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:
Whether the fact that a non-resident corporation has a non-related Canadian company perform certain accounting and clerical services for it under a sub-contract would, in and of itself, cause the non-resident company or its non-resident clients with which it has an administrative services contract to be carrying on business in Canada.
Position:
Non-resident corporations concerned do not carry on business in Canada solely by virtue of the fact that an arm's length Canadian corporation provides non-core services under sub-contract to one of the non-residents who has contracted to perform certain administrative duties for the other non-resident corporations.
Reasons:
XXXXXXXXXX
Based on the specific facts and proposed transactions Canco is not acting in a capacity of agent for the non-residents and is not simply an extension of the non-resident.
XXXXXXXXXX 970492
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. In your further letters of XXXXXXXXXX, you provided additional information in respect of the facts and proposed transactions described in your original letter.
To the best of your knowledge and that of the taxpayers involved:
(i) none of the issues involved in the requested ruling 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 ruling is the subject of any notice of objection or is under appeal.
Definitions
In this letter, the following terms have the meanings specified:
(a) 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") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated;
(b) "Foreignco #1" means and is more fully described in paragraph 1 below;
(c) "Foreignco #2" means XXXXXXXXXX and is more fully described in paragraph 7 below;
(d) "Managementco #1" means XXXXXXXXXX and is more fully described in paragraph 13 below;
(e) "Managementco #2" means XXXXXXXXXX and is more fully described in paragraph 16 below;
(f) "Managing Partnership" means XXXXXXXXXX and is more fully described in paragraph 19 below;
(g) "Canco" means XXXXXXXXXX and is more fully described in paragraph 20 below;
(h) "Individual #1" means XXXXXXXXXX, a non-resident of Canada;
(i) "Individual #2" means XXXXXXXXXX, a non-resident of Canada; and
(j) "Affilco" means XXXXXXXXXX.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
FACTS
Foreignco #1
1.Foreignco #1 is an open-end investment fund.
XXXXXXXXXX
2.The primary objective of Foreignco #1 is to achieve long-term capital appreciation throughout various market cycles. Foreignco #1 focuses its investments in securities of companies in the XXXXXXXXXX. Foreignco #1 invests primarily in publicly-traded securities, including common stock, preferred stock, stock warrants and rights, bonds, debentures, convertible securities and other debt obligations. Foreignco #1 has no investments in Canada.
3.Foreignco #1's affairs are managed under the supervision of its Board of Directors, which is currently comprised of Managementco #2 and Individual #1. None of the directors is, or will be, resident in Canada. No meetings of the Board of Directors are or will be held in Canada. Foreignco #1 has no office or physical presence in Canada.
4.Common shares of Foreignco #1 are offered for sale at a purchase price equal to their net asset value and are widely distributed. The common shares are generally redeemable at the option of the holder at the end of each calendar month at the net asset value of the shares. Currently, no holders of the common shares are resident in Canada and the shares will not be marketed for sale in Canada although sophisticated Canadian investors may purchase the common shares directly from transfer agents located outside of Canada.
5.Foreignco #1's trading and investments will be managed on a fully discretionary basis by Managing Partnership of which Individual #2 is the general partner. Managing Partnership will manage the assets of Foreignco #1 pursuant to an investment management agreement between Managing Partnership and Foreignco #1. Other investment managers may be selected by Managing Partnership at its discretion. Managing Partnership will, however, not select an investment manager resident in Canada.
6.Managementco #1 provides management and administrative services to Foreignco #1.
Foreignco #2
7.Foreignco #2 is an open-end investment fund.
XXXXXXXXXX
8.The primary objective of Foreignco #2 is to achieve long-term capital appreciation throughout various market cycles. Foreignco #2 invests primarily in publicly-traded securities, including common stock, preferred stock, stock warrants and rights, bonds, debentures, convertible securities and other debt obligations. Foreignco #2 has no investments in Canada.
9.Foreignco #2's affairs are managed under the supervision of its Board of Directors, which is currently comprised of Managementco #2 and Individual #1. None of the directors is, or will be, resident in Canada. No meetings of the Board of Directors are or will be held in Canada. Foreignco #2 has no office or physical presence in Canada.
10.Common shares of Foreignco #2 are offered for sale at a purchase price equal to their net asset value and are widely distributed. The common shares are generally redeemable at the option of the holder at the end of each calendar month at the net asset value of the shares. Currently, no holders of the common shares are resident in Canada and the common shares will not be marketed for sale in Canada although sophisticated Canadian investors may purchase the common shares directly from transfer agents located outside of Canada.
11.Foreignco #2's trading and investments will be managed on a fully discretionary basis by Managing Partnership. Managing Partnership will manage the assets of Foreignco #2 pursuant to an investment management agreement between Managing Partnership and Foreignco #2. Other investment managers may be selected by Managing Partnership at its discretion. Managing Partnership does not expect to select an investment manager resident in Canada.
12.Managementco #1 provides management and administrative services to Foreignco #2.
Managementco #1
13.Managementco #1 is a corporation incorporated under the laws of XXXXXXXXXX and has not been continued under the laws of Canada. None of the directors of Managementco #1 are resident in Canada and no meetings of the board of directors of Managementco #1 are held in Canada. Managementco #1 has no office or physical presence in Canada.
14.As noted above, Managementco #1 entered into a management and administrative services agreement with Foreignco #1 and Foreignco #2 (the "Management Agreement") pursuant to which Managementco #1 renders accounting, administrative and clerical services. Managementco #1 also renders these services to many other investment funds resident in XXXXXXXXXX. Managementco #1 has subcontracted certain of these services to Managementco #2 as described below.
15.Managementco #1 has approximately XXXXXXXXXX employees, all located in XXXXXXXXXX.
Managmentco #2
16.Managementco #2 is a corporation organized under XXXXXXXXXX and has not been continued under the laws of Canada. None of the directors of Managementco #2 are resident in Canada and no meetings of the board of directors of Managementco #2 are held in Canada. Managementco #2 has no office or physical presence in Canada.
17.Managementco #2 has entered into an agreement with Managementco #1 pursuant to which it provides certain administrative services to Managementco #1 in respect of various clients of Managementco #1. Pursuant to this agreement, Managementco #2 performs certain of the administrative services required to be performed by Managementco #1 pursuant to the Management Agreement.
18.Managementco #2 is a wholly-owned subsidiary of Affilco, an affiliate of Managementco #1.
Managing Partnership
19.Managing Partnership, the investment manager to Foreignco #1 and Foreignco #2, is a limited partnership organized under the laws of XXXXXXXXXX, of which Individual #2, who is a resident of the United States, is the general partner. None of the partners of Managing Partnership is a resident of Canada. Managing Partnership has no offices or fixed place of business in Canada.
Canco
20.Canco is a corporation incorporated under the Business Corporations Act (XXXXXXXXXX). Canco has an office in XXXXXXXXXX and currently employs XXXXXXXXXX people. No employees of Foreignco #1, Foreignco #2, Managementco #1 or Management #2 will be involved in the day-to-day activities of Canco.
21.Managementco #1 deals at arm's length with the shareholders of Foreignco #1 and Foreignco #2.
PROPOSED TRANSACTIONS
1.Managementco #1 will enter into an administration services agreement (the "Agreement") with Canco pursuant to which, in consideration of certain fees, Canco, as an independent contractor, will provide the following, and only the following services:
(a) preparing and maintaining all customary financial and accounting books in appropriate form and in sufficient detail to support an annual independent audit of the financial condition of Foreignco #1 and Foreignco #2 in accordance with instructions provided by Managementco #1;
(b) making books and records available to audit and answering questions with respect to same;
(c) based on accounting records, calculating the fees and expenses of the supervisory directors in connection with attending meetings, non-Canadian taxes, non-Canadian filing fees and other costs and expenses incurred for the account of Foreignco #1 and Foreignco #2 (other than transaction costs and related expenses relating to the investment program);
(d) preparing quarterly and annual financial statements for Foreignco #1 and Foreignco #2;
(e)computing the market value and net asset value of the assets held by Foreignco #1 and Foreignco #2 each month;
(f)calculating proceeds for the redemption of shares of Foreignco #1 and Foreignco #2;
(g)calculating the amount of dividends that may be paid by Foreignco #1 and Foreignco #2 in accordance with guidelines provided by Managementco #1;
(h)calculating the fees payable to Managing Partnership in accordance with relevant formulae;
(i) preparing monthly reports containing statements of net assets and liabilities, operations, changes in net assets and subsidiary or detailed reports, as may be requested by Managementco #1;
(j)placing on ledgers any capital information (i.e. share subscription and redemptions) based on information received from Managementco #1; and
(k)any other accounting and accounting related functions incidental to the foregoing.
2.Managementco #1 will itself continue to provide all other administrative and clerical services currently provided to Foreignco #1 and Foreignco #2. Furthermore, Managementco #2 will not provide any further administrative services to Managementco #1 in respect of Foreignco #1 and Foreignco #2.
3.Pursuant to the Agreement, Canco will have no right to directly affect the legal relations of Managementco #1 as regards to other persons. Specifically, it will have no authority to make contracts on behalf of Managementco #1. Furthermore, the Agreement will specifically provide that there will be no agency relationship between Managementco #1 and Canco.
4.No resolution will be passed by Managementco #1 appointing Canco as its agent nor will a resolution be passed by Canco accepting an appointment of agency of Managementco #1.
5.The accounts of Canco will show its profits as its own, with no liability to account therefore to Managementco #1.
6.Canco will employ the persons who will perform the services described in the Agreement. The various contracts entered into by Canco in the course of carrying on its business in Canada will create rights and obligations that are personal to Canco vis-à-vis the third parties.
PURPOSE OF PROPOSED TRANSACTIONS
The purpose of Canco and Managementco #1 entering into the Agreement is that additional resources are required to perform certain of the accounting, administrative and clerical services provided to Foreignco #1 and Foreignco #2. The Agreement, as described herein, provides an excellent opportunity for Canco to grow and employ additional residents of Canada.
RULING GIVEN
Provided that the above statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and that the proposed transactions are carried out as set forth herein, the following ruling is given:
Foreignco #1, Foreignco #2 and Managementco #1 will not, as a result of the provision of services by Canco pursuant to the Agreement, in and by itself, be carrying on business in Canada for the purpose of paragraph 2(3)(b) of the Act.
The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada, Customs, Excise and Taxation on December 30, 1996 and is binding provided that the Agreement described in paragraph 1 of the Proposed Transactions is signed by XXXXXXXXXX.
The above ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling 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 transactions described herein other than those specifically described in the ruling given above.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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