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: A. Will the members holding membership units of the Dutch Cooperative (DC) be considered to hold "shares" for the purposes of the Act?
B. Will the BV be considered to have disposed of any of its property on its conversion to a DC?
C. Will the cancellation of the shares in the capital of BV on the Conversion in exchange for a membership interest in the DC occur on a tax-deferred basis for the purposes of the Act, pursuant to section 86? D. Does 85.1(3) of the Act apply to the transfer(s) by Holdco of the shares in the capital of the FAcos to DC? E. Does 85.1(3) of the Act apply to the transfer(s) by Newco of the shares in the capital of the FAcos to DC? F. Does 95(6) of the Act apply to the Conversion or the Transfers?
Position: A. Yes B. No C. Yes D. Yes E. Yes F. No
Reasons: A. As long as the DC is treated as a corporation, then the comments in paragraph 3 of IT-392 will apply such that the members of the DC will be considered to own "shares". B. There is no disposition of its property on the conversion from the BV to the DC since the DC is the same corporation as the BV. C. The criteria in 86(1) have been met. D. The criteria in 85.1(3) have been met. E. The criteria in 85.1(3) have been met.
F. Based on the facts and circumstances surrounding the proposed transactions, there is no reason that 95(6) should be triggered.
XXXXXXXXXX
2010-037380
XXXXXXXXXX , 2010
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in response to your XXXXXXXXXX revised request for an advance income tax ruling on behalf of the above-referenced entities.
The rulings given herein is based solely on the facts, proposed transactions and the purposes of the proposed transactions described below. Facts and proposed transactions in the documents submitted with your request not described below do not form part of the facts and proposed transactions on which this ruling letter 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:
"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date of this advance income tax ruling;
"Active business" has the meaning assigned by subsection 95(1) of the Act;
"Adjusted cost base" ("ACB") has by virtue of subsection 248(1) of the Act, the meaning assigned by section 54 of the Act;
"Articles" means the Articles included in the notarial deed converting BV into DC;
"BV" means XXXXXXXXXX , a private limited liability company under Dutch law;
"Canco" means XXXXXXXXXX Business Number XXXXXXXXXX
XXXXXXXXXX Tax Services Office;
"Capital property" has by virtue of subsection 248(1) of the Act, the meaning assigned by section 54 of the Act;
"CBCA" means the Canada Business Corporations Act;
"Controlled foreign affiliate" has by virtue of subsection 248(1) of the Act, the meaning assigned by subsection 95(1) of the Act;
"Conversion" has the meaning assigned thereto in paragraph 11 below;
"CRA" means the Canada Revenue Agency;
"DC" means XXXXXXXXXX , the cooperative under Dutch law to be created on the conversion of BV described in paragraph 11 below;
"Exchanges" means XXXXXXXXXX ;
"Excluded property" has the meaning assigned by subsection 95(1) of the Act;
"FAcos" means certain controlled foreign affiliates of Canco resident in or carrying on business in various XXXXXXXXXX countries;
"Forco" means XXXXXXXXXX ;
"Foreign affiliate" has, by virtue of subsection 248(1) of the Act, the meaning assigned by subsection 95(1) of the Act;
"Foreign Country" means the Netherlands;
"Foreign Country 1" means XXXXXXXXXX ;
"Foreign Country 2" means XXXXXXXXXX ;
"Foreign Legislation" means the Dutch Civil Code;
"Holdco" means XXXXXXXXXX Business Number XXXXXXXXXX
XXXXXXXXXX Tax Services Office;
"Investment business" has the meaning assigned by subsection 95(1) of the Act;
"L Co." means XXXXXXXXXX ;
"Newco" means A new corporation to be incorporated by Holdco as part of the proposed transactions as described in paragraph 8 below;
"Non-resident" has the meaning assigned by subsection 248(1) of the Act;
"Parent" means XXXXXXXXXX Business Number XXXXXXXXXX
XXXXXXXXXX Tax Services Office;
"Public Corporation" has, by virtue of subsection 248(1) of the Act, the meaning assigned by subsection 89(1) of the Act;
"Regulations" means the Income Tax Regulations;
"Ruling" means this advance income tax ruling;
"Share" has the meaning assigned by subsection 248(1) of the Act;
"Subsidiary wholly-owned has the meaning assigned by subsection 248(1)
Corporation" of the Act;
"Taxable Canadian corporation" has, by virtue of subsection 248(1) of the Act, the meaning assigned by subsection 89(1) of the Act;
"Treaty" means the Canada-Netherlands Income Tax Convention;
"Treaty 1" means the Canada-XXXXXXXXXX Income Tax Convention; and
"Treaty 2" means the Canada-XXXXXXXXXX Income Tax Convention.
Facts:
1. Parent is a taxable Canadian corporation and a public corporation. Shares in the capital stock of Parent are widely-held and traded on the Exchanges.
2. Canco is a XXXXXXXXXX corporation and a subsidiary wholly-owned corporation of Parent. Canco is a taxable Canadian corporation XXXXXXXXXX .
3. Holdco is a taxable Canadian corporation and a subsidiary wholly-owned corporation of Canco.
4. L Co. is a non-resident corporation for the purposes of the Act and is resident in Foreign Country 1 for the purposes of Treaty 1. L Co. is a subsidiary wholly-owned corporation and a controlled foreign affiliate of Holdco. Holdco holds its shares in the capital of L Co. as capital property.
5. BV is a non-resident corporation for the purposes of the Act and is resident in Foreign Country for the purposes of the Treaty. BV is a subsidiary wholly-owned corporation of L Co. and a controlled foreign affiliate of Holdco. L Co. holds its shares in the capital of BV as capital property.
6. Forco is a non-resident corporation for the purposes of the Act and is resident in Foreign Country 2 for the purposes of Treaty 2. Forco is a direct and indirect wholly-owned subsidiary of Holdco and a controlled foreign affiliate of Holdco. XXXXXXXXXX . Forco carries on XXXXXXXXXX business in Foreign Country 2 that is an active business, and not an investment business. Forco's shares are "excluded property" to BV.
7. The FAcos are controlled foreign affiliates of Canco, and are resident in or carrying on business in various countries in XXXXXXXXXX . Canco holds its shares of the FAcos as capital property.
Proposed Transactions:
It is proposed that the following transactions will occur in the order in which they are described:
8. Holdco will cause Newco to be incorporated under the CBCA and will subscribe for one common share in the capital of Newco for $XXXXXXXXXX .
9. L Co. will be liquidated and dissolved pursuant to the laws of Foreign Country 1, and on the liquidation and dissolution all of the liabilities of L Co. will be assumed by Holdco and all of the property of L Co., including the shares of BV held by L Co., will be distributed to Holdco.
10. Holdco will transfer XXXXXXXXXX % of the shares in the capital of BV to Newco in exchange for the issuance by Newco to Holdco of one additional common share in the capital of Newco. Holdco and Newco will file an election in accordance with subsection 85(6) to have the provisions of subsection 85(1) apply to such transfer, and the agreed amount in such election will be the lesser of the adjusted cost base to Holdco of the transferred shares and the fair market value of such shares.
11. BV will convert into DC pursuant to the Foreign Legislation (the "Conversion"). DC will be registered with the appropriate commercial register in the Foreign Country. By virtue of the execution of the notarial deed effecting the conversion before a notary, DC will be regarded as a legal entity under the Foreign Legislation that continues to exist separate and apart from Holdco and Newco.
12. Pursuant to the Foreign Legislation, DC will be the same corporation as, and a continuation of, BV, and BV will not be considered to have disposed of any of its property to any person on the conversion of BV into DC.
13. On the conversion of BV into DC, the issued share capital of BV will be cancelled and Holdco and Newco will automatically become members of DC holding membership interests proportionate to their respective shareholdings in BV immediately before such conversion.
14. Pursuant to the Foreign Legislation:
(a) with respect to the law of property, rights and interests, DC will have a separate legal existence and will be considered to be equivalent to a natural person;
(b) subject to the restrictions under its Articles, the board of directors of DC will be charged with the management of DC; and
(c) where the Articles so provide, the board of directors of DC have the authority to, in general terms, commit or otherwise bind DC to agreements and/or undertakings.
15. The Articles provide that:
(a) The members of DC may enter into membership agreements 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 unanimous consent of all existing members of DC.
(d) Each member must make capital contributions to DC as unanimously agreed upon 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 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. Each member entitled to vote at any general meeting of members will at all times be entitled to at least one vote.
(g) The retained profits of DC are available to DC for its use unless the members vote to distribute all, or a portion of, such retained profits. A distribution of retained profits will only be made with the unanimous agreement of all members of DC. 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.
16. In one or more separate transfer(s), Canco will transfer all of the issued and outstanding shares in the capital of the FAcos to Holdco in exchange for the issuance by Holdco to Canco of additional common shares in the capital of Holdco. Canco and Holdco will elect in accordance with subsection 85(6) to have the provisions of subsection 85(1) apply to such transfer(s), and the agreed amount in such election will be the lesser of the adjusted cost base to Canco of the transferred shares and the fair market value of such shares.
17. In one or more separate transfer(s), Holdco will transfer XXXXXXXXXX % of the shares in the capital of each of the FAcos to Newco in exchange for the issuance by Newco to Holdco of additional common shares in the capital of Newco. Holdco and Newco will elect in accordance with subsection 85(6) to have the provisions of subsection 85(1) apply to such transfer(s), and the agreed amount in such election will be the lesser of the adjusted cost base to Holdco of the transferred shares and the fair market value of such shares.
18. In one or more separate transfer(s), Holdco will transfer the remaining shares in the capital of the FAcos (being all such shares except for the shares transferred to Newco in paragraph 17 above) to DC. As sole consideration for the transfer, DC will increase Holdco's membership interest in DC by an amount that will be equal to the fair market value of the FAcos' shares transferred by Holdco to DC.
In respect of each transfer, Holdco, in its tax return for the taxation year in which the transfer takes place, will file a notice stating that it intends to have the roll-over provisions in subsection 85.1(3) apply to the transfer.
19. In one or more separate transfer(s), Newco will transfer the shares in the capital of the FAcos transferred to it by Holdco as described in paragraph 17 above to DC. As sole consideration for the transfer, DC will increase Newco's membership interest in DC by an amount that will be equal to the fair market value of the FAcos' shares transferred by Newco to DC.
In respect of each transfer, Newco, in its tax return for the taxation year in which the transfer takes place, will file a notice stating that it intends to have the roll-over provisions in subsection 85.1(3) apply to the transfer.
Purpose of the Proposed Transactions:
20. The purpose of the proposed transactions is to create a holding structure for the shares of Forco and the FAcos that is administratively efficient, while facilitating a tax-efficient repatriation of funds to Newco, Holdco, Canco and Parent, as DC will not be required to withhold any tax in Foreign Country on any dividends paid to Newco and Holdco. The current holding structure for the shares of Forco and the FAcos facilitates such a tax-efficient repatriation of funds, but is administratively burdensome.
21. The Taxpayers are of the view that DC will be a corporation for the purposes of the Act, since the preponderance of its characteristics, as set out in the Articles and the Foreign Legislation, will be those of a corporation.
22. None of the proposed transactions described in paragraphs 8 to19 above is part of a series of transactions or events the purpose of which is to dispose of the shares of the FAcos to a person who, immediately after the series of transactions or events, will be a person with whom Holdco, Newco, Canco or Parent is dealing at arm's length.
Rulings Given:
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our Rulings are as follows:
We confirm that:
A. The comments contained in paragraph 3 of Interpretation Bulletin IT-392 ("IT-392") regarding the meaning of the term "share" will apply to DC such that Holdco will be considered to own XXXXXXXXXX shares of DC, and Newco will be considered to own XXXXXXXXXX share of DC.
B. On its conversion into DC, BV will not be considered to have disposed of any of its property for the purposes of the Act.
C. The cancellation of the shares in the capital of BV on the Conversion in exchange for the issuance of the membership interests in DC will occur on a tax-deferred basis for the purposes of the Act, pursuant to subsection 86(1), such that:
(i) the cost to Holdco of the shares of DC receivable as consideration for the cancellation of the BV shares will be deemed to be equal to Holdco's adjusted cost base of its shares of BV immediately before the Conversion;
(ii) Holdco shall be deemed to have disposed of the BV shares for proceeds of disposition equal to the cost of the DC shares receivable by Holdco referred to in C(i) above;
(iii) the cost to Newco of the shares of DC receivable as consideration for the cancellation of the BV shares will be deemed to be equal to Newco's adjusted cost base of its shares of BV immediately before the Conversion; and
(iv) Newco shall be deemed to have disposed of the BV shares for proceeds of disposition equal to the cost of the DC shares receivable by Newco referred to in C(iii) above.
D. The provisions of subsection 85.1(3) of the Act will apply to the transfer(s) by Holdco of the shares in the capital of the FAcos to DC described in paragraph 18 above
(the "First Transfer"), such that:
(i) the cost to Holdco of the shares of DC receivable as consideration for the First Transfer will be deemed to be equal to Holdco's adjusted cost base of its shares of the FAcos immediately before the First Transfer;
(ii) Holdco will be deemed to have disposed of its shares of the FAcos for proceeds of disposition equal to the cost to Holdco of the shares of DC referred to in D(i) above; and
(iii) the cost to DC of the shares of the FAcos acquired from Holdco will be deemed to be equal to Holdco's proceeds of disposition of the shares of the FAcos referred to in D(ii) above.
E. The provisions of subsection 85.1(3) of the Act will apply to the transfer(s) by Newco of the shares in the capital of the FAcos to DC described in paragraph 19 above (the "Second Transfer", and together with the First Transfer, the "Transfers"), such that:
(i) the cost to Newco of the shares of DC receivable as consideration for the Second Transfer will be deemed to be equal to Newco's adjusted cost base of its shares of the FAcos immediately before the Second Transfer;
(ii) Newco will be deemed to have disposed of its shares of the FAcos for proceeds of disposition equal to the cost to Newco of the shares of DC referred to in E(i) above; and
(iii) the cost to DC of the shares of the FAcos acquired from Newco will be deemed to be equal to Newco's proceeds of disposition of the shares of the FAcos referred to in E(ii) above.
F. Subsection 95(6) of the Act will not apply to the Conversion or the Transfers.
These Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Revenue Agency ("CRA") provided the proposed transactions are carried out before XXXXXXXXXX.
Nothing in this letter should be construed as implying that the Canada Revenue Agency has reviewed, accepted or otherwise agreed to any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the Rulings given above.
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 into law, could have an effect on the Rulings provided herein.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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