2008 Ruling 2008-0267821R3 - Foreign Affiliates

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: Whether a XXXXXXXXXX will be resident in XXXXXXXXXX for the purposes of Part LIX of the Regulations

Position: The XXXXXXXXXX will be considered to be resident in XXXXXXXXXX for the purposes of Part LIX of the Regulations if central management and control is located in XXXXXXXXXX and the XXXXXXXXXX carries on business in XXXXXXXXXX pursuant to a valid certificate of qualification

Reasons: Canada-XXXXXXXXXX Tax Treaty and Part LIX of the Regulations

XXXXXXXXXX 							2008-026782

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above. We acknowledge receipt of the additional information provided in various telephone conversations (XXXXXXXXXX ) and in your letter dated XXXXXXXXXX .

Unless otherwise stated, all statutory references herein are to the Income Tax Act,

R.S.C. 1985, c.1 (5th Supplement) (the "Act"), as amended to the date of this advance income tax ruling.

The rulings given herein are based solely on the facts, the proposed transactions and the purpose of the proposed transactions described below. Facts and proposed transactions described in the documents submitted with your request do not form part of the facts and proposed transactions on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader.

Definitions

(a) "Parent" means XXXXXXXXXX .;

(b) "Subco" means XXXXXXXXXX ;

(c) "Subsidiary or Subsidiaries" means each or all, as is applicable, of the foreign operating subsidiaries owned directly or indirectly by Parent XXXXXXXXXX

(d) "Affiliate" means any person, company, partnership, limited partnership, trust or other entity, other than Subco, that is affiliated with Parent within the meaning of section 251.1 of the Act;

(e) "Canco" means XXXXXXXXXX ;

(f) "CRA" means the Canada Revenue Agency;

(g) "Exchange" means the XXXXXXXXXX ;

(h) "Foreign Country #1" means XXXXXXXXXX ;

(i) "Foreign Country #2" means XXXXXXXXXX ;

(j) "Market" means the XXXXXXXXXX ;

(k) XXXXXXXXXX

(l) "Authority" means the Exchange Control Authority for Foreign Country #2;

(m) XXXXXXXXXX

(n) "Comptroller" means the Comptroller of Customs for Foreign Country #2;

(o) "Supervisor" means the Supervisor of Insurance for Foreign Country #2;

(p) XXXXXXXXXX

(q) "ITA" means the XXXXXXXXXX Income Tax Act;

(r) XXXXXXXXXX

(s) "Regulations" means the Income Tax Regulations, C.R.C., c. 95, as amended;

(t) "Treaty" means the Agreement between Canada and XXXXXXXXXX for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and on Capital;

(u) "arm's length" has the meaning assigned by section 251 of the Act;

(v) "controlled foreign affiliate" has the meaning assigned by subsection 95(1) of the Act;

(w) "disposition" includes the meaning assigned by subsection 248(1) of the Act;

(x) "exempt earnings" and "exempt loss" have the meanings assigned by subsection 5907(1) of the Regulations;

(y) "foreign affiliate" has the meaning assigned by subsection 95(1) of the Act;

(z) "foreign accrual property income" ("FAPI") has the meaning assigned by subsection 95(1) of the Act;

(aa) "income from an active business" has the meaning assigned by subsection 95(1) of the Act;

(bb) "investment business" has the meaning assigned by subsection 95(1) of the Act;

(cc) "public corporation" has the meaning assigned by subsection 89(1) of the Act;

(dd) "related persons" has the meaning assigned by subsection 251(2) of the Act; and

(ee) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Facts

1. Parent is a public corporation and a taxable Canadian corporation whose shares trade on the Exchange. Parent carries on XXXXXXXXXX business in Canada and outside of Canada, both directly and indirectly through its Affiliates. Parent files its tax returns with the XXXXXXXXXX Taxation Centre under Business Account Number XXXXXXXXXX and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

2. Parent, directly or indirectly, owns all of the issued and outstanding shares of the Subsidiaries such that each of the Subsidiaries is a controlled foreign affiliate of Parent.

3. Canco is a Canadian company licensed to offer insurance in Canada. Canco deals at arm's length with Parent, Subco and each of the Subsidiaries. Canco provides insurance to Parent and its Canadian subsidiaries in respect of certain property and casualty risks.

4. Subco was formed pursuant to the company law of Foreign Country #1. On XXXXXXXXXX Subco continued into Foreign Country #2 pursuant to its XXXXXXXXXX and, at that time, it was granted a license to engage in XXXXXXXXXX insurance business in Foreign Country #2. Subco prepares its financial statements with a XXXXXXXXXX year-end. Parent owns all of the issued and outstanding shares of Subco such that Subco is a controlled foreign affiliate of Parent.

5. For the purposes of the ITA, a company that is resident in Foreign Country #2 is subject to income tax in that country on its worldwide income. The residence of a company is based on the location of its central management and control, not its place of incorporation. Therefore, a company is considered to be resident in Foreign Country #2 whenever the company's central management and control, as determined under common law principles, is located in Foreign Country #2.

6. Subco is resident in Foreign Country #2 by virtue of its central management and control being located in Foreign Country #2. In particular:

• A majority of the board of directors of Subco are residents of Foreign Country #2;
• The affairs of Subco are managed under the supervision of its board of directors and such directors have the autonomy to make independent decisions at board meetings; and
• Each annual meeting of the board of directors has, since Parent acquired control of Subco, taken place in Foreign Country #2.

7. XXXXXXXXXX During the period in which Subco is not subject to any income tax under the ITA, Subco is not required to file an income tax return in Foreign Country #2. Subco is, however, required to submit to the Supervisor a copy of its audited financial statements within XXXXXXXXXX months of its financial year-end.

8. Subco is in the business of providing insurance in respect of property XXXXXXXXXX Subco does not underwrite employee benefits, life or accident risks. Subco also provides reinsurance for the risks assumed by Canco. Under this arrangement, Canco insures certain Canadian risks of Parent and its Canadian subsidiaries and these risks are then re-insured by Subco.

9. The insurance premiums paid or payable to Subco by each of the Subsidiaries are deductible by each such Subsidiary in computing that Subsidiary's earnings or loss from an active business (other than an active business carried on in Canada) and from its exempt earnings or exempt loss.

10. The income derived by Subco from the reinsurance of Canco's Canadian risks has been treated as FAPI, in accordance with paragraph 95(2)(a.2) of the Act, and has been included in computing the income of Parent pursuant to subsection 91(1) of the Act. The income derived by Subco from the insurance of the Subsidiaries' risks has been treated as income from an active business pursuant to subparagraph 95(2)(a)(ii) of the Act.

11. Subco has never paid any dividends to Parent. Subco has, from time to time, made Canadian dollar denominated, non-interest bearing loans to Parent.

12. To the best of your knowledge and that of Parent, none of the issues involved in this ruling letter:

(a) is in an earlier return of Parent or any related persons of Parent;

(b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of Parent or any related persons of Parent;

(c) is under objection by Parent or any related persons of Parent; or

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

Additional Information

13. XXXXXXXXXX

14. XXXXXXXXXX

15. A XXXXXXXXXX is subject to income tax in Foreign Country #2 on its worldwide income at the same rate as other XXXXXXXXXX companies (XXXXXXXXXX %). However, a XXXXXXXXXX is entitled to a foreign currency earnings credit to a maximum of XXXXXXXXXX % of its XXXXXXXXXX income tax liability in respect of its XXXXXXXXXX . A XXXXXXXXXX that is entitled to a full foreign currency earnings credit is subject to an overall effective income tax rate of XXXXXXXXXX % on its taxable income arising from the XXXXXXXXXX

Proposed Transactions

16. Subco will:

(a) Amend its articles of incorporation to authorize it to carry on business as a XXXXXXXXXX ; and

(b) Make a written application to the Supervisor in Foreign Country #2 to cease to be a company registered under the XXXXXXXXXX and to become a company registered under the XXXXXXXXXX .

17. The Supervisor will send a notification of acceptance to Subco and provide Subco with a certificate of qualification. Immediately after furnishing Subco with a certificate of qualification, the Supervisor will notify the Authority, the XXXXXXXXXX and the Comptroller that a certificate of qualification has been issued to Subco.

Effect of the Proposed Transactions

18. Upon completion of the proposed transactions, Subco will be a XXXXXXXXXX . As a XXXXXXXXXX , Subco will be subject to income tax under the ITA and will be required to file an income tax return on an annual basis in Foreign Country #2. Subco's taxation year-end will be XXXXXXXXXX ; however, it will only be subject to income tax in its first taxation year on its income from the date of qualification to the end of the taxation year.

Purpose of the Proposed Transactions

19. The purpose of the proposed transactions is to ensure that Subco will be liable to taxation in Foreign Country #2 within the meaning of Article IV of the Treaty with the result that Subco will be resident in Foreign Country #2 for the purposes of Part LIX of the Regulations.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. For purposes of the Act, the proposed transactions will not result in a disposition of property by Subco or in a disposition of the shares of Subco by Parent.

B. Following the conversion of Subco to a XXXXXXXXXX , Subco will be resident in Foreign Country #2 for purposes of Part LIX of the Regulations provided that:

(i) Subco's central management and control continues to be located in Foreign Country #2; and

(ii) Subco continues to carry on business as a XXXXXXXXXX pursuant to a valid certificate of qualification.

C. Provided that Subco continues to be resident in Foreign Country #2 for purposes of Part LIX of the Regulations, the exempt earnings of Subco, for its taxation years ending after it becomes resident in Foreign Country#2, will include income derived from amounts paid or payable to Subco by the Subsidiaries (as described in paragraph 9 above) to the extent that such income is described in subparagraph (d)(ii) of the definition "exempt earnings".

D. Subsection 245(2) of the Act will not be applied to the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the above Rulings.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5, issued by the CRA on May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX .

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein. For greater certainty, the CRA has not made any determination as to whether:

(i) any of the Subsidiaries are foreign affiliates of Parent; or

(ii) Subco's central management and control is in fact located in Foreign Country #2.

The above-noted rulings are based on the Act and the Treaty in its present form and do not take into account any proposed amendments to the Act or the Treaty which, if enacted, could have an effect on the rulings provided herein.

Yours truly,

for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch