2009 Ruling 2009-0308961R3 - Principal Purpose of Business

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.

Principal Issues: Whether the principal purpose of the business of a controlled foreign affiliate of a taxpayer is to derive income from property with respect to those amounts received by the affiliate under the XXXXXXXXXX Agreements?

Position: No, provided that the business of the affiliate is one single business.

Reasons: Based on the character of the income earned through the XXXXXXXXXX Agreements.

XXXXXXXXXX 								2009-030896

Attention: XXXXXXXXXX

XXXXXXXXXX , 2009

Dear Sirs or Madams:

Re: XXXXXXXXXX ("Aco")
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 taxpayer.

Aco's tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre under Business Number XXXXXXXXXX .

To the best of your knowledge and that of the taxpayer involved, none of the issues involved with this request:

(i) is involved in an earlier return of the taxpayer or a related person;
(ii) 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;
(iii) is under objection by the taxpayer or a related person; or
(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.

The ruling given herein is based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions in the documents submitted with your request not described below do not form part of the facts and proposed transactions on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader.

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;

(b) "active business" has the meaning assigned by subsection 95(1);

(c) "Additional Amounts" refer to those additional future amounts receivable under the XXXXXXXXXX Agreements, including the Bco Agreement, that are based on a percentage of end-user sales, and which have been identified in such agreements as "royalty payments", "royalty" or "royalties" or the like;

(d) "Bco" means XXXXXXXXXX . and its successors in respect of the Bco Agreement;

(e) "Bco Agreement" is a XXXXXXXXXX Agreement XXXXXXXXXX , between Xco and Bco, XXXXXXXXXX ;

(f) "Bco License" refers to such exclusive license under the TM#2 IP, granted by Xco (XXXXXXXXXX CFA1 as successor) to Bco under the Bco Agreement, to market, XXXXXXXXXX , distribute, XXXXXXXXXX the Products XXXXXXXXXX in the designated territory;

(g) "Cco" means XXXXXXXXXX .;

(h) "XXXXXXXXXX " refer to the different arm's-length third parties that are non-residents of Canada, including Bco and Dco, each of which has entered into a XXXXXXXXXX Agreement with Xco or XXXXXXXXXX CFA1, as the case may be;

(i) "XXXXXXXXXX Agreement" refers to each agreement, including the Bco Agreement and the Dco Agreement, entered into between Xco or XXXXXXXXXX CFA1 and a XXXXXXXXXX pertaining to the marketing and distribution of the Products and similar or other products, as amended from time to time. Together these agreements are referred to as XXXXXXXXXX Agreements;

(j) "controlled foreign affiliate" has the meaning assigned by subsection 95(1);

(k) "Dco" means XXXXXXXXXX . and its predecessors or successors in respect of the Dco Agreement;

(l) "Dco Agreement" is a XXXXXXXXXX Agreement XXXXXXXXXX between Xco and Dco, XXXXXXXXXX;

(m) "Dco License" refers to such exclusive license under the TM#2 IP, granted by Xco (XXXXXXXXXX CFA1 as successor) to Dco under the Dco Agreement, to use, develop, market, XXXXXXXXXX , distribute, XXXXXXXXXX the Products XXXXXXXXXX in the designated territory;

(n) "Eco" means XXXXXXXXXX .;

(o) "FAPI" refers to foreign accrual property income, as that term is defined in subsection 95(1);

(p) "foreign affiliate" has the meaning assigned by subsection 95(1);

(q) "Manufacturing Cost" refers to XXXXXXXXXX CFA1's actual cost of XXXXXXXXXX the Products, XXXXXXXXXX , which actual cost is comprised of the cost of goods produced as determined in accordance with generally accepted accounting principles, and includes direct labour, direct material, XXXXXXXXXX , and the allocable portion of XXXXXXXXXX CFA1's manufacturing overhead directly attributable to the manufacture of the Products;

(r) "Products" means collectively XXXXXXXXXX ;

(s) "Proposed Transactions" means the transactions described in paragraph 22 below. The termination of all of the employees of XXXXXXXXXX CFA1 described in that paragraph was completed by XXXXXXXXXX ;

(t) "public corporation" has the meaning assigned by subsection 89(1);

(u) "TM#1" means the products which are currently marketed by the XXXXXXXXXX under the XXXXXXXXXX trademark name for the XXXXXXXXXX ;

(v) "TM#1 IP" refers to all the intangible assets owned by XXXXXXXXXX CFA1, including copyrights/proprietary rights, trademarks, know-how/trade secrets and patents, which provide protection of the TM#1 Products XXXXXXXXXX in major markets and other jurisdictions throughout the world;

(w) "TM#2" means Xco's XXXXXXXXXX marketed under the XXXXXXXXXX trademark name and consisting of XXXXXXXXXX ;

(x) "TM#2 IP" refers to all the intangible assets owned by XXXXXXXXXX CFA1, including copyrights/proprietary rights, trademarks, know-how/trade secrets and patents, which provide protection of the TM#2 XXXXXXXXXX in major markets and other jurisdictions throughout the world;

(y) XXXXXXXXXX ;

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

(aa) "XXXXXXXXXX CFA1" means XXXXXXXXXX ., a corporation organized under the laws of XXXXXXXXXX , and where appropriate, includes a reference to its predecessor, Xco;

(bb) "XXXXXXXXXX CFA1 IP" means TM#1 IP and TM#2 IP;

(cc) "XXXXXXXXXX CFA2" means XXXXXXXXXX ., a corporation organized under the laws of XXXXXXXXXX ;

(dd) "Xco" means XXXXXXXXXX ., and where appropriate, includes a reference to its successor, XXXXXXXXXX CFA1; and
(ee) XXXXXXXXXX .

Facts

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

1. Aco is a company organized and existing under the laws XXXXXXXXXX Canada. Its headquarters is in XXXXXXXXXX and its fiscal year end is XXXXXXXXXX . Aco is a XXXXXXXXXX a taxable Canadian corporation. XXXXXXXXXX

2. XXXXXXXXXX

3. XXXXXXXXXX CFA2 is, at all relevant times, a foreign affiliate and controlled foreign affiliate of Aco. XXXXXXXXXX

4. XXXXXXXXXX CFA1 is, at all relevant times, a foreign affiliate and a controlled foreign affiliate of Aco. It is a resident of XXXXXXXXXX for purposes of the Act, the Income Tax Regulations and the XXXXXXXXXX Income Tax Convention. XXXXXXXXXX CFA1's current key business assets comprise the XXXXXXXXXX CFA1 IP.

5. Xco is the predecessor of XXXXXXXXXX CFA1. Since the incorporation of its predecessor Xco in XXXXXXXXXX under the laws of XXXXXXXXXX , XXXXXXXXXX CFA1 has been involved in XXXXXXXXXX .

6. XXXXXXXXXX CFA1 is party to XXXXXXXXXX Agreements, pursuant to which XXXXXXXXXX CFA1 provides marketing territories to the XXXXXXXXXX with regards to the distribution of the Products or similar and other products in a defined territory for a defined period.

7. Bco and Dco are two of the XXXXXXXXXX among others. Each of Bco and Dco is a non-resident of Canada and deals at arm's length with XXXXXXXXXX CFA1. There are XXXXXXXXXX Agreements outstanding. The Bco Agreement and the Dco Agreement described in paragraphs 12 and 13 below are generally representative of all these XXXXXXXXXX Agreements.

8. Each of the XXXXXXXXXX Agreements has unique terms but is based on the same general principle that XXXXXXXXXX CFA1 would be responsible for the XXXXXXXXXX development of the Products, XXXXXXXXXX and the maintenance of the XXXXXXXXXX CFA1 IP, while the XXXXXXXXXX would be responsible for marketing and distributing the Products purchased from XXXXXXXXXX CFA1. Except for rights granted to the XXXXXXXXXX to use related intellectual property (e.g. trademarks) specifically in connection with the marketing and distribution of the Products, the XXXXXXXXXX do not have the right to use the XXXXXXXXXX CFA1 IP for any other purpose, including the right to manufacture the Products, except in certain limited situations. From XXXXXXXXXX CFA1's perspective, these certain limited situations are not commercially or practically intended to arise, and if they arise, they are anticipated to be temporary in nature. XXXXXXXXXX .

Under some XXXXXXXXXX Agreements, in addition to the right to market, XXXXXXXXXX , distribute, XXXXXXXXXX the Products, the XXXXXXXXXX is also granted the right to use and develop the Products, XXXXXXXXXX for the purpose of facilitating XXXXXXXXXX the manufacture and commercialization of the existing Products developed by XXXXXXXXXX CFA1, XXXXXXXXXX

At all relevant times, ownership of the XXXXXXXXXX CFA1 IP remains with XXXXXXXXXX CFA1, which continues to maintain and protect the XXXXXXXXXX CFA1 IP.

9. Under the XXXXXXXXXX Agreements, payments for the purchased Products only become payable by a XXXXXXXXXX after title to the Products is transferred from XXXXXXXXXX CFA1 to the XXXXXXXXXX .

10. In some of the XXXXXXXXXX Agreements, other than the one-time non-refundable license fee and the XXXXXXXXXX payments that may be payable, there are two additional payments: one payment is in the form of a lower initial amount (in comparison to certain other XXXXXXXXXX Agreements discussed below), equal to the Manufacturing Cost of the Products, and payable at the time title to the Products is transferred from XXXXXXXXXX CFA1 to the XXXXXXXXXX . The other payment (the "Additional Amount") is payable when the Products are sold by the XXXXXXXXXX to unrelated persons, and determined as a percentage of the XXXXXXXXXX revenue from such sales. An example is the Bco Agreement, XXXXXXXXXX the key provisions of which are outlined in paragraph 12 below. For the XXXXXXXXXX to XXXXXXXXXX calendar years, XXXXXXXXXX .

11. In other XXXXXXXXXX Agreements, the payments for the purchased Products to XXXXXXXXXX CFA1 are in the form of a single amount based on a predetermined selling price as agreed upon between the parties to the agreement, and payable at the time title to the Products transfers from XXXXXXXXXX CFA1 to the XXXXXXXXXX. An example is the Dco Agreement, the key provisions of which are also outlined in paragraph 13 below.

Bco Agreement

12. Key provisions of the Bco Agreement, XXXXXXXXXX , include the following:

(a) XXXXXXXXXX CFA1 continues to own the TM#2 IP, but grants to Bco the Bco License to market, XXXXXXXXXX , distribute, XXXXXXXXXX the Products in XXXXXXXXXX. The Bco License also includes XXXXXXXXXX CFA1 granting to Bco an exclusive royalty-free right to use certain trademarks owned by XXXXXXXXXX CFA1 (including the TM#2 trademark) in connection with the marketing, XXXXXXXXXX distribution and sale of the Products.

(b) As partial consideration for the Bco License, Bco paid a one-time non-refundable license fee in the amount of XXXXXXXXXX . Bco was also required to pay to XXXXXXXXXX CFA1, as licensing fees, XXXXXXXXXX payments of XXXXXXXXXX for each Product XXXXXXXXXX .

(c) Bco, at its own expense, is responsible for all market research and commercialization (including all sales and marketing activities) related to the Products. XXXXXXXXXX board comprised of XXXXXXXXXX representatives from each of Bco and XXXXXXXXXX CFA1 is formed to consult with Bco on all major decisions in the marketing of the Products, but Bco alone is responsible for making the final decisions on all sales, marketing, XXXXXXXXXX and distribution issues. XXXXXXXXXX .

(d) XXXXXXXXXX CFA1 is required, at its expense, to maintain and protect all its intellectual property rights in relation to the TM#2 IP (which includes the TM#1 IP under the terms of the Bco Agreement).

(e) Bco agrees to purchase exclusively from XXXXXXXXXX CFA1, and XXXXXXXXXX CFA1 agrees to manufacture for, and sell exclusively to Bco in specified geographic territories, each of the Products, as required by Bco and in accordance with specifications as agreed between Bco and XXXXXXXXXX CFA1 from time to time. Subject to Bco's prior written approval, such approval not to be unreasonably withheld, conditioned or delayed by Bco, XXXXXXXXXX CFA1 is permitted to subcontract any part of the manufacturing process for the Products, subject to certain conditions such as the Products and manufacturing facilities continuing to meet the requirements under the Bco Agreement and XXXXXXXXXX CFA1 XXXXXXXXXX . Products may be subjected to testing by Bco at its designated facility in order to verify conformance with specifications as agreed between the parties from time to time. XXXXXXXXXX CFA1 agrees to consult closely with the XXXXXXXXXX board on all aspects of the manufacturing and development of the Products, XXXXXXXXXX .

(f) Title to any Product purchased by Bco from XXXXXXXXXX CFA1 passes to Bco upon the earlier of (i) a common carrier accepting possession or control of such Product, or (ii) passage of such Product to Bco or its agent.

(g) Bco and XXXXXXXXXX CFA1 agree that the Products will be marketed in XXXXXXXXXX under the TM#1 trademark. If either Bco or XXXXXXXXXX CFA1 desires, or XXXXXXXXXX , that the Products be sold under a different name, the different name must be acceptable to XXXXXXXXXX CFA1. XXXXXXXXXX .

(h) As patent holder of the TM#2 IP, and in connection with the product sales cycle which involves XXXXXXXXXX CFA1 manufacturing and Bco marketing and distributing the Products, XXXXXXXXXX CFA1 receives ongoing monetary consideration at two separate points in time. Receipt of the initial amount from Bco is shortly after the sale of manufactured Products by XXXXXXXXXX CFA1 to Bco. The initial amount is generally equal to the Manufacturing Cost, and is adjusted XXXXXXXXXX based on certain predetermined guidelines. Manufacturing Cost was set initially in the Bco Agreement to be XXXXXXXXXX Receipt of the Additional Amounts from Bco is shortly after Bco's sale of the Products. In respect of the Additional Amounts, Bco is required to pay to XXXXXXXXXX CFA1 amounts generally calculated as a percentage of the net sales proceeds XXXXXXXXXX received by Bco and its affiliates from arm's length sales of the Products, XXXXXXXXXX . Under the Bco Agreement, such payments, generally calculated as XXXXXXXXXX % of net sales, have been referred to as "royalties" or "royalty payments".

(i) Bco agrees to furnish XXXXXXXXXX CFA1 with a quarterly written report showing in reasonably specific detail, XXXXXXXXXX , the calculation of net sales and of Additional Amounts payable to XXXXXXXXXX CFA1. Bco is required to keep complete and accurate records in sufficient detail to permit XXXXXXXXXX CFA1 to confirm the completeness and accuracy of such reports.

(j) The Bco Agreement is in effect until the expiration, XXXXXXXXXX , of the last applicable patent rights related to the TM#2 IP. It may generally be terminated prior to its expiry date upon or by, inter alia, (i) mutual written consent, (ii) the dissolution or insolvency or the cessation of operations of either party, (iii) either party for cause (such as an unremedied breach of any material provision in the agreement), (iv) XXXXXXXXXX CFA1 upon Bco's failure to make payments as required under the agreement, or (iv) Bco if the Manufacturing Cost increases to an extent that Bco deems to be commercially non-viable, and the parties fail to reach mutual agreement on the purchase price of the Products.

Dco Agreement

13. Key provisions of the Dco Agreement, XXXXXXXXXX include the following:

(a) XXXXXXXXXX CFA1 agrees to conduct research and development activities XXXXXXXXXX

(b) XXXXXXXXXX CFA1 continues to own the TM#2 IP, but grants to Dco the Dco License to use, XXXXXXXXXX market, XXXXXXXXXX distribute, XXXXXXXXXX the Products in XXXXXXXXXX With prior written consent from XXXXXXXXXX CFA1, Dco is entitled to sublicense its rights under the Dco License to a third party XXXXXXXXXX , with Dco being responsible for and guaranteeing the performance by the sublicensee of the obligations under the Dco License. The Dco License also includes XXXXXXXXXX CFA1 granting to Dco an exclusive royalty-free right to use certain trademarks owned by XXXXXXXXXX CFA1 (including TM#2 trademark) in connection with the use, XXXXXXXXXX marketing, XXXXXXXXXX distribution and sale of the Products.

(c) As partial consideration for the Dco License, Dco paid an initial one-time non-refundable license fee of XXXXXXXXXX . Dco was also required to pay to XXXXXXXXXX CFA1, as licensing fees, XXXXXXXXXX payments of XXXXXXXXXX for each Product XXXXXXXXXX
(d) Dco, at its own expense, is responsible for all market research and commercialization in XXXXXXXXXX related to the Products (including all sales and marketing activities). XXXXXXXXXX board comprised of XXXXXXXXXX representatives from each of Dco and XXXXXXXXXX CFA1 is formed to consult on all major decisions in the development and marketing of the Products, but Dco alone is responsible for making the final decisions on the development and marketing of the Products, subject to the provisions governing XXXXXXXXXX CFA1's research and development activities. XXXXXXXXXX .

(e) XXXXXXXXXX CFA1 is required, at its expense, to maintain and protect its intellectual property rights in relation to the TM#2 IP (which includes the TM#1 IP under the terms of the Dco Agreement).

(f) Dco agrees to purchase exclusively from XXXXXXXXXX CFA1, and XXXXXXXXXX CFA1 agrees to manufacture for, and sell exclusively to Dco in specified geographic territories, each of the Products, as required by Dco and in accordance with terms and conditions of the Dco Agreement. Subject to Dco's prior written approval, such approval not to be unreasonably withheld, conditioned or delayed by Dco, XXXXXXXXXX CFA1 is permitted to subcontract any part of the manufacturing process for the Products, subject to certain conditions such as the Products and manufacturing facilities continuing to meet the requirements under the Dco Agreement, and XXXXXXXXXX CFA1 and the third-party subcontractor XXXXXXXXXX . Products may be subjected to testing by Dco at its designated facility in order to verify conformance with specifications as agreed between the parties from time to time. XXXXXXXXXX CFA1 agrees to consult on an ongoing basis with the XXXXXXXXXX board on all aspects of the manufacturing and development of the Products, XXXXXXXXXX .

(g) Each Product is sold by XXXXXXXXXX CFA1 to Dco at a purchase price equal to the greater of (i) XXXXXXXXXX % of the price for the Product XXXXXXXXXX , and (ii) a pre-determined minimum price as agreed between XXXXXXXXXX CFA1 and Dco in advance. Such purchase price is subject to renegotiation between the parties should changes in the exchange rate and other market factors make it no longer commercially viable for XXXXXXXXXX CFA1 or Dco to continue under the Dco Agreement. The purchase price has been based on XXXXXXXXXX above which resulted in initial purchase prices XXXXXXXXXX

(h) Title to any Product purchased by Dco from XXXXXXXXXX CFA1 passes to Dco upon the earlier of (i) a common carrier accepting possession or control of such Product, or (ii) passage of such Product to Dco or its agent.

(i) Subject to the terms and conditions of the Dco Agreement, Dco has the right to use any trademark, logo or design on the Products for the purpose of marketing and distributing the Products in XXXXXXXXXX , provided such trademark, logo or design complies with all applicable laws.

(j) The Dco Agreement is in effect until the XXXXXXXXXX anniversary of the first commercial sale XXXXXXXXXX of the Product in the specified territory, XXXXXXXXXX . The Dco Agreement may be terminated prior to its expiry date upon or by, inter alia, (i) the dissolution or insolvency or the cessation of operations of either party, (ii) a party's good faith determination that its continued performance under the agreement is no longer commercially viable, (iii) either party for cause (such as an unremedied breach of any material provision in the agreement), or (iv) XXXXXXXXXX CFA1 upon Dco's failure to make payments as required under the agreement.

(k) XXXXXXXXXX

14. While the mechanical calculation of the payments differs between the Bco Agreement and Dco Agreement, XXXXXXXXXX CFA1 entered into each of these XXXXXXXXXX Agreements with the expectation that it would generate profits under each agreement in exchange for providing manufactured patented products to the XXXXXXXXXX .

In each of the years XXXXXXXXXX , the aggregate amount of the Manufacturing Costs and the Additional Amounts earned by XXXXXXXXXX CFA1 exceeds by a large margin the aggregate amount of the one-time non-refundable license fees and the XXXXXXXXXX payments received by it under such XXXXXXXXXX Agreements. For example, in the XXXXXXXXXX calendar year, the aggregate amount of Manufacturing Costs and Additional Amounts is approximately XXXXXXXXXX while the aggregate amount of license fees and XXXXXXXXXX payments received is approximately XXXXXXXXXX . These amounts do not include XXXXXXXXXX the one-time license fee for the XXXXXXXXXX license granted to Cco described in paragraph 20(b) below (which was considered by Aco to be a partial sale of the TM#2 IP for Canadian income tax purposes).

Business Restructuring and Development

15. XXXXXXXXXX CFA1 manufactured all of the Products at its XXXXXXXXXX manufacturing facility in XXXXXXXXXX

16. XXXXXXXXXX

17. XXXXXXXXXX CFA1 entered into a long-term supply agreement for XXXXXXXXXX the Products with Eco, a non-resident of Canada and a person dealing at arm's length with Aco and XXXXXXXXXX CFA1. To the best of Aco's knowledge, Eco was, at the time XXXXXXXXXX CFA1 entered into the agreement with Eco, and to date is, dealing at arm's length with the XXXXXXXXXX XXXXXXXXXX . Eco continues to be the contract manufacturer of the Products for US CFA1, XXXXXXXXXX

18. XXXXXXXXXX . On XXXXXXXXXX , Aco XXXXXXXXXX decided to implement certain XXXXXXXXXX steps in the company's XXXXXXXXXX restructuring XXXXXXXXXX
XXXXXXXXXX

19. XXXXXXXXXX

20. As part of the XXXXXXXXXX restructuring XXXXXXXXXX outlined above:

(a) XXXXXXXXXX

(b) On XXXXXXXXXX , XXXXXXXXXX CFA1 entered into a XXXXXXXXXX license agreement with Cco, a third party and a non-resident of Canada, for its TM#2 XXXXXXXXXX . As consideration Cco paid XXXXXXXXXX CFA1 a XXXXXXXXXX fee of XXXXXXXXXX in cash, and agreed to pay XXXXXXXXXX up to XXXXXXXXXX . The license agreement allows Cco the right to use the TM#2 IP XXXXXXXXXX without any involvement with or by XXXXXXXXXX CFA1. However, XXXXXXXXXX CFA1 retains the right to use the TM#2 IP with respect to existing Products and any future Products that it may develop under existing agreements.

(c) Until XXXXXXXXXX CFA1 had XXXXXXXXXX employees. XXXXXXXXXX .

(d) Notwithstanding the XXXXXXXXXX restructuring XXXXXXXXXX CFA1 has employed and continues to employ more than five full-time employees in the active conduct of its business. Nevertheless, XXXXXXXXXX , it is anticipated that over time it will be more cost efficient for XXXXXXXXXX CFA1 to subcontract some or all of its functions.

21. In addition to the XXXXXXXXXX Agreements, XXXXXXXXXX CFA1 has entered into a small number of non-product agreements in respect of the XXXXXXXXXX CFA1 IP, such as the license agreement with Cco as described in subparagraph 20(b) above. Except for the license fee earned by XXXXXXXXXX CFA1 from Cco as noted above, XXXXXXXXXX CFA1 currently receives insignificant amounts of income from such agreements. The XXXXXXXXXX Agreements represent by far the most material component of XXXXXXXXXX CFA1's business, and the revenues therefrom, which include the Additional Amounts, constitute the principal source of XXXXXXXXXX CFA1's revenues.

Proposed Transactions

22. As a further step in the XXXXXXXXXX restructuring XXXXXXXXXX CFA1 plans to terminate all of its employees before XXXXXXXXXX , at which time all remaining business functions, including maintenance of patents, XXXXXXXXXX , coordination of purchase XXXXXXXXXX , invoicing of the XXXXXXXXXX and payments to the manufacturing subcontractor would need to be completely outsourced to related or unrelated entities. To generate cost savings and benefit from synergies XXXXXXXXXX , it is likely that some of these business functions (including possibly representing XXXXXXXXXX CFA1 at the XXXXXXXXXX boards with the XXXXXXXXXX representatives as required under the XXXXXXXXXX Agreements) will be outsourced to, and undertaken by, personnel of Aco or another related party or affiliate for a fee.

Purpose of the Proposed Transactions

23. Due to economic conditions and XXXXXXXXXX , Aco and its group of affiliates, including XXXXXXXXXX CFA1, are refocusing their efforts XXXXXXXXXX As a result, while XXXXXXXXXX CFA1 currently employs more than 5 employees full time in the active conduct of its business, since XXXXXXXXXX the manufacture of the Products is subcontracted, XXXXXXXXXX CFA1 will be eliminating its workforce so that Aco and its group of companies can focus resources XXXXXXXXXX .

Ruling Given

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 ruling is as follows:

Provided that the activities of XXXXXXXXXX CFA1 as described in this letter comprise a single business, and such business continues to derive its income principally from the XXXXXXXXXX Agreements based on the general principle described in paragraph 8 above, the business will not be considered to be an "investment business", as that term is defined in subsection 95(1), for the purposes of the Act. Accordingly, the income earned under the XXXXXXXXXX Agreements and the non-product agreements is not considered income from an investment business nor "income from property", as that term is defined in subsection 95(1) for purposes of the Act.

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the Canada Revenue Agency ("CRA") provided that the proposed transactions are completed by XXXXXXXXXX

This ruling is based on the Act in the present form and does not take into account amendments to the Act which, if enacted into law, could have an effect on the ruling provided herein.

Other Comments

Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above. In particular, nothing in this ruling should be construed as implying that the CRA has agreed to

(i) the application or non-application of paragraph 95(2)(a.1) or 95(2)(a.3);
(ii) the classification of any of the entities described in this ruling; and
(iii) the tax consequences of any reorganizations referred to in this ruling.

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch