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.
Principal Issues:
Does paragraph 4 of Article XXVII of the Canada-UK Income Tax Convention apply to force Canada to treat such a transaction as a dividend in circumstances where we are not dealing with an ordinary dividend but instead a capital transaction.
Position:
No if the result is the Canadian resident is subject to more Canadian tax than he would have been had there not been a treaty.
Reasons:
A tax treaty should be relieving and not result in additional tax liabilities.
XXXXXXXXXX 962142
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer.
To the best of your knowledge and that of the taxpayers involved:
(i)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
(ii)none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.
Unless otherwise stated all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act").
In this letter, the following terms have the meanings specified:
(a)"adjusted cost base" ("ACB") has the meaning assigned to that term in section 54 of the Act;
(b)"capital property" has the meaning assigned to that term in section 54 of the Act;
(c)"Convention" means the Canada-United Kingdom Income Tax Convention (1978);
(d)"foreign affiliate" has the meaning assigned to that term in subsection 95(1) of the Act; and
(e)"UKCA" means the U.K.'s Companies Act (1985) and, where applicable, its predecessor statutes.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
FACTS
1.XXXXXXXXXX immigrated to Canada on or about XXXXXXXXXX and became a resident of Canada for income tax purposes at that time. XXXXXXXXXX remains a citizen of the United Kingdom.
2.XXXXXXXXXX is a private corporation resident and controlled in the United Kingdom. XXXXXXXXXX is not a resident of Canada. XXXXXXXXXX was incorporated on XXXXXXXXXX by virtue of the UKCA. XXXXXXXXXX principal activity is XXXXXXXXXX in the United Kingdom.
3.The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX Ordinary Shares. The issued share capital consists of XXXXXXXXXX Ordinary Shares which are held as follows:
Shareholder Shares
XXXXXXXXXX
(1) XXXXXXXXXX
(2) XXXXXXXXXX
(3) XXXXXXXXXX
4.As a result of the shareholdings described in paragraph 3 above, XXXXXXXXXX is considered a foreign affiliate to XXXXXXXXXX as her interest in XXXXXXXXXX is XXXXXXXXXX% (XXXXXXXXXX).
5.At the time of immigration to Canada, XXXXXXXXXX was the owner of XXXXXXXXXX shares of XXXXXXXXXX The XXXXXXXXXX shares are capital property to XXXXXXXXXX.
The fair market value of the XXXXXXXXXX shares at the time XXXXXXXXXX became a Canadian resident was $XXXXXXXXXX per share. Pursuant to former subsection 48(3) of the Act, XXXXXXXXXX was deemed to have acquired the XXXXXXXXXX shares at a cost equal to their fair market value at that particular time. Consequently, the ACB per share was $XXXXXXXXXX.
6.In XXXXXXXXXX acquired XXXXXXXXXX additional shares of XXXXXXXXXX.
7.In XXXXXXXXXX disposed of XXXXXXXXXX shares of XXXXXXXXXX and claimed the capital gains deduction provided for in former subsection 110.6(3) of the Act to shelter the capital gain of $XXXXXXXXXX that resulted from the disposition. As a result of that disposition, XXXXXXXXXX now holds XXXXXXXXXX shares of XXXXXXXXXX.
8.When filing her XXXXXXXXXX personal tax return, XXXXXXXXXX elected in the prescribed form to have the provisions of subsection 110.6(19) of the Act apply. As a result, the ACB of her remaining XXXXXXXXXX shares of XXXXXXXXXX was increased by $XXXXXXXXXX. The ACB of such shares is now $XXXXXXXXXX.
PROPOSED TRANSACTION
9.XXXXXXXXXX will, pursuant to its Articles of Association described in paragraph 10 below, resolve to repurchase a significant amount of the XXXXXXXXXX shares held by XXXXXXXXXX for an amount that will be negotiated between XXXXXXXXXX and XXXXXXXXXX These negotiations are not yet complete, however, the amount for which the XXXXXXXXXX shares will be acquired will clearly be in excess of their ACB to XXXXXXXXXX.
10.Pursuant to the Articles of Association of XXXXXXXXXX "XXXXXXXXXX.
11.As a matter of U.K. corporate law, the proposed repurchase of the XXXXXXXXXX shares, as described in paragraph 9 above, will not be considered a dividend. In this regard, subsection 162(1) of the UKCA states the following:
"Subject to the following provisions of this Chapter, a company limited by shares or limited by guarantee and having a share capital may, if authorized to so by its articles, purchase its own shares."
As a matter of U.K. corporate law, the ability of a company to repurchase its shares is separate and distinct from the ability to pay a dividend. Section 162 of the UKCA provides a mechanism for a company to repurchase capital directly, without declaration of any dividends.
The repurchase of the XXXXXXXXXX shares will not be accounted for as a dividend in the audited financial statements, but instead as an alteration to the capital and reserves of the company. As a fundamental principle of U.K. general corporate law, a share buy back is inherently a capital transaction, for example, if shares owned by a U.K. trust are repurchased by the company, the entire proceeds are capital, and for the benefit of a beneficiary interested in the capital, and none of the proceeds is applied for the benefit of an income beneficiary.
12.The income tax legislation of the United Kingdom treats amounts received in excess of original share capital as a distribution assessable under section 209(2)(b) of the Income and Corporations Taxes Act, 1988. The relevant extract of the U.K. income tax legislation is as follows:
"In the Corporation Tax Acts, "distribution" in relation to any company means
(a)any dividend paid by the company, including a capital dividend;
(b)subject to subsections (5) and (6) below, any other distribution out of assets of the company (whether in cash or otherwise) in respect of shares in the company, except so much of the distribution, if any, as represents repayment of capital on the shares or is, when it is made, equal in amount or value to any new consideration received by the company for the distribution;"
Accordingly, such distributions will be considered a "dividend" for purposes of Article X of the Convention.
PURPOSE OF THE PROPOSED TRANSACTION
13.XXXXXXXXXX wishes to repurchase its shares from various passive shareholders, including XXXXXXXXXX In order to do so, the most commercially viable means is through a purchase of the shares held by XXXXXXXXXX in XXXXXXXXXX Such an approach is the preferable course given that financing can be obtained at the XXXXXXXXXX level.
XXXXXXXXXX
RULINGS GIVEN
Provided that the above statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transaction and purpose of the proposed transaction, and that the proposed transaction is carried out as set forth herein, the following rulings are given:
A.Provided that the XXXXXXXXXX shares held by XXXXXXXXXX are capital property to XXXXXXXXXX the aggregate of the amount paid to XXXXXXXXXX by XXXXXXXXXX on the proposed repurchase of her shares in XXXXXXXXXX as described in paragraph 9 above, and the amount of the Advance Corporation Tax Credit that XXXXXXXXXX will be entitled to receive pursuant to paragraph 3(b) of Article X of the Convention will constitute proceeds of disposition, as that term is defined in section 54 of the Act, for the purposes of determining XXXXXXXXXX capital gain or loss under section 39 of the Act.
B.Any withholding tax levied by the United Kingdom in accordance with paragraph 3(a)(ii) of Article X of the Convention on the aggregate of the amount considered a distribution under U.K. tax law and the Advance Corporation Tax Credit that XXXXXXXXXX is entitled to receive with respect thereto will be considered a non-business income tax as that term is defined in subsection 126(7) of the Act.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992, and is binding on Revenue Canada, Customs, Excise and Taxation provided that the proposed transaction is completed by XXXXXXXXXX
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed 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 International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation 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, 1995
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, 1995
Email this Content