2015-0615041R3 Conversion of Delaware corporation to LLC

Principal Issues: 1. Whether, after the conversion, the LLC will be considered to be the same corporation as the Delaware corporation. 2. Whether there is a disposition of the assets of a Delaware corporation upon its conversion to an LLC. 3. Whether there is a disposition of the shares of the Delaware corporation upon its conversion to an LLC. 4. Whether, after the conversion, the ACB of the shares of the LLC to the shareholder will be equal to the ACB of the shares of the Delaware corporation to the shareholder immediately before the conversion.

Position: 1. Yes. 2. No. 3. No. 4. Yes.

Reasons: The governing Delaware legislation provides for conversion and treats the LLC as a continuation of the converting corporation. CRA can apply the Delaware legislation for purposes of administering the Act. CRA’s administrative position is that a Delaware LLC is a corporation for purposes of the Act.

Author: XXXXXXXXXX
Section: 248(1)

XXXXXXXXXX                                                                                                            2015-061504

XXXXXXXXXX, 2016

Dear XXXXXXXXXX,

Advance Income Tax Ruling – XXXXXXXXXX

This is in reply to your email of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayer referred to above.  The documents submitted with your request are part of this document only to the extent described herein.

We understand that to the best of your knowledge and that of the taxpayer on whose behalf this ruling was requested, none of the issues involved in this ruling are:

(a)    in an earlier return of the taxpayer referred to above 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 taxpayer referred to above or a related person;

(c)    under objection by the taxpayer referred to above or a related person;

(d)    in relation to the taxpayer referred to above or a related person, before the courts or the subject of a judgment the time limit for appeal from which has not expired; or

(e)    the subject of a ruling previously considered by the Income Tax Rulings Directorate in relation to the taxpayer referred to above or a related person.

DEFINITIONS

In this ruling request, unless otherwise specified, all monetary amounts are expressed in Canadian dollars and the following terms have the meanings specified below:

“ACB” means adjusted cost base, as defined in section 54;

“A Co” means XXXXXXXXXX;

“A Co Group” is defined in Paragraph 1;

“Act” means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof, and unless otherwise stated, all statutory references are to the Act and all terms and conditions used herein that are defined in the Act have the meaning given in such definition;

“B Co” means XXXXXXXXXX;

“C Co” means XXXXXXXXXX;

“C Co Common Shares” is defined in Paragraph 5;

“cost amount” has the meaning assigned by subsection 248(1);

“controlled foreign affiliate” has the meaning assigned by subsection 95(1);

“CRA” means the Canada Revenue Agency;

“DGCL” means the Delaware General Corporation Law, being Chapter 1 of Title 8 of the Delaware Code;

“DLLCA” means the Delaware Limited Liability Company Act, being Chapter 18 of Title 6 of the Delaware Code;

“foreign affiliate” has the meaning assigned by subsection 95(1);

“IRC” means the Internal Revenue Code of the United States of America;

“LLC” means a limited liability company formed pursuant to, and having the attributes and features described in, the DLLCA and the applicable LLC Agreement;

“LLC Agreement” means a limited liability company agreement (or operating agreement) of an LLC;

“Paragraph” refers to a numbered paragraph in this letter;

“Proposed Transactions” means the transactions described in the section “Proposed Transactions” below;

“public corporation” has the meaning assigned by subsection 89(1);

“taxable Canadian corporation” has the meaning assigned by subsection 89(1); and

“Treaty” means the Canada-United States Tax Convention (1980) as amended by the Protocols signed June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997 and September 21, 2007.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows.

FACTS

Relevant Parties

1.    A Co is a corporation incorporated under the laws of Canada or a province therein.  A Co is a resident of Canada for purposes of the Act and is a taxable Canadian corporation.  The authorized share capital of A Co includes common shares and XXXXXXXXXX preferred shares, issuable in series.  The common and various series of preferred shares of A Co are listed and posted for trading on the XXXXXXXXXX.  A Co is a XXXXXXXXXX and such interests are located primarily in XXXXXXXXXX.  A Co and each of its direct and indirect subsidiaries are collectively referred to as the “A Co Group”.

2.    B Co is an unlimited liability corporation incorporated under the laws of XXXXXXXXXX.  B Co is a resident of Canada for purposes of the Act and is a taxable Canadian corporation.  B Co is a wholly-owned indirect subsidiary of A Co.  B Co acts as a holding company for the XXXXXXXXXX operations of the A Co Group carried on by various direct and indirect XXXXXXXXXX subsidiaries of B Co.  B Co has a XXXXXXXXXX taxation year-end and its head office is located at XXXXXXXXXX.  B Co’s business number and tax account number is XXXXXXXXXX. B Co deals with the XXXXXXXXXX Tax Centre, XXXXXXXXXX, and files its returns with the XXXXXXXXXX Tax Services Office. 

3.    C Co is a corporation incorporated in Delaware under the DGCL. C Co is a non-resident of Canada for purposes of the Act and is a resident of the U.S. for purposes of the Treaty.  C Co is a wholly-owned direct subsidiary of B Co. C Co is a foreign affiliate and a controlled foreign affiliate of B Co. C Co acts as a holding company for the XXXXXXXXXX operations of the A Co Group carried on by various direct and indirect subsidiaries of C Co.  C Co is treated as a corporation for U.S. tax purposes. C Co is regarded as a corporation for Canadian tax purposes.

4.    The principal assets of C Co consist of shares in its XXXXXXXXXX direct and indirect subsidiaries which it holds as part of the XXXXXXXXXX corporate structure of the A Co Group.

Share Capital of C Co

5.    C Co’s authorized share capital consists of XXXXXXXXXX shares of common stock having a par value of $XXXXXXXXXX per share (the “C Co Common Shares”). XXXXXXXXXX C Co Common Shares were issued and outstanding as of XXXXXXXXXX, all of which were held by B Co.

6.    Each C Co Common Share entitles the holder to one vote at all meetings of shareholders, to dividends as and when declared by the board of directors of C Co and to participate on a pro rata basis in the remaining assets of C Co on its winding-up or liquidation.

7.    The C Co Common Shares are not listed on any public market or quotation system.

8.    The current fair market value of the C Co Common Shares is XXXXXXXXXX the ACB of such shares to B Co.

ADDITIONAL INFORMATION

9.    Paragraph (a) of section 266 of the DGCL provides that a domestic corporation such as C Co may convert to an LLC of the State of Delaware. Paragraph (f) of that section provides that, unless otherwise provided in a resolution of conversion, the converting corporation shall not be required to wind up its affairs or pay its liabilities and distribute its assets, and the conversion shall not constitute a dissolution of the corporation.  Paragraph (h) of that section provides that when a corporation has been converted to another entity or business form pursuant to section 266, the other entity or business form shall, for all purposes of the laws of Delaware, be deemed to be the same entity as the corporation.

10.    Section 18-214 of the DLLCA provides for the conversion of certain entities, including a domestic corporation such as C Co, to an LLC.  Paragraph (d) of that section provides that the existence of the LLC shall be deemed to have commenced on the date the other entity commenced its existence in the jurisdiction in which the other entity was first created, formed, incorporated or otherwise came into being.  Paragraph (e) of that section provides that the conversion of the entity into an LLC shall not be deemed to affect obligations or liabilities of the other entity incurred prior to its conversion to an LLC.  Paragraph (f) of that section provides that any conversion shall have become effective under that section, for all purposes of the laws of the State of Delaware, all of the rights, privileges and powers of the other entity that has converted, and all property, real and personal and mixed, and all debts due to such other entity, as well as all other things and causes of action belonging to such other entity shall remain vested in the LLC into which such other entity has converted and shall be the property of the LLC.  Paragraph (g) of that section provides that unless otherwise agreed, the converting other entity shall not be required to wind up its affairs or pay its liabilities and distribute its assets, and the conversion shall not be deemed to constitute a dissolution of such other entity and shall constitute a continuation of the existence of the converting entity in the form of an LLC.  It further provides that when an entity has been converted to an LLC pursuant to that section, the LLC shall, for all purposes of the laws of the State of Delaware, be deemed to be the same entity as the converting entity.

11.    An LLC established under the DLLCA and the terms of the applicable LLC Agreement are governed by Delaware Law.  Under that law, the LLC constitutes a legal entity that is brought into existence by the execution of a certificate of formation, the filing of that certificate with the Delaware Secretary of State and the entering into of an LLC Agreement.  An LLC is considered to have a separate legal existence from its members.  In particular, the assets and property of an LLC belong to the LLC as the owner of the assets and property, not its members.  The LLC is liable for the debts it incurs in the course of carrying on its business.  Thus, a member has no interest in specific property of the LLC and the liabilities of the LLC are not the liabilities of the members of the LLC.

12.    Section 18-101(7) of the DLLCA provides that an LLC Agreement of an LLC having only one member shall not be unenforceable by reason of there being only one person who is a party to the LLC Agreement.  Under section 1101(b) of the DLLCA, the maximum effect is given both to the principle of freedom of contract and enforceability of LLC Agreements.  An LLC Agreement that establishes that the capital of an LLC is divided into shares is legally effective for such purposes and enforceable in accordance with its terms.  Accordingly, subject to the DLLCA, the capital of an LLC may consist of shares with the attributes established in the LLC Agreement.

13.    The Proposed Transactions will be considered non-recognition transactions and will be tax-deferred for purposes of the IRC.   Specifically, taking into account the “check-the-box” election described below, it is intended that the conversion will be treated as a tax-free “F” reorganization under IRC section 368.

14.    After C Co converts to an LLC, the LLC will make a “check-the-box” election under Treasury Regulation Section 301.7701-3(c) to be effective on the date of formation of the LLC to be treated as corporation for U.S. tax purposes.

15.    For Canadian tax purposes and for comparable purposes of the IRC, the implementation of the Proposed Transactions will not facilitate or permit, either immediately or in the future and either absolutely or contingently, any change in the cost of, or ACB in, any of the C Co Common Shares held by B Co or its successor.

PROPOSED TRANSACTIONS

Under the statutory provisions described in Paragraphs 9 and 10 above, C Co will convert from a corporation governed by the DGCL to an LLC governed by the DLLCA.  In general, to effect the conversion, both the board of directors of C Co and that of B Co will take the appropriate corporate action to approve and implement the conversion, all in accordance with the relevant provisions of the DGCL and DLLCA.  The principal steps are set out below.

16.    With the approval of B Co, its sole shareholder, C Co will file with the Delaware Secretary of State the following:

(a)    a certificate of formation in accordance with the requirements of section 18-214(b) of the DLLCA, and 

(b)    a certificate of conversion in accordance with section 266 of the DGCL and section 18-214(b) of the DLLCA.

17.    The terms of B Co’s approval of the conversion of C Co into an LLC will not require the winding up of C Co.

18.    B Co will enter into an LLC Agreement specifying, inter alia, the following:

(a)    The LLC is a continuation of the existence of C Co, which converted into an LLC in accordance with the provisions of section 266 of the DGCL and section 18-214 of the DLLCA.  All rights, privileges and powers of C Co and all property, real, personal and mixed, of C Co and all debts due to C Co, as well as all other things and causes of action belonging to C Co, shall be vested in the LLC and shall be the property of the LLC as they were of C Co, and title to any real property vested by deed or otherwise in C Co shall not revert by reason of the conversion of C Co into the LLC;

(b)    “Board of Directors” means all of the directors of the LLC;

(c)    “LLC Common Share” shall mean an interest of a Shareholder in LLC having the rights and privileges set out in the LLC Agreement;

(d)    “Director” means a person elected to the Board of Directors pursuant to the terms of the LLC Agreement, which Director shall be a “manager” of the LLC for purposes of the DLLCA;

(e)    “Share” means an interest in the LLC held by a Shareholder of the LLC.  Subject to the LLC Agreement and the DLLCA, Shares may be issued in separate classes, each such class having its own rights and privileges; and

(f)    “Shareholder” means B Co and any other person who may be admitted to C Co as a Shareholder upon the issuance of Shares to and the execution of the LLC Agreement by such person.  A Shareholder shall be a “member” of the LLC for purposes of the DLLCA.

19.    As a consequence of the conversion of C Co into an LLC, all of the C Co Common Shares held by B Co, which shares will be the only shares of C Co outstanding immediately before the conversion, will become LLC Common Shares.

20.    Thus, immediately following the conversion, B Co will be the sole Shareholder of the LLC and it will hold all of the LLC Common Shares which will constitute all of the outstanding LLC Shares.  Each of the LLC Common Shares will entitle B Co as the holder to one vote, to share rateably in dividends as and when declared by the Board of Directors of the LLC and to share rateably in the remaining assets of the LLC on its liquidation.

21.    The LLC Agreement will provide that the holders of the LLC Common Shares will be entitled to receive and the LLC will pay, if, as and when declared by the Board of Directors, out of the monies of the LLC properly applicable to the payment of dividends in any financial year (and subject to the “solvency” limitations provided in the LLC Agreement), such dividends as the Board of Directors may determine.

PURPOSE OF PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is as follows:

22.    The Proposed Transactions are a necessary first step in the ultimate reorganization of the XXXXXXXXXX corporate structure in the A Co Group.  The reorganization is being undertaken to deal with XXXXXXXXXX corporate structure of the A Co Group in a manner that achieves important business objectives for the A Co Group.  As such, the Proposed Transactions are not intended or designed to obtain any benefit or advantage of any kind, including any Canadian tax benefit or advantage. 

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, the additional information, the proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are undertaken in the manner described above, our rulings are as follows:

A.    Following its conversion from a corporation to an LLC in the manner described above, for the purposes of the Act, C Co will be considered to be the same corporation that it was prior to the conversion.

B.    C Co will not be considered to have disposed of any of its assets or property as a result of its conversion from a corporation to an LLC in the manner described above.

C.    B Co will not be considered to have disposed of its C Co Common Shares as a consequence of the conversion of C Co from a corporation to an LLC in the manner described above. 

D.    Immediately after the conversion in the manner described above, the ACB of the LLC Common Shares held by B Co will be the ACB of the C Co Common Shares held by B Co immediately before the conversion.

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

Unless otherwise expressly confirmed, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

a)    the fair market value or ACB of any asset or the paid-up capital of any share; or

b)    any other tax consequences relating to the facts, additional information and Proposed Transactions described herein, 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.

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

Yours truly,

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

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