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:
post-butterfly financing
Position:
no effect on butterfly
Reasons:
55(3.1) not applicable, butterflied property not being disposed
XXXXXXXXXX 1-963022
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re: Advance Income Tax Ruling #3-961734
dated XXXXXXXXXX, 1996 (the "Ruling") XXXXXXXXXX
We are writing in response to your letter of XXXXXXXXXX wherein you informed us of certain proposed financing transactions which will be undertaken after completion of the proposed transactions described in the Ruling. Terms used herein carry the same meaning as is used in the Ruling. It is proposed that the following transactions will be undertaken:
Immediately following the Arrangement, XXXXXXXXXX will lend $XXXXXXXXXX to Newco and assume the Rollover Note for which Newco will issue a note (the "Subscription Note") to XXXXXXXXXX. The Subscription Note will have a maturity date of 18 months from issuance, subject to an option of early repayment in favour of Newco, but (as discussed below) it is anticipated that repayment will occur within a few months. As a condition of the XXXXXXXXXX listing and prior to the Arrangement, XXXXXXXXXX will commit to making the $XXXXXXXXXX loan and the assumption of the Rollover Note in exchange for the Subscription Note following the Arrangement.
Shortly following the Arrangement, Newco will effect an equity financing transaction in the amount of about $XXXXXXXXXX, likely by means of a rights offering. XXXXXXXXXX will subscribe for its pro rata share of any such additional Newco equity, and prior to the Arrangement will express to the XXXXXXXXXX its intention to subscribe for such shares. Under an agreement between Newco and XXXXXXXXXX, in the event of the anticipated Newco equity financing:
XXXXXXXXXX will not, under any circumstances, subscribe for or accept shares of Newco such as would cause XXXXXXXXXX to acquire control of Newco; and
the maturity of the Subscription Note will be accelerated to the extent of any amount owing to Newco on account of the subscription price of Newco shares acquired as part of this financing, and such accelerated amount of the Subscription Note will be applied against such subscription amount owing to Newco.
The above transactions are being undertaken for the following reasons.
The XXXXXXXXXX is insisting that the funds required to satisfy its minimum working capital requirements be in place immediately following the Arrangement and prior to the actual listing of the Newco Common Shares. The post-butterfly equity financing of Newco will take a few months since the applicable securities law requirements (e.g. prospectus filing) must be complied with. An immediate post-Arrangement injection of funds from a "friendly" shareholder with the necessary resources within the context of the overall post-Arrangement financing appears to be the only solution to this XXXXXXXXXX requirement.
The 18-month maturity date of the Subscription Note is the minimum period acceptable to the XXXXXXXXXX in order to characterize these funds as "working capital". It is anticipated that retirement of the Subscription Note in the form of application against share subscriptions from the post-butterfly equity financing will occur before XXXXXXXXXX. A XXXXXXXXXX post-butterfly financing transaction is considered extremely likely to occur by XXXXXXXXXX management since Newco will be unable to conduct operations without such permanent capital.
You have advised us that there have not been any other changes to the relevant facts and proposed transactions as described in the Ruling.
Subject to the conditions stated therein, we confirm that the Ruling will continue to be binding on Revenue Canada provided that the proposed transactions are completed by XXXXXXXXXX.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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