7 July 1995 Income Tax Severed Letter 9528213 - Sale of Shares—Treaty Exemption

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.

XXXXXXXXXX 952821

Attention: XXXXXXXXXX

XXXXXXXXXX , 1995

Dear Sirs:

Re: XXXXXXXXXX

Advance Income Tax Ruling

We are writing in response to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. In your letter dated XXXXXXXXXX you provided additional information with respect to the facts and proposed transaction. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX ).

To the best of your knowledge and that of XXXXXXXXXX :
• a) none of the issues involved in the requested rulings is being considered by a Tax Services Office or a Taxation Centre in connection with a tax return already filed, and
• b) none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.

Definitions and Abbreviations

In this letter, the following terms have the meanings specified:
• a) “Act” means the Income Tax Act, R.S.C. 1995, c. 1 (5th supplement), as amended as at the date hereof, and any reference to any Part, section, subsection, paragraph or subparagraph is a reference to the specified Part or provision of the Act;
• b) “adjusted cost base” (“ACB”) has the meaning assigned by section 54;
• e) “capital property” has the meaning assigned by section 54;
• i) “paid-up capital” (“PUC”) has the meaning assigned by subsection 89(1);
• j) “private corporation” has the meaning assigned by subsection 89(1);
• n) “taxable Canadian corporation” has the meaning assigned by subsection 89(1).

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

Facts
• 1. XXXXXXXXXX is a corporation resident in the U.K. and a wholly-owned subsidiary of The XXXXXXXXXX and XXXXXXXXXX head office is XXXXXXXXXX is the U.K. holding company for XXXXXXXXXX Canadian group of companies (“the Canadian Group”). XXXXXXXXXX owns all of the shares of XXXXXXXXXX is a taxable Canadian corporation.
2. The address and account number of XXXXXXXXXX is as follows:
• XXXXXXXXXX
• Account no.: XXXXXXXXXX
• The tax returns of XXXXXXXXXX are handled by the XXXXXXXXXX Taxation Centre and the XXXXXXXXXX Tax Services Office.
3. XXXXXXXXXX was incorporated under the laws of XXXXXXXXXX . Its issued share capital consists of XXXXXXXXXX Class B shares (PUC of $XXXXXXXXXX and ACB to XXXXXXXXXX of $XXXXXXXXXX ), XXXXXXXXXX Class C share (PUC and ACB to XXXXXXXXXX of $XXXXXXXXXX ) and XXXXXXXXXX Class D shares (PUC of $XXXXXXXXXX and ACB to XXXXXXXXXX of $XXXXXXXXXX ).
• The Class B shares were created in XXXXXXXXXX . They are voting, dividend paying, fully participating shares and are also convertible at the option of the holder into Class C shares. The shares do not provide for any redemption or retraction rights other than those provided under corporate law, which provides for the repurchase by the issuer of shares for cancellation at fair market value.
• The Class C shares were created in XXXXXXXXXX and are voting, dividend paying, redeemable preferred shares, which are entitled upon liquidation, dissolution or winding-up of the corporation, to receive an amount per share equal to what is described as “the Redemption Amount”. The Redemption Amount is stipulated to equal the stated capital of the shares plus all declared and unpaid dividends. The Class C shares, originally issued in XXXXXXXXXX , were redeemed at their stated capital amount with the exception of one share which remains outstanding.
• The Class D shares were created at the end of XXXXXXXXXX . All of XXXXXXXXXX existing Class A shares then outstanding were converted into Class D shares. The Class D shares are voting, dividend bearing shares which are fully participating upon liquidation, dissolution or winding-up of the corporation. The rights attaching to the Class D shares are similar to those of the Class B shares except that the Class D shares do not enjoy the right to be converted into Class C shares.
• A resolution has been passed authorizing a reduction of the stated capital of $XXXXXXXXXX in the case of each of the Class B and Class D shares. A $XXXXXXXXXX cash payment will be made to XXXXXXXXXX in respect of each reduction of capital. These transactions will be completed imminently.
• 4. XXXXXXXXXX holds direct and indirect investments in a number of Canadian subsidiary corporations. The relevant subsidiaries for the purposes of this ruling request are XXXXXXXXXX has other wholly-owned subsidiaries which are either inactive or have immaterial assets and liabilities.
• 5. XXXXXXXXXX is a corporation amalgamated under the laws of XXXXXXXXXX and is a wholly-owned subsidiary of XXXXXXXXXX is a holding and investment company. It has one active wholly-owned subsidiary, XXXXXXXXXX , and a number of other wholly-owned subsidiaries which are either inactive or have immaterial assets and liabilities. These other subsidiaries are not relevant for the purposes of this request.
• 6. XXXXXXXXXX is a corporation incorporated under the laws of XXXXXXXXXX . All of the issued shares (except Class D) of XXXXXXXXXX were acquired by XXXXXXXXXX for fair market value. The issued Class D shares of XXXXXXXXXX are held by XXXXXXXXXX . These shares are non-voting and redeemable at their issue value. XXXXXXXXXX It has operations in XXXXXXXXXX and the U.S. (the latter through a U.S. wholly-owned subsidiary).
• 7. XXXXXXXXXX is a corporation incorporated under the laws of XXXXXXXXXX was acquired by XXXXXXXXXX from an arm's length third party. XXXXXXXXXX operations include the XXXXXXXXXX owns several subsidiaries, one of which is XXXXXXXXXX .
• 8. XXXXXXXXXX is a corporation incorporated under the laws of XXXXXXXXXX and is wholly-owned by XXXXXXXXXX
9. XXXXXXXXXX was incorporated to become the new principal Canadian holding company of the Canadian Group in XXXXXXXXXX . To achieve this result, XXXXXXXXXX transferred its holdings of XXXXXXXXXX to XXXXXXXXXX for share consideration. At that time, XXXXXXXXXX comprised more than XXXXXXXXXX % by value of the Canadian Group. Revenue Canada issued section 116 certificates in respect of this transfer on the basis of XXXXXXXXXX belief that it was entitled to claim exemption under paragraph 8 of Article 13 of the Canada-U.K. Income Tax Convention (the “Convention”).
• In addition, over the past XXXXXXXXXX years, several reorganizations of capital have occurred within XXXXXXXXXX and XXXXXXXXXX . As part of these reorganizations, capital was returned to the shareholder by way of redemptions of shares and reductions of stated capital. Revenue Canada issued section 116 certificates for the disposition of shares deemed to occur under section 86 on the capital reorganizations and on the actual dispositions triggered by redemption of shares.
• 10. Estimates made by senior management of the Canadian Group indicate that more than XXXXXXXXXX % of the fair market value of the shares of XXXXXXXXXX may be attributable to the XXXXXXXXXX Properties of XXXXXXXXXX

Additional Information
• 11. Any assets of the Canadian Group that are of the nature described in paragraph 4 of Article 13 of the Convention and any assets of the Canadian Group that are leased or rented to third parties or other members of the XXXXXXXXXX Group, are immaterial to the issues dealt with in this ruling request. As well, any assets of the Canadian Group that are either redundant or in excess of current business requirements are immaterial to the issues dealt with in this ruling request.
• 12. A corporate reorganization of the Canadian Group is planned to rationalize the corporate structure and which will result in the merger of XXXXXXXXXX and XXXXXXXXXX . Management's intention is that this reorganization should be completed by the end of XXXXXXXXXX or as soon as is practicable. In addition, management is currently engaged in a review of the Canadian Group's financing and in this connection is endeavouring to arrange alternative third party financing sources. Depending upon the success of these refinancing efforts, management of XXXXXXXXXX intends to consider repatriating funds to its shareholder.

Proposed Transaction

XXXXXXXXXX . is proposing to transfer all of its shares of XXXXXXXXXX to XXXXXXXXXX , a sister company of XXXXXXXXXX resident in the Netherlands, or one of its wholly-owned Netherlands subsidiaries.

Purpose of the Proposed Transaction

The purpose of the proposed transaction is to optimize the foreign tax credits that can be claimed by XXXXXXXXXX . under U.K. tax law. It is common for U.K. corporations to utilize Dutch subsidiaries as holding companies for foreign affiliates. Such subsidiaries enable an averaging of effective foreign tax rates to be achieved and thus permit optimal use to be made for U.K. tax purposes of foreign tax credits related to the income of the foreign affiliates.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transaction and purpose of the proposed transaction, and provided that the proposed transaction is completed in the manner described above, our rulings are as follows:
• A. For the purposes of subparagraph 7(b) of Article 13 of the Convention, the XXXXXXXXXX Properties are properties (other than rental properties) in which the business of the company is carried on and therefore do not constitute immovable property under paragraph 5 of Article 13;
• B. Where the greater part of the value of the shares of XXXXXXXXXX is derived from the XXXXXXXXXX Properties, any gain from the disposition of these shares of XXXXXXXXXX will be exempt from taxation in Canada pursuant to paragraph 8 of Article 13 of the Convention.The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, and are binding on Revenue Canada, Customs, Excise and Taxation provided that the proposed transaction is completed by XXXXXXXXXX.These rulings are based on the Convention in its present form and do not take into account any proposed amendments to the Convention which, if enacted into law, could have an effect on the rulings provided herein.

Comments

Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:
• (a) the determination of the fair market value or ACB of any property referred to herein, or the PUC of any shares referred to herein; or
• (b) any tax consequences relating to the facts and proposed transaction described herein other than those specifically described in the rulings given above.

Yours truly,for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate Policy and Legislation Branch