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) Whether a subsection 84(1) deemed dividend is a dividend for the purposes of Article X of the Treaty; 2) Whether Article IV(7)(b) of the Treaty applies to treat a subsection 84(1) deemed dividend as not being paid to or derived by a resident of the United States; 3) Whether Article IV(7)(b) of the Treaty applies to treat certain royalty payments as not being paid to or derived by a resident of the United States
Position: 1) Yes; 2) No; 3) No
Reasons: 1) The definition "dividends" in Article X(3) of the Treaty is broad enough to include a subsection 84(1) deemed dividend; 2) Article IV(7)(b) does not apply because the deemed dividend is subject to the same treatment under the taxation laws of the United States as it would be if the dividend payer were not fiscally transparent; 3) Article IV(7)(b) does not apply because the royalties are subject to the same treatment under the taxation laws of the United States as they would be if the royalty payer were not fiscally transparent.
XXXXXXXXXX 2009-034858
XXXXXXXXXX , 2009
Dear XXXXXXXXXX :
Re: XXXXXXXXXX
(collectively referred to as the "taxpayers")
We are writing in response to your request dated XXXXXXXXXX for an advance income tax ruling on behalf of the above-noted taxpayers.
To the best of your knowledge and that of the taxpayers, none of the issues involved in this request for an advance income tax ruling is:
(i) dealt with in an earlier return of the taxpayers or a person related to the taxpayers;
(ii) being considered by any tax services office or taxation centre in connection with a tax return previously filed by the taxpayers or a person related to the taxpayers;
(iii) under objection by any of the taxpayers or by a person related to the taxpayers; or
(iv) before the courts.
In this letter, the following terms have the meanings specified below:
"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended;
"Agreement" means the XXXXXXXXXX License Agreement, as described in Paragraph 10;
"Canco" means XXXXXXXXXX , an unlimited liability company under the Companies Act;
"Code" means the Internal Revenue Code of 1986 (United States), as amended;
"Companies Act" means the Companies Act (XXXXXXXXXX );
"Merger" has the meaning ascribed to in Paragraph 2;
"Paragraph" means a numbered paragraph in this letter;
"PUC Increase" has the meaning ascribed to in Paragraph 14;
"PUC Reduction" has the meaning ascribed to in Paragraph 14;
"Qualifying Person" has the meaning ascribed to in Article XXIX-A(2) of the Treaty;
"Royalty" means the fee payable under the Agreement, as described in Paragraph 10;
"taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;
"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;
"US Holdings" means XXXXXXXXXX ;
"US Parent" means XXXXXXXXXX .; and
"US Subco" means XXXXXXXXXX .
The rulings provided herein are based solely on the facts and proposed transactions described below. Any documents submitted with your request do not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
Our understanding of the facts, proposed transactions and the purposes of the proposed transactions are as follows:
Facts
1. US Parent was incorporated under the laws of XXXXXXXXXX in XXXXXXXXXX . US Parent, together with its subsidiaries, is XXXXXXXXXX
2. XXXXXXXXXX . As of XXXXXXXXXX , there were XXXXXXXXXX holders of record of US Parent's common stock, including US Holdings, which owned XXXXXXXXXX % of US Parent's common stock at that time.
3. US Subco is a corporation incorporated under the laws of XXXXXXXXXX and is a wholly-owned subsidiary of US Parent.
4. Canco was incorporated under the laws of XXXXXXXXXX in XXXXXXXXXX and is a taxable Canadian corporation. All of the issued and outstanding shares of Canco are owned by US Parent. On XXXXXXXXXX , Canco converted to a XXXXXXXXXX unlimited liability company ("ULC"). The reasons for the conversion of Canco to an ULC include (i) to allow US Parent to maintain the carrying on of its XXXXXXXXXX business in Canada through a branch for U.S. federal income tax purposes, and (ii) to better manage its taxes and maintain US Parent's access, for United States federal income tax purposes, to any losses incurred by Canco and to tax credits in respect of Canadian income taxes paid by Canco.
5. Canco is disregarded as an entity separate from US Parent under the taxation laws of the United States and is fiscally transparent for the purposes of Article IV of the Treaty.
6. XXXXXXXXXX
7. Canco deals with the XXXXXXXXXX Tax Services Office and files its tax returns with the XXXXXXXXXX Taxation Centre.
8. As a result of various intercompany transactions, Canco will be indebted to US Subco on XXXXXXXXXX ("US Subco Debt"). The US Subco Debt will be interest-bearing.
9. On XXXXXXXXXX , Canco entered into the following agreements pertaining to the operation of its XXXXXXXXXX in Canada: (i) a Royalty Agreement with US Parent providing for the use by Canco, for a fee, of the XXXXXXXXXX concept relating to the XXXXXXXXXX (the "Concept") developed and owned by US Parent; and (ii) a License Agreement with US Parent and a wholly-owned subsidiary of US Parent to permit Canco to use, for a fee, certain XXXXXXXXXX (the "Marks"). Subsequent to the execution of the Royalty Agreement and License Agreement, the right, title and interest in and to the Marks, the Concept, the License Agreement and the Royalty Agreement were transferred to and/or between different subsidiaries of US Parent. Since XXXXXXXXXX , various amended and restated or new agreements for the use of the Marks and the Concept were entered into by Canco for the use of the same or similar rights by Canco to operate its XXXXXXXXXX in Canada.
10. On XXXXXXXXXX , the then owner of the Marks and the Concept transferred all of its right, title and interest in and to the Marks and the Concept to US Subco. On the same date, US Subco entered into a XXXXXXXXXX License Agreement (the "Agreement") with Canco for the right to use, until XXXXXXXXXX , the Marks and the Concept in Canada in consideration of a fee (the "Royalty") XXXXXXXXXX . Canco has prepared or obtained contemporaneous documentation with respect to the Royalty in accordance with subsection 247(4) of the Act.
11. US Parent and US Subco are members of a consolidated group and have elected to file on a consolidated basis for United States federal income tax purposes.
12. US Parent is the beneficial owner of any dividends or other distributions on the shares of Canco owned by US Parent. US Subco is the beneficial owner of the Royalty under the Agreement and the interest under the US Subco Debt.
13. US Parent and US Subco are residents of the United States for the purposes of the Treaty and are either Qualifying Persons under the Treaty or meet all of the conditions set forth under Article XXIX-A(3) of the Treaty to be entitled to the benefits of the Treaty with respect to any interest, dividends or royalties paid to them by Canco.
Proposed Transactions
14. At some time in XXXXXXXXXX , Canco will, in lieu of declaring and paying a cash dividend:
(a) increase, in accordance with the provisions of the Companies Act, the paid-up capital in respect of its common shares held by US Parent by an amount equal to the amount of cash that it wishes to distribute to US Parent (the "PUC Increase");
(b) reduce, as soon as practicable, the paid-up capital of those shares, in accordance with the provisions of the Companies Act, by an amount equal to the amount of the increase described in subparagraph (a) (the "PUC Reduction"); and
(c) distribute an amount in cash, as a return of paid-up capital on its shares held by US Parent, equal to the amount of the PUC Reduction.
15. At some time in XXXXXXXXXX , Canco will pay all or a portion of the Royalty owing to US Subco under the Agreement and will pay all or a portion of the interest owing to US Subco under the terms of the US Subco Debt.
16. Notwithstanding that the proposed transaction described in Paragraph 14(a) will, pursuant to subsection 84(1) of the Act, result in a deemed payment of a dividend on the shares of Canco, no amount of income, profit or gain will arise or will be recognized under the taxation laws of the United States as a result of that transaction. Similarly, no amount of income, profit or gain would arise or be recognized under the taxation laws of the United States as a result of the proposed transaction if Canco were not fiscally transparent under those taxation laws. More specifically, the PUC Increase will not be recognized under the taxation laws of the United States and would not be recognized if Canco were not fiscally transparent under those laws.
17. The proposed transaction described in Paragraph 14(a) will not affect the treatment under the taxation laws of the United States of any subsequent distribution on the Canco shares, including the return of paid-up capital described in Paragraph 14(c).
18. The Royalty will be recognized as an item of income in the hands of US Subco under the taxation laws of the United States in the same manner as it would be if Canco were not fiscally transparent. More specifically, the quantum and character of the Royalty and its timing in the inclusion in the income of US Subco will be the same under the taxation laws of the United States as it would be if Canco were not fiscally transparent under those laws.
19. The interest on the US Subco Debt will be recognized as an item of income in the hands of US Subco under the taxation laws of the United States in the same manner as it would be recognized if Canco were not fiscally transparent under those laws. More specifically, the quantum and character of the interest and its timing in the inclusion in the income of US Subco will be the same under the taxation laws of the United States as it would be if Canco were not fiscally transparent under those laws.
20. Under the taxation laws of the United States, the geographic source of the Royalty and the interest would either be the same as it would be if Canco were not fiscally transparent or would not be relevant to the treatment of those amounts, as items of income, under those laws.
21. If the full amount of the Royalty owing under the Agreement is not paid at the end of the second taxation year following the taxation year in which the Royalty is incurred, Canco and US Subco will file an agreement in prescribed form and within the time prescribed by paragraph 78(1)(b) of the Act with the result that the unpaid Royalty will be deemed to be paid by Canco and received by US Subco at the time described in subparagraph 78(1)(b)(i) of the Act.
Purposes of the Proposed Transactions
22. The purposes of the proposed transactions are:
(a) to allow US Parent and its subsidiaries to maintain their existing corporate structure without triggering an increased tax burden on amounts distributed by Canco to US Parent and on amounts paid by Canco to US Subco; and
(b) to allow US Parent to continue to carry on its XXXXXXXXXX business in Canada through a branch for U.S. federal income tax purposes so as to better manage Canadian taxes and maintain US Parent's access, for United States federal income tax purposes, to any losses incurred by Canco and to tax credits in respect of Canadian income tax paid by Canco.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. To the extent that Canco is deemed to have paid and US Parent is deemed to have a received a dividend pursuant to subsection 84(1) of the Act as a result of the PUC Increase, that dividend will be a taxable dividend described in paragraph 212(2)(a) of the Act.
B. The dividend referred to in Ruling A will be considered to be income as described in the definition "dividends" in Article X(3) of the Treaty.
C. Article IV(7)(b) of the Treaty will not apply to:
(a) the dividend referred to in Ruling A;
(b) the Royalty paid by Canco to US Subco, as described in Paragraph 15; or
(c) the interest paid by Canco to US Subco, as described in Paragraph 15.
D. Subsection 245(2) of the Act to will not apply to redetermine the tax consequences confirmed in the rulings given above.
The above-noted rulings are based on the Act and the Treaty in its present form and do not take into account any proposed amendments to the Act or the Treaty which, if enacted, could have an effect on the rulings provided herein.
These rulings are based solely on the facts and proposed transactions described above and are 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 transactions are completed before XXXXXXXXXX .
Opinion
Article IV(7)(b) of the Treaty will not apply to treat an amount as not having been paid to or derived by a resident of the United States solely because the amount was deemed to have been paid by paragraph 78(1)(b) of the Act.
Caveat
Nothing in this letter should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:
(a) whether US Parent or US Subco is a Qualifying Person or whether the deemed dividend referred to Ruling A or any amounts paid or deemed to be paid by Canco would be eligible for benefits under the Treaty because of paragraphs 3 or 4 of Article XXIX-A of the Treaty;
(b) whether the deemed dividend referred to in Paragraph 14 is disregarded under the taxation laws of the United States or would be disregarded if Canco were not fiscally transparent under the taxation laws of the United States; and
(c) any tax consequences relating to the facts and the proposed transactions described herein other than those specifically described in the rulings given above.
Yours truly,
for 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, 2009
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, 2009
Email this Content