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: A & B: Whether a subsection 84(1) deemed dividend is a dividend for the purposes of Article X of the Canada-U.S. Treaty?
C. Whether subparagraph 7(b) of Article IV of the Treaty applies to the deemed dividend?
D. Whether a non-qualifying person in this situation will be entitled to treaty benefits?
E. Whether 245(2) applies to the proposed transactions?
Position: A & B: Yes
C. No
D. Yes
E. No
Reasons: A & B: Since the PUC account is increased and none of the exceptions in 84(1) are met, a deemed dividend arises. The definition of "dividends" in paragraph 3 of Article X is broad enough to include a subsection 84(1) deemed dividend. The deemed dividend will be subjected to the same tax treatment as income from shares under the ITA and therefore meets the requirements of paragraph 3 of Article X of the Treaty.
C. The tax treatment of the deemed dividend income under the taxation laws of the U.S. from the payer who is fiscally transparent would be the same if the deemed dividend payer were not fiscally transparent.
D. All the criteria in paragraph 4 of Article XXIX A of the Treaty have been met.
E. The proposed transactions do not result in a misuse or abuse of the provisions of the Income Tax Act or Treaty.
XXXXXXXXXX 2012-047192
Attention: XXXXXXXXXX
XXXXXXXXXX, 2013
Dear XXXXXXXXXX:
Re: XXXXXXXXXX ("U.S. Holdco") and XXXXXXXXXX ("Canco")
We are writing in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayers.
The rulings given herein are based solely on the facts, proposed transactions and purpose of the proposed transactions described below. Facts and proposed transactions in the documents submitted with your request not described below do not form part of the facts and proposed transactions on which this ruling letter is based and any reference to these documents is provided solely for the convenience of the reader.
Unless otherwise stated, all references to a statute are references to the provisions of the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.) as amended to the date hereof (the "Act"), and every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act.
Definitions
"arm's length" has the meaning ascribed in subsection 251(1);
"CAD" means Canadian dollars;
"Canco" means XXXXXXXXXX
Business Number: XXXXXXXXXX
Tax Centre: XXXXXXXXXX Tax Centre;
"Can LP" means XXXXXXXXXX;
"Capital Dividend" has by virtue of subsection 248(1), the meaning assigned by section 83;
"City 1" means the city of XXXXXXXXXX, in Province 2 as defined below;
"Company Act" means the Companies Act XXXXXXXXXX;
"Country 1" means XXXXXXXXXX;
"Deductible Expenses" means deductible expenses computed pursuant to the Internal Revenue Code of the US;
"Exchange 1" means the XXXXXXXXXX Exchange;
"Exchange 2" means the XXXXXXXXXX Exchange;
"Exchange 3" means the XXXXXXXXXX Exchange;
"FCU" means XXXXXXXXXX;
"Foreign Holdco" means XXXXXXXXXX;
"Foreign Sub" means XXXXXXXXXX;
"GP Inc." means XXXXXXXXXX;
"Gross Income" means gross income that is computed pursuant to the Internal Revenue Code of the US;
"paid-up capital" has unless otherwise specified, the meaning assigned in the Company Act;
"Province 1" means the Province of XXXXXXXXXX;
"Province 2" means the Province of XXXXXXXXXX;
"qualifying person" has the meaning assigned by paragraph 2 of Article XXIX-A of Treaty 1;
"related persons" has the meaning assigned by subsection 251(2);
"State 1" means the State of XXXXXXXXXX;
"taxable Canadian corporation" has the meaning assigned by subsection 89(1);
"taxable dividend" has by virtue of subsection 248(1), the meaning assigned by subsection 89(1);
"Treaty 1" means the Convention between Canada and the United States of America with respect to Taxes on Income and Capital signed on September 26, 1980, as amended by protocols signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997 and September 21, 2007;
"Treaty 2" means XXXXXXXXXX;
"United States" or "US" means the United States of America;
"U.S. Holdco" means XXXXXXXXXX; and
"U.S. Sub" means XXXXXXXXXX.
Facts
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
1. Foreign Holdco is a corporation incorporated under the laws of Country 1. Foreign Holdco's outstanding common shares are publicly traded on Exchange 1, Exchange 2, and Exchange 3. Foreign Holdco is a resident of Country 1 and is entitled to all of the benefits of Treaty 2. Foreign Holdco is not a "qualifying person" as that term is defined in paragraph 2 of Article XXIX A of Treaty 1. Foreign Holdco has a XXXXXXXXXX year-end for tax purposes.
2. Foreign Sub is a corporation incorporated under the laws of Country 1. Foreign Sub is a wholly-owned subsidiary of Foreign Holdco, and is XXXXXXXXXX. Foreign Sub is a resident of Country 1 and is entitled to all of the benefits of Treaty 2. Foreign Sub is not a qualifying person as that term is defined in paragraph 2 of Article XXIX A of Treaty 1. Foreign Sub produces and sells XXXXXXXXXX. During its taxation year ended XXXXXXXXXX, Foreign Sub generated approximately FCU XXXXXXXXXX ($XXXXXXXXXX CAD) in gross revenues. During its taxation year ended XXXXXXXXXX, Foreign Sub had total assets with a book value of approximately FCU XXXXXXXXXX ($XXXXXXXXXX CAD). Of the total assets, approximately FCU XXXXXXXXXX ($XXXXXXXXXX CAD) of the assets are used in Foreign Sub's active XXXXXXXXXX business.
3. U.S. Holdco is a corporation incorporated under the laws of State 1. XXXXXXXXXX% of U.S. Holdco's outstanding shares are owned by Foreign Sub. U.S. Holdco is not treated as a fiscally transparent entity for US income tax purposes. Accordingly, U.S. Holdco is a resident of the US for purposes of Treaty 1. U.S. Holdco is a holding company and does not carry on active business operations in its own right. U.S. Holdco's year-end is XXXXXXXXXX.
4. U.S. Holdco is not a "qualifying person" as that term is defined in paragraph 2 of Article XXIX A of Treaty 1. U.S. Holdco is not eligible for the benefits of Treaty 1 pursuant to paragraph 3 of Article XXIX A of Treaty 1.
5. During its XXXXXXXXXX taxation year, U.S. Holdco's Deductible Expenses paid or payable, directly or indirectly, to persons that are not qualifying persons under Treaty 1, were less than XXXXXXXXXX% of its Gross Income for that taxation year. It is expected that during each of its XXXXXXXXXX taxation years, U.S. Holdco's Deductible Expenses paid or payable directly or indirectly to persons that are not qualifying persons under Treaty 1 will be less than XXXXXXXXXX% of its Gross Income for that year.
6. In addition to U.S. Holdco, Foreign Sub has other minority investments in US operations that are in the business of XXXXXXXXXX.
7. U.S. Sub is a wholly-owned subsidiary of Foreign Sub, and is a resident of the US for purposes of Treaty 1. U.S. Sub owns XXXXXXXXXX% of the outstanding shares of GP Inc., a taxable Canadian corporation. The remaining outstanding shares of GP Inc. are held by persons with whom Canco deals at arm's length. GP Inc. owns XXXXXXXXXX% of the outstanding partnership units of Can LP. GP Inc. is not treated as a fiscally transparent entity for US tax purposes.
8. Canco is a taxable Canadian corporation incorporated as an unlimited liability company under the laws of Province 1, and has a XXXXXXXXXX year-end. The outstanding voting shares of Canco are wholly-owned by U.S. Holdco. Canco is a holding company which owns XXXXXXXXXX% of the outstanding limited partnership units of Can LP, described below. The XXXXXXXXXX% of the outstanding limited partnership units in Can LP not described in this paragraph and paragraph 7 above are held by persons with whom Canco deals at arm's length. Canco's income is, and always has been, substantially all comprised of its share of the income of Can LP. The paid-up capital of the shares of Canco is estimated to be $XXXXXXXXXX CAD.
9. For US federal income tax purposes, U.S. Holdco has elected to treat Canco as a fiscally transparent entity. In that regard, all of the income of Canco is taxed in the US on a current basis.
10. Can LP is a limited partnership formed under the laws of Province 2. Can LP is treated as a fiscally transparent entity for both Canadian and US income tax purposes. The profits of Can LP are allocated to its partners based upon their relative capital interests in Can LP. Can LP operates a XXXXXXXXXX business in City 1. Can LP's gross revenues during its taxation year ending XXXXXXXXXX were approximately $XXXXXXXXXX CAD and the book value of its total assets as at the year ended XXXXXXXXXX were approximately $XXXXXXXXXX CAD. All of the assets of Can LP are used in its active XXXXXXXXXX business.
11. U.S. Holdco does not carry on business through a "permanent establishment" located in Canada, as that term is described in Article V of Treaty 1. Similarly, Canco does not have a "permanent establishment" in the United States, as that term is described in Article V of Treaty 1.
12. 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 taxation centre in connection with a tax return already filed by any of the taxpayers or a related person;
(iii) under objection by any of the taxpayers or by a person related to the taxpayers; or
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.
Proposed Transactions
13. During the XXXXXXXXXX taxation year Canco intends to sell its XXXXXXXXXX% outstanding limited partnership units of Can LP to an unrelated party. On this sale Canco expects to realize a gain for accounting purposes of approximately $XXXXXXXXXX CAD. This gain will be included in Canco's retained earnings at the time of sale for its XXXXXXXXXX fiscal year. Canco intends to distribute the proceeds of disposition of the partnership interest, less any taxes payable on the disposition, to U.S. Holdco.
14. In lieu of paying and declaring a dividend, Canco will, on or before XXXXXXXXXX:
(a) in accordance with the provisions of the Company Act, add an amount from its retained earnings to the paid-up capital account maintained in respect of the common shares of Canco. The amount to be added will be sufficient to increase the paid-up capital account to the amount of the anticipated distribution, but will not be greater than Canco's retained earnings at the time of the transaction;
(b) reduce, as soon as practicable after the increase referred to in paragraph 14(a) above, the paid-up capital in respect of its shares in accordance with the provisions of the Company Act by an amount equal to the amount of the anticipated distribution; and
(c) distribute as a return of capital on its share an amount equal to the reduction referred to in paragraph 14(b) above.
Purpose of the Proposed Transactions
15. The purpose of the proposed transactions described in paragraph 14 above is to make a distribution of the proceeds of the sale of the units of Can LP from Canco to U.S. Holdco in a manner that avoids the application of subparagraph 7(b) of Article IV of Treaty 1.
16. Notwithstanding that the proposed transaction described in paragraph 14(a) above will result in a deemed dividend on the shares of Canco owned by U.S. Holdco under subsection 84(1), no income, profit or gain will arise or will be recognized under the taxation laws of the United States as a result of the transactions described in paragraphs 14(a) and (b) above. Similarly, no amount of income, profit or gain would arise or be recognized under the taxation laws of the United States as a result of those transactions if Canco were not fiscally transparent under the taxation laws of the United States.
17. Canco will not elect, in accordance with subsection 83(2), to deem any portion of the dividend that it will be deemed to have been paid by virtue of subsection 84(1), to be a Capital Dividend.
18. The proposed transactions described in paragraphs 14(a) and (b) above will not affect the tax treatment in the United States of any subsequent distribution on the Canco shares owned by U.S. Holdco, including the return of paid-up capital referred to in paragraph 14(c) above.
19. U.S. Holdco will be the beneficial owner of any deemed dividend, as referred to in paragraph 16 above, and will hold not less than XXXXXXXXXX percent of the voting shares of Canco throughout Canco's XXXXXXXXXX taxation year.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. To the extent Canco is deemed to have paid, and U.S. Holdco is deemed to have received, a dividend pursuant to subsection 84(1) as a result of the transaction described in paragraph 14(a) above, that dividend will be a taxable dividend as described in paragraph 212(2)(a).
B. For the purposes of applying Article X of Treaty 1, the amount of the dividend referred to in Ruling A will be considered to be income as described in the definition of "dividends" in paragraph 3 of Article X of Treaty 1 that is derived by U.S. Holdco.
C. Subparagraph 7(b) of Article IV of Treaty 1 will not apply to treat the dividend referred to in Ruling B as not having been paid to U.S. Holdco.
D. Provided that during U.S. Holdco's taxation year-ended XXXXXXXXXX, the amount of U.S. Holdco's Deductible Expenses for the year payable directly or indirectly to persons who are not qualifying persons is less than XXXXXXXXXX percent of U.S. Holdco's Gross Income for the year, U.S. Holdco will be entitled to the benefits of Treaty 1 by virtue of paragraph 4 of Article XXIX A of Treaty 1 in respect of the dividend deemed paid by Canco to U.S. Holdco referred to in paragraph 14(a) above.
E. Subsection 245(2) will not apply to re-determine the tax consequences confirmed in the rulings given above.
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Revenue Agency ("CRA") provided the proposed transactions are completed by XXXXXXXXXX.
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:
(a) whether Canco is fiscally transparent under the taxation laws of the United States;
(b) whether the deemed dividend resulting from the proposed transaction referred to in paragraph 14 above 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; or
(c) the adjusted cost base, paid-up capital for the purposes of the Act or fair market value of any shares or other property referred to herein .
Yours truly,
XXXXXXXXXX
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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