2014-0527961R3 Deemed dividend under subsection 90(2)

Principal Issues: 1. Do two groups of shares denominated in different currencies represent different classes of shares for purposes of subsection 90(2)? 2. Is a distribution in respect of the two groups of shares made in proportion to the capital contributed in respect of the shares deemed to be a dividend under subsection 90(2)?

Position: 1. Yes; 2. Yes.

Reasons: 1. The two groups of shares will be considered to be two classes of shares because they have different rights attached to them. 2. The distribution will be in respect of two classes of shares and will be a pro-rata distribution in respect of all shares of each class.

Author: XXXXXXXXXX
Section: 90(2); 90(5)

XXXXXXXXXX                                                                                                                                   2014-052796

Attention: XXXXXXXXXX

XXXXXXXXXX, 2015

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling
        XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX as revised on XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the receipt of the final corporate law counsel’s opinion on XXXXXXXXXX as further described in the Facts below.

This letter is based solely on the Facts, Proposed Transactions and Additional Information 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 above-noted taxpayer none of the issues involved in this advance income tax ruling is:

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

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

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

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

(v)   the subject of a ruling previously considered by the Income Tax Rulings Directorate in connection with the above-noted taxpayer or a related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (the “Act”) or the Income Tax Regulations (the “Regulations”) and every reference herein to a section, subsection, paragraph, subparagraph or clause is a reference to the relevant provisions of the Act, unless stated otherwise.

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

Definitions

In this letter, unless otherwise stated, all amounts are in US dollars and the following terms have the meaning specified below:

a)    “Canco” means XXXXXXXXXX;

b)    “controlled foreign affiliate” or “foreign affiliate” have the meaning assigned by subsection 95(1);

c)    “Country X” means XXXXXXXXXX;

d)    “FA” means XXXXXXXXXX;

e)    “public corporation” and “taxable Canadian corporation” have the meanings assigned by subsection 89(1);

f)    XXXXXXXXXX;

g)    “US$” means United States dollars; and

h)    “€” means Euros.

Facts

1.    Canco is a taxable Canadian corporation, a public corporation and XXXXXXXXXX.

2.    The issued and outstanding shares of Canco are publically traded on the XXXXXXXXXX. 

3.    Canco is and at all relevant times has been resident in Canada for the purposes of the Act.

4.    Canco carries on a XXXXXXXXXX services enterprise and holds interests in a number of wholly-owned subsidiary corporations that carry on similar or related activities, both in Canada and abroad.

5.    FA is a wholly-owned direct subsidiary of Canco, incorporated under the laws of Country X. 

6.    FA is resident in Country X for the purposes of the Act, and for the purposes of the tax laws of Country X, where it is liable to tax on its worldwide income. 

7.    FA is a foreign affiliate and a controlled foreign affiliate of Canco.

8.    The share capital of FA is described as follows in its constating documents: “The capital of the Company is €XXXXXXXXXX and US$XXXXXXXXXX divided into XXXXXXXXXX shares of €XXXXXXXXXX each and XXXXXXXXXX shares of US$XXXXXXXXXX each.”

9.    As required by Country X’s corporate law, FA’s register of members distinguishes and separately identifies the € shares and the US$ shares held by each shareholder.

10.   The share capital structure, as described in paragraph 8 above, has been in place since XXXXXXXXXX.

11.   Pursuant to FA’s constating documents, “[all] dividends shall be declared and paid according to the amounts paid or credited as paid on the shares in respect whereof the dividend is paid” and “[all] dividends shall be apportioned and paid proportionately to the amounts paid or credited as paid on the shares”

12.   No dividend can be paid on the US$ shares exclusive of the € shares and vice versa.

Proposed Transactions

13.   In accordance with its governing law and constating documents, FA (or its relevant governance organs) will declare and pay an amount that constitutes a dividend as a matter of FA’s governing corporate law on all of its issued and outstanding shares (the “FA dividend”).  The amount of the FA dividend paid on each share will be based on the amount paid or credited as paid on that share.

14.   The distribution described in paragraph 13 above will not be made in the course of a liquidation and dissolution of FA, on a redemption, acquisition or cancellation of the shares by FA, or on a qualifying return of capital, as that term is defined in subsection 90(3), in respect of the shares of FA.

Additional Information

15.   FA’s functional currency is US$. FA issued US$ denominated shares and maintains the corresponding US$ capital account in order to match the currency of its investments and its functional currency.

16.   As a matter of the corporate law of Country X, a dividend becomes a debt of FA at the time it is declared and payable. Transactions in foreign currencies are translated into the functional currency of FA at appropriate prevailing exchange rates on the date of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the exchange rate at that date. Accordingly, the amount of the dividend must be determined based on the amount paid on the shares, translated to the functional currency at the exchange rate prevailing at the time the particular dividend becomes payable (i.e. when it becomes a debt of the FA).

17.   A distribution payable on each share will be equal to the proportion of the total distribution on all the shares that the amount paid or credited as paid on the share (in the case of € shares, translated into US$ as described in paragraph 16) is of the aggregate amount paid or credited as paid on all outstanding shares of FA (including all the translated US$ amounts).

18.   Given the present difference in value between the € and the US$, the paid in capital of the € shares on a per share basis is greater than the paid in capital of the US$ shares and, as a result, the € shares will be entitled on a per share basis to a larger proportion of dividends and to a larger proportion of the assets available for distribution on a winding up of FA. These differences in the dividend and liquidation entitlement of the two groups of shares are expected to be present at the time of the proposed dividend distribution.

Country X corporate law counsel opined that it considers that the two groups of shares of FA form two separate classes of shares under Country X’s corporate law.

Purpose of Proposed Transactions

19.   The purpose of the proposed transactions is to permit Canco to repatriate earnings from its interests in FA.

Rulings

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

A.    The share capital of FA will be considered to consist of two classes of shares, one class being those shares denominated in US$ and the other class being those shares denominated in €.

B.    The distribution on FA shares, as described in paragraph 13 above, will be considered to be in respect of two classes of shares of FA, pro rata in respect of all shares of each such class and will be deemed to be a dividend paid by FA and received by Canco pursuant to subsections 90(2) and (5) for the purposes of subsection 15(1), section 90 and section 113.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014, and are binding on the CRA provided that the Proposed Transactions are completed prior to XXXXXXXXXX.

Comments

Nothing in this ruling letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of any tax consequences relating to the Facts, Proposed Transactions and Additional Information described herein other than those specifically described in the rulings given above.

Yours truly,

XXXXXXXXXX
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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