2006 Ruling 2006-0207391R3 - FAPI Determination

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 a gain accrued prior to a specific day on a property of a foreign affiliate ("FA") of a Canadian corporation (Holdco) would be excluded in the computation of FAPI of FA in respect of Holdco when the property is disposed of by FA?

Position: Yes.

Reasons: Because of the operation of subparagraph 95(2)(f)(iv). Also GAAR would not be applied in this case.

XXXXXXXXXX                                            2006-020739

Attention: XXXXXXXXXX

XXXXXXXXXX, 2006

Dear Sir:

Re: XXXXXXXXXX ("Holdings")
Business Number XXXXXXXXXX
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 taxpayer (the "Ruling Request"). We acknowledge the additional information you provided in your letter of XXXXXXXXXX. In your letter of XXXXXXXXXX you provided us with certain amendments to the Ruling Request. We also acknowledge the information you provided in your letter of XXXXXXXXXX and our various telephone conversations.

Holdings' tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre under the business number noted above.

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

(i) is involved in an earlier return of the taxpayer 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 taxpayer 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.

This document is based solely on the 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

In this letter the following terms have the meanings specified:

(a) "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;

(b) "ACB" means "adjusted cost base" as that expression is defined in section 54;

(c) XXXXXXXXXX;

(d) XXXXXXXXXX;

(e) XXXXXXXXXX

(f) "Cansub 2" means XXXXXXXXXX;

(g) "capital gain" has the meaning assigned in subsection 39(1);

(h) "capital loss" has the meaning assigned in subsection 39(1);

(i) "controlled foreign affiliate" has the meaning assigned by subsection 95(1);

(j) XXXXXXXXXX;

(k) XXXXXXXXXX;

(l) "Cco" means XXXXXXXXXX;

(m) "excluded property" has the meaning assigned by subsection 95(1);

(n) "FA 1" means XXXXXXXXXX;

(o) "FA 2" means XXXXXXXXXX;

(p) "FA 3" means XXXXXXXXXX;

(q) XXXXXXXXXX;

(r) "FAPI" means "foreign accrual property income" as that expression is defined in subsection 95(1);

(s) "Forco" means XXXXXXXXXX;

(t) "foreign affiliate" has the meaning assigned by subsection 95(1);

(u) "paid-up capital" has the meaning assigned by subsection 89(1);

(v) XXXXXXXXXX;

(w) "Proposed Transactions" mean transactions described in paragraphs 32 to 35 below;

(x) XXXXXXXXXX;

(y) XXXXXXXXXX;

(z) XXXXXXXXXX;

(aa) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

(bb) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(cc) XXXXXXXXXX;

(dd) XXXXXXXXXX;

(ee) "Xco" means XXXXXXXXXX;

(ff) XXXXXXXXXX;

(gg) "Yco" means XXXXXXXXXX; and

(hh) "Zco" means XXXXXXXXXX.

Facts

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

1. Xco is a non-resident corporation formed under the laws XXXXXXXXXX. For the purposes of the Act, it is resident in XXXXXXXXXX and not in Canada.

2. Yco is a non-resident corporation formed under the laws of XXXXXXXXXX. It is a subsidiary wholly-owned corporation of Xco and, for purposes of the Act, is resident in XXXXXXXXXX and not in Canada.

3. Zco is a non-resident corporation formed under the laws of XXXXXXXXXX. It is a subsidiary wholly-owned corporation of Yco and, for purposes of the Act, is resident in XXXXXXXXXX and not in Canada.

4. Holdings is XXXXXXXXXX formed under the laws of the Province of XXXXXXXXXX on XXXXXXXXXX. As at XXXXXXXXXX the shareholders of Holdings are: (i) Xco, which holds XXXXXXXXXX; (ii) Zco, which holds XXXXXXXXXX; and (iii) Yco which holds XXXXXXXXXX. The year end of Holdings is fixed at XXXXXXXXXX.

5. Cco is a taxable Canadian corporation incorporated under the XXXXXXXXXX on XXXXXXXXXX with nominal capital. On XXXXXXXXXX, Cco became a subsidiary wholly-owned corporation of Holdings.

6. Cco's issued and outstanding shares as at XXXXXXXXXX were XXXXXXXXXX. On that date the shares were held as follows:

      Class of Shares               Number of Shares        Shareholder

      XXXXXXXXXX                    XXXXXXXXXX              Holdings

      XXXXXXXXXX                    XXXXXXXXXX              XXXXX Shareholders

      XXXXXXXXXX                    XXXXXXXXXX              XXXXXXXXXX 

7. The XXXXXXXXXX ("XXXXXXXXXX Shareholders") are XXXXXXXXXX who deal at arm's length with Xco and all of its direct and indirect subsidiaries. The year end of Cco is fixed at XXXXXXXXXX.

8. XXXXXXXXXX.

9. Holdings and Cco were formed by the Xco group for the purpose of effecting the acquisition of Vco, a taxable Canadian corporation, on XXXXXXXXXX, as described in paragraph 11 below.

10. XXXXXXXXXX. On XXXXXXXXXX, Xco and Vco entered into an agreement (the "Agreement"), subject to the approval of their shareholders, that would result in the acquisition of all the shares of Vco by Xco or its nominee(s). Approval of the Agreement was obtained from the shareholders of Xco and Vco on XXXXXXXXXX Such Agreement formed part of the XXXXXXXXXX described in paragraph 11 below.

At all times prior to the transaction described in paragraph 11 below, Vco, its shareholders and all direct and indirect subsidiaries of Vco dealt at arm's length with Holdings, Cco, Xco, Yco, Zco XXXXXXXXXX.

XXXXXXXXXX.

11. On XXXXXXXXXX, pursuant to a XXXXXXXXXX, Holdings and Cco together acquired all of the issued and outstanding shares of Vco. Immediately after this acquisition, Holdings owned approximately XXXXXXXXXX% of the issued and outstanding common shares of Vco. The remaining issued and outstanding common shares of Vco (approximately XXXXXXXXXX%) were owned by Cco. At that time,

(i) Cansub 2, a taxable Canadian corporation, was a subsidiary wholly-owned corporation of Vco; and

(ii) FA 3, an indirect wholly-owned corporation of Vco, owned XXXXXXXXXX shares (or approximately XXXXXXXXXX% of the total issued and outstanding XXXXXXXXXX shares) of Forco, a non-resident corporation XXXXXXXXXX these shares had been acquired by FA 3 in XXXXXXXXXX

12. XXXXXXXXXX. Vco is a taxable Canadian corporation governed under the XXXXXXXXXX. The shareholders of Vco, as at XXXXXXXXXX, will be Cco, which will hold XXXXXXXXXX entitling Cco to XXXXXXXXXX% of the outstanding voting rights of Vco, and Holdings, which will hold XXXXXXXXXX of Vco entitling Holdings to XXXXXXXXXX% of the outstanding voting rights of Vco. XXXXXXXXXX At all times after XXXXXXXXXX, relevant to this ruling letter, Vco was controlled by Holdings. The year end of Vco is fixed at XXXXXXXXXX.

13. XXXXXXXXXX.

14. Cansub 2 is a corporation governed under the XXXXXXXXXX and, at all times from XXXXXXXXXX to the date referred to in paragraph 32 below has been and continues to be a subsidiary wholly-owned corporation of Vco. The year end of Cansub 2 is fixed at XXXXXXXXXX.

15. XXXXXXXXXX.

16. FA 1 is a non-resident corporation formed under the laws of the XXXXXXXXXX It is a foreign affiliate and a controlled foreign affiliate of Cansub 2. On XXXXXXXXXX The current shareholders of FA 1 are Cansub 2 and Xco. XXXXXXXXXX.

17. FA 2 is a non-resident corporation formed under the laws of the XXXXXXXXXX and has, at all relevant times for purposes of this ruling, been a subsidiary wholly-owned corporation of FA 1.

18. FA 3 is a non-resident corporation formed under the law of the XXXXXXXXXX and has, at all relevant times for purposes of this ruling, been a subsidiary wholly-owned corporation of FA 2. It is currently a foreign affiliate and a controlled foreign affiliate of Vco, Cco and Holdings by virtue of the direct and indirect interests of those corporations in Cansub 2. FA 3 was not a foreign affiliate of Holdings or any person with whom Holdings was not dealing at arm's length, prior to XXXXXXXXXX.

19. XXXXXXXXXX.

20. FA 1, FA 2, FA 3, XXXXXXXXXX are, and at all relevant times for purposes of this ruling have been since XXXXXXXXXX, foreign affiliates and controlled foreign affiliates of Cansub 2 and/or Vco. As a result of the acquisition described in paragraph 11 above, FA 1 (XXXXXXXXXX), FA 2, FA 3, XXXXXXXXXX became foreign affiliates and controlled foreign affiliates of Holdings and Cco on XXXXXXXXXX. Immediately prior to the Proposed Transactions, Cansub 2 will be the sole Canadian resident taxpayer with a participating percentage in FA 1, FA 2, FA 3, XXXXXXXXXX. Each of them is currently a foreign affiliate and a controlled foreign affiliate of Vco, Cco and Holdings by virtue of the direct or indirect interests of those corporations in Cansub 2. The taxation year of each of FA 1, FA 2, FA 3, XXXXXXXXXX ends on XXXXXXXXXX.

21. On XXXXXXXXXX , FA 3 disposed of all of its XXXXXXXXXX shares of Forco XXXXXXXXXX for proceeds of XXXXXXXXXX per share (XXXXXXXXXX). The total proceeds of disposition were approximately Cdn$XXXXXXXXXX.

22. The XXXXXXXXXX Forco XXXXXXXXXX shares sold by FA 3 on XXXXXXXXXX had an ACB to FA 3 for Canadian tax purposes of approximately Cdn$XXXXXXXXXX, or Cdn$XXXXXXXXXX per share.

23. XXXXXXXXXX, the total value of the XXXXXXXXXX Forco XXXXXXXXXX shares held by FA 3 on XXXXXXXXXX was approximately Cdn$XXXXXXXXXX.

24. XXXXXXXXXX.

25. XXXXXXXXXX.

26. In summary, the proceeds of disposition and the ACB to FA 3 of the XXXXXXXXXX Forco XXXXXXXXXX shares on XXXXXXXXXX and their fair market values on XXXXXXXXXX are as follows:

Proceeds of disposition (XXXXXXXXXX ) Cdn$ XXXXXXXXXX
ACB (XXXXXXXXXX ) Cdn$ XXXXXXXXXX
Fair market value (XXXXXXXXXX ) Cdn$ XXXXXXXXXX
XXXXXXXXXX

27. The XXXXXXXXXX Forco XXXXXXXXXX shares were held by FA 3 on capital account. When FA 3 sold the Forco XXXXXXXXXX shares on XXXXXXXXXX, Forco was not a foreign affiliate of Cansub 2, Vco, Holdings or Cco and, thus, the Forco XXXXXXXXXX shares sold were not excluded property of FA 3.

28. XXXXXXXXXX.

29. XXXXXXXXXX.

30. On XXXXXXXXXX , Holdings purchased all of the outstanding XXXXXXXXXX Shares of Cco.

31. XXXXXXXXXX.

Proposed Transactions

32. Effective on its close of business on XXXXXXXXXX, Vco will transfer all of its issued and outstanding shares in Cansub 2 to Holdings for non-share consideration equal to the fair market value of the Cansub 2 shares. XXXXXXXXXX

33. On XXXXXXXXXX, Holdings, being the sole shareholder of Cansub 2 as a result of the transaction described in paragraph 32 above, will commence a winding-up of Cansub 2. All of the assets of Cansub 2 (other than amounts receivable from Holdings, if any) will be distributed to Holdings in the course of the winding-up of Cansub 2, and all of the liabilities of Cansub 2 (other than liabilities owed to Holdings, if any) will be assumed by Holdings. The shares of FA 1 will be transferred to Holdings on XXXXXXXXXX.

34. Prior to the transaction described in paragraph 35 below, Holdings will transfer all of its issued and outstanding XXXXXXXXXX shares in Vco XXXXXXXXXX to Cco for non-share consideration equal to the aggregate fair market value of the XXXXXXXXXX shares XXXXXXXXXX in Vco. XXXXXXXXXX.

35. On or before XXXXXXXXXX but after XXXXXXXXXX, Cco, now the sole shareholder of Vco as a result of the transaction described in paragraph 34 above, will commence a winding-up of Vco. As a result, on or before XXXXXXXXXX, all of the assets of Vco (other than amounts receivable from Cco, if any, and certain rights Vco has to amounts receivable pursuant to previous arrangements which cannot be assigned) will be distributed to Cco. All other assets of Vco will be distributed to Cco in the course of the winding-up of Vco and all of the liabilities of Vco (other than liabilities owed to Cco, if any, and certain liabilities relating to XXXXXXXXXX) will be assumed by Cco on or before XXXXXXXXXX. Cco will put in place an agreement to provide support to Vco for any liabilities relating to XXXXXXXXXX until such liabilities can either be settled by Vco or transferred to Cco in the course of the winding-up of Vco.

Additional Information

36. XXXXXXXXXX.

37. XXXXXXXXXX.

38. XXXXXXXXXX.

39. XXXXXXXXXX.

40. XXXXXXXXXX.

41. XXXXXXXXXX.

42. XXXXXXXXXX.

43. XXXXXXXXXX.

44. Cansub 2 and Vco will continue to exist legally until the companies have completed all the legal procedures necessary to terminate their corporate existences. It is unlikely that they will complete these procedures by XXXXXXXXXX. Therefore, they will continue to exist legally as at
XXXXXXXXXX and likely for some time after XXXXXXXXXX. However, they will have distributed substantially all of their assets in the course of their winding-ups prior to XXXXXXXXXX.

Purpose of the Proposed Transactions

45. The purpose of the Proposed Transactions XXXXXXXXXX is to simplify the corporate structure of Xco. After the acquisition of XXXXXXXXXX, Xco began a review of its group structure, with the intention of eliminating all inactive and unnecessary corporations and other entities. A key factor that has motivated Xco to simplify its worldwide corporate structure is that the complexity of the structure following the acquisition of Vco made it difficult XXXXXXXXXX to evaluate the performance of Xco's various business units.

Rulings 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 rulings are as follows:

A. Pursuant to the provisions of paragraph 95(2)(f) and based on the values of the Forco shares as at XXXXXXXXXX and XXXXXXXXXX, no amount of the capital gain realized by FA 3 from the disposition of its XXXXXXXXXX Forco XXXXXXXXXX shares on XXXXXXXXXX as described in paragraph 21 above, determined in respect of Holdings, will be included in computing the taxable capital gain of FA 3. Accordingly, in Holdings' taxation year ended XXXXXXXXXX and in any subsequent taxation year, Holdings will not be required to include any amount in its income pursuant to subsection 91(1), in respect of the disposition by FA 3 on XXXXXXXXXX of its XXXXXXXXXX Forco XXXXXXXXXX shares.

B. Neither Vco nor Cansub 2 will include any amount in its income pursuant to subsection 91(1) in respect of the XXXXXXXXXX , or any subsequent taxation year of FA 3 in respect of any gain realized by FA 3 from the disposition of its XXXXXXXXXX Forco XXXXXXXXXX shares on XXXXXXXXXX as described in paragraph 21 above.

C. Subsection 95(6), and in particular paragraph 95(6)(b), will not apply as a consequence of the reduction to the taxes payable by any person in respect of the transaction described in paragraph 21 above arising as a result of the Proposed Transactions set out above.

D. Subsection 245(2) will not be applied as a result of the Proposed Transactions described in paragraphs 32 to 35 above, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Revenue Agency (the "CRA") provided that the Proposed Transactions are completed by XXXXXXXXXX.

These rulings are based on the Act in the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Opinion

Under the Legislation Proposals, Draft Regulations and Explanatory Notes Relating to Income Tax dated February 27, 2004, in computing FA 3's FAPI for its taxation year ended XXXXXXXXXX and any subsequent year in respect of Holdings there will not be included any taxable capital gain in respect of the disposition by FA 3 of its XXXXXXXXXX Forco XXXXXXXXXX shares on XXXXXXXXXX as described in paragraph 21 above. Therefore, Holdings will not include any amount in its income pursuant to subsection 91(1) in respect of such gain.

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 rulings given above. In particular, nothing is this ruling should be construed as implying that the CRA has agreed to or reviewed

(i) the ACB and fair market value of any shares of any corporations described in this ruling letter; or

(ii) the tax consequences of the transactions described in paragraphs 10 and 11 and paragraphs 28 to 31 under the section titled "Facts" and paragraphs 36 to 44 under the section titled "Additional Information" above. In particular, nothing in this ruling should be construed as implying that the CRA has reviewed whether section 245 applies to adjust the paid-up capital of the shares of Holdings.

Yours truly,

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