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: A foreign affiliate of Canco (CFA 2) will make various Group Contribution Payments under the domestic tax law of the country in which it is resident to other foreign affiliates of Canco resident in that same country (CFA 1 and CFA 3) as follows:
a direct payment from CFA 2 to an indirect parent company (CFA 3) that will be paid out of earnings from an active business. The payment will be designated as a Group Contribution Payment from CFA 2 to CFA 3.
a direct payment from CFA 2 to its direct parent company (CFA 1) that will be paid out of earnings from an active business. The payment will be designated as a Group Contribution Payment from CFA 2 to CFA 1.
a direct payment from CFA 2 to an indirect parent company (CFA 3) that will immediately be contributed back. The payment will be designated as a Group Contribution Payment from CFA 2 to CFA 3.
a direct payment from CFA 2 to an indirect parent company (CFA 3) that will immediately be contributed back. In addition, CFA 3 will make a capital contribution for the same amount down the chain of intermediary entities to CFA 1. The payment by CFA 2 to CFA 3 will be designated as a Group Contribution Payment from CFA 2 to CFA 3, and the capital contribution from CFA 3 down the chain of intermediary entities to CFA 1 will also be designated as a Group Contribution Payment from CFA 3 to CFA 1.
Will the Group Contribution Payments result in a reduction in CFA 2's exempt surplus, and an increase in CFA 1 or CFA 3's exempt surplus?
Position:
Yes
Yes
No
No
Reasons:
the payment reduces CFA 2's earnings from an active business computed in accordance with the domestic tax law of that country, and will be recharacterized as income from an active business to CFA 3 by clause 95(2)(a)(ii)(B)
the payment reduces CFA 2's earnings from an active business computed in accordance with the domestic tax law of that country, and will be recharacterized as income from an active business to CFA 1 by clause 95(2)(a)(ii)(B)
the payment will be contributed back under a contract and the designation of it as a Group Contribution Payment will not affect the earnings of CFA 2 or CFA 3
the payment from CFA 2 to CFA 3 will be contributed back under a contract and the designation of the payment from CFA 2 to CFA 3, and from CFA 3 down the chain of intermediary entities to CFA 1 as Group Contribution Payments will not affect the earnings of CFA 1, CFA 2 or CFA 3
XXXXXXXXXX 2010-036336
Attention: XXXXXXXXXX
XXXXXXXXXX , 2011
Dear XXXXXXXXXX :
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX in which you ask for an advance income tax ruling on behalf of XXXXXXXXXX .
Definitions
In this letter, the following terms have the meanings specified.
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1 as amended to the date hereof. All statutory references in this letter are to the Act unless otherwise noted.
(b) "active business" has the meaning assigned by subsection 95(1).
(c) "adjusted cost base" has the meaning assigned by subsection 54(1).
(d) "Canco" means XXXXXXXXXX .
(e) "CFA A" means XXXXXXXXXX .
(f) "CFA B" means XXXXXXXXXX .
(g) "CFA 1" means XXXXXXXXXX .
(h) "CFA 2" means XXXXXXXXXX .
(i) "CFA 3" means XXXXXXXXXX .
(j) "CFA 4" means XXXXXXXXXX .
(k) "CFA I" means XXXXXXXXXX .
(l) "CFA II" means XXXXXXXXXX .
(m) "CFA III" means XXXXXXXXXX .
(n) "controlled foreign affiliate" has the meaning assigned by subsection 95(1).
(o) "Country V" means the XXXXXXXXXX .
(p) "Country W" means XXXXXXXXXX .
(q) "Country X" means XXXXXXXXXX .
(r) "Country Y" means XXXXXXXXXX .
(s) "Country Z" means XXXXXXXXXX .
(t) "earnings" has the meaning assigned by subsection 5907(1) of the Regulations.
(u) "exempt surplus" has the meaning assigned by subsection 5907(1) of the Regulations.
(v) "FAPI" means foreign accrual property income as defined in subsection 95(1).
(w) "foreign affiliate" has the meaning assigned by subsection 95(1).
(x) "Group Contribution Payment" is a payment made under XXXXXXXXXX , and is further described in 12 below.
(y) "public corporation" has the meaning assigned by subsection 89(1).
(z) "Regulations" means the Income Tax Regulations.
(aa) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1).
(bb) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).
Facts
1. Canco is a public corporation and a taxable Canadian corporation. Canco carries on an active business in and outside Canada either directly or indirectly through Canadian and foreign subsidiaries. Canco and its subsidiaries carry on active businesses principally in the XXXXXXXXXX . Canco files its tax returns at the XXXXXXXXXX Tax Centre and is served by the XXXXXXXXXX Tax Services Office.
2. CFA A is a corporation incorporated under the laws of Country Y, and is a subsidiary wholly-owned corporation of Canco. CFA A is a non-resident of Canada and a resident of Country Y for purposes of the Act and the Canada-Country Y Tax Convention. CFA A is a foreign affiliate and controlled foreign affiliate of Canco. It carries on a business in the XXXXXXXXXX and earns active business income from it.
3. CFA B is a corporation incorporated under the laws of Country Y and a subsidiary wholly-owned corporation of CFA A. CFA B is a non-resident of Canada and a resident of Country Y for purposes of the Act and the Canada-Country Y Tax Convention. CFA B is a foreign affiliate and controlled affiliate of Canco. It does not carry on an active business.
4. CFA 1 is a corporation incorporated under the laws of Country X and is a subsidiary wholly-owned corporation of CFA B. CFA 1 is a non-resident of Canada and a resident of Country X for purposes of the Act and the Canada-Country X Income Tax Convention. CFA 1 is a foreign affiliate and controlled foreign affiliate of Canco. It does not carry on an active business. It has available property losses stemming from prior indebtedness used to earn property income.
5. CFA 2 is a corporation incorporated under the laws of Country X and is a subsidiary wholly-owned corporation of CFA 1. CFA 2 is a non-resident of Canada and a resident of Country X for purposes of the Act and the Canada-Country X Income Tax Convention. CFA 2 is a foreign affiliate and controlled foreign affiliate of Canco. CFA 2 carries on a business in the XXXXXXXXXX and earns active business income from it. None of the income of CFA 2 from its active business is subject to tax under Part I of the Act.
6. CFA 3 is a corporation incorporated under the laws of Country X and is a subsidiary wholly-owned corporation of Canco. CFA 3 is a non-resident of Canada and a resident of Country X for purposes of the Act and the Canada-Country X Income Tax Convention. CFA 3 is a foreign affiliate and controlled foreign affiliate of Canco. It does not carry on an active business. It has available property losses stemming from interest-bearing loans from Canco used to finance its investment in CFA 4.
7. CFA 4 is a corporation incorporated under the laws of Country X and is a subsidiary wholly-owned corporation of CFA 3. CFA 4 is a non-resident of Canada and a resident of Country X for purposes of the Act and the Canada-Country X Income Tax Convention. CFA 4 is a foreign affiliate and controlled foreign affiliate of Canco. It does not carry on an active business.
8. CFA I is a corporation incorporated under the laws of Country Z and is a subsidiary wholly-owned corporation of CFA 4. CFA I is a non-resident of Canada and a resident of Country W for purposes of the Act and the Canada-Country V Tax Convention. CFA I is a foreign affiliate and controlled foreign affiliate of Canco. It does not carry on an active business.
9. CFA II is a corporation incorporated under the laws of Country Z and is a subsidiary wholly-owned corporation of CFA I. CFA II is a non-resident of Canada and a resident of Country W for purposes of the Act and the Canada-Country V Tax Convention. CFA II is a foreign affiliate and controlled foreign affiliate of Canco. CFA II does not carry on an active business.
10. CFA III is a corporation incorporated under the laws of Country W and is a subsidiary wholly-owned corporation of CFA II. CFA III is a non-resident of Canada and a resident of Country W for purposes of the Act and the Canada-Country V Tax Convention. CFA III is a foreign affiliate and controlled foreign affiliate of Canco. It carries on a business in the XXXXXXXXXX and earns active business income from it.
11. Canco has a XXXXXXXXXX year-end; CFA 1, CFA 2 and CFA 3 each have a XXXXXXXXXX year-end.
12. Although there is no tax consolidation regime per se in Country X, it is nonetheless possible for corporations to benefit from group taxation rules allowing transfers of profits between corporations within a group. These rules are found in XXXXXXXXXX of the Country X Income Tax Act. Generally speaking, the purpose of the group taxation regime is to treat business activities on a combined basis from an income tax standpoint, whether they are carried on by one or many corporate entities.
More specifically, a corporation making a Group Contribution Payment benefits from a deduction in computing its taxable income, whereas the corporation receiving the Group Contribution Payment must include it in its taxable income, and it will be able to deduct its available losses against it. In effect, this regime allows shifting taxable income from a profitable member of a group to a non-profitable member. Such transfers are booked directly to shareholder equity in the annual accounts in both corporations and are executed by actual transfer of funds.
To qualify as a Group Contribution Payment, there must be a transfer of value from one entity to the other. However, a subsequent repayment is not detrimental in the analysis of whether value was transferred.
Group Contribution Payments are allowed between subsidiary, parent and grandparent corporations provided each entity owns more than 90% of the capital of its immediate subsidiary. Similarly, Group Contribution Payments are generally allowed between sister corporations provided they have the same ultimate parent corporation.
The decision to make a Group Contribution Payment is made on an annual basis, at the entire discretion of the payer. Furthermore, no contractual agreement is required between the parties to the Group Contribution Payment.
13. CFA 2 made payments to CFA 1 of XXXXXXXXXX . These amounts were designated to be Group Contributions Payments, and were deducted against taxable income by CFA 2 and included in taxable income by CFA 1 for Country X income tax purposes.
14. For the fiscal year ended on XXXXXXXXXX , CFA 2 paid a dividend of XXXXXXXXXX to CFA 1. In turn, a dividend of the same amount was paid from CFA 1 to CFA B, from CFA B to CFA A, and from CFA A to Canco. Canco contributed the same amount to CFA 3 as a capital contribution. XXXXXXXXXX was designated to be a Group Contribution Payment from CFA 2 to CFA 3, and was deducted against taxable income by CFA 2 and included in taxable income by CFA 3 for Country X income tax purposes.
Proposed Transactions
15. Prior to CFA 2 making the Group Contribution Payments as described in 16 to 19 below, Canco will transfer all of its shares in CFA A to CFA 3 in exchange for shares of CFA 3 and an interest-bearing note from CFA 3 payable to Canco. The note will be an amount not greater than the total of the adjusted cost base to Canco of its shares in CFA A, plus the amount, if any, designated under a subsection 93(1) election. Subsection 85.1(3) of the Act will apply to the transfer, and Canco will elect under subsection 93(1) in respect of the disposition of the CFA A shares, such that Canco will not realize a gain on the transfer for purposes of the Act.
16. To the extent that CFA 2 has taxable income and CFA 3 has available losses in a year as computed in accordance with Country X tax law, CFA 2 will make a payment directly to CFA 3 in an amount not exceeding CFA 2's income from an active business for the year computed in accordance with Country X tax law. The payment will be designated as a Group Contribution Payment from CFA 2 to CFA 3. The payment will reduce CFA 2's income from an active business in the year as computed in accordance with Country X tax law, and will be included in taxable income by CFA 3 for Country X income tax purposes.
17. To the extent that CFA 2 has taxable income remaining after the payment described in 16 above, and CFA 1 has available losses in a year as computed in accordance with Country X tax law, CFA 2 will make a payment directly to CFA 1 in an amount not exceeding the amount by which CFA 2's income from an active business for the year computed in accordance with Country X tax law exceeds the payment described in 16 above. The payment will be designated as a Group Contribution Payment from CFA 2 to CFA 1. The payment will reduce CFA 2's income from an active business in the year as computed in accordance with Country X tax law, and will be included in taxable income by CFA 1 for Country X income tax purposes.
18.
(a) To the extent that CFA 2 has taxable income (other than income from an active business) remaining after the payments described in 16 and 17 above, and CFA 3 has available losses remaining, CFA 2 will make a second payment directly to CFA 3. This amount will be designated to be a Group Contribution Payment from CFA 2 to CFA 3, and will be deducted from taxable income by CFA 2 and included in taxable income by CFA 3 for Country X income tax purposes.
(b) Prior to making the payment in 18(a) above, CFA 2 and CFA 3 will enter into an agreement where CFA 3 will agree to immediately contribute to CFA 2 all of the funds paid to CFA 3 as described in 18(a). CFA 3 will immediately contribute to CFA 2 the funds in accordance with the agreement. The contribution of the funds will have no effect on the results described in 18(a) for Country X tax purposes.
19.
(a) To the extent that CFA 2 has taxable income (other than income from an active business) remaining after the payments described in 16, 17 and 18(a) above, and CFA 1 has available losses remaining, CFA 2 will make a third payment directly to CFA 3. This amount will be designated to be a Group Contribution Payment from CFA 2 to CFA 3, and will be deducted from taxable income by CFA 2 and included in taxable income by CFA 3 for Country X income tax purposes. CFA 3 will make a capital contribution for the same amount to CFA A, CFA A will make an equivalent capital contribution to CFA B and CFA B will also make an equivalent capital contribution to CFA 1. CFA 1 may either pay a dividend or a return of paid-up capital for the same amount up the chain of intermediary entities to CFA 3 (i.e. through CFA B and CFA A). The amount paid by CFA 3 through CFA A and CFA B to CFA 1 will be designated to be a Group Contribution Payment from CFA 3 to CFA 1, and will be deducted from taxable income by CFA 3 and included in taxable income by CFA 1 for Country X income tax purposes.
(b) Prior to making the payments in 19(a) above, CFA 2 and CFA 3 will enter into an agreement where CFA 3 will agree to immediately contribute to CFA 2 all of the funds paid by CFA 2 to CFA 3 as described in 19(a). CFA 3 will immediately contribute to CFA 2 the funds in accordance with the agreement. The contribution of the funds by CFA 3 to CFA 2 will have no effect on the results described in 19(a) for Country X tax purposes.
(c) Any dividend or return of paid-up capital from CFA 1 will have no effect on the results described in 19(a) for Country X tax purposes.
Purpose of the Proposed Transactions
The purpose of the Proposed Transactions is to achieve efficient group taxation in Country X, while providing for a neutral tax treatment for the foreign affiliates of Canco from a Canadian tax perspective. The agreement described in, 18(b) and 19(b) above to return the funds is to ensure that CFA 2 will have funds necessary to carry on its business. Contributions of Group Contribution Payments described in, 18(b) and 19(b) will be booked directly to shareholder equity.
Other than as outlined in 13 and 14 above, to the best of your knowledge and that of Canco, none of the issues involved in this advance income tax ruling is:
- in an earlier return of Canco or a related person;
- being considered or under assessment by a tax services office or taxation centre in connection with a previously filed tax return of Canco or a related person;
- under objection by Canco or a related person;
- before the courts, and no judgement has been issued which may be under appeal; or
- the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Rulings Given
Provided the preceding statements constitute a complete and accurate disclosure of all the relevant Definitions, Facts, Proposed Transactions and Purpose of the Proposed Transactions, we rule as follows:
A. Group Contribution Payments made by CFA 2 to CFA 3 as referred to in 16 above will be included in CFA 3's income because of subsection 246(1). Clause 95(2)(a)(ii)(B) will apply to include those payments in computing the income or loss from an active business of CFA 3 because they will be derived from expenditures that will be deductible by CFA 2 in computing the amounts prescribed by subsection 5907(1) of the Regulations to be its earnings from an active business (other than an active business carried on in Canada).
B. Group Contribution Payments made by CFA 2 to CFA 1 referred to in 17 above will be included in CFA 1's income because of subsection 15(1). Clause 95(2)(a)(ii)(B) will apply to include those payments in computing the income or loss from an active business of CFA 1 because they will be derived from expenditures that will be deductible by CFA 2 in computing the amounts prescribed by subsection 5907(1) of the Regulations to be its earnings from an active business (other than an active business carried on in Canada).
C. Group Contribution Payments described in 18(a) above that are contributed back as described in 18(b) above will not constitute income to CFA 3, and will not reduce the amount prescribed by subsection 5907(1) of the Regulations to be CFA 2's earnings from an active business (other than an active business carried on in Canada) or any of CFA 2's surplus account balances. Nor will the payments reduce the FAPI, if any, of CFA 2.
D. Group Contribution Payments described in 19(a) above from CFA 2 to CFA 3 that are contributed back by CFA 3 to CFA 2 as described in 19(b) above will not constitute income to CFA 3, and will not reduce the amount prescribed by subsection 5907(1) of the Regulations to be CFA 2's earnings from an active business (other than an active business carried on in Canada) or any of CFA 2's surplus account balances. Nor will the payments reduce the FAPI, if any, of CFA 2.
E. Group Contribution Payments described in 19(a) above from CFA 3 to CFA 1 by way of capital contributions down the chain of intermediary entities will have no impact on the surplus balances of either CFA 3 or CFA 1.
F. Other than as set out above in rulings A and B, subsections 15(1), 56(2) and 246(1) will not apply solely as a result of the Proposed Transactions.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002 and are binding on the Canada Revenue Agency for Group Contribution Payments made as outlined in 16 to 19 above after the date of the letter and before XXXXXXXXXX .
This letter is based solely on the Facts and Proposed Transactions described above. The documentation submitted with your request does 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 reviewed, accepted or otherwise agreed to any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the rulings given above. In particular, the rulings given above do not apply to the Group Contribution Payments described in 13 and 14 above.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein. Further, the above rulings are given on the basis that the Group Contribution Payments referred to in 16 to 19 above are effective and satisfy all of the conditions and requirements under Country X or Country Y law.
Yours truly,
XXXXXXXXXX , Manager
For Director
International & Trusts Division
Income Tax Rulings Directorate
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