2011 Ruling 2010-0369661R3 - Corporate Reorganization

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: Whether the proposed reorganization to reorganize the corporation's incestuous shareholdings from its publicly held shares results in the application of a) subsection 15(1); b) subsection 56(2); c) subsection 246(1); d) subsection 86(2) or e) subsection 245(2); and f) whether subsection 86(1) will apply to the proposed reorganization; and g) whether subsection 86(2.1) will apply to reduce the PUC of the new class of shares.

Position: a) no; b) no; c) no; d) no; e) no; f) yes; g) no

Reasons: a) The transfer of the public's interest into a separate class from the incestuously held shares will not result in the conferral of a benefit to the public; b) id.;c) id.; d) the public shareholders are not related to the incestuous shareholders e) the primary purpose of the proposed transactions is commercial and therefore there is no avoidance transaction; f) the proposed reorganization meets the statutory requirements; g) the aggregate PUC of the corporation's shares after the reorganization does not exceed the PUC of its shares before the reorganization.

XXXXXXXXXX
									2010-036966
									XXXXXXXXXX 

XXXXXXXXXX , 2011

Dear XXXXXXXXXX :

Re: XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of XXXXXXXXXX . We also acknowledge the information provided in your emails of XXXXXXXXXX .

We understand that to the best of your knowledge, and that of the Corporation, none of the issues involved in this ruling request is:

(a) in an earlier return of the Corporation or any related person;

(b) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the Corporation or any related person;

(c) under objection by the Corporation or any related person;

(d) before the courts or, if a judgment has been issued, the time limit for appeal to higher court has expired; or,

(e) except as reflected herein, the subject of a ruling previously considered by the Directorate.

Except as otherwise noted, all statutory references in this ruling are references to the Income Tax Act (Canada) ( the "Act") and all reference to regulations are references to the Regulations to the Act.

Definitions

Unless otherwise stated, the terms and conditions used herein are defined as follows:

"ACB" means adjusted cost base, as defined in section 54 ;

"Acquiror" means XXXXXXXXXX ;

"Acquisition" means the acquisition by Bidco of all of the issued and outstanding shares of the Corporation held by the Public;

XXXXXXXXXX ;

"Bidco" means a wholly owned Canadian subsidiary of the Acquiror;

"CFC" means controlled foreign company;

"Circular Shareholdings" means the Common Shares held collectively by the Corporate Group;

"Class A Shares" means the issued and outstanding common shares to be issued to the public shareholders of the Corporation in the course of the Proposed Transactions;

"Common Shares" means the current issued and outstanding common shares of the Corporation;

"Corporate Group" means Sub 1, Sub 2 and Sub 3 collectively;

"Corporation" means XXXXXXXXXX , having its address at XXXXXXXXXX ;

"FAPI" means foreign accrual property income, as defined by subsection 95(1);

"First Exchange" means the XXXXXXXXXX Stock Exchange;

"First Treaty" means the Canada-XXXXXXXXXX Income Tax Convention;

"FMV" means fair market value;

"Management" means the management of the Corporation;

"Proposed Transactions" means the proposed transactions described under "Proposed Transactions" in this ruling;

"Public" means the Canadian resident and non-resident shareholders of the Corporation, other than the Corporate Group, who collectively hold approximately XXXXXXXXXX % of the Common Shares;

"PUC" means paid-up capital, as defined in subsection 89(1);

"Second Exchange" means the XXXXXXXXXX Stock Exchange;

"Second Treaty" means the Canada-XXXXXXXXXX Income Tax Convention;

"Sub 1" means XXXXXXXXXX , a company formed under the laws of XXXXXXXXXX that is a resident of XXXXXXXXXX for Canadian and XXXXXXXXXX tax purposes;

"Sub 2" means XXXXXXXXXX , a company formed under the laws of XXXXXXXXXX that is a resident of XXXXXXXXXX for Canadian and XXXXXXXXXX tax purposes;

"Sub 3" means XXXXXXXXXX , a company formed under the laws of XXXXXXXXXX that is resident in XXXXXXXXXX for Canadian and XXXXXXXXXX tax purposes; and

"TCP" means taxable Canadian property, as defined in subsection 248(1).

Background Facts

1. The Corporation is a "taxable Canadian Corporation" and a "public corporation" as defined in subsection 89(1) . The Corporation is a resident of Canada for Canadian tax purposes.

2. The shares of the Corporation are listed for trading on the First Exchange and the Second Exchange, both under the trade symbol "XXXXXXXXXX ". Consequently, the Common Shares are listed on a "designated stock exchange" as defined in subsection 248(1).

3. The Corporation was incorporated under the laws of the province of XXXXXXXXXX for the purpose of XXXXXXXXXX .

4. As at XXXXXXXXXX , there were XXXXXXXXXX issued and outstanding Common Shares. The PUC of the Common Shares is approximately $XXXXXXXXXX (or $XXXXXXXXXX per Common Share). There has been no material change to the Corporation's share capital since that time.

5. At all relevant times, more than XXXXXXXXXX % of the FMV of the Common Shares was derived directly or indirectly from Canadian resource properties.

6. Since incorporation, the Corporation has never paid a dividend; the declaration of a dividend in the near future is not anticipated.

7. The Corporation acquired XXXXXXXXXX % of the issued and outstanding common shares of Sub 1 on XXXXXXXXXX . At the time of the acquisition, the Corporate Group was collectively a significant shareholder of the Corporation. Within the XXXXXXXXXX month period immediately preceding the date of this letter, the Corporate Group collectively held greater than XXXXXXXXXX % of the Common Shares. Consequently, the Common Shares held by the Corporate Group constitute TCP.

8. Sub 1 is entitled to the benefits provided under the First Treaty. Sub 1 owns XXXXXXXXXX Common Shares.

9. Sub 1 owns XXXXXXXXXX % of the issued and outstanding common shares of Sub 2.

10. Sub 2 is entitled to the benefits provided under the First Treaty. Sub 2 owns XXXXXXXXXX Common Shares.

11. Sub 1 owns XXXXXXXXXX % of the issued and outstanding common shares of Sub 3.

12. Sub 3 is entitled to the benefits provided under the Second Treaty. Sub 3 owns XXXXXXXXXX Common Shares.

13. Immediately prior to the XXXXXXXXXX acquisition of Sub 1, the Corporation had XXXXXXXXXX Common Shares outstanding, including the Circular Shareholdings. The PUC of the Common Shares as at XXXXXXXXXX (immediately prior to the Sub 1 acquisition) is estimated to be approximately $XXXXXXXXXX (or approximately $XXXXXXXXXX per Common Share).

14. Sub 1, Sub 2 and Sub 3 are controlled foreign affiliates of the Corporation as defined in subsection 95(1).

15. The following table summarizes the details of the Circular Shareholdings held by the Corporate Group.

		# of
		Common	Trading				Accrued	   PUC ($)
Entity	Shares Held	Value ($)(i)   ACB ($)(ii)	Gain ($)(iii)  (XXXX)

Sub 1		XXXX		XXXX		    XXXX		XXXX			XXXX
Sub 2		XXXX		XXXX		    XXXX		XXXX			XXXX
Sub 3		XXXX		XXXX		    XXXX		XXXX			XXXX

Total
XXXX
		XXXX
		    XXXX
		XXXX			XXXX

(i) The trading value is computed on the assumption that the Corporation's trading price as quoted on the First Exchange accurately reflects the value of the Circular Shareholdings. The amount reflected in this table is based on the closing price of the Corporation's Common Shares on XXXXXXXXXX , which was $XXXXXXXXXX per Common Share.

(ii) The ACB shown in this table reflects the historical cost of the Common Shares to the Corporate Group at the time of the respective share purchases and has not been adjusted for any gains or losses that might have been accrued within the group prior to the acquisition of Sub 1 by the Corporation.

(iii) This amount reflects the gain in the Circular Shareholdings that has accrued (but has not been realized) subsequent to the Corporation's acquisition of Sub 1 on XXXXXXXXXX (based on the closing price on XXXXXXXXXX of $XXXXXXXXXX in relation to the Trading Value shown above). (This accrual would be the amount relevant for purposes of a FAPI computation pursuant to paragraph 95(2)(f.1)).

16. The remaining Common Shares of the Corporation not owned by the Corporate Group are broadly held by the Public. To the best of Management's knowledge, all members of the Public deal at arm's length with the Corporation and with the Corporate Group.

17. XXXXXXXXXX

18. Although the Public holds approximately XXXXXXXXXX % of the Common Shares outstanding, the Public in fact owns and controls XXXXXXXXXX % of the voting shares of the Corporation.

19. On XXXXXXXXXX , the Corporation and the Acquiror announced that they had entered into an agreement with respect to the Acquisition, whereby Bidco would acquire all of the issued and outstanding shares of the Corporation held by the Public. If accepted, the Acquisition will be effected by way of a statutory plan of arrangement pursuant to the XXXXXXXXXX . Under the terms of this agreement, the Public will be permitted to exchange each of their Common Shares for, at their election, $XXXXXXXXXX in cash or XXXXXXXXXX of an Acquiror share, or for some combination thereof. The Acquisition is not contingent on the implementation of the Proposed Transactions; however, it is the preference of the Acquiror's management to carry out the Proposed Transaction in advance of the Acquisition because the existence of the Circular Shareholdings limits the flexibility that the Acquiror will have to reorganize its investment in the Corporation following the Acquisition (e.g., a post-Acquisition reorganization may result in significant foreign tax issues). Further, the Acquiror's acquisition of the Corporation will cause the Corporation to become a CFC for purposes of the XXXXXXXXXX , XXXXXXXXXX , and XXXXXXXXXX CFC rules, which could result in unintended and unusual tax consequences.

20. To facilitate the implementation of the Proposed Transactions and the Acquisition and to minimize the securities and corporate law complexities, the Public will vote on one plan of arrangement that will include the steps to carry out the Proposed Transactions and the Acquisition. The shareholder vote is scheduled to take place on XXXXXXXXXX , and it is anticipated the plan of arrangement will receive court approval shortly thereafter.

21. It is Management's intention to effect the Proposed Transactions irrespective of the completion of the Acquisition. The Acquisition has not yet been approved by the Company's shareholders or by XXXXXXXXXX . In the event the Acquisition does not take place, the Corporation will hold a second shareholder meeting in the future, in which the Corporation's shareholders will vote on a plan of arrangement that includes only the steps necessary to carry out the Proposed Transactions.

22. Management has received advice that any disposition by Sub 3 of its Common Shares will be subject to XXXXXXXXXX capital gains tax on a significant portion of the accrued gain. There is a XXXXXXXXXX provided under XXXXXXXXXX corporate tax law, which generally exempts from taxation gains arising in a shareholder on the disposition of shares of a CFC where the XXXXXXXXXX corporate taxpayer holds XXXXXXXXXX % or more of the voting shares of the CFC. By virtue of the provisions of section XXXXXXXXXX of the XXXXXXXXXX referenced above, even though Sub 3 holds greater than XXXXXXXXXX % of the Common Shares, it does not hold voting shares. Sub 1 and Sub 2 have obtained a tax clearance from XXXXXXXXXX that confirms the XXXXXXXXXX will exempt from XXXXXXXXXX corporation tax any XXXXXXXXXX gain arising from the Proposed Transactions. Sub 3 has obtained a private ruling from the XXXXXXXXXX Taxation Office that confirms the Proposed Transactions will not result in taxes owing or payable in XXXXXXXXXX because, inter alia:

(a) the XXXXXXXXXX will not apply to trigger a capital gain;

(b) the application of the XXXXXXXXXX will not result in an XXXXXXXXXX corporate income tax liability;

(c) no capital gain will be realized; and

(d) the XXXXXXXXXX general anti-avoidance rule will not apply to the Proposed Transactions to deem a tax benefit XXXXXXXXXX .

Proposed Transactions

23. The Corporation will amend its articles of incorporation to create the Class A Shares in an unlimited number, having the following rights, privileges, restrictions and conditions:

(a) The holders of the Class A Shares shall be entitled to one vote for each Class A Share held at all meetings of shareholders of the Corporation, other than meetings at which only the holders of another class of shares are entitled to vote separately as a class;

(b) The holders of the Class A Shares shall be entitled to receive, in priority to the holders of the Common Shares and any other class of shares ranking junior to the Class A Shares with respect to the payment of dividends and the Corporation shall pay thereon, as and when declared by the board of directors of the Corporation out of the monies of the Corporation properly applicable to the payment of dividends, such non-cumulative dividends on the Class A Shares as a class as the directors may from time to time declare, in their absolute discretion. For greater certainty, dividends can be declared on the Class A Shares to the exclusion of the Common Shares and any other class of shares ranking junior to the Class A Shares with respect to the payment of dividends;

(c) No dividend or other distribution (other than a redemption of Common Shares for fair market value) shall be declared or paid or set apart for payment and no other dividend or distribution may be declared or made, directly or indirectly, on or with respect to the Common Shares or any other class of shares ranking junior to the Class A Shares with respect to the payment of dividends of the Corporation while any of the Class A Shares are outstanding;

(d) In the event of any dissolution, liquidation or winding-up of the Corporation, whether voluntary or involuntary, or any other distribution of assets of the Corporation among its shareholders for the purpose of winding up its affairs:

i. first, the holders of the Common Shares shall be entitled to receive an amount for each Common Share held an amount equal to (i) the PUC of all of the outstanding Common Shares as of the date of such dissolution, liquidation or winding up divided by (ii) the number of Common Shares outstanding as of the date of such dissolution, liquidation or winding-up (the "Common Share Liquidation Payment"), and, after payment of the Common Share Liquidation Payment in full, the holders of the Common Shares shall not be entitled to share in any further distribution of the property or assets of the Corporation; and

ii. second, after the payment in full of the Common Share Liquidation Payment in full, the holders of the Class A Shares shall be entitled to receive the remaining assets of the Corporation;

(e) If upon any such liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the holders of Common Shares the full amount to which they shall be entitled, the holders of Common Shares shall share rateably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the Common Shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

24. Each outstanding Common Share will be exchanged (without any action on the part of the holder of the Common Shares) for one Class A Share. No other consideration will be received by any holder of the Common Shares. The aggregate stated capital of the Class A Shares will be equal to approximately $XXXXXXXXXX . The aggregate stated capital of the Common Shares will be reduced by this amount to $XXXXXXXXXX . Each shareholder shall cease to be the holder of the Common Shares so exchanged, shall cease to have any rights with respect to such Common Shares and shall become the holder of the number of Class A Shares issued to such shareholder. The name of such shareholder shall be removed from the central securities register of the Corporation in respect of the Common Shares so exchanged and shall be added to the central securities register of the Corporation as the holder of the number of Class A Shares so issued to such shareholder; each holder of the Common Shares thereof shall be deemed to have executed and delivered all consents, releases, assignments and waivers, statutory or otherwise, required to exchange such shares as described above.

25. The Common Shares, which were exchanged for the Class A Shares, shall be cancelled and the appropriate entry shall be made in Corporation's central securities registry.

26. The Class A Shares will be listed on the First Exchange.

27. It is intended that the exchange of Common Shares for Class A Shares by the Public will be carried out on a tax-deferred basis pursuant to section 86 .

28. Substantially all of the enterprise value of the Corporation will be associated with the Class A Shares. It is contemplated that following the exchange of Common Shares for Class A Shares, the Common Shares held by the Corporate Group will have nil trading value and a FMV equal to the PUC of the Common Shares.

29. If the Public approves the Acquisition, each outstanding Class A Share, other than:

(a) Class A Shares held by a dissenting shareholder who is ultimately entitled to be paid the fair value of its Class A Shares; and

(b) Class A Shares held by the Acquiror or any affiliate thereof,

shall be transferred without any further act or formality by the holder thereof to Bidco in exchange for (as elected or deemed to be elected by the holder in accordance with the plan of arrangement) $XXXXXXXXXX in cash or XXXXXXXXXX of a share of the Acquiror, or for some combination thereof, and the name of each such holder shall be removed from the register of holders of Class A Shares and added (as applicable) to the register of holders of common shares of the Acquiror, and Bidco shall be recorded as the registered holder of the Class A Shares so exchanged and shall be deemed to be the legal and beneficial owner thereof.

30. The Corporation may contemplate a repurchase, cancelation or other reorganization transaction to eliminate the Circular Shareholdings in the future, including the possible sale of the Circular Shareholdings to Bidco subsequent to the plan of arrangement.

Purposes of the Proposed Transactions

The purposes of the Proposed Transactions are as follows:

(a) To eliminate the perceived confusion in the market caused by the Circular Shareholdings. This confusion has caused the market (i.e., analysts, shareholders, etc.) to unnecessarily focus on understanding the Corporation's intentions with and the implications to the Circular Shareholdings. Further, it is extraordinarily unusual for a public company to hold its own publicly-listed shares through a wholly owned subsidiary. In a public markets context, companies simply do not want a share structure that shareholders and the public in general do not understand.

(b) To eliminate the future circular flow of funds with respect to the payment of dividends by the Corporation. As a matter of corporate law, dividends paid on the Common Shares must be paid on all of the Common Shares, and thus a portion (XXXXXXXXXX %) of any such dividends is effectively paid back to the Corporation through the Corporate Group. This is inefficient from a cash flow and Canadian and foreign withholding tax perspective.

(c) To provide flexibility for a future reorganization with the objective of simplifying and rationalizing the Corporation's current organizational structure.

(d) To address other ongoing issues, such as managing corporate law issues associated with the Circular Shareholdings. In the event the Acquisition occurs, the Proposed Transaction will also mitigate against unintended and adverse foreign tax consequences arising as a result of the Circular Shareholdings (e.g., application of XXXXXXXXXX , XXXXXXXXXX , and XXXXXXXXXX CFC rules).

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, Proposed Transactions and the purposes of the Proposed Transactions and provided further that the Proposed Transactions are completed in the manner described above, we rule as follows:

A. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to the Proposed Transactions in and by themselves.

B. On the exchange of the Common Shares for Class A Shares as described in paragraph 24 above by a shareholder who is part of the Public, the provisions of subsection 86(1) will apply, and the provisions of subsections 86(2) and (2.1) will not apply, to the disposition of each Common Share by that shareholder for one Class A Share provided that:

(a) the shareholder holds the Common Shares as capital property; and

b) the shareholder and DC do not file an election under subsection 85(1) or (2) in respect of the exchange.

C. Subsection 245(2) will not be applied as a result of the Proposed Transactions in and by themselves to determine the tax consequences described in rulings A and B above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Revenue Agency provided that the Proposed Transactions are completed within XXXXXXXXXX months of the date of this ruling letter.

Comments

Nothing in this ruling letter should be construed as implying that the Canada Revenue Agency has agreed to, reviewed or has made any determination in respect of:

(a) the FMV or ACB of any property or the PUC of any shares referred to herein;

(b) foreign law or foreign tax considerations; or

(c) any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the rulings given above.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
For Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and
Regulatory Affairs Branch