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 transaction qualifies as a "merger" pursuant to ss204.85(3)?
Position: Yes.
Reasons: In accordance with the Act and conforms to tax policy described by the Department of Finance.
XXXXXXXXXX 2011-041234
XXXXXXXXXX , 2011
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling Request
XXXXXXXXXX ("Continuing Fund"),
XXXXXXXXXX ("TFI") XXXXXXXXXX ,
XXXXXXXXXX ("TFII") XXXXXXXXXX ,
XXXXXXXXXX ("TFIII") XXXXXXXXXX ,
XXXXXXXXXX ("TFIV") XXXXXXXXXX ,
XXXXXXXXXX ("TFV") XXXXXXXXXX and
XXXXXXXXXX ("TFVI") XXXXXXXXXX .
(collectively known as the "Terminating Funds" and individually as a "Terminating Fund")
We are writing in response to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-named taxpayers.
This letter is based solely on the facts and proposed transactions described below. Any documentation submitted in respect of your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
To the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling request are:
(i) dealt with in an earlier return of the taxpayers or a related person;
(ii) being considered by a Tax Services Office or Taxation Centre of Canada Revenue Agency ("CRA") in connection with a previously filed tax return of the taxpayers or a related person;
(iii) under objection by the taxpayers or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate to the taxpayers or a related person; or
(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.
XXXXXXXXXX
Unless otherwise stated, statutory references in this letter are to the Income Tax Act, R.S.C. 1985 (5th Suppl.) c. 1, as amended to the date hereof (the "Act"). Further, the term "Merger NAV" in this letter means, in respect of the Continuing Fund or any Terminating Fund, the amount determined to be the net asset value of the Continuing Fund or any Terminating Fund for purposes of the Merger (defined in 22 below) as at the effective date of the Merger.
Our understanding of the facts and proposed transactions is as follows:
Facts
1. Continuing Fund is a corporation incorporated under the XXXXXXXXXX and continued under the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended ("CBCA") on XXXXXXXXXX . Its head office is located at XXXXXXXXXX . Continuing Fund is registered as a labour-sponsored investment fund corporation under XXXXXXXXXX and, as such, is a "prescribed labour-sponsored venture capital corporation" under section 6701 of the Income Tax Regulations. Continuing Fund is neither a registered labour-sponsored venture capital corporation nor a revoked corporation for purposes of the Act.
2. Continuing Fund has approximately $XXXXXXXXXX in net assets and approximately XXXXXXXXXX Class A shareholders as at XXXXXXXXXX . Continuing Fund's Taxation Centre and Tax Services Office are XXXXXXXXXX Tax Centre and XXXXXXXXXX Tax Services Office, respectively.
3. TFI is a corporation incorporated under the XXXXXXXXXX in XXXXXXXXXX and continued under the XXXXXXXXXX , inXXXXXXXXXX . Its head office is located at XXXXXXXXXX . TFI is:
i. a registered labour-sponsored venture capital corporation under the Act; and
ii. registered as a labour-sponsored investment fund corporation under the XXXXXXXXXX .
4. TFI has approximately $XXXXXXXXXX in net assets as at XXXXXXXXXX , and approximately XXXXXXXXXX Class A shareholders as at XXXXXXXXXX . TFI's Taxation Centre and Tax Services Office are XXXXXXXXXX Tax Centre and XXXXXXXXXX Tax Services Office, respectively.
5. TFII is a corporation incorporated under the XXXXXXXXXX in XXXXXXXXXX and continued under XXXXXXXXXX , in XXXXXXXXXX . Its head office is located at XXXXXXXXXX . TFII is:
i. a registered labour-sponsored venture capital corporation under the Act; and
ii. registered as a labour-sponsored investment fund corporation under the XXXXXXXXXX .
6. TFII has approximately $XXXXXXXXXX in net assets as at XXXXXXXXXX , and approximately XXXXXXXXXX Class A shareholders as at XXXXXXXXXX . TFII's Taxation Centre and Tax Services Offices are XXXXXXXXXX Tax Centre and XXXXXXXXXX Tax Services Office, respectively.
7. TFIII is a corporation incorporated under the XXXXXXXXXX in XXXXXXXXXX and its head office is located at XXXXXXXXXX . TFIII is:
i. a registered labour-sponsored venture capital corporation under the Act; and
ii. registered as a labour-sponsored investment fund corporation under the XXXXXXXXXX .
8. TFIII has approximately $XXXXXXXXXX in net assets as at XXXXXXXXXX , and approximately XXXXXXXXXX Class A shareholders as at XXXXXXXXXX . TFIII's Taxation Centre and Tax Services Offices are XXXXXXXXXX Tax Centre and XXXXXXXXXX Tax Services Office, respectively.
9. TFIV is a corporation incorporated under the XXXXXXXXXX in XXXXXXXXXX and its head office is located at XXXXXXXXXX . TFIV is:
i. a registered labour-sponsored venture capital corporation under the Act; and
ii. registered as a labour-sponsored investment fund corporation under the XXXXXXXXXX .
10. TFIV has approximately $XXXXXXXXXX in net assets as at XXXXXXXXXX , and approximately XXXXXXXXXX Class A shareholders as at XXXXXXXXXX . TFIV's Taxation Centre and Tax Services Offices are XXXXXXXXXX Tax Centre and XXXXXXXXXX Tax Services Office, respectively.
11. TFV is a corporation incorporated under the XXXXXXXXXX in XXXXXXXXXX and its head office is located at XXXXXXXXXX . TFV is:
i. a registered labour-sponsored venture capital corporation under the Act; and
ii. registered as a labour-sponsored investment fund corporation under the XXXXXXXXXX .
12. TFV has approximately $XXXXXXXXXX in net assets as at XXXXXXXXXX , and approximately XXXXXXXXXX Class A shareholders as at XXXXXXXXXX . TFV's Taxation Centre and Tax Services Offices are XXXXXXXXXX Tax Centre and XXXXXXXXXX Tax Services Office, respectively.
13. TFVI is a corporation incorporated under the XXXXXXXXXX in XXXXXXXXXX and its head office is located at XXXXXXXXXX . TFVI is:
i. registered as a labour-sponsored investment fund corporation under the XXXXXXXXXX ; and
ii. a prescribed labour-sponsored venture capital corporation under section 6701 of the Income Tax Regulations.
14. TFVI has approximately $XXXXXXXXXX in net assets and approximately XXXXXXXXXX Class A shareholders as at XXXXXXXXXX . TFVI's Taxation Centre and Tax Services Office are XXXXXXXXXX Tax Centre and XXXXXXXXXX Tax Services Office, respectively.
15. The authorized capital of Continuing Fund consists of an unlimited number of Class A shares, issuable in series, XXXXXXXXXX Class B shares, an unlimited number of Class C shares, issuable in series, XXXXXXXXXX Class D shares and an unlimited number of Class E shares, issuable in series. The Class A shares of Continuing Fund are offered to the members of the public in XXXXXXXXXX .
16. The authorized capital of TFI consists of XXXXXXXXXX Class A shares, issuable in series, and XXXXXXXXXX Class B shares. The Class A shares of TFI were offered to the members of the public in XXXXXXXXXX .
17. The authorized capital of TFII consists of XXXXXXXXXX Class A shares, issuable in series, and XXXXXXXXXX Class B shares. The Class A shares of TFII are offered to the members of the public in XXXXXXXXXX .
18. The authorized capital of TFIII consists of XXXXXXXXXX Class A shares, issuable in series, XXXXXXXXXX Class B shares and XXXXXXXXXX Class C shares. The Class A shares of TFIII were offered to the members of the public in XXXXXXXXXX .
19. The authorized capital of TFIV consists of XXXXXXXXXX Class A shares, issuable in series, XXXXXXXXXX Class B shares and XXXXXXXXXX Class C shares. The Class A shares of TFIV were offered to the members of the public in XXXXXXXXXX .
20. The authorized capital of TFV consists of XXXXXXXXXX Class A shares, issuable in series, XXXXXXXXXX Class B shares and XXXXXXXXXX Class C shares. The Class A shares of TFV were offered to the members of the public in XXXXXXXXXX .
21. The authorized capital of TFVI consists of XXXXXXXXXX Class A shares, issuable in series, and an unlimited number of Class B shares. The Class A shares of TFVI are offered to the members of the public in XXXXXXXXXX .
Proposed Transactions
22. Terminating Funds and Continuing Fund will be merged (the "Merger") by effecting the following series of steps (the "Proposed Transactions"):
(a) In connection with the Merger, the rights and restrictions attached to the outstanding Class A shares (the "Redeemed Shares") of each Terminating Fund, will be amended to incorporate a merger redemption procedure, whereby the Redeemed Shares will be automatically redeemed as at the effective date of the Merger immediately after the purchase of the Terminating Fund's assets referred to in 22(e) below.
(b) The rights and restrictions attached to the Class A shares of Continuing Fund will be amended, pursuant to the Articles of Amendment to be filed under the CBCA (the "Articles of Amendment") to provide for the issuance of Class A shares of the Continuing Fund in series.
(c) The Articles of Amendment will provide that Continuing Fund may issue Class A shares to either a registered or prescribed labour-sponsored venture capital corporation (a "Receiving Fund") as payment for the purchase of all or part of the Receiving Fund's assets as part of a series of steps to effect a Merger of Continuing Fund and the Receiving Fund, provided, however, that such shares are in turn promptly transferred by Receiving Fund to its Class A shareholders. The issuance of Class A shares to each Receiving Fund will occur at the time of completion of the Merger transaction with that Receiving Fund and no additional Class A shares will be issued by the Continuing Fund to any of the Receiving Funds after completion of the Merger transaction. (The provision in the Articles of Amendment as described above would not comply with the current clause 204.81(1)(c)(ii)(A) and subparagraph 204.81(1)(c)(vii). In such a situation, Continuing Fund would request a comfort letter from the Minister of National Revenue confirming that the Minister will not exercise his powers under subsection 204.81(6) to revoke its registration as a result of those Merger specific provisions. (The Articles of Amendment have been drafted to comply with clause 204.81(1)(c)(ii)(A) of the proposed legislative amendments of November 5, 2010.))
(d) If a shareholder of any of the Terminating Fund has validly exercised a dissent right in respect of the dissenting shareholder's outstanding Class A shares of that Terminating Fund, the Terminating Fund will honour the dissent rights by paying fair value to the dissenting shareholder for those Class A shares.
(e) The Terminating Funds, with TFVI being the last of the Terminating Funds in the sequence, will sell all of their assets (other than liquid assets equal to the amount payable in respect of dissent rights) (the "Assets") to Continuing Fund at a purchase price equal to their corresponding net asset value as at the effective date of the Merger. Under the authority of its Articles of Amendment, Continuing Fund will satisfy the purchase price by issuing a series of its Class A shares (the "Merger Shares") to each of the Terminating Funds as consideration for the Terminating Fund's Assets. The number of Merger Shares of a series issued to a Terminating Fund as consideration for its Assets will be determined by dividing the Merger NAV attributed to the corresponding series of such Terminating Fund's shares by the Merger NAV per Class A share of the Continuing Fund, subject to an adjustment to account for amounts, if any, paid pursuant to the exercise of any dissent rights described in paragraph 22(d) above.
(f) Pursuant to the merger redemption procedure referred to in 22(a) above, the Merger Shares of the series issued to a Terminating Fund will be immediately transferred to the Class A shareholders of that Terminating Fund (other than those held by dissenting shareholders) in payment of the redemption price for the Redeemed Shares of that Terminating Fund. The number of Merger Shares transferred to a given holder of Redeemed Shares through the merger redemption procedure will be determined by multiplying the number of Class A shares of a Terminating Fund held by the shareholder of the Redeemed Shares by an exchange ratio determined by dividing the Merger NAV per Share for applicable series of Redeemed Shares by the Merger NAV per Share for Merger Shares. The aggregate redemption price of the Redeemed Shares will be equal to the Merger NAV of the Merger Shares distributed to the holders of the Redeemed Shares of the Terminating Funds under the merger redemption procedure.
The number of Merger Shares received by a shareholder will be rounded to the nearest one-thousandth of a Merger Share such that fractions of 0.0005 and above will be rounded up and fractions of less than 0.0005 will be rounded down.
(g) The manager of TFIII holds XXXXXXXXXX Class C shares of TFIII; the manager of TFIV holds XXXXXXXXXX Class C shares of TFIV; and the manager of TFV holds XXXXXXXXXX Class C shares of TFV. Each of TFIII, TFIV and TFV and the managers holding Class C shares have determined that the Class C shares held by the managers have XXXXXXXXXX value. Each of TFIII, TFIV and TFV will redeem all outstanding Class C shares in its respective capital for an aggregate redemption amount of $XXXXXXXXXX per Terminating Fund.
(h) At the end of the above Merger steps, Continuing Fund will be the resulting single corporate entity with the consolidated assets and Class A shareholders of both Continuing and Terminating Funds (other than dissenting shareholders).
(i) XXXXXXXXXX
(j) As soon as reasonably possible following the effective date of the Merger, after all necessary ancillary steps have been taken to complete the transfer of the Assets of each Terminating Fund to the Continuing Fund, each Terminating Fund will be wound-up or dissolved in accordance with the provisions of the applicable corporate law governing each Terminating Fund.
23. The Merger will be subject to the prior approval by the shareholders of Continuing Fund at a general meeting. The Merger will also be subject to the prior approval by special resolution of the shareholders of each of the Terminating Funds. (The shareholder meetings of the Terminating Funds and the Continuing Fund to approve the Merger transaction is scheduled to be held on XXXXXXXXXX ). An information circular with relevant information concerning the Merger and proxy materials will be mailed to each shareholder of Continuing Fund and the Terminating Funds in connection with these meetings.
24. The Merger will also be subject to any necessary securities regulatory approvals.
25. Pursuant to subsection 204.85(1) of the Act, the Continuing Fund and the Terminating Funds have sent a written notification of the Merger, dated XXXXXXXXXX , to the Minister of National Revenue, each of which was at least XXXXXXXXXX days before the Merger.
Purpose of the Proposed Transactions
26. The purpose of the Proposed Transactions is to:
i. achieve cost savings by combining the funds' management, administration, marketing and back office functions and realizing increased economies of scale;
ii. improve investment performance by creating a larger, more diversified venture investment portfolio;
iii. improve liquidity and resources to fund follow-on investments;
iv. create a higher profile in the marketplace for the post-Merger Continuing Fund, thereby increasing awareness of the fund among both investors and entrepreneurs; and
v. create a larger, more efficient and diversified investment pool to improve the prospects for achieving positive returns for investors, providing a significant and stable source of venture capital for eligible businesses and fostering business development, economic growth and job creation in the regions in which the funds invest.
27. The purpose of the Merger is to:
(a) avoid having to continue any Terminating Funds into another jurisdiction in order to implement a statutory amalgamation; and
(b) benefit from industry familiarity among investment advisors and back-office administration staff with the Merger by the purchase of Assets and transfer of Merger Shares on redemption of Class A shares of Terminating Funds structure.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:
A. The Merger will be a "merger" within the meaning of subsection 204.85(3) and subsection 211.7(2).
B. Upon completion of the Merger, Continuing Fund will be the "new corporation" formed by the merger within the meaning of subsection 204.85(3).
C. Pursuant to subsection 204.85(3), Continuing Fund will be the same corporation as, and a continuation of, the Terminating Funds, for the purposes of subsections 204.83(1) and (2).
D. A Redeemed Share will be "replaced on the amalgamation or merger" by a Merger Share and a Merger Share is the "new share" of the Continuing Fund within the meaning of paragraph 204.85(3)(c).
E. Continuing Fund will be deemed to be registered as a labour-sponsored venture capital corporation for purposes of the Act pursuant to paragraph 204.85(3)(d).
The rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act, including those proposed on November 5, 2010, and are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5, dated May 17, 2002, issued by the CRA, and is binding on the CRA provided the Merger occurs on or before XXXXXXXXXX .
Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:
(i) the GST implications of any of the Proposed Transactions;
(ii) the fair market value or net asset value of any assets or shares; or
(iii) any other tax consequences of the Proposed Transactions or of related transactions or events that are not described herein.
Opinion
With respect to 22(c) above, we confirm that the Minister of National Revenue will not exercise her discretion under subsection 204.81(6) of the Act to revoke Continuing Fund's registration as a result of the fact that one LSVCC, i.e., each Terminating Fund, temporarily holds shares of another LSVCC, i.e., Continuing Fund, in the course of the Merger.
Yours truly,
XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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