2006 Ruling 2006-0184821R3 - Proposed PUC reduction by a public corporation

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 a proposed reduction of PUC by a public corporation occurs on the reorganization of business for the purposes of subsection 84(2)?

Position: Yes.

Reasons: The Law.

XXXXXXXXXX 							2006-018482
								Michael Cooke
XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Subject: XXXXXXXXXX - Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, and your subsequent correspondence wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. You have advised us that to the best of your knowledge and that of the taxpayer involved none of the issues involved in this ruling request are:

(i) in an earlier return of the taxpayer or any related person;

(ii) being considered by a tax services office ("TSO") or taxation centre ("TC") in connection with a previously filed tax return by the taxpayer or any related person;

(iii) under objection by the taxpayer or any related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The taxpayer has also represented that the proposed transaction described herein will not result in the taxpayer or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter, and unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph, clause or subclause is a reference to the relevant provision of the Act, and the Income Tax Act Regulations thereunder are referred to as the "Regulations";

(b) "adjusted cost base" means adjusted cost base as that term is defined in section 54;

(c) "BN" means the tax identification number assigned by the CRA to the particular entity;

(d) "CRA" means the Canada Revenue Agency;

(e) "Distributed Property" means the common shares of Subco to be distributed by Pubco, the number of which will be determined by having Pubco distribute to each registered Pubco's shareholder, 1 common share of Subco for every XXXXXXXXXX issued and outstanding Pubco Common Shares held by each such shareholder on the Record Date for the Distribution, provided that no fractional interests in the common shares of Subco will be distributed. It is anticipated that approximately XXXXXXXXXX common shares of Subco (representing approximately XXXXXXXXXX of all the issued and outstanding common shares of Subco) will be distributed on the Distribution Date;

(f) "Distribution Date" means the date the Distributed Property is transferred to the holders of the Pubco Common Shares;

(g) "fair market value" ("FMV") means the highest price amount available in an open and unrestricted market between informed prudent parties acting at arm's length;

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

(i) "Paragraph" means a numbered paragraph in this advance tax ruling;

(j) "Proposed Transaction" means the transaction described in Paragraph 10;

(k) "Pubco" means XXXXXXXXXX;

(l) "Pubco Common Share Capital Return" means the proposed distribution of the Distributed Property to holders of Pubco Common Shares by way of the reduction of the paid-up capital of the Pubco Common Shares described in Paragraph 10;

(m) "Pubco Common Shares" means the common shares in the share capital of Pubco, as described in Paragraph 3;

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

(o) "QCA" means the Loi sur les compagnies du Québec (Companies Act, Québec);

(p) "Record Date" means the date determined by Pubco on which ownership of a Pubco Common Share will entitle holders thereof to their share of the Distributed Property, which, for greater certainty, will be the Distribution Date;

(q) "Stated Capital" has the meaning assigned by section 123.47 of the QCA;

(r) "Subco" means XXXXXXXXXX;

(s) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and

(t) "taxable dividend" means a taxable dividend as that term is defined in subsection 89(1).

FACTS

1. Pubco was incorporated under the QCA on XXXXXXXXXX. Pubco is a public corporation and a taxable Canadian corporation. Pubco files its returns at the XXXXXXXXXX TC and deals with the XXXXXXXXXX TSO.

2. Pubco is a XXXXXXXXXX company with a diversified portfolio XXXXXXXXXX.

3. Pubco's authorized share capital consists of an unlimited number of common shares (the "Pubco Common Shares"), of which approximately XXXXXXXXXX are issued and outstanding. The PUC attributable to the Pubco Common Shares is not less than $XXXXXXXXXX.

4. On XXXXXXXXXX, Pubco incorporated Subco under the QCA. The incorporation of Subco represented the first stage of a planned reorganization of Pubco's business whereby Pubco's XXXXXXXXXX activities would be separated from its XXXXXXXXXX activities.

5. In XXXXXXXXXX, Pubco transferred certain XXXXXXXXXX to Subco. Subco owns, manages and operates these XXXXXXXXXX operations. The XXXXXXXXXX activities continued to be owned by Pubco.

6. In XXXXXXXXXX, Subco issued an aggregate of XXXXXXXXXX common shares by way of private placement to XXXXXXXXXX investors.

7. At present, there are XXXXXXXXXX common shares of Subco issued and outstanding. Of these, Pubco owns XXXXXXXXXX common shares of Subco (representing XXXXXXXXXX% of the outstanding common shares and votes) while the XXXXXXXXXX investors continue to hold an aggregate of XXXXXXXXXX common shares of Subco (representing XXXXXXXXXX % of the outstanding common shares and votes).

8. Subco is currently in the process of raising additional funds through the issuance, by way of private placement, of XXXXXXXXXX common shares at a price of $XXXXXXXXXX per share, for gross proceeds to Subco of $XXXXXXXXXX.

9. In conjunction with this ruling request, Subco has filed an application to have its common shares listed for trading on the XXXXXXXXXX.

PROPOSED TRANSACTION

10. Subject to the approval of the Pubco shareholders, the grant of the rulings herein and any other regulatory approvals, Pubco will reduce its Stated Capital in accordance with the QCA, by an amount that will be at least equal to the fair market value of the Distributed Property on the Distribution Date. Concurrently with the reduction of its Stated Capital, Pubco will distribute the Distributed Property to the holders of Pubco Common Shares as of the Distribution Date (the "Pubco Common Share Capital Return"). The fair market value of the Distributed Property will be determined on the basis of the average closing price of the common shares of Subco on the XXXXXXXXXX for the first XXXXXXXXXX days on which such shares are listed for trading on said exchange. For greater certainty, the reduction in Pubco's Stated Capital will not exceed the aggregate PUC of the Pubco Common Shares. This Distribution is intended to represent a one-time distribution of the common shares of Subco by Pubco leaving Pubco with approximately XXXXXXXXXX % of the issued and outstanding common shares of Subco.

ADDITIONAL INFORMATION

11. The Pubco Common Share Capital Return has not been preceded by any other transaction that resulted in an increase in the PUC of the Pubco Common Shares, except for increases attributable to the exercise of options and warrants and in respect of subscriptions received for private placements or public offerings of Pubco Common Shares.

12. The Pubco Common Share Capital Return is not in lieu of ordinary course dividends. Pubco has no history of paying dividends to its shareholders and, as mentioned above, the Pubco Common Share Capital Return is intended to be a one-time transaction.

13. In XXXXXXXXXX, the Board of Directors and management of Pubco proposed a similar transaction to that described in Paragraph 10 to Pubco's shareholders, as set out in Pubco's management proxy circular dated XXXXXXXXXX, prepared in connection with an annual and special general meeting of Pubco's shareholders held on XXXXXXXXXX. At that shareholders' meeting a new Board of Directors was elected and, immediately thereafter, new management was appointed at Pubco. While the new Board of Directors and management team of Pubco always had the intention of reorganizing Pubco's XXXXXXXXXX activities through its subsidiary Subco and distributing all or a portion of Subco's common shares to the shareholders of Pubco, their initial priorities for Pubco were: (i) XXXXXXXXXX; and (ii) Pubco's XXXXXXXXXX activities.

14. In XXXXXXXXXX, management of Pubco instructed counsel to develop a corporate, tax and securities law structure for the reorganization of Pubco's XXXXXXXXXX activities through the distribution of shares of Subco. Although the reorganization was delayed due to a markedly increased level of activity with respect to Pubco's XXXXXXXXXX and financing activities, the Board of Directors of Pubco has now submitted the Proposed Transaction to Pubco's shareholders for consideration at the annual and special general meeting of shareholders which was held on XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

15. Pubco believes that it is in the best interests of its shareholders to proceed with the Pubco Common Share Capital Return for a number of reasons, including the following:

(a) given the current levels of XXXXXXXXXX prices, by distributing Pubco's XXXXXXXXXX properties to its shareholders in the form of publicly-traded common shares of Subco, Pubco intends to unlock the unrecognized potential and value of these assets and place such value directly in the hands of the holders of Pubco Common Shares in the form of Subco's common shares;

(b) with the establishment of Subco as a separate public company, Pubco expects that any future valuation of Pubco will be based solely on its XXXXXXXXXX properties and potential; and

(c) with the establishment of Subco as a separate public company, Subco will be positioned to achieve the type of benefits enjoyed by public companies, such as increasing Subco's access to capital through the public markets, motivating management and employees of Subco to develop the business profitably, and increasing focus on the creation of shareholder value.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transaction, and provided that the Proposed Transaction is completed in the manner described above, our rulings are as set forth below.

A. Subject to the application of subsection 40(3), the payment of the Pubco Common Share Capital Return, will not, in and of itself, result in a disposition, within the meaning of subsection 248(1), of a Pubco Common Share.

B. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to the Pubco Common Share Capital Return, such that Pubco will be deemed to have paid to a particular holder of Pubco Common Shares and such holder will be deemed to have received a dividend to the extent, if any, that the fair market value of such holder's Pubco Common Share Capital Return exceeds the amount by which the paid-up capital of such holder's Pubco Common Shares is reduced on the distribution.

C. Where a taxpayer holds Pubco Common Shares as capital property, the amount received by the taxpayer on the Pubco Common Share Capital Return, will be deducted in computing the ACB of that taxpayer's Pubco Common Shares by virtue of subparagraph 53(2)(a)(ii) to the extent that the amount received, or such portion thereof, is not otherwise deemed by subsection 84(2) to be a dividend received by such taxpayer.

D. Subject to the application of section 47, the cost of a Subco common share received by a holder of Pubco Common Share on the Pubco Common Share Capital Return, will be equal to the fair market value of the Subco common share at that time and Pubco will be considered to be disposed of such shares for an amount equal to their aggregate fair market value at that time.

E. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transaction, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA provided that the Proposed Transactions are completed by XXXXXXXXXX. The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

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 paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein, including for greater certainty, the fair market value of the Distributed Property; or

(b) 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, including whether any of the Proposed Transactions would also be included in a series of transactions or events that include other transactions or events that are not described in this letter.

Yours truly,

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