2010 Ruling 2010-0372181R3 - Canada-U.S. Tax Convention - Article IV(7)(b)

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: 1) Whether Article IV(7)(b) of the Treaty applies to treat the deemed dividend and the interest paid by Canco (a fiscally transparent entity) as not being paid to a resident of the USA. 2) Whether the interest paid by Canco to the US resident will be subject to withholding under subsection 212(1)(b).

Position: 1) No. 2) No.

Reasons: 1) Article IV(7)(b) of the Treaty does not apply because the deemed dividend and the interest paid are subject to the same treatment under the taxation laws of the U.S.A. as it would be if Canco were not fiscally transparent. 2) Paragraph 1 of Article XI of the Treaty applies.

XXXXXXXXXX 							2010-037218

XXXXXXXXXX , 2010

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX - Business number: XXXXXXXXXX

We are writing in reply to your letter of XXXXXXXXXX in respect of your request for an advance income tax ruling on behalf of the above noted-taxpayer. We also acknowledge the information provided to us in your electronic correspondence and during various telephone conversations (XXXXXXXXXX) in connection with your ruling request.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling request is:

(i) dealt with in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has expired, and

(v) the subject of a previous ruling issued to the taxpayer or a related person by the Income Tax Rulings Directorate

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified hereunder:

a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof, and unless otherwise stated, a reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act and the regulations thereunder are referred to as the "Regulations";

b) "Canco" means XXXXXXXXXX , a XXXXXXXXXX unlimited liability company. Canco's registered office is XXXXXXXXXX . Canco has a XXXXXXXXXX taxation year-end. Canco files its federal income tax returns with the XXXXXXXXXX Tax Centre. Its business registration number is XXXXXXXXXX ;

c) "CRA" means the Canada Revenue Agency;

d) "non-resident" has the meaning assigned by subsection 248(1);

e) XXXXXXXXXX ;

f) "Paragraph" means a numbered paragraph in this advance income tax ruling request;

g) "Predco ULC" means XXXXXXXXXX (a predecessor and separate entity from Canco described in paragraph (b) above), a XXXXXXXXXX unlimited liability company incorporated on XXXXXXXXXX . Predco ULC was amalgamated with other entities within the related group on XXXXXXXXXX to form Canco.

h) "Predco Debt" means the loan as described in Paragraph 8;

i) "Proposed Transactions" means the transactions described in Paragraphs 9 and 10;

j) "Pubco" means XXXXXXXXXX , a corporation formed on XXXXXXXXXX under the laws of XXXXXXXXXX . Pubco is a non-resident of Canada and a resident of the U.S. for purposes of the Act and for the purposes of the Treaty;

k) "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 to the date hereof;

l) "U.S." means the United States of America; and

m) "US Holdco" means XXXXXXXXXX , a corporation formed under the laws of XXXXXXXXXX . US Holdco is a non-resident of Canada and a resident of the U.S. for purposes of the Act and for the purposes of the Treaty.

Unless otherwise indicated in this letter, all dollar amounts referred to herein are in Canadian dollars.

Our understanding of the facts, proposed transactions and the purposes of the proposed transactions are as follows:

FACTS

1. Canco actively carries on business in Canada and is engaged in the manufacturing and distribution of XXXXXXXXXX products throughout Canada. It is also engaged in the distribution of other XXXXXXXXXX products purchased from Pubco and its US subsidiaries. For the year ended XXXXXXXXXX , Canco generated gross sales of approximately $XXXXXXXXXX in Canada. Canco reported total assets of approximately $XXXXXXXXXX on its balance sheet as at XXXXXXXXXX .

2. Canco is disregarded as a separate entity for U.S. federal income tax purposes (i.e. Canco is fiscally transparent and treated as a branch of US Holdco).

3. US Holdco owns all the issued and outstanding shares of Canco.

4. US Holdco is not disregarded as a separate entity for U.S. federal income tax purposes (i.e. US Holdco is not fiscally transparent).

5. Pubco owns all the issued and outstanding shares of US Holdco. Pubco's common shares are traded on the XXXXXXXXXX . Pubco and its subsidiaries' businesses consist of manufacturing and distributing XXXXXXXXXX products in XXXXXXXXXX . For the year ended XXXXXXXXXX , Pubco generated sales of approximately U.S.$XXXXXXXXXX Pubco is authorized to issue up to XXXXXXXXXX shares of a separate class of Preferred Stock. However, as at the date of this letter, no Preferred Stock have been issued and the sole class of shares issued by Pubco are common shares.

6. Pubco, together with its wholly-owned U.S. subsidiaries, including US Holdco, file a U.S. federal income tax return as a consolidated group.

7. Each of Pubco and US Holdco is a resident of the U.S. as defined in Article IV of the Treaty. Further, each of Pubco and US Holdco is a "qualifying person" for the purposes of Article XXIX A of the Treaty per Article XXIX A2(c) and XXIX A2(d), respectively.

8. On XXXXXXXXXX , Predco ULC borrowed U.S.$XXXXXXXXXX from Pubco (the "Predco Debt"). The Predco Debt is denominated in U.S. dollars and pays interest at a rate of XXXXXXXXXX % per annum. Predco ULC in turn used all of the funds to acquire shares of Canadian target companies from an unrelated vendor on XXXXXXXXXX . Canco became the debtor of the Predco Debt as a result of the amalgamation of Predco ULC and the other Canadian target companies in XXXXXXXXXX , as described above.

PROPOSED TRANSACTIONS

9. On or after XXXXXXXXXX , Canco will from time to time make interest payments ("Interest Payment") to Pubco pursuant to the terms of the Predco Debt as described in Paragraph 8. The same amount of interest received by Pubco will be included in computing its separate taxable income for U.S. tax purposes in the same period that the interest is received.

10. On or after XXXXXXXXXX , in lieu of paying and declaring a dividend, Canco will from time to time:

a) increase, in accordance with the provisions of the XXXXXXXXXX , the paid-up capital in respect of its shares by an amount equal to the amount it wishes to distribute to its shareholders;

b) reduce, as soon as practicable after the increase referred to in Paragraph 10(a), the paid-up capital in respect of its shares in accordance with the provisions of the XXXXXXXXXX by an amount equal to the amount of the increase described in Paragraph 10(a); and

c) distribute as a return of capital on its shares an amount equal to the reduction referred to in Paragraph 10(b).

PURPOSE OF THE PROPOSED TRANSACTIONS

11. The purpose of the Proposed Transaction described in Paragraph 9 is to continue to comply with the terms of the Predco Debt.

12. The purpose of the Proposed Transactions described in Paragraph 10 is to make future distributions from Canco to US Holdco in a manner that avoids the application of Article IV(7)(b) of the Treaty.

ADDITIONAL INFORMATION

13. Notwithstanding that the proposed transaction described in Paragraph 10(a) will result in a deemed dividend on the shares of Canco owned by US Holdco under subsection 84(1), 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 10(a)-(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 were not fiscally transparent under the taxation laws of the United States.

14. The proposed transactions described in Paragraph 10(a)-(b) will not affect the tax treatment in the United States of any subsequent distribution on the Canco shares owned by US Holdco, including the return of paid-up capital referred to in Paragraph 10(c).

15. The interest on the Predco Debt will be recognized as an item of income in the hands of Pubco under the taxation laws of the United States in the same manner as it would be recognized if Canco were not fiscally transparent under those laws. More specifically, the timing, character and quantum of the interest on the Predco Debt included in the income of Pubco will be the same under the taxation laws of the United States as it would be if Canco were not fiscally transparent under those laws.

RULINGS GIVEN

Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we rule as follows:

A. Article IV(7)(b) of the Treaty will not apply to treat any Interest Payment described in Paragraph 9 paid or credited by Canco to Pubco on the Predco Debt as not having been paid to Pubco.

B. Interest paid or credited by Canco to Pubco on the Predco Debt described in Paragraph 9 on or after XXXXXXXXXX will not be subject to withholding tax under subsection 212(1)(b), by virtue of Paragraph 1 of Article XI of the Treaty.

C. To the extent Canco is deemed to have paid, and US Holdco is deemed to have received, a dividend pursuant to subsection 84(1) as described in Paragraph 10(a) that dividend will be a taxable dividend as described in paragraph 212(2)(a).

D. For the purposes of applying Article X of the Treaty, the amount of the dividend referred to in Ruling C will be considered to be income as described in the definition of "dividends" in Article X(3) of the Treaty.

E. Article IV(7)(b) of the Treaty will not apply to treat the dividend referred to in Ruling C as not having been paid to US Holdco.

F. As a result of the Proposed Transactions, in and by themselves, subsection 245(2) will not be applied to re-determine the tax consequences described in the rulings given above, to any of the parties.

The above-noted rulings are based on the Act and the Treaty in their present forms and do not take into account any proposed amendments to the Act or the Treaty 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; and

(b) whether the deemed dividend resulting from the proposed transaction referred to in paragraph 10 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.

Finally, nothing in this letter should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:

(a) the determination of the adjusted cost base, paid-up capital for the purposes of the Act or fair market value of any shares or other property referred to herein; and

(b) any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above.

This ruling is based solely on the facts, proposed 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.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

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