1999 Ruling 9924553 - FOREIGN AFFILIATE REORGANIZATION

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 95(2)(e.1) applies to a cross-border wind-up.

Position: Yes because the exception in 95(2)(e.1) can only apply if both foreign affiliates are in the same country.

Reasons: The words of the exception are unable to bear another meaning.

XXXXXXXXXX
XXXXXXXXXX 992455
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX Advance Income Tax Ruling

This is in your reply to your letters of XXXXXXXXXX requesting an advance income tax ruling on behalf of the above referenced taxpayers. We also acknowledge our telephone conversations.

Definitions

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. All terms used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. References herein to the "Regulations" are references to the Income Tax Regulations.

b) "Parent" means XXXXXXXXXX.

c) "Holdco" means XXXXXXXXXX.

d) "Canco" means XXXXXXXXXX.

e) "Cansub 1" means XXXXXXXXXX.

f) "Cansub 2" means XXXXXXXXXX.

g) "Subco 1" means XXXXXXXXXX.

h) "Subco 2" means XXXXXXXXXX.

i) "Subco 3" means XXXXXXXXXX.

j) "Subco 4" means XXXXXXXXXX.

k) "Subco 5" means XXXXXXXXXX.

l) XXXXXXXXXX.

Facts

1. To the best of your knowledge and that of the taxpayer involved, none of the issues associated with this advance income tax ruling:

a) is involved in an earlier return of the taxpayer 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 taxpayer or a related person,

c) is under objection, or

d) is before the courts or, if a judgment has been issued, the time limit for appeal has not expired.

2. Parent is a Canadian resident corporation continued under the XXXXXXXXXX Act. It is a "public corporation" and a "taxable Canadian corporation". Parent's subsidiary companies carry on various businesses, including XXXXXXXXXX.

3. Holdco is a "taxable Canadian corporation" and wholly-owned subsidiary of Parent.

4. Canco is a "taxable Canadian corporation" and a wholly-owned subsidiary of Holdco. Canco wholly owns two non-resident subsidiaries, being Subco 1, Subco 2. Canco also wholly owns two subsidiaries, Cansub 1 and Cansub 2, resident in Canada.

5. Subco 1 is a corporation incorporated under the laws of the State of XXXXXXXXXX, USA. Canco holds the shares of Subco 1 as capital property.

6. Subco 1, in turn, owns all the shares of Subco 3, Subco 4 and Subco 5. Subco 3 and Subco 5 are corporations incorporated under the laws of the State of XXXXXXXXXX, USA. Subco 4 is a corporation incorporated under the laws of the State of XXXXXXXXXX, USA. The aforesaid shares, and cash are the only assets of Subco 1. Each of Subco 1, Subco 3, Subco 4 and Subco 5 is resident in the United States and is not resident in Canada.

7. Subco 3 is a company that restricts its activities to short-term investments. It has net assets of approximately US $XXXXXXXXXX which are invested in short-term debt instruments. Subco 3's activities constitute an "investment business" as defined in subsection 95(1) and Subco 3's foreign accrual property income derived from such business has been included in Canco's income for tax purposes as required under subsection 91(1). The funds so invested by Subco 3 were obtained by it as capital contributions from Subco 1. The funds so contributed by Subco 1 to Subco 3 were derived by Subco 1 from dividends it received from Subco 4 and other former US subsidiaries of Subco 1 that were engaged in the business of XXXXXXXXXX in the USA and from the sale of shares or assets of such former subsidiaries. Subco 4 formerly carried on in the USA the XXXXXXXXXX business which has since been sold. Subco 4 is winding down that activity by discharging the remaining liabilities of the business and has no assets except cash. Subco 5 carries on the business of XXXXXXXXXX in the USA.

8. The historical cost (at historical exchange rates) of the shares held by Canco in Subco 1 is approximately Canadian $XXXXXXXXXX.

9. Subco 1 has exempt surplus of approximately US$XXXXXXXXXX and a taxable surplus of approximately US$XXXXXXXXXX. Subco 3 has no exempt surplus and has taxable surplus of approximately US$XXXXXXXXXX. Subco 4 has negligible exempt surplus and a taxable deficit of approximately US$XXXXXXXXXX. Subco 5 has exempt surplus of approximately US$XXXXXXXXXX and neither "taxable surplus" or a "taxable deficit". These figures include the earnings of Subco 1, Subco 3, Subco 4 and Subco 5 for the stub-period ending XXXXXXXXXX which are not included in the surplus accounts of a foreign affiliate under section 5907 of the Regulations until the taxation year of the particular affiliate ends. No exempt dividends, within the meaning of subsection 93(3), have ever been received by Canco on the shares of Subco 1 or on shares for which the shares of Subco 1 were substituted.

10. Subco 2 is incorporated under the laws of, and is resident in, XXXXXXXXXX. Subco 2 is a XXXXXXXXXX and carries on a XXXXXXXXXX business. Subco 2's activities are regulated in XXXXXXXXXX by the XXXXXXXXXX. The business qualifies as an active business and employs approximately XXXXXXXXXX employees in XXXXXXXXXX. The business is conducted exclusively with arm's length customers. For the purpose of paragraph 95(2)(l), the principal purpose of the business of Subco 2 is not to derive income from trading and dealing in indebtedness.

11. Cansub 1 is a Canadian XXXXXXXXXX company, the business activities of which are subject by law to the supervision of the Superintendent of Financial Institutions. Cansub 1 was incorporated on XXXXXXXXXX but only received all of the necessary regulatory approvals to carry on its business in XXXXXXXXXX. Its business activities, over time, may include XXXXXXXXXX.

12. XXXXXXXXXX.

Proposed Transactions

13. Subco 4 and Subco 5 will merge pursuant to the laws of the State of XXXXXXXXXX. For purposes of this ruling, the corporation formed on such merger is referred to as "Mergeco".

14. Holdco will incorporate a new wholly-owned subsidiary under the laws of the State of XXXXXXXXXX ("US Newco"). Holdco will subscribe for shares of US Newco in an amount equal to the purchase price to be paid by US Newco for the shares of Mergeco. US Newco will acquire from Subco 1 the shares of Mergeco in return for cash in an amount equal to the fair market value of Mergeco, which is estimated to be approximately US$XXXXXXXXXX.

15. Subco 3 will convert all of its short-term investments to cash and thereafter will be liquidated and dissolved. In the course of the liquidation, Subco 3 will distribute to Subco 1 all of its cash, and the shares of Subco 3 held by Subco 1 will be cancelled. Under the Internal Revenue Code of the United States, no gain or loss is recognized by Subco 3 in respect of any property distributed by it in the course of the liquidation to Subco 1. After this transaction and the transactions described in paragraph 14 above, Subco 1's assets will consist of cash of approximately US$XXXXXXXXXX.

16. Canco will transfer the shares of Subco 1 to Subco 2 in return for common shares of Subco 2 (the "New Subco 2 Shares"). No other consideration will be paid by Subco 2 to Canco for the shares of Subco 1.

17. Subco 1 will be liquidated and dissolved. In the course of the liquidation, Subco 1 will distribute its cash to Subco 2, and the shares of Subco 1 held by Subco 2 will be cancelled. Under the Internal Revenue Code of the United States, no gain or loss is recognized by Subco 1 in respect of any property distributed by it in the course of the liquidation to Subco 2.

Purpose of Proposed Transactions

18. The purpose of the proposed transactions is to maximize operating efficiencies by restricting Canco's holdings to subsidiaries that are engaged in XXXXXXXXXX businesses and to provide to Subco 2 the cash in Subco 3 for use in Subco 2's XXXXXXXXXX business.

Rulings Given

Provided the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided the proposed transactions are completed in the manner described above, our rulings are as follows:

A. Paragraph 95(2)(e.1) will apply to the dissolution of Subco 3 into Subco 1 and to the dissolution of Subco 1 into Subco 2, with the result that (i) Subco 1's proceeds of disposition of the shares of Subco 3 that are cancelled on the liquidation will be the adjusted cost base of those shares to Subco 1 immediately before the cancellation and (ii) Subco 2's proceeds of disposition of the shares of Subco 1 that are cancelled on the liquidation will be the adjusted cost base of those shares to Subco 2 immediately before the cancellation.

B. The surplus accounts of Subco 1 will be reduced in accordance with subsection 5907(1) of the Regulations by the loss, if any, on the shares of Mergeco, after the application of subsection 93(2), that is deemed to occur immediately before the dissolution of Subco 1 begins pursuant to subparagraph 40(3.4)(b)(v).

C. Subsection 5905(7) will apply to each dissolution referred to in Ruling A above.

D. Subsection 85.1(3) will apply to the transfer by Canco of the shares of Subco 1 to Subco 2 with the result that each of (i) the cost to Canco of the New Subco 2 Shares it receives as consideration for the shares of Subco 1, (ii) Canco's proceeds of disposition of the shares of Subco 1, and (iii) Subco 2's cost of the Subco 1 shares, will be the adjusted cost base to Canco of the shares of Subco 1 immediately before the transfer.

E. Subsection 5905(1) of the Regulations will apply on the transfer of Mergeco to Holdco with the result that the exempt surplus and taxable deficit of Mergeco in respect of Holdco will be nil.

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

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 the proposed transactions are completed by XXXXXXXXXX.

The rulings are based on the Act in its 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 letter should be construed as implying that Revenue Canada has reviewed, accepted or otherwise agreed to:

a) the determination of the amount of the adjusted cost base of any property referred to herein,

b) the fair value of assets transferred to or contributed to corporations referred to herein,

c) the surplus balances of foreign affiliates referred to herein,

d) the residence of the foreign affiliates referred to herein,

e) the nature of any business or the character of the income, including that realized from any business, prior to or subsequent to the incorporation of Cansub 1, of any of the foreign affiliates referred to herein, or

f) any other tax consequences relating to any facts or proposed transactions referred to herein,

other than as 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