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: Taxpayer seeking time extension and changes to Ruling 2010-035310.
Position: Extension granted. Ruling modified.
Reasons: Changes made in this supplemental do not affect the validity of the ruling given.
XXXXXXXXXX 2010-039014
XXXXXXXXXX
XXXXXXXXXX , 2011
Dear Sir:
Re: XXXXXXXXXX
Advance Income Tax Ruling Request
We are writing in response to your letter of XXXXXXXXXX , in which you requested amendments to advance income tax ruling 2010-035310, which was issued to the above-noted taxpayers on XXXXXXXXXX , 2010 (the "Ruling"). We also acknowledge receipt of additional information provided on XXXXXXXXXX XXXXXXXXXX .
Given the number of amendments to the Ruling that have been requested and having regard to the fact that a number of the proposed transactions described in the Ruling were completed prior to the date of this letter, the Ruling is amended and restated in its entirety below.
Unless otherwise noted, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (hereinafter referred to as the "Act"). Unless otherwise noted, all references to currency are to Canadian dollars.
DEFINITIONS
(a) "adjusted cost base" has the meaning assigned by section 54;
(b) "Canco Note" means the promissory note issued by Canco ULC Amalco, as described in Paragraph 24;
(c) "Canco ULC Amalco" means the taxable Canadian corporation formed on the amalgamation of Canco and Canco ULC, as described in Paragraph 22;
(d) "Canco ULC" means XXXXXXXXXX , a taxable Canadian corporation incorporated as an unlimited liability company under the laws of XXXXXXXXXX . Canco ULC's address is XXXXXXXXXX , it files its Canadian federal income tax returns with the XXXXXXXXXX Tax Centre, and its Canadian federal income tax affairs are administered by the XXXXXXXXXX Tax Services Office;
(e) "Canco" means XXXXXXXXXX , a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX . Canco's address is XXXXXXXXXX , its Business Number is XXXXXXXXXX , it files its Canadian federal income tax returns with the XXXXXXXXXX Tax Centre and its Canadian federal income tax affairs are administered by the XXXXXXXXXX Tax Services Office;
(f) "Company Legislation" means the XXXXXXXXXX ;
(g) "Convention" 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 March 28, 1984, March 17, 1995, July 29, 1997 and September 21, 2007;
(h) "CRA" means the Canada Revenue Agency;
(i) "Debt 1" has the meaning ascribed in Paragraph 17;
(j) "Debt 2" has the meaning ascribed in Paragraph 17;
(k) "Debt" has the meaning ascribed in Paragraph 15;
(l) "fair market value" means the highest price, expressed in terms of money or money's worth obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact;
(m) "LLC 1" means XXXXXXXXXX , a limited liability company established under the laws of XXXXXXXXXX ;
(n) "LLC 2" means XXXXXXXXXX , a limited liability company established under the laws of XXXXXXXXXX ;
(o) "LLC Holdco" means XXXXXXXXXX , a limited liability company established under the laws of XXXXXXXXXX ;
(p) "paid-up capital" has, unless otherwise specified, the meaning assigned under the Company Legislation;
(q) "Paragraph" means a numbered paragraph in this letter;
(r) "Pubco" means XXXXXXXXXX , a corporation incorporated under the laws of XXXXXXXXXX ;
(s) "related persons" has the meaning assigned by subsection 251(2);
(t) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);
(u) "taxable Canadian property" has the meaning assigned by subsection 248(1);
(u.1) "taxable dividend" has the meaning assigned by subsection 89(1);
(v) "United States" means the United States of America;
(w) "US Holdco" means XXXXXXXXXX ; and
(x) "US Partnership" means XXXXXXXXXX , a partnership established under the laws of XXXXXXXXXX .
FACTS
1. Pubco and each of its corporate subsidiaries have a XXXXXXXXXX year-end for financial statement reporting and tax purposes.
2. Pubco's issued and outstanding share capital consists of only common shares. The common shares of Pubco are listed for trading on the XXXXXXXXXX Stock Exchange under the symbol "XXXXXXXXXX ".
3. Pubco's common shares are its "principal class of shares" and are not "debt substitute shares" for the purposes of Article XXIX-A of the Convention. The common shares of Pubco do not constitute a "disproportionate class of shares" for the purposes of Article XXIX-A of the Convention.
4. Pubco is not fiscally transparent under the taxation laws of the United States for the purposes of the Convention.
5. Pubco is a resident of the United States for the purposes of the Convention and is a "qualifying person" as described in Article XXIX-A(2)(c) of the Convention.
6. Prior to XXXXXXXXXX , Pubco owned all of the issued and outstanding membership units of LLC Holdco. LLC Holdco is a disregarded entity for United States tax purposes and is fiscally transparent under the taxation laws of the United States for the purposes of the Convention.
7. Prior to XXXXXXXXXX , LLC Holdco owned all of the issued and outstanding common shares of Canco ULC. There were no other issued and outstanding shares of Canco ULC.
8. Canco ULC carried on a XXXXXXXXXX business in Canada. Canco ULC was a disregarded entity for United States tax purposes and was fiscally transparent under the taxation laws of the United States for the purposes of the Convention. As of XXXXXXXXXX, Canco ULC had an accumulated deficit of approximately $XXXXXXXXXX .
9. Prior to XXXXXXXXXX , Canco ULC owned all of the issued and outstanding membership units of LLC 1. LLC 1 carries on a XXXXXXXXXX business in the United States. LLC 1 does not carry on business or own any assets outside of the United States. LLC 1 is a disregarded entity for United States tax purposes and is fiscally transparent under the taxation laws of the United States for the purposes of the Convention.
10. LLC 1 is governed by the terms and conditions of an Amended and Restated Limited Liability Company Agreement ("LLC 1 Operating Agreement") entered into by its sole member, Canco ULC. LLC 1 has one class of authorized membership units. Membership units of LLC 1 represent an ownership interest in LLC 1 consisting of (i) the profits, losses, allocations and distributions of LLC 1, (ii) the right to grant or withhold consents with respect to LLC 1 matters as provided herein or in the XXXXXXXXXX , and (iii) such other rights and privileges as provided in the LLC 1 Operating Agreement governing LLC 1. The membership units of LLC 1 possess full voting rights and, in accordance with the LLC 1 Operating Agreement, entitle Canco ULC to receive distributions from LLC 1 as and when determined by Canco ULC. Profits and losses of LLC 1 are allocated to Canco ULC.
11. Except to the extent that a distribution would cause the liabilities of LLC 1 to exceed the fair value of its properties and thereby be prohibited under the laws of XXXXXXXXXX , LLC 1 is not precluded or restricted from making distributions to its members.
12. LLC 1 owns a XXXXXXXXXX % interest in US Partnership. The remaining interests in US Partnership are held by companies related to Pubco. US Partnership is the XXXXXXXXXX % owner and sole member of LLC 2, which operates a XXXXXXXXXX business for the XXXXXXXXXX exclusively for the Pubco corporate group. US Partnership does not carry on business or own any assets other than its interest in LLC 2. US Partnership is not treated as a corporation for United States tax purposes and is fiscally transparent under the taxation laws of the United States for the purposes of the Convention.
13. All of the gross income earned by LLC Holdco, Canco ULC and LLC 1, including, with respect to LLC 1, its share of US Partnership's income, is included in computing Pubco's gross income on a current basis under United States taxation laws.
14. Prior to XXXXXXXXXX , Pubco owned all of the issued and outstanding shares of Canco. Canco carried on XXXXXXXXXX business in Canada. Prior to XXXXXXXXXX , Canco was not a disregarded entity for United States tax purposes and was not fiscally transparent under the taxation laws of the United States for the purposes of the Convention.
15. During XXXXXXXXXX and XXXXXXXXXX , Pubco made advances to LLC 1 totaling approximately US$XXXXXXXXXX (the "Debt"), which LLC 1 used to finance a XXXXXXXXXX in the United States. Prior to XXXXXXXXXX , the Debt bore interest at an arm's-length rate.
SUBJECT TRANSACTIONS
The transactions described in Paragraphs 16 to 28 were completed in the order presented below on XXXXXXXXXX and XXXXXXXXXX , with the exception of the price adjustment referred to in Paragraph 27, which may be completed after the date of this letter.
15.1 On XXXXXXXXXX , US Holdco was incorporated under the laws of XXXXXXXXXX . US Holdco is disregarded as an entity for United States tax purposes and is part of an affiliated group of corporations, which includes Pubco, that is permitted to file a consolidated income tax return as contemplated by section 1501 of the Internal Revenue Code. US Holdco is a resident of the United States and a "qualifying person" as described in Article XXIX-A(2)(d) of the Convention.
15.2 On XXXXXXXXXX , Canco was continued under the Company Legislation as a limited company. At that time, Canco was not fiscally transparent under the taxation laws of the United States for the purposes of the Convention.
16. LLC 1 paid all accrued interest on the Debt.
17. Immediately after the payment of the accrued interest described in Paragraph 16, Pubco exchanged the Debt for the issuance by LLC 1 of two new debt obligations with different principal amounts. The Debt was cancelled as result of the exchange. One of the debt obligations issued by LLC 1 on the exchange had a principal amount equal to XXXXXXXXXX of the principal amount of the Debt outstanding immediately before the exchange and was denominated in United States dollars ("Debt 1"). The other debt obligation had a principal amount equal to XXXXXXXXXX of the principal amount of the Debt outstanding immediately before the exchange and was denominated in United States dollars ("Debt 2"). In all other material respects, except for the interest rate, the terms and conditions of Debt 1 and Debt 2 were identical to the terms and conditions of the Debt prior to the exchange.
18. The rate of interest on Debt 1 and Debt 2 was equal to the XXXXXXXXXX London Interbank Offered Rate plus XXXXXXXXXX %.
19. Pubco transferred Debt 1 to LLC Holdco in exchange for the issuance of additional membership units of LLC Holdco. The purchase price for Debt 1 was equal to the fair market value of Debt 1 at the time of the transfer.
20. Pubco transferred the shares of Canco to LLC Holdco in exchange for the issuance of additional membership units of LLC Holdco. The purchase price for the shares of Canco was equal to the fair market value of the shares of Canco at the time of the transfer.
21. LLC Holdco transferred the shares of Canco ULC to Canco in exchange for the issuance of additional common shares of Canco. The purchase price for the common shares of Canco ULC was equal to the fair market value of the shares of Canco ULC on the date of the transfer.
22. Canco and Canco ULC amalgamated under the Company Legislation as an unlimited liability company ("Canco ULC Amalco"). On the amalgamation,
(a) all of the property of Canco and Canco ULC immediately before the amalgamation became property of Canco ULC Amalco by virtue of the amalgamation (except amounts that were receivable from Canco or Canco ULC),
(b) all of the liabilities of Canco and Canco ULC immediately before the amalgamation became liabilities of Canco ULC Amalco by virtue of the amalgamation (except amounts that were payable to Canco or Canco ULC), and
(c) the shares of Canco and Canco ULC were cancelled on the amalgamation and Class A common shares of Canco ULC Amalco were issued to LLC Holdco.
23. LLC Holdco contributed Debt 1 to Canco ULC Amalco in exchange for the issuance of Class B common shares of Canco ULC Amalco. The purchase price for Debt 1 was equal to the fair market value of Debt 1. In accordance with the Company Legislation, an amount equal to the fair market value of Debt 1, determined at the time of the contribution, was added to the paid-up capital of the Class B common shares of Canco ULC Amalco. The Class B common shares of Canco ULC Amalco are identical to the Class A common shares of Canco ULC Amalco, except that the Class B common shares have a priority distribution of $XXXXXXXXXX (in the aggregate) on a wind-up, liquidation or dissolution of Canco ULC Amalco.
24. Pubco transferred Debt 2 to Canco ULC Amalco in exchange for the issuance of an interest-bearing promissory note by Canco ULC Amalco (the "Canco Note"). The Canco Note is denominated in Canadian dollars. At the time of issuance, the principal amount of the Canco Note was equal to the fair market value of Debt 2 on the date of transfer. The rate of interest on the Canco Note is equal to the XXXXXXXXXX London Interbank Offered Rate plus XXXXXXXXXX %.
25. Immediately after the issuance of the Canco Note, Canco ULC Amalco repaid a portion of the Canco Note by legally offsetting it against existing receivables owing to Canco ULC Amalco.
26. Pubco transferred the membership units of LLC Holdco to US Holdco in exchange for additional shares of US Holdco. The purchase price paid by US Holdco for the membership units of LLC Holdco was equal to the fair market value of such units at the time of transfer.
27. Canco ULC Amalco contributed Debt 1 and Debt 2 to LLC 1 in exchange for the issuance of additional membership units of LLC 1, including, for greater certainty, membership units issued as consideration for the contribution of Debt 1 and Debt 2 pursuant to a price adjustment. The purchase price for Debt 1 and Debt 2 was equal to the fair market value of Debt 1 and Debt 2 at the time of the exchange. As a result of the contribution, Debt 1 and Debt 2 were cancelled and extinguished.
28. LLC Holdco distributed the Class A and Class B common shares of Canco ULC Amalco to US Holdco as a dividend-in-kind.
29. In accordance with the terms of the Canco Note, Canco ULC Amalco will make periodic interest payments to Pubco.
30. Subsequent to the distribution of the common shares of Canco ULC Amalco referred to in Paragraph 28, in lieu of declaring and paying a cash dividend, Canco ULC Amalco will, subject to Paragraph 31:
(a) increase, in accordance with the provisions of the Company Legislation, the paid-up capital in respect of the Class A or Class B common shares of Canco ULC Amalco by an amount equal to the amount it wishes to distribute to Pubco;
(b) reduce, in accordance with the provisions of the Company Legislation and as soon as practicable after the increase referred to in Paragraph 30(a), the paid-up capital in respect of the class of common shares of Canco ULC Amalco subject to the increase described in Paragraph 30(a), by an amount equal to the amount of the increase; and
(c) on the reduction of paid-up capital referred to in Paragraph 30(b), distribute an amount of cash to Pubco equal to the amount of the reduction.
31. In the event that Canco ULC Amalco is prohibited from increasing the paid-up capital in respect of its shares under the Company Legislation in the manner described under Paragraph 30(a), Canco ULC Amalco will not complete the transactions described in Paragraphs 30(a), 30(b) and 30(c), but will:
(a) declare, in accordance with the provisions of the Company Legislation, a stock dividend payable to US Holdco for an amount equal to the amount it wishes to distribute to US Holdco;
(b) pay the stock dividend referred to in Paragraph 31(a) by issuing to US Holdco additional Class A or Class B common shares of Canco ULC Amalco having a fair market value equal to the amount Canco ULC Amalco wishes to distribute to US Holdco;
(c) add the amount of the stock dividend referred to in Paragraph 31(a) to the paid-up capital in respect of the class of common shares of Canco ULC Amalco issued in Paragraph 31(b);
(d) immediately after payment of the stock dividend referred to in Paragraph 31(b), consolidate the class of common shares upon which the dividend was paid in accordance with the provisions of the Company Legislation such that the number of common shares of that class outstanding immediately after the consolidation equals the number of common shares of that class that were outstanding immediately before payment of the stock dividend; and
(e) immediately after the share consolidation referred to in Paragraph 31(d), distribute an amount of cash to US Holdco as a return of capital on the class of common shares so consolidated equal to the amount of the stock dividend referred to in Paragraph 31(a).
32. The distributions referred to in Paragraphs 30 and 31 will be funded from Canco ULC Amalco's Canadian business operations or from amounts received by Canco ULC Amalco from LLC 1 out of cash generated from the business operations of LLC 2. In addition, such distributions may be effected by setting-off intercompany account balances in lieu of a cash payment.
PURPOSES OF THE SUBJECT TRANSACTIONS
33. The purpose of transferring the membership interests of LLC Holdco to US Holdco was to ensure that interest payments on the Canco Note are included in computing Pubco's separate taxable income for United States tax purposes such that the treatment of the interest is the same as it would be if Canco ULC Amalco were not fiscally transparent for United States tax purposes.
34. The purpose of the transactions described Paragraphs 30 and 31 is to make a distribution from Canada ULC Amalco in manner that avoids the application of Article IV(7)(b) of the Convention to a cash dividend paid by Canco ULC Amalco.
35. The purpose of the amalgamation of Canco and Canco ULC was to simplify Pubco's Canadian corporate structure and to better integrate its Canadian operations.
36. Notwithstanding that Canco ULC Amalco will be deemed to pay a dividend on the common shares of Canco ULC Amalco as a consequence of the transaction described in Paragraph 30(a) pursuant to subsection 84(1) of the Act, no income, profit or gain will arise or will be recognized under the taxation laws of the United States as a result of the transactions described in Paragraphs 30(a) and 30(b). Similarly, no amount of income, profit or gain would arise or be recognized under the taxation laws of the United States as a result of those transactions if Canco ULC Amalco were not fiscally transparent under the taxation laws of the United States.
37. The transactions described in Paragraphs 30(a) and 30(b) will not affect the treatment under the taxation laws of the United States of any subsequent distribution on the common shares of Canco ULC Amalco, including the return of paid-up capital referred to in Paragraph 30(c).
38. Notwithstanding that the payment of the stock dividend described in Paragraph 31(b) will be a payment of a taxable dividend under the Act, the integration of the payment of the stock dividend and the subsequent share consolidation will result in no income, profit or gain arising or being recognized under the taxation laws of the United States. Similarly, no amount of income, profit or gain would arise or be recognized under the taxation laws of the United States as a result of those transactions if Canco ULC Amalco were not fiscally transparent under the taxation laws of the United States for the purposes of the Convention.
39. The transactions described in Paragraphs 31(a), 31(b), 31(c) and 31(d) will not affect the tax treatment in the United States of any subsequent distribution on the shares of Canco ULC Amalco, including the return of paid-up capital referred to in Paragraph 31(e).
40. Pubco will include the interest income on the Canco Note in computing its separate taxable income for Unites States tax purposes. US Holdco will deduct the interest expense on the Canco Note in computing its separate taxable income for United States tax purposes. In computing the consolidated taxable income of the affiliated group of corporations that includes both Pubco and US Holdco, the interest income inclusion and the interest expense will offset each other.
41. At no time in the XXXXXXXXXX months immediately preceding the transfer referred to in Paragraph 28 will more than XXXXXXXXXX % of the fair market value of any share of Canco ULC Amalco have been derived directly or indirectly from one or any combination of (i) real or immovable property situated in Canada, (ii) Canadian resource property, (iii) timber resource property, and (iv) options in respect of, or interests in, or for civil law rights in, property described in any of subparagraphs (i) to (iii), whether or not the property exists.
42. [deleted].
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the subject transactions and the purposes of the subject transactions, and provided further that the subject transactions have been and will be completed in the manner described above, we rule as follows:
A. To the extent that Canco ULC Amalco is deemed to have paid, and US Holdco is deemed to have received, a dividend pursuant to subsection 84(1) of the Act as a consequence of the transaction described in Paragraph 30(a), that dividend will be a taxable dividend described in paragraph 212(2)(a) of the Act.
B. The amount of any stock dividend received by US Holdco as a consequence of the transactions described in Paragraphs 31(b) and 31(c) will be a taxable dividend described in paragraph 212(2)(a) of the Act.
C. For the purpose of applying Article X of the Convention, the amount of a dividend referred to in Ruling A or B will be considered to be income as described in the definition "dividends" in Article X(3) of the Convention that is derived by US Holdco.
D. US Holdco will be entitled to the same benefits under Article X(2) of the Convention that it would be entitled to if a dividend referred to in Ruling A or B were paid as a cash dividend and the Convention were read without reference to Article IV(7)(b).
E. Article IV(7)(b) of the Convention will not apply to treat a dividend referred to in Ruling A or B as not having been paid to or derived by US Holdco.
F. Article IV(7)(b) of the Convention will not apply to treat a payment of interest on the Canco Note as not having been paid to or derived by Pubco.
G. Provided that Canco ULC Amalco has a legal obligation to pay interest on the Canco Note and the membership units of LLC 1 acquired by Canco ULC Amalco on the contribution of Debt 2 as described in Paragraph 27 continue to be held by Canco ULC Amalco for the purpose of gaining or producing income therefrom, Canco ULC Amalco will, subject to subsection 18(4), be entitled to deduct, pursuant to paragraph 20(1)(c), the lesser of the interest paid or payable (depending on the method regularly followed by Canco ULC Amalco in computing its income for the purposes of the Act) in respect of that taxation year or a reasonable amount in respect thereof.
H. Subsection 245(2) will not apply to the subject transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.
The above-noted rulings are based on the Act and the Convention in their present form 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
Nothing in this letter should be construed as implying that the CRA has agreed to or reviewed:
(a) the determination of the adjusted cost base, paid-up capital (for the purposes of both the Company Legislation and the Act) or fair market value of any shares or other property referred to herein;
(b) the amount of any stock dividend paid by Canco ULC Amalco;
(c) whether Canco ULC is fiscally transparent under the taxation laws of the United States for the purposes of the Convention or whether Canco ULC Amalco is fiscally transparent under those laws;
(d) whether a taxable dividend resulting from the transactions in Paragraphs 30 and 31 is disregarded under the taxation laws of the United States or would be disregarded if Canco ULC Amalco were not fiscally transparent under the taxation laws of the United States for the purposes of the Convention;
(e) the application of subsection 247(2) in determining the amount of interest that may be deducted by Canco ULC Amalco in respect of the Canco Note; and
(f) any tax consequences relating to the facts and subject transactions described herein other than those described in the rulings given above.
This ruling is based solely on the facts, the subject transactions 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 CRA provided that the subject transactions are completed on or before XXXXXXXXXX .
Yours truly,
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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