2012 Ruling 2011-0424211R3 - Article X(2) and 84(3) deemed dividends

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 a reduced withholding rate pursuant to Article X(2)(a) is available pursuant to Article XXIX-A(3) in respect of: a) 84(3) deemed dividends that arise on the redemption of the shares of a Canadian corporation; and b) 82(1) cash dividends paid by a Canadian corporation on a particular class of its capital stock.

Position: a) Yes b) Yes

Reasons: The benefits of the Canada-US Treaty apply to the taxpayer pursuant to paragraph (3) of Article XXIX-A. Consistent with past positions, subparagraph (2)(a) of Article X will apply to reduce the withholding rate applicable to the a) subsection 84(3) deemed dividends and b) subsection 82(1) dividend resulting from the proposed transactions.

XXXXXXXXXX
2011-042421

XXXXXXXXXX, 2012

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your request dated XXXXXXXXXX, for an advance income tax ruling on behalf of the taxpayer referenced above. We also acknowledge additional information provided in subsequent telephone conversations (XXXXXXXXXX).

To the best of your knowledge and that of the aforementioned taxpayers, none of the issues involved in this request for an advance income tax ruling is:

(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") and all references to currency are to Canadian dollars.

DEFINITIONS

In this letter, the following terms have the meanings specified below":Canada Group" means Opco1, Opco2 and Salesco; "CBCA" means the Canada Business Corporations Act;"CRA" means the Canada Revenue Agency;"Country X" means XXXXXXXXXX;"XXXXXXXXXXBCA" means the Business Corporations Act (XXXXXXXXXX);"Opco1" means XXXXXXXXXX;"Opco1 Class A Common shares" means the XXXXXXXXXX issued and outstanding Class A Common shares of the capital stock of Opco1;"Opco1 Class J Common shares" means the XXXXXXXXXX issued and outstanding Class J Common shares of the capital stock of Opco1;"Opco2" means XXXXXXXXXX;"Opco2 Class A Common shares" means the XXXXXXXXXX issued and outstanding Class A Common shares of the capital stock of Opco2;"Opco2 Class J Common shares" means the XXXXXXXXXX issued and outstanding Class J Common shares of the capital stock of Opco2;"Opco2 Share Redemption" has the meaning described in paragraph 27;"Parentco" means XXXXXXXXXX;"Parentco Group" has the meaning described in paragraph 13;"Salesco" means XXXXXXXXXX;"Salesco Class A Common shares" means the XXXXXXXXXX issued and outstanding Class A Common shares of the capital stock of Salesco;"Salesco Class J Common shares" means the XXXXXXXXXX issued and outstanding Class J Common shares of the capital stock of Salesco;"Salesco Share Redemption" has the meaning described in paragraph 26;"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 on 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" means the United States of America;"US Group" means USSalesco1 and the corporations that are related to USSalesco1 within the meaning at subsection 251(2) of the Act, and that carry on an active trade or business in the US, namely, USSalesco2, USOpco1 and USOpco2;

"USJVCol" means XXXXXXXXXX;"USJVCo2" means XXXXXXXXXX;"USOpco1" means XXXXXXXXXX;"USOpco2" means XXXXXXXXXX;"USSalesco1" means XXXXXXXXXX;"USSalesco2" means XXXXXXXXXX;

FACTS

General Corporate Structure

1. Parentco is a corporation formed under the laws of Country X. Parentco has issued and outstanding shares listed on the XXXXXXXXXX;

2. USSalesco1 is a corporation formed under the laws of the United States. USSalesco1 is a resident of the US for the purposes of the Treaty and is not fiscally transparent under the taxation laws of the US. All of the issued and outstanding shares of USSalesco1 are owned by Parentco;

3. Opco1 is a taxable Canadian corporation incorporated under the CBCA. Opco1's address is XXXXXXXXXX. Opco1 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. Opco1 is a resident of Canada for purposes of the Treaty and is not fiscally transparent under the taxation laws of the US. Opco1's current issued and outstanding share capital consists of the Opco1 Class A Common shares, which are owned by USSalesco1, and the Opco1 Class J Common shares, which are owned by Parentco. The Opco1 Class A Common shares and Opco1 Class J Common shares are identical in all respects, and each issued and outstanding share is, at the option of the holder, convertible on a one-for-one basis into a share of the other class;

4. Salesco is a taxable Canadian corporation incorporated under the XXXXXXXXXXBCA. Salesco's address is XXXXXXXXXX. Salesco 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. Salesco is a resident of Canada for purposes of the Treaty and is not fiscally transparent under the taxation laws of the United States. Salesco's current issued and outstanding share capital consists of the Salesco Class A Common shares, which are owned by USSalesco1, and the Salesco Class J Common shares, which are owned by Opco1. The Salesco Class A and Salesco Class J Common shares are identical in all respects and each issued and outstanding share is, at the option of the holder, convertible on a one-for-one basis into a share of the other class;

5. The paid-up capital of the Salesco Class A Common shares and USSalesco1's adjusted cost base in respect of the Salesco Class A Common shares is $XXXXXXXXXX;

6. Since XXXXXXXXXX, USSalesco1 has owned XXXXXXXXXX% of the issued and outstanding common shares of Salesco;

7. Opco2 is a taxable Canadian corporation incorporated under the XXXXXXXXXXBCA. Opco2's address is XXXXXXXXXX. Opco2 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. Opco2 is a resident of Canada for purposes of the Treaty and is not fiscally transparent under the taxation laws of the United States. Opco2's current issued and outstanding share capital consists of the Opco2 Class A Common shares, which are owned by USSalesco1, and the Opco2 Class J Common shares, which are owned by Opco1. The Opco2 Class A and Opco2 Class J Common shares are identical in all respects and each issued arid outstanding share is, at the option of the holder, convertible on a one-for-one basis into a share of the other class;

8. The paid-up capital of the Opco2 Class A Common shares and USSalesco1's adjusted cost base in respect of the Opco2 Class A Common shares is $XXXXXXXXXX;

9. Since XXXXXXXXXX, USSalesco1 has owned XXXXXXXXXX% of the issued and outstanding common shares of Opco2;

10. USJVCol is a corporation formed under the laws of the United States. USSalesco1 owns XXXXXXXXXX% of the issued, and outstanding shares of USJVCol, and the remaining XXXXXXXXXX% of the issued and outstanding shares of USJVCol are owned by an arm's length third party;

11. USJVCo2 is a corporation formed under the laws of the United States. USSalesco1 owns XXXXXXXXXX% of the issued and outstanding shares of USJVCo2 and the remaining XXXXXXXXXX% of the issued and outstanding shares of USJVCo2 are owned by an arm's length third party;

12. In addition to the companies listed above, Parentco and USSalesco1 own shares in a number of other corporate subsidiaries located outside of Canada;

Parentco's Operations

13. The Parentco Group is comprised of Parentco and a number of subsidiaries worldwide that are controlled by Parentco and that manufacture and/or distribute XXXXXXXXXX products for use in a variety of industrial applications;

Canadian Operations

14. The Parentco Group's manufacturing and distribution business in Canada is primarily carried on by the Canada Group;

15. XXXXXXXXXX;

16. XXXXXXXXXX;

17. XXXXXXXXXX;

18. No member of the Canada Group carries on business other than its respective business described above. Other than $XXXXXXXXXX, $XXXXXXXXXX and $XXXXXXXXXX of income earned since XXXXXXXXXX ($XXXXXXXXXX, $XXXXXXXXXX and $XXXXXXXXXX in XXXXXXXXXX), by Opco1, Salesco and Opco2, respectively, on the investment of their working capital and excess funds primarily in term deposits, all of the income of the Canada Group is either (a) in the case of Salesco or Opco2, income from their respective business above, or (b) in the case of Opco1, either income from its respective business above, dividend income received from Salesco or Opco2, or rental income from Salesco in the amount of $XXXXXXXXXX per annum in respect of the rental of the premise which Opco1 owns and shares with Salesco;

US Operations

19. The Parentco Group's XXXXXXXXXX business in the US is primarily carried on by the US Group;

20. USSalesco1 is XXXXXXXXXX;

21. USSalesco2 is XXXXXXXXXX;

22. With respect to the purchase of the products XXXXXXXXXX by Opco1 or Opco2, either USSalesco1 or USSalesco2, as applicable, will place the relevant purchase order with Salesco who, in turn, will communicate this purchase information to Opco1 or Opco2, as applicable, so that XXXXXXXXXX of the products can be coordinated and undertaken. When the XXXXXXXXXX process is complete, the finished products are sold to Salesco. Salesco then sells these finished products to either USSalesco1 or USSalesco2;

23. USOpco1 and USOpco2, the remaining members of the US Group, are both XXXXXXXXXX. USOpco1 sells its finished products to USSalesco1, USSalesco2, and arm's length customers, while USOpco2 sells its finished products to USSalesco1 and arm's length customers;

24. The relevant facts regarding the US Group's business carried on in the US as of, or in respect of, the US Group's financial years ending XXXXXXXXXX, are as follows:

* XXXXXXXXXX
.

The above figures only include information with respect to the US Group's business carried on in the US, and do not include information in connection with the US Group's business carried on worldwide.

25. No member of the US Group carries on business in Canada for Canadian federal income tax purposes.

PROPOSED TRANSACTIONS

26. Salesco will purchase for cancellation all of the issued and outstanding Salesco Class A Common shares, which are owned by USSalesco1, for an amount equal to the determined fair market value of such shares ("Salesco Share Redemption"). Salesco will satisfy the Salesco Share Redemption by either a payment of cash to USSalesco1 and/or by the issuance of a demand non-interest bearing promissory note to USSalesco1. Pursuant to subsection 84(3) of the Act, Salesco will be deemed to have paid, and USSalesco1 will be deemed to have received, a dividend equal to the amount by which the amount paid by Salesco on the Salesco Share Redemption exceeds the paid-up capital of the Salesco Class A Common shares immediately before the purchase for cancellation. After the Salesco Share Redemption, the only issued and outstanding shares of the capital stock of Salesco will be the Salesco Class J Common shares; accordingly, Opco1 will be the only shareholder of Salesco.

27. Opco2 will purchase for cancellation all of the issued and outstanding Opco2 Class A Common shares, which are owned by USSalesco1, for an amount equal to the determined fair market value of such shares ("Opco2 Share Redemption"). Opco2 will satisfy the Opco2 Share Redemption by either a payment of cash to USSalesco1 and/or by the issuance of a demand non-interest bearing promissory note to USSalesco1. Pursuant to subsection 84(3) of the Act Opco2 will be deemed to have paid, and USSalesco1 will be deemed to have received, a dividend equal to the amount by which the amount paid by Opco2 on the Opco2 Share Redemption exceeds the paid-up capital of the Opco2 Class A Common shares immediately before the purchase for cancellation. After the Opco2 Share Redemption, the only issued and outstanding shares of the capital stock of Opco2 will be the Opco2 Class J Common shares; accordingly, Opco1 will be the only shareholder of Opco2.

28. Subsequent to the Salesco Share Redemption and the Opco2 Share Redemption, Opco1 will declare a dividend on the Opco1 Class A Common shares which will be satisfied by a cash payment to USSalesco1 (the "Opco1 Dividend").

PURPOSE OF THE PROPOSED TRANSACTIONS

29. The purpose of the Salesco Share Redemption and the Opco2 Share Redemption is to simplify the organizational structure, enhance the overall global tax efficiency of the Parentco Group and to allow for the repatriation of funds. With respect to the efficiency and repatriation considerations, following the Salesco Share Redemption and the Opco2 Share Redemption, a larger proportion of future income earned by Salesco and Opco2 can be distributed directly to Parentco with the result that U.S. corporate income and withholding tax will be mitigated on funds ultimately repatriated from Canada. The purpose of the Opco1 Dividend is to repatriate surplus funds to USSalesco1.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transaction, and provided further that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. Provided that USSalesco1 is the beneficial owner of dividends paid or distributions made on the Salesco Class A Common shares, pursuant to Article XXIX-A(3) and Article X(2)(a) of the Treaty, the benefits of the Treaty will apply to USSalesco1 with respect to the subsection 84(3) deemed dividend resulting from the Salesco Share Redemption outlined in paragraph 26 above;

B. Provided that USSalesco1 is the beneficial owner of dividends paid or distributions made on the Opco2 Class A Common shares, pursuant to Article XXIX-A(3) and Article X(2)(a) of the Treaty, the benefits of the Treaty will apply to USSalesco1 with respect to the subsection 84(3) deemed dividend resulting from the Opco2 Share Redemption outlined in paragraph 27 above; and

C. Provided that USSalesco1 is the beneficial owner of dividends paid or distributions made on the Opco1 Class A Common shares, pursuant to Article XXIX-A(3) and Article X(2)(a) of the Treaty, the benefits of the Treaty will apply to USSalesco1 with respect to the Opco1 Dividend outlined in paragraph 28 above.

The above-noted rulings are based on the Act and the Treaty in their 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.

The 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 CRA provided that the proposed transactions are completed on or before XXXXXXXXXX.

CAVEATS

1. The above-noted Rulings are provided on the condition that:

(a) the members of the US Group will continue to carry on their respective active business activities in the US, and that those business activities will remain substantial in relation to the activities carried on in Canada by the Canada Group; and,

(b) all member corporations in the US Group will continue to be related within the meaning of subsection 251(2) of the Act.

Any material change in the type, composition, or the size of the businesses carried on by the members of either the US Group or the Canada Group may render the above-noted Rulings inapplicable.

2. For greater certainty, 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; and

(b) any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above.

Yours truly,

XXXXXXXXXX
Section Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch