2015-0577141R3 Election to cease to be a public corporation

Principal Issues: Whether an election not to be a public corporation can be made when previously listed shares no longer exist.

Position: Yes.

Reasons: Previous positions. Since as a matter of tax policy, a corporation in this situation should not be precluded from electing not to be a public corporation, the condition in Regulation 4800(2)(a) can be read as applying where previously listed shares no longer exist.

Author: XXXXXXXXXX
Section: 89(1); Reg. 4800

XXXXXXXXXX
                                                                                    2015-057714

XXXXXXXXXX, 2015

Dear Sir,

Re:   Advance Income Tax Ruling
         XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer.

We understand that to the best of your knowledge and that of the above-referenced taxpayer and your client, none of the issues involved described herein is:

(a)   dealt with in an earlier return of the above-referenced taxpayer or a related person;

(b)   being considered by a tax services office or taxation centre in connection with a previously filed tax return of the above-referenced taxpayer or a related person;

(c)   under objection by the above-referenced taxpayer or a related person;

(d)   before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(e)   the subject of a ruling previously issued by the Income Tax Rulings Directorate.

In this letter, unless otherwise specified, all monetary amounts are expressed in Canadian dollars.

Legal Entity Definitions

The transactions described in this ruling involve the following entities:

(a)   “ACo” means XXXXXXXXXX.

(b)   “Amalco” means the continuing corporation to be formed by the amalgamation on the Effective Date of Pubco and Bidco pursuant to the XXXXXXXXXX. It is Amalco’s intention to retain the legal name, business number and address of the predecessor corporation, XXXXXXXXXX.

(c)   “Bidco” means XXXXXXXXXX.

(d)   “Holdco1” means XXXXXXXXXX.

(e)   “Holdco2” means XXXXXXXXXX.

(f)   “Pubco” means XXXXXXXXXX.

(g)   “Purchaseco” means XXXXXXXXXX.

Definitions

In this letter, the following terms have the meanings specified below:

(a)   “Act” means the Income Tax Act, R.S.C. 1985 (5th Supp.) c. 1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act.

(b)   “XXXXXXXXXX Business” means the business unit of Pubco that is XXXXXXXXXX.

(c)   “CRA” means the Canada Revenue Agency.

(d)   “Designated stock exchange” has the meaning assigned by subsection 248(1).

(e)   “Designated stock exchange in Canada” means a designated stock exchange located in Canada for which a designation under section 262 is in effect.

(f)   “XXXXXXXXXX” means the XXXXXXXXXX and the regulations made thereunder, as now in effect and as they may be promulgated or amended from time to time.

(g)   “Paid-up capital” has the meaning assigned by subsections 89(1) and 248(1).

(h)   “Paragraph” means a numbered paragraph in this letter.

(i)   “Prescribed labour-sponsored venture capital corporation” has the meaning assigned by Regulation 6701.

(j)   “Public corporation” has the meaning assigned by subsections 89(1) and 248(1).

(k)   “Regulations” means the Income Tax Regulations.

(l)   “Stated Capital” means the stated capital of the corporation established under the provisions of the XXXXXXXXXX.

(m)   “Taxable Canadian corporation” has the meaning assigned by subsections 89(1) and 248(1).

(n)   “XXXXXXXXXX” means the XXXXXXXXXX, a designated stock exchange pursuant to subsection 262(5).

(o)   “XXXXXXXXXX Business” means the business unit of Pubco that relates to XXXXXXXXXX.

Facts

1.    ACo is a taxable Canadian corporation and a public corporation. It is a resident of Canada for purposes of the Act and for treaty purposes.

2.    Amalco will be a taxable Canadian corporation and will not be considered to be a prescribed labour-sponsored venture capital corporation for purposes of the Act.

3.    Bidco is a corporation governed by the laws of the Province of XXXXXXXXXX. It is a taxable Canadian corporation. All of its issued and outstanding common shares are owned by Holdco2. Bidco is not considered to be a prescribed labour-sponsored venture capital corporation for purposes of the Act. Bidco’s tax affairs are administered by the XXXXXXXXXX Tax Services Office, and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.

4.    Holdco1 is a corporation governed by the laws of XXXXXXXXXX. It is a non-resident of Canada for purposes of the Act and a resident of XXXXXXXXXX for treaty purposes. Holdco1 is a public corporation, the shares of which are listed on the XXXXXXXXXX.

5.    Holdco2 is a corporation governed by the laws of XXXXXXXXXX. It is a non-resident of Canada for purposes of the Act and a resident of XXXXXXXXXX for treaty purposes. All of its issued and outstanding shares are owned by Holdco1.

6.    Pubco is a taxable Canadian corporation and a public corporation. It is a resident of Canada for purposes of the Act and for treaty purposes. Pubco has only XXXXXXXXXX of common shares issued and outstanding listed on the XXXXXXXXXX. Pubco is not considered to be a prescribed labour-sponsored venture capital corporation for purposes of the Act. Pubco’s business number is XXXXXXXXXX, and its address is XXXXXXXXXX. Pubco’s tax affairs are administered by the XXXXXXXXXX Tax Services Office, and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.

7.    Pubco has two business units: the XXXXXXXXXX business and the XXXXXXXXXX business. The businesses are partially owned directly by Pubco, and partially owned indirectly through investments in Canadian subsidiary entities and foreign affiliates of Pubco.  

8.    Purchaseco is a corporation governed by the laws of Canada. It is a taxable Canadian corporation. All of its issued and outstanding shares are owned by ACo.

9.    On XXXXXXXXXX, Holdco2, Bidco, ACo, Purchaseco and Pubco entered into an arrangement agreement (“Arrangement Agreement”), pursuant to which Bidco will acquire all issued and outstanding shares of Pubco (“Share Acquisition”) from the shareholders of Pubco at a future date (“Effective Date”, expected to be on XXXXXXXXXX), in an all-cash transaction valued at $XXXXXXXXXX per share (“Purchase Price”). The Share Acquisition is part of a plan of arrangement (“Plan of Arrangement”) described in the Arrangement Agreement.

10.   ACo is party to the Arrangement Agreement as it will assist in funding Bidco’s acquisition of Pubco and will acquire, by virtue of the Plan of Arrangement, property of Amalco on the Effective Date, subsequent to Bidco’s acquisition of Pubco.

11.   Subject to the appropriate shareholder, court and regulatory approvals, the transactions, amongst others, occurred or will occur by virtue of the Plan of Arrangement, and are designated in the Plan of Arrangement to occur on the Effective Date, except as expressively provided for by the Proposed Transactions.

Proposed Transactions

12.   Bidco will acquire all the issued and outstanding common shares of the capital stock of Pubco for consideration of $XXXXXXXXXX per share, such that Pubco will become a wholly-owned subsidiary of Bidco. The XXXXXXXXXX rules result in the inability to delist common shares of Pubco from the XXXXXXXXXX until three business days after the Effective Date.

13.   Pubco will reduce the aggregate Stated Capital of its common shares to $XXXXXXXXXX without any distribution to any shareholder.

14.   Pubco and Bidco will be amalgamated to form Amalco and continue as one corporation under subsection XXXXXXXXXX of the XXXXXXXXXX in such a manner that:

a)    all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of each of Pubco and Bidco immediately before the amalgamation, will become property of Amalco by virtue of the amalgamation;

b)    all of the liabilities (except amounts payable to any predecessor corporation) of each of Pubco and Bidco immediately before the amalgamation, will become liabilities of Amalco by virtue of the amalgamation;

c)    the issued and outstanding Pubco shares shall be cancelled without any repayment of capital in respect thereof;

d)    the by-laws of Amalco shall be the same as the by-laws of Bidco;

e)    the articles of Amalco shall be the same as the articles of Bidco;

f)    the issued and outstanding common shares of Bidco shall survive and continue to be common shares of Amalco without amendment, and no securities shall otherwise be issued and no assets shall be distributed by Amalco in connection with the amalgamation; and

g)    all of the issued and outstanding shares of the capital stock of Amalco will be held by Holdco2.

15.   Three days after the Effective Date, the shares of the capital stock of Pubco will be delisted by the XXXXXXXXXX, in accordance with the XXXXXXXXXX rules.

At no time subsequent to that date will any class of shares in the capital of Amalco be qualified for distribution to the public, as described in Regulation 4800(2)(c), or be listed on a designated stock exchange in Canada. At no time will Amalco file an election to be a public corporation pursuant to subparagraph (b)(i) of the definition of “public corporation” in subsection 89(1).

16.   Amalco will file an election in prescribed manner not to be a public corporation pursuant to subparagraph (c)(i) of the definition of “public corporation” in subsection 89(1) (“the Election”). The date on which the Election will be effective (and recorded as such on Form T2067) will be the later of four business days following the Effective Date or soon as practically possible after the receipt of a positive ruling on this matter.

Purpose of Proposed Transactions

17.   The purpose of the Proposed Transactions is such that Amalco will not be treated as a public corporation following the effective date of the Election.  While it is not presently contemplated, Amalco may wish to distribute its paid-up capital (contributed by Holdco2) in the future without creating a deemed dividend under subsection 84(4.1).

Rulings given

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant Facts, Proposed Transactions and of the Purpose of Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A.    Amalco will meet the condition in paragraph 4800(2)(a) of the Regulations and will cease to be a public corporation at the time it files an election, in prescribed manner, not to be a public corporation pursuant to subparagraph (c)(i) of the definition of “public corporation” under subsection 89(1).

The above ruling is 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 before XXXXXXXXXX.

The above ruling is 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.

Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed:

(a)   any provincial tax consequences of the Proposed Transactions; any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically confirmed in the ruling given above;
(b)   the determination of the fair market value or adjusted cost base of any property referred to herein, the paid-up capital in respect of any share referred to herein, or the outstanding balance of various tax accounts for any of the corporate entities described herein.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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