2003 Ruling 2003-0038003 - Acquisition of Control

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: Do the proposed transactions result in an acquisition of control of Canco?

Position: No.

Reasons: By virtue of paragraphs 256(7)(a) and (b).

XXXXXXXXXX 2003-003800

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is in reply to 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 taxpayers, none of the issues involved in the requested rulings:

- is in an earlier return filed by the taxpayer, or a related person;

- is being considered by a Tax Services Office or taxation centre in connection with an income tax return previously filed by the taxpayer or a related person;

- is subject to a notice of objection under section 165 of the Act or is otherwise under appeal or,

- except as disclosed herein, is the subject of a previous ruling.

Definitions

"Act" means the Income Tax Act, RSC 1985 c. 1 (5th Supplemental), as amended and all statutory references are, unless otherwise noted, references to provisions of the Act;

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

"Aco" means XXXXXXXXXX;

XXXXXXXXXX;

"CBCA" means the Canada Business Corporations Act, RSC 1985, c. C-44, as amended;

"Cco" means XXXXXXXXXX;

"CLco" means XXXXXXXXXX;

"Dco" means XXXXXXXXXX;

"Xco" means XXXXXXXXXX;

"Partnership" means XXXXXXXXXX, a partnership to be formed by the Shareholders in the course of the proposed transactions;

"Rco" means XXXXXXXXXX;

"Canco" means XXXXXXXXXX;

"Shareholders" means Aco, Cco, CLco, Dco, Xco, Rco and WLco;

"Shareholders Agreement" has the meaning given in paragraph (20 of the Proposed Transactions;

"Sco" means XXXXXXXXXX;

""Sub1" and "Sub2" are wholly-owned subsidiaries of Xco and are both taxable Canadian corporations";

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

"Throughput" has the meaning given in paragraph (9 of the Facts;

"WLco" means XXXXXXXXXX; and

"Wco" means XXXXXXXXXX.

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

Facts

1) Canco is a taxable Canadian corporation governed by the XXXXXXXXXX. Its principal assets are a XXXXXXXXXX% interest in Wco, and a XXXXXXXXXX% interest in Sco.

2) Wco is a taxable Canadian corporation which provides XXXXXXXXXX.

3) Sco is a XXXXXXXXXX international business corporation governed by the XXXXXXXXXX Company Act. Its principal business is the XXXXXXXXXX. It is XXXXXXXXXX a resident of XXXXXXXXXX and not to be a resident of Canada.

4) Canco's Memorandum, in compliance with XXXXXXXXXX describes the authorized capital of Canco as XXXXXXXXXX shares consisting of:

(a) XXXXXXXXXX common shares with a par value of $XXXXXXXXXX each;

(b) XXXXXXXXXX Class A Preferred Shares without par value; and

(c) XXXXXXXXXX Class B Preferred Shares with a par value of $XXXXXXXXXX each.

5) Canco's Articles, in compliance with XXXXXXXXXX, provide that the following special rights and restrictions attach to the issued and outstanding Class A Preferred Shares and the Class B Preferred Shares in its capital:

(a) The Class A Preferred Shares:

(i) except as expressly otherwise required by the XXXXXXXXXX, do not have any voting rights for the election of directors or for any other purpose;

(ii) are not in any circumstance entitled to receive any dividends;

(iii) may be redeemed by Canco for $XXXXXXXXXX per Share; and

(iv) are entitled, on liquidation, to a preferential distribution of $XXXXXXXXXX per Share but no more.

(b) The Class B Preferred Shares:

(i) except as otherwise required by the XXXXXXXXXX, do not have any voting rights for the election of directors or for any other purpose;

(ii) are not in any circumstances entitled to receive any dividends;

(iii) may be redeemed by Canco for $XXXXXXXXXX per Share; and

(iv) are entitled, on liquidation, to a preferential return of $XXXXXXXXXX per Share but no more.

6) The Articles of Canco do not prescribe any special rights and restrictions for the common shares; accordingly, they are accorded one vote per share, are entitled to share equally in dividends and in any surplus on liquidation.

7) The Articles of Canco do contain a rule dealing with voting which reads as follows:

XXXXXXXXXX.

This rule was added to the Articles in XXXXXXXXXX and has never been amended. It was added in an attempt to ensure that, in compliance with the Foreign Investment Review Act as it then was, no shareholder controlled by non-residents exercised more than 20% of the votes in relation to Canco. XXXXXXXXXX.

8) Canco's issued shares are legally and beneficially owned by, and registered in the names of, seven different taxable Canadian corporations, each of which is engaged in a XXXXXXXXXX business in XXXXXXXXXX. Each of the Shareholders is a substantial and significant company and each of the Shareholders deals at arm's length with each of the other Shareholders. These companies and their holdings (in each case, legal, beneficial and registered) of shares of Canco are summarized as follows:

Shareholder
Common Shares
Class A
Preferred Shares
Class B
Preferred Shares

Aco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Cco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Clco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Dco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Xco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Rco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Wlco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Total
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

9) Sco's customers include the Shareholders as well as other persons. XXXXXXXXXX. The preferred shares in Canco have been issued to the Shareholders over the years to act as markers of their legal entitlement to a specific amount of Canco income when, and if, distributed.

10) Canco has accumulated non-capital loss carry forwards derived from XXXXXXXXXX operations formerly carried on directly by it and from deductions under paragraph 110(1)(k) of the Act in relation to Part VI.1 tax paid by it.

Proposed Transactions

11) Reorganization of Capital of Canco

The Memorandum of Canco will be amended to authorize two new classes of shares (Class C and D shares with a par value of $XXXXXXXXXX each) and its Articles will be amended to attach special rights and restrictions to the two new classes of shares as follows:

(i) Class C voting shares will carry one vote per share, will not participate in any dividends, and will be entitled to a preferential return, after payment of all amounts required to preferred shareholders, of their par value in the event of a liquidation or dissolution of Canco.

(ii) Class D non-voting shares will not be entitled to vote. They will be entitled to participate pro rata in relation to dividends with the common shares. They will participate pro rata with the common shares on the liquidation or dissolution of Canco.

12) Each Shareholder will exchange its common shares in the capital of Canco for an equal number of class C voting shares and class D non-voting, participating shares in the capital of Canco.

13) Xco will transfer XXXXXXXXXX of its Class C voting shares to each of two of its wholly-owned subsidiaries, Sub1 and Sub2, in exchange for additional common shares of each subsidiary. Elections under subsection 85(1) will be filed in relation to these transfers.

14) The Memorandum of Canco will be amended to delete the portion of Article XXXXXXXXXX which purports to restrict the voting rights attached to voting shares held by significant shareholders.

15) Creation of Partnership

(a) The Shareholders will enter into an agreement forming the Partnership, a partnership governed by the XXXXXXXXXX Partnership Act. The Partnership's business will be to lease the office premises of Canco from the owner thereof and sublease those premises to Canco, to hold shares in Canco and any other such business as is approved by the partners.

(b) The Partnership Agreement will call for the sharing of distributions amongst the partners in proportion to Throughput provided by partners, and will view all distributions as being on a first-in, first-out basis with earliest year's profits being viewed as the first to be distributed. Voting rights in respect of the Partnership matters will be allocated amongst the partners in proportion to their respective average Throughput over the most recent XXXXXXXXXX years. As a result, Xco will, at the outset, have the right to over XXXXXXXXXX% of the votes which can be cast at a Partnership meeting.

16) Transfer of Canco Non-voting Shares to the Partnership

Each of the Shareholders will then transfer all of its Class A Preferred Shares and Class B Preferred Shares and class D non-voting, participating shares in the capital of Canco to the Partnership as a contribution of capital. Each partner will, together with the Partnership, make an election under subsection 97(2), electing that the transfer occur at the adjusted cost base of its respective shares.

17) Formation of Newco

Xco will incorporate Newco under the XXXXXXXXXX and will subscribe for the subscriber's share, being one class A voting, non-participating share. The share capital of Newco will consist of two classes of shares:

(i) class A voting, non-participating shares with a par value of $XXXXXXXXXX each. The shares will carry one vote per share, will not participate in any dividends, and will be entitled to a preferential return of their par value in the event of a liquidation or dissolution of Newco; and

(ii) class B common, non-voting, participating shares with a par value of $XXXXXXXXXX each. The shares will not be entitled to vote. They will be entitled to participate pro rata in relation to dividends and in all remaining assets on the liquidation or dissolution of the company.

18) All of the issued shares of Canco held by the Partnership, by the Shareholders and by Sub1 and Sub2 will be transferred to Newco as follows:

(i) each of the Shareholders and Sub1 and Sub2 will transfer its class C, voting shares with a par value of $XXXXXXXXXX each to Newco in exchange for class A voting, non-participating shares with a par value of $XXXXXXXXXX each in the capital of Newco on a 1-for-1 basis, except that Xco will receive only XXXXXXXXXX class A shares (not XXXXXXXXXX).

(ii) the Partnership will transfer its Class A Preferred Shares, Class B Preferred Shares, and its class D non-voting, participating shares in the capital of Canco to Newco in exchange for a demand promissory note in an amount equal to its total adjusted cost base of all of the Class A and B Preferred Shares and for class B non-voting, participating shares with a par value of $XXXXXXXXXX each in the capital of Newco.

Each transferor will, together with Newco, make an election under subsection 85(1) electing that each transfer occur at the adjusted cost base of the relevant share.

19) Canco and Newco will be amalgamated to form an amalgamated company ("Amalco") under the provisions of XXXXXXXXXX. All of the shares in the capital of Canco will be cancelled and the issued share capital of Amalco will be the same as that of Newco immediately prior to the amalgamation.

20) The holders of the class A voting, non-participating shares in the capital of Amalco will enter into an agreement (the "Shareholders Agreement") to vote their Class A, voting, non-participating shares in its capital as directed by the Partnership. The Partnership Agreement will provide that the voting rights in relation to these shares will be exercised as directed by a resolution passed with the support of parties holding over XXXXXXXXXX% of the votes in the Partnership.

Purposes of the Proposed Transactions

The proposed transactions result in the Shareholders holding their participating equity interest in Canco through the Partnership under the terms of that Partnership Agreement, rather than directly. The restructuring achieves a number of commercial objectives related to solidifying the legal basis of the relationships amongst the Shareholders. These include:

1) providing, through the Partnership, a forum at which all Shareholders are entitled to meet and speak on a regular basis to discuss the business of Canco;

2) providing, through the Partnership, a legally enforceable right to distributions in accordance with the existing commercial understanding;

3) removing, through the reorganization of capital of Canco, the invalid and potentially misleading restriction on voting rights contained in Article XXXXXXXXXX; and

4) providing, through the Partnership and the Shareholders Agreement, a mechanism whereby the voting in respect of Canco is as directed by the partners holding a majority of the voting rights at the Partnership level.

In addition, the restructuring eliminates all preferred shares from the capital of Canco. This will allow Canco's successor by amalgamation to distribute dividends to the Partnership without incurring any Part VI.1 tax.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:

A. The proposed transactions, in and of themselves, will not result in an acquisition of control of Canco or Amalco by a person or group of persons for purposes of the provisions referred to in the preamble to subsection 256(7).

B. Subsection 245(2) will not apply to deem an acquisition of control of Canco or Amalco to occur as a result of the proposed transactions.

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:

(b) the determination of the adjusted cost base, paid-up capital or fair market value of any shares referred to herein; or

(c) any tax consequences relating to the facts and proposed transactions described herein other that those described in the ruling given above.

Yours truly,

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