27 March 1995 External T.I. 9419065 - FOREIGN AFFILIATE - DEEMED ACTIVE BUSINESS INCOME

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

	              	   941906
XXXXXXXXXX                                 Olli Laurikainen

Attention: XXXXXXXXXX

March 27, 1995

Dear Sirs:

Re: Active Business Income of a Foreign Affiliate

This is in reply to correspondence dated February 13, 1995 and March 13, 1995 from XXXXXXXXXX.

You request our opinion concerning the application of proposed paragraph 95(2)(a) of the Act as set out in Bill C-70 which received first reading in the House of Commons February 16, 1995, to the following hypothetical fact situation.

1)Canco is a corporation resident in Canada.

2)Cansub is a corporation resident in Canada. Canco owns directly 100% of the shares of Cansub.

3)Opco is a corporation resident in the United States. Canco owns directly or indirectly 100% of the shares of Opco.

4)X is a corporation resident in Canada which deals at arm's length with Canco.

5)Xsub is a corporation resident in Canada. X owns directly 100% of the shares of Xsub.

6)X owns directly or indirectly 100% of the shares of a corporation ("FAX") resident in the United States.

7)P is a partnership that carries on an active business in the United States. All of the income of P is derived from the active business.

8)Opco and FAX each own a 50% interest in P and each partner shares equally in partnership distributions.

9)LLC is a limited liability corporation organized under The Wyoming Limited Liability Company Act and is resident in the United States for the purposes of the Act.

10)LLC has issued shares and 50% of the shares of LLC are held by Cansub and 50% are held by Xsub. LLC makes distributions of profits to the shareholders in proportion to their percentage ownership of its shares.

11)LLC has purchased bonds issued by a political subdivision of the United States. The bonds bear an arm's length commercial rate of interest. The proceeds from the sale of such bonds were used by the political subdivision to finance the construction of a manufacturing plant which is leased to P to be used by it to carry on its active business. P has an agreement with the political subdivision to purchase the manufacturing plant and related lands for US$1 following the full repayment of the bonds.

12)The above lease is treated as a financing lease under the Internal Revenue Code (the "Code") of the United States.

13)The amount computed under the Code to be the annual interest expense to P under the lease agreement, equals the annual interest income of LLC from the bonds of the U.S. political subdivision.

14)The interest expense of P under the lease agreement will be deducted in computing the income or profit of P from its active business for the purpose of calculating the tax liability of Opco and Fax under the Code in respect of the activities of P.

15)Canco and X have entered into a bona fide agreement for business reasons whereby Canco will have an option to acquire all of the issued and outstanding shares of FAX and X similarly has an option to acquire all of the issued and outstanding shares of Opco.

16)Canco and X have also entered into a bona fide agreement for business reasons whereby Canco will have an option to acquire all of the issued and outstanding shares of Xsub and X similarly has an option to acquire all of the issued and outstanding shares of Cansub.

In our view, in the above circumstances, proposed subparagraph 95(2)(a)(i) of the Act as set out in Bill C-70 which received first reading in the House of Commons February 16, 1995, would provide that the interest income earned by LLC from the bonds issued by the U.S. political subdivision would be included in computing the income of LLC from an active business.

As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, issued by Revenue Canada, Taxation the foregoing opinion is not an advance income tax ruling and is not binding on the Department.

We trust that the foregoing comments are of assistance to you.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch