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 there is a disposition of assets and shares of a Delaware corporation as a result of its conversion into a Delaware LLC
Reasons: The governing legislation in Delaware treats the LLC so converted as a continuation of the converting corporation.
Advance Income Tax Ruling
We are writing in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge the information you provided in your facsimiles of XXXXXXXXXX, as well as during our various telephone conversations (XXXXXXXXXX).
XXXXXXXXXX tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre under Account Number XXXXXXXXXX.
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 provisions of the Act;
(b) "Canco #1" means XXXXXXXXXX corporation governed by the Business Corporations Act (XXXXXXXXXX) (the "XXXXXXXXXX");
(c) "Canco #2" means XXXXXXXXXX corporation governed by the XXXXXXXXXX;
(d) "USco #1" means XXXXXXXXXX, a corporation incorporated under the provisions of the Delaware General Corporation Law;
(e) "USco #2" means XXXXXXXXXX, a corporation incorporated under the provisions of the Delaware General Corporation Law..
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
1. To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this request:
a) is involved in an earlier return of the taxpayers or a related person;
b) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayers or a related person;
c) is under objection by the taxpayers or a related person; or
d) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.
2. Canco #2 is a "taxable Canadian corporation" within the meaning of subsection 89(1). Canco #2 is an indirect, wholly-owned subsidiary of Canco #1 which is a "taxable Canadian corporation" and a "public corporation" within the meaning of subsection 89(1). The fiscal period of Canco #2 within the meaning of subsection 249.1(1) is XXXXXXXXXX.
3. USco #1 is a corporation incorporated in the State of Delaware, U.S.A. USco #1 is resident and carries on business exclusively in the United States of America. USco #1 is an indirect wholly-owned subsidiary of Canco #2 and is therefore a "controlled foreign affiliate" of Canco #2 within the meaning of subsection 95(1).
4. USco #2 is a corporation incorporated in the State of Delaware. USco #2 is resident and carries on business exclusively in the United States of America. It is an indirect wholly-owned subsidiary and controlled foreign affiliate of Canco #2. The assets of USco #2 consist principally of U.S. real estate operating assets, shares of U.S. resident subsidiaries and majority interests in U.S. resident partnerships. USco #2's issued and outstanding share capital consists of XXXXXXXXXX common shares, all of which are owned by USco #1. Each of these common shares of USco #2 is entitled to one vote, to share rateably in dividends as and when declared by USco #2 and to share rateably in the assets of USco #2 on its liquidation.
5. Section 266, Subchapter IX, Title 8 of the Delaware Code relating to the General Corporation Law ("DGCL") provides for a domestic corporation to convert to other entities.
Paragraph (a) of that section provides that a corporation may convert to a limited liability company ("LLC"), limited partnership or business trust of the State of Delaware.
Paragraph (d) of that section provides that the conversion shall not be deemed to affect any obligations or liabilities of the corporation incurred prior to the conversion.
Paragraph (e) of that section provides that after the time the certificate of conversion becomes effective, the corporation shall continue to exist as an LLC, limited partnership or business trust of the State of Delaware, and the laws of that State shall apply to the entity to the same extent as prior to such time.
Paragraph (f) of that section provides that unless otherwise provided in a resolution of conversion, the converting corporation shall not be required to wind up its affairs or pay its liabilities and distribute its assets, and the conversion shall not constitute a dissolution of such corporation and shall constitute a continuation of the existence of the converting corporation in the form of the applicable other entity of that State.
6. Section 18-214, Chapter 18, Limited Liability Company Act, Title 6 of the Delaware Code ( "LLCA") provides for the conversion of certain entities to an LLC. These entities, as described in paragraph (a) of that section, include a corporation.
Paragraph (d) of that section provides that the existence of the LLC shall be deemed to have commenced on the date the converting entity commenced its existence in the jurisdiction in which the converting entity was first created, formed, incorporated or otherwise came into being.
Paragraph (e) of that section provides that the conversion of the entity into an LLC shall not be deemed to affect any obligations or liabilities of the entity incurred prior to its conversion to an LLC.
Paragraph (f) of that section provides that when any conversion shall have become effective under that section, for all purposes of the laws of the State of Delaware, all of the rights, privileges and powers of the entity that has converted, and all property, real, personal and mixed, and all debts due to such entity, as well as all other things and causes of action belonging to such entity, shall be vested in the LLC and shall thereafter be the property of the LLC as they were of the entity that has converted.
Paragraph (g) of that section provides that unless otherwise agreed, or as required under applicable non-Delaware law, the converting entity shall not be required to wind up its affairs or pay its liabilities and distribute its assets, and the conversion shall not be deemed to constitute a dissolution of such entity and shall constitute a continuation of the existence of the converting entity in the form of an LLC. It further provides that when an entity has been converted to an LLC pursuant to that section, the LLC shall, for all purposes of the laws of the State of Delaware, be deemed to be the same entity as the converting entity.
7. Section 18-101(7) of the LLCA provides that a limited liability company agreement ("LLC Agreement") of an LLC having only one member shall not be unenforceable by reason of there being only one person who is a party to the LLC Agreement.
8. Under section 18-1101(b) of the LLCA, a maximum effect is given both to the principle of freedom of contract and to the enforceability of LLC Agreements. The LLCA refers to economic interests in an LLC as "interests", and provides that voting and certain other rights reside in "members". The LLCA does not require the ownership interests in an LLC to be divided into shares. However, an LLC Agreement that establishes that the capital of an LLC is divided into shares is legally effective for such purpose and enforceable in accordance with its terms. Accordingly, subject to the LLCA, the capital of an LLC organized in such a way will consist of "shares" with the attributes established in the LLC Agreement.
9. For U.S. tax purposes, the conversion of USco #2 to an LLC under the Delaware law as described in 10 and 11 below would be considered a non-recognition event with no immediate tax consequences on USco #1 and USco #2 provided that the resolution of conversion of USco #2 from a corporation to an LLC does not require USco #2 to wind up its affairs. However, for U.S. tax purposes, the conversion would result in the end of a tax fiscal period for USco #2.
1. Under the statutory provisions described in 5, 6, 7 and 8 above, USco #2 will convert from a corporation governed by the DGCL to an LLC governed by the LLCA ("USco LLC"). To effect this, with the approval of its sole shareholder, USco #1, USco #2 will file with the Delaware Secretary of State a certificate of formation in accordance with the requirements of section 18-214(b) of the LLCA and a certificate of conversion in accordance with section 266 of the DGCL and section 18-214(b) of the LLCA. The terms of USco #1's approval of the conversion of USco #2 will not require the winding up of USco #2. An Operating Agreement of USco LLC will be entered into by USco #1 specifying, among other things, the following:
a) USco LLC is a continuation of the existence of USco #2, which converted to an LLC in accordance with the provisions of section 266 of the DGCL and section 18-214 of the LLCA. All the rights, privileges and powers of USco #2, and all property, real, personal and mixed, and all debts due to USco #2, as well as all other things and causes of action belonging to USco #2, shall be vested in USco LLC and shall be the property of USco LLC as they were of USco #2, and title to any real property vested by deed or otherwise in USco #2 shall not revert by reason of such conversion;
b) "Share" means an LLC interest in USco LLC ;
c) "Stockholder" means each person signing the Operating Agreement and any person who subsequently obtains Shares in USco LLC, in its capacity as a Stockholder of USco LLC;
d) "Capital" of Shares is the aggregate of all amounts paid to USco LLC and the monetary value at the time of contribution of property contributed to USco LLC in consideration for the issuance of Shares together with any amounts added thereto by the Board of Managers or the Stockholders in accordance with the provisions of the Operating Agreement, less the aggregate of all amounts by which such capital has been reduced by the Stockholders or the Board of Managers in accordance with the Operating Agreement. The capital of each Share can be determined at any time by dividing the capital of all the Shares by the number of issued and outstanding Shares at that time; and
e) "Capital Contribution" means the initial capital contribution and any additional capital contributions made by a Stockholder. The capital contribution for the shares outstanding in USco #2 shall be and shall constitute the initial capital contribution for the initial Stockholder's Shares in USco LLC.
2. Subject to the LLCA, following the conversion, USco #1's ownership interest in USco LLC will consist of XXXXXXXXXX shares, each of which is entitled to one vote, to share rateably in dividends as and when declared by USco LLC and to share rateably in the assets of USco LLC on its liquidation.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to permit USco #2 to be treated as a branch of USco #1 for U.S. tax purposes under the "check-the-box" regulations of the Internal Revenue Code.
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. USco #2 will not be considered to have disposed of its assets as a result of the conversion of USco #2 from a corporation to an LLC in the manner described in 10 and 11 above.
B. USco #1 will not be considered to have disposed of its shares of USco #2 as a result of the conversion of USco #2 from a corporation to an LLC in the manner described in 10 and 11 above.
C. No amount will be included in the income of Canco #2 pursuant to subsection 91(1) of the Act solely by virtue of the conversion, in and of itself, of USco #2 from a corporation to an LLC in the manner described in 10 and 11 above, other than foreign accrual property income (as defined in subsection 95(1)) otherwise earned by USco #2 in the taxation year that ends as a result of such conversion.
D. Following the conversion in the manner described in 10 and 11 above, for purposes of the Act, USco LLC will be considered to be the same corporation as USco #2 prior to the conversion.
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 the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings 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 rulings given above.
Reorganizations and International Division
Income Tax Rulings and
Policy and Legislation Branch
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