1999 Ruling 9927473 - TERM PREFERRED SHARES

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 Can paragraph (b) of the definition "term preferred share" apply when the issuing corporation is controlled by a person related to the owner of the shares?

Position:. No

Reasons: All of the voting shares of the issuing corporation are owned by a corporation related to the holder of the shares. The words "together with any of such corporations" must mean control by group. As stated in IT-302R3, where a corporation is controlled by a single person, this precludes a group from also controlling the corporation. The deeming provisions in 256(1.2) do not apply.

XXXXXXXXXX 992747

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

We are writing in response to your correspondence of XXXXXXXXXX in which you had requested an advance income tax ruling on behalf of the above corporations.

You have advised that to the best of your knowledge, none of the issues raised in this request for an advance income tax ruling is being considered by a Tax Services Office or Taxation Centre of the Canada Customs and Revenue Agency ("the CCRA") in connection with a return already filed by XXXXXXXXXX or a related person nor are any of these issues under objection or appeal by XXXXXXXXXX or a related person.

Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1 as amended (the "Act")

In this ruling:

"ACO" refers to XXXXXXXXXX;

"BCO" refers to XXXXXXXXXX;

"CCO" refers to XXXXXXXXXX;

Facts

1. Each of ACO and BCO is a taxable Canadian corporation, within the meaning of subsection 89(1) of the Act, controlled directly or indirectly by XXXXXXXXXX corporation resident in the U.S. which in turn is controlled by XXXXXXXXXX. CCO is a taxable Canadian corporation controlled by XXXXXXXXXX corporation resident in the U.S. which in turn is controlled by XXXXXXXXXX corporation resident in the U.S. which in turn is controlled by XXXXXXXXXX.

2. Before changing its name by articles of amendment dated XXXXXXXXXX, ACO was XXXXXXXXXX.

3. Each of ACO, BCO and CCO have fiscal and taxation years ending on XXXXXXXXXX in each calendar year.

4. ACO's head office is located at XXXXXXXXXX, its business number is XXXXXXXXXX, and its tax returns are filed with the XXXXXXXXXX Tax Services Office.

5. BCO's head office is located at XXXXXXXXXX, its business number is XXXXXXXXXX, and its tax returns are filed with the XXXXXXXXXX Tax Services Office.

6. CCO's head office is located at XXXXXXXXXX, its business number is XXXXXXXXXX and its tax returns are filed with the XXXXXXXXXX.

7. BCO carries on the business of XXXXXXXXXX.

8. CCO carries on the business of XXXXXXXXXX.

9. Neither BCO nor CCO trades or deals in shares.

10. BCO has three wholly-owned Canadian resident subsidiaries, XXXXXXXXXX These subsidiaries were established for specific purposes, i.e., to make capital loans to XXXXXXXXXX and to make loans to an affiliated corporation, respectively. The share investments by BCO in these corporations are capital investments. CCO has no subsidiaries.

11. BCO and CCO are related to one or more corporations that are described in any of paragraphs (a) to (e.1) of the definition "specified financial institution" in subsection 248(1) of the Act.

12. BCO and CCO are specified financial institutions within the meaning of subsection 248(1) of the Act.

13. ACO carries on the business of XXXXXXXXXX. The capital required to carry on its business activities comes from trade payables, arm's length and related party borrowings, common share capital and retained earnings. ACO qualifies for the manufacturing and processing profits deduction in section 125.1 of the Act.

14. ACO has authorized capital of an unlimited number of common shares, of which XXXXXXXXXX common shares are issued and outstanding. All of the issued and outstanding common shares of ACO are owned by XXXXXXXXXX and were acquired from related parties after XXXXXXXXXX.

15. The capital required because of ACO's expanding portfolio of XXXXXXXXXX has since XXXXXXXXXX been provided by loans from BCO (the "BCO Debt"). The BCO Debt is currently in excess of $XXXXXXXXXX. Interest is payable on the outstanding amount of these borrowed funds based on a spread over the Government of Canada two year bond rate. It is proposed to change a substantial portion of ACO's capital from debt to share capital by issuing Preferred Shares to BCO for an aggregate subscription price of $XXXXXXXXXX.

16. BCO and CCO intend to amalgamate on XXXXXXXXXX or so soon thereafter as is practical to form a new corporation ("Amalco").

17. BCO does not intend to provide and there is no intention to cause Amalco to provide further capital to ACO through preferred share support after the subscription for Preferred Shares described herein.

Proposed transactions

18. The authorized capital of ACO will be amended to add a new class of preference shares (the "Preferred Shares"). The Preferred Shares will have the following principal attributes:

a) redeemable at the option of the issuer for its redemption amount plus accrued and unpaid dividends;

b) non-voting;

c) preferential cumulative dividend at the rate set as described below; and

d) redemption amount equal to the issue price of $XXXXXXXXXX per share.

19. The dividend rate for the Preferred Shares will be a spread over the average Government of Canada two year bond rate or a comparable benchmark rate applied to the redemption amount of the Preferred Shares. The dividend rate will be fixed from time to time by the Directors of ACO at a rate that at the time the rate is so fixed will not be less than XXXXXXXXXX basis points over the average Government of Canada two year bond rate. The dividend yield on the Preferred Shares will exceed BCO's cost of funds, and following the amalgamation of BCO and CCO, will exceed the cost of funds of Amalco. The dividend yield at the time of issuance will be not less than the comparable yield for preference shares issued at par to the public by corporations of similar financial strength.

20 BCO will subscribe for XXXXXXXXXX Preferred Shares for an aggregate subscription price of $XXXXXXXXXX and will pay the subscription price by assigning to ACO the equivalent principal amount of BCO Debt. The BCO Debt so assigned will cease to exist upon the assignment thereof because the interests of ACO as both debtor and creditor merge. ACO and BCO will jointly elect in prescribed form and in accordance with subsection 85(6) of the Act to have the provisions of subsection 85(1) of the Act apply to the assignment of BCO Debt in consideration for the issuance of the Preferred Shares.

21. ACO will repay the remaining BCO Debt with funds advanced by XXXXXXXXXX corporation that is related to XXXXXXXXXX, or repay such debt as it matures.

22. None of BCO and CCO has and none of the foregoing corporations and Amalco will have any absolute or contingent right to control or acquire control of ACO.

Purpose

ACO requires capital to support its business operations. BCO and CCO have been consistently taxable and are expected to continue to be so. ACO on the other hand has from time to time incurred non-capital losses and its operations are more subject to fluctuation between taxable and loss status. The purpose of the proposed transactions is to provide capital to ACO in a way that reduces the aggregate tax liability of ACO and BCO, and following the amalgamation, Amalco. The proposed transactions will provide a portion of the capital required by ACO in the form of share capital, will reduce ACO's interest expense and thereby ensure that losses incurred by ACO are utilized more quickly than would otherwise be the case and will reduce BCO's or Amalco's taxable income by eliminating the interest income received on the BCO Debt. The taxable income of BCO or Amalco will be reduced and there will be a corresponding increase in ACO's income that will either be absorbed by losses or taxed in ACO.

Rulings Provided

Provided that the above statements of fact are complete and accurate and that the proposed transactions are undertaken as described, the following rulings are provided:

A. The provisions of paragraph (b) of the definition "term preferred share" in subsection 248(1) of the Act will not cause the Preferred Shares of ACO acquired by BCO to be "term preferred shares".

B. As a result of the proposed transactions in and of themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the rulings given.

These rulings are provided subject to the limitations and qualifications set out in Information Circular 70-6R3 issued on December 30, 1996 and are binding upon the CCRA provided that the proposed transactions are completed on or before XXXXXXXXXX. The rulings are based on the Act and the Income Tax Regulations in their present form and do not take into account the effects of any proposed amendments thereto.

We would further note that nothing in this letter should be construed as confirmation that the CCRA has reviewed or accepted any tax consequences arising from the facts or proposed transactions described herein other than those specifically confirmed in the rulings provided.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch