2010 Ruling 2010-0375311R3 - Article IV(7)(b) Restructuring

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: Will Article IV(7)(b) apply to interest paid by Canadian-resident unlimited liability company ("ULC") on debt obligations previously assigned by partnership that is the sole shareholder of the ULC to a partnership that is the limited partner of the partnership?

Position: No.

Reasons: The United States tax treatment of the interest income on the assigned debt obligations will be the same whether or not the ULC is fiscally transparent for United States tax purposes.

XXXXXXXXXX
					2010-037531
					XXXXXXXXXX 

XXXXXXXXXX , 2010

Dear Sir:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

We are writing in response to your letter of XXXXXXXXXX , in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. You have advised us that to the best of your knowledge and that of the taxpayer, none of the issues involved in this ruling request are:

(i) in an earlier return of the taxpayer or persons related to the taxpayer;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or persons related to the taxpayer;
(iii) under objection by the taxpayer or persons related to the taxpayer;
(iv) before the courts; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise noted, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the "Act").

DEFINITIONS

(a) "adjusted cost base has the meaning assigned by section 54;

(b) "Canco" means XXXXXXXXXX , an unlimited liability company incorporated under the laws of the Province of XXXXXXXXXX ;

(c) "Canco Note 1" means the promissory note evidencing indebtedness owing by Canco on XXXXXXXXXX in the principal amount of US$XXXXXXXXXX bearing interest annually at a rate of XXXXXXXXXX %;

(d) "Canco Note 2" means the promissory note evidencing indebtedness owing by Canco on XXXXXXXXXX in the principal amount of US$XXXXXXXXXX bearing interest annually at a rate of XXXXXXXXXX %;

(e) "Canco Notes" means Canco Note 1 and Canco Note 2;

(f) "Code" means the Internal Revenue Code of 1986, 26 U.S.C.;

(g) "Convention" means the Convention Between the United States of America and Canada With Respect to Taxes on Income and on Capital Signed on 26 September 1980, as Amended by the Protocols Signed on 14 June 1983, 28 March 1984,
17 March 1995, 29 July 1997 and 21 September 2007;

(h) "GP means XXXXXXXXXX , a XXXXXXXXXX corporation;

(i) "LP1" means XXXXXXXXXX , a XXXXXXXXXX limited partnership;

(j) "LP2" means XXXXXXXXXX , a XXXXXXXXXX limited partnership;

(k) "Paragraph" means a numbered paragraph in this letter;

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

(m) "taxable income" has the meaning assigned by subsection 248(1);

(n) "taxable year" has the meaning assigned under the Code; and

(o) "United States" means the United States of America.

FACTS

1. LP1 is a limited partnership formed under the laws of XXXXXXXXXX . It is characterized as a partnership under the Code and is fiscally transparent under the taxation laws of the United States for the purposes of the Convention. LP1 is a partnership for the purposes of the Act.

2. The interests of the limited partners of LP1 are referred to as limited partnership units. The limited partnership units are XXXXXXXXXX . GP is the sole general partner of LP1.

3. In the aggregate, the holders of the limited partnership units of LP1 are allocated approximately XXXXXXXXXX percent of the income of LP1 for United States tax purposes. GP is allocated approximately XXXXXXXXXX percent of the income of LP1 for United States tax purposes.

4. GP is a resident of the United States for the purposes of the Convention.

5. LP1 holds a XXXXXXXXXX percent limited partnership interest in LP2 and the remaining XXXXXXXXXX percent partnership interest is held by its general partner, GP.

6. LP2 is a limited partnership formed under the laws of XXXXXXXXXX . It is characterized as a partnership under the Code and is fiscally transparent under the taxation laws of the United States for the purposes of the Convention. LP2 is a partnership for the purposes of the Act.

7. LP2 holds all of the issued and outstanding shares of Canco, a taxable Canadian corporation. Canco files its Canadian federal income tax returns with the XXXXXXXXXX Tax Center and its Canadian federal income tax affairs are administered by the XXXXXXXXXX Tax Services Office.

8. Canco is a resident of Canada for the purposes of the Convention. Canco is disregarded as an entity separate from its owner under the Code and is fiscally transparent under the taxation laws of the United States for the purposes of the Convention.

9. LP1, LP2 and the subsidiaries of LP1 and LP2, including Canco and its subsidiaries in Canada, conduct a XXXXXXXXXX in North America. The business activities of Canco are highly integrated with the business activities conducted by LP1 and its direct and indirect United States subsidiary entities.

10. Interest on the Canco Notes is paid by Canco from the income earned by it, directly or indirectly, in the conduct of the active business of Canco and its related Canadian subsidiary entities.

11. Prior to XXXXXXXXXX , the Canco Notes were held by LP2.

12. Effective XXXXXXXXXX , LP2 assigned the Canco Notes to LP1 in payment of an amount owing by LP2 to LP1 (the "Assignment"). There was no amount of unpaid accrued interest on the Canco Notes at the date of the Assignment. Following the Assignment, interest accruing on the Canco Notes is payable to LP1.

13. No interest on the Canco Notes has been paid subsequent to the Assignment.

PROPOSED TRANSACTION

14. Canco will pay interest to LP1 in accordance with its obligations under the Canco Notes.

PURPOSE OF THE PROPOSED TRANSACTION

15. The purpose of the proposed transaction is to comply with Canco's obligation to pay interest on the Canco Notes.

ADDITIONAL INFORMATION

16. The purpose of the Assignment was to allow LP1 to maintain the existing corporate structure without triggering an increased tax burden on interest paid by Canco under the Canco Notes that would have resulted from the application of Article IV(7)(b) of the Convention to such payments of interest had LP2 continued to hold the Canco Notes.

17. Canco's status as a fiscally transparent, disregarded entity under the Code allows LP2 to carry on its business in Canada through a branch for United States federal income tax purposes so as to better manage Canadian taxes and to maintain access, for United States federal income tax purposes, to any losses incurred by Canco and to tax credits in respect of Canadian income tax paid by Canco.

18. The Canco Notes do not constitute an interest or option in respect of property described in paragraphs (a) to (k) of the definition of "taxable Canadian property."

19. LP1 and LP2 do not carry on business in Canada for the purposes of the Act.

20. For the purposes of the Code, any transaction between Canco and LP1, including the payment of interest by Canco to LP1, is treated as a transaction between LP2 and LP1.

21. Canco carries on business activities described in Paragraph 9 both directly and indirectly through a number of subsidiary entities. For United States federal income tax purposes, substantially all of the revenues earned by Canco's subsidiary entities from these business activities are included in the computation of the taxable income of LP1 on a current basis.

22. In determining its taxable income for a taxable year, LP1 is required to include the interest income from the Canco Notes that accrues in the year and such interest is allocated as an item of income for United States tax purposes to the holders of limited partnership units of LP1 and to GP.

23. Interest expense relating to the Canco Notes is expected to be deductible in the computation of the taxable income of LP2. In the computation of the taxable income of LP1, the interest income from the Canco Notes may be offset in full by the interest expense deducted in the computation of the taxable income of LP2.

24. Under the taxation laws of the United States, the interest on the Canco Notes will be recognized as an item of income of LP1, and will be allocated as an item of income to the holders of the limited partnership units of LP1 and to GP, in the same manner as the interest would be if Canco was not fiscally transparent under those laws. More specifically, the quantum and character of the interest income and its timing in the inclusion in the taxable income of LP1, and its allocation to the holders of limited partnership units of LP1 and GP, will be the same under the taxation laws of the United States as it would be if Canco was not fiscally transparent under those laws.

25. If Canco was not fiscally transparent for the purposes of the Code, the interest on the Canco Notes would be considered to be interest from indebtedness owing to LP1 by Canco, and could, depending on the circumstances, be considered to have a geographic source different than the geographic source that will be attributed to such interest having regard to Canco's fiscal transparency under the Code. However, LP1 would be required to include the same amount of interest income from the Canco Notes on the accrual basis described in Paragraph 22 notwithstanding any difference in geographic source.

26. Under the taxation laws of the United States, the geographic source of the interest would not be relevant to the treatment of the interest on the Canco Notes, as an item of income, under those laws.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the proposed transaction and the purpose of the proposed transaction, and provided further that the proposed transaction is completed in the manner described above, we rule as follows:

A. Article IV(7)(b) of the Convention will not apply to the payment of interest on the Canco Notes described in Paragraph 14.

B. Subsection 245(2) will not apply to the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the ruling given.

The above-noted rulings are based on the Act and the Convention in their present forms and do not take into account any proposed amendments to the Act or the Convention which, if enacted, could have an effect on the rulings provided herein.

CAVEAT

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, the Canada Revenue Agency has not confirmed or made a determination in respect of:

(a) whether Canco is fiscally transparent under the taxation laws of the United States for the purposes of the Convention;

(b) the United States federal income tax treatment of the interest income on the Canco Notes described in Paragraphs 20 to 26; and

(c) the amount of tax exigible pursuant to Part XIII in respect of any payment of interest on the Canco Notes.

Nothing in this letter should be construed as implying that the Canada Revenue Agency has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above, including, for greater certainty, the deductibility of interest on the Canco Notes under the Act.

This ruling is based solely on the facts, proposed transaction and additional information described above and is subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002. This ruling is binding on the Canada Revenue Agency provided that the proposed transaction is completed before XXXXXXXXXX .

Yours truly,

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