1999 Ruling 9923853 - TAKEOVER AND BUMP - 88(1)(C)(VI)

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 88(1)(c)(vi) to takeover and bump transaction

Position: Not applicable

Reasons: see Principal Issues.

XXXXXXXXXX 					3-992385

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re:

XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge the additional information in your two letters of XXXXXXXXXX.

You have provided the following information in respect of XXXXXXXXXX.

XXXXXXXXXX

Address: XXXXXXXXXX

XXXXXXXXXX

Address: XXXXXXXXXX

Revenue Canada account number: XXXXXXXXXX

Tax Services Office: XXXXXXXXXX

Taxation Centre: XXXXXXXXXX

To the best of the knowledge of XXXXXXXXXX, none of the issues involved in this ruling request:

• is in an earlier return of XXXXXXXXXX, or a person related to either company;
• is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of XXXXXXXXXX, or a person related to either company;
• is under objection by XXXXXXXXXX , or a person related to either company;
• is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
• is the subject of a previously issued advance income tax ruling.

In this letter, unless otherwise noted, all statutory references are to the Income Tax Act (Canada) (the "Act").

DEFINED TERMS

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

"adjusted cost base" has the meaning assigned by section 54;

"CBCA" means Canada Business Corporation Act;

"capital property" has the meaning assigned by section 54;

"non-resident" has the meaning assigned by subsection 248(1);

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

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

"related" means related persons as that expression is defined by subsection 251(2); and

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

FACTS

1. XXXXXXXXXX is a US public company and a non-resident corporation for purposes of the Act.

2. XXXXXXXXXX is a corporation incorporated under the CBCA, and is a public corporation and a taxable Canadian corporation. XXXXXXXXXX has only one class of shares issued and outstanding.

3. XXXXXXXXXX is a corporation organized under the laws of the State of XXXXXXXXXX is a non-resident corporation for purposes of the Act. XXXXXXXXXX is a direct wholly-owned subsidiary of XXXXXXXXXX.

4. The shares of XXXXXXXXXX are capital property to XXXXXXXXXX.

5. XXXXXXXXXX are both specified shareholders of XXXXXXXXXX for the purposes of subparagraph 88(1)(c)(vi) of the Act, within the meaning of subparagraph 88(1)(c.2)(iii) and subsection 248(1), each owning approximately XXXXXXXXXX% of the issued and outstanding XXXXXXXXXX shares.

6. XXXXXXXXXX are non-residents of Canada and residents of the US for the purposes of the application of the provisions of the Canada-US Income Tax Convention ("the Convention").

7. XXXXXXXXXX will have been residents of Canada, for purposes of the Convention, within the XXXXXXXXXX years preceding the date of the anticipated disposal of their shares of XXXXXXXXXX, as contemplated in the proposed transactions described below. Furthermore, all of the shares of XXXXXXXXXX currently owned by XXXXXXXXXX were owned by them at the time they ceased to be residents of Canada.

8. The shares of XXXXXXXXXX held by XXXXXXXXXX are "taxable Canadian property" pursuant to subparagraph 115(1)(b)(vi) of the Act.

9. Pursuant to an offer agreement dated XXXXXXXXXX has agreed to cause, and has caused, an indirect wholly-owned CBCA subsidiary to make an offer to purchase all of the issued and outstanding common shares (including any common shares which may become outstanding pursuant to the exercise of outstanding options to acquire common shares) of XXXXXXXXXX by way of a takeover bid for US$XXXXXXXXXX per share in cash (the "Offer"). The Offer was made on XXXXXXXXXX. It is a condition of the Offer (the "Minimum Deposit Condition") that at least XXXXXXXXXX% of the common shares of XXXXXXXXXX not already held by XXXXXXXXXX be deposited to the Offer, including any shares that are deposited pursuant to the Holdco Alternative (as described in paragraph 10 below).

10. At the sole discretion of XXXXXXXXXX, the above offer may be structured so as to permit XXXXXXXXXX to each hold their shares of XXXXXXXXXX indirectly through a qualifying holding company and to deposit all of the issued and outstanding shares of such holding company and all of the shares of XXXXXXXXXX held by the holding company to the Offer. The offeror would purchase the holding company shares in lieu of the XXXXXXXXXX shares owned by such holding company that would otherwise be deposited directly under the Offer. This possibility will be referred to herein as "the Holdco Alternative".

11. For the purposes of the Holdco Alternative, a qualifying holding company is one for which the shareholder of the holding company represents, warrants and covenants to the effect that, among other things, the holding company will have no assets other than shares of XXXXXXXXXX and no tax or other liabilities, and that the holding company has never carried on any business or operations of any kind.

12. XXXXXXXXXX will only make the Holdco Alternative available to XXXXXXXXXX after receipt of this letter.

13. XXXXXXXXXX does not currently own, directly or indirectly, any shares of XXXXXXXXXX.

14. XXXXXXXXXX entered into a stock option agreement on XXXXXXXXXX, concurrently with the offer agreement. The stock option agreement grants XXXXXXXXXX an option to acquire up to XXXXXXXXXX% of the shares of XXXXXXXXXX. The option is exercisable only in the event that the Offer agreement is terminated and a break-up fee becomes payable by XXXXXXXXXX to XXXXXXXXXX.

14.1 XXXXXXXXXX will not, at any time during the course of the series of transactions which includes the proposed transactions described below, collectively own more than XXXXXXXXXX% of the issued and outstanding shares of XXXXXXXXXX.

15. XXXXXXXXXX has incorporated a US corporation under XXXXXXXXXX law ("XXXXXXXXXX Sub").

16. XXXXXXXXXX Sub has incorporated an unlimited liability company pursuant to the XXXXXXXXXX.

17. XXXXXXXXXX has incorporated a limited corporation under the CBCA ("Acq. Co.").

18. XXXXXXXXXX (hereinafter referred to, collectively, as the "Holdco Shareholders", and, individually, as a "Holdco Shareholder"), have each incorporated a limited corporation under the XXXXXXXXXX Business Corporations Act (hereinafter referred to, collectively, as the "Holdcos", and, individually, as a "Holdco").

PROPOSED TRANSACTIONS

18.1 XXXXXXXXXX will fund XXXXXXXXXX Sub, XXXXXXXXXX Sub will in turn fund XXXXXXXXXX and XXXXXXXXXX will in turn fund Acq. Co., with an amount of cash equal to the amount required to purchase 100% of the shares of XXXXXXXXXX under the Offer. The shares of XXXXXXXXXX will have a stated capital equal to their subscription price.

19. The Holdco Shareholders will transfer their shares of XXXXXXXXXX to the Holdcos in exchange for common shares of the Holdcos.

20. Each Holdco will increase the stated capital of its common shares by special resolution by an amount equal to the difference between the aggregate adjusted cost base of its XXXXXXXXXX shares and the product obtained when $XXXXXXXXXX US is multiplied by the number of such XXXXXXXXXX shares.

21. By approximately XXXXXXXXXX, Acq. Co. will determine whether or not the conditions of the Offer have been satisfied (including the Minimum Deposit Condition), and whether it is prepared to waive any conditions that have not been satisfied.

22. If all conditions have been satisfied or waived, at XXXXXXXXXX, Acq. Co. will complete the purchase of the shares of the Holdcos ("the Holdco Shares") pursuant to the Purchase Agreements, as defined below.

23. Following the purchase of the Holdco Shares, each of the Holdcos will, by written resolution expressly stated to be effective as of XXXXXXXXXX, determine to commence proceedings to wind-up, and the shares of XXXXXXXXXX will be transferred to Acq. Co. Acq. Co. will designate an amount with respect to the XXXXXXXXXX shares pursuant to paragraph 88(1)(d).

24. At XXXXXXXXXX, Acq. Co. will take up and pay for all of the common shares of XXXXXXXXXX deposited to the Offer, other than the common shares of XXXXXXXXXX previously acquired from the Holdcos, as described in paragraph 22, by Acq. Co.

25. The Offer will expire at XXXXXXXXXX, unless Acq. Co. determines to extend the Offer period.

26. If Acq. Co. acquires less than 100% but 90% or more of the common shares of XXXXXXXXXX pursuant to the Offer, or any extension thereof, including the common shares of XXXXXXXXXX held by any of the Holdcos that are acquired under the Holdco Alternative, Acq. Co. will use the compulsory acquisition provisions of Section 206 of the CBCA to acquire the remaining XXXXXXXXXX common shares (a "Compulsory Acquisition"). The Compulsory Acquisition will be effected by Acq. Co. delivering a notice to all holders of XXXXXXXXXX common shares who have not accepted the Offer and depositing with a depository funds sufficient to pay such shareholder US$XXXXXXXXXX per share. Thereafter such shareholders will have the right to be paid for their shares upon surrender of their share certificates and a duly executed letter of transmittal or the ability to exercise dissent rights but have no ongoing rights as XXXXXXXXXX shareholders. Following the completion of the Compulsory Acquisition, if applicable, XXXXXXXXXX will be wound up into Acq. Co. Acq. Co. will designate an amount with respect to the XXXXXXXXXX US shares pursuant to paragraph 88(1)(d).

26.1 If Acq. Co acquires 100% of the common shares of XXXXXXXXXX pursuant to the

Offer, XXXXXXXXXX will be wound up into Acq. Co. Acq. Co. will designate an amount with respect to the XXXXXXXXXX US shares pursuant to paragraph 88(1)(d).

27. If Acq. Co. is unable to complete a Compulsory Acquisition, it will enter into a second-stage transaction (the "Amalgamation Squeeze-Out") in which Acq. Co. will amalgamate with XXXXXXXXXX. Shareholders of XXXXXXXXXX will be entitled to exercise dissent rights in connection with the Amalgamation Squeeze-Out. The Amalgamation Squeeze-Out will be required to be submitted to the holders of XXXXXXXXXX common shares at a special meeting called for such purpose but Acq. Co. will only take up and pay for shares under the Offer if by so doing it will have acquired sufficient voting control over XXXXXXXXXX that the approval of the Amalgamation Squeeze-Out is assured.

The authorized share capital of the corporation continuing following the Amalgamation Squeeze-Out ("Amalco") will be an unlimited number of common shares and a number of redeemable preference shares equal to the number of XXXXXXXXXX common shares not tendered to the Offer. Under the Amalgamation Squeeze-Out, the XXXXXXXXXX shares held by Acq. Co. will be cancelled without any repayment of capital and the XXXXXXXXXX common shares held by the shareholders (the "Preferred Shareholders"), other than Acq. Co. and dissenting shareholders, will be converted into redeemable preference shares of Amalco. The redeemable preference shares of Amalco will be redeemed for US$XXXXXXXXXX each on the day immediately following the Amalgamation Squeeze-Out. The dissenting shareholders will be entitled to receive payment of the fair value of their XXXXXXXXXX shares from Amalco. All the common shares of Acq. Co. will be converted into common shares of Amalco.

28. [Reserved]

29. Amalco or Acq. Co, as the case may be, will be wound up into XXXXXXXXXX If Amalco is wound up into XXXXXXXXXX will designate an amount with respect to the XXXXXXXXXX US shares pursuant to paragraph 88(1)(d).

30. XXXXXXXXXX will distribute the shares of XXXXXXXXXX to XXXXXXXXXX Sub by way of a reduction of stated capital.

ADDITIONAL INFORMATION

31. XXXXXXXXXX will elect, in its tax return for the period ending immediately before the acquisition of control contemplated in paragraph 24 above, not to have the provisions of subsection 256(9) apply. As such, the acquisition of control of XXXXXXXXXX should occur at 10:30 p.m. and not at the beginning of the day contemplated in paragraph 24.

32. [Reserved]

33. Each Holdco Shareholder must enter into a share purchase agreement with Acq. Co. (a "Purchase Agreement") providing for the purchase of his Holdco shares by Acq. Co. under which he will provide Acq. Co. with certain representations, warranties and covenants, including those referred to in paragraph 11 above. Each Holdco Shareholder will deposit all of his Holdco shares to the Offer, and the Holdco will be considered to have deposited all of the shares of XXXXXXXXXX held by it to the Offer.

34. The aggregate consideration payable by Acq. Co. for the Holdco shares under the Purchase Agreements will be identical to the consideration that the Holdcos would have been entitled to receive had they tendered the XXXXXXXXXX shares held by them directly under the Offer.

35. Under the securities laws of the Province of XXXXXXXXXX and other provinces of Canada, an offeror making a takeover bid is required to allow at least 21 days from the date of the bid during which securities may be deposited, and may not take up any securities deposited under the offer until the expiration of 21 days from the date of the offer. Any securities that are taken up by an offeror under a bid must be paid for as soon as possible, and in any event not more than three days after taking up such securities. A shareholder may withdraw any shares deposited under a take-over bid up until the date which is the later of 21 days following the mailing of the take-over bid circular and 10 days after any variation of the take-over bid.

36. Each Purchase Agreement will provide that Acq. Co. shall only be obligated to complete any purchase thereunder if all of the conditions of the Offer have been satisfied, or waived by Acq. Co. The Purchase Agreement will expressly provide that if the purchase of the Holdco Shares by Acq. Co. is completed, the effective time of such purchase will be XXXXXXXXXX.

37. No current shareholder of XXXXXXXXXX will acquire any direct or indirect interest in the shares of XXXXXXXXXX, after the acquisition of control of XXXXXXXXXX by Acq. Co., as part of the series of transactions or events that includes the proposed transactions.

PURPOSES OF THE PROPOSED TRANSACTIONS

38. The main purpose of the proposed transactions is to effect the takeover of XXXXXXXXXX by XXXXXXXXXX.

39. The purpose of the incorporation by XXXXXXXXXX of XXXXXXXXXX Sub is to provide limited liability to XXXXXXXXXX for the activities of XXXXXXXXXX.

40. The purpose of the incorporation of XXXXXXXXXX is twofold. First, it is used to allow for a paragraph 88(1)(c) bump on the XXXXXXXXXX shares in the event that an Amalgamation Squeeze-Out is required. Second, it is used in order to maximize the US income tax benefit relating to depreciation and amortization deductions in respect of the assets of XXXXXXXXXX.

In the latter regard, XXXXXXXXXX plans to make an election under Section 338 of the US Internal Revenue Code with respect to its purchase of XXXXXXXXXX stock. As a result of the Section 338 election, XXXXXXXXXX tax basis (for US tax purposes) in each of the assets owned by XXXXXXXXXX will be equal to each asset's respective fair market value at the time of the acquisition.

Furthermore, XXXXXXXXXX plans to structure its ownership of the XXXXXXXXXX assets (other than the stock of XXXXXXXXXX) through a XXXXXXXXXX unlimited liability company because such an entity can be disregarded as an entity separate from its owner for US income tax purposes. Stated otherwise, for US income tax purposes, assets which are directly owned by XXXXXXXXXX will be treated as directly owned by the entity which owns all of the interests in XXXXXXXXXX (in this case, XXXXXXXXXX Sub). Consequently, for US income tax purposes, XXXXXXXXXX Sub will be able to depreciate or amortize the assets which are directly owned by XXXXXXXXXX over their entire useful life (or statutory life, in the case of amortization deductions).

41. The purpose of obtaining the bump under paragraph 88(1)(c) on the XXXXXXXXXX shares and the distribution of the shares of XXXXXXXXXX as a return of capital is to permit XXXXXXXXXX to transfer the shares of XXXXXXXXXX to XXXXXXXXXX Sub in a tax efficient manner so that they may be owned directly by a member of the US consolidated reporting group for US tax purposes.

42. The purpose of the Holdco Alternative is to have the accrued gains in the XXXXXXXXXX shares of XXXXXXXXXX taxed as a dividend for Canadian tax purposes (subject to a 15% Canadian withholding tax) rather than as a capital gain and to thereby reduce the US tax payable on the transaction by reason of the US providing a foreign tax credit for the Canadian withholding tax of 15% against the US capital gains tax of 20% on the sale of the Holdco shares. This will result in Canada receiving slightly more tax (15%) than if the income were taxed as a capital gain (approximately 14.47%) for Canadian tax purposes.

The reason for this difference is that, pursuant to Article XXIV(2)(c) of the Convention, Canada would be required to provide a credit for the US tax payable (20%) against the Canadian tax payable of approximately 34.47% (75% of the top marginal rate applicable to a non-resident for income not earned in a province) on a capital gain, leaving Canada with a net tax of approximately 14.47%. This is so because Canada's ability to tax these capital gains arises solely because of Article XIII(5) of the Convention. Although Canada would only net 14.47% if the transactions were structured to result in capital gains for Canadian tax purposes, the overall tax paid by XXXXXXXXXX would be 34.47% as compared to 20% where the transactions are structured to result in dividend treatment for Canadian tax purposes.

RULINGS

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, we confirm the following:

A. For the purposes of applying paragraphs 88(1)(c) and (d) to the wind-up of the Holdcos into Acq. Co., described in paragraph 23:

(a) the acquisition of shares of XXXXXXXXXX by the Holdcos described in paragraph 19 will not be considered to be an acquisition described in clause 88(1)(c)(vi)(B); and

(b) the shares of the Holdcos, acquired by the Holdco Shareholders as described in paragraph 19, will not be considered to be "any other property acquired by any person in substitution therefor" within the meaning of clause 88(1)(c)(vi)(B).

B. For the purposes of applying paragraphs 88(1)(c) and (d) to the wind-up of XXXXXXXXXX into Acq. Co., described in paragraph 26 or paragraph 26.1, as the case may be, the acquisition of the shares of the Holdcos by the Holdco Shareholders, described in paragraph 19, and the acquisition of the XXXXXXXXXX shares by the Holdcos from the Holdco Shareholders, also described in paragraph 19, will not be considered to be acquisitions described in clause 88(1)(c)(vi)(B).

C. For the purposes of applying paragraphs 88(1)(c) and (d) to the wind-up of Amalco into XXXXXXXXXX, described in paragraph 29, the acquisition of the shares of the Holdcos by the Holdco Shareholders, described in paragraph 19, and the acquisition of the XXXXXXXXXX shares by the Holdcos from the Holdco Shareholders, also described in paragraph 19, will not be considered to be acquisitions described in clause 88(1)(c)(vi)(B).

D. For the purposes of applying paragraphs 88(1)(c) and (d) to the wind-up of Amalco into XXXXXXXXXX, described in paragraph 29, the acquisition of the Amalco preferred shares by the Preferred Shareholders, described in paragraph 27, will not be considered to be an acquisition described in clause 88(1)(c)(vi)(B).

E. For the purposes of applying paragraph 88(1)(c) to the wind-up of Amalco into XXXXXXXXXX, described in paragraph 29, the shares of XXXXXXXXXX will be considered to have been owned by Amalco at the time that XXXXXXXXXX last acquired control of Amalco.

F. Subsection 245(2) 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.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 provided that the Proposed Transactions are completed by 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.

Nothing in this letter should be construed as confirmation of the tax consequences of any of the transactions described in this letter other than as specifically described. Without restricting the generality of the foregoing, we are not confirming the tax consequences to XXXXXXXXXX of the use of the Holdco Alternative.

Yours truly,

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