7 July 2007 Income Tax Severed Letter 2007-0237481R3 - Purchase of target and bump

Unedited CRA Tags

88(1)(c), 88(1)(d), 87(11), 18(6)

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Text of Severed Letter

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.

SUMMARY: Purchase of target and bump—ITA-88(1)(c), 88(1)(d), 87(11), 18(6)—Advance income tax ruling—Issues relating to the acquisition of control of a Target, amalgamation of the Target with the Parent, and bump of the capital property held by the Target.

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: Acquisition of control of a Target. Amalgamation of the Target with the Parent, and bump of the capital property held by the Target

POSITION: Favourable rulings provided.

REASONS: In compliance with the law.

XXXXXXXXXX 2007-023748

XXXXXXXXXX, 2007

Dear Sir:

Re: Advance Income Tax Ruling

XXXXXXXXXX

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

This ruling replaces and rescinds Ruling no. 2006-018243 [], dated XXXXXXXXXX, 2006, except with respect to Ruling B and Ruling D of Ruling no. 2006-018243 which remain binding on the CRA until the date of this letter, provided however that the proposed transactions described herein are completed before XXXXXXXXXX.

(i) involved in an earlier return of the taxpayers 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 taxpayers or a related person,
(iii) under objection by the taxpayers 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 (other than Ruling no. 2006-018243 []).

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

LEGAL ENTITY DEFINITIONS

(a) “Amalco” means the corporation resulting from the amalgamation of Newco and Target, as described in Paragraph 43;
(b) “Bidco” means XXXXXXXXXX, a corporation incorporated by Parent under the CBCA, as described in Paragraph 4;
(c) “CanSub” means XXXXXXXXXX, a corporation incorporated under the CBCA, which was a wholly-owned subsidiary of Target before its winding-up as described in Paragraph 22;
(d) “Finance I” means XXXXXXXXXX formed under the laws of XXXXXXXXXX, which is indirectly a wholly-owned subsidiary of Parent, as described in Paragraph 3;
(e) “Finance II” means XXXXXXXXXX, a company established under the laws of XXXXXXXXXX, which is indirectly a wholly-owned subsidiary of Parent;
(f) “Foreignco” means XXXXXXXXXX;
(g) XXXXXXXXXX;
(h) “Investment Managers” means XXXXXXXXXX;
(i) “InvestmentCo” means XXXXXXXXXX;
(j) “Nco” means XXXXXXXXXX.;
(k) “Newco” means a new corporation to be incorporated by Bidco under the CBCA, as described in Paragraph 41;
(l) “Opco” means XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX
(m) “Parent” means XXXXXXXXXX incorporated under the laws of XXXXXXXXXX;
(n) “Parent Group” means Parent and its subsidiaries;
(o) “ParentSub” means XXXXXXXXXX, formerly XXXXXXXXXX incorporated under the laws of XXXXXXXXXX, which is a wholly-owned subsidiary of Parent, as described in Paragraph 3;
(p) “Partnership1” means XXXXXXXXXX, a limited partnership formed under the laws of XXXXXXXXXX on XXXXXXXXXX, as described in Paragraph 10;
(q) “Partnership2 means XXXXXXXXXX, a limited partnership formed under the laws of XXXXXXXXXX on XXXXXXXXXX, as described in Paragraph 10;
(r) “Partnership3 means XXXXXXXXXX, a limited partnership formed under the laws of XXXXXXXXXX on XXXXXXXXXX, as described in Paragraph 10;
(s) “Partnership4 means XXXXXXXXXX, a limited partnership formed under the laws of XXXXXXXXXX on XXXXXXXXXX, as described in Paragraph 10;
(t) “Subco1” means XXXXXXXXXX, a corporation resident XXXXXXXXXX, which is a wholly-owned subsidiary of Target, as described in Paragraph 10;
(u) “Subco2” means XXXXXXXXXX, a corporation incorporated under the CBCA, which is a wholly-owned subsidiary of Target, as described in Paragraph 10;
(v) “Subco3” means XXXXXXXXXX, a corporation incorporated under the CBCA, which is a wholly-owned subsidiary of Target, as described in Paragraph 10;
(w) “Subco4” means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX, which is a wholly-owned subsidiary of Subco1 and an indirect wholly-owned subsidiary of Target;
(x) “Target” means XXXXXXXXXX, a public corporation that was continued under the CBCA;
(y) “Xco” means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;
(z) “Yco” means XXXXXXXXXX;
(aa) “Zco” means XXXXXXXXXX.

DEFINITIONS

(a) “ACB” has the meaning assigned to the expression “Adjusted Cost Base” in section 54 of the Act;
(b) “Act” means theIncome 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 and clause or subclause is a reference to the relevant provision of the Act;
(c) “CBCA” means the CanadaBusiness Corporations Act;
(d) “CRA” means the Canada Revenue Agency;
(e) “FMV” means fair market value;
(f) “Initial Bid” means the initial unsolicited take-over bid announced on XXXXXXXXXX, by Xco, to acquire all of the shares of the capital stock of Parent, as described in Paragraph 27;
(g) “Memorandum of Understanding” means the memorandum of understanding between Parent, Xco and other parties dated XXXXXXXXXX, as described in Paragraphs 28, 30 and 32;
(h) “non-resident” has the meaning assigned by subsection 248(1);
(i) “Offer” means the offer formally launched on XXXXXXXXXX, by Parent, through Bidco, to acquire all of the Target Shares, as amended on XXXXXXXXXX, as described in Paragraphs 12, 14, 16 and 17;
(j) “paid-up capital” has the meaning assigned by subsection 89(1);
(k) “Post-Take-over Merger” means the proposed merger of Xco with Parent, as described in Paragraph 30;
(l) “private corporation” has the meaning assigned by subsection 89(1);
(m) “public corporation” has the meaning assigned by subsection 89(1);
(n) XXXXXXXXXX;
(o) “Report” means the report filed on XXXXXXXXXX with Canadian securities commissions by the Investment Managers under XXXXXXXXXX;
(p) “Revised Bid” means the amended bid made by Xco to acquire all of the shares of the capital stock of Parent, resulting from modifications made to the Initial Bid on XXXXXXXXXX, as described in Paragraph 28;
(q) “Specified Shareholder” has the meaning assigned by subparagraph 88(1)(c.2)(iii) and subsection 248(1);
(r) “subsidiary wholly-owned corporation” has the meaning assigned by subsection 248(1);
(s) “Target Shares” means all of the issued and outstanding common shares of the capital stock of Target;
(t) “taxable Canadian corporation” has the meaning assigned in subsection 89(1);
(u) “Treaty” means the Convention Between The Government of Canada and XXXXXXXXXX;
(v) XXXXXXXXXX.

FACTS

1. Parent was a publicly held corporation that was listed on the XXXXXXXXXX Stock Exchanges.
XXXXXXXXXX Parent is the holding company of a group of companies located in numerous jurisdictions.
XXXXXXXXXX The Parent Group is a XXXXXXXXXX.
Parent is not resident in Canada and does not carry on business in Canada for purposes of the Act. Parent does not have a permanent establishment in Canada as defined under Article 5 of the Treaty.
2. XXXXXXXXXX
3. ParentSub is a wholly-owned subsidiary of Parent.
ParentSub owns a XXXXXXXXXX% interest in Finance I. The remaining XXXXXXXXXX% interest in Finance I is held by indirectly wholly-owned subsidiaries of Parent.
Finance I is a corporation subject to tax in XXXXXXXXXX and is resident of XXXXXXXXXX for the purposes of the Treaty.
Neither Finance I nor ParentSub are resident in Canada or carry on business in Canada for purposes of the Act, and neither has a permanent establishment in Canada as defined under Article 5 of the Treaty.
4. Bidco was incorporated on XXXXXXXXXX and, until the transfer of shares made on XXXXXXXXXX and described in Paragraph 23, was a wholly-owned subsidiary of Parent. Bidco is a private corporation and a taxable Canadian corporation. Bidco has authorized capital of an unlimited number of common shares.

5. Target is a public corporation and a taxable Canadian corporation.
Target has authorized share capital consisting of XXXXXXXXXX Class A preferred shares, and an unlimited number of Class B preferred shares, Class C preferred Shares and common shares. As at XXXXXXXXXX, the issued and outstanding share capital consisted of XXXXXXXXXX common shares. On XXXXXXXXXX, options issued by Target to purchase XXXXXXXXXX common shares were outstanding.
The Target Shares were traded on the XXXXXXXXXX. Subsequent to the acquisition of the Target Shares by Bidco as described in Paragraphs 19 to 21, Bidco applied to de-list the Target Shares from the XXXXXXXXXX.
XXXXXXXXXX
6. XXXXXXXXXX
7. Based on the Report, the Investment Managers “controlled,” as at XXXXXXXXXX, XXXXXXXXXX Target Shares, representing approximately XXXXXXXXXX% of all Target Shares.
XXXXXXXXXX
8. On XXXXXXXXXX, the Investment Managers filed a second report under XXXXXXXXXX indicating that their combined securityholding percentage in Target had decreased to less than XXXXXXXXXX%.
9. Opco has authorized capital consisting of an unlimited number of voting common shares, Class A preferred shares, Class B preferred shares and Class C preferred shares. As at XXXXXXXXXX, the issued and outstanding capital consisted of XXXXXXXXXX common shares.
Target currently owns XXXXXXXXXX% of all of the issued and outstanding shares of the capital stock of Opco. As at XXXXXXXXXX when Bidco acquired control of Target, the FMV of Target's interest in Opco was approximately $XXXXXXXXXX.
Prior to its winding-up as described in Paragraph 22, CanSub, a wholly-owned subsidiary of Target, owned XXXXXXXXXX% of all of the issued and outstanding shares of the capital stock of Opco. Prior to its winding-up, CanSub held the shares of the capital stock of Opco as capital property.
The remaining XXXXXXXXXX% interest in Opco is held by InvestmentCo.
Target acquired a XXXXXXXXXX% interest in Opco in XXXXXXXXXX from a third party for fair market value consideration consisting of cash. Shortly after, Target transferred its interest in Opco to CanSub.
In XXXXXXXXXX, Opco experienced serious financial problems. CanSub sold its XXXXXXXXXX% interest in Opco to InvestmentCo for nominal cash consideration. CanSub then subscribed for $XXXXXXXXXX of preferred shares of the capital stock of Opco by tendering its $XXXXXXXXXX note receivable from Opco. XXXXXXXXXX other shareholders also acquired a $XXXXXXXXXX preferred share interest in Opco at that time.
On XXXXXXXXXX, CanSub acquired the preferred share interests in Opco held, directly or indirectly, by the other shareholders for fair market value consideration consisting of cash. CanSub's preferred share interest in Opco was then converted into XXXXXXXXXX common shares of the capital stock of Opco, giving CanSub the ownership of XXXXXXXXXX% of all of the issued and outstanding shares of the capital stock of Opco.

• all of the issued and outstanding shares of the capital stock of Subco1, the FMV of which is estimated at approximately $XXXXXXXXXX as at XXXXXXXXXX when Bidco acquired control of Target. Target owns, through its investment in Subco1, a number of foreign affiliates in XXXXXXXXXX;
• all of the issued and outstanding shares of the capital stock of Subco2, the FMV of which is estimated at approximately $XXXXXXXXXX as at XXXXXXXXXX. Target owns, through its investment in Subco2, foreign affiliates in XXXXXXXXXX
• a XXXXXXXXXX% limited partnership interest in Partnership1, the FMV of which is estimated at approximately $XXXXXXXXXX as at XXXXXXXXXX. Partnership1 was formed in XXXXXXXXXX to XXXXXXXXXX;
• a XXXXXXXXXX% limited partnership interest in Partnership2, the FMV of which is estimated at approximately $XXXXXXXXXX as at XXXXXXXXXX. Partnership2 was formed in XXXXXXXXXX and XXXXXXXXXX. As at XXXXXXXXXX, Partnership2 had about XXXXXXXXXX employees;
• a XXXXXXXXXX% limited partnership interest in Partnership3, the FMV of which is estimated at approximately $XXXXXXXXXX as at XXXXXXXXXX. Partnership3 was formed in XXXXXXXXXX and XXXXXXXXXX. As at XXXXXXXXXX, Partnership3 had about XXXXXXXXXX employees;
• a XXXXXXXXXX% limited partnership interest in Partnership4, the FMV of which is estimated at approximately $XXXXXXXXXX as at XXXXXXXXXX. Partnership4 was formed in XXXXXXXXXX and XXXXXXXXXX. As at XXXXXXXXXX, Partnership4 employed about XXXXXXXXXX employees;
• all of the issued and outstanding shares of the capital stock of Subco3, the FMV of which is estimated at approximately $XXXXXXXXXX as at XXXXXXXXXX. Subco3 is a XXXXXXXXXX. Subco3 has XXXXXXXXXX. Subco3 also has XXXXXXXXXX. As at XXXXXXXXXX, Subco3 employed about XXXXXXXXXX persons in its operations in XXXXXXXXXX, and about XXXXXXXXXX persons at its XXXXXXXXXX.

At the time Bidco acquired control of Target, Target held the shares of the capital stock of Subco1, Subco2 and Subco3 and the partnership interests in Partnership1, Partnership2, Partnership3 and Partnership4, as capital properties.

11. On XXXXXXXXXX, Foreignco and Target announced that they had entered into a support agreement under which Foreignco would make an offer to acquire all of the issued and outstanding Target Shares at a price of $XXXXXXXXXX per share with the support of the board of directors of Target.
12. On XXXXXXXXXX, Parent announced its intention to make an offer to acquire all of the Target Shares at a price of $XXXXXXXXXX per share.
On XXXXXXXXXX, Parent formally launched, through Bidco, its Offer to acquire all of the Target Shares at a price of $XXXXXXXXXX per share.
13. On XXXXXXXXXX, Foreignco announced its intention to increase the price of its offer to acquire all of the Target Shares to $XXXXXXXXXX per share.
On XXXXXXXXXX, Foreignco announced its intention to increase the price of its offer to acquire all of the Target Shares to $XXXXXXXXXX per share.
14. On XXXXXXXXXX, Parent through Bidco, announced its intention to increase the price of its offer to acquire all of the Target Shares for a cash consideration of $XXXXXXXXXX per share.
15. On XXXXXXXXXX, Foreignco announced that it would not increase its $XXXXXXXXXX offer.
16. On XXXXXXXXXX, Parent and Target announced that they had entered into a support agreement under which Bidco would amend its Offer and would offer a cash consideration of $XXXXXXXXXX per share with the support of the board of directors of Target.
On XXXXXXXXXX, Bidco formally amended its Offer to acquire all of the Target Shares for a cash consideration of $XXXXXXXXXX per share.
17. The Offer was made only for the Target Shares and was not made for any stock options, warrants or other rights to acquire Target Shares. Holders of such stock options, warrants or other rights that wished to participate in the Offer had to fully exercise their rights in order to obtain Target Shares that could be deposited in accordance with the terms of the Offer.
In connection with the Offer, Target made amendments to its stock option plans and agreed to take steps to allow all persons holding stock options to exercise their stock options (i) on an accelerated vesting basis solely for the purpose of tendering under the Offer all Target Shares issued in connection with such exercise; and (ii) on a cashless basis for the purpose of tendering under the Offer all Target Shares issued in connection with such cashless exercise.
18. On XXXXXXXXXX, Bidco was financed through a common share equity contribution from Parent for an amount of $XXXXXXXXXX and a loan of $XXXXXXXXXX from Finance I, for a total of $XXXXXXXXXX. The loan granted by Finance I to Bidco bears interest at the rate of CA$ XXXXXXXXXX.
Bidco used the funds provided by the share subscription from Parent and the loan from Finance I to acquire the Target Shares under the Offer for $XXXXXXXXXX, as described in Paragraphs 19 to 21.
19. On XXXXXXXXXX, Parent and Target jointly announced that XXXXXXXXXX Target Shares, representing XXXXXXXXXX% of all Target Shares, were deposited to Bidco's Offer and that, effective at XXXXXXXXXX, Bidco had taken up and acquired ownership of such shares.
In connection with the acquisition of control by Bidco described in this paragraph, Target elected, in its return of income for its taxation year ending immediately before its acquisition of control by Bidco, not to have subsection 256(9) apply.
20. On XXXXXXXXXX, Parent announced that an additional XXXXXXXXXX Target Shares had been deposited to Bidco's Offer between XXXXXXXXXX and XXXXXXXXXX, the final expiry date of the offer, which brought the total number of Target Shares deposited to XXXXXXXXXX, representing XXXXXXXXXX% of all Target Shares.
At the same time, Parent announced its intention to acquire, as soon as permitted, the remaining Target Shares by means of a statutory compulsory acquisition procedure under the applicable provisions of the CBCA at the same price as the Offer price and, upon acquiring a sufficient number of Target Shares, to de-list the Target Shares from the XXXXXXXXXX.
21. On XXXXXXXXXX, Bidco commenced the process required to permit Bidco to acquire the remaining Target Shares by means of the statutory compulsory acquisition procedure under Section 206 of the CBCA at the same price as the Offer price. Such process was successfully completed on XXXXXXXXXX and Target was, at such date, a subsidiary wholly-owned corporation of Bidco.

22. Pursuant to section 210 of the CBCA, Target caused CanSub to be wound up and dissolved on XXXXXXXXXX, prior to the acquisition of control of Target by Bidco, as described in Paragraph 19. In the process, all of the properties of CanSub, including the shares of the capital stock of Opco owned by CanSub, were acquired by Target, and all of the liabilities of CanSub were assumed by Target.
At the time Bidco acquired control of Target, Target held the shares of the capital stock of Opco as capital property.
23. On XXXXXXXXXX, Parent transferred legal title to XXXXXXXXXX% of the outstanding shares of the capital stock of Bidco to XXXXXXXXXX.
Parent has complied with the provisions of section 116 to obtain from the Minister a certificate in prescribed form in respect of the disposition of the shares of the capital stock of Bidco. The Minister has effectively issued such certificate on XXXXXXXXXX.
At any relevant time, the shares of the capital stock of Bidco transferred did not derive their value principally from immovable property.
24. The transfer of the shares of the capital stock of Bidco to XXXXXXXXXX described in the above Paragraph was effected following an unsolicited take-over bid for the shares of the capital stock of Parent announced on XXXXXXXXXX by Xco and described in Paragraph 27.
XXXXXXXXXX

25. Xco is a publicly held corporation whose shares are listed on the XXXXXXXXXX.
Between XXXXXXXXXX and XXXXXXXXXX, the only persons that owned more than XXXXXXXXXX% of the shares of the capital stock of Xco were Yco and Zco. More specifically, during such period, Yco owned between XXXXXXXXXX% and 7XXXXXXXXXX% of the shares of the capital stock of Xco. Furthermore, during the same period, Zco owned between XXXXXXXXXX% and XXXXXXXXXX% of the shares of the capital stock of Xco.
Before its acquisition of control of Parent, Xco, together with its subsidiaries, was a XXXXXXXXXX. Xco owns and operates XXXXXXXXXX in numerous jurisdictions.
26. XXXXXXXXXX
27. On XXXXXXXXXX, Xco announced that it had made an unsolicited offer (the “Initial Bid”) to acquire all of the shares of the capital stock of Parent for consideration consisting of cash and shares of the capital stock of Xco.
On XXXXXXXXXX, the board of directors of Parent rejected the Xco's Initial Bid.
28. While Parent's board of directors recommended rejection of Xco's Initial Bid, subsequent negotiations between Parent and Xco resulted in a binding Memorandum of Understanding on XXXXXXXXXX between Parent, Xco and certain other parties. This Memorandum of Understanding set out certain terms and understandings pursuant to which Xco agreed to modify the terms of its Initial Bid (the “Revised Bid”) and Parent agreed to recommend acceptance of the Revised Bid.
29. Under the Revised Bid, shareholders of Parent could choose to receive a combination of Class A shares of the capital stock of Xco and cash, all cash, or all shares of the capital stock of Xco, with certain limitations on the total number of shares issuable and on the total amount of cash payable. The maximum number of Class A shares of Xco issuable pursuant to the Revised Bid was limited to XXXXXXXXXX.
30. The Memorandum of Understanding provided that, as soon as practicable following completion of the Revised Bid, the parties would make their best effort to ensure that Xco would merge with Parent (the “Post-Take-over Merger”), on the basis that the shares of the capital stock of Xco would be exchanged for shares of the capital stock of Parent on a share exchange ratio consistent with the value of the Revised Bid as at the date of its settlement and delivery, and that Parent would continue to be incorporated, domiciled and headquartered in XXXXXXXXXX.
The Post-Take-over Merger between Parent and Xco has not been completed to date.
31. On XXXXXXXXXX, Xco announced that over XXXXXXXXXX% of the shares of the capital stock of Parent (and convertible securities) had been tendered. Xco took up and paid for the tendered shares and convertible securities on XXXXXXXXXX.
32. Prior to making the Revised Bid, Xco entered into an agreement with Foreignco on XXXXXXXXXX, pursuant to which Xco agreed that, if successful in its bid for Parent and if Xco successfully acquired management control over Parent with the ability to sell Target, it would cause Parent to sell the Target Shares to Foreignco.
However, the Memorandum of Understanding between Xco and Parent provided that the parties were unable to reach an agreement as to the ultimate disposition of Target and that, in order to permit the Revised Bid to go forward for the benefit of the respective shareholders of Parent and Xco, Xco agreed that it would submit the question of the sale of Target to Parent's board of directors for further consideration after completion of the Revised Bid. XXXXXXXXXX.
33. XXXXXXXXXX
34. XXXXXXXXXX
35. XXXXXXXXXX
36. XXXXXXXXXX

37. On XXXXXXXXXX, Parent entered into a purchase agreement with Nco pursuant to which Nco would acquire all of the XXXXXXXXXX properties and assets of Parent. The agreement between Parent and Nco provides, among other things, that the assets owned by Subco3 and Subco4 would only be part of the transaction if XXXXXXXXXX. If these conditions are met, Parent would cause Subco3 and Subco4 to be sold as part of a share deal to Nco.
38. Subject to the above Paragraph, Parent and Xco currently have no intention to sell Target or any of its direct subsidiaries or direct partnership interests, including those mentioned in Paragraphs 9 and 10, to third parties. Any contemplated transfer of Target or any of its direct subsidiaries or direct partnership interests would be made in the context of a post-acquisition internal reorganization to improve profitability and ease of management of the consolidated group of companies. Furthermore, Target has no intention to sell, either directly or indirectly, any of its direct partnership interests, including those mentioned in Paragraph 10, in favour of a person exempt from tax under section 149.

39. Upon completion of an interest rate determination transfer pricing study, a series of new interest-bearing loans totalling $XXXXXXXXXX will be made to Bidco by Finance II, a XXXXXXXXXX related entity, pursuant to new loan arrangements to be entered into by the parties. These new interest-bearing loans will consist in a term loan of approximately $XXXXXXXXXX and a credit facility of approximately $XXXXXXXXXX. In addition, it is understood that the term loan and the credit facility may be broken into segments of varying amounts.
Bidco will use the money borrowed from Finance II to repay the existing loan of $XXXXXXXXXX from Finance I described in Paragraph 18.
40. For tax purposes, Target intends to elect in prescribed form and manner, pursuant to subparagraph (c)(i) of the definition of public corporation in subsection 89(1), not to be a public corporation.
41. Bidco will incorporate Newco. Newco will be a private corporation and a taxable Canadian corporation. Bidco will subscribe for shares of the capital stock of Newco for a nominal cash consideration.
42. Bidco will transfer all of the Target Shares to Newco for FMV consideration. The consideration for this transfer will be paid in full by Newco by the issuance to Bidco of common shares and two interest-bearing promissory notes (“NoteA” and “NoteB”).
The principal amount of NoteA will be approximately $XXXXXXXXXX and the principal amount of NoteB will be approximately $XXXXXXXXXX. NoteA will bear interest at a rate slightly higher than the rate on the credit facility between Finance II and Bidco. NoteB will bear interest at a rate slightly higher than the rate on the term loan from Finance II to Bidco. In addition, it is understood that NoteA and NoteB may be broken into segments of varying amounts.
Bidco and Newco will elect, jointly and in prescribed form and within the time limit referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the Target Shares to Newco. The “agreed amount” specified in the election in respect of the Target Shares will be equal to the ACB to Bidco of the transferred shares immediately before the transfer, which amount will not exceed the FMV of such shares.
The paid-up capital in respect of the common shares of the capital stock of Newco issued to Bidco will be subject to the provisions of subsection 85(2.1).
Further to the transactions described in this Paragraph, Target will be a subsidiary wholly-owned corporation of Newco.
43. Target and Newco will be amalgamated to form Amalco. As a consequence, all of the assets and liabilities of Target and Newco will become assets and liabilities of Amalco, and all the Target Shares will be cancelled. No shares of the capital stock of Amalco will be issued such that the issued and outstanding shares of the capital stock of Newco will become the shares of the capital stock of Amalco. This amalgamation will be governed by subsection 87(1).
XXXXXXXXXX

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

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

• to consolidate profits and losses within a related group by enabling Bidco to earn sufficient interest income on NoteA and NoteB issued by Amalco, in order to eliminate losses that Bidco would otherwise incur on its acquisition debt. Effectively, the proposed transactions permit the application of interest charges with respect to NoteA and NoteB against income of Target; and
• to permit Parent to reorganize its corporate structure following the acquisition of Target in a more efficient manner.

RULINGS GIVEN

A. Subsection 18(6) will not apply, as a consequence of the Proposed Transactions, in and by themselves, to deem NoteA and NoteB (as described in Paragraph 42) to be debts incurred by Amalco to Finance II.
B. Provided that Bidco has a legal obligation to pay interest on the loan from Finance I described in Paragraph 18 and the new interest-bearing loans from Finance II described in Paragraph 39, and provided that Bidco continues to hold the common shares of the capital stock of Amalco, as described in Paragraph 43, for the purposes of producing income (other than exempt income), Bidco will, subject to subsection 18(4) and pursuant to paragraph 20(1)(c) and subsection 20(3), be entitled to deduct, in computing its income for a taxation year, the lesser of the interest paid or payable (depending on the method regularly followed by Bidco in computing its income for purposes of the Act) in respect of that year on the loan from Finance I and the new interest-bearing loans from Finance II, or a reasonable amount in respect thereof.
C. Provided that Amalco has a legal obligation to pay interest on NoteA and NoteB described in Paragraph 42, and provided that the property acquired as a result of the amalgamation of Newco and Target, as described in Paragraph 43, continues to be used by Amalco for the purposes of gaining or producing income therefrom (other than exempt income), Amalco will, pursuant to paragraph 20(1)(c), be entitled to deduct, in computing its income for a taxation year, the lesser of the interest paid or payable (depending on the method regularly followed by Amalco in computing its income for purposes of the Act) in respect of that year on NoteA and NoteB, or a reasonable amount in respect thereof.
D. The provisions of subsections 87(11) and 88(1) will apply to the vertical amalgamation of Target and Newco to form Amalco as described in Paragraph 43 such that, for purposes of the Act, and provided that no property acquired by Amalco on such amalgamation or “any 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 Target and the “parent” is Newco) as part of the series of transactions or events that includes the proposed transactions described herein, the cost to Amalco of each property owned by Target at the time Bidco acquired control of Target and that became property of Amalco pursuant to the amalgamation will be deemed by paragraph 88(1)(c) to be the cost amount of such property plus, provided that such property is capital property, but not depreciable property, the amount designated by Amalco under paragraph 88(1)(d) in respect of the property as described in Paragraph 43.
For greater certainty, property that became property of Amalco on the vertical amalgamation of Target and Newco will not be ineligible property for the purposes of paragraph 88(1)(c) solely as a result of any of the Facts or Proposed Transactions described herein.
E. 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.

a. For the purposes of subparagraph 88(1)(c)(vi), whether “substituted property” as described in paragraph 88(1)(c.3) is acquired by a person or persons described in subclauses 88(1)(c)(vi)(B)(I) to (III) as part of the series of transactions or events that includes the amalgamation of Target and Newco, is a question of fact that will depend on the circumstances. In general, an acquisition of shares of the capital stock of Parent or Xco by former shareholders of Target, each of which would not be a person described in clause 88(1)(c)(vi)(B) if this clause were read without reference to subclause 88(1)(c)(vi)(B)(II), will not necessarily be considered to occur as part of a series of transactions or events that includes the amalgamation of Target with Newco.
b. You informed us that between XXXXXXXXXX and XXXXXXXXXX inclusively, Opco has paid taxable dividends to CanSub. You also informed us that during the same period, CanSub paid taxable dividends to Target. Considering that these dividends were not taxable dividends paid on Target Shares (being the “subsidiary” for the purposes of paragraph 88(1)(d)) and provided that the shares of the capital stock of Opco and CanSub are not “replaced shares” as referred to in paragraph 88(1)(d), the taxable dividends paid on the shares of the capital stock of Opco and CanSub will not be dividends described in subparagraph 88(1)(d)(i.1) with respect to the amalgamation of Target and Newco.
c. Provided that, at any relevant time, the Investment Managers did not own the Target Shares listed in the Report as described in Paragraph 7, the fact that the Investment Managers exercised “discretionary investment management authority” over such shares will not, in and by itself, result in the Investment Managers being persons described in clause 88(1)(c)(vi)(B).
d. With respect to subparagraph 88(1)(c)(vi), the fact that persons hold legal ownership in shares of the capital stock of Target in their capacity as trustees will not, in and by itself, result in such persons being persons described in clause 88(1)(c)(vi)(B).

COMMENTS

(a) the determination of the FMV or ACB of any property referred to herein, or the paid-up capital in respect of any share referred to herein;
(b) any provincial tax consequences of the proposed transactions; or
(c) 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

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7 July 2007 Income Tax Severed Letter 2007-0237481R3 - Purchase of target and bump

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