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: See issue sheet.
Position: See issue sheet
Reasons: See issue sheet
XXXXXXXXXX
XXXXXXXXXX 3-991397
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: XXXXXXXXXX
We are writing in response to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted taxpayer. We acknowledge receipt of your letters of XXXXXXXXXX and our telephone conversations in connection herewith.
We understand that to the best of your knowledge and that of XXXXXXXXXX, none of the issues contained herein:
(a) is in an earlier return of XXXXXXXXXX or a related person;
(b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of XXXXXXXXXX or a related person;
(c) is under objection by XXXXXXXXXX or a related person;
(d) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate of Revenue Canada,
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) "ACB" means "adjusted cost base" and has the meaning assigned by section 54;
(c) "capital property" has the meaning assigned by section 54;
(d) "fiscal period" has the meaning assigned by subsection 249.1(1);
(e) XXXXXXXXXX;
(f) "paid-up capital" has the meaning assigned by subsection 89(1);
(g) "proceeds of disposition" has the meaning assigned by section 54;
(h) "public corporation" has the meaning assigned by subsection 89(1);
(i) "short-term preferred share" has the meaning assigned by subsection 248(1);
(j) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);
(k) "taxable dividend" has the meaning assigned by subsection 89(1); and
(l) "taxable preferred share" has the meaning assigned by subsection 248(1).
FACTS
1. XXXXXXXXXX is a taxable Canadian corporation and public corporation which was incorporated under the xxxxxxxxxx.
2. XXXXXXXXXX federal tax account number is xXXXXXXXXX tax affairs are administered by Revenue Canada's XXXXXXXXXX District Office, and it files its tax returns at the XXXXXXXXXX Taxation Centre. Its mailing address is XXXXXXXXXX.
XXXXXXXXXX fiscal period is XXXXXXXXXX.
3. The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX subordinate voting shares ("SVS”), of which XXXXXXXXXX shares were outstanding as at XXXXXXXXXX multiple voting shares ("MVS"), of which XXXXXXXXXX were outstanding as at XXXXXXXXXX first preference shares and an unlimited number of preference shares, none of which are outstanding. In addition, there are outstanding options to purchase an aggregate of XXXXXXXXXX SVS granted in the ordinary course to employees of XXXXXXXXXX under its employee stock option plan.
4. Except with respect to voting and conversion rights, the share provisions of the SVS and MVS are identical. The holders of SVS and MVS (the "Shareholders") are entitled, share for share, to receive on a pro rata basis such dividends as may be declared by the directors of XXXXXXXXXX. In the event of the liquidation, dissolution, or winding-up of XXXXXXXXXX, the Shareholders are entitled, share for share, to receive on a pro rata basis all of the assets of XXXXXXXXXX remaining after payment of all of XXXXXXXXXX liabilities.
In the event that either the SVS or the MVS are subdivided or consolidated, the other class must be changed similarly to.preserve the relative position of each class. The Shareholders are entitled to vote at any meeting of shareholders of XXXXXXXXXX. However, the SVS carry one vote per share, while the MVS carry XXXXXXXXXX votes per share. Each MVS may be converted into one SVS. Should the number of MVS as a percentage of the total of MVS and SVS fall below 2%, the MVS automatically convert into SVS.
5. The stated capital of the SVS is approximately $XXXXXXXXXX per SVS and the paid-up capital of each SVS is not less than $XXXXXXXXXX per SVS. The paid-up capital of the SVS arises:
(i) from the conversion of common shares of XXXXXXXXXX to SVS in the course of a reorganization of the capital of XXXXXXXXXX;
(ii) on the subsequent issuances of SVS for cash, on the exercise of employee stock options, and on the acquisition of certain capital properties by XXXXXXXXXX; and
(iii) on the conversion of MVS to SVS.
The paid-up capital of the SVS includes any reduction required under subsection 85(2.1) in respect of SVS issued as consideration for the transfer of property in a transaction to which subsections 85(1) or (2) applied.
6. The stated capital of the MVS is approximately $XXXXXXXXXX per MVS and the paid-up capital of each MVS within the meaning of subsection 89(1) is not less than $XXXXXXXXXX per MVS. The paid-up capital of the MVS arises:
(i) from the conversion of common shares of XXXXXXXXXX to MVS in the course of a reorganization of the capital of XXXXXXXXXX; and
(ii) from subsequent issuances of MVS on the acquisition of capital properties by XXXXXXXXXX.
The paid-up capital of the MVS includes any reduction required under subsection 85(2.1) in respect of MVS issued as consideration for the transfer of property in a transaction to which subsections 85(1) or (2) applied.
7. XXXXXXXXXX has been reinvesting earnings to finance its growth and has not paid dividends on either the SVS or MVS in the last XXXXXXXXXX years.
8. The SVS and MVS are not taxable preferred shares, short-term preferred shares or term preferred shares.
9. The SVS are listed for trading on XXXXXXXXXX. The MVS are listed for trading on the XXXXXXXXXX Stock Exchange.
10. The only persons who, to the knowledge of the directors and officers of XXXXXXXXXX, beneficially own or exercise control or direction over securities carrying more than 10% of the voting rights attached to any class of outstanding voting securities are XXXXXXXXXX.
11. XXXXXXXXXX is an individual resident in Canada and is the chairman of the board of directors of XXXXXXXXXX (the "Board"). XXXXXXXXXX owns XXXXXXXXXX SVS and XXXXXXXXXX MVS. XXXXXXXXXX, a private corporation controlled by XXXXXXXXXX, owns XXXXXXXXXX MVS.
12. XXXXXXXXXX is a corporation incorporated under the XXXXXXXXXX and all its issued and outstanding shares are owned by XXXXXXXXXx, an individual resident in Canada, is a member of the Board. XXXXXXXXXX owns XXXXXXXXXX SVS and XXXXXXXXXX MVS.
13. XXXXXXXXXX ("LLC") is a limited liability company existing under the laws of the State of XXXXXXXXXX. Prior toXXXXXXXXXX (the "Sale Date") all of the membership interests in LLC (the "LLC Interests") were owned by XXXXXXXXXX. LLC owns XXXXXXXXXX common shares of XXXXXXXXXX a corporation incorporated under the laws of the State of XXXXXXXXXX. Prior to the Sale Date, XXXXXXXXXX owned XXXXXXXXXX shares of preferred stock of XXXXXXXXXX (the "XXXXXXXXXX Preferred Shares"). The remaining XXXXXXXXXX common shares of XXXXXXXXXX are owned by XXXXXXXXXX a corporation that formerly was a wholly-owned subsidiary of XXXXXXXXXX and the parent of the corporations carrying on the XXXXXXXXXX business described in paragraphs 15 to 20 below.
The XXXXXXXXXX Businesses - Prior to the Sale Date
14. XXXXXXXXXX. These businesses are carried out through a number of subsidiaries.
15. XXXXXXXXXX.
16. XXXXXXXXXX.
17. XXXXXXXXXX.
18. XXXXXXXXXX.
19. XXXXXXXXXX.
20. XXXXXXXXXX.
21. XXXXXXXXXX is incorporated under the laws of the province of XXXXXXXXXX still owns XXXXXXXXXX% of the outstanding shares of XXXXXXXXXX, a joint venture established in XXXXXXXXXX with XXXXXXXXXX. The business of XXXXXXXXXX consists of the XXXXXXXXXX.
22. XXXXXXXXXX.
23. XXXXXXXXXX
24. Following a review undertaken by the Board in XXXXXXXXXX, the Board concluded that XXXXXXXXXX could not sustain a leading position in each of its businesses without incurring unacceptable levels of risk and capital investment. On XXXXXXXXXX entered into an acquisition agreement pursuant to which XXXXXXXXXX agreed to sell XXXXXXXXXX. This sale was to be effected by:
(i) selling all of the issued and outstanding shares of XXXXXXXXXX (the "XXXXXXXXXX Shares") to XXXXXXXXXX a corporation existing under the XXXXXXXXXX;
(ii) selling the LLC Interests to XXXXXXXXXX a corporation existing under the laws of the State of XXXXXXXXXX; and
(iii) selling the XXXXXXXXXX Preferred Shares to XXXXXXXXXX.
25. XXXXXXXXXX, a public company existing under the laws of XXXXXXXXXX, is the parent company of each of XXXXXXXXXX. But for the agreement to acquire the XXXXXXXXXX Shares and the LLC Interests, each of XXXXXXXXXX would deal at arm's length with XXXXXXXXXX.
26. The sale of XXXXXXXXXX required shareholder and certain regulatory approvals. Shareholder approval was sought because the sale of XXXXXXXXXX Business may constitute the sale of all or substantially all the property XXXXXXXXXX. The shareholders of XXXXXXXXXX approved the sale of XXXXXXXXXX at a meeting held on XXXXXXXXXX. The sale of XXXXXXXXXX was completed on XXXXXXXXXX.
27. XXXXXXXXXX estimates that XXXXXXXXXX net cash proceeds from the sale and repayment to XXXXXXXXXX by the XXXXXXXXXX companies of outstanding intercorporate debt will be approximately $XXXXXXXXXX intends to use these proceeds to repay certain existing indebtedness and to make a cash distribution to the Shareholders. The distribution is estimated to be approximately $XXXXXXXXXX per share and is subject to a number of conditions, including sufficient cash proceeds remaining after payment of transaction costs and indebtedness and satisfaction of certain corporate requirements.
28. At the Shareholders' meeting held on XXXXXXXXXX, a special resolution was passed to authorize the Board to reduce the stated capital attributable to each MVS and SVS in such amount as the Board shall decide but not to exceed $XXXXXXXXXX per MVS and SVS (and in equal amounts per share as the provisions of the SVS and MVS require them to be treated in a similar manner) and, in the Board's sole discretion, to either add the amount of such reduction to the retained earnings of XXXXXXXXXX or to make a distribution to Shareholders equal to the amount of the stated capital reduction.
29. In the absence of a reduction in stated capital, a distribution to the shareholders of XXXXXXXXXX would result in a large deficit in retained earnings in XXXXXXXXXX financial statements. As the total amount expected to be distributed to XXXXXXXXXX shareholders exceeds the amount of the proposed reduction in stated capital, any distribution to be made to holders of SVS and MVS in excess of the amount, if any, distributed on the reduction of capital will be paid by way of dividend.
On a sale of significant assets, where the proceeds are not being reinvested in a new or existing business, you consider that it is appropriate that Shareholders receive a return that reflects the realization of a portion of the capital element of their shares. The net proceeds from the sale of XXXXXXXXXX in effect represent a portion of the capital previously invested by Shareholders in XXXXXXXXXX shares. The amount to be distributed to holders of MVS and SVS as a return of capital will not exceed the paid-up capital per MVS and SVS, respectively. Consequently, XXXXXXXXXX believes it would be inappropriate for Shareholders to receive a dividend where a significant portion of the capital underlying their shares has been realized by XXXXXXXXXX. The reduction of capital and distribution will leave XXXXXXXXXX with a deficit in retained earnings. In those circumstances, you consider that it is not appropriate that Shareholders should receive income treatment in the form of a dividend for the entire amount of the distribution.
30. As a result of the sale of XXXXXXXXXX principal businesses now consists of XXXXXXXXXX currently carried on through XXXXXXXXXX.
PROPOSED TRANSACTIONS
31. Following the sale of XXXXXXXXXX will reduce the paidup capital of its SVS and MVS by an amount equal to $XXXXXXXXXX for each issued and outstanding SVS and MVS at that time. The payment in respect of the reduction in paid-up capital of the SVS and MVS will be made in cash by XXXXXXXXXX. The fair market value of a SVS or MVS, as the case may be, exceeds the amount of the amount paid on the reduction of paid-up capital.
32. In addition, XXXXXXXXXX will make a payment of an amount equal to the total amount of the distribution of approximately $XXXXXXXXXX less the amount of the paid-up capital reduction to each holder of a SVS or MVS.
PURPOSE OF PROPOSED TRANSACTIONS
33. The purposes of the proposed transactions are:
(i) to allow the shareholders of XXXXXXXXXX to receive the net proceeds realized on a sale of significant assets representing XXXXXXXXXX businesses, where the proceeds are not being reinvested in a new or existing business, in part, as a return of capital and, in part, as a dividend; and
(ii) to enable XXXXXXXXXX to have the financial capability to support strategic alternatives, as XXXXXXXXXX remaining businesses will generate sufficient cash flow to finance its continuing operations and internal growth.
RULINGS
Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:
A. The reduction of the paid-up capital of the SVS and MVS described in paragraph 31 above, will not, in and by itself, result in a disposition, within the meaning of section 54, by a shareholder of XXXXXXXXXX of their SVS or MVS, as the case may be.
B. The amount received by a shareholder of XXXXXXXXXX in respect of the reduction of the paid-up capital of the SVS or MVS, as the case may be, described in paragraph 31 above will, by virtue of subparagraph 53(2)(a)(ii), be deducted in calculating the adjusted cost base of the SVS or MVS, as the case may be, and pursuant to subsection 84(2) no portion of such amount will be deemed to be a dividend.
C. Subsection 84(4.1) will not apply to deem any amount paid by XXXXXXXXxx to its shareholders on the reduction of paid-up capital of the SVS or MVS, as described in paragraph 31 above, to be a dividend.
D. Subsection 84(2) will apply to deem any amount paid by XXXXXXXXXX to a shareholder, as described in paragraph 32 above, to be a dividend.
E. Subsection 245(2) will not be applied to 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 currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.
1. Subsection 55(2) may apply to the dividend described in Ruling D above, received by a corporation resident in Canada in respect of which the corporation is entitled to a deduction under subsection 112(1) or 138(6), unless none of the purposes of the dividend is to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of a share of the capital stock of any corporation immediately before the dividend.
2. Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed:
(a) the determination of the paid-up capital of any shares referred to herein; or
(b) any tax consequences relating to the facts or proposed transactions described herein other those specifically described in the rulings given above.
Yours truly,
for Director
Reorganization and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 1999
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© Sa Majesté la Reine du Chef du Canada, 1999
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