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:
Whether certain proposed transactions will constitute a reorganization for purposes of section 86
Whether the exchange of shares will result in a disposition of the related options
Position:
Yes.
No.
Reasons:
It meets the requirements as set out in section 86
No changes will be made to the agreements related to the options.
XXXXXXXXXX
XXXXXXXXXX 992901
XXXXXXXXXX
Attention; XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.
To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this advance income tax 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.
In this letter, unless otherwise specified, "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 portion of the Act.
DEFINITIONS
In this letter the following terms have the meanings specified:
(a) "adjusted cost base" has the meaning assigned in section 54;
(b) "capital property" has the meaning assigned in section 54;
(c) "paid-up capital" has the meaning assigned in subsection 89(1);
(d) "private corporation" has the meaning assigned in subsection 89(1); and
(e) "taxable Canadian corporation" has the meaning assigned in subsection 89(1).
Our understanding of the facts, purposes of the proposed transactions and proposed transactions is as follows:
FACTS
1. XXXXXXXXXX is an employee venture capital corporation established in accordance with the XXXXXXXXXX.
2.
XXXXXXXXXX
3. XXXXXXXXXX was incorporated in XXXXXXXXXX. The shareholders of XXXXXXXXXX are employees of XXXXXXXXXX. XXXXXXXXXX has been well received and has proved to be successful.
4. XXXXXXXXXX is a private corporation and a taxable Canadian corporation incorporated under the Company Act, RSBC 1996 c. 62.
XXXXXXXXXX
5. XXXXXXXXXX currently holds XXXXXXXXXX shares in the capital of XXXXXXXXXX. These are all of the issued and outstanding Class XXXXXXXXXX common, Class XXXXXXXXXX preferred, Class XXXXXXXXXX common, and Class XXXXXXXXXX preferred shares in the capital of XXXXXXXXXX and represent approximately XXXXXXXXXX% of the issued and outstanding shares of XXXXXXXXXX.
6. On XXXXXXXXXX, XXXXXXXXXX were amalgamated to form XXXXXXXXXX. Prior to the amalgamation, XXXXXXXXXX held XXXXXXXXXX share in the capital of XXXXXXXXXX. On the amalgamation XXXXXXXXXX received XXXXXXXXXX shares in exchange for the XXXXXXXXXX Class XXXXXXXXXX preferred shares.
7. XXXXXXXXXX holds either directly or indirectly through a Canadian subsidiary, XXXXXXXXXX, approximately XXXXXXXXXX% of the issued and outstanding shares in the capital of XXXXXXXXXX. The remaining XXXXXXXXXX% is held by XXXXXXXXXX key employees.
8. The rights and restrictions attaching to the outstanding shares of the various classes of shares in the capital of XXXXXXXXXX are attached to your request.
9. XXXXXXXXXX is a private US corporation incorporated under the laws of the State of XXXXXXXXXX is not taxable in Canada. Its shares are owned by US and other foreign investors. XXXXXXXXXX only activities are the holding of the shares of XXXXXXXXXX and shares of XXXXXXXXXX.
10. XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX and is incorporated under the laws of the State of XXXXXXXXXX is not taxable in Canada. XXXXXXXXXX was incorporated in XXXXXXXXXX for the purpose of expanding markets in the USA.
11. XXXXXXXXXX has operated as a wholly-owned subsidiary of XXXXXXXXXX and is incorporated in XXXXXXXXXX is not taxable in Canada. XXXXXXXXXX has acted as an agent and distributor in the sale of XXXXXXXXXX products in XXXXXXXXXX. will become a wholly-owned subsidiary of XXXXXXXXXX as part of the overall corporate group structure described in paragraph below.
12.
XXXXXXXXXX
13. Under subsection 131(8) and paragraph 6701(c) of the Income Tax Regulations, XXXXXXXXXX is a "mutual fund corporation".
14. XXXXXXXXXX was incorporated to replace an earlier employee stock purchase plan in XXXXXXXXXX. At that time, all of the Class XXXXXXXXXX common shares of old XXXXXXXXXX owned by employees were transferred to XXXXXXXXXX in exchange for Class XXXXXXXXXX shares of XXXXXXXXXX. Elections were made under subsection 85(1) with respect to the shares transferred by the employees to XXXXXXXXXX. Subsequent to the transfer, all the Class XXXXXXXXXX common shares held were exchanged for Class XXXXXXXXXX preferred shares of old XXXXXXXXXX.
15. In XXXXXXXXXX offered to XXXXXXXXXX a certain number of Class XXXXXXXXXX common shares (now Class XXXXXXXXXX shares). In turn XXXXXXXXXX offered its Class XXXXXXXXXX shares to its shareholders (employees of XXXXXXXXXX). To the extent that employees accepted the XXXXXXXXXX offer, XXXXXXXXXX purchased shares in old XXXXXXXXXX. All transactions were at fair market value based on a formula approved by the administrators appointed XXXXXXXXXX.
16. In XXXXXXXXXX, the package offered by old XXXXXXXXXX included an option for XXXXXXXXXX to purchase an additional Class XXXXXXXXXX common share in the capital of XXXXXXXXXX for each share purchased. The exercise price under the option is the fair market value of a Class XXXXXXXXXX common share at the date of offer increasing by XXXXXXXXXX% per year for each year the option is not exercised. (XXXXXXXXXX).
17. The option is exercisable at the earlier of:
(a) XXXXXXXXXX; and
(b) change of control of XXXXXXXXXX.
(XXXXXXXXXX)
18. The option terminates on the earlier to occur of:
(a) XXXXXXXXXX; and
(b) termination of employment of the employee to which the option relates.
(XXXXXXXXXX)
19. XXXXXXXXXX currently has XXXXXXXXXX options outstanding to purchase XXXXXXXXXX Class XXXXXXXXXX common shares (now Class XXXXXXXXXX shares) in the capital of XXXXXXXXXX.
20. The options and the shares in the capital of XXXXXXXXXX held by XXXXXXXXXX constitute capital property.
21. XXXXXXXXXX does not currently hold any shares in XXXXXXXXXX nor does XXXXXXXXXX hold any shares in XXXXXXXXXX.
22. XXXXXXXXXX cannot hold options in XXXXXXXXXX.
23. XXXXXXXXXX, a corporate structure was developed under which XXXXXXXXXX will either wholly-own or hold controlling interests in corporations that will undertake the active operations in various international markets.
PURPOSE OF THE PROPOSED TRANSACTIONS
24. Under a reorganization, the XXXXXXXXXX key employees of XXXXXXXXXX will receive "exchangeable" shares. The rights and restrictions attached to the new shares will serve to reflect or mirror the value of shares held directly in the capital of XXXXXXXXXX. In general terms, this is achieved by having the shares under certain circumstances redeemable/retractable for shares in the capital of XXXXXXXXXX. As a result, the XXXXXXXXXX key employees and XXXXXXXXXX will be able to participate in the growth of the corporate group and not just XXXXXXXXXX.
25. Any future share offerings (after XXXXXXXXXX) to XXXXXXXXXX employees are expected to be from XXXXXXXXXX.
26. It is XXXXXXXXXX intention to have the employees participate in the growth of the corporate group and not just XXXXXXXXXX. For the employees to participate through XXXXXXXXXX, it is necessary for XXXXXXXXXX to dispose of its existing shares in the capital of XXXXXXXXXX for exchangeable shares in the capital of XXXXXXXXXX. Similarly, XXXXXXXXXX must ensure that the options currently held by XXXXXXXXXX will be exercisable in connection with the exchangeable shares.
PROPOSED TRANSACTIONS
27. XXXXXXXXXX will alter its memorandum and articles of incorporation such that current Class XXXXXXXXXX common, Class XXXXXXXXXX preferred, Class XXXXXXXXXX common, and Class XXXXXXXXXX preferred shares may be exchanged for new Class XXXXXXXXXX common, Class XXXXXXXXXX preferred, Class XXXXXXXXXX common, and Class XXXXXXXXXX preferred shares. XXXXXXXXXX. The new shares will grant the shareholders of these classes of shares the right to require XXXXXXXXXX to redeem those shares for a specified number of shares in XXXXXXXXXX common stock, representing the shareholder's proportionate equity interest in XXXXXXXXXX. No amendments will be made to the XXXXXXXXXX/XXXXXXXXXX in respect of the options held by XXXXXXXXXX.
28. Pursuant to the terms of a "Share Exchange Agreement" ( the "Exchange Agreement"), entered into between XXXXXXXXXX will exchange all of its Class XXXXXXXXXX common, Class XXXXXXXXXX preferred, Class XXXXXXXXXX common and Class XXXXXXXXXX preferred shares of XXXXXXXXXX into new Class XXXXXXXXXX common, Class XXXXXXXXXX preferred, Class XXXXXXXXXX common and Class XXXXXXXXXX preferred shares ("Exchangeable Shares") of XXXXXXXXXX.
29. No amendments will be made to the Class XXXXXXXXXX common, Class XXXXXXXXXX common, Class XXXXXXXXXX preferred, or Class XXXXXXXXXX preferred shares in the capital of XXXXXXXXXX. The outstanding shares of these classes are held either directly or indirectly by XXXXXXXXXX.
30. Under an agreement among XXXXXXXXXX and the XXXXXXXXXX key employees, the XXXXXXXXXX key employees and XXXXXXXXXX will grant XXXXXXXXXX the right to require them to exchange their shares for the same number of shares of XXXXXXXXXX common stock on the earliest of:
(a) a public offering by XXXXXXXXXX;
(b) a change of control of XXXXXXXXXX; or
(c) XXXXXXXXXX.
31. Under the same agreement, XXXXXXXXXX will acquire an option to require the shareholders of Class XXXXXXXXXX common, Class XXXXXXXXXX preferred, Class XXXXXXXXXX common, or Class XXXXXXXXXX Preferred shares to exchange their shares in the capital of XXXXXXXXXX for shares in the capital of XXXXXXXXXX upon a shareholder calling for redemption.
RULINGS
Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, purposes of the proposed transactions and proposed transactions, we rule as follows:
a) Provided that the Class XXXXXXXXXX common, Class XXXXXXXXXX preferred, Class XXXXXXXXXX common, and Class XXXXXXXXXX preferred shares represent capital property to XXXXXXXXXX, the provisions of section 86, other than subsection 86(2) will apply to the exchange by XXXXXXXXXX of the Class XXXXXXXXXX common, Class XXXXXXXXXX preferred, Class XXXXXXXXXX common and Class XXXXXXXXXX preferred shares into Exchangeable Shares of XXXXXXXXXX as described in paragraph 28 above.
b) The proposed transactions, in and of themselves, will not constitute a disposition, for purposes of the Act, of the XXXXXXXXXX options for Class XXXXXXXXXX common and Class XXXXXXXXXX preferred shares in the capital of XXXXXXXXXX held by XXXXXXXXXX.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R3 issued on December 30, 1996, and are binding provided that that 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 amendment to the Act, which if enacted, could have an effect on the rulings given.
Nothing in these rulings should be construed as implying that the Canada Customs and Revenue Agency has reviewed, accepted or otherwise agreed to:
(a) the determination of the adjusted cost base, the fair market value or the paid-up capital of any shares referred to herein; or
(b) 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
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