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: 1) Whether the US corporation will be entitled to the benefits of the treaty notwithstanding the proposed transaction? 2) Whether another entity in the group, the agent, will be considered to be carrying business in Canada?
Position: 1) Yes 2) No
Reasons: 1) The payments should be viewed as being made to the principal. 2) The services are not being rendered in Canada
XXXXXXXXXX 2004-009617
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request in respect of XXXXXXXXXX (USLLC) and XXXXXXXXXX (USCO 3)
This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer with respect to the transactions described herein. We acknowledge further information supplied in your letter dated XXXXXXXXXX and your facsimile dated XXXXXXXXXX.
To the best of your knowledge and that of USLLC and USCO 3, none of the issues involved in this ruling request are:
a. in an earlier return of USCO 3, or a related person,
b. being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of USLLC or a related person,
c. under objection by USCO 3 or a related person,
d. before the courts, or
e. the subject of a ruling previously issued by CCRA.
In this letter, references to the "Act" mean the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof. Unless otherwise stated, statutory references in this letter are to the Act. Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is set out below.
I. DEFINITIONS
"R&D" means research and development.
"CANCO" means XXXXXXXXXX located at XXXXXXXXXX. The location of the Tax Services Office and Taxation Centre where CANCO's returns are filed is XXXXXXXXXX.
"THE GROUP" means USCO 1 and all companies directly or indirectly affiliated with USCO 1
"USCO 2" means XXXXXXXXXX.
"USCO 1" means XXXXXXXXXX.
"USLLC" means XXXXXXXXXX.
"USCO 3" means XXXXXXXXXX.
II. FACTS
Description of the Business:
1. XXXXXXXXXX.
2. XXXXXXXXXX.
3. THE GROUP' services revenue consists of fees derived from XXXXXXXXXX.
Organizational Structure:
4. USCO 1 is a publicly held XXXXXXXXXX corporation. USCO 1 is a holding company with no business activities of its own.
5. The organizational chart depicting the structure of the group of companies as it relates to THE GROUP' activities in Canada was attached to your ruling request.
6. USCO 2 is a XXXXXXXXXX corporation and all of its shares are held by USCO 1. USCO 2 holds the rights to THE GROUP intellectual property for the Americas. USCO 2 has some employees, but USLLC performs a significant portion of the continuing R&D of intellectual property as an R&D contractor of USCO 2, and is compensated by USCO 2 for those activities under an arm's length cost plus arrangement.
7. USCO 3 is a corporation incorporated under the laws of the State of XXXXXXXXXX and is taxed under subchapter C of the United States Internal Revenue Code. As of XXXXXXXXXX, USCO 3 makes all sales to Canadian customers and does its own invoicing to Canadian customers. Prior to XXXXXXXXXX USCO 3 was a holding company with no business activities of its own. USCO 3 has no Canadian employees and owns no assets in Canada. USCO 3 is registered for GST. All of the shares of USCO 3 are held by USCO 2.
8. USLLC is a XXXXXXXXXX limited liability company and all of its shares are held by USCO 3. Prior to XXXXXXXXXX, USLLC was XXXXXXXXXX, a corporation incorporated under the laws of the State of XXXXXXXXXX and taxed under subchapter C of the United States Internal Revenue Code. XXXXXXXXXX was the employer of substantially all U.S. employees of THE GROUP, with the exception of the employees of USCO 2. XXXXXXXXXX was performing the majority of the R&D activities within the Americas, as well as all of the marketing, sales, general and administrative activities within the U.S. USLLC outsources the manufacturing of all of its XXXXXXXXXX products. USLLC pays USCO 2 arm's length royalties for the use of USCO 2 intellectual property in the manufacturing, sale and support of its products. For the period from XXXXXXXXXX made all sales to Canadian customers and collected and remitted GST. As of XXXXXXXXXX ceased selling to Canadian customers.
9. USCO 3 purchases the products and services it sells to Canadian customers from USLLC. USLLC also provides all of the services necessary to support the business of USCO 3 (i.e., shipping products, invoicing, receivables collection, accounting support, etc.)
10. CANCO is a Canadian corporation and all of its shares are held by USLLC. CANCO performs all of the sales solicitation and marketing functions on behalf of USCO 3 (and formerly on behalf of XXXXXXXXXX) in Canada. CANCO performs marketing activities in Canada, identifies Canadian customers, provides product information to customers, meets with customers on USCO 3's behalf and provides the customer with a quote for product orders which is subject to approval of USCO 3. CANCO is compensated for these activities on an arm's length basis.
11. Contracts between USCO 3 and Canadian customers may provide for some services to be rendered in Canada. These services are provided by CANCO on behalf of USCO 3. CANCO invoices USCO 3 regarding the services provided to the Canadian customers and in turn USCO 3 invoices Canadian customers for the services.
12. For XXXXXXXXXX, approximately XXXXXXXXXX % of THE GROUP "Americas" revenue was from Canadian customers.
III. PROPOSED TRANSACTIONS
13. USCO 3 and USLLC will enter into an Agency and Administrative Services Agreement (the "Agreement") under which USLLC will perform services of order processing, invoicing, collection and related services for USCO 3 with respect to contracts between USCO 3 and its Canadian customers for the sale of the above-referenced products and services.
14. With respect to the "collection services", in the event that a Canadian customer has not paid its invoice, the process followed by US employees of USLLC would consist of the following:
a. If an account is overdue, a USLLC credit analyst in the US will first confirm that the billing was in accordance with the purchase order.
b. If the billing is correct, the credit analyst will telephone the customer to determine the reason for the payment discrepancy.
c. If there is an issue with the product, it would be referred back to the Canadian sales agent to attempt to resolve the issue (i.e. getting the XXXXXXXXXX working to the client's satisfaction). This could also result in the product being returned.
d. In the unusual circumstance that the customer cannot pay, the account may be turned over to the US collection agency or law firm that THE GROUP uses. Both third parties handle matters in Canada from their US offices.
15. With respect to the nature of the "related services" referred in the above paragraph 13, those services are comprised of legal services, credit assessment, order management, order entry, product delivery XXXXXXXXXX located in the US or notification to a third party fulfillment company in the US (not acting as an agent of USLLC), XXXXXXXXXX, and accounting services. Those services are more fully described in the detailed description of support services attached to your facsimile dated XXXXXXXXXX, submitted in connection with your ruling request. According to the facsimile of XXXXXXXXXX, and the letter dated XXXXXXXXXX, all of the employees and equipment (XXXXXXXXXX) of USLLC are located outside Canada.
16. Canadian customers will continue to enter into contracts with USCO 3 and will order products and services from USCO 3. A copy of a contract between USCO 3 and a Canadian customer was attached to your ruling request.
17. Where a contract covers customers that may operate in multiple jurisdictions one of which is Canada, the form of contract (a copy was attached to your ruling request) will specify that contracts with respect to customers in Canada will be entered into between the customer and USCO 3.
18. USLLC will receive and process customer orders for USCO 3 as a service and will have authority to bind USCO 3 as provided in the agency agreement. USCO 3 will approve orders, or will provide USLLC with the authority to fulfill orders on its behalf within specifications provided by USCO 3.
19. USLLC will issue invoices in its own name on behalf of USCO 3 and will collect payment on behalf of USCO 3. USCO 3 will assume all legal and economic risk for these activities carried out by USLLC. A draft Agency and Administrative Services Agreement was attached to your ruling request.
20. USCO 3 will continue to purchase the products and services from USLLC for sale to Canadian customers.
21. USLLC will receive payment of invoices on behalf of USCO 3. Cash remittances will be deposited into USCO 3's bank account. Risk of nonpayment will remain with USCO 3.
IV. PURPOSE OF THE PROPOSED TRANSACTIONS
22. USLLC sells to customers throughout the Americas. It has the personnel, systems and infrastructure to carry out these activities. However, due to the lack of application of the Canada-U.S. Tax Treaty to a limited liability company, it is not tax-effective for USLLC to sell to Canadian customers. However, the THE GROUP accounting system cannot easily accommodate invoicing by two different legal entities (i.e., USCO 3 and USLLC). Currently, the preparation of invoices to Canadian customers by USCO 3 requires substantial non-automated activities. Therefore, the proposed transactions will accomplish the objective of having USCO 3 as the legal vendor to Canadian customers with the least disruption to THE GROUP' business operations.
V. RULINGS GIVEN
A. Nothing in the proposed activities that USLLC will carry out under the Agency and Services Agreement for USCO 3 will preclude USCO 3 from being entitled to the benefits of the Canada-US Tax Treaty, and in particular to the benefits of articles VII and XII of the said treaty.
B. USLLC will not be considered to be carrying on business in Canada solely because of the services and activities set out in the Agency and Administrative Services Agreement.
Nothing in this letter should be construed as implying that the CRA has considered, examined, agreed to or ruled on whether:
1- any of the entities mentioned in this letter have a permanent establishment or fixed base in Canada.
2- the right or property in respect of which the royalties are paid is effectively connected with a permanent establishment or fixed base for the purposes of paragraph 5 of article XII of the Canada-US Tax Treaty.
3- transfer pricing practices of entities in this letter are in accordance with section 247 of the Act.
The rulings given are based solely on the facts, proposed transactions and purposes of the proposed transactions described above. Facts and proposed transactions in the documents submitted with your request not described above do not form part of the facts and proposed transactions (except with respect to the facts stated in your facsimile dated XXXXXXXXXX referred to in the above paragraph 3 of part III of this letter) on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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