2009 Ruling 2009-0344711R3 - Canada-U.S. Tax Treaty - Limitation on Benefits

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: Would a taxable capital gain realized by the taxpayer (a resident of the United States) on the sale of the shares of a Canadian corporation be eligible for Treaty benefits under Article XXIX A(3) of the Treaty?

Position: Yes

Reasons: Requirements of Article XXIX A(3) are met

XXXXXXXXXX  							2009-034471

XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

Re: 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.

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 person related to the taxpayer;

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

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

(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.

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;

(b) "adjusted cost base" has the meaning assigned by section 54 of the Act;

(c) "Canco" means XXXXXXXXXX ;

(d) "capital property" has the meaning assigned by section 54 of the Act;

(e) "Code" means the United States Internal Revenue Code;

(f) "Connected Business Activities" means the business activities of Canco, as described in paragraph 6 herein;

(g) "Foreign Country" means XXXXXXXXXX ;

(h) "Foreignco" means XXXXXXXXXX ;

(i) "Related USCo" means XXXXXXXXXX ;

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

(k) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(l) "Treaty" means the Convention Between Canada and the United States of America With Respect to Taxes on Income and Capital Signed on September 26, 1980 as Amended by the Protocols Signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997 and September 21, 2007;

(m) "U.S." means the United States of America;

(n) "U.S. Business Activities" means the business activities of USCo and Related USCo, as described in paragraph 7 herein;

(o) "USCo" or the "taxpayer" means XXXXXXXXXX ; and

(p) "US Holdco" means XXXXXXXXXX

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

Facts

1. Foreignco is a widely-held publicly-traded corporation incorporated in the Foreign Country and taxable in the Foreign Country. Foreignco is listed on the XXXXXXXXXX

2. US Holdco is a subchapter C corporation for the purposes of the Code and is a resident of the U.S. for purposes of the Treaty. All of the shares of US Holdco are owned by Foreignco.

3. USCo is a subsidiary wholly-owned corporation of US Holdco. USCo is a subchapter C corporation for the purposes of the Code and is a resident of the U.S. for purposes of the Treaty. USCo it is not a "qualifying person" as that term is defined in Article XXIX A(2) of the Treaty. USCo's head office is located at XXXXXXXXXX

4. Related USCo is a subsidiary wholly-owned corporation of US Holdco. Related USCo is a subchapter C corporation for the purposes of the Code and is a resident of the United States for purposes of the Treaty.

5. Canco is a taxable Canadian corporation that carries on business activities in Canada (described in paragraph 6 below). USCo owns XXXXXXXXXX % of the shares of Canco and Foreignco owns the remaining XXXXXXXXXX %. The shares of Canco owned by USCo are capital property to USCo.

6. Canco is engaged in XXXXXXXXXX business activities in Canada XXXXXXXXXX Canco does not own any property situated outside of Canada or the U.S. or any property the value of which is attributable to property situated outside Canada or the U.S.

7. Both USCo and Related USCo carry on an active business in the U.S. USCo carries on the XXXXXXXXXX business and Related USCo carries on the XXXXXXXXXX businesses. USCo and Related USCo carry on the XXXXXXXXXX businesses XXXXXXXXXX . The XXXXXXXXXX businesses carried on by USCo and Related USCo are collectively referred to hereafter as the "U.S. Business Activities".

8. Each of USCo's and Related USCo's distinct business activities generate more sales volume (where applicable) and revenue than Canco's equivalent business activities and they employ more employees than Canco. In aggregate, the U.S. Business Activities generated sales in XXXXXXXXXX of approximately XXXXXXXXXX and gross revenues of approximately $US XXXXXXXXXX while Canco generated sales in XXXXXXXXXX of approximately XXXXXXXXXX and gross revenues of approximately $Cdn XXXXXXXXXX .

9. The relative sales, gross revenue and employees of Canco, USCo and Related USCo for each business segment have not changed substantially since XXXXXXXXXX nor are they expected to change substantially prior to the proposed transaction.

Proposed Transaction

10. USCo will sell of all its shares of Canco to Foreignco for cash consideration equal to their fair market value. The proposed sale will occur no later than XXXXXXXXXX .

Additional Information

11. USCo and Related USCo, are "related persons" as that term is defined in subsection 251(2) of the Act. Neither USCo nor Related USCo carry on a business of making or managing investments.

12. The fair market value of the Canco shares owned by USCo exceeds their adjusted cost base to USCo.

13. The value of the Canco shares is wholly attributable to Canco's Connected Business Activities.

Purposes of the Proposed Transaction

14. The purposes of the proposed transaction are to better align Foreignco's North American operations, eliminate the tax leakage associated with streaming Canco's dividends through the U.S. to Foreignco and to provide USCo with cash to repay short-term intercompany debt.

Ruling

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transaction and the purposes of the proposed transaction and the proposed transaction is completed in the manner described above, our ruling is as follows:

Pursuant to Article XXIX A(3) of the Treaty, the benefits of the Treaty, including, in particular, any benefit under Article XIII of the Treaty, will apply to any taxable capital gain realized by USCo on the sale of the Canco shares, as described in paragraph 10 above, provided that:

(a) the Connected Business Activities are carried on by Canco at the time of the proposed transaction and Canco is not engaged, at that time, in any activity other than its Connected Business Activities; and

(b) the U.S. Business Activities are carried on by USCo and Related USCo at the time of the proposed transaction and the relative size of the U.S. Business Activities in relation to the Connected Business Activities is not substantially different, at that time, than as described in paragraph 8 above.

This ruling is based solely on the facts and proposed transaction described above and is subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002. This ruling is binding on the Canada Revenue Agency provided that the proposed transaction is completed on or before XXXXXXXXXX .

Caveat

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

(a) the fair market value or the adjusted cost base of any property referred to in this ruling; or

(b) any tax consequences or tax reporting obligations relating to the facts and the proposed transactions described herein other than those specifically described in the ruling given above.

Yours truly,

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