1999 Ruling 9830673 - TAX TREATIES AND CONVENTIONS

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: Application of Article XVI(4) of the Canada-U.S Tax Convention.

Position: Article XVI(4) applies.

Reasons: Payments satisfy the technical requirements of Article XVI(4).

XXXXXXXXXX
XXXXXXXXXX 983067
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
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-noted taxpayers. We also acknowledge receipt of the additional information provided in your correspondence of XXXXXXXXXX and during our telephone conversations.

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayers or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;

(iii) under objection by the taxpayers or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings & Interpretations Directorate; or

(v) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), 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) "Canadian corporation" has the meaning assigned by subsection 89(1);

(c) "Convention" means the Canada - United States Income Tax Convention, 1980, as amended;

(d) "Signing Bonus" means an amount paid as an inducement to sign an agreement relating to the performance of services of an athlete (other than an amount referred to in paragraph 1 of Article XV of the Convention) within the meaning of paragraph 4 of Article XVI of the Convention;

(e) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(f) "Team" means the XXXXXXXXXX.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1. The XXXXXXXXXX (the "Partnership") is a limited partnership established under the laws of the Province of XXXXXXXXXX. Its general partner is XXXXXXXXXX ("Aco") and its limited partners are XXXXXXXXXX ("Bco") and XXXXXXXXXX ("Cco"). The limited partners, as a group, share in XXXXXXXXXX% of the profits or losses of the Partnership and the general partner is entitled to XXXXXXXXXX% of the profits or losses. Each of Aco, Bco and Cco is controlled by XXXXXXXXXX (Mr. X), XXXXXXXXXX.

2. Aco is a Canadian corporation and taxable Canadian corporation.

3. Each of Bco and Cco is a corporation incorporated under the laws of one of the States of the United States and is not resident in Canada by virtue of subsection 250(5).

XXXXXXXXXX

4. The Partnership owns and operates the XXXXXXXXXX.

5.

XXXXXXXXXX

6. The Player is a resident of the United States and is not a resident of Canada for purposes of the Act or the Convention.

7.

XXXXXXXXXX

8.

XXXXXXXXXX

9.

XXXXXXXXXX

10.

XXXXXXXXXX

Proposed Transactions

11. The Player will sign a new XXXXXXXXXX the terms of which include a Signing Bonus. The XXXXXXXXXX will take effect on XXXXXXXXXX and no amounts will be payable thereunder prior to the effective date.

12. The Partnership or Mr. X or corporations owned by Mr. X will incorporate a corporation under the laws of XXXXXXXXXX or Canada (the "Employee Corporation"). The Employee Corporation will have the same constituent board of directors as Aco and the same executive officers.

13. Subject to the XXXXXXXXXX Agreement described in paragraph 18 below, the Partnership will assign the XXXXXXXXXX to and the Employee Corporation will assume the obligations of the Partnership under the XXXXXXXXXX in respect of the Player.

14. The Employee Corporation will become the employer of the Player and will be obligated to pay to the Player any compensation, including any Signing Bonus and salary payable under the XXXXXXXXXX.

XXXXXXXXXX

15. The Employee Corporation may also sign certain players to contracts such that these players will also become employees of the Employee Corporation. Once employees, the Employee Corporation will pay to such players, any remuneration, including Signing Bonuses, called for under their XXXXXXXXXX.

16. Under a contractual arrangement (the "Arrangement"), the Employee Corporation will provide the Player's services to the Team.

17. The Partnership will be obligated to pay to the Employee Corporation under the Arrangement an amount equal to the total compensation paid by the Employee Corporation to the Player under the XXXXXXXXXX plus a reasonable fee for services provided.

18. Prior to XXXXXXXXXX, the League, the Employee Corporation and the Partnership will enter into an agreement (the "XXXXXXXXXX Agreement") pursuant to which:

(a) The League will have the power, in certain circumstances, or by giving advance notice, to revoke the right of the Employee Corporation to employ players.

(b) The Employee Corporation will agree to abide by and be subject to all rules applicable to League teams, including those set forth in the League Constitution and By-Laws, the XXXXXXXXXX with the League Players Association, resolutions of the Board of Governors of the League and decisions of the Commissioner of the League.

(c) The Partnership and the Employee Corporation will agree that their actions and obligations would be attributed to the other for purposes of administering and enforcing League Rules.

(d) Players who become employees of the Employee Corporation will agree that the Employee Corporation and the Partnership will possess the same rights under the applicable Collective Bargaining Agreement (including the XXXXXXXXXX), League Rules and any applicable laws that other League teams possess in respect of their players.

19. The implementation of the XXXXXXXXXX Agreement will be subject, inter alia, to the following conditions:

(a) that appropriate changes will be made to the relevant pension plans to reflect the Arrangement;

(b) that the Employee Corporation will be wholly-owned by Mr. X, the Partnership or a corporation wholly-owned by Mr. X;

(c) that the League membership will be continued to be held by the Partnership;

(d) that the Partnership's general partner and the Employee Corporation have the same board of directors and executive officers;

(e) that the League will have the right in certain circumstances, or by giving advance notice, to revoke the right of the Employee Corporation to sign and employ players;

(f) that the Employee Corporation will agree to abide by and be subject to all rules applicable to League teams;

(g) that the Partnership and the Employee Corporation (and any other corporations wholly-owned by Mr. X that has a direct or indirect interest in the Employee Corporation) will agree that the actions and obligations of each will be attributed to the other for purposes of administering and enforcing League Rules;

(h) that the players who are employed with the Employee Corporation will agree that the Employee Corporation will possess the same rights under the Collective Bargaining Agreement, League Rules and any applicable laws that other League teams possess with respect to their players;

(i) that the Arrangement will be ratified by the League Board of Governors; and

(j) that the Arrangement will be agreed to by the League Players Association.

Purpose of the Proposed Transactions

20. The purpose of the proposed transactions is to permit the Partnership to structure the remuneration for U.S. resident players on a basis which is similar to that of its U.S. competitors. By reducing the exposure of its U.S. resident players to Canadian tax, the Partnership, through the Employee Corporation, will be in a position to offer Signing Bonuses that are taxed on the same basis as bonuses paid by U.S. teams to U.S. resident players.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of 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 rulings are as set forth below.

A. Provided that the Player does not become resident in Canada at any time before the later of the expiration of the XXXXXXXXXX and the time the final payment has been received by the Player in respect of services performed under the XXXXXXXXXX, any amounts received or deemed to be received by the Player in respect of services performed under the XXXXXXXXXX will, subject to Article XV of the Convention, be taxable in Canada pursuant to paragraphs 2(3)(a) and 115(1)(a), to the extent that such amounts are attributable to the duties of an office or employment performed by the Player in Canada.

B. Provided that the Player does not, at any time, become resident in Canada before all payments in respect of the Signing Bonus have been received by the Player, any amounts received by the Player in respect of the Signing Bonus will be taxable in Canada, pursuant to paragraphs 2(3)(a), 115(1)(a), 115(2)(c.1) and 115(2)(e), to the extent that such amounts are not attributable to the duties of an office or employment performed by the Player outside Canada.

C. Provided that the Player is not resident in Canada at any time in a taxation year in which an amount in respect of the Signing Bonus is included in the income of the Player under Part I of the Act, such amount will not be "income earned in the year in a province" for purposes of section 120 of the Act and section 2602 of the Income Tax Regulations and will be subject to additional tax under subsection 120(1).

D. Provided that the Player is a resident of the U.S. for the purpose of the Convention at the time an amount in respect of the Signing Bonus is paid to the Player, such amount will be eligible for treatment under paragraph 4 of Article XVI of the Convention, with the result that the gross amount of the Signing Bonus will be subject to tax under Part I of the Act at a rate not to exceed 15%.

E. Provided the amounts described in rulings A and B are incurred for the purpose of earning income from a business and are otherwise deductible in computing the income of the Employee Corporation, a deduction for such remuneration will not be denied by virtue of paragraph 18(1)(a).

F. Provided the amounts payable by the Partnership to the Employee Corporation under the Arrangement are incurred for the purpose of earning income from a business and are otherwise deductible in computing the income of the Partnership, a deduction for such amounts will not be denied in computing the income of the Partnership by virtue of paragraph 18(1)(a).

G. As a result of the proposed transactions, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given.

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 affect the rulings provided herein.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada Customs, Excise and Taxation provided that the proposed transactions are completed by XXXXXXXXXX.

Caveat

Nothing in this ruling shall be construed as implying that Revenue Canada, Customs, Excise and Taxation ("RC-CET") has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. For greater certainty, RC-CET has not reviewed and is not providing an opinion on whether any amount described herein as a Signing Bonus qualifies, in whole or in part, as an inducement payment within the meaning of Article XVI(4) of the Convention.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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