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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
XXXXXXXXXX 932563
Attention: XXXXXXXXXX
December 16, 1993
Dear Sirs:
Re: Subparagraph 95(2)(a)(i) of the Income Tax Act (the "Act")
This is in reply to your request for Revenue Canada's opinion concerning the application of the above provision to the following hypothetical fact situation.
1) Canco is a corporation resident in Canada.
2) Opco is a corporation resident in the United States. Canco owns directly or indirectly 100% of the shares of Opco.
3) X is a corporation resident in Canada which deals at arm's length with Canco.
4) X owns directly or indirectly 100% of the shares of a corporation ("FAX") resident in the United States.
5) P is a partnership that carries on an active business in the United States. All of the income of P is derived from the active business.
6) Opco and FAX each own a 50% interest in P and each partner shares equally in partnership distributions.
7) LLC is a limited liability corporation organized under The Wyoming Limited Liability Company Act and is resident in the United States for the purposes of the Act.
8) LLC has issued shares and 50% of the shares of LLC are held by X and 50% are held by Canco. LLC makes distributions of profits to the shareholders in proportion to their percentage ownership of its shares.
9) LLC has purchased bonds issued by a political subdivision of the United States. The bonds bear an arm's length commercial rate of interest. The proceeds from the sale of such bonds were used by the political subdivision to finance the construction of a manufacturing plant which is leased to P to be used by it to carry on its active business. P has an agreement with the political subdivision to purchase the manufacturing plant and related lands for US$1 following the full repayment of the bonds.
10) The above lease is treated as a financing lease under the Internal Revenue Code (the "Code") of the United States.
11) The amount computed under the Code to be the annual interest expense to P under the lease agreement, equals the annual interest income of LLC from the bonds of the U.S. political subdivision.
12) Canco and X have entered into a bona fide agreement whereby Canco will have an option to acquire all of the issued and outstanding shares of FAX and X similarly has an option to acquire all of the issued and outstanding shares of Opco.
It is our opinion that LLC would be a foreign affiliate of Canco and that in the above circumstances subparagraph 95(2)(a)(i) of the Act would provide that the interest income earned by LLC from the bonds issued by the U.S. political subdivision would be included in computing the income of LLC from an active business. In addition, it is our opinion that any distribution of profits made by LLC, as set out in paragraph 8 above, would be a dividend for the purposes of Act.
As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, issued by Revenue Canada, Taxation the foregoing opinions are not advance income tax rulings and are not binding on the Department.
We trust that the foregoing comments are of assistance to you.
for Director Reorganizations and Foreign Division Rulings Directorate Legislative and Intergovernmental Affairs Branch
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