2010 Ruling 2009-0343991R3 - Classification of a XXXXXXXXXX Co-op

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 a XXXXXXXXXX Co-op would be treated as a corporation for purposes of the Act?

Position: In the present instance, yes.

Reasons: The provisions of the foreign legislation and the articles creating the XXXXXXXXXX Co-op support the conclusion that this cooperative should be treated as a corporation for purposes of the Act.

XXXXXXXXXX 			2009-034399

XXXXXXXXXX , 2010

Dear Sir:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above taxpayers. We acknowledge receipt of the amendments you made to the ruling request and the additional information that you provided.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended to the date of this advance income tax ruling ("Act").

For greater certainty, all the documents and correspondence submitted in support of your request are part of this letter only to the extent described herein, and any reference to these documents is provided solely for the convenience of the reader. The rulings given herein are based solely on the Facts, Proposed Transactions and the Purpose of the Proposed Transactions described below.

DEFINITION

(a) "Adjusted Cost Base" ("ACB") has, by virtue of subsection 248(1), the meaning assigned by section 54;

(b) "Arm's Length" has the meaning assigned by subsection 251(1);

(c) "Articles" means the articles of association attached to the notarial deed creating the XXXXXXXXXX Co-op;

(d) "Controlled Foreign Affiliate" has, by virtue of subsection 248(1), the meaning assigned by subsection 95(1);

(e) "Corporation" has the meaning assigned by subsection 248(1);

(f) "CRA" means the Canada Revenue Agency;

(g) "XXXXXXXXXX Co-op" means XXXXXXXXXX .;

(h) "Eligible Property" has the meaning assigned by subsection 85(1.1);

(i) "Foreignco1" means XXXXXXXXXX .;

(j) "Foreignco2" means XXXXXXXXXX .;

(k) "Foreignco3" means XXXXXXXXXX .;

(l) "Foreign Affiliate" has, by virtue of subsection 248(1), the meaning assigned by subsection 95(1);

(m) "Foreign Country" means XXXXXXXXXX ;

(n) "Holdco" means XXXXXXXXXX ;

(o) "Foreign Legislation" means the XXXXXXXXXX ;

(p) "Non-Resident" has the meaning assigned by subsection 248(1);

(q) "Paid-up Capital" ("PUC") has, by virtue of subsection 248(1), the meaning assigned by subsection 89(1);

(r) "Parentco" means XXXXXXXXXX ;

(s) "Proceeds of Disposition" ("PD") has the meaning assigned by subsection 54(1);

(t) "Pubco" means XXXXXXXXXX ;

(u) "Related Persons" has the meaning assigned by subsection 251(2);

(v) "Series of Transactions or Events" has the meaning assigned by subsection 248(10);

(w) "Share" has the meaning assigned by subsection 248(1);

(x) "Taxable Canadian Corporation" has, by virtue of subsection 248(1), the meaning assigned by subsection 89(1); and

(y) "Treaty" means the Canada-XXXXXXXXXX Income Tax Convention.

Our understanding of the Facts, Proposed Transactions and the Purpose of the Proposed Transactions is as follows:

FACTS

1. Pubco is a public company resident in the United States for the purpose of the Act, the United States's domestic income tax law and the Canada-United States Income Tax Convention.

2. Parentco is a Taxable Canadian Corporation controlled directly or indirectly by Pubco.

3. Parentco holds Shares in other Canadian Corporations and Foreign Affiliates. Its tax affairs are administered by the XXXXXXXXXX , Tax Service Office, its Federal Business Number is XXXXXXXXXX , and its address is as follows:
XXXXXXXXXX

4. Parentco owns all of the Shares of Holdco, a Corporation resident in Canada for the purpose of the Act. Holdco holds shares in Foreign Affiliates. Holdco's Federal Business Number is XXXXXXXXXX .

5. Holdco owns all of the Shares of Foreignco1, a Corporation constituted on XXXXXXXXXX . Foreignco1 is resident in the Foreign Country for the purpose of the Act, the Foreign Country's domestic income tax law and the Treaty. Foreignco1 is a Controlled Foreign Affiliate of Parentco and of Holdco, and its only assets are Shares in Foreign Affiliates of Parentco and Holdco.

6. Parentco owns all of the Shares of Foreignco2, a Corporation constituted on XXXXXXXXXX . Foreignco2 is resident in the Foreign Country for the purpose of the Act, the Foreign Country's domestic income tax law and the Treaty. It is a Controlled Foreign Affiliate of Parentco and its only assets are Shares in Foreign Affiliates of Parentco.

7. Parentco owns all of the Shares of Foreignco3, a Corporation constituted on XXXXXXXXXX . Foreignco3 is resident in the Foreign Country for the purpose of the Act, the Foreign Country's domestic income tax law and the Treaty. It is a Controlled Foreign Affiliate of Parentco.

8. On XXXXXXXXXX , Parentco and Foreignco3 formed a cooperative under the Foreign Legislation, hereafter referred to as the XXXXXXXXXX Co-op. Parentco and Foreignco3's initial capital contribution to the XXXXXXXXXX -Co-op at the moment of its constitution was a nominal amount.

9. The Articles of XXXXXXXXXX Co-op are registered with the appropriate "commercial register" in the Foreign Country. By virtue of the registration of the notarial deed with the "commercial register", XXXXXXXXXX Co-op is regarded as a legal entity that exists separate and apart from Parentco and Foreignco3 under the Foreign Legislation and the Foreign Country's domestic income tax law.

10. Pursuant to the Foreign Legislation, with respect to the law of property, rights and interests, XXXXXXXXXX Co-op is considered to be equivalent to a natural person. The Foreign Legislation also provides that, subject to any restrictions under its articles, the board of directors is charged with the management of XXXXXXXXXX Co-op. The Foreign Legislation also confirms that, where the articles of XXXXXXXXXX Co-op so provide, the board of directors have the authority, in very general terms, to commit or otherwise bind XXXXXXXXXX Co-op to agreements and/or undertakings.

11. The Articles of XXXXXXXXXX Co-op include the following:

(a) The XXXXXXXXXX Co-op is formed for an indeterminate period.

(b) The board of directors shall unanimously decide on the admittance of a new member after having obtained the unanimous consent of all the members of XXXXXXXXXX Co-op at a general meeting held by such members. Admission of any new members is subject to, and conditional upon, the member contributing to the capitalization of XXXXXXXXXX Co-op. A membership interest in XXXXXXXXXX Co-op is only transferable upon the unanimous approval of all of the members at a general meeting.

(c) All members, if not suspended, shall be entitled to attend any general meetings of XXXXXXXXXX Co-op and shall have at least one vote thereat. The Articles of XXXXXXXXXX Co-op further provide that the number of votes a member may cast at a general meeting is determined with reference to the capital account of that particular member.

(d) XXXXXXXXXX Co-op maintains a separate capital account for each member's capital contributions/withdrawals to/from XXXXXXXXXX Co-op. The capital account of a member may be repaid to such member, in whole or in part, with the prior unanimous approval of all members at a general meeting. On the dissolution of XXXXXXXXXX Co-op or upon termination of a membership interest, the capital account(s) will be distributed to the member(s). XXXXXXXXXX Co-op's repayment of a capital account shall be payable to a member within XXXXXXXXXX days after approval thereof at a general meeting.

(e) The retained profits of XXXXXXXXXX Co-op is available to XXXXXXXXXX Co-op for its use unless the members, at a general meeting, vote at unanimity to distribute all, or a portion of, such retained profits. The distribution of any retained profits is made proportional to each member's capital contribution to XXXXXXXXXX Co-op.

(f) The entitlement to profits of the XXXXXXXXXX Co-op only occurs following the approval of the annual accounts and the declaration of a dividend by the board of directors of the XXXXXXXXXX Co-op. Profits and losses are not allocated to the members.

(g) The board of directors of XXXXXXXXXX Co-op has the authority to represent XXXXXXXXXX Co-op. It is imperative that the board be constituted of members and non-members of the XXXXXXXXXX Co-op. The power to represent XXXXXXXXXX Co-op is also vested in the directors of XXXXXXXXXX Co-op, as long as the member and non-member directors act jointly. The board of directors may grant one or more persons the power to represent XXXXXXXXXX Co-op on a continuing basis.

(h) The members and former members of XXXXXXXXXX Co-op will not be liable for any debts or losses incurred by XXXXXXXXXX Co-op that are in excess of their initial contributions to the capitalization of XXXXXXXXXX Co-op.

12. We understand that, to the best of your knowledge and that of Parentco, no issue involved in this ruling letter:

a) is in an earlier return of Parentco or a Related Person,

b) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of Parentco or a Related Person,

c) is under objection by Parentco or a Related Person,

d) is before the courts, or

e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate.

PROPOSED TRANSACTIONS

The proposed transactions will follow sequentially.

1. Parentco will transfer its membership interest in the XXXXXXXXXX Co-op to Holdco in exchange for common Shares of Holdco. No consideration other than the common Shares of Holdco will be received by Parentco on the transfer. The fair market value of the common Shares of Holdco received by Parentco will be equal to the fair market value of Parentco's membership interest in the XXXXXXXXXX Co-op. Parentco will jointly elect with Holdco in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply in respect of the transfer. The elected amount will not be less than Parentco's ACB in the transferred property and will not be greater than the fair market value of the transferred property. The transferred property will constitute Eligible Property of the transferor for the purposes of the Act.

2. Parentco will transfer its Shares of Foreignco3 to Holdco in exchange for common Shares of Holdco. No consideration other than the common Shares of Holdco will be received by Parentco on the transfer. The fair market value of the common Shares of Holdco received by Parentco will be equal to the fair market value of Parentco's Shares of Foreignco3 at the time of the transfer. Parentco will jointly elect with Holdco in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply in respect of the transfer. The elected amount will not be less than Parentco's ACB in the transferred property and will not be greater than the fair market value of the transferred property. The transferred property will constitute Eligible Property of the transferor for the purposes of the Act.

3. Parentco will transfer its Shares of Foreignco2 to Holdco in exchange for common Shares of Holdco. No consideration other than the common Shares of Holdco will be received by Parentco on the transfer. The fair market value of the common Shares of Holdco received by Parentco will be equal to the fair market value of Parentco's Shares of Foreignco2 at the time of the transfer. Parentco will jointly elect with Holdco in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply in respect of the transfer. The elected amount will not be less than Parentco's ACB in the transferred property and will not be greater than the fair market value of the transferred property. The transferred property will constitute Eligible Property of the transferor for the purposes of the Act.

4. Holdco will transfer its Shares of Foreignco1 to the XXXXXXXXXX Co-op in exchange for a membership interest in the XXXXXXXXXX Co-op. The fair market value of the membership interest in the XXXXXXXXXX Co-op that will be received by Holdco on the exchange will be equal to the fair market value of its Shares of Foreignco1 at the time of the transfer. No other consideration will be received by Holdco on the transfer of its Shares of Foreignco1 to the XXXXXXXXXX Co-op. It is intended the transaction occur pursuant to subsection 85.1(3), such that for Canadian tax purposes, Holdco's ACB in its membership interest in the XXXXXXXXXX Co-op be increased by an amount equal to the ACB of its Shares of Foreignco1.

5. Holdco will transfer its Shares of Foreignco2 to the XXXXXXXXXX Co-op in exchange for a membership interest in the XXXXXXXXXX Co-op. The fair market value of the membership interest in the XXXXXXXXXX Co-op that will be received by Holdco on the exchange will be equal to the fair market value of its Shares of Foreignco2 at the time of the transfer. No other consideration will be received by Holdco on the transfer of its Shares of Foreignco2 to the XXXXXXXXXX Co-op. It is intended the transaction occur pursuant to subsection 85.1(3), such that for Canadian tax purposes, Holdco's ACB in its membership interest in the XXXXXXXXXX Co-op be increased by an amount equal to the ACB of its Shares of Foreignco2.

PURPOSE OF THE PROPOSED TRANSACTIONS

The utilization of a cooperative organized pursuant to the Foreign Legislation as a holding company is tax efficient. This kind of entity is taxed as any other corporation organized under the Foreign Country's corporate laws, however the repatriation of profits from a cooperative is generally not subject to withholding tax in the Foreign Country. Pubco wishes to establish an international holding company for its XXXXXXXXXX subsidiaries and within the Parentco legal ownership chain. A cooperative organized pursuant to the Foreign Legislation is a suitable vehicle for this.

The transfers described in paragraphs 1 through 5 of the Proposed Transactions above are not being carried out for Canadian tax considerations. Also, XXXXXXXXXX Co-op will not dispose of the Shares of Foreignco1 and Foreignco2 to a person with whom Holdco deals at Arm's Length as part of a Series of Transactions or Events that includes the Proposed Transactions described herein.

RULINGS GIVEN

Provided that:

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions and the Purpose of the Proposed Transactions;

(b) the Proposed Transactions are completed in the manner described above;

(c) there are no other transactions which may be relevant to the rulings requested; and

(d) the Article of XXXXXXXXXX Co-op are not amended or modified in any manner to change the items listed in paragraph 11 of the Facts above,

our rulings are as follows:

A. The XXXXXXXXXX Co-op will be treated as a Corporation for purposes of the Act, and thus, will be a Foreign Affiliate and a Controlled Foreign Affiliate of Parentco and Holdco.

B. The membership interest in the XXXXXXXXXX Co-op will be considered share capital of the XXXXXXXXXX Co-op that is divided into Shares, and each shareholder's contribution of capital to the XXXXXXXXXX Co-op in exchange for a membership interest will be considered to be share capital, and thus, PUC for purposes of the Act.

C. The provisions of subsection 85(1) will apply to the transfer by Parentco of its membership interest in the XXXXXXXXXX Co-op and of all of its Shares of Foreignco2 and Foreignco3 to Holdco in exchange for common Shares of Holdco described in paragraphs 1, 2 and 3 of the Proposed Transactions above.

D. The provisions of subsection 85.1(3) will apply to the transfer by Holdco of its Shares of Foreignco1 and Foreignco2 to the XXXXXXXXXX Co-op in exchange for a membership interest of the XXXXXXXXXX Co-op described in paragraphs 4 and 5 of the Proposed Transactions above.

E. Paragraph 95(6)b) will not apply to the transfers described in paragraphs 1 through 5 of the Proposed Transactions above.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding on the CRA provided that the Proposed Transactions are entered into before XXXXXXXXXX .

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted any of the tax consequences relating to the Facts and Proposed Transactions described herein except as expressly stated in the rulings. Without restricting the generality of the preceding statement, it should be noted that nothing in this letter should be interpreted as confirming, either expressly or implicitly, that the CRA has agreed to, reviewed or has made any determination in respect of ACB or PUC of any Share of any of the Corporations mentioned above, and whether the Facts and Proposed Transactions described herein are, or would be undertaken for fair market value considerations.

We trust the above comments will be of some assistance.

Yours truly,

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