2007 Ruling 2006-0209631R3 - 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 company will be treated as a corporation for purposes of the Act.

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

Reasons: The provisions of the foreign legislation and the agreement to be entered into to convert the existing LLC to a XXXXXXXXXX company support the conclusion that the XXXXXXXXXX company will be treated as a corporation for purposes of the Act.

XXXXXXXXXX 								2006-020963

XXXXXXXXXX, 2007

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
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) "Canco" means XXXXXXXXXX;

(b) "Foreignco A" means XXXXXXXXXX;

(c) "Foreignco B" means XXXXXXXXXX;

(d) "Subco" means XXXXXXXXXX;

(e) "Non-Resident" means XXXXXXXXXX;

(f) "Converted Subco" means Subco after it is converted from a "XXXXXXXXXX" to a "XXXXXXXXXX company" by Foreignco B and the Non-Resident as part of the proposed transactions described below;

(g) "Agreement" means the agreement that Foreignco B and the Non-Resident will enter into to convert Subco to Converted Subco;

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

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

(j) "Exchanges" means the XXXXXXXXXX;

(k) "Foreign Country" means XXXXXXXXXX;

(l) "XXXXXXXXXX Code" means the XXXXXXXXXX Code;

(m) "Tax Code" means the XXXXXXXXXX Tax Code;

(n) "Treaty" means the XXXXXXXXXX;

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

(p) "corporation" has the meaning assigned by subsection 248(1) of the Act;

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

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

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

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

(u) "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. Canco was incorporated under the CBCA. Canco's shares are publicly traded on the Exchanges. Canco is a public corporation and a taxable Canadian corporation. Canco's business is focused on XXXXXXXXXX. Canco's business number is XXXXXXXXXX. Canco files its tax returns with the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office.

2. Subco is a limited liability company ("LLC") formed under XXXXXXXXXX law. Subco is considered a resident of XXXXXXXXXX under common law principles and for the purposes of the Treaty.

3. Foreignco A is a corporation incorporated pursuant to the laws of XXXXXXXXXX. Foreignco B is a corporation incorporated pursuant to the laws of XXXXXXXXXX. Canco owns all of the issued and outstanding shares of

Foreignco A. Foreignco A owns all of the issued and outstanding shares of Foreignco B. Foreignco B owns XXXXXXXXXX% of Subco.

4. The Non-Resident is an individual that holds a XXXXXXXXXX% interest in Subco. The Non-Resident is a resident of the United States.

5. Canco and the Non-Resident do not deal with each other at arm's length.

6. Subco is a limited liability corporation registered under the laws of the Foreign Country. The incorporating documents of Subco provide the following:

(a) Subco is registered in the commercial registry of the Foreign Country and has a separate legal existence from that of Foreignco B and the Non-Resident.

(b) The incorporating documents provide that the capital of Subco is divided into "interests" and the total capital of Subco is the XXXXXXXXXX equivalent of US$XXXXXXXXXX. Foreignco B contributed $XXXXXXXXXX as its capital contribution to Subco and the Non-Resident contributed $XXXXXXXXXX as a capital contribution to Subco. The incorporating documents provide that when the "interest-holders" convene to decide on certain issues (such as changes to the by-laws, change of name, dissolution of the LLC or increase in capital contributions), notwithstanding that the "interests" entitle Foreignco B to XXXXXXXXXX% of the votes and the Non-resident to XXXXXXXXXX % of the votes, unanimous consent by both "interest-holders" is required in respect of such decisions. The holder of a capital "interest" cannot dispose of such interest without the consent of all of the "interest" holders. The capital "interest" of any holder thereof continues with the heirs of any deceased capital "interest" holder.

(c) Foreignco B's and the Non-Resident's liability for the debts incurred by Subco is limited to the amount of their respective capital contribution to Subco.

(d) Subco, and the management of Subco (Foreignco B is currently the legal representative of Subco) is vested with the power to pay debts and collect credits, sue debtors, acquire materials and real estate and enter into and terminate work contracts. The management can also represent Subco when dealing with public authorities and can represent Subco in any court of law.

(e) The profits of Subco can be distributed to Foreignco B and the Non-Resident after the management of Subco has approved the payment of dividends. The distribution of Subco's profits is made to its shareholders proportionally based upon their participation in the capital "interests" held by each of them.

(f) The incorporating documents provide that Subco will exist for a minimum period of XXXXXXXXXX years and that Subco's existence is automatically extended for XXXXXXXXXX year periods thereafter unless Foreignco B or the Non-Resident choose to initiate a wind up of Subco. There is no limit to the number of extensions that would maintain Subco's existence.

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

(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 by the Directorate.

Proposed Transaction

8. Foreignco B and the Non-Resident will convert Subco into Converted Subco XXXXXXXXXX Converted Subco will be evidenced by a public deed (the "Agreement"), an extract of which shall be entered in the Registrar of XXXXXXXXXX of the Foreign Country.

9. The XXXXXXXXXX Code and/or the Agreement provide for the following:

(a) The filing of the Agreement, whose terms are in compliance with the XXXXXXXXXX Code, will result in Converted Subco having a separate legal existence from Canco, Foreignco B, and the Non-Resident.

(b) Pursuant to the "Capital" and the "Share" provisions in the Agreement, Foreignco B's and the Non-Resident's initial capital contributions to Converted Subco are divided into registered, no par value, common shares. The terms of the shares include the right to one vote for each share held by Foreignco B and the Non-Resident, respectively. The shares are transferable provided that a notarized document providing the details thereof is filed with the Register of XXXXXXXXXX of the Foreign Country.

(c) Converted Subco will be managed by a Board of Directors, which will be elected by Foreignco B and the Non-Resident.

(d) The management of Converted Subco will be vested with the power to pay debts and collect credits, sue debtors, acquire materials, enter into and terminate work contracts and sell XXXXXXXXXX . The management will also represent Converted Subco when dealing with public authorities and represent Converted Subco in any court of law.

(e) The profits of Converted Subco will not be distributed to Foreignco B or the Non-Resident until after the Board of Directors has approved the payment of dividends. The distribution of Converted Subco's profits will be made to shareholders proportionally based upon the number of outstanding shares held by each of them.

(f) Foreignco B and the Non-Resident will not be liable for any losses incurred by Converted Subco that are in excess of their initial contributions to the capitalization of Converted Subco.

(g) Converted Subco can be wound up by Foreignco B and the Non-Resident, except that such wind up can only occur at the end of XXXXXXXXXX-year intervals.

10. All of Subco's existing business will become Converted Subco's business after the conversion. This conversion will not result in a disposition by Subco of its assets and will not result in an acquisition of any assets by Converted Subco under the Foreign Country's law. For purposes of the Foreign Country's income taxes, the conversion will be a non-taxable transaction XXXXXXXXXX. Converted Subco will not be a resident of Canada for purposes of the Act.

11. Foreignco B's and the Non-Resident's interests in Subco will be converted into interests in Converted Subco. This conversion will not result in a disposition by Foreignco B or the Non-Resident of their respective interest in Subco and will not result in an acquisition of an interest in Converted Subco by either of them under Foreign Country law.

Purpose of the Proposed Transactions

12. Converting from a LLC to a XXXXXXXXXX company offers Foreignco B and the Non-Resident more flexibility. Converted Subco's capital is divided into shares and such shares can be disposed of by a shareholder without the consent of any other shareholder. This is in contrast to the LLC where capital interests can only be transferred with the consent of both Foreignco B and the Non-Resident.

XXXXXXXXXX.

Converting Subco to a XXXXXXXXXX company preserves the shareholders' right to claim certain expenses under the Tax Code, which would not be available if Subco became a new corporation.

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. We confirm that Subco is treated as a corporation for purposes of the Act. Subco is therefore a foreign affiliate and a controlled foreign affiliate of Canco.

B. We confirm that Converted Subco will be treated as a corporation for purposes of the Act. Converted Subco will therefore be a foreign affiliate and a controlled foreign affiliate of Canco.

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.

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