2005 Ruling 2005-0157901R3 - 212(1)(d)

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: Would payments in respect of the Participation Right described in the ruling letter be considered rents, royalties or similar payments for the purposes of paragraph 212(1)(d)?

Position: No.

Reasons: They do not fit into the definitions of rents, royalties or similar payments.

XXXXXXXXXX  							2005-015790

XXXXXXXXXX, 2005

Dear Sir:

Re: XXXXXXXXXX ("Bco")
XXXXXXXXXX ("Cco")
Advance Income Tax Ruling

We are writing in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge additional information provided in your letters of XXXXXXXXXX, in your email of XXXXXXXXXX, and during our various telephone conversations (XXXXXXXXXX).

Cco's tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre under Account Number XXXXXXXXXX.

To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this request:

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

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

(iii) is under objection; or

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

The ruling given herein is based solely on the facts, proposed transactions and purpose of the proposed transactions described below. Facts and proposed transactions in the documents submitted with your request not described below do not form part of the facts and proposed transactions on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader.

Definitions

In this letter the following terms have the meanings specified:

(a) "Aco" means XXXXXXXXXX., a public corporation incorporated under the laws of Canada;

(b) "Act" means the Income Tax Act R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act;

(c) "Bco" means XXXXXXXXXX., a corporation incorporated in XXXXXXXXXX the shares of which are publicly traded;

(d) "Cco" means XXXXXXXXXX., a corporation incorporated under the laws of XXXXXXXXXX;

(e) "Dco" means XXXXXXXXXX., a public corporation incorporated under the laws of XXXXXXXXXX;

(f) "Eco" means XXXXXXXXXX., a corporation incorporated in XXXXXXXXXX;

(g) "Mine" means the XXXXXXXXXX;

(h) "Project" means the XXXXXXXXXX that includes the rights to the XXXXXXXXXX mine together with related tangible and intangible assets; and

(i) "Public corporation" has the meaning assigned under subsection 89(1).

Facts

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

1. Aco, a public corporation (within the meaning of subsection 89(1)) resident in Canada, owns XXXXXXXXXX% of all the issued and outstanding shares of Bco, which is a resident of XXXXXXXXXX and a non-resident person for the purposes of the Act.

2. Cco is resident in Canada and is a wholly-owned subsidiary of Bco.

3. Dco is a public corporation and a resident of Canada.

Prior to the transactions described in 5 below, each of Aco and Dco owned 50% of the Project.

4. In XXXXXXXXXX, Aco and Dco incorporated Eco in XXXXXXXXXX and each of Aco and Dco owned 50% of Eco initially. Each of Aco and Dco transferred its 50% interest in the Project to Eco in exchange for additional shares of Eco.

5. Subsequent to the transactions described in 5 above and in XXXXXXXXXX, Aco and Dco entered into a letter agreement for Dco to purchase from Aco all of the latter's interest in Eco such that Dco would own 100% of Eco. In consideration, Dco agreed to pay to Aco cash and to make further payments of the purchase price to Aco by way of a participation right (the "Participation Right"). In sum, the Participation Right is a right to receive payments on a quarterly basis. The payments are calculated by reference to the level of XXXXXXXXXX production from the Mine and the market price of XXXXXXXXXX. The payment is made in respect of the first XXXXXXXXXX removed from the Mine only if the market price of XXXXXXXXXX exceeds certain benchmark prices. If during the production of the first XXXXXXXXXX, the market price of XXXXXXXXXX falls below the benchmark prices then no payment is required.

6. Aco retained a security interest over the shares of Eco that were transferred to Dco to secure Dco's payment obligations to Aco, including those relating to the Participation Right. This security interest was later assigned by Aco to Bco and then from Bco to Cco when the Participation Right was transferred to them as described below and by them to their bank in respect of the loans made by the bank to them in respect of the purchase of the Participation Right.

7. On XXXXXXXXXX, Bco bought from Aco the Participation Right at fair market value. In consideration for the purchase, Bco agreed to make to Aco XXXXXXXXXX lump sum payments plus additional payments which are contingent on the level of XXXXXXXXXX production from the Mine exceeding XXXXXXXXXX.

8. Aco included the XXXXXXXXXX lump sum payments referred to in 8 above and certain Participation Right payments it received from Dco in computing its income in XXXXXXXXXX under subsection 59(1).

9. Immediately after the transfer referred to in 8 above but on the same day, Bco Transferred the Participation Right to Cco at fair market value pursuant to an Assignment and Payment Agreement. XXXXXXXXXX of the Assignment and Payment Agreement provides that in consideration for the sale, transfer and assignment of the Participation Right, Cco shall pay to Bco:

• $XXXXXXXXXX in Canadian currency; and
• an amount equal to XXXXXXXXXX% of the dollar amount of each Participation Right payment within XXXXXXXXXX business days after receipt of such payment by Cco from Dco.

10. None of Aco, Bco or Cco holds any mineral or mining rights related to the Mine or the Project issued by the government of XXXXXXXXXX after the transfer of the interest in Eco by Aco to Dco as described in 6 above.

Proposed Transactions

11. Bco will wind up Cco as its sole shareholder. As a result, the Participation Right held by Cco will be distributed to Bco. Dco will then be obligated to make the Participation Right payments to Bco.

Purpose of the Proposed Transactions

12. The reason for the proposed transactions is to simplify the corporate structure of the XXXXXXXXXX group and to resolve various XXXXXXXXXX accounting issues that have arisen because of the existing structure.

Ruling 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 ruling is that paragraph 212(1)(d) will not apply to the Participation Right payments made by Dco to Bco subsequent to the winding-up of Cco such that Dco will not be obligated to withhold tax under Part XIII on such payments.

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 Canada Revenue Agency (the "CRA") provided that the proposed transactions are completed by XXXXXXXXXX.

This ruling is based on the Act in the present form and does not take into account amendments to the Act which, if enacted into law, could have an effect on the ruling provided herein.

Other Comments

Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above. In particular, nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed the tax consequences of:

(a) the sale of the shares of Eco by Aco to Dco described in 6 above;

(b) the Participation Right payments made by Dco to Aco prior to the transfer of the Participation Right from Aco to Bco described in 8 above;

(c) the Participation Right payments made by Dco to Cco prior to the proposed winding-up of Cco described in 12 above;

(d) the payments made by Cco to Bco as consideration for the transfer of the Participation Right by Bco to Cco on XXXXXXXXXX described in 10 above and in respect of the Participation Right payments received by Cco from Dco as a result of such transfer; and

(e) the proposed winding-up of Cco referred to in 12 above other than the tax consequences specified in the ruling given.

In addition, the CRA provides no opinion whether the Participation Right payments to be received by Bco after the proposed transactions described in 12 above will be included in computing the foreign accrual property income of Bco.

Yours truly,

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