2020 Ruling 2019-0799981R3 - Disposition – Reclassification and Stock Split

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: USco is a corporation formed under the laws XXXXXXXXXX. USco carries on a business in Canada through a PE situated in Canada. All the operations of USco are situated in Canada and USco is subject to tax in Canada and the US. USco has only one class of shares issued and outstanding, being common shares divided into seven series. Pursuant to section XXXXXXXXXX of the XXXXXXXXXX, USco proposes to reorganize its capital by amending its article of incorporation to reclassify and split its shares as a class with a single series. Whether the proposed reclassification and stock split will result in a disposition of the shares of the capital stock of USco by its shareholders.

Position: No.

Reasons: According to the law and previous positions.

XXXXXXXXXX								2019-079998

XXXXXXXXXX, 2020

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

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

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

(i) in a previously filed tax return of the taxpayer or a person related to the taxpayer;

(ii) being considered by a tax services office or a taxation centre in connection with a previously filed return of the above-referred taxpayer or a related person to the taxpayer;

(iii) under objection by the above-referred taxpayer or a related person to the taxpayer;

(iv) the subject of a current or completed court process involving the taxpayer or a person related to the taxpayer; or

(v) the subject of an advance income ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise stated, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, (the “Act”) as amended.

Throughout this letter, except in Paragraph 16, the entities mentioned in this letter will be referred to as follows:

“Canco1” means XXXXXXXXXX, a corporation formed under the CBCA, which deals, at all relevant times, at arm’s length with Foreign Pubco1, Foreign Pubco2, Foreign Sub and Foreign Co;

“Canco2” means XXXXXXXXXX, a corporation formed under the CBCA, which deals, at all relevant times, at arm’s length with Foreign Pubco1, Foreign Pubco2, Foreign Sub and Foreign Co;

“Foreign Co” means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX, which is part of the XXXXXXXXXX. XXXXXXXXXX deals, at all relevant times, at arm’s length with Foreign Pubco1, Foreign Pubco2, Foreign Sub, Canco1 and Canco2;

“Foreign Pubco1” means XXXXXXXXXX, a public corporation formed under the laws of XXXXXXXXXX, the issued and outstanding common shares of which are listed on the XXXXXXXXXX. Foreign Pubco1 deals, at all relevant times, at arm’s length with Canco1, Canco2 and Foreign Co;

“Foreign Pubco2” means XXXXXXXXXX, a public corporation formed under the laws of XXXXXXXXXX, the issued and outstanding common shares of which are listed on the XXXXXXXXXX. Foreign Pubco2 deals, at all relevant times, at arm’s length with Canco1, Canco2 and Foreign Co;

“Foreign Sub” means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX, indirectly owned by Foreign Pubco1 and Foreign Pubco2. Foreign Sub deals, at all relevant times, at arm’s length with Canco1, Canco2 and Foreign Co;

“USco” means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX, owned by Foreign Sub, Foreign Co, Canco1 and Canco2, as more particularly described in Paragraph 1.

DEFINITIONS

In this letter, the following terms have the meanings specified and, where the circumstances so require, the singular should be read as plural and vice versa:

“arm’s length” has the meaning assigned in section 251;

XXXXXXXXXX;

“Canada-US Treaty” means the Canada-United States Income Tax Convention (1980), as amended;

“CBCA” means the Canada Business Corporations Act, R.S.C. 1985 c. C.44, as amended to the date hereof;

“CRA” means the Canada Revenue Agency;

XXXXXXXXXX;

“Existing Common Shares” refers to the common shares of the capital stock of USco which have a par value of $XXXXXXXXXX per share and are divided into seven series (Series A, B, C, D, E, F and G).

“FMV” means “fair market value”, being the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and without compulsion to act, expressed in terms of cash;

XXXXXXXXXX;

XXXXXXXXXX;

“Paragraph” refers to a numbered paragraph in this letter;

“PE” means permanent establishment;

“proceeds of disposition” has the meaning assigned in section 54;

“Proposed Transaction” means the transaction described in Paragraph 11;

“Reclassified Common Shares” has the meaning assigned in Paragraph 11;

“Share Capital Reorganization” means the reorganization of the share capital of USco described in Paragraph 11;

“Shareholders” means Foreign Co, Foreign Sub, Canco1 and Canco2 or individually “Shareholder”;

“taxable Canadian corporation” has the meaning assigned in subsection 89(1);

“taxable Canadian property” has the meaning assigned in subsection 248(1);

“US” means the United States of America.

Our understanding of the Facts, Proposed Transaction and Purposes of the Proposed Transaction are as follows:

FACTS

USco

1. All of the issued and outstanding Existing Common Shares of USco are owned by Foreign Sub (XXXXXXXXXX%), Foreign Co (XXXXXXXXXX%), Canco1 (XXXXXXXXXX%) and Canco2 (XXXXXXXXXX%). USco is treated as a corporation for Canadian and US federal income tax purposes. USco is a resident of the US for purposes of the Act and the Canada-US Treaty.

2. The terms, rights and preferences of the shares of each series of the Existing Common Shares are as follows:

a. Dividends shall be paid equally with respect to all shares of the Series A, B, C, D, E, F and G common shares as and when declared;

b. The shares of the Series A, B, C, D, E, F and G common shares shall be in all respects identical to one another;

c. Holder of each series of common shares are entitled to one vote for each share of common shares;

d. Participating in any dividend, reclassification, merger, consolidation, reorganization, recapitalization, liquidation, dissolution or winding-up of the affairs of USco, share for share, without priority or other distinctions between series.

3. USco manufactures and supplies XXXXXXXXXX. It operates a XXXXXXXXXX. USco carries on a business in Canada through a PE situated in Canada. All the operations of USco are located in Canada and USco is subject to tax in Canada and the US.

4. USco contemplates becoming a publicly listed corporation in XXXXXXXXXX and as part of the public offering, it is expected that the Shareholders may each dispose of a portion of their shares of USco to the public. In light of the foregoing, USco currently intends to effect a reorganization of its capital structure in order to (i) reclassify all the Existing Common Shares as a number of shares of a single series of the Reclassified Common Shares (which will have the same terms, rights and preferences as the Existing Common Shares) in order to create a per share value for the Existing Common Shares that will be consistent with the preferred trading value of the Reclassified Common Shares and (ii) implement a stock split.

Foreign Pubco1

5. Foreign Pubco1 through its subsidiaries carries-on a XXXXXXXXXX, whose principal XXXXXXXXXX.

Foreign Pubco2

6. Foreign Pubco2 through its subsidiaries (like Foreign Pubco1) carries-on a XXXXXXXXXX, primarily in XXXXXXXXXX.

Foreign Sub

7. Foreign Sub is a holding corporation. All the issued and outstanding shares of Foreign Sub are indirectly owned by Foreign Pubco1 and Foreign Pubco2 respectively.

Canco1

8. Canco1 is a publicly listed corporation formed under the CBCA, is a taxable Canadian corporation and a resident of Canada for the purposes of the Act. Canco1 holds overriding royalty rights entitling it to a XXXXXXXXXX% royalty on the sale of all XXXXXXXXXX by USco and shipped by USco.

Canco2

9. Canco2 is a corporation formed under the CBCA, is a taxable Canadian corporation and a resident of Canada for the purposes of the Act. Canco2 is entitled to a XXXXXXXXXX on all the sales of XXXXXXXXXX by USco.

Foreign Co

10. Foreign Co operates in XXXXXXXXXX.

PROPOSED TRANSACTION

Share capital reorganization

11. Pursuant to section XXXXXXXXXX of the XXXXXXXXXX, USco will reorganize its capital (i.e., the Share Capital Reorganization) by amending its articles of incorporation to reclassify and split all the Existing Common Shares as a class with a single series (i.e., the Reclassified Common Shares), having a par value of $XXXXXXXXXX per share, which will have the same terms, rights and preferences as the Existing Common Shares. The Reclassified Common Shares will have the following terms, rights and preferences:

a. Dividend shall be paid equally with respect to all shares of the Reclassified Common Shares as and when declared;

b. The Reclassified Common Shares shall be in all respects identical to one another;

c. Each of the holders of the Reclassified Common Shares shall be entitled to one vote for each share of the Reclassified Common Shares;

d. Participating in any dividend, reclassification, merger, consolidation, reorganization, recapitalization, liquidation, dissolution or winding-up of the affairs of USco, share for share, without priority or other distinctions.

ADDITIONAL INFORMATION

12. The aggregate FMV of the Reclassified Common Shares immediately following the Share Capital Reorganization will be equal to the aggregate FMV of the Existing Common Shares immediately before the Share Capital Reorganization.

13. The Share Capital Reorganization will not affect (i) the proportion of shares held by each Shareholder, (ii) the total capital represented by the shares, (iii) the interest, rights and preferences of the Shareholders and (iv) the capital structure of USco.

14. Immediately following the Share Capital Reorganization, the Reclassified Common Shares will represent the only issued and outstanding class of shares of the capital stock of USco.

15. The Existing Common Shares are “taxable Canadian property” and the Reclassified Common Shares will continue to constitute such.

16. The federal business number of XXXXXXXXXX, the location of its tax services office and taxation centre, and the address of its head office are as follows:

Business Number: XXXXXXXXXX
Tax Services Office: XXXXXXXXXX
Head office address: XXXXXXXXXX

PURPOSES OF THE PROPOSED TRANSACTION

17. Foreign Sub, Foreign Co, Canco1 and Canco2 may sell part of their respective participation in the Reclassified Common Shares to the public in the course of a public offering.

18. USco’s current capital structure is not well-suited to a public- offering. Specifically, given that the Shareholders currently own different series of the Existing Common Shares, USco is required to reclassify the Existing Common Shares to the Reclassified Common Shares in order to align the share capital prior to the public offering. This will facilitate the public distribution of the Reclassified Common Shares.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transaction and purposes of the proposed transaction and provided that the proposed transaction is completed in the manner described above, we confirm the following:

A. The Proposed Transaction will result neither in a disposition of the Existing Common Shares by the Shareholders nor in an acquisition of the Existing Common Shares by USco.

B. Further to Ruling A, the non-resident Shareholders will not be required to request a compliance certificate pursuant to section 116.

COMMENTS

Unless otherwise expressively confirmed, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:

(a) any other tax consequence relating to the Facts, Proposed Transaction or any transaction or event taking place either prior to the Proposed Transaction or subsequent to the Proposed Transaction, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transaction would also be included in a series of transaction or events that includes other transaction or events that are not described in this letter.

(b) the application or interpretation of any foreign law or foreign tax considerations, relating to the Facts, Proposed Transaction or any transaction or event taking place either prior to the Proposed Transaction or subsequent to the Proposed Transaction, whether described in this letter or not.

The Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R9 issued by the CRA on April 23, 2019, and are binding on the CRA provided that the Proposed Transaction is completed on or before XXXXXXXXXX.

The Rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the Rulings provided herein

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