2008 Ruling 2008-0264671R3 - Entity Classification

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 the proposed XXXXXXXXXX cooperative will be treated as a corporation for purposes of the Act. 2. Whether subsection 85.1(3) of the Act will apply to the share transfers.

Position: 1. Question of fact depending on the articles creating the cooperative. In this particular case, it will be treated as a corporation. 2. Yes.

Reasons: 1. The provisions of the foreign legislation and the articles creating the cooperative support the conclusion that this cooperative should be treated as a corporation for purposes of the Act. 2. The share transfers satisfy the requirements of that provision.

XXXXXXXXXX 						2008-026467

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

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. We acknowledge receipt of the additional information provided to us on 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. Facts and proposed transactions described in the documents submitted with your request that are not set out below do not form part of the facts and proposed transactions on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader.

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

Definitions

(a) "Parent" means XXXXXXXXXX .;

(b) "Subco" means XXXXXXXXXX

(c) "Newco" means XXXXXXXXXX ;

(d) "Holdco" means XXXXXXXXXX ;

(e) "Non-Resident" means XXXXXXXXXX ;

(f) "Shareholder" means XXXXXXXXXX

(g) "DC" means XXXXXXXXXX .;

(h) "Articles" means the articles attached to the notarial deed that created DC in Foreign Country 1;

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

(j) "CBCA" means the Canada Business Corporations Act;

(k) "Exchange" is the XXXXXXXXXX ;

(l) "Foreign Country 1" means XXXXXXXXXX ;

(m) "Foreign Country 2" means XXXXXXXXXX ;

(n) "Foreign Country 3" means XXXXXXXXXX ;

(o) "Foreign Country 4" means XXXXXXXXXX ;

(p) "Foreign Legislation" means the XXXXXXXXXX ;

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

(r) "arm's length" has the meaning assigned by subsection 251(1) of the Act;

(s) "capital property" has the meaning assigned by section 54 of the Act;

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

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

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

(w) "proceeds of disposition" has the meaning assigned by section 54 of the Act;

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

(y) "related persons" has the meaning assigned by subsection 251(2) of the Act;

(z) "share" has the meaning assigned by subsection 248(1) of the Act;

(aa) "specified participating interest" has the meaning assigned by the proposed amendment to subsection 248(1) of the Act contained in Bill C-10 (passed by the House of Commons on October 29, 2007);

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

(cc) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.

Facts

1. Parent is a public corporation and a taxable Canadian corporation. Parent was formed under the laws of Canada pursuant to the provisions of the CBCA. Parent's shares trade on the Exchange. The Shareholder owned approximately XXXXXXXXXX % of the issued and outstanding shares of Parent prior to XXXXXXXXXX . Parent carries on business in Canada and outside of Canada through Subco and Newco, both of whom carry on an active business in the XXXXXXXXXX . 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. Subco is a company formed pursuant to the laws of Foreign Country 2. XXXXXXXXXX Subco does not carry on business in Canada and is not a resident of Canada for purposes of the Act. Subco is a subsidiary wholly-owned corporation of Parent and a controlled foreign affiliate of Parent.

3. Prior to XXXXXXXXXX , Holdco was a subsidiary wholly-owned corporation of the Shareholder. Holdco is resident in Foreign Country 4.

4. Newco is a corporation incorporated in Foreign Country 3. XXXXXXXXXX Holdco owns approximately XXXXXXXXXX % of the issued and outstanding shares of Newco.

5. On XXXXXXXXXX , Parent acquired all of the shares of Holdco from the Shareholder. Parent granted the Shareholder a XXXXXXXXXX % "net operating profit interest" and issued additional common shares to the Shareholder as the sole consideration for the shares of Holdco acquired by it. The Shareholder's ownership interest in Parent increased to approximately XXXXXXXXXX % of the issued and outstanding shares of Parent upon completion of this transaction.

6. The Non-Resident is an individual resident in XXXXXXXXXX . The Non-Resident is not a resident of Canada for purposes of the Act.

7. The Shareholder is a privately owned corporation that was incorporated in Foreign Country 1. The Shareholder does not carry on business in Canada and is not a resident of Canada for purposes of the Act.

8. On XXXXXXXXXX , Parent and the Non-Resident organized DC. DC is a cooperative formed in Foreign Country 1 pursuant to the provisions of the Foreign Legislation. DC was established by a notarial deed pursuant to the Foreign Legislation and is registered with the appropriate commercial register in Foreign Country 1. Upon registration of the notarial deed with the commercial register, the Foreign Legislation recognizes DC as a legal entity that exists separate and apart from Parent and the Non-Resident. The initial capital contribution to DC by Parent and the Non-Resident was the same and was a nominal amount.

9. Pursuant to the Foreign Legislation:

(a) with respect to the law of property, rights and interests, DC is considered to be equivalent to a natural person;

(b) subject to the restrictions under its articles, the board of directors of DC are charged with the management of DC; and

(c) where the articles of DC so provide, the board of directors of DC have the authority to, in general terms, commit or otherwise bind DC to agreements and/or undertakings.

10. The Articles of DC provide that:

(a) Each member of DC must enter into a membership agreement with DC.

(b) DC will carry on its business in its own name and at its own expense and risk.

(c) Admission of new members requires unanimous written consent of all existing members of DC.

(d) Each member must make capital contributions to DC as unanimously agreed upon in writing by all members.

(e) The management of DC has the authority to represent DC.

(f) All members, if not suspended, are entitled to attend any general meeting of members and are entitled to vote thereat. The number of votes that a member may cast at a general meeting of members is equal to the percentage of ownership in DC held by such member. Each member entitled to vote at any general meeting of members will at all times be entitled to at least one vote.

(g) The retained profits of DC are available to DC for its use unless the members, at a general meeting, vote to distribute all, or a portion of, such retained profits. A distribution of retained profits will only be made after unanimous written consent is received from all members of DC. With the exception of retained profits that were allocated, but not paid, to former members, the distribution of any retained profits will be proportional to the ownership percentage of each member of DC at the time of such distribution.

(h) The members and former members of DC are not liable for any debts or losses incurred by DC that are in excess of their required contributions to the capitalization of DC.

11. On XXXXXXXXXX , the Non-Resident transferred the membership interest acquired upon the formation of DC to Parent such that Parent became the sole member of DC.

12. 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

13. Parent will transfer all of the issued and outstanding shares of Subco to DC. Parent will receive additional membership interests in DC as the sole consideration for the shares of Subco transferred to DC. DC will increase Parent's membership interest in DC by an amount that will be equal to the fair market value of the issued and outstanding shares of Subco transferred to DC.

14. Parent will also transfer all of the issued and outstanding shares of Holdco owned by it to DC. Parent will receive additional membership interests in DC as the sole consideration for the shares of Holdco transferred to DC. DC will increase Parent's membership interest in DC by an amount that will be equal to the fair market value of the issued and outstanding shares of Holdco transferred to DC.

Additional Information

15. Parent's transfer of the shares of Subco and Holdco to DC is not part of a series of transactions or events the purpose of which is to dispose of the shares of Subco or Holdco to a person who, immediately after the series of transactions or events, will be a person with whom Parent is dealing at arm's length.

16. Parent's transfer of the shares of Subco and Holdco to DC will not be a disposition of a specified participating interest by Parent.

Purpose of the Proposed Transactions

17. The purpose of the proposed transactions is to create a holding company for the shares of Subco and Holdco and for any future acquisitions of shares of foreign affiliates by Parent. The creation of a holding company facilitates a more tax-efficient repatriation of funds to Parent as DC will not be required to withhold any tax in Foreign Country 1 on any dividends paid to Parent.

Rulings

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. As a result of the formation of DC in accordance with the Foreign Legislation and pursuant to the Articles of DC, as described in paragraph 10 above, DC will be treated as a corporation for purposes of the Act.

B. The comments contained in paragraph 3 of Interpretation Bulletin IT-392 regarding the meaning of the term "share" will apply to DC such that Parent's membership interest in DC, at any time after XXXXXXXXXX and while Parent is the only member of DC, will, for purposes of the Act, be considered to be XXXXXXXXXX shares of a class of the capital stock of DC.

C. The provisions of subsection 85.1(3) of the Act will apply to the transactions described in paragraphs 13 and 14 above such that:

(i) the cost to Parent, of the shares of DC receivable as consideration for the transfer of the shares of:

(a) Subco, will be deemed to be equal to the ACB of the shares of Subco to Parent determined immediately before the transfer described in paragraph 13 above;

(b) Holdco, will be deemed to be equal to the ACB of the shares of Holdco to Parent determined immediately before the transfer described in paragraph 14 above;

(ii) Parent's proceeds of disposition of:

(a) the shares of Subco will be deemed to be an amount equal to the cost of the shares of DC receivable by Parent as consideration for the disposition;

(b) the shares of Holdco will be deemed to be an amount equal to the cost of the shares of DC receivable by Parent as consideration for the disposition; and

(iii) the cost to DC of the shares of Subco and Holdco acquired from Parent will be deemed to be an amount equal to Parent's proceeds of disposition of the shares of Subco and Holdco as determined in (ii) above.

D. Subsection 95(6) of the Act will not apply to the transfers described in paragraphs 13 and 14 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 completed before XXXXXXXXXX .

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:

(a) reviewed the fair market value of the shares of Subco or Holdco transferred to DC by Parent;

(b) made any determination as to whether the shares of Subco or Holdco are capital property to Parent; or

(c) made any determination as to whether Subco, Holdco or Newco is, in fact, a corporation for purposes of the Act.

The above-noted rulings are based on the Act in its present form and, subject to the opinion given below, do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Opinion

Provided that the amendments to subsections 85.1(4) and 248(1) of the Act, as contained in Bill C-10 (which received Second Reading in the Senate on December 4, 2007) are enacted in the form passed by the House of Commons on October 29, 2007, it is our opinion that, if the proposed transactions described in paragraph 13 and 14 above occur in a taxation year of Parent beginning after 2006, the provisions of subsection 85.1(3) of the Act will apply to such transfers, as confirmed in Ruling C above.

Yours truly,

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