30 November 1995 Ruling 9627733 - GAAR

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Application of GAAR to sale of assets of U.S. owned Candadian company followed by sale of shares to gain treaty exemption.

Position:

GAAR not Appliccable

Reasons:

no avoidance transaction - see issue sheet at end of ruling

XXXXXXXXXX 3-962773

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sir:

Re: XXXXXXXXXX
Advance Ruling Request

This is in response to your letter of XXXXXXXXXX in which you requested an advance ruling on behalf of XXXXXXXXXX. We also acknowledge your letters of XXXXXXXXXX, and our telephone discussions in connection therewith.

To the best of your knowledge and that of XXXXXXXXXX, none of the issues discussed in this letter are being considered by a tax services office or taxation centre in connection with a tax return already filed nor are any of these issues presently under objection.

The business number of XXXXXXXXXX files its tax returns at the XXXXXXXXXX taxation centre and is under the jurisdiction of the XXXXXXXXXX tax services office.

Unless otherwise expressly stated all references herein to statutory provisions relate to the Income Tax Act (Canada) (the "Act") and all references to dollars or $ refer to Canadian dollars.

FACTS

1.XXXXXXXXXX was incorporated on XXXXXXXXXX under the Canada Business Corporations Act (the "CBCA") and is a taxable Canadian corporation and a private corporation as defined in subsection 89(1). The taxation year of XXXXXXXXXX ends on XXXXXXXXXX of each year. The authorized share capital of XXXXXXXXXX consists of an unlimited number of Class XXXXXXXXXX Voting Common Shares ("Class XXXXXXXXXX Shares") and an unlimited number of Class XXXXXXXXXX Non-Voting Common Shares ("Class XXXXXXXXXX Shares") (collectively the "Shares") of XXXXXXXXXX. The Class XXXXXXXXXX Shares are not entitled to dividends.

2.XXXXXXXXXX has issued long term debentures (the "Debentures") to the holders of Class XXXXXXXXXX Shares. A substantial percentage (approximately XXXXXXXXXX%) of the Class XXXXXXXXXX Shares and the Debentures are held by U.S. pension funds as described in paragraph 2 of Article XXI of the Canada-U.S. Tax Convention (the "Treaty"). Approximately XXXXXXXXXX% of the Class XXXXXXXXXX Shares and Debentures are held by a scientific, educational or charitable organization as described in paragraph 1 of Article XXI of the Treaty. The funds borrowed on the issuance of the Debentures were used to purchase fixed assets and form part of the permanent or fixed capital of XXXXXXXXXX. As at XXXXXXXXXX the principal amount of the outstanding Debentures was approximately $XXXXXXXXXX. The salient terms of the Debentures include the following:

(a) the Debentures are payable in U.S. dollars fifteen years from the date of issue which is in the period of XXXXXXXXXX;

(b) the Debentures bear interest at XXXXXXXXXX% per annum payable on a XXXXXXXXXX basis;

(c) XXXXXXXXXX is entitled, if the after-tax cash flow is not sufficient to make interest payments, to satisfy interest payments by issuing additional Debentures valued at an amount equal to XXXXXXXXXX% of the principal amount thereof, and Class XXXXXXXXXX Shares at a price per share determined by the Board of Directors to be the fair market value of the shares on the interest payment date in a XXXXXXXXXX ratio to the Debenture holders.

3.Under a Unit Subscription Agreement, the investors have subscribed for units at $XXXXXXXXXX U.S. per unit consisting of $XXXXXXXXXX U.S. of Debentures and $XXXXXXXXXX U.S. of Class XXXXXXXXXX Shares (XXXXXXXXXX Class XXXXXXXXXX Shares at a price of $XXXXXXXXXX U.S. per share) in a XXXXXXXXXX ratio. XXXXXXXXXX received commitments for unit subscriptions totaling $XXXXXXXXXX U.S. ($XXXXXXXXXX U.S. of debentures and XXXXXXXXXX Class XXXXXXXXXX Shares at $XXXXXXXXXX U.S. per share). At XXXXXXXXXX% of the subscriptions were paid for and Debentures and Class XXXXXXXXXX Shares were issued. No further subscriptions were called for after XXXXXXXXXX and pursuant to the Unit Subscription Agreement, subscriber obligations to make any further subscriptions terminated in XXXXXXXXXX. At XXXXXXXXXX U.S. of Debentures and $XXXXXXXXXX U.S. Class XXXXXXXXXX Shares were issued and outstanding. Class XXXXXXXXXX Shares are issued equal to XXXXXXXXXX% of the Class XXXXXXXXXX Shares issued pursuant to subscription calls. Class XXXXXXXXXX Shares were issued for $XXXXXXXXXX U.S. per share. The Shares and Debentures are currently held as shown in Schedule A to this letter.

4.Upon "payout", as defined in XXXXXXXXXX Articles: (i) each Class XXXXXXXXXX Share may be converted to a Class XXXXXXXXXX Share; and (ii) the Class XXXXXXXXXX shareholders have a call option (the "Options") to purchase, in the aggregate, XXXXXXXXXX% of the then outstanding Debentures at a price of $XXXXXXXXXX U.S. for each $XXXXXXXXXX U.S. principal amount of Debentures.

5.XXXXXXXXXX is engaged in the business of XXXXXXXXXX All of XXXXXXXXXX assets are located in XXXXXXXXXX. The assets of XXXXXXXXXX include working capital, XXXXXXXXXX and tangible depreciable property. The single most valuable asset of

XXXXXXXXXX

As at XXXXXXXXXX the principal “tax pools” of XXXXXXXXXX were as follows:

Non-Capital Loss Carryforward

XXXXXXXXXX

Total Undepreciated
Capital Cost: $ XXXXXXXXXX

XXXXXXXXXX

Total NCL, UCC &
XXXXXXXXXX $XXXXXXXXXX

6. XXXXXXXXXX

7.XXXXXXXXXX holds approximately XXXXXXXXXX% of the issued and outstanding Class XXXXXXXXXX Shares, XXXXXXXXXX% of the issued and outstanding Class XXXXXXXXXX Shares and XXXXXXXXXX% of the issued and outstanding Options. XXXXXXXXXX deals at arm's length, for purposes of the Act, with XXXXXXXXXX and each of the Investors (other than itself). XXXXXXXXXX is a taxable Canadian corporation and a public corporation as defined in subsection 89(1). Canco is a taxable Canadian corporation as defined in subsection 89(1) and a subsidiary wholly-owned corporation of a corporation incorporated and resident in the United States. Canco deals at arm's length, for purposes of the Act, with XXXXXXXXXX and each of the Investors.

8.The shareholders of XXXXXXXXXX have or will request clearance certificates from the XXXXXXXXXX Tax Services office under subsection 116(1) in respect of the proposed disposition, as described below, of the Class XXXXXXXXXX Shares and Class XXXXXXXXXX Shares.

9.None of the holders of the Debentures or Options uses those Debentures or Options in a business carried on in Canada.

PROPOSED TRANSACTIONS

10.XXXXXXXXXX will conclude negotiations in respect of a definitive agreement (the "Asset Sale Agreement") for the disposition, on a taxable basis, of XXXXXXXXXX and certain working capital associated therewith (collectively the "Assets") to XXXXXXXXXX. It is anticipated that the sale price for the Assets, after all adjustments, will be approximately $XXXXXXXXXX. The purchase price for the Assets will be payable in cash.

11.The Investors will conclude negotiations in respect of a definitive agreement (the "Share Sale Agreement") for the disposition, on a taxable basis, of all of the issued and outstanding Class XXXXXXXXXX Shares, Class XXXXXXXXXX Shares, Debentures and Options. It is anticipated that the aggregate proceeds of disposition for the Class XXXXXXXXXX Shares, Class XXXXXXXXXX Shares, Debentures and Options after all adjustments, including adjustments in respect of the net working capital of XXXXXXXXXX, will be approximately $XXXXXXXXXX. Conditions to the closing of the transactions contemplated by the Share Sale Agreement will include the closing of the sale of the Assets as contemplated by the Asset Sale Agreement.

12.Debentures will be converted into Canadian dollars. This conversion will be implemented as a prepayment and cancellation of the existing Debentures by the issue of a new series of debentures denominated in Canadian dollars.

13.XXXXXXXXXX will dispose of the Assets pursuant to the Asset Sale Agreement to XXXXXXXXXX. XXXXXXXXXX will not dispose of the Assets to XXXXXXXXXX or to any party that does not deal at arm's length with XXXXXXXXXX

14.Within a reasonable period of time of receiving the certificates described in section 116, the Investors will dispose of the Shares, Debentures and Options pursuant to and in the manner contemplated by the Share Sale Agreement. This will take place as follows (note that capitalized terms have the meaning set out in the Share Sale Agreement):

i) At closing, the Purchaser will purchase the Purchased Shares for an aggregate purchase price estimated to be approximately $XXXXXXXXXX (after costs related to the disposition). The allocation of the purchase price is not part of the Share Sale Agreement. However it is anticipated that this amount will be allocated between the holders of Class XXXXXXXXXX Shares and Class XXXXXXXXXX Shares approximately as follows:

Class XXXXXXXXXX Shareholders - $XXXXXXXXXX

Class XXXXXXXXXX Shareholders - $XXXXXXXXXX

ii) At closing the Option will be terminated. There is no specific amount paid under the Share Sale Agreement to terminate the Options. This allocation is not being done for tax reasons. Rather, the amount paid to the Class XXXXXXXXXX Shareholders includes an amount representing the value of the Options. Inasmuch as the Class XXXXXXXXXX Shares and Options were acquired for a nominal amount, virtually all of the proceeds received on the disposition of the Class XXXXXXXXXX Shares and on the termination of the Options will represent a capital gain.

iii) It is anticipated that XXXXXXXXXX will choose to repay the Debentures (defined under the Share Sale Agreement to be replacement debentures issued under the Debenture Prepayment Agreement) within a reasonably short period of time following Closing. On the Business Day immediately following Closing, the Representative has the right to demand that the Debentures be repaid. If XXXXXXXXXX has not already repaid the Debentures, it is anticipated that the Representative will make such a demand and the Debentures will be repaid shortly thereafter.

PURPOSE OF THE PROPOSED TRANSACTIONS

15.The overriding purpose of the proposed transactions, in general terms, is to facilitate the disposition of the business carried on by XXXXXXXXXX for the highest and best aggregate purchase price. The bidding process, as described above, and, in particular, the offers received from XXXXXXXXXX and Canco, indicate that this necessarily involves a two-part disposition to distinct purchasers. It is to be noted that the aggregate proceeds of disposition in respect of the Shares, Options and Debentures pursuant to the proposed transactions (approximately $XXXXXXXXXX) exceeds the offer of $XXXXXXXXXX for the Shares and Debentures of XXXXXXXXXX (XXXXXXXXXX) by approximately $XXXXXXXXXX. This increase in gross proceeds of disposition far exceeds any possible "tax benefit" arising from the two-part structure (the amount of a potential tax benefit is discussed below).

16.The purpose of disposing of the Assets separately from the remaining business of XXXXXXXXXX is to maximize, by a substantial amount, the gross proceeds received on the disposition. With the elimination of the "purchase butterfly", a two-part transaction requires that at least one part be implemented as a taxable sale of assets. The disposition of the Assets will result in the following income tax consequences:

(a)recapture of capital cost allowance pursuant to subsection 13(1) equal to the difference between the aggregate cost of the Assets and the aggregate undepreciated capital cost balance of the relevant CCA pools in the approximate aggregate amount of $XXXXXXXXXX; and

(b)capital gain pursuant to subsection 39(1) equal to the difference between the proceeds of disposition (net of costs of disposition) and the aggregate cost of the Assets to XXXXXXXXXX in the approximate amount of $XXXXXXXXXX.

17.The purpose of disposing of the Shares, Debentures and Options is to facilitate the overall purpose of the Investors, namely the disposition of their investment in XXXXXXXXXX. It is submitted that this disposition will result in the following principal income tax consequences:

(a)The disposition of the Class XXXXXXXXXX Shares will result in an acquisition of control of XXXXXXXXXX and:

(i) a deemed end to the taxation year of XXXXXXXXXX immediately before the acquisition of control pursuant to subsection 249(4); and

(ii) the resource deductions of XXXXXXXXXX will become subject to the successor rules pursuant to subsection 66.7(10).

(b)The holders of the Shares will realize capital gains on the disposition of such shares in amounts equal to the difference between the proceeds of disposition and the adjusted cost base of such shares. It is estimated that XXXXXXXXXX will realize a capital gain on the disposition of its Shares, Options and Debentures in the approximate amount of $XXXXXXXXXX. The Shares will be taxable Canadian property as defined in subsection 248(1) to the non-resident holders.

(c)It is submitted that the gains recognized by residents of the U.S. on the disposition of the Shares will be exempt from tax in Canada pursuant to paragraph 4 of Article XIII of the Treaty. This is because, at the time of the disposition of the Shares, the value of such shares will be derived principally from non-real property assets, including the cash and near cash assets of XXXXXXXXXX, and not from real property situated in Canada. In particular, as described in Schedule "B" hereto it is anticipated that at the time of the sale of the Shares, the fair market value of real property situated in Canada will be approximately $XXXXXXXXXX and the cash and near cash owned by XXXXXXXXXX will be approximately $XXXXXXXXXX.

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:

A.The Debentures and Options will not be taxable Canadian property as defined in subsection 248(1).

B.Provided that at the time of the disposition of the shares, the fair market value of the cash and near cash assets and other non-real-property assets of XXXXXXXXXX exceeds the fair market value of the real property situated in Canada owned by XXXXXXXXXX, the value of the XXXXXXXXXX shares will not be derived principally from real property situated in Canada and a gain on the disposition of the Class XXXXXXXXXX Shares or Class XXXXXXXXXX Shares realized by a resident of the U.S. will therefore be exempt from taxation in Canada pursuant to Article XIII of the Treaty.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990 and are binding provided that the Proposed Transactions are completed before XXXXXXXXXX

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

Nothing in this letter should be construed as confirmation of the tax consequences of any of the transactions described in this letter other than as described in Rulings A and B above. In particular:

a.We make no comment as to whether the conversion of the Debentures, descibed in paragraph 12 will result in XXXXXXXXXX being deemed to realize a loss described in paragraph 39(2)(b);

b.We make no comment regarding whether interest paid or payable by XXXXXXXXXX on the Debentures constitutes a reasonable amount and is or has been deductible under paragraph 20(1)(c) in computing its income; and

c.In our view the cost of the Class XXXXXXXXXX Shares acquired by the Purchaser will be the amount paid less the fair market value of the Options.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch