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.
