2001 Ruling 2000-0052953 - Resident of a Contracting State

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: Whether election by a UK corporation to have its shipping activities taxed under the new UK "tonnage tax" regime would cause it not to be a resident of the UK under the Canada-UK Income Tax Convention.

Position: No

Reasons: See detailed issue sheet

XXXXXXXXXX 2000-005295

Attention: XXXXXXXXXX

XXXXXXXXXX, 2001

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

XXXXXXXXXX files its T2 Return with the XXXXXXXXXX Tax Centre.

Definitions

In this ruling the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, chapter 1, R.S.C. 1985 (5th supp.), as amended as at the date hereof, and all terms used herein that are defined in the Act have the meaning given in such definition unless otherwise specified, and all references to sections or components thereof are references to the Act unless otherwise specified;

(b) "CBCA" means Canada Business Corporation Act;

(c) "CCRA" means Canada Customs and Revenue Agency;

(d) "Canadian corporation" has the meaning assigned by subsection 89(1);

(e) "controlled foreign affiliate" has the meaning assigned by subsection 95(1);

(f) "earnings" has the meaning assigned by subsection 5907(1) of the Regulations;

(g) "exempt earnings" has the meaning assigned by subsection 5907(1) of the Regulations;

(h) "public corporation" has the meaning assigned by subsection 89(1);

(i) "Regulation(s)" means the Income Tax Regulations, Consolidated Regulations of Canada, Chapter 945 (Consolidated as of December 31, 1997) proclaimed in force August 15, 1979, as amended to July 15, 2000;

(j) "taxable Canadian corporation" as the meaning assigned by subsection 89(1); and

(k) "the UK Convention" means the Canada-UK Income Tax Convention..

Facts

1. XXXXXXXXXX is a taxable Canadian corporation XXXXXXXXXX incorporated under the CBCA. XXXXXXXXXX became the parent of the XXXXXXXXXX ("XXXXXXXXXX Group") as a result of a XXXXXXXXXX corporate reorganization XXXXXXXXXX.

2. XXXXXXXXXX wholly owns a Canadian subsidiary, XXXXXXXXXX.

3. XXXXXXXXXX.

4. XXXXXXXXXX.

5. XXXXXXXXXX is incorporated in the UK. XXXXXXXXXX is resident in the UK under common-law and UK corporate tax legislation and will continue to be so resident at all relevant times for purposes of this ruling request. XXXXXXXXXX is liable to tax in the UK on its world-wide income.

6. XXXXXXXXXX is a "controlled foreign affiliate" for purposes of the Act.

7. Recent legislated changes to the UK Corporation Tax include provisions specifically for shipping companies, hereinafter referred to as - tonnage tax. The tonnage tax was introduced by the UK to encourage the resurgence of the UK shipping industry. These provisions are substantially the same as provisions introduced by the Netherlands, Germany and Denmark.

8. Tonnage tax requires that the ships be strategically and commercially managed in the UK.

9. The following types of activities will qualify for tonnage tax:

a) Tugs,
b) Vessels providing transport for services at sea,
c) Merchant adventurers,
d) Pooling on liner services,
e) Secondary activities,
f) Passengers,
g) Gambling,
h) Sale of luxury goods,
i) Slot charters,
j) Incidental activities, and
k) Distributions of overseas shipping companies.

10. In general, tonnage tax requires the calculation of a shipping company's tax liability, under the UK corporation tax, to be based on the net tonnage of each of the qualifying ships (regardless of location) operated by the company. A company will pay UK corporation tax at the normal rates as required under the UK corporation tax legislation. Activities that do not qualify are not eligible under the tonnage tax legislation.

11. Once the election has been made to compute corporate taxes using the tonnage tax legislation, the election will last for an initial 10 year period.

12. The shipping profits derived under the tonnage tax regime will be ring fenced. There are specific anti-avoidance provisions in place which prevent a company from transferring in profits from outside the regime (such as non-shipping income or income not ancillary to the shipping operations), or from transferring losses outside the regime. There is also a "sweep-up" anti-avoidance provision aimed at moves to exploit the regime by complying with the form rather than the substance of the ring-fence rules.

13. To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this request:

a) is involved in an earlier return of the taxpayers or a related person,

b) is being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayers or a related person,

c) is under objection,

d) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired, or

e) is the subject of a ruling previously issued by the Directorate.

Proposed Transaction

14. XXXXXXXXXX will elect under the relevant UK corporation tax provisions to have the profits in respect of its qualifying shipping activities computed under the tonnage tax regime. This election will be effective for the accounting period of XXXXXXXXXX beginning XXXXXXXXXX.

Purpose of the Proposed Transaction

The purpose for electing under the tonnage tax regime is to allow XXXXXXXXXX to be taxed on a competitively similar basis to that of other international shipping companies located in Germany, Denmark and The Netherlands (all are countries which have a tonnage tax regime similar to that legislated in the UK). There is no other economic or other advantage or benefit conferred on XXXXXXXXXX or its parent.

Ruling Given

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

A. The election by XXXXXXXXXX to be subject to the UK tonnage tax regime will not, in and by itself, preclude XXXXXXXXXX from being a resident of the UK for purposes of the UK Convention or preclude XXXXXXXXXX from being "resident in a designated treaty country" for purposes of Part LIX of the Regulations.

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and is binding on the CCRA provided that the proposed transaction is completed by XXXXXXXXXX.

This ruling is based on the Act and the UK Convention in their present form and does not take into account any proposed amendments to the Act or the UK Convention which, if enacted into law, could have an effect on the ruling provided herein.

Comments

Nothing in this 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 ruling given above.

In particular, nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed whether XXXXXXXXXX "earnings" would be considered "exempt earnings" within the meaning of subsection 5907(1) of the Regulations. Such a determination is a question of fact based on whether/where XXXXXXXXXX carries on an active business and the location of any permanent establishments of XXXXXXXXXX in respect of which the income of such business(es) is attributable.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch