2007 Ruling 2006-0208571R3 - 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 proposed XXXXXXXXXX cooperative will be treated as a corporation for purposes of the Act.

Position: Question of fact depending on the articles creating the cooperative. In this particular case, it will be treated as a corporation.

Reasons: The provisions of the foreign legislation and the articles creating the cooperative support the conclusion that this cooperative will be treated as a corporation for purposes of the Act.

XXXXXXXXXX 							2006-020857

XXXXXXXXXX, 2007f

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 in the documents submitted with your request that are 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.

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

Definitions

(a) "Parent" means XXXXXXXXXX;

(b) "Canco" means XXXXXXXXXX;

(c) "Subco" means XXXXXXXXXX;

(d) "DC" means XXXXXXXXXX;

(e) "Newco" means a new corporation to be incorporated by Canco as part of the proposed transactions;

(f) "Amalco" means the entity formed upon the merger of DC and Subco;

(g) "Articles" means the Articles attached to the notarial deed creating DC and filed with the appropriate "commercial register" in the Foreign Country;

(h) "CBCA" means the Canada Business Corporations Act;

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

(j) "Exchanges" means the XXXXXXXXXX Stock Exchange and the XXXXXXXXXX Stock Exchange;

(k) "Foreign Country" means XXXXXXXXXX;

(l) "Foreign Legislation" means the XXXXXXXXXX;

(m) "Treaty" means the Canada-XXXXXXXXXX Income Tax Convention;

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

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

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

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

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

(s) "foreign merger" has the meaning assigned by subsection 87(8.1) of the Act;

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

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

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

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

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

(y) "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 widely held Canadian public company. Parent carries on an XXXXXXXXXX business, both in Canada and abroad, and both directly and indirectly through subsidiaries and other affiliates. The shares of Parent are listed and trade on the Exchanges. Parent is a public corporation and a taxable Canadian corporation.

2. Canco is a corporation incorporated under the CBCA. Canco is a direct subsidiary wholly-owned corporation of Parent and a taxable Canadian corporation. Canco's tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre under Business Account Number XXXXXXXXXX .

3. Subco is a company incorporated and resident in the Foreign Country for the purposes of the Act, the Foreign Country's domestic income tax law and the Treaty. Subco is a holding company that owns several direct and indirect non-resident subsidiaries located in various jurisdictions around the world. Subco is a subsidiary wholly-owned corporation of Canco, and is a foreign affiliate and controlled foreign affiliate of Canco. The shares of Subco are held as capital property by Canco.

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

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

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

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

(v) is the subject of a ruling previously issued to Canco by this Directorate.

Proposed Transaction

5. Canco will incorporate Newco under the laws of Canada or a province thereof. Canco's initial contribution to Newco will be a nominal amount. At all times, Newco will be a subsidiary wholly-owned corporation of Canco and a taxable Canadian corporation.

6. Canco and Newco will organize DC. DC will be organized under the Foreign Legislation as a cooperative and will be established by a notarial deed pursuant to the Foreign Legislation. DC will be registered with the appropriate "commercial register" in the Foreign Country. By virtue of the registration of the notarial deed with the "commercial register", DC will be regarded as a legal entity under the Foreign Legislation that exists separate and apart from Canco and Newco. 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. The Foreign Legislation also provides that, subject to any restrictions under its articles, the board of directors is charged with the management of DC. The Foreign Legislation also confirms that, where the articles of DC so provide, the board of directors have the authority to, in very general terms, commit or otherwise bind DC to agreements and/or undertakings. Canco's and Newco's initial capital contribution to DC will be the same and will be a nominal amount.

7. The Articles of DC will be registered in the "commercial register" as an attachment to the notarial deed. The Articles of DC will include the following:

(a) The DC will be formed for an indeterminate period.

(b) Admission to membership in DC will be determined by a majority vote of all of the members of DC at a general meeting held by such members. A unanimous vote of the members is required to pass a resolution to admit new members. Admission of any new members is subject to, and conditional upon, the member contributing to the capitalization of DC. Membership in DC is only transferable upon unanimous approval of all of the members at a general meeting.

(c) All members, if not suspended, shall be entitled to attend any general meeting of DC and shall have at least one vote thereat. The Articles of DC further provide that the number of votes a member may cast at a general meeting will be determined with reference to the capital account of that particular member.

(d) Canco's and Newco's capital contribution to DC will be in "Euros". DC will maintain a separate capital account for each member's capital contributions/withdrawals to/from DC. The capital account of a member may be repaid to such member, in whole or in part, with the approval of all members at a general meeting. On the dissolution of DC or upon termination of a membership, the capital account(s) will be distributed to the member(s). DC's repayment of a capital account shall be payable to a member within XXXXXXXXXX days after approval thereof at a general meeting.

(e) 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. If a vote to distribute retained profits ends in a tie, there will be no distribution of such retained profits by DC. The distribution of any retained profits will be made proportional to each member's capital contribution to DC.

(f) The board of directors of DC has the authority to represent DC. The power to represent DC is also vested in each director of DC individually. The board of directors may grant one or more persons the power to represent DC on a continuing basis.

(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 initial contributions to the capitalization of DC.

8. Canco will contribute all of the issued and outstanding shares of Subco to DC. DC will increase Canco's capital interest in DC by an amount that will be equal to the fair market value of the issued and outstanding shares of Subco contributed to DC. No other consideration will be received by Canco on the contribution of the shares of Subco to DC.

9. Approximately XXXXXXXXXX months after Canco's transfer of the shares of Subco to DC, Subco and DC will merge to form Amalco. Amalco will be the new combined entity, or alternatively, the surviving entity, depending on what legal form the merger takes, formed by the merger of Subco and DC. The shares of Subco will be cancelled and cease to exist. Amalco will be a cooperative organized under the Foreign Legislation. Amalco's articles of association will be identical to those described in paragraph 7 above for DC. Canco and Newco will not receive any non-share consideration as a result of the merger and will be the only members of Amalco. As a result of the merger, all or substantially all of the assets and liabilities (except amounts receivable or payable between DC and Subco or shares of the capital stock of DC or Subco) will become assets and liabilities of Amalco.

Purpose of the Proposed Transactions

10. The purpose of the proposed transactions is two-fold:

The Parent would like to further centralize its international business operations under one common entity, which is Amalco. Upon completion of the proposed transactions described herein, the Parent anticipates that further rationalization and centralization of its international operations, through various corporate reorganizations and restructurings and under DC, will take place.

The restructuring of the corporate structure will facilitate more tax-effective repatriation of funds from Amalco to Canada as Amalco will not be required to withhold any tax in the Foreign Country on any dividends paid to Parent.

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. Provided that the Articles of DC are not amended to change the items listed in paragraph 7 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 ("IT-392") regarding the meaning of the term "share" will apply to DC such that as a result of Canco's and Newco's contributions to the capital of DC, as described in paragraphs 6 and 8 above, they will be considered to own that number of shares of DC as determined in IT-392.

C. By virtue of subparagraph (b)(iii) of the definition of paid-up capital, the paid-up capital of the share capital of DC, as described in Ruling B, shall be the amount as determined in paragraph 7(d) above, subject to any adjustment pursuant to the provisions of the Act listed in subparagraph (b)(iii).

D. The provisions of subsection 85.1(3) of the Act will apply to the transaction described in paragraph 8 above (hereinafter referred to as the "Transfer") such that:

(i) the cost to Canco, of the shares of DC receivable as consideration on the Transfer, will be deemed to be equal to Canco's ACB of its interest in Subco immediately before the Transfer;

(ii) Canco will be deemed to have disposed of its interest in Subco for proceeds of disposition equal to the ACB of such interest; and

(iii) the cost to DC of the Subco shares acquired from Canco will be deemed to be equal to Canco's ACB of the shares of Subco immediately before the Transfer.

E. Subsection 95(6) of the Act will not apply to the Transfer described in paragraph 8 above.

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 provided that the proposed transactions are entered into before XXXXXXXXXX. 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.

Nothing in this ruling should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of the ACB of Canco's interest in Subco.

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.

Yours truly,

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