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 payments pursuant to a time-charter agreement between two non-residents for fully-crewed vessels that will be used, in part, in Canadian waters, will be subject to paragraph 212(1)(d) as a result of its interaction with paragraphs 212(13)(a) or 212(13.2)(a)?
Position:
Generally, no.
Reasons:
The party that supplies a fully-crewed vessel is engaged in the operation of a ship and the payments received for such services would not generally be considered rent.
XXXXXXXXXX 973265
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Dear Sirs:
Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-referenced taxpayers. In your letters dated XXXXXXXXXX you provided additional information in respect of, and amendments to, the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
XXXXXXXXXX
To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this request:
(a) is involved in an earlier return of the taxpayer or a related person,
(b) is being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayer or a related person,
(c) is under objection,
(d) is before the courts or, if a judgment has been issued, the time limit for appeal has not expired, and
(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.
Definitions
In this letter the following terms have the meanings specified:
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
(b) "Charterco" means XXXXXXXXXX.
(c) "Crewco" means XXXXXXXXXX.
(d) "Mgtco" means XXXXXXXXXX and
(e) "Parent" means XXXXXXXXXX.
Facts
1. Parent is controlled by a group of related individuals, none of whom reside in Canada. Parent is not resident in Canada and does not carry on business in Canada. Parent and its direct or indirect subsidiaries (the "Group") collectively carry on an integrated international shipping business.
2. Charterco is owned 100% by Parent. Charterco was purchased by Parent from an arm’s length party ("Vendor") on XXXXXXXXXX. As consideration, Parent issued a promissory note to Vendor. Charterco then borrowed funds from a U.S. branch of an arm’s length XXXXXXXXXX financial institution and used the loan proceeds to redeem certain of its shares then held by Parent. Parent used the redemption proceeds to settle the promissory note with Vendor. Charterco refinanced this borrowing in XXXXXXXXXX with the same financial institution.
3. The principal business of Charterco is international shipping. Charterco directly owns XXXXXXXXXX ships used in international shipping. At all times, the aggregate fair market value of the ships is in excess of XXXXXXXXXX% of the total fair market value of the assets of Charterco. This condition will not change at any time prior to the proposed transactions outlined below.
4. All or substantially all of Charterco’s gross revenue for each year is from the operation of ships in transporting goods in international traffic.
XXXXXXXXXX
XXXXXXXXXX
Charterco has a permanent establishment in XXXXXXXXXX however, under subsection 250(6), the company is deemed to be resident in XXXXXXXXXX and not to be resident in Canada.
5. Charterco files a T2 Corporation Income Tax Return on which it records an adjustment under paragraph 81(1)(c) to exclude the income for the year from the operation of ships in international traffic.
6. Mgtco is related to Parent. Mgtco is resident in the XXXXXXXXXX and is not resident in Canada. Mgtco provides various ship management services.
7. Crewco is owned XXXXXXXXXX by Parent and XXXXXXXXXX by arm’s length parties. Crewco provides certain ship management services to the Group and other arm’s length parties. Crewco is resident in XXXXXXXXXX and not resident in Canada.
8. The Group plans to reorganize and refinance its shipping operation. Part of this reorganization involves the use of limited liability companies formed under
XXXXXXXXXX
XXXXXXXXXX
Proposed Transactions
9. Parent will incorporate a new holding company ("Holdco") in XXXXXXXXXX. Holdco will not be resident in Canada.
10. Parent will sell its shares of Charterco to Holdco at fair market value and will receive shares of Holdco as consideration. Parent will also transfer other assets to Holdco including its indirect interest in XXXXXXXXXX other ships. None of these other assets have any nexus to Canada and XXXXXXXXXX.
11. Holdco will form XXXXXXXXXX new limited liability companies (each a "Shipco" and collectively the "Shipcos") under the laws of XXXXXXXXXX. The Shipcos will be resident in XXXXXXXXXX and will not be resident in Canada. The Shipcos will be capitalized with sufficient cash to purchase Charterco’s ships.
12. Charterco will sell one of its XXXXXXXXXX vessels to each of the Shipcos for fair market value cash consideration.
13. Holdco will form a XXXXXXXXXX limited liability company under the laws of the XXXXXXXXXX ("Mergeco").
14. After the above proposed transactions Charterco will merge with Mergeco under XXXXXXXXXX law with Mergeco being the surviving entity, (hereinafter referred to as "New Charterco"). New Charterco will be a limited liability company formed under XXXXXXXXXX law. As a result of the merger Charterco will cease to exist. New Charterco will not be an XXXXXXXXXX.
15. Each of the Shipcos will contract with Mgtco to provide ship management services. These ship management services will include arranging for ship crews, vessel registration and insurance; planning, arranging for, and controlling the maintenance of vessels; implementing the systems and procedures required to meet operating and safety standards; and the preparation of documentation and reports required by the relevant shipping authorities, classification societies, etc. The Shipcos will pay fair market value consideration for Mgtco’s services.
16. Mgtco will engage Crewco to hire the specific individuals to crew the Shipcos’ vessels. Mgtco will pay fair market value consideration for Crewco’s services.
17. Each of the Shipcos will enter into an agreement with New Charterco to provide a fully crewed vessel on a time-charter basis for a specified period. New Charterco will pay fair market value consideration to the Shipco’s for their services. Under the time-charter agreements these vessels will be used exclusively to transport goods in international traffic.
18. New Charterco will not provide any services directly or indirectly to Crewco or Mgtco with respect to the crewing of the vessels that it will time-charter from the Shipcos. The wages and any other employee benefits enjoyed by the crews of the vessels time-chartered to New Charterco will not be the responsibility of New Charterco.
19. New Charterco will arrange cargo to transport for its own account with its own customers. As is the case with time charter arrangements, New Charterco will be responsible for fuel costs, port costs, loading and discharge costs and other costs relating to the usage while under time charter.
20. Holdco and the Shipcos will each have its mind and management situated outside of Canada. New Charterco will continue to have its mind and management situated in Canada.
Purpose of the Proposed Transactions
The primary objective of the reorganization is for Parent to capitalize a new holding company such that there will be sufficient equity and cash flow to support new debt financing for the Group.
The secondary objective of the reorganization is to have each vessel held in a separate ship holding company in order to protect the assets of the Group from liabilities arising from the operation of a single vessel.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. Paragraph 115(1)(b) will not apply to Parent’s sale of its shares of Charterco to Holdco, as described in paragraph 10 above.
B. Neither subsection 212(13) nor 212(13.2) will apply with respect to payments made by New Charterco to the Shipcos pursuant to the time-charter agreement described in paragraph 17 above.
C. New Charterco will be considered a corporation for purposes of the Act.
D. Provided the conditions in paragraphs 250(6)(a), (b) and (c) apply to New Charterco for a particular taxation year, New Charterco will be deemed to be resident in the XXXXXXXXXX for purposes of the Act throughout that taxation year and will not be resident in Canada.
E. Provided subsection 250(6) applies to New Charterco for a particular taxation year, New Charterco’s income for that year from the operation of ships in international traffic will, pursuant to paragraph 81(1)(c), not be included in computing its income for that year under Part I.
F. The income of the Shipcos derived from the services performed under the time-charter agreements with New Charterco, described in paragraph 17 above, will, pursuant to paragraph 81(1)(c), not be included in computing their income under Part I.
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on Revenue Canada provided that the proposed transactions are completed by XXXXXXXXXX.
These rulings are based on the Act in its present form 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.
Opinions
Provided that our understanding of the facts and proposed transactions described herein is correct and provided that proposed paragraph 115(1)(b) is enacted in substantially the same form as set out in Bill C-28, which received first reading in the House of Commons on December 10, 1997 (the "Draft Amendments"), our opinions are as follows:
1. The sale of ships by Charterco, described in paragraph 12 above, will not result in taxable capital gains or allowable capital losses from the disposition of "taxable Canadian property" under paragraph 115(1)(b) of the Draft Amendments.
2. Paragraph 115(1)(b) of the Draft Amendments will not apply to the sale of the shares of Charterco from Parent to Holdco, as described in paragraph 10 above.
Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed:
(a) the determination of the fair market value or adjusted cost base of any property referred to herein, or
(b) any tax consequences relating to the facts and proposed transactions 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
8
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