2014-0530371R3 Combination of credit unions

Principal Issues: Whether: (1) subsection 85.1(1) applies to the share for share exchange pursuant to which Acquireco would acquire all the shares that each member of Targetco holds in exchange for shares in Acquireco; (2) subsection 88(1) applies to the transfer of the rights, property and assets of Targetco distributed to Acquireco on the dissolution of Targetco; and (3) subsection 137(4.1) applies to Targetco's transfer of its rights, property and assets to Acquireco on the winding-up

Position: (1) Yes; (2) Yes; (3) No

Reasons: (1) Subsection 85.1(1) applies to the exchange pursuant to which the vendor exchanges shares in Targetco for shares in Acquireco; (2) For the purposes of paragraph 88(1)(a), we should consider that not less than 90% of the issued shares in the subsidiary will be held by the parent "immediately before the winding-up" since all the shares of the subsidiary will be owned by the parent prior to the transfer of its assets and the assumption of its liabilities, and its ultimate dissolution; (3) Acquireco will not become a member of Targetco, as that term is defined in subsection 137(6), at any point in time during the process leading to Targetco' dissolution

Author: XXXXXXXXXX
Section: 85.1(1) and (2)(d); 88(1)(a), (b) and (e.2); 137(4.1), (4.4) and (6)

XXXXXXXXXX                                            2014-053037

Attention:  XXXXXXXXXX

XXXXXXXXXX, 2014

Dear Sir,
Re:   Advance Income Tax Ruling
         XXXXXXXXXX

This is in reply to your letter in which you requested an advance income tax ruling on behalf of the above-referenced taxpayer (“Rulings Request”).  The information that you provided in the aforementioned letter and our email correspondence only forms part of this letter to the extent described herein.  
To the best of your knowledge and that of the above-referenced taxpayer, none of the issues raised in the Rulings Request is:
(i)   in an earlier income tax return of the above-referenced taxpayer  or a person related to that taxpayer;
(ii)  being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the above-referenced taxpayer or a person related to that taxpayer;
(iii) under objection by the above-referenced taxpayer or a person related to that taxpayer;
(iv)  before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; or
(v)   the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Furthermore, the above-referenced taxpayer has confirmed that the proposed transactions described herein will not result in it or any related person described herein being unable to pay any of its outstanding tax liabilities.
Unless otherwise expressly stated, all statutory references herein are to sections or subsections, paragraphs or subparagraphs and clauses or subclauses of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter, and all references to monetary amounts are in Canadian dollars.
DEFINITIONS:
“ACB” means adjusted cost base as that term is defined by section 54.

“Acquireco” means XXXXXXXXXX, which is a Credit Union having its head office at XXXXXXXXXX.

“Act1” means the XXXXXXXXXX.
“Agreement” means the Asset Transfer Agreement that Targetco will propose and submit to the XXXXXXXXXX, which provides for the Share for Share Exchange and the Asset Transfer.
“Arm’s Length” has the meaning assigned by subsection 251(1).
“Asset Transfer” means the transfer of the rights, properties and assets to, and the assumption of the liabilities of Targetco by Acquireco on the Effective Time in accordance with section XXXXXXXXXX of Act1
“Certificate of Business Acquisition” means the certificate of business acquisition issued by the Registrar showing that, on the Effective Date, Acquireco will have acquired the assets and assumed the liabilities of Targetco, and will carry on the business of Targetco.
XXXXXXXXXX.
“Cost Amount” has the meaning assigned by subsection 248(1).
“Credit Union” means a credit union as that term is defined in subsection 137(6).
“Dissent Rights” means the rights granted to shareholders of Targetco to require that Acquireco purchase their Class C XXXXXXXXXX shares at their FMV for cash consideration as determined under the Agreement.
“Dissolution” means the dissolution of Targetco on the Effective Date under section XXXXXXXXXX of Act1.
“Effective Date” means the date when the Members will exchange the shares in Targetco for shares of Acquireco, and when Acquireco will acquire the assets and assume the liabilities of Targetco.
“FAPI” means foreign accrual property income as that term is defined in subsection 95(1)
“FMV” means fair market value, which refers to the amount, expressed in money terms, that is the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm’s length and under no compulsion to act.

“Member” means a person recorded as a member of Targetco pursuant to section XXXXXXXXXX of Act1 and entitled to participate in the services provided by Targetco.
“Paragraph” means a numbered paragraph in this letter.
“PUC” means paid-up capital as that term is defined in subsection 89(1).
“Registrar” means the Registrar of Companies appointed pursuant to section XXXXXXXXXX of the Business Corporations Act XXXXXXXXXX.
“Rules” means the rules governing a Credit Union adopted under section XXXXXXXXXX of Act1.
“Share for Share Exchange” means the transfer of the shares described in Paragraph 8 that each Member of Targetco owns in that Credit Union to Acquireco in exchange for shares in Acquireco on the Effective Date pursuant to subsection XXXXXXXXXX of Act1.
“Special Resolution” means a resolution of the Credit Union passed by a majority of not less than XXXXXXXXXX of the votes cast by the Members who are entitled to vote in accordance with any of the methods permitted under the Rules of the Credit Union.
“Targetco” means XXXXXXXXXX, which is a Credit Union having its head office at XXXXXXXXXX.
“Winding-Up” means the winding-up and the discontinuance of Targetco’s business as described in Paragraph 12.
FACTS:
1.    Acquireco has the following authorized share capital:
(a)   Class “A” XXXXXXXXXX Shares
(b)   Class “B” XXXXXXXXXX Shares
(c)   XXXXXXXXXX
(d)   XXXXXXXXXX
(e)   XXXXXXXXXX
(f)   XXXXXXXXXX
(g)   XXXXXXXXXX
(h)   XXXXXXXXXX
All XXXXXXXXXX shares have a par value of $XXXXXXXXXX and are redeemable for their par value plus any dividends declared but unpaid thereon.
2.    Targetco has the following authorized share capital:
(a)   Class “A” XXXXXXXXXX Shares
(b)   Class “B” XXXXXXXXXX Shares
(c)   Class “C” XXXXXXXXXX Shares, and
(d)   Class “D” XXXXXXXXXX Shares
All XXXXXXXXXX shares have a par value of $XXXXXXXXXX. Classes “A”, “B”, and “C” are redeemable for their par value plus any dividends declared but unpaid thereon.  No Class “B” XXXXXXXXXX Shares are currently issued and outstanding.
3.    The shares of Acquireco and Targetco are widely held.
4.    No one controls Acquireco or Targetco.
5.    Acquireco and Targetco deal at Arm’s Length with each other.
PROPOSED TRANSACTIONS:
6.    Acquireco and Targetco wish to combine their businesses to form a single corporate entity by way of an asset sale governed by section XXXXXXXXXX of Act1.
The proposal and ratification of the Agreement
7.    In accordance with subsection XXXXXXXXXX of Act1, Targetco will submit the Agreement, which describes the manner in which the issued and unissued shares of Purchaseco will be exchanged for those of Acquireco, to the Commission.
8.    Article XXXXXXXXXX of the Agreement provides that the Share for Share Exchange will be completed as follows: (i) each class A XXXXXXXXXX Share of Targetco will be exchanged for one class A XXXXXXXXXX Share of Acquireco; (ii) each class C XXXXXXXXXX Share of Targetco will be exchanged for one class B XXXXXXXXXX Share of Acquireco; and (iii) each class D XXXXXXXXXX Share of Targetco will be redeemed for an amount of cash agreed upon in the Agreement.
9.    The Members will be entitled to exercise their Dissent Rights prior to the Share for Share Exchange.
10.   Upon receipt of the XXXXXXXXXX’s consent to the Agreement, Targetco will submit the Agreement to its Members for their approval by Special Resolution pursuant to subsection XXXXXXXXXX of Act1.
The execution of the Agreement
11.   In accordance with article XXXXXXXXXX of the Agreement, the Share for Share Exchange will be entered into at XXXXXXXXXX on the Effective Date.
12.   In accordance with article XXXXXXXXXX of the Agreement, Targetco will transfer to Acquireco and Acquireco will acquire from Targetco all its rights, property and assets at XXXXXXXXXX on the Effective Date as part of the Winding-Up.
13.   Targetco will deliver the executed Agreement to the XXXXXXXXXX under subsection XXXXXXXXXX of Act1.
14.   In accordance with subsection XXXXXXXXXX of Act1, the XXXXXXXXXX will stipulate that the Agreement will be effective as of the Effective Date, and will deliver the executed Agreement to the Registrar.
15.   Upon receipt of the executed Agreement, the Registrar will issue a Certificate of Business Acquisition pursuant to paragraph XXXXXXXXXX of Act1 showing that, on the Effective Date, Acquireco will have acquired the assets and assumed the liabilities of Targetco and will carry on the business of both Credit Unions.
16.   In accordance with section XXXXXXXXXX of Act1, the rights, properties and assets of Targetco will be deemed to have been transferred to and vested in Acquireco, and the liabilities of Targetco will be deemed to have been transferred and assumed by Acquireco on and after the Effective Date.
The dissolution of Targetco
17.   Targetco will be deemed to have been dissolved on the Effective Date pursuant to section XXXXXXXXXX of Act1.
PURPOSE OF THE PROPOSED TRANSACTIONS:
Acquireco and Targetco each carry on the business of providing banking, lending, investment, and other retail financial services to their members. Acquireco and Targetco wish to combine their businesses so as to obtain synergies and economies of scale in their operations and to obtain a larger share of the credit union market.

RULINGS:

Provided that the above statements of facts, Proposed Transactions and Purpose of the Proposed Transactions are accurate and constitute complete disclosure of all relevant information, our rulings are as follows:
A.    Provided that a Member who, immediately before the Share for Share Exchange described in Paragraph 11, holds Class A XXXXXXXXXX Shares, class C XXXXXXXXXX Shares or shares of both classes in Targetco at that time: 
(a)   holds such shares as capital property at that time;
(b)   deals at Arm’s Length with Acquireco at that time;
(c)   does not file an election under subsection 85(1) or (2) with respect to exchange of such shares as part of the Share for Share Exchange;
(d)   does not receive on the Share for Share Exchange consideration for the Class A XXXXXXXXXX shares other than Class A XXXXXXXXXX Shares in Acquireco;
(e)   does not receive on the Share for Shares Exchange consideration for the Class C XXXXXXXXXX Shares other than Class B XXXXXXXXXX Shares in Acquireco;
(f)   does not include any portion of the gain or loss in respect of the exchange of the Class A XXXXXXXXXX Shares and the Class C XXXXXXXXXX Shares otherwise determined in computing his or her income for the year of the Share for Share Exchange;
(g)   is not a person described in subparagraph 85.1(2)(e)(i) who has included any portion of the gain or loss from the disposition of the Class A XXXXXXXXXX Shares and class C XXXXXXXXXX Shares in computing its FAPI for the taxation year that includes the Share for Share Exchange;
and further provided that immediately after the Share for Share Exchange such a Member or persons with whom the Member does not deal at Arm’s Length, or such a Member together with any other person or persons with whom such a Member does not deal at Arm’s Length will not control Acquireco or beneficially own shares of Acquireco having an aggregate FMV representing more than 50% of the aggregate FMV of all the outstanding shares in Acquireco;
then, pursuant to paragraph 85.1(1)(a):
(h)   such Member will be deemed to have disposed of the Class A XXXXXXXXXX Shares in Targetco for proceeds of disposition equal to the aggregate ACB of such Class A XXXXXXXXXX Shares in Targetco to the Member immediately before the Share for Share Exchange;
(i)   such Member will be deemed to have disposed of the Class C XXXXXXXXXX Shares in Targetco for proceeds of disposition equal to the aggregate ACB of such Class C XXXXXXXXXX Shares in Targetco to the Member immediately before the Share for Share Exchange; and
(j)   such Member will be deemed to have acquired the Class A XXXXXXXXXX Shares in Acquireco that he or she will receive in exchange for his or her Class A XXXXXXXXXX Shares in Targetco at an aggregate cost equal to the aggregate ACB of his or her Class A XXXXXXXXXX Shares in Targetco immediately before the Share for Share Exchange;
(k)   such Member will be deemed to have acquired the Class B XXXXXXXXXX Shares in Acquireco that he or she will receive in exchange for his or her Class C XXXXXXXXXX Shares in Targetco at an aggregate cost equal to the aggregate ACB of his or her Class C XXXXXXXXXX Shares in Targetco immediately before the Share for Share Exchange;
and, pursuant to paragraph 85.1(1)(b):
(l)   the cost to Acquireco of each of the Class A XXXXXXXXXX Shares and Class C XXXXXXXXXX Shares in Targetco share that it acquires from each such Member on the Share for Share Exchange will be deemed to be the lesser of the FMV and the PUC of such shares immediately before the Share for Share Exchange.
B.    Subject to subsection 69(11), the provisions of subsection 88(1) will apply to the Proposed Transactions such that:
(a)   Pursuant to subparagraph 88(1)(a)(iii), each property of Targetco that will be distributed to Acquireco on the Winding-Up will be deemed to have been disposed for proceeds equal to the Cost Amount of the property to Targetco immediately before the Winding-Up;
(b)   Acquireco will be deemed to have disposed of all its shares in Targetco on the Winding-Up for proceeds equal to the greater of the amounts described in subparagraphs 88(1)(b)(i) and (ii); and
(c)   Pursuant to paragraphs 88(1)(c) and (d), the cost to Acquireco of each property distributed by Targetco to Acquireco on the Winding-Up shall be deemed to be equal to the amount deemed to be the proceeds of that property to Targetco pursuant to subparagraph 88(1)(a)(iii).
C.    Subsection 137(4.1) will not apply to deem an amount paid or payable by Targetco to Acquireco in respect of a share of its capital stock on the Winding-Up to have been paid by Targetco and received by Acquireco as interest.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R6 issued on August 29, 2014, and are binding on the CRA, provided that the Proposed Transactions are completed within six months of the date of this letter.

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 letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of:
(a)   The PUC of any shares or the FMV or the ACB of any particular asset referred herein, or
(b)   Any other tax consequences relating to the Facts, Proposed Transactions or any event taking place either prior to or subsequent to the Proposed Transactions whether described in this letter or not other than those specifically described in the above Rulings.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
Reorganizations Division
Income Tax Ruling Directorate
Legislative Policy and Regulatory Affairs Branch

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