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: Is a distribution by a US foreign affiliate a dividend so that there will be no benefit under subsection 15(1)?
Position: Yes, a dividend.
Reasons: XXXXXXXXXX corporate law provides for the issuance of par value shares. It is our understanding that paid-in capital can only be returned as a dividend payment from the corporate surplus account.
XXXXXXXXXX
XXXXXXXXXX 981865
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Dear Sirs/Mesdames:
Re: XXXXXXXXXX (“Canco”) (XXXXXXXXXX)
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge your facsimile transmission of XXXXXXXXXX, and your revised ruling request of XXXXXXXXXX.
To the best of your client’s and your knowledge, none of the issues involved in this ruling request:
(i) is in an earlier return of Canco or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of Canco or a related person;
(iii) is under objection by Canco or a related person; or
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.
Unless otherwise indicated, all references to statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended (the “Act”);
Our understanding of the facts, proposed transactions and purpose of the proposed transactions are as follows:
FACTS
1. Canco is a taxable Canadian corporation within the meaning of subsection 89(1) of the Act and its taxation year ends on XXXXXXXXXX.
2. XXXXXXXXXX (“USHoldco”) is a corporation organized and existing under the XXXXXXXXXX whose principal place of business is situated in the City of XXXXXXXXXX.
3. The authorized capital of USHoldco consists of:
XXXXXXXXXX shares of Class XXXXXXXXXX shares, at $XXXXXXXXXX par value per share;
XXXXXXXXXX shares of Class XXXXXXXXXX shares, at $XXXXXXXXXX par value per share.
4. The XXXXXXXXXX shares are entitled to a cumulative preferred dividend of $XXXXXXXXXX per share, payable in arrears on the last day of each taxation year. Other dividends must be declared and paid to the holders of the XXXXXXXXXX and XXXXXXXXXX shares on a pro rata basis.
5. All of the issued XXXXXXXXXX shares of USHoldco (XXXXXXXXXX) are owned by Canco. These shares were originally issued for a total consideration of XXXXXXXXXX. All of the XXXXXXXXXX shares are owned by XXXXXXXXXX a wholly owned subsidiary of Canco incorporated under the XXXXXXXXXX. These shares were originally issued for a consideration of XXXXXXXXXX.
6. USHoldco is a holding company which owns the shares of XXXXXXXXXX (“USco1”), XXXXXXXXXX (“USco2”) and XXXXXXXXXX (“USco3”), all of which are organized under the XXXXXXXXXX and carry on XXXXXXXXXX activities in XXXXXXXXXX. USco1 is engaged in XXXXXXXXXX and is qualified or licensed to do business in XXXXXXXXXX. USco2 is engaged in XXXXXXXXXX is qualified or licensed to do business in XXXXXXXXXX. USco3 is engaged in XXXXXXXXXX and is qualified or licensed to do business in XXXXXXXXXX. USco1, USco2 and USco3 derive more than XXXXXXXXXX% of their gross revenue from XXXXXXXXXX to arm’s length parties who are non-residents of Canada. The US corporations file income tax returns in the United States on a consolidated basis and their taxation year ends on XXXXXXXXXX. Each of USHoldco, USco1, USco2 and USco3 is a controlled foreign affiliate of Canco within the meaning of subsection 95(1) of the Act.
7. Canco also is engaged in XXXXXXXXXX activities in the United StatesXXXXXXXXXX. Canco, USco1, USco2 and USco3 share office space and employees in the United States. In the taxation year ending XXXXXXXXXX, there were XXXXXXXXXX employees located in the United States. USco1, USco2 and USco3 employed respectively the equivalent of XXXXXXXXXX employees full time in the active conduct of their business during the XXXXXXXXXX taxation year. Canco receives payment for the employees seconded to USco1, USco2 and USco3 from those corporations which is at least equal to the cost to it of those employees.
8. Each of USHoldco, USco1, USco2 and USco3 is a resident of the United States under Canadian common law principles as well as being a resident of the United States for the purposes of the Canada-United States Income Tax Convention, 1980. The majority of their directors are U.S. residents and all board meetings are held in the United States.
9. The exempt surplus of USco2 as at XXXXXXXXXX is $XXXXXXXXXX. The exempt deficits of USco1 and USHoldco, as at XXXXXXXXXX, are $ XXXXXXXXXX and $ XXXXXXXXXX respectively. None of the US corporations have any taxable surplus or deficit.
10. The estimated earnings (loss) of USco1, USco2 and Usco3 for the taxation year ending XXXXXXXXXX are XXXXXXXXXX respectively.
11. On XXXXXXXXXX, Usco2 made a distribution which was a dividend under XXXXXXXXXX to USHoldco in the amount of XXXXXXXXXX Pursuant to subparagraph 53(2)(b)(i) and paragraph 92(2)(c) of the Act the adjusted cost base (“acb”) of the shares of USco2 was reduced by the amount of the dividend that was paid out of pre-acquisition surplus. The acb of the shares of USco2 was in excess of the portion of the dividend paid out of pre-acquisition surplus.
12.
XXXXXXXXXX
Proposed Transactions
13. Prior to XXXXXXXXXX, USco1 will declare and make a distribution which will qualify as a dividend under XXXXXXXXXX of approximately XXXXXXXXXX. The dividend will be paid out of USco1’s “surplus” account as defined under XXXXXXXXXX, which includes its paid-in capital.
The acb of the shares of USco1 is in excess of the dividend that will be paid. Pursuant to subparagraph 53(2)(b)(i) and paragraph 92(2)(c) of the Act the acb of the shares of USco1 will be reduced by the amount of the dividend that will be paid out of pre-acquisition surplus.
14. On XXXXXXXXXX, USHoldco will declare and pay to Canco a preferred dividend in the amount of approximately XXXXXXXXXX. The distribution will be a dividend under XXXXXXXXXX. The dividend will be paid out of USHoldco’s retained earnings, and out of paid-in capital all of which is included in its “surplus” account as defined under XXXXXXXXXX.
Pursuant to subparagraph 53(2)(b)(i) and paragraph 92(2)(c) of the Act the acb of the shares of USHoldco will be reduced by the amount of the dividends that will be paid out of pre-acquisition surplus. The acb of the shares of USHoldco is in excess of the portion of this dividend that will be paid out of pre-acquisition surplus.
15.
XXXXXXXXXX
Purpose of the Proposed Transactions
Further to a review of its business operations in the United States, the management of USHoldco has concluded that USHoldco is currently over capitalized. The management of USHoldco wishes to increase its capital ratio (Total Assets/Shareholder’s Equity) to an adequate ratio XXXXXXXXXX.
In order to increase its capital ratio to an adequate ratio, USHoldco intends to distribute approximately of XXXXXXXXXX to its shareholders XXXXXXXXXX.
Ruling
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our ruling is as follows:
A. The distribution received by Canco from USHoldco, as described in paragraph 14 above, will be a dividend for purposes of the Act and subsection 15(1) of the Act will not apply to Canco as a result of the distribution.
This 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 proposed transactions are completed by XXXXXXXXXX.
The above ruling is based on the act in its present form and do 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:
(a) the determination of the surplus accounts of USHoldco, USco1, USco2 or USco3 or the characterization of those accounts, or the characterization of the income of those corporations for the purposes of the foreign affiliate surplus accounts and the determination of foreign accrual property income;
(b) the determination of the adjusted cost base, paid-up capital or paid-in capital of any particular share; or
(c) 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
XXXXXXXXXX
6
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