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: (1) What is the amount of the stock dividend declared and paid to members of a credit union and (2) whether Part VI.1 tax is exigible?
Position: (1) The amount of the stock dividend is the amount by which the paid-up capital of the XXXXXXXXXX Shares is increased by reason of the payment of the stock dividend which is calculated in reference to the par value of each Share. (2) Part VI.1 tax does not apply.
Reasons: (1) Pursuant to paragraph (c) of the definition "amount" in subsection 248(1) and provisions of governing federal legislation. (2) By virtue of the operation of subsections 137(4.1) and (4.2) the amount of the stock dividend is deemed to be interest and deemed not to be dividend, notwithstanding any other provision of the Act.
XXXXXXXXXX 2008-028368
XXXXXXXXXX , 2008
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling and is further to an advance income tax ruling, 2007-024156 (the "Ruling") issued on XXXXXXXXXX , 2007 which expired on XXXXXXXXXX . This is a resubmission of the Ruling and is further to our discussion of XXXXXXXXXX We also acknowledge various telephone conversations (XXXXXXXXXX ) in furtherance of this matter.
To the best of your knowledge and that of the taxpayer involved, none of the issues contained in this ruling request are:
(i) dealt with in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or taxation centre of the Canada Revenue Agency ("CRA") in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate to the taxpayer or a related person, other than the Ruling; nor
(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. XXXXXXXXXX ("ACo") is a XXXXXXXXXX corporation that is governed primarily by the XXXXXXXXXX ACo is also subject to the provisions of the XXXXXXXXXX ACo is a "taxable Canadian corporation" as that term is defined in subsection 89(1) of the Act, and a resident of Canada for Canadian income tax purposes. The XXXXXXXXXX Tax Services Office and XXXXXXXXXX Tax Centre serve ACo.
2. As the central credit union for the province of XXXXXXXXXX , ACo's primary financial responsibilities to its member credit unions are to manage the province's liquidity reserves, deliver central and investment banking services, provide payment and clearing services, and facilitate electronic transaction services through the development and delivery of online technology.
3. All the members of ACo having full voting rights in ACo are corporations, associations or federations incorporated as credit unions or cooperative credit societies that derive all or substantially all of their revenues from sources described in paragraph (a) of the definition of "credit union" in subsection 137(6) of the Act. Accordingly, ACo qualifies as a "credit union" within the meaning of subparagraph 137(6)(b)(i) of the Act.
4. ACo's authorized share capital consists of an unlimited number of XXXXXXXXXX Shares (collectively, the "Shares", each a "Share"), each Share having a par value of $XXXXXXXXXX . Each holder of XXXXXXXXXX Shares is considered a member of ACo within the meaning of subsection 137(4.1) of the Act. The Shares have not been listed on a prescribed stock exchange within the meaning of section 3200 of the Income Tax Regulations. The Shares have, inter alia, the following rights and restrictions:
a. the Shares are not retractable and may only be redeemed with the consent of ACo's directors;
b. members who have withdrawn from membership and whose Shares are entitled to redemption are entitled to the value of their Shares which is not to exceed the par value plus any declared and unpaid dividends on such Shares;
c. the directors of ACo may authorize the redemption of the Shares provided that the total number of members does not fall below XXXXXXXXXX ;
d. the Shares are transferable under certain conditions;
e. in the event of the liquidation, dissolution or winding-up of ACo, any surplus, profits or assets of ACO are to be distributed rateably and proportionately among all shareholders of ACo regardless of the class of Shares held by the shareholders;
f. the Shares entitle the holder thereof to receive dividends if, as, and when declared by the board of directors; and
g. holders of XXXXXXXXXX Shares are entitled to one vote per Share.
5. A Co has XXXXXXXXXX Shares (the "XXXXXXXXXX Shares"), XXXXXXXXXX Shares (the "XXXXXXXXXX Shares"), and XXXXXXXXXX Shares (the "XXXXXXXXXX Shares") issued and outstanding as at the date hereof. No XXXXXXXXXX Shares (the XXXXXXXXXX Shares") are currently issued or outstanding.
6. Membership in ACo is currently restricted to credit unions incorporated in XXXXXXXXXX , co-operatrives and certain other organizations. In particular:
a. XXXXXXXXXX Shares may only be held by members of ACo that are credit unions incorporated under XXXXXXXXXX ;
b. XXXXXXXXXX Shares may be held by members of ACo that are co-operatives incorporated under the XXXXXXXXXX or are corporations that conduct their operations on a co-operative basis and that are designated as a co-operative association by the directors of ACo for the purposes of membership in ACo;
c. XXXXXXXXXX Shares may only be held by members of ACo whose application for membership in ACo is otherwise approved; and
d. XXXXXXXXXX Shares may only be held by members of ACo that hold XXXXXXXXXX Shares.
7. The Shares do not have rights of retraction and, under their terms and conditions, ACo cannot be required to redeem, acquire or cancel the Shares. The Shares are each not a "short-term preferred Share" or "term preferred Share" within the meaning of subsection 248(1) of the Act.
8. The Shares are not shares described in either of subsection 112(2.2) or 112(2.4) of the Act.
9. The amount that shareholders are entitled to receive in respect of a Share on the redemption of the Share is limited to a maximum; therefore some if not all of the Shares may be "taxable preferred shares" or "taxable RFI shares" as those terms are defined in subsection 248(1) of the Act.
10. XXXXXXXXXX ("BCo") is a central credit union for the province of XXXXXXXXXX BCo is not a public corporation. BCo's primary financial responsibilities to its member credit unions are to manage the province's liquidity reserves, deliver central and investment banking services, provide payment and clearing services, and facilitate electronic transaction services through the delivery of online technology.
The Combination:
11. In XXXXXXXXXX , ACo entered into negotiations with BCo for the merger of ACo and BCo (the "Combination"). The terms of the Combination were provided in an agreement entitled the "Combination Agreement" between ACo and BCo (the "Agreement") dated XXXXXXXXXX .
12. In general terms, the Combination will be carried out through a number of steps, the main transaction and overall purpose of which is the sale by BCo of substantially all of its assets and liabilities to ACo. In exchange for its assets, BCo will receive an equity interest in ACo that is proportionate to its contribution. A substantial portion of this equity interest will then be transferred by BCo to its members such that BCo's members will own that part of the equity interest directly. BCo members are predominantly XXXXXXXXXX credit unions; however, the constitution will be amended to allow credit unions from outside XXXXXXXXXX to be XXXXXXXXXX shareholders.
13. The closing date of the Combination under the original Agreement was XXXXXXXXXX
14. ACo and BCo have entered into four amending agreements to the Agreement that was the subject of the Ruling. The purpose of the four amending agreements was to delay the original closing date (as defined in the Agreement) XXXXXXXXXX The closing date was initially deferred from XXXXXXXXXX to XXXXXXXXXX . The closing date was subsequently deferred to on or about XXXXXXXXXX . The fourth amending agreement dated XXXXXXXXXX therefore delayed closing and modified terms of the Agreement XXXXXXXXXX
15. None of the other substantive terms of the Agreement have changed as a result of the fourth amending agreement.
16. The total combined net asset value of the XXXXXXXXXX credit union centrals is projected to be $XXXXXXXXXX at XXXXXXXXXX . Of this amount, the net asset value of ACo prior to the combination is estimated at $XXXXXXXXXX and the net asset value of BCo prior to the combination is estimated at $XXXXXXXXXX . Based on the fact that each credit union central has a similar ratio of net assets to total assets, BCo should only be contributing XXXXXXXXXX % to the combined equity of the entities.
17. ACo requires that after the proposed transactions, BCo receive a percentage of XXXXXXXXXX Shares equivalent to the percentage that the XXXXXXXXXX system assets is of the total system assets (the "Allocation Percentage"). As discussed above, only the XXXXXXXXXX shares have any voting rights under their terms and conditions. BCo will acquire their Allocation Percentage of XXXXXXXXXX Shares as partial consideration for the transfer of the assets. The Allocation Percentage is estimated at XXXXXXXXXX % based upon the information available as of XXXXXXXXXX . Using this Allocation Percentage and the number of XXXXXXXXXX shares outstanding results in the following allocation of XXXXXXXXXX Shares as between members of BCo and members of ACo after the proposed transaction:
XXXXXXXXXX Shares to members of BCo, XXXXXXXXXX percent; and
XXXXXXXXXX Shares to members of ACo, XXXXXXXXXX percent.
Proposed Transactions:
18. The balance of the consideration payable to BCo will be settled by way of issuing XXXXXXXXXX Shares and cash. The parties estimate that the number of XXXXXXXXXX Shares that wil be issued to BCo is XXXXXXXXXX based on information available as of XXXXXXXXXX
19. Subsequent to the Combination, BCo will distribute the XXXXXXXXXX Shares and a substantial portion of the XXXXXXXXXX Shares to its members such that BCo's members will own that part of the equity interest directly.
20. As part of the Combination, and prior to the sale by BCo of its assets, ACo will amend the constitution such that the XXXXXXXXXX Shares have a par value of $XXXXXXXXXX per share and have a non-cumulative dividend entitlement. The amendments will further provide that holders of the XXXXXXXXXX Shares are entitled to a fixed redemption of $XXXXXXXXXX per share upon redemption of the XXXXXXXXXX Shares, or upon the liquidation, dissolution or winding-up of BCo.
21. ACo will declare and pay a stock dividend (the "Stock Dividend") of XXXXXXXXXX Shares to the holders of the XXXXXXXXXX Shares (collectively, the "Recipients"). The Stock Dividend will be paid on the basis of one XXXXXXXXXX Share per fixed number of XXXXXXXXXX Shares held by the member, as predetermined by formula. Fractional shares, if any, will be paid out in cash. Because the number of XXXXXXXXXX Shares issued and outstanding is nominal, it is expected that holders of the XXXXXXXXXX Shares will receive cash instead of XXXXXXXXXX Shares.
Purpose of the Proposed Transactions:
22. The overriding purpose of the Proposed Transactions is to carry out the Combination in accordance with its negotiated terms. The result of the issuance of a XXXXXXXXXX stock dividend to members of ACo will be that the proportional interest of members of both ACo and BCo is represented in the ownership and governance of the combined operations.
23. The Stock Dividend of XXXXXXXXXX Shares to ACo member credit unions is required to avoid the need for a significant capital injection.
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 Stock Dividend will be a "stock dividend" as defined by subsection 248(1) of the Act, the amount of which, pursuant to the definition of "amount" in subsection 248(1) of the Act, will be the amount by which the paid-up capital of the XXXXXXXXXX Shares is increased by reason of the payment of the Stock Dividend, as described in 21 above.
B. By virtue of subsections 137(4.1) and (4.2) of the Act, which deem an amount paid or payable by a credit union to a member in respect of a share of the credit union to be paid or payable as interest and not as a dividend, Part VI.1 will not apply upon the payment of the Stock Dividend.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided the proposed transactions are completed on or before XXXXXXXXXX .
The ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments to the Act.
Nothing in this letter should be construed as implying that the CRA has reviewed or is making a determination or ruling in respect of:
a) the determination of the adjusted cost base, paid-up capital or fair market value of any Shares referred to herein;
b) the application of subsection 15(1.1) of the Act to the Proposed Transactions;
c) any tax consequences in respect of the Combination; nor
d) any tax consequences in relation to any facts or proposed transactions referred to herein other than those specifically described in the rulings given.
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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