2018-0778931R3 55(3)(a) Reorganization

Principal Issues: Did the reorganization meet the requirements of paragraph 55(3)(a)?

Position: Yes.

Reasons: Meets legislative requirements. Consistent with prior rulings involving similar issues.

Author: XXXXXXXXXX
Section: 55(2), 55(3)(a), 55(4), 85(1), "GRIP", 129(1), 186, 187.1, 191, 251(2)

XXXXXXXXXX                                                                                                             2018-077893

XXXXXXXXXX, 2018

Dear XXXXXXXXXX:

Re:   XXXXXXXXXX

        Supplemental Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX in which you requested a supplemental advance income tax ruling with respect to advance income tax ruling 2018-074949 dated XXXXXXXXXX, addressed to the above-noted taxpayers (the “Original Ruling”). We also acknowledge the information you provided in subsequent e-mails.  The information that you provided in such correspondence form part of this letter only to the extent described herein.

Unless otherwise stated, capitalized terms in this letter have the meaning ascribed in the Original Ruling.

The following amendments are made to the Original Ruling:

1.    Paragraph 5(a)(iii) is amended by adding “immediately before the transaction described in Paragraph 10.1” before the reference to PUC and ACB so that after that amendment, Paragraph 5(a)(iii) will read as follows:

(iii) XXXXXXXXXX DC Class C Shares which have an aggregate redemption amount and FMV of $XXXXXXXXXX and, immediately before the transaction described in Paragraph 10.1, a PUC and ACB of $XXXXXXXXXX;

2.    Paragraph 10 is amended by adding the following at the end of the Paragraph:

DC’s CDA immediately before the increase in PUC described in Paragraph 10.1 was not less than $XXXXXXXXXX.

After that addition, Paragraph 10 will read as follows:

10.   DC’s GRIP, CDA and RDTOH balances as at XXXXXXXXXX were $XXXXXXXXXX, $XXXXXXXXXX and $XXXXXXXXXX respectively.  DC’s CDA immediately before the increase in PUC described in Paragraph 10.1 was not less than $XXXXXXXXXX.

3.    New Paragraph 10.1 is added after Paragraph 10 under the heading “Facts”:

10.1. On XXXXXXXXXX, DC resolved to increase the amount in the stated capital account – and consequently, the PUC – of the DC Class C Shares by $XXXXXXXXXX (that is, an amount equal to the amount by which the redemption amount of the DC Class C Shares exceeded their PUC prior to the PUC increase).  DC will file an election under subsection 83(2) in the prescribed form and in the prescribed manner provided in that subsection and subsections 83(3) and (4).  The increase in PUC also resulted in an increase of the ACB of the DC Class C Shares held by Parent to $XXXXXXXXXX.

4.    Paragraph 11(a) is amended by replacing the reference to “XXXXXXXXXX” with “XXXXXXXXXX” such that after the amendment Paragraph 11(a) will read as follows:

a)    Increase the number of votes per share to which the DC Class A Shares are entitled from XXXXXXXXXX.  The purpose of this step is to ensure that Parent maintains control of DC at all relevant times.

5.    Paragraph 12 is amended by deleting the last sentence of that Paragraph. After such deletion, Paragraph 12 shall read as follows:

12.   On or before the Transaction Date, DC will redeem the XXXXXXXXXX DC Class B Shares and the XXXXXXXXXX DC Class C Shares for their respective redemption amounts in exchange for a demand non-interest bearing promissory note issued by DC to Parent with a principal amount and FMV equal to the aggregate redemption amount of the redeemed shares (the “Parent Note 2”).

6.    Paragraph 30 is amended by deleting “On or about XXXXXXXXXX” and inserting in its place “On the second day following the Transaction Date” such that following that amendment, Paragraph 30 shall read as follows:

“30.  On the second day following the Transaction Date, DC will redeem its Class D Shares held by each of the TransfereeCos as follows:

a)    DC will redeem the Class D Shares held by TC1 in exchange for a demand non-interest bearing promissory note (the “TC1 Note”) having a principal amount and FMV equal to the aggregate FMV and redemption amount of such redeemed shares.

b)    DC will redeem its Class D Shares held by TC2 in exchange for a demand non-interest bearing promissory note (the “TC2 Note”) having a principal amount and FMV equal to the aggregate FMV and redemption amount of such redeemed shares.

c)    DC will redeem its Class D Shares held by TC3 in exchange for a demand non-interest bearing promissory note (the “TC3 Note”) having a principal amount and FMV equal to the aggregate FMV and redemption amount of such redeemed shares.

d)    DC will redeem its Class D Shares held by TC4 in exchange for a demand non-interest bearing promissory note (the “TC4 Note”) having a principal amount and FMV equal to the aggregate FMV and redemption amount of such redeemed shares.

7.    Paragraph 31 is amended by deleting “On or about XXXXXXXXXX” and inserting in its place “On the second day following the Transaction Date” such the following that amendment, Paragraph 31 shall read as follows:

31.   On the second day following the Transaction Date, the promissory notes owing by each TransfereeCo to DC will be set off with the promissory notes owing by DC to each TransfereeCo as follows:

a)    The TC1 Note and the DC-TC1 Note will be set-off against each other in full payment and satisfaction of the amounts due thereunder, which will result in the cancellation of such notes;

b)    The TC2  Note and the DC-TC2 Note will be set-off against each other in full payment and satisfaction of the amount due thereunder, which will result in the cancellation of such notes;

c)    The TC3 Note and the DC-TC3 Note will be set-off against each other in full payment and satisfaction of the amounts due thereunder, which will result in the cancellation of such notes; and;

d)    The TC4 Note and the DC-TC4 Note will be set-off against each other in full payment and satisfaction of the amounts due thereunder, which will result in the cancellation of such notes.”

8.    New Paragraph 47.1 is added after Paragraph 47 under the heading “Additional Information”:

47.1. The increase in stated capital described in Paragraph 10.1, including the amount of such increase, is permitted under the BCA and is not subject to any restriction under the BCA or other law, or any by-law or other constating document of DC.”

9.    Paragraph 49 is deleted and replaced by “[Reserved].”

10.   Ruling B is deleted and replaced by “[Reserved].”

We hereby confirm that the amendments set out above do not affect the rulings given in the Original Ruling as amended by this letter and will continue to be binding on the Canada Revenue Agency, subject to the conditions and limitations stated in the Original Ruling.

Yours truly,

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

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