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: Creation of a new public corporation to own the transferred property.
Position: Favourable rulings given
Reasons: In compliance with the Act and previous positions
XXXXXXXXXX
2014-055883
XXXXXXXXXX, 2015
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in correspondence and telephone conversations concerning your request. You have advised that to the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein is:
(a) in an earlier tax return of the taxpayers or a related person;
(b) being considered by a Tax Services Office or Taxation Centre in connection with any tax return previously filed by the taxpayers or a related person;
(c) under objection or appeal by the taxpayers or a related person;
(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(e) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
You have also advised that to the best of your knowledge, and that of the responsible officers of the taxpayers, the Proposed Transactions will not result in the taxpayers or any related person described herein being unable to pay its existing outstanding tax liabilities.
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 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 (the “Act”). In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated.
DEFINITIONS
The following terms or expressions have the meaning specified:
“ACB” means adjusted cost base, as defined in section 54.
“Act1” means the XXXXXXXXXX.
“Act2” means the XXXXXXXXXX.
“agreed amount” means the amount agreed on by the transferor and the transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1). The agreed amount will not be less than the fair market value, at the time of the transfer, of the consideration therefore (other than any shares of the capital stock of the corporation or a right to receive any such shares) received, subject to paragraph 85(1)(c), nor will the agreed amount be greater than the fair market value, at the time of the transfer, of the property so disposed of.
“Amalco” means XXXXXXXXXX, the corporation which will be formed on the amalgamation of DC and DC Sub 1. The registered office of Amalco will be XXXXXXXXXX.
“Amalco MSA” means the management services agreement pursuant to which DC (and subsequently, Amalco) will receive those various management and other services from Manageco Sub 1 in respect of Division 1 that are currently being provided by Manageco to DC under the DC MSA.
“Amalco MV Shares” means the multiple voting shares of the capital stock of Amalco with terms and conditions identical to the DC New MV Shares.
“Amalco Replacement Stock Options” means the DC Replacement Stock Options which become stock options of Amalco pursuant to the amalgamation of DC and DC Sub 1.
“Amalco Stock Option Plan” means the DC Stock Option Plan which becomes the stock option plan of Amalco pursuant to the amalgamation of DC and DC Sub 1.
“Amalco SV Shares” means the unlimited number of subordinate voting shares of the capital stock of Amalco with terms and conditions identical to the DC New SV Shares.
“arm’s length” has the meaning assigned by section 251.
“Arrangement” means the arrangement under section XXXXXXXXXX of Act2 on the terms and subject to the conditions set forth in the Plan of Arrangement.
“Arrangement Agreement” means the agreement that governs the Plan of Arrangement. Pursuant to the Arrangement Agreement, DC and Spinco will:
(a) covenant and agree with and in favour of each other that for a period of XXXXXXXXXX years after the Effective Date, it will not (and that it will cause its subsidiaries to not) take any action or enter into any transaction that could cause the Arrangement, or any transaction contemplated by the Arrangement Agreement, to be taxed in a manner inconsistent with the rulings provided in this letter without obtaining another tax ruling or an opinion of a nationally recognized accounting firm or law firm that such action or transaction will not have such effect; and
(b) will agree to indemnify each other for losses suffered or incurred as a result of or in connection with a breach or non-compliance with the covenant described in (a) above.
“Butterfly Proportion Amount” means that amount which is equal to the result obtained when the fair market value of all of the issued and outstanding DC Shares, determined immediately prior to effecting the DC Share Exchange, is multiplied by the fraction A/B where:
“A” is the Net Fair Market Value of the common shares of the capital stock of Newco to be transferred by DC to Spinco, determined immediately before the Distribution; and
“B” is the Net Fair Market Value of all property owned by DC immediately before the Distribution, determined immediately before the Distribution.
“capital property” has the meaning assigned by section 54.
“Change in Control” has the meaning assigned by section XXXXXXXXXX of the DC MSA, and generally refers to circumstances under which control of DC (or a successor to DC) is changed from one person (or group of persons) to another person (or group of persons) other than to a person who does not deal at arm’s length with the person(s) exercising control of DC immediately prior to such circumstances occurring.
“cost amount” has the meaning assigned by subsection 248(1) .
“CRA” means the Canada Revenue Agency.
“DC” means XXXXXXXXXX, a corporation existing under Act2. DC’s head office is located at XXXXXXXXXX.
“DC Articles” means the certificate and articles of amalgamation of DC effective on XXXXXXXXXX, as amended by the certificate and articles of amendment of DC effective on XXXXXXXXXX.
“DC Credit Facility” means the XXXXXXXXXX-year revolving credit facility entered into by DC with a syndicate of lenders.
“DC Issuer Bid” means the normal course issuer bid governed by the rules applicable to such bids set out in applicable securities laws and the rules of the XXXXXXXXXX. Under the renewed DC Issuer Bid, DC may purchase up to XXXXXXXXXX of the DC SV Shares, representing approximately XXXXXXXXXX% of the issued and outstanding DC SV Shares as of the commencement of the DC Issuer Bid. Purchases made through XXXXXXXXXX may not exceed XXXXXXXXXX% of the outstanding DC SV Shares as of the commencement of the DC Issuer Bid. The price paid for any DC SV Shares acquired by DC will be the market price at the time of purchase and all shares purchased under the DC Issuer Bid will be cancelled.
“DC Management Services Business” means the portion of Manageco’s management business that is referable to Division 1 (including the DC MSA and all of Manageco’s rights, benefits and obligations thereunder relating to the Division 1 Segment, the transfer of which is permitted by, and will be made in accordance with, the DC MSA).
“DC MSA” means the management services agreement entered into by DC, the Manageco Principal and Manageco, effective XXXXXXXXXX. The initial term of the DC MSA was XXXXXXXXXX years, commencing on XXXXXXXXXX, with successive XXXXXXXXXX-year renewals at the option of Manageco. Manageco may voluntarily terminate the DC MSA upon XXXXXXXXXX months prior written notice to DC.
“DC MV Shares” means the multiple voting shares of the capital stock of DC (their designation will be changed to Class A Multiple Voting shares of the capital stock of DC according to the Plan of Arrangement). Each DC MV Share entitles the holder to XXXXXXXXXX votes at all meetings of shareholders and to dividends as and when declared by the board of directors of DC. The DC MV Shares are convertible into DC SV Shares on a one-for-one basis at any time at the option of the holder. The DC MV Shares and the DC SV Shares rank equally with respect to the payment of dividends and other distributions (subject to the discretion of the board of directors of DC to pay a greater amount per DC SV Share than per DC MV Share).
“DC MV Special Shares” means the preference shares of the capital stock of DC, Series MV. The DC MV Special Shares will have the following terms:
(a) The DC MV Special Shares will be non-voting.
(b) Each DC MV Special Share will entitle the holder to receive dividends as and when declared by the board of directors of DC.
(c) The DC MV Special Shares will be redeemable and retractable at any time for a redemption price per DC MV Special Share, which “per share” redemption price shall be equal to the total of the following two amounts:
(i) that amount which is equal to the quotient obtained when:
(A) the Butterfly Proportion Amount multiplied by a fraction:
(1) the numerator of which is the fair market value of all of the issued and outstanding DC MV Shares as determined immediately prior to effecting the DC Share Exchange; and
(2) the denominator of which is the fair market value of all of the issued and outstanding DC MV Shares and DC SV Shares as determined immediately prior to effecting the DC Share Exchange;
is divided by:
(B) the number of DC MV Special Shares issued in connection with the DC Share Exchange;
plus:
(ii) that amount which is equal to all declared and unpaid dividends on such DC MV Special Share.
(d) Except with the consent in writing of the holders of all of the DC MV Special Shares, no dividend shall at any time be declared and paid on, or declared and set apart for payment on, the DC SV Shares, DC MV Shares, DC New SV Shares or DC New MV Shares unless, after the payment of such dividend, the realizable value of the assets of DC would not be less than the aggregate redemption price of the DC MV Special Shares.
(e) In the event of the dissolution, liquidation or winding-up of DC, whether voluntary or involuntary, or any other distribution of assets of DC among its shareholders for the purpose of winding-up its affairs, the holders of DC MV Special Shares shall be entitled to receive from the assets of DC an amount equal to the aggregate redemption price of the DC MV Special Shares before any amount shall be paid or any assets of DC distributed upon any liquidation, dissolution or winding-up of DC to the holders of the DC SV Shares, DC MV Shares, DC New SV Shares, or DC New MV Shares. After payment to the holders of DC MV Special Shares of the amount so payable to them, such holders shall not be entitled to share in any further distribution of the assets of DC.
(f) For the purposes of subsection 191(4) of the Act, the terms and conditions of the DC MV Special Share will specify an amount in respect of each such share for which the share is to be redeemed, acquired or cancelled. The amount shall be designated pursuant to the resolution of the directors of the issuing corporation made in connection with the issuance of such share. The amount specified in respect of such share, at the time of the issuance thereof, will be expressed as a fixed dollar amount that will not be determined by formula or subject to change thereafter and will not exceed the fair market value of the consideration for which the share is issued.
“DC New MV Shares” means the multiple voting shares of the capital stock of DC, with terms and conditions identical to the DC MV Shares prior to their amendment by the First Amended DC Articles, subject to the terms of the DC MV Special Shares.
“DC New SV Shares” means the Subordinate Voting Shares of the capital stock of DC, with terms and conditions identical to the DC SV Shares prior to their amendment by the First Amended DC Articles, subject to the terms of the DC SV Special Shares.
“DC Notes” means the debt instruments issued by DC in an original aggregate principal amount of US$XXXXXXXXXX through the following private placements, of which US $XXXXXXXXXX was outstanding as of XXXXXXXXXX:
XXXXXXXXXX.
“DC Redemption Note” means the promissory note to be issued by DC to Spinco, as sole consideration for the redemption of all of the issued and outstanding DC MV Special Shares and DC SV Special Shares held by Spinco in a principal amount equal to the aggregate redemption amount (as determined pursuant to the DC Articles, as amended) for such DC MV Special Shares and DC SV Special Shares and bearing interest at a rate equal to the Prime Rate from the date of demand for payment to the date of payment, in full and absolute payment, satisfaction and discharge of such aggregate redemption amount, with the risk of the DC Redemption Note being dishonoured.
“DC Replacement Stock Option” means an option to acquire a DC New SV Share to be granted and issued by DC.
“DC Share Exchange” means the share exchange of each issued and outstanding DC MV Share and DC SV Share held by a DC shareholder (other than a dissenting shareholder) described in the Proposed Transactions.
“DC Shareholderco” means XXXXXXXXXX, a corporation existing under Act2.
“DC Shares” means the DC MV Shares and the DC SV Shares.
“DC Stock Option Plan” means the share incentive plan under which the board of directors of DC has the discretionary authority to grant DC Stock Options to directors, officers and full-time employees XXXXXXXXXX of DC or its subsidiaries. The DC Stock Option Plan was amended and restated on XXXXXXXXXX. The DC Stock Option Plan provides flexible vesting, at the discretion of the DC board of directors.
“DC Stock Options” means the options to purchase DC SV Shares. The board of directors of DC has the authority to fix the terms of the DC Stock Options, which generally may not be for less than XXXXXXXXXX from the date of grant. The exercise price of each DC Stock Option is determined by the board of directors of DC at the time the option is granted, and cannot be less than the closing price of a DC SV Share on the XXXXXXXXXX on the last trading day before the day the option is granted.
“DC Sub 1” means XXXXXXXXXX, a corporation existing under Act2.
“DC Sub 1 Arrangements” means the arrangement allowing DC to acquire (outside and not as part of the Plan of Arrangement) all of the issued and outstanding shares (and options to acquire shares) of DC Sub 1 that it does not own.
“DC Sub 1 Governance Agreement” means the governance and support agreement that was amended and restated effective XXXXXXXXXX.
“DC Sub 1 Minority Shareholders” means officers and employees of DC Sub 1 that collectively hold all the shares of the capital stock of DC Sub 1 that are not owned by DC.
“DC Sub 2” means XXXXXXXXXX, a corporation existing under the laws of XXXXXXXXXX.
“DC Sub 2 First Debt” means the outstanding debt owing by DC Sub 2 to Spinco Sub 4.
“DC Sub 2 Second Debt” means the outstanding debt owing by DC Sub 2 to Spinco Sub 8.
“DC Sub 2 First Preferred Shares” means the first preferred shares of the capital stock of DC Sub 2.
“DC Sub 2 Second Preferred Shares” means the second preferred shares of the capital stock of DC Sub 2.
“DC Sub 3” means XXXXXXXXXX, a limited liability corporation existing under the laws of XXXXXXXXXX.
“DC Sub 3 Debt” means the outstanding debt owing by DC Sub 3 and its subsidiaries to Spinco Sub 5.
“DC Sub 4” means XXXXXXXXXX, a limited liability corporation existing under the laws of XXXXXXXXXX.
“DC Sub 4 First Debt” means the outstanding debt owing by DC Sub 4 to Spinco Sub 5.
“DC Sub 4 Second Debt” means the outstanding debt owing by DC Sub 4 to Spinco Sub 8. This debt is assumed by DC Sub 2 on the liquidation of DC Sub 4, such that the debt is then owing by DC Sub 2 to Spinco Sub 8.
“DC SV Shares” means the subordinate voting shares of the capital stock of DC (their designation will be changed to Class A subordinate voting shares according to the Plan of Arrangement). Each DC SV Share entitles the holder to one vote at all meetings of shareholders, to dividends as and when declared by the board of directors of DC, and to certain additional rights in the event that a bid is made to acquire the DC MV Shares. The DC MV Shares and the DC SV Shares rank equally with respect to the payment of dividends and other distributions (subject to the discretion of the board of directors of DC to pay a greater amount per DC SV Share than per DC MV Share).
“DC SV Special Shares” means the preference shares, series SV, of the capital stock of DC. The DC SV Special Shares will have the following terms:
(a) The DC SV Special Shares will be non-voting.
(b) Each DC SV Special Share will entitle the holder to receive dividends as and when declared by the board of directors of DC.
(c) The DC SV Special Shares will be redeemable and retractable at any time for a redemption price per DC SV Special Share, which “per share” redemption price will be equal to the total of the following two amounts:
(i) that amount which is equal to the quotient obtained when:
(A) the Butterfly Proportion Amount multiplied by a fraction:
(1) the numerator of which is the fair market value of all of the issued and outstanding DC SV Shares as determined immediately prior to effecting the DC Share Exchange; and
(2) the denominator of which is the fair market value of all of the issued and outstanding DC MV Shares and DC SV Shares as determined immediately prior to effecting the DC Share Exchange;
is divided by:
(B) the number of DC SV Special Shares issued in connection with the DC Share Exchange;
plus:
(ii) that amount which is equal to all declared and unpaid dividends on such DC SV Special Share.
(d) Except with the consent in writing of the holders of all of the DC SV Special Shares, no dividend will at any time be declared and paid on, or declared and set apart for payment on, the DC SV Shares, DC MV Shares, DC New SV Shares or DC New MV Shares unless, after the payment of such dividend, the realizable value of the assets of DC would not be less than the aggregate redemption price of the DC SV Special Shares.
(e) In the event of the dissolution, liquidation or winding-up of DC, whether voluntary or involuntary, or any other distribution of assets of DC among its shareholders for the purpose of winding-up its affairs, the holders of DC SV Special Shares will be entitled to receive from the assets of DC an amount equal to the aggregate redemption price of the DC SV Special Shares before any amount will be paid or any assets of DC distributed upon any liquidation, dissolution or winding-up of DC to the holders of the DC SV Shares, DC MV Shares, DC New SV Shares, or DC New MV Shares. After payment to the holders of DC SV Special Shares of the amount so payable to them, such holders will not be entitled to share in any further distribution of the assets of DC.
(f) For the purposes of subsection 191(4) of the Act, the terms and conditions of the DC SV Special Share will specify an amount in respect of each such share for which the share is to be redeemed, acquired or cancelled. The amount shall be designated pursuant to the resolution of the directors of the issuing corporation made in connection with the issuance of such share. The amount specified in respect of such share, at the time of the issuance thereof, will be expressed as a fixed dollar amount that will not be determined by formula or subject to change thereafter and will not exceed the fair market value of the consideration for which the share is issued.
“depreciable property” has the meaning assigned by subsection 13(21).
“designated stock exchange” means a stock exchange designated pursuant to subsection 262(1).
“distribution” has the meaning assigned by subsection 55(1).
“Distribution” means the transfer by DC to Spinco of the common shares in the capital of Newco.
“Divisions” means Division 1, Division 2 and Division 3.
“Division 1” means the XXXXXXXXXX.
“Division 1 Segment” means the rights and obligations under the DC MSA attributable to Division 1.
“Division 2” means the XXXXXXXXXX.
“Division 2 and 3 Segment” means the rights and obligations under the DC MSA attributable to Division 2 and Division 3.
“Division 3” means the XXXXXXXXXX.
“Effective Date” means the effective date of the Arrangement, as specified on the certificate of arrangement issued under Act2.
“Effective Time” means XXXXXXXXXX on the Effective Date.
“eligible dividend” has the meaning assigned by subsection 89(1).
“Eligible Holder” means a DC shareholder, other than a dissenting shareholder who:
(a) is resident of Canada for purposes of the Act and not exempt from tax under Part I of the Act;
(b) is a non-resident of Canada for purposes of the Act and whose DC Shares constitute taxable Canadian property to the holder, provided that any gain realized by the holder on a disposition at fair market value of such shares would not be exempt from tax under the Act by virtue of an applicable tax treaty; or
(c) is a partnership that owns DC Shares if one or more of the partners thereof would be described in either (a) or (b) of this definition, if such partner held such DC Shares directly.
“eligible property” has the meaning assigned by subsection 85(1.1).
“exempt surplus” has the meaning assigned by subsection 5907(1.01) of the Regulations to the Act.
“Exercise Price Proportion” means the fraction A/B, where:
“A” is the Net Fair Market Value of the common shares of the capital stock of Newco immediately before the Distribution; and
“B” is the Net Fair Market Value of all property owned by DC immediately before the Distribution;
with the foregoing being subject to adjustment, as determined by the board of directors of DC, Amalco and/or Spinco, as applicable, in order to ensure that the exercise price of each DC Stock Option immediately prior to the Effective Time is fairly and appropriately apportioned among the associated DC Replacement Stock Option (subsequently the Amalco Replacement Stock Option) and Spinco Replacement Stock Option at the Effective Time.
“FAPI” means foreign accrual property income, as defined in subsection 95(1).
“fair market value” means the highest price available in an open and unrestricted market between informed prudent parties acting at arm’s length and under no compulsion to act, expressed in terms of cash.
“First Amended DC Articles” means the DC Articles amended:
(a) to change the designation of the DC MV Shares from “Multiple Voting Shares” to “Class A Multiple Voting Shares”, and provide that such shares will entitle the holder to XXXXXXXXXX votes per share (instead of XXXXXXXXXX votes per share before the amendment);
(b) to change the designation of the DC SV Shares from “Subordinate Voting Shares” to “Class A Subordinate Voting Shares”, and provide that such shares will entitle the holder to XXXXXXXXXX votes per share (instead of XXXXXXXXXX per share before the amendment); and
(c) to create and authorize the issuance of (in addition to the shares that DC is authorized to issue immediately before such amendment) the following new classes and series of shares: (i) an unlimited number of DC New MV Shares; (ii) an unlimited number DC New SV Shares; (iii) an unlimited number of DC MV Special Shares; and (iv) an unlimited number of DC SV Special Shares.
“foreign affiliate” has the meaning assigned by subsection 95(1).
“functional currency” has the meaning assigned by subsection 261(1).
“In The Money Amount” means, in relation to a particular option to acquire a share of a corporation, the amount by which the fair market value of the share that is the subject of the particular option is greater than the exercise price of such option.
“LTA Event” means XXXXXXXXXX.
“Manageco” means XXXXXXXXXX, a corporation existing under Act2. Manageco’s office is located at XXXXXXXXXX.
“Manageco Principal” means XXXXXXXXXX.
“Manageco Sub 1” means XXXXXXXXXX, a corporation that will be formed under Act2.
“Manageco Sub 2” means XXXXXXXXXX, a corporation that will be formed under Act2.
XXXXXXXXXX
“Net Fair Market Value” means, in respect of any property, the net fair market value of that property determined on a consolidated basis in accordance with all administrative policies of the CRA in effect at the time of the DC Share Exchange and, in determining Net Fair Market Value, the following principles will apply:
(a) any tax-related accounts in any corporation (such as deferred income taxes, the balance of non-capital losses and the balance of net capital losses) will not be considered to be property of that corporation;
(b) the amount of any liability will be its principal amount;
(c) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification;
(d) the portion of the long-term debt due within one year will be treated as a current liability; and
(e) liabilities of a corporation will include its respective partnership share of each liability of any partnership of which such corporation is a partner.
“New LLC” means a new limited liability company formed by Spinco Sub 2 under the laws of XXXXXXXXXX.
“Newco” means XXXXXXXXXX, an unlimited liability company, incorporated by DC on XXXXXXXXXX, under Act1.
“Newco Internal Note” means a promissory note with a principal amount of approximately $XXXXXXXXXX payable by Newco to DC.
“Newco Loan” means a debt obligation of approximately $XXXXXXXXXX.
“non-resident” has the meaning assigned by subsection 248(1).
“Paragraph” refers to a numbered paragraph in this letter.
“Partial LTA Event” means XXXXXXXXXX.
“Participant” means a holder of a DC SV Special Share or a DC MV Special Share, other than Spinco.
“Partnerco” means XXXXXXXXXX, a corporation existing under Act2.
“Partnership” means XXXXXXXXXX, a general partnership existing under the laws of XXXXXXXXXX, and a “Canadian partnership” as defined in subsection 102(1).
“Plan of Arrangement” means the plan of arrangement under Act2 to effect the divisive reorganization of DC.
“POD” means proceeds of disposition, as defined in section 54.
“Pre-Arrangement Transactions” means the transactions described under the heading “Pre-Arrangement Transactions” below.
“Prime Rate” means the floating rate of interest established from time to time by XXXXXXXXXX.
“Proposed Transactions” means the transactions described in the Proposed Transactions section of this letter.
“public corporation” has the meaning assigned by subsection 89(1).
“PUC” means paid-up capital, as defined in subsection 89(1).
“Regulations” means the Income Tax Regulations, C.R.C., c. 945, as amended.
“Reorganization Transactions” means the transactions described under the heading Reorganization Transactions below.
“related persons” has the meaning assigned by subsection 251(2).
“Second Amended DC Articles” means the First Amended DC Articles amended:
(a) to change its name from “XXXXXXXXXX” to “XXXXXXXXXX”; and
(b) to remove all of the DC MV Special Shares, DC SV Special Shares, DC MV Shares, DC SV Shares, Series 1 Preference Shares of DC and XXXXXXXXXX% Cumulative Preference Shares, Series 1 of DC from the authorized capital of DC (and to remove all references to the DC MV Special Shares, DC SV Special Shares, DC MV Shares, DC SV Shares, Series 1 Preference Shares of DC and XXXXXXXXXX% Cumulative Preference Shares, Series 1 of DC), such that, following such amendment, DC will be authorized to issue an unlimited number of DC New SV Shares, an unlimited number of DC New MV Shares and an unlimited number of preference shares, issuable in one or more series.
“short-term preferred share” has the meaning assigned by subsection 248(1).
“specified corporation” has the meaning assigned by subsection 55(1).
“specified financial institution” has the meaning assigned by subsection 248(1).
“Spinco” means XXXXXXXXXX, a corporation existing under Act2 and incorporated on XXXXXXXXXX, by DC. Spinco has a taxation year-end of XXXXXXXXXX. Spinco’s head office is located at XXXXXXXXXX. Spinco’s business number and tax account number is XXXXXXXXXX, it will deal with the XXXXXXXXXX tax services office, and it will file its returns with the XXXXXXXXXX tax centre.
“Spinco Management Services Business” means the portion of Manageco’s management business that is referable to Division 2 and Division 3 (including the DC MSA and all of Manageco’s rights, benefits and obligations thereunder relating to the Division 2 and 3 Segment, the transfer of which is permitted by, and will be made in accordance with, the DC MSA).
“Spinco MSA” means the management services agreement pursuant to which Newco (and subsequently, Spinco) will receive those various management and other services from Manageco Sub 2 in respect of Division 2 and Division 3 that are currently being provided by Manageco to DC under the DC MSA.
“Spinco MV Shares” means an unlimited number of multiple voting shares of Spinco with terms and conditions identical to the DC MV Shares prior to their amendment by the First Amended DC Articles.
“Spinco Redemption Note” means the demand promissory note to be issued by Spinco to DC as the sole consideration for the redemption of all of the outstanding Spinco Special Shares held by DC in a principal amount equal to the aggregate redemption amount (as determined pursuant to the articles of incorporation of Spinco, as amended) for the Spinco Special Shares and bearing interest at a rate equal to the Prime Rate from the date of demand for payment to the date of payment, in full and absolute payment, satisfaction and discharge of such aggregate redemption amount, with the risk of the Spinco Redemption Note being dishonoured.
“Spinco Replacement Stock Option” means an option to purchase one Spinco SV Share.
“Spinco Special Shares” means the unlimited number of preference shares, series special of the capital stock of Spinco.
“Spinco Stock Option Plan” means the share incentive plan the board of directors of Spinco will adopt. Under the Spinco Stock Option Plan, the board of directors of Spinco will have the authority to, among other things, grant the Spinco Replacement Stock Options to holders of DC Stock Options, in accordance with the Plan of Arrangement.
“Spinco Sub 1” means XXXXXXXXXX, a corporation existing under Act2.
“Spinco Sub 1 Debt” means the outstanding debt owing by Spinco Sub 1 and its Canadian subsidiaries to DC.
“Spinco Sub 2” means XXXXXXXXXX, a corporation existing under the laws of XXXXXXXXXX.
“Spinco Sub 2 First Debt” means the outstanding debt owing by Spinco Sub 2 to DC.
“Spinco Sub 2 Second Debt” means the outstanding debt owing by Spinco Sub 2 to Spinco Sub 9.
“Spinco Sub 3” means XXXXXXXXXX, a corporation existing under the laws of XXXXXXXXXX.
“Spinco Sub 3 Preferred Shares” means all of the issued and outstanding preferred shares of the capital stock of Spinco Sub 3.
“Spinco Sub 4” means XXXXXXXXXX, a corporation existing under the laws of XXXXXXXXXX.
“Spinco Sub 5” means XXXXXXXXXX, a corporation existing under the laws of XXXXXXXXXX.
“Spinco Sub 5 First Debt” means the outstanding debt owing by Spinco Sub 5 to DC Sub 2.
“Spinco Sub 6” means XXXXXXXXXX, a corporation existing under Act2.
“Spinco Sub 6 Debt” means the outstanding debt owning by Spinco Sub 6 to DC.
“Spinco Sub 7” means XXXXXXXXXX, a corporation existing under Act2.
“Spinco Sub 7 Canadian Subsidiaries” means several Canadian subsidiaries, which directly and indirectly own operating assets of Division 3 in Canada, in which Spinco Sub 7 owns shares.
“Spinco Sub 8” means XXXXXXXXXX, a corporation existing under the laws of XXXXXXXXXX.
“Spinco Sub 9” means XXXXXXXXXX, a corporation existing under the laws of XXXXXXXXXX.
“Spinco Sub 10” means XXXXXXXXXX, the surviving entity from the merger, pursuant to the laws of XXXXXXXXXX, of the New LLC and Spinco Sub 8.
“Spinco SV Shares” means the subordinate voting shares of the capital stock of Spinco with terms and conditions identical to the DC SV Shares prior to their amendment by the First Amended DC Articles.
“taxable Canadian corporation” has the meaning assigned by subsection 89(1).
“taxable Canadian property” has the meaning assigned by subsection 248(1).
“taxable preferred share” has the meaning assigned by subsection 248(1).
“term preferred share” has the meaning assigned by subsection 248(1).
“Transitional Services and Separation Agreement” means the agreement between DC, DC Sub 1, Spinco, Newco, Manageco, Manageco Sub 1, Manageco Sub2 and the Manageco Principal whereby, among other things:
(a) DC, Manageco and the Manageco Principal will agree to restate the DC MSA;
(b) DC and Newco (and ultimately Amalco and Spinco) will agree to provide each other, on a transitional basis, certain services and facilities in order to facilitate the orderly transfer of the operating assets of Division 2 and Division 3 to Newco;
(c) Newco (and ultimately Spinco) will agree to indemnify DC and its affiliates from and against any liabilities associated with, among other things, the post-Arrangement assets and businesses of Spinco, whether relating to the period, or arising, prior to or after the Effective Time;
(d) DC (and ultimately Amalco) will agree to indemnify Newco and its affiliates from and against any liabilities associated with, among other things, the assets to be owned by Amalco or any affiliate of Amalco and the businesses to be carried on by Amalco or any affiliate of Amalco after the Effective Time, whether relating to the period, or arising, prior to or after the Effective Time; and
(e) DC (and ultimately Amalco) and Spinco will agree to indemnify each other for losses suffered or incurred as a result of or in connection with a breach or non-compliance with the covenant in Paragraph 9a) of the definition of Arrangement Agreement, and that such indemnity will supersede and replace the indemnity described in Paragraph (b) of the definition of Arrangement Agreement.
XXXXXXXXXX
FACTS
1. DC is a taxable Canadian corporation and a public corporation. DC did not elect not to be a public corporation nor has the Minister designated DC not to be a public corporation. DC has a XXXXXXXXXX taxation year-end. DC has made an election under paragraph 261(3)(b) for subsection 261(5) to apply to DC, on the basis that its functional currency is the U.S. dollar. This election became effective on XXXXXXXXXX and has not been revoked.
Share Capital of DC
2. DC’s authorized share capital and the issued and outstanding shares are as follows:
(a) an unlimited number of DC MV Shares (as of XXXXXXXXXX, XXXXXXXXXX DC MV Shares were issued and outstanding);
(b) an unlimited number of DC SV Shares (as of XXXXXXXXXX, XXXXXXXXXX DC SV Shares were issued and outstanding); and
(c) an unlimited number of preference shares, issuable in one or more series, of which two series of shares have previously been created and authorized for issuance (the Series 1 Preference Shares and XXXXXXXXXX% Cumulative Preference Shares, Series 1) (no such shares are currently issued and outstanding).
3. The DC SV Shares are listed for trading on designated stock exchanges (XXXXXXXXXX). The DC MV Shares are not listed on any public market or quotation system. Some of the DC SV Shares are owned by persons who are non-residents.
4. The DC MV Shares and the DC SV Shares are not short-term preferred shares, taxable preferred shares or term preferred shares.
5. The current fair market value of the DC MV Shares and the DC SV Shares exceeds the ACB of such shares to most holders thereof.
6. The Manageco Principal is a resident of Canada for purposes of the Act. DC Shareholderco is a corporation controlled by the Manageco Principal and is a taxable Canadian corporation. As of XXXXXXXXXX, DC Shareholderco owned XXXXXXXXXX DC SV Shares and all of the issued and outstanding DC MV Shares. As of XXXXXXXXXX, the DC Shares which are directly or indirectly owned or controlled by the Manageco Principal represent approximately XXXXXXXXXX% of all of the issued and outstanding shares of DC and approximately XXXXXXXXXX% of the voting rights attached to all such shares.
7. To the best of the knowledge of the directors and senior officers of DC, as of XXXXXXXXXX, no person or related group of persons beneficially owns, directly or indirectly, more than XXXXXXXXXX% of the DC MV Shares or the DC SV Shares, other than DC Shareholderco.
8. Effective XXXXXXXXXX, the DC board of directors adopted a new dividend policy, pursuant to which DC intends to pay quarterly cash dividends to holders of the DC Shares at a rate of US$XXXXXXXXXX per share. DC commenced paying dividends under this new dividend policy effective for the quarter ended XXXXXXXXXX.
9. On XXXXXXXXXX, DC announced receipt of regulatory approval respecting its intention to continue its DC Issuer Bid through the facilities of XXXXXXXXXX.
The maximum number of DC SV Shares which may be purchased under the current DC Issuer Bid is limited to XXXXXXXXXX (or XXXXXXXXXX% of DC’s issued and outstanding shares as at XXXXXXXXXX).
10. DC has a history of purchasing DC SV Shares under the DC Issuer Bid, which has been in effect for over XXXXXXXXXX years. Over the past XXXXXXXXXX fiscal years, DC repurchased and cancelled the following amounts of DC SV Shares pursuant to normal course issuer bids:
Year ended XXXX DC SV Shares Repurchased and Cancelled
XXXX XXXX
The current DC Issuer Bid is a continuation of a succession of one-year normal course issuer bids conducted by DC, which commenced in XXXXXXXXXX and have been renewed by DC annually.
The DC Issuer Bid is not in contemplation of the Proposed Transactions.
11. DC is prohibited pursuant to applicable securities laws and the requirements of the XXXXXXXXXX from making purchases pursuant to the DC Issuer Bid from DC Shareholderco.
12. XXXXXXXXXX
DC Stock Option Plan
13. Options exercisable for a total of XXXXXXXXXX DC SV Shares have been granted and are outstanding as at XXXXXXXXXX. Up to XXXXXXXXXX, under the DC Stock Option Plan, options which were exercisable for a total of XXXXXXXXXX DC SV Shares have been exercised or expired and options which were exercisable for a total of XXXXXXXXXX DC SV Shares were cancelled and the options for such XXXXXXXXXX DC SV Shares have been returned to the pool of options available to be granted.
Debt Obligations of DC
14. XXXXXXXXXX. DC has issued DC Notes. The DC Notes were issued by way of private placements to groups of arm’s length institutional lenders, including insurance companies and pension funds. The DC Notes were issued to provide long-term financing to DC’s business at a predictable fixed interest rate. Proceeds from the issuance of the DC Notes were used to finance the purchase prices of acquired businesses, to finance investments in property, plant and equipment, and to repay previous debts which were used to earn income from DC’s business. The DC Credit Facility was amended and restated effective XXXXXXXXXX. The maximum principal amount of the DC Credit Facility is US$XXXXXXXXXX. The principal amount outstanding under the DC Credit Facility as of XXXXXXXXXX was approximately US$XXXXXXXXXX.
Management Services Agreement
15. Manageco is a taxable Canadian corporation. All of the issued and outstanding shares of Manageco are owned by the Manageco Principal.
16. Pursuant to the terms of the DC MSA, DC retained Manageco to provide various management and other services to DC, and Manageco Principal agreed to perform such services on behalf of Manageco. DC is required to pay various fees to Manageco in consideration for the services provided under the DC MSA.
Business of DC
17. DC and its subsidiaries are engaged in diverse business activities which are comprised of the Divisions. DC and its subsidiaries own business assets in Canada, the United States and several other countries.
Relevant Subsidiaries of DC
18. DC Sub 1 is a taxable Canadian corporation. DC owns approximately XXXXXXXXXX% of the issued and outstanding shares of DC Sub 1, and the remaining shares are owned by the DC Sub 1 Minority Shareholders. DC has an option to acquire the shares of DC Sub 1 which are owned by the DC Sub 1 Minority Shareholders pursuant to the DC Sub 1 Governance Agreement. DC Sub 1, directly or indirectly through subsidiaries, owns operating assets of Division 1 in Canada and foreign countries. DC Sub 1 has made an election under paragraph 261(3)(b) for subsection 261(5) to apply to DC Sub 1, on the basis that its functional currency is the U.S. dollar. This election became effective on XXXXXXXXXX and has not been revoked.
19. DC Sub 2 is a non-resident corporation. DC owns XXXXXXXXXX% of the issued and outstanding common shares of the capital stock of DC Sub 2, and the remaining common shares the capital stock of are owned by an officer of DC Sub 2. DC has an option to acquire the common shares owned by this officer pursuant to a shareholder’s agreement.
20. The outstanding debt obligations of DC Sub 2 include the DC Sub 2 First Debt and the DC Sub 2 Second Debt.
21. DC Sub 3 is a non-resident corporation. DC Sub 2 owns all of the issued and outstanding shares of the capital stock of DC Sub 3. The DC Sub 3 and its subsidiaries own operating assets of Division 1 in the United States. The outstanding debt obligations of the DC Sub 3 and its subsidiaries include the DC Sub 3 Debt.
22. DC Sub 4 is a non-resident corporation. DC Sub 2 owns all of the issued and outstanding shares of the capital stock of DC Sub 4. The outstanding debt obligations of DC Sub 4 include the DC Sub 4 First Debt and the DC Sub 4 Second Debt.
23. Spinco Sub 1 is a taxable Canadian corporation. DC owns all of the issued and outstanding shares of the capital stock of Spinco Sub 1. Spinco Sub 1 and its subsidiaries own operating assets of Division 2 in Canada. The outstanding debt obligation of Spinco Sub 1 and its subsidiaries is the Spinco Sub 1 Debt.
24. Partnerco is a taxable Canadian corporation. DC owns all of the issued and outstanding shares of the capital stock of Partnerco.
25. The Partnership is a general partnership. DC holds a XXXXXXXXXX% partnership interest in the Partnership, and Partnerco holds a XXXXXXXXXX% partnership interest in the Partnership.
26. Spinco Sub 2 is a non-resident corporation. The Partnership owns XXXXXXXXXX% of the issued and outstanding common shares of the capital stock of Spinco Sub 2 and the remaining common shares of the capital stock of Spinco Sub 2 are owned by DC. Spinco Sub 2 owns DC Sub 2 Second Preferred Shares. Spinco Sub 2 debts include the Spinco Sub 2 First Debt and the Spinco Sub 2 Second Debt.
27. Spinco Sub 3 is a non-resident corporation. Spinco Sub 2 owns all of the issued and outstanding common shares of the capital stock of Spinco Sub 3. DC owns the Spinco Sub 3 Preferred Shares.
28. Spinco Sub 4 is a non-resident corporation. Spinco Sub 3 owns XXXXXXXXXX% of the issued and outstanding shares of the capital stock of Spinco Sub 4 and the remaining shares of the capital stock of Spinco Sub 4 are owned by an officer/employee of Spinco Sub 4. DC has an option to acquire the shares owned by this officer/employee pursuant to a shareholder’s agreement. Spinco Sub 4 owns operating assets of Division 2 in the United States. Spinco Sub 4 holds DC Sub 2 First Preferred Shares.
29. Spinco Sub 5 is a non-resident corporation. The Partnership owns all of the issued and outstanding shares of the capital stock of Spinco Sub 5. Spinco Sub 5 debts include the Spinco Sub 5 First Debt and a debt owing to a third party bank.
30. Spinco Sub 6 is a taxable Canadian corporation. DC owns XXXXXXXXXX% of the issued and outstanding common shares of the capital stock of Spinco Sub 6, and the remaining shares of the capital stock of Spinco Sub 6 are owned by officers and employees of Spinco Sub 6. DC has an option to acquire the shares owned by the officers and employees, pursuant to a shareholder’s agreement. Spinco Sub 6 also has issued and outstanding preferred shares. DC owns approximately XXXXXXXXXX% of the issued and outstanding preferred shares of the capital stock of Spinco Sub 6. Spinco Sub 6 owns operating assets of Division 2 in Canada. Spinco Sub 6 debts include the Spinco Sub 6 Debt.
31. Spinco Sub 7 is a taxable Canadian corporation. DC owns all of the issued and outstanding shares of the capital stock of Spinco Sub 7. Spinco Sub 7 owns (i) shares of the capital stock of the Spinco Sub 7 Canadian Subsidiaries; and (ii) all of the issued and outstanding shares of the capital stock of Spinco Sub 8. Spinco Sub 7 and the Spinco Sub 7 Canadian Subsidiaries have debt owing to DC. The Spinco Sub 7 Subsidiaries own the operating assets of Division 3 in Canada. Spinco Sub 8 is a non-resident. Spinco Sub 8, directly and indirectly through subsidiaries, owns operating assets of Division 3 in the United States. Spinco Sub 8 owns DC Sub 2 First Preferred Shares.
32. Spinco Sub 9 is a non-resident corporation. DC owns all of the issued and outstanding shares of the capital stock of Spinco Sub 9.
PRELIMINARY TRANSACTIONS
33. Spinco was incorporated and did not issue any shares upon its incorporation. The board of directors of Spinco was set on incorporation by Spinco’s incorporating documents. Spinco is a taxable Canadian corporation. Spinco’s articles of incorporation provide that its authorized share capital consists of:
(a) Spinco MV Shares;
(b) Spinco SV Shares; and
(c) preference shares, issuable in one or more series.
34. Newco was incorporated. Newco issued XXXXXXXXXX common shares to DC upon its incorporation, in exchange for $XXXXXXXXXX cash. Newco’s articles of incorporation provide that its authorized share capital consists of an unlimited number of common shares. Newco is a taxable Canadian corporation.
Reorganization Transactions
35. The transactions described in this section have been or will be implemented in the order described below.
36. The Partnership transferred the shares of the capital stock of Spinco Sub 5 to Spinco Sub 2, in exchange for additional shares of the capital stock of Spinco Sub 2.
37. The Partnership was liquidated and dissolved. The Partnership’s property (including its shares of the capital stock of Spinco Sub 2) was distributed to DC and Partnerco, such that DC and Partnerco acquired undivided percentage interests in each and every property of the Partnership in proportion to their respective partnership interests. DC and Partnerco assumed all of the liabilities and obligations of the Partnership.
38. DC contributed its receivables from the Spinco Sub 7 Canadian Subsidiaries to Spinco Sub 7 for additional shares of the capital stock of Spinco Sub 7.
39. Spinco Sub 7 contributed its receivables from the Spinco Sub 7 Canadian Subsidiaries to the Spinco Sub 7 Canadian Subsidiaries for additional shares of the capital stock of Spinco Sub 7 Canadian Subsidiaries.
40. Spinco Sub 7 reduced the stated capital of its shares to $XXXXXXXXXX and did not distribute any amount to its shareholders on this reduction. Immediately after this stated capital reduction, Spinco Sub 7 resolved to commence wind-up and dissolution proceedings. In the course of the wind-up, Spinco Sub 7 distributed all of its property (including shares of the capital stock of Spinco Sub 8 and the Spinco Sub 7 Canadian Subsidiaries) to DC, and DC assumed all of the liabilities and obligations of Spinco Sub 7. In due course, Spinco Sub 7 will file articles of dissolution.
41. Partnerco reduced the stated capital of its shares to $XXXXXXXXXX and Partnerco did not distribute any amount to its shareholders on this reduction. Immediately after this stated capital reduction, Partnerco resolved to commence wind-up and dissolution proceedings. In the course of the wind-up, Partnerco distributed all of its property (including its undivided interest in the shares of the capital stock of Spinco Sub 2) to DC, and DC assumed all of the liabilities and obligations of Partnerco. In due course, Partnerco will file articles of dissolution.
42. DC Sub 4 was liquidated into DC Sub 2.
43. Spinco Sub 2 formed New LLC. Upon the formation of New LLC, Spinco Sub 2 subscribed for all of the member interests in New LLC for an aggregate subscription price of US$XXXXXXXXXX cash.
44. New LLC and Spinco Sub 8 merged. The surviving entity from such merger is Spinco Sub 10. As a consequence of this merger:
(a) all of the property of New LLC and Spinco Sub 8 (including the DC Sub 2 First Preferred Shares, the DC Sub 2 Second Debt and the DC Sub 4 Second Debt) became property of Spinco Sub 10;
(b) all of the liabilities of New LLC and Spinco Sub 8 became liabilities of Spinco Sub 10;
(c) all of the member interests of New LLC were exchanged for member interests of Spinco Sub 10; and
(d) all of the shares of Spinco Sub 8 were exchanged for shares of Spinco Sub 2.
45. Spinco Sub 10 declared a dividend on its member interests in an amount equal to the aggregate fair market value of its DC Sub 2 First Preferred Shares, the DC Sub 2 Second Debt and the DC Sub 4 Second Debt, and paid this dividend by distributing its DC Sub 2 First Preferred Shares, the DC Sub 2 Second Debt and the DC Sub 4 Second Debt to Spinco Sub 2.
46. Spinco Sub 2 declared a dividend on its common shares in the same amount as the dividend that it received from Spinco Sub 10 and distributed the properties that it received in payment of that dividend to DC.
47. Spinco Sub 4 declared a dividend to Spinco Sub 3 in an amount equal to the aggregate of the fair market value of its DC Sub 2 First Preferred Shares and the DC Sub 2 First Debt, and paid this dividend by distributing its DC Sub First Preferred Shares and the DC Sub 2 First Debt to Spinco Sub 3. Prior to this dividend, the shares of Spinco Sub 4 were reorganized under applicable US corporate law to permit a dividend solely on its shares owned by Spinco Sub 3.
48. Spinco Sub 3 declared a dividend to Spinco Sub 2 in the same amount as the dividend that it received from Spinco Sub 4 and distributed the properties that it received in payment of that dividend to Spinco Sub 2.
49. Spinco Sub 5 declared a dividend on its common shares in an amount equal to the aggregate fair market value of the DC Sub 4 First Debt and the DC Sub 3 Debt, and paid this dividend by distributing the DC Sub 4 First Debt and the DC Sub 3 Debt to Spinco Sub 2.
PROPOSED TRANSACTIONS
50. Shortly before the Effective Date and before the transactions described in Paragraph 59, Spinco Sub 2 will repay the outstanding principal amount of the Spinco Sub 2 First Debt, by transferring to DC portions of the DC Sub 2 First Preferred Shares, the DC Sub 2 Second Preferred Shares and the DC Sub 3 Debt with an aggregate fair market value equal to the outstanding principal amount of the Spinco Sub 2 First Debt. Spinco Sub 2 will declare a dividend on its common shares equal to the aggregate fair market value of the remaining portions of the DC Sub 2 First Preferred Shares, the DC Sub 2 Second Preferred Shares and the DC Sub 3 Debt, and will pay this dividend by distributing the remaining portions of the DC Sub 2 First Preferred Shares, the DC Sub 2 Second Preferred Shares and the DC Sub 3 Debt to DC.
51. Each of the dividends described in Paragraphs 45 to 49, inclusive, will be reported as being paid out of the exempt surplus balance of the dividend payer.
Pre-Arrangement Transactions
52. DC, DC Sub 1, Spinco, Newco, the Manageco Principal, DC Shareholderco and certain other parties will execute and deliver the standstill agreement, which will become effective prior to the time the Arrangement Agreement is entered into. Pursuant to the standstill agreement, among other things, the Manageco Principal, DC Shareholderco and certain other parties will agree to certain restrictions on the disposition to any person who is not related to the transferor of:
(a) shares of the capital stock of DC, Spinco and Amalco;
(b) property XXXXXXXXXX% or more of the fair market value of which is or may be derived from shares described in (a) immediately above; and
(c) any property acquired in substitution for the property described in (a) and (b) immediately above.
53. Manageco Sub 1 and Manageco Sub 2 will be incorporated and Manageco will acquire shares in both corporations. Manageco Sub 1 and Manageco Sub 2 will be taxable Canadian corporations.
54. DC, Spinco, Newco and DC Sub 1 will enter into the Arrangement Agreement.
55. DC, DC Sub 1, Spinco, Newco, Manageco, Manageco Sub 1, Manageco Sub 2 and the Manageco Principal will execute and deliver the Transitional Services and Separation Agreement. The Transitional Services and Separation Agreement will clarify that a divisive reorganization of the type described in subsection 55(3) does not in itself constitute a Partial LTA Event or result in a Change of Control of DC (and that consequently no amounts will be payable to Manageco or to any other person by DC pursuant to the long term incentive arrangement contained in the DC MSA solely as a result of the implementation of such a reorganization).
56. The DC MSA will be restated to segment the rights and obligations described in the DC MSA into the Division 1 Segment and the Division 2 and 3 Segment, such that:
(a) the various management and other services that are currently being provided by Manageco to DC under the terms of the DC MSA will continue to be provided in respect of Division 1, Division 2 and Division 3;
(b) the base amount under the long term incentive arrangement contained in the DC MSA immediately before the restatements described in this Paragraph become effective, will be divided in respect of the Division 1 Segment and the Division 2 and 3 Segment based on the ratio of the Net Fair Market Value of the common shares in the capital stock of Newco to the Net Fair Market Value of all property owned by DC immediately before the Distribution; and
(c) all amounts payable to Manageco upon the occurrence of certain events under the DC MSA immediately before the restatement of the DC MSA will be allocated to the Division 1 Segment and the Division 2 and 3 Segment, such that the aggregate amounts will be the same before and after the restatement;
Other than the restatement noted above, no further restatements or amendments will be made to the DC MSA. Further, no consideration will be paid or received as a result of the restatements to the DC MSA.
57. The board of directors of Spinco will adopt the Spinco Stock Option Plan.
58. DC will enter into the DC Sub 1 Arrangements.
59. DC will transfer to Newco Division 2 and Division 3 by transferring:
(a) all of its shares of Spinco Sub 1, Spinco Sub 2, Spinco Sub 6, Spinco Sub 9 and the Spinco Sub 7 Canadian Subsidiaries;
(b) the Spinco Sub 1 Debt and the Spinco Sub 6 Debt;
(c) certain intangible property; and
(d) its interest in all contracts pertaining to Division 2 and Division 3 (including the DC MSA relating to the Division 2 and 3 Segment).
The aggregate fair market value of the consideration paid by Newco to DC for the transferred property will be equal to the aggregate fair market value of such transferred property. DC will receive as consideration for the transferred property: (i) newly issued common shares of Newco; (ii) the Newco Internal Note; and (iii) the assumption by Newco of the liabilities associated with the transferred property.
Newco will add $XXXXXXXXXX to the stated capital of its common shares in respect of the transfer. DC and Newco will jointly elect for subsection 85(1), and the corresponding provisions of any applicable provincial tax legislation, to apply to the transfer of each property so transferred by DC to Newco that is eligible property for an agreed amount that is:
(a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
(c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).
For the purposes of the joint elections described in this Paragraph, if DC and Newco so indicate in their joint election, the reference in subparagraph 85(1)(d)(i) to “XXXXXXXXXX of the taxpayer’s cumulative eligible capital in respect of the business immediately before the disposition” shall be interpreted to mean the proportion of XXXXXXXXXX of DC’s cumulative eligible capital in respect of its business immediately before the transfer to Newco that the transferred eligible capital property in respect of the business (based on fair market value at that time or the amount of the cumulative eligible capital that is attributable to those assets) is of all of DC’s eligible capital property in respect of the business (based on fair market value at that time or the amount of the cumulative eligible capital that is attributable to those assets).
60. Concurrently with the transfer of assets from DC to Newco, as described in the previous Paragraph, Manageco will divide its existing management services business into two separate businesses, and in connection therewith:
(a) Manageco will transfer the DC Management Services Business, to Manageco Sub 1 at a price equal to the fair market value of the DC Management Services Business at the time of the transfer, and:
(i) as consideration for the property so transferred, Manageco Sub 1 will issue to Manageco from treasury a total of XXXXXXXXXX common shares of the capital stock of Manageco Sub 1;
(ii) Manageco and Manageco Sub 1 will jointly elect to have the provisions of subsection 85(1), and the corresponding provisions of any applicable provincial legislation, apply in respect of the transfer of the DC Management Services Business, and the agreed amount in respect of each eligible property so transferred will be as follows:
(A) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(B) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
(C) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii); and
(iii) the amount added to the stated capital of the Manageco Sub 1 common shares issued by Manageco Sub 1 to Manageco as consideration for the transfer of the DC Management Services Business will be equal to the aggregate of the agreed amounts specified in the election described in (ii), immediately above; and
(b) Manageco will transfer the Spinco Management Services Business to Manageco Sub 2 at a price equal to the fair market value of the Spinco Management Services Business at the time of the transfer, and:
(i) as consideration for the property so transferred, Manageco Sub 2 will issue to Manageco from treasury a total of XXXXXXXXXX common shares of the capital stock of Manageco Sub 2;
(ii) Manageco and Manageco Sub 2 will jointly elect to have the provisions of subsection 85(1), and the corresponding provisions of any applicable provincial legislation, apply in respect of the transfer of the Spinco Management Services Business, and the agreed amount in respect of each eligible property so transferred will be as follows:
(A) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(B) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
(C) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii); and
(iii) the amount added to the stated capital of the Manageco Sub 2 common shares issued by Manageco Sub 2 to Manageco as consideration for the transfer of the Spinco Management Services Business will be equal to the aggregate of the agreed amounts specified in the election described in (ii), immediately above.
61. Following the transfers of property described in Paragraphs 59 and 60, the arrangements described in the DC MSA, as so transferred or assumed, will be documented in the Amalco MSA and the Spinco MSA.
62. Newco will borrow the Newco Loan from one or more arm’s length persons. Newco will repay the Newco Internal Note, by paying approximately $XXXXXXXXXX cash to DC using the proceeds of the Newco Loan, and by assuming a portion of the DC Notes to the extent of approximately $XXXXXXXXXX. DC will use the approximately $XXXXXXXXXX cash received on the repayment of the Newco Internal Note to repay a portion of the amounts outstanding under the DC Notes and/or the DC Credit Facility.
Arrangement Transactions
63. The Proposed Transactions described in Paragraphs 64 to 80, and Paragraphs 82 to 85, will be undertaken pursuant to the Plan of Arrangement commencing at the Effective Time. The DC Sub 1 Arrangements will occur outside of, and not as part of the Plan of Arrangement, although the Plan of Arrangement will refer to the time at which these arrangements become effective in order to ensure that DC Sub 1 is a wholly-owned subsidiary of DC prior to the amalgamation in Paragraph 83.
64. No DC Stock Options may be exercised or surrendered after the Effective Time.
65. The DC Shares held by dissenting shareholders, who exercise their dissent rights will be deemed to have been transferred to DC and cancelled and will cease to be outstanding at the Effective Time such that the dissenting shareholders will cease to have any rights as DC shareholders other than the right to be paid the fair value for their DC Shares by DC.
66. The DC Articles will be amended to become the First Amended DC Articles.
67. Concurrently with the DC Share Exchange, as described in Paragraph 68, each holder of a DC Stock Option will dispose of the Exercise Price Proportion of such holder’s DC Stock Option to Spinco and the remaining portion to DC, and as sole consideration therefor:
(a) Spinco will grant and issue one Spinco Replacement Stock Option; and
(b) DC will grant and issue one DC Replacement Stock Option;
The DC Stock Options so exchanged will be cancelled and terminated concurrently with the option exchange. The DC Stock Option Plan will be amended and restated to include provisions that provide that each person that is a director, officer and/or full-time employee of DC or its subsidiaries who holds a DC Stock Option immediately prior to the Effective Time and who will, following the Effective Time, not be a director, officer and/or full-time employee of Amalco or its subsidiaries will, for so long as such person remains a director, officer and/or full-time employee, as applicable, of Spinco or any of its subsidiaries on or after the Effective Time, be permitted to hold and exercise his or her Amalco Replacement Stock Options in accordance with their terms as though such person was a director, officer and/or full-time employee, as applicable, of Amalco or its subsidiaries.
The other material commercial terms and conditions of the Spinco Replacement Stock Option and the DC Replacement Stock Option will generally parallel those of the DC Stock Option.
The issuance by Spinco of the Spinco Replacement Stock Option will be in anticipation of the transfer of all of the common shares of the capital stock of Newco to Spinco as described in Paragraph 73 and will form part of the non-share consideration relating to such transfer.
68. DC shareholders (other than a dissenting shareholder) will proceed with the DC Share Exchange by concurrently exchanging each issued and outstanding DC MV Share and DC SV Share that they hold as follows:
(a) each DC MV Share will be exchanged for one DC New MV Share and one DC MV Special Share; and
(b) each DC SV Share will be exchanged for one DC New SV Share and one DC SV Special Share;
and the DC MV Shares and DC SV Shares so exchanged will be cancelled. In connection with the DC Share Exchange:
(a) DC will not make a joint election under the provisions of subsections 85(1) or 85(2) or under any other provisions of the Act (or corresponding provisions of any applicable provincial or foreign tax legislation) with a DC shareholder;
(b) the aggregate amount to be added by DC to the stated capital accounts of the DC New MV Shares and the DC MV Special Shares issued on the DC Share Exchange will be an amount equal to the aggregate PUC of the DC MV Shares (excluding any DC MV Shares transferred to DC pursuant to Paragraph 65) immediately before such exchange and such PUC will be allocated between the DC New MV Shares and the DC MV Special Shares based on the proportion that the fair market value of the DC New MV Shares and the DC MV Special Shares, as the case may be, is of the fair market value of all of the DC New MV Shares and the DC MV Special Shares issued on such exchange; and
(c) the aggregate amount to be added by DC to the stated capital accounts of the DC New SV Shares and the DC SV Special Shares issued on the DC Share Exchange will be an amount equal to the aggregate PUC of the DC SV Shares (excluding any DC SV Shares transferred to DC pursuant to Paragraph 63) immediately before such exchange and such PUC will be allocated between the DC New SV Shares and the DC SV Special Shares based on the proportion that the fair market value of the DC New SV Shares and the DC SV Special Shares, as the case may be, is of the fair market value of all of the DC New SV Shares and the DC SV Special Shares issued on such exchange.
69. Concurrently with the issuance of the DC New SV Shares and DC SV Special Shares pursuant to the DC Share Exchange, the DC New SV Shares will, outside and not as part of the Plan of Arrangement, continue to be listed and posted for trading on the XXXXXXXXXX (subject to standard listing conditions imposed by the XXXXXXXXXX in similar circumstances) and, for greater certainty, such continued listing will be effective before the Distribution.
70. The articles of incorporation of Spinco will be amended to create and authorize the issuance of (in addition to the shares of the capital stock that Spinco is authorized to issue immediately before such amendment) an unlimited number of Spinco Special Shares. The Spinco Special Shares will have the following terms:
(a) The Spinco Special Shares will be non-voting.
(b) Each Spinco Special Share will entitle the holder to receive dividends as and when declared by the board of directors of Spinco.
(c) The Spinco Special Shares will be redeemable and retractable at any time for a redemption price per Spinco Special Share equal to the aggregate of the following two amounts:
(i) that amount which is equal to the quotient obtained when:
(A) the aggregate fair market value of the common shares in the capital of Newco at the time of its transfer to Spinco as described in the Plan of Arrangement;
is divided by:
(B) the number of Spinco Special Shares issued in connection with the Distribution;
plus:
(ii) that amount which is equal to all declared and unpaid dividends on such Spinco Special Share.
(d) Except with the consent in writing of the holders of all of the Spinco Special Shares, no dividend will at any time be declared and paid on, or declared and set apart for payment on, the Spinco SV Shares or Spinco MV Shares unless, after the payment of such dividend, the realizable value of the assets of Spinco would not be less than the aggregate redemption price of the Spinco Special Shares.
(e) In the event of the dissolution, liquidation or winding-up of Spinco, whether voluntary or involuntary, or any other distribution of assets of Spinco among its shareholders for the purpose of winding-up its affairs, the holders of Spinco Special Shares will be entitled to receive from the assets of Spinco an amount equal to the aggregate redemption price of the Spinco Special Shares before any amount will be paid or any assets of Spinco distributed upon any liquidation, dissolution or winding-up of Spinco to the holders of the Spinco SV Shares or Spinco MV Shares. After payment to the holders of Spinco Special Shares of the amount so payable to them, such holders will not be entitled to share in any further distribution of the assets of Spinco.
(f) For the purposes of subsection 191(4), the terms and conditions of the Spinco Special Share will specify an amount in respect of each such share for which the share is to be redeemed, acquired or cancelled. The amount shall be designated pursuant to the resolution of the directors of the issuing corporation made in connection with the issuance of such share. The amount specified in respect of such share, at the time of the issuance thereof, will be expressed as a fixed dollar amount that will not be determined by formula or subject to change thereafter and will not exceed the fair market value of the consideration for which the share is issued.
71. Immediately after the DC Share Exchange, each Participant will transfer to Spinco all the DC MV Special Shares and DC SV Special Shares held by the Participant. Every Participant will receive fair market value consideration from Spinco in the form of one Spinco MV Share for every transferred DC MV Special Share and one Spinco SV Share for every transferred DC SV Special Share.
In connection with the exchange:
(a) if requested by an Eligible Holder within XXXXXXXXXX days after the Effective Date, Spinco will jointly elect with such Eligible Holder for subsection 85(1) (or, in the case of an Eligible Holder that is a partnership, subsection 85(2)) and the corresponding provisions of any applicable provincial tax legislation to apply to the transfer of each share so transferred by the Eligible Holder to Spinco that is eligible property for an agreed amount that is, in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii); and
(b) Spinco will add the following amounts to the stated capital of its shares:
(i) with respect to the Spinco MV Shares, an amount equal to the aggregate stated capital of the DC MV Special Shares so transferred to Spinco, less the amount, if any, by which the aggregate stated capital of the DC MV Special Shares that are subject to an election under subsections 85(1) or 85(2), as the case may be, exceeds the aggregate agreed amounts specified in such elections; and
(ii) with respect to the Spinco SV Shares, an amount equal to the aggregate stated capital of the DC SV Special Shares so transferred to Spinco, less the amount, if any, by which the aggregate stated capital of the DC SV Special Shares that are subject to the elections under subsections 85(1) or 85(2), as the case may be, exceeds the aggregate agreed amounts specified in such elections.
72. Concurrently with the issuance of the Spinco SV Shares pursuant to the exchange described in Paragraph 71, the Spinco SV Shares will, outside and not as part of the Plan of Arrangement, be listed or accepted for trading on the XXXXXXXXXX (subject to standard post-closing listing conditions imposed by the XXXXXXXXXX and subject to official notice of issuance by XXXXXXXXXX, in each case, in similar circumstances) and, for greater certainty, such listing will be effective before the redemption of the DC MV Special Shares and DC SV Special Shares and the redemption of the Spinco Special Shares as part of the Proposed Transactions.
73. Immediately after the step described in Paragraph 71, DC will proceed to the Distribution by transferring to Spinco all of the common shares of the capital stock of Newco. In consideration for that transfer, Spinco will issue to DC XXXXXXXXXX Spinco Special Shares and will have issued the Spinco Replacement Stock Options as described in Paragraph 67. The XXXXXXXXXX Spinco Special Shares will have an aggregate redemption amount, as determined pursuant to the articles of incorporation of Spinco, as amended, equal to the excess of the fair market value, at the time of transfer, of the common shares in the capital of Newco over the aggregate fair market value at such time of the Spinco Replacement Stock Options. In connection with the Distribution:
(a) Spinco and DC will jointly elect for subsection 85(1) and the corresponding provisions of any applicable provincial tax legislation, to apply to the transfer of each common share in the capital of Newco. The agreed amount in respect of such election will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(b) the amount added to the stated capital of the Spinco Special Shares issued by Spinco to DC pursuant to the Distribution will be equal to the agreed amount described in (a) immediately above; and
(c) the Net Fair Market Value of the common shares in the capital of Newco received by Spinco on the Distribution will be equal to or approximate that proportion of the Net Fair Market Value of all property owned by DC immediately before the transfer that:
(i) the aggregate fair market value of the DC MV Special Shares and DC SV Special Shares owned by Spinco immediately before the transfer; is of
(ii) the aggregate fair market value of all the issued and outstanding shares of DC immediately before the transfer;
74. Spinco will redeem for cancellation all of the outstanding Spinco Special Shares held by DC and will issue to DC, as the sole consideration therefor, the Spinco Redemption Note. The amount of any deemed dividend resulting from the application of subsection 84(3) to the redemption of all of the outstanding Spinco Special Shares will be designated by Spinco, to the extent permitted under the Act, as an eligible dividend.
75. DC will redeem for cancellation all of the outstanding DC MV Special Shares and DC SV Special Shares held by Spinco and will issue to Spinco, as the sole consideration therefor, the DC Redemption Note. The amount of any deemed dividend resulting from the application of subsection 84(3) to the redemption of all of the outstanding DC MV Special Shares and DC SV Special Shares will be designated by DC, to the extent permitted under the Act, as an eligible dividend.
76. DC will pay the principal amount of the DC Redemption Note by transferring to Spinco the Spinco Redemption Note, and the Spinco Redemption Note will be accepted by Spinco in full and absolute payment, satisfaction and discharge of DC’s obligations under the DC Redemption Note. Simultaneously, Spinco will pay the principal amount of the Spinco Redemption Note by transferring to DC the DC Redemption Note, and the DC Redemption Note will be accepted by DC in full and absolute payment, satisfaction and discharge of Spinco’s obligations under the Spinco Redemption Note. Each of the DC Redemption Note and the Spinco Redemption Note will thereupon be cancelled.
77. The First Amended DC Articles will be amended to become the Second Amended DC Articles.
78. The articles of Spinco will be amended as follows:
(a) to change its name from “XXXXXXXXXX” to “XXXXXXXXXX”; and
(b) to remove all of the Spinco Special Shares from the authorized capital of Spinco (and to remove all references to the Spinco Special Shares).
79. The number of directors of Spinco will be XXXXXXXXXX and the directors of Spinco will be those persons listed as such in the Plan of Arrangement.
80. Spinco will resolve to dissolve Newco and in connection therewith:
(a) all of the rights, title and interest of Newco in and to all of its property, assets and business of every kind and nature, real and personal, both tangible and intangible, and movable and immovable, wherever situate will be transferred and assigned to Spinco; and
(b) Spinco will assume and become liable to pay, satisfy, discharge and observe, perform and fulfill all of the liabilities and obligations of Newco.
81. Pursuant to the DC Sub 1 Arrangements, DC will acquire all of the issued and outstanding shares (and options to acquire shares) of DC Sub 1 that are held by the DC Sub 1 Minority Shareholders for consideration consisting of DC New SV Shares and/or cash. The DC Sub 1 Governance Agreement will be terminated at that time and be of no further force and effect. All persons or partnerships who acquire shares of DC pursuant to the DC Sub 1 Arrangements will deal at arm’s length with DC for purposes of the Act. The DC Sub 1 Arrangements will not result in (i) an acquisition of control of DC by any person or group of persons for purposes of the Act; or (ii) any person or related group of persons beneficially owning, directly or indirectly, more than XXXXXXXXXX% of the DC MV Shares or the DC SV Shares, other than DC Shareholderco.
82. The stated capital of the shares of the capital stock of DC Sub 1 will be reduced to $XXXXXXXXXX and no amount will be distributed on this reduction.
83. DC and DC Sub 1 will be amalgamated and continued as one corporation as if, except as otherwise set forth herein, the amalgamation was carried out pursuant to subsection XXXXXXXXXX of Act2 to form Amalco in accordance with the following:
(a) Amalco’s share capital will be:
(i) an unlimited number of Amalco SV Shares;
(ii) an unlimited number of Amalco MV Shares; and
(iii) an unlimited number of Preference Shares, issuable in one or more series;
(b) Effect of Amalgamation: the provisions of section XXXXXXXXXX of Act2 will apply to the amalgamation with the result that:
(i) DC and DC Sub 1 cease to exist as entities separate from Amalco;
(ii) Amalco possesses all the property, rights, privileges and franchises and is subject to all liabilities, including civil, criminal and quasi-criminal, and all contracts, disabilities and debts of each of DC and DC Sub 1;
(c) Cancellation and Continuation of Shares: on the amalgamation:
(i) each issued and outstanding Class A common share and Class B common share in the capital of DC Sub 1 held by DC will be cancelled without any repayment of capital in respect thereof;
(ii) no securities will be issued and no assets will be distributed by Amalco in connection with the amalgamation; and
(iii) the issued and outstanding DC New SV Shares and DC New MV Shares will survive and become, and continue on as, Amalco SV Shares and Amalco MV Shares, respectively, without amendment; and
(d) Stated Capital: the stated capital of:
(i) the Amalco SV Shares will be an amount equal to the stated capital of the DC New SV Shares; and
(ii) the Amalco MV Shares will be an amount equal to the stated capital of the DC New MV Shares.
84. Concurrently with the continuation of the Amalco SV Shares:
(a) the Amalco SV Shares will, outside and not as part of the Plan of Arrangement, continue to be listed and posted for trading on the XXXXXXXXXX (subject to standard listing conditions imposed by the XXXXXXXXXX in similar circumstances); and
(b) each outstanding DC Replacement Stock Option will become an Amalco Replacement Stock Option entitling the holder thereof to acquire the same number of Amalco SV Shares, and the DC Stock Option Plan will become the Amalco Stock Option Plan, with all of the other terms and conditions of, and restrictions on, the Amalco Replacement Stock Options, including exercise price, vesting conditions and exercise or surrender restrictions, being the same as the DC Replacement Stock Options.
85. The Transitional Services and Separation Agreement, which will have been executed and delivered by DC, DC Sub 1, Spinco, Newco, Manageco, Manageco Sub 1, Manageco Sub 2 and the Manageco Principal, will become effective with respect to the provisions described in Paragraphs (b) to (e) in that definition.
86. The Proposed Transactions will occur in the order presented unless otherwise indicated, subject to the following exceptions:
(a) the Pre-Arrangement Transactions will occur in the sequence presented in the description of those transactions; however, certain Pre-Arrangement Transactions may occur prior to the completion of certain Reorganization Transactions;
(b) the applicable election forms will be filed within the applicable due dates following the completion of the Proposed Transactions; and
(c) the filing of any articles of dissolution may occur following the completion of the Proposed Transactions.
87. Spinco will, pursuant to the post-amble in the definition of public corporation in subsection 89(1), elect in its return of income for its first taxation year to have been a public corporation from the beginning of such year.
88. Neither DC, Spinco nor Amalco is, or will be at the time of the Proposed Transactions, a specified financial institution.
89. None of the shares of DC, Spinco or Amalco has been, or will be, at any time during the implementation of the Proposed Transactions:
(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a “guarantee agreement”;
(b) the subject of a dividend rental arrangement referred to in subsection 112(2.3) , as that term is defined in subsection 248(1);
(c) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5);
(d) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or
(e) issued for consideration that is or includes:
(i) an obligation of the type described in subparagraph 112(2.4)(b)(i); or
(ii) any right of the type described in subparagraph 112(2.4)(b)(ii).
90. Except as specifically outlined herein, DC Shareholderco has no present intention or plans to dispose of any shares of DC, Spinco or Amalco to an unrelated person, and no direct or indirect shareholder of DC Shareholderco has any present intention or plans to dispose of any shares of DC Shareholderco (or any property XXXXXXXXXX% or more of the fair market value of which is or may be derived from such shares) to an unrelated person.
91. Except as specifically outlined herein, there is no expectation or intention of any of DC, Spinco, or Amalco, or any corporation controlled by such corporation, to dispose of any property owned by it as part of the series of transactions that includes the Proposed Transactions, other than in the ordinary course of business.
PURPOSES OF THE PROPOSED TRANSACTIONS
92. The purpose of the DC Issuer Bid is to enhance the shareholder value of DC. Specifically, DC believes that the DC SV Shares may from time to time trade in a price range that does not adequately reflect the value of such shares in relation to the business of DC and its future business prospects. DC believes that purchases of DC SV Shares pursuant to the DC Issuer Bid will enhance shareholder value and represent an attractive investment to DC.
93. The purpose of the Reorganization Transactions is to eliminate cross-ownership interests and inter-company payables/receivables between Division 1 (which will be retained by Amalco) and Division 2 and Division 3 (which latter two Divisions will be transferred to Spinco), to simplify DC’s corporate structure (and do so in a manner that is tax neutral, to the extent possible, in countries other than Canada) and to consolidate Divisions 2 and 3 into one entity with the appropriate capital structure.
94. The purpose of Newco is to facilitate the distribution to Spinco. The use of Newco simplifies the distribution process, as it allows DC to transfer only a single asset on the Distribution (i.e., the shares of Newco), rather than transferring the operating assets of Division 2 and Division 3 individually.
95. The purpose of the Proposed Transactions is to transfer the assets of Division 2 and Division 3 from DC to Spinco on the basis outlined above. DC believes that this transfer is in the best interests of DC and its shareholders because it should:
(a) provide Amalco and Spinco with a sharper business and strategic focus;
(b) enable each of Amalco and Spinco to improve and expand its strategic positioning and growth opportunities;
(c) provide shareholders with more focused investments and additional flexibility;
(d) provide each of Amalco and Spinco with independent access to capital;
(e) improve the ability of financial markets and investors to evaluate Amalco and Spinco independently based on their respective merits; and
(f) enable Amalco and Spinco to better attract, retain and motivate key employees.
96. Pursuant to the DC MSA, Manageco currently provides (and since XXXXXXXXXX, has provided) services to each of the three Divisions, as carried on by DC prior to the Proposed Transactions. After the Proposed Transactions, Amalco, as successor of DC, will continue to own and operate Division 1 and Spinco will own and operate Division 2 and Division 3. The arrangements relating to the DC MSA (subsequently the Amalco MSA and the Spinco MSA) are necessitated by the Proposed Transactions and the purpose of these arrangements is to ensure that, from a commercial perspective, the services provided by Manageco to DC in respect of its three Divisions prior to the Proposed Transactions continue to be provided to Amalco (in respect of Division 1) and to Spinco (in respect of Division 2 and Division 3) following the completion of the Proposed Transactions.
97. Each of Amalco and Spinco will be a publicly-listed corporation subject to disclosure and reporting requirements imposed by XXXXXXXXXX regulatory authorities. Under current requirements, detailed disclosure is required to be made regarding the DC MSA in the annual and other filings made by DC. The separation of the DC MSA into the Amalco MSA and the Spinco MSA is necessary as, without these two separate and distinct contracts, it may become necessary to disclose confidential information regarding Spinco in Amalco’s filings and vice versa.
98. XXXXXXXXXX
RULINGS
Provided that the above Statements of Facts, Preliminary and Proposed Transactions, Purposes of the Proposed Transactions and Additional Information, are accurate and constitute complete disclosure of all relevant facts, our rulings are as follows:
A. With regard to the purchase by DC of existing DC SV Shares from a dissenting holder as described in Paragraph 65 and subject to the application of subsection 55(2):
(a) DC will be deemed by paragraph 84(3)(a) to have paid, and each dissenting shareholder will be deemed by paragraph 84(3)(b) to have received, a dividend, equal to the amount, if any, by which any payment from DC to a dissenting holder (exclusive of any interest awarded by a court) in respect of the purchase for cancellation of such dissenting holder’s DC SV Shares exceeds the amount of PUC attributable to such shares immediately before the purchase for cancellation;
(b) the amount of any such dividend will be included in computing such dissenting holder’s income under subsection 82(1) and paragraph 12(1)(j); and
(c) subsections 212(2) and 215(1) will apply (subject to the provisions of any applicable income tax convention) to require DC to withhold and remit XXXXXXXXXX% of the amount of each such dividend deemed to have been paid as described in (a) to a dissenting shareholder who is a non-resident of Canada.
B. The provisions of subsection 7(1.4) will apply with respect to each exchange by a particular holder of DC Stock Options that are subject to the provisions of subsection 7(1) for DC Replacement Stock Options and Spinco Replacement Stock Options, as described in Paragraph 67, provided that the aggregate In The Money Amount of the DC Replacement Stock Options and the Spinco Replacement Stock Options received by the holder on the exchange does not exceed the In The Money Amount of the DC Stock Options that were so exchanged by the holder, with the result that for the purposes of section 7:
(a) such holder will be deemed not to have disposed of such holder’s DC Stock Options and not to have acquired such holder’s DC Replacement Stock Options and Spinco Replacement Stock Options;
(b) the DC Replacement Stock Options and Spinco Replacement Stock Options will be deemed to be the same as, and a continuation of, the corresponding DC Stock Options; and
(c) Spinco will be deemed in respect of the Spinco Replacement Stock Options to be the same person as, and a continuation of, DC.
C. On the exchange of the DC SV Shares for DC New SV Shares and DC SV Special Shares, as described in Paragraph 68, the provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the disposition of each DC SV Share by a holder for one DC New SV Share and one DC SV Special Share provided that:
(a) the particular holder of DC SV Shares holds its DC SV Shares as capital property; and
(b) the particular holder of DC SV Shares and DC does not file an election under subsection 85(1) or (2) in respect of the exchange;
such that
(c) the holder will be deemed by paragraph 86(1)(b) to have acquired the DC New SV Shares and DC SV Special Shares at a cost equal to the proportion of the ACB to such holder of such DC SV Shares, immediately before the exchange, that:
(i) the fair market value, immediately after the exchange, of the DC New SV Shares or the DC SV Special Shares, as the case may be, received by such holder,
is of
(ii) the fair market value, immediately after the exchange, of all of the shares in the capital of DC acquired by such holder for the DC SV Shares;
(d) pursuant to paragraph 86(1)(c), such holder of DC SV Shares will be deemed to have disposed of the holder’s DC SV Shares for aggregate POD equal to the aggregate cost to such holder of the DC New SV Shares and the DC SV Special Shares received by such holder, as determined in (c) above; and
(e) pursuant to subsection 86(2.1), the aggregate PUC of the DC New SV Shares and DC SV Special Shares will be equal to the PUC of the DC SV Shares which were exchanged for the DC New SV Shares and DC SV Special Shares.
D. On the exchange of the DC MV Shares for DC New MV Shares and DC MV Special Shares, as described in Paragraph 68, the provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the disposition of each DC MV Share by a holder for one DC New MV Share and one DC MV Special Share provided that
(a) the particular holder of DC MV Shares holds its DC MV Shares as capital property; and
(b) the particular holder of DC MV Shares and DC does not file an election under subsection 85(1) or (2) in respect of the exchange;
such that
(c) the holder will be deemed by paragraph 86(1)(b) to have acquired the DC New MV Shares and DC MV Special Shares at a cost equal to the proportion of the ACB to such holder of such DC MV Shares, immediately before the exchange, that:
(i) the fair market value, immediately after the exchange, of the DC New MV Shares or the DC MV Special Shares, as the case may be, received by such holder,
is of
(ii) the fair market value, immediately after the exchange, of all of the shares in the capital of DC acquired by such holder for the DC MV Shares;
(d) pursuant to paragraph 86(1)(c), such holder of DC MV Shares will be deemed to have disposed of the holder’s DC MV Shares for aggregate POD equal to the aggregate cost to such holder of the DC New MV Shares and the DC MV Special Shares received by such holder, as determined in (c) above; and
(e) pursuant to subsection 86(2.1), the aggregate PUC of the DC New MV Shares and DC MV Special Shares will be equal to the PUC of the DC MV Shares which were exchanged for the DC New MV Shares and DC MV Special Shares.
E. Provided that a Participant who, immediately before the exchange of DC SV Special Shares for Spinco SV Shares or the exchange of DC MV Special Shares for Spinco MV Shares, described in Paragraph 71:
(a) holds such DC SV Special Shares or DC MV Special Shares as capital property;
(b) does not receive any consideration, other than Spinco SV Shares in exchange for the DC SV Special Shares or Spinco MV Shares in exchange for DC MV Special Shares;
(c) deals at arm’s length with Spinco immediately before the exchange;
(d) does not, jointly with Spinco, file an election under subsection 85(1) or subsection 85(2) with respect to the exchange;
(e) does not include any portion of the gain or loss, otherwise determined in computing its income for that year; and
(f) is not a person described in paragraph 85.1(2)(e) who has included any portion of the gain or loss in computing its foreign accrual property income (as defined in subsection 95(1)) for that year;
and further, provided that immediately after the exchange,
(g) such Participant or persons with whom such Participant does not deal at arm’s length or such Participant together with any other person or persons with whom such Participant does not deal at arm’s length, will not: control Spinco or beneficially own shares in the capital of Spinco having an aggregate fair market value representing more than XXXXXXXXXX% of the aggregate fair market value of all the outstanding shares in the capital of Spinco;
then, pursuant to paragraph 85.1(1)(a):
(h) such Participant will be deemed to have disposed of such DC SV Special Shares or DC MV Special Shares for POD equal to the aggregate ACB of such shares to the Participant immediately before the exchange; and
(i) such Participant will be deemed to have acquired such Spinco SV Shares or Spinco MV Shares at an aggregate cost equal to the aggregate ACB of such Participant’s DC SV Special Shares or DC MV Special Shares immediately before the exchange;
and pursuant to paragraph 85.1(1)b):
(j) the cost to Spinco of each DC SV Special Share or DC MV Special Share acquired from such Participant will be deemed to be the lesser of its fair market value immediately before the exchange and the PUC of such DC SV Special Share or DC MV Special Share immediately before the exchange.
F. Subject to the application of subsection 69(11), provided that each respective transferor and transferee jointly file an election pursuant to subsection 85(1) (or subsection 85(2), where the transferor is a partnership) in the prescribed form and manner and within the time specified in subsection 85(6), and that each property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefore, the provisions of subsection 85(1) (or subsection 85(2), as the case may be), other than paragraph 85(1)(e.2), will apply to:
(a) the transfer of property by DC to Newco as described in Paragraph 59;
(b) the transfer of the DC Management Services Business to Manageco Sub 1 and of the Spinco Management Services Business to Manageco Sub 2, as described in Paragraph 60;
(c) the transfer of DC SV Special Shares (or DC MV Special Shares, as the case may be) by each Participant to Spinco as described in Paragraph 71; and
(d) the transfer of common shares of the capital stock of Newco by DC to Spinco as described in Paragraph 73;
such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor’s POD and the transferee’s cost of such property pursuant to paragraph 85(1)(a).
G. Subsection 84(3) will apply to:
(a) the redemption for cancellation of the Spinco Special Shares held by DC, as described in Paragraph 74, such that Spinco will be deemed to have paid and DC will be deemed to have received; and
(b) the redemption for cancellation of the DC MV Special Shares and DC SV Special Shares held by Spinco, as described in Paragraph 75, such that DC will be deemed to have paid and Spinco will be deemed to have received;
a dividend on the Spinco Special Shares, the DC MV Special Shares and DC SV Special Shares, respectively, equal to the amount, if any, by which the aggregate amount paid upon such redemption for cancellation exceeds the aggregate PUC, in respect of such shares redeemed, immediately before such redemption for cancellation, and any such dividend will:
(c) be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the corporation deemed to have received such dividend;
(d) be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the taxation year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4);
(e) be excluded, in determining the POD to the vendor of the shares so redeemed for cancellation, pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54;
(f) reduce, by virtue of subsection 112(3), the loss, if any, in respect of the redemption of the shares on which the particular dividend is deemed to be received; and
(g) will not be subject to tax under Parts IV.1 and VI.1.
H. Provided that:
(a) there is not a distribution by DC (or Amalco) to a corporation that is not an “acquiror” within the meaning of the definition of “specified corporation” before the day that is three years after the Effective Date; and
(b) there is not a distribution by Spinco or any acquiror in relation to DC before the day that is three years after the Effective Date;
and as part of the series of transactions or events that includes the taxable dividends described in Ruling G, there is not:
(c) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(d) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(e) an acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii); or
(f) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or (d);
which has not been described in the Facts, Preliminary Transactions and Proposed Transactions, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling G and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
I. Pursuant to clause 256(7)(a)(i)(E), control of Newco will be deemed not to have been acquired as a result of the transfer by DC of the common shares of the capital stock of Newco to Spinco, as described in Paragraph 73.
J. Pursuant to subsection 55(6), the DC SV Shares will be deemed, for the purposes of subsection 116(6) and the definition of taxable Canadian property, to be listed on a designated stock exchange if:
(a) the dividends received by DC and Spinco in the course of the reorganization described in Paragraphs 74 and 75 are not subject to subsection 55(2) because of paragraph 55(3)(b); and
(b) immediately before the share exchange described in Paragraph 68, a DC SV Share is not taxable Canadian property to its holder.
K. The settlement and cancellation of the DC Redemption Note held by Spinco and the settlement and cancellation of the Spinco Redemption Note held by DC, as described in Paragraphs 74 and 75, will not give rise to a “forgiven amount” within the meaning of subsections 80(1) and 80.01(1). Neither Spinco nor DC will realize a gain or incur a loss as a result of the repayment and resultant cancellation of the DC Redemption Note or the Spinco Redemption Note.
L. The provisions of subsection 88(1) will apply to the wind-up of Newco into Spinco, as described in Paragraph 80.
M. Upon the amalgamation of DC and DC Sub 1, as described in Paragraph 83 :
(a) the provisions of section 87 will apply in respect of DC and DC Sub 1;
(b) provided that the DC New SV Shares (or the DC New MV Shares, as the case may be) are held by a particular holder thereof as capital property, the provisions of subsections 87(4) will apply to such holder, other than paragraphs 87(4)(c) to (e), such that the holder will be considered to have received Amalco SV Shares (or Amalco MV Shares) in consideration for the disposition by such holder of the DC New SV Shares (or the DC New MV Shares) for POD equal to, and to have acquired the Amalco SV Shares (or the Amalco MV Shares) at a cost equal to, the ACB to the holder of such DC New SV Shares (or DC New MV Shares) immediately before the amalgamation; and
(c) Amalco will be deemed to be a public corporation at the commencement of its first taxation year pursuant to paragraph 87(2)(ii).
N. With respect to the disposition of the DC New SV Shares by a holder for Amalco SV Shares as a consequence of the amalgamation described in Ruling M, the DC New SV Shares will be “excluded property”, within the meaning of subsection 116(6), of any non-resident person owning such shares at the time of the amalgamation.
O. Provided Spinco makes the election to be a public corporation as described in Paragraph 87, the DC New SV Shares, DC New MV Shares, DC SV Special Shares, DC MV Special Shares, Spinco SV Shares, Spinco MV Shares, Amalco SV Shares and Amalco MV Shares will be “qualified investments”:
(a) for a deferred profit sharing plan by virtue of paragraph (i) of the definition “qualified investment” in section 204;
(b) for a registered disability savings plan by virtue of paragraph (d) of the definition “qualified investment” in subsection 205(1);
(c) for a registered education savings plan by virtue of paragraph (e) of the definition “qualified investment” in subsection 146.1(1);
(d) for a registered retirement income fund by virtue of paragraph (c) of the definition “qualified investment” in subsection 146.3(1);
(e) for a registered retirement savings plan by virtue of paragraph (d) of the definition “qualified investment” in subsection 146(1); and
(f) for a tax-free savings account by virtue of paragraph (c) of the definition “qualified investment” in subsection 207.01(1).
P. The restatement of the DC MSA, as described in Paragraph 56, and the documentation of the arrangements in the Amalco MSA and the Spinco MSA as described in Paragraph 61, will not, in and of themselves, result in a disposition, as that term is defined in subsection 248(1), by any person of its rights under the DC MSA.
Q. The provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not apply to the Proposed Transactions, in and of themselves.
Subsection 245(2) will not apply to the Proposed Transactions, in and of themselves, to redetermine the tax consequences confirmed in the Rulings. The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014 and are binding on the CRA provided that the Proposed Transactions are completed within six months of the date of this letter, unless otherwise specified.
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, 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; 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, other than those specifically described 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 Division Director
Reorganizations Division
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 prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2015
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, 2015
Email this Content