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.Will the Net Smelter return taken back on sale of shares constitute a foreign resource property?; 2. examination of components of NSR calculations--are all elements production related or are otherwise subject to the 10% rule.
Position: 1. NSR will qualify as a foreign resource property; 2.all elements are production related
Reasons: 1. sales of mineral are directly related to the production of that mineral; 2. confirmed by client and added as a fact of ruling
XXXXXXXXXX 2008-029214
XXXXXXXXXX , 2009
Dear. XXXXXXXXXX :
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge your correspondence dated XXXXXXXXXX received in respect of this ruling.
You have advised that to the best of your knowledge and that of the taxpayer above, none of the issues contained herein:
a) is in an earlier return of the taxpayer or a related person;
b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
c) is under objection by the taxpayer or a related person;
d) is before the courts; or
e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Definitions
In this letter, unless otherwise indicated, all statutory references are to the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended from time to time and consolidated to the date of this letter (the "Act").
In this letter, the following terms have the meanings specified:
a) "Corporation" means XXXXXXXXXX ;
b) XXXXXXXXXX ;
c) "Mine" means the XXXXXXXXXX ;
d) "New Mine" means an underground operation to be created underneath the Mine;
e) "NSR" means the net smelter return referred to in the Term Sheet;
f) XXXXXXXXXX ;
g) XXXXXXXXXX .;
h) "Other Shareholders" means XXXXXXXXXX ;
i) XXXXXXXXXX ;
j) "XXXXXXXXXX Royalty" means the royalty payable to the Government under the XXXXXXXXXX ; and
k) "Term Sheet" means that term sheet dated XXXXXXXXXX among the Corporation, XXXXXXXXXX .
Facts
1. The Corporation is a "taxable Canadian Corporation" and a "public corporation" as defined in subsection 89 (1) of the Act. Its shares are listed on the XXXXXXXXXX . Its tax account number is XXXXXXXXXX . It files its annual income tax return at the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office. The Corporation's address is:
XXXXXXXXXX
2. The Corporation is a global mining company that produces XXXXXXXXXX . It has operations and development projects in XXXXXXXXXX
3. The Corporation owns XXXXXXXXXX ordinary shares, or XXXXXXXXXX % of the issued and outstanding Ordinary Shares of XXXXXXXXXX .
4. The other shareholders in XXXXXXXXXX are XXXXXXXXXX , which holds XXXXXXXXXX % of the shares of XXXXXXXXXX, which holds the remaining XXXXXXXXXX %, both directly and via XXXXXXXXXX .
5. The Corporation deals at arm's length with each of XXXXXXXXXX .
6. The Corporation first acquired an indirect interest in XXXXXXXXXX on XXXXXXXXXX by acquiring shares in an intermediary holding company. XXXXXXXXXX became a "foreign affiliate" (as defined in subsection 95(1) of the Act) on XXXXXXXXXX . The Corporation has maintained its current ownership of XXXXXXXXXX % (directly and indirectly) since XXXXXXXXXX .
7. As a result of various reorganization transactions, the Corporation now holds its XXXXXXXXXX % interest in XXXXXXXXXX directly.
8. The business activities of XXXXXXXXXX consist of the operation of the Mine and activities ancillary to the operation of the Mine. XXXXXXXXXX has no other business activities.
9. The Mine is an open-cut operation with an average of XXXXXXXXXX tonnes mined each day. The processing plant associated with the Mine treats an average of XXXXXXXXXX tonnes per day. XXXXXXXXXX The Mine is expected to continue in operation until approximately XXXXXXXXXX at which point the current pit will be exhausted and closure activities will commence.
10. The current governance structure of XXXXXXXXXX became effective in XXXXXXXXXX . The overall objective was for XXXXXXXXXX to be managed to maximize profitability, cash flow and distributions to its shareholders. XXXXXXXXXX .
11. XXXXXXXXXX
12. XXXXXXXXXX
Proposed Transactions
13. It is proposed that the Corporation will exchange its XXXXXXXXXX % interest in XXXXXXXXXX in exchange for cash and the NSR. As evidenced by the terms and conditions of the Term Sheet, the Corporation and the Other Shareholders have agreed that XXXXXXXXXX will purchase from the Corporation the Corporation's shares of XXXXXXXXXX for consideration consisting of the cash to be received in accordance with the terms and conditions of the Term Sheet and the value of the NSR.
14. The NSR provides for a payment by XXXXXXXXXX of XXXXXXXXXX % of the proceeds received by or credited to XXXXXXXXXX on the sale of mineral products from the Mine less costs, charges and expenses incurred by XXXXXXXXXX from the time that such products are loaded on board ship at a port in XXXXXXXXXX and the delivery and acceptance by the purchaser. These costs include:
a) treatment charges and penalties;
b) insurance, freight, sampling/assaying; and
c) the XXXXXXXXXX Royalty.
15. The NSR provides that for the purpose of determining "proceeds", only gains and losses from hedging and forward sales of mineral products from the Mine approved and in effect as of XXXXXXXXXX shall be included in the calculation of the NSR. Any gains and losses from hedging and forward sales of mineral products forming part of the proceeds consist of forward sales of the mineral products and hedges relating to the sale price of those products. These forward sales and hedges are all production related and were not entered into to hedge currency risks. The hedging and forward sales have been created by XXXXXXXXXX entering into contracts with third parties independent of the Corporation, the Other Shareholders and XXXXXXXXXX . The Corporation will not share in any of the gains or losses on hedges entered into after it ceases to be a shareholder. This reflects the hedges that were in effect as at XXXXXXXXXX - the date by which the Corporation and representatives of the Other Shareholders, agreed to the basic terms contained in the term sheet. These hedges had been approved by the Corporation as part of the annual business planning process of XXXXXXXXXX . However, as the Corporation will not be part of any future hedging decisions of XXXXXXXXXX as a result of the proposed transaction, the parties have agreed that the revenue stream used as the basis for determining the NSR would not be affected by any other hedges that the management of XXXXXXXXXX and the Other Shareholders might approve in the future following the execution of the proposed transaction.
16. The NSR will be registered on title to the Mine as a security interest in favour of the Corporation, subordinate in priority only to the XXXXXXXXXX Royalty, but, otherwise the NSR shall rank in priority to all other charges, lines and security interests on the property and assets of XXXXXXXXXX or the Mine.
17. Either the Corporation or XXXXXXXXXX will obtain a ruling from the XXXXXXXXXX tax authorities confirming that:
a) the withholding tax on the NSR payments will be 10% of the gross amount thereof;
b) the withholding tax on the cash portion of the exchange proceeds will be 10%; and
c) no withholding and other taxes will be imposed on the exchange of the XXXXXXXXXX shares for the NSR.
Purpose of the Proposed Transactions
18. The purpose of the proposed transaction is to allow the Corporation to realize the full net present value of its investment in XXXXXXXXXX while allowing the Other Shareholders to pursue their objectives without impinging on the rights of the Corporation. XXXXXXXXXX .
Ruling
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, we confirm that the NSR will constitute a "foreign resource property" as defined in subsection 66(15) of the Act.
Opinion
Provided that our understanding of the facts and proposed transactions described herein is correct, and provided that the proposed changes to the definition of "Canadian resource property" in subsection 66(15) of the Act is enacted in the form proposed by Bill C-10, which received second reading in the Senate on December 4, 2007 and which subsequently expired on the Order Paper, it is our opinion that the NSR will continue to qualify as a "foreign resource property".
Except as expressly stated, our ruling does not imply acceptance, approval or confirmation of any income tax implications relating to the facts or proposed transactions.
The above ruling is given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued by the Canada Revenue Agency on May 17, 2002, and is binding provided that the proposed transactions described above commence before XXXXXXXXXX .
This ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments thereto.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislation Policy Regulatory and Affairs Branch
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