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 Article IV(7)(b) applies to deemed payment of dividend under s. 84(1) by Canadian-resident unlimited liability company that is fiscally transparent for United States tax purposes to its United States-resident shareholder.
Position: No.
Reasons: United States tax treatment of the dividend income deemed to arise in Canada under s. 84(1) is the same whether or not the unlimited liability company is fiscally transparent for United States tax purposes.
XXXXXXXXXX 2009-035092
XXXXXXXXXX , 2010
Dear Sir:
Re: XXXXXXXXXX
Advance Income Tax Ruling Request
We are writing in response to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided in various e-mail correspondence. You have advised us that to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling request are:
(i) in an earlier return of the taxpayer or persons related to the taxpayer;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or persons related to the taxpayer;
(iii) under objection by the taxpayer or persons related to the taxpayer;
(iv) before the courts; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Unless otherwise noted, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the “Act”). All references to currency are to Canadian dollars.
DEFINITIONS
(a) “adjusted cost base” has the meaning assigned by section 54;
(b) “Canco” means XXXXXXXXXX ;
(c) “capital account” means a capital account referred to in XXXXXXXXXX of the Company Legislation;
(d) “Code” means the Internal Revenue Code, 26 U.S.C., as amended;
(e) “Company Legislation” means the XXXXXXXXXX , as amended;
(f) “Convention” means the Convention Between the United States of America and Canada With Respect to Taxes on Income and on Capital Signed on 26 September 1980, as Amended by the Protocols Signed on 14 June 1983, 28 March 1984, 17 March 1995, 29 July 1997 and 21 September 2007;
(g) “Individual” means XXXXXXXXXX ;
(h) “paid-up capital” has the meaning assigned the Company Legislation except where stated otherwise;
(i) “qualifying person” has the meaning assigned by Article XXIX-A(2) of the Convention;
(j) “taxable dividend” has the meaning assigned by subsection 89(1);
(k) “United States” means the United States of America;
(l) “USco” means XXXXXXXXXX .; and
(m) “US Holdco” means XXXXXXXXXX .
FACTS
1. Individual is not resident in Canada for the purposes of the Act. Individual is a resident of the United States and a qualifying person pursuant to the Convention.
2. USco is incorporated under the laws of the State of XXXXXXXXXX . USco is a resident of the United States and a qualifying person pursuant to the Convention. USco does not carry on business in Canada within the meaning of the Act.
3. The shares of USco are held by US Holdco, which is also incorporated under the laws of the State of XXXXXXXXXX . US Holdco is also a resident of the United States and a qualifying person pursuant to the Convention. Individual holds all of the shares of US Holdco.
4. USco and US Holdco have each made a valid election to be taxed under Subchapter S of Chapter 1 of the Code. As a consequence, Individual will generally include the amount of each separately stated item of income, deduction, loss or credit of USco and US Holdco and any nonseparately stated income or loss of USco or US Holdco in the computation of the taxable income of Individual under the Code.
5. Canco is a taxable Canadian corporation incorporated as an unlimited company under the Company Legislation. It files its Canadian income tax returns with the XXXXXXXXXX Tax Centre, and its Canadian income tax affairs are administered by the XXXXXXXXXX Tax Services Office.
6. Canco is disregarded as an entity separate from its shareholder for the purposes of the Code and is thereby fiscally transparent under the taxation laws of the United States for the purposes of the Convention.
7. The authorized share capital of Canco consists of XXXXXXXXXX common shares without nominal or par value. The issued share capital consists of one common share that was issued to USco for XXXXXXXXXX on Canco’s incorporation. USco has continued to hold this share to the present time. Canco has not issued any other shares.
8. Canco holds an undivided interest in real property situated in Canada, consisting primarily of XXXXXXXXXX , which Canco co-owns with other persons. Canco earns rental income from these holdings.
9. At XXXXXXXXXX , Canco’s retained earnings were $XXXXXXXXXX . Canco has not previously recorded any amount of contributed surplus on its financial statements.
10. XXXXXXXXXX of the Company Legislation permits a company to add to a capital account maintained in respect of a class or series of shares of the company without nominal or par value any amount credited by the company to retained earnings, share premium, contributed surplus or other surplus account of the company.
11. USco is the beneficial owner of any dividends or other distributions on the share of Canco owned by USco.
PROPOSED TRANSACTIONS
12. USco will pass a special resolution authorizing Canco to add $XXXXXXXXXX from Canco’s retained earnings account to the capital account maintained in respect of the common shares of Canco. Canco will add the amount so authorized to that capital account. Canco will be deemed, pursuant to subsection 84(1), to pay a dividend on its sole issued and outstanding common share equal to the amount by which the “paid-up capital”, as defined in subsection 89(1), of that class of common shares increases as a result of the addition to the capital account, and USco, the sole holder of the common share of Canco, will be deemed to receive a dividend equal to the amount of that increase. Canco will remit the appropriate amount of taxes to the Receiver General pursuant to Part XIII of the Act in respect of the deemed payment of that dividend.
13. After the capital account maintained in respect of the common shares of Canco has been increased as described in the preceding paragraph, USco will pass a special resolution authorizing Canco to reduce the paid-up capital of its common shares in the amount of $XXXXXXXXXX . Canco will return that amount of paid-up capital to USco by distributing cash and setting-off the amount owing by USco to Canco in respect of the taxes remitted by Canco on USco’s behalf under Part XIII of the Act as described in the preceding paragraph.
14. Subsequent to the completion of the proposed transactions described above, Canco may again add retained earnings to the capital account maintained in respect of its class of common shares. After making such an addition, it may then decrease the paid-up capital of its common shares by an equivalent amount, distributing such amount to USco as a return of paid-up capital.
15. Notwithstanding that Canco will be deemed pursuant to subsection 84(1) of the Act to pay a dividend on its issued and outstanding common share as a result of proposed transaction described in paragraph 12 above, 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 in the United States as a result of that transaction if Canco were not fiscally transparent under the taxation laws of the United States.
16. The proposed transaction described in paragraph 12 above will not affect the tax treatment in the United States of any subsequent distribution on the common share of Canco, including the return of paid-up capital on that share referred to in paragraph 13 above.
PURPOSE OF THE PROPOSED TRANSACTIONS
17. The purpose of the proposed transactions described in paragraphs 12 and 13 above is to make a partial distribution of the retained earnings of Canco to USco in a manner that avoids the application of Article IV(7)(b) of the Convention.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the proposed transactions and the purposes of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, we rule as follows:
A. To the extent that Canco is deemed to have paid, and USco is deemed to have received, a dividend pursuant to subsection 84(1) as a result of the proposed transaction described in paragraph 12 above, that dividend will be a taxable dividend described in paragraph 212(2)(a).
B. For the purpose of applying Article X of the Convention, the amount of 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 Convention that is derived by USco.
C. Article IV(7)(b) of the Convention will not apply to treat the dividend referred to in Ruling A as not having been paid to or derived by USco.
D. The dividend referred to in Ruling A will be subject to Part XIII withholding tax at a rate of 5% pursuant to Article X(2)(a) of the Convention.
E. Pursuant to paragraph 53(1)(b), the adjusted cost base of the common share of Canco will be increased by the amount of the dividend described in Ruling A that is deemed to be received by USco pursuant to subsection 84(1).
F. Subsection 245(2) will not apply to the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.
The above-noted rulings are based on the Act and the Convention in their present forms and do not take into account any proposed amendments to the Act or the Convention which, if enacted, could have an effect on the rulings provided herein.
OPINION
As stated in paragraph 20 of Information Circular 70-6R5, although the Canada Revenue Agency does not provide advance income tax rulings on draft legislation, it will give non-binding technical interpretations. In this regard, provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the applicable amendments to the Act that were set out in subsection 66(1) of Bill C-10 as passed at Second Reading by the Senate on December 4, 2007, are enacted substantially as proposed, it is our opinion, subject to the caveats noted below, that the amount of the dividend described in Ruling A that is deemed to be received by USco would continue to be added to the adjusted cost base of the common share of Canco in computing the adjusted cost base of that share to USco pursuant to paragraph 53(1)(b).
CAVEAT
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 Canada Revenue Agency has not confirmed or made a determination in respect of:
(a) whether Canco is fiscally transparent under the taxation laws of the United States; and
(b) whether the deemed dividend resulting from the proposed transaction referred to in paragraph 12 above 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.
Finally, nothing in this letter should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:
(a) the determination of the adjusted cost base, paid-up capital for the purposes of the Act or fair market value of any shares or other property referred to herein; and
(b) any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above.
This ruling is based solely on the facts, proposed transactions and additional information 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 transactions are completed before XXXXXXXXXX .
Yours truly,
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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