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) Do the Forco2 shares that are held by Forco1 and Forco4 principally derive their value from immovable property or hydrocarbon properties for the purpose of the Canada-UK Tax Treaty? (2) Will a disposition of the shares of Forco2 be exempt from tax under Article 13 of the Canada-UK Tax Treaty? (3) Are the shares of Forco2 "excluded property" as defined in subsection 116(6) of the Act?
Position: (1) No. (2) Yes. (3) Provided that purchaser (Forco3) provides notice to the Minister pursuant to s.116(5.02).
Reasons: (1) All of the value of Forco2 shares is derived from the Canco shares. While Canco does have both hydrocarbon and real properties, the majority of Canco's value is derived from it's storage business as an ongoing concern, the real property of Canco is actively used in its business operations, and the hydrocarbon properties do not make up a substantial portion of Canco's value. (2) Since Forco2 has no significant assets other than its direct ownership in Canco and the value or the greater part of the value of the Canco shares is not derived from hydrocarbon and immovable properties, any gain from Forco2 shares will be exempt from tax under the Act under Article 13(8) by virtue of Article 13(7)(b) of the Tax Treaty. (3) In the case of a transfer between related parties treaty-protected property will be treaty-exempt property for the purposes of s.116(6.1) and therefore be excluded property only if the purchaser of such property provides notice to the Minister pursuant to s.116(5.02) of the Act.
XXXXXXXXXX , 2012
Dear XXXXXXXXXX :
Advanced Income Tax Ruling
We are writing in reply to your email of XXXXXXXXXX in which you requested that we confirm our previous advance income tax ruling dated XXXXXXXXXX on behalf of the above Taxpayers, with certain modifications. We also acknowledge our various telephone conversations.
To the best of your knowledge and that of the Taxpayers involved, none of the issues involved with this request:
(i) is involved in an earlier return of the Taxpayers or a related person;
(ii) is being considered by a tax services office or a taxation centre in connection with a tax return filed by the Taxpayers or a related person;
(iii) is under objection;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal has not expired.
The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions described in the documents submitted with your request that are not set out below do not form part of the facts and proposed transactions on which these rulings are based and any reference to those documents is provided solely for the convenience of the reader.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the “Act”).
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
In this letter the following terms have the meanings specified:
(a) “adjusted cost base” has the meaning assigned to that expression in section 54 of the Act;
(b) “Canco” means XXXXXXXXXX ;
(c) “capital property” has the meaning assigned to that expression in section 54 of the Act;
(d) “CRA” means the Canada Revenue Agency;
(e) “Facilities” are comprised of all real and personal property of every nature and kind (XXXXXXXXXX , and all related facilities acquired or constructed, from time to time;
(f) “Forco1” means XXXXXXXXXX ;
(g) “Forco2” means XXXXXXXXXX ;
(h) “Forco3” means XXXXXXXXXX ;
(i) “Forco4” means XXXXXXXXXX ;
(j) “Forcountry1” means XXXXXXXXXX ;
(k) “Forcountry2” means the XXXXXXXXXX ;
(l) “paid-up-capital” has the meaning assigned to that expression in subsection 89(1) of the Act;
(m) “Parent” means XXXXXXXXXX ;
(n) “Proposed Transactions” are the transactions described in paragraphs 29-31 hereof;
(o) “PNG Rights” means the rights to produce petroleum, natural gas, and related hydrocarbons from the Reservoirs;
(p) “Storage Right” means the right to store natural gas underground in the Reservoirs;
(q) “Reservoirs” mean the reservoirs XXXXXXXXXX ;
(r) “Tax Convention” means the Convention Between Canada and XXXXXXXXXX for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and on Capital; and
(s) “Tax Treaty” means the Convention between Canada and the United Kingdom of Great Britain and Northern Ireland with Respect to Taxes on Income and Capital Gains, signed in London on September 8, 1978, as amended by the protocols signed on April 15, 1980 and October 16, 1985.
1. Parent is a public company incorporated and resident in Forcountry1 for the purposes of the Act and the Tax Convention. Its shares trade on XXXXXXXXXX .
2. Forcol is wholly-owned by Parent. Forcol is a utility company incorporated and existing under the laws of Forcountry2. Forcol is a non-resident of Canada, does not carry on business in Canada, and does not have a permanent establishment in Canada. Forcol is a resident of Forcountry2 for the purposes of the Tax Treaty.
3. Forco2 is a single purpose holding company incorporated and existing under the laws of the Forcountry2. Forco2 is owned XXXXXXXXXX % by Forco1 and XXXXXXXXXX % by Forco4. Forco2 is a non-resident in Canada, does not carry on business in Canada, and does not have a permanent establishment in Canada. Forco2 is a resident of Forcountry2 for the purposes of the Tax Treaty.
4. Forco2 has no significant assets other than its direct ownership in the capital stock of Canco. The adjusted cost base of the Forco2 shares is approximately $XXXXXXXXXX and the estimated fair market value of the Forco2 shares currently is $XXXXXXXXXX .
5. Forco3 is wholly-owned by Parent. Forco3 is a holding company incorporated and existing under the laws of Forcountry2. Forco3 is a non-resident of Canada, does not carry on business in Canada, and does not have a permanent establishment in Canada. Forco3 is a resident of Forcountry2 for the purposes of the Tax Treaty.
6. Forco3 is charged with the management, directly or indirectly, of Parent’s North American gas business.
7. Forco4 is wholly-owned by Forco1 and is incorporated and existing under the laws of Forcountry2. Forco4 is a non-resident of Canada, does not carry on business in Canada, and does not have a permanent establishment in Canada. Forco4 is a resident of Forcountry 2 for the purposes of the Tax Treaty.
8. Canco is a taxable Canadian corporation and carries on business in Canada.
9. Canco deals with the XXXXXXXXXX Tax Service Office and files its returns with the XXXXXXXXXX Tax Centre.
10. The authorized share capital of Canco consists of an unlimited number of class “A” voting shares, class “B” voting shares, class “C” non-voting shares, class “D” non-voting preferred shares and class “E” voting preferred shares. There are XXXXXXXXXX class “A” voting shares issued and outstanding, with nominal adjusted cost base and paid-up capital. The fair market value of the Canco shares currently is estimated to be $XXXXXXXXXX .
11. The primary assets of Canco are: (i) a XXXXXXXXXX % interest in the Facilities, which includes cushion gas; (ii) a XXXXXXXXXX % interest in the PNG Rights; (iii) a XXXXXXXXXX % interest in the Storage Right; (iv) gas storage contracts; (v) XXXXXXXXXX ; and (vi) cash and trade receivables.
12. The only assets of Canco that may, subject to the exclusion in subparagraph 7(b) of Article 13 of the Tax Treaty, be considered real or immovable property under the Tax Treaty are the Facilities.
13. Canco leases offices in Canada wherein Canco engages in XXXXXXXXXX .
14. XXXXXXXXXX .
15. Canco has approximately XXXXXXXXXX employees XXXXXXXXXX .
16. XXXXXXXXXX .
17. XXXXXXXXXX .
18. Canco does not lease capacity; rather, it provides a storage service to third parties.
19. Canco enters into a master service agreement with each customer covering the general contractual terms for the gas storage service. Canco and each customer will also enter into an individual transactions agreement for each transaction.
20. The individual transactions agreements outlined the term, quantity, price and type of service. The fees depend in part, on XXXXXXXXXX .
21. Canco’s customers do not obtain exclusive possession of any part of the Facilities, merely a right to obtain a specific quantity of gas XXXXXXXXXX .
22. Canco operates its business in the Facilities. XXXXXXXXXX . Canco does not own the land where the Facilities are located or where XXXXXXXXXX . Canco leases the Facilities land from a combination of XXXXXXXXXX . These leasehold interests are held XXXXXXXXXX % for the benefit of Canco and XXXXXXXXXX % for the benefit of XXXXXXXXXX . Canco is not related to XXXXXXXXXX .
23. Canco has a Storage Unit Agreement with XXXXXXXXXX allowing Canco to use XXXXXXXXXX . The Storage Unit Agreement requires that Canco own or control the PNG Rights.
24. Canco owns or controls the PNG Rights through resource leases from XXXXXXXXXX and through trust agreements with third parties who also lease resources rights in the XXXXXXXXXX .
25. Canco produces hydrocarbons XXXXXXXXXX . When Canco produces hydrocarbons pursuant to the PNG Rights, the beneficial interests in those hydrocarbons XXXXXXXXXX .
26. The assets of Canco that are of the nature described in paragraph 4 of Article 13 of the Tax Treaty, which include the PNG Rights, the cushion gas, the hydrocarbons produced under the PNG Rights, and the wells at the facilities, do not exceed XXXXXXXXXX of Canco’s value.
27. Based upon estimates of value prepared internally by the management of Canco, the value of XXXXXXXXXX business on a going concern basis is greater than XXXXXXXXXX % of the aggregate value of the Canco shares, most of which would be attributable to the cash flow generated from XXXXXXXXXX contracts and to the Facilities.
28. The immovable property, Storage Right, and the PNG Rights associated with the gas storage business are incapable of being sold separately from the gas storage business.
29. Canco is indirectly managed by Forco3 through one of Forco3’s subsidiaries.
30. Forco4 will transfer its shares in Forco2 to Forco1 for consideration in an amount equal to the shares’ book value.
31. Forco1 will then transfer all of the shares in Forco2 to Forco3 for consideration in an amount equal to the shares’ book value.
32. Any gains realized by Forco1 and/or Forco4, whether actual or deemed, on the transfer of the Forco2 shares are not expected to be subject to tax in Forcountry2.
PURPOSE OF THE PROPOSED TRANSACTIONS
33 The main purpose of the Proposed Transactions is to transfer the shares of Forco2 in a tax efficient manner so that the shares of Canco may be owned indirectly by Forco3. This move will facilitate accountability for the business by aligning the ownership and the management of Canco. Additionally, Forco3 will now both indirectly manage and directly or indirectly own all of Parent’s North American gas business.
Provided the preceding statements constitute a complete and accurate disclosure of all the relevant Definitions, Facts, Proposed Transactions, and Purpose of the Proposed Transactions, our rulings are as follows:
A. Forco1 and Forco4 will be deemed to receive proceeds of disposition equal to the fair market value of the Forco2 shares they respectively transfer pursuant to subparagraph 69(1)(b)(i) of the Act while the shares’ cost to Forco3 will remain equal to the shares’ book value;
B. The gains realized by Forco1 and Forco4 from their disposition of the shares of Forco2 will be exempt from tax under the Act by virtue of paragraph 8 of Article 13 of the Tax Treaty; and
C. Provided Forco1 and Forco3 give notice of their respective acquisitions of the shares of Forco2 as described in subsection 116(5.02) of the Act the shares of Forco2 will be “excluded property” of Forco1 and Forco4 in respect of the disposition of those shares for the purposes of subsection 116(1) and subsection 116(3) of the Act.
The above advance income tax rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 entitled Advance Income Tax Rulings, dated May 17, 2002, and are binding on the CRA provided the proposed transactions are completed before XXXXXXXXXX .
These rulings are based on the Act in the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided here.
Nothing in this letter should be construed as confirmation, express or implied, of the fair market value or adjusted cost base of any property referred to herein.
International and Trusts Division
Income Tax Rulings Directorate
Legislative and Regulatory Affairs Branch
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