2007 Ruling 2007-0242871R3 - Foreign divisive reorganization

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. Does the transfer of property in a foreign divisive reorganization result in benefits under subsections 15(1), 56(2) or 246(1)? 2. Will the existing surplus balances move up the corporate chain pursuant to subsections 93(1.1) and 93(1)? 3. What are the proceeds of disposition of the property disposed of in the course of the reorganization? 4. What is the cost of property acquired in the course of the reorganization? 5. Are transactions to purify a foreign affiliate (i.e., ensure that shares are "excluded property") subject to GAAR?

Position: 1. No. 2. Yes. 3. Fair market value. 4. Fair market value. 5. No.

Reasons: 1. Position in 2002-016667, case law re benefits, reorganization exclusion in paragraph 15(1)(a), failure to meet conditions in subsections 56(2) and 246(1). 2. Subsection 93(1) deems the relevant amount to be a dividend received by the disposing foreign affiliate immediately before the disposition of the shares. 3. Proceeds of disposition will be equal to the consideration received for the property 4. Rationale in Teleglobe. 5. No misuse or abuse based on facts

XXXXXXXXXX 2007-024287

XXXXXXXXXX , 2007

Dear XXXXXXXXXX :

Re: XXXXXXXXXX
Business Number: XXXXXXXXXX
Advance Income Tax Ruling Request

We are writing in response to your request dated XXXXXXXXXX for an advance income tax ruling on behalf of the above-noted taxpayer. We acknowledge receipt of your subsequent electronic messages dated XXXXXXXXXX, as well as the information provided to us during out telephone conversations.

To the best of your knowledge and that of the taxpayer, none of the issues involved in this request for an advance income tax ruling is:

(i) dealt with in an earlier return of the taxpayer or a related person;

(ii) being considered by any tax services office or taxation centre in connection with a tax return previously filed by the taxpayer or a related person;

(iii) under objection by the taxpayer or by a related person;

(iv) the subject of a previously issued ruling by the Income Tax Rulings Directorate; or

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.

This letter 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.

In this letter, the following terms have the meanings specified below:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th supp.), c. 1, as amended, and unless otherwise stated, all statutory references herein are to the Act;

(b) "excluded property", "foreign affiliate" and "controlled foreign affiliate" have the meanings assigned by subsection 95(1);

(c) "adjusted cost base", "corporation", "property", "public corporation", "subsidiary wholly-owned corporation" and "taxable Canadian corporation" have the meanings assigned by subsection 248(1);

(d) "exempt deficit", "exempt surplus", "taxable deficit" and "taxable surplus" have the meanings assigned by subsection 5907(1) of the Regulations;

(e) "Division" has the meaning assigned in paragraph 14 of this letter;

(f) "FA Oldco" means XXXXXXXXXX;

(g) 'FA1" means XXXXXXXXXX;

(h) "FA2" means XXXXXXXXXX;

(i) "FA3" means XXXXXXXXXX;

(j) "FA4" means XXXXXXXXXX;

(k) "FA5" means XXXXXXXXXX;

(l) "FA6" means XXXXXXXXXX;

(m) "FA 6-H" means XXXXXXXXXX;

(n) "FA7" means XXXXXXXXXX;

(o) "FA8" means XXXXXXXXXX;

(p) "FA9" means XXXXXXXXXX;

(q) "Pubco" means XXXXXXXXXX;

(r) "Regulations" means the Income Tax Regulations, C.R.C. 1977, c. 945, as amended; and

(s) "SF" means XXXXXXXXXX.

Our understanding of the facts, proposed transactions and the purposes of the proposed transactions is as follows.

Facts

1. Pubco is a taxable Canadian corporation and a public corporation. Pubco's taxation year-end is XXXXXXXXXX.

2. Pubco operates a multinational enterprise, both directly and indirectly through affiliated corporations, including foreign affiliates, throughout the world, in the XXXXXXXXXX.

3. FA Oldco is a private limited liability company governed by the laws of the XXXXXXXXXX . FA Oldco is a non-resident of Canada and a resident of the XXXXXXXXXX for the purposes of the Act and the Canada-XXXXXXXXXX Income Tax Convention (the "XXXXXXXXXX Treaty"). FA Oldco is an indirect wholly-owned subsidiary, and a foreign affiliate and controlled foreign affiliate, of Pubco.

4. All of the shares of the capital stock of FA Oldco are held by FA1 and FA2, as to 50% in each case. Each of FA1 and FA2 is a non-resident of Canada and resident of XXXXXXXXXX for the purposes of the Act and the Canada-XXXXXXXXXX Income Tax Convention. Each of FA1 and FA2 is a subsidiary wholly-owned corporation, and a foreign affiliate and controlled foreign affiliate, of Pubco.

5. All or substantially all of the property of FA Oldco consists of the following:

(a) all of the shares of the capital stock of FA3 (the "FA3 Shares");

(b) XXXXXXXXXX% of the shares of the capital stock of FA4 (the "FA4 Shares");

(c) XXXXXXXXXX% of the shares of the capital stock of FA5 (the "FA5 Shares"); and

(d) one share of the capital stock in each of FA7, FA8, and FA9 (the "FA789 Shares").

6. FA3 is a private limited liability company governed by the laws of the XXXXXXXXXX . FA3 is a non-resident of Canada and a resident of the XXXXXXXXXX for the purposes of the Act and the XXXXXXXXXX Treaty. FA3 is a foreign affiliate and controlled foreign affiliate of Pubco. All or substantially all of the property of FA3 will be excluded property immediately before the time of the Division.

7. FA4 is a company governed by the laws of XXXXXXXXXX . FA4 is a non-resident of Canada and a resident of XXXXXXXXXX for the purposes of the Act and the Canada-XXXXXXXXXX Income Tax Convention. FA4 is a foreign affiliate and controlled foreign affiliate of Pubco. Pubco directly holds XXXXXXXXXX% of the equity interests in FA4. All or substantially all of the property of FA4 will be excluded property immediately before the time of the Division.

8. FA5 is a company governed by the laws of XXXXXXXXXX. FA5 is a non-resident of Canada and a resident of XXXXXXXXXX for the purposes of the Act and the Canada-XXXXXXXXXX Income Tax Agreement (the "XXXXXXXXXX Treaty"). FA5 is a foreign affiliate but not a controlled foreign affiliate of Pubco. All or substantially all of the property of FA5 will be excluded property immediately before the time of the Division.

9. FA6 is a company governed by the laws of the XXXXXXXXXX . FA6 is a non-resident of Canada and a resident of the XXXXXXXXXX for the purposes of the Act and the XXXXXXXXXX Treaty. FA6 is a foreign affiliate and controlled foreign affiliate of Pubco. All or substantially all of the property of FA6 will be excluded property immediately before the time of the Division.

10. All of the shares of the capital stock of FA6 ("the FA6 Shares") are held by FA 6-H. FA 6-H is a non-resident of Canada and a resident of XXXXXXXXXX for the purposes of the Act and the XXXXXXXXXX Treaty. FA 6-H is a foreign affiliate and a controlled foreign affiliate of Pubco. Pubco holds XXXXXXXXXX% of the shares of the capital stock of FA 6-H.

11. Each of FA7, FA8 and FA9 is a company governed by the laws of XXXXXXXXXX, and each is a non-resident of Canada and a resident of XXXXXXXXXX for the purposes of the Act and the Canada-XXXXXXXXXX Income Tax Convention. Each is a foreign affiliate and controlled foreign affiliate of Pubco. FA3 holds all but one of the shares of the capital stock of FA7, and FA7 holds all of the shares of the capital stock of each of FA8 and FA9. All or substantially all of the property of FA7, FA8 and FA9 will be excluded property immediately before the time of the Division.

12. SF was established and is registered under the laws of XXXXXXXXXX as a "XXXXXXXXXX". SF is a partnership for Canadian tax purposes. The members of SF are FA7 and FA9. SF carries on a treasury and financing function for the Pubco group of foreign affiliates. A portion of the income allocated to FA7 and FA9 from SF may constitute taxable earnings of FA7 and FA9. Such income consists of income derived by SF from certain loans (the "SF Loans") to foreign affiliates of Pubco that may not be treated as income from an active business under paragraph 95(2)(a).

Proposed Transactions

13. SF will dispose of all or substantially all of its interests in the SF Loans. SF will apply substantially all of its cash on hand in repayment of loans made to it by foreign affiliates of Pubco, or to make new loans to, or otherwise acquire new debt obligations of, foreign affiliates of Pubco, the income from which would clearly qualify as income from an active business under paragraph 95(2)(a).

14. In accordance with the provisions of FA Oldco's governing corporate and commercial laws, its members and its directors will adopt, publish and file such resolutions and other legal acts or instruments as may be necessary or appropriate to put into motion a legal process resulting in a juridical act referred to as an "absolute division" (the "Division"), whereby:

(a) Two private limited liability companies ("FA Newco 1" and "FA Newco 2") will be created, and will be governed by the same corporate and commercial laws as FA Oldco;

(b) All the property, rights and interests of FA Oldco, as well as all of its liabilities, will be acquired by, or transmitted (by general transfer of title) to, FA Newco 1 and FA Newco 2, as allocated by FA Oldco under the terms of the Division;

(c) FA Oldco will cease to exist; and

(d) The shares of FA Oldco held by each of FA1 and FA2 will be cancelled at the time FA Oldco ceases to exist and each of FA1 and FA2 will receive, as consideration, 50% of the shares of the capital stock in each of FA Newco 1 and FA Newco 2 to be issued by FA Newco 1 and FA Newco 2 on the Division.

The effect of the Division is that FA Oldco will dispose of all of its property to FA Newco 1 and FA Newco 2, in consideration for FA Newco 1 and FA Newco 2 assuming the liabilities of FA Oldco and issuing fully-paid shares of their capital stock to FA1 and FA2 with a fair market value equal to the amount by which the fair market value of the property acquired on the Division exceeds the assumed liabilities.

15. Each of FA Newco 1 and FA Newco 2 will be a non-resident of Canada and a resident of the XXXXXXXXXX for the purposes of the Act and the XXXXXXXXXX Treaty, and will be a foreign affiliate and controlled foreign affiliate of Pubco.

16. On the Division,

(a) FA Newco 1 will acquire the FA3 Shares, the FA5 Shares and the FA789 Shares and issue shares to FA1 and FA2 such that, after the issuance, each of FA1 and FA2 will own 50% of the outstanding shares of FA Newco 1; and

(b) FA Newco 2 will

i) acquire the FA4 Shares and any other property of FA Oldco not transmitted to FA Newco 1;

ii) assume all of the liabilities of FA Oldco (as partial consideration for the property acquired); and

iii) issue shares to FA1 and FA2 such that, after the issuance, each of FA1 and FA2 will own 50% of the outstanding shares of FA Newco 2.

17. Pursuant to FA Oldco's governing corporate and commercial laws, and in accordance with generally accepted accounting principles applicable in the XXXXXXXXXX, each of FA Newco 1 and FA Newco 2 will, in respect of the shares of the capital stock to be issued by it to FA1 and FA2:

(a) add to its legal capital account an amount such that the aggregate amount in the legal capital accounts of FA Newco 1 and FA Newco 2 will equal the amount in the legal capital account of FA Oldco before the Division, and

(b) add to its share premium account an amount equal to the excess, if any, of the value of the property to be acquired by it from FA Oldco (net of liabilities) over the amount to be added by it to its legal capital account as described above in (a).

18. Following the Division, FA Newco 2 will acquire the FA6 Shares from FA 6-H for fair market value consideration.

Additional Information

19. The adjusted cost base of each of the FA3 Shares, FA4 Shares, FA5 Shares and FA789 Shares is less than their fair market value and is expected to be less than their fair market value at the time of the Division. The liabilities to be assumed by FA Newco 2 on the Division will be less than the fair market value of property of FA Oldco transferred to FA Newco 2 on the Division. In addition, Pubco will not make any elections pursuant to the Act in respect of the disposition of any property that will occur on the Division, other than the elections that will be deemed to be made under subsection 93(1.1).

Purposes of the Proposed Transactions

20. The purposes of the proposed transactions are:

(a) to permit the property currently held in FA Oldco to be held through two separate entities, namely FA Newco 1 and FA Newco 2, so that any future transactions involving each chain of lower tier foreign affiliates will not result in adverse foreign tax consequences with reference to another chain of lower tier foreign affiliates;

(b) to ensure that the shares of the capital stock of all relevant foreign affiliates will constitute excluded property; and

(c) to facilitate subsequent reorganizations, if any, within the Pubco group of foreign affiliates.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, and there are no other transactions which may be relevant to the rulings requested, our rulings are as follows:

A. Subject to the application of subsections 93(1.1) and 93(1), the proceeds of disposition to FA Oldco of each property that is disposed of by FA Oldco on the Division, as described in paragraph 14 above, will be equal to its fair market value at the time of the disposition.

B. The cost to FA Newco 1 of the FA3 Shares, FA5 Shares and FA789 Shares acquired by FA Newco 1, and the cost to FA Newco 2 of the FA4 Shares and any other property acquired by FA Newco 2, as described in paragraph 16 above, will be equal to their fair market value at the time of the acquisition.

C. Subject to the application of subsections 93(1.1) and 93(1), the proceeds of disposition to FA1 and FA2 of their shares of FA Oldco, in respect of the disposition of those shares as described in paragraphs 14 and 16 above, will be equal to the fair market value, at the time of the Division, of the FA Newco 1 and FA Newco 2 shares issued to FA1 and FA2 on the Division.

D. The cost to each of FA1 and FA2 of the shares of the capital stock of FA Newco 1 and FA Newco 2 issued to FA1 and FA2, as described in paragraphs 14 and 16 above, will be equal to their fair market value at the time of the issuance.

E. Subsection 93(1.1) will apply to the disposition by FA Oldco of each of the FA3 Shares, FA4 Shares, FA5 Shares and FA789 Shares, such that Pubco will be deemed to have made an election under subsection 93(1) in respect of each of the FA3 Shares, FA4 Shares, FA5 Shares, and FA789 Shares and the amount designated in each election will be the amount prescribed in subsection 5902(6) of the Regulations.

F. Subsection 93(1.1) will apply to the disposition by each of FA1 and FA2 of its shares of the capital stock of FA Oldco, such that Pubco will be deemed to have made an election under subsection 93(1) in respect of the shares of the capital stock of FA Oldco disposed of by each of FA1 and FA2 and the amount designated in each election will be the amount prescribed in subsection 5902(6) of the Regulations.

G. Any amount deemed by subsection 93(1), by virtue of the application of subsection 93(1.1), to have been received by FA Oldco as a dividend on the FA3 Shares, FA4 Shares, FA5 Shares, and FA789 Shares immediately before the Division will be relevant in computing the exempt surplus (or exempt deficit) or taxable surplus (or taxable deficit) of FA Oldco in respect of Pubco to the extent so prescribed by the Regulations and such exempt surplus (or exempt deficit) or taxable surplus (or taxable deficit) of FA Oldco, as adjusted, will be relevant in respect of the application of subsection 93(1), by virtue of the application of subsection 93(1.1), in respect of the disposition by each of FA1 and FA2 of its shares of the capital stock of FA Oldco.

H. Section 80 will not apply to the proposed transactions solely as a result of the assumption of the liabilities of FA Oldco by FA Newco 2 as described in paragraph 16 above.

I. Subsections 15(1), 56(2) and 246(1) will not apply to the proposed transactions.

J. Subsection 245(2) will not be applied as a result of the proposed transactions, in and of themselves, to re-determine the tax consequences described in the rulings given above.

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.

The above 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 affect the rulings provided herein.

Opinions

Provided that proposed paragraphs 95(2)(c.1) and (c.2) and subsection 95(3.2) and the proposed amendments to subsections 93(1) and (1.1) and Part LIX of the Regulations are enacted in substantially the same form as set out in the draft legislation released by the Department of Finance on February 27, 2004, our opinions are as follows:

A. Proposed paragraph 95(2)(c.2) will apply to the disposition by FA Oldco on the Division of the FA3 Shares, FA4 Shares, FA5 Shares and FA789 Shares, such that

(a) pursuant to proposed subparagraph 95(2)(c.2)(i), FA Oldco's proceeds of disposition (determined without reference to subsection 93(1)) from the disposition of the FA3 Shares, FA4 Shares, FA5 Shares and FA789 Shares will be an amount equal to the amount determined under proposed clause 95(2)(c.2)(i)(A);

(b) pursuant to proposed subparagraph 95(2)(c.2)(iii), FA Newco 1's cost of the FA3 Shares, FA5 Shares and FA789 Shares and FA Newco 2's cost of the FA4 Shares, disposed of to FA Newco 1 and FA Newco 2, respectively, by FA Oldco, will be equal to their fair market value at the time of the disposition; and

(c) pursuant to proposed subparagraph 95(2)(c.2)(v), FA Oldco will be deemed to have an unadjusted suspended gain in respect of each of the FA3 Shares, FA4 Shares, FA5 Shares and FA789 Shares equal to the amount determined under that subparagraph.

B. The draft legislation issued by the Department of Finance on February 27, 2004 will not affect the rulings given in C, E, F or G, above.

Caveat

Nothing in this letter should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:

(a) whether any particular corporation described in this ruling is a foreign affiliate of Pubco;

(b) whether any property described in the facts or the proposed transactions is excluded property; or

(c) any tax consequences relating to the facts and the proposed transactions described herein other than those specifically described in the Rulings and Opinions given above.

Yours truly,

For Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch