Principal Issues: Whether an offering memorandum, under the Capital Raising Exemptions of the National Instrument 45-106 Prospectus and Registration Exemptions, B.C. Reg. 227/2009, would be considered to be a document similar to a prospectus for the purposes of paragraph 4803(2)(a) of the Regulations, in the context of a corporation wishing to elect to be a public corporation under paragraph (b) of the definition "public corporation" in subsection 89(1) of the Act.
Position: Generally yes.
Reasons: Wording of the Act and previous positions.
XXXXXXXXXX 2011-041386 U. Chalupa (613) 957-2124
September 23, 2011
Dear XXXXXXXXXX ,
Re: Election to be a public corporation
This is in reply to your email dated July 13, 2011 in which you requested the Canada Revenue Agency's ("CRA") comments on whether an offering memorandum is considered to be "a similar document" for the purpose of paragraph 4803(2)(a) of the Income Tax Regulations (the "Regulations").
A corporation resident in Canada may elect under paragraph (b) of the definition "public corporation" in subsection 89(1) of the Income Tax Act (the "Act") to be a public corporation if certain conditions prescribed in subsection 4800(1) of the Regulations are satisfied. One of these conditions described in paragraph 4800(1)(a) of the Regulations is that a class of shares of the capital stock of the corporation designated by the corporation in its election must be "qualified for distribution to the public". Pursuant to paragraph 4803(2)(a) of the Regulations, a class of shares of the capital stock of a corporation is qualified for distribution to the public if "a prospectus, registration statement or similar document has been filed with, and, where required by law, accepted for filing by, a public authority in Canada pursuant to and in accordance with the law of Canada or of any province and there has been a lawful distribution to the public of shares (...) of that class in accordance with that document".
Your question is whether an offering memorandum, under the Capital Raising Exemptions contained in the National Instrument 45-106 Prospectus and Registration Exemptions, B.C. Reg. 227/2009 ("NI 45-106"), is considered to be document similar to a prospectus for purposes of the public corporation election.
In the past, a similar issue was raised in the context of mutual fund trusts (paragraphs 4801(a) and 4803(2)(a) of the Regulations). Considering that both paragraphs 4800(1)(a) and 4801(a) of the Regulations use the expression "qualified for distribution to the public" defined in subsection 4803(2) of the Regulations, we are of the view that the general position taken by the CRA in the context of mutual fund trusts should apply equally in determining whether an offering memorandum delivered by a corporation is a "similar document" for the purpose of paragraph 4803(2)(a) of the Regulations.
In that respect, our Directorate has issued several favourable rulings to the effect that a trust, that has not filed a prospectus based on a prospectus exemption, will still meet the requirement set out in paragraph 4803(2)(a) of the Regulations if an offering memorandum is filed with the applicable securities regulators.
In Technical Interpretation no. 9529225, the CRA described as follows what type of document should be considered as a "similar document" for the purposes of paragraph 4803(2)(a) of the Regulations.
A prospectus, offering memorandum, or registration statement can therefore be described as a document prepared for prospective investors to provide them with information about a proposed issue of securities and the business of the issuer so that the prospective investor may make an informed decision as to the merit of such an investment.
Consequently, we are of the view that to be considered a "similar document" for the purposes of paragraph 4803(2)(a) of the Regulations, a document should contain information similar to, and be prepared for the same purpose as, a prospectus or registration statement. This was the case in those rulings where we indicated that a mutual fund trust, which had prepared and delivered an offering memorandum to prospective investors and the applicable securities commission but had not filed a prospectus, would meet the requirements of that paragraph.
In addition, in Technical Interpretation no. 5-7577, the CRA stated:
We agree that the reference to "similar document" in paragraph 4803(2)(a) of the ITR would generally include documents required to be filed with a
Canadian provincial securities commission under an exemption to the prospectus requirements contained in Canadian securities legislation.
Thus, it is possible that an offering memorandum filed under the Securities Act would be a "similar document" for the purposes of paragraph 4803(2)(a) of the ITR. However, a review of the offering memorandum and all the relevant circumstances would be required before a final determination could be made.
Consequently, the CRA's long-standing position is that a class of shares of the capital stock of a corporation will be considered as being "qualified for the distribution to the public" under paragraph 4803(2)(a) of the Regulations if an offering memorandum, which contains information similar to, and is prepared for the same purpose as, a prospectus, is filed with, and, when required by law, accepted for filing by, a public authority in Canada pursuant to and in accordance with the law of Canada or of any provinces and there has been a lawful distribution to the public of shares of that class in accordance with that document.
In your particular situation, we understand that section 2.9 of NI 45-106 provides a prospectus exemption for trades in securities by an issuer to an investor if, among other conditions, the issuer delivers an offering memorandum to the purchaser prepared in accordance with a prescribed form and obtains a signed risk acknowledgement from the purchaser. In addition, subsection 2.9(17) of NI 45-106 provides that the issuer must file a copy of the offering memorandum with the securities regulatory authority on or before the 10th day after the distribution under the offering memorandum or update of the offering memorandum. Pursuant to section 6.4 of NI 45-106, the required form of offering memorandum under section 2.9 of NI 45-106 is Form 45-106F2 for non-qualifying issuers or Form 45-106F3 for qualifying issuers.
In the instructions for completing Form 45-106F2 or Form 45-106F3, it is also specified that an offering memorandum is generally not required to contain the level of detail and extent of disclosure required by a prospectus. However, an offering memorandum under section 2.9 of NI 45-106 must provide a prospective purchaser with sufficient information to make an informed investment decision.
Pursuant to Form 45-106F2, an offering memorandum would include, if applicable, the following information:
1. General information about the issuer and the securities offered;
2. Use of available funds;
3. Information about the business of issuer;
4. Interests of directors, management, promoters and principal holders;
5. Capital structure;
6. Securities offered;
7. Income tax consequences and RRSP eligibility;
8. Compensation paid to sellers and finders;
9. Risk factors;
10. Reporting Obligations;
11. Resale restrictions;
12. Purchasers' rights;
13. Financial Statements;
14. Date and certificate.
Pursuant to Form 45-106F3, an offering memorandum would include, if applicable, the following information:
1. General information about the issuer and the securities offered;
2. Use of available funds;
3. Information about the business of issuer;
4. Interests of directors, executive officers, promoters and principal holders;
5. Capital structure;
6. Securities offered;
7. Income tax consequences and RRSP eligibility;
8. Compensation paid to sellers and finders;
9. Risk factors;
10. Reporting Obligations;
11. Resale restrictions;
12. Purchasers' rights;
13. Date and certificate.
In light of our previous positions, we are of the view that an offering memorandum delivered in the context of the prospectus exemption under section 2.9 of NI 45-106 should generally be considered as a "similar document" for the purpose of paragraph 4803(2)(a) of the Regulations. In our opinion, such an offering memorandum should normally contain information similar to, and be prepared for the same purpose as, a prospectus.
We would however point out that other conditions required by the Act and the Regulations have to be satisfied in order for a corporation to be able to elect to be a public corporation. We would note for example the requirement prescribed in paragraph 4803(2)(a) of the Regulations that the distribution of the shares must be a lawful distribution to the public in accordance with a prospectus, registration statement or similar document. A review of all the relevant facts and circumstances would be required to determine whether those conditions are satisfied in a particular situation. Consequently, nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or made any determination in respect of the conditions required by the Act or the Regulations that have to be satisfied in order for a particular corporation to be able to elect to be a public corporation.
We trust that the foregoing will be of assistance to you.
Yours truly,
Stéphane Prud'Homme, LL.B, M. Fisc.
Manager
Mergers and Acquisitions Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch