2007 Ruling 2006-0206961R3 - Entity Classification

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 XXXXXXXXXX cooperative will be treated as a corporation for purposes of the Act.

Position: Yes.

Reasons: The provisions of the foreign legislation and the notarial deed of the cooperative support the conclusion that the cooperative will be treated as a corporation for purposes of the Act

XXXXXXXXXX 									2006-020696

XXXXXXXXXX, 2007

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

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

Unless otherwise stated, all references herein to a statute are to the Income Tax Act R.S.C. 1985 (5th Supplement), c.1 (the "Act"), as amended 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 indicated.

The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions described in the documents submitted with your request that are not set out 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.

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

Definitions

(a) "Parent" means XXXXXXXXXX;

(b) "Foreignco" means XXXXXXXXXX;

(c) "Holdco" means XXXXXXXXXX;

(d) "Opco" means XXXXXXXXXX;

(e) "Subco" means XXXXXXXXXX;

(f) "Newco" means XXXXXXXXXX;

(g) "Partnership" means XXXXXXXXXX;

(h) "DC" means XXXXXXXXXX;

(i) "Coop" means XXXXXXXXXX;

(j) "LLC" means a limited liability company resident in Foreign Country 1;

(k) "Agreement" means the "XXXXXXXXXX" entered into by the Partnership and Newco;

(l) "Articles" means the articles attached to the notarial deed creating DC and filed with the appropriate "commercial register" in Foreign Country 2 on XXXXXXXXXX;

(m) "CRA" means the Canada Revenue Agency;

(n) "Exchange" means the XXXXXXXXXX Stock Exchange;

(o) "Foreign Country 1" means the United States of America;

(p) "Foreign Country 2" means XXXXXXXXXX;

(q) "Foreign Legislation" means the XXXXXXXXXX;

(r) "Original Member" means XXXXXXXXXX;

(s) "Member Agreements" means the agreements entered into by DC and Foreignco and DC and the Original Member upon the formation of DC;

(t) "adjusted cost base" ("ACB") has, by virtue of subsection 248(1) of the Act, the meaning assigned by section 54 of the Act;

(u) "arm's length" has the meaning assigned by subsection 251(1) of the Act;

(v) "capital property" has, by virtue of subsection 248(1) of the Act, the meaning assigned by section 54 of the Act;

(w) "foreign affiliate" has, by virtue of subsection 248(1) of the Act, the meaning assigned by subsection 95(1) of the Act;

(x) "controlled foreign affiliate" has, by virtue of subsection 248(1) of the Act, the meaning assigned by subsection 95(1) of the Act;

(y) "non-resident" has the meaning assigned by subsection 248(1) of the Act;

(z) "paid-up capital" has, by virtue of subsection 248(1) of the Act, the meaning assigned by subsection 89(1) of the Act;

(aa) "proceeds of disposition" has the meaning assigned by section 54 of the Act;

(bb) "public corporation" has, by virtue of subsection 248(1) of the Act, the meaning assigned by subsection 89(1) of the Act;

(cc) "related persons" has the meaning assigned by subsection 251(2) of the Act;

(dd) "share" has the meaning assigned by subsection 248(1) of the Act;

(ee) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act; and

(ff) "taxable Canadian corporation" has, by virtue of subsection 248(1) of the Act, the meaning assigned by subsection 89(1) of the Act.

Facts

1. Parent is a publicly traded company resident in Foreign Country 1. Its shares trade on the Exchange. Parent sought bankruptcy protection in Foreign Country 1 because of XXXXXXXXXX. In XXXXXXXXXX, a plan for emerging from bankruptcy was approved by a bankruptcy court in Foreign Country 1.

2. Foreignco is a corporation resident in Foreign Country 1 and is a subsidiary wholly-owned corporation of Parent.

3. Holdco was a taxable Canadian corporation and a subsidiary wholly-owned corporation of Foreignco. Holdco was resident in Canada for purposes of the Act.

4. Subco was a taxable Canadian corporation. Foreignco owned all of the common shares of Subco. Opco owned XXXXXXXXXX preference shares of Subco. Subco was resident in Canada for purposes of the Act.

5. Opco was a taxable Canadian corporation and a subsidiary wholly-owned corporation of Holdco. Opco was resident in Canada for purposes of the Act.

6. The Original Member is a company incorporated under the laws applicable thereto in Foreign Country 1. Parent indirectly owns all of the issued shares of the Original Member.

7. The Partnership was formed as a limited partnership in Foreign Country 2. Parent indirectly owns all of the membership interests of the Partnership. The Partnership owns all of the issued shares of a holding corporation ("ACO") incorporated in Foreign Country 2. ACO owns all of the issued shares of a corporation ("BCO") that was also incorporated in Foreign Country 2.

8. Coop is a cooperative formed pursuant to the Foreign Legislation of Foreign Country 2. Parent indirectly owns all of the membership interests in Coop.

9. Foreignco and the Original Member formed DC on XXXXXXXXXX. DC is a cooperative formed in Foreign Country 2 pursuant to the provisions of the Foreign Legislation. DC was established by a notarial deed pursuant to the Foreign Legislation and is registered with the appropriate "commercial register" in the Foreign Country. By virtue of the registration of the notarial deed with the "commercial register", DC is regarded as a legal entity under the Foreign Legislation that exists separate and apart from its members. Pursuant to the Foreign Legislation, with respect to the law of property, rights and interests, DC is considered to be equivalent to a natural person.

10. The Articles of DC include the following:

(a) DC will carry on its business in its own name and at its own expense and risk.

(b) Admission to membership in DC requires the unanimous written consent of all members of DC.

(c) Each member must make capital contributions to DC as unanimously agreed upon by all members. DC will issue one share to each member for each euro contributed to DC. Foreignco and the Original Member each made an initial capital contribution to DC in the amount of XXXXXXXXXX euros in exchange for XXXXXXXXXX shares in the capital of DC.

(d) The management of DC has the authority to represent DC.

(e) All members, if not suspended, shall be entitled to attend any general meeting of members and shall be entitled to vote thereat. The number of votes that a member may cast at a general meeting of members will be equal to the number of shares held by such member.

(f) The retained profits of DC will be available to DC for its use unless the members, at a general meeting, vote to distribute all, or a portion of, such retained profits. A vote to distribute retained profits must be unanimous by all members of DC. The distribution of any retained profits will be proportional to the shares of DC outstanding at the time of such distribution.

(g) The members and former members of DC will not be liable for any debts or losses incurred by DC that are in excess of their contributions to the capitalization of DC.

11. Subsequent to the formation of DC, the Original Member transferred its membership interest in DC to Foreignco such that Foreignco was the only member of DC on XXXXXXXXXX.

12. We understand that, to the best of your knowledge and that of Newco, none of the issues involved in this ruling letter:

(i) is in an earlier return of Newco or related persons of Newco,

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

(iii) is under objection by Newco or related persons of Newco, 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.

Completed Transactions

13. The following series of transactions were completed on XXXXXXXXXX:

(a) Foreignco contributed the shares of various subsidiaries, other than its Canadian subsidiaries, to DC and received additional membership interests in DC in the amount of XXXXXXXXXX euros.

(b) Foreignco transferred the shares of Holdco and Subco held by it to the Partnership in exchange for a general partnership interest in the Partnership.

(c) The Partnership incorporated a new taxable Canadian corporation ("PCO").

(d) The Partnership transferred the shares of Holdco held by it to PCO. The Partnership received additional shares of PCO and a note receivable as proceeds of disposition for the Holdco shares. The principal amount of the note receivable was equal to the paid-up capital (approximately $XXXXXXXXXX) of the Holdco shares immediately before the disposition of such shares by the Partnership.

14. Pursuant to a series of transactions completed on XXXXXXXXXX, Parent concluded a corporate reorganization that included the following:

(a) PCO, Holdco, Subco and Opco were amalgamated to form Newco. Newco became a subsidiary wholly-owned corporation of the Partnership. At that time, the shares of Newco had a fair market value that was less than their adjusted cost base.

(b) Foreignco contributed XXXXXXXXXX % of its membership interest in DC to its wholly-owned LLC.

(c) Foreignco and LLC formed a limited partnership ("Partnership #2") in Foreign Country 2 and contributed their membership interests in DC to Partnership #2.

(d) ACO transferred the shares of BCO to DC and received membership interests in DC in the amount of XXXXXXXXXX euros.

(e) ACO transferred its membership interest in DC to Coop in exchange for a note receivable of XXXXXXXXXX euros.

(f) Coop then transferred its membership interest in DC to the Partnership in settlement of a debt.

(g) Partnership #2 transferred its interest in DC to the Partnership in exchange for an interest in the Partnership.

(h) The culmination of the transactions described above resulted in all of the membership interests in DC, including Foreignco's indirect membership interest in DC, being transferred to the Partnership. Accordingly, the Partnership became the only member of DC.

(i) The Partnership transferred assets that it owned to DC in exchange for additional membership interests in DC in the amount of XXXXXXXXXX euros.

(j) Newco entered into the Agreement and acquired all of the Partnership's membership interest in DC for XXXXXXXXXX euros (XXXXXXXXXX euro initial contribution held by Foreignco before XXXXXXXXXX and subsequently transferred to the Partnership on XXXXXXXXXX + the XXXXXXXXXX described in paragraph 13(a) above + the XXXXXXXXXX described in (i) above) (approx. $XXXXXXXXXX). Newco issued a note payable to the Partnership as the only consideration for the purchase of the membership interest. As a result of this purchase, Newco became the only member of DC.

(k) The Partnership transferred the shares of Newco to Coop and received membership interests in Coop and a note receivable.

(l) The Partnership sold the $XXXXXXXXXX note receivable from Newco to Coop in exchange for a note payable to the Partnership.

15. The XXXXXXXXXX Articles of DC were amended as adopted by the resolution of the general meeting of members (the "Amended Articles"). Such amendments were registered in the "commercial register" in Foreign Country 2. The only amendments to the Articles of DC that are described in paragraph 10 above will be to the Articles that refer to "shares", which Articles need to be amended to reflect the fact that DC cannot issue shares, and replace them with references to members and their capital accounts. The Amended Articles will include the following:

(a) Admission to membership in DC requires the unanimous written consent of all members of DC. A new member must provide the management of DC with a written application for membership. Admission of any new members is subject to, and conditional upon, the member making a capital contribution to DC as provided for in Article XXXXXXXXXX of the Amended Articles. DC must maintain a capital account for each member of DC. The capital account of a member will be credited with all contributions made by a member and shall be debited by all amounts re-paid to a member. A member's capital account must be transferred in conjunction with the transfer of a member's membership interest in DC.

(b) All members, if not suspended, shall be entitled to attend any general meeting of members and shall be entitled to vote thereat. The number of votes that a particular member gets to cast relative to all the votes that could be cast at a meeting of members is equal to the proportion that the membership interest of a particular member is of all of the membership interests of all of the members of DC.

(c) The retained profits of DC will be available to DC for its use unless the members, at a general meeting, vote to distribute all, or a portion of, such retained profits. A vote to distribute retained profits must be unanimous by all members of DC. The distribution of any retained profits will be made proportional to each member's interest in DC.

(d) The members and former members of DC will not be liable for any debts or losses incurred by DC that are in excess of their contributions to the capitalization of DC.

Purpose of the Completed Transactions

16. As part of the corporate reorganization of entities ultimately owned by Parent, Newco, through DC, acquired the shares of various corporations previously held indirectly by Parent. The use of DC as a holding company provides for the repatriation of the profits of the subsidiaries of DC to Newco without any withholding of tax as the payment of dividends by DC to Newco is generally not subject to withholding tax in Foreign Country 2.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, completed transactions and the purpose of the completed transactions, and provided further that the proposed transactions are completed in the manner described above our rulings are as follows:

A. Provided that the Articles of DC are as outlined in paragraph 15 above, and provided further that there are no other changes to the Articles of DC described in paragraph 10 above, we confirm that DC will be treated as a corporation for purposes of the Act.

B. Since DC is considered to be a corporation for the purposes of the Act, the comments contained in paragraph 3 of Interpretation Bulletin IT-392 regarding the meaning of the term "share" will apply to DC such that Newco's membership interest in DC will be considered Newco's "shares" in the capital stock of DC.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5, issued by the CRA on May 17, 2002, and are binding on the CRA.

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. For greater certainty, the CRA has not reviewed:

(a) the fair market value of the Newco shares transferred to Coop by Foreignco;

(b) the application of subsection 95(6) of the Act to the series of transactions completed on XXXXXXXXXX;

(c) the application of section 245 of the Act to the series of transactions completed on XXXXXXXXXX and XXXXXXXXXX;

(d) the application of subsection 212.1(1) of the Act to the series of transactions completed on XXXXXXXXXX and XXXXXXXXXX, as described in paragraphs 13 and 14 above; or

(e) the application of any other provisions of the Act to the series of transactions described in paragraphs 13 and 14 above.

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 ruling provided herein.

Additional Comment

As described in paragraph 14 above, the Coop acquired all of the issued and outstanding shares of Newco and the Partnership sold the note receivable from Newco to the Coop on XXXXXXXXXX. It is our understanding that the Coop's articles are similar to the Amended Articles of DC such that the Coop may be treated as a corporation for purposes of the Act. The Coop would therefore be a specified shareholder of Newco within the meaning thereof in subsection 18(5) of the Act. Accordingly, nothing in this Ruling should be construed as implying that the CRA has agreed to or reviewed the application of subsection 18(4) of the Act to any interest paid or payable on the $XXXXXXXXXX debt owing by Newco to the Coop subsequent to XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch