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 dividends paid by a Canadian corporation to a United States resident corporation qualifies for treaty benefits under Article XXIX-A(3) of the Treaty. (2) Whether the benefits of Article X(2)(a) will reduce the Part XIII withholding tax on the dividends paid by Canco to 5% of the dividend.
Position: (1) Yes. (2) Yes.
Reasons: (1) The dividend income is derived by a resident of the United States in connection with an active trade or business carried on in the United States that is substantial in relation to the activity in Canada that gave rise to the income. (2) Holdco is a resident of the U.S. and the beneficial owner of the dividends to be paid by Canco.
XXXXXXXXXX
2012-043521
XXXXXXXXXX, 2012
Re: Advance Income Tax Rulings Request
XXXXXXXXXX
We are writing in response to your letter dated XXXXXXXXXX in which you requested an advance tax ruling on behalf of the above named taxpayer.
We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in this ruling request:
(i) is in an earlier return of the taxpayer or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) is under objection by the taxpayer or a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) is the subject of a Ruling previously issued by the Income Tax Rulings Directorate.
Unless otherwise stated, all statutory references herein are to the Income tax Act, R.S.C. 1985 (5th Suppl.), c.1 (the "Act") as amended. Unless otherwise noted, all references to currency are to Canadian dollars.
Definitions
The following terms have the meaning specified below:
"C2" means XXXXXXXXXX;
"Canco" means XXXXXXXXXX;
"Consolidated Holdco" is the term used to refer to the deemed substantive consolidation of the XXXXXXXXXX and Holdco Estates under the Plan of Liquidation pursuant to the United States Bankruptcy Code. The deemed substantive consolidation of the XXXXXXXXXX and Holdco Estates is solely for purposes of the Chapter 11 plan confirmation and claims distribution process and is not otherwise applicable to non-bankruptcy law.
"CRA" means Canada Revenue Agency;
XXXXXXXXXX;
"Holdco" means XXXXXXXXXX;
"L5" means XXXXXXXXXX;
"LV" means XXXXXXXXXX;
"Plan of Liquidation" means XXXXXXXXXX;
"REIT" means XXXXXXXXXX;
"Treaty" means Canada-United States Tax Convention (1980), as amended by the Protocols signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997 and September 21, 2007;
"Trust II" means XXXXXXXXXX;
"Trust III" means XXXXXXXXXX;
"U.S." means the United States of America;
"USCo" means XXXXXXXXXX;
"USD" means United States dollars; and
XXXXXXXXXX.
Our understanding of the facts, proposed transactions and the purposes of the proposed transactions is as follows.
Facts
1. USCo was formed as a XXXXXXXXXX. USCo's business was the XXXXXXXXXX in the United States. USCo is a resident of the U.S. pursuant to Article IV of the Treaty.
2. USCo formed Holdco on XXXXXXXXXX. Holdco has no taxable presence in Canada. Holdco is a resident of the U.S. pursuant to Article IV of the Treaty.
3. Pursuant to a merger under U.S. law, USCo became a wholly-owned subsidiary of Holdco in XXXXXXXXXX.
4. On XXXXXXXXXX, Holdco commenced an initial public offering on the XXXXXXXXXX.
5. In XXXXXXXXXX, USCo formed REIT, a XXXXXXXXXX originated by USCo. The REIT was created as a XXXXXXXXXX by the Declaration of Trust; however, the REIT has numerous corporate features:
- The REIT is statutorily granted powers and authorizations that are comparable to the powers and authorizations granted corporations;
- The REIT is managed by, and under the direction of, a duly elected Board of Trustees;
- The Board of Trustees can appoint officers in the manner determined by the REIT's bylaws;
- Beneficial interests in the REIT are divided into XXXXXXXXXX common shares having a par value of USD $XXXXXXXXXX per share, and XXXXXXXXXX preferred shares having a par value of USD $XXXXXXXXXX per share;
- The common shareholders of the REIT have voting rights, dividend rights and rights upon liquidation that are comparable to those of a corporation, which rights include the right to elect and remove Trustees of the Board;
- The REIT declares and pays dividends on its shares in the same manner as a corporation;
- The REIT is of perpetual duration unless terminated pursuant to the terms of the Declaration of Trust.
Under U.S. federal income tax law, the REIT is characterized as a corporation. It is permitted to claim deductions for dividends paid to its shareholders in a manner similar to a trust. The REIT is a resident of the U.S. pursuant to Article IV of the Treaty.
6. As part of its formation, the REIT issued USD $XXXXXXXXXX of preferred shares to the public under a Registration Statement filed with the Securities Exchange Commission on XXXXXXXXXX, and amended XXXXXXXXXX. The shares are currently sold over-the-counter in the U.S. i.e., the "pink sheets". The REIT's issued and outstanding common shares were owned by USCo.
7. XXXXXXXXXX.
8. XXXXXXXXXX.
9. XXXXXXXXXX.
10. In early XXXXXXXXXX, USCo's warehouse lenders reduced collateral values and placed large margin calls on USCo totalling over USD $XXXXXXXXXX. To provide liquidity, Holdco, USCo and the REIT obtained a USD $XXXXXXXXXX bridge loan from XXXXXXXXXX. This loan was secured by all or substantially all of the assets of Holdco, USCo and the REIT.
11. In XXXXXXXXXX, LV, a fund that XXXXXXXXXX, made an offer to purchase all of the outstanding shares of Holdco for approximately USD $XXXXXXXXXX at USD $XXXXXXXXXX per share. LV subsequently announced that it believed that the conditions of the tender offer would not be met and that it would not tender for shares.
12. On or about XXXXXXXXXX, Holdco issued a press release announcing steps it was taking in response to XXXXXXXXXX.
13. In XXXXXXXXXX, Holdco and LV resumed negotiations. The negotiations culminated on XXXXXXXXXX with Holdco and L5, a XXXXXXXXXX limited liability company and LV affiliate, executing an amended merger agreement. On XXXXXXXXXX, L5 acquired Holdco for approximately USD $XXXXXXXXXX at USD $XXXXXXXXXX per share. Concurrent with the acquisition by L5, Holdco was de-listed from XXXXXXXXXX.
14. The members of L5 are not known.
15. Throughout the first half of XXXXXXXXXX, USCo focused on restarting its XXXXXXXXXX, which business had been suspended prior to the acquisition of Holdco by L5. USCo needed a secondary market for XXXXXXXXXX. However, USCo had limited success in identifying a secondary market XXXXXXXXXX and as a result, in XXXXXXXXXX, USCo closed XXXXXXXXXX of its XXXXXXXXXX and reduced its workforce by approximately XXXXXXXXXX percent. In the second half of XXXXXXXXXX, USCo suspended its XXXXXXXXXX operations.
16. On XXXXXXXXXX, USCo executed a promissory note in the amount of USD $XXXXXXXXXX payable to the REIT to evidence an inter-company obligation. On the same day, USCo distributed to Holdco the shares it held in the REIT such that Holdco currently owns all of the issued and outstanding common stock of the REIT. Holdco also assumed USCo's obligation to the REIT under the terms of the promissory note.
17. Although USCo stopped XXXXXXXXXX, the XXXXXXXXXX in which the REIT holds a residual interest continue and the REIT's preferred shares remain outstanding. On XXXXXXXXXX, the XXXXXXXXXX in which the REIT has an interest had a principal balance of USD $XXXXXXXXXX. XXXXXXXXXX. The REIT does not have any employees; since XXXXXXXXXX, the XXXXXXXXXX has been subcontracted to an unrelated third party under a servicing agreement.
18. XXXXXXXXXX is a limited liability company formed on or about XXXXXXXXXX under the laws of XXXXXXXXXX. XXXXXXXXXX is treated as a corporation for U.S. tax purposes. XXXXXXXXXX. XXXXXXXXXX was acquired by USCo on or about XXXXXXXXXX. XXXXXXXXXX was transferred to Holdco on or about XXXXXXXXXX. XXXXXXXXXX is a resident of the U.S. pursuant to Article IV of the Treaty.
19. XXXXXXXXXX that were issued by Holdco's other subsidiaries. In some cases, Holdco's other subsidiaries would reimburse XXXXXXXXXX for its expenses and pay fees to XXXXXXXXXX for its services. In other instances, the XXXXXXXXXX themselves paid and reimbursed XXXXXXXXXX for these services and expenses.
20. On XXXXXXXXXX, USCo and Holdco filed a petition for bankruptcy in the XXXXXXXXXX Bankruptcy Court. The first Chapter 11 Plan of Liquidation was filed on XXXXXXXXXX, but it has been modified several times thereafter. The XXXXXXXXXX and Holdco Estates underwent a deemed substantive consolidation. The merger of the XXXXXXXXXX and Holdco Estates is solely for the purposes of the Chapter 11 plan confirmation and claims distribution process. The creditors of each separate entity were lumped together by class in order to vote on the plan and for distributions under the plan. The deemed substantive consolidation of the XXXXXXXXXX and Holdco Estates occurred on XXXXXXXXXX.
21. Canco is a Canadian corporation incorporated in XXXXXXXXXX under the Business Corporations Act (XXXXXXXXXX). Canco is a resident of Canada pursuant to Article IV of the Treaty and is a "taxable Canadian corporation" as defined in subsection 89(1) of the Act. Canco was incorporated by USCo for the purpose of carrying on the group's XXXXXXXXXX business in Canada. XXXXXXXXXX.
22. Canco and Holdco are related within the meaning of subsection 251(2) of the Act.
23. Each of Trust II and Trust III was established by XXXXXXXXXX. The beneficiary of each of Trust II and Trust III, as specified in the governing Declarations of Trust, is any one or more charities registered under the Act.
24. Under a Master Purchase Agreement, Canco sold its XXXXXXXXXX to a number of Canadian Trusts established expressly for these purposes, including Trust II and Trust III. The Canadian Trusts issued notes to fund the initial purchase price of the XXXXXXXXXX and entered into interest rate swap agreements to insulate themselves from directional market movements. Similar to the REIT, the Canadian Trusts' income was essentially comprised of the spread derived from the excess interest received on the XXXXXXXXXX over the interest costs of their borrowings. Under agreements with the Canadian Trusts, Canco is XXXXXXXXXX to all of the Canadian Trusts' portfolios. The XXXXXXXXXX was ultimately provided by a third party under subcontract with Canco.
25. In XXXXXXXXXX, Canco ceased originating XXXXXXXXXX in Canada.
26. On XXXXXXXXXX, Trust III sold its portfolio of XXXXXXXXXX back to Canco who then sold the portfolio to C2. As part of the transaction, Canco acquired XXXXXXXXXX Class B interest-bearing subordinated notes from C2 for XXXXXXXXXX, respectively. Principal and interest is paid on the subordinated notes if and when C2 receives cash to fund such payments.
27. On XXXXXXXXXX, the shares of Canco were transferred to Holdco as a result of the Plan of Liquidation.
28. The following tables summarize revenue, book net income, assets and payroll expenses for USCo and its subsidiaries, the REIT and Canco for the years XXXXXXXXXX. All amounts are reported in USD.
Table 1 Total Revenue and Book net income for USCo and its subsidiaries, the REIT and Canco
XXXXXXXXXX
Table II Assets and Payroll expenses
XXXXXXXXXX
29. Canco stopped originating XXXXXXXXXX. However, Canco continues to earn income from both the subordinated notes and the XXXXXXXXXX originated in prior years. The majority of the income earned by Canco has been the deferred purchase price paid on XXXXXXXXXX it sold to the Canadian trusts, including Trust II. In XXXXXXXXXX, Canco earned taxable income of $XXXXXXXXXX from Trust II on account of this deferred purchase price. In XXXXXXXXXX, Canco earned $XXXXXXXXXX, respectively from the Canadian trusts.
30. Trust II continues to hold a portfolio of XXXXXXXXXX, which are XXXXXXXXXX, if necessary, and interest is received. On XXXXXXXXXX, Trust II's XXXXXXXXXX portfolio had a principal balance of $XXXXXXXXXX. In XXXXXXXXXX, Trust II's gross business income and net income was $XXXXXXXXXX and $XXXXXXXXXX, respectively. Trust II does not have any employees; the XXXXXXXXXX continues to be carried out by an unrelated third party. The other Canadian trusts are now dormant.
31. Neither Holdco nor USCo carry on a business of making or managing investments.
Proposed Transaction
The following transactions are proposed at the time of the ruling request.
32. Canco will make up to three separate cash dividends (the "Dividends") aggregating approximately $XXXXXXXXXX to Holdco. The aggregate amount of the first XXXXXXXXXX Dividends will be approximately $XXXXXXXXXX and the amount of the last of the Dividends will be approximately $XXXXXXXXXX.
33. Holdco will have full ownership rights to all of the Dividends as it will be the sole shareholder of Canco throughout the period during which the Dividends are paid.
34. The Dividends will be paid in Canadian dollars to Holdco by way of wire transfer to Holdco's bank, converted to USD and deposited into a bank account owned by Holdco. Through the Plan Administrator under the Plan of Liquidation, Holdco will have exclusive possession and control over all bank accounts throughout the period during which the Dividends are paid.
35. The Dividends will be intermingled with other monies flowing in and out of Holdco's accounts from which expenses will be paid and amounts will be distributed at the discretion of the Plan Administrator under the Plan of Liquidation. There will be no segregation of the funds comprising the Dividends into a separate account or reserve.
36. Holdco will bear the risk of any losses in the value of its assets, including any losses in the value of the equity in Canco and any losses in the conversion of Canadian dollars to USD each time one of the Dividends is paid.
37. Holdco's pre-bankruptcy creditors will not exercise oversight or control over the operations of Holdco or the management decisions made by the Plan Administrator under the Plan of Liquidation. Through the Plan Administrator under the Plan of Liquidation, Holdco will have full discretion and control over the Dividends throughout the period during which the Dividends are paid.
Purpose of the Proposed Transactions
38. The purpose of the proposed transactions is to distribute Canco's earnings to Holdco pursuant to the Plan of Liquidation.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant Definitions, Facts, Proposed Transactions and the Purpose of the Proposed Transactions, and provided further that the proposed transactions are completed in the manner described above, we confirm that:
A. Pursuant to Article XXIX-A, paragraph 3 of the Treaty, the benefits of the Treaty will apply to Holdco with respect to the Dividends to be made by Canco to Holdco.
B. Pursuant to Article X, paragraph 2(a) of the Treaty, the rate of withholding tax, under Part XIII of the Act, on the Dividends will be 5 percent of the gross amount.
Caveats
Ruling A is provided on the understanding that Holdco, USCo and Canco will remain related within the meaning of subsection 251(2) of the Act throughout the period during which the Dividends are paid. Any change in the connection of the income activities carried on by Canco in Canada to the activities conducted by Holdco and its subsidiaries in the U.S. may render the ruling inapplicable at the time each Dividend is paid.
Except as expressly stated, the ruling provided does not imply acceptance, approval or confirmation of any other income tax implications of facts or proposed transactions described herein. For greater certainty, CRA has not made any determination in respect of the classification of any entity described in this rulings letter.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002 and are binding on the CRA provided that the proposed transaction is completed on or before the period that ends XXXXXXXXXX following the date of this letter.
This letter is based solely on the Facts and Proposed Transactions described above. The documentation submitted with your request does not form part of the Facts and Proposed Transactions and any references thereto are provided solely for the convenience of the reader.
The above noted rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
Yours truly,
XXXXXXXXXX
Assistant Director
International Division/ Division des opérations internationales
International Section III
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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