2003 Ruling 2003-0005243 - Share for Share Exchange

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:

1. Whether a proposed share for share exchange results in an acquisition of control CANCO?

2. Whether the new rights under a shareholder rights plan constitute "consideration other than shares" received on the share exchange for purposes of paragraph 85.1(2)(d)?

Position:

1. No.

2. No.

Reasons: 1. Clause 256(7)(a)(i)(B) will deem there to not be an acquisition of control of CANCO.

2. Based upon the relevant facts and circumstances, it is reasonable to accept that the new rights are not consideration for the shares exchanged

XXXXXXXXXX 2003-000524

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Reorganization of XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, which was replaced and restated by your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.

To the best of your knowledge and that of the taxpayer involved, none of the issues involved in this advance income tax ruling:

- is in an earlier return;

- is 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;

- is under objection;

- is before the courts; or

- is the subject of a ruling previously considered by the Directorate.

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

Definitions

Non-Statutory Terms

In this ruling request, unless expressly otherwise stated:

? "Arrangement" means the series of transactions and events set forth in the "Plan of Arrangement";

? "CCRA" means Canada Customs and Revenue Agency, formerly known as Revenue Canada;

? "Effective Date" means the effective date of the Plan of Arrangement;

? "Effective Time" means XXXXXXXXXX hrs (Mountain Daylight Savings Time) on the Effective Date;

? "FMV" means "fair market value" and is the highest price available in an open and unrestricted market between informed, prudent parties dealing at arm's length and under no compulsion to transact;

? XXXXXXXXXX;

? "Paragraph" refers to a numbered paragraph in this letter;

? XXXXXXXXXX;

? "Plan of Arrangement" means the proposed plan of arrangement under section 192 of the CBCA in respect of the proposed transactions set forth in this ruling request;

? "Proposed Transactions" means the transactions described below under the heading PROPOSED TRANSACTIONS;

? "Public Holdco" means the corporation described in Paragraph 13;

? "Public Holdco Common Share" means an outstanding voting fully participating common share of Public Holdco;

? "Public Holdco Stock Option" means an employee stock option entitling the holder to acquire one or more Public Holdco Common Shares;

? XXXXXXXXXX;

? "CANCO" means XXXXXXXXXX as described in Paragraph 1;

? "CANCO Common Shareholder" means a holder of a CANCO Common Share;

? "CANCO Common Share" means an outstanding voting fully participating common share of CANCO;

? XXXXXXXXXX;

? XXXXXXXXXX;

? XXXXXXXXXX;

? "CANCO Preferred Share" means an outstanding CANCO XXXXXXXXXX Share or CANCO XXXXXXXXXX Share;

? "CANCO XXXXXXXXXX Share" means a XXXXXXXXXX cumulative redeemable first preferred share of CANCO as described in Paragraph 4(a)(i);

? "CANCO XXXXXXXXXX Share" means a XXXXXXXXXX cumulative redeemable first preferred share of CANCO as described in Paragraph 4(a)(ii);

? "CANCO Shareholder" means a holder of a CANCO Share;

? "CANCO Share" means a CANCO Common Share or a CANCO Preferred Share;

? "CANCO Stock Option Plan" means the CANCO XXXXXXXXXX Stock XXXXXXXXXX Plan (XXXXXXXXXX) as described in Paragraph 6;

? "CANCO Stock Option" means an employee stock option entitling the holder to acquire one or more CANCO Common Shares under the CANCO Stock Option Plan;

? "CANCO's Solicitor" means the lawyer referred to in Paragraph 13;

? XXXXXXXXXX;

? XXXXXXXXXX;

? XXXXXXXXXX.

Statutory Terms

In this ruling request, unless otherwise expressly stated:

? "ACB" means "adjusted cost base" as that term is defined in section 54;

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

? "capital property" has the meaning assigned by section 54;

? "CBCA" means the Canada Business Corporation Act, R.S.C. 1985, c.C-44, as amended to the date hereof;

? "PUC" means "paid-up capital" as that expression is defined in subsection 89(1);

? "prescribed stock exchange" has the meaning assigned by section 3200 of the Regulations;

? "proceeds of disposition" has the meaning assigned by section 54;

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

? "Regulations" refers to the Income Tax Regulations;

? "related persons" has the meaning assigned by subsection 251(2);

? "series of transactions or events" has the meaning assigned by subsection 248(10);

? "stated capital" has the meaning set forth in the CBCA; and

? "taxable Canadian corporation" has the meaning assigned by subsection 89(1).

Our understanding of the facts, purposes of the proposed transactions and proposed transactions is as follows:

FACTS

1. CANCO is a taxable Canadian corporation and a public corporation, the shares of which are listed on XXXXXXXXXX Stock Exchange and XXXXXXXXXX Stock Exchange. CANCO is engaged directly and indirectly through its subsidiary corporations and partnerships in the XXXXXXXXXX.

2. XXXXXXXXXX.

3. The Tax Services Office and Taxation Centre which are responsible for CANCO are the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre. CANCO's business number is XXXXXXXXXX.

4. As at XXXXXXXXXX, the following was the issued and outstanding share capital of CANCO:

(a) CANCO Preferred Shares

(i) XXXXXXXXXX Shares (the "CANCO XXXXXXXXXX Shares")

(ii) XXXXXXXXXX Shares (the "CANCO XXXXXXXXXX Shares")

The CANCO Preferred Shares are non-voting in respect of the election of the board of directors of CANCO, except in the event of a failure or default under the terms or conditions of such shares. The CANCO Preferred Shares are not convertible into or exchangeable for shares of CANCO other than shares having these same characteristics. On or after XXXXXXXXXX, CANCO may redeem the CANCO XXXXXXXXXX Shares for $XXXXXXXXXX per share, and on or after XXXXXXXXXX, CANCO may redeem the CANCO XXXXXXXXXX Shares for $XXXXXXXXXX per share. The PUC and redemption amount of the CANCO Preferred Shares are as follows:

Series
PUC
Redemption Amount
CANCO XXXXXXXXX Shares
$XXXXXXXXXX
$XXXXXXXXXX
CANCO XXXXXXXXX Shares
$XXXXXXXXXX
$XXXXXXXXXX

(b) XXXXXXXXXX CANCO Common Shares

As at XXXXXXXXXX, the aggregate PUC of the CANCO Common Shares was approximately $XXXXXXXXXX.

5. CANCO has paid dividends on the CANCO Common Shares since XXXXXXXXXX.

Employee Compensation Matters

6. CANCO has granted CANCO Stock Options to certain key employees under the CANCO XXXXXXXXXX (the "CANCO Stock Option Plan"). XXXXXXXXXX.

XXXXXXXXXX.

7. XXXXXXXXXX group index for such year, a lesser amount, or no amount, may be accrued as determined by a committee designated by CANCO's board of directors. A Performance Unit may be exercised for the amount accrued on the unit at any time following the third anniversary of the award date, provided that the CANCO Stock Option granted on the corresponding award date is exercised on or before the date of exercise of the Performance Unit, but not prior to the XXXXXXXXXX year anniversary from the award date. A Performance Unit is deemed to be exercised automatically on the XXXXXXXXXX anniversary of the award date. In addition, in order for a Performance Unit to be exercised, at the time of exercise the market price of a CANCO Common Share plus the amount accrued on the Performance Unit must not be less than the market price of a CANCO Common Share on the award date of the Performance Unit. As at XXXXXXXXXX, a total of XXXXXXXXXX Performance Units had been granted with an accrued bonus amount of approximately $XXXXXXXXXX. In XXXXXXXXXX, the CANCO Performance Unit Plan was amended to provide that no further Performance Units would be issued under the plan.

8. XXXXXXXXXX.

9. XXXXXXXXXX.

Debt Financing Matters

10. XXXXXXXXXX.

PROPOSED TRANSACTIONS

General Outline of the Plan of Arrangement Transactions

11. Under the Plan of Arrangement, on the Effective Date the following transactions will be completed in the following sequence:

(a) The shareholder rights plan of CANCO (described in Paragraph 20) will be terminated and the existing rights issued and outstanding thereunder will be cancelled;

(b) The public shareholders of CANCO will exchange each of their CANCO Common Shares for an identical number of Public Holdco Common Shares;

(c) Public Holdco will issue, in accordance with and pursuant to a shareholder rights plan to be adopted by Public Holdco (as described in Paragraph 20), one contingent right to acquire a Public Holdco Common Share for each Public Holdco Common Share issued pursuant to Paragraph 11(b); and

(d) Holders of CANCO Stock Options will exchange them for an identical number of Public Holdco Stock Options.

As a result of these transactions, Public Holdco will have replaced CANCO as the parent corporation in the CANCO group of corporations. Public Holdco will be a holding corporation that will own all of the outstanding CANCO Common Shares. The holders of CANCO Preferred Shares will continue to own such shares rather than exchanging them for preferred shares of Public Holdco.

Detailed Description of Proposed Transactions

12. Subject to the appropriate shareholder, regulatory and court approvals, the transactions described under this heading will be undertaken on or before the Effective Date pursuant to the Plan of Arrangement in the sequence set forth below.

13. Prior to the Effective Date, CANCO will instruct a partner in the XXXXXXXXXX law firm ("CANCO's Solicitor") to cause a new corporation ("Public Holdco") to be incorporated under the CBCA, with CANCO being the incorporator of Public Holdco. CANCO's Solicitor will be the sole initial director of Public Holdco. CANCO will indemnify CANCO's Solicitor against any liability resulting from CANCO's Solicitor being a director or officer of Public Holdco, and will instruct CANCO's Solicitor to complete all actions and execute all documents required in order to implement the Proposed Transactions. No shares of Public Holdco will be issued to CANCO. One common share of Public Holdco may be issued to CANCO's Solicitor for $XXXXXXXXXX before the Effective Date if it becomes necessary to amend the articles of incorporation of Public Holdco. Such share, if issued, will be purchased for cancellation by Public Holdco for $XXXXXXXXXX before the Arrangement becomes effective.

14. The holders of the outstanding CANCO Common Shares who do not exercise rights of dissent will transfer to Public Holdco each of their CANCO Common Shares. As consideration for such transfer, Public Holdco will issue one Public Holdco Common Share for each CANCO Common Share so transferred to Public Holdco. Pursuant to subparagraph 26(3)(a)(ii) of the CBCA, Public Holdco will add to the stated capital account maintained for its common shares an amount equal to the stated capital, at the Effective Date, of all the CANCO Common Shares transferred to Public Holdco. For the purposes of the calculation of the PUC of Public Holdco, to the extent that the stated capital of the Public Holdco Common Shares immediately after the exchange exceeds the PUC of the CANCO Common Shares, subsection 85.1(2.1) will apply. CANCO Common Shareholders who dissent in respect of the Plan of Arrangement will be dealt with in the manner described in Paragraph 19.

15. The holders of the outstanding CANCO XXXXXXXXXX Shares and CANCO XXXXXXXXXX Shares will not transfer such shares to Public Holdco.

16. No elections under subsection 85(1) of the Act will be made in respect of the transfers to Public Holdco of the CANCO Common Shares.

17. (a) Each outstanding CANCO Stock Option will be exchanged for one Public Holdco Stock Option; immediately after which, the CANCO Stock Options will be cancelled. The exercise price under each Public Holdco Stock Option will be determined such that

(i) the amount by which the total value of a Public Holdco Common Share that a holder is entitled to acquire under his Public Holdco Stock Option immediately after the Effective Date exceeds the total amount payable by such holder to acquire a Public Holdco Common Share under a Public Holdco Stock Option;

will not exceed

(ii) the amount by which the total value of a CANCO Common Share that a holder is entitled to acquire under his CANCO Stock Option immediately before the Effective Date exceeds the amount payable by the holder to acquire a CANCO Common Share under a CANCO Stock Option.

XXXXXXXXXX

18. Immediately after completion of the preceding Proposed Transactions, the former holders of each CANCO Common Share, each CANCO Stock Option or rights under the CANCO DSU Plan will own one Public Holdco Common Share, one Public Holdco Stock Option or equivalent rights under Public Holdco's DSU Plan respectively, as the case may be; and Public Holdco will own all of the outstanding CANCO Common Shares.

19. An Interim Order of the XXXXXXXXXX was received on XXXXXXXXXX, directing CANCO and Public Holdco, among other things, to hold a special meeting of CANCO Common Shareholders to consider adopting the Arrangement, adopting a resolution approving it, providing CANCO Common Shareholders a right to dissent in respect of the Arrangement and confirming that a dissenting CANCO Common Shareholder will have a right to be paid by Public Holdco, not CANCO, the fair value of the CANCO Shares held by him determined as of the close of business on the date before the Order of the Court is made. A CANCO Common Shareholder who exercises the right to dissent will cease to have any rights as a shareholder other than the right to be paid by Public Holdco the fair value of his shares, except if the dissenting CANCO Common Shareholder withdraws his notice of dissent and in certain other events set forth in such order of the Court. In accordance with the requirements of such order of the Court, Public Holdco will pay to each CANCO Common Shareholder who validly dissents the fair value of all the Common Shares of CANCO held by him. Immediately following the Arrangement, Public Holdco will own all of the outstanding CANCO Common Shares acquired from dissenting CANCO Common Shareholders, if any.

20. CANCO has adopted a shareholder rights plan. CANCO's board of directors will take such action as it considers necessary to ensure that CANCO's shareholder rights plan will not be triggered by the transactions to be completed pursuant to the Plan of Arrangement. Prior to the Effective Date, Public Holdco will adopt a shareholder rights plan. In accordance with the Plan of Arrangement, the contingent share purchase rights attached to each CANCO Common Share will be terminated. Such rights do not have any material value as it is not expected that any of these rights would ever become exercisable. These contingent rights entitle holders to acquire common shares at a substantial discount from their market value upon the occurrence of a triggering event, i.e. an acquisition under a take-over bid other than a "permitted bid". These rights would not be exercisable by the person acquiring shares under such a bid. Pursuant to the Plan of Arrangement, in accordance with the Public Holdco shareholder rights plan, Public Holdco will issue contingent rights to acquire Public Holdco Common Shares to all persons to whom Public Holdco Common Shares are issued in exchange for CANCO Common Shares.

PURPOSE OF PROPOSED TRANSACTIONS

21. The purpose of the Proposed Transactions is to cause Public Holdco to become a publicly traded holding company which will own all of the CANCO Common Shares.

22. XXXXXXXXXX.

RULINGS

Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, purposes of the proposed transactions and proposed transactions, we rule as follows:

A. Provided that a CANCO Common Shareholder who immediately before the exchange of shares described in paragraph 14:

(a) holds his CANCO Common Shares as capital property;

(b) does not include, in computing his income for the taxation year in which the exchange of his CANCO Common Shares pursuant to the Plan of Arrangement takes place, any portion of the gain or loss, otherwise determined, from the disposition of such shares;

(c) deals at arm's length with Public Holdco immediately before such exchange;

(d) does not file a joint election under subsection 85(1) or 85(2) with Public Holdco with respect to the CANCO Common Shares;

(e) does not receive any consideration other than Public Holdco Common Shares in exchange for CANCO Common Shares;

and provided that immediately after the exchange:

(f) such holder or persons with whom such holder does not deal at arm's length or such holder together with persons with whom he does not deal at arm's length will not:

(i) control Public Holdco; or

(ii) beneficially own shares of Public Holdco having a FMV of more than 50% of the FMV of all of the outstanding shares of Public Holdco;

such holder will be deemed to have disposed of his CANCO Common Shares for proceeds of disposition equal to the ACB to him of such shares immediately before the exchange, and to have acquired the Public Holdco Common Shares that are issued to him on such exchange at a cost equal to the ACB to him of such CANCO Common Shares immediately before the exchange, in accordance with the provisions of paragraph 85.1(1)(a).

B. The cost to Public Holdco of the CANCO Common Shares acquired from the holders thereof pursuant to the Plan of Arrangement will be deemed to be the lesser of:

(a) the FMV of such CANCO Common Shares immediately before such exchange; and

(b) the PUC of such CANCO Common Shares immediately before such exchange;

in accordance with the provisions of paragraph 85.1(1)(b).

C. The provisions of subsection 7(1.4) will apply to the exchange of a CANCO Stock Option and the issuance of a Public Holdco Stock Option described in paragraph 17 provided that the amount by which:

(a) the total FMV of the Public Holdco Common Shares issuable to the holder of the Public Holdco Stock Option

exceeds

(b) the total amount payable by the holder of the Public Holdco Stock Option to acquire those Public Holdco Common Shares

does not exceed the amount by which

(c) the total FMV of the CANCO Common Shares issuable to the holder of the CANCO Stock Option

exceeds

(d) the total amount payable by the holder of the CANCO Stock Option to acquire those CANCO Common Shares

with the result that for the purpose of section 7 and paragraph 110(1)(d):

(e) such holder of a CANCO Stock Option will be deemed not to have disposed of his CANCO Stock Option and not to have acquired a Public Holdco Stock Option , and

(f) such holder's Public Holdco Stock Options will be deemed to be the same as, and a continuation of, his CANCO Stock Options.

For greater certainty, a holder of a CANCO Stock Option will not be deemed to have received a benefit pursuant to paragraph 7(1)(b) and no income inclusion to such holder will otherwise arise solely as the result of the cancellation of a CANCO Stock Option and the receipt of a Public Holdco Stock Option.

D. There will be no acquisition of control of CANCO solely as a result of the completion of the Proposed Transactions provided that there is no person or group of persons who will act in concert to exercise control of Public Holdco immediately after the Effective Date.

E. A CANCO Shareholder who exercises his right to dissent in respect of the Plan of Arrangement will be considered for purposes of the Act to have received proceeds of disposition for all CANCO Shares in respect of which he exercises such right of dissent, equal to the amount of the cash payment received by such dissenting CANCO Shareholder.

F. Provided that the Public Holdco Common Shares issued to the former holders of CANCO Common Shares pursuant to the Plan of Arrangement are listed on a prescribed stock exchange, such shares will be a "qualified investment" for:

(a) a deferred profit sharing plan by virtue of paragraph (d) of the definition of "qualified investment" in section 204;

(b) a registered retirement savings plan by virtue of paragraph (a) of the definition of "qualified investment" in subsection 146(1);

(c) a registered retirement income fund by virtue of paragraph (a) of the definition of "qualified investment" in subsection 146.3(1); and

(d) a registered education savings plan by virtue of paragraph (a) of the definition of "qualified investment" in subsection 146.1(1).

G. The provisions of subsections 15(1), 56(2) or 246(1) will not be applied as a result of the exchange of shares described in paragraph 14 above.

H. Section 245 will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the Rulings given above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

COMMENTS

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 adjusted cost base, paid-up capital or fair market value of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above.

Yours truly,

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