7 July 1994 Income Tax Severed Letter 9403043 - Canada-U.K. Treaty—Immovable Property

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 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 subparagraph 7(b) of Article 13 of the Canada-U.K. Income Tax Convention should be applied on look-through bsis for purposes of subparagraph 5(a) of article 13.

POSITION TAKEN:

Yes

REASONS FOR POSITION TAKEN: As paragraph 5 of Article 13 clearly provides for a look-through, subparagraph 7(b) exception should also be on a look-through basis.

XXXXXXXXXX 940304

Attention: XXXXXXXXXX

XXXXXXXXXX , 1994

Dear Sirs:

Re: XXXXXXXXXX

XXXXXXXXXX

Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers.

All references herein to section or components thereof are to the Income Tax Act S.C. 1970-71-72, c.63 as amended consolidated to June 10, 1993 (the “Act”) unless otherwise indicated, and all terms used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts
• 1. XXXXXXXXXX is a corporation incorporated under the laws of XXXXXXXXXX . Its head office is in XXXXXXXXXX is a private corporation and a taxable Canadian corporation.
• The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX Class A voting common shares without nominal or par value, and XXXXXXXXXX Class B nonvoting common shares without nominal or par value. The issued share capital of XXXXXXXXXX as at the time of submitting this request consists of XXXXXXXXXX Class A shares, and XXXXXXXXXX of Class B shares. The paid-up capital of the issued and outstanding Class A shares and Class B shares is $XXXXXXXXXX and $XXXXXXXXXX respectively.
• All of the outstanding shares of XXXXXXXXXX are owned by XXXXXXXXXX .
• XXXXXXXXXX acts as a holding company and its major asset is its share investment in XXXXXXXXXX which accounted, on a book value basis, for XXXXXXXXXX % of the XXXXXXXXXX net assets as at XXXXXXXXXX . The remaining net assets comprise accounts receivable net of accounts payable (XXXXXXXXXX %). cash and short term deposits (XXXXXXXXXX %), and a receivable from XXXXXXXXXX (XXXXXXXXXX %).
• 2. XXXXXXXXXX is a corporation incorporated under the laws of XXXXXXXXXX . Its head office is in XXXXXXXXXX is a private corporation and a taxable Canadian corporation.
• The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX voting common shares without nominal or par value. The issued share capital of XXXXXXXXXX as at the time of submitting this request consists of XXXXXXXXXX of common shares. The paid-up capital of the issued and outstanding common shares of XXXXXXXXXX is $XXXXXXXXXX .
• XXXXXXXXXX currently owns XXXXXXXXXX % of the outstanding voting shares of XXXXXXXXXX . The balance of XXXXXXXXXX shares are owned by XXXXXXXXXX ., a U.S. resident third party corporation that is not related to any other corporation or person referred to in this ruling.
• The major asset of XXXXXXXXXX is its XXXXXXXXXX % investment in the voting shares of XXXXXXXXXX which accounted, on a book value basis, for XXXXXXXXXX % of the XXXXXXXXXX net assets at XXXXXXXXXX . The remaining XXXXXXXXXX % consisted of cash and short term investments net of accounts payable.
• 3. XXXXXXXXXX was incorporated under the laws of XXXXXXXXXX . Its head office is in XXXXXXXXXX is a private corporation and a taxable Canadian corporation.
• The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX common shares without nominal or par value. The issued share capital of XXXXXXXXXX as at the time of submitting this request consists of XXXXXXXXXX common shares. The paid-up capital of the issued and outstanding common shares of XXXXXXXXXX is $XXXXXXXXXX .
• XXXXXXXXXX is the major operating company of the XXXXXXXXXX . Its principal business activities are the XXXXXXXXXX . XXXXXXXXXX also owns all of the issued and outstanding shares of XXXXXXXXXX and XXXXXXXXXX % of the issued and outstanding shares of XXXXXXXXXX is by far the most significant operating entity in the XXXXXXXXXX , accounting for in excess of XXXXXXXXXX % of the fair market value of the XXXXXXXXXX.
• The major assets of XXXXXXXXXX , on a book value basis, at XXXXXXXXXX consisted of Equipment used in the business, being principally XXXXXXXXXX (XXXXXXXXXX %); Accounts receivable (XXXXXXXXXX %); Inventories and other current assets (XXXXXXXXXX %); and Investments in and advances to related corporations (XXXXXXXXXX %).
• The liabilities (excluding deferred taxes and shareholders' equity) include Accounts payable (XXXXXXXXXX %); Advances from related corporations (XXXXXXXXXX %); and Bank debt (XXXXXXXXXX %).
• XXXXXXXXXX
• 4. XXXXXXXXXX was incorporated under the laws of XXXXXXXXXX . Its head office is in XXXXXXXXXX is a private corporation and a taxable Canadian corporation.
• The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX common shares without nominal or par value. The issued share capital of XXXXXXXXXX as at the time of submitting this request consists of XXXXXXXXXX common shares. The paid-up capital of the issued and outstanding common shares of XXXXXXXXXX is $XXXXXXXXXX .
• The principal business activity of XXXXXXXXXX is the XXXXXXXXXX operations are very insignificant, relative to the XXXXXXXXXX
• The major assets of XXXXXXXXXX at XXXXXXXXXX include Equipment used in conducting the business (XXXXXXXXXX %), and Current Assets (XXXXXXXXXX %). The liabilities (excluding deferred taxes and shareholders' equity) include Accounts payable (XXXXXXXXXX %) and Due to XXXXXXXXXX (XXXXXXXXXX %).
• 5. XXXXXXXXXX was incorporated under the laws of XXXXXXXXXX and has its head office in XXXXXXXXXX is a private corporation and a taxable Canadian corporation.
• The authorized share capital of XXXXXXXXXX consists of Unlimited Class A voting shares without nominal or par value, and Unlimited Class B nonvoting shares without nominal or par value. The issued share capital of XXXXXXXXXX as at the time of submitting this request consists of XXXXXXXXXX of Class A shares, and XXXXXXXXXX of Class B shares. The paid-up capital of the issued and outstanding Class A shares and Class B shares of XXXXXXXXXX is $XXXXXXXXXX and $XXXXXXXXXX respectively.
• XXXXXXXXXX is an operating company that is a subsidiary wholly-owned corporation of XXXXXXXXXX . Its principal business activity is the XXXXXXXXXX . XXXXXXXXXX operations do not represent a substantial part of the XXXXXXXXXX
• The major assets of XXXXXXXXXX include the equipment and XXXXXXXXXX used in carrying out the business which account for XXXXXXXXXX % of total assets. The remaining assets as at XXXXXXXXXX included Accounts receivable (XXXXXXXXXX %); Other current assets (XXXXXXXXXX %); and Advances due from XXXXXXXXXX (XXXXXXXXXX %). The liabilities include Accounts payable (XXXXXXXXXX %).
• 6. XXXXXXXXXX was incorporated under the laws of XXXXXXXXXX and has its head office in XXXXXXXXXX is a private corporation and a taxable Canadian corporation.
• The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX common shares without nominal or par value. The issued share capital of XXXXXXXXXX as at the time of submitting this request consists of XXXXXXXXXX common shares. The paid-up capital of the issued and outstanding common shares is $XXXXXXXXXX .
• XXXXXXXXXX is an operating company that is a subsidiary wholly owned corporation of XXXXXXXXXX . Its principal business activity is the XXXXXXXXXX operations are very insignificant, relative to the XXXXXXXXXX .
• The major assets of XXXXXXXXXX at XXXXXXXXXX include Equipment used in conducting the business (XXXXXXXXXX %), and Current assets (XXXXXXXXXX %). The liabilities (excluding shareholders equity) consist of Due to XXXXXXXXXX (XXXXXXXXXX %).
• 7. XXXXXXXXXX is a corporation incorporated and resident in the United States of America, and has its head office in XXXXXXXXXX is a holding company that holds all of XXXXXXXXXX indirect share investments in a number of United States operating companies.
• 8. XXXXXXXXXX is a corporation incorporated in the United Kingdom and resident in the United Kingdom for purposes of the Canada-U.K. Income Tax Convention (the “Convention”). It has its head office in XXXXXXXXXX is a subsidiary wholly-owned corporation of XXXXXXXXXX is a corporation incorporated in the United Kingdom and resident in the United Kingdom for purposes of the Convention. It has its head office in XXXXXXXXXX.
9. The shares of XXXXXXXXXX that are owned by XXXXXXXXXX derive their value from the shares of XXXXXXXXXX that are held by XXXXXXXXXX and ultimately from the assets owned by the lower tier operating entities within the XXXXXXXXXX . These assets are principally the following:
• • XXXXXXXXXX ;
• • XXXXXXXXXX ;
• • XXXXXXXXXX ;
• • XXXXXXXXXX
• • XXXXXXXXXX.
• 10. There have been no significant changes in the fixed assets of the XXXXXXXXXX companies since XXXXXXXXXX , nor will there be any significant changes prior to the completion of the proposed transactions noted below.
• 11. The adjusted cost base to XXXXXXXXXX of its shares in XXXXXXXXXX is significantly lower than the current fair market value of these shares.
12. The fair market value of the shares of XXXXXXXXXX is dependent on the value of the underlying assets of the XXXXXXXXXX companies. More than XXXXXXXXXX % of the value of the shares of XXXXXXXXXX is derived from:
• • XXXXXXXXXX ;
• • XXXXXXXXXX ;
• • XXXXXXXXXX
• • XXXXXXXXXX
• 13. Any assets of the XXXXXXXXXX that are of the nature described in paragraph 4 of Article 13 of the Convention and any assets of the XXXXXXXXXX that are leased or rented to third parties or other members of the XXXXXXXXXX , are immaterial to the issues dealt with in this ruling request. As well, any assets of the XXXXXXXXXX that are either redundant or in excess of current business requirements are immaterial to the issues dealt with in this ruling request.
• 14. Any reference herein to the “XXXXXXXXXX” means collectively, XXXXXXXXXX
• 15. To the best of your knowledge and that of the officers and directors of the corporations named herein, none of the issues involved in this ruling is being considered by a District Office and/or Taxation Centre in connection with an income tax return already filed, and none of these issues is under objection or appeal.

Proposed Transactions
• 16. XXXXXXXXXX will incorporate a new company under the laws of the United Kingdom (“Newco”). Newco will be resident in the United Kingdom and will be wholly owned by XXXXXXXXXX .
• 17. Newco will then incorporate a new company under the laws of the Netherlands (“BV”). BV will be resident in the Netherlands and will be wholly owned by Newco.
• 18. XXXXXXXXXX will transfer its shares of XXXXXXXXXX to Newco at net book value for United Kingdom tax purposes in exchange for consideration including intercompany debt. Newco will then immediately transfer its shares of XXXXXXXXXX to BV for fair market value consideration that comprises solely shares in BV.
• 19. The transfer of the XXXXXXXXXX shares to Newco will be free of United Kingdom capital gains or corporation income tax, by virtue of United Kingdom domestic tax law. In addition, the transfer of XXXXXXXXXX shares by Newco to BV in exchange for shares is not expected to give rise to current United Kingdom capital gains or corporation income tax. Advance clearance on this second transfer will be obtained from the United Kingdom tax authorities.
• 20. Simultaneously with the transfer of XXXXXXXXXX shares to BV, the shares of XXXXXXXXXX will also be transferred to BV.
• 21. These transactions will be completed on or before XXXXXXXXXX .

Purpose of the Proposed Transactions
• There are two principal reasons for the proposed transactions.
• Following the transfers of XXXXXXXXXX and XXXXXXXXXX shares to BV, all of XXXXXXXXXX direct and indirect North American investments will be owned by a single non-resident holding company. This structure is intended to provide XXXXXXXXXX and improved control and management of XXXXXXXXXX North American interests. The Netherlands has been chosen as the location for the North American sub-group's intermediate holding company because of the quality of local staff in the Netherlands, geographical location and an acceptable Netherlands domestic tax regime.
• The flow of dividends from Canada and the United States directly to the United Kingdom presents potential income tax problems in the United Kingdom under United Kingdom tax laws with respect to the application of foreign tax credits. By “mixing” the dividends through an intermediary corporation in the Netherlands which will in turn flow dividends to the United Kingdom, these problems can be alleviated. It is your understanding that the United Kingdom tax authorities accept the use of such so-called “dividend mixer” corporations.

Ruling Given
• Provided the above statements of facts and proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions and that the proposed transactions are carried out as set forth herein, the following ruling is given:

  A. By virtue of paragraph 8 of Article 13 of the Convention, the gains realized on the disposition of shares of XXXXXXXXXX by XXXXXXXXXX and by Newco, as described in paragraph 18 herein, will not be subject to Canadian tax.

• The ruling outlined above is given subject to the limitations and qualifications set out in Information Circular 70-6R2, issued by Revenue Canada, Taxation on September 28, 1990, and the Special Release thereto dated September 30, 1992 and is binding provided the proposed transactions are completed by XXXXXXXXXX .
• The above ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act which if enacted into law could have an effect on the ruling provided herein.

Yours truly,for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental Affairs Branch