2006 Ruling 2006-0202071R3 - Definition of "corporation" in subsection 248(1).

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: Will the XXXXXXXXXX -Foreign XXXXXXXXXX Joint Venture be treated as a corporation for purposes of the Act?

Position: Yes.

Reasons: The characteristics of this joint venture are similar to the characteristics of a corporation under Canadian commercial law.

XXXXXXXXXX 									2006-020207

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request

XXXXXXXXXX.

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 references herein to a statute are to the Income Tax Act R.S.C. 1985 (5th Supplement), c.1, as amended, (the "Act") to the date of this advance income tax ruling and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.

The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions in the documents submitted with your request that are not described 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) "CRA" is the Canada Revenue Agency;

(b) "Canco" is XXXXXXXXXX;

(c) "Newco" is a company to be incorporated by Canco under the laws of XXXXXXXXXX;

(d) "Non-Resident" is XXXXXXXXXX;

(e) "Joint Venture" is XXXXXXXXXX;

(f) "Articles" is the Articles of Association of the Joint Venture;

(g) "Agreements" is a reference to the joint venture agreements entered into by the Non-Resident and Canco on XXXXXXXXXX;

(h) "Joint Venture Law" is a reference to the XXXXXXXXXX;

(i) "Foreign Country" is the XXXXXXXXXX;

(j) "Non-Treaty Country" is XXXXXXXXXX;

(k) "XXXXXXXXXX Project" is the XXXXXXXXXX;

(l) "Exchange" is the XXXXXXXXXX Stock Exchange;

(m) "adjusted cost base" ("ACB") has, by virtue of subsection 248(1) of the Act, the meaning assigned by section 54 of the Act;

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

(o) "capital property" has, by virtue of subsection 248(1) of the Act, the meaning assigned by section 54 of the Act;

(p) "direct equity percentage" and "equity percentage" have the meaning assigned by subsection 95(4) of the Act;

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

(r) "foreign affiliate" has, by virtue of subsection 248(1) of the Act, the meaning assigned by subsection 95(1) of the Act; and

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

Facts

1. Canco was incorporated under the laws of the XXXXXXXXXX and was subsequently continued into XXXXXXXXXX. Canco's business is focused on the XXXXXXXXXX Project. The shares of Canco are listed on the Exchange. Canco's business number is XXXXXXXXXX. Canco files its tax returns with the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office.

2. The Non-Resident is a company incorporated under the laws of the Foreign Country. The Non-Resident is in the business of XXXXXXXXXX.

3. Canco and the Non-Resident deal with each other at arm's length.

4. The Joint Venture is a XXXXXXXXXX joint venture created pursuant to the Joint Venture Law, the Articles and the Agreements. Canco and the Non-Resident formed the Joint Venture in XXXXXXXXXX to XXXXXXXXXX. Canco has a XXXXXXXXXX% interest in the Joint Venture and the Non-Resident holds the remaining XXXXXXXXXX% interest in the Joint Venture. The Foreign Country issued the XXXXXXXXXX license for the XXXXXXXXXX Project to the Joint Venture. If the Joint Venture is a corporation, it is not a resident of Canada for the purposes of the Act.

5. Pursuant to the provisions of the Articles and the Agreements, the Joint Venture is established in accordance with the Joint Venture Law, has its own name, is an organization that enjoys civil rights and assumes civil liabilities in accordance with the Joint Venture Law and is able to own property in its own name. Accordingly, for the purposes of the Joint Venture Law, the Joint Venture is a "legal person" that exists separate and apart from Canco and the Non-Resident.

6. Pursuant to the provisions of the Articles and the Agreements, the Joint Venture will have a Board of Directors consisting of XXXXXXXXXX directors to be appointed by Canco (including a Chairman) and XXXXXXXXXX directors to be appointed by the Non-Resident (including one Vice-Chairman). The Board shall be the highest authority of the Joint Venture and will make all decisions on major issues.

7. The Articles and the Agreements provide that the liability of each of Canco and the Non-Resident shall be limited to the amount of their respective subscribed contributions to the capital of the Joint Venture and that neither one of them will have any liability to the Joint Venture or any third party either individually, jointly or severally, over and above their capital contributions. The total amount of capital contribution is to be determined by the Board of Directors, in accordance with the regulatory requirements under the Joint Venture Law. After Canco and the Non-Resident have each made their required capital contributions to the Joint Venture, an independent accounting firm registered in the Foreign Country must verify that such contributions have been made and issue a verification report. Upon the issuance of the verification report, the Joint Venture must issue a certificate, signed by the Chairman and Vice-Chairman of the Board of Directors, evidencing the amount of capital contributed to the Joint Venture by Canco and the Non-Resident.

8. Pursuant to the Articles and the Agreements, and subject to certain provisions applicable to in-house transfers and a typical buy-sell provision, either of Canco or the Non-Resident may assign, sell or otherwise dispose of all or part of their interest in the Joint Venture to a third party, provided such transfer falls within the relevant provisions and procedures in the Joint Venture Law.

9. Pursuant to the Articles and the Agreements, the Joint Venture is to exist for a term of XXXXXXXXXX years. Canco and the Non-Resident may agree to an extension of the term, with no limits specified for such an extension.

10. The Articles and the Agreements provide that the Joint Venture will distribute its profits in proportion to the interests of Canco (XXXXXXXXXX%) and the Non-Resident (XXXXXXXXXX%) after Canco and the Non-Resident have fully recovered their respective portion of the funding of the XXXXXXXXXX Project. However, no amount can be distributed by the Joint Venture until it has paid all taxes (Article XXXXXXXXXX of the Articles), including the "land use tax" (Article XXXXXXXXXX of the Articles), and the Board of Directors has "set aside a prescribed amount from its after tax profits for each year for such prescribed funds as the XXXXXXXXXX ... in accordance with the stipulations in the Joint Venture Law or other applicable regulation" (Article XXXXXXXXXX of the Articles).

11. Canco has filed information returns with the XXXXXXXXXX Tax Services Office on the assumption that the Joint Venture would be treated as a corporation for Canadian income tax purposes. The XXXXXXXXXX Tax Services Office did not review whether the Joint Venture would, in fact, be treated as a corporation for purposes of the Act.

12. We understand that, to the best of your knowledge and that of Canco, none of the issues involved in this ruling request:

(i) is in an earlier return of Canco or a related person,

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

(iii) is under objection by Canco or a related person, 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 Transaction

13. Canco will incorporate Newco pursuant to the laws of the Non-Treaty Country. Newco will be a wholly-owned foreign affiliate of Canco. Newco will not be a resident of Canada for purposes of the Act.

14. Canco will transfer its equity interest in the Joint Venture to Newco. As consideration for the equity interest in the Joint Venture transferred to it by Canco, Newco will issue additional shares to Canco.

Purpose of the Proposed Transactions

15. Under the current business structure and regulatory framework of the Foreign Country, the Taxpayer cannot transfer any portion of its interest in the Joint Venture without prior approval of the Foreign Country. Should the Taxpayer choose to transfer a portion of its interest in the Joint Venture to a "partner", to assist in the XXXXXXXXXX Project, this transfer of the Joint Venture interest to Newco will facilitate such an indirect transfer of a portion of the Taxpayer's interest in the Joint Venture to a "partner" without any requirement for regulatory approval of the Foreign Country.

16. XXXXXXXXXX.

Rulings

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; and

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

our rulings are as follows:

A. We confirm that the Joint Venture will be treated as a corporation for purposes of the Act.

B. Since the Joint Venture is considered to be a corporation for the purposes of the Act, and since the ownership of the Joint Venture is not divided into "shares", the CRA's position in Interpretation Bulletin IT-392, that the foreign business entity is viewed as having a capital stock of 100 issued shares and each owner of a beneficial interest in the foreign business entity is considered to own that number of shares that is proportionate to their beneficial interest in the foreign business entity, will apply to the Joint Venture. Accordingly, for the purposes of the foreign affiliate provisions of the Act, the Joint Venture would be considered to have capital stock of 100 shares and the Taxpayer, by virtue of its XXXXXXXXXX% beneficial interest in the Joint Venture, would be considered to own XXXXXXXXXX of such shares.

C. Subject to the application of subsection 85.1(4), the provisions of subsection 85.1(3) of the Act will apply to the transaction described in paragraph 14 above (hereinafter referred to as the "Transfer") such that:

(i) the Taxpayer will be treated as having disposed of its interest in the Joint Venture for proceeds of disposition equal to the ACB of such interest;

(ii) the cost to the Taxpayer, of the shares of Newco received on the Transfer, will be equal to the Taxpayer's ACB of its interest in the Joint Venture immediately before the Transfer; and

(iii) the cost of the Joint Venture interest acquired by Newco will be equal to the ACB of the Taxpayer's interest in the Joint Venture immediately before the Transfer.

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.

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.

Nothing in this ruling should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of the ACB of the Taxpayer's interest in the Joint Venture.

These 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 ruling provided herein.

Yours truly,

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