2009 Ruling 2008-0290081R3 - Foreign Affiliate Reorganization

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 subsection 5907(5.1) of the Regulations applies to the capital property disposed of in the course of the proposed corporate reorganization; 2) Whether subsections 15(1), 56(2) or 246(1) apply.

Position: 1) Yes; 2) No

XXXXXXXXXX 								2008-029008

XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above taxpayer. We also acknowledge receipt of the amendments to the XXXXXXXXXX letter provided to us in your XXXXXXXXXX e-mail and the additional information provided to us in our various telephone conversations (XXXXXXXXXX ).

Unless otherwise stated, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c.1 (5th Supplement) (the "Act"), as amended to the date of this advance income tax ruling.

The rulings given herein are based solely on the facts, proposed transactions and the purpose of the proposed transactions described below.

Definitions

(a) "active business" has the meaning assigned by subsection 95(1) of the Act;

(b) "adjusted cost base" ("ACB") has the meaning assigned by section 54 of the Act;

(c) "CFA1" means XXXXXXXXXX .;

(d) "CFA2" means XXXXXXXXXX .;

(e) "CFA3" means XXXXXXXXXX ;

(f) "CFA4" means XXXXXXXXXX ;

(g) "CFA5" means XXXXXXXXXX ;

(h) "controlled foreign affiliate" has the meaning assigned by subsection 95(1) of the Act;

(i) "Convention" means the XXXXXXXXXX ;

(j) "corporation" has the meaning assigned by subsection 248(1) of the Act;

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

(l) "excluded property" has the meaning assigned by subsection 95(1) of the Act;

(m) "FMV" means fair market value;

(n) "foreign accrual property income" ("FAPI") has the meaning assigned by subsection 95(1) of the Act;

(o) "foreign affiliate" has the meaning assigned by subsection 95(1) of the Act;

(p) "Foreign Country 1" means XXXXXXXXXX ;

(q) "Foreign Country 2" means XXXXXXXXXX ;

(r) "Parent" means XXXXXXXXXX .;

(s) "public corporation" has the meaning assigned by subsection 89(1) of the Act;

(t) "Regulations" means the Income Tax Regulations (Canada);

(u) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act;

(v) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act; and

(w) "Treaty" means the XXXXXXXXXX .

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Facts

1. Parent is a public corporation and a taxable Canadian corporation. Parent carries on an active business in Canada and outside Canada through directly and indirectly owned entities, including foreign affiliates. Parent's tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre under Business Number XXXXXXXXXX .

2. CFA1 is a subsidiary wholly-owned corporation and a controlled foreign affiliate of Parent. CFA1 is resident in Foreign Country 1 for the purposes of the Treaty.

3. CFA2 is a controlled foreign affiliate of Parent. All of the issued and outstanding shares of CFA2 are held by CFA1. CFA2 is resident in Foreign Country 1 for the purposes of the Treaty.

4. CFA3 is a controlled foreign affiliate of Parent. All of the issued and outstanding shares of CFA3 are held by CFA2. CFA3 is resident in Foreign Country 2 for the purposes of the Convention.

5. CFA4 is a controlled foreign affiliate of Parent. All of the issued and outstanding shares of CFA4 are held by CFA3. CFA4 is resident in Foreign Country 2 for the purposes of the Convention.

6. CFA4 carries on an active business XXXXXXXXXX

7. CFA5 is a newly formed corporation that has a nominal amount of cash and has no liabilities. CFA5 is a resident of Foreign Country 2 for the purposes of the Act and the Convention. All of the issued and outstanding shares of CFA5 are held by CFA3. CFA5 is a controlled foreign affiliate of Parent.

8. To the best of your knowledge and that of Parent, none of the issues involved in this ruling letter:

(i) is in an earlier return of Parent or any related persons of Parent,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of Parent or any related persons of Parent,

(iii) is under objection by Parent or any related persons of Parent, or

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

Proposed Transactions

9. CFA3 will cause CFA4 to separate the XXXXXXXXXX business currently carried on by CFA4 and to transfer all of the assets attributable to the XXXXXXXXXX business to CFA5 at an amount that will not exceed, in aggregate, their tax value (the "Transfer Amount"). As consideration for the assets transferred to it, CFA5 will assume the liabilities associated with these assets (as recorded in CFA4's financial statements immediately before the transfer) and will issue CFA4 a promissory note having a face value equal to the Transfer Amount less the amount of the liabilities assumed by it. The promissory note will be non-interest-bearing.

10. CFA5 will thereafter carry on the XXXXXXXXXX business as an active business. CFA4 will at all times carry on the XXXXXXXXXX business as an active business.

11. CFA4 will distribute the promissory note received from CFA5 to CFA3 as a dividend-in-kind when it has sufficient distributable earnings.

Additional Information

12. CFA4's transfer to CFA5 of the net business assets used or held principally for the purpose of gaining or producing income from the XXXXXXXXXX business, at an amount that does not exceed their tax values, is a transaction that will benefit from a tax deferral, rollover or similar tax postponement under the income tax law of Foreign Country 2. Thus, no gain or loss will be recognized in Foreign Country 2 and no income or profits tax will be payable to Foreign Country 2 in respect of the transfers described in paragraph 9 above.

Purpose of the Proposed Transactions

13. The proposed reorganization of the business of CFA4 is being undertaken to separate its XXXXXXXXXX business assets from its XXXXXXXXXX business assets, thereby facilitating a potential merger of CFA5's XXXXXXXXXX business with that of a strategic partner.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. For the purposes of section 5907 of the Regulations, subsection 5907(5.1) of the Regulations will apply to the disposition by CFA4 to CFA5 of capital property that was used or held by CFA4 principally for the purpose of gaining or producing income from the XXXXXXXXXX business.

B. No amount of revenue, income or profit will be required to be added to the earnings of CFA4, pursuant to paragraph 5907(2)(f) of the Regulations, in respect of CFA4's disposition to CFA5 of any intangible property used or held in, or any property that is described in the inventory of, the XXXXXXXXXX business.

C. Subsections 15(1), 56(2) and 246(1) of the Act will not apply to the proposed transactions.

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 completed before XXXXXXXXXX .

Caveats

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 CRA has not made any determination:

(a) as to whether any property owned by CFA4 is excluded property immediately before the transfer of the XXXXXXXXXX business assets, as described in paragraph 9 above;

(b) with respect to the book value, the FMV or the tax value of any of the XXXXXXXXXX business assets or the XXXXXXXXXX business assets described in paragraph 6 above;

(c) as to whether any gain or loss will be recognized by CFA4 under the income tax law of Foreign Country 2 in respect of the transfer to CFA5 of the capital property used or held principally for the purpose of gaining or producing income from the XXXXXXXXXX business; or

(d) as to whether CFA4's transfer to CFA5 of the property used or held in the XXXXXXXXXX business is a transaction that will benefit from a tax deferral, rollover or similar tax postponement under the income tax law of Foreign Country 2.

The above-noted rulings are based on the Act in its present form and, subject to the opinions given below, do not take into account any proposed amendments to the Act or the Regulations (specifically paragraph 5907(2)(f) of the Regulations) which, if enacted, could have an effect on the rulings provided herein.

Opinions

Provided that the draft amendments to the Act and the Regulations that were released by the Minister of Finance on February 27, 2004 ("Draft Legislation") are, in respect of the proposed addition of paragraphs 95(2)(f.3) to (f.9), and the proposed repeal of subsection 5907(5.1) of the Regulations, enacted in substantially the same form as proposed in the Draft Legislation, or in the case of subsection 5907(5.1) of the Regulations, repealed in respect of dispositions to which paragraphs 95(2)(f.3) to (f.9) of the Act apply, our opinions are as follows:

I. Where paragraph 95(2)(f.4) of the Act applies to CFA4 in respect of a particular disposition of an asset that is a specified property, as referred to in paragraph 95(2)(f.3)(i), CFA4 will, provided that Parent does not elect under clause 95(2)(f.4)(i)(B), be deemed by clause 95(2)(f.4)(i)(A) to have disposed of the asset for proceeds of disposition equal to its ACB at the time of the disposition.

II. Pursuant to subparagraph 95(2)(f.4)(ii) of the Act, the cost to CFA5 of each specified property will be deemed to be equal to its FMV at the time the asset is disposed of by CFA4 to CFA5.

III. Where paragraph 95(2)(f.4) of the Act applies to CFA4 in respect of a particular disposition of an asset that is a specified property:

(a) CFA4 will be deemed to have an unadjusted suspended gain in respect of the asset, at the time of the disposition, equal to the amount determined in subparagraph 95(2)(f.4)(iv); and

(b) CFA4 will be deemed to have a capital gain (equal to the amount prescribed to be its adjusted suspended gain) from the disposition of the asset at the earlier of the times specified by paragraph 95(2)(f.5).

IV. Where paragraph 95(2)(f.4) of the Act applies to CFA4 in respect of a particular disposition of an asset that is a specified property, such disposition will not, provided that Parent does not elect under clause 95(2)(f.4)(i)(B), give rise to FAPI to CFA4.

V. Where paragraph 95(2)(f.4) of the Act does not apply to CFA4 in respect of a particular disposition of an asset, any taxable capital gain realized by CFA4 on the disposition of the asset will give rise to FAPI to CFA4.

Yours truly,

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