Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether subsection 84(2) will apply in the circumstances described below.
Reasons: Previous positions and jurisprudence.
Section: 84(2), 84.1, 85(2.1), 245(2)
Re: Advance Income Tax Ruling
We are writing in response to your request for an advance income tax ruling (“Ruling request”) on behalf of the above-noted taxpayer and the other taxpayers involved in this Ruling request as described below (collectively, “the taxpayers”). We acknowledge your initial Ruling request, dated XXXXXXXXXX, as well as the additional information provided to us in subsequent emails. The documents submitted as part of your Ruling request are part of this document only to the extent described herein.
To the best of your knowledge and that of the above-noted taxpayer, none of the proposed transactions or issues involved in this Ruling request are the same as or substantially similar to transactions or issues that are:
i. in a previously filed tax return of the taxpayer or a related person and:
(A) being considered by the CRA in connection with such return;
(B) under objection by the taxpayer or a related person; or
(C) the subject of a current or completed court process involving the taxpayer or a related person; or
ii. the subject of a ruling request previously considered by the Income Tax Rulings Directorate.
The tax account number, Tax Services Office and the Tax Centre and head office address of the above-noted taxpayer is as follows:
Tax Services Office: XXXXXXXXXX
Tax Centre: XXXXXXXXXX
Unless otherwise stated:
i. all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended, (the “Act”);
ii. all terms and conditions used in this Ruling request that are defined in the Act (or in the Regulations) have the meaning given in such definition;
iii. all references to monetary amounts are in Canadian dollars; and
iv. the singular should be read as plural and vice versa where the circumstances so require.
The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to as follows:
“Aggregate Purchase Price” means $XXXXXXXXXX multiplied by the number of Public Shares issued and outstanding immediately before Newco purchases such shares pursuant to the Plan of Arrangement as described in Paragraph 17, which is estimated to be $XXXXXXXXXX;
“Amalco” means the corporation to be formed on the amalgamation of Pubco and Newco as described in Paragraph 18;
“Arm’s length” has the meaning assigned by subsection 251(1);
“AXXXXXXXXXX Sub-segment” has the meaning set forth in Paragraph 3;
“Bank Loan” has the meaning set forth in Paragraph 14;
“BCA” means the Business Corporations Act, XXXXXXXXXX, as amended or proposed to be amended;
“Business” has the meaning set forth in Paragraph 3;
“CCPC” means “Canadian-controlled private corporation” as that term is defined in subsection 125(7);
“Continuing Shareholders” means Holdco1, Holdco2, and Holdco3;
“Dissent Liability” means the liability of Pubco arising in respect of the obligation to make a cash payment on the repurchase of any Dissent Shares pursuant to the Plan of Arrangement as described in Paragraph 16;
“Dissent Rights” means the statutory dissent rights provided under the provisions of the BCA, as modified by the Plan of Arrangement;
“Dissent Shares” means Pubco Shares in respect of which Dissent Rights have been exercised;
“Eligible Property” has the meaning assigned by subsection 85(1.1);
“Fair Market Value” or “FMV” means the highest price available in an open and unrestricted market between informed prudent parties acting at arm’s length;
“Financial Assets” has the meaning set forth in Paragraph 5;
“Holdco1” means XXXXXXXXXX, a CCPC and a TCC formed under the laws of XXXXXXXXXX all of the shares of which are, directly or indirectly, owned or controlled by XXXXXXXXXX;
“Holdco2” means XXXXXXXXXX, a CCPC and a TCC formed under the laws of XXXXXXXXXX, all of the shares of which are, directly or indirectly, owned or controlled by XXXXXXXXXX;
“Holdco3” means XXXXXXXXXX, a CCPC and a TCC formed under the federal laws of Canada, all of the shares of which are directly or indirectly owned or controlled by XXXXXXXXXX;
“IXXXXXXXXXX Segment” has the meaning set forth in Paragraph 3;
“Key Employees” means one or more employees of Pubco who own Pubco Shares. Each of the Key Employees is resident in Canada;
“MXXXXXXXXXX Sub-segment” has the meaning set forth in Paragraph 3;
“Newco” means a corporation to be incorporated under the BCA as described in Paragraph 12 for the purposes of purchasing the Public Shares;
“OXXXXXXXXXX Segment” has the meaning set forth in Paragraph 3;
“Paid-Up Capital” or “PUC” has the meaning assigned by subsection 89(1);
“Paragraph” refers to a numbered paragraph in this letter;
“Plan of Arrangement” means a plan of arrangement effected under the BCA pursuant to which, among other things, the Public Share Sale will occur. The Proposed Transactions in Paragraphs 15 to 17 will be executed under the Plan of Arrangement;
“Proposed Transactions” means the transactions described in the Proposed Transactions section of this letter;
“Pubco” means XXXXXXXXXX;
“Pubco Shares” means the issued and outstanding common shares of Pubco having no par value;
“Public Corporation” has the meaning assigned by subsection 89(1);
“Public Shareholders” means holders of Public Shares other than the Continuing Shareholders and Key Employees;
“Public Shares” means all the issued and outstanding Pubco Shares, other than the Pubco Shares redeemed by Pubco on the exercise of Dissent Rights as described in Paragraph 17 or the Pubco Shares acquired by Newco as described in Paragraphs 13 and 14, immediately prior to the Public Share Sale;
“Public Share Sale” has the meaning set forth in Paragraph 17;
“SXXXXXXXXXX Segment” has the meaning set forth in Paragraph 3;
“XXXXXXXXXX” means XXXXXXXXXX Corporation, an arm's-length US public company formed under the laws of XXXXXXXXXX;
“XXXXXXXXXX Asset Sale” has the meaning set forth in Paragraph 9; and
“TCC” means “taxable Canadian corporation” as that term is defined in subsection 89(1).
1. Pubco was incorporated under the provisions of the Business Corporations Act (XXXXXXXXXX) on XXXXXXXXXX. Pubco was continued under the provisions of the BCA on XXXXXXXXXX.
2. Pubco is a public corporation, the shares of which are listed on the XXXXXXXXXX under symbol “XXXXXXXXXX”. The only shares of Pubco that are currently issued and outstanding are the Pubco Shares. Pubco’s records office is located at XXXXXXXXXX.
3. Pubco carries on a business of XXXXXXXXXX a portfolio of products focused on XXXXXXXXXX directly and indirectly through its subsidiaries (the “Business”). The Business has XXXXXXXXXX, which are described as follows:
a. the XXXXXXXXXX segment (“SXXXXXXXXXX Segment”) includes sub-segments focused on XXXXXXXXXX. As described below, the SXXXXXXXXXX Segment previously included a sub-segment focused on XXXXXXXXXX (the “AXXXXXXXXXX Sub-segment”) and a sub-segment focused on the provision of XXXXXXXXXX (the “MXXXXXXXXXX Sub-segment”);
b. the XXXXXXXXXX segment (the “IXXXXXXXXXX Segment”) is focused on XXXXXXXXXX; and
c. the XXXXXXXXXX segment (the “OXXXXXXXXXX Segment”) is focused on XXXXXXXXXX.
4. Pubco currently has approximately XXXXXXXXXX employees worldwide and approximately US$XXXXXXXXXX in budgeted revenue for XXXXXXXXXX in respect of the Business.
5. In addition to all of the assets related to the SXXXXXXXXXX Segment, IXXXXXXXXXX Segment and OXXXXXXXXXX Segment of the Business, Pubco currently holds interest-bearing cash deposits and/or cash equivalents of approximately $XXXXXXXXXX and US$XXXXXXXXXX, respectively (the “Financial Assets”). Substantially all of the Financial Assets arose as a result of the sale of certain business assets described in Paragraphs 9 and 10.
6. There are XXXXXXXXXX issued and outstanding Pubco Shares, of which approximately XXXXXXXXXX% are held by the Continuing Shareholders and Key Employees. More specifically, Holdco1 owns XXXXXXXXXX Pubco Shares (XXXXXXXXXX%), Holdco3 owns XXXXXXXXXX Pubco Shares (XXXXXXXXXX%) and Holdco2 owns XXXXXXXXXX Taxpayer Shares (XXXXXXXXXX%). The Key Employees of Pubco own approximately XXXXXXXXXX Pubco Shares (XXXXXXXXXX%).
7. The aggregate PUC of the Pubco Shares is $XXXXXXXXXX, or $XXXXXXXXXX per share.
9. XXXXXXXXXX. After a period of negotiation, XXXXXXXXXX and the Pubco announced the execution of an asset purchase agreement pursuant to which Pubco agreed to sell all assets relating to the AXXXXXXXXXX Sub-segment and all of its subsidiaries that held assets relating to the MXXXXXXXXXX Sub-segment to XXXXXXXXXX (the “XXXXXXXXXX Asset Sale”).
10. On XXXXXXXXXX, the XXXXXXXXXX Asset Sale was completed and Pubco received after-tax net sale proceeds of approximately US$XXXXXXXXXX.
11. In the course of considering these and other alternatives, the Continuing Shareholders indicated that they did not wish to sell their Pubco Shares to a third party purchaser and Pubco determined that the cost to maintain its public company listing was prohibitive. As a result of these considerations, on XXXXXXXXXX, the Continuing Shareholders delivered a non-binding proposal to purchase all the Pubco Shares not already owned or controlled by them (other than Pubco Shares held by the Key Employees) at a price of $XXXXXXXXXX per share, payable in cash.
The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, which will be filed within the applicable due dates following the completion of the Proposed Transactions.
12. The Continuing Shareholders will incorporate a new corporation under the BCA (“Newco”). The authorized share structure of Newco will consist of an unlimited number of common shares without par value. The common shares of Newco will have XXXXXXXXXX per share. On incorporation, one or more of the Continuing Shareholders will subscribe for a nominal number of common shares of Newco for a nominal subscription price.
13. The Continuing Shareholders will transfer all of their Pubco Shares to Newco. As consideration for the Pubco Shares so transferred, Newco will issue common shares and a promissory note with a FMV equal to $XXXXXXXXXX per common share transferred. The aggregate FMV of all consideration received will be equal to the FMV of the Pubco Shares so transferred by the particular Continuing Shareholder. To the extent that the Pubco Shares are eligible property of the particular transferee, the particular transferee will jointly elect with Newco, in the prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each such transfer. The agreed amounts will not be less than the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) nor will it exceed the FMV of the property so transferred to Newco in accordance with paragraph 85(1)(c). In addition, the agreed amounts will not be less than the amount permitted in paragraph 85(1)(b).
Newco will add to its capital account maintained for the Newco common shares an amount that will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).
The Key Employees will transfer all of their Pubco Shares to Newco. As consideration for the Pubco Shares so transferred, Newco will issue common shares and a promissory note with a FMV equal to $XXXXXXXXXX per common share transferred to the Key Employee. The aggregate FMV of all consideration received will be equal to the FMV of the Pubco Shares so transferred by the particular Key Employee. To the extent that the Pubco Shares are eligible property of the particular transferee, the particular transferee will jointly elect with Newco, in the prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each such transfer. The agreed amounts will not be less than the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) nor will it exceed the FMV of the property so transferred to Newco in accordance with paragraph 85(1)(c). In addition, the agreed amounts will not be less than the amount permitted in paragraph 85(1)(b).
Newco will add to its capital account maintained for the Newco common shares an amount that will not exceed the maximum amount that could be added to the PUC of such shares without an adjustment under paragraph 84.1(1)(a).
14. Newco will borrow an amount equal to the Aggregate Purchase Price from an arm’s-length lender (the “Bank Loan”).
Plan of Arrangement
The following transactions will comprise part of the Plan of Arrangement, which is currently in the process of shareholder and court approval:
15. Pubco will repurchase and cancel each outstanding Pubco stock option in exchange for a cash payment to the holder thereof equal to the amount, if any, by which $XXXXXXXXXX exceeds the exercise price for such option.
16. Pubco will repurchase any Dissent Shares in exchange for the right to receive a cash payment equal to the FMV thereof (“Dissent Liability”) determined under the BCA as modified by the Plan of Arrangement, and such Dissent Shares shall be cancelled immediately upon repurchase.
17. Newco will purchase from the Public Shareholders all of the remaining issued and outstanding Public Shares for $XXXXXXXXXX per share (the “Public Share Sale”) and will use the proceeds from the Bank Loan to pay the Aggregate Purchase Price.
18. Newco and the Pubco (“the predecessor corporations”) will be amalgamated to form a new corporation (“Amalco”) pursuant to the BCA, in such a manner that:
a. all the property (except amounts receivable from any predecessor corporation) of the predecessor corporations immediately before the merger will become property of Amalco by virtue of the merger;
b. all the liabilities (except amounts payable to any predecessor corporation) of the predecessor corporations (including the Dissent Liability) immediately before the merger will become liabilities of Amalco by virtue of the merger; and
c. all of the shareholders (except any predecessor corporation) who owned shares of the capital stock of any predecessor corporation immediately before the merger, being, the Continuing Shareholders and Key Employees of Newco, will receive common shares of Amalco by virtue of the merger.
19. In connection with the amalgamation described in Paragraph 18, each of the Continuing Shareholders and each of the Key Employees, as the case may be, will receive a number of “new” common shares of Amalco in the same proportion as the number of common shares of Newco that such shareholder owned immediately before the amalgamation. The aggregate FMV of the common shares of Amalco issued to each of the Continuing Shareholders and each of the Key Employees, as the case may be, on the amalgamation will also equal the aggregate FMV of all the shares of Newco owned by such shareholder immediately before the amalgamation.
The stated capital of the common shares of Amalco issued on the amalgamation will not exceed the aggregate PUC of all the shares in the capital stock of Newco that were issued and outstanding immediately before the amalgamation.
20. Amalco will pay any Dissent Liability in full using its own available funds.
21. Amalco will repay the Bank Loan in full using the Financial Assets.
22. Amalco will apply to voluntarily be delisted for trading on the XXXXXXXXXX pursuant to XXXXXXXXXX of the XXXXXXXXXX. Timelines with respect to voluntarily delisting are prescribed in XXXXXXXXXX. Contemporaneously, Amalco will make an application to the applicable securities regulatory authorities for Amalco to cease to be a reporting issuer under applicable Canadian securities laws. In due course Amalco will elect not be a “public corporation” pursuant to subsection 89(1).
23. Certain Key Employees may subscribe for additional shares of Amalco for cash. The subscription price for any shares will be equal to the FMV thereof.
24. The Business formerly carried on by Pubco will, after the Proposed Transactions are completed, continue to be carried on by Amalco. There are no plans to wind-up or discontinue or otherwise reorganize the Business.
PURPOSES OF THE PROPOSED TRANSACTIONS
25. The purpose of the Proposed Transactions is to facilitate the Public Share Purchase and allow the Continuing Shareholders and Key Employees to continue to carry on the Business of Pubco through a private corporation.
Provided that the above statements of Facts, Proposed Transactions, Purposes of the Proposed Transactions and Additional Information are accurate and constitute a complete disclosure of all relevant information, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:
A. Subsection 84(2) will apply to the Public Share Sale described in Paragraph 17, such that Pubco will be deemed to have paid, and each holder of Public Shares having such shares purchased by Newco will be deemed to have received, a dividend to the extent that the amount paid by Newco to each such holder on the Public Share Sale exceeds the amount of PUC attributable to such holder’s shares.
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. The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R9 dated April 23, 2019 and are binding on the CRA provided that the Proposed Transactions are completed within the time frame described in this letter, unless otherwise stated.
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;
b. any other tax consequence (including provincial tax consequences) 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.
The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
For Division Director
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.
© Her Majesty the Queen in Right of Canada, 2020
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2020
For additional commentary on Technical Interpretations, court cases, government releases, and conference materials in a single practical document specifically geared toward owner-managed businesses, see Video Tax News Monthly Tax Update newsletter.
This effective summary and flagging tool is the most efficient way to ensure that you, your firm, and clients are fully supported and armed for whatever challenges are thrown your way.
Packages start at $399/year.