2018-0775221R3 Benefit Rules

Principal Issues: Will the benefit rules in ss. 15(1), 56(2), 246(1) apply to the proposed transactions?

Position: Favourable ruling given.

Reasons: Conditions for the application of subsections 15(1), 56(2) and 246(1) not met in the particular circumstances of this situation.

Author: XXXXXXXXXX
Section: Subsections 15(1), 56(2), 246(1)

XXXXXXXXXX

XXXXXXXXXX, 2019                                                                       2018-077522

Re. Advance Income Tax Ruling – XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX and your subsequent correspondence in which you requested an advance income tax ruling (a “Ruling”) on behalf of the above-noted taxpayer (the “Corporation”).

To the best of the knowledge of the Corporation and that of the taxpayers involved, none of the proposed transactions or issues involved in this Ruling are the same as or substantially similar to transactions or issues that are:

(a)   in a previously filed tax return of the Corporation or a related person and:

A.    being considered by the Canada Revenue Agency (the “CRA”) in connection with such return;

B.    under objection by the Corporation or a related person; or

C.    the subject of a current or completed court proceedings involving the Corporation or a related person; or

(b)   the subject of a ruling request previously considered by the Income Tax Rulings Directorate in relation to the Corporation or a related person.

Unless otherwise noted, all statutory references herein are to the provisions of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, together with the regulations thereto (the “Act”).  

I.    DEFINITIONS

“arm’s length” has the meaning assigned by section 251; 

“Code” means the XXXXXXXXXX enacted with Law No. XXXXXXXXXX on XXXXXXXXXX (as amended) and which is applicable in Foreign Country A;

“Convention” means Convention XXXXXXXXXX, which is subject to the provisions of the Code;

“Corporation” refers to XXXXXXXXXX;

“Corporation X” refers to XXXXXXXXXX whose headquarters are in Foreign Country A;

“Corporation Y” refers to XXXXXXXXXX;

“XXXXXXXXXX” means a newly-created corporation which will have the characteristics described in paragraphs 10 to 13;

“XXXXXXXXXX” has the meaning assigned in paragraph 14;

“FA1” means XXXXXXXXXX, described in paragraph 2;

“FA2” means XXXXXXXXXX, described in paragraph 3;

“Foreign Country A” means the XXXXXXXXXX;

“Foreign Country B” means the XXXXXXXXXX;

“Foreign Government” means the Government of Foreign Country A;

“XXXXXXXXXX” has the meaning assigned in paragraph 15;

“non-resident” has the meaning assigned in subsection 248(1);

“OpCo” means XXXXXXXXXX, described in paragraphs 4 and 16;

“Permit” means an XXXXXXXXXX permit issued pursuant to XXXXXXXXXX of the Convention;

“Project” means the XXXXXXXXXX carried out within the XXXXXXXXXX, District of XXXXXXXXXX and which is described in XXXXXXXXXX of the Convention; and

“Proposed Transactions” means the transactions described in paragraphs 22 and 23.

II.   FACTS

A.    Corporate Information

1.    The Corporation is resident in Canada for purposes of the Act and its common shares are listed on the XXXXXXXXXX, XXXXXXXXXX. Subsidiaries of the Corporation are engaged in the XXXXXXXXXX and development of XXXXXXXXXX, with the intention of developing them into XXXXXXXXXX. Subsidiaries of the Corporation own XXXXXXXXXX in Foreign Country A which are at the XXXXXXXXXX in some cases and the XXXXXXXXXX in other cases. 

2.    FA1 is a company incorporated under the laws of, and resident in, Foreign Country B and is a non-resident of Canada for purposes of the Act. FA1 is a direct, wholly-owned subsidiary of the Corporation.

3.    FA2 is a limited liability company incorporated under the laws of, and resident in, Foreign Country A and is a non-resident of Canada for purposes of the Act. FA2 is a direct, wholly-owned subsidiary of FA1.

4.    OpCo is a limited liability company incorporated under the laws of Foreign Country A on XXXXXXXXXX and it is resident in Foreign Country A and a non-resident of Canada for purposes of the Act. FA2 owns XXXXXXXXXX% of the issued and outstanding shares of OpCo while the remaining XXXXXXXXXX% is owned by Corporation X.

5.    FA1, FA2 and OpCo do not carry on any business in Canada and do not own any taxable Canadian property. ExploitationCo will also not carry on any business in Canada and will not own any taxable Canadian property.

6.    Corporation Y is a corporation whose business is the development of XXXXXXXXXX. It has headquarters in XXXXXXXXXX. On XXXXXXXXXX, the Corporation acquired all the issued and outstanding shares of Corporation Y.

7.    Corporation X deals at arm’s length with the Corporation and its subsidiaries.

B.    Foreign XXXXXXXXXX Regime

8.    The Code governs all XXXXXXXXXX activities in Foreign Country A, including the XXXXXXXXXX. Any person seeking to undertake XXXXXXXXXX activities in Foreign Country A must enter into an agreement with the Foreign Government (such as the Convention) that sets out the respective rights and obligations of the holder of the XXXXXXXXXX rights and the Foreign Government.

9.    XXXXXXXXXX.

10.   Pursuant to the Code, an XXXXXXXXXX may only be granted to the holder of a pre-existing XXXXXXXXXX and will only be granted to that holder if the holder has fulfilled all of its obligations set out in the applicable XXXXXXXXXX agreement.

11.   Pursuant to the Code, when the holder of the XXXXXXXXXX makes the decision to XXXXXXXXXX, a new operating company must be created for the purposes of XXXXXXXXXX The headquarters of the new operating company must be in Foreign Country A.

12.   According to the Code, once an XXXXXXXXXX is granted to the holder of an XXXXXXXXXX, the XXXXXXXXXX must, as soon as practical, be transferred to the new operating company free of charge.

13.   XXXXXXXXXX of the Code states that the Foreign Government must hold a XXXXXXXXXX% interest in the share capital of the new operating company and such interest must be granted free of any charge and cannot be subjected to any dilution even in the event of a capital increase. Furthermore, the Foreign Government has the right to acquire additional XXXXXXXXXX% of the share capital of the new operating company.  

C.    Project History and the Convention

14.   On XXXXXXXXXX, Corporation X entered into the Convention. Subsequently, Corporation X was granted an XXXXXXXXXX through a XXXXXXXXXX dated XXXXXXXXXX the right to XXXXXXXXXX the area of the Project (the “XXXXXXXXXX”).

15.   On XXXXXXXXXX, Company X and Company Y entered into a XXXXXXXXXX and formation agreement (the “XXXXXXXXXX”). This agreement was further amended and reinstated on XXXXXXXXXX. Company Y subsequently assigned its rights and obligations under the XXXXXXXXXX to FA2.

16.   In accordance with the XXXXXXXXXX, OpCo was incorporated. As noted above, XXXXXXXXXX% of the issued and outstanding shares of OpCo are owned by FA2 while the remaining XXXXXXXXXX% are owned by Corporation X.

17.   Corporation X assigned the XXXXXXXXXX to OpCo. The assignment was sanctioned by a ministerial order No. XXXXXXXXXX, dated XXXXXXXXXX.

18.   Pursuant to the assignment of the XXXXXXXXXX and XXXXXXXXXX of the Convention, OpCo acquired and assumed all the rights and obligations of Corporation X under the Convention.

19.   Pursuant to XXXXXXXXXX of the Convention, following the completion of the XXXXXXXXXX phase, OpCo must apply for the Permit which will allow for the further XXXXXXXXXX and XXXXXXXXXX.

20.   Pursuant to the Code and XXXXXXXXXX of the Convention, prior to commencing the XXXXXXXXXX and XXXXXXXXXX with regard to the XXXXXXXXXX, OpCo must cause a new operating company, XXXXXXXXXX, to be formed.

21.   Pursuant to the Code and the XXXXXXXXXX of the Convention, OpCo must transfer the Permit to XXXXXXXXXX free of charge and the Foreign Government will acquire a XXXXXXXXXX% interest in XXXXXXXXXX free of charge.

III.  PROPOSED TRANSACTIONS

22.   In order to obtain the Permit for the Project, the following steps will be undertaken:

a.    OpCo will apply for the Permit.

b.    Once the Permit is granted, FA1 and Corporation X will form XXXXXXXXXX. 

c.    XXXXXXXXXX will have the following shareholders:

i.    FA1 will hold an XXXXXXXXXX% equity interest,

ii.   Corporation X will hold a XXXXXXXXXX% equity interest, and

iii.  The Foreign Government will hold a XXXXXXXXXX% equity interest, which it will be granted free of charge.

d.    FA2 will pass a shareholder resolution approving the transfer of the Permit to XXXXXXXXXX free of charge and authorizing OpCo to take all necessary steps to finalize the transfer.

e.    OpCo will apply to the Foreign Government to transfer the Permit to XXXXXXXXXX under the conditions of the Code (i.e., free of charge).

f.    Assuming the Foreign Government issues the transfer decree, the Permit will be transferred from OpCo to XXXXXXXXXX free of charge and it will be registered in the name of XXXXXXXXXX. 

23.   Following the foregoing steps, OpCo will transfer its XXXXXXXXXX assets to XXXXXXXXXX for aggregate consideration equal to the fair market value of those assets at the time of such transfer.

IV.   PURPOSE OF THE TRANSACTIONS

The purpose of the Proposed Transactions is to satisfy the terms and the conditions of the Convention by obtaining the Permit in order to advance the Project from the exploration phase to the development phase and then to the exploitation phase.

V.    RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the Proposed Transactions are carried out as described above, the provisions of subsections 15(1), 56(2) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

COMMENTS

Except as expressly stated, the ruling provided herein does not imply acceptance, approval or confirmation of any income tax implications of the facts or Proposed Transactions. For greater certainty, the CRA has not, in the context of issuing this letter, considered, confirmed or made any determination in respect of:

a.    the application or interpretation of any foreign law or foreign tax considerations, including whether the disposition of the Permit by OpCo would result in any gain or income for foreign tax purposes;

b.    the adjusted cost base or fair market value of the Permit or the XXXXXXXXXX assets referred to in paragraph 23 above or any other property referred to herein;

c.    the reasonableness of any expenditure referred to in this letter;

d.    the characterization as “excluded property” (within the meaning of that term in subsection 95(1)): (i) the Permit, (ii) the XXXXXXXXXX assets to OpCo or (iii) the shares of any entity referred to herein;

e.    the implications of the Proposed Transactions on the foreign affiliate surplus balances of any of the entities referred to herein; whether any “foreign accrual property income,” within the meaning of that term in subsection 95(1), would result from the Proposed Transactions;

f.    the characterization or tax residency of any entity referred to herein from a Canadian or foreign tax perspective; and

g.    any tax consequences relating to the facts or the Proposed Transactions described herein other than those described in the ruling given above, including for greater certainty any tax consequences to any person other than the Corporation, FA1, FA2, OpCo or XXXXXXXXXX.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R9 dated April 23, 2019, and are binding on the CRA provided that the Proposed Transactions are implemented as described above by no later than XXXXXXXXXX.

Although we received, for review, certain documents relating to the Proposed Transactions, our ruling is based solely on the facts and representations contained herein.

The above ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act and does not take into account any proposed or future amendments of the applicable foreign law (including, for greater certainty, the Code and the Convention) which, if enacted, could have an effect on the ruling provided herein.

Yours truly,

XXXXXXXXXX,
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

UNCLASSIFIED

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