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 there is a disposition of the assets of a Delaware corporation on its conversion into an LLC. Whether, after conversion, the LLC is considered the same entity as the corporation. Whether, after conversion, the LLC will be considered a corporation for purposes of the Act. Eligibility of particular transaction for Treaty exemption under Article XIII(4).
Position: No. Yes. Yes.
Reasons: The governing Delaware legislation provides for conversion and treats the LLC as a continuation of the converting corporation. CRA can apply the Delaware legislation for purposes of administering the Act. CRA's administrative position is that a Delaware LLC is a corporation for purposes of the Act. Transaction in question meets requirements for Article XIII(4) Treaty exemption.
XXXXXXXXXX , 2008
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
This is in reply to your letters of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayer referred to above. We also acknowledge our meetings and subsequent correspondence concerning your request. The documents submitted with your request are part of this document only to the extent described herein.
We understand that to the best of your knowledge and that of the taxpayers on whose behalf this ruling was requested, none of the issues involved in this ruling are:
(a) in an earlier return of the taxpayers or a related person;
(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;
(c) under objection by the taxpayers or a related person;
(d) in relation to the taxpayers or a related person, before the courts or the subject of a judgment the time limit for appeal from which has not expired; or
(e) the subject of a ruling previously considered by the Directorate in relation to the taxpayers or a related person.
Except as otherwise noted, all statutory references are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended (the "Act").
In this letter, unless otherwise indicated or the context otherwise requires, the following terms have the meanings specified:
"ACB" means adjusted cost base and has the meaning assigned by section 54;
"A Co" means XXXXXXXXXX ;
"B Co" means XXXXXXXXXX ;
"C Co" means XXXXXXXXXX ;
"D Co" means XXXXXXXXXX .;
"E Co" means XXXXXXXXXX .;
"F Co" means XXXXXXXXXX .;
"G Co" means XXXXXXXXXX ;
"H Co" means XXXXXXXXXX ;
"I Co" means XXXXXXXXXX ;
"J Co" means XXXXXXXXXX ;
"K Co" means XXXXXXXXXX ;
"cost amount" has the meaning assigned by subsection 248(1);
"CRA" means the Canada Revenue Agency;
"DGCL" means the Delaware General Corporation Law, being Chapter 1 of Title 8 of the Delaware Code;
"DLLCA" means the Delaware Limited Liability Company Act, being Chapter 18 of Title 6 of the Delaware Code;
"FMV" means fair market value and is the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm's length;
"IRC" means the Internal Revenue Code of the United States of America;
"LLC" means a limited liability company;
"Old C Co" means XXXXXXXXXX ;
"Proposed Transactions" means those transactions and events described as such below;
"subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);
"Taxable Canadian Corporation" has the meaning assigned by subsection 89(1);
"TCP" means taxable Canadian property and has the meaning assigned by subsection 248(1);
"Treaty" means the Canada-United States Tax Convention (1980) as amended by the Protocols signed June 14, 1983, March 28, 1984, March 17, 1995 and July 29, 1997;
"ULC" means Unlimited Liability Corporation;
"U.S." means United States of America;
"US$" means the U.S. dollar unit of currency; and
"$" means the Canadian dollar unit of currency.
Our understanding of the facts, proposed transactions and purposes of the proposed transactions is as follows:
1. A Co is a U.S. corporation incorporated in Delaware under the DGCL and is a publicly traded company in the U.S.
2. B Co is a U.S. corporation incorporated in Delaware under the DGCL, and is a non-resident of Canada for purposes of the Act and a resident of the U.S. for purposes of the Treaty. B Co is a wholly-owned subsidiary of A Co.
3. C Co and D Co are U.S. corporations incorporated in Delaware under the DGCL. C Co is a wholly-owned subsidiary of A Co and D Co is a wholly-owned subsidiary of B Co.
3.1. D Co is a non-resident of Canada for purposes of the Act and a resident of the U.S. for purposes of the Treaty.
4. E Co and F Co were incorporated under the XXXXXXXXXX , and are not ULCs. G Co, H Co, I Co and J Co were incorporated under the XXXXXXXXXX , and are ULCs. E Co, F Co, G Co, H Co, I Co and J Co are all Taxable Canadian Corporations.
5. C Co owns all of the common shares of E Co and XXXXXXXXXX % of the preferred shares of E Co. The remaining preferred shares of E Co are owned by J Co.
6. C Co owns all of the common shares of F Co, and J Co owns all of the preferred shares of F Co.
7. C Co owns all of the common shares of J Co and I Co.
8. D Co owns all of the common and preferred shares of G Co and H Co.
9. The shares of E Co, F Co and G Co are TCP, i.e., they are all shares of the capital stock of a corporation resident in Canada that are not listed on a prescribed stock exchange.
10. The value of the shares of each of E Co, F Co and G Co is derived principally from real property situated in Canada.
11. The shares of H Co, I Co and J Co are TCP, i.e., they are all shares of the capital stock of a corporation resident in Canada that are not listed on a prescribed stock exchange.
12. The value of the shares of each of H Co, I Co and J Co is not derived principally from real property situated in Canada.
13. The shares of D Co are TCP, i.e., they are not listed on a prescribed exchange and during the immediately preceding XXXXXXXXXX -month period the FMV of all the properties of D Co that are described in subparagraph (e)(i) of the definition of TCP in subsection 248(1) was greater than XXXXXXXXXX % of the FMV of all D Co's properties, and more than XXXXXXXXXX % of the FMV of the D Co shares was derived from real property situated in Canada.
14. XXXXXXXXXX are parties to an agreement with the Minister of National Revenue pursuant to section 115.1 of the Act and Article XIII(8) of the Treaty. This agreement is dated XXXXXXXXXX and is hereinafter referred to as the "Competent Authority Agreement".
16. Paragraph (a) of section 266 of the DGCL provides that a domestic corporation may convert to an LLC of the State of Delaware. Paragraph (f) of that section provides that, unless otherwise provided in a resolution of conversion, the converting corporation shall not be required to wind up its affairs or pay its liabilities and distribute its assets, and the conversion shall not constitute a dissolution of the corporation.
17. Section 18-214 of the DLLCA provides for the conversion of certain entities to an LLC. These entities, as described in paragraph (a) of that section, include a corporation. Paragraph (d) of that section provides that the existence of the LLC shall be deemed to have commenced on the date the converting entity commenced its existence in the jurisdiction in which the converting entity was first created, formed, incorporated or otherwise came into being. Paragraph (e) of that section provides that the conversion of the entity into an LLC shall not be deemed to affect any obligations or liabilities of the other entity incurred prior to its conversion to an LLC. Paragraph (f) of that section provides that when any conversion shall have become effective under that section, for all purposes of the laws of the State of Delaware, all of the rights, privileges and powers of the other entity that has converted, and all property, real, personal and mixed, and all debts due to such other entity, as well as all other things and causes of action belonging to such other entity, shall remain vested in the LLC into which such other entity has converted and shall be the property of the LLC. Paragraph (g) of that section provides that unless otherwise agreed, the converting other entity shall not be required to wind up its affairs or pay its liabilities and distribute its assets, and the conversion shall not be deemed to constitute a dissolution of such other entity and shall constitute a continuation of the existence of the converting entity in the form of an LLC. It further provides that when an entity has been converted to an LLC pursuant to that section, the LLC shall, for all purposes of the laws of the Sate of Delaware, be deemed to be the same entity as the converting entity.
18. Section 18-101(7) of the DLLCA provides that an LLC Agreement of an LLC having only one member shall not be unenforceable by reason of there being only one person who is a party to the LLC Agreement. Under section 18-1101(b) of the DLLCA, the maximum effect is given both to the principle of freedom of contract and to the enforceability of LLC Agreements. The DLLCA refers to economic interests in an LLC to which it applies as "interests" and provides that voting and certain other rights reside in "members". The DLLCA does not require the ownership interests in an LLC to be divided into shares. However, an LLC Agreement that establishes that the capital of an LLC is divided into shares is legally effective for such purpose and enforceable in accordance with its terms. Accordingly, subject to the DLLCA, the capital of an LLC may consist of "shares" with the attributes established in the LLC Agreement.
19. You advise that the Proposed Transactions will be considered non-recognition transactions and will be tax deferred for purposes of the IRC.
20. For Canadian and US tax purposes, the implementation of the Proposed Transactions will not facilitate or permit, either immediately or in the future and either absolutely or contingently, any step-up or other increase in the cost of, or ACB in, any of the E Co or F Co shares held by C Co or its successor.
21. A Co will contribute its shares of C Co to B Co as a capital contribution.
22. B Co will contribute its shares of D Co to C Co as a capital contribution.
23. D Co will convert from a corporation governed under the DGCL to an LLC governed under the DLLCA. The specific steps will be undertaken pursuant to the statutory provisions described in paragraphs 16 to 18 above, and will occur as follows:
(a) With the approval of its sole shareholder, C Co, D Co will file, with the Delaware Secretary of State, a certificate of formation in accordance with the requirements of section 18-214(b) of the DLLCA.
(b) Also with the approval of C Co, D Co will file, with the Delaware Secretary of State, a certificate of conversion in accordance with section 266 of the DGCL and section 18-214(b) of the DLLCA.
(c) The terms of C Co's approval of the conversion of D Co into an LLC will not require the winding up of D Co.
(d) C Co will enter into an LLC Agreement, specifying, among other things, the following:
(i) The LLC is a continuation of the existence of D Co, which converted to an LLC in accordance with the provisions of section 266 of the DGCL and section 18-214 of the DLLCA. All the rights, privileges and powers of D Co and all property, real, personal, and mixed, of D Co and all debts due to D Co, as well as all other things and causes of action belonging to D Co, shall be vested in the LLC and shall be the property of the LLC as they were of D Co, and title to any real property vested by deed or otherwise in D Co shall not revert by reason of such conversion.
(ii) "Share" means a limited liability company interest in the
(iii) "Stockholder" means each person signing the LLC
Agreement and any person who subsequently obtains
Shares in the LLC, in each case in its capacity as a
Stockholder of the LLC;
(iv) "Capital" of Shares is the aggregate of all amounts paid to the LLC and the monetary value at the time of contribution of property contributed to the LLC (in each case including amounts paid or contributed prior to D Co's conversion to an LLC) in consideration for the issuance of Shares together with any amounts added thereto by the Board of Managers or the Stockholders in accordance with the provisions of the LLC Agreement, less the aggregate of all amounts by which such capital has been reduced by the Stockholders or the Board of Managers in accordance with the LLC Agreement. The capital of each Share can be determined at any time by dividing the capital of all Shares by the number of issued and outstanding Shares at that time; and
(v) "Capital Contribution" means the initial capital contribution and any additional capital contributions made by a Stockholder to the LLC. The existing balance of the capital for the shares outstanding in D Co shall be and constitutes the initial capital contribution for the initial Stockholder's Shares in the LLC.
(e) Subject to the DLLCA and in accordance with the LLC Agreement, immediately following the conversion, the Stockholder's ownership interest in D Co will consist of a certain number of Shares, each of which is entitled to one vote, to share rateably in dividends as and when declared by D Co and to share rateably in the assets of D Co on its liquidation.
PURPOSE OF PROPOSED TRANSACTIONS
The purposes of the proposed transaction are as follows:
24. To simplify and consolidate D Co's corporate structure from both a U.S. and Canadian perspective. As an LLC, D Co will be treated as a disregarded entity in the U.S., which will reduce the administration and reporting requirements related to this company.
25. The Proposed Transactions are necessary first steps in the ultimate reorganization of the Canadian entities. If these entities are held under one U.S. corporation for US tax purposes, it will allow the reorganization of Canadian companies that are owned by C Co and D Co without any adverse Canadian or U.S. tax consequences. This will enable the rationalization of the Canadian corporate group, which will significantly reduce administrative costs and improve cash management.
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, the Proposed Transactions, and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed as described, our rulings are as follows:
A. D Co will not be considered to have disposed of its shares of G Co or H Co as a result of its conversion from a corporation to an LLC under Delaware corporate law.
B. Following its conversion from a corporation to an LLC, for the purposes of the Act, D Co will be considered to be the same corporation that it was prior to the conversion.
C. D Co, as an LLC organized under the DLLCA, will be considered to be a corporation for the purposes of the Act.
D. Although there will be a disposition of the D Co shares when B Co contributes them to C Co, any gain on this disposition will be exempt from tax in Canada under Article XIII(4) of the Treaty.
Our rulings are given subject to the limitations set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided the Proposed Transactions are completed within six months of the date of this letter. Our rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act or Regulations.
Nothing in this ruling should be construed as implying that CRA has reviewed any tax consequences relating to the facts or the Proposed Transactions other than those described in the rulings given above, or has agreed:
(a) to the fair market value or adjusted cost base of any asset or to the paid-up capital of any share;
(b) to any tax consequences relating to any transaction described herein other than those specifically described in the rulings given above; or
(c) that the Proposed Transactions comply with the terms of the Competent Authority Agreement.
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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