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: Whether: (1) designated treaty country residence requirement in paragraph (d) of the definition of "exempt earnings" in Regulation 5907(1) can be satisfied in respect of the taxation year of the affiliate where central control and management is situated in XXXXXXXXXX on the last day of the taxation year and the affiliate is a resident of XXXXXXXXXX on that day; (2) foreign accrual property income ("FAPI") arises in relation to a foreign affiliate of PUBCO from an amount paid or payable to HOLDCO 5 by OPCO 5, OPCO 2, OPCO 4 and OPCO 3 of earnings from an active business to the extent the payment is deductible in computing exempt earnings of OPCO 5, OPCO 2, OPCO 4 and OPCO 3; (3) FAPI arises as a result of an amount paid or payable by HOLDCO 5 to OPCO 5, OPCO 2, OPCO 4 or OPCO 3 by HOLDCO 5 under the OPCO 5 PTA, OPCO 4 PTA and OPCO 3 PTA respectively; (4) OPCO 5, OPCO 2, OPCO 4 or OPCO 3 will have any earnings or loss after payments made under the relevant PTA's to HOLDCO 5; (5) subsection 245(2) will apply to the transactions; (6) income derived by FINCO from interest paid or payable by HOLDCO 5 under the HOLDCO 5 Loan will be included in computing the income from an active business of FINCO and the "exempt earnings" of FINCO, on the assumption proposed paragraph 95(2)(n) and subparagraph 95(2)(a)(ii)(B)
Position: (1) Yes; (2) No; (3) No; (4) No; (5) No; (6) Yes.
Reasons: (1) the foreign affiliates that own and control OPCO 5 pursuant to the OPCO 5 Acquisition are resident in XXXXXXXXXX under the Canada-XXXXXXXXXX Income Tax Convention and mind, management and control of OPCO 5 is exercised in XXXXXXXXXX ; (2) clause 95(2)(a)(ii)(B) would apply to re-characterize this income from property; (3) to the extent the downstream payment pertains to loss from an active business of the recipient; (4) definition of "earnings" or "loss" in Regulation 5907(1); (5) no avoidance transactions; (6) back-to-back operation of subparagraph 95(2)(a)(ii)(B) to re-characterize such income and loss.
XXXXXXXXXX 2003-001681
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX ("PUBCO") (Account XXXXXXXXXX)
This is in reply to your and the taxpayer's letters of XXXXXXXXXX requesting an advance income tax ruling in respect of the above-noted taxpayer. We also acknowledge the additional information provided in various subsequent letters, emails, facsimiles and telephone conversations (XXXXXXXXXX).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Definitions
In this ruling, unless otherwise specified:
? "Act" means the Income Tax Act, R.S.C. 1985, c. 1 (15th Supp.), as amended to the date hereof;
? "Regulations" means the Income Tax Regulations, C.R.C. 1977, c. 945, as amended to the date hereof;
? all statutory references herein are to provisions of the Act unless otherwise specified;
? the words and expressions which are defined for purposes of the Act and Regulations (in particular, subdivision i of Division B of Part I of the Act and Part LIX of the Regulations) shall have the same meanings for the purposes hereof;
? "Proposed Transactions" means the transactions described in the paragraphs hereof which appear under the heading "Proposed Transactions";
? XXXXXXXXXX is "PUBCO";
? XXXXXXXXXX is "CANCO 1";
? XXXXXXXXXX is "CANCO 2";
? XXXXXXXXXX is "HOLDCO 1";
? XXXXXXXXXX is "HOLDCO 2";
? XXXXXXXXXX is "HOLDCO 3";
? XXXXXXXXXX is "HOLDCO 4";
? XXXXXXXXXX is "HOLDCO 5";
? XXXXXXXXXX is "HOLDCO 6";
? XXXXXXXXXX is "OPCO 3";
? XXXXXXXXXX is "OPCO 2";
? XXXXXXXXXX is "OPCO 4";
? XXXXXXXXXX is "FA 2";
? XXXXXXXXXX is "FA 1";
? XXXXXXXXXX;
? XXXXXXXXXX is "OPCO 1";
? XXXXXXXXXX is "FINCO";
? XXXXXXXXXX is "HOLDCO 7".
Facts
1. PUBCO is a widely held Canadian public company that carries on an XXXXXXXXXX business both in Canada and abroad, both directly and indirectly through subsidiaries and other affiliates. PUBCO is a public corporation and a taxable Canadian corporation.
2. The XXXXXXXXXX companies consists of the following relevant entities:
(a) HOLDCO 1 is a XXXXXXXXXX corporation, with its central control and management in XXXXXXXXXX, which is resident in XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Income Tax Convention. HOLDCO 1 is a direct wholly owned subsidiary of PUBCO. HOLDCO 1 is a foreign affiliate and a controlled foreign affiliate of PUBCO in respect of which PUBCO has a qualifying interest.
(b) HOLDCO 2 is a XXXXXXXXXX corporation, with its central control and management in XXXXXXXXXX, which is resident in XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Income Tax Convention. HOLDCO 2 is an indirect wholly owned subsidiary of PUBCO. HOLDCO 1 holds all the common shares of HOLDCO 2, representing XXXXXXXXXX % of the equity in HOLDCO 2. HOLDCO 4 holds preferred shares in HOLDCO 2, representing XXXXXXXXXX % of the equity in HOLDCO 2. HOLDCO 2 is a foreign affiliate and a controlled foreign affiliate of PUBCO in respect of which PUBCO has a qualifying interest.
(c) HOLDCO 3 is a XXXXXXXXXX corporation, with its central control and management in XXXXXXXXXX , which is resident in XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Income Tax Convention. HOLDCO 3 is an indirect wholly owned subsidiary of PUBCO. HOLDCO 2 holds XXXXXXXXXX % of the shares of HOLDCO 3. HOLDCO 3 is a foreign affiliate and a controlled foreign affiliate of PUBCO in respect of which PUBCO has a qualifying interest.
(d) HOLDCO 4 is a XXXXXXXXXX corporation, with its central control and management in XXXXXXXXXX , which is resident in XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Income Tax Convention. HOLDCO 4 is an indirect wholly owned subsidiary of PUBCO. HOLDCO 2 holds all the common shares of HOLDCO 4, representing XXXXXXXXXX % of the equity in HOLDCO 4. HOLDCO 3 holds preferred shares in HOLDCO 4, representing XXXXXXXXXX % of the equity in HOLDCO 4. PUBCO holds preferred shares in HOLDCO 4, representing XXXXXXXXXX % of the equity in HOLDCO 4. HOLDCO 4 is a foreign affiliate and a controlled foreign affiliate of PUBCO in respect of which PUBCO has a qualifying interest.
(e) HOLDCO 5 is a XXXXXXXXXX corporation, with its central control and management in XXXXXXXXXX , which is resident in XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Income Tax Convention. HOLDCO 5 is an indirect wholly owned subsidiary of PUBCO. HOLDCO 2 holds XXXXXXXXXX % of the shares of HOLDCO 5. HOLDCO 1 holds XXXXXXXXXX % of the shares of HOLDCO 5. HOLDCO 5 is a foreign affiliate and a controlled foreign affiliate of PUBCO in respect of which PUBCO has a qualifying interest.
(f) HOLDCO 6 is a XXXXXXXXXX corporation, with its central control and management in XXXXXXXXXX , which is resident in XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Income Tax Convention. HOLDCO 6 is an indirect wholly owned subsidiary of PUBCO. HOLDCO 5 holds XXXXXXXXXX % of the shares of HOLDCO 6. HOLDCO 6 is a foreign affiliate and a controlled foreign affiliate of PUBCO in respect of which PUBCO has a qualifying interest.
(g) OPCO 3 is a XXXXXXXXXX corporation, with its central control and management in XXXXXXXXXX , which is resident in XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Income Tax Convention. OPCO 3 is an indirect wholly owned subsidiary of PUBCO. HOLDCO 5 holds XXXXXXXXXX % of the shares of OPCO 3. OPCO 3 is a foreign affiliate and a controlled foreign affiliate of PUBCO in respect of which PUBCO has a qualifying interest. Aside from the holding of shares of OPCO 2, the activities of OPCO 3 consist of the carrying on of an active business in XXXXXXXXXX .
(h) OPCO 2 is a XXXXXXXXXX corporation, with its central control and management in XXXXXXXXXX , which is resident in XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Income Tax Convention. OPCO 2 is an indirect wholly owned subsidiary of PUBCO. HOLDCO 6 holds XXXXXXXXXX % of the shares of OPCO 2. OPCO 3 holds XXXXXXXXXX % of the shares of OPCO 2. OPCO 2 is a foreign affiliate and a controlled foreign affiliate of PUBCO in respect of which PUBCO has a qualifying interest. The activities of OPCO 2 consist of the carrying on of an active business in XXXXXXXXXX .
(i) OPCO 4 is a XXXXXXXXXX corporation, with its central control and management in XXXXXXXXXX , which is resident in XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Income Tax Convention. OPCO 4 is an indirect wholly owned subsidiary of PUBCO. OPCO 4 is a direct wholly owned subsidiary of HOLDCO 5. OPCO 4 is a foreign affiliate and a controlled foreign affiliate of PUBCO in respect of which PUBCO has a qualifying interest. The activities of OPCO 4 consist of the carrying on of an active business in XXXXXXXXXX .
3. Each of OPCO 2, OPCO 4 and OPCO 3 has entered into a "profit transfer agreement" ("PTA") as contemplated by XXXXXXXXXX with HOLDCO 5 (respectively, the "OPCO 2 PTA", the "OPCO 4 PTA" and the "OPCO 3 PTA"). The "dominant" company under each of these agreements is HOLDCO 5, and the "subservient" company is OPCO 2, OPCO 4 and OPCO 3, respectively. The effects of these arrangements under XXXXXXXXXX law are described in greater detail below in paragraphs 10 and 11.
4. Employees of HOLDCO 5 provide accounting, legal and cash management services for OPCO 2, OPCO 4 and OPCO 3.
5. HOLDCO 5 also holds certain other assets, consisting of interests in other foreign affiliates and corporations, and an interest in an association designated as a "XXXXXXXXXX" in accordance with the applicable articles of the XXXXXXXXXX.
6. CANCO 1 is a direct wholly owned subsidiary of PUBCO. CANCO 1 is a taxable Canadian corporation.
7. CANCO 2 is an indirect wholly owned subsidiary of PUBCO. CANCO 2 is a direct wholly owned subsidiary of CANCO 1. CANCO 2 is a taxable Canadian corporation.
8. HOLDCO 7 is a XXXXXXXXXX corporation, with its central control and management in XXXXXXXXXX, which is resident in XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Income Tax Convention. HOLDCO 7 is an indirect wholly owned subsidiary of PUBCO. HOLDCO 7 is a wholly owned subsidiary of CANCO 1. HOLDCO 7 is a foreign affiliate and a controlled foreign affiliate of CANCO 1 (and of PUBCO) in respect of which CANCO 1 (and PUBCO) has a qualifying interest.
9. FINCO is an XXXXXXXXXX corporation, with its central control and management in XXXXXXXXXX, which is resident in XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Income Tax Convention. FINCO is an indirect wholly owned subsidiary of PUBCO. CANCO 2 holds all the common shares of FINCO. HOLDCO 7 holds XXXXXXXXXX% of the Class D preferred shares of FINCO. FINCO is engaged in providing financing to various non-resident corporations controlled directly or indirectly by PUBCO. FINCO is a foreign affiliate and a controlled foreign affiliate of CANCO 2 (and of CANCO 1 and PUBCO) in respect of which CANCO 2 (and CANCO 1 and PUBCO) has a qualifying interest.
10. XXXXXXXXXX entities may enter into a profit transfer agreement as contemplated by XXXXXXXXXX. Pursuant to such an agreement, and in accordance with the applicable provisions of the XXXXXXXXXX, any and all income or capital gains arising from the operation or disposition of the subservient company's assets (computed in accordance with commercial accounting principles applicable in XXXXXXXXXX) must be transferred to the dominant company, and the dominant company becomes liable without limitation to compensate any and all losses arising from the operation or disposition of the subservient company's assets. Provided that a relevant profit transfer agreement is entered into by the end of a fiscal year, it will have effect throughout that year, and thereafter, in accordance with its terms.
11. For XXXXXXXXXX corporation tax purposes, the relationship between the dominant and subservient companies constitutes an "XXXXXXXXXX", such that the subservient company will thereafter have no income or capital gains (or losses), and any and all income or capital gains (or losses) arising from the operation or disposition of the subservient company's assets for each of its taxation years will be included (or deducted) in the hands of the dominant company, as income or capital gains (or losses) of the dominant company from the same sources, and from sources in the same places, in the hands of the dominant company as they would have in the hands of the subservient company but for the profit transfer agreement.
12. HOLDCO 6 does not have an exempt deficit or a taxable deficit in respect of PUBCO. HOLDCO 6's accumulated losses arose primarily from activities that occurred before it became a foreign affiliate of PUBCO and to this extent would not therefore result in relevant deficits in respect of PUBCO. The post-foreign affiliate status activities of HOLDCO 6 have given rise to a book profit of approximately XXXXXXXXXX Euros for the XXXXXXXXXX year, and a book loss of approximately XXXXXXXXXX Euros for the XXXXXXXXXX year.
13. The taxation year-end of each of PUBCO, CANCO 1, CANCO 2, HOLDCO 5, HOLDCO 6, HOLDCO 7, OPCO 2, OPCO 3, OPCO 4 and FINCO, is XXXXXXXXXX respectively.
14. PUBCO, CANCO 1 and CANCO 2 have not filed their tax returns in Canada for their taxation year ended XXXXXXXXXX .
Proposed Transactions
15. The Proposed Transactions described below have been completed.
16. FINCO made an interest-bearing loan to HOLDCO 5 (the "HOLDCO 5 Loan").
17. HOLDCO 5 used the proceeds of the HOLDCO 5 Loan to make a contribution to the capital of HOLDCO 6 (the "HOLDCO 6 Contribution").
18. HOLDCO 6 used the proceeds of the HOLDCO 6 Contribution to make a contribution to the capital of OPCO 2 (the "OPCO 2 Contribution").
19. OPCO 2 used the proceeds of the OPCO 2 Contribution to acquire from an arm's length third-party seller (the "Seller") XXXXXXXXXX% of the shares (being all of the shares held by the Seller) of a XXXXXXXXXX corporation named XXXXXXXXXX ("OPCO 5") (the transaction known as the "OPCO 5 Acquisition"). The Seller is an entity within the XXXXXXXXXX group of companies and the remaining XXXXXXXXXX% interest in OPCO 5 was retained by its current owners, being the family of individuals that founded OPCO 5. As of the date of the OPCO 5 Acquisition, the central control and management of OPCO 5 was located in XXXXXXXXXX, and OPCO 5 was resident in XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Income Tax Convention. As of such acquisition, OPCO 5 became a foreign affiliate and a controlled foreign affiliate of PUBCO in respect of which PUBCO has a qualifying interest. The material activities of OPCO 5 consist of the carrying on of an active business in XXXXXXXXXX.
20. HOLDCO 5 and OPCO 5 entered into a profit transfer agreement (the "OPCO 5 PTA") XXXXXXXXXX, under which HOLDCO 5 is the "dominant" company and OPCO 5 is the "subservient" company. The effects of this arrangement under XXXXXXXXXX law are described in greater detail in paragraphs 0 and 11 above.
21. Employees of HOLDCO 5 provide accounting, legal and cash management services for OPCO 5.
Purpose of the Proposed Transactions
22. The purpose of the proposed series of transactions was to facilitate the arm's length acquisition of OPCO 5.
To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this ruling letter:
(i) is under objection;
(ii) is before the courts or, if a judgment has been issued, the time limit for appeal has not expired; or
(iii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by one of the taxpayers or a related person.
Rulings Given
A. Provided that: (i) the taxation year of OPCO 5 did not end as a consequence of the acquisition of the OPCO 5 shares by OPCO 2, (ii) OPCO 5's central control and management is situated in XXXXXXXXXX on the last day of that taxation year, and (iii) OPCO 5 is a resident of XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Income Tax Convention on that day, the designated treaty country residence requirement under paragraph (d) of the definition of "exempt earnings" in subsection (1) of Regulation 5907 will be satisfied in respect of OPCO 5 for the taxation year of OPCO 5 which includes the purchase by OPCO 2 of shares in OPCO 5 as described in paragraph 19 above.
B. During the subsistence of the OPCO 5 PTA, OPCO 2 PTA, OPCO 4 PTA and OPCO 3 PTA described in paragraphs 3 and 20 above, no amount will be included in computing the foreign accrual property income of a foreign affiliate of PUBCO solely as a consequence of a payment that was made in accordance with the respective PTA, GSCL and XXXXXXXXXX corporate law as described in paragraphs 10 and 11 above, by OPCO 5, OPCO 2, OPCO 4 and OPCO 3 respectively to HOLDCO 5 of its earnings from an active business provided the amount paid or payable to HOLDCO 5 as described for a particular taxation year exceeds the aggregate of all amounts deductible pursuant to the Act in computing the income derived therefrom for that year, to the extent that the amounts that are paid or payable by each of OPCO 5, OPCO 2, OPCO 4 and OPCO 3 under the OPCO 5 PTA, OPCO 2 PTA, OPCO 4 PTA and OPCO 3 PTA respectively, are deductible in the year or a subsequent year in computing the amounts prescribed to be the exempt earnings from an active business of OPCO 5, OPCO 2, OPCO 4 and OPCO 3 respectively other than an active business carried on in Canada. For these purposes, the amounts that are paid or payable under each of the OPCO 5 PTA, OPCO 2 PTA, OPCO 4 PTA and OPCO 3 PTA respectively will be considered to be deductible for that year in computing the amounts prescribed to be the exempt earnings from an active business of OPCO 5, OPCO 2, OPCO 4 and OPCO 3 respectively other than an active business carried on in Canada, to the extent that, before taking into account any such payment, OPCO 5, OPCO 2, OPCO 4 and OPCO 3 respectively have an amount of "exempt earnings" for that year from an active business, other than an active business carried on in Canada, as defined in subsection (1) of Regulation 5907, which equals or exceeds the amount of any such payment.
C. Any amount payable to OPCO 5, OPCO 2, OPCO 4 or OPCO 3 by HOLDCO 5 under the OPCO 5 PTA, OPCO 2 PTA, OPCO 4 PTA and OPCO 3 PTA respectively which pertains to a loss from an active business carried on by it will not be included in the computation of income of the recipient for purposes of Part I of the Act.
D. Subject to any adjustment under subsections (2), (2.1), (2.2) or (2.9) of Regulation 5907 while the OPCO 5 PTA, OPCO 2 PTA, OPCO 4 PTA and OPCO 3 PTA are in force as described in paragraphs 10 and 11 above, OPCO 5, OPCO 2, OPCO 4 and OPCO 3 will have no "earnings" or "loss" as those terms are defined in subsection (1) of Regulation 5907 from an active business carried on by them in a country other than Canada in any taxation year.
E. As a result of the Proposed Transactions, in and by themselves, subsection 245(2) will not be applied to re-determine the tax consequences described in the rulings given above to any person.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, issued by the Canada Revenue Agency ("the CRA") and are binding on the CRA.
The income of HOLDCO 5 vis-à-vis CANCO 2 will be income from property for the reason that CANCO 2 will not have a "qualifying interest" as defined in paragraph 95(2)(m). As a result, the income of FINCO derived from interest paid or payable under the HOLDCO 5 Loan will not qualify for re-characterization as active business income under the provisions of paragraph 95(2)(a). Provided the Legislative Proposals introduced by the Department of Finance on February 27, 2004 (the "Legislative Proposals") are enacted into law as currently worded, it is our opinion that proposed paragraph 95(2)(n) will apply to deem HOLDCO 5 to be a foreign affiliate of CANCO 2 in respect of which CANCO 2 has a qualifying interest. Accordingly, provided the Legislative Proposals are enacted into law as they are currently worded, in our opinion, to the extent that such income would otherwise be income from property, the income derived by FINCO from interest paid to FINCO by HOLDCO 5 under the HOLDCO 5 Loan will be included in computing the income from an active business of FINCO pursuant to clause 95(2)(a)(ii)(B), and will be included in computing the exempt earnings of FINCO pursuant to clause (d)(ii)(E) of that definition in subsection 5907(1) of the Regulations, to the extent that the amounts that are paid by HOLDCO 5 to FINCO under the HOLDCO 5 Loan are deductible in the year or a subsequent taxation year in computing the amounts that would be prescribed to be the exempt earnings from an active business other than an active business carried on in Canada. Furthermore, provided the proposed amendments to subparagraph 95(2)(a)(ii) and the definition of "loss" and "exempt loss" in subsection (1) of Regulation 5907 included in the Legislative Proposals are enacted into law as currently worded, it is our opinion that the preceding comment will also apply if the interest paid on the HOLDCO 5 Loan would be deductible in computing the amount that would be prescribed to be the "exempt loss" of HOLDCO 5.
Nothing in this letter shall be construed as implying that the CRA has accepted or otherwise agreed:
i) to the determination of the amount of the adjusted cost base of any property referred to herein or the fair value of any assets transferred or payments made;
ii) to the validity of any agreements or terms and conditions therein;
iii) to surplus balances of foreign affiliates referred to herein;
iv) that the general anti-avoidance rule will not apply to completed or future transactions other than the Proposed Transactions as described in this letter;
v) to any other tax consequences relating to any facts or proposed transactions referred to herein, other than as specifically described in the rulings given above; or
vi) to any other tax consequences relating to any facts or proposed transactions referred to herein as a result of the Legislative Proposals or the legislative proposals introduced by the Department of Finance on December 20, 2002, except as commented above.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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