Revenue Canada Taxation Head Office
XXXX
T. B. Kuss (613) 957-2120
Attention: XXXX
October 16, 1986
Dear Sir:
Re: Transfer of assets between U.S. branches operating in Canada
This is in reply to your letter of July 9, 1986 regarding the above-referenced subject. It is the Department's policy not to give written interpretations on specific fact situations other than in response to requests for advance income tax rulings. The procedures for requesting an advance income tax ruling are found in Information Circular 70-6R, dated December 18, 1978, published by Revenue Canada Taxation. Although your questions relate to a specific situation, we will address the conceptual issues in hypothetical terms.
The circumstances of your situation can be summarized hypothetically as follows:
Corporation A ("A Ltd.") and Corporation B ("B Ltd.") are U.S. subsidiary corporations of the same U.S. parent corporation. Both subsidiaries carry on branch operations in Canada through permanent establishments. A Ltd. and B Ltd. carry on similar businesses.
You have asked whether A Ltd. can transfer its operating assets to B Ltd. at their undepreciated capital cost so that there will be no immediate Canadian tax implications on the transfer. You have also asked whether A Ltd. can roll over its previous year's allowance for investment in Canada (for Part XIV tax purposes) to B Ltd.
Regarding the transfer of the operating assets, it is our opinion there are no provisions in the Canadian Income Tax Act (the "Act") that will facilitate this transfer on a tax deferred basis. Subsection 85(1) of the Act deals with such transfers; however for this subsection to apply the corporation acquiring the assets must be a taxable Canadian corporation.
"Taxable Canadian corporation" and "Canadian corporation" are defined in paragraphs 89(l)(i) and 89(l)(a) respectively. It is clear that B Ltd. would not fall within these definitions.
While there are no specific provisions in the Act that will provide a deferral, Article XIII, paragraph 8 of the Canada- U.S. Income Tax Convention, 1980 (the "Convention") may afford relief.
To paraphrase this paragraph, as it applies to your hypothetical situation, where a resident (A Ltd.) of a Contracting State (the U.S.) alienates property in the course of a reorganization, and profit, gain, or income with respect to such alienation is not recognized for the purpose of taxation in that State (the U.S.), if requested by the person who acquires the property (B Ltd.), the competent authority of the other State (Canada) may agree, in order to avoid double taxation, and subject to terms and conditions satisfactory to such competent authority, to defer the recognition of profit, gain or income with respect to such property for the purpose of taxation in that other State (Canada) until such time and in such manner as is stipulated in the agreement.
For Article XIII, paragraph 8 of the Convention to apply two things have to occur. First, the reorganization must be subject to a rollover for U.S. purposes. Second, the reorganization must result in double taxation if Canada did not agree to the deferral. You would have to satisfy the Canadian competent authority that this is the case. The terms and conditions of any agreement would also have to be negotiated with the Canadian competent authority.
All requests for competent authority consideration should be sent to the following address:
Director Tax Avoidance and Audit Applications Division Audit Directorate Revenue Canada, Taxation 875 Heron Road Ottawa, Ontario KlA OL8
Reference should also be made to Information Circular 71-17R2 dated July 9, 1984, published by Revenue Canada, Taxation. This circular deals with requests for competent authority consideration.
Regarding the Part XIV issues mentioned previously it is our opinion that in the year the assets are transferred, pursuant to paragraph 219(l)(b) of the Act, A Ltd. will include in its Part XIV tax base any investment allowance claimed pursuant to paragraph 219(l)(h) in the immediately preceding year. Because A Ltd. will not have any Canadian assets and presumably will not be carrying on business in Canada at the end of the year, no paragraph 219(l)(h) deduction will be available in the year of disposition. Any assets acquired by B Ltd. from A Ltd., provided they otherwise satisfy paragraph 219(l)(h) and Regulation 808, will be deducted from B Ltd.'s. Part XIV tax base in the year of acquisition. The cost of these assets for Part XIV purposes should also be negotiated with the Canadian competent authority.
We hope these comments have been of assistance to you.
Yours sincerely,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch