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:
1) Will debts of a trust be foreign property for purposes of Part XI?
2) Will GAAR apply to this scenario?
Position: 1) No. 2) No.
Reasons:
1) Nothing in the Act to include debts of a trust as foreign property.
2) The GAAR Committee ruled that there is no misuse or abuse of the Act.
XXXXXXXXXX 2001-006488
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. XXXXXXXXXX (the "Corporation") is a corporation governed by the Business Corporations Act XXXXXXXXXX. The Corporation is exempt from tax under the Income Tax Act (the "Act") pursuant to paragraph 149(1)(o.2)(iii) of the Act and is subject to Part XI of the Act.
The Corporation's current mailing address is XXXXXXXXXX. The Corporation is serviced by the XXXXXXXXXX Tax Services Office and it files its tax returns with the XXXXXXXXXX Taxation Centre.
2. XXXXXXXXXX ("Parent") is XXXXXXXXXX The Corporation is a direct, wholly-owned subsidiary of Parent.
3. XXXXXXXXXX ("Company A") is a corporation governed by the XXXXXXXXXX Business Corporations Act (the "XXXXXXXXXX"). Company A is controlled, within the meaning of paragraph 256(1.2)(c), by Parent. Company A is a "taxable Canadian corporation" within the meaning assigned by subsection 89(1) of the Act. Company A's Business Number is XXXXXXXXXX.
Company A is serviced by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre.
4. XXXXXXXXXX ("Company B") is a corporation governed by the XXXXXXXXXX . Company B is a direct, wholly-owned subsidiary of Company A. Company B is a "taxable Canadian corporation" within the meaning assigned by subsection 89(1) of the Act. Company B's Business Number is XXXXXXXXXX.
Company B is serviced by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre.
5. XXXXXXXXXX (the "Existing Partnership") is a general partnership existing under the laws of XXXXXXXXXX. The partners of the Existing Partnership are XXXXXXXXXX ("Partner A") and XXXXXXXXXX ("Partner B"). The assets of the Existing Partnership include, among other assets, all of the assets (the "Special Assets") that comprise the XXXXXXXXXX (the "Property"). XXXXXXXXXX.
6. Relevant facts relating to the Property include the following:
(a) The total area of the Property XXXXXXXXXX is located in Canada. XXXXXXXXXX.
(b) XXXXXXXXXX.
(c) XXXXXXXXXX.
(d) XXXXXXXXXX is currently operated on behalf of the Existing Partnership by Partner A and all of the employees engaged in the operation, administration and maintenance of the Property are Canadian residents that report for work in Canada. Following the completion of the proposed transactions, the Property will be operated by Partner B on behalf of the New Partnership (described below) and it is anticipated that the Partner B employees engaged in the operation, administration and maintenance of the Property will be Canadian residents that report to work in Canada.
Proposed Transactions
7. The Existing Partnership will be dissolved and each of Partner A and Partner B will receive an undivided 50 percent interest in the assets of the Existing Partnership, including the Special Assets. Partner A and Partner B will make and file an election under subsection 98(3) of the Act within the time required by subsection 96(4) of the Act in respect of the dissolution of the Existing Partnership. Partner A and Partner B will assume any indebtedness of the Existing Partnership.
8. The Corporation will establish an inter vivos commercial trust (the "Trust") pursuant to a declaration of trust. The Trust will be governed by Canadian law. Company B will be the trustee of the Trust. For convenience, the interests of the beneficiaries of the Trust will be described by reference to units. The Trust will not be a registered investment under the Act and units of the Trust will be "foreign property" as defined in subsection 206(1) of the Act.
9. The Corporation will acquire units of the Trust and will also make a subordinated, unsecured interest-bearing loan (the "Corporation Loan") to the Trust. The only assets of the Corporation will be the units in the Trust and the Corporation Loan. The cost amount to the Corporation of its investment in the units of the Trust will not at any time exceed XXXXXXXXXX percent of the total cost amount of all of its assets.
10. The Trust will purchase Partner A's undivided 50 percent interest in the Special Assets. The interest in the Special Assets will be "capital property" to the Trust within the meaning of section 54 of the Act. The Trust will assume any indebtedness of Partner A that was assumed by Partner A on the dissolution of the Existing Partnership. XXXXXXXXXX The cash portion of the purchase price for the assets acquired by the Trust will be financed with the proceeds from the Corporation Loan and the issuance of units of the Trust.
11. The Trust and Partner B will establish a general partnership (the "New Partnership") under the laws of the Province of XXXXXXXXXX. Both the Trust and Partner B will contribute their 50 percent undivided interests in the Special Assets to the New Partnership. The Trust and Partner B will make and file an election under subsection 97(2) of the Act within the time required by subsection 96(4) of the Act in respect of their respective dispositions of the Special Assets to the New Partnership. The New Partnership will assume any indebtedness assumed by Partner B and the Trust in connection with the dissolution of the Existing Partnership and the purchase by the Trust of Partner A's interest in the Special Assets. The New Partnership will contract the operation, management and maintenance of the Property to Partner B.
12. It is anticipated that unrelated investors, including pension funds and other tax-exempt entities, will make loans to the Trust, and that they may also acquire units of the Trust. Some of these investors may not be resident in Canada, in which case any units of the Trust acquired by such investors would be acquired by a taxable Canadian corporation, the shareholders of which would be the non-resident investors. Loans to the Trust by these investors would be made directly.
Purpose of the Proposed Transactions
13. The purpose of the proposed transactions is to permit the Corporation to acquire an indirect interest in the Property XXXXXXXXXX, and to finance that acquisition through an investment in the Trust where the portion of the Corporation's investment in the Trust represented by the Corporation Loan will not be considered to be foreign property for purposes of Part XI of the Act.
14. To the best of your knowledge and the knowledge of the Corporation, none of the issues involved in this request for an advance income tax ruling:
(a) is in an earlier return of the Corporation or a person related to the Corporation;
(b) is being considered by a tax services office or tax centre in connection with a previously-filed return of the Corporation or of a person related to the Corporation;
(c) is under objection by the Corporation or by a person related to the Corporation;
(d) is before the courts; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate to the Corporation or to a person related to the Corporation.
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 carried out as described above, we rule as follows:
A. The Corporation Loan will not constitute foreign property for purposes of Part XI of the Act.
B. Subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the ruling given.
The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, 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 provided that the proposed transactions are completed by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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