2008 Ruling 2007-0255241R3 - Entity Classification

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: Whether the proposed XXXXXXXXXX cooperative will be treated as a corporation for purposes of the Act.

Position: Yes.

Reasons: The provisions of the foreign legislation and the articles creating the cooperative support the conclusion that this cooperative will be treated as a corporation for purposes of the Act.

XXXXXXXXXX 							2007-025524

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

This is in response to your XXXXXXXXXX request, and your XXXXXXXXXX revised request, for an advance income tax ruling on behalf of the above.

Unless otherwise stated, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c.1, (5th Supplement) (the "Act"), as amended to the date of this advance income tax ruling.

The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions described in the documents submitted with your request that are not set out below do not form part of the facts and proposed transactions on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

(a) "Parent" means XXXXXXXXXX .;

(b) "Subco" means XXXXXXXXXX .;

(c) "Foreignco" means XXXXXXXXXX ;

(d) "DC" means XXXXXXXXXX .;

(e) "Newco" means XXXXXXXXXX .;

(f) "NRCO #1" means XXXXXXXXXX ;

(g) "NRCO #2" means XXXXXXXXXX .;

(h) "Articles" means the articles, described in paragraph 8 below, attached to the notarial deed creating DC;

(i) "CRA" means the Canada Revenue Agency;

(j) "CBCA" means the Canada Business Corporations Act;

(k) "Foreign Country #1" means XXXXXXXXXX ;

(l) "Foreign Country #2" means XXXXXXXXXX ;

(m) "Foreign Legislation" means the XXXXXXXXXX ;

(n) "capital property" has the meaning assigned by section 54 of the Act;

(o) "foreign affiliate" has the meaning assigned by subsection 95(1) of the Act;

(p) "controlled foreign affiliate" has the meaning assigned by subsection 95(1) of the Act;

(q) "public corporation" has the meaning assigned by subsection 89(1) of the Act;

(r) "related persons" has the meaning assigned by subsection 251(2) of the Act;

(s) "share" has the meaning assigned by subsection 248(1) of the Act;

(t) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act; and

(u) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.

Facts

1. Parent is a public corporation and a taxable Canadian corporation that is resident in Canada. XXXXXXXXXX .

2. Subco is a corporation incorporated pursuant to the CBCA. Subco is a subsidiary wholly-owned corporation of Parent and a taxable Canadian corporation.

3. Foreignco is a corporation formed pursuant to the Foreign Legislation. Subco owns all of the issued and outstanding shares of Foreignco. Foreignco is resident in Foreign Country #1. Foreignco is a foreign affiliate and a controlled foreign affiliate of Subco. The shares of Foreignco are held as capital property by Subco.

4. NRCO #1 is a company resident in Foreign Country #1 for the purposes of the Act. All of the issued and outstanding shares of NRCO #1 are owned by Foreignco.

5. NRCO #2 is a company resident in Foreign Country #2 for the purposes of the Act. All of the issued and outstanding shares of NRCO #2 are owned by Foreignco.

6. Parent and Subco organized DC on XXXXXXXXXX . DC is a cooperative formed in Foreign Country #1 pursuant to the provisions of the Foreign Legislation. DC was established by a notarial deed pursuant to the Foreign Legislation and is registered with the appropriate "commercial register" in Foreign Country #1. Upon registration of the notarial deed with the "commercial register", the Foreign Legislation recognized DC as a legal entity that exists separate and apart from Parent and Subco. Parent's initial capital contribution to DC was XXXXXXXXXX euros and Subco's initial capital contribution to DC was XXXXXXXXXX euros.

7. Pursuant to the Foreign Legislation:

(a) with respect to the law of property, rights and interests, DC is considered to be equivalent to a natural person;

(b) subject to the restrictions under its articles, the board of directors is charged with the management of DC; and

(c) where the articles of DC so provide, the board of directors have the authority to commit or otherwise bind DC to agreements and/or undertakings.

8. The Articles of DC include the following:

(a) Each member of DC must enter into a membership agreement with DC.

(b) DC will carry on its business in its own name and at its own expense and risk.

(c) Admission of new members requires a unanimous vote of all existing members of DC.

(d) Each member must make capital contributions to DC as unanimously agreed upon in writing by all members.

(e) The management of DC has the authority to represent DC.

(f) All members, if not suspended, are entitled to attend any general meeting of members and shall be entitled to vote thereat. The number of votes that a member may cast at a general meeting of members is equal to the percentage of ownership in DC held by such member.

(g) The retained profits of DC will be available to DC for its use unless the members, at a general meeting, vote to distribute all, or a portion of, such retained profits. A distribution of retained profits requires unanimous written consent from all members of DC. With the exception of retained profits that were allocated, but not paid, to former members, the distribution of any retained profits will be proportional to the ownership percentage of each member of DC at the time of such distribution.

(h) The members and former members of DC are not liable for any debts or losses incurred by DC that are in excess of their required contributions to the capitalization of DC.

9. To the best of your knowledge and that of Parent and Subco, none of the issues involved in this ruling letter:

(i) is in an earlier return of Parent or Subco or any related persons of Parent or Subco,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of Parent or Subco or any related persons of Parent and Subco,

(iii) is under objection by Parent or Subco or any related persons of Parent or Subco, or

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

Proposed Transactions

10. DC and Foreignco will form Newco. Newco will be a corporation resident in Foreign Country #1 for the purposes of the Act, Foreign Country #1's domestic income tax law and the Treaty. DC will subscribe for common shares of Newco for nominal consideration. Foreignco will subscribe for redeemable preferred shares of Newco for nominal consideration. The redeemable preferred shares will be redeemable at the option of Foreignco.

11. Foreignco will transfer the shares of NRCO #1 and NRCO #2 to Newco. Foreignco will receive additional redeemable preferred shares of Newco as the sole consideration for the shares of NRCO #1 and NRCO #2 transferred by it to Newco. These redeemable preferred shares will have a redemption value that is equal to the fair market value of the shares of NRCO #1 and NRCO #2 at the time of their transfer to Newco.

Purpose of the Proposed Transactions

12. The utilization of DC as a holding company will facilitate a more efficient return of capital to its members and allows for a more tax-efficient repatriation of funds from DC to Parent and Subco as DC will not be required to withhold any tax in Foreign Country #1 on any dividends paid to Parent or Subco.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. DC, being formed in accordance with the Foreign Legislation and having as its articles the terms outlined in paragraph 8 above, will be treated as a corporation for purposes of the Act.

B. The comments contained in paragraph 3 of Interpretation Bulletin IT-392 regarding the meaning of the term "share" will apply to DC such that Parent's XXXXXXXXXX % membership interest in DC and Subco's XXXXXXXXXX % membership interest in DC will be considered to be XXXXXXXXXX share and XXXXXXXXXX shares, respectively, of the capital stock of DC.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5, issued by the CRA on May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX .

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein. For greater certainty, the CRA has not:

(a) made any determination as to whether NRCO #1 and NRCO #2 are corporations for purposes of the Act;

(b) made any determination as to the fair market value of the shares of NRCO #1 and NRCO #2 at the time of Foreignco's transfer thereof to Newco; or

(c) made any determination as to whether Newco is a corporation for purposes of the Act.

The above-noted 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.

Yours truly,

XXXXXXXXXX
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch