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 Investors that collectively own XXXXXXXXXX % of a Canadian corporation are "acting in concert", and therefore not at arm's length when they wind up the structure in order to sell the shares?
Position: Winding up the structure will not, in itself, cause the Investors to deal at arm's length.
Reasons: The shares are very widely held, and each Investor acts in his/its own interest.
XXXXXXXXXX 2005-013304
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Collectively the "Investors"
Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX in which you ask for an advance income tax ruling on behalf of the above Investors.
Definitions
In this letter, the following terms have the meanings specified:
(a) "ACo" means XXXXXXXXXX.
(b) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1 as amended to the date hereof. All statute references in this letter are to the Act unless otherwise indicated.
(c) "arm's length" has the meaning assigned by subsection 251(1).
(d) "BCo" means XXXXXXXXXX.
(e) "BCo Loan" means a loan from DCo to BCo as described in 9 below.
(f) "CCo" means XXXXXXXXXX.
(g) "CRA" means the Canada Revenue Agency.
(h) "DCo" means XXXXXXXXXX.
(i) "Investors" means the shareholders of DCo, as listed in Appendix I.
(j) "IPO" means the initial public offering of ACo's shares on NASDAQ on XXXXXXXXXX.
(k) "NASDAQ" means the NASDAQ National Market.
(l) "private corporation" has the meaning assigned by subsection 89(1).
(m) "public corporation" has the meaning assigned by subsection 89(1).
(n) "related" has the meaning assigned by subsection 251(2).
(o) "taxable Canadian property" has the meaning assigned by subsection 248(1).
(p) "Treaty" means the Agreement Between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, January 1, 1976.
Facts
1. ACo is a Canadian public corporation whose common shares are listed on the NASDAQ. Prior to its initial public offering on NASDAQ and the XXXXXXXXXX Stock Exchange, ACo was a XXXXXXXXXX incorporated private corporation.
2. XXXXXXXXXX.
3. BCo is a domestic Barbados Society with Restricted Liability. The central management and control of BCo is in Barbados. Accordingly, BCo is resident in Barbados under the Treaty and under Canadian common law principles.
4. CCo is a domestic Barbados corporation. The central management and control of CCo is in Barbados. Accordingly, CCo is resident in Barbados under the Treaty and under Canadian common law principles.
5. DCo is a domestic Barbados International Society with Restricted Liability. DCo has elected to be treated as an International Business Corporation under the provisions of the Barbados International Business Companies (Exemption from Income Tax) Act, Cap 77. The central management and control of DCo is in Barbados. Accordingly, DCo is resident in Barbados under Canadian common law principles.
6. A description of the Investors and their relevant shareholdings in DCo are set out in Appendix I. The Investors are served by the International Tax Services Office. The Investors that are partnerships are very widely held, with virtually all of the units held by residents of the U.S. or other countries with which Canada has an income tax convention.
7. DCo has issued and outstanding XXXXXXXXXX shares (or quotas) divided into five classes (Classes A, B, C, D and E). None of the holders of any particular class of shares is related to the holders of another particular class of shares. No two partnerships holding different classes of DCo shares are controlled by the same partner (either directly or with a related group of partners). Finally, none of DCo's shareholders are related to DCo.
8. DCo owns all of the issued and outstanding shares of CCo.
9. DCo owns XXXXXXXXXX shares (XXXXXXXXXX% of the issued and outstanding shares) of BCo. DCo also has a loan receivable ("BCo Loan") from BCo with a principal amount outstanding as of XXXXXXXXXX of US$XXXXXXXXXX. DCo has no other assets other than the shares of CCo, the BCo Loan, and the shares of BCo.
10. The remaining XXXXXXXXXX shares (XXXXXXXXXX% of the issued and outstanding shares) of BCo are owned by CCo. CCo has no other assets.
11. BCo owns XXXXXXXXXX or XXXXXXXXXX% of the common shares of ACo based on current Securities Exchange Commission filings. BCo holds its investment in the common shares of ACo as capital property, not as inventory. BCo has no other assets.
12. Prior to ACo's IPO and a related stock split, BCo had initially acquired XXXXXXXXXX Series A Preferred shares of ACo as a private placement from treasury. The acquisition was completed on XXXXXXXXXX . The Series A Preferred shares were taxable Canadian property to BCo. The Series A Preferred shares contained a conversion feature such that the shares were converted to common shares of ACo upon the closing of the IPO. The conversion occurred on a tax-deferred basis pursuant to subsection 51(1), and, in accordance with paragraph 51(1)(f), the common shares of ACo are deemed to be taxable Canadian property to BCo.
Proposed Transactions
13. BCo will commence winding up and will distribute all of its common shares of ACo to DCo on settlement of the loan and on redemption of its issued and outstanding shares. DCo will hold the common shares of ACo as capital property and not as inventory.
14. Immediately after the windup of BCo, DCo will commence winding up and will distribute all of the common shares of ACo to the Investors. The distribution of the ACo common shares to the Investors will be in proportion to their entitlement to the assets of DCo on winding up. The Investors will hold the common shares of ACo as capital property and not as inventory.
15. Each Investor will sell or otherwise transfer some, but not necessarily all, of his/its ACo common shares, based upon his/its own investment criteria and circumstances.
Purpose of the Proposed Transactions
The trading restrictions for the ACo shares will be lifted on XXXXXXXXXX. The BCo/DCo structure requires coordinated block sales of ACo shares. This would require coordination among the Investors, which is contrary to their particular interests and, moreover, creates issues under U.S. securities laws. Removing the BCo/DCo structure will make it easier for each Investor to sell or otherwise transfer all or retain some of the ACo shares based on his/its own investment criteria and circumstances.
To the best of your knowledge, and that of the Investors, none of the issues involved in this advance income tax ruling is:
a. in an earlier return of the Investors or a person related to any of them;
b. being considered or under assessment by a tax services office or taxation centre in connection with a previously filed tax return of the Investors or a person related to any of them;
c. under objection by the Investors or a person related to any of them;
d. before the courts, and no judgement has been issued which may be under appeal; or
e. the subject of a ruling previously issued by the Directorate.
Ruling Given
Provided the preceding statements constitute a complete and accurate disclosure of all the relevant definitions, facts, proposed transactions, purpose of the proposed transactions and other information, and provided the proposed transactions are completed in the manner described above, our rulings is as follows:
The winding up of BCo and DCo and the transfer of the ACo shares to DCo and to the Investors will not, in and of itself, cause the Investors to be considered to deal not at arm's length with one another, with BCo or with DCo.
The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R5, dated May 17, 2002, and is binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX.
? The residence of BCo, CCo and DCo for purposes of the Act is a question of fact, and nothing in this advance income tax ruling should be construed as implying that the CRA has agreed that BCo, CCo or DCo are in fact, resident in Barbados for purposes of the Act.
? Pursuant to paragraph (f) of the definition of taxable Canadian property in subsection 248(1), the shares of ACo will be taxable Canadian property to a shareholder at a particular time if, at any time during the 60-month period that ends at that time, the shareholder, persons with whom the shareholder did not deal at arm's length, or the shareholder together with such persons owned 25% or more of the issued shares of any class of the capital stock of ACo. Other than the ruling provided above, nothing in this advance income tax ruling should be construed as implying that the CRA has agreed that the Investors deal at arm's length with one another, with DCo or with BCo.
? Nothing in this advance income tax ruling should be construed as implying that the CRA has agreed to the application of the Treaty to any of the facts or proposed transactions herein.
Yours truly,
XXXXXXXXXX
Acting Section Manager
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
XXXXXXXXXX
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