2003 Ruling 2003-0015903 - XXXXXXXXXX

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 CCRA.

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

Principal Issues: Spin-off of the shares of a subsidiary of a public corporation ("Parent") by way of a reduction of paid-up capital of the parent's shares. Whether subsection 84(4.1) applies or subsection 84(2).

Position: Favourable Rulings issued.

Reasons: In compliance with the law.

XXXXXXXXXX 2003-001590

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. You have advised us that to the best of your knowledge and that of the taxpayer involved none of the issues involved in this ruling is:

(i) in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office ("TSO") or taxation centre ("TC") 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;

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(iv) the subject to a ruling previously issued by the Income Tax Rulings Directorate.

The taxpayer has also represented that the proposed transactions described herein will not result in Aco or its subsidiaries being unable to pay their outstanding tax liabilities.

DEFINITIONS

In this letter all monetary amounts are expressed in Canadian dollars and the following terms have the meanings specified:

(a) "A Co" means XXXXXXXXXX, and is more fully described in Paragraphs 1 and 2;

(b) "A Co XXXXXXXXXX Group" means A Co and entities directly or indirectly controlled by it that carry on or support the XXXXXXXXXX Operations;

(c) "A Co Class A Share" means a Class A XXXXXXXXXX Share of A Co, as described in Paragraphs 4 and 5;

(d) "A Co Class A Shareholder" means a holder of A Co Class A Shares;

(e) "A Co Class B Share" means a Class B Share of A Co, as described in Paragraphs 4 and 5;

(f) "A Co Class B Shareholder" means a holder of A Co Class B Shares;

(g) "A Co Group" means A Co and entities directly or indirectly controlled by it;

(h) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act;

(i) "adjusted cost base" has the meaning assigned by section 54;

(j) "arm's length" has the meaning assigned by section 251;

(k) "XXXXXXXXXX Operations" has the meaning assigned by Paragraph 2;

(l) "B Co" means XXXXXXXXXX, and is more fully described in Paragraph 7;

(m) "B Co Common Shares" means the voting common shares of B Co, as described in Paragraph 7;

(n) "B Co Group" means B Co and entities directly or indirectly controlled by it that carry on or support the XXXXXXXXXX Operations;

(o) "B Co Group Debt" means the indebtedness owed by members of the B Co Group to non-B Co Group members of the A Co Group, as described in Paragraph 12;

(p) "C Co" means XXXXXXXXXX, and is more fully described in Paragraph 14;

(q) "C Co Class A Share" means a share of the Class A XXXXXXXXXX stock of C Co, as described in Paragraph 15;

(r) "C Co Class B Share" means a share of the Class B stock of C Co, as described in Paragraph 15;

(s) "C Co Operations" means the activities described in Paragraph 3(b);

(t) "Canadian corporation" has the meaning assigned by subsection 89(1);

(u) "Canadian XXXXXXXXXX Property" means the XXXXXXXXXX property (XXXXXXXXXX) situate in Canada that will be held directly and indirectly by Newco immediately following the Proposed Transactions, substantially all of which is currently owned by the Canadian Subs;

(v) "Canadian Subs" means (collectively) H Co, I Co and D Co, which together presently own all or substantially all of the Canadian XXXXXXXXXX Property;

(w) "capital property" has the meaning assigned by section 54;

(x) "Capitalized Retained Earnings" means the amount by which the retained earnings of A Co are reduced and added to the stated capital of the A Co Class B Shares, as described in Paragraph 24;

(y) "CCRA" means the Canada Customs and Revenue Agency;

(z) "Class A Capital Return" means the distribution of Newco Class A Shares (and cash in lieu of fractional shares) effected as a reduction of stated capital on the A Co Class A Shares, as described in Paragraph 25;

(aa) "Class A PUC" means the aggregate paid-up capital of the A Co Class A Shares, immediately prior to the Proposed Transactions;

(bb) "Class B Capital Return" means the distribution of Newco Class B Shares (and cash in lieu of fractional shares) effected as a reduction of stated capital on the A Co Class B Shares, as described in Paragraph 24;

(cc) "Class B PUC" means the aggregate paid-up capital of the A Co Class B Shares, immediately prior to the Proposed Transactions;

(dd) "D Co" means XXXXXXXXXX;

(ee) "E Co" means XXXXXXXXXX, and is more fully described in Paragraph 10;

(ff) "Effective Date" means the effective date of the Proposed Transactions;

(gg) "F Co" means XXXXXXXXXX, and is more fully described in Paragraph 6;

(hh) "F Co Group" means F Co and persons related thereto within the meaning of the Act;

(ii) "fair market value" means the highest price available in an open and unrestricted market between informed, prudent parties acting at arm's length and under no compulsion to act;

(jj) "Forcos" means the various XXXXXXXXXX entities that collectively own substantially all of the Foreign XXXXXXXXXX Property;

(kk) "Foreign XXXXXXXXXX Property" means the XXXXXXXXXX property (XXXXXXXXXX) situate outside Canada and the United States ("U.S.") that will be held indirectly by Newco (through the Forcos) immediately following the Proposed Transactions, substantially all of which is currently owned by the Forcos;

(ll) "G Co" means XXXXXXXXXX, and is more fully described in Paragraph 19;

(mm) "H Co" means XXXXXXXXXX;

(nn) "I Co" means XXXXXXXXXX;

(oo) "J Co" means XXXXXXXXXX, and is more fully described in Paragraph 18;

(pp) "K Co" means XXXXXXXXXX;

(qq) "Newco" means the taxable Canadian corporation formed on the amalgamation of B Co, J Co, H Co and I Co, as described in Paragraph 23;

(rr) "Newco Class A Share" means a Class A XXXXXXXXXX Share of Newco, as described in Paragraph 23;

(ss) "Newco Class A Shareholder" means a holder of Newco Class A Shares;

(tt) "Newco Class B Share" means a Class B Share of Newco, as described in Paragraph 23;

(uu) "Newco Class B Shareholder" means a holder of Newco Class B Shares;

(vv) "Non-XXXXXXXXXX Operations" means the C Co Operations and the XXXXXXXXXX Operations;

(ww) XXXXXXXXXX;

(xx) "paid-up capital" has the meaning assigned by subsection 89(1);

(yy) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;

(zz) "Proposed Transactions" means the transactions described in Paragraphs 23 to 25;

(aaa) "public corporation" has the meaning assigned by subsection 89(1);

(bbb) "XXXXXXXXXX Operations" means the activities described in Paragraph 3(a);

(ccc) "stated capital" means stated capital for purposes of XXXXXXXXXX;

(ddd) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(eee) XXXXXXXXXX; and

(fff) "U.S. XXXXXXXXXX Property" means the XXXXXXXXXX property (XXXXXXXXXX) situate in the U.S. that will be held indirectly by Newco (through E Co and its subsidiaries) immediately following the Proposed Transactions, substantially all of which is currently owned directly or indirectly by E Co.

FACTS

Facts Relating to A Co

1. XXXXXXXXXX. A Co is a public corporation and a taxable Canadian corporation. XXXXXXXXXX.

2. A Co (directly or through direct or indirect subsidiaries and jointly-controlled entities) XXXXXXXXXX. These activities are collectively described as the "XXXXXXXXXX Operations".

3. In addition to the XXXXXXXXXX Operations, A Co indirectly carries on non-XXXXXXXXXX operations including:

(a) XXXXXXXXXX. These activities are carried on primarily by the B Co Group as described in Paragraph 8 and are collectively described as the "XXXXXXXXXX Operations". XXXXXXXXXX; and

(b) XXXXXXXXXX. These activities, carried on by C Co and its subsidiaries, are collectively described as the "C Co Operations".

4. A Co has two classes of issued and outstanding common shares. As of XXXXXXXXXX A Co Class A Shares and XXXXXXXXXX A Co Class B Shares were issued and outstanding, representing all of the issued shares of its capital stock. The A Co Class A Shares are listed XXXXXXXXXX, and the A Co Class B Shares are listed on the XXXXXXXXXX.

5. XXXXXXXXXX. The A Co Class A Shares and the A Co Class B Shares participate equally as to dividends and in respect of all of A Co's assets available for distribution on the liquidation, dissolution or winding-up of A Co, without preference, priority or distinction.

6. XXXXXXXXXX, A Co is controlled by F Co XXXXXXXXXX . In addition, A Co Class A Shares and/or A Co Class B Shares are also owned by employees of, and employee benefit plans and management compensatory plans established by, A Co or related corporations. The remaining A Co Class A Shares and A Co Class B Shares are widely held by members of the public.

Facts Relating to XXXXXXXXXX Operations

7. B Co is a taxable Canadian corporation governed by the XXXXXXXXXX. As at XXXXXXXXXX B Co Common Shares were issued and outstanding, all of which were owned by A Co.

8. B Co, directly or through other members of the B Co Group, carries on the XXXXXXXXXX Operations.

9. The principal Canadian subsidiaries of B Co are the Canadian Subs. In addition to owning XXXXXXXXXX, H Co owns all of the issued and outstanding shares in the capital stock of E Co.

10. E Co is a corporation incorporated under the laws of XXXXXXXXXX and resident in XXXXXXXXXX for purposes of the Act that (directly and indirectly) currently owns substantially all of the U.S. XXXXXXXXXX Property.

11. B Co directly or indirectly owns all of the issued and outstanding shares of the Forcos. The Forcos are corporations that are non-residents of Canada (and the U.S.) for purposes of the Act and that directly or indirectly own the Foreign XXXXXXXXXX Property.

12. The Canadian Subs, E Co and the Forcos are indebted to direct or indirect subsidiaries of A Co that are not part of the B Co Group. Such indebtedness is collectively referred to as the "B Co Group Debt".

13. Some of the assets that are part of the XXXXXXXXXX Operations are currently owned by entities in the A Co XXXXXXXXXX Group. Conversely, some of the assets currently owned by the B Co Group are assets other than assets which are used in the XXXXXXXXXX Operations.

Facts Relating to C Co Operations

14. C Co is a corporation incorporated under the laws of XXXXXXXXXX and resident in XXXXXXXXXX for purposes of the Act. C Co carries on the C Co Operations directly or through one or more subsidiaries.

15. C Co has two classes of issued and outstanding capital stock. As of XXXXXXXXXX shares of C Co Class A XXXXXXXXXX stock ("C Co Class A Shares") and XXXXXXXXXX shares of C Co Class B stock ("C Co Class B Shares") XXXXXXXXXX The C Co Class A Shares and the C Co Class B Shares participate equally as to dividends and in respect of all of C Co's assets available for distribution on the liquidation, dissolution or winding-up of C Co, without preference, priority or distinction. The C Co Class A Shares are listed on the XXXXXXXXXX.

16. Through wholly-owned subsidiaries, A Co owns XXXXXXXXXX C Co Class B Shares and XXXXXXXXXX C Co Class A Shares XXXXXXXXXX. These shares are owned by the following entities:

Shareholder
C Co Class A
C Co Class B

J Co
XXXXXXXXXX
XXXXXXXXXX
G Co
XXXXXXXXXX
XXXXXXXXXX
B Co
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

17. The remaining C Co Class A Shares are generally widely held by members of the public, other than XXXXXXXXXX.

18. J Co is a taxable Canadian corporation governed by the XXXXXXXXXX and a wholly-owned subsidiary of A Co. The authorized share capital of J Co consists of an unlimited number of common shares of which XXXXXXXXXX are issued and outstanding. J Co's only material assets are the C Co Class B Shares and C Co Class A Shares as described in Paragraph 16.

19. G Co is a taxable Canadian corporation governed by the XXXXXXXXXX and a wholly-owned subsidiary of B Co. The authorized share capital of G Co consists of an unlimited number of common shares of which XXXXXXXXXX are issued and outstanding. G Co's only material assets are the C Co Class B Shares as described in Paragraph 16.

20. XXXXXXXXXX.

Transactions to be Implemented Prior to the Proposed Transactions

21. Prior to the Effective Date, additional XXXXXXXXXX properties not currently owned by the B Co Group and that are intended to be included in the XXXXXXXXXX Operations will be transferred by members of the A Co XXXXXXXXXX Group to members of the B Co Group. Similarly, prior to the Effective Date, some XXXXXXXXXX properties currently owned by members of the B Co Group and that are not intended to be included in the XXXXXXXXXX Operations will be transferred by members of the B Co Group to members of the A Co XXXXXXXXXX Group. Such transfers may involve the buyer issuing debt to the vendor (in each case being the relevant entities in the A Co XXXXXXXXXX Group or the B Co Group, as the case may be) as consideration for the transferred assets.

22. XXXXXXXXXX.

PROPOSED TRANSACTIONS

On the Effective Date, subject to the appropriate shareholder and regulatory approvals, the following transactions will occur in the order listed below.

23. J Co (all of the shares of which will be owned by A Co), B Co (all of the shares of which will be owned by A Co), H Co (all of the shares of which will be owned by B Co) and I Co (all of the shares of which will be owned by B Co), all of whom are hereinafter referred to as "predecessor corporations", will undertake an amalgamation under the provisions of the XXXXXXXXXX to continue as one new corporation for purposes of the Act ("Newco") in such a manner that:

(a) all of the property (except any amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become property of Newco by virtue of the amalgamation;

(b) all of the liabilities (except any amount payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of Newco by virtue of the amalgamation; and

(c) Newco's articles of amalgamation will authorize share capital consisting of XXXXXXXXXX Class B Shares XXXXXXXXXX (the "Newco Class B Shares"), an unlimited number of Class A XXXXXXXXXX Shares XXXXXXXXXX (the "Newco Class A Shares") and an unlimited number of preference shares (none of which preference shares will be issued on the amalgamation), and (i) all of the issued and outstanding shares of H Co and I Co will be cancelled, and (ii) all of the issued and outstanding shares in the capital stock of J Co and B Co held by A Co immediately prior to the amalgamation will (by virtue of the amalgamation) be converted into, (1) a number of Newco Class A Shares XXXXXXXXXX, and (2) a number of Newco Class B Shares XXXXXXXXXX.

XXXXXXXXXX. The Newco Class A Shares and the Newco Class B Shares will participate equally as to dividends and in respect of all of Newco's assets available for distribution on the liquidation, dissolution or winding-up of Newco, without preference, priority or distinction.

Distribution of Newco Shares by A Co

24. The retained earnings of A Co will be reduced by an amount that will be added to the stated capital (and hence the paid-up capital) of the A Co Class B Shares as a capitalization of a portion of the retained earnings of A Co. The amount of A Co retained earnings so capitalized will be equal to the excess of the aggregate fair market value of the Newco Class B Shares to be received by the A Co Class B Shareholders as described below in this Paragraph (plus the cash value of all fractional Newco Class B Shares that would otherwise have been issued to all registered holders of A Co Class B Shares XXXXXXXXXX over the Class B PUC. A Co will then distribute the Newco Class B Shares to the A Co Class B Shareholders. XXXXXXXXXX , and to the extent that an A Co Class B Shareholder XXXXXXXXXX would otherwise be entitled to a fraction of a Newco Class B Share, such shareholder will instead receive the cash equivalent of the fractional share. Such distribution (the "Class B Capital Return") will be effected as a reduction of the stated capital of the A Co Class B Shares, duly authorized by the board of directors of A Co and approved by a vote of the A Co shareholders. The amount of the stated capital reduction on the A Co Class B Shares will be the aggregate fair market value of the Newco Class B Shares received by the A Co Class B Shareholders (plus the cash value of all fractional Newco Class B Shares that would otherwise have been issued to all registered holders of A Co Class B Shares XXXXXXXXXX.

25. A Co will distribute the Newco Class A Shares to the A Co Class A Shareholders. XXXXXXXXXX, and to the extent that an A Co Class A XXXXXXXXXX would otherwise be entitled to a fraction of a Newco Class A Share, such shareholder will instead receive the cash equivalent of the fractional share. Such distribution (the "Class A Capital Return") will be effected as a reduction of the stated capital of the A Co Class A Shares, duly authorized by the board of directors of A Co and approved by a vote of the A Co shareholders. The amount of the stated capital reduction on the A Co Class A Shares will be the aggregate fair market value of the Newco Class A Shares received by the A Co Class A Shareholders (plus the cash value of all fractional Newco Class A Shares that would otherwise have been issued to all registered holders of A Co Class A Shares XXXXXXXXXX

PURPOSE OF THE PROPOSED TRANSACTIONS

26. The purpose of the Proposed Transactions in general is to separate the XXXXXXXXXX Operations of A Co from the Non-XXXXXXXXXX Operations. A Co believes that it is in the best interests of its shareholders that A Co "spin off" the Non-XXXXXXXXXX Operations to the A Co Class A Shareholders and the A Co Class B Shareholders for the following reasons:

(a) the separation of the Non-XXXXXXXXXX Operations from the A Co Group XXXXXXXXXX Operations is intended to increase shareholder value, since it is anticipated that the A Co Group XXXXXXXXXX Operations and Newco (together with entities it controls) will achieve higher valuations operating independently of each other;

(b) the separation of the Non-XXXXXXXXXX Operations from A Co will facilitate Newco's access to financing for ongoing and future business prospects relating to such operations;

(c) as a separate public company, Newco will be better able to develop profit-based compensation programs for its management and employees; and

(d) the separation will permit the A Co Group to focus on its core XXXXXXXXXX Operations.

27. The purpose for the increase in the stated capital of the A Co Class B Shares is XXXXXXXXXX.

ADDITIONAL INFORMATION

28. The proposed reductions in the stated capital of the A Co Class B Shares, as described in Paragraph 24, and of the A Co Class A Shares, as described in Paragraph 25, have not been preceded by an increase in the paid-up capital of either class of shares that resulted in any dividend in respect of which A Co elected to treat as having been paid out of its 1971 capital surplus on hand nor are such reductions in lieu of ordinary dividends since A Co has a history of paying annual quarterly cash dividends on each such class of shares.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.

A. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to the Class B Capital Return, such that (except for the dividend in the amount of the Capitalized Retained Earnings deemed by subsection 84(1) to have been paid on the A Co Class B Shares by A Co on the stated capital increase described in Paragraph 24) A Co will be deemed to have paid, and the A Co Class B Shareholders will be deemed to have received, a dividend only to the extent, if any, that the amount of the Class B Capital Return exceeds the amount by which the paid-up capital of the A Co Class B Shares (as increased by the Capitalized Retained Earnings) is reduced.

B. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to the Class A Capital Return, such that A Co will be deemed to have paid, and the A Co Class A Shareholders will be deemed to have received, a dividend only to the extent, if any, that the amount of the Class A Capital Return exceeds the amount by which the Class A PUC is reduced.

C. Where an A Co Class A Shareholder holds A Co Class A Shares as capital property, the amount received by each such person upon the reduction in the paid-up capital of the A Co Class A Shares described in Paragraph 25, shall be deducted in computing the particular A Co Class A Shareholder's adjusted cost base of such shares by virtue of subparagraph 53(2)(a)(ii), and where the amount of such reduction in the paid-up capital of the A Co Class A Shares exceeds the particular A Co Class A Shareholder's adjusted cost base thereof, the excess shall be deemed to be a gain of such holder for the year from the disposition of such share under subsection 40(3).

D. Where an A Co Class B Shareholder holds A Co Class B Shares as capital property, the amount received by each such person upon the reduction in the paid-up capital of the A Co Class B Shares described in Paragraph 24, shall be deducted in computing the particular A Co Class B Shareholder's adjusted cost base of such shares by virtue of subparagraph 53(2)(a)(ii), and where the amount of such reduction in the paid-up capital of the A Co Class B Shares exceeds the particular A Co Class B Shareholder's adjusted cost base thereof, the excess shall be deemed to be a gain of such holder for the year from the disposition of such share under subsection 40(3).

E. The Newco Class A Shares received by an A Co Class A Shareholder on the Class A Capital Return will be considered to have been acquired by such A Co Class A Shareholder at a cost equal to their fair market value.

F. The Newco Class B Shares received by an A Co Class B Shareholder on the Class B Capital Return will be considered to have been acquired by such A Co Class B Shareholder at a cost equal to their fair market value.

G. Subject to the application of subsection 40(3) as described in Rulings C and D above, the Class B Capital Return and the Class A Capital Return, will not, in and by themselves, result in a disposition of the A Co Class A Shares or A Co Class B Shares, as the case may be.

H. To the extent that an A Co Class A Shareholder realizes a capital gain on their A Co Class A Shares or an A Co Class B Shareholder realizes a capital gain on their A Co Class B Shares, as a result of the application of subsection 40(3), in computing the adjusted cost base of such shareholder's A Co Class A Shares or A Co Class B Shares, as the case may be, the amount of the gain will be added to the adjusted cost base of such shares under paragraph 53(1)(a).

I. The provisions of subsections 15(1), 56(2), 56(4), and 246(1) will not apply to the Proposed Transactions, in and by themselves.

J. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the limitations and qualifications set out in IC 70-6R5 and are binding on the CCRA provided that the Proposed Transactions are completed by XXXXXXXXXX. These rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

OTHER COMMENTS

Nothing in this letter should be construed as implying that the CCRA has confirmed, reviewed or has made any determination in respect of:

(a) the paid-up capital of any share or the adjusted cost base or fair market value of any share or other property referred to herein;

(b) the application of subsection 55(2) to any dividends that may arise as part of the series of transactions or events that includes the Proposed Transactions whether described in this letter or not; or

(c) any other tax consequence relating to the facts, Proposed Transactions, other information or any transactions or events, taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above.

Yours truly,

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