2016-0648991R3 Internal spinoff reorganization of XXXXXXXXXX

Principal Issues: 1. Does paragraph 55(3)(a) apply in the context of this internal reorganization? 2. Does subsection 245(2) apply with respect to this internal reorganization? 3. Do the back-to-back transfers of shares of XXXXXXXXXX subsidiaries (i.e., the property) cause the characterization of the property to change from capital property, for purposes of subsection 85.1(3)?

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

Reasons: 1. There is no transaction described in subparagraphs 55(3)(a)(i) to (v) that forms a part of the same series of transactions or events that include the deemed dividends; 2. The Proposed Transactions do not include an avoidance transaction; furthermore, there is no creation or streaming of cost base and the preferred shares in the Proposed Transactions are cross-redeemed for notes that are set-off and cancelled; 3. XXXXXXXXXX.

Author: XXXXXXXXXX
Section: 55(3)(a), 86(1), 85(1), 85.1(3), 245(2)

XXXXXXXXXX                        2016-064899

XXXXXXXXXX, 2016

Dear XXXXXXXXXX,

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 XXXXXXXXXX (“Taxpayer”) and certain subsidiaries. 

We understand that to the best of your knowledge and that of the Taxpayer’s, none of the issues described herein:

(a) is in a previously filed tax return of the Taxpayer or a related person;

(b) is 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;

(c)    is under objection by the Taxpayer or a related person; 

(d)    is the subject of a current or completed court process involving the Taxpayer or a related person; or

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

Unless otherwise noted, all references herein to sections or components thereof are references to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, or the Income Tax Regulations, as appropriate, and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

Unless otherwise noted, the following terms have the meanings ascribed to them below:

“ACB” has the meaning assigned to the expression “adjusted cost base” in section 54;

“Act” means the XXXXXXXXXX;

“Agreed amount” means the amount that the transferor and the transferee of an eligible property have agreed upon in a joint election pursuant to subsection 85(1); 

“Aggregate Cansub1 PS Redemption Amount” means an amount equal to the Cansub1 PS Redemption Amount multiplied by the number of Cansub1 New Preferred Shares redeemed;

“Aggregate Cansub2(ForSub1 Transfer) PS Redemption Amount” means an amount equal to the Cansub2 PS (ForSub1 Transfer) Redemption Amount multiplied by the number of Cansub2 New Preferred Shares (ForSub1 Transfer) redeemed;

XXXXXXXXXX

“Canadian Affiliate” is XXXXXXXXXX, a Canadian-resident affiliate of ParentCo;

“Canadian Affiliate 2” is XXXXXXXXXX, a Canadian-resident affiliate of ParentCo;

“CanSub1” means XXXXXXXXXX;

“CanSub1 Capital Reorganization” means the reorganization of capital of CanSub1 described in Paragraph 17;

“CanSub1 Common Shares” means the common shares in the capital stock of CanSub1;

“CanSub1 New Common Shares” means the common shares described in Paragraph 17;

“CanSub1 New Preferred Shares” means the preferred shares described in Paragraph 17;

“CanSub1 Note” means a non-interest bearing note payable on demand having a principal amount and a FMV equal to the Aggregate CanSub1 PS Redemption Amount;

“CanSub1 PS Redemption Amount” means an amount equal to: (i) the aggregate FMV of the ForSub1 Common Shares outstanding immediately before the CanSub1 Capital Reorganization, divided by (ii) the number of CanSub1 New Preferred Shares first issued; 

“CanSub2” means XXXXXXXXXX;

“CanSub2 Common Shares” means the common shares in the capital stock of CanSub2;

“CanSub2 Preferred Shares” means the preferred shares in the capital stock of CanSub2, having a redemption amount of $XXXXXXXXXX per share;

“CanSub2 New Preferred Shares (ForSub1 Transfer)” means the preferred shares described in Paragraph 16;

“CanSub2 New Preferred Shares (ForSub3 Transfer)” means the preferred shares described in Paragraph 16;

“CanSub2 Note” means a non-interest bearing note payable on demand having a principal amount and a FMV equal to the Aggregate CanSub2 PS (ForSub1 Transfer) Redemption Amount;

“CanSub2 PS (ForSub1 Transfer) Redemption Amount” means an amount equal to: (i) the FMV of the property received by CanSub2 in exchange for the first issuance of CanSub2 New Preferred Shares (ForSub1 Transfer); divided by (ii) the number of CanSub2 New Preferred Shares (ForSub1 Transfer) first issued as consideration for such property; 

“CanSub2 PS (ForSub3 Transfer) Redemption Amount” means an amount equal to: (i) the FMV of the property received by CanSub2 in exchange for the first issuance of the CanSub2 New Preferred Shares (ForSub3 Transfer); divided by (ii) the number of CanSub2 New Preferred Shares (ForSub3 Transfer) first issued as consideration for such property; (iii) plus any declared and unpaid dividends thereon;

“capital property” has the meaning assigned by section 54;

XXXXXXXXXX

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

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

“CRA” means the Canada Revenue Agency;

“disposition” has the meaning given in subsection 248(1);

“Effective Date” means a date chosen by the parties to implement the Proposed Transactions;

“eligible dividend” as the meaning assigned by subsection 89(1);

“eligible property” has the meaning assigned by subsection 85(1.1);

“EEDD” means excessive eligible dividend designation, as defined in subsection 89(1);

XXXXXXXXXX;

“FMV” means “fair market value”, being the highest price available in an open and unrestricted market between informed prudent parties acting at arm’s length and without compulsion to act, expressed in terms of cash;

“ForSub1” means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX. It operates in XXXXXXXXXX as a XXXXXXXXXX. Its primary business activities are XXXXXXXXXX;

“ForSub1 Common Shares” means the common shares in the capital stock of ForSub1;

“ForSub2” means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX. It is XXXXXXXXXX;

“ForSub2 Common Shares” means the common shares in the capital stock of ForSub2;

“ForSub3” means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX. It is XXXXXXXXXX;

“ForSub3 Common Shares” means the common shares in the capital stock of ForSub3;

“ForSub4” means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

“ForSub4 Common Shares” means the common shares in the capital stock of ForSub4;

“ForSub5” means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

“forgiven amount” has the meaning assigned by subsections 80(1) and 80.01(1);

“LRIP” means “low rate income pool”, as defined in subsection 89(1);

“non-resident” has the meaning assigned by subsection 248(1);

XXXXXXXXXX;

“Paragraph” means a numbered paragraph in this letter;

“ParentCo” means XXXXXXXXXX;

“ParentCo Group” means, collectively, ParentCo and its direct and indirectly-owned subsidiaries;

XXXXXXXXXX;

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

“proceeds of disposition” has the meaning assigned by subsection 54;

“Proposed Transactions” means the proposed transactions described in Paragraphs 13 to 29;

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

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

XXXXXXXXXX;

“Restricted Share Payment” means a payment or transfer by one of CanSub1 or CanSub2, as applicable, of any money or other property in respect of any dividend on, reduction of stated capital of, redemption of, purchase or other acquisition of, or other distribution on shares that rank junior to the CanSub1 New Preferred Shares, CanSub2 New Preferred Shares (ForSub1 Transfer) or CanSub2 New Preferred Shares (ForSub3 Transfer), as applicable; or warrants, rights or options to purchase such junior ranking shares;

“series of transactions or events” means a series of transactions or events as interpreted by the Courts for purposes of the Income Tax Act and includes the transactions or events referred to in subsection 248(10);

XXXXXXXXXX;

“SPVs” means XXXXXXXXXX;

“Stated Capital” means the amount of legal stated capital reported in the Stated Capital Account attributable to a share;

“Stated Capital Account” refers to the account that a corporation is required to maintain for each class of shares that it issues in accordance with the provisions of XXXXXXXXXX and XXXXXXXXXX, as applicable;

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

“unrelated person” has the meaning assigned by paragraph 55(3.01)(a).

FACTS

ParentCo

1.    ParentCo is a taxable Canadian corporation, a public corporation, XXXXXXXXXX. ParentCo carries on a XXXXXXXXXX and is the parent corporation for directly and indirectly-owned subsidiaries that collectively comprise the ParentCo Group.

2.    ParentCo’s executive offices are situated at XXXXXXXXXX.

3.    ParentCo’s authorized share capital includes common shares and preferred shares. ParentCo’s common shares are widely held and traded on the XXXXXXXXXX and the XXXXXXXXXX. ParentCo has XXXXXXXXXX fiscal year end.

CanSub1

4.    CanSub1 is a taxable Canadian corporation incorporated under the XXXXXXXXXX. It is a XXXXXXXXXX. CanSub1 provides XXXXXXXXXX.  The issued and outstanding share capital of CanSub1 consists of CanSub1 Common Shares, all of which are owned by ParentCo; first preference shares, series A, having an aggregate redemption amount of $XXXXXXXXXX, all of which are owned by CanSub2; and first preference shares, series B having an aggregate redemption amount of $XXXXXXXXXX, all of which are owned by Canadian Affiliate 2. CanSub1 has XXXXXXXXXX fiscal year end.

5.    CanSub1 has an LRIP balance of $XXXXXXXXXX as of the date hereof. The PUC of the CanSub1 Common Shares does not exceed the ACB to ParentCo of such shares.

CanSub2

6.    CanSub2 is a taxable Canadian corporation incorporated under XXXXXXXXXX. It is a XXXXXXXXXX. Cansub2 is XXXXXXXXXX. 

7.    The issued and outstanding share capital of CanSub2 consists of CanSub2 Common Shares, all of which are owned by ParentCo, and one CanSub2 Preferred Share, which is owned by Canadian Affiliate. CanSub2 has XXXXXXXXXX fiscal year end.

ForSub1

8.    ForSub1 is a non-resident.  The issued and outstanding share capital of ForSub1 consists of the ForSub1 Common Shares, all of which are owned by CanSub1. 

ForSub2

9.    ForSub2 is a non-resident.  The issued and outstanding share capital of ForSub2 consists of the ForSub2 Common Shares, all of which are owned by CanSub2.

ForSub3

10.    ForSub3 is a non-resident. The issued and outstanding share capital of ForSub3 consists of the ForSub3 Common Shares, all of which are owned by ForSub5. 

11.    ForSub5 is a non-resident. ForSub5 is an indirect wholly-owned subsidiary of ParentCo.

ForSub4

12.    ForSub4 is a non-resident.  The issued and outstanding share capital of ForSub4 consists of the ForSub4 Common Shares, all of which are owned by ParentCo.

PROPOSED TRANSACTIONS

Transfer of ForSub4 Common Shares to ForSub2

13.    ForSub4 will make a cash distribution to ParentCo by way of the declaration and payment of a cash dividend on the ForSub4 Common Shares of approximately XXXXXXXXXX$XXXXXXXXXX.

14.    ParentCo will transfer the ForSub4 Common Shares to CanSub2. As consideration for the shares, CanSub2 will issue additional CanSub2 Common Shares having an aggregate FMV equal to the aggregate FMV of the ForSub4 Common Shares at the time of the transfer.

ParentCo and CanSub2 will jointly elect under subsection 85(1), within the time prescribed by subsection 85(6), to transfer the ForSub4 Common Shares at an agreed amount equal to the ACB to ParentCo of the ForSub4 Common Shares.

The agreed amount will not exceed the FMV of the ForSub4 Common Shares.

The amount that will be added to the Stated Capital Account of the CanSub2 Common Shares will be equal to the agreed amount in respect of the transfer of the ForSub4 Common Shares.

15.    CanSub2 will transfer all of its ForSub4 Common Shares to ForSub2 at a purchase price equal to the aggregate FMV of such shares at the time of the transfer. As consideration for the shares, ForSub2 will issue additional ForSub2 Common Shares having an aggregate FMV equal to the aggregate FMV of the ForSub4 Common Shares at the time of the transfer.

Amendment of CanSub2 Articles of Incorporation

16.    CanSub2 will amend its articles of incorporation to create two new classes of preferred shares: the CanSub2 New Preferred Shares (ForSub1 Transfer) and the CanSub2 New Preferred Shares (ForSub3 Transfer). These shares will have the rights and conditions as described below:

*    The CanSub2 New Preferred Shares (ForSub1 Transfer) will have the following terms and conditions:

o    each of the CanSub2 New Preferred Shares (ForSub1 Transfer) will be redeemable at the option of CanSub2 and retractable at the option of the holder at any time and in whole or in part for an amount equal to the CanSub2 PS (ForSub1 Transfer) Redemption Amount;

o    the holder of each of the CanSub2 New Preferred Shares (ForSub1 Transfer) will be entitled to annual, non-cumulative cash dividends equal to a fixed percentage of the CanSub2 PS (ForSub1 Transfer) Redemption Amount;

o    the holder of each of the CanSub2 New Preferred Shares (ForSub1 Transfer) will be entitled, upon the liquidation, dissolution or winding-up of CanSub2, to a payment of an amount equal to the CanSub2 PS (ForSub1 Transfer) Redemption Amount to the extent of the amount or value of property available under applicable law for payment to shareholders of CanSub2 upon such liquidation, dissolution or winding-up, but will not be entitled to any additional amount; 

o    each of the CanSub2 New Preferred Shares (ForSub1 Transfer) will rank in priority to the CanSub2 Common Shares and the CanSub2 Preferred Shares with respect to the entitlement to dividends and to receive amounts on a liquidation, dissolution or winding-up of CanSub2, but will rank junior to the CanSub2 New Preferred Shares (ForSub3 Transfer) in this regard;

o    notwithstanding its rank, CanSub2 may make a Restricted Share Payment at any time or from time to time in any financial year, provided that at the time CanSub2 becomes obligated to make the Restricted Share Payment, CanSub2 could redeem all of the issued and outstanding CanSub2 New Preferred Shares (ForSub1 Transfer) by payment in full of the CanSub2 PS (ForSub1 Transfer) Redemption Amount for such shares; and

o    the holders of CanSub2 New Preferred Shares (ForSub1 Transfer) will not be entitled to vote at any meeting of the shareholders of CanSub2, other than as provided under applicable law.

*    The CanSub2 New Preferred Shares (ForSub3 Transfer) will have the following terms and conditions:

o    each of the CanSub2 New Preferred Shares (ForSub3 Transfer) will be redeemable in whole or in part at the option of CanSub2 at any time beginning on the date that is XXXXXXXXXX after the date of issuance for an amount equal to the CanSub2 PS (ForSub3 Transfer) Redemption Amount;

o    each of the CanSub2 New Preferred Shares (ForSub3 Transfer) will be retractable at the option of the holder beginning on the date that is XXXXXXXXXX after the date of issuance for an amount equal to the CanSub2 PS (ForSub3 Transfer) Redemption Amount;

o    the holder of each of the CanSub2 New Preferred Shares (ForSub3 Transfer) will be entitled to XXXXXXXXXX, cumulative cash dividends equal to a percentage of the CanSub2 PS (ForSub3 Transfer) Redemption Amount, which is based on the yield on XXXXXXXXXX, plus a spread, and dividends need not also be declared on any other class of shares of CanSub2;

o    the holder of each of the CanSub2 New Preferred Shares (ForSub3 Transfer) will be entitled, upon the liquidation, dissolution or winding-up of CanSub2, to a payment of an amount equal to the CanSub2 PS (ForSub3 Transfer) Redemption Amount to the extent of the amount or value of property available under applicable law for payment to shareholders of CanSub2 upon such liquidation, dissolution or winding-up, but will not be entitled to any additional amount;

o    each of the CanSub2 New Preferred Shares (ForSub3 Transfer) will rank in priority to the CanSub2 Common Shares, the CanSub2 Preferred Shares and the CanSub2 New Preferred Shares (ForSub1 Transfer) with respect to the entitlement to dividends and to receive amounts on a liquidation, dissolution or winding-up of CanSub2;

o    notwithstanding its rank, CanSub2 may make a Restricted Share Payment, at any time or from time to time, in any financial year, provided that at the time CanSub2 becomes obligated to make the Restricted Share Payment, CanSub2 could redeem all of the issued and outstanding CanSub2 New Preferred Shares (ForSub3 Transfer) by payment in full of the CanSub2 PS (ForSub3 Transfer) Redemption Amount for such shares; and

o    the holders of CanSub2 New Preferred Shares (ForSub3 Transfer) will not be entitled to vote at any meeting of the shareholders of CanSub2, other than as provided under applicable law.

Amendment of CanSub1 Articles of Incorporation

17.    CanSub1 will proceed with the CanSub1 Capital Reorganization by: (i) amending its articles of incorporation to create CanSub1 New Common Shares and CanSub1 New Preferred Shares; (ii) issuing to ParentCo CanSub1 New Common Shares and CanSub1 New Preferred Shares in exchange for all of its CanSub1 Common Shares; and (iii) simultaneously cancelling all the CanSub1 Common Shares so exchanged. 

The newly created shares will have the rights and conditions described below:

*    Each of the CanSub1 New Common Shares will be fully participating and the holder is entitled to XXXXXXXXXX votes at each meeting of the shareholders of CanSub1. All other terms and conditions of the CanSub1 New Common Shares will be identical to the terms and conditions of the CanSub1 Common Shares; and

*    The CanSub1 New Preferred Shares will have the following terms and conditions:

o    each of the CanSub1 New Preferred Shares will be redeemable at the option of CanSub1 and retractable at the option of the holder at any time and in whole or in part for an amount equal to the CanSub1 PS Redemption Amount;

o    the holder of each of the CanSub1 New Preferred Shares will be entitled to annual, non-cumulative cash dividends, equal to a fixed percentage of the CanSub1 PS Redemption Amount.

o    the holder of each of the CanSub1 New Preferred Shares will be entitled, upon the liquidation, dissolution or winding-up of CanSub1, to a payment in priority to all other classes of shares of CanSub1 of an amount equal to the CanSub1 PS Redemption Amount to the extent of the amount or value of property available under applicable law for payment to shareholders of CanSub1 upon such liquidation, dissolution or winding-up, but will not be entitled to any additional amount; 

o    the CanSub1 New Preferred Shares will rank in priority to all other classes of shares of CanSub1 with respect to the payment of dividends and in the distribution of assets in the event of liquidation, winding-up or dissolution of CanSub1;

o    notwithstanding its rank, CanSub1 may make a Restricted Share Payment, at any time or from time to time, in any financial year, provided that at the time CanSub1 becomes obligated to make the Restricted Share Payment, CanSub1 could redeem all of the issued and outstanding CanSub1 New Preferred Shares by payment in full of the CanSub1 PS Redemption Amount for such shares; and

o    the holders of CanSub1 New Preferred Shares will not be entitled to vote at any meeting of the shareholders of CanSub1, other than as provided under applicable law.

Immediately after the CanSub1 Capital Reorganization, the aggregate FMV of the Cansub1 New Common Shares and the Cansub1 New Preferred Shares received by ParentCo will equal the aggregate FMV of the CanSub1 Common Shares immediately before the CanSub1 Capital Reorganization.

No election will be filed under subsection 85(1) in respect of the CanSub1 Capital Reorganization.

On the CanSub1 Capital Reorganization, (i) the Stated Capital of Account of the cancelled CanSub1 Common Shares will be reduced by the amount of the Stated Capital of such shares immediately before the CanSub1 Capital Reorganization; and (ii) an amount equal to the PUC of the CanSub1 Common Shares immediately before the CanSub1 Capital Reorganization will be added to the aggregate Stated Capital Accounts of CanSub1, allocated between the CanSub1 New Preferred Shares and CanSub2 New Common Shares, based on their respective FMV. For clarity, the aggregate PUC of the CanSub1 New Common Shares and CanSub1 New Preferred Shares immediately after the CanSub1 Capital Reorganization will equal the PUC of the CanSub1 Common Shares immediately before the CanSub1 Capital Reorganization.

Spin off of ForSub1

18.    ParentCo will transfer the CanSub1 New Preferred Shares to CanSub2. As consideration for the shares, CanSub2 will issue additional CanSub2 Common Shares having an aggregate FMV equal to the FMV of the CanSub1 New Preferred Shares at the time of the transfer. 

ParentCo and CanSub2 will jointly elect under subsection 85(1), within the time prescribed by subsection 85(6), to transfer the CanSub1 New Preferred Shares at an agreed amount equal to the ACB to ParentCo of the CanSub1 New Preferred Shares.

The agreed amount will not exceed the FMV of the CanSub1 New Preferred Shares.

The amount that will be added to the Stated Capital Account of the CanSub2 Common Shares will be equal to the agreed amount in respect of the transfer of the CanSub1 New Preferred Shares.

19.    CanSub1 will transfer the ForSub1 Common Shares to CanSub2. As consideration for the shares, CanSub2 will issue CanSub2 New Preferred Shares (ForSub1 Transfer) having an aggregate FMV equal to the FMV of the ForSub1 Common Shares at the time of the transfer.

CanSub1 and CanSub2 will jointly elect under subsection 85(1), within the time prescribed by subsection 85(6), to transfer the ForSub1 Common Shares at an agreed amount equal to the ACB to CanSub1 of the ForSub1 Common Shares.

The agreed amount will not exceed the FMV of the ForSub1 Common Shares.

The amount that will be added to the Stated Capital Account of the CanSub2 New Preferred Shares (ForSub1 Transfer) will be equal to the agreed amount in respect of the transfer of the ForSub1 Common Shares.

20.    CanSub1 will redeem all the CanSub1 New Preferred Shares held by CanSub2 for the Aggregate CanSub1 PS Redemption Amount. As consideration for the shares, CanSub1 will issue the CanSub1 Note. CanSub2 will accept the CanSub1 Note as a full and absolute payment for the amount due to CanSub2 from the redemption of the CanSub1 New Preferred Shares.

CanSub1 will designate the dividend resulting from the redemption of the CanSub1 New Preferred Shares of CanSub1 to be an eligible dividend for purposes of subsection 89(14). An EEDD will be made to the extent that Cansub1 has an LRIP balance at the time of the redemption.

21.    CanSub2 will redeem all the CanSub2 New Preferred Shares (ForSub1 Transfer) held by CanSub1 for the Aggregate CanSub2 PS (ForSub1 Transfer) Redemption Amount. As consideration for the shares, CanSub2 will issue the CanSub2 Note. CanSub1 will accept the CanSub2 Note as a full and absolute payment for the amount due to CanSub1 from the redemption of the CanSub2 New Preferred Shares (ForSub1 Transfer).

CanSub2 will designate the dividend resulting from the redemption of the CanSub2 New Preferred Shares (ForSub1 Transfer) of CanSub2 to be an eligible dividend for purposes of subsection 89(14). An EEDD will be made to the extent that Cansub2 has an LRIP balance at the time of the redemption.

22.    Immediately following the transactions described in Paragraphs 20 and 21, the obligations under the CanSub1 Note and the CanSub2 Note will be legally set-off against each other as payment in full of such notes, and the notes will be cancelled.

Transfer of ForSub1 Common Shares by CanSub2 to ForSub2

23.    CanSub2 will transfer all of its ForSub1 Common Shares to ForSub2 at a purchase price equal to the aggregate FMV of such shares at the time of the transfer. As consideration for the shares, ForSub2 will issue CanSub2 additional ForSub2 Common Shares having an aggregate FMV equal to the aggregate FMV of the ForSub1 Common Shares at the time of the transfer. 

Transfer of ForSub3 Common Shares by ForSub5 to ForSub2

24.    ForSub3 will sell its XXXXXXXXXX% ownership interest in XXXXXXXXXX to an unrelated person for a purchase price equal to its FMV, satisfied in cash. Under the income tax law of the country in which ForSub3 is resident, the resulting gain or loss will be computed using proceeds of disposition that are not less than the FMV of such interest and the gain or loss so computed will be included in ForSub3’s income for the purposes of that law. Less than XXXXXXXXXX% of the FMV of such ownership interest is derived from any combination of the shares of the capital stock and debt of Cansub1 and/or Cansub2.

25.    ForSub3 will declare and pay a cash dividend on the ForSub3 Common Shares to ForSub5 of approximately XXXXXXXXXX$XXXXXXXXXX.

26.    ForSub5 will transfer all of its ForSub3 Common Shares to CanSub2 at a purchase price equal to the aggregate FMV of such shares at the time of the transfer. As consideration for the shares, CanSub2 will issue to ForSub5 CanSub2 New Preferred Shares (ForSub3 Transfer) having an aggregate FMV equal to the aggregate FMV of the ForSub3 Common Shares at the time of the transfer.

27.    CanSub2 will transfer all of its ForSub3 Common Shares to ForSub2 at a purchase price equal to the aggregate FMV of such shares at the time of the transfer. As consideration for the shares, ForSub2 will issue CanSub2 additional ForSub2 Common Shares having an aggregate FMV equal to the aggregate FMV of the ForSub3 Common Shares at the time of the transfer.

28.    ParentCo owns all the issued and outstanding membership interests in the SPVs.  ParentCo will sell some or all of its interests in the SPVs to ForSub2 at a purchase price equal to the aggregate FMV of such interests at the time of the transfer. As consideration for such interests, ForSub2 will pay an amount of cash equal to the aggregate FMV of such interests at the time of the transfer.

29.    [Reserved] 

ADDITIONAL INFORMATION

30.    The Proposed Transactions in Paragraphs 18 to 22 will take place sequentially on the Effective Date. 

31.    The Proposed Transactions in Paragraphs 13 to 17 will occur as initial steps on the Effective Date or will take place on an earlier date.

32.    The Proposed Transactions in Paragraphs 23 and 25 to 27 will take place on the Effective Date or on a later date, but in any event, after the Proposed Transactions in Paragraphs 18 to 22.

33.    The Proposed Transactions in Paragraphs 24 and 28 will take place at any time.

34.    [Reserved].

35.    Each of ParentCo, CanSub1, CanSub2, Canadian Affiliate, Canadian Affiliate 2, ForSub1, ForSub2, ForSub3, ForSub4 and ForSub5, as well as each SPV is related to ParentCo and to each other by virtue of subsection 251(2).

36.    CanSub1 and CanSub2 are not a corporation described in any of XXXXXXXXXX.

37.    The issued CanSub1 New Preferred Shares and CanSub2 New Preferred Shares (ForSub1 Transfer) will not, at any time throughout the series of transactions or events that includes the Proposed Transactions be:

(a)    shares that will be acquired in the ordinary course of the business carried on by CanSub1 or CanSub2;

(b)    the subject of a “dividend rental arrangement” as defined in 248(1);

(c)    the subject of any undertaking that is referred to in subsection 112(2.2) as a “guarantee agreement”;

(d)    the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

(e)    issued for consideration that is or includes:

(i)    an obligation of the type described in subparagraph 112(2.4)(b)(i); or

(ii)    any right of the type described in subparagraph 112(2.4)(b)(ii).

38.    Sometime subsequent to the completion of the CanSub1 Capital Reorganization, ParentCo may subscribe for additional shares of, or contribute additional capital to, CanSub1 in order to replace all or part of the reduction in the capital of CanSub1 resulting from the transactions described in Paragraphs 18 to 22.

39.    ParentCo does not intend to make any specific contemporaneous public disclosure of the Proposed Transactions. Management of ParentCo has no reason to believe that: (a) the Proposed Transactions will have any material impact on the trading price of shares in the capital stock of ParentCo; and (b) public trading of shares in the capital stock of ParentCo will in any way be facilitated or motivated by the Proposed Transactions. It is possible that the Proposed Transactions may be disclosed in the ParentCo’s regular disclosure documents, XXXXXXXXXX.

40.    Any reduction in the FMV of the CanSub2 New Preferred Shares (ForSub3 Transfer) attributable to the limitation of the right of the holder of such shares to have those shares retracted before the date that is XXXXXXXXXX after their date of issuance will be offset by an equivalent increase in the FMV of such shares resulting from the right that the holder has to receive an amount equal to a percentage of the CanSub2 PS (ForSub3 Transfer) Redemption Amount in the form of XXXXXXXXXX, cumulative cash dividends.

PURPOSES OF THE PROPOSED TRANSACTIONS

41.    The purpose of the Proposed Transactions is to create a new holding structure for the direct and indirect subsidiaries of ParentCo which are incorporated and operating in XXXXXXXXXX. The Proposed Transactions will enable the consolidation of the XXXXXXXXXX subsidiaries of ParentCo under ForSub2, on a tax-deferred basis; XXXXXXXXXX.

42.    The transaction described in Paragraph 13 is not required to achieve the purpose described in Paragraph 41.  The purpose of the transaction in Paragraph 13 is to distribute ForSub4’s excess cash on hand to ParentCo, prior to the transfers of the ForSub4 Common Shares in Paragraphs 14 and 15. This dividend will also reduce the value of the ForSub4 Common Shares and therefore reduce the amount of the gain realized on the dispositions of the ForSub4 Common Shares for XXXXXXXXXX income tax purposes in Paragraphs 14 and 15. 

43.    The transaction described in Paragraph 24 is not required to achieve the purpose described in Paragraph 41. The sale transaction described in Paragraph 24 is for commercial reasons. Furthermore, it ensures that the shares of ForSub3 are not XXXXXXXXXX for XXXXXXXXXX income tax purposes at the time of their transfer to CanSub2 in Paragraph 26.

44.    The transaction described in Paragraph 25 is not required to achieve the purpose described in Paragraph 41.  The purpose of the transaction in Paragraph 25 is to distribute ForSub3’s excess cash on hand to ForSub5, prior to the transfers of the ForSub3 Common Shares in Paragraphs 26 and 27. This dividend will also reduce the value of the ForSub3 Common Shares and therefore reduce the amount of the deferred gain for XXXXXXXXXX income tax purposes and the value of the CanSub2 New Preferred Shares (ForSub3 Transfer) that ForSub5 will receive in Paragraph 26.

45.    The CanSub2 New Preferred Shares (ForSub3 Transfer) terms and conditions are described in Paragraph 16.  They are retractable at the option of the holder beginning on the date that is XXXXXXXXXX after the date of issuance. The purpose of this particular restriction on the timing of the retraction is so that these shares will be considered to be equity, as opposed to debt, for XXXXXXXXXX income tax purposes. 

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions, Additional Information and Purposes of the Proposed Transactions and provided that the Proposed Transactions are completed in the manner described above:

A.    The provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the disposition of the CanSub1 Common Shares by ParentCo in exchange for the CanSub1 New Common Shares and CanSub1 New Preferred Shares pursuant to the CanSub1 Capital Reorganization as described in Paragraph 17, provided that:

a.    ParentCo holds its CanSub1 Common Shares as capital property; and

b.    ParentCo and CanSub1 do not file an election under subsection 85(1) or (2) in respect of the exchange;

such that

c.    pursuant to paragraph 86(1)(b), the cost to ParentCo of the CanSub1 New Common Shares and of the CanSub1 New Preferred Shares, respectively, will be deemed to be the proportion of the total ACB to ParentCo of such CanSub1 Common Shares immediately before the exchange that

i.    the FMV, immediately after the exchange, of the CanSub1 New Common Shares, or of the CanSub1 New Preferred Shares, as the case may be, received by ParentCo

      is of

ii.    the FMV, immediately after the exchange, of all the shares of the capital stock of CanSub1 acquired by ParentCo on the exchange;

d.    pursuant to paragraph 86(1)(c), ParentCo will be deemed to have disposed of the CanSub1 Common Shares for aggregate proceeds of disposition equal to the aggregate cost to ParentCo of the CanSub1 New Common Shares and CanSub1 New Preferred Shares received by ParentCo as determined in (c) above; and

e.    the aggregate PUC of the CanSub1 New Common Shares and CanSub1 New Preferred Shares will be equal to the PUC of the CanSub1 Common Shares which were exchanged for the CanSub1 New Common Shares and CanSub1 New Preferred Shares, and subsection 86(2.1) will not apply to adjust such aggregate PUC.

B.    Subject to the application of subsection 69(11), provided that the appropriate elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6) and provided that each particular property described below is an eligible property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1) will apply to the transfer of CanSub1 New Preferred Shares by ParentCo to CanSub2 described in Paragraph 18 with the result that the agreed amount in respect of such transfer will be deemed pursuant to paragraph 85(1)(a) to be the proceeds of disposition thereof to ParentCo and the cost thereof to CanSub2. For greater certainty, paragraph 85(1)(e.2) shall not apply to the transfer described in Paragraph 18. The increase in the PUC of the CanSub2 Common Shares as a result of the issuance of CanSub2 Common Shares as described in Paragraph 18 will be equal to the agreed amount in respect of the transfer of the CanSub1 New Preferred Shares, and therefore subsection 85(2.1) will not apply to reduce such PUC.

C.    Subject to the application of subsection 69(11), provided that the appropriate elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6) and provided that each particular property described below is an eligible property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1) will apply to the transfer of ForSub1 Common Shares by CanSub1 to CanSub2 described in Paragraph 19 with the result that the agreed amount in respect of such transfer will be deemed pursuant to paragraph 85(1)(a) to be the proceeds of disposition thereof to CanSub1 and the cost thereof to CanSub2. For greater certainty, paragraph 85(1)(e.2) shall not apply to the transfer described in Paragraph 19. The increase in the PUC of the CanSub2 New Preferred Shares (ForSub1 Transfer) as a result of the issuance of CanSub2 New Preferred Shares (ForSub1 Transfer) as described in Paragraph 19 will be equal to the agreed amount in respect of the transfer of the ForSub1 Common Shares, and therefore subsection 85(2.1) will not apply to reduce such PUC.

D.    On the redemption of the CanSub1 New Preferred Shares held by CanSub2 as described in Paragraph 20 above, CanSub1 will be deemed by paragraph 84(3)(a) to have paid, and CanSub2 will be deemed by paragraph 84(3)(b) to have received, dividends equal to the amount, if any, by which the amount paid to redeem those shares exceeds the PUC of those shares immediately before the redemption, and such dividends:

a.    will be excluded in determining CanSub2’s proceeds of disposition of the CanSub1 New Preferred Shares that it holds in CanSub1 pursuant to paragraph (j) of the definition of proceeds of disposition in section 54;

b.    will be included in computing CanSub2’s income pursuant to subsection 82(1) and paragraph 12(1)(j);

c.    will be deductible pursuant to subsection 112(1) in computing the taxable income of CanSub2 for the taxation year in which such dividends are deemed to be received, and, for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3), or (2.4) will not apply to deny the deduction of such deemed dividends; 

d.    will not be subject to tax under Parts IV.1 or VI.1; and

e.    will reduce any loss that would otherwise be realized as a result of CanSub2’s disposition of the CanSub1 New Preferred Shares in respect of which the dividends are deemed to be received pursuant to subsection 112(3).

E.    On the redemption of all CanSub2 New Preferred Shares (ForSub1 Transfer) held by CanSub1 as described in Paragraph 21 above, CanSub2 will be deemed by paragraph 84(3)(a) to have paid, and CanSub1 will be deemed by paragraph 84(3)(b) to have received, dividends equal to the amount, if any, by which the amount paid to redeem those shares exceeds the PUC of those shares immediately before the redemption, and such dividends:

a.    will be excluded in determining CanSub1’s proceeds of disposition of the CanSub2 New Preferred Shares (ForSub1 Transfer) that it holds in CanSub2 pursuant to paragraph (j) of the definition of proceeds of disposition in section 54;

b.    will be included in computing CanSub1’s income pursuant to subsection 82(1) and paragraph 12(1)(j);

c.    will be deductible pursuant to subsection 112(1) in computing CanSub1’s taxable income for the taxation year in which such dividends are deemed to be received, and, for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3), or (2.4) will not apply to deny the deduction of such deemed dividends;

d.    will not be subject to tax under Parts IV.1 or VI.1; and

e.    will reduce any loss that would otherwise be realized as a result of CanSub1’s disposition of the CanSub2 New Preferred Shares (ForSub1 Transfer) in respect of which the dividends are deemed to be received pursuant to subsection 112(3).

F.    The set-off of the CanSub1 Note with the CanSub2 Note as described in Paragraph 22 above will not, in and of itself, result in a forgiven amount, and neither CanSub1 nor CanSub2 will realize any gain or sustain any loss as a result of such set-off.

G.    By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the dividends referred to in Rulings E and D provided there is not a disposition of property to, or increase in interest by, an unrelated person described in any of subparagraphs 55(3)(a)(i) to (v) which is part of the series of transactions or events that includes the Proposed Transactions. For greater certainty, the Proposed Transactions, in and by themselves, will not be considered to result in any disposition of property to, or increase in interest by, an unrelated person described in any of subparagraphs 55(3)(a)(i) to (v).

H.    For purposes of subsection 85.1(3), provided that the ForSub1 Common Shares constitute capital property to CanSub1 immediately prior to the transfer of the shares by CanSub1 to CanSub2, as described in Paragraph 19, the transfer by CanSub1 of the ForSub1 Common Shares to CanSub2, as described in Paragraph 19, and the subsequent transfer by CanSub2 of such shares to ForSub2, as described in Paragraph 23, will not, in and by themselves, cause such ForSub1 Common Shares not to be capital property of CanSub2.

I.    For purposes of subsection 85.1(3), provided that the ForSub3 Common Shares constitute capital property to ForSub5 immediately prior to the transfer of the shares by ForSub5 to CanSub2, as described in Paragraph 26, the transfer by ForSub5 of the ForSub3 Common Shares to CanSub2, as described in Paragraph 26, and the subsequent transfer by CanSub2 of such shares to ForSub2, as described in Paragraph 27, will not, in and by themselves, cause such ForSub3 Common Shares not to be capital property of CanSub2.

J.    Subsection 245(2) will not apply as a result of entering into the Proposed Transactions, in and of themselves, to re-determine the tax consequences confirmed in the rulings given. 

The above rulings are subject to the limitations and qualifications set out in Information Circular 706R7, dated April 22, 2016 and are binding on the CRA provided that the Proposed Transactions in Paragraphs 13 to 22 are completed within XXXXXXXXXX of the date of this letter and the Proposed Transactions in Paragraphs 23 to 28 are completed within XXXXXXXXXX of the date of this letter, unless otherwise specified.  

The above rulings are based on the Income Tax Act as it presently reads and do not take into account any proposed amendments to the Income Tax Act and the Income Tax Regulations which, if enacted, could have an effect on the rulings provided herein.  

OTHER COMMENTS

Unless otherwise confirmed in the above rulings, 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 PUC of any share or the ACB or FMV of any property referred to herein, including the representation in Paragraph 40 in respect of the CanSub2 New Preferred Shares (ForSub3 Transfer) issued, as described in Paragraph 26; 

(b)    the balance of the LRIP, or any other tax account of any corporation referred to herein; 

(c)    that any person described herein deal, or do not deal, with any other person at arm’s length; and

(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.

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

Yours truly,

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

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