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 certain transactions will result in a new royalty being created.
Position: No.
Reasons: Based upon the facts of the situation and XXXXXXXXXX .
XXXXXXXXXX 2001-011367
XXXXXXXXXX, 2002
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above taxpayers. We also acknowledge receipt of letters dated XXXXXXXXXX, as well as our various telephone conversations (XXXXXXXXXX) concerning this matter.
The above XXXXXXXXXX files its income tax returns with the XXXXXXXXXX Tax Centre, under account number XXXXXXXXXX, and is serviced by the XXXXXXXXXX Tax Services Office. The above XXXXXXXXXX file their income tax returns with the XXXXXXXXXX Tax Centre and are serviced by the XXXXXXXXXX Tax Services Office. Their respective account numbers are as follows: XXXXXXXXXX.
To the best of your knowledge and that of the taxpayers involved, none of the issues contained herein:
(i) is in an earlier tax return of the taxpayers or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;
(iii) is under objection by the taxpayers or a related person;
(iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; or
(v) is the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate (except Ruling 1 and Ruling 2, each as defined below).
Definitions
Unless otherwise stated, in this letter the following terms and expressions have the meanings specified below:
"A Co." means XXXXXXXXXX.
"B Co." means XXXXXXXXXX.
"ACB" means "adjusted cost base" as defined in section 54 of the Act.
XXXXXXXXXX
"Act" means the Income Tax Act R.S.C. 1985 (5th Supp.), c.1 as amended to the date of this letter.
"capital property" has the meaning assigned by section 54 of the Act.
"Combination" means the transactions described in paragraph 26 below.
"mutual fund trust" has the meaning assigned by subsection 132(6) of the Act.
"private corporation" has the meaning assigned to that expression by subsection 89(1) of the Act.
"Project" means the XXXXXXXXXX.
"Projectco 1" means XXXXXXXXXX.
"Projectco 2" means XXXXXXXXXX.
"public corporation" has the meaning assigned to that expression by subsection 89(1) of the Act.
"PUC" means "paid-up capital" as defined in subsection 89(1) of the Act.
"Regulations" means the Income Tax Regulations as amended to the date of this letter.
"Ruling 1" means the advance income tax ruling issued to X Co., et al, dated XXXXXXXXXX, including any amendments.
"Ruling 2" means the advance income tax ruling issued to Y Co., et al, dated XXXXXXXXXX, including any amendments.
"taxable Canadian corporation" has the meaning assigned to that expression by subsection 89(1) of the Act.
"Trust 1" means the trust originally established as the XXXXXXXXXX as noted in paragraph 28 below.
"Trust 2" means the trust originally established as the XXXXXXXXXX which is in the process of being wound up pursuant to Trust Indenture 2 as noted in paragraph 27 below.
"Trustee 1" means the XXXXXXXXXX, a corporation which has been a taxable Canadian corporation at all times relevant to this letter.
"Trustee 2" means XXXXXXXXXX, a corporation which has been a taxable Canadian corporation at all times relevant to this letter.
"X Co." means XXXXXXXXXX.
"Y Co." means XXXXXXXXXX.
"Z Co." means XXXXXXXXXX.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. The Project is located XXXXXXXXXX and is a joint venture owned in undivided interests, by XXXXXXXXXX participants (each a "Participant").
Each of X Co. and Y Co. is a Participant in the Project, having undivided interests of XXXXXXXXXX% and XXXXXXXXXX%, respectively.
2. XXXXXXXXXX.
3. XXXXXXXXXX.
4. XXXXXXXXXX (the "Leases").
5. XXXXXXXXXX.
6. The Project is operated and managed by Projectco 1, a single purpose corporation having no significant assets, which corporation is owned by the Participants in the same proportion as their ownership of the Project. Projectco 2 also is a single purpose corporation owned by the Participants which was established XXXXXXXXXX. Each of these corporations is a taxable Canadian corporation.
7. The "Ownership and Management Agreement", to which all of the Participants are parties, sets forth the management structure of the Project.
The Project is governed by XXXXXXXXXX.
8. A Co. is a taxable Canadian corporation and a public corporation. A Co. is organized and existing under the Canada Business Corporations Act (the "CBCA"). Its head office is located in XXXXXXXXXX. A Co.'s taxation year for the purposes of the Act ends on XXXXXXXXXX.
9. X Co. is a corporation that was incorporated on XXXXXXXXXX pursuant to the provisions of the XXXXXXXXXX. It is a private corporation and a taxable Canadian corporation. X Co.'s taxation year for the purposes of the Act ends on XXXXXXXXXX.
X Co. is authorized to issue an unlimited number of common shares and XXXXXXXXXX preferred shares. Its issued share capital consists of: XXXXXXXXXX common shares owned by Z Co. having an ACB and PUC, in each case in aggregate, of $XXXXXXXXXX; and XXXXXXXXXX preferred shares owned by A Co. having an ACB and PUC, in each case in aggregate, of $XXXXXXXXXX. The preferred shares are redeemable by X Co. for the aggregate amount of $XXXXXXXXXX plus any accrued but unpaid dividends.
The preferred shares of X Co. have a cumulative annual dividend of XXXXXXXXXX%, payable XXXXXXXXXX. These preferred shares were initially issued from treasury to B Co., a taxable Canadian corporation that was formerly a Participant, on XXXXXXXXXX for cash consideration of $XXXXXXXXXX. These shares were sold for the same amount by B Co. to A Co. on XXXXXXXXXX.
Until the transactions described in paragraph 27(a) below, the board of directors of X Co. consisted of XXXXXXXXXX directors. The common shares, as a class, entitled the holders to elect XXXXXXXXXX directors of X Co. The preferred shares, as a class, entitled the holders to elect XXXXXXXXXX directors of X Co. Currently, the board of directors of X Co. consists of XXXXXXXXXX directors with the common shares, as a class, entitled to elect all directors, up to a maximum of XXXXXXXXXX.
10. The principal asset of X Co. is an XXXXXXXXXX% undivided interest in the assets of the Project (the "X Co. Working Interest") and working capital relating to that operation.
As outlined in more detail in Ruling 1, X Co. acquired the X Co. Working Interest in XXXXXXXXXX pursuant to an arrangement whereby XXXXXXXXXX sold to X Co. its XXXXXXXXXX% undivided working interest in the Project reserving a XXXXXXXXXX% net profit interest (the royalty so reserved being "Royalty 1" which is now owned by Trust 1).
11. Subject to Royalty 1, the X Co. Working Interest entitles X Co. to the following:
(a) an undivided XXXXXXXXXX% participating interest in the Project, being the right, title and interest in and to the Project of a Participant, including agreements relating to operations of the Project and XXXXXXXXXX shares in the capital stock of Projectco 1;
(b) an undivided XXXXXXXXXX% interest in the "Project Technology" being, essentially, all information, inventions, and patents conceived, developed or obtained in connection with the operations of the Project at the expense of all of the Participants;
(c) XXXXXXXXXX shares in the capital stock of Projectco 2; and
(d) certain other assets relating to the Project.
12. By virtue of the X Co. Working Interest, X Co. is a Participant, is subject to the Ownership and Management Agreement, XXXXXXXXXX.
13. Trust 1 was established as a closed-ended investment trust formed under the laws of the Province of XXXXXXXXXX pursuant to a trust indenture dated XXXXXXXXXX ("Trust Indenture 1"). On XXXXXXXXXX, Trust 1 was converted into an open-ended investment trust.
Trust 1 is, and at all times relevant hereto has been, a mutual fund trust having a trustee that is a taxable Canadian corporation. Trust Indenture 1 provides that at no time may non-residents of Canada for purposes of the Act be the beneficial owner of a majority of the units of Trust 1. If the trustee thereof becomes aware that XXXXXXXXXX% or more of such trust units are owned by non-residents of Canada for purposes of the Act, the trustee can force a sale of such units as necessary to ensure that not more than XXXXXXXXXX% of such trust units are beneficially owned by non-residents of Canada for purposes of the Act.
14. Trust Indenture 1 also provides that Trust 1 was formed for the purpose of holding Royalty 1, as well as the common shares of X Co., and issuing trust units. Prior to the amendments to Trust Indenture 1 relating to the Combination (see part (d) to paragraph 27 below), the undertaking of Trust 1 was primarily restricted to its ownership of Royalty 1 and XXXXXXXXXX% of the common shares of X Co.
Trust 1 acquired Royalty 1 and all of the common shares of X Co. in XXXXXXXXXX.
15. The terms of Royalty 1 (the "Royalty 1 Provisions"), remain as detailed in Ruling 1 and entitle Trust 1 to receive, each calendar quarter, a payment from X Co. equal to XXXXXXXXXX% of the sale proceeds of XXXXXXXXXX products produced from the Leases in respect of the X Co. Working Interest during that quarter ("X Co. Production Revenue") less XXXXXXXXXX% of the production expenses and costs attributable to the X Co. Working Interest during that quarter ("X Co. Production Costs").
16. Royalty 1 also entitles the holder to XXXXXXXXXX% of other revenue (the "X Co. Other Revenues") in respect of the X Co. Working Interest in each quarter.
17. Trust 1's entitlement to XXXXXXXXXX% of the X Co. Production Revenue and XXXXXXXXXX% of the X Co. Other Revenues in respect of the X Co. Working Interest in each quarter is subject to the following:
(a) if Trust 1 elects to take XXXXXXXXXX in kind for the quarter, as it is entitled to do under the Royalty 1 Provisions in certain special circumstances, the X Co. Production Revenue amount will not include the sale proceeds of such XXXXXXXXXX taken in kind; and
(b) the amount of the X Co. Other Revenues will be reduced so that the X Co. Other Revenues which would be included in Royalty 1 for the quarter would not exceed XXXXXXXXXX% of the total of the X Co. Other Revenues for the quarter and the X Co. Production Revenue for the quarter (any excess being "X Co. Excess Revenues").
Any Excess Revenues from the immediately preceding quarter are paid by X Co. into a reserve it established solely to fund the payment of the X Co. Production Costs. This reserve is owned by X Co. and Trust 1 has no interest therein.
18. Y Co. is a corporation that was incorporated on XXXXXXXXXX pursuant to the provisions of the XXXXXXXXXX. It is a private corporation and a taxable Canadian corporation. Y Co.'s taxation year for the purposes of the Act ends on XXXXXXXXXX.
Y Co. is authorized to issue an unlimited number of common shares and XXXXXXXXXX preferred shares. Its issued share capital consists of: XXXXXXXXXX common shares owned by Z Co. having an ACB and PUC, in each case in aggregate, of $XXXXXXXXXX; and XXXXXXXXXX preferred shares owned by A Co. having an ACB and PUC, in each case in aggregate, of $XXXXXXXXXX. The preferred shares are redeemable by Y Co. for the aggregate amount of $XXXXXXXXXX plus any accrued but unpaid dividends.
The preferred shares of Y Co. have a cumulative annual dividend of XXXXXXXXXX%, payable XXXXXXXXXX. These preferred shares were issued from treasury to A Co. on XXXXXXXXXX for cash consideration of $XXXXXXXXXX.
Until the transactions described in paragraph 27(a) below, the board of directors of Y Co. consisted of XXXXXXXXXX directors. The common shares, as a class, entitled the holders to elect XXXXXXXXXX directors of Y Co. The preferred shares, as a class, entitled the holders to elect XXXXXXXXXX directors of Y Co. Currently, the board of directors of Y Co. may consist of up to XXXXXXXXXX directors with the common shares, as a class, entitled to elect all directors.
19. The principal asset of Y Co. is a XXXXXXXXXX% undivided interest in the assets of the Project (the "Y Co. Working Interest") and working capital relating to that operation.
As outlined in more detail in Ruling 2, Y Co. acquired the Y Co. Working Interest on XXXXXXXXXX pursuant to an arrangement whereby A Co. sold to Y Co. its XXXXXXXXXX% undivided working interest in the Project reserving a XXXXXXXXXX% net profit interest (the royalty so reserved being "Royalty 2").
20. Subject to the Royalty 2, the Y Co. Working Interest entitles Y Co. to the following:
(a) an undivided XXXXXXXXXX% participating interest in the Project, being the right, title and interest in and to the Project of a Participant, including agreements relating to operations of the Project and XXXXXXXXXX shares in the capital stock of Projectco 1;
(b) an undivided XXXXXXXXXX% interest in the "Project Technology" (as referred to in paragraph 11(b) above);
(c) XXXXXXXXXX shares in the capital stock of Projectco 2; and
(d) certain other assets relating to the Project.
21. By virtue of the Y Co. Working Interest, Y Co. is a Participant, is subject to the Ownership and Management Agreement, XXXXXXXXXX.
22. Trust 2 was established as a closed-ended investment trust formed under the laws of the Province of XXXXXXXXXX pursuant to a trust indenture dated XXXXXXXXXX ("Trust Indenture 2"). On XXXXXXXXXX, Trust 2 was converted into an open-ended investment trust.
Trust 2 is, and at all times relevant hereto has been, a mutual fund trust having a trustee that is a taxable Canadian corporation. Trust Indenture 2 provides that at no time may non-residents of Canada for purposes of the Act be the beneficial owner of, a majority of the units of Trust 2. If the trustee thereof becomes aware that XXXXXXXXXX% or more of such trust units are owned by non-residents of Canada for purposes of the Act, the trustee can force a sale of such units as necessary to ensure that not more than XXXXXXXXXX% of such trust units are beneficially owned by non-residents of Canada for purposes of the Act.
23. Trust Indenture 2 also provides that the only undertaking of Trust 2 is the investing of funds of Trust 2 in Royalty 2, the common shares of Y Co., royalties (or units representing an interest in royalties) in respect of XXXXXXXXXX other than Royalty 2, and certain short-term investments. The undertaking of Trust 2 has been primarily restricted to its ownership (prior to the Combination) of Royalty 2 and XXXXXXXXXX% of the common shares of Y Co.
Trust 2 acquired Royalty 2 on XXXXXXXXXX. It also acquired all of the common shares of Y Co. in XXXXXXXXXX.
24. The terms of Royalty 2 (the "Royalty 2 Provisions") remain as detailed in Ruling 2 and entitle Trust 2 to receive, each calendar quarter, a payment from Y Co. equal to the amount by which the "Royalty Revenues" for that quarter exceed the "Deductible Production Costs" for that quarter.
Royalty Revenues are defined in Ruling 2, essentially, as XXXXXXXXXX% of the sum of the Y Co. Working Interest share of: i) the proceeds from the sale of XXXXXXXXXX products produced from the Leases during the quarter in question; and ii) other revenues for that quarter (these latter revenues being the "Y Co. Other Revenues").
Deductible Production Costs are defined in Ruling 2, essentially, as XXXXXXXXXX% of the costs and expenses attributable to the Y Co. Working Interest during the quarter in question that are deductible under the Royalty 2 Provisions.
Trust 2's entitlement to XXXXXXXXXX% of the above Royalty Revenues in respect of the Y Co. Working Interest in each quarter is subject to the following:
(a) if Trust 2 elects to take XXXXXXXXXX in kind during a particular calendar quarter, as it is entitled to do under the Royalty 2 Provisions in certain special circumstances, the Royalty Revenues for that quarter will not include the gross sale proceeds receivable from the sale of such XXXXXXXXXX during that quarter; and
(b) the amount of Y Co. Other Revenues included in Royalty Revenues for any particular calendar quarter will not exceed XXXXXXXXXX% of the total of the Y Co. Other Revenues for that quarter and the Y Co. Production Revenues for that quarter.
The amount of any excess arising due to the limitation in (b) from the immediately preceding quarter is paid by Y Co. into a reserve it established solely to fund the payment of the Y Co. Production Costs. This reserve is owned by Y Co. and Trust 2 has no interest therein.
Historically, the X Co. Other Revenues and the Y Co. Other Revenues have always been well under the XXXXXXXXXX% limitations contained in part (b) to paragraphs 17 and 24, respectively. Furthermore, given the magnitude of revenues from sales of XXXXXXXXXX, the prospect of exceeding those respective limitations in the future is highly unlikely.
25. Each of Royalty 1 and Royalty 2 is a XXXXXXXXXX.
26. On XXXXXXXXXX the Combination occurred whereby Trust 1 acquired all of the assets of Trust 2 (including Royalty 2 and all of the common shares in Y Co.) and assumed all of Trust 2's liabilities in exchange for Trust 1 issuing a number of units of Trust 1 equal to the number of units of Trust 2 outstanding immediately prior to that time.
In addition, on that date and as part of the Combination, Trust 2 acquired all of its outstanding units from the unitholders thereof (except for certain unitholders resident in the United States) for cancellation in exchange for units of Trust 1 on a one-for-one basis. No other consideration was given by Trust 2 to such unitholders for their units of Trust 2.
The Combination was effected in accordance with a Joint Management Information Circular with respect to Trust 1 and Trust 2 dated XXXXXXXXXX which was issued to the unitholders of those respective trusts; and the terms of an agreement dated XXXXXXXXXX among Trustee 1 (as trustee of Trust 1), X Co., Trustee 1 (as trustee of Trust 2) and Y Co.
Trust 1 and Trust 2 jointly filed an election in respect of the Combination pursuant to paragraph (c) of the definition of "qualifying exchange" in subsection 132.2(2) of the Act within the time required in that paragraph.
27. As a result of the Combination, the following occurred:
(a) The Articles of Incorporation of X Co. and Y Co. were amended to, inter alia, increase the maximum number of directors from XXXXXXXXXX to XXXXXXXXXX , remove the limit on the number of directors that may be elected by the holders of the common shares, remove the right of the holders of the preferred shares of X Co. and Y Co. to elect directors and permit those preferred shares to be redeemed by X Co. and Y Co., respectively, at any time.
(b) Following the disposition of its assets on XXXXXXXXXX , Trust 2 is in the process of being wound up pursuant to Trust Indenture 2.
(c) Certain administrative services agreements and marketing agreements were terminated and replaced by a "Successor Administrative Services Agreement" and a "Successor Marketing Agreement". (On XXXXXXXXXX, A Co. had been selected to provide administrative and marketing services to Trust 1 after the Combination.)
(d) Trust Indenture 1, which continues to govern Trust 1 subsequent to the Combination, was restated and amended ("Amended Trust Indenture 1") to, inter alia, recognize X Co. and Y Co. as the managers of Trust 1 under two management agreements, permit Trust 1 to hold Royalty 2 and all of the common shares of Y Co. (in addition to its holding Royalty 1 and all of the common shares of X Co.), facilitate more efficient and effective administration of Trust 1 after the combination and permit Trustee 1 to assign its rights and duties as trustee of Trust 1 to Trustee 2 to whom Trustee 1 had sold its corporate trust business.
28. After the Combination, Trust 1 changed its name to that which had been the name of Trust 2. Trust 1 continues to be an open-ended investment trust governed by the laws of the Province of XXXXXXXXXX with the sole beneficiaries thereof remaining the holders of the units thereof (including those holders who acquired their units of Trust 1 in exchange for the units of Trust 2 they formerly held). The units of Trust 1 are listed for trading on the XXXXXXXXXX Stock Exchange and are widely held by the public.
Pursuant to Amended Trust Indenture 1, the undertaking of Trust 1 has primarily been restricted to its ownership of Royalty 1 and Royalty 2 as well as XXXXXXXXXX% of the common shares of each of X Co. and Y Co. (the ownership of such shares permitted either directly, or indirectly through Z Co., as described in paragraph 30 below).
Notwithstanding that Special Resolutions, passed by the holders of the units in Trust 1 and Trust 2 with respect to the Combination, provided for the possibility that Royalty 1 and Royalty 2 might be combined and replaced, such action was subject to the approval of the directors of X Co. and Y Co., which approval has not and will not be obtained, and is contrary to the intentions of the parties to Royalty 1 and Royalty 2 (currently Trust 1 as well as X Co. and Y Co.) that those royalties continue to have a separate existence notwithstanding the amalgamation described in paragraph 35 below.
29. Z Co. is a new corporation that Trust 1 caused to be incorporated under the XXXXXXXXXX. It is a private corporation and a taxable Canadian corporation having an authorized share capital consisting of an unlimited number of common shares and an unlimited number of preferred shares.
The issued share capital of Z Co. consists of XXXXXXXXXX common shares all of which are owned by Trust 1. These shares are held by Trust 1, and will be held by it immediately before the amalgamation described in paragraph 35 below, as capital property. These shares have an aggregate ACB and an aggregate PUC of $XXXXXXXXXX to Trust 1.
Z Co. was incorporated to facilitate the borrowing of certain funds. In particular, the incorporation of Z Co. was a requirement imposed by the lenders to consolidate the borrowings related to the operations of X Co. and Y Co. in one entity. The reason for such consolidation was to reduce administrative complexity and enhance and facilitate the position of the lenders for repayment of the loaned funds.
30. Pursuant to an agreement dated XXXXXXXXXX, between Trustee 2 (as trustee of Trust 1) and Z Co., all of the common shares of each of X Co. and Y Co. (collectively the "Shares") were sold by Trust 1 to Z Co. for consideration consisting solely of XXXXXXXXXX common shares of Z Co.
Trustee 2, as trustee of Trust 1, and Z Co. jointly elected under subsection 85(1) of the Act, within the time required under subsection 85(6) thereof, in respect of the above transfer at an aggregate elected amount of $XXXXXXXXXX which amount was equal to the aggregate ACB of the Shares to Trust 1 at the time of the transfer.
Immediately before the amalgamation described in paragraph 35 below, all of the issued and outstanding shares of the capital stock of each of X Co. and Y Co., being solely common shares in both cases, will be owned by Z Co.
31. XXXXXXXXXX . All other functions required of X Co. and Y Co. are performed by A Co. under the agreements referred to in paragraph 27(c) above.
32. XXXXXXXXXX.
Proposed Transactions
33. X Co. will redeem all of the issued preferred shares in its capital stock at their aggregate redemption amount and fair market value of $XXXXXXXXXX. In furtherance thereof, X Co. will make a payment in cash to A Co. equal to this amount.
34. Y Co. will redeem all of the issued preferred shares in its capital stock at their aggregate redemption amount and fair market value of $XXXXXXXXXX. In furtherance thereof, Y Co. will make a payment in cash to A Co. equal to this amount.
35. X Co., Y Co. and Z Co. (each also referred to in this paragraph as a "predecessor corporation") will amalgamate pursuant to the provisions of the XXXXXXXXXX (the amalgamated corporation being referred to herein as "Amalco") in such manner that:
(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of each of X Co., Y Co. and Z Co., including the X Co. Working Interest and the Y Co. Working Interest, immediately before the amalgamation will become property of Amalco by virtue of the amalgamation,
(b) all of the liabilities (except amounts payable to any predecessor corporation) of each of X Co., Y Co. and Z Co. immediately before the amalgamation will become liabilities of Amalco by virtue of the amalgamation,
(c) all of the issued and outstanding shares of X Co. and Y C.o. will be cancelled (without any amount being paid in respect of such cancellation), and
(d) the issued and outstanding shares of Z Co. (being solely common shares) will be unaffected. In particular, the shares of Z Co. will not be cancelled on the merger and no shares of the capital stock of Amalco will be issued by Amalco in connection with the amalgamation.
This amalgamation will be a short-form amalgamation of X Co., Y Co. and Z Co. in accordance with the provisions of XXXXXXXXXX. Amalco will be a private corporation and a taxable Canadian corporation governed by the provisions of the XXXXXXXXXX. Trust 1 will be the only shareholder of Amalco both immediately before, and immediately after, the merger.
36. As a result of its acquisition of the X Co. Working Interest and the Y Co. Working Interest on the amalgamation described in the preceding paragraph, Amalco will become a Participant in the Project and will be subject to the Ownership and Management Agreement referred to in paragraph 7 above XXXXXXXXXX.
Amalco will carry on business as a Participant entitled to, in aggregate, the X Co. Working Interest and the Y Co. Working Interest share of the revenues, and bearing, in aggregate, the X Co. Working Interest and the Y Co. Working Interest share of the expenses, relating to the operations of the Project described in paragraph 2 above. Financial projections, relating to Amalco's ownership of the X Co. Working Interest and the Y Co. Working Interest, indicate that, based upon reasonable assumptions (XXXXXXXXXX), Amalco will derive income from those working interests after deducting all costs related thereto, including amounts arising under Royalty 1 and Royalty 2 and amounts arising under administration and marketing agreements with A Co. The business activities of Amalco will also include the provision of management services to Trust 1 for which it will receive a management fee.
There is currently no intention to sell, now or in the foreseeable future, all or any portion of either the X Co. Working Interest or the Y Co. Working Interest.
Amalco may enter into transactions (referred to as "swap transactions") for the purposes of managing risks associated with fluctuations in interest rates, foreign exchange rates and commodity prices. The purpose and intent of any such swap transactions will not be to speculate but to preserve the Canadian dollar value of Amalco's share of production from the Project and mitigate against changes in interest rates.
37. After the amalgamation described in paragraph 35 above, each of Royalty 1 and Royalty 2 will remain separate properties of Trust 1 and separate obligations of Amalco. Amalco will make separate quarterly payments to Trust 1 pursuant to the provisions of Royalty 1 and Royalty 2, respectively.
To reflect the intention of Amalco and Trustee 2, as trustee for Trust 1, that Royalty 1 and Royalty 2 be affirmed and continued as separate royalties, they will execute documentation that:
(a) confirms that each of Royalty 1 and the Royalty 2 continues in full force and effect without any novation; and
(b) to the extent certain non-fundamental provisions of Royalty 1 and Royalty 2 (which, for greater certainty, will not affect the fundamental obligations of the grantor to pay the royalties or the material terms of computation or timing of payment of such royalties) are similar but not identical, the terms of one or both of such royalties will be clarified or amended to resolve such inconsistencies.
38. The documentation referred to in the preceding paragraph will be in substantially the same form as the draft agreement related to the "Confirmation and Conformation" of Royalty 1 and Royalty 2, and the schedule attached thereto which you have submitted.
In this documentation:
i) Amalco and Trustee 2 will expressly confirm and acknowledge that Royalty 1 will continue to be applicable to the X Co. Working Interest and to encumber such interest but that Royalty 1 is not and will not be applicable to or encumber the Y Co. Working Interest. Similarly, they will expressly confirm and acknowledge that Royalty 2 will continue to be applicable to the Y Co. Working Interest and to encumber such interest but that Royalty 2 is not and will not be applicable to or encumber the X Co. Working Interest.
ii) For greater certainty, it will be expressly acknowledged that Royalty 1 and Royalty 2 will each constitute a separate property creating separate rights and obligations to Amalco and Trustee 2. In that regard, it will be expressly acknowledged that each of Royalty 1 and Royalty 2 constitutes a separate contractual obligation, each separate from and not conditional upon the contractual obligations of Amalco or Trustee 2 in respect of the other; a failure or default of Amalco or Trustee 2 in respect of one of
Royalty 1 or Royalty 2 will not in and of itself constitute a failure or default under the other such royalty; and satisfaction of the obligations in respect of Royalty 1 or Royalty 2 will not in and of itself constitute satisfaction of the obligations under the other such royalty.
In addition, the clarifications and amendments to be contained in this documentation, and to be made to Royalty 1 and Royalty 2 as envisioned in paragraph 37(b) above, will be made solely for the purpose of achieving greater simplicity in accounting for Royalty 1 and Royalty 2. These clarifications and amendments will not materially impact the calculation or payment of either of Royalty 1 or Royalty 2. Specifically, these clarifications and amendments are intended to achieve the following:
(a) to clarify the manner in which certain costs, expenses and revenues are accounted for in the calculation of Royalty 1 and Royalty 2;
(b) to provide for consistent accounting for the cost, expenses and revenues used in the calculation of Royalty 1 and Royalty 2; and
(c) to clarify the allocation of certain costs and revenues as between Royalty 1 and Royalty 2 in order that duplication of such amounts does not occur in the calculation of those royalties as a result of the amalgamation of X Co. and Y Co.
In the view of the management of Z Co., to date there have been no significant differences in the calculation or in the administration of Royalty 1 and Royalty 2, nor will there be any significant differences in the foreseeable future.
39. You have submitted a copy of an opinion, obtained from legal counsel external to the parties to this ruling request, which expresses the view that following the conforming changes to the provisions of Royalty 1 and Royalty 2, as proposed in the draft agreement described in the preceding paragraph, Royalty 1 and Royalty 2 would continue in full force and effect without any novation and a new royalty would not be created.
40. The Successor Marketing Agreement referred to in part (c) to paragraph 27 above will be amended or revised to the extent required to reflect the amalgamation described in paragraph 35 above. Notice has been given to A Co. that the Successor Administrative Services Agreement, also referred to in part (c) to paragraph 27 above, will be terminated as of XXXXXXXXXX. It is intended that Amalco will hire its own administrative staff to provide the required administrative services.
Amalco will make quarterly payments to A Co. pursuant to the above revised marketing agreement. Trust 1 will make quarterly payments to Amalco pursuant to a revised management agreement.
Purpose of the Proposed Transactions
41. The proposed transactions are being undertaken for the following reasons:
i) To simplify the corporate structure held by the Trust 1 and thereby reduce management fees and decrease administrative costs including costs in connection with the preparation of:
a) financial statements;
b) GST and income tax returns (both federal and provincial);
c) regulatory filings; and
d) certain annual returns for corporation filings.
ii) To achieve simplicity and consistency in dealing with all items of royalty administration and calculations in the future.
iii) To simplify the corporate structure held by the Combined Trust and thus simplify negotiations with existing and anticipated future lenders.
iv) To simplify the overall structure of Trust 1 to facilitate equity offerings.
Rulings Given
Provided that the above statements of facts, proposed transactions and purpose of the proposed transactions are accurate and constitute complete disclosure thereof, and that the proposed transactions are carried out as set forth herein, the following rulings are given:
A. The amalgamation of X Co., Y Co. and Z Co., as described in paragraph 35 above, will be an amalgamation within the meaning of subsection 87(1) of the Act. In particular, on that amalgamation the provisions of subsection 87(1) of the Act will apply, by virtue of subsection 87(1.1) thereof.
B. Amalco will include its share of revenue and expenses from the Project with respect to the X Co. Working Interest and the Y Co. Working Interest in computing its income for a taxation year pursuant to section 9 of the Act. Provided that the facts concerning Amalco's prospects for deriving income from those two working interests are as stated in paragraph 36 above, and that Amalco continues to carry on business as a Participant in the Project, Amalco will also be entitled to a deduction, in computing its income for a taxation year pursuant to section 9 of the Act, for the amounts paid or payable by it to Trust 1 under Royalty 1 and Royalty 2 for that year.
C. XXXXXXXXXX.
The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 issued by the Canada Customs and Revenue Agency (the "Agency") on May 17, 2002 and are binding on the Agency provided that the proposed transactions are completed by XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments thereto. Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.
Opinion
After the acquisition of the X Co. Working Interest and the Y Co. Working Interest by Amalco as a result of the amalgamation described in paragraph 35 above, the provisions of the XXXXXXXXXX as referred to in paragraph 32 above, will apply to Amalco in a taxation year provided that Amalco is a successor of X Co. and Y Co., respectively, and still retains a share in the Project in that taxation year.
The foregoing opinion is not an advance income tax ruling and, as explained in paragraph 22 of Information Circular 70-6R5 referred to above, is not binding on the Agency.
Yours truly,
Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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