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.
Principal Issues: Whether 95(2)(e.1) applies to a cross-border wind-up.
Position: Yes because the exception in 95(2)(e.1) can only apply if both foreign affiliates are in the same country.
Reasons: The words of the exception are unable to bear another meaning.
XXXXXXXXXX
XXXXXXXXXX 2000-001098
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX wherein you advised us of changes to the proposed transactions described in our letter of XXXXXXXXXX, 1999, our file number 992455 (the "Ruling"). Terms defined in the Ruling to have certain meaning have the same meaning when used in this letter.
As a result of your letter, the following changes are made to the Ruling:
Paragraph 14 of the Ruling is replaced with:
Subco 1 will create a wholly-owned subsidiary under the laws of the State of XXXXXXXXXX ("US Newco") which will be a limited liability company. US Newco will be resident in the United States and will not be resident in Canada. Subco 1 will transfer its shares of Mergeco to US Newco in exchange for an equity interest in US Newco. Mergeco and US Newco will merge to form Mergeco 2. Mergeco 2 will also be a XXXXXXXXXX limited liability company resident in the United States and not resident in Canada. Canco will acquire from Subco 1 the equity interest in Mergeco 2 for cash consideration in an amount equal to its fair market value, which is estimated to be approximately US$XXXXXXXXXX. Canco will transfer the equity interest in Mergeco 2 to Holdco as a dividend in kind. US Newco and Mergeco 2 will be treated as disregarded entities under the Internal Revenue Code (the "Code) of the United States and are corporations for the purposes of the Act.
Ruling B is replaced with:
The surplus accounts of Subco 1 will be reduced in accordance with subsection 5907(1) of the Regulations by the loss, if any, on the disposition of the equity interest in Mergeco 2, after the application of subsection 93(2), that is deemed to occur immediately before the dissolution of Subco 1 begins pursuant to subparagraph 40(3.4)(b)(v).
Ruling E is deleted.
We confirm that with the exception of the amendment to Ruling B as set out above and the deletion of Ruling E, the amendments to the proposed transactions described in paragraph 14 of the Ruling will not affect the remaining rulings given and, moreover, Ruling B as amended, and the other remaining rulings will be binding as indicated in the Ruling.
Comments
US Tax Paid in Respect of the Income of a US Limited Liability Company
You indicate that as a result of the fact that Mergeco 2 will be treated as a disregarded entity under the Code, Holdco will be liable for tax on any income for the purposes of the Code, derived by Mergeco 2. You request our opinion whether such tax would affect the surplus accounts of Mergeco 2 vis-à-vis Holdco.
In our opinion, where the Code provides that a corporation resident in Canada is liable for a tax in respect of the income of a limited liability company (i.e. a foreign affiliate) resident in the United States wholly-owned by the Canadian corporation and the Canadian corporation pays the tax, such tax cannot be considered a tax paid by the foreign affiliate for the purposes of section 5907 of the Regulations. Accordingly, such tax would not reduce the surplus accounts of the foreign affiliate vis-à-vis the Canadian corporation.
The tax paid by the corporation resident in Canada would be a tax paid "in respect of income from a share of foreign affiliate" for the purposes of paragraph 126(1)(a) and subsection 20(12) of the Act. Therefore the tax would neither be creditable under subsection 126(1) nor deductible under subsection 20(12) of the Act. However, a deduction may be available under paragraph 113(1)(c) of the Act if the tax can be considered reasonably applicable to a dividend paid out of taxable surplus by the limited liability company.
Proposed Amendments to Subsection 93(2)
In reference to Ruling B, in the event that the proposed amendments to subsection 93(2) introduced by the Department of Finance in November of 1999 are passed and come into force in the form they were introduced, subsection 93(2) would not apply to reduce a loss to Subco 1 from the disposition of its equity interest in Mergeco 2 if the equity interest in Mergeco 2 is excluded property to Subco 1.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch