2007 Ruling 2006-0211991R3 - Part XIII Tax

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: 1. Whether payments pursuant to a bareboat charter are made for the use of corporeal property. 2. Does Article 21 of the Canada-Norway Treaty apply to a bareboat charter payment? 3. Are payments under a bareboat charter covered by Article 7 of the Canada-Norway Treaty? Does GAAR apply to the proposed transactions?

Position: 1. Yes. 2. No. 3. Yes. 4. No.

Reasons: Ownership structure is consistent with taxpayer's worldwide ownership structure. See statement of principal issues for file #2005-012796 for detailed discussion of all issues.

XXXXXXXXXX 								2006-021199

XXXXXXXXXX , 2007

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX
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 1" means XXXXXXXXXX ;

(b) "Canco 2" means XXXXXXXXXX ;

(c) "Cancos" means Canco 1 and Canco 2, collectively;

(d) "Foreign Co" means XXXXXXXXXX .;

(e) "Partnership VI" means XXXXXXXXXX ;

(f) "Partnership IX" means XXXXXXXXXX ;

(g) "Partner 1" means XXXXXXXXXX .;

(h) "Partner 2" means XXXXXXXXXX .;

(i) "OPCO" means XXXXXXXXXX .;

(j) "Bareboat Charter" means a contract under which a ship is leased or rented for a period of time on an unmanned basis. The person chartering the ship is responsible for manning and operating the ship and paying all expenses related thereto;

(k) "Time Charter" means a contract under which the services of the ship are provided on a fully manned, provisioned, stored and insured basis. The person chartering the ship is responsible for bunkers, port charges, canal tolls and crew overtime connected with the cargo. The charter may cover varying periods of time and a daily or monthly fixed rate is paid for the charter;

(l) "Agreement" means the Bareboat Charter Agreement entered into by Partnership IX and Foreign Co;

(m) "Canada" means Canada as defined in section 5 of the Income Tax Conventions Interpretation Act, R.S.C. 1985, c. I-4, as amended to the date hereof;

(n) "Contract" means the Time Charter Agreement entered into by Foreign Co and the Cancos;

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

(p) "Foreign Country" means Norway;

(q) XXXXXXXXXX

(r) "Payments" means the payments to be made by Foreign Co to Partnership IX under the terms the Agreement;

(s) "Province" means the province of XXXXXXXXXX ;

(t) "Ship" means the XXXXXXXXXX ;

(u) "Treaty" means the Canada-Norway Tax Convention which entered into force on December 19, 2002;

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

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

(x) "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. Partnership VI and Partnership IX are each a limited partnership formed under the laws of the Foreign Country. The partners of Partnership VI and Partnership IX are Partner 1 and Partner 2, each of which owns a 50% interest in each partnership. Partnership VI and Partnership IX are each a partnership for purposes of the Act. Each of Partnership VI and Partnership IX is not a resident of the Foreign Country for purposes of the Treaty. Partner 1 and Partner 2 are taxable, pursuant to the tax law of the Foreign Country, on their proportionate share of any income earned by each of Partnership VI and Partnership IX. Partnership IX is the owner of the Ship. Partnership IX does not carry on any business through a permanent establishment situated in Canada for purposes of the Treaty.

2. Partner 1 is a limited liability company incorporated pursuant to the laws of the Foreign Country. Partner 1 is a resident of the Foreign Country for purposes of the Treaty and is a non-resident of Canada for purposes of the Act. Partner 1 does not carry on any business through a permanent establishment situated in Canada for purposes of the Treaty.

3. Partner 2 is a limited liability company incorporated pursuant to the laws of the Foreign Country. Partner 2 is a resident of the Foreign Country for purposes of the Treaty and is a non-resident of Canada for purposes of the Act. Partner 2 does not carry on any business through a permanent establishment situated in Canada for purposes of the Treaty.

4. Partner 1 and Partner 2 deal with each other at arm's length and deal at arm's length with Foreign Co.

5. Foreign Co is a limited liability company incorporated pursuant to the laws of the Foreign Country. Partnership VI is the sole shareholder of Foreign Co. Foreign Co is a resident of the Foreign Country for purposes of the Treaty and is a non-resident of Canada for purposes of the Act.

6. Canco 1 is a widely held Canadian public company. Canco 1 carries on an active XXXXXXXXXX business, both in Canada and abroad, and both directly and indirectly through subsidiaries and other affiliates. Canco 1 is a public corporation and a taxable Canadian corporation.

7. Canco 2 is a corporation organized under the laws of XXXXXXXXXX . Canco 2 is a wholly owned subsidiary of a Canadian-based XXXXXXXXXX company.

8. Canco 1 and Canco 2 are each a resident of Canada for purposes of the Act and the Treaty.

9. Partnership IX has entered into the Agreement with Foreign Co pursuant to which Foreign Co will make the Payments to Partnership IX for the right to use the Ship.

10. Foreign Co has entered into the Contract with the Cancos. Foreign Co will use the Ship to transport XXXXXXXXXX . The XXXXXXXXXX is located in Canada and is owned by the Cancos. The terms of the Contract will become effective upon the delivery of the Ship to Foreign Co. The Contract is for an initial term of up to XXXXXXXXXX years, but the terms thereof provide that it may be extended for additional periods of time.

11. Pursuant to the terms of the Agreement, all operating expenses of the Ship are to be borne by Foreign Co. The Payments to be made by Foreign Co are based on the amounts paid by the Cancos pursuant to the Contract, less a discount to take into account the expected operating costs associated with the Ship over the life of the Contract and to allow Foreign Co to earn a profit that recognizes the operating risks it bears.

12. Foreign Co has entered into an agreement with OPCO to supply captains and crew, as required, for the Ship. OPCO is a taxable Canadian corporation that is resident in Canada for purposes of the Act and the Treaty. OPCO deals at arm's length with Foreign Co.

13. Foreign Co will be registered in the Province for the purpose of doing business therein. Foreign Co will have a permanent establishment in the Province of XXXXXXXXXX for purposes of the Treaty.

14. We understand that, to the best of your knowledge and that of Partner 1, Partner 2 and Foreign Co, none of the issues involved in this ruling request:

(i) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of Partner 1, Partner 2, Foreign Co or a related person of any of them,

(ii) is under objection by Partner 1, Partner 2, Foreign Co or a related person of any of them, or

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

Proposed Transaction

15. Once the Ship is delivered to Foreign Co, Foreign Co will make the required Payments, pursuant to the terms of the Agreement, to Partnership IX.

Purpose of the Proposed Transactions

16. Foreign Co requires the use of the Ship to replace an existing ship that will be going "off-hire" and will undergo repairs and maintenance. Foreign Co's Payments to Partnership IX will be made as, on account of, or in lieu of, or in satisfaction of, Foreign Co's use of, or the right to use, the Ship to transport XXXXXXXXXX to locations inside and outside of Canada.

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. To the extent that the Payments would otherwise be subject to the application of Part XIII of the Act, that portion of the Payments that is in respect of the use of the Ship outside of Canada will be exempt from withholding under Part XIII by virtue of subparagraph 212(1)(d)(ix) of the Act.

B. Article 21 of the Treaty will not deem Partnership IX, Partner 1 or Partner 2 to have a permanent establishment situated in Canada solely by reason of Partnership IX having entered into the Agreement with Foreign Co.

C. Partnership IX, Partner 1 and Partner 2 will not have a permanent establishment situated in Canada for purposes of Article 5 of the Treaty, solely by reason of Partnership IX having entered into the Agreement with Foreign Co.

D. Provided that Partnership IX, Partner 1 and Partner 2 do not carry on a business through a permanent establishment situated in Canada at the time that Foreign Co makes any of the Payments to Partnership IX, to the extent that such Payments relate to the use of the Ship in Canada, the Payments will be exempt from withholding under Part XIII of the Act by virtue of paragraph 1 of Article 7 of the Treaty.

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, and in particular, does not consider the potential application of section 247 of the Act.

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.

Yours truly,

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