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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: German Foreign Sub-LP and Foreign Sub-Holdco will be "merged" under German law with Foreign LP such that Foreign LP becomes the surviving entity. As a consequence of the merger, all of the assets and liabilities of Foreign Sub-LP and Foreign Sub-Holdco will be transferred to, or assumed by, Foreign LP. As a result of the merger, there will be dispositions of taxable Canadian property (TCP). The issue is whether the taxable capital gain on these dispositions of TCP will be exempt from tax by virtue of paragraph 5 of Article 13 of the Canada-German Income Tax Agreement (the "German Convention").
Position: Yes. The taxable capital gain on the dispositions of TCP will be exempt from tax by virtue of paragraph 5 of Article 13 of the German Convention.
Reasons: Paragraph 4 of Article 13 of the German Convention allows Canada to tax gains derived by a resident of Germany from the alienation of an interest in a partnership the value of which is derived principally from "immovable property" situated in Canada. For the purposes of paragraph 4, the term "immovable property" includes an interest in a partnership the value of which is derived principally from immovable property situated in Canada. (Thus, a partnership "look-through" rule is provided for.) However, the term "immovable property" does not include property (other than rental property) in which the business of the partnership was carried on.
In a previous advance ruling involving some of the same taxpayers, we concluded that the processing plants, buildings, machinery and equipment used by a limited partnership carrying on business in Canada in its mining and its processing business were "property.... in which the business of the.... partnership.... was carried on" in paragraph 4 of Article 13 of the German Convention. Consistent with the previous advance ruling, we maintained our view in the current advance ruling that such partnership interests do not constitute "immovable property" for the purposes of paragraph 4. Thus, paragraph 4 of Article 13 of the German Convention does not apply to the dispositions.
Since the gains, if any, from the dispositions of TCP do not fall under paragraphs 1 to 4 of Article 13 of the German Convention, such gains are exempt from tax in Canada by virtue of paragraph 5 of Article 13 of the German Convention.
XXXXXXXXXX
XXXXXXXXXX 1999-001058
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX (Mr. T)
XXXXXXXXXX (Foreign Holdco)
XXXXXXXXXX (Foreign LP)
XXXXXXXXXX (Foreign Sub-Holdco) and
XXXXXXXXXX (Foreign Sub-LP)
(collectively the "Parties")
Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above Parties. In your letters of XXXXXXXXXX, you provided additional information in respect of the proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
XXXXXXXXXX files his tax returns at the XXXXXXXXXX Tax Services Office and his social insurance number is XXXXXXXXXX. The other Parties have not filed any Canadian tax returns.
Definitions
In this letter, the following terms have the meanings specified:
(a) "Act" means the Income Tax Act R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act.
(b) "Adjusted cost base" has the meaning assigned by section 54.
(c) "Taxable Canadian property" has the meaning assigned by subsection 115(1) and 248(1).
(d) "Mr. T" means XXXXXXXXXX.
(e) XXXXXXXXXX.
(f) XXXXXXXXXX.
(g) "Foreign LP" means XXXXXXXXXX.
(h) "Foreign Sub-LP" means XXXXXXXXXX.
(i) "Foreign Holdco" means XXXXXXXXXX.
(j) "Foreign Sub-Holdco" means XXXXXXXXXX.
(k) "Foreign Opco" means XXXXXXXXXX.
Facts
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
1. To the best of your knowledge and that of the Parties involved, none of the issues involved in this request:
(a) is involved in an earlier return of the Parties or a related person;
(b) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the Parties or a related person;
(c) is under objection by the Parties or a related person; or
(d) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.
2. Mr. T is an individual resident in Germany for Canadian tax purposes and for purposes of the Canada-Germany Income Tax Convention (the "German Convention").
3. Mr. T is a limited partner of Foreign LP, a limited partnership created under German law. The general partner of Foreign LP is Foreign Holdco which was incorporated under German law and is a corporation resident in Germany for German income tax purposes and for purposes of the German Convention. Mr. T is entitled to XXXXXXXXXX% profits and/or losses of Foreign LP. Foreign Holdco is the general partner only and has no profit or loss participation in Foreign LP.
4. Foreign Sub-LP is a limited partnership created under German law. Foreign LP owns a XXXXXXXXXX% interest in Foreign Sub-LP. The other XXXXXXXXXX% interest is owned by Foreign Sub-Holdco.
5. Foreign Sub-Holdco was incorporated under German law and is a corporation resident in Germany for German income tax purposes and for purposes of the German Convention. Foreign Sub-Holdco is wholly owned by Foreign LP. Foreign Sub-Holdco's XXXXXXXXXX% interest in Foreign Sub-LP is the major asset of Foreign Sub-Holdco and represents substantially all of the fair market value of all of its properties.
6. Foreign Sub-LP is the general partner of XXXXXXXXXX, a general partnership created under the laws of XXXXXXXXXX and Foreign Sub-LP holds a XXXXXXXXXX% interest in XXXXXXXXXX actively carries on the business of XXXXXXXXXX. Foreign Sub-LP's other assets are cash and notes receivable, however the fair market value of such assets are immaterial to the issues relevant to this ruling request. Foreign Sub-LP's interest in XXXXXXXXXX represents substantially all of the fair market value of all of Foreign Sub-LP's properties.
The other XXXXXXXXXX% interest in XXXXXXXXXX is owned by the managing partner, XXXXXXXXXX, which is a corporation incorporated in the province of XXXXXXXXXX and is resident in Canada for Canadian tax purposes and for purposes of the German Convention.
7. The major assets of XXXXXXXXXX are:
(i) XXXXXXXXXX;
(ii) premises, machinery and equipment used to XXXXXXXXXX; and
(iii) accounts receivable and inventories directly related to the production and sale of XXXXXXXXXX products.
These assets represent substantially all of the fair market value of all of XXXXXXXXXX properties.
The business activities of XXXXXXXXXX are substantially unchanged XXXXXXXXXX.
8.
XXXXXXXXXX
9. Foreign Opco was incorporated under German law and is a corporation resident in Germany for German income tax purposes and for purposes of the German Convention. Foreign LP has a XXXXXXXXXX% interest in Foreign Opco. Foreign Opco is a large operating company and the fair market value of its direct or indirect interests in "taxable Canadian property" constitutes an insignificant proportion of the fair market value of its total assets.
10. Substantially all of the fair market value of Foreign LP's interest in Foreign Sub-LP is indirectly attributable to the fair market value of Foreign Sub-LP's interest in XXXXXXXXXX. The fair market value of Foreign LP's interest in Foreign Sub-LP is significantly in excess of its adjusted cost base to Foreign LP.
11. (a) Foreign Sub-LP's interest in XXXXXXXXXX is taxable Canadian property.
(b) Foreign LP's interest in Foreign Sub-LP is taxable Canadian property.
(c) Foreign Sub-Holdco's interest in Foreign Sub-LP is taxable Canadian property.
(d) Foreign LP's interest in Foreign Sub-Holdco is taxable Canadian property.
Proposed Transactions
12. It is proposed that Foreign Sub-LP and Foreign Sub-Holdco will be "merged" under German law with Foreign LP such that Foreign LP becomes the surviving entity. You have been advised by legal counsel in Germany that under German law a corporation (GmbH) can be merged with a partnership (KG). As a consequence of the merger, all of the assets and liabilities of Foreign Sub-LP and Foreign Sub-Holdco will be transferred to, or assumed by, Foreign LP.
13. Prior to the merger, requests for certificates of compliance (clearance certificates) will be filed by the appropriate Parties in accordance with the provisions of section 116 of the Act in respect of the following dispositions of taxable Canadian property arising as a result of the merger.
(a) the disposition of Foreign Sub-LP's interest in XXXXXXXXXX;
(b) the disposition of Foreign LP's interest in Foreign Sub-LP;
(c) the disposition of Foreign LP's interest in Foreign Sub-Holdco; and
(d) the disposition of Foreign Sub-Holdco's interest in Foreign Sub-LP.
14. Subsequent to the merger, Mr. T, Foreign Holdco and Foreign Sub-Holdco will comply with the requirements to file income tax returns in accordance with subsection 150(1) of the Act.
Purpose of the Proposed Transactions
Foreign Sub-LP and Foreign Sub-Holdco do not serve a useful economic purpose any longer. With the creation of Foreign LP in XXXXXXXXXX, the need for a separate entity between Foreign LP and XXXXXXXXXX no longer exists. Therefore, the merger proceedings described above are proposed in order to simplify the corporate structure and eliminate redundant administration requirements, etc.
Rulings Given
Provided that the above 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:
A. Provided that the assets of Foreign Sub-Holdco, Foreign Sub-LP, XXXXXXXXXX and Foreign LP are substantially the same as described in 5, 6, 7 and 10 above, respectively, at the time of the merger, the following property interests will not derive their value principally from immovable property within the meaning of that term in paragraph 4 of Article 13 of the German Convention.
(i) Foreign Sub-LP's interest in XXXXXXXXXX;
(ii) Foreign LP's interest in Foreign Sub-LP; and
(iii) Foreign Sub-Holdco's interest in Foreign Sub-LP.
B. As a result of the proposed merger mentioned in 12 above, there will be a disposition of Foreign Sub-LP's interest in XXXXXXXXXX; a disposition of Foreign LP's interest in Foreign Sub-LP; a disposition of Foreign LP's interest in Foreign Sub-Holdco; and a disposition of Foreign Sub-Holdco's interest in Foreign Sub-LP as described in 13 above.
The gains, if any, realized by Mr. T, Foreign Holdco and/or Foreign Sub-Holdco in respect of such dispositions, will be exempt from taxation in Canada pursuant to paragraph 5 of Article 13 of the German Convention.
C. As a result of the proposed transactions, in and by themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences described in the rulings given.
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on the Canada Customs and Revenue Agency (the CCRA) provided that the proposed transactions described in paragraph 12 above are completed by XXXXXXXXXX.
These 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.
Nothing in this advance ruling should be construed as implying that the CCRA has agreed to or reviewed:
(a) the determination of the fair market value or adjusted cost base of any property referred to herein; or
(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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