2005 Ruling 2005-0153941R3 - Withholding Tax Rate

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 the 5% reduced withholding rate, pursuant to paragraph 2 of Article X of the Canada-US Treaty, applies to the proposed dividend(s) from a Canadian corporation, through a partnership, to US partners that are issued more than 10% of the voting shares of the Canadian corporation that is paying the dividend.

Position: Yes.

Reasons: Each of the partners is resident of the US for purposes of the Canada-US Treaty. The issuance of the voting shares is not considered to be an abuse of the provisions of the Act or the Canada-US treaty pursuant to paragraph 7 of Article XXIX-A of the Treaty.

XXXXXXXXXX 										2005-015394

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX.

Advance Income Tax Ruling

This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above taxpayers. We acknowledge receipt of the additional information provided to us in the XXXXXXXXXX e-mail.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supplement), c.1, as amended, (the "Act") to the date of this advance income tax ruling and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions.

Unless otherwise stated, all references to currency are to Canadian dollars.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

(a) "Foreign Parent" is XXXXXXXXXX.;

(b) "Foreign Sub1" is XXXXXXXXXX.;

(c) "Foreign Sub2" is XXXXXXXXXX.;

(d) "Foreign Sub3" is XXXXXXXXXX;

(e) "Foreign Corporation" is a corporation formed and existing under the laws of XXXXXXXXXX;

(f) "Foreign Partnership" is the general partnership formed under XXXXXXXXXX

(f) "Canadian Parent" is XXXXXXXXXX;

(g) "CanSub1" is XXXXXXXXXX.;

(h) "CanSub2" is XXXXXXXXXX;

(i) "NSULC" is an unlimited liability company existing under the XXXXXXXXXX

(j) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(k) "Treaty" means the Convention between Canada and the United States of America With Respect to Taxes on Income and on Capital, which was signed on September 26, 1980 and amended by subsequent protocols;

(l) "Code" means the United States Internal Revenue Code;

(m) "Foreign Stock Exchange" is the XXXXXXXXXX Stock Exchange; and

(n) "Foreign Country" is the United States of America.

Facts

1. Foreign Parent is a Foreign Corporation. XXXXXXXXXX. The shares of Foreign Parent are listed on the Foreign Stock Exchange.

2. Foreign Sub1 is a Foreign Corporation and a wholly-owned subsidiary of Foreign Parent.

3. Foreign Sub2 is a Foreign Corporation. Foreign Parent owns approximately XXXXXXXXXX percent of the voting shares of Foreign Sub2. Foreign Sub1 owns the remaining approximately XXXXXXXXXX percent of the voting shares of Foreign Sub2. Foreign Sub2 is a company that is a resident of the Foreign Country for purposes of the Treaty.

4. Foreign Sub3 is a Foreign Corporation and a wholly-owned subsidiary of Foreign Sub2. Foreign Sub3 is a company that is a resident of the Foreign Country for purposes of the Treaty.

5. On XXXXXXXXXX, Foreign Sub2 and Foreign Sub3 formed the Foreign Partnership. The Foreign Partnership was formed to centralize ownership of the direct and indirect international subsidiaries of Foreign Parent, including CanSub1. As a result, the Foreign Partnership currently owns controlling interests in a number of entities operating in foreign countries. These entities are also engaged in the XXXXXXXXXX related businesses. The sole partners of the Foreign Partnership have always been Foreign Sub2 and Foreign Sub3. Foreign Sub2's interest in the Foreign Partnership is approximately XXXXXXXXXX% and Foreign Sub3's interest in the Foreign Partnership is approximately XXXXXXXXXX%. The Foreign Partnership is not taxable as a corporation for purposes of the Code.

6. Canadian Parent is an NSULC. Canadian Parent is a taxable Canadian corporation with a XXXXXXXXXX year-end for purposes of the Act. The authorized share capital of Canadian Parent consists of XXXXXXXXXX common shares. Each common share entitles the holder to one vote per share, to dividends as and when declared and to a residual right to the assets of the corporation upon dissolution. The Foreign Partnership owns XXXXXXXXXX common shares, representing all of the issued and outstanding shares of Canadian Parent.

7. Canadian Parent's office is in XXXXXXXXXX. Its Business Number is XXXXXXXXXX. Canadian Parent files its tax returns with the XXXXXXXXXX Taxation Centre and it deals with the XXXXXXXXXX Tax Services Office.

8. CanSub1 is a corporation formed under the laws of Canada. CanSub1 is a taxable Canadian corporation with a XXXXXXXXXX year-end for purposes of the Act. CanSub1's issued and outstanding share capital consists of common shares, class A preferred shares and class B preferred shares. Canadian Parent owns all of the issued and outstanding common shares of CanSub1. The Foreign Partnership owns all of the issued and outstanding class A preferred shares of CanSub1. CanSub2 owns all of the issued and outstanding class B preferred shares of CanSub1.

9. CanSub2 is an NSULC and is a taxable Canadian corporation. The Foreign Partnership owns all of the issued and outstanding shares of CanSub2.

10. We understand that, to the best of your knowledge and that of the above taxpayers, none of the issues involved in the ruling request:

(i) is in an earlier return of the taxpayers or a related person,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person,

(iii) is under objection by the taxpayers or a related person, or

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

Proposed Transactions

11. The articles of Canadian Parent will be amended to create a new class of shares. The articles will be amended to authorize XXXXXXXXXX class A voting preferred shares (the "Class A Shares"). The terms and conditions of each Class A Share will be as follows:

(a) it will entitle the holder thereof to one (1) vote at all meetings of the shareholders;

(b) it will carry a right to dividends, as and when declared by the Canadian Parent's board of directors;

(c) it will be redeemable and retractable at the redemption price of $XXXXXXXXXX per share plus declared and unpaid dividends, payable in cash; and

(d) on the dissolution of Canadian Parent, the holder thereof will be entitled to the redemption price, plus declared and unpaid dividends, in preference to any participation by the common share holders.

12. Each of Foreign Sub2 and Foreign Sub3 will subscribe for XXXXXXXXXX Class A Shares of Canadian Parent. Canadian Parent will issue such shares in consideration for a cash subscription price of $XXXXXXXXXX received from each of Foreign Sub2 and Foreign Sub3.

13. Canadian Parent will pay one or more dividends aggregating not more than approximately $XXXXXXXXXX (the "Repatriation Distribution") to the Foreign Partnership after the transactions described in 11 and 12 above are completed, but prior to XXXXXXXXXX.

Purpose of the Proposed Transactions

The Repatriation Distribution is intended to effect a distribution in an effective tax manner by avoiding excess Canadian withholding tax and by qualifying for the reduced income tax rate under newly enacted section 965 of the Code.

The proposed transactions will result in each of Foreign Sub2 and Foreign Sub3 owning at least 10% of the voting shares of Canadian Parent. This will enable Foreign Sub2 and Foreign Sub3 to claim the benefit of the 5% reduced withholding tax rate, pursuant to the Treaty, on the Repatriation Distribution to the Foreign Partnership.

Since section 965 of the Code only applies to dividends paid during either the taxpayer's last taxable year that begins before XXXXXXXXXX, or the taxpayer's first taxable year that begins during the one-year period beginning on XXXXXXXXXX, and since the partners of the Foreign Partnership are XXXXXXXXXX is the last date on which Canadian Parent can make a Repatriation Distribution to the Foreign Partnership and benefit from the preferential income tax rate provided for in section 965 of the Code.

Rulings

Provided that:

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;

(b) the proposed transactions are completed in the manner described above; and

(c) there are no other transactions which may be relevant to the rulings requested,

our rulings are as follows:

A. The Repatriation Distribution made by Canadian Parent on its common shares held by the Foreign Partnership will be subject to Part XIII withholding tax at a 5% rate pursuant to subparagraph 2(a) of Article X of the Treaty.

B. The application of the reduced withholding tax rate, under subparagraph 2(a) of Article X of the Treaty, to the Repatriation Distribution paid by Canadian Parent on the common shares held by the Foreign Partnership will not be denied pursuant to subsection 245(2) of the Act or pursuant to paragraph 7 of Article XXIX-A of the Treaty.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the Canada Revenue Agency ("CRA") on May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein. Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein.

The rulings given are based solely on the facts, proposed transactions and purposes of the proposed transactions described above. Facts and proposed transactions, if any, in the documents submitted with your request and not described above, do not form part of the facts and proposed transactions on which this advance income tax ruling is based.

Yours truly,

XXXXXXXXXX
for Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch