Principal Issues: Whether changes in monetization arrangements entered into in XXXXXXXXXX to provide for the right to accelerate the maturity date under the forward contract in respect of part of the reference shares would trigger the application of section 80.6.
Position: No.
Reasons: According to the law.
XXXXXXXXXX 2022-093090
XXXXXXXXXX
Dear Sir,
Subject: Request for Advance Income Tax Ruling
XXXXXXXXXX.
This is in response to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of XXXXXXXXXX. We have also taken into account the information you have sent to us by email, as well as additional information submitted during telephone conversations (XXXXXXXXXX).
To the best of your knowledge and that of the taxpayers involved in the transactions, none of the proposed transactions or matters covered by this request are the same as or substantially comparable to any transaction or matter that:
i. was addressed in a previously filed tax return of the taxpayer, or a related person, that:
A. is under review by the Canada Revenue Agency with respect to that return;
B. is the subject of an objection by the taxpayer or the related person; or
C. is the subject of a legal proceeding, either in progress or completed, involving the individual or the related person; or
ii. has been the subject of an advance ruling request previously reviewed by the Income Tax Rulings Directorate.
Definitions
Unless otherwise indicated:
i. all statutory references are to provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the "Act")
ii. all words and phrases used in this request and defined in the Act shall have the meaning given to them in the Act;
iii. all monetary amounts are in Canadian dollars
iv. words importing the singular number shall include the plural and vice versa, where the context so requires.
In this letter, with the exception of paragraph 16, the parties involved in the Proposed Transactions (described below) will be identified as follows:
"Aco" means XXXXXXXXXX Corporation;
"FI" refers to the XXXXXXXXXX.
"Holdco A" means the XXXXXXXXXX Corporation. (formerly named XXXXXXXXXX.);
The following abbreviations, phrases and terms have the meanings described below.
"CCPC" means "Canadian-controlled private corporation" as defined in subsection 125(7).
"Class A Shares" means the Class A Subordinate Shares of the capital stock of Aco, currently listed on the XXXXXXXXXX under the symbol "XXXXXXXXXX" and on the XXXXXXXXXX under the symbol "XXXXXXXXXX";
"Closing Price" has the meaning set forth in Section 1.1.9 of the Forward Contract;
"CRA" means the Canada Revenue Agency;
"Forward Contract" means the agreement between Holdco A and FI, as described in paragraphs 10 through 13 of Advance Ruling 2007-0246461R3;
"Loan Agreement" means the agreement between Holdco A and FI, as described in paragraphs 15 to 18 of Advance Ruling 2007-0246461R3;
"Maturity Date" has the meaning set forth in Section 1.1.12 of the Forward Contract and Schedule A of the Loan Agreement;
"Monetization Agreement" refers to the agreements entered into on XXXXXXXXXX between Holdco A and FI, as described in advance rulings 2007-0246461R3 and 2008-0276821R3;
"Proposed Transactions" means the transactions described in paragraphs 12 through 14 below;
"Public Corporation" has the meaning set out in subsection 89(1);
"Reference Price" as defined in Section 1.1.9 of the Forward Contract;
"Reference Shares" means, with respect to Holdco A, the XXXXXXXXXX Class A Shares of the capital stock of Aco described in Advance Ruling 2007-0246461R3, as amended in Advance Ruling 2008-0276821R3;
"TCC" means "taxable Canadian corporation" as defined in subsection 89(1);
"Termination Date" has the meaning set forth in Section 1.1.15 of the Forward Contract, being the date on which the Maturity Date is accelerated pursuant to certain events as provided in the Forward Contract;
Facts
1. Holdco A is a CCPC and a TCC.
2. Aco is a public corporation and a TCC.
3. During the period from XXXXXXXXXX to XXXXXXXXXX, the market price of the Class A shares on the XXXXXXXXXX Exchange ranged from $XXXXXXXXXX (low) to $XXXXXXXXXX (high). At the close of business on XXXXXXXXXX, the trading price was $XXXXXXXXXX.
4. On the date hereof, the Monetization Agreement is still in effect and has not been amended except as described in Advance Ruling 2021-0880641R3 to replace the XXXXXXXXXX Reference Index with a comparable index following the cessation of its publication by the Issuer in XXXXXXXXXX.
5. Under the terms of the Forward Contract, Holdco A will be obligated to make a payment to FI if the Closing Price of the Reference Shares on the settlement date was higher than the Reference Price. If the Closing Price of the Reference Shares on the settlement date is lower than the Reference Price, then FI shall have the obligation to make a payment to Holdco A.
6. At the end of the period ending XXXXXXXXXX, the Reference Price for each Reference Share was $XXXXXXXXXX. The Reference Price for the XXXXXXXXXX Reference Shares of Holdco A totaled $XXXXXXXXXX.
7. Under the Loan Agreement, the loan amount is divided between Tranche I and Tranche II. Currently, the loan amount for Tranche I and II totals $XXXXXXXXXX, an amount equal to the Reference Price for the XXXXXXXXXX Reference Shares. The Maturity Date under the Loan Agreement corresponds to the Maturity Date under the Forward Contract, i.e. XXXXXXXXXX.
8. Upon completion of the Forward Contract and repayment of the Loan, Holdco A may settle its borrowing under the Loan Agreement and its obligations under the Forward Contract by delivering the Reference Shares to FI (physical settlement) or by making a cash payment without having to deliver such shares.
9. Article 2.3 of the Loan Agreement provides that Holdco A may repay the Loan in whole or in part before the Maturity Date. The Loan Agreement also provides for an "Early Termination Fee".
10. Section 5.2.1 of the Forward Contract gives Holdco A the right to terminate the Forward Contract in full before the Maturity Date, but not in part.
11. The interpretation and application of the various agreements between Holdco A and FI relating to the Monetization Agreement is governed by the laws of the Province of XXXXXXXXXX and the federal laws applicable therein.
Proposed Transactions
12. Section 5.2.1 of the Forward Contract will be amended to (i) replace the phrase "shall have the right to terminate the Contract prior to maturity" with the italicized phrase above and (ii) add the underlined phrase below:
"Subject to Section 5.2.2, the Counterparty may require acceleration of the Maturity Date in respect of all or any part of the Reference Shares upon thirty (30) Business Days' written notice. Following such notice, the effective date of termination set forth in such notice shall constitute the Termination Date and the adjustments set forth in Section 5.3.1 shall be made with respect to such Termination Date. In the event of an acceleration of only a portion of the Reference Shares, such adjustments shall be effective only with respect to the accelerated portion and the Contract shall continue with respect to the remaining Reference Shares.
13. 13. Section 5.3.2 of the Forward Contract will be amended to add the following underlined language:
"In the event of a partial termination pursuant to Article 4.2.2.3 and Article 5.2.1, the adjustment provisions set forth in Article 5.3.1 shall apply with respect to the portion of the Reference Shares in respect of which the Contract is terminated. The Agreement shall continue in respect of the remaining Reference Shares which shall, from the Termination Date, constitute the Reference Shares for the purposes of the Agreement.
For greater certainty, pursuant to Section 5.4 of the Forward Contract, Holdco A may elect to settle its obligations following a partial termination by cash payment or by physical settlement.
14. The amendment agreement to the Monetization Agreement will state that the parties (Holdco A and FI) have agreed that the amendments described in paragraphs 12 and 13 above will not effect novation.
Purpose of the Proposed Transactions
15. The purpose of the Proposed Transactions is to ensure that the Monetization Agreement allows for the withdrawal of only a portion of the Reference Shares prior to the Maturity Date.
Additional Information
16. The main contact details for the taxpayer subject to the advance ruling are:
XXXXXXXXXX
Ruling
Provided that the statement of relevant facts, the Proposed Transactions and the Additional Information constitute full disclosure of all relevant facts and proposed transactions and that the Proposed Transactions are carried out as described above, our decision is as follows:
To the extent that the Proposed Transactions do not have the effect of novating the Monetization Agreement, they will not engage the application of section 80.6.
This ruling is subject to the limitations and general conditions set out in Information Circular 70-6R12 dated April 1, 2022, issued by the CRA and is binding on the CRA provided that the Proposed Transactions described in paragraphs 12 to 14 are completed by XXXXXXXXXX. These rulings are based on the current Act and do not take into account any proposed amendments to the Act.
Other Comments
The rulings should not be construed as an acquiescence on the part of the CRA that we have considered the other tax consequences that may result from the Proposed Transactions set out herein.
The statement of our fees for the time spent on your case will be sent to you under separate cover.
Best regards,
XXXXXXXXXX
For the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch