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.
Principal Issues: Will the corporation that acquired the shares of the target Canadian public corporation be a "specified person" for purposes of subsection 6204(1) of the Income Tax Regulations?
Position: No.
Reasons: Is excluded pursuant to paragraph 6204(3)(a) of the Regulations.
XXXXXXXXXX 2005-015100
XXXXXXXXXX , 2006
Dear XXXXXXXXXX
Re: Advance Income Tax Ruling
XXXXXXXXXX ("Target") - BN XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of Target.
We understand that, to the best of the knowledge of Target, none of the issues described herein is:
a) in an earlier tax return of Target or a related person;
b) being considered by a tax services office or taxation centre in connection with any tax return previously filed by Target or a related person;
c) under objection by Target or a related person;
d) before the courts or under appeal; nor
e) the subject of a ruling previously considered by the Income Tax Rulings Directorate.
Definitions and Abbreviations
In this letter, the following terms have the meanings set out below:
"Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended and unless otherwise stated, all statutory references are to provisions of the Act;
"arm's length" has the meaning assigned by section 251 of the Act; "Arrangement Agreement" has the meaning assigned in 12 below;
"Cash Consideration" has the meaning assigned in 12 below;
"Target Common Shares" has the meaning assigned in 3 below;
"CRA" means the Canada Revenue Agency;
XXXXXXXXXX
"Plan of Arrangement" has the meaning assigned in 13 below;
"Regulations" means the Income Tax Regulations;
"Shareholder" has the meaning assigned in 14 below;
"Stock Option Plan" means the Target stock option plan, as described in 4 below; and Unless otherwise indicated, all dollar amounts referred to herein are in Canadian dollars.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. Target was incorporated under the XXXXXXXXXX and is a public corporation and a taxable Canadian corporation. The expressions "public corporation" and "taxable Canadian corporation" have the meaning assigned by subsection 89(1) of the Act. Target carries on the business of XXXXXXXXXX.
2. The tax account number for Target is XXXXXXXXXX. Target files its tax returns through the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre of CRA.
3. The authorized share capital of Target consists of an unlimited number of common shares and an unlimited number of preference shares. As of XXXXXXXXXX, there were issued and outstanding XXXXXXXXXX common shares (the "Target Common Shares") and there were no other shares of any class or series of Target outstanding. The Target Common Shares were listed and traded on the XXXXXXXXXX Stock Exchange.
4. Target implemented a stock option plan for directors and full-time employees in XXXXXXXXXX, as amended on XXXXXXXXXX (the "Stock Option Plan"). The Stock Option Plan provided for the grant of options to acquire Target Common Shares from treasury at exercise prices and vesting periods to be determined in each case by the Board of Directors of Target (the "Board"). If the Board did not make any specific determination with respect to vesting periods, the options were deemed to be exercisable for a period of XXXXXXXXXX years from the grant of the option with certain restrictions on the number of options that could be exercised in each month. The Stock Option Plan also provided that the term of an option could not exceed XXXXXXXXXX years from the date of grant and that in no circumstances could the exercise price of an option be lower than the market price of the Target Common Shares at the date of grant of the option. The Stock Option Plan did not provide for the automatic cancellation of options on a change of control of Target. In addition to the options granted under the Stock Option Plan, the Board authorized the grant of options to purchase Target Common Shares pursuant to certain employment agreements entered into by Target with employees of Target on terms consistent with those provided for under the Stock Option Plan. The options granted under such employment agreements and under the Stock Option Plan are herein referred to collectively as the "Target Options".
5. As at XXXXXXXXXX, there were XXXXXXXXXX Target Common Shares issuable upon the exercise of Target Options of which XXXXXXXXXX were in-the-money by reference to the amount of the Cash Consideration. The aggregate in-the-money value based on the Cash Consideration was approximately $XXXXXXXXXX (including Target Options held by both residents and non-residents of Canada).
6. XXXXXXXXXX ("U.S. Corp") is a corporation existing under the laws of the State of XXXXXXXXXX . U.S. Corp, along with its subsidiaries, XXXXXXXXXX The common shares of U.S. Corp are listed and trade on the XXXXXXXXXX Stock Exchange.
7. XXXXXXXXXX ("Acquireco") is a taxable Canadian corporation incorporated under the XXXXXXXXXX on XXXXXXXXXX XXXXXXXXXX and is an indirect wholly-owned subsidiary of U.S. Corp.
8. Prior to the transactions referred to in 15 below, U.S. Corp and Acquireco each dealt at arm's length with Target, but for the application of paragraph 251(5)(b) of the Act.
9. In XXXXXXXXXX, executives of U.S. Corp initially approached executives of Target and raised the prospect of combining the two companies.
10. On XXXXXXXXXX, U.S. Corp indicated preliminary interest in purchasing all of the outstanding Target Common Shares. This expression of interest indicated that U.S Corp believed that a transaction could be completed at a price between $XXXXXXXXXX and $XXXXXXXXXX per Target Common Share.
11. The Board agreed that the U.S Corp proposal was not adequate. Between XXXXXXXXXX and XXXXXXXXXX, after having been advised that its offer price was not acceptable, U.S Corp verbally indicated that it would consider increasing the consideration for each Target Common Share to $XXXXXXXXXX payable in cash.
12. On XXXXXXXXXX, the increased consideration, referred to in 11 above, was discussed at a Target directors' meeting. Target determined that it could be prepared to support a transaction with U.S. Corp at a cash offer price of $XXXXXXXXXX (the "Cash Consideration"). Target and U.S. Corp entered into an exclusivity agreement dated as of XXXXXXXXXX. On XXXXXXXXXX, Target entered into an agreement with U.S. Corp to outline the terms of the acquisition, which was amended by the parties as of XXXXXXXXXX (collectively, the "Arrangement Agreement").
13. The Arrangement Agreement set out the transactions that would comprise the plan of arrangement (the "Plan of Arrangement"). As described in "Transactions" below, these transactions would effect the cancellation of the Target Options and the acquisition by U.S. Corp of the Target Common Shares. The Arrangement Agreement also contained customary representations and warranties from each of Target and U.S Corp and provisions describing when and how the agreement could be terminated and under what circumstances Target could entertain a competing offer from a third party for the Target Common Shares.
14. The Arrangement Agreement further provided that Target would call a special meeting of the holders of Target Common Shares (the "Shareholders") to consider and approve the Plan of Arrangement. Implementation of the Plan of Arrangement was subject to its approval by XXXXXXXXXX percent of the votes cast by Shareholders represented at this meeting of Shareholders, which was held on or about XXXXXXXXXX. A Notice of Special Meeting and Management Information Circular detailing the transactions contemplated by the Arrangement Agreement was mailed to Shareholders on or about XXXXXXXXXX. Implementation was also subject to certain other conditions, including court and regulatory approvals.
Transactions
15. Upon obtaining the approvals required to effect the Plan of Arrangement, the following transactions, taken in the sequence indicated, occurred:
(a) all of the Target Options granted and outstanding, without any further action on behalf of any Target Option holder, were transferred by the holders thereof to Target without any act or formality on its or their part in exchange for a cash amount equal to the excess, if any, of (i) the product of the number of Target Common Shares underlying such Target Options held by such holder and the Cash Consideration over (ii) the aggregate exercise price payable under such Target Options by the holder to acquire the Target Common Shares underlying such Target Options. All Target Options issued and outstanding were thereafter immediately cancelled;
and
(b) all of the Target Common Shares issued and outstanding held by each Shareholder (other than Target Common Shares held by Shareholders who exercised certain dissent rights XXXXXXXXXX, and any Target Common Shares held by U.S. Corp and its affiliates, which were not transferred under the Arrangement) were, without any further action on behalf of such Shareholder, transferred by the holders thereof, and acquired by Acquireco without any act or formality on its or their part in exchange for a cash amount equal to the product of the number of Target Common Shares held by such holder and the Cash Consideration and Acquireco was deemed to be the legal and beneficial owner thereof, free and clear of all liens.
Purpose of the Transactions
16. The purpose of the transactions is to allow U.S. Corp to acquire all the Target Common Shares and Target Options in the most efficient manner. An acquisition of the Target Common Shares could have been structured as either a take-over bid or an arrangement. A court-approved arrangement under the XXXXXXXXXX permits the cancellation of all outstanding Target Options and permits the acquisition of 100 percent of the Target Common Shares.
Ruling Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, transactions and purpose of the transactions, and provided that the transactions were completed in the manner described above, we rule as follows:
At the time that Target acquired the Target Options under the Plan of Arrangement, referred to in 15(a) above, for the purpose of subsection 6204(1) of the Regulations, Acquireco would not be a "specified person", pursuant to paragraph 6204(3)(a) of the Regulations.
The above ruling, which is based on the Act and Regulations in their present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the CRA.
We note that a ruling in respect to deductibility of the cash amounts paid by Target to any Target Option holders in exchange for their Target Options has not been requested. However, in our view, the decisions rendered in The Queen v Kaiser Petroleum Ltd, 90 DTC 6603 (FCA) and Canada Forgings Ltd v The Queen, 83 DTC 5110 (FCTD) support a conclusion that these payments are on account of capital.
Nothing in this ruling should be construed as implying that the CRA has reviewed or is making a determination in respect of:
a) the fair market value of any share 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,
XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
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