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: Whether a public company PUC reduction qualifies for the "reorganization of business" exemption under 84(2).
Position: Yes.
Reasons: Reorganization and sale of substantially all of its business.
XXXXXXXXXX 2003-003919
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge receipt of your facsimiles as well as the information provided in various telephone conversations.
Throughout this letter, the following corporations will be referred to as follows:
XXXXXXXXXX Pco
XXXXXXXXXX Rco
XXXXXXXXXX Sco
XXXXXXXXXX Tco
XXXXXXXXXX Fco
XXXXXXXXXX Gco
XXXXXXXXXX Vco
XXXXXXXXXX Lco
XXXXXXXXXX Mco
XXXXXXXXXX Nco
XXXXXXXXXX Wco
Pco files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office. Pco is resident in Canada for the purposes of the Act.
To the best of your knowledge and that of Pco, none of the issues involved in this ruling request is:
(i) in an earlier return of Pco or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of Pco or a related person;
(iii) under objection by Pco or a related person;
(iv) before the courts; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Pco has confirmed that the proposed transactions described herein will not affect its ability to pay any of its outstanding tax liabilities.
Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.
DEFINITIONS
In this letter, unless otherwise expressly stated, the following terms have the meanings specified:
(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, including the regulations promulgated thereunder, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
(b) "adjusted cost base" ("ACB") has the meaning assigned by section 54;
(c) XXXXXXXXXX;
(d) "paid-up capital" ("PUC") has the meaning assigned by subsection 89(1);
(e) "Paragraph" means a numbered paragraph in this advance income tax ruling;
(f) "proposed transactions" means the transactions described in Paragraphs 16 to 18 below;
(g) "public corporation" has the meaning assigned by subsection 89(1);
(h) "special resolution" has the meaning assigned by XXXXXXXXXX; and
(i) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
FACTS
1. Pco is a public corporation and a taxable Canadian corporation. Pco was incorporated under the laws of XXXXXXXXXX under the name "XXXXXXXXXX". Pco continued under the laws of XXXXXXXXXX and continued under the laws of XXXXXXXXXX. Pco adopted its current name coincident with its continuance into XXXXXXXXXX.
2. XXXXXXXXXX.
3. Pco's authorized share capital consists of an unlimited number of common shares and an unlimited number of preferred shares. As of the end of XXXXXXXXXX, Pco's issued and outstanding shares consisted of XXXXXXXXXX common shares (the "Common Shares") without nominal or par value.
4. The PUC of the Common Shares is, and at the time of the proposed transactions will be, at least $XXXXXXXXXX per Common Share.
5. Pco's most valuable asset is all of the issued and outstanding shares of Rco (the "Rco Shares"), a corporation formed under the laws of XXXXXXXXXX. The Rco Shares represent over XXXXXXXXXX% of the total value of Pco's assets, based on the current trading value of the Fco shares and the current Canada/US dollar exchange rate.
Pco also holds all of the shares of Lco, a corporation formed under the laws of XXXXXXXXXX; all of the shares of Mco, a company formed under the laws of XXXXXXXXXX; and all of the shares of Nco, a corporation formed under the laws of XXXXXXXXXX. Nco, in turn, holds all of the shares of Wco, a corporation formed under the laws of XXXXXXXXXX.
6. Rco, in turn, wholly owns Sco, a corporation formed under the laws of XXXXXXXXXX.
7. Sco, in turn, owns XXXXXXXXXX% of the issued common shares of Tco, a corporation formed under the laws of XXXXXXXXXX. The other XXXXXXXXXX% of the common shares of Tco are owned by Gco, an affiliate of Fco formed under the laws of XXXXXXXXXX.
8. Tco holds a XXXXXXXXXX (the "Property"), located in XXXXXXXXXX.
9. Rco and Sco own certain assets (the "Excluded Assets") that Fco does not wish to indirectly acquire on the purchase of the Rco Shares. One of the Excluded Assets held by Rco is a XXXXXXXXXX % interest in Vco, a corporation formed under the laws of XXXXXXXXXX that no longer has any assets.
10. Fco is a corporation governed under the laws of XXXXXXXXXX. Fco and its subsidiaries are engaged XXXXXXXXXX.
11. As of the end of XXXXXXXXXX, Gco held XXXXXXXXXX Common Shares, comprising approximately XXXXXXXXXX% of the issued Common Shares of Pco.
12. Fco and Pco entered into an Arrangement Agreement (the "Agreement") dated XXXXXXXXXX, under which the parties agreed, subject to the satisfaction of the terms and conditions set out in the Agreement, to implement the following transactions (collectively, the "Transaction"):
(a) Rco will transfer certain Excluded Assets to Nco and Wco, and Sco will transfer certain Excluded Assets to Wco, in consideration for indebtedness of the applicable purchaser;
(b) Rco and Sco will transfer the indebtedness referred to in Paragraph 12(a) above to Pco in partial repayment of amounts owing by them to Pco;
(c) Pco will settle the Rco indebtedness to Pco, and will contribute to Rco the Sco indebtedness to Pco, in consideration for the issuance by Rco of additional shares to Pco;
(d) Rco will transfer the shares of Vco to Lco;
(e) Pco and Tco will enter into a royalty agreement under which Tco will agree to pay Pco a net XXXXXXXXXX royalty of XXXXXXXXXX% in respect of XXXXXXXXXX Pco will pay Tco XXXXXXXXXX for agreeing to enter into the royalty agreement;
(f) Gco will transfer its XXXXXXXXXX Common Shares of Pco to Fco. Pco will then purchase these XXXXXXXXXX Common Shares of its capital stock for cancellation for a purchase price of just under $XXXXXXXXXX per share (totalling $XXXXXXXXXX), being the weighted average closing price for the Common Shares on the XXXXXXXXXX Stock Exchange for the five days preceding XXXXXXXXXX; and
(g) Pco will transfer the Rco Shares to Fco in consideration for: (i) cash equal to the sum of the dollar amounts referred to in paragraphs (e) and (f) less US$XXXXXXXXXX; and (ii) the issuance from treasury by Fco of XXXXXXXXXX Fco common shares to Pco. The Agreement expressly allocates the cash and non-cash consideration to comply with subsection 85.1(5).
13. Immediately following the Transaction, Pco's assets will consist primarily of the proceeds of disposition from the Transaction, the shares of Lco, Mco and Nco (which, through Wco, will hold interests in certain XXXXXXXXXX properties), and an option on a XXXXXXXXXX property in XXXXXXXXXX.
14. The sale of the Rco Shares is a sale of substantially all of the assets of Pco for the purposes of the XXXXXXXXXX and is being effected by way of a plan of arrangement under the XXXXXXXXXX. Subsections XXXXXXXXXX require that the Pco shareholders approve the Transaction by special resolution. This approval will be sought at a meeting of the Pco shareholders to be held on XXXXXXXXXX.
15. Subsection XXXXXXXXXX requires that the Pco shareholders approve the return of capital, described in the proposed transactions below, by special resolution. This approval will be sought at the shareholders' meeting referred to in Paragraph 14 above. The text of the resolution will approve a reduction of the stated capital account maintained for the Common Shares by an amount of up to $XXXXXXXXXX per Common Share, and a return of capital to the Pco shareholders in the amount of such reduction.
PROPOSED TRANSACTIONS
16. Following the transfer of the Rco Shares and the completion of the other transactions comprising the Transaction, described in Paragraph 12 above, Pco will dispose of XXXXXXXXXX of the XXXXXXXXXX Fco common shares that it received on the transfer of the Rco Shares to Fco.
17. Pco will distribute the net cash proceeds (the "Proceeds") from the sale of the XXXXXXXXXX Fco common shares to the Pco shareholders as a return of capital and dividend, as described in Paragraph 18 below.
18. Pco will pay to the Pco shareholders:
(a) as a return of capital on the Common Shares, an amount equal to the lesser of:
(i) the Proceeds; and
(ii) $XXXXXXXXXX per Common Share; and
(b) as a dividend, an amount equal to the amount, if any, by which the Proceeds exceed the amount referred to in (a) above.
As indicated in Paragraph 15 above, the return of capital will have been approved by a special resolution of the Pco shareholders.
PURPOSE OF PROPOSED TRANSACTIONS
19. Pco is discontinuing the portion of its business represented by its holding in Rco (apart from the Excluded Assets) and is reorganizing its continuing operations in connection therewith. In view of this substantial divestiture, Pco wishes to return to its shareholders a portion of their investment in Pco.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of 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. Subject to the application of subsection 40(3), the return of capital on the Common Shares, described in Paragraph 18(a) above, will not, in and by itself, result in a disposition, within the meaning of subsection 248(1), of the Common Shares.
B. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to the return of capital, described in Paragraph 18(a) above, such that Pco will be deemed to have paid to a particular holder of Common Shares, and such holder will be deemed to have received, a dividend only to the extent that the amount distributed by Pco as a return of capital on such Common Shares exceeds the PUC of such shares.
C. Where a holder of Common Shares holds such shares as capital property, the amount received by such holder on the return of capital, described in Paragraph 18(a) above, will be deducted in computing the ACB of the holder's Common Shares pursuant to subparagraph 53(2)(a)(ii) to the extent that the amount received is not deemed by subsection 84(2) to be a dividend received by such holder.
D. Subsection 15(1) will not apply to include any amount distributed to a holder of Common Shares as a return of capital, described in Paragraph 18(a) above, in computing the income of such holder for the year.
E. Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.
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 Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
The above 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, could have an effect on the rulings provided herein.
1. Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:
(a) the determination of the fair market value or ACB of any particular asset, the paid-up capital in respect of any shares referred to herein, or the non-capital losses or net capital losses of any corporation; or
(b) any tax consequences relating to the facts and Proposed Transactions described herein 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
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