2007 Ruling 2007-0259921R3 - 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 cooperative will be treated as a corporation for purposes of the Act.

Position: Question of fact that is determined by the articles creating the cooperative. In this particular case, it will be treated as a corporation.

Reasons: The provisions of the foreign legislation and the articles creating the cooperative support the conclusion that this cooperative will be treated as a corporation for purposes of the Act.

XXXXXXXXXX 							2007-025992

XXXXXXXXXX , 2007

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling 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 statutory references herein are to the Income Tax Act, R.S.C. 1985, c.1, (5th Supplement) (the "Act"), as amended to the date of this advance income tax ruling.

The rulings given herein are based solely on the facts, proposed transactions and the purpose of the proposed transactions described below. Facts and proposed transactions described in the documents submitted with your request that are not set out 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) "Parent" means XXXXXXXXXX;

(b) "Subco" means XXXXXXXXXX;

(c) "Foreignco" means XXXXXXXXXX;

(d) "DC" means XXXXXXXXXX;

(e) "Articles" means the articles to be attached to the notarial deed creating DC which notarial deed will be filed with the appropriate "commercial register" in the Foreign Country;

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

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

(h) "Foreign Country" means XXXXXXXXXX;

(i) "Foreign Legislation" means the XXXXXXXXXX;

(j) "adjusted cost base" ("ACB") has, by virtue of subsection 248(1) of the Act, the meaning assigned by section 54 of the Act;

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

(l) "capital property" has, by virtue of subsection 248(1) of the Act, the meaning assigned by section 54 of the Act;

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

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

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

(p) "proceeds of disposition" has the meaning assigned by section 54 of the Act;

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

(r) "related persons" has the meaning assigned by subsection 251(2) of the Act;

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

(t) "specified participating interest" has the meaning assigned by the proposed amendment to subsection 248(1) of the Act contained in Bill C-10 (passed by the House of Commons on October 29, 2007);

(u) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act;

(v) "taxable Canadian corporation" has, by virtue of subsection 248(1) of the Act, the meaning assigned by subsection 89(1) of the Act; and

(w) "Treaty" means the Canada-XXXXXXXXXX Income Tax Convention.

Facts

1. Parent is a public corporation and a taxable Canadian corporation. Parent carries on an active business in Canada and outside of Canada through directly and indirectly owned subsidiaries and affiliates. The business of Parent is comprised of XXXXXXXXXX. Parent's tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre under Business Number XXXXXXXXXX.

2. Subco is a corporation incorporated pursuant to the CBCA. Subco is a subsidiary wholly-owned corporation of Parent and a taxable Canadian corporation.

3. To the best of your knowledge and that of Parent and Subco, none of the issues involved in this ruling letter:

(i) is in an earlier return of Parent or Subco or any related persons of Parent or Subco,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of Parent or Subco or any related persons of Parent and Subco,

(iii) is under objection by Parent or Subco or any related persons of Parent or Subco, or

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

Proposed Transactions

4. Parent will form Foreignco as XXXXXXXXXX pursuant to the Foreign Legislation. Foreignco will be a corporation for purposes of the Act. Parent will own all of the issued and outstanding shares of Foreignco from the time of its formation until it transfers such shares to DC, as described in paragraph 9 below. Foreignco will be resident in the Foreign Country for the purposes of the Act, the Foreign Country's domestic income tax law and the Treaty. Foreignco will be a foreign affiliate and a controlled foreign affiliate of Parent. The shares of Foreignco will be held as capital property by Parent.

5. Parent and Subco will organize DC. DC will be a cooperative formed in the Foreign Country pursuant to the provisions of the Foreign Legislation. DC will be established by a notarial deed pursuant to the Foreign Legislation and will be registered with the appropriate "commercial register" in the Foreign Country. Upon registration of the notarial deed, the Foreign Legislation will recognize DC as a legal entity that exists separate and apart from Parent and Subco. Parent's and Subco's initial capital contribution to DC will be the same and will be a nominal amount.

6. Pursuant to the Foreign Legislation:

(a) the property, rights and interests of DC will be considered to be equivalent to a natural person;

(b) subject to any restrictions under its articles, the board of directors of DC will be charged with the management of DC; and

(c) where the articles of DC so provide, the board of directors of DC will have the authority to, in general terms, commit or otherwise bind DC to agreements and/or undertakings.

7. The Articles of DC will provide that:

(a) Each member of DC must enter into a membership agreement with DC.

(b) DC will carry on its business in its own name and at its own expense and risk.

(c) Admission of new members will require a unanimous vote of all existing members of DC.

(d) Each member must make capital contributions to DC as unanimously agreed upon in writing by all members.

(e) The management of DC has the authority to represent DC.

(f) All members, if not suspended, shall be entitled to attend any general meeting of members and shall be entitled to vote thereat. The number of votes that a member may cast at a general meeting of members will be equal to the percentage of ownership in DC held by such member.

(g) The retained profits of DC will be available to DC for its use unless the members, at a general meeting, vote to distribute all or a portion of such retained profits. A distribution of retained profits will only be made after unanimous written consent is received from all members of DC. With the exception of retained profits that were allocated, but not paid, to former members, the distribution of any retained profits will be proportional to the ownership percentage of each member of DC at the time of such distribution.

(h) The members and former members of DC will not be liable for any debts or losses incurred by DC that are in excess of their required contributions to the capitalization of DC.

8. In the course of an internal reorganization, Parent will transfer the shares of certain wholly-owned foreign affiliates, carrying on business as part of the XXXXXXXXXX, to Foreignco. Parent will receive additional Foreignco shares as the sole consideration for the shares it transfers to Foreignco.

9. Parent will transfer all of the issued and outstanding shares of Foreignco to DC. DC will increase Parent's membership interest in DC by an amount that will be equal to the fair market value of the shares of Foreignco transferrred to DC. No other consideration will be receivable by Parent on the transfer of the Foreignco shares to DC.

Additional Information

10. The transfer of the Foreignco shares to DC is not part of a series of transactions or events the purpose of which is to dispose of a share or shares of Foreignco to a person who, immediately after the series of transactions or events, was a person with whom Parent was dealing at arm's length.

11. The Foreignco shares will not be a specified participating interest to Parent and the transfer of the Foreignco shares to DC by Parent will not be a disposition of a specified participating interest by Parent.

Purpose of the Proposed Transactions

12. The purpose of the proposed transactions is to create a holding company (DC) for Parent's foreign affiliates in the XXXXXXXXXX. The creation of DC will facilitate a more tax-efficient repatriation of funds to Parent as DC will not be required to withhold any tax in the Foreign Country on any dividends paid to Parent.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. Provided that DC is formed in accordance with the Foreign Legislation and provided that the Articles of DC include the terms outlined in paragraph 7 above, DC will be treated as a corporation for purposes of the Act.

B. The comments contained in Interpretation Bulletin IT-392 regarding the meaning of the term "share" will apply such that DC will be treated as if it had a capital stock of XXXXXXXXXX issued shares and Parent and Subco will each be considered to own that number of those shares that is proportionate its beneficial interest in DC.

C. The provisions of subsection 85.1(3) of the Act will apply to the transaction described in paragraph 9 above (hereinafter referred to as the "Transfer") such that:

(i) the cost to Parent, of the shares of DC receivable as consideration for the Transfer, will be deemed to be equal to Parent's ACB of its Foreignco shares immediately before the Transfer;

(ii) Parent's proceeds of disposition of the Foreignco shares will be deemed to be an amount equal to the cost to Parent of the DC shares receivable by Parent as consideration for the Transfer; and

(iii) the cost to DC of the Foreignco shares acquired from Parent will be deemed to be an amount equal to Parent's proceeds of disposition of the Foreignco shares referred to in (ii) above.

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. For greater certainty, the CRA has not:

(a) reviewed or determined the fair market value of the Foreignco shares transferred to DC by Parent;

(b) made any determination as to whether the shares of Foreignco are capital property to Parent; or

(c) made any determination as to whether Foreignco is in fact a corporation for purposes of the Act.

The above-noted rulings are based on the Act in its present form and, subject to the opinion given below, do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Opinion

Provided that the amendments to subsections 85.1(4) and 248(1) of the Act, as contained in Bill C-10 (which received Second Reading in the Senate on December 4, 2007) are enacted in the form passed by the House of Commons on October 29, 2007, it is our opinion that, if the proposed transaction described in paragraph 9 above occurs in a taxation year of Parent beginning after 2006, the provisions of subsection 85.1(3) of the Act will apply to the Transfer, as confirmed in Ruling C above.

Yours truly,

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