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: Will Opco2 be a specified employer, as defined in subsection 122.3(2)?
Position: Opco2 will be a specified employer for the purposes of section 122.3 of the Act.
Reasons: Subsection 95(6) will not apply to the acquisition by Opco1 of 10% of the shares of Opco2. Therefore, Opco2 will be a foreign affiliate of Opco1 which resides in Canada and will be a specified employer pursuant to paragraph c) of the definition of specified employer in subsection 122.3(2) of the Act.
XXXXXXXXXX 2007-021929
XXXXXXXXXX, 2007
Dear Sir:
Re: Advance Income Tax Ruling
XXXXXXXXXX - Tax Number XXXXXXXXXX (Tax Services Office and Taxation Centre: XXXXXXXXXX )
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers.
We understand that to the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request are:
a) dealt with in an earlier return of the taxpayers or a related person;
b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or a related person;
c) under objection by one or any of the taxpayers or a related person;
d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; and
e) the subject of a ruling previously issued by this Directorate.
In this document, unless otherwise indicated, all statute references are to the Income Tax Act (R.S.C. 1985, 5th Supplement, c.1, as amended, the "Act")
DEFINITIONS
In this letter, unless otherwise expressly stated, the following terms have the meanings specified:
(a) "Holdco1" means XXXXXXXXXX;
(b) "Holdco2" means XXXXXXXXXX;
(c) "Opco1" means XXXXXXXXXX;
(d) "Opco2" means XXXXXXXXXX.
FACTS
1. Opco1 is a "taxable Canadian corporation" as that term is defined in subsection 89(1), and has a XXXXXXXXXX year-end. Opco1 was incorporated under the laws of XXXXXXXXXX pursuant to an amalgamation in XXXXXXXXXX. Opco1's address is XXXXXXXXXX.
2. XXXXXXXXXX.
3. Opco1 has a unionized labor bargaining unit.
4. Holdco1 is a non-resident corporation by virtue of its incorporation outside Canada, and does not conduct any activity in Canada. It has a XXXXXXXXXX year-end. Holdco1 was incorporated under the laws of XXXXXXXXXX in XXXXXXXXXX. Holdco1's address is XXXXXXXXXX.
5. Holdco1 is an investment holding business.
6. Opco1 and Holdco1 are indirect subsidiaries of Holdco2, a XXXXXXXXXX corporation which trades on the XXXXXXXXXX Stock Exchange.
7. XXXXXXXXXX.
PROPOSED TRANSACTIONS
8. Opco2 will be incorporated under the laws of XXXXXXXXXX in early to XXXXXXXXXX. Opco2 will be a non-resident corporation and will have a XXXXXXXXXX year-end. Opco2's address will be XXXXXXXXXX.
9. The proposed principal business of Opco2 is to provide XXXXXXXXXX services. XXXXXXXXXX.
10. Opco2 will be owned XXXXXXXXXX% by Opco1 and XXXXXXXXXX% by Holdco1.
11. Opco2 will become a new equity investment for Opco1 and a means to participate in the XXXXXXXXXX. Opco1's share investment is a permanent, fully participating equity investment. Opco1's initial share investment represents an opportunity to utilize monies accumulated in Canada. The investment is intended to give Opco1's management an opportunity to participate in all aspects of the new operation in light of an expected significant interaction between the companies. The shares are not intended to defer compensation or to be a substitute for compensation because the support provided by Opco1, in particular through its XXXXXXXXXX office, will be recharged to Opco2 annually at fair and reasonable current values.
12. Opco2 will be operated as a completely separate business, with its own accounting, administration and oversight, which is separate and apart from that of Opco1, Holdco1 and any related companies.
13. Opco2 will contract Opco1 staff and management at arm's length rates to assist Opco2 in meeting staffing requirements. Opco1 will recruit staff as an agent for Opco2. Opco1 will receive reimbursement of all expenses incurred in connection with the recruiting and administrative effort plus a XXXXXXXXXX% mark-up.
14. Opco2 will be a non-unionized employer and as a XXXXXXXXXX entity will not incur social security charges on its payroll and will preserve the segregation of non-unionized Canadian XXXXXXXXXX from Opco1's bargaining unit.
15. Opco2 will hire individuals resident in Canada. Opco2 will also hire individuals resident in non-Canadian countries. Opco2 anticipates it will hire at least XXXXXXXXXX new individual employees, many recruited by Opco1 and will take over responsibility for a further XXXXXXXXXX Canadian and non-Canadian workers from other Holdco2 companies XXXXXXXXXX. All employees of Opco2 will be at arm's length with Opco2. Individual employees will receive an Employment letter XXXXXXXXXX in lieu of employment contracts, when first employed to delineate terms and conditions of employment and the details of their assignment. From time to time, Opco2 will issue additional XXXXXXXXXX as needed to document events such as promotion, demotion, transfer, etc. All individuals will be employed on a full time year round basis. Opco2 may periodically hire/second employees from Opco1.
16. Newly hired Opco2 staff may be XXXXXXXXXX for training purposes in preparation for placement on XXXXXXXXXX operated by Opco2. Opco2 may periodically provide workers to other related companies to cover staffing needs arising from vacation, sickness and other unexpected absences.
17. There are no significant transactions that were completed by Opco2 prior to the proposed transactions or that may be undertaken after the completion of the proposed transactions, which may be part of a series of transactions that includes the proposed transactions.
PURPOSES OF PROPOSED TRANSACTIONS
Opco2 is being created for the business purpose of establishing a single entity within the Holdco2 group, XXXXXXXXXX.
Holdco2 management, as part of the overall review leading to the decision to establish Opco2, has recognized the increasing importance of Opco1 in providing staffing resources to Holdco2 group's XXXXXXXXXX operations. Share ownership in the new Opco2 entity was identified as a means of enabling the Canadian operation to benefit from its contribution to the international XXXXXXXXXX program to be operated by Opco2. Opco1's contribution to the international XXXXXXXXXX program is primarily in the area of staff recruitment and secondments/transfers. Since labour is approximately 10% of any XXXXXXXXXX contract this became the basis for Opco1's equity participation in the new entity to align participation with reward.
The share investment to be held by Opco1 represents a mechanism to return to Canada a proportionate share of any financial success Opco2 may achieve in the longer term. Such success may be achieved on savings from reduced down time achieved by staff continuity, safety performance or other such benefits derived from staff sourced in Canada but such contributions are not immediately apparent at the time the persons are provided to the new Opco2 company. The ownership of shares by Opco1 will create a mechanism to return a proportionate share of these benefits to Canada.
RULINGS
Provided the above statements of facts, proposed transactions and purposes thereof are accurate and constitute complete disclosure of all relevant facts and proposed transactions, our rulings are as follows:
A. Opco2 will be a "specified employer", as defined in subsection 122.3(2).
B. Subsection 95(6) will not apply to the acquisition by Opco1 of a 10% share investment in Opco2.
The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described above.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act. Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed any tax consequences relating to the facts and Proposed Transactions described herein other than those described in the rulings given. In particular, we express no opinion in respect of the entitlement of the employees to the tax credit provided for in subsection 122.3(1) of the Act because the entitlement is essentially a question of fact that we do not determine beforehand and that will be determined based on all the actual relevant facts in a particular taxation year.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Revenue Agency provided that the Proposed Transactions are completed before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for the Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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