. Subnewco will then redeem all of the Subnewco preferred shares owned by Distributing and will agree to pay on demand a principal amount defined to be equal to the fair market value of the preferred shares (the "Subnewco Debt"). The Subnewco Debt will not be interest bearing except in the event of default.

26. At the last moment on Transaction Date, Distributing will purchase for cancellation the XXXXXXXXXX% of its common shares and redeem its XXXXXXXXXX Preferred Shares owned by Newco, and as sole consideration in payment of such purchase and redemption Distributing will assign the Subnewco Debt to Newco.

27. At the earliest moment on the day after Transaction Date, Subnewco will be amalgamated into Newco in a vertical short form amalgamation such that the shares of Subnewco will be cancelled and the amalgamated corporation ("Amalgamated Newco") will issue no new shares out of treasury.

OTHER TRANSACTIONS

Certain events have occurred and it is contemplated that certain events may occur (as described in the following paragraphs) which are not part of the Proposed Transactions, but which you wish to disclose.

28. XXXXXXXXXX.

29. XXXXXXXXXX.

30. XXXXXXXXXX.

31. XXXXXXXXXX.

32. XXXXXXXXXX.

33. XXXXXXXXXX.

34. XXXXXXXXXX.

35. XXXXXXXXXX.

36. XXXXXXXXXX.

PURPOSES OF THE PROPOSED TRANSACTIONS

37. The primary purpose of the Proposed Transactions is to address the following business problems:

XXXXXXXXXX.

RULINGS

Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, purposes of the proposed transactions and the proposed transactions, we rule as follows:

a) XXXXXXXXXX

b) Provided that the common shares of Distributing constituted capital property to Parent prior to the commencement of the Proposed Transactions, the Proposed Transactions will not, in and of themselves, cause the common shares and the XXXXXXXXXX Preferred Shares of Distributing to not be capital property.

c) The amount of the dividend received by Parent in paragraph 22 of the Proposed Transactions will be determined pursuant to paragraph (c) of the definition "amount" in subsection 248(1) as the amount by which the paid-up capital of Distributing is increased by reason of the payment of the dividend (that is, nil).

d) Provided that the requisite elections are filed under subsection 85(1) within the prescribed time period, subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to:

(i) the transfer by Parent to Newco, as described in paragraph 23 above, of the common shares of Distributing and the XXXXXXXXXX Preferred Shares; and

(ii) the transfer by Distributing to Subnewco, as described in paragraph 24 above, of the Canholdco Shares;

such that the agreed amount, as adjusted under paragraph 85(1)(c.1) in respect of the Canholdco shares, in respect of each transfer will be deemed to be the proceeds of disposition to the transferor and the cost thereof to the transferee. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

e) The paid-up capital of the preferred shares issued by Subnewco to Distributing on the transfer of the Canholdco Shares described in paragraph 24 above, will be the agreed amount pursuant to the election under subsection 85(1) subject to any adjustments under subsection 85(2.1).

f) Subsection 84(3) will apply on:

(i) the redemption of the Subnewco preferred shares held by Distributing as described in paragraph 25, to deem Subnewco to have paid and Distributing to have received;

(ii) the repurchase of the Distributing common shares and the redemption of the XXXXXXXXXX Preferred Shares held by Newco as described in paragraph 26, to deem Distributing to have paid and Newco to have received:

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption or repurchase exceeds the aggregate paid-up capital in respect of such shares immediately before such redemption or repurchase, and any such dividend

(iii) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the person deemed to have received such dividend;

(iv) will result in a deduction by the recipient, XXXXXXXXXX, in computing its taxable income for the year in which such dividend is deemed to have been received in an amount equal to the amount of such dividend, and such deduction will not be prohibited by any of subsection 112(2.1) or (2.2);

(v) will be excluded in determining the proceeds of disposition to the recipient of the shares so redeemed pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;

(vi) will not be subject to tax under Parts VI.1 and IV.I; and

(vii) will only be subject to tax under Part IV pursuant to the provisions of paragraph 186(1)(b).

g) Distributing will have no gain on the assignment of the Subnewco Debt by it to Newco in paragraph 26 of the Proposed Transactions.

h) Provided that as part of the series of transactions or events that includes the Proposed Transactions described herein , there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v), then by virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends referred to in ruling (f) above.

i) The provisions of subsections 15(1), 56(2), or section 246 will not apply to any of the Proposed Transactions in and of themselves.

j) The amalgamation of Newco and Subnewco described in paragraph 27 of the Proposed Transactions will not result in a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1) with respect to the Subnewco debt owed to Newco immediately prior to the amalgamation by virtue of subsection 80.01(3).

j.1)The assignment of the Subnewco Debt by Distributing to Newco as described in paragraph 26 of the Proposed Transactions will not result in a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

k) Provided that the Canholdco Shares represent capital property to Amalgamated Newco, the cost to Amalgamated Newco of the Canholdco Shares acquired as a result of the amalgamation described in paragraph 27 of the Proposed Transactions will be equal to Subnewco's adjusted cost base pursuant to paragraph 87(2)(e).

l) Section 245 will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given.

m) Section 245 will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine Distributing's Part I.3 tax in years after the taxation year that includes the Transaction Date.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996, and are binding provided that the proposed transactions are completed before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in these rulings should be construed as implying that Revenue Canada has reviewed, accepted or otherwise agreed:

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

(b) to any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular, we are not commenting on the tax consequences of the transactions described in paragraphs 3 through 13 and 28 through 36 above; or

(c) that the transactions described in paragraphs 28 through 36 above will not occur as part of the same series of transactions as the Proposed Transactions.

Yours truly,

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