2014-0527221R3 Disposition of shares under Canada-Israel Treaty

Principal Issues: Whether a gain realized by a company resident in Israel on the disposition of shares of a Canadian corporation, in a situation where the Canadian corporation holds shares of another Canadian corporation and the shares of that other Canadian corporation derive their value principally from real or immovable property situated in Canada, will be exempt from Canadian tax under the Act by virtue of paragraph 4 of Article XIII of the Canada-Israel Tax Convention.

Position: Yes.

Reasons: The property of the Canadian corporation the shares of which are being disposed of cannot be said to consist principally of immovable property situated in Canada and therefore, the gain does not meet the requirements of paragraph 3 of Article XIII of the Canada-Israel Tax Treaty.

Author: XXXXXXXXXX
Section: Paragraph 2(3)(c) and subsection 248 of the Act, Article XIII of the Canada-Israel Tax Treaty

XXXXXXXXXX
                                                                                                                                                           2014-052722
XXXXXXXXXX, 2014

Dear XXXXXXXXXX:

Re:   XXXXXXXXXX (Non-Resident)
        XXXXXXXXXX (Non-Resident)
        XXXXXXXXXX
        Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX which contained a revised advance income tax ruling request on behalf of the above-noted taxpayers. The original request had been dated XXXXXXXXXX. We also acknowledge the additional information provided to us in your emails and phone calls, the last of which was dated XXXXXXXXXX.

The Ruling given is based solely on the Facts, Proposed Transactions, Additional Information, and Purpose of the Proposed Transactions described below. Any documentation submitted in respect of your request does not form part of the Facts, Proposed Transactions and Additional Information, and any references thereto are provided solely for the convenience of the reader.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this Ruling letter:

(i)   is in an earlier return of the above-noted taxpayers or a related person;

(ii)  is being considered by a Tax Services Office or Tax Centre in connection with a previously filed tax return of the above-noted taxpayers or a related person;

(iii) is under objection by the above-noted taxpayers or a related person;

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

is the subject of a Ruling previously issued by the Income Tax Rulings Directorate. Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”).

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

Definitions

The following definitions apply in respect of this advance income tax ruling.  Throughout this advance income tax ruling, the singular should be read as plural and vice versa where the circumstances so require. 

(a)   “Canadian partnership” has the meaning assigned by subsection 102(1) of the Act;

(b)   “Canco1” means XXXXXXXXXX;

(c)   “Canco2” means XXXXXXXXXX;

(d)   “Dispositions” means the disposition of the shares of Canco2 by Foreign Holdco and the disposition of the shares of Canco1 by Foreign Parent described in the Proposed Transactions;

(e)   “Exchange” means the XXXXXXXXXX;

(f)   “Foreign Holdco” means XXXXXXXXXX;

(g)   “Foreign Parent” means XXXXXXXXXX;

(h)   “Foreign Parent Companies” means Foreign Parent and Foreign Holdco;

(i)   “Income Tax Ordinance” means the legislative act codifying the Israeli income tax law;

(j)   “LP” means XXXXXXXXXX;

(k)   “Other Exchanges” means XXXXXXXXXX and XXXXXXXXXX;

(l)   “Proposed Transactions” means the transactions described in paragraphs 8 and 9 below;

(m)   “Pubco” means XXXXXXXXXX;

(n)   “taxable Canadian corporation” has the meaning assigned by subsection 89(1) of the Act; and

(o)   “Treaty” means the Convention between Canada and the Government of the State of Israel for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital, signed on July 21, 1975 and entered into force on July 27, 1976.

Facts

1.    Foreign Parent is a company incorporated under the laws of Israel, the shares of which are publicly traded on the Exchange and the Other Exchanges. Foreign Parent is a resident of Israel for purposes of the Treaty.  Foreign Parent’s head office is located at XXXXXXXXXX.

2.    Foreign Parent owns all the issued and outstanding shares of Canco1, a company incorporated under the laws of XXXXXXXXXX. Canco1 is a resident of Canada for purposes of the Act and for purposes of the Treaty. Canco1 is a taxable Canadian corporation.  Canco1’s shares are not listed on any exchange.  Canco1 files its corporate income tax returns at the XXXXXXXXXX Tax Centre and otherwise deals with the XXXXXXXXXX Tax Services Office.  Canco1’s taxation year-end is XXXXXXXXXX.  Its business number is XXXXXXXXXX.  Canco1’s head office is located at XXXXXXXXXX.

3.    Foreign Parent also owns all the issued and outstanding shares of Foreign Holdco, a company incorporated under the laws of XXXXXXXXXX. Foreign Holdco is a resident of Israel for purposes of the Treaty. XXXXXXXXXX.

4.    Foreign Holdco owns XXXXXXXXXX% of the common shares of Canco2, a company incorporated under the laws of XXXXXXXXXX. The remaining XXXXXXXXXX% of the common shares of Canco2 are held by Foreign Parent. Canco2 is a resident of Canada for purposes of the Act and for purposes of the Treaty. Canco2 is a taxable Canadian corporation. Canco2’s shares are not listed on any exchange.  Canco2 files its corporate income tax returns at the XXXXXXXXXX Tax Centre and otherwise deals with the XXXXXXXXXX Tax Services Office.  Canco2’s taxation year-end is XXXXXXXXXX.  Its business number is XXXXXXXXXX.  Canco2’s head office is located at XXXXXXXXXX.

5.    Canco2 is the general partner in LP and owns XXXXXXXXXX% of the partnership units of LP.  Canco1 is the limited partner in LP and owns XXXXXXXXXX% of the partnership units of LP. LP is a Canadian partnership.

6.    Canco2 owns XXXXXXXXXX%, Canco1 owns XXXXXXXXXX%, and LP owns XXXXXXXXXX% of the common shares of Pubco, a company incorporated under the laws of XXXXXXXXXX, the shares of which are publicly traded on the Exchange. The remaining shares of Pubco are held by arm’s length parties. Pubco is a resident of Canada for purposes of the Act.  Pubco’s assets consist principally of Canadian real estate assets (i.e., real or immovable property situated in Canada).

7.    LP’s only assets are the shares of Pubco. The assets of Canco1 and Canco2 include their respective units in LP, shares of Pubco, short-term investments, intercompany receivables, cash, prepaid expenses, etc., and do not include any direct interests in real or immovable property.

Proposed Transactions

8.    Pursuant to the terms of a tax-deferred reorganization in Israel, Foreign Parent will acquire from Foreign Holdco, for no consideration, the shares of Canco2 held by Foreign Holdco. The transaction will be exempted from tax in Israel in accordance with section 104C of the Income Tax Ordinance. After the acquisition, Foreign Parent will own XXXXXXXXXX% of the issued and outstanding shares of Canco2.

9.    Pursuant to the terms of a tax-deferred reorganization in Israel, Canco2 will purchase all the issued and outstanding shares of Canco1 from Foreign Parent and in exchange, Canco2 will issue additional common shares to Foreign Parent with a fair market value equal to the fair market value of the shares of Canco1. The transaction will be exempted from tax in Israel in accordance with section 104A of the Income Tax Ordinance.

Additional Information

10.   The corporate organizational structure and the ownership in the shares of Pubco by Canco1 and Canco2 described in the Facts above have not changed for the past XXXXXXXXXX years.  LP was formed in XXXXXXXXXX and acquired the shares of Pubco at their FMV from a related Canadian company.  The various chains of Foreign Parent’s indirect ownership in Pubco resulted from the fact that certain shares of Pubco were acquired by Canco2 through a third party financing that was guaranteed by the shares of Canco2, while the remaining shares of Pubco were acquired by Canco1 and LP without the third party financing.

11.   The Proposed Transactions are not implemented in contemplation of a sale of the shares of Canco1 or Canco2 to an arm’s length party.

12.   Section 212.1 of the Act will apply on the transfer by Foreign Parent of the shares of Canco1 to Canco2 to limit the increase in the paid-up capital of the shares of Canco2.

13.   Foreign Parent will request a tax ruling in Israel in respect of the Proposed Transactions.  Since this process is expected to take a number of months, the Proposed Transactions will likely be completed at some time in XXXXXXXXXX.

14.   Subsequent to the Proposed Transactions, additional transactions may be implemented to further simplify the corporate organizational structure. For example, LP may be dissolved such that all of its property would be distributed to its partners, Canco1 and Canco2, or Canco1 and Canco2 may be amalgamated.

Purpose of the Proposed Transactions

15.   Currently, Foreign Parent has two separate chains of indirect ownership in Pubco, being XXXXXXXXXX% via Canco2 (directly and indirectly through Foreign Holdco) and XXXXXXXXXX% via Canco1 (these ownership percentages include the indirect ownership of Pubco by Canco2 and Canco1 via LP). The purpose of the Proposed Transactions is to eliminate the separation of this ownership and to simplify the structure into a single chain to own XXXXXXXXXX% of Pubco. The simplification of the structure is expected to reduce the compliance and administrative costs associated with having two separate chains of ownership of Pubco and to facilitate the receipt of future dividend payments.

Ruling

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant Facts, Proposed Transactions, Additional Information, and Purpose of the Proposed Transactions and provided further that the Proposed Transactions are completed in the manner described above, we rule as follows:

The gain that may be realized by the Foreign Parent Companies on the Dispositions will be exempt from tax under the Act by virtue of paragraph 4 of Article XIII of the Treaty.

Comments

The above Ruling, which is based on the Act and the Treaty in their present form and does not take into account any proposed amendments thereto, is given subject to the limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014, and is binding on the CRA provided that the Proposed Transactions are completed prior to XXXXXXXXXX.

Nothing in this letter should be construed as implying that the Canada Revenue Agency has agreed to, reviewed or has made any determination in respect of any tax consequences relating to the Facts, Proposed Transactions, Additional Information, and Purpose of the Proposed Transactions described herein other than those specifically described in the Ruling given above and in particular, without limiting the generality of the foregoing, in respect of:

*     any issues concerning the residency of Foreign Parent and Foreign Holdco for purposes of the Treaty;
*     any tax compliance issues arising from the Dispositions, including the filing requirements and withholding obligations under section 116 and section 150 of the Act; and
*     the GST implications of any of the Proposed Transactions.

Yours truly,

XXXXXXXXXX
For Director
International Division
Income Tax Rulings Directorate

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