2012 Ruling 2011-0416821R3 - Article XII of Canada-US Tax Convention

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 certain payments from a Canadian payor to an arm's length US corporation are in respect of a franchise

Position: No

Reasons: This was a factual determination

XXXXXXXXXX
										2011-041682
										XXXXXXXXXX
	

XXXXXXXXXX , 2012

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above named taxpayers.

The ruling given herein is based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions described in the documents submitted with your advance income tax ruling request do not form part of the facts and proposed transactions on which the 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 meaning specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supplement) as amended to the date of this advance income tax ruling;

(b) "Agreement" means the License and Distribution agreement to be entered into by Pubco, Parent and Canco;

(c) "Canco" means XXXXXXXXXX ;

(d) "CRA" means the Canada Revenue Agency;

(e) "Existing Product" means the XXXXXXXXXX product;

(f) "Foreign Country" means the United States of America;

(g) "Foreign Exchange" means the XXXXXXXXXX ;

(h) "New Product" means the XXXXXXXXXX product;

(i) "non-resident" has the meaning assigned by subsection 248(1) of the Act;

(j) "Parent" means XXXXXXXXXX ;

(k) "Province" means XXXXXXXXXX ;

(l) "Pubco" means XXXXXXXXXX ;

(m) "related persons" has the meaning assigned by subsection 251(2) of the Act;

(n) "S Corporation" means a corporation that has elected to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code;

(o) "State 1" means XXXXXXXXXX ;

(p) "State 2" means XXXXXXXXXX ;

(q) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act;

(r) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(s) "Territory" means Canada; and

(t) "Treaty" means the Convention between Canada and the United States of America with Respect to Taxes on Income and Capital signed on September 26, 1980 as Amended by Protocols signed on 14 June 1983, March 28, 1984, March 17, 1995, July 29, 1997 and September 21, 2007.

Facts

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

1. Pubco is a non-resident corporation incorporated under the laws of State 2. Pubco is a publicly traded corporation whose shares are listed on the Foreign Exchange. Pubco XXXXXXXXXX has XXXXXXXXXX software XXXXXXXXXX systems, including the Existing Product and the New Product.

2. Parent is a non-resident corporation incorporated under the laws of State 1. Parent is an S Corporation that is indirectly owned by individuals resident in the Foreign Country. Pursuant to a licence from Pubco, Parent manufactures and sells, through independent and third party distributors, the Existing Product in the Foreign Country. Parent does not have the right to manufacture or to sell the New Product in the Foreign Country or the Territory.

3. Canco is a taxable Canadian corporation organized and existing under the laws of the Province. Canco is a subsidiary wholly-owned corporation of Parent. Canco imports the Existing Product from Parent and sells it throughout the Territory. Canco's fiscal year end is XXXXXXXXXX . Canco's business number is XXXXXXXXXX . Canco files its tax returns with the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

4. Pubco is a "qualifying person" within the meaning of Article XXIX-A of the Treaty. Pubco is not related to Parent or Canco.

5. To the best of your knowledge and that of Parent, none of the proposed transactions involved in this ruling letter:

(i) is in an earlier return of Parent or any persons related to Parent,
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of Parent or any persons related to Parent,
(iii) is under objection by Parent or any persons related to Parent, or
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

Additional Information

6. Pubco has terminated its supply and sale arrangement of the New Product with another third party distributor in the Territory so that it could enter into the Agreement.

7. Pubco, Parent and Canco have entered into the Agreement whereby Canco acquires the exclusive distribution license for the Existing Product from Parent and acquires the exclusive distribution license for the New Product from Pubco. Canco also acquires the right to manufacture the New Product from Pubco. The Agreement's effective date is XXXXXXXXXX . The Agreement provides, among other things, the following:

(a) Pubco appoints Canco as the exclusive licensee for the distribution of the Existing Product and the New Product in the Territory, subject to all of the terms and conditions of the Agreement;

(b) Pubco grants Canco the right to manufacture, or pursue a manufacturer for, the New Product and will provide Canco with the designs and mechanical drawings necessary for the manufacture of the New Product;

(c) The initial term of the Agreement is XXXXXXXXXX years;

(d) Pubco retains all right, title and interest in the patents, copyrights, software and other intellectual property rights in the Existing Product and the New Product;

(e) Pubco will not develop any operating systems, operating standards or operating manuals and will not impose any restrictions on the manner in which Canco may carry on its business;

(f) Pubco will supply Canco with product availability information and, when available, descriptive literature and instructional material that is directed at the end user to support the promotion and use of the Existing Product and the New Product;

(g) Pubco reserves the right to alter the specifications of the Existing Product or the New Product, to discontinue the production of the Existing Product, to discontinue the development of additional products or to commence the sale of newly-developed product as a replacement for the Existing Product or the New Product;

(h) Canco will be responsible for all expenses associated with the operation of its business;

(i) Canco shall provide competent sales and technical support personnel, including at least one specifically trained for support of the New Product, all at Canco's expense;

(j) Canco cannot sell other manufacturer's products that would be considered to be directly competing with the Existing Product or the New Product;

(k) Canco may appoint sub-distributors, resellers, distributors or agents to market and sell the existing Product and/or the New Product;

(l) In the event of termination of the Agreement, Canco shall immediately cease to use the trademarks of Pubco and neither Pubco nor Canco shall owe any compensation for lost profits, lost opportunities, goodwill or any other loss or damage resulting or arising from such termination;

(m) The Agreement does not make either Pubco or Canco the employee, agent or legal representative of the other for any purpose whatsoever. Neither Pubco nor Canco is granted any right or authority to assume or to create any obligation or responsibility, express or implied, on behalf of or in the name of the other. Each of Pubco and Canco are acting as independent contractors; and

(n) The Agreement constitutes the entire license agreement between Pubco and Canco and supersedes all proposals, oral or written, and all negotiations, conversations, discussions and distribution agreements previously entered into by Pubco, Parent and Canco.

8. Pubco has never charged Parent or Canco for the use of its trademarks in carrying on their business of manufacturing or selling the Existing Product. Pubco has granted Canco an exclusive, non-transferable and royalty-free license to use Pubco's trademarks related to the New Product solely in connection the manufacture, distribution, promotion, advertising and maintenance of the New Product in the Territory.

9. As consideration for the New Product distribution license granted by Pubco to Canco under the terms of the Agreement and as a result of Canco's acquisition of the Existing Product distribution license from Parent, Canco will make payments to Pubco in respect of all Existing Product and New Product sold by Canco. The amount to be paid by Canco will be determined pursuant to the formula agreed upon by Pubco and Canco in the Agreement. Pubco has the right to audit Canco's calculation of the amounts paid to it.

10. The rights or property in respect of which Canco will make payments to Pubco under the Agreement will not be effectively connected with any permanent establishment that Pubco may have in Canada.

Proposed Transactions

11. Canco will enter into an agreement with a manufacturer to have the New Product manufactured. In accordance with the terms of the Agreement, Canco will only sell, directly or indirectly, such New Product in the Territory.

12. Notwithstanding that Canco is to remit the payments due to Pubco at the earlier of (i) within XXXXXXXXXX days of the installation and customer acceptance of an Existing Product or a New Product; and (ii) within XXXXXXXXXX days of Canco's receipt of any payment from a customer of Canco, at the time of this letter no amounts have been paid to Pubco by Canco under the Agreement. Canco will commence making the required payments upon the receipt of a favorable advance income tax ruling.

Purpose of the Proposed Transactions

13. Canco's right to manufacture the New Product and its acquisition of the distribution license to the Existing Product and the New Product allows Canco to expand its business operations in the Territory. Pubco is XXXXXXXXXX . The payments from Canco will provide Pubco with a source of funds for its XXXXXXXXXX activities.

Ruling

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 further that the proposed transactions are completed in the manner described above, our ruling is as follows:

A. Each payment from Canco to Pubco, as described in paragraph 9 above, to the extent that it is for the use of, or the right to use, any patent or any information concerning industrial, commercial or scientific experience, will only be taxable in the Foreign Country pursuant to subparagraph 3(c) of Article XII of the Treaty.

This ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5, issued by the CRA on May 17, 2002, and is binding on the CRA in respect of the payments made by Canco to Pubco in accordance with the terms of the Agreement.

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein. For greater certainty, nothing in this ruling should be construed as implying that the CRA:

(a) has reviewed, or agreed to, the reasonableness of any payment, as described in paragraph 9 above, that will be paid by Canco to Pubco pursuant to the Agreement;

(b) has reviewed, or agreed to, the non-application of section 247 of the Act to any payment, as described in paragraph 9 above, that will be paid by Canco to Pubco pursuant to the Agreement;

(c) has reviewed whether any payment, or any portion of any payment, from Canco to Pubco, as described in paragraph 9 above, is a payment not described in Ruling A above; or

(d) has reviewed whether, or agreed that, Pubco, Parent and Canco deal at arm's length.

The above-noted ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.

Yours truly,

for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch