2010 Ruling 2010-0359731R3 - Foreign Accrual Property 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.

Principal Issues: Do the proposed transactions give rise to foreign accrual property income?

Position: No

Reasons: The proposed transactions involve the sale of property used exclusively in an active business.

XXXXXXXXXX 								2010-035973

XXXXXXXXXX , 2010

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above taxpayer.

To the best of your knowledge and that of Canco, none of the issues involved in this ruling is:

(i) dealt with in an earlier return of Canco or any persons related to Canco,

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of Canco or any persons related to Canco,

(iii) under objection by Canco or any persons related to Canco, or

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

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 ruling given herein is based solely on the facts, proposed transactions and the purpose of the proposed transactions described below. Facts and proposed transactions described in the documents submitted with your request that are not set out below 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) "Acquisitionco" means XXXXXXXXXX ;

(b) "Acquisitionco Shares" means the initial public offering shares of XXXXXXXXXX :

(c) "Canco" means XXXXXXXXXX ;

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

(e) "earnings" has the meaning assigned by subsection 5907(1) of the Regulations;

(f) "excluded property" has the meaning assigned by subsection 95(1) of the Act;

(g) "Finco" means XXXXXXXXXX ;

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

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

(j) "Foreign Country 1" means XXXXXXXXXX ;

(k) "Foreign Country 1 Holdco" means XXXXXXXXXX ;

(l) "Foreign Country 2" means XXXXXXXXXX ;

(m) "Foreign Country 3" means XXXXXXXXXX ;

(n) XXXXXXXXXX

(o) "Holdco1" means XXXXXXXXXX ;

(p) "Holdco2" means XXXXXXXXXX ;

(q) "investment property" has the meaning assigned by subsection 95(1) of the Act;

(r) "Newco" means XXXXXXXXXX ;

(s) "New Holdco" means XXXXXXXXXX ;

(t) "non-resident" has the meaning assigned by subsection 248(1) of the Act;

(u) XXXXXXXXXX ;

(v) "Opco" means XXXXXXXXXX ;

(w) "Project" means the XXXXXXXXXX project;

(x) "Regulations" means the Income Tax Regulations;

(y) "related" or "related person" has the meaning assigned by subsection 251(2) of the Act; and

(z) "Stock Exchanges" means the XXXXXXXXXX .

Facts

1. Canco is a corporation governed by the laws of the XXXXXXXXXX . XXXXXXXXXX . Canco is a XXXXXXXXXX company that carries on XXXXXXXXXX activities inside and outside of Canada through its directly and indirectly held subsidiaries. Canco's income tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its income tax returns with the XXXXXXXXXX Taxation Centre.

2. Foreign Country 1 Holdco is a corporation governed by the laws of Foreign Country 1 and is a non-resident. Foreign Country 1 Holdco is a subsidiary wholly-owned corporation of Canco.

3. Finco is a corporation governed by the laws of Foreign Country 1 and is a non-resident. Finco serves as a holding company for Canco's XXXXXXXXXX interests, including its XXXXXXXXXX interests in Foreign Country 3. Finco is a subsidiary wholly-owned corporation of Foreign Country 1 Holdco.

4. Holdco1 is a corporation governed by the laws of Foreign Country 1 and is a non-resident. Holdco1 is a subsidiary wholly-owned corporation of Finco.

5. Holdco2 is a corporation governed by the laws of Foreign Country 2 and is a non-resident. Holdco2 is a subsidiary wholly-owned corporation of Holdco1.

6. Opco is a corporation governed by the laws of Foreign Country 3 and is a non-resident. Holdco1 holds XXXXXXXXXX % of the issued and outstanding shares of Opco and Holdco2 holds the remaining XXXXXXXXXX % of the issued and outstanding shares of Opco. The shares of Opco are capital property to Holdco1 and Holdco2.

7. Opco XXXXXXXXXX owns and operates the Project and another XXXXXXXXXX project in Foreign Country 3. The property, licenses and XXXXXXXXXX rights associated with the Project are XXXXXXXXXX . The Project has a book value of US$XXXXXXXXXX for income tax purposes in Foreign Country 3. All of the property relating to the Project is being used or held in an active business carried on by Opco.

8. Acquisitionco is a corporation governed by the laws of XXXXXXXXXX . Canco is not related to Acquisitionco and it deals at arm's length with Acquisitionco for the purposes of the Act.

9. Canco has entered into a pre-acquisition agreement (the "Agreement") with Acquisitionco pursuant to which Acquisitionco will acquire the Project from Canco. As consideration for the Project, Canco will receive cash and shares of Acquisitionco. XXXXXXXXXX (the "Cash Proceeds") and XXXXXXXXXX (the "Share Proceeds").

Proposed Transactions

10. Holdco1 and Holdco2 will incorporate New Holdco pursuant to the laws of Foreign Country 1. New Holdco will, at all relevant times, be a non-resident. Upon incorporation, Holdco1 will acquire XXXXXXXXXX % of the shares to be issued by New Holdco and Holdco2 will acquire the remaining XXXXXXXXXX % of the shares to be issued by New Holdco.

11. Newco will be a corporation formed pursuant to the corporate laws of Foreign Country 3 by no less than XXXXXXXXXX nominee shareholders resident in Foreign Country 3. Newco will, at all relevant times, be a non-resident. Immediately after incorporation, all but one of the nominee shareholders will transfer all of their shares of Newco to New Holdco. The remaining nominee shareholder will transfer the ownership of the remaining share(s) of Newco to Holdco2. Holdco2 will retain ownership of the share(s) to satisfy the corporate law requirement in Foreign Country 3 that Newco have at least XXXXXXXXXX shareholders.

12. Canco will lend approximately US$XXXXXXXXXX to Holdco1 and will lend approximately US$XXXXXXXXXX to Holdco2. Holdco1 and Holdco2 will use the loan proceeds to make additional investments in the share capital of New Holdco. New Holdco will use a portion of the subscription proceeds from Holdco1 and Holdco2 to acquire additional shares of Newco and will use the remainder of the subscription proceeds from Holdco1 and Holdco2 to make an interest free loan to Newco.

13. Newco will acquire the Project from Opco for US$XXXXXXXXXX in cash, the book value of the Project plus the XXXXXXXXXX % XXXXXXXXXX payable to Foreign Country 3.

14. Holdco1 and Holdco2 will sell their shares of New Holdco to Acquisitionco. Holdco1 will receive XXXXXXXXXX Cash Proceeds and XXXXXXXXXX Share Proceeds as consideration for its shares of New Holdco and Holdco2 will receive XXXXXXXXXX Cash Proceeds and XXXXXXXXXX Share Proceeds as consideration for its shares of New Holdco.

Purpose of the Proposed Transactions

15. Senior management of Canco has reviewed its current XXXXXXXXXX activities and business objectives and has concluded that the Project does not align itself with its other XXXXXXXXXX activities. The proposed transactions are structured to ensure that Opco's disposition of the Project does not result in adverse income tax consequences under the income tax law of Foreign Country 3.

Additional Information

16. The activities of Opco do not include:

• the deriving of income from property (other than through its active business operations);
• the deriving of profits from the disposition of investment property; or
• the deriving of income from a business that is deemed by subsection 95(2) of the Act to be a business other than an active business.

17. For the purposes of the definition of "earnings" in Part LIX of the Regulations, Opco is required to compute its income or profit in accordance with the tax laws of Foreign Country 3.

18. In accordance with the income tax laws of Foreign Country 3, Opco will not realize any income, gains or losses as a result of its disposition of the Project to Newco.

19. The shares of New Holdco will be excluded property to Holdco1 and Holdco2 at the time of their sale to Acquisitionco. The only property owned or held by Newco at the time of the sale of the New Holdco Shares will be the property associated with the Project.

Ruling

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 further that the proposed transactions are completed in the manner described above, our ruling is as follows:

A. The proposed transactions will not result in the realization of FAPI, such that no amount will, solely as a consequence of the proposed transactions, be included in computing Canco's income pursuant to subsection 91(1) of the Act.

Caveats

This ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5, issued by the CRA on May 17, 2002, and is binding on the CRA provided that the proposed transactions are entered into 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 reviewed or made a determination of:

(a) the fair market value, cost or book value of the Project;

(b) whether Canco deals at arm's length with Acquisitionco or will, immediately after the proposed transactions, be dealing at arm's length with Acquisitionco;

(c) whether any property associated with the Project is a XXXXXXXXXX property; or

(d) whether proposed paragraph 95(2)(c.2) of the Act applies to the sale of the shares of New Holdco, as described in paragraph 14 above.

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

Yours truly,

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