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
2011-043076
Attention: XXXXXXXXXX
XXXXXXXXXX, 2012
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 through various e-mail correspondence in XXXXXXXXXX. You have advised us that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this 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 (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:
(a) “Acquisitionco” means XXXXXXXXXX;
(b) “adjusted cost base” has the meaning assigned by section 54;
(c) “Canco 1” means XXXXXXXXXX;
(d) “Canco 2” means XXXXXXXXXX;
(e) “Code” means the Internal Revenue Code of 1986, 26 U.S.C.;
(f) “Company Legislation” means the Companies Act XXXXXXXXXX;
(g) “controlled foreign affiliate” has the meaning assigned by subsection 95(1) of the Act;
(h) “CRA” means the Canada Revenue Agency;
(i) “paid-up capital” has the meaning assigned pursuant to the Company Legislation except where otherwise stated;
(j) “Paragraph” means a numbered paragraph in this letter;
(k) “Parentco” means XXXXXXXXXX;
(l) “Pubco” means XXXXXXXXXX;
(m) “qualifying person” has the meaning assigned by Article XXIX A(2) of the U.S. Treaty;
(n) “recognized stock exchange” has the meaning assigned by Article XXIX A(5)(f) of the U.S. Treaty;
(o) “related person” means, in relation to a particular person, another person which is related to the particular person because of subsection 251(2);
(p) “taxable Canadian corporation” has the meaning assigned by subsection 89(1);
(q) “taxation year” has the meaning assigned by subsection 249(1);
(r) “Trust” means the XXXXXXXXXX;
(s) “United States” or “U.S.” means the United States of America;
(t) “U.S. Treaty” 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;
(u) “US Subs” has the meaning assigned by Paragraph 13;
(v) “USCo 1” means XXXXXXXXXX;
(w) “USCo 2” means XXXXXXXXXX; and
(x) “USCo 3” means XXXXXXXXXX.
FACTS
1. Parentco is incorporated under the laws of XXXXXXXXXX. It has made a valid election to be taxed in accordance with subchapter S of Chapter 1 of the Code. As a consequence, each shareholder of Parentco will generally be required to include a proportionate share of each separately stated item of income, deduction, loss or credit of Parentco and of any non-separately stated amount of income or loss of Parentco in the computation of that shareholder’s taxable income under the Code on an annual basis.
2. All of the shares of Parentco are held by natural persons and trusts that are not resident in Canada for the purposes of the Act. Each shareholder of Parentco is a resident of the United States and a qualifying person for the purposes of the U.S. Treaty.
3. The Trust controls Parentco.
4. Parentco is a resident of the United States and a qualifying person for purposes of the U.S. Treaty.
5. Canco 1 is a taxable Canadian corporation that was originally formed under the Company Legislation as a limited company. 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. In XXXXXXXXXX, it became an unlimited liability company under the Company Legislation. Parentco holds all of the issued and outstanding shares of Canco 1.
6. Canco 1 is disregarded as an entity separate from its owner under the Code and is fiscally transparent under the taxation laws of the United States for the purposes of the U.S. Treaty.
7. On XXXXXXXXXX, Canco 2 was formed on the amalgamation of Acquisitionco, a taxable Canadian corporation that was originally formed under the Company Legislation as a limited company, and Pubco, a corporation that was governed under the Canada Business Corporations Act prior to XXXXXXXXXX. Pubco was continued under the Companies Act as a limited company on XXXXXXXXXX. After the amalgamation, Canco 2 was converted to an unlimited liability company under the Company Legislation on XXXXXXXXXX.
8. Canco 2 is a taxable Canadian corporation. All of its issued and outstanding shares are held by Canco 1. Canco 2 is disregarded as an entity separate from its owner under the Code and is fiscally transparent under the taxation laws of the United States for the purposes of the U.S. Treaty.
9. USCo 1 is a limited liability company formed under the laws of XXXXXXXXXX. It is a corporation that is not resident in Canada for the purposes of the Act. Canco 2 holds all of the issued and outstanding units of USCo 1. USCo 1 is disregarded as an entity separate from its owner under the Code and is fiscally transparent under the taxation laws of the United States for the purposes of the U.S. Treaty.
10. USCo 2 is a limited liability company formed under the laws of XXXXXXXXXX. It is a corporation that is not resident in Canada for the purposes of the Act. USCo 1 holds all of the preferred units of USCo 2; Parentco holds all the common units of USCo 2. USCo 2 is disregarded as an entity separate from its owners under the Code and is fiscally transparent under the taxation laws of the United States for the purposes of the U.S. Treaty.
11. USCo 3 was incorporated under the laws of XXXXXXXXXX. It is a corporation that is not resident in Canada for the purposes of the Act. USCo2 holds all of the issued and outstanding shares of USCo 3. USCo 3 carries on an active business in the United States.
12. USCo 3 is the sole member of a number of limited liability companies governed under United States laws. Each of these companies is disregarded as an entity separate from its owner and is fiscally transparent under the taxation laws of the United States for the purposes of the U.S. Treaty. USCo 3 also holds a XXXXXXXXXX% membership interest in another limited liability company formed under United States laws. This limited liability company is a considered a partnership under the Code and is fiscally transparent under the taxation laws of the United States for the purposes of the U.S. Treaty. In addition, USCo 3 is the sole shareholder of a subsidiary corporation formed under United States laws.
13. Each of the entities described in Paragraph 12 in which USCo 3 is a member or shareholder (collectively, the “US Subs”) carries on an active business in the United States.
14. Parentco has elected to treat both USCo 3 and the subsidiary corporation referred to in Paragraph 12 as a “qualified subchapter S subsidiary”, as defined in section 1361 of the Code. As a consequence, USCo 3 and that subsidiary corporation are not treated as being separate from Parentco. In addition, the assets, liabilities, and items of income, deduction, and credit of USCo 3 and that subsidiary are treated as assets, liabilities, and items of income, deduction and credit of Parentco.
15. USCo 1, USCo 2 and USCo 3 and the US Subs are controlled foreign affiliates of Canco 2.
PROPOSED TRANSACTIONS
16. In lieu of declaring and paying a cash dividend, Canco 1 will:
(a) increase, in accordance with the provisions of the Company Legislation, the paid-up capital in respect of its shares held by Parentco by an amount equal to the amount of cash that it wishes to distribute to Parentco;
(b) reduce, as soon as practicable, the paid-up capital of those shares in accordance with the provisions of the Company Legislation by an amount equal to the amount of the increase described in Paragraph 16(a); and,
(c) distribute an amount of cash as a return of paid-up capital on its shares held by Parentco equal to the amount of the reduction referred to in Paragraph 16(b).
PURPOSES OF THE PROPOSED TRANSACTIONS
17. The purpose of the proposed transactions is to distribute earnings from the business operations of USCo 3 and the US Subs to Parentco in a manner that avoids the application of Article IV(7)(b) of the Treaty. As the income earned by these entities is included in the taxable income of the shareholders of Parentco on a current basis, the distribution of earnings by Canco 1 to Parentco will help fund the payment of the resulting U.S. federal income tax liability of those shareholders.
18. The purpose of the amalgamation of Acquisitionco and Pubco, and the subsequent conversion of Canco 2 from a limited company to an unlimited liability company referred to in Paragraph 7, as well as the conversion of Canco 1 from a limited company to an unlimited liability company referred to in Paragraph 5, was to facilitate a buy-out of the minority shareholders of Pubco, and, thereafter, allow the income earned by USCo 3 and the US Subs to be included in the computation of the taxable income of the shareholders of Parentco for U.S. federal income tax purposes.
19. Notwithstanding that the proposed transaction described in Paragraph 16(a) would, pursuant to subsection 84(1) of the Act, result in a deemed payment of a dividend on the shares of Canco 1, 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 1 was not fiscally transparent under the taxation laws of the United States.
20. The proposed transaction described in Paragraph 16(a) will not affect the United States tax treatment of any subsequent distributions on the shares of Canco 1, including the return of paid-up capital referred to in Paragraph 16(c).
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the proposed transactions, the purposes of the proposed transactions and the additional information provided herein, and provided further that the proposed transactions are completed in the manner described above, we rule as follows:
A. To the extent that Canco 1 is deemed to have paid, and Parentco is deemed to have received a dividend pursuant to subsection 84(1) of the Act on the increase of the paid-up capital of the shares of Canco 1 described in Paragraph 16(a), that dividend will be a taxable dividend described in paragraph 212(2)(a) of the Act.
B. For the purpose of applying Article X of the U.S. Treaty, 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 U.S. Treaty.
C. Parentco will be entitled to the same benefits under Article X(2) of the U.S. Treaty that it would be entitled to if the dividend referred to in Ruling A were paid as a cash dividend and the U.S. Treaty were read without reference to Article IV(7)(b).
D. Article IV(7)(b) of the U.S. Treaty will not apply to treat the dividend referred to in Ruling A as not having been paid to or derived by Parentco.
E. 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 U.S. Treaty in their present form and do not take into account any proposed amendments to the Act or the U.S. Treaty which, if enacted, could have an effect on the rulings provided herein.
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 CRA has not confirmed or made a determination in respect of whether:
(a) Canco 1 is fiscally transparent under the taxation laws of the United States; and
(b) the dividend that Canco is deemed to pay as a result of the proposed transaction referred to in Paragraph 16(a) 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.
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 or fair market value of any shares or other property referred to herein;
(b) the determination of the paid-up capital of any share or class of shares under the Company Legislation or the Act;
(c) the tax consequences of any distribution that will be made to Canco 1 or Canco 2 to fund the payment described in Paragraph 16(c); and
(d) any tax consequences relating to the facts and the 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,
XXXXXXXXXX
Section Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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