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:
Would shares be considered to be "substituted property" for purposes of 88(1)(c.3).
Position:
No, falls into exception in 88(1)(c.3). See issue sheet for full discussion.
Reasons:
XXXXXXXXXX 3-971653
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Opinion Request
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax opinion on behalf of the above-noted taxpayers.
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the requested opinion is being considered by a taxation services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.
DEFINITIONS
"Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), as amended. All statutory references in this letter are to the Act, unless stated otherwise.
"Electing Shareholders" has the meaning assigned in Paragraph 10.
"Paragraph" refers to a numbered paragraph in this letter.
"Private Corporation" has the meaning assigned in subsection 89(1).
"Proposed Transactions" means the transactions described in Paragraphs 1-20.
"Public Corporation" has the meaning assigned in subsection 89(1).
"PUC" has the meaning assigned in subsection 89(1).
"Taxable Canadian Corporation" has the meaning assigned in subsection 89(1).
FACTS AND PROPOSED TRANSACTIONS
1. XXXXXXXXXX, has recently incorporated XXXXXXXXXX ("Bidco") under the Ontario Business Corporations Act ("OBCA").
2. XXXXXXXXXX will contribute $XXXXXXXXXX respectively to Bidco for a combination of common shares, subordinate debt and/or preferred shares.
3. XXXXXXXXXX will incorporate a new Canadian company ("Tempco") with nominal share capital, pro rata on the same basis as their equity participation in Bidco. Tempco will be a Taxable Canadian Corporation.
4. Tempco will form a wholly-owned U.S. subsidiary, ("U.S. AcquisitionCo.").
5. U.S. AcquisitionCo. will subscribe for special shares of Bidco. The value of these shares will equal the value of the U.S. subsidiaries described in Paragraph 6.
6. XXXXXXXXXX is a Public Corporation and a Taxable Canadian Corporation. XXXXXXXXXX current taxation year-end is XXXXXXXXXX. Its federal Business Number is XXXXXXXXXX. It has one Canadian subsidiary, XXXXXXXXXX, and a wholly-owned U.S. subsidiary, XXXXXXXXXX ("U.S. Subco") which in turn has three wholly-owned U.S. subsidiaries, XXXXXXXXXX.
XXXXXXXXXX also has a wholly-owned XXXXXXXXXX subsidiary, XXXXXXXXXX which has two wholly-owned subsidiaries, XXXXXXXXXX. These two subsidiaries in turn have investments in a number of other corporations in XXXXXXXXXX Europe, directly and indirectly XXXXXXXXXX, XXXXXXXXXX.
7. XXXXXXXXXX, an individual resident in Canada, is currently the largest individual shareholder of XXXXXXXXXX. He owns XXXXXXXXXX shares of XXXXXXXXXX personally, and XXXXXXXXXX through a holding company, XXXXXXXXXX. His investment represents an approximately XXXXXXXXXX% interest in XXXXXXXXXX.
8. XXXXXXXXXX will transfer all of his shares of XXXXXXXXXX to a holding company ("XXXXXXXXXX") prior to closing. This step may be undertaken by XXXXXXXXXX as part of his own personal tax planning relating to the transaction and does not form part of Bidco’s acquisition structure or plan.
9. Bidco will acquire all the common shares of XXXXXXXXXX through a transaction that will be implemented pursuant to an arrangement under section 182 of the OBCA. Under the arrangement, all of XXXXXXXXXX shareholders will be permitted to elect to receive a stock dividend prior to the sale of their shares to Bidco. As well, certain XXXXXXXXXX shareholders of XXXXXXXXXX will be allowed to exchange their shares of XXXXXXXXXX for shares of Bidco on a tax-deferred basis pursuant to subsection 85(1).
10. The plan of arrangement will provide that the following steps will occur in the following order:
a. All shareholders of XXXXXXXXXX, except those who elect to receive a stock dividend ("Electing Shareholders") and except certain XXXXXXXXXX shareholders, will sell their shares for $XXXXXXXXXX cash per share.
b. Certain XXXXXXXXXX shareholders (except Electing Shareholders) will exchange their shares of XXXXXXXXXX for shares of Bidco pursuant to subsection 85(1). The shares of Bidco they receive will consist of common shares and preferred shares with a fixed redemption amount and fixed dividend rate.
c. Electing Shareholders will receive a series of stock dividends totalling $XXXXXXXXXX per share (XXXXXXXXXX) to be paid in common shares of XXXXXXXXXX.
d. The then existing shareholders (XXXXXXXXXX) will tender their shares for $XXXXXXXXXX cash per share, the same total cash equivalent as if they had sold their shares for $XXXXXXXXXX per share immediately before the stock dividend.
e. The remaining XXXXXXXXXX shareholders will exchange their shares of XXXXXXXXXX for shares of Bidco pursuant to subsection 85(1). The shares of Bidco they receive will consist of common shares and preferred shares with a fixed redemption amount and fixed dividend rate (identical to the shares to be received by XXXXXXXXXX described in Paragraph 10(b)).
11. In effect, the election provides all shareholders a choice between receiving a capital gain and a dividend on acquisition. It is expected that most shareholders will not make the election, and will tender their shares of XXXXXXXXXX to Bidco prior to the stock dividend. Bidco will likely acquire control of XXXXXXXXXX at that time. Accordingly, Bidco will be a shareholder of XXXXXXXXXX at the time of payment of the stock dividend.
12. As part of the arrangement described in Paragraph 10, XXXXXXXXXX will exchange $XXXXXXXXXX worth of its shares of XXXXXXXXXX for shares of Bidco pursuant to subsection 85(1) and will sell the balance of its shares for cash, likely after the stock dividend. The Bidco shares received will consist of common shares and preferred shares with a fixed redemption amount and fixed dividend rate.
13. As outlined above, XXXXXXXXXX will be given the opportunity to exchange their shares of XXXXXXXXXX for shares of Bidco pursuant to subsection 85(1). The shares of Bidco they receive will consist of common shares and preferred shares with a fixed redemption amount and fixed dividend rate.
XXXXXXXXXX
14. XXXXXXXXXX currently hold a portion of their shareholdings of XXXXXXXXXX in their RRSPs. It is not expected that the shares of Bidco will be a qualified investment for RRSP purposes. Consequently, those individuals will purchase the shares of XXXXXXXXXX held by their RRSPs for cash and then, as part of the arrangement, exchange their shares of XXXXXXXXXX for shares of Bidco.
15. Bidco will not have at any time prior to the acquisition of XXXXXXXXXX, any rights to shares of XXXXXXXXXX, as described in paragraph 251(5)(b).
16. Within the 30 days following the acquisition of XXXXXXXXXX by Bidco, Bidco will either commence the wind-up of, or amalgamate with, XXXXXXXXXX.
17. Bidco will redeem its shares held by U.S. Acquisition Co. through a distribution of the shares of U.S. Subco. For the purposes of subsection 84(3), the redemption amount will not exceed the PUC of the Bidco shares so redeemed.
18. XXXXXXXXXX will transfer their shares of Tempco to Bidco either for shares of Bidco or for cash.
19. Bidco will amalgamate with Tempco.
20. U.S. AcquisitionCo., U.S. Subco, and possibly one or more of the U.S. operating subsidiaries, will be merged. The merger will be done on a tax-deferred basis for both Canadian and U.S. purposes and will match the acquisition debt to the underlying U.S. assets.
PURPOSE OF THE PROPOSED TRANSACTIONS
21. The purpose of Tempco in the structure is to avoid a U.S. distribution of earnings and profits on the proposed refinancing of the U.S. operations.
XXXXXXXXXX
XXXXXXXXXX
Tempco is simply the Canadian holding company incorporated by the equity investors for Bidco to form the U.S. AcquisitionCo. It is a temporary entity for this purpose, and is eliminated subsequent to the distribution of the shares of U.S. Subco to U.S. AcquisitionCo.
There are two reasons that the equity investors subscribe for shares of Tempco instead of directly for shares of U.S. AcquisitionCo. First it provides a single vehicle through which all three investors can hold their shares of U.S. AcquisitionCo. and XXXXXXXXXX.
22. XXXXXXXXXX will transfer all of his shares of XXXXXXXXXX into a holding company for the purpose of accessing his share of the "safe income" of XXXXXXXXXX.
23. The plan of arrangement allows XXXXXXXXXX shareholders of XXXXXXXXXX to exchange their shares of XXXXXXXXXX for shares of Bidco pursuant to subsection 85(1). This option is available for both electing and non-electing XXXXXXXXXX shareholders. The intention is to enable XXXXXXXXXX shareholders to retain their investment in XXXXXXXXXX on a tax-efficient basis.
The Bidco shares received on the exchange will consist of a combination of common shares and preferred shares with a fixed redemption amount and fixed dividend rate. The preferred shares allow the XXXXXXXXXX shareholders to fix a value and a return to a portion of their investment, while maintaining an interest in the growth of the company through the common shares.
24. Pursuant to the plan of arrangement, all shareholders will be permitted to elect to receive a stock dividend prior to the sale of their shares of XXXXXXXXXX to Bidco. The purpose of this option is to provide shareholders with the choice between receiving a capital gain or a dividend on the disposition of their shares of XXXXXXXXXX.
25. The reason XXXXXXXXXX shareholders who hold shares of XXXXXXXXXX in their RRSPs purchase those shares for cash prior to exchanging them for shares of XXXXXXXXXX is to fit within the exception in subparagraph 88(1)(c.3)(i) for "shares of the capital stock of the parent issued by the parent as consideration for the acquisition of the shares of the capital stock of the subsidiary by the parent". Since the shares of Bidco will not be qualified investments for RRSP purposes it was not possible, without having the XXXXXXXXXX shareholders purchase the XXXXXXXXXX shares held by their RRSPs, to make the exchange.
26. The purpose of the wind-up or amalgamation of Bidco and XXXXXXXXXX is to match the acquisition debt from Bidco with XXXXXXXXXX. One consequence of the proposed wind-up is to obtain a step-up to Bidco of the cost of selected assets of XXXXXXXXXX, particularly its U.S. and XXXXXXXXXX subsidiaries. This bump in cost is relevant to Bidco's ability to "transfer" a portion of its acquisition debt from Bidco to subsidiaries in the U.S.
27. The purpose of XXXXXXXXXX exchanging their shares of Tempco either for shares of Bidco or for cash is to move U.S. Subco "below" Bidco to ensure that XXXXXXXXXX have an interest in U.S. Subco without winding-up Bidco.
28. The merger of U.S. AcquisitionCo and one or more of the U.S. operating subsidiaries matches the acquisition debt to the underlying assets.
OPINION
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 and provided that subsection 88(1) is amended in the manner proposed in Bill C-69, which received first reading on December 2, 1996 but which was not passed, it is our opinion that the shares of Bidco, acquired by XXXXXXXXXX shareholders as described in Paragraphs 10(b) and 10(e), will not be considered to be "property distributed to the parent on the winding-up" or "property acquired by any person in substitution therefor" within the meaning of clause 88(1)(c)(vi)(B) and paragraph 88(1)(c.3).
1. Nothing in this letter should be construed as implying that Revenue Canada has reviewed, or agreed to, the tax consequences of the Proposed Transactions other than as specifically provided in the opinion above.
2. In particular, it is our view that if subsection 88(1) is amended in the manner proposed in Bill C-69, which received first reading on December 2, 1996 but which was not passed, the acquisition by XXXXXXXXXX of shares of XXXXXXXXXX both from XXXXXXXXXX and through the payment of the stock dividend from XXXXXXXXXX, and the acquisition of the shares of XXXXXXXXXX, would result in any property distributed to Bidco on the winding up of XXXXXXXXXX being considered to be ineligible property for the purposes of subparagraph 88(1)(c) if any such acquisition occurs as part of the same series of transactions as the winding-up.
3. In addition, we express no view as to whether the merger described in Paragraph 21 or the merger described in Paragraph 22 would be a foreign merger within the meaning of subsection 87(8.1).
This opinion is given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada.
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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