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 lower rate of 5% applies to a deemed dividend, triggered under 84(3) of the Act by Canco's purchase for cancellation shares held by Japanese Company
Position: yes
Reasons: Article 10 of the Convention applies to deemed dividends and all other conditions required under paragraph 2(a) have been met.
XXXXXXXXXX 2007-024802
XXXXXXXXXX , 2007
Dear XXXXXXXXXX:
Re: XXXXXXXXXX (the "Company") Advance Income Tax Ruling
We are writing in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayer.
To the best of your knowledge and that of the Company, none of the issues involved with this ruling request:
(i) is in an earlier return of the Company 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 the Company or a related person;
(iii) is under objection by the Company 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 expired, or
(v) is the subject of a ruling previously considered by the Income Tax Rulings Directorate.
DEFINITIONS
In this letter the following terms have the meanings specified:
(a) "Act" means the Income Tax Act R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act;
(b) "Convention" means the Canada-Japan Income Tax Convention, 1986;
(c) "ACB" means adjusted cost base;
(d) "PUC" means paid-up capital;
(e) "Company" means XXXXXXXXXX;
(f) "Canco" means XXXXXXXXXX;
(g) "Forco" means XXXXXXXXXX; and
(h) "CRA" means the Canada Revenue Agency.
Our understanding of the facts, the proposed transaction and the purpose of the proposed transaction are as follows:
FACTS
1. The Company is a resident of Japan for purposes of the Act and the Convention. The Company does not carry on business through a permanent establishment in Canada.
2. Canco was incorporated in the province of XXXXXXXXXX and is a "taxable Canadian corporation", as defined in subsection 89(1) of the Act. Canco has a XXXXXXXXXX fiscal and taxation year-end.
3. The Company is the beneficial owner of XXXXXXXXXX% of the issued and outstanding voting shares of Canco (the "Shares"). It acquired the Shares as follows:
Number of ACB & PUC of
Date Acquired Shares Acquired Shares Acquired
XXXXXXXXXX XXXXXXXXXX C$XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX C$XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX C$XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX C$XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX C$XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX C$XXXXXXXXXX
Total XXXXXXXXXX C$XXXXXXXXXX
4. The Company has beneficially owned at least XXXXXXXXXX% of the voting shares of Canco throughout the period of XXXXXXXXXX months immediately before the end of the last taxation year of Canco and will continue to beneficially own at least XXXXXXXXXX % of the voting shares of Canco until the time that is immediately before the proposed transaction.
5. Forco owns all the voting shares of Canco not owned by the Company.
6. As at XXXXXXXXXX, the retained earnings of Canco amounted to
C$ XXXXXXXXXX . Canco's estimated earnings for the period from XXXXXXXXXX to XXXXXXXXXX are C$ XXXXXXXXXX .
7. Canco has declared and paid the following dividends on its voting common shares since XXXXXXXXXX:
Date of Amt of Total Dividends Dividends Declared &
Resolution Declared & Paid by Canco Paid to the Company
XXXXXXXXXX C$XXXXXXXXXX C$XXXXXXXXXX
XXXXXXXXXX C$XXXXXXXXXX C$XXXXXXXXXX
XXXXXXXXXX C$XXXXXXXXXX C$XXXXXXXXXX
XXXXXXXXXX C$XXXXXXXXXX C$XXXXXXXXXX
8. On or about XXXXXXXXXX, Canco issued to Forco XXXXXXXXXX non-voting non-cumulative redeemable special shares XXXXXXXXXX for a total subscription amount of C$ XXXXXXXXXX. None of the purposes for the issuance of the special shares was to provide funds to Canco to complete the purchase for cancellation of the Shares, as described in paragraph 9 below nor will the subscription proceeds be used to fund the purchase for cancellation of the Shares.
PROPOSED TRANSACTION
9. On XXXXXXXXXX, Canco will purchase the Shares for cancellation and, in consideration, will pay to the Company the amount of C$ XXXXXXXXXX.
10. As a result, Canco will be deemed to have paid, and the Company will be deemed to have received, under subsection 84(3) of the Act, a dividend on the Shares equal to the amount by which the amount paid exceeds the PUC of the Shares.
PURPOSE OF THE TRANSACTION
11. The purpose of the proposed transaction is to liquidate the Company's investment in Canco resulting in Canco becoming a wholly owned subsidiary of Forco.
RULING GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the proposed transaction and the purpose of the proposed transaction, and provided that the proposed transaction is completed in the manner described above, our ruling is as follows:
A. The deemed dividend arising under subsection 84(3) of the Act on the purchase for cancellation of the Shares will be subject to tax at a rate of 5% of the gross amount of the dividend pursuant to subsection 212(2) of the Act and Article 10 of the Convention.
The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the CRA provided that the proposed transaction is completed by XXXXXXXXXX.
This ruling is based on the Act in the present form and does not take into account amendments to the Act, which, if enacted into law, could have an effect on the ruling provided herein.
CAVEAT
Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transaction described herein other than those specifically described in the ruling given above. In particular, nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed:
(i) the ACB, PUC, or the fair market value of the Shares; or
(ii) whether subsection 245(2) of the Act will apply to re-determine the tax consequences confirmed in the ruling given.
Yours truly,
XXXXXXXXXX
for the Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2007
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2007
Email this Content