2015 Ruling 2015-0564981R3 - "cross-statute" amalgamation -- summary under Allowable Disposition

Background

ACo, which is a CCPC and an agricultural cooperative corporation that was incorporated under Act II, carries on both Business 1 and Business 2, each of which has a specified connection to its (farming) “ACo Members.” Real estate which is not used in Business 1 is used to conduct Business 2 or is rented out to third-party tenants. ACo’s outstanding shares consist of redeemable voting membership shares of the ACo Members ("ACo Membership Shares") and non-voting redeemable ACo Class C shares. The ACo Members are entitled to share in a distribution from ACo in a year (paid in cash or through the issuance of ACo Class C shares or the issuance of ACo Certificates of Indebtedness) based on their proportionate Business 1 sales for the year. ACo cannot redeem any ACo Class C shares within five years from the date of issue otherwise than pursuant to an allowable disposition, as defined in s. 135.1(1).

Completed transactions

ACo was issued SubCo shares on incorporating SubCo under Act I. ACo incorporated BCo under Act II, having a similar authorized share capital to ACo, and each ACo member subscribed for BCo Membership Shares.

Plan of Arrangement

Pursuant to a Plan of Arrangement:

1. The ACo Members will cease to be members of ACo.
2. ACo will redeem all the ACo Class C shares for cash.
3. ACo and SubCo will amalgamate to form Amalco under Act I. Amalco’s authorized capital will consist of voting non-participating Amalco Class A Shares and non-voting participating Amalco Class B Shares. On the amalgamation, all the property and liabilities of the predecessors (other than SubCo shares held by ACo) will become property and liabilities of Amalco, and each ACo Membership Shareholder will receive Amalco Class A and B Shares with an aggregate FMV equal to that of their ACo Membership Shares and their related membership in ACo on the assumption that ACo was liquidated for the FMV of its assets and the proceeds distributed to the ACo Membership Shareholders and the ACo Members.
4. Amalco will transfer all of the Business 1 assets to BCo in consideration for the assumption of ACo’s obligations and a portion of the Amalco Certificates of Indebtedness and the issuance to Amalco of BCo Membership Shares.
5. Amalco will make a capital distribution of the BCo Membership Shares to the Amalco Class A Shareholders.
6. BCo redeem's the incorporator's shares.

Immediately following the Plan of Arrangement, BCo will lease from Amalco the real estate needed in Business 1.

Purpose of transactions

Business 2 has no connection to the xxx activities of the ACo members. Under the current structure, ACo members who retire before the real estate is sold do not benefit from its appreciation and, conversely, new members could participate in gains that had accrued prior to their becoming members. The purpose of having ACo Members who own ACo Class C Shares cease their membership in ACo immediately before the redemption of those shares (in 1 above) is to ensure that such redemption of any shares which have been issued for less than five years will qualify as an allowable disposition, so that the Class C shares' aggregate redemption amount will be included in their income.

Rulings

• The redemption of any ACo Class C Shares less than five years after their issuance as described in 2 would occur as a consequence of an allowable disposition.
• The amalgamation will be considered to be an amalgamation within the meaning of s. 87(1).