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 paragraph 69(11)(b) would apply when shares of a foreign affiliate are transferred by a Canadian corporation to a foreign affiliate pursuant to subsection 85.1(3) and when the foreign affiliate disposed of those shares (which are not taxable Canadian property) in favour of an arm's length person.
Position: In the situation described, there would be no exemption available to the foreign affiliate from tax payable under the Act on income arising from a subsequent disposition.
Reasons: In the situation described, the gain arising from the subsequent disposition is not considered to be income for the purposes of the Act (it is not included in the income of the foreign affiliate because there is no provision of the Act adding this gain to the income). Therefore, there is no tax payable under the Act. As there is no income and no tax payable under the Act, there is no exemption from tax payable available to the foreign affiliate.
October 21, 2013
Danielle Asselin, Auditor HEADQUARTERS
Aggressive International Tax Planning Income Tax Rulings
International and Large Business Directorate Directorate
Eastern Quebec TSO Sylvie Labarre
165 Pointe-aux-Lièvres
Québec QC GIK 7L3
2013-050583
Potential Application of Paragraph 69(11)(b) - Rollover to a Foreign Affiliate.
We are writing in response to your memorandum of September 24, 2013 in which you requested our views on the potential application of paragraph 69(11)(b) of the Income Tax Act (the "Act") in the context of the situation described below.
Facts
1. XXXXXXXXXX (the "Taxpayer") is a Canadian corporation.
2. XXXXXXXXXX is a subsidiary wholly-owned corporation of the Taxpayer and is also a Canadian corporation.
3. XXXXXXXXXX ("Forco") is a resident of XXXXXXXXXX and a controlled foreign affiliate of the Taxpayer.
4. XXXXXXXXXX ("Subco") (XXXXXXXXXX) is a subsidiary wholly-owned corporation of the Taxpayer. Subco operated the XXXXXXXXXX of the Taxpayer group.
5. XXXXXXXXXX is a corporation resident of the United States of America.
6. XXXXXXXXXX ("Purchaseco") is a resident of the United States of America and is a subsidiary wholly-owned corporation of XXXXXXXXXX.
7. XXXXXXXXXX is a Canadian corporation and a subsidiary wholly-owned corporation of XXXXXXXXXX.
8. The Taxpayer group and the Purchaseco group deal with each other at arm's length.
9. On XXXXXXXXXX, the Taxpayer disposed of all of its voting and participating shares of the capital stock of Subco to Forco pursuant to a Share Exchange Agreement. According to the valuation report performed by a third party, the Subco shares were worth US $XXXXXXXXXX. In consideration, the Taxpayer received XXXXXXXXXX Preference Shares of the capital stock of Forco. Those shares were issued for US $XXXXXXXXXX per share to the Taxpayer for an aggregate amount of US $XXXXXXXXXX. According to the Taxpayer, subsection 85.1(3) of the Act applied to the transaction. Therefore, the disposition occurred on a "rollover" basis.
10. In XXXXXXXXXX, Forco exercised the option granted by Article XXXXXXXXXX of the Share Exchange Agreement and purchased the Intellectual properties of XXXXXXXXXX for US $XXXXXXXXXX.
11. On XXXXXXXXXX, Forco sold the XXXXXXXXXX, including the intellectual properties, to XXXXXXXXXX and its subsidiaries Purchaseco and XXXXXXXXXX, triggering a capital gain in the XXXXXXXXXX foreign affiliate.
The first step to the XXXXXXXXXX transactions was the sale by Forco of intellectual properties for an aggregate purchase price of US $XXXXXXXXXX to Purchaseco and XXXXXXXXXX. XXXXXXXXXX. You were unable to obtain the list of the intellectual properties acquired by Forco in XXXXXXXXXX. Therefore, you are unable to establish that the intellectual property acquired in XXXXXXXXXX and the intellectual property sold in XXXXXXXXXX are exactly the same.
The second step was the disposition by Forco of all of its Subco shares to Purchaseco for an aggregate purchase price of US $XXXXXXXXXX.
Finally, the last step was the sale by XXXXXXXXXX of all its assets related to the business of XXXXXXXXXX for an aggregate purchase price of Cdn $XXXXXXXXXX. XXXXXXXXXX was the Canadian purchaser and Purchaseco was the US purchaser.
12. Further to your request, the Business Equity Valuation Section of the CRA established that the fair market value of the voting and participating shares of the capital stock of Subco as at XXXXXXXXXX was US $XXXXXXXXXX.
13. The tax representatives of the Taxpayer are of the view that Forco, a non-resident corporation not carrying on business in Canada, was not subject to Canadian tax with respect to its gain on the sale of the Subco shares since these shares were not taxable Canadian property.
Question
Your question is whether paragraph 69(11)(b) of the Act applies with respect to the disposition of the Subco shares by the Taxpayer in favour of Forco.
Where, at any particular time as part of a series of transactions or events, a taxpayer disposes of property for proceeds of disposition that are less than its fair market value and it can reasonably be considered that one of the main purposes of the series is to obtain the benefit of an exemption available to any person from tax payable under this Act on any income arising on a subsequent disposition of the property or property substituted for the property, the tax consequences provided for in subsection 69(11) of the Act will apply. When applicable, subsection 69(11) of the Act denies the benefit of the rollover on the original disposition by deeming the taxpayer's proceeds of disposition to be equal to the fair market value of the property disposed of.
In your file, one of the questions is whether the Taxpayer obtained the benefit of an exemption available to Forco from tax payable under the Act on any income arising on a subsequent disposition of the shares of the capital stock of Subco.
According to the tax representatives, the shares of the capital stock of Subco are not taxable Canadian property. Therefore, the gain on those shares does not represent income of Forco for the purpose of the Act. Forco is not subject to tax on this gain under the Act pursuant to subsection 2(3) of the Act.
In our view, there is no exemption available from tax payable under the Act on any income arising on the disposition of the shares of the capital stock of Subco by Forco. The fact that there is no tax payable under the Act by Forco with respect to its gain on the disposition of the Subco shares is due to the fact that the disposition does not result in any income under the Act (Forco is simply not subject to tax under subsection 2(3) of the Act), not because an exemption from tax payable under the Act is available to Forco. Consequently, paragraph 69(11)(b) of the Act would not apply in the particular circumstances.
Considering the above, we feel that it is not necessary to provide additional comments with respect to the other conditions of subsection 69(11) of the Act.
It could be argued that, in a situation where a rollover was done pursuant to subsection 85.1(3) of the Act and where the property was disposed of to an arm's length party as part of the same series of transactions or events as the 85.1(3) rollover, subsection 85.1(4) of the Act should be the appropriate provision to deny the benefit of the 85.1(3) rollover. In our view and considering the scheme of the Act, a court would probably be reluctant to apply subsection 69(11) of the Act to deny the benefit of the 85.1(3) rollover where the conditions to apply subsection 85.1(3) of the Act are met (considering paragraph 95(6)(b) of the Act) and where subsection 85.1(4) of the Act does not apply in a particular situation. We believe that our position with respect to subsection 69(11) of the Act in your particular file is in accordance with the tax policy underlying those subsections.
You advised us that you will send another request to the International Division of the Income Tax Rulings Directorate with respect to the potential application of subsection 85.1(4) of the Act in the present situation. Therefore, we will not comment on that issue in the present file.
We trust that our comments will be of assistance.
Yours truly,
Stéphane Prud'Homme, LL.B, M. Fisc.
Manager
Réorganisations et Finances, section I
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2013
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2013
Email this Content