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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Will GAAR apply to a reorganization the primary purpose of which is to avoid the foreign content rules in Part XI?
Position: No.
Reasons: Not an abuse or misuse of the provisions of the Act read as a whole.
XXXXXXXXXX
XXXXXXXXXX 1999-001279
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Trust")
This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the above-referenced taxpayer.
Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows.
In this letter, references to statutes are references to the Income Tax Act R.S.C. 1985 (5th Supp.), as amended (the "Act"), unless otherwise specifically stated.
Definitions
a) "Adjusted cost base" has the meaning assigned by section 54 of the Act;
b) "Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;
c) "Canco" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX, having Business Number XXXXXXXXXX;
d) "Cost amount" has the meaning assigned by subsection 248(1) of the Act;
e) "Nomineeco" means XXXXXXXXXX, a corporation incorporated under the laws of the State of XXXXXXXXXX;
f) "Foreign property" has the meaning assigned by subsection 206(1) of the Act;
g) "Holdco" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX as an unlimited liability company;
h) "Letter of Intent" means the letter of intent between XXXXXXXXXX providing for the acquisitions of the Properties upon such terms and conditions as are set forth therein. The Letter of Intent is assignable by XXXXXXXXXX to the USCos;
i) "Mutual fund trust" has the meaning assigned by subsection 132(6) of the Act;
j) "Paid-up capital" has the meaning assigned by subsection 89(1) of the Act;
k) "Properties" means XXXXXXXXXX and which USCos propose to acquire pursuant to the terms of the Letters of Intent;
l) "Registered investment" has the meaning assigned by subsection 204.4(1) of the Act.
m) "Taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;
n) "Trust" means XXXXXXXXXX. The address of the Trust is: XXXXXXXXXX;
o) "Unit trust" has the meaning assigned by subsection 108(2) of the Act;
p) "USCos" means, collectively, the following entities:
(i) XXXXXXXXXX, a limited liability company formed under the laws of XXXXXXXXXX. It does not have a Business Number.
(ii) XXXXXXXXXX, a limited liability company formed under the laws of XXXXXXXXXX. It does not have a Business Number.
(iii) XXXXXXXXXX, a limited liability company formed under the laws of XXXXXXXXXX. It does not have a Business Number.
(iv) XXXXXXXXXX, a limited liability company formed under the laws of XXXXXXXXXX. It does not have a Business Number.
(v) XXXXXXXXXX, a limited liability company formed under the laws of XXXXXXXXXX. It does not have a Business Number.
(vi) XXXXXXXXXX, a limited liability company formed under the laws of XXXXXXXXXX. It does not have a Business Number.
(vii) XXXXXXXXXX, a limited liability company formed under the laws of XXXXXXXXXX. It does not have a Business Number.
Relevant Facts
1. The Trustees of the Trust are individuals, all of whom are residents of Canada.
2. The Trust is a mutual fund trust and has not been deemed, pursuant to subsection 132(7) of the Act, not to be a mutual fund trust.
3. The Trust is a registered investment and it has not received a notice of revocation of its status as a registered investment pursuant to subsection 204.4(3) of the Act. The registration number is XXXXXXXXXX.
4. Units of the Trust are listed on the XXXXXXXXXX Stock Exchange.
5. The Trust is currently not subject to tax on foreign property pursuant to subsection 206(2.01) of the Act.
6. The Trust owns all of the shares of certain taxable Canadian corporations, including XXXXXXXXXX common shares of Canco, being all of the issued and outstanding shares of Canco, and beneficially owns all of the shares of Holdco. Nomineeco is the registered owner of all of the shares of Holdco.
7. Holdco is a taxable Canadian corporation and owns all of the shares of the USCos. Holdco maintains an office in Canada.
8. None of the USCos are resident in Canada for purposes of the Act and none owns any property or carries on any activities in Canada. Each USCo intends to acquire one of the Properties pursuant to the Letter of Intent.
9. Canco is a taxable Canadian corporation and owns certain property located in Canada that it uses in carrying on a XXXXXXXXXX business in Canada. Canco employs approximately XXXXXXXXXX full-time and XXXXXXXXXX part-time individuals in Canada to carry on its business. The employees of Canco are not employed primarily in connection with any activities or businesses described in subclauses 206(1.1))(d)(iii)(B)(I) through (III) of the Act.
10. The adjusted cost base to the Trust of its shares of Canco is $XXXXXXXXXX. The paid-up capital of the shares of Canco is $XXXXXXXXXX.
11. The Trust owns shares of other taxable Canadian corporations which carry on similar businesses as Canco and each of which have at least five full-time employees in Canada, who are not employed primarily in connection with any activities or businesses described in subclauses 206(1. 1)(d)(iii)(B)(I) through (III) of the Act.
12. The Trust also beneficially owns all of the shares of three other taxable Canadian corporations (Aco, Bco and Cco), which, like Holdco, are XXXXXXXXXX unlimited liability corporations ("ULCs"). Aco owns all of the shares of two limited liability companies ("LLCs") formed in the U.S. which own directly properties located in the U.S.. Bco owns XXXXXXXXXX % of the shares of a LLC formed in the U.S. which, in turn, owns shares of three LCCs, which own directly properties located in the U.S.. Cco does not currently own shares of any LLC. None of the U.S. LLCs is resident in Canada. The U.S. properties owned indirectly by the Trust through these separate chains of XXXXXXXXXX ULC-LLCs are all used in XXXXXXXXXX businesses which are similar to the businesses intended to be carried on by the USCos.
13. Nomineeco is the registered owner of the shares of each of the XXXXXXXXXX ULC's referred to in paragraph 12.
Proposed Transactions
14. It is proposed that the Trust will transfer at fair market value all of the common shares that it owns in Canco to Holdco in exchange for additional common shares of Holdco having a fair market value equal to the fair market value of the Canco shares. This transfer will take place pursuant to the provisions of subsection 85(1) of the Act. The Trust will file a joint election with Holdco within the time referred to in subsection 85(6). The agreed amount in respect of the Canco shares so transferred will equal the adjusted cost base to the Trust of its shares of Canco so transferred, which amount will be less than the fair market value of such shares. Holdco will add to the stated capital account of its common shares an amount equal to the agreed amount pursuant to the provisions of subsection 85(1).
15. As a result of this transfer, Holdco will own all of the shares of Canco, and the Trust will continue to own all of the shares of Holdco. The cost to the Trust of all of the shares of Holdco will be equal to the aggregate of the cost to it of the issued shares of Holdco immediately before the transfer plus the cost of the shares issued to it as a result of this transfer. The paid-up capital of the shares of Holdco will be increased by an amount equal to the elected amount.
16. Holdco will be capitalized by the Trust with a combination of debt and equity in a sufficient amount to effect each USCo's acquisition of the Properties. The cost amount of the Holdco shares to the Trust will be increased by the additional amount of capital contributed to Holdco by the Trust. In addition, Holdco will be indebted to the Trust by the amount loaned by the Trust to Holdco. The total amount of the cost of all of the Holdco shares and debt to the Trust will not exceed 10% of the amount of the cost of all of the Trust's properties.
17. Each USCo will be capitalized by Holdco with sufficient capital to enable it to acquire the properties.
18. The USCos will acquire the Properties upon terms substantially similar to those reflected in the Letter of Intent, or upon such terms and conditions as the parties to the Letter of Intent may subsequently agree.
19. The Trust holds certain of its investments in XXXXXXXXXX properties indirectly through separate corporate entities for the following reasons:
a) in order to ensure that it continues to satisfy the 10% threshold in subparagraph 108(2)(b)(v) of the Act applicable to unit trusts; and
b) in order to diversify its investments and limit its overall commercial risk.
The Trust intends to make future investments in XXXXXXXXXX in this same manner where the above factors are relevant.
20. In the future, if additional properties in the U.S. are targeted for acquisition by the Trust, new corporations similar to Holdco and the USCos would be incorporated. An existing operating corporation owned by the Trust, similar to Canco, with at least five (5) full-time employees who are not employed primarily in connection with any activities or businesses described in subclauses 206(1.l)(d)(iii)(B)(I) through (III) of the Act, would be transferred pursuant to subsection 85(1) of the Act to a new corporation which is similar to Holdco, in the same manner as described in paragraph 14.
Purpose of the Proposed Transactions
21. The purpose of the transfer of all of the shares of Canco to Holdco is to enable Holdco to satisfy the test in clause 206(l.1)(d)(iii)(B) of the Act so that the shares of Holdco will not constitute foreign property to the Trust. The Trust would be liable for tax under subsection 206(2.01) of the Act if the cost amount of all foreign property as described in subsection 206(1) of the Act held by it exceeds 20% of the cost amount to it of all property held by it.
22. To the best of your knowledge and the knowledge of the Trust, none of the issues relevant to the rulings being requested is:
(a) raised in an earlier return filed by the Trust or a related person,
(b) being considered by a tax services office or tax center in connection with a previously-filed tax return of the Trust or a related person,
(c) under objection by the Trust or a related person,
(d) before the courts in respect of the Trust or a related person, or
(e) the subject of a ruling previously issued by the Income Tax Rulings Directorate to the Trust or a related person.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the related facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed as described above, we rule as follows:
A. Immediately after the proposed transactions and provided at that time the facts in 7 and 9 above are still true, Holdco, by virtue of its acquisition of Canco, will satisfy the condition in clause 206(1.1)(d)(iii)(B) of the Act and the shares of Holdco will not constitute foreign property as described in paragraph 206(1)(d.1) of the Act.
B. Provided that the aggregate adjusted cost base of the shares and debt of Holdco represents not more than 10% of the aggregate cost amount of all properties owned by the Trust, the investment by the Trust in shares and debt of Holdco will not in and by itself result in the Trust property consisting of more than 10% in the bonds, securities or shares of any one corporation or debtor for purposes of subparagraph 108(2)(b)(v) of the Act.
C. As a result of the proposed transactions, in and by themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the rulings given.
The above advance income tax rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding provided that the proposed transactions are completed on or before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2000
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2000
Email this Content