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 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 Department of Finance.
XXXXXXXXXX
2010-038137
XXXXXXXXXX
XXXXXXXXXX , 2010
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.
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").
Our understanding of the facts and proposed transactions is as follows:
Facts
1. Continuing Fund is a corporation incorporated under the XXXXXXXXXX in XXXXXXXXXX and 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. Continuing Fund's Taxation Centre and Tax Services Office are XXXXXXXXXX and XXXXXXXXXX , respectively.
3. TFI is a corporation incorporated under the XXXXXXXXXX , in XXXXXXXXXX and continued under the XXXXXXXXXX , in XXXXXXXXXX . 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 and approximately XXXXXXXXXX Class A shareholders. TFI's Taxation Centre and Tax Services Office are XXXXXXXXXX and XXXXXXXXXX , 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 and approximately XXXXXXXXXX Class A shareholders. TFII's Taxation Centre and Tax Services Office are XXXXXXXXXX and XXXXXXXXXX , 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 and approximately XXXXXXXXXX Class A shareholders. TFIII's Taxation Centre and Tax Services Office are XXXXXXXXXX and XXXXXXXXXX , 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 and approximately XXXXXXXXXX Class A shareholders. TFIV's Taxation Centre and Tax Services Office are XXXXXXXXXX and XXXXXXXXXX , 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 and approximately XXXXXXXXXX Class A shareholders. TFV's Taxation Centre and Tax Services Office are XXXXXXXXXX and XXXXXXXXXX , 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. TFVI's Taxation Centre and Tax Services Office are XXXXXXXXXX and XXXXXXXXXX , 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 an unlimited number of 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 an unlimited number of 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 an unlimited number of 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 an unlimited number of 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 an unlimited number of 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 an unlimited number of 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. Continuing Fund will be continued under the XXXXXXXXXX (date of actual continuance was XXXXXXXXXX ).
b. 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 22c below.
c. The rights and restrictions attached to the Class A shares of Continuing Fund will be amended (date of actual amendment was XXXXXXXXXX ), pursuant to the Articles of Amendment filed under the XXXXXXXXXX (the "Articles of Amendment"). The Articles of Amendment provided 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.
Each Terminating Fund is a Receiving Fund and, as further discussed in 22d to f below, under the authority of the Articles of Amendment as described above, Continuing Fund will issue its Class A shares (the "Merger Shares") to each Terminating Fund, as consideration for the purchase of each Terminating Fund's assets; such Merger shares will be immediately thereafter transferred and distributed to the Class A shareholders of each Terminating Fund under the Merger redemption procedure referred to in 22b above.
(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) of the proposed legislative amendments of November 5, 2010.))
d. The Terminating Funds, with TFVI being the last of the Terminating Funds in the sequence, will transfer all of their assets (the "Assets") to Continuing Fund at a value equal to their corresponding net asset value as at the effective date of the Merger.
e. As consideration for the Assets of each of the Terminating Funds, Continuing Fund will issue the Merger Shares to the Terminating Funds. The issue price of the Merger Shares will be equal to their net asset value as at the effective date of the Merger.
f. Pursuant to the Merger redemption procedure referred to in 22b above, the Merger Shares issued to the Terminating Funds will be immediately transferred to the Class A shareholders of the Terminating Funds 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 applying the ratio obtained by dividing the total Merger Shares by the total Redeemed Shares. The aggregate redemption price of the Redeemed Shares will be equal to the net asset value of the Merger Shares distributed under the Merger redemption procedure.
g. As soon as practicable following the effective date of the Merger, each Terminating Fund will be wound-up or dissolved in accordance with the provisions of the applicable corporate law governing each Terminating Fund.
h. At the end of these 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.
23. Shareholders of Continuing Fund and Terminating Funds approved the Merger by special resolution (XXXXXXXXXX of votes cast must approve) at a general meeting held on XXXXXXXXXX . An information circular with relevant information concerning the Merger and proxy materials were mailed to Continuing Fund and Terminating Funds shareholders 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, Continuing Fund sent a written notification of the Merger, dated XXXXXXXXXX , and Terminating Funds 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:
a. achieve cost savings by combining the funds' management, administration, marketing and back office functions and realizing increased economies of scale;
b. improve investment performance by creating a larger, more diversified venture investment portfolio;
c. improve liquidity and resources to fund follow-on investments;
d. 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,
e. create a larger, more efficient 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. reduce transaction costs as compared to those associated with a statutory amalgamation. The materials printed and mailed to each Terminating Fund's shareholders were much less voluminous than those associated with a statutory amalgamation. Additionally, costs associated with a court process are eliminated; and,
b. benefit from industry familiarity among investment advisors and back-office administration staff with the Merger by the purchase of Assets 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 22c above, we confirm that the Minister of National Revenue will not exercise his 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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