2015 Ruling 2015-0604051R3 - Internal Reorganization -- summary under Subparagraph 55(3)(a)(iii)

Background

XXXco1, a (U.S.?) corporation which is the survivor of a merger of three corporations and apparently is an indirect subsidiary of a non-resident public corporation (“Parent”), wholly-owns Canco1, as well as holding the shares of USco2 that are not held by USco1 (described below). Canco1 (a holding company) wholly owns Canco2 (the Canadian operating entity), which wholly owns Canco3 (a holding company), which wholly owns USco1 (a holding company), which jointly owns USco2 along with XXXco1. USco2 is the group U.S. operating entity. Canco4 is an unlimited liability company with no material assets which is wholly-owned by USco3, which is an indirect wholly-owned subsidiary of [Parent]. Canco1, Canco2 and Canco4 are SFIs under4 para. (g) of the SFI definition.

Preliminary proposed transactions

Articles of amendment will be filed to convert the common shares of Canco1 to Class A common shares having no par value, and to add to its authorized capital Calass B Common Shares having a par value. Canco1 will convert to an unlimited liability company that is disregarded for Code purposes, and Canco3 will subdivide its shares.

Substantive proposed transactions

1. Canco3 will repurchase all but one of its common shares in consideration for a non-interest bearing demand note (“Canco3 Promissory Note”), giving rise to a s. 84(3) deemed dividend.
2. Canco2 will reduce its stated capital and Canco1 will exchange its common shares of Canco2 for new Class2 Class A common shares of Canco2 with multiple votes per share and for redeemable retractable non-voting preferred shares.
3. Canco2 will redeem all its preferred shares in consideration for delivering its Canco3 Promissory Note and common share of Canco3, giving rise to a s. 84(3) deemed dividend. Canco3 will convert to an unlimited liability company so that it is disregarded for U.S. tax purposes.
4. XXXco1 will transfer a portion of its Class A Common Shares of Canco1, corresponding to the FMV of Canco1’s investment in Canco3, to USco3 in consideration for additional ordinary shares of USco3.
5. Canco1 will pay (and XXXco1 and USco3 will receive) a stock dividend on the Class A Common Shares, comprising par value (Class B) common shares having an FMV equal to that of such Class A Common Shares immediately before the dividend, so that the FMV of such Class A Common Shares (held by XXXco1 and USco3) will be diluted to an immaterial amount. The stock dividend FMV will be subject to s. 212(2) withholding.
6. USco3 will transfer the Class B Common Shares of Canco1 so received by it to Canco4 in consideration for additional common shares of Canco4, which will have a PUC equal to that of the transferred shares.
7. Canco1 will transfer the Canco3 Promissory Note (and the remaining outstanding share of Canco3) to Canco4 as consideration for the purchase for cancellation of the Class B Common Shares held by Canco4, giving rise to a s. 84(3) deemed dividend.
8. Canco3 and Canco4 will amalgamate, with the Canco3 Promissory Note being extinguished by operation of law. Amalco will be disregarded under the Code.

The proposed transactions will not be subject to any specific public disclosure, and will not materially affect Parent’s share price.

Purposes

To align the group activities on a country-by-country rather than business-line basis. The amalgamation in 8 eliminates the tax basis in the Canco3 Promissory Note.

Rulings

The s. 55(3)(a) exception will apply to the dividends in 1, 3 and 7, provided there is not a disposition of property or an increase in interest described in ss. 55(3)(a)(i) to (v) which is part of the series of transactions or events – and the proposed transactions, by themselves, will not be considered to result in any disposition to, or increase in interest by, an unrelated person described in ss. 55(3)(a)(i) to (v).

S. 15(1.1) will not apply to the stock dividend in 5.

S. 212.3(2) will not apply to any of the proposed transactions, provided that, respecting the acquisitions of Canco3 common shares, Canco1 Class B Common Shares and Canco3 common shares in 3, 6 and 7, (a) none of Canco1, Canco2, Canco3, Canco4 and USco3 deal at arm’s length with any of Parent, XXXco1, USco3 and other listed non-resident corporations at any time that is during the series of transactions or events and, in the case of acquisitions of Canco3 common shares, Canco1 Class B Common Shares and Canco3 common shares in 3, 6 and 7, before such acquisitions and (b) there are no other non-resident corporations that participate in the series.

S. 245(2) will apply to deny the tax benefit arising from the ACB, to USco3 and XXXco1, of the Canco1 Class A common shares.

The above rulings are binding provided that, after implementation:

• A notice of determination is sent pursuant to s. 152(1.11) to USco3 and XXXco1 to reduce the ACB, to USco3 and XXXco1, of the Canco1 Class A common shares to a nominal amount; and
• USco3 and XXXco1 waive in writing the right of objection or appeal relative to such determination pursuant to ss. 165(1.2) and 169(2.2).