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 the deemed dividend; 3) Whether GAAR applies to the series of transactions.
Position: 1) Yes 2) No
Reasons: 1) The definition "dividends" in Article X(3) is broad enough to include a subsection 84(1) deemed dividend; 2) Tax treatment of the deemed dividend income under the taxation laws of the United States would be the same if the deemed dividend payer were not fiscally transparent; 3) The proposed transactions do not result in a misuse or abuse of the provisions of the Income Tax Act or the Treaty
XXXXXXXXXX 2010-036453
XXXXXXXXXX , 2010
Dear XXXXXXXXXX :
Re: XXXXXXXXXX ("Canco1")
XXXXXXXXXX
We are writing in response to your request dated XXXXXXXXXX for an advance income tax ruling on behalf of Canco1.
To the best of your knowledge and that of Canco1, none of the issues involved in this request for an advance income tax ruling is:
(i) dealt with in an earlier return of Canco1 or a person related to the Canco1;
(ii) being considered by any tax services office or taxation centre in connection with a tax return previously filed by Canco1 or a person related to the Canco 1;
(iii) under objection by Canco1 or by a person related to Canco1; or
(iv) before the courts.
Definitions
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 to the date of this letter.
"Canco1" means XXXXXXXXXX , a taxable Canadian corporation.
"Canco2" means XXXXXXXXXX , a taxable Canadian corporation.
"Can LP" means XXXXXXXXXX , an XXXXXXXXXX Limited Partnership.
"Canco3" means XXXXXXXXXX which is a taxable Canadian corporation.
"Canco4" means XXXXXXXXXX which is a taxable Canadian corporation.
"Paid-up capital" has, by virtue of subsection 248(1) of the Act, the meaning assigned by subsection 89(1) of the Act.
"Paragraph" means a numbered paragraph in this letter.
"Qualifying Person" has the meaning ascribed to in Article XXIX-A(2) of the Treaty.
"Resident" has the meaning ascribed to in Article IV of the Treaty.
"Taxable Canadian corporation" has, by virtue of subsection 248(1) of the Act, the meaning assigned by subsection 89(1) of the Act.
"Tax Code" means the US Internal Revenue Code of 1986, as amended.
"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 LP1" means XXXXXXXXXX .
"US GP1" means XXXXXXXXXX .
"US C Corp" means XXXXXXXXXX .
"US S Corp1" means XXXXXXXXXX .
"US S Corp2" means XXXXXXXXXX .
"US Shareholders" means US LP1, US S Corp1 and US SCorp2.
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. Cancol is incorporated under the Companies Act (XXXXXXXXXX ) as a XXXXXXXXXX Unlimited Liability Company ("XXXXXXXXXX ULC") and is a taxable Canadian corporation. Since its incorporation in XXXXXXXXXX , Cancol has derived all of its income from carrying on business in XXXXXXXXXX directly and through its XXXXXXXXXX % interest in Can LP. The issued and outstanding shares of Canco1 are comprised of common and Class A shares. The Class A shares are non-voting.
2. Can LP is an XXXXXXXXXX Limited Partnership and derives all of its income from carrying on business in XXXXXXXXXX where it receives operating fees from the operation of a XXXXXXXXXX in XXXXXXXXXX . Can LP regularly distributes its net income to Cancol and Canco2, the partners of Can LP. Canco1 is the sole general partner of Can LP (owning a XXXXXXXXXX % partnership interest) while Canco2 is its sole limited partner (owning a XXXXXXXXXX % partnership interest).
3. Canco3 holds XXXXXXXXXX % of the common shares of Canco1.
4. Canco4 holds XXXXXXXXXX % of the common shares of Canco1.
5. US LP1 which is formed under the XXXXXXXXXX Partnership Act, as a XXXXXXXXXX limited partnership owns XXXXXXXXXX % of the common and XXXXXXXXXX % of the Class A shares of Cancol.
6. US GP1 holds a XXXXXXXXXX % interest in USLP1 as a limited partner. US GP1 was formed under the XXXXXXXXXX Partnership Act as a general partnership.
7. US C Corp holds a XXXXXXXXXX % interest in USLP1 as the sole general partner. US C Corp was incorporated under XXXXXXXXXX .
8. The partners of US GP1 comprise of both US Resident individuals and US Resident trusts.
9. US S Corp1 holds XXXXXXXXXX % of the common shares and XXXXXXXXXX % of the Class A shares of Cancol. US S Corp1 was incorporated under XXXXXXXXXX and has elected to be treated as an "S corporation" under XXXXXXXXXX the Tax Code.
10. US S Corp2 owns XXXXXXXXXX % of the common shares of Cancol. US S Corp2 was incorporated under XXXXXXXXXX and has elected to be treated as an "S corporation" under XXXXXXXXXX the Tax Code.
11. For U.S. tax purposes, Cancol has elected to be treated as a partnership, and files a US partnership tax return annually. The income of Cancol as calculated for US tax purposes includes its share of the income of Can LP.
12. Until XXXXXXXXXX , Cancol paid regular distributions to its shareholders from its net after tax income. The dividends payable by Cancol to its US Resident shareholders are paid net of Part XIII of the Act withholding tax (i.e., 15% withholding tax on dividends paid to US LP1, and 5% withholding tax on dividends paid to US S Corp1 & US S Corp2). Canco1 ceased paying monthly dividends in XXXXXXXXXX as they wanted to verify that they were withholding the correct amount of tax.
13. The partners of US GP1 include their share of the income of Can LP in their US taxable income and claim a US foreign tax credit for the Canadian corporate tax paid by Cancol and any withholding tax payable in respect of distributions by Canco1.
14. Cancol has a nil balance in its contributed surplus account.
15. Cancol has a balance of over $XXXXXXXXXX in its accumulated retained earnings account, which represents its undistributed after tax income derived from carrying on business in XXXXXXXXXX .
Proposed Transactions
16. Cancol will, by a special resolution of the shareholders or such other mechanism as may be permitted or required by the corporate law that governs it, transfer amounts from its retained earnings account or the current year earnings, as the case may be, to increase the capital accounts of the common shares and the Class A shares. The aggregate of the amounts transferred will not exceed the balance in the retained earnings account or the current year earnings, as the case may be.
17. By a special resolution of the shareholders effective following the transaction described in Paragraph 16, or by such other mechanism as may be permitted or required by the corporate law governing the taxpayer, Canco1 will reduce the capital accounts of the common shares and the Class A shares by the amount to be distributed as a return of capital to the shareholders. The amounts of the reduction in capital will not exceed the balance in the capital accounts.
18. Canco1 will pay a cash distribution to each shareholder as a return of capital. Canco1 will withhold from the distributions payable to the US Shareholders sufficient funds to cover the Part XIII withholding tax due in respect of the deemed dividends payable to non-resident shareholders as a result of the transaction described in Paragraph 16. Canco 1 will remit to the Receiver General any applicable Part XIII taxes in respect of the dividend that is deemed by subsection 84(1) of the Act to have been paid by Canco 1 as a consequence of the transaction described in Paragraph 16 on or before the 15th day of the month following the month in which the dividend is deemed paid.
19. Subsequent to the completion of the proposed transactions described above, Canco1 may again add retained earnings to the capital account maintained in respect of its common shares and Class A shares. After making such an addition, it may then decrease the paid-up capital of its common shares and Class A shares by an equivalent amount, distributing such amount to its shareholders as a return of paid-up capital.
20. Notwithstanding that Canco1 will be deemed pursuant to subsection 84(1) of the Act to pay a dividend on its issued and outstanding common shares and Class A shares as a result of proposed transaction described in Paragraph 16 above, no amount of income, profit or gain will arise or will be recognized in respect of any person 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 Canco1 were not fiscally transparent under the taxation laws of the United States.
21. The proposed transaction described in Paragraph 16 above will not affect the tax treatment in the United States of any subsequent distribution on the common or Class A shares of Canco1, including the return of paid-up capital on those shares referred to in Paragraph 17 and Paragraph 18 above.
Purpose of the Proposed Transactions
22. The proposed transactions are intended to put the US investors in the same position vis-à-vis benefits under the Treaty as they would have been in before the coming into force of paragraph 7 of Article IV of the Treaty.
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 Canco1 is deemed to have paid and US Shareholders are deemed to have a received a dividend pursuant to subsection 84(1) of the Act as a result of the transaction described in Paragraph 16 above, that dividend will be a taxable dividend for purposes of 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 paragraph 3 of Article X of the Treaty.
C. Subparagraph 7(b) of Article IV of the Treaty will not apply to treat any portion of the dividend referred to in ruling A as not having been paid to or derived by the beneficial owners thereof.
D. Provided such partners are Qualifying Persons, each of the partners in US GP1 and US C Corp will be subject to Part XIII withholding tax at a rate of 15% with respect to their share of the dividend referred to in ruling A above received by US LP1, pursuant to subparagraph 2(b) of Article X of the Treaty.
E. Provided they are Qualifying Persons, US S Corp1 and US S Corp2 will be subject to Part XIII withholding tax at a rate of 5% with respect to the dividend referred to in ruling A above, pursuant to subparagraph 2(a) of Article X of the Treaty.
F. Subsection 245(2) of the Act will not apply to re-determine the tax consequences described in rulings A to E 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. These rulings are binding on the Canada Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX .
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 Canco1 is fiscally transparent under the taxation laws of the United States;
(b) whether the deemed dividend resulting from the proposed transaction referred to in Paragraph 16 above is disregarded under the taxation laws of the United States or would be disregarded if Canco1 were not fiscally transparent under the taxation laws of the United States;
(c) whether any person referred to herein is a "qualifying person" as defined in paragraph 2 of Article XXIX-A of the Treaty; or
(d) 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.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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