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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: 1) Will a corporation incorporated under the laws of XXXXXXXXXX that holds almost all of its board meetings in XXXXXXXXXX be a resident in XXXXXXXXXX for purposes of the XXXXXXXXXX Tax Convention? 2) Will a corporation incorporated in XXXXXXXXXX that qualifies as an XXXXXXXXXX be a resident of XXXXXXXXXX for purposes of the XXXXXXXXXX Tax Convention? 3) Will income earned in respect of an escrow agreement be considered to pertain to or be incident to an active business?
Position: 1) No. 2) Yes. 3) Yes.
Reasons: 1) Even though all of the corporation's income will be tied to XXXXXXXXXX , the corporation will not be resident there for purposes of the treaty because it will not be considered liable to that country's most comprehensive tax in accordance with the Crown Forest Decision. A XXXXXXXXXX corporation will be used instead. 2) In order to qualify as an XXXXXXXXXX , a corporation must be resident in XXXXXXXXXX . Therefore, any company incorporated in XXXXXXXXXX that qualifies as an XXXXXXXXXX will be a resident of XXXXXXXXXX for purposes of the treaty. 3) Paragraphs 4 - 7 of IT-73R5 support this conclusion.
XXXXXXXXXX 2001-010305
XXXXXXXXXX, 2002
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX ("Subco") (XXXXXXXXXX)
This is in reply to your letters of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer.
To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is
i) in an earlier income tax return of Subco or a related person;
ii) being considered by a tax services office or taxation centre in connection with a previously filed income tax return of Subco or a related person;
iii) under objection by Subco or a related person;
iv) before the Courts; or
v) the subject of an advance income tax ruling previously issued by the Directorate to Subco or a related person.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. XXXXXXXXXX ("Parent") is a corporation that exists under the Business Corporations Act (Canada) (the "BCA"). Parent is a taxable Canadian corporation and a public corporation. Parent's shares are posted for trading on the XXXXXXXXXX stock exchanges. Parent is a XXXXXXXXXX company with consolidated assets of about $XXXXXXXXXX. Its consolidated interests are principally engaged in the XXXXXXXXXX. The expressions "taxable Canadian corporation" and "public corporation" each have the meaning assigned by subsection 89(1) of the Income Tax Act (Canada) (the "Act").
2. Subco is a taxable Canadian corporation and a subsidiary wholly-owned corporation of Parent. Subco is a corporation that exists under the BCA. The expression "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act.
3. XXXXXXXXXX ("Opco") is a controlled foreign affiliate of Parent. Opco is a corporation that exists under the laws of XXXXXXXXXX. Opco is a non-resident of Canada. The expression "controlled foreign affiliate" has the meaning assigned by subsection 95(1) of the Act.
4. XXXXXXXXXX ("Foreignco") is a XXXXXXXXXX company that exists under the laws of XXXXXXXXXX (the "Foreign Country").
5. XXXXXXXXXX (the "Business") is XXXXXXXXXX project located in the Foreign Country. Foreignco formerly operated the Business.
6. In XXXXXXXXXX, the Foreign Country invited bids for the continued development of the Business. On XXXXXXXXXX, Opco was awarded the right to negotiate an agreement for the Business.
7. The government of the Foreign Country, the Central Bank of the Foreign Country, Foreignco and Opco have entered into a letter of intent (the "Agreement") which has established the basic terms, agreements and conditions under which Opco (or its assigns) will contract for the continued development of the Business. The basic terms, agreements and conditions contained in the Agreement will be included in a XXXXXXXXXX contract of XXXXXXXXXX (the "Contract") granted to Opco (or its assigns). XXXXXXXXXX.
Proposed Transactions
8. Subco will incorporate XXXXXXXXXX ("Canco") under the corporate laws of XXXXXXXXXX. Canco will be a taxable Canadian corporation and a subsidiary wholly-owned corporation of Subco.
9. Canco will incorporate XXXXXXXXXX ("FA1") under the corporate laws of XXXXXXXXXX. FA1 will be a subsidiary wholly-owned corporation and a controlled foreign affiliate of Canco.
10. FA1 will incorporate XXXXXXXXXX ("FA2") under the laws of XXXXXXXXXX. FA2 will be a subsidiary wholly-owned corporation of FA1. XXXXXXXXXX. Consequently, FA2 will be resident in XXXXXXXXXX for Canadian income tax purposes. FA2 will be resident in XXXXXXXXXX for XXXXXXXXXX income tax purposes. XXXXXXXXXX The board will be managed by majority. Each director will have the autonomy to make independent decisions at the board meetings. At all times, a majority of the board members will not be resident in Canada for income tax purposes.
An operational committee will be established to run the daily activities of the Business within the Foreign Country, with duties and authority as prescribed by the Board of Directors from time to time. The operational committee will be separate from the Board of Directors. Rather than create separate titles of chief executive officer, chief financial officer, and chief operational officer, the concept of the operational committee will be a body responsible for running the daily operations of the Business and it will report to the Board of Directors.
FA2 will be incorporated under, and governed by, the laws of XXXXXXXXXX rather than the laws of the Foreign Country solely for non-tax reasons. XXXXXXXXXX.
11. Opco will assign its contractual rights and obligations in respect of the Business to FA2. Under the terms of the Agreement, FA2 will have to assume the obligations, responsibilities and XXXXXXXXXX liabilities resulting from its construction and operation of the Business in accordance with an approved XXXXXXXXXX management plan, as amended from time to time. These obligations, responsibilities and liabilities will be referred to as the "XXXXXXXXXX Obligations".
12. The Foreign Country wants to secure the performance of the XXXXXXXXXX Obligations. Accordingly, FA2 will be required to deposit, within XXXXXXXXXX days after the end of each quarter, an amount equal to XXXXXXXXXX% of its monthly operating costs, net of the amount of any XXXXXXXXXX costs incurred in the month, into a special fund (the "XXXXXXXXXX Fund"). These amounts will have to be deposited until the XXXXXXXXXX Fund equals the estimated cost of the XXXXXXXXXX Obligations. The XXXXXXXXXX Fund will be administered by an international bank.
13. FA2, the Foreign Country and the international bank will enter into an escrow agreement (the "Escrow Agreement") whereunder the international bank (the "Escrow Agent") will hold the XXXXXXXXXX Fund as security for FA2's XXXXXXXXXX Obligations. The XXXXXXXXXX Fund will be used to underwrite the costs of FA2's XXXXXXXXXX Obligations for the closing and ongoing post-closing maintenance of the Business.
The proposed terms of the Escrow Agreement can be summarized as follows:
(a) The Escrow Agent will be an international bank. The location of the international bank has not been selected. However, it will not be resident in Canada, but may be resident in a country with which Canada does not have an income tax treaty.
(b) The Escrow Agreement will not create a trust and the Escrow Agent will not hold the XXXXXXXXXX Fund in trust for the benefit of any person.
(c) The Escrow Agent will deposit the XXXXXXXXXX Fund into a special purpose, segregated, interest bearing account or it will invest the XXXXXXXXXX Fund into such government-backed securities, interest bearing certificates, term deposits or any other investments specified in writing by FA2. Any income earned by the XXXXXXXXXX Fund will be retained and re-invested in the XXXXXXXXXX Fund until the XXXXXXXXXX Fund equals the estimated cost of the XXXXXXXXXX Obligations. Once the XXXXXXXXXX Fund equals the estimated cost of the XXXXXXXXXX Obligations, any excess amount will be paid out to FA2.
(d) FA2 will have the right to instruct the Escrow Agent to distribute funds, as they are required by FA2 to pay for or reimburse the costs incurred by FA2 relating to its XXXXXXXXXX Obligations. Such instructions shall be subject to approval by the Foreign Country, such approval shall not unreasonably be withheld, conditioned or delayed.
(e) In the event of default, the Foreign Country will have the right to instruct the Escrow Agent to pay the Foreign Country for any of its costs incurred relating to any of the XXXXXXXXXX Obligations. The Foreign Country will not be paid by the Escrow Agent unless there is confirmation that FA2 has received notice of the Foreign Country's request. FA2 will be entitled to dispute the validity of the request and such dispute will have to be resolved by arbitration in accordance with the Contract.
(f) The XXXXXXXXXX Fund will exist for the period that FA2's XXXXXXXXXX Obligations remain outstanding. Once the XXXXXXXXXX Obligations are settled, the Escrow Agent will have to return the balance of the XXXXXXXXXX Fund to FA2.
(g) The Escrow Agent can only distribute the amounts held in the XXXXXXXXXX Fund in the manner set out in the Escrow Agreement.
(h) The Escrow Agreement may be amended or expanded by mutual written agreement of FA2 and the Foreign Country. The rights and duties of the Escrow Agent can only be changed with the written approval of the Escrow Agent.
14. XXXXXXXXXX.
15. FA2 will be incorporated and resident under Canadian common law in XXXXXXXXXX, with a branch carrying on an active business in the Foreign Country. The Foreign Country operations will constitute a permanent establishment for FA2 in the Foreign Country under subsections 5906(2) and 400(2) of the Regulations.
The Business is the only business expected to be carried on by FA2, which will be carried on by the branch in the Foreign Country. FA2 will be subject to taxation under the XXXXXXXXXX on the basis of FA2's worldwide income. FA2 will be eligible for the tax incentives available under the XXXXXXXXXX. FA2 will be taxed on its worldwide income as follows:
(a) FA2 will be subject to tax in the Foreign Country on its income from sources in the Foreign Country in accordance with the income tax laws of the Foreign Country as amended under the Contract.
(b) FA2 will be subject to tax in jurisdictions outside of the Foreign Country and XXXXXXXXXX on its income earned in those jurisdictions calculated in accordance with the tax legislation enacted in the particular jurisdiction.
(c) FA2 will be subject to tax in XXXXXXXXXX on its worldwide income calculated in accordance with the XXXXXXXXXX subject to the tax incentives contained in the XXXXXXXXXX. In accordance with the XXXXXXXXXX, FA2 will pay XXXXXXXXXX tax on its profits and gains at rates varying between XXXXXXXXXX % depending on its amount of profits. FA2 may elect to take a credit in respect of taxes paid to the Foreign Country and other jurisdictions outside of XXXXXXXXXX provided such an election does not reduce the taxes payable in XXXXXXXXXX to a rate of less than XXXXXXXXXX% of FA2's profits and gains in any year.
16. XXXXXXXXXX.
17. FA2's contributions to the XXXXXXXXXX Fund will not be deductible under the XXXXXXXXXX. Funds withdrawn by FA2 from the XXXXXXXXXX Fund will not be included in FA2's income under the XXXXXXXXXX. The annual investment income earned on the XXXXXXXXXX Fund will be included in FA2's income under the XXXXXXXXXX. As the funds are spent on FA2's XXXXXXXXXX Obligations, FA2 will claim a deduction under the XXXXXXXXXX.
Purpose of the Proposed Transactions
18. The proposed transactions will allow Subco, through Opco and FA2, to take over the operations of the Business in the Foreign Country. The establishment of the XXXXXXXXXX Reserve Fund is to ensure that the obligations in respect of the XXXXXXXXXX Obligations are satisfied with monies provided from the Business carried on in the Foreign Country.
Rulings
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 as described above, we rule as follows:
A. For the purposes of Part LIX of the Regulations, FA2 will be resident in a designated treaty country. FA2's income from an active business carried on by it in a designated treaty country will include its earnings from its Business in the Foreign Country.
B. Provided there is no amendment to the terms of the Escrow Agreement, the existence of the Escrow Agreement will not, in and by itself, create a permanent establishment in respect of FA2.
C. The Escrow Agreement will not result in the creation of a trust within the meaning assigned by subsection 108(1) of the Act.
D. In computing FA2's income from an active business carried on by it in the Foreign Country for a taxation year, the income earned on the XXXXXXXXXX Fund for the year will be considered to pertain to or be incident to the active business carried on by FA2 in the Foreign Country and will not be considered income from a separate investment business. Consequently, the income earned or loss incurred on the XXXXXXXXXX Fund for a taxation year will be included in calculating FA2's exempt earnings, within the meaning assigned by subsection 5907(1) of the Regulations, or exempt loss, within the meaning assigned by subsection 5907(1) of the Regulations, for the taxation year.
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 70-6R4 dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
Yours truly,
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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