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 subsection 84(2) applies to reduction of stated capital.
Position: Yes
Reasons: Complies with law and CRA administrative positions.
XXXXXXXXXX
2011-041735
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX
Dear Sir:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers referred to above. The documents submitted with your request are part of this document only to the extent described herein.
We understand that to the best of your knowledge and that of the taxpayers on whose behalf this ruling was requested, none of the issues involved in this ruling request are:
(a) in an earlier return of the taxpayers referred to above or a related person;
(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers referred to above or a related person;
(c) under objection by the taxpayers referred to above or a related person;
(d) in relation to the taxpayers referred to above or a related person, before the courts or the subject of a judgment the time limit for appeal from which has not expired; or
(e) the subject of a ruling previously considered by the Directorate in relation to the taxpayers referred to above or a related person.
In this letter, unless otherwise indicated or the context otherwise requires:
(a) all statutory references in this letter are to the Act; and
(b) all monetary amounts are expressed in Canadian dollars; and
(c) the following terms have the meanings specified below:
Definitions
"Act" means the Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th supp.), as amended to the date hereof;
"adjusted cost base" has the meaning assigned by section 54 ;
"amount" has the meaning assigned by subsection 248(1) ;
"Business" means the exploration for and development of mineral resources;
"Business Segment A" means the XXXXXXXXXX ;
"disposition" has the meaning assigned by subsection 248(1) ;
"Exchange" means the TSX Venture Exchange;
"First Act" means the Quebec Business Corporations Act, S.Q. 2009, c.52, which came into force on February 14, 2011, pursuant to Order-in-Council 908-2010, replacing Parts I and IA of the Quebec Companies Act, R.S.Q. c.C-38, as amended;
"issued and paid-up share capital account" has the meaning assigned by the First Act;
"PUC" means "paid-up capital" and has the meaning assigned by subsection 89(1) ;
"principal-business corporation" has the meaning assigned by subsection 66(15) ;
"Properties" means XXXXXXXXXX ;
"Proposed Transactions" means the transactions described in the proposed transactions section of this letter;
"Pubco" means XXXXXXXXXX ;
"public corporation" has the meaning assigned by subsection 89(1) ;
"Registrations" XXXXXXXXXX ;
"Regulations" means the Income Tax Regulations promulgated under the Act;
"Second Act" means the Business Corporations Act (Ontario), R.S.O. 1990, c.B.16, as amended;
"Second Exchange" means the Canadian National Stock Exchange;
"stated capital" has the meaning assigned by the Second Act;
"Subco 1" means XXXXXXXXXX ;
"Subco 2" means XXXXXXXXXX , a corporation incorporated under the Second Act XXXXXXXXXX ;
"Subco 2 Common Share Distribution" means the pro-rata distribution of the Subco 2 Distribution Shares to the Pubco shareholders;
"Subco 2 Distribution Shares" means the common shares and warrants of Subco owned by Pubco as described in paragraph 15 below; and
"taxable Canadian corporation" has the meaning assigned by subsection 89(1) .
Facts
1. Pubco is a corporation incorporated pursuant to and governed by the First Act. Pubco is a public corporation, a taxable Canadian corporation and a principal business corporation.
2. The fiscal period of Pubco ends on December 31 of each year.
3. The authorized share capital of Pubco consists of an unlimited number of common shares of which there are XXXXXXXXXX common shares issued and outstanding as of XXXXXXXXXX .
4. The common shares of Pubco are listed on the Exchange and are widely held by the public.
5. Pubco carries on the Business.
6. Pubco owns all the issued and outstanding shares of Subco 1. Pubco and Subco 1 both carry on the Business.
7. Pursuant to certain option agreements entered into in XXXXXXXXXX and XXXXXXXXXX , Pubco is in the process of earning a XXXXXXXXXX % interest in certain mining claims in the Properties.
8. Subco 1 staked a series of Registrations near the Properties.
9. The Business Segment A of Pubco is carried on through its subsidiary, Subco 2.
10. Subco 2 is a taxable Canadian corporation and a principal-business corporation.
11. The fiscal period of Subco 2 ends on XXXXXXXXXX of each year.
12. The authorized share capital of Subco 2 consists of an unlimited number of common shares of which there are XXXXXXXXXX common shares and XXXXXXXXXX warrants to purchase common shares issued and outstanding as of XXXXXXXXXX .
13. Pubco owns XXXXXXXXXX common shares of Subco 2 and XXXXXXXXXX warrants to purchase common shares in Subco 2 as of XXXXXXXXXX .
13.1. On August 11, 2011, Subco 2 issued XXXXXXXXXX common shares and XXXXXXXXXX warrants to purchase common shares to a single arm's length purchaser.
14. On XXXXXXXXXX , the following transactions occurred:
(a) Subco 2 issued to Pubco XXXXXXXXXX common shares and XXXXXXXXXX warrants to purchase common shares in Subco 2 in exchange for XXXXXXXXXX new treasury shares and XXXXXXXXXX share purchase warrants of Pubco; and
(c) Subco 2 agreed to acquire a XXXXXXXXXX % interest in certain XXXXXXXXXX and, in exchange, to provide consideration that includes the issuance of XXXXXXXXXX common shares, $XXXXXXXXXX , XXXXXXXXXX Pubco common shares and a total of $XXXXXXXXXX of exploration expenditures.
15. After completion of the transactions described in paragraph 14 above, Subco 2 will have XXXXXXXXXX issued and outstanding common shares and XXXXXXXXXX issued and outstanding warrants to purchase common shares and, of these securities, Pubco will own XXXXXXXXXX Subco 2 common shares (the "Subco 2 Distribution Shares") and XXXXXXXXXX warrants to purchase common shares.
Proposed Transactions
16. The directors of Pubco will authorize Pubco to, and Pubco will reduce the issued and paid-up share capital account of its common shares in accordance with the First Act by an amount that will be equal to the fair market value of the Subco 2 Distribution Shares at such time.
17. Concurrently with the reduction of its issued and paid-up share capital account, Pubco will make the Subco 2 Common Share Distribution. For greater certainty, the reduction in Pubco's issued and paid-up share capital account will not exceed the aggregate PUC of the Pubco common shares issued and outstanding at such time.
18. Subco 2 will initially list its common shares for trading on the Second Exchange and then will make an application to list its common shares on the First Exchange.
18.1. The amount of the Subco 2 Common Share Distribution will not exceed the PUC of the Pubco common shares that is in respect of share issuances for cash only.
18.2. The proposed reduction in the issued and paid-up share capital account of Pubco's common shares has not been preceded by an increase in the PUC of that class that has resulted in a dividend in respect of which Pubco elected to treat as having been paid out of Pubco's XXXXXXXXXX capital surplus on hand.
18.3. The reduction of its issued and paid-up capital share account and the Subco 2 Common Share Distribution by Pubco is a one-time transaction, and is not being made in lieu of ordinary course dividends.
18.4. Pubco will realize a capital gain on the disposition of its shares of Subco 2.
Purpose of the Proposed Transactions
19. Pubco believes that it is in the best interests of its shareholders to proceed with the Subco 2 Common Share Distribution for a number of reasons, including the following:
(i) given the current level of Pubco's stock price, by distributing the Subco 2 Distribution Shares to its shareholders, Pubco intends to unlock the unrecognized potential and value of the Subco 2 Distribution Shares and place such value directly in the hands of its shareholders in the form of Subco 2 common shares that are listed for trading on a recognized stock exchange;
(ii) with the establishment of Subco 2 as a separate listed public company, Pubco expects that any future valuation of Pubco will be based solely on its base metal exploration properties and potential including the Properties; and
(iii) with the establishment of Subco 2 as a separate listed public company, Subco 2 will be positioned to achieve the type of benefits enjoyed by listed public companies such as increasing Subco 2's ability to access to capital through the public markets.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, the Proposed Transactions, and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed as described, our rulings are as follows:
A. Subject to the potential application of subsection 40(3), the reduction in the issued and paid-up share capital account of the Pubco common shares will not, in and by itself, result in a disposition of the Pubco common shares.
B. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to the Subco 2 Common Share Distribution, such that Pubco will be deemed to have paid, and the holders of Pubco common shares will be deemed to have received, a dividend on their Pubco common shares only to the extent, if any, that the amount of the Subco 2 Common Share Distribution (equal to the fair market value of the Subco 2 Distribution Shares to be distributed in satisfaction thereof) exceeds the amount by which the PUC of the Pubco common shares is reduced on the Subco 2 Common Share Distribution.
C. Where a Pubco common shareholder holds his or her shares as capital property, the amount of the Subco 2 Common Share Distribution received on such shares will be deducted in computing the particular Pubco common shareholders adjusted cost base of such shares pursuant to subparagraph 53(2)(a)(ii). To the extent such amount exceeds the ACB to such shareholder of the shares, the shareholder will be deemed to have a capital gain pursuant to subsection 40(3).
D. Subject to the application of section 47, the cost to a Pubco common shareholder of a Subco 2 Distribution Share received on the Subco 2 Common Share Distribution will be equal to the fair market value of the Subco 2 Distribution Share at the moment of the Subco 2 Common Share Distribution. .
E. Subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.
Our rulings are given subject to the limitations set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided the Proposed Transactions are completed within six months of the date of this letter. Our rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act or Regulations.
Nothing in this letter should be construed as implying that CRA has reviewed any tax consequences relating to the facts or the Proposed Transactions other than those described in the rulings given above, or has agreed:
(a) to the fair market value or adjusted cost base of any asset or to the paid-up capital of any share; or
(b) to any tax consequences relating to any transaction described herein other than those specifically described in the rulings given above.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2011
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2011
Email this Content