2003 Ruling 2003-0048443 - Treaty Exemption

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: Whether GAAR will apply to the transfer of the Rco Shares to ACO?

Position: No.

Reasons: It is represented that there is no intention by GCO to sell the shares of ACO.

XXXXXXXXXX 2003-004844

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX ("ACO")
XXXXXXXXXX ("Rco")

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

To the best of your knowledge, none of the issues involved in this Ruling request:

- is in an earlier return of the taxpayers or a related person;
- is being considered by a tax services office or a taxation centre in connection with any tax return already filed;
- is before the courts; or
- is under objection.

DEFINITIONS

In this letter, the following terms or expressions have the meaning specified:

Unless otherwise stated all statutory references are to the Income Tax Act, R.S.C. 1985 c.1 (5th supplement), as amended (the "Act").

"adjusted cost base" or "ACB" has the meaning assigned by section 54;

"agreed amount" means the amount agreed upon in respect of a property in an election filed pursuant to subsection 85(1);

"capital property" has the meaning assigned by section 54;

"CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended;

"cost amount" has the meaning assigned by subsection 248(1);

"German Convention" means the Canada-Germany Income Tax Convention;

"immovable property" has the extended meaning given to that expression by Article 13 of the Swiss Convention and by Article 13 of the German Convention;

"paid-up capital" or "PUC" has the meaning assigned by subsection 89(1);

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

"Swiss Convention" means the Canada-Switzerland Income Tax Convention;

"stated capital" means the amount of capital determined in respect of a class or series of shares in accordance with the CBCA;

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

"taxable Canadian property" has the meaning assigned by subsection 248(1).

Our understanding of the facts, proposed transactions and the purposes of the proposed transactions is as follows:

FACTS

1. ACO is a taxable Canadian corporation and a private corporation and has a XXXXXXXXXX year-end. ACO was incorporated under the laws of Canada in XXXXXXXXXX and was continued under the CBCA. ACO carries on a XXXXXXXXXX.

2. ACO's authorized share capital consists of the following:

- XXXXXXXXXX non-cumulative, voting, preferred shares redeemable at $XXXXXXXXXX each; and

- an unlimited number of common shares.

The issued share capital of ACO consists of XXXXXXXXXX preferred shares and XXXXXXXXXX common shares.

3. Rco is a taxable Canadian corporation and a private corporation and has a XXXXXXXXXX year-end. Rco was incorporated under the laws of Canada in XXXXXXXXXX and was continued under the CBCA. Rco carries on a XXXXXXXXXX.

4. Rco's authorized share capital consists of the following:

- XXXXXXXXXX non-cumulative, non-voting, preferred shares redeemable at $XXXXXXXXXX each; and

- an unlimited number of common shares.

The issued share capital consists of XXXXXXXXXX preferred shares and XXXXXXXXXX common shares.

5. XXXXXXXXXX ("Hco") is a non-resident company that is resident in Switzerland.

6. XXXXXXXXXX ("GCO") is a non-resident company that is resident in Germany. GCO owns all the issued and outstanding shares of ACO.

7. XXXXXXXXXX ("PCO") is a non-resident company that is resident in Germany. PCO owns all the issued and outstanding shares of GCO. PCO owns all the issued and outstanding shares of Hco.

8. ACO owns XXXXXXXXXX% of the issued and outstanding common and preferred shares of Rco.

9. Hco owns XXXXXXXXXX% of the issued and outstanding common and preferred shares of Rco.

PROPOSED TRANSACTIONS

10. Hco will sell its shares of Rco (the "Rco Shares") to ACO and as consideration therefor will receive common shares of ACO (the "AShares") with a fair market value ("FMV") equal to the FMV of the Rco Shares transferred. A joint election will be filed under subsection 85(1), within the time period prescribed under subsection 85(6), and the agreed amount will be equal to the ACB of the Rco Shares so transferred. A clearance certificate will be obtained under section 116 in respect of this transaction.

ACO will add to its stated capital an amount equal to the PUC of the Rco Shares transferred.

11. The Rco Shares constitute taxable Canadian property pursuant to paragraph (d) of the definition of "taxable Canadian property" in subsection 248(1).

12. Rco will be wound up into ACO. Accordingly, all of the assets of Rco will be distributed to ACO and ACO will assume all the liabilities of Rco. It is represented that less than 50% of the FMV of the shares of ACO will be derived from immovable property situated in Canada. The PUC of the Rco Shares is not greater than their ACB.

13. Hco will be wound up into PCO. Consequently, the AShares will be transferred to PCO. A clearance certificate will be obtained under section 116 in respect of this transaction.

14. PCO will transfer the AShares to GCO. A clearance certificate will be obtained under section 116 in respect of this transaction.

PURPOSE OF PROPOSED TRANSACTIONS

15. The purpose of the proposed transactions is to benefit from the operational and administrative efficiencies that will be achieved by merging ACO and Rco.

16. An additional purpose is to allow for the merger of ACO and Rco by way of a winding-up pursuant to subsection 88(1) which is easier to implement than an amalgamation, from an operational perspective. Rco owns fewer than XXXXXXXXXX leased properties while ACO is a substantially larger operating company. Consequently, it is administratively simpler to wind up Rco instead of amalgamating the two companies.

17. Finally, one of the purposes is to consolidate the ownership of the merged Canadian entity in GCO. It is represented that there is no intention by GCO to sell the shares of ACO.

RULINGS

Provided that the above statements constitute a complete and accurate disclosure of the relevant facts, proposed transactions and the purposes of the proposed transactions, we rule as follows:

A. The provisions of subsection 85(1) will apply to the transfer of the Rco Shares by Hco to ACO as described in paragraph 10 above, such that the agreed amount in respect of the transfer will be deemed to be Hco's proceeds of disposition and ACO's cost of such transferred property under paragraph 85(1)(a).

B. The application of subsection 212.1(1) to the transfer described in paragraph 10 above will not result in a deemed dividend under paragraph 212.1(1)(a) or a reduction in PUC under paragraph 212.1(1)(b).

C. The provisions of subsection 88(1) will apply to the winding-up of Rco into ACO as described in paragraph 12 above.

D. Any gain realized by Hco on the transfer of the AShares, upon the winding-up of Hco into PCO, will be exempt from taxation in Canada pursuant to paragraph 4 of Article 13 of the Swiss Convention provided that less than 50% of the FMV of such shares is derived from immovable property situated in Canada.

E. Any gain realized by PCO on the transfer of the AShares to GCO, will be exempt from taxation in Canada pursuant to paragraph 4 of Article 13 of the German Convention provided that less than 50% of the FMV of such shares is derived from immovable property situated in Canada.

F. Subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

The above 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, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agree to or reviewed:

(a) the determination of the ACB, PUC or fair market value of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above.

Yours truly,

XXXXXXXXXX
Manager
Corporate Reorganizations Section 1
Reorganizations and Resources Division
Income Tax Rulings Directorate

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