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 two proposed corporations would qualify for the exemption under paragraph 149(1)(d.3).
Position: Yes.
Reasons: The share ownership test in subparagraph 149(1)(d.3)(i) would be met.
XXXXXXXXXX 2003-005018
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the additional information in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).
You advise that to the best of your knowledge and that of the taxpayers referred to above, none of the issues involved in the ruling request is:
(i) in an earlier return of the taxpayers or related persons;
(ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or related persons;
(iii) under objection by the taxpayers or related persons;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) the subject of a ruling previously issued by the Directorate.
In this letter, unless otherwise indicated, all statutory references are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c. 1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given to such definition unless otherwise indicated.
Our understanding of the relevant definitions, the facts, proposed transactions and their purposes is as follows:
DEFINITIONS
a) "ACO" means XXXXXXXXXX,
b) "ACO Act" means the XXXXXXXXXX,
c) "BCO" means the XXXXXXXXXX,
d) "BCO Act" means the XXXXXXXXXX,
e) "Lieutenant Governor" means the Lieutenant Governor in Council of the Province,
f) "Minister" means the XXXXXXXXXX, and
g) "Province" means Her Majesty in Right of the Province of XXXXXXXXXX.
FACTS
1) ACO was established and incorporated by operation of the ACO Act on XXXXXXXXXX. Its office is located in XXXXXXXXXX.
2) The capital of ACO consists of one share with a par value of $XXXXXXXXXX which is held by the Minister of XXXXXXXXXX on behalf of the Province.
3) Pursuant to the ACO Act, ACO is an agent of the Province.
4) The purpose and mandate of ACO is to provide management services for funds placed with ACO for investment (see 5 below). ACO started providing these management services on XXXXXXXXXX. Prior to XXXXXXXXXX, the services provided by ACO were provided by the XXXXXXXXXX of the Province.
5) ACO provides its services to XXXXXXXXXX (collectively, the "Clients"). ACO recovers its operating costs and capital expenditures from:
XXXXXXXXXX.
6) One of ACO's Clients is BCO. ACO provides investment management and advisory services to BCO. Those services include providing advice in regard to types of investments to be made by BCO.
7) BCO places funds with ACO as agent for investment. Typically, those funds are physically placed in bank accounts maintained by ACO for BCO. Based on advice provided by ACO, funds placed for investment by BCO are directed to various types of investments made by ACO on behalf of and for BCO.
8) BCO is a corporation without share capital continued pursuant to the BCO Act. BCO is not an agent of the Province. Its office is located in XXXXXXXXXX.
9) The Province has jurisdiction over the BCO Act and can amend the BCO Act and its regulations at its discretion.
10) Pursuant to the BCO Act:
a) the board of directors of BCO consists of XXXXXXXXXX voting directors appointed by the Lieutenant Governor and the president of BCO who is a non-voting director;
b) the board of directors is responsible for selecting the president of BCO;
c) the board of directors must
i) XXXXXXXXXX, and
ii) set and supervise the direction of BCO;
d) BCO is required to make an annual report to the Lieutenant Governor which is then laid before the Legislature by the Minister. The annual report must include a review of BCO's activities, including financial, statistical and performance information. XXXXXXXXXX;
e) BCO is required to provide a XXXXXXXXXX plan to the Minister each year which will be laid before the Legislature.
11) There is no provision in the BCO Act regarding the winding up or dissolution of BCO but, based on advice from counsel of BCO, on a winding up or dissolution of BCO, the assets of BCO would be dealt with pursuant to specific legislation of the Province enacted at the time, thereby making the dealing with such assets on dissolution under the control of the Province. If no specific legislation were enacted on a dissolution or winding up of BCO, the assets of BCO would be subject to escheat and bona vacantia, thereby being distributed to the Province.
12) There are no parties (other than the Province) that have a right in equity or otherwise, either immediately or in the future and either absolutely or contingently to, or to acquire, capital of BCO.
PROPOSED TRANSACTIONS
13) ACO and BCO will form two corporations ("Investcos") under the Canada Business Corporations Act each of which will have capital comprised of two classes of shares: non-voting participating shares and voting non-participating shares. Upon and subsequent to incorporation, all of the voting non-participating shares of each Investco will be owned by ACO and all of the non-voting participating shares of each Investco will be owned by BCO. You advise that no person (other than ACO and BCO) will have one or more rights in equity or otherwise, either immediately or in the future and either absolutely or contingently to, or to acquire, shares or capital of each Investco.
14) The two Investcos will reflect different categories of investment that will be made by those Investcos. Investco A will restrict its investments to investments that deal directly or indirectly with international real estate and Investco B will not be restricted in this manner. Some, but not all, funds and property placed by BCO with ACO for investment will be contributed to each Investco as share or stated capital for non-voting participating shares of each Investco. Upon formation of each Investco, such contribution will include contribution by way of cash and contribution by way of property previously held by ACO as agent for investment for and on behalf of BCO. On a periodic basis, it is expected that BCO will continue to contribute funds, in cash, to each Investco as share capital in consideration for the issuance of further non-voting participating shares or additions to stated capital of such shares.
15) The Investcos will make investments and investment returns realized by the Investcos will be distributed to BCO by way of dividends, repurchase of shares or return or reduction of share or stated capital of the Investcos in regard to the shares of the Investcos held by BCO. The funds distributed by the Investcos to BCO may be placed with ACO by BCO for further investment either in the Investcos or in other investments.
16) The non-voting participating shares of each Investco held by BCO may be set up in a number of series of classes of shares which reflect different years to allow BCO to track the quantum of investment made in each Investco for each year.
17) The constating documents of the Investcos will provide the Investcos with the authority to borrow funds and issue debt obligations. Upon incorporation, the Investcos will borrow funds from ACO to assist the Investcos in funding their initial incorporation costs. In connection with this borrowing, the Investcos will issue a demand promissory note to ACO to evidence this borrowing.
18) While, as discussed, we are not prepared to rule that BCO is a corporation described in paragraph 149(1)(d) since this transaction has already taken place, you advise as a fact that BCO so qualifies as such.
19) As we also discussed, we are not prepared to rule on the tax status of ACO for purposes of the Act since the transaction has already taken place. However, you advise that the proposed transactions to be undertaken by ACO are within the mandate of ACO as agent of the Province.
PURPOSE OF THE PROPOSED TRANSACTIONS
20) Some of the investments made by ACO for BCO include investments in the United States. If BCO invests directly in such investments it may become subject to United States tax filing obligations directly which it wishes, for administrative purposes, to avoid. Accordingly, it is proposed that the Investcos act as an investment vehicle for BCO which would only subject the Investcos to the tax filing obligations in the United States and not BCO itself.
21) BCO does not wish, for administrative purposes, to be required to consolidate the Investcos for accounting purposes. If BCO were to own all the voting and non-voting shares of each Investco, it may be required to consolidate each Investco for accounting purposes. As a result, it is proposed that all of the voting control of each Investco be held by BCO by virtue of its ownership of the voting non-participating shares of each Investco.
RULING GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, and provided that paragraph 149(1)(d) applies to BCO and that ACO is acting within its mandate as agent of the Province as described in 18 and 19 above, our ruling is as follows:
Provided all of the outstanding non-voting participating shares of each Investco are held by BCO and all of the outstanding voting non-participating shares of each Investco are held by ACO, as described in 13 above, immediately following completion of the proposed transactions, each Investco will be exempt from tax on its taxable income under Part I pursuant to paragraph 149(1)(d.3).
This ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on the Canada Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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