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: How is a taxation year determined under the definition provided under subsection 95(1)? Specifically, is the taxation year of the FA and AFAs in question for the purposes of the definition in subsection 95(1) of the Act XXXXXXXXXX, or is it the sale date?
Position: XXXXXXXXXX.
Reasons: Subject to certain exceptions, the taxation year of the foreign affiliate under the subsection 95(1) of the Act is the taxation year of the foreign affiliate under the taxation laws of its country of residence. If the foreign affiliate does not have to report its income to the foreign home jurisdiction, the taxation year will be determined based on the relevant accounting principles of its home jurisdiction and in accordance with its corporate statutes.
XXXXXXXXXX
2012-044994
XXXXXXXXXX, 2012
Dear XXXXXXXXXX,
Re: XXXXXXXXXX and XXXXXXXXXX (collectively the “Taxpayers”)
We are writing in reply to your letter of XXXXXXXXXX, in which you request an Advance Income Tax Ruling on behalf of the above named Taxpayers.
To the best of your knowledge and that of the Taxpayers involved, none of the issues involved with this request is:
(i) involved in an earlier return of the Taxpayers or a related person;
(ii) 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) under objection; or
(iv) 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:
Definitions
In this letter the following terms have the meanings specified:
(a) “AFA” means a corporation formed under the laws of Foreign Country, or any of its political subdivisions, not resident in Canada for the purposes of the Act, all of the shares of which are owned directly by FA2 or indirectly by FA2 through other AFAs;
(b) “Canco1” means XXXXXXXXXX, an unlimited liability company formed under the laws of XXXXXXXXXX and is a taxable Canadian corporation;
(c) “Canco2” means XXXXXXXXXX, an unlimited liability corporation formed under the laws of XXXXXXXXXX, Canco2 is a public corporation and a taxable Canadian corporation;
(d) “Canco3” means XXXXXXXXXX, an unlimited liability corporation formed under the laws of XXXXXXXXXX and is a taxable Canadian corporation;
(e) “Canco4” means XXXXXXXXXX, an unlimited liability corporation formed under the laws of XXXXXXXXXX and is a taxable Canadian corporation;
(f) “Consolidated Group” means a “XXXXXXXXXX consolidated group” as defined by the taxation laws of Foreign Country;
(g) “controlled foreign affiliate” has the meaning assigned by subsection 95(1) of the Act;
(h) “excluded property” has the meaning assigned by subsection 95(1) of the Act;
(i) “FA1” means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX, resident in XXXXXXXXXX and not resident in Canada for the purposes of the Act;
(j) “FA2” means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX, and not resident in Canada for the purposes of the Act;
(k) “FMV” means fair market value, being the highest price available in an open and unrestricted market between informed prudent parties acting at arm’s length;
(l) “Forco1” means XXXXXXXXXX, a XXXXXXXXXX formed under the laws of, and is resident in XXXXXXXXXX and not resident in Canada for the purposes of the Act;
(m) “Forco2” means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX, resident in Foreign Country and not resident in Canada for the purposes of the Act;
(n) “foreign affiliate” has the meaning assigned by subsection 95(1) of the Act;
(o) “Foreign Country” means XXXXXXXXXX;
(p) “Foreign Election” means the Foreign Country tax election described under the heading “Proposed Transactions” below;
(q) “foreign tax year” means the “XXXXXXXXXX” under the taxation laws of Foreign Country and the time period for which income is reported for the purposes of Foreign Country income tax;
(r) “Head Company” means the head company of a consolidated group as defined by the taxation laws of Foreign Country;
(s) “Intercompany Balances” means the debts owing among FA2 and the AFAs;
(t) “Parent” means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX, resident in XXXXXXXXXX and not resident in Canada for the purposes of the Act;
(u) “public corporation” has the meaning assigned by subsection 89(1) of the Act;
(v) “sale date” means XXXXXXXXXX; and
(w) “taxable Canadian corporation” has the meaning assigned by subsection 89(1) of the Act.
Facts
1. Parent owns all of the shares of Forco1 and all the issued and outstanding shares of Forco2.
2. Canco1’s authorized capital consists of XXXXXXXXXX common shares and XXXXXXXXXX Class A shares, all without nominal or par value. Parent and Forco1 own all of the issued shares of Canco1.
3. Canco2’s authorized capital consists of an unlimited number of XXXXXXXXXX. At all material times prior to XXXXXXXXXX, all of the issued shares of Canco2 were owned by either Canco1 or Parent, except for XXXXXXXXXX shares of Canco2 that were listed on a designated stock exchange. Of the issued and outstanding XXXXXXXXXX shares, approximately XXXXXXXXXX% were owned by Canco1 and the remainder were widely-held by arm’s length parties.
4. Canco2 owns all of the issued and outstanding shares of Canco3.
5. Canco3 owns all of the issued and outstanding shares of Canco4.
6. FA1’s authorized capital consists of XXXXXXXXXX common shares, XXXXXXXXXX preferred shares and XXXXXXXXXX special shares. Parent owns XXXXXXXXXX special shares of FA1, representing XXXXXXXXXX% voting and economic interest in FA1. Canco4 owns XXXXXXXXXX common shares and XXXXXXXXXX preferred shares of FA1, representing in the aggregate XXXXXXXXXX% voting and economic entitlement in FA1. FA1 is a foreign affiliate and a controlled foreign affiliate of Canco4 at all material times.
7. Prior to the sale date, the shares of FA2 were owned as follows:
Forco2 owned XXXXXXXXXX ordinary shares, or XXXXXXXXXX%.
Canco2 owned XXXXXXXXXX ordinary shares, or XXXXXXXXXX%.
FA1 owned XXXXXXXXXX ordinary shares, or XXXXXXXXXX%.
In addition, Parent owns XXXXXXXXXX redeemable preferred shares of FA2.
8. At all material times prior to the sale date, FA2 was a foreign affiliate and a controlled foreign affiliate of Canco2 and Canco4.
9. At all material times, FA2 directly or indirectly was the owner of XXXXXXXXXX% of the shares of more than XXXXXXXXXX AFAs. Prior to the sale date, each of the AFAs was a foreign affiliate and a controlled foreign affiliate of Canco2 and Canco4. Prior to the sale date, FA2 was the “head company” in a consolidated group for Foreign Country income tax purposes and all of the AFAs formed part of that consolidated group. Under Foreign Country’s income tax law, as the head company of this consolidated group, FA2 was (and in respect of its XXXXXXXXXX foreign tax year, is) required to file a tax return for each foreign tax year, reporting all income and loss of the consolidated group for the period in the year in which it was the head company of the consolidated group. FA2’s foreign tax year commences on XXXXXXXXXX and ends on XXXXXXXXXX of each year. In addition, FA2’s fiscal year for accounting purposes commences on XXXXXXXXXX and ends on XXXXXXXXXX each year.
10. FA2 and the AFAs conduct Parent’s XXXXXXXXXX operations in Foreign Country.
11. Prior to the day before the sale date, there existed between FA2 and the AFAs numerous Intercompany Balances. Many of the Intercompany Balances have been reflected in the books and records of FA2 and the AFAs for many years and pre-date Parent’s ownership of FA2 and the AFAs, which began only in XXXXXXXXXX. Some of the Intercompany Balances reflect cash advanced among FA2 and the AFAs since Parent’s ownership began.
12. On the day before the sale date, FA2 and the AFAs entered into a Deed of Release pursuant to which all of the Intercompany Balances were released and discharged. FA2 and the AFAs settled the Intercompany Balances in order to simplify the determination of whether the shares of FA2 were excluded property.
13. On the sale date, Canco2 sold all of its shares of FA2 to Forco2 in consideration of XXXXXXXXXX, being the FMV of those shares.
14. Also on the sale date, FA1 sold all of its shares of FA2 to Forco2 in consideration of XXXXXXXXXX, being the FMV of those shares.
FA2 and the AFAs prepare their accounting records on the basis of a fiscal year that commences on XXXXXXXXXX and ends on XXXXXXXXXX. Specifically, each company prepares quarterly financial statements (in order for Parent to prepare quarterly consolidated financial statements to satisfy its public disclosure obligations under relevant securities law). Accordingly, for each calendar year, FA2 and the AFAs prepare financial statements for the XXXXXXXXXX months ending on XXXXXXXXXX, the XXXXXXXXXX months ending on XXXXXXXXXX, the XXXXXXXXXX months ending on XXXXXXXXXX, and the XXXXXXXXXX months ending on XXXXXXXXXX. This remained true in XXXXXXXXXX notwithstanding the transactions described in the paragraphs above.
15. FA2 is obligated to file a tax return in Foreign Country in respect of its foreign tax year ending on XXXXXXXXXX.
16. Forco2 is obligated to file a tax return in Foreign Country in respect of its foreign tax year ending on XXXXXXXXXX.
17. FA2’s foreign tax year is not deemed by the laws of Foreign Country to have ended on the sale date as a result of its shares being purchased by Forco2, and FA2 is not obligated under Foreign Country’s income tax law to file any income tax return in respect of a period ending on that date. Additionally, FA2’s fiscal year for accounting purposes did not end on the sale date, but continued uninterrupted to XXXXXXXXXX.
18. Under Foreign Country’s income tax law, the AFAs are not required to file a tax return as they are members of a consolidated group. Only the head company is recognized for tax purposes, and the other members of the consolidated group are ignored. The head company is required to calculate income as if all income and expenses of the consolidated group were actually earned or incurred by the head company.
19. Both FA2 and Forco2 are required to report the income or loss realized by the AFAs on their tax returns for the respective periods in which they were the head company of the consolidated group.
Proposed Transactions
20. When it files its Foreign Country income tax return for its XXXXXXXXXX foreign tax year, Forco2 will file the Foreign Election with the Foreign Country’s tax authorities to form a consolidated group among itself, FA2, and all the AFAs. FA2 will file a notification indicating that it and the AFAs have ceased to be part of a consolidated group with FA2 as the head company, and Forco2 will file a notification indicating that FA2 and each AFA have instead joined a consolidated group with Forco2 as the head company. For Foreign Country income tax purposes, if the Foreign Election is filed, FA2 and each AFA are then considered to have become part of Forco2’s consolidated group on the day that FA2 became wholly-owned by Forco2, being the sale date.
Purpose of the Proposed Transactions
21. The purpose of filing the Foreign Election is to achieve consolidation for Foreign Country income tax purposes with Forco2 as the head company of a consolidated group that includes FA2 and the AFAs, on the day when Forco2 acquired all of the shares of FA2, being the sale date.
22. Regardless of whether the Foreign Election is filed, FA2 remains obligated to file a Foreign Country tax return in respect of its foreign tax year ending on XXXXXXXXXX. This tax return will report all of the income earned by FA2 during its foreign tax year that commenced on XXXXXXXXXX, and ended on XXXXXXXXXX, including any income earned by FA2 following the sale date, which was earned while it was not a member of another consolidated group.
23. Under Foreign Country’s income tax law, where a corporation was a member of a consolidated group for only part of the foreign tax year, such a corporation is required to calculate its aggregate income and expenses for all periods within the income year for which is was not a member of a consolidated group and report such amounts on a single Foreign Country income tax return. The corporation is not required to file separate Foreign Country income tax returns for each period within the foreign tax year in which it was not a member of a consolidated group, nor is it required to separately calculate each such period on its return for the foreign tax year. Rather, the corporation merely reports its aggregate income or loss from all periods in which it was not a member of a consolidated group. Income or loss of a corporation for a period in which it is a member of a consolidated group will not be reported on its own return, but instead will be reflected on the tax return filed by the head company of the consolidated group.
Since FA2 was not a member of consolidated group, but rather the head company of a consolidated group from XXXXXXXXXX to the sale date, FA2 must calculate its income and expenses for this period and report such amounts on its Foreign Country income tax return for the foreign tax year ending on XXXXXXXXXX.
24. The situation will be different for the AFAs. Because Forco2 files the Foreign Election, each of the AFAs will be treated as a member of FA2’s consolidated group up until the sale date, and afterwards as part of Forco2’s consolidated group. At no time were the AFAs not part of a consolidated group. Any income or loss realized by each of the AFAs up to the sale date will be reported on FA2's tax return for its foreign tax year ending on XXXXXXXXXX. Similarly, any income or loss realized by each of the AFAs on or after the sale date will be reported in Forco2's tax return for its foreign tax year ending on XXXXXXXXXX. None of the AFAs will be required to separately calculate or report its income or expenses for XXXXXXXXXX for Foreign Country income tax purposes.
Rulings Given
Provided the preceding statements constitute a complete and accurate disclosure of all the relevant Definitions, Facts, Proposed Transactions, Purpose of the Proposed Transactions, and Additional Information, our rulings are as follows:
A. The "taxation year", as defined in subsection 95(1) of the Act, of FA2 that began on XXXXXXXXXX, ended on XXXXXXXXXX, and did not end on the sale date; and
B. The "taxation year", as defined in subsection 95(1) of the Act, of the AFAs that began on XXXXXXXXXX, ended on XXXXXXXXXX, and did not end on the sale date.
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 Canada Revenue Agency 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 implying that the CRA has agreed to or reviewed:
a) the fair market value or adjusted cost base of any property referred to herein;
b) the Canadian tax treatment of the release and discharge of the Intercompany Balances; or
c) any other tax consequences relating to the facts and the Proposed Transactions described herein other than those described in the rulings given above.
Yours truly,
XXXXXXXXXX
for Director
International Division
Income Tax Rulings Directorate
Legislative and Regulatory Affairs Branch
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