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: i) Are payments pursuant to a bareboat charter made for the use of corporeal property? ii) Does Article 21 of the Norway Treaty apply to a bareboat charter? iii) Are payments under a bareboat charter covered by Article 7 of the Norway Treaty? iv) Should we consider applying GAAR to the use of single purpose corporations to hold the ships?
Position: i) Yes. ii) No. iii) Yes. iv) No.
Reasons: i) See IT-494. ii) See 2003-0012325. iii) See 913233A. iv) Ownership structure is consistent with the taxpayer's worldwide ownership structure and there are no discernible tax benefits.
XXXXXXXXXX 2005-012796
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
Partners of XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the Partners with respect to the Part XIII withholding tax implications of the Bareboat Payments to be made by Aco and Bco to the Partnership. In this ruling all statutory references are to the Act unless otherwise stated. This document is based solely on the definitions, facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
Definitions
1. In this letter unless expressly stated otherwise:
a) "Aco" means XXXXXXXXXX., a limited liability company incorporated in Norway.
b) "Act" means the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended to the date hereof.
c) "Bareboat Charter" means a contract under which a ship is leased or rented for a period of time on an unmanned basis. The person chartering the ship is responsible for manning and operating the ship and paying all expenses related thereto.
d) "Bareboat Payments" means the payments made from Aco to the Partnership under the terms of the Bareboat Charter of Ship 1 and from Bco to the Partnership under the terms of the Bareboat Charter of Ship 2.
e) "Bco" means XXXXXXXXXX., a limited liability company incorporated in Norway.
f) "Canada" means Canada as defined in section 5 of the Income Tax Conventions Interpretation Act, R.S.C. 1985, c. I-4, as amended to the date hereof.
g) "Canco 1" means XXXXXXXXXX.
h) "Canco 2" means XXXXXXXXXX.
i) "Cancos" means Canco 1 and Canco 2 collectively.
j) "CRA" means Canada Revenue Agency.
k) "Group of Companies" means the XXXXXXXXXX group of companies. Aco, Bco, Sisterco and Parentco are part of this group.
l) XXXXXXXXXX
m) "Parentco" means XXXXXXXXXX., a limited liability company incorporated in Norway.
n) "Partner 1" means XXXXXXXXXX., a limited liability company incorporated in Norway.
o) "Partner 2" means XXXXXXXXXX a limited liability company incorporated in Norway.
p) "Partner 3" means XXXXXXXXXX, who holds a XXXXXXXXXX% interest in the Partnership.
q) "Partners" means Partner 1, Partner 2 and Partner 3 collectively.
r) "Partnership" means XXXXXXXXXX., a limited partnership formed under Norwegian law. The partners of the Partnership are Partner 1, Partner 2 and Partner 3.
s) "Ship 1" means the XXXXXXXXXX.
t) "Ship 2" means the XXXXXXXXXX.
u) "Ships" means Ship 1 and Ship 2 collectively.
v) "Shipyard" means the XXXXXXXXXX.
w) "Sisterco" means XXXXXXXXXX., a limited liability company incorporated in Norway.
x) "Time Charter" means a contract under which the services of the ship are provided on a fully manned, provisioned, stored and insured basis. The person chartering the ship is responsible for bunkers, port charges, canal tolls and crew overtime connected with the cargo. The charter may cover varying periods of time and a daily or monthly fixed rate is paid for the charter.
y) "Tax Treaty" means the Canada-Norway Income Tax Convention.
Facts
2. To the best of your knowledge, and that of each of the Partners, none of the issues involved in this ruling request are:
a. reported in an earlier tax return of any of the Partners or a person related to any of them;
b. being considered by a tax services office or a taxation centre in connection with a previously filed tax return of any of the Partners or a person related to any of them;
c. under objection by any of the Partners or a person related to any of them;
d. before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has expired in respect of any of the Partners or a person related to any of them; or
e. the subject of a ruling previously considered by the Income Tax Rulings Directorate for any of the Partners or a person related to any of them.
3. Aco, Bco, Sisterco, Parentco and the Partners are residents of Norway for purposes of the Tax Treaty and are non-residents of Canada for purposes of the Act.
4. Prior to XXXXXXXXXX, Parentco was the sole shareholder of Aco and Bco.
5. The Partnership is a partnership for purposes of the Act. The Partnership is not a resident of Norway for purposes of the Tax Treaty. The Partners are taxable under Norwegian tax law on their proportionate share of any income earned by the Partnership.
6. Canco 1 and Canco 2 are residents of Canada for purposes of the Act and the Tax Treaty.
7. Partner 1 and Partner 2 deal at arm's length with each other. Partner 1 and Partner 2 together own the Group of Companies.
8. Partner 3 is a director of various companies within the Group of Companies.
9. Partner 1 and Partner 2 indirectly own XXXXXXXXXX vessels, consisting mainly of XXXXXXXXXX. Partner 1 and Partner 2 hold interests in XXXXXXXXXX single purpose corporations and limited partnerships, of which XXXXXXXXXX own XXXXXXXXXX.
10. On XXXXXXXXXX Parentco entered into XXXXXXXXXX shipbuilding contracts with XXXXXXXXXX. The contracts were for the construction of the Ships, which were to be built at the Shipyard and delivered in XXXXXXXXXX.
11. On XXXXXXXXXX Sisterco entered into Time Charters with the Cancos, under which the Ships would be provided to the Cancos for the transportation of XXXXXXXXXX. The Ships would operate both inside and outside of Canada. The Time Charter for Ship 1 has a XXXXXXXXXX-year term and the Time Charter for Ship 2 has a XXXXXXXXXX-year term. These terms began when delivery of the Ships was taken from the Shipyard.
12. On XXXXXXXXXX Parentco entered into a Bareboat Charter with Aco under which Parentco leased Ship 1 to Aco. On the same day Parentco entered into a Bareboat Charter with Bco under which Parentco leased Ship 2 to Bco. The durations of these Bareboat Charters coincide with those of the Time Charters referred to in paragraph 11.
13. On XXXXXXXXXX, by agreement with the Cancos, Sisterco novated and assigned the Time Charter for Ship 1 to Aco, and novated and assigned the Time Charter for Ship 2 to Bco.
14. On XXXXXXXXXX Parentco sold to the Partnership its rights, title and interest in the shipbuilding contracts referred to in paragraph 10 and in the Bareboat Charters referred to in paragraph 12, and its shares of Aco and Bco. Parentco was paid cash and the Partnership assumed certain liabilities of Parentco.
15. Under the Bareboat Charters for Ship 1 and Ship 2, all operating expenses are borne by Aco and Bco, respectively. The Bareboat Payments to be made by Aco and Bco are based on the Time-Charter rates paid by the Cancos, less a discount to take into account the expected operating costs associated with the vessels over the life of the contracts and to allow Aco and Bco a profit element that recognizes the operating risks they bear. Since the Time Charter for Ship 1 has a shorter duration, the daily rate for Ship 1 is higher than that for Ship 2.
16. Aco and Bco have hired captains and crew for the Ships from XXXXXXXXXX a corporation resident in Canada for purposes of the Act and it deals at arm's length with Aco and Bco. The captains and crew consist solely of individuals that are residents of Canada for purposes of the Act.
17. Aco and Bco are registered in the Province of XXXXXXXXXX for the purpose of doing business in that province.
18. The Partnership does not have a permanent establishment in Canada for purposes of the Tax Treaty. None of the Partners have a permanent establishment in Canada for purposes of the Tax Treaty.
19. Both Ships were delivered to the Partnership in XXXXXXXXXX.
20. XXXXXXXXXX.
21. Aco and Bco began to make Bareboat Payments to the Partnership beginning from the date the Ships were delivered. The Bareboat Payments to the Partnership will be made as on account of, or in lieu of, or in satisfaction of Aco's and Bco's use of, or right to use, the vessels inside and outside of Canada.
22. XXXXXXXXXX.
Proposed Transaction
23. XXXXXXXXXX.
24. Aco and Bco will have permanent establishments for purposes of the Tax Treaty in the Province of XXXXXXXXXX, from which the operation of the Ships will be managed.
25. The Partnership will not carry on any activities with respect to the Ships through a permanent establishment as defined in Article 5 of the Tax Treaty, in Canada. None of the Partners will carry on any activities with respect to the Ships through a permanent establishment as defined in Article 5 of the Tax Treaty, in Canada.
Purpose of Proposed Transaction
26. The overall purpose of the proposed transaction is to provide the Ships on a Time-Charter basis to the Cancos. Ownership of the Ships rests with the Partnership as part of the consolidation of its modern tanker fleet to allow long-term financing to be obtained under common security. The Bareboat Charters to Aco and Bco are consistent with this consolidation approach.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transaction and the purpose of the proposed transaction, and provided that the proposed transaction is completed in the manner described above, our rulings are as follows:
A. To the extent such payments would otherwise be taxable under Part XIII, pursuant to subparagraph 212(1)(d)(ix) the Bareboat Payments will be exempt from withholding under Part XIII to the extent they relate to the use of the Ships outside Canada.
B. Article 21 of the Tax Treaty will not deem either the Partnership or its Partners to have a permanent establishment in Canada solely by reason of having entered into Bareboat Charters with Aco and Bco with respect to the Ships.
C. Neither the Partnership nor the Partners will have a permanent establishment in Canada for purposes of Article 5 of the Tax Treaty, solely by reason of having entered into Bareboat Charters with Aco and Bco with respect to the Ships.
D. Pursuant to paragraph 1 of Article 7 of the Tax Treaty, the Bareboat Payments will be exempt from withholding under Part XIII to the extent they relate to the use of the Ships in Canada.
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5, and are binding on the CRA provided that the proposed transaction is completed by 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 that, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this ruling letter is to be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transaction other than as specifically described herein, and in particular does not consider the potential application of section 247.
Yours truly,
XXXXXXXXXX
For Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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