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 leasehold interest in land situated in Canada is a real property situated in Canada for purposes of Article XIII(3)(b)(ii) of the Canada-U.S. Income Tax Convention?
Position: Yes.
Reasons: Leasehold interest in a land situated in Canada is an interest in a real property and a real property situated in Canada.
XXXXXXXXXX 2004-005590
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling - XXXXXXXXXX
This is in response to your letter dated XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the additional information provided in your submissions of XXXXXXXXXX, and the information provided during our telephone conversations (XXXXXXXXXX).
We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling is:
(i) in an earlier return of a taxpayer identified in this document or of a related person,
(ii) being considered by any Tax Services Office or Taxation Center of the CRA in connection with a tax return already filed,
(iii) under objection by a taxpayer identified in this document or by a related person,
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired,
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate to the taxpayer or a related person.
In this letter, unless otherwise expressly stated, the following terms have the meanings specified:
(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th supp.) c.1 as amended from time to time and consolidated to the date of this letter (herein referred to as the "Act") and unless otherwise expressly stated, every reference to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act;
(b) "Canco" means XXXXXXXXXX;
(c) "CBCA" means the Canada Business Corporation Act;
(d) "Convention" means the Canada-US Income Tax Convention (1980), as amended to the date hereof;
(e) "CRA" means the Canada Revenue Agency;
(f) "Holdco" means XXXXXXXXXX;
(g) "M-A" means XXXXXXXXXX;
(h) "M-B" means XXXXXXXXXX;
(i) "Private corporation" has the meaning assigned by subsection 89(1);
(j) "Taxable Canadian Corporation" has the meaning assigned by subsection 89(1).
Our understanding of the facts and proposed transaction is as follows:
FACTS
1. M-A presently resides at XXXXXXXXXX, and M-B presently resides at XXXXXXXXXX. M-A and M-B are non-residents of Canada and are residents of the United States for purposes of the Act and the Convention. M-A and M-B together own XXXXXXXXXX% of the issued and outstanding shares of Holdco. The capital stock of Holdco consists of XXXXXXXXXX common shares.
2. Holdco is a corporation incorporated under the CBCA, a taxable Canadian corporation, and a private corporation. Holdco is a holding corporation that owns all the issued shares of Canco.
3. The Business Number of Holdco is XXXXXXXXXX. Holdco deals with the XXXXXXXXXX Tax Services Office. The business office of Holdco is XXXXXXXXXX.
4. The only assets of Holdco are its investment in shares of the capital stock of Canco and a small amount of cash.
5. Canco is a corporation incorporated under the CBCA, a taxable Canadian corporation and a private corporation.
6. The Business Number of Canco is XXXXXXXXXX. Canco deals with the XXXXXXXXXX Tax Services Office. The business office of Canco is XXXXXXXXXX.
7. Canco operates a business in the XXXXXXXXXX. The operation can be summarized as a XXXXXXXXXX.
8. In order to exploit the business, Canco owns various fixed assets including land, buildings, rolling stock, and production and other equipment.
9. Canco also entered into a lease with XXXXXXXXXX. The lease is a XXXXXXXXXX operating lease to XXXXXXXXXX with a renewable period of XXXXXXXXXX years. XXXXXXXXXX.
10. Canco has obtained "XXXXXXXXXX" a permit XXXXXXXXXX.
11. Over the years, Canco has developed significant know-how and proprietary processes ("know-how") in the XXXXXXXXXX. The Canco process consists of XXXXXXXXXX.
12. Canco is one of a limited number of businesses in this XXXXXXXXXX industry. It is clear that Canco could not operate without the agreement of the XXXXXXXXXX. The operating permit and the XXXXXXXXXX lease are two key assets that Canco must have to operate in accordance with the laws regarding the XXXXXXXXXX.
PROPOSED TRANSACTION AND PURPOSE
13. M-A and M-B have received offers from several bidders for the acquisition of their shares in Holdco and they are proposing to dispose of their shares in Holdco.
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 completed in the manner described above, our rulings are as follows:
A. For the purposes of paragraph 3(b)(ii) of Article XIII of the Convention, the leasehold interest, as described in paragraph 9 herein, represents a real property situated in Canada.
B. For the purposes of paragraph 3(b)(ii) of Article XIII of the Convention, the permit, as described in paragraph 10 herein, does not represent a real property situated in Canada.
C. For the purposes of paragraph 3(b)(ii) of Article XIII of the Convention, the know-how, as described in paragraph 11 herein, does not represent a real property situated in Canada.
We express no view in respect of nor have we considered the fair market value of above properties including shares or whether value of shares is derived principally from real property for purposes of Article XIII of the Convention.
The Rulings are given subject to the limitations and qualifications set out in Information Circular IC 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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