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 U.S. tax paid as a consequence of a section 338(g) election under the U.S. Internal Revenue Code is eligible for a foreign tax credit under section 126.
Position: In the circumstances of this ruling the U.S. tax qualifies for foreign tax credit within the limits of section 126.
Reasons: The U.S. section 338(g) election gives rise to a legal liability for U.S. tax and allows the taxpayer to match the timing of U.S. and Canadian tax liability in connection with the same income and gains. Therefore the U.S. section 338(g) election effectively prevents double taxation that would otherwise have arisen. The U.S. tax is only paid in respect of income and gains that the U.S. is entitled to tax under the Canada - U.S. Income Tax Convention.
XXXXXXXXXX
XXXXXXXXXX 992920
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above referenced taxpayers. We also acknowledge your fax transmissions and 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.
b) "Canco" means XXXXXXXXXX. Its tax account number is XXXXXXXXXX. The tax services office and taxation centre where XXXXXXXXXX return is filed are XXXXXXXXXX, respectively.
c) "US Sub1" means XXXXXXXXXX was incorporated under the laws of the State of XXXXXXXXXX on XXXXXXXXXX.
d) "US Sub2" means XXXXXXXXXX was incorporated under the laws of the State of XXXXXXXXXX on XXXXXXXXXX.
e) "Buyerco" means XXXXXXXXXX.
Facts
1. To the best of your knowledge and that of the taxpayer involved, none of the issues involved with this request:
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 judgement has been issued, the time limit for appeal has not expired.
2. Canco is a public corporation listed on the XXXXXXXXXX Stock Exchange, incorporated under the Canadian Business Corporations Act on XXXXXXXXXX, and a taxable Canadian corporation. Approximately XXXXXXXXXX% percent of Canco's shareholders are non-residents of Canada. Only one shareholder owns more than XXXXXXXXXX percent of the shares of Canco. That shareholder XXXXXXXXXX deals at arm's length with Canco and Buyerco (see paragraph 5 below).
3. US Sub1 and US Sub2 are wholly-owned U.S. resident subsidiaries of Canco. Neither the shares of US Sub1 nor the shares of US Sub2 are a United States real property interest within the meaning of paragraph 3(a) of Article XIII of the Canada - U.S. Income Tax Convention (the "Convention").
4. Canco has a permanent establishment in the U.S. by virtue of the business it carries on through its U.S. branch operations. The fair market value of Canco's U.S. branch is all or substantially all attributable to XXXXXXXXXX property. Canco also has certain XXXXXXXXXX property which is not associated with the U.S. branch operation.
5. Buyerco is a non-resident corporation resident in the United States that deals at arm's length with Canco, US Sub1 and US Sub2.
Proposed Transactions
6. Buyerco will incorporate Acquireco XXXXXXXXXX. The relevant corporate law will permit Acquireco to hold shares in Buyerco.
7. Buyerco will subscribe for common shares of Acquireco with funds equal to the purchase price of the Canco shares described in paragraph 9 below.
8. Acquireco will purchase common shares of Buyerco at fair market value using most, but not all, of the cash received on the issuance of its shares described in paragraph 7 above.
9. Acquireco will purchase pursuant to a Plan of Arrangement all the issued and outstanding common and preferred shares of Canco for consideration comprised of the remaining cash and all of the Buyerco common shares it acquired in step 8 above. Immediately after the purchase, the former shareholders of Canco will not control Buyerco.
10. Acquireco will elect for U.S. income tax purposes under paragraph 338(g) of the Internal Revenue Code of the United States (the "Code") to have Canco be treated as having disposed of its assets at the close of the day of acquisition (the "Acquisition Day") at fair market value. As a result of Acquireco's acquisition of all of the shares of Canco and the paragraph 338(g) election, Canco will have a taxation year for the purposes of the Code commencing at the time of the acquisition on Acquisition Day and ending at the end of Acquisition Day. Canco will be required to file an income tax return under the Code in respect of Acquisition Day wherein it will report and be taxable under the Code on income and capital gains in respect of the notional alienation of all of its real property situated in the United States and in respect of the notional alienation of the personal property forming part of Canco's U.S. permanent establishment for the purposes of paragraph 2 of Article XIII of the Convention. Income and gains, if any, computed under the Code in respect of the notional disposition of property of Canco on Acquisition Day not pertaining to the U.S. permanent establishment (e.g. the XXXXXXXXXX property referred to in paragraph 4 above and the shares of US Sub1 and US Sub2) will not be taxed under the Code or under the income tax legislation of any political subdivision of the United States.
11. The section 338(g) of the Code election is also made in respect of US Sub1 and US Sub2.
12. Canco will declare and pay a stock dividend in an amount that will be sufficient to increase the paid-up capital of all of its capital stock to their fair market value. The fair market value of the Canco capital stock at that time will be equal to the purchase price to Acquireco of the Canco shares it purchased in step 9 above.
13. Acquireco will distribute all of the Canco shares to Buyerco as a reduction of its paid-up capital.
14. Acquireco will be wound-up into Buyerco pursuant to subsection 88(2).
15. Canco will be continued as a corporation under a U.S. corporate statute. Effective as of the date of the continuance, Canco will become liable to tax in the United States on its worldwide income.
16. Canco's business will not have a "fiscal period", within the meaning of section 249.1, ending for income tax purposes in the time period over the course of which the proposed transactions set out above are carried out.
Purpose of the Proposed Transactions
Buyerco intends to acquire Canco and make it a U.S. resident subsidiary corporation.
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. Subsection 249(4) will apply to deem the taxation year of Canco to have ended immediately before the time its shares are acquired by Acquireco and a new taxation year to have commenced at that time.
B. Effective the time it is continued as a corporation under a U.S. corporate statute as set out in paragraph 15 above, Canco will be deemed not to be resident in Canada pursuant to subsection 250(5).
C. Subparagraph 128.1(4)(a)(i) will deem the taxation year of Canco to have ended immediately before the time it is continued as a corporation under a U.S. corporate statute as set out in paragraph 15 above.
D. Paragraph 128.1(4)(b) will deem Canco to have disposed of all of its property for proceeds equal to its fair market value in the taxation year that is deemed to have ended as set out in ruling C above.
E. U.S. income or profits tax paid by Canco in respect of income arising as a result of the election under paragraph 338(g) of the Code as set out in paragraph 10 above, and reported by it in its tax return filed under the Code for Acquisition Day, will be in part business-income-tax and in part non-business-income-tax paid for the taxation year referred to in ruling C above, and will be eligible for a deduction from tax within the limits of subsections 126(1) and 126(2). For the purpose of subsections 126(1) and 126(2.1), income from business and capital gains arising from disposition of the shares of US Sub1 and US Sub2 and from the disposition of any other property not forming part of the business property of the U.S. permanent establishment will not be "qualifying incomes" of Canco from sources in the United States.
F. Income or profit, if any, of US Sub1 and US Sub2 computed in accordance with the Code and which is directly attributable to the notional disposition of the assets by US Sub1 and US Sub2 pursuant to the 338(g) of the Code election, is not included in the "earnings" from an active business of US Sub1 and US Sub2 as that term is defined in subsection 5907(1) of the Regulations.
G. As a result of the proposed transactions in and by themselves, subsection 245(2) will not apply to re-determine 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 the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
These 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 the Canada Customs and Revenue Agency has:
a) accepted that any particular property of Canco, is personal property forming part of the business property of a permanent establishment in the United States for the purposes of paragraph 2 of Article XIII of the Convention,
b) accepted or reviewed the fair market value or cost of any property of Canco, or
c) agreed to any other tax consequences relating to any facts or proposed transactions referred to herein other than those as specifically described in the rulings given above.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2000
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2000
Email this Content