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 subparagraph 7(b) of Article IV of the Canada-U.S. Tax Convention will apply to deny treaty benefits where a corporation increases paid up capital and subsequently makes a payment that reduces paid up capital?
Reasons: Previous rulings given. Subsections 84(1) and 212(2) of the Act will apply on the increase of paid-up capital.
XXXXXXXXXX , 2010
Dear XXXXXXXXXX :
(collectively referred to as the "Taxpayers")
We are writing in response to your request dated XXXXXXXXXX for an advance income tax ruling on behalf of the above noted Taxpayers.
To the best of your knowledge and that of the Taxpayers, issues involved in this ruling request are not:
(i) the subject of an earlier return of the Taxpayers or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Taxpayers or a related person;
(iii) under objection by any of the taxpayers or a related person;
(iv) before the courts, or if a judgement has been issued, the time limit for appeal to a higher court has expired; or
(v) the subject of a ruling previously considered by the Directorate.
In this letter, the following terms have the meaning specified below:
"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date of this letter;
"Canco" means XXXXXXXXXX ;
"Canco2" means XXXXXXXXXX ;
"Canco3" means XXXXXXXXXX ;
"CBCA" means the Canada Business Corporations Act;
"Companies Act" means XXXXXXXXXX ;
"LP" means XXXXXXXXXX ;
"Paid-Up Capital" has the meaning assigned by subsection 89(1) of the Act;
"Taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;
"Treaty" means the Convention between Canada and the United States of America With Respect to Taxes on Income and on Capital Signed on September 26, 1980 as Amended by Protocols Signed on June 14, 1983, March 28, 1984, March 15, 1995, July 29, 1997 and September 21, 2007;
"USCO" means XXXXXXXXXX ;
"USCO2" means XXXXXXXXXX ;
"USCO3" means XXXXXXXXXX ; and
"USParentco" means XXXXXXXXXX .
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
1. USParentco was incorporated under the laws of the State of XXXXXXXXXX . USParentco is a publicly traded company that is listed on the XXXXXXXXXX . USParentco is a "qualifying person" as defined in subparagraph 2(c) of Article XXIX-A of the Treaty.
2. USCO was incorporated under the laws of the State of XXXXXXXXXX . US Parentco owns all of the issued and outstanding shares of USCO. USCO is a "qualifying person" as defined in subparagraph 2(d) of Article XXIX-A of the Treaty. USCO does not have a Canadian tax identification number.
3. Canco is a taxable Canadian corporation formed under the Companies Act as an unlimited liability corporation. USCO owns all of the issued and outstanding shares of Canco. Canco files its tax returns at the XXXXXXXXXX Tax Centre, and is served by the XXXXXXXXXX Tax Services Office.
4. Canco is treated as a disregarded entity under the taxation laws of the United States (i.e. Canco is fiscally transparent).
5. Canco2 is a taxable Canadian corporation governed by the CBCA. Canco owns all of the issued and outstanding shares of Canco2. Canco2 is treated as a corporation under the taxation laws of the United States (i.e. it is not fiscally transparent).
6. USCO3 was incorporated under the laws of the State of XXXXXXXXXX . USParentco owns all of the issued and outstanding shares of USCO3.
7. Canco3 is a taxable Canadian corporation governed by the CBCA. USCO3 owns all of the issued and outstanding shares of Canco3.
8. LP was formed in Canada. LP carries on a XXXXXXXXXX business, and the XXXXXXXXXX is sold to Canco2. LP is also a member of three other partnerships. LP and the three partnerships are "Canadian partnerships" as defined in subsection 102(1) of the Act. LP's Canada Revenue Agency identification number is XXXXXXXXXX .
9. Canco owns a XXXXXXXXXX % partnership interest in LP. LP is treated as a partnership under the taxation laws of the United States (i.e. it is a fiscally transparent entity).
10. Canco3 owns a XXXXXXXXXX % partnership interest in LP.
11. USCO2 was incorporated under the XXXXXXXXXX . Canco owns all of the issued and outstanding shares of USCO2.
12. USParentco, USCO, USCO2, USCO3, Canco, Canco2 and Canco3 each have a fiscal period that begins on XXXXXXXXXX and ends on XXXXXXXXXX .
13. USParentco files its U.S. federal tax return on a consolidated basis. USCO, USCO2 and USCO3 are also part of the consolidated group.
14. During its XXXXXXXXXX taxation year, Canco, in lieu of declaring and paying a cash dividend, will:
(a) increase, in accordance with the provisions of the Companies Act, the paid-up capital in respect of its shares held by USCO by an amount equal to the amount of cash that it wishes to distribute to USCO;
(b) reduce, as soon as practicable, the paid-up capital of those shares, in accordance with the provisions of the Companies Act, by an amount equal to the amount of the increase described in paragraph (a) above; and
(c) distribute an amount in cash, as a return of paid-up capital on its shares held by USCO, equal to the amount of the reduction referred to in paragraph (b) above.
15. Notwithstanding that the proposed transaction referred to in paragraph 14(a) above would, pursuant to subsection 84(1) of the Act, result in a deemed payment of a dividend on the shares of Canco, no amount of income, profit or gain will arise or will be recognized under the taxation laws of the United States as a result of that transaction. Similarly, no amount of income, profit or gain would arise or be recognized in the United States as a result of that transaction if Canco were not fiscally transparent under the taxation laws of the United States.
16. The proposed transaction described in paragraph 14(a) above will not affect the tax treatment in the United States of any subsequent distribution on the Canco shares, including the return of paid-up capital referred to in paragraph 14(c) above.
Purpose of the Proposed Transactions
17. The purpose of the Proposed Transactions is to distribute earnings from Canco and Canco2's Canadian business operations to USCO in a manner that avoids the application of subparagraph 7(b) of Article IV of the Treaty.
Provided that the preceding statements constitute a complete and accurate disclosure of the all of the relevant facts, proposed transactions and the purposes of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. To the extent that Canco is deemed to have paid, and USCO is deemed to have received, a dividend pursuant to subsection 84(1) of the Act on the increase of paid-up capital referred to in paragraph 14(a) above, that dividend will be a taxable dividend described in paragraph 212(2)(a) of the Act.
B. The dividend referred to in Ruling A will be considered to be income as described in the definition of "dividends" in paragraph 3 of Article X of the Treaty.
C. Subparagraph 7(b) of Article IV will not apply to the dividend referred to in Ruling A.
D. Subsection 245(2) of the Act will not apply to redetermine the tax consequences confirmed in the rulings given above.
The above-noted rulings are based on the Act and the Treaty in their present form and do not take into account any proposed amendments which, if enacted, could have an effect on the rulings provided herein.
The rulings are based solely on the facts and proposed transactions described above and are subject to the limitation and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002. The rulings are binding on the Canada Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX .
Any documents submitted with your request do not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
Nothing in this letter should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:
(a) whether USCO is a "qualifying person" as defined in Article XXIX-A of the Treaty;
(b) whether the deemed dividend referred to in paragraph 14(a) above is disregarded under the taxation laws of the United States or would be disregarded if Canco were not fiscally transparent under the taxation laws of the United States; and
(c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
International & Trust Division
Income Tax Rulings Directorate
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