2015-0584151R3 Conversion of Contributed Surplus to PUC

Principal Issues: Whether share premium arising from share issuances governed by foreign corporate law is contributed surplus for purposes of paragraph 84(1)(c.3) that can be added to PUC without giving rise to a deemed dividend under subsection 84(1).

Position: Yes.

Reasons: Consistent with previous published positions.

Author: XXXXXXXXXX
Section: 84(1), 84(1)(c.3), 89(1), 128.1(2), 261

XXXXXXXXXX                                                              2015-058415

XXXXXXXXXX, 2015

Dear XXXXXXXXXX

Re:   XXXXXXXXXX
         Advance Income Tax Ruling Request

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 also acknowledge the additional information provided to us in subsequent letters and emails, and during our various telephone conversations.

To the best of your knowledge, and that of the taxpayer involved, none of the issues involved in this ruling request is:

(i)   in an earlier return of the taxpayer or a related person;

(ii)  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;

(iii) under objection by the taxpayer or a related person;

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

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

DEFINITIONS

Unless otherwise expressly stated, every reference herein to the Act or to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision 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 the Income Tax Regulations thereunder are referred to as the Regulations.

Unless otherwise noted, all references herein to a currency are a reference to Canadian dollars.

In addition, unless otherwise noted, the following terms have the meaning ascribed to them as follows:

“ACo” means XXXXXXXXXX;

“Amalgamation” means the amalgamation that resulted in the formation of ACo under the Country A Corporate Act as described in Paragraph 5 herein.

“arm’s length” has the meaning assigned by subsection 251(1);

“BCo” means XXXXXXXXXX;

“CCo” means XXXXXXXXXX;

“Contributed Surplus Account” means the ACo surplus account under the Province 2 Corporate Act described in Paragraph 18 below;

“Country A Corporate Act” means the XXXXXXXXXX;

“Country A” means XXXXXXXXXX;

“Country B” means XXXXXXXXXX;

“Country C” means XXXXXXXXXX;

“Exchange 1” means XXXXXXXXXX;

“Exchange 2” means XXXXXXXXXX;

“IFRS” means the International Financial Reporting Standards;

“Initial Stated Capital” means the amount of ACo’s Stated Capital Account determined in accordance with subsection XXXXXXXXXX of the Province 2 Corporate Act immediately after ACo’s continuance to the Province 2 Corporate Act as described in Paragraph 17 herein;

“Issued Capital” means the aggregate of the nominal value of the shares actually issued by ACo under the Country A Corporate Act;

“nominal value” refers to the amount described in Paragraph 9;

“Paragraph” means the numbered paragraphs in this letter;

“Province 1 Corporate Act” means the XXXXXXXXXX;

“Province 2 Corporate Act” means the XXXXXXXXXX;

“PUC” means paid-up capital, as defined in subsection 89(1);

XXXXXXXXXX;

“Share Issue Surplus” means the excess of (A) the aggregate amount expressed in dollars received by ACo over time on the issuance of its common shares in consideration for the: (i) payment of cash or the transfer of XXXXXXXXXX in Country B to ACo; or (ii) payment of liabilities or other obligations or repayment of loans of ACo to third parties (including related parties) which liabilities, obligations or loans were incurred on arm’s length terms; over (B) the aggregate amount added to its Issued Capital as a result of such share issuances;

“Share Premium Account” means the account referred to in section XXXXXXXXXX of the Country A Corporate Act described in Paragraph 11 herein;

“Share Premium” has the meaning provided in Paragraph 11 herein;

“Stated Capital Account” means the account referred to in subsection XXXXXXXXXX of the Province 2 Corporate Act; and

“taxable Canadian property” has the meaning assigned by subsection 248(1).

FACTS

1.    ACo was originally incorporated under the Country A Corporate Act on XXXXXXXXXX.  Prior to the transactions described in Paragraphs 14 to 16 below, ACo was a XXXXXXXXXX within the meaning of subsection 89(1).  Prior to XXXXXXXXXX, the common shares of ACo were listed on Exchange 1.  ACo files its tax returns with the XXXXXXXXXX Tax Centre and otherwise deals with the XXXXXXXXXX Tax Services Office.

2.    ACo is XXXXXXXXXX in Country B. ACo’s most significant asset is XXXXXXXXXX in Country B.  All of ACo’s other principal assets (other than marketable securities and cash reserves) are located in Country B.  For greater certainty, ACo has never owned property that is, or would have been, taxable Canadian property.

3.    XXXXXXXXXX

4.    XXXXXXXXXX

5.    XXXXXXXXXX

6.    On XXXXXXXXXX, ACo became resident in Canada for purposes of the Act by virtue of its central management and control being relocated to Canada.  ACo has been resident in Canada at all times since XXXXXXXXXX.

7.    ACo is neither XXXXXXXXXX nor XXXXXXXXXX within the meaning of subsection 84(1) and is not a XXXXXXXXXX subject to section 212.3.

8.    In XXXXXXXXXX, ACo made a functional currency election under section 261 whereby it elected to compute its Canadian tax results in United States dollars and has never revoked or changed such election. The functional currency election is effective for ACo’s taxation year ending XXXXXXXXXX and its subsequent taxation years.

9.    The issued and outstanding shares in the capital stock of ACo are XXXXXXXXXX common shares with a nominal value of US$XXXXXXXXXX per share.  The nominal value of an ACo common share is equal to the amount of ACo’s authorized share capital determined in accordance with the Country A Corporate Act divided into the number of common shares that ACo is authorized to issue.  ACo’s current authorized share capital in respect of its common shares is US$XXXXXXXXXX divided into XXXXXXXXXX common shares resulting in a nominal value of US$XXXXXXXXXX per share.

10.   Pursuant to section XXXXXXXXXX of the Country A Corporate Act, only the nominal value of the issued shares may be added to the “Issued Capital” of the company.

11.   Pursuant to section XXXXXXXXXX of the Country A Corporate Act, where a company issues shares for consideration in excess of the nominal value of the share, the amount of such excess is referred to as a “Share Premium” and is added to the company’s “Share Premium Account”.

12.   The current balance of ACo’s Issued Capital is US$XXXXXXXXXX.

13.   The current balance of ACo’s Share Premium Account is approximately US$XXXXXXXXXX of which approximately US$XXXXXXXXXX represents the Share Issue Surplus. An additional amount of approximately US$XXXXXXXXXX was added to ACo’s Share Premium Account as a result of its amalgamation with BCo.  The balance of the Share Premium Account shown on ACo’s financial statements represents XXXXXXXXXX.

14.   XXXXXXXXXX, the shareholders of ACo transferred their common shares in the capital stock of ACo to CCo in exchange for one (1) CCo common share for each ACo common share transferred (the “Share Exchange”).  Upon the completion of this exchange, ACo became a wholly-owned subsidiary of CCo.  XXXXXXXXXX

15.   XXXXXXXXXX

16.   XXXXXXXXXX

PROPOSED TRANSACTIONS

ACo proposes to undertake the following transactions:

17.   The board of directors and sole shareholder of ACo will authorize ACo to undergo a corporate continuance whereby ACo’s governing statute will become the Province 2 Corporate Act.  This will involve filing a notice of discontinuance under the Country A Corporate Act and Articles of Continuance under the Province 2 Corporate Act.

18.   The Articles of Continuance will provide that, upon the Articles of Continuance becoming effective, (i) the issued common shares in the capital of ACo will be converted into common shares without par value, (ii) ACo will be authorized to issue an unlimited number of additional common shares without par value, (iii) the amount of ACo’s Issued Capital will become the Initial Stated Capital and (iv) ACo’s Share Premium Account will be renamed as its “Contributed Surplus Account”.

19.   Pursuant to subsections XXXXXXXXXX and XXXXXXXXXX of the Province 2 Corporate Act, the board of directors of ACo will pass a resolution whereby ACo will add a portion of its Contributed Surplus Account equal to the Share Issue Surplus to its Stated Capital Account in respect of its common shares. 

ADDITIONAL INFORMATION

20.   Under Country A corporate law, a XXXXXXXXXX cannot create shares without a nominal value or convert any amount of its Share Premium Account to Issued Capital.

21.   At the time ACo became a resident of Canada on XXXXXXXXXX, the PUC adjustment in respect of its common shares computed under paragraph 128.1(2)(a) was a positive amount.  More specifically, the fair market value of the property owned by ACo immediately before it became a resident of Canada exceeded the total amount of debts owing by ACo, or any other obligation of ACo to pay an amount that was outstanding at the time it became a resident of Canada.

22.   The amount of ACo’s positive PUC adjustment at the time it became a resident of Canada, computed in accordance with paragraph 128.1(2)(a), exceeded the amount in ACo’s Share Premium Account at that time.

23.   ACo did not make an election under subparagraph 128.1(2)(b)(i) to add the amount of the positive PUC adjustment in computing its PUC in order to avoid any deemed dividend under paragraph 128.1(1)(c.2).

24.   The Share Issue Surplus arose entirely from the issuance of ACo common shares in consideration for XXXXXXXXXX. 

25.   Neither ACo nor any of its predecessors has ever paid a dividend that would result in a reduction in contributed surplus under subsection 84(10).

26.   XXXXXXXXXX

27.   The amount in ACo’s Share Premium Account and the amount of its Issued Capital and Share Issue Surplus were each converted (i) to Canadian currency at the time that ACo became resident in Canada and (ii) from Canadian currency or any currency other than ACo’s elected functional currency to ACo’s elected functional currency in accordance with the Act including, but not limited to, section 261.

28.   XXXXXXXXXX, none of ACo or any of its predecessors has ever redeemed, purchased or otherwise cancelled any of its issued and outstanding shares or changed, exchanged, converted or otherwise reorganized its share capital. 

29.   The shareholders of ACo each dealt at arm’s length with ACo and CCo at all relevant times.

30.   The increase in the PUC of an ACo common share resulting from the proposed addition of the Share Issue Surplus to ACo’s Stated Capital Account will not exceed the fair market value of such ACo share immediately before such addition.

31.   The increase in the aggregate PUC of the CCo common shares as a result of the Share Exchange did not exceed the Share Issue Surplus.

32.   ACo will record the amount of PUC in respect of its issued and outstanding shares in both its functional currency and in Canadian currency as required under the Act.

PURPOSE OF PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to enable ACo to add to its Stated Capital Account part of the amount of the consideration that it received on the issuance of its common shares that was in excess of the nominal value of the shares at the time of issuance.  XXXXXXXXXX

By adding the amount of its Share Issue Surplus to its Stated Capital Account, ACo intends to increase the PUC of its common shares so that it can treat future distributions of the amount of its Share Issue Surplus as returns of PUC rather than dividends XXXXXXXXXX.

RULINGS

Provided the preceding is a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the Proposed Transactions and provided that the Proposed Transactions are completed in the manner described above, we rule as follows:

A.    ACo will not be deemed to have paid a dividend pursuant to subsection 84(1) solely as a result of:

(i)   the Issued Capital becoming the Initial Stated Capital and the renaming of its Share Premium Account as its Contributed Surplus Account as described in Paragraph 18 above upon its continuance under subsection XXXXXXXXXX of the Province 2 Corporate Act; or

(ii)  The addition of the Share Issue Surplus to its Stated Capital Account in respect of its common shares as described in Paragraph 19 above.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R6 issued by the CRA on August 29, 2014 and are binding on the CRA. 

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, made any determination, or accepted any method for the determination in respect of:

(a)   any matter relating to the laws of Country A;

(b)   the amount of the Share Issue Surplus, Share Premium Account or Contributed Surplus Account;

(c)   the PUC of any share, or the ACB or FMV of any property referred to herein;

(d)   the conversion of any amounts to Canadian currency or from Canadian currency or any currency other than ACo’s elected functional currency to ACo’s elected functional currency;

(e)   any other tax account of any XXXXXXXXXX referred to herein;

(f)   the characterization of any share or other property as taxable Canadian property; or

(e)   any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above.  For greater certainty, we are not commenting on any tax consequences relating to the transactions described in Paragraphs 5 and 6 or Paragraphs 14 to 16.

Yours truly,

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

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