2006 Ruling 2006-0210741R3 - Paid-up Capital Reduction - 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 subsection 84(2) applies to the proposed distribution of shares of a subsidiary corporation, to be effected as a reduction of the stated capital of a public corporation.

Position: Favourable rulings provided.

Reasons: In compliance with the law and previous positions.

XXXXXXXXXX 2006-021074
XXXXXXXXXX, 2006
Dear Sir:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided in your letter and e-mail of XXXXXXXXXX, and during our various telephone conversations in connection with your ruling request (XXXXXXXXXX).

We understand that to the best of your knowledge and that of the taxpayer involved, none of the issues involved in this ruling is:

(i) involved in an earlier return of the taxpayer or a related person,

(ii) 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,

(iii) under objection by the taxpayer or a 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.

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

LEGAL ENTITY DEFINITIONS

In this letter, except in Paragraph 13 below, the taxpayers will be referred to as follows:

(a) "BAcoes" means XXXXXXXXXX, as lead underwriter of a group of underwriters in relation to the Bought Deal described in Paragraphs 9 and 10 hereof;

(b) "Pubco" means XXXXXXXXXX, a corporation described in Paragraph 1 hereof;

(c) "Pubco 2" means XXXXXXXXXX, a corporation described in Paragraph 7 hereof; and

(d) "X" means XXXXXXXXXX .

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified.

(a) "ACB" has the meaning assigned to the expression "Adjusted Cost Base" in section 54 of the Act;

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

(c) "CBCA" means the Canada Business Corporations Act, as amended;

(d) "Bought Deal" means the transaction described in Paragraphs 9 and 10 hereof;

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

(f) "Common Shares" means the common shares of the capital stock of Pubco;

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

(h) "disposition" has the meaning assigned by subsection 248(1);

(i) "Distribution" means the proposed distribution of Pubco 2 Shares, to be effected as a reduction of the stated capital of the Common Shares of the capital stock of Pubco, as described in Paragraph 12 hereof;

(j) "Distribution Date" means the date the Distributed Pubco 2 Shares are transferred to the holders of Common Shares, which will be XXXXXXXXXX;

(k) "Distributed Pubco 2 Shares" means all the Pubco 2 Shares held by Pubco and distributed to its shareholders on the Distribution Date;

(l) "FMV" means fair market value;

(m) XXXXXXXXXX;

(n) "Paragraph" means a numbered paragraph in this letter;

(o) "Pubco 2 Shares" means the subordinate voting shares of the capital stock of Pubco 2;

(p) "PUC" has the meaning assigned to the expression "Paid-up Capital" in subsection 89(1);

(q) "Proposed Transactions" means the transactions described in Paragraph 12 hereof;

(r) "Record Date" means the date on which ownership of a Common Share will entitle holders thereof to a pro rata share of the Distributed Pubco 2 Shares, which will be XXXXXXXXXX;

(s) "special resolution" means a shareholders' resolution described in paragraph 38(1)(b) of the CBCA;

(t) "stated capital" means stated capital as that expression is used in the CBCA;

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

(v) "TCC" has the meaning assigned to the expression "Taxable Canadian Corporation" in subsection 89(1); and

(w) XXXXXXXXXX.

FACTS

1. Pubco is a public corporation governed by the CBCA and a TCC. The Common Shares of the capital stock of Pubco are currently listed and posted for trading on the XXXXXXXXXX under the trading symbols XXXXXXXXXX, respectively.

XXXXXXXXXX.

Prior to the time of the closing of the Bought Deal described in Paragraphs 9 and 10, Pubco owned XXXXXXXXXX multiple voting shares of Pubco 2 and XXXXXXXXXX Pubco 2 Shares. Such ownership represented approximately XXXXXXXXXX% of the equity and XXXXXXXXXX% of the voting rights of Pubco 2. XXXXXXXXXX Prior to the time of the closing of the Bought Deal, Pubco had de jure control of Pubco 2 for the purposes of the Act.

Prior to the time of the closing of the Bought Deal and based on the market capitalization of Pubco and Pubco 2, the interest held by Pubco in Pubco 2 represented approximately between XXXXXXXXXX% and XXXXXXXXXX% of Pubco's value.

The XXXXXXXXXX annual report of Pubco states that on a consolidated basis, Pubco operates in XXXXXXXXXX segments of operations including: XXXXXXXXXX.

Pubco's XXXXXXXXXX consolidated financial statements include the accounts of Pubco and all of its subsidiaries, including Pubco 2 and its own subsidiaries. These accounts are accounted for using the full consolidation method.

2. The authorized share capital of Pubco consists of an unlimited number of Common Shares without nominal value and an unlimited number of preferred shares issuable in series. Management of Pubco believes that approximately XXXXXXXXXX Common Shares and no preferred shares will be outstanding on the Record Date. The PUC of the Common Shares will not be less than approximately $XXXXXXXXXX per Common Share (approximately $XXXXXXXXXX in aggregate) on the Distribution Date.

The following table summarizes the capitalization of Pubco since its incorporation:

- Public issuances for cash
   and exercises of options for cash (prior toXXXXXX )  $XXXXXXXXXX
- Conversion of debts in XXXXXXXXXX  	  	       $XXXXXXXXXX
- Exercises of options for cash in XXXXXXXXXX 	       $XXXXXXXXXX
- Acquisition of assets in XXXXXXXX  (no rollover)     $XXXXXXXXXX
MINUS Fees in connection with issuances of shares	 ($XXXXXXXXXX )
PUC in respect of the Common Shares			       $XXXXXXXXXX 

Each holder of a Common Share is entitled to receive notice and attend all general and special meetings of the shareholders of Pubco and is entitled to one vote per share at such meetings. Each holder of a Common Share is also entitled to receive dividends if, as and when declared by the board of directors of Pubco. Finally, each holder of a Common Share is entitled to participate, pro rata to its holding of Common Shares, in any distribution of assets made by Pubco upon its liquidation, dissolution or winding-up.

3. Pubco has never declared and paid any dividends since becoming a public corporation. Consequently, the proposed Distribution, to be effected as a reduction of the stated capital of the Common Shares as described in Paragraph 12 below, is not in lieu of ordinary course dividends and is intended to be a one-time transaction.

Furthermore, since Pubco was incorporated only in XXXXXXXXXX, it has never increased its PUC of any class of its shares and elected to treat such amount as a dividend paid out of its "pre-1972 capital surplus on hand" as that term is defined in subsection 88(2.1).

4. Pubco was incorporated on XXXXXXXXXX by X.

XXXXXXXXXX

XXXXXXXXXX

5. XXXXXXXXXX.

6. On XXXXXXXXXX, Pubco 2 completed an initial public offering and secondary offering of XXXXXXXXXX subordinate voting shares of its capital stock in Canada at a price of $XXXXXXXXXX per share, for total gross proceeds of $XXXXXXXXXX. Pubco 2's subordinate voting shares have, since its initial public offering, traded on the XXXXXXXXXX under the symbol "XXXXXXXXXX". The gross proceeds received by Pubco 2 from the treasury offering totaled approximately $XXXXXXXXXX and were used by Pubco 2 primarily to pursue its acquisition strategy and for general corporate purposes.

7. Pubco 2 is a public corporation governed by the CBCA and a TCC. The authorized share capital of Pubco 2 consists of an unlimited number of multiple voting shares, subordinate voting shares (the Pubco 2 Shares) and preferred shares issuable in series. XXXXXXXXXX.

8. During its XXXXXXXXXX fiscal year, Pubco engaged itself in a lengthy and detailed review process with respect to its equity investment in Pubco 2. During this process, management and the board of directors of Pubco examined a number of strategic alternatives for how best to pursue and implement Pubco's business plan of becoming a XXXXXXXXXX company. The strategic alternatives considered included a possible divestiture by Pubco of its equity investment in Pubco 2. XXXXXXXXXX. Historically, in addition to its own business (more fully described above), Pubco has been involved, directly and indirectly through its equity investment in Pubco 2, in the business of Pubco 2.

9. As a culmination of the process described in Paragraph 8 above, Pubco publicly announced on XXXXXXXXXX that it intended to become a XXXXXXXXXX company focused on XXXXXXXXXX. At the same time, Pubco also announced its intention to complete the spin-off of Pubco 2 by the end of XXXXXXXXXX.

More specifically, Pubco announced on XXXXXXXXXX that it had entered into an agreement with BAcoes providing for the sale to the public, on a bought-deal basis of XXXXXXXXXX Pubco 2 Shares.

On XXXXXXXXXX, Pubco also indicated that following the closing of the Bought Deal, and subject to receiving regulatory approvals and the approval of the Pubco shareholders, it intended to distribute the remaining XXXXXXXXXX Pubco 2 Shares to its shareholders.

10. On XXXXXXXXXX, Pubco announced the closing of the Bought Deal.

Upon such closing, Pubco first converted XXXXXXXXXX multiple voting shares of the capital stock of Pubco 2 it held into Pubco 2 Shares on a XXXXXXXXXX ratio. This conversion occurred on a tax-deferred basis pursuant to subsection 51(1).

According to an underwriting agreement dated XXXXXXXXXX by and between Pubco, Pubco 2 and BAcoes, Pubco and certain senior officers of Pubco 2 then sold, upon closing of the Bought Deal, XXXXXXXXXX Pubco 2 Shares at a price of $XXXXXXXXXX for net proceeds of $XXXXXXXXXX. From the XXXXXXXXXX Pubco 2 Shares sold in the course of the Bought Deal, XXXXXXXXXX shares were sold by senior officers of Pubco 2. Pubco will use the net proceeds from the Bought Deal to advance its XXXXXXXXXX and for general corporate purposes.

Finally, immediately following the closing of the Bought Deal, all of the issued and outstanding multiple voting shares of the capital stock of Pubco 2 held by Pubco were automatically converted into Pubco 2 Shares pursuant to a XXXXXXXXXX ratio. This conversion occurred on a tax-deferred basis pursuant to subsection 51(1).

As a result of the completion of the Bought Deal and the conversions described in above, Pubco currently owns XXXXXXXXXX Pubco 2 Shares, which represents approximately XXXXXXXXXX% of the equity and voting rights of Pubco 2.

11. On XXXXXXXXXX, Pubco announced that its Board had approved, among other matters, the convening of a special meeting of shareholders on XXXXXXXXXX for the purpose of submitting to shareholders for their approval a resolution authorizing the distribution of all remaining XXXXXXXXXX Pubco 2 Shares held by Pubco by way of a reduction of the stated capital of the Common Shares of the capital stock of Pubco.

PROPOSED TRANSACTIONS

12. Before the opening of trading on the XXXXXXXXXX on the Distribution Date, and subject to the approval of the Pubco shareholders, the grant of the advance income tax ruling herein and any other regulatory approvals, Pubco will reduce its stated capital, pursuant to a special resolution by an aggregate amount equal to the lesser of (i) the PUC of the Common Shares on the Distribution Date and (ii) the FMV of the Distributed Pubco 2 Shares on the Distribution Date. The Distribution will be made to holders of Common Shares registered at the close of trading on the Record Date. Management currently believes that the reduction of Pubco's PUC will not exceed the PUC of the said Common Shares. Pubco will distribute the Distributed Pubco 2 Shares as payment for the PUC reduction before the opening of trading on the XXXXXXXXXX on the Distribution Date.

Based on Pubco's XXXXXXXXXX Common Shares that are currently issued and outstanding, Pubco shareholders would receive approximately XXXXXXXXXX of a Pubco 2 share for each one of their Common Shares. No fractional Pubco 2 Share will be distributed pursuant to the PUC reduction and any such fractional share will be rounded down to the nearest whole number. Pubco intends to dispose of any Pubco 2 Shares it retains as a result of fractional entitlements, which it expects will be of a relatively small number, in an orderly manner after the Distribution Date.

Pubco will hold a special meeting of shareholders on or around XXXXXXXXXX to seek approval from its shareholders in respect of the Proposed Transactions. The favourable vote of at least XXXXXXXXXX% of the votes cast by those in attendance or by proxy is required to approve the Proposed Transactions.

ADDITIONAL INFORMATION

13. The federal business number of Pubco, the location of the tax services office and taxation centre where it returns are filed, and the address of its head office are as follows:

XXXXXXXXXX.

-  Business Number: 		XXXXXXXXXX
-  Tax Services Office:  	XXXXXXXXXX
-  Taxation Centre:  		XXXXXXXXXX
-  Address:	XXXXXXXXXX  

14. After the completion of the Proposed Transactions, Pubco will pursue other business opportunities other than Pubco 2's business.

15. Neither Pubco nor Pubco 2 has any outstanding tax liabilities that could be affected by the Proposed Transactions.

PURPOSES OF THE PROPOSED TRANSACTIONS

16. As discussed in Paragraphs 8 and 9 above, Pubco has decided to divest itself of its equity investment in Pubco 2 in order to best pursue and implement Pubco's business plan of becoming a XXXXXXXXXX company and focus on advancing its XXXXXXXXXX . This divestiture is part of a reorganization aimed at refocusing the business of Pubco.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant Facts, Proposed Transactions and the Purposes of the Proposed Transactions, and provided that the proposed transactions are completed in the manner described above, we confirm the following:

A. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, to the Distribution described in Paragraph 12 above, such that Pubco will be deemed to have paid, and the holders of Common Shares of the capital stock of Pubco will be deemed to have received, a dividend only to the extent, if any, that the amount of the Distribution exceeds the amount by which the PUC in respect of the Common Shares is reduced.

B. Subject to the application of subsection 40(3), the Distribution described in Paragraph 12 above will not, in and by itself, result in a disposition of the Common Shares.

C. Where a holder of Common Shares holds the shares as capital property, the amount received by each such person upon the reduction of the PUC of the Common Shares, as described in Paragraph 12 above, will be deducted in computing the particular holder's ACB of such Common Shares by virtue of subparagraph 53(2)(a)(ii), and where the amount of such reduction in the PUC of the Common Shares exceeds the particular holder's ACB thereof, the excess will be deemed to be a gain of such holder for the year from the disposition of such shares under subsection 40(3).

D. To the extent that a holder of Common Shares realizes a capital gain on his Common Shares as a result of the application of subsection 40(3), in computing the particular holder's ACB of such Common Shares, as the case may be, the amount of the gain will be added to the ACB of such shares under paragraph 53(1)(a).

E. Subject to the application of section 47, the cost of the Distributed Pubco 2 Shares received by a holder of Common Shares on the Distribution will be equal to the FMV of such shares on the Distribution Date.

F. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

G. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX.

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.

COMMENTS

Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed:

(a) the determination of the FMV or ACB of any property referred to herein, or the PUC in respect of any share referred to herein; or

(b) any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically confirmed 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 Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch