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:
(a) Whether a corporate taxpayer's successor mill could process ore from the corporate taxpayer's non-successor mines not beyond the prime metal stage for the purposes of clauses 1202(2)(b)(i)(C) and (D) of the Regulations. (b) Whether the expression "not operated by him" in clause 1204(1)(b)(iii)(A) of Regulations could be interpreted as "not operated by the Partnership" in the case at hand (i.e., the Partnership would be treated as a separate person) for the purposes of clauses 1202(7)(i)(ii) of the Regulations. (c) What would be a corporate partner's "percentage share" for the purposes of subparagraph 1202(7)(i)(i) and clause 1202(7)(i)(ii)(B) of the Regulations.
(d) Whether GAAR would apply to the proposed transactions.
PositionS TAKEN:
(a) No; (b) Yes; (c) 40%; and (d) No.
Reasons:
(a) Even though the term "property" has a broad scope, clauses (C) and (D) did not envision a taxpayer's successor mill to be used to process the taxpayer's non-successor mineral resource;
(b) subsection 1206(3) and subparagraph 1202(7)(i)(i) of the Regulations deem the partners of the Partnership owning the successor mill, but they do not deem the partners operating the successor mill. However, by virtue of paragraph 96(1)(c) of the Act, the Partnership is deemed to operate the successor mill; (c) the corporate partner's share in distributions of assets of the partnership in accordance with the partnership agreement is the "percentage share", and in this case, it is 40%; (d) GAAR would not apply because the Partnership has been in existence for a long time and there are many business reasons to maintain the Partnership in the future.
XXXXXXXXXX 980181
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted corporations.
We understand that 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 an office of Revenue Canada 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.
We also understand that XXXXXXXXXX have filed their income tax returns at the XXXXXXXXXX Taxation Centre and have been served by the XXXXXXXXXX Tax Services Office.
Our understanding of the facts is as follows:
Facts
1. xxxxxxxxxx is a taxable Canadian corporation and a public corporation as defined in subsection 89(1) of the Income Tax Act (the "Act"). XXXXXXXXXX was incorporated under the XXXXXXXXXX (the "Corporations Act").
2. XXXXXXXXXX is the successor to XXXXXXXXXX. In XXXXXXXXXX, XXXXXXXXXX acquired substantially all of the assets and liabilities of XXXXXXXXXX, including its subsidiaries, in exchange for its shares which were subsequently listed on XXXXXXXXXX stock exchanges.
3. XXXXXXXXXX is engaged in the mining, production, and processing of XXXXXXXXXX. XXXXXXXXXX has a long-term mining and processing agreement with respect to an interest in a XXXXXXXXXX mine located in XXXXXXXXXX. XXXXXXXXXX, and its U.S. subsidiary owns a mine in XXXXXXXXXX. Subsidiaries of XXXXXXXXXX market and distribute XXXXXXXXXX in North America and offshore. XXXXXXXXXX acquired the shares of XXXXXXXXXX which directly, or through subsidiaries, produce and market XXXXXXXXXX products primarily in the United States. In XXXXXXXXXX, XXXXXXXXXX acquired the XXXXXXXXXX companies which produce and market XXXXXXXXXX products, primarily in the United States and XXXXXXXXXX.
4. XXXXXXXXXX is a taxable Canadian corporation as defined in subsection 89(1) of the Act. XXXXXXXXXX was incorporated under the Corporations Act. All of the issued and outstanding shares of XXXXXXXXXX are owned by XXXXXXXXXX. XXXXXXXXXX owns directly, or has indirect interests in, warehouse facilities in Canada which are used for the storage of XXXXXXXXXX.
5. XXXXXXXXXX are taxable Canadian corporations and private corporations as defined in subsection 89(1) of the Act. XXXXXXXXXX and Numberco are corporations incorporated pursuant to the Canada Business Corporations Act ("CBCA").
Numberco is a wholly-owned subsidiary of XXXXXXXXXX. The issued and outstanding shares of XXXXXXXXXX are owned equally by XXXXXXXXXX. XXXXXXXXXX is a corporation incorporated under the laws of XXXXXXXXXX and XXXXXXXXXX is a corporation incorporated under the laws of XXXXXXXXXX. XXXXXXXXXX are non-residents within the meaning of the term under subsection 248(1) of the Act.
6. XXXXXXXXXX and Numberco are partners of a general partnership which was constituted under the laws of the Province of XXXXXXXXXX. The partnership is known as XXXXXXXXXX (the "Partnership"). The Partnership owns and operates only a XXXXXXXXXX mine (the "XXXXXXXXXX Mine") and mill (the "XXXXXXXXXX Mill") at XXXXXXXXXX. Pursuant to section 6 of the Partnership agreement, XXXXXXXXXX and Numberco shall share in the profits and losses of the Partnership and in distributions of assets of the Partnership in proportion to their respective Partnership interests of 46% and 60%.
7. The Partnership was originally formed on XXXXXXXXXX as a general partnership between XXXXXXXXXX (as to a 40% interest) and XXXXXXXXXX (as to a 60% interest). The name of the partnership, at that time was XXXXXXXXXX. XXXXXXXXXX served as the manager of the operations for XXXXXXXXXX and was in charge of its development and production. On XXXXXXXXXX, Numberco acquired XXXXXXXXXX 60% partnership interest in XXXXXXXXXX for approximately $XXXXXXXXXX. At this time, the name of the partnership was changed from XXXXXXXXXX to XXXXXXXXXX. Since then, XXXXXXXXXX has served as the manager of the operations for the Partnership. XXXXXXXXXX acted as the sales agent for XXXXXXXXXX before the acquisition of the 60% partnership interest by Numberco and has continued to act as the Partnership's sales agent after this acquisition.
8. XXXXXXXXXX has a wholly-owned U.S. subsidiary, XXXXXXXXXX, which buys XXXXXXXXXX from the Partnership for resale.
9. The fiscal year end for each of XXXXXXXXXX, Numberco and the Partnership is XxXXXXXXxX.
10. The Partnership produced XXXXXXXXXX from the XXXXXXXXXX Mine by conventional underground mining methods, utilizing shafts and mining equipment to excavate the deposits. However, in XXXXXXXXXX as a result of persistent flooding, the Partnership was no longer able to extract ore from the XXXXXXXXXX Mine by conventional means. Since that time, the Partnership has been considering how to deal with the XXXXXXXXXX tonnes of tailings on surface while maintaining the XXXXXXXXXX Mill on a standby basis and, at the same time, investigating whether XXXXXXXXXX mining could be used to extract the estimated $XXXXXXXXXX still underground in the XXXXXXXXXX Mine.
11. The earned depletion base ("EDB") of XXXXXXXXXX, as calculated under subsection 1205(1) of the Income Tax Reguzations (the "Regulations"), as of XXXXXXXXXX was $XXXXXXXXXX. This amount is expected to remain the same immediately before the closing referred to in 14 below. The EDB of XXXXXXXXXX would have been generated primarily as the result of expenditures incurred by the Partnership or XXXXXXXXXX in the construction of the XXXXXXXXXX Mill and allocated to XXXXXXXXXX as a partner under paragraph 1206(3)(b) of the Regulations. The EDB of Numberco as of XXXXXXXXXX was nil.
12. The cumulative Canadian exploration expense ("CCEE") of XXXXXXXXXX, as calculated under subsection 66.1(6) of the Act, as of XXXXXXXXX was $XXXXXXXXXX. This amount is expected to be reduced to approximately $XXXXXXXXXX immediately before the closing referred to in 14 below. The cumulative Canadian development expense ("CCDE") of XXXXXXXXXX, as calculated under subsection 66.2(5) of the Act, as of XXXXXXXXXX was $XXXXXXXXXX. This amount is expected to remain the same immediately before the closing referred to in 14 below. On the other hand, the CCEE and CCDE of Numberco as of XXXXXXXXXX are nil.
13. The partners' equity (deficit) in the Partnership as of XXXXXXXXXX is as follows:
Numberco (60% partnership interest) $ XXXXXXXXXX
XXXXXXXXXX (40% partnership interest) XXXXXXXXXX
$ XXXXXXXXXX
The Partnership's income for 1997 is expected to be approximately $XXXXXXXXXX and there will be a write-down of the Partnership's assets for accounting purposes for approximately $XXXXXXXXXX. It has been estimated that immediately before the closing referred to in 14 below, the partners' equity (deficit) in the Partnership for Numberco and XXXXXXXXXX will be approximately ($XXXXXXXXXX) and $XXXXXXXXXX, respectively. It is expected that Numberco would have a negative "adjusted cost base" in respect of its interest in the Partnership (approximately $XXXXXXXXXX) within the meaning of this expression under section 54 of the Act immediately before such closing.
Proposed Transactions
14. Pursuant to a share purchase agreement (the "Purchase Agreement"), XXXXXXXXXX will acquire all of the issued and outstanding shares of XXXXXXXXXX from XXXXXXXXXX, subject to a condition precedent that approvals under the Competition Act (Canada) and the IIart-Scott-Rodino Antitrust Improvements Act of 1976 (United States) must be obtained before the closing of such purchase (the "Closing"). The consideration for this share purchase will be $XXXXXXXXXX, subject to certain adjustments, and the Closing will be on, or about XXXXXXXXXX. Upon the Closing, the control of XXXXXXXXXX and Numberco will be considered to have been acquired by XXXXXXXXXX for the purposes of subsection 66.7(10) of the Act.
15. On the first day after the Closing ("Date2"), XXXXXXXXXX will subscribe for a 1% partnership interest in the Partnership for a consideration of cash equal to the fair market value of such interest. The partnership agreement in respect of the Partnership will be amended to provide that XXXXXXXXXX will be allocated 1% of the future profits and losses of the Partnership.
16. After Date2, XXXXXXXXXX will cause Numberco to be wound-up into XXXXXXXXXX, so that subsections 88(1) and (1.5) of the Act will apply. On the winding-up of Numberco, all of its assets will be distributed to XXXXXXXXXX and XXXXXXXXXX will assume all of its liabilities, Numberco will be dissolved after its assets have been distributed and its liabilities have been discharged,
17. After the winding-up of Numberco, XXXXXXXXXX will cause XXXXXXXXXX to be wound-up into XXXXXXXXXX, so that subsections 88(1) and (1.5) of the Act will apply. On the winding-up of XXXXXXXXXX, all of its assets will be distributed to XXXXXXXXXX and XXXXXXXXXX will assume all of its liabilities. XXXXXXXXXX will be dissolved after its assets have been distributed and its liabilities have been discharged.
18. As a result of the winding-up of XXXXXXXXXX and Numberco, XXXXXXXXXX will become a 99% partner in the Partnership with the other 1% partnership interest being held by XXXXXXXXXX.
19. The Partnership will utilize the XXXXXXXXXX Mill to upgrade standard grade XXXXXXXXXX from XXXXXXXXXX Mines to XXXXXXXXXX product for shipment into XXXXXXXXXX and the United States,
20. The continued existence of the Partnership is required, as all permits, approvals, and licenses, necessary for the operation of the XXXXXXXXXX Mine and the XXXXXXXXXX Mill are held by the Partnership. Therefore, in addition to the necessary consents and registrations required to be obtained prior to the Closing, the same consents and registrations are required to be re-obtained upon a dissolution of the Partnership.
XXXXXXXXXX
21. XXXXXXXXXX will also investigate additional future opportunities for the XXXXXXXXXX Mill such as expanding the production of XXXXXXXXXX ore at the XXXXXXXXXX Mine which would be transported (XXXXXXXXXX) to the XXXXXXXXXX Mill for processing, as well as applying solution mining techniques to extract the remaining XXXXXXXXXX ore in the XXXXXXXXXX Mine.
Purposes of the Proposed Transactions
22. The purposes of the proposed transactions are:
a) to allow XXXXXXXXXX to benefit from the deductions of capital cost allowance claimed by the Partnership and the deductions for earned depletion in respect of resource profits of the Partnership, and
b) to facilitate the reorganization of XXXXXXXXXX, Numberco and the Partnership in order to rationalize operations, minimize future costs of operation, and to integrate the operations of the Partnership with existing operations of XXXXXXXXXX.
The proposed transactions result in XXXXXXXXXX accomplishing its objectives as XXXXXXXXXX will acquire a 99% interest in the Partnership, while eliminating the corporate existence and related costs of XXXXXXXXXX and Numberco, and at the same time, preserving the Partnership.
The winding-up of both XXXXXXXXXX and Numberco will eliminate costs associated with the administrative, legal and compliance activities which would be necessary if the separate legal existence of each entity was maintained. Except for their respective interests in the Partnership, the separate existence of either XXXXXXXXXX or Numberco is not necessary. The investment by XXXXXXXXXX in the Partnership allows for the winding-up of XXXXXXXXXX and Numberco which would otherwise cause dissolution of the Partnership.
Rulings Provided
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, other information and purposes of the proposed transactions, and provided that the Partnership is a partnership at law and the proposed transactions described herein are completed in the manner described above, our rulings are as follows:
A. Subsequent to the Closing, XXXXXXXXXX share of the income of the Partnership from processing standard grade XXXXXXXXXX from XXXXXXXXXX Mines into XXXXXXXXXX product with the successor XXXXXXXXXX Mill as described in 19 above will be considered as income of XXXXXXXXXX from such processing as is described in subparagraph 1204(1)(b)(iii) of the Regulations by virtue of subparagraph 1202(7)(i)(ii) of the Regulations.
B. For the purposes of subparagraph 12>02(7)(i)(i) and clause 1202(7)(i)(ii)(B) of the Regulations, upon Closing, XXXXXXXXXX percentage share will be 40%.
C. Subsection 245(2) of the Act will not apply to redetermine the income tax consequences to XXXXXXXXXX in respect of rulings (A) and (B) above.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3, as amended, and are binding on Revenue Canada, provided that the proposed transactions described in 14 to 18 above are completed and the upgrading referred to in 19 above has commenced by XXXXXXXXXX.
Nothing in this letter should be construed as confirming the cost of any property or the amount of any expense described herein, the amount of EDB, CCEE and CCDE or as confirming the allocation of any purchase price. For greater certainty, we are not ruling nor expressing any opinion with respect to the negative adjusted cost base of Numberco's Partnership interest as described in 13 above. The rulings given above do not imply acknowledgement, acceptance or confirmation by Revenue Canada of any tax consequences arising out of the facts, proposed transactions and other information described herein except as expressly stated in the above rulings.
Yours truly,
R.S. Biscaro, CA
Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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