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: Reduction of Capital - Public Corporation.
Position: Subsection 84(2) precludes application of subsection 84(4.1).
Reasons: Proposed transactions constitute a reorganization of a business.
XXXXXXXXXX 2000-006291
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: XXXXXXXXXX ("Canco")
This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge the additional information in your other correspondence of XXXXXXXXXX.
We understand that, to the best of your knowledge and that of the directors and officers of Canco none of the issues raised in this ruling request is (i) in an earlier return of the taxpayer or a related person, (ii) being considered by a tax services office or taxation centre 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, (iv) before the courts or (v) the subject of a ruling previously issued by us.
DEFINITIONS
The following terms have the meanings set out below:
(a) "Act" means the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended; all statutory references herein are to provisions of the Act unless otherwise specified;
(b) "adjusted cost base" and "proceeds of disposition" have the meanings assigned thereto in section 54;
(c) "CAD" means Canadian dollars and "USD" means United States dollars;
(d) "paid-up capital", "public corporation" and "taxable Canadian corporation" have the meanings assigned thereto by subsection 89(1); and
(e) "Proposed Transactions" means the transactions described below in paragraphs 10 to 14.
FACTS
1. Canco is a corporation governed by the XXXXXXXXXX, and is a taxable Canadian corporation and a public corporation. Canco is the corporation resulting from the amalgamation (the "Amalgamation") of XXXXXXXXXX and its controlled subsidiary, XXXXXXXXXX which was effected on XXXXXXXXXX.
2. Canco's issued and outstanding capital stock consists of two classes - namely, common shares (the "Canco Common Shares") and special shares (the "Canco Special Shares"). XXXXXXXXXX are Canco's principal shareholders.
XXXXXXXXXX
By their terms, the Canco Special Shares are convertible into Canco Common Shares at any time after XXXXXXXXXX It is not expected that the Canco Special Shares will be converted before the Reorganization, but Canco has no control over any such conversion.
3. The stated capital account maintained in respect of the Canco Common Shares and the paid-up capital of these shares exceeds CAD XXXXXXXXXX. The paid-up capital of the Canco Common Shares has arisen on issuances for cash of those shares, or of shares of one of Canco's predecessors, XXXXXXXXXX. In particular, neither Canco nor XXXXXXXXXX has at any time increased the paid-up capital of any class of its shares and elected to treat such amount as a dividend paid out of its 1971 capital surplus on hand.
4. Canco has XXXXXXXXXX business units:
XXXXXXXXXX.
5. Canco's business operations have been carried on both directly and indirectly through subsidiary corporations. XXXXXXXXXX:
(a) Canco held all the shares of XXXXXXXXXX, a corporation governed by the laws of the State of XXXXXXXXXX ("US Holdco"),
(b) US Holdco held:
(i) all the shares of XXXXXXXXXX, a corporation governed by the laws of the State of XXXXXXXXXX ("XXXXXXXXXX"), which carries on Canco's US XXXXXXXXXX operations,
(ii) a XXXXXXXXXX% interest in XXXXXXXXXX company governed by the laws of the State of XXXXXXXXXX ("XXXXXXXXXX"), which carries on the US XXXXXXXXXX operations, and
(iii) all of the shares of XXXXXXXXXX, a corporation governed by the laws of the State of XXXXXXXXXX ("XXXXXXXXXX"), which operated Canco's US XXXXXXXXXX facilities (which was later sold as described in Paragraph 9), and
Canco held all the shares of XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX ("XXXXXXXXXX"), which carries on Canco's XXXXXXXXXX operations.
6. During XXXXXXXXXX, and in preparation for the Reorganization, Canco formed a new subsidiary corporation, originally named XXXXXXXXXX and subsequently renamed XXXXXXXXXX ("Newco"), to which Canco transferred the XXXXXXXXXX and Canco's shares of XXXXXXXXXX.
7. In addition, and again in preparation for the Reorganization, Canco (or its predecessor(s)) entered into a number of agreements with certain other entities, pursuant to which Newco would acquire the other parts of the XXXXXXXXXX Business and would effectively be spun-off to the XXXXXXXXXX. In particular:
(a) Canco and US Holdco entered into an agreement with Newco, pursuant to which Newco would acquire from Canco and US Holdco the XXXXXXXXXX.
(b) Canco entered into an agreement with Newco, pursuant to which Newco would acquire from Canco all of Canco's shares of US Holdco. XXXXXXXXXX.
In substitution for the agreement described above in paragraph 8(b), Canco and US Holdco entered into an agreement with Newco (the "Packaging Agreement"), pursuant to which Newco would acquire from US Holdco all of US Holdco's shares of XXXXXXXXXX. This agreement continues to be executory, and will be completed shortly after the date of this letter.
(c) Canco entered into an agreement with the XXXXXXXXXX (the "Spin-off Agreement"), which has since been amended, pursuant to which the XXXXXXXXXX would acquire from Canco all of Canco's shares of Newco, for a cash payment to Canco in the amount of approximately:
(i) CAD XXXXXXXXXX, if the Packaging Agreement has not been completed at the time that the Spin-off Agreement is completed, or
(ii) CAD XXXXXXXXXX, if the Packaging Agreement has been completed at the time that the Spin-off Agreement is completed.
This agreement continues to be executory, and will be completed shortly after the date of this letter.
8. Finally, US Holdco has declared XXXXXXXXXX dividends to Canco, in the amounts, respectively, of XXXXXXXXXX. These dividends have been paid by the issuance of promissory notes (the "Dividend Notes") by US Holdco to Canco.
9. Canco also directly operates certain XXXXXXXXXX facilities in Canada. Canco is, however, actively pursuing the sale of the Canadian XXXXXXXXXX facilities. In addition, until XXXXXXXXXX, Canco operated XXXXXXXXXX facilities in the United States, indirectly through XXXXXXXXXX. On XXXXXXXXXX, Canco announced the sale of XXXXXXXXXX to XXXXXXXXXX, Inc. for USD XXXXXXXXXX. Proceeds of this sale were used to pay down debt.
PROPOSED TRANSACTIONS
10. The Spin-off Agreement will be completed, such that the XXXXXXXXXX will acquire from Canco all of Canco's shares of Newco, for a cash payment to Canco in the amount of approximately CAD XXXXXXXXXX.
11. The XXXXXXXXXX will subscribe for additional shares of Newco's capital stock, for an aggregate subscription price of approximately CAD XXXXXXXXXX.
12. The Packaging Agreement will be completed, such that Newco will acquire from US Holdco all of US Holdco's shares of XXXXXXXXXX, for a cash payment to US Holdco in the amount of approximately CAD XXXXXXXXXX.
13. US Holdco will make a payment on the Dividend Notes, in the amount of approximately CAD XXXXXXXXXX.
14. The stated capital account maintained in respect of the Canco Common Shares will be reduced by approximately CAD XXXXXXXXXX, and this amount will be distributed among the holders of the Canco Common Shares, which will result in a return of capital to the XXXXXXXXXX of approximately CAD XXXXXXXXXX, being the aggregate amount paid by them to Canco and Newco for their Newco shares, and will compensate Canco's minority public shareholders who will not acquire an interest in Newco.
PURPOSE OF PROPOSED TRANSACTIONS
The purpose of the proposed series of transactions is to permit Canco to cease to carry on substantial parts of the XXXXXXXXXX Business, so that Canco could thereafter focus on developing the XXXXXXXXXX Business.
RULINGS
Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and purposes of the Proposed Transactions, we confirm the following:
A. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to the distribution made by Canco in respect of the reduction to the stated capital account maintained in respect of the Canco Common Shares, as described above in paragraph 14, such that Canco will be deemed to have paid, and the holders of Canco Common Shares will be deemed to have received, a dividend only to the extent that the amount so distributed by Canco exceeds the amount by which the paid-up capital in respect of the Canco Common Shares is reduced on the distribution.
B. The amount received by each holder of Canco Common Shares on the reduction of the paid-up capital of those shares, as described above in paragraph 14, will be deducted in computing the adjusted cost base of the holder's Canco Common Shares by virtue of subparagraph 53(2)(a)(ii).
C. Subject to the application of subsection 40(3), the reduction of the paid-up capital of the Canco Common Shares, as described above in paragraph 14, will not, in and by itself, result in a disposition of the Canco Common Shares within the meaning of section 54.
.
D. Subject to the application of section 47, the cost to each of the XXXXXXXXXX of the Newco shares acquired by it in accordance with the Spin-off Agreement, as described above in paragraph 10, will be equal to the amount paid by it for those shares pursuant to that agreement.
E. Subject to the application of section 47, the cost to each of the XXXXXXXXXX of the Newco shares acquired by it, as described above in paragraph 11, will be equal to the subscription price paid by it for those shares.
F. No income or capital gain will be realized by any holder of the Canco Common Shares by reason of the disposition or other use by such holder of cash received from Canco on the reduction of the paid-up capital of the Canco Common Shares, as described in paragraph 14.
G. Subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to redetermine the tax consequences described in the rulings given.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 provided that the Proposed Transactions are completed by 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 specifically described.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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