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) Does subsection 5907(5.1) of the Regulations apply to the transfer of capital (active business) assets in the course of the proposed foreign affiliate reorganization? 2) Does paragraph 5907(2)(f) apply in respect of the transfer of non-capital (active business) assets in the course of the proposed foreign affiliate reorganization? 3) Do subsections 15(1), 56(2) or 246(1) apply to the proposed foreign affiliate reorganization?
Position: 1) Yes; 2) No; 3) No.
Reasons: 1) No gain or loss is recognized on the transfer of the capital assets under the relevant foreign income tax law, and the other conditions provided in subsection 5907(5.1) of the Regulations are met. 2) Since the transfer of the non-capital assets is done on a rollover basis under the relevant foreign income tax law, the conditions of paragraph 5907(2)(f) are not met. 3) No benefit is being conferred.
Section: 15(1), 56(2), 246(1), 95(1); Reg. 5907(5.1) and 5907(2)(f)
Re: Advance Income Tax Ruling
XXXXXXXXXX - Business Number XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling (the “Ruling”) on behalf of the above-named company (the “Taxpayer”).
We also acknowledge the information provided in subsequent correspondence and communication in connection with your Ruling request. The information that you provided to us only forms part of this Ruling letter to the extent described herein.
We understand that, to the best of your knowledge and that of the Taxpayer, none of the Proposed Transactions or issues involved in this Ruling request are the same as or substantially similar to transactions or issues that are:
(i) in a previously filed tax return of the Taxpayer or a related person and:
A. being considered by the CRA in connection with such return;
B. under objection by the Taxpayer or a related person; or
C. the subject of a current or completed court process involving the Taxpayer or a related person; or
(ii) the subject of a ruling request previously considered by the Income Tax Rulings Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the “Act”), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. The singular should be read as plural and vice versa, where the circumstances so require.
The following abbreviations, terms and expressions have the meaning specified, and the relevant parties to the Proposed Transactions will be referred to as follows:
(a) “active business” has the meaning assigned by subsection 95(1);
(b) “ACB” means adjusted cost base and has the meaning assigned by section 54;
(c) “capital property” has the meaning assigned by section 54;
(d) “CFA1” means XXXXXXXXXX;
(e) “CFA1 Note” has the meaning assigned by Paragraph 12;
(f) “CFA2” means XXXXXXXXXX;
(g) “controlled foreign affiliate” has the meaning assigned by subsection 95(1);
(h) “Convention” means the Convention between Canada and XXXXXXXXXX;
(i) “CRA” means the Canada Revenue Agency;
(j) “earnings” has the meaning assigned by subsection 5907(1) of the Regulations;
(k) “excluded property” has the meaning assigned by subsection 95(1);
(l) “Foreign Act” means the XXXXXXXXXX, as amended;
(m) “foreign affiliate” has the meaning assigned by subsection 95(1);
(n) “Foreign Country” means XXXXXXXXXX;
(o) “FMV” means fair market value;
(p) “Paragraph” refers to a numbered paragraph in this letter;
(q) “Parent” means XXXXXXXXXX;
(r) “Proposed Business Transfer” has the meaning assigned by Paragraph 12;
(s) “Proposed Transactions” means the proposed transactions that are described under Paragraphs 10 to 13.
(t) “Regulations” means the Income Tax Regulations (Canada).
Our understanding of the facts, Proposed Transactions and the purpose of the Proposed Transactions is as follows:
1. Parent is a publicly traded corporation that is a resident of Canada for the purposes of the Act and the Convention.
2. Parent owns all of the issued and outstanding shares of the Taxpayer, a corporation that is a resident of Canada for the purposes of the Act and the Convention. The Taxpayer’s Tax Services Office is XXXXXXXXXX and its Taxation Centre is XXXXXXXXXX.
3. The Taxpayer owns all of the issued and outstanding shares of CFA1, a corporation which is incorporated and has its mind and management in Foreign Country. CFA1 is a resident of Foreign Country for purposes of the Convention, and is a foreign affiliate and a controlled foreign affiliate of the Taxpayer. CFA1 does not carry on business in Canada nor does it have taxable income earned in Canada.
4. The Taxpayer owns all of the issued and outstanding shares of CFA2, a corporation which is incorporated and has its mind and management in Foreign Country. CFA2 is a resident of Foreign Country for purposes of the Convention, and is a foreign affiliate and a controlled foreign affiliate of the Taxpayer. CFA2 does not carry on business in Canada nor does it have taxable income earned in Canada.
5. CFA1 XXXXXXXXXX and carries on an active business in Foreign Country. CFA1 has generated losses, which are available for carryforward under the Foreign Act.
6. CFA2 XXXXXXXXXX and carries on an active business in Foreign Country. CFA2 is profitable and has no losses available for carryforward under the Foreign Act. CFA2 only has one class of shares that is issued and outstanding.
7. All of CFA2’s assets are excluded property, which are used or held principally for the purpose of gaining or producing income from the active business it carries on in Foreign Country.
8. The FMV of CFA2’s assets as a whole is greater than the book value of those assets. The FMV of all of CFA2’s liabilities, for the creditors, are equal to their book value.
9. The FMV of the CFA2 shares held by the Taxpayer is greater than the Taxpayer’s ACB of these shares.
The following Proposed Transactions will occur in the order in which they are described below:
10. The Taxpayer will transfer all of the issued and outstanding shares of CFA2 to CFA1 in exchange for additional shares of CFA1, having a FMV equal to the FMV of the shares of CFA2.
11. Approximately XXXXXXXXXX after the previous step, CFA2 will distribute a dividend to CFA1 equal to its retained earnings, if any. To the extent that CFA2 does not have sufficient cash for the dividend, CFA2 will have an unpaid dividend liability.
12. CFA2 will transfer its entire business to CFA1 by disposing of substantially all of its capital and non-capital property and assigning substantially all of its liabilities (including the unpaid dividend liability, if any) at book value in exchange for a promissory note from CFA1 (the “CFA1 Note”) equal to the book value of the assets transferred minus the amount of liabilities assumed by CFA1 (the “Proposed Business Transfer”). See Paragraph 16 below for assets and liabilities that will remain with CFA2.
13. In the same fiscal year as the prior steps, a shareholders’ resolution will be passed in order to liquidate and dissolve CFA2. CFA2 will then be liquidated into CFA1 and will distribute its remaining assets to CFA1 and assign any residual liability to CFA1.
14. The Proposed Business Transfer will occur on a tax-deferred basis for purposes of the Foreign Act.
15. The shares of CFA2 will be excluded property after the completion of the Proposed Transaction described in Paragraph 10.
16. After the transaction described in paragraph 12, but prior to the transaction described in paragraph 13, CFA2 will retain any assets and liabilities that cannot be transferred (e.g., tax refunds and/or taxes payable).
17. CFA2’s unpaid dividend liability and CFA1’s corresponding dividend receivable will cease to exist at the time of the Proposed Business Transfer.
18. CFA1 will inherit the tax bases of the assets and will assume the liabilities of CFA2 for purposes of the Foreign Act.
19. As part of the liquidation process, CFA2 will distribute the CFA1 Note to CFA1, which will result in the CFA1 Note being extinguished.
Purposes of the Proposed Transactions
20. The purpose of the foreign affiliate reorganization described herein is purely commercial and will consolidate CFA1’s and CFA2’s active businesses under one corporate entity. CFA1 and CFA2 carry on businesses that are part of the same corporate group segment, which globally has XXXXXXXXXX. The consolidation will also streamline various functions consisting of operations, management, reporting and administration, and reduce overall operating costs. Following the Proposed Business Transfer, CFA1 will continue CFA2’s business.
21. The Proposed Transactions will allow CFA1 to apply its loss carryforward balance against the operating profits of CFA2’s active business on a go-forward basis. Under the Foreign Act, CFA1, as a legal entity, must remain in existence for the CFA1 losses to be accessible. In other words, an amalgamation involving CFA1 or a direct liquidation of CFA1 would result in an effective forfeiture of CFA1’s existing tax losses.
22. The purpose of arranging a two-stage liquidation (i.e., a business transfer followed by a statutory liquidation), under the Proposed Transactions, is to achieve a tax-deferred liquidation under the Foreign Act. Without two separate steps, a direct liquidation of CFA2 into CFA1 is taxable under the Foreign Act to the extent that the liquidation proceeds exceed CFA1’s cost of the CFA2 shares. The Proposed Transactions are in accordance with the provisions of the Foreign Act to achieve a tax-deferred liquidation, and are thus not entered into in order to obtain a Canadian tax benefit.
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, Proposed Transactions, additional information and purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we rule as follows, in reliance on such statements and subject to the comments below:
A. Subsection 5907(5.1) of the Regulations will apply to the disposition by CFA2 of its capital property to CFA1 pursuant to the Proposed Business Transfer.
B. No amount of revenue, income or profit will be required to be added to the earnings of CFA2, pursuant to paragraph 5907(2)(f) of the Regulations, in respect of CFA2’s Proposed Business Transfer of its non-capital property to CFA1.
C. Subsections 15(1), 56(2) and 246(1) will not apply to the Proposed Transactions.
The above Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R9, Advance Income Tax Rulings and Technical Interpretations, dated April 23, 2019, and are binding on the CRA provided that the Proposed Transactions are completed within six months of the date of this letter.
The above Rulings are based on the Act and the Regulations in their present form and do not take into account any proposed amendments to the Act or the Regulations which, if enacted, could have an effect on the Rulings provided herein.
Nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or made any determination in respect of any tax consequences in respect of:
(a) the fair market value of any property referred to herein;
(b) whether the Proposed Transactions described herein, other than the Proposed Business Transfer, would be undertaken for fair market value consideration;
(c) the characterization and tax residency of any entity;
(d) any foreign income tax consequences, including whether a rollover provision applies under the Foreign Act;
(e) whether any property referred to herein is a “taxable Canadian property”, within the meaning of subsection 248(1), or whether any disposition thereof, including a deemed disposition, could give rise to a taxable capital gain;
(f) the potential application of subsection 245(2) to re-determine the tax consequences confirmed in the Rulings given above; or
(g) any other tax consequences relating to the facts, Proposed Transactions and additional information described herein, other than those specifically described in the Rulings given above.
An invoice for our fees in connection with this Ruling request will be sent to you under separate cover.
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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