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. Application of Article IV(7)(b) to interest and dividend payments by Canadian-resident entity that is fiscally transparent for United States income tax purposes. 2. Deductibility of interest.
Position: 1. Article IV(7)(b) does not apply to the payments in question. 2. Interest is deductible.
Reasons: 1. For the purposes of Article IV(7)(b), the dividends and interest will receive the same United States income tax treatment if the Canadian-resident entity were not fiscally transparent for United States income tax purposes. 2. Meets the requirements of s. 20(1)(c)(ii).
XXXXXXXXXX
2010-035310
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX , 2010
Dear Sir:
Re: XXXXXXXXXX XXXXXXXXXX
Advance Income Tax Ruling Request
We are writing in response to your letters of XXXXXXXXXX , in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in subsequent e-mail correspondence, and in the course of various telephone conversations. You have advised us that, to the best of your knowledge and that of the taxpayers involved (each referred to below as a "Taxpayer"), none of the issues involved in this ruling request are:
(i) in an earlier return of a Taxpayer or persons related to a Taxpayer;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of a Taxpayer or persons related to a Taxpayer;
(iii) under objection by a Taxpayer or persons related to a 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 (hereinafter referred to as the "Act"). Unless otherwise noted, all references to currency are to Canadian dollars.
DEFINITIONS
(a) "adjusted cost base" has the meaning assigned by section 54;
(b) "Canco Note" means the promissory note to be issued by Canco ULC Amalco, as described in Paragraph 24;
(c) "Canco ULC Amalco" means the taxable Canadian corporation to be formed on the amalgamation of Canco and Canco ULC, as described in Paragraph 22;
(d) "Canco ULC" means XXXXXXXXXX , a taxable Canadian corporation incorporated as an unlimited liability company under the laws of XXXXXXXXXX . Canco ULC's address is XXXXXXXXXX , it files its Canadian federal income tax returns with the XXXXXXXXXX Tax Centre, and its Canadian federal income tax affairs are administered by the XXXXXXXXXX Tax Services Office;
(e) "Canco" means XXXXXXXXXX , a taxable Canadian corporation incorporated under the laws of Canada. Canco's address is XXXXXXXXXX , its Business Number is XXXXXXXXXX , it files its Canadian federal income tax returns with the XXXXXXXXXX Tax Centre and its Canadian federal income tax affairs are administered by the XXXXXXXXXX Tax Services Office;
(f) "Company Legislation" means XXXXXXXXXX ;
(g) "Convention" 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 Protocols Signed on March 28, 1984, March 17, 1995, July 29, 1997 and September 21, 2007;
(h) "CRA" means the Canada Revenue Agency;
(i) "Debt 1" has the meaning ascribed in Paragraph 17;
(j) "Debt 2" has the meaning ascribed in Paragraph 17;
(k) "Debt" has the meaning ascribed in Paragraph 15;
(l) "fair market value" means the highest price, expressed in terms of money or money's worth obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact;
(m) "LLC 1" means XXXXXXXXXX , a limited liability company established under the laws of the State of XXXXXXXXXX ;
(n) "LLC 2" means XXXXXXXXXX , a limited liability company established under the laws of the State of XXXXXXXXXX ;
(o) "LLC Holdco" means XXXXXXXXXX , a limited liability company established under the laws of the State of XXXXXXXXXX ;
(p) "paid-up capital" has, unless otherwise specified, the meaning assigned under the Company Legislation;
(q) "Paragraph" means a numbered paragraph in this letter;
(r) "Pubco" means XXXXXXXXXX , a corporation incorporated under the laws of the State of XXXXXXXXXX ;
(s) "related persons" has the meaning assigned by subsection 251(2);
(t) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);
(u) "taxable Canadian property" has the meaning assigned by subsection 248(1);
(v) "United States" means the United States of America;
(w) "US Holdco" means the corporation to be formed by Pubco as described in Paragraph 26; and
(x) "US Partnership" means XXXXXXXXXX , a partnership established under the laws of the State of XXXXXXXXXX .
FACTS
1. Pubco and each of its corporate subsidiaries have a XXXXXXXXXX year-end for financial statement reporting and tax purposes.
2. Pubco's issued and outstanding share capital consists of only common shares. The common shares of Pubco are listed for trading on the XXXXXXXXXX Stock Exchange under the symbol "XXXXXXXXXX ".
3. Pubco's common shares are its "principal class of shares" and are not "debt substitute shares" for the purposes of Article XXIX-A of the Convention. The common shares of Pubco do not constitute a "disproportionate class of shares" for the purposes of Article XXIX-A of the Convention.
4. Pubco is not fiscally transparent under the taxation laws of the United States for the purposes of the Convention.
5. Pubco is a resident of the United States for the purposes of the Convention and is a "qualifying person" as described in Article XXIX-A(2)(c) of the Convention.
6. Pubco owns all of the issued and outstanding membership units of LLC Holdco. LLC Holdco is treated as a disregarded entity for United States tax purposes and is fiscally transparent under the taxation laws of the United States for the purposes of the Convention.
7. LLC Holdco owns all of the issued and outstanding common shares of Canco ULC. There are no other issued and outstanding shares of Canco ULC.
8. Canco ULC carries on a XXXXXXXXXX business in Canada. Canco ULC is treated as a disregarded entity for United States tax purposes and is a fiscally transparent entity under the taxation laws of the United States for the purposes of the Convention. As of XXXXXXXXXX , Canco ULC had an accumulated deficit of approximately $XXXXXXXXXX .
9. Canco ULC owns all of the issued and outstanding membership units of LLC 1. LLC 1 carries on a XXXXXXXXXX business in the United States. LLC 1 does not carry on business or own any assets outside of the United States. LLC 1 is treated as a disregarded entity for United States tax purposes and is fiscally transparent under the taxation laws of the United States for the purposes of the Convention.
10. LLC1 is governed by the terms and conditions of an Amended and Restated Limited Liability Company Agreement ("LLC1 Operating Agreement") entered into by its sole member, Canco ULC. LLC 1 has one class of authorized membership units. Membership units of LLC 1 represent an ownership interest in LLC 1 consisting of (i) the profits, losses, allocations and distributions of LLC 1, (ii) the right to grant or withhold consents with respect to LLC 1 matters as provided herein or in the XXXXXXXXXX Limited Liability Company Act, and (iii) such other rights and privileges as provided in the LLC1 Operating Agreement governing LLC1. The membership units of LLC 1 possess full voting rights and, in accordance with the LLC1 Operating Agreement, entitle Canco ULC to receive distributions from LLC 1 as and when determined by Canco ULC. Profits and losses of LLC 1 are allocated to Canco ULC.
11. Except to the extent that a distribution would cause the liabilities of LLC 1 to exceed the fair value of its properties and thereby be prohibited under the laws of XXXXXXXXXX , LLC 1 is not precluded or restricted from making distributions to its members.
12. LLC 1 owns a XXXXXXXXXX % interest in US Partnership. The remaining interests in US Partnership are held by related companies in the Pubco group. US Partnership is the 100% owner and sole member of LLC 2, which operates a XXXXXXXXXX business for the XXXXXXXXXX exclusively for the Pubco corporate group. US Partnership does not carry on business or own any assets other than its interest in LLC 2. US Partnership is not treated as a corporation for United States tax purposes and is fiscally transparent under the taxation laws of the United States for the purposes of the Convention.
13. All of the gross income earned by LLC Holdco, Canco ULC and LLC 1, including, with respect to LLC 1, its share of US Partnership's income, is included in computing Pubco's gross income on a current basis under United States taxation laws.
14. Pubco owns all of the issued and outstanding shares of Canco. Canco carries on an XXXXXXXXXX business in Canada. Canco is not a disregarded entity for United States tax purposes and is not fiscally transparent under the taxation laws of the United States for the purposes of the Convention.
15. In XXXXXXXXXX , Pubco made advances to LLC 1 totaling approximately US$XXXXXXXXXX (the "Debt"), which LLC 1 used to finance a XXXXXXXXXX in the United States. The Debt bears interest at an arm's-length rate.
PROPOSED TRANSACTIONS
16. Immediately prior to implementing the transactions described below, LLC 1 will pay all accrued interest on the Debt.
17. Immediately after the payment of the accrued interest described in the preceding paragraph, Pubco will exchange the Debt for the issuance by LLC 1 of two new debt obligations with different principal amounts. The Debt will be cancelled as result of the exchange. One of the debt obligations issued by LLC 1 on the exchange will have a principal amount equal to XXXXXXXXXX of the principal amount of the Debt outstanding immediately before the exchange and will be denominated in United States dollars ("Debt 1"). The other debt obligation will have a principal amount equal to XXXXXXXXXX of the principal amount of the Debt outstanding immediately before the exchange and will be denominated in United States dollars ("Debt 2"). In all other respects, the terms and conditions of Debt 1 and Debt 2 will be identical to the current terms and conditions of the Debt.
18. The rate of interest on Debt 1 and Debt 2 will be equal to the XXXXXXXXXX London Interbank Offered Rate plusXXXXXXXXXX %.
19. Pubco will transfer Debt 1 to LLC Holdco in exchange for additional membership units of LLC Holdco having a fair market value equal to the fair market value of Debt 1 at the time of the transfer.
20. Pubco will transfer the shares of Canco to LLC Holdco in exchange for the issuance of additional membership units of LLC Holdco having a fair market value equal to the fair market value of the shares of Canco at the time of the transfer.
21. Canco will be continued under the Company Legislation as an unlimited liability company. At that time, Canco will become a disregarded entity for United States tax purposes and will be considered fiscally transparent under the taxation laws of the United States for the purposes of the Convention.
22. Canco and Canco ULC will amalgamate under the Company Legislation as an unlimited liability company ("Canco ULC Amalco"). On the amalgamation,
(a) all of the property of Canco and Canco ULC immediately before the amalgamation will become property of Canco ULC Amalco by virtue of the amalgamation (except amounts receivable from Canco or Canco ULC),
(b) all of the liabilities of Canco and Canco ULC immediately before the amalgamation will become liabilities of Canco ULC Amalco by virtue of the amalgamation (except amounts payable to Canco or Canco ULC), and
(c) the shares of Canco and Canco ULC will be cancelled on the amalgamation and common shares of Canco Amalco ULC will be issued to LLC Holdco.
23. LLC Holdco will contribute Debt 1 to Canco ULC Amalco in exchange for additional common shares of Canco ULC Amalco having a fair market value equal to the fair market value of Debt 1. In accordance with the Company Legislation, an amount equal to the fair market value of Debt 1, determined at the time of the contribution, will be added to the paid-up capital of the common shares of Canco ULC Amalco.
24. Pubco will transfer Debt 2 to Canco ULC Amalco in exchange for the issuance of an interest-bearing promissory note by Canco ULC Amalco (the "Canco Note"). The Canco Note will be denominated in Canadian dollars and will have a principal amount equal to the fair market value of Debt 2 on the date of transfer. The rate of interest on the Canco Note will be equal to the XXXXXXXXXX London Interbank Offered Rate plus XXXXXXXXXX %.
25. Immediately after the issuance of the Canco Note, Canco ULC Amalco will repay a portion of the Canco Note by legally offsetting it against existing receivables owing to Canco ULC Amalco.
26. Immediately after the repayment described in Paragraph 25, Pubco will transfer the Canco Note to US Holdco, a corporation to be formed under the laws of the United States. The purchase price paid by US Holdco for the Canco Note will be the fair market value of the Canco Note at the time of transfer. As consideration for the transfer of the Canco Note, US Holdco will issue shares of US Holdco to Pubco having a fair market value equal to the fair market value of the Canco Note at the time of the transfer. US Holdco will not be disregarded as an entity for United States tax purposes and will be part of an affiliated group of corporations which includes Pubco that is permitted to file a consolidated income tax return as contemplated by section 1501 of the Internal Revenue Code. US Holdco will be a resident of the United States and a "qualifying person" as described in Article XXIX-A(2)(d) of the Convention.
27. Canco ULC Amalco will contribute Debt 1 and Debt 2 to LLC 1 in exchange for additional membership units of LLC 1 having a fair market value equal to the fair market value of Debt 1 and Debt 2 at the time of the exchange. As a result of the contribution, Debt 1 and Debt 2 will be cancelled and extinguished.
28. In accordance with the terms of the Canco Note, Canco ULC Amalco will make periodic interest payments to US Holdco.
29. LLC Holdco will distribute the common shares of Canco ULC Amalco to Pubco as a dividend-in-kind.
30. Subsequent to the distribution of the common shares of Canco ULC Amalco referred to in Paragraph 29, in lieu of declaring and paying a cash dividend, Canco ULC Amalco will, subject to Paragraph 31:
(a) increase, in accordance with the provisions of the Company Legislation, the paid-up capital in respect of the common shares of Canco ULC Amalco by an amount equal to the amount it wishes to distribute to Pubco;
(b) reduce, as soon as practicable after the increase referred to in Paragraph 30(a), the paid-up capital in respect of the common shares of Canco ULC Amalco in accordance with the provisions of the Company Legislation by an amount equal to the amount of the increase described in Paragraph 30(a); and
(c) on the reduction of paid-up capital referred to in Paragraph 30(b), distribute an amount of cash to Pubco equal to the amount of the reduction.
31. In the event that Canco ULC Amalco is prohibited from increasing the paid-up capital in respect of its shares under the Company Legislation in the manner described under Paragraph 30(a), Canco will not complete the transactions described in Paragraphs 30(a), 30(b) and
30(c), but will:
(a) declare, in accordance with the provisions of the Company Legislation, a stock dividend payable to Pubco for an amount equal to the amount it wishes to distribute to Pubco;
(b) pay the stock dividend referred to in Paragraph 31(a) by issuing to Pubco additional common shares of Canco ULC Amalco having a fair market value equal to the amount Canco ULC Amalco wishes to distribute to Pubco;
(c) add the amount of the stock dividend referred to in Paragraph 31(a) to the paid-up capital of the common shares of Canco ULC Amalco;
(d) immediately after payment of the stock dividend referred to in Paragraph 31(b), consolidate its common shares in accordance with the provisions of the Company Legislation such that the number of common shares outstanding immediately after the consolidation equals the number of common shares that were outstanding immediately before payment of the stock dividend; and
(e) immediately after the share consolidation referred to in Paragraph 31(d), distribute an amount of cash to Pubco as a return of capital on its shares held by Pubco equal to the amount of the stock dividend referred to in Paragraph 31(a).
32. The distributions referred to in Paragraphs 30 and 31 will be funded from Canco ULC Amalco's Canadian business operations or from amounts received by Canco ULC Amalco from LLC 1 out of cash generated from the business operations of LLC 2. In addition, such distributions may be effected by setting-off intercompany account balances in lieu of a cash payment.
PURPOSES OF THE PROPOSED TRANSACTIONS
33. The purpose of transferring the Canco Note to US Holdco is to ensure that interest payments on the Canco Note are included in computing US Holdco's separate taxable income for United States tax purposes such that the treatment of the interest is the same as it would be if Canco ULC Amalco were not fiscally transparent for United States tax purposes.
34. The purpose of the proposed transactions described Paragraphs 30 and 31 is to make a distribution from Canada ULC Amalco in manner that avoids the application of Article IV(7)(b) of the Convention to a cash dividend paid by Canco ULC Amalco.
35. The purpose of the amalgamation of Canco and Canco ULC is to simplify Pubco's Canadian corporate structure and to better integrate its Canadian operations.
36. Notwithstanding that Canco ULC Amalco will be deemed to pay a dividend on the common shares of Canco ULC Amalco as a consequence of the proposed transaction described in Paragraph 30(a) pursuant to subsection 84(1) of the Act, no income, profit or gain will arise or will be recognized under the taxation laws of the United States as a result of the transactions described in Paragraphs 30(a) and 30(b). 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 those transactions if Canco ULC Amalco were not fiscally transparent under the taxation laws of the United States.
37. The proposed transactions described in Paragraphs 30(a) and 31(b) will not affect the treatment under the taxation laws of the United States of any subsequent distribution on the common shares of Canco ULC Amalco, including the return of paid-up capital referred to in Paragraph 30(c).
38. Notwithstanding that the payment of the stock dividend described in Paragraph 31(b) will be treated as a taxable dividend under the Act, the integration of the payment of the stock dividend and the subsequent share consolidation will result in no income, profit or gain arising or being recognized under the taxation laws of the United States. 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 those transactions if Canco ULC Amalco were not fiscally transparent under the taxation laws of the United States for the purposes of the Convention.
39. The proposed transactions described in Paragraphs 31(a), 31(b), 31(c) and 31(d) will not affect the tax treatment in the United States of any subsequent distribution on the shares of Canco ULC Amalco, including the return of paid-up capital referred to in Paragraph 31(e).
40. US Holdco will include the interest income on the Canco Note in computing its separate taxable income for Unites States tax purposes. Pubco will deduct the interest expense on the Canco Note in computing its separate taxable income for United States tax purposes. In computing the consolidated taxable income of the affiliated group of corporations that includes both Pubco and US Holdco, the interest income inclusion and the interest expense will offset each other.
41. At no time in the XXXXXXXXXX months immediately preceding the transfer referred to in Paragraph 29 will more than XXXXXXXXXX % of the fair market value of the shares of Canco ULC Amalco have been derived directly or indirectly from one or any combination of (i) real or immovable property situated in Canada, (ii) Canadian resource property, (iii) timber resource property, and (iv) options in respect of, or interests in, or for civil law rights in, property described in any of subparagraphs (i) to (iii), whether or not the property exists.
42. No amount of interest will accrue on the Canco Note prior to the transfer described in Paragraph 26.
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 Amalco ULC is deemed to have paid, and Pubco is deemed to have received, a dividend pursuant to subsection 84(1) of the Act as a consequence of the transaction described in Paragraph 30(a), that dividend will be a taxable dividend described in paragraph 212(2)(a) of the Act.
B. The amount of any stock dividend received by Pubco as a consequence of the transactions described in Paragraphs 31(b) and 31(c) will be a taxable dividend described in paragraph 212(2)(a) of the Act.
C. For the purpose of applying Article X of the Convention, the amount of a dividend referred to in Ruling A or B will be considered to be income as described in the definition "dividends" in Article X(3) of the Convention that is derived by Pubco.
D. Pubco will be entitled to the same benefits under Article X(2) of the Convention that it would be entitled to if a dividend referred to in Ruling A or B were paid as a cash dividend and the Convention were read without reference to Article IV(7)(b).
E. Article IV(7)(b) of the Convention will not apply to treat a dividend referred to in Ruling A or B as not having been paid to or derived by Pubco.
F. Article IV(7)(b) of the Convention will not apply to treat a payment of interest on the Canco Note as not having been paid to or derived by US Holdco.
G. Provided that Canco Amalco ULC has a legal obligation to pay interest on the Canco Note and the membership units of LLC 1 acquired by Canco Amalco ULC on the contribution of Debt 2 as described in Paragraph 27 continue to be held by Canco Amalco ULC for the purpose of gaining or producing income therefrom, Canco Amalco ULC will, subject to subsection 18(4), be entitled to deduct, pursuant to paragraph 20(1)(c), the lesser of the interest paid or payable (depending on the method regularly followed by Canco Amalco ULC in computing its income for the purposes of the Act) in respect of that taxation year or a reasonable amount in respect thereof.
H. 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 form 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.
CAVEAT
Nothing in this letter should be construed as implying that the CRA has agreed to or reviewed:
(a) the determination of the adjusted cost base, paid-up capital or fair market value of any shares or other property referred to herein;
(b) the amount of any stock dividend paid by Canco Amalco ULC;
(c) whether Canco ULC is fiscally transparent under the taxation laws of the United States for the purposes of the Convention or whether Canco ULC Amalco will be fiscally transparent under those laws;
(d) whether the deemed dividend resulting from the Proposed Transactions referred to in Paragraphs 30 and 31 is disregarded under the taxation laws of the United States or would be disregarded if Canco Amalco ULC were not fiscally transparent under the taxation laws of the United States for the purposes of the Convention;
(e) the application of subsection 247(2) in determining the amount of interest that may be deducted by Canco ULC Amalco in respect of the Canco Note; and
(f) 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, the 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 CRA provided that the Proposed Transactions are completed on or before XXXXXXXXXX .
Yours truly,
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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