2001 Ruling 2001-0074533 - Cross-border wind-up bump and distribution

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Availability of bump in situation where non-resident purchaser incorporates Canadian Acquisitionco to purchase Canco. Canco is wound up and shares of Canco's subsidiary are bumped and distributed to non-resident purchaser.

Position: Bump is available.

Reasons: Technical requirements are met. GAAR is n/a.

XXXXXXXXXX 2001-007453

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayers.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the requested rulings is being considered by a taxation services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.

Unless otherwise indicated, all statutory references contained in this letter are to the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to date hereof (the "Act").

Definitions

(a) "CBCA" means the Canada Business Corporations Act;

(b) "capital property" has the meaning assigned by section 54;

(c) "cost amount" has the meaning assigned by subsection 248(1);

(d) "depreciable property" has the meaning assigned by subsection 13(21);

(e) "paid-up capital" has the meaning assigned by subsection 89(1);

(f) "private corporation" has the meaning assigned by subsection 89(1);

(g) "public corporation" has the meaning assigned by subsection 89(1);

(h) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1); and

(i) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).

Facts

1. XXXXXXXXXX ("Parent") is a publicly held company that is listed on the XXXXXXXXXX Stock Exchange. The head office of Parent is in XXXXXXXXXX. Parent is the holding company for a group of companies located in numerous jurisdictions (the "Parent Group").

XXXXXXXXXX

Parent is not resident in Canada and does not carry on business in Canada for purposes of the Act, Parent is incorporated under the laws of XXXXXXXXXX, and does not have a permanent establishment in Canada as defined under XXXXXXXXXX (the "Convention").

2. "Holdco" means XXXXXXXXXX, which was incorporated under the CBCA on XXXXXXXXXX. The registered office of Holdco is located at XXXXXXXXXX . Holdco is a private corporation and a taxable Canadian corporation. Holdco has authorized capital of unlimited common shares. XXXXXXXXXX subsidiary corporations of Parent ("Direct Parents"), which do not carry on business in Canada or have a permanent establishment in Canada as defined under XXXXXXXXXX the Convention, own all the outstanding common shares in Holdco. The business number of Holdco is XXXXXXXXXX. Prior to the transactions described below, Holdco had no other assets except for one share of Offeror, as noted in paragraph 3 below.

3. "Offeror" means XXXXXXXXXX, which was incorporated under the CBCA on XXXXXXXXXX. The registered office of Offeror is located at XXXXXXXXXX . Offeror is a private corporation and a taxable Canadian corporation. Offeror has authorized capital of unlimited common shares. Holdco owns the only outstanding common share in Offeror, which it acquired on subscription in exchange for nominal consideration. XXXXXXXXXX Prior to the transactions described below, Offeror had no other assets and no other outstanding shares.

4. "Target" means XXXXXXXXXX. Target is a public corporation and a taxable Canadian corporation. Target has authorized capital consisting of an unlimited number of Class A Multiple Voting Shares and an unlimited number of Class B Subordinate Voting Shares, of which XXXXXXXXXX Class A Multiple Voting Shares and XXXXXXXXXX Class B Subordinate Voting Shares were issued and outstanding at XXXXXXXXXX, (referred to collectively as the "Target Shares"). The Target Shares were traded on the XXXXXXXXXX Stock Exchange. The business number of Target is XXXXXXXXXX . Target's offices are located at XXXXXXXXXX. Target files its tax return with XXXXXXXXXX Tax Centre, and is serviced by the XXXXXXXXXX Tax Services Office.

Target is a holding company for the Target group of companies (the "Target Group"). XXXXXXXXXX.

5. "Targetsub" means XXXXXXXXXX. Targetsub is a taxable Canadian corporation. Targetsub has authorized capital consisting of an unlimited number of common shares and an unlimited number of XXXXXXXXXX% non-cumulative, redeemable and retractable preferred shares. No Targetsub preference shares are issued and outstanding, and Target owns all of the XXXXXXXXXX outstanding common shares. The business number of Targetsub is XXXXXXXXXX. Targetsub's offices are located at XXXXXXXXXX Targetsub files its tax return with XXXXXXXXXX Tax Centre and is serviced by the XXXXXXXXXX Tax Services Office. The shares of Targetsub are capital property of Target.

XXXXXXXXXX,

6. "Targetsub Foreign Subsidiary" means XXXXXXXXXX. Targetsub owns all of the outstanding shares of Targetsub Foreign Subsidiary. Targetsub Foreign Subsidiary is an investment holding company that provides financing to certain of the Target Foreign Subsidiaries (defined below) and their subsidiaries. In particular, Targetsub Foreign Subsidiary has made loans to XXXXXXXXXX which are presently outstanding (the "Loans"). The shares of Targetsub Foreign Subsidiary are capital property of Targetsub.

Targetsub Foreign Subsidiary is not resident in Canada and does not carry on business in Canada for purposes of the Act. Targetsub Foreign Subsidiary is incorporated under the laws of XXXXXXXXXX and does not have a permanent establishment in Canada as defined under XXXXXXXXX .

7. "Target Foreign Subsidiaries" means, collectively, XXXXXXXXXX The shares of Target Foreign Subsidiaries are capital property of Target.

The Target Foreign Subsidiaries are not resident in Canada and do not carry on business in Canada for purposes of the Act. The Target Foreign Subsidiaries are all controlled foreign affiliates of Target, as defined in subsection 17(15).

Certain of the Target Foreign Subsidiaries have loans payable to Target.

8. The "Partnership" means XXXXXXXXXX, a partnership established under the laws of XXXXXXXXXX Targetsub is a XXXXXXXXXX % partner, and Target is a XXXXXXXXXX % partner. Partnership's only asset is all of the issued and outstanding shares of XXXXXXXXXX. ULC's only asset is the shares of XXXXXXXXXX.

The Partnership has recently repaid $XXXXXXXXXX US to the XXXXXXXXXX. This amount had previously been used by the Partnership to subscribe for shares of ULC which in turn used the funds to subscribe for shares of LLC. LLC had loaned the amount to a related U.S. corporation for use in the latter's active business.

9. Parent, Offeror and Target entered into a Support Agreement on XXXXXXXXXX which provides, among other things, that Parent will, through the Offeror, make an offer to acquire all of the Target shares at a price of $XXXXXXXXXX per share ("the Offer").

10. Parent and each of XXXXXXXXXX, Chairman and Chief Executive Officer of Target, XXXXXXXXX, a director and Executive Vice President of Target, XXXXXXXXXX, entered into agreements dated XXXXXXXXXX pursuant to which each such shareholder irrevocably and unconditionally agreed to deposit certificates representing all of the Target shares beneficially owned by him, or over which control was exercised by him, under the Offer, and, subject to limited exceptions, not to withdraw the Target shares deposited under the Offer. These Shareholders owned or exercised control or direction over an aggregate of XXXXXXXXXX Class A Multiple Voting Shares and XXXXXXXXXX Class B Subordinate Voting Shares.

11. On XXXXXXXXXX, Parent announced the Offer. Under the terms of the Offer, the acquisition price for the Target shares was $XXXXXXXXXX. Parent agreed to also contribute $XXXXXXXXXX, post acquisition, into the Target Group for purposes of its refinancing.

12. XXXXXXXXXX. As a consequence, a total of XXXXXXXXXX Parent shares have now been placed in the offering. Parent has received total gross proceeds from the offering of approximately XXXXXXXXXX . The net proceeds of this offering were used by Parent to finance the Offer.

13. Parent, through Direct Parents, has provided Holdco with an amount equal to the purchase price of the Target shares. This funding was made through a combination of a subscription for additional common shares in Holdco and debt of Holdco issued to Direct Parents.

14. Holdco used the cash received in paragraph 13 above to provide Offeror with the amount equal to the purchase price of the Target shares. This funding was made through a subscription for additional common shares in Offeror.

15. The Offer expired at XXXXXXXXXX, at which time approximately XXXXXXXXXX% of the outstanding Class A Voting Shares and approximately XXXXXXXXXX% of the outstanding Class B Subordinate Voting Shares had been tendered to the Offer and not withdrawn. In accordance with the Offer, the tendered shares were taken up and paid for by the Offeror on or before XXXXXXXXXX.

Proposed Transactions

16. Offeror will use the compulsory acquisition provisions of section 206 of the CBCA to acquire the remaining Target shares (a "Compulsory Acquisition"). The Compulsory Acquisition will be effected by Offeror (i) delivering a notice to all holders of Target shares who have not accepted the Offer and (ii) depositing with the depositary sufficient funds to pay each such holder $XXXXXXXXXX per share. Thereafter such holders will have the right to be paid for their shares upon surrender of their share certificates and a duly executed letter of transmittal and acceptance and the right to apply to a court to seek to be paid "fair value" for the shares so acquired but have no ongoing rights as Target shareholders.

17. Target will sell its XXXXXXXXXX% interest in Partnership to Targetsub causing a cessation of Partnership.

17.1 Any of the Target Foreign Subsidiaries that have loans payable to Target will repay them.

18. Offeror will amalgamate with Target and Targetsub to form a new corporation ("Amalco"). Upon the amalgamation, Amalco will be a subsidiary wholly-owned corporation of Holdco.

19. Holdco will amalgamate with Amalco to form a new corporation ("Amalcol") (the "Amalco Amalgamation").

20. In its tax return for the first taxation immediately following the Amalco Amalgamation, Amalco1 will designate in respect of each of the shares of the Targetsub Foreign Subsidiary, the shares of the Target Foreign Subsidiaries and any other capital property (that is not depreciable property) acquired by it on the Amalco Amalgamation (and owned by Targetsub or Target at the time that Holdco acquired control of those corporations), an amount not exceeding the amount permitted by paragraph 88(1)(d).

21. Amalcol will distribute the shares of the Target Foreign Subsidiaries and the Targetsub Foreign Subsidiary to Direct Parents. The distributions will be made as consideration for the purchase for cancellation of a portion of Holdco's common shares held by Direct Parents that have a fair market value equal to the fair market value of the shares so distributed. Subsequent to the distributions, the Loans will be transferred from Targetsub Foreign Subsidiary to another member of the Parent Group resident in XXXXXXXXXX.

22. In determining the fair market value of the property to be designated in paragraph 20 above, Offeror will engage a qualified third party to perform valuations. Preliminary estimates indicate that the collective value of the Target Foreign Subsidiaries and the Targetsub Foreign Subsidiary exceed XXXXXXXXXX% of the value of the Target Shares as noted in paragraph 11 above.

23. No property acquired by Amalcol on the Amalco Amalgamation or any other property acquired by any person in substitution therefor, will be acquired by a person or persons described in subclauses 88(1)(c)(vi)(B)(I), (II) or (III).

24. Amalcol, as the sole shareholder of ULC, will pass a resolution authorizing the winding-up of ULC, and immediately thereafter ULC will deliver such documents to Amalcol as may be necessary to transfer the legal and the beneficial ownership of the shares of LLC to Amalcol. Thereafter, Amalcol, as the sole shareholder of LLC, will pass a resolution authorizing the winding-up of LLC, and immediately thereafter LLC will deliver such documents to Amalcol as may be necessary to transfer the legal and the beneficial ownership of the property of LLC to Amalcol.

Purposes of the Proposed Transactions

The purposes of the proposed transactions are as follows:

• to permit Parent to reorganize its corporate structure following the acquisition of Target, in part to thereby consolidate the operations of the Target Foreign Subsidiaries and the Targetsub Foreign Subsidiary with any of Parent's pre-existing operations in those foreign jurisdictions.
• to eliminate the financing arrangements in place between Targetsub Foreign Subsidiary and Target Foreign subsidiaries, including the loans receivable by Target from these entities.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the proposed transactions, our rulings are as follows:

A. Provided that no property acquired by Amalcol on the Amalco Amalgamation or any other property acquired by any person in substitution therefor (within the meaning of that phrase for the purposes of clause 88(1)(c)(vi)(B)) is acquired by any person described in any of subclauses 88(1)(c)(vi)(B)(I), (II) or (III) (on the assumption that the "subsidiary" referred to in those subclauses is Amalco and the "parent" is Holdco or Amalcol as the context requires) as part of the series of transactions or events that includes the acquisition of control of Target and Targetsub (collectively "Targets") by Holdco and the Amalco Amalgamation, the cost to Amalcol of each property owned by Targetsub or Target at the time Holdco acquired control of Targets and that became property of Amalcol by virtue of the Amalco Amalgamation will be deemed by paragraph 88(1)(c) to be the cost amount of such property plus, on the assumption that such property is capital, but not depreciable, property, the amount designated by Amalcol under paragraph 88(1)(d) in respect of the property as described in paragraph 20 above.

B. After the shares of Targetsub Foreign Subsidiary are distributed to Direct Parents, subsection 17(2) will not apply to deem the Loans (as defined in paragraph 6) to be owing to a corporation resident in Canada.

C. Subsection 245(2) will not be applied, as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences as described in the rulings given.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 and are binding provided that the proposed transactions are completed before XXXXXXXXXX.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

Nothing in this letter should be construed as confirmation of the tax consequences of any of the transactions described herein, other than as specifically described in the rulings given.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch