2024 Ruling 2023-0976381R3 - Ruling Request - Foreign Tax Credit

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: (1) Whether the gain realized by the Taxpayer on the sale of his shares in certain Chinese Private Companies will be “sourced” in China for the purposes of paragraph 126(1)(b) and the determination of “qualifying income” in subsections 126(7) and (9) of the Act; and (2) be considered to “arise” in China for the purposes of Articles 13(5) and 21(4) of the Canada-China Income Tax Treaty.

Position: (1) The taxable capital gain will be “sourced” in China under paragraph 126(1)(b) and the determination of “qualifying income” in subsections 126(7) and (9) of the Act; (2) if the gain arises in China under Chinese income tax laws, the gain will be considered to have arisen in China under Articles 13(5) and 21(4) of the Canada-China Income Tax Treaty.

Reasons: (1) Based on the facts and additional information provided; (2) for the purposes of Article 13(5) of the Canada-China Income Tax Treaty, the word “arise” has the meaning that it has under Chinese income tax laws pursuant to Article 3(2) of the Canada-China Income Tax Treaty.

XXXXXXXXXX									2023-097638

XXXXXXXXXX, 2024

Dear XXXXXXXXXX:

Re: Advance income tax ruling
XXXXXXXXXX

This is in response to your letter of XXXXXXXXXX, followed by a revised submission on XXXXXXXXXX, in which you requested an advance income tax ruling (“Ruling Request”) on behalf of XXXXXXXXXX (the “Taxpayer”). We also acknowledge the information provided in subsequent correspondences in connection with your request.

We understand that, to the best of your knowledge and that of the Taxpayer, except to the extent described herein, none of the proposed transactions and/or issues described in this letter are the same as or substantially similar to transactions and/or issues that are:

i. in a previously filed tax return of the Taxpayer or a related person and:

(a) being considered by the CRA in connection with such return;
(b) under objection by the Taxpayer or a related person; or
(c) the subject of a current or completed court process involving the Taxpayer or a related person; or

ii. the subject of a ruling request previously considered by the Income Tax Rulings Directorate.

Unless otherwise expressly stated, every reference herein to the “Act” or to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter. Every reference to “Regulations” is a reference to the Income Tax Regulations, CRC, c.945, as amended.

All terms used herein that are defined in the Act have the meaning given in such definition. All references to monetary amounts are in Canadian dollars, unless otherwise stated.

For greater certainty, all the documents and information submitted in support of your Ruling Request are part of this letter only to the extent described herein and any reference to these documents is provided solely for the convenience of the reader. The ruling given herein is based solely on the Facts, Proposed Transactions, Additional Information, and the Purpose of the Proposed Transactions as described below.

DEFINITIONS

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to as follows:

“ACB” means “adjusted cost base” and has the meaning assigned by section 54;

“amount” has the meaning assigned by subsection 248(1);

“arm’s length” has the meaning assigned by subsection 251(1);

“capital property” has the meaning assigned by section 54;

“China” means the People’s Republic of China;

“Chinese Individual Income Tax Act” means the Individual Income Tax Law of the People’s Republic of China (2018 Amendment);

“Chinese Individual Income Tax Regulations” means the Regulation on the Implementation of the Individual Income Tax Law of the People's Republic of China, as amended, 2018;

“Chinese Individual Tax Measures on Equity Transfers” means the Measures for the Administration of Individual Tax on Equity Transfer Income (for Trial Implementation) dated December 7, 2014;

“Chinese Private Companies” means Forco1, Forco2 and Forco3, collectively;

“corporation” has the meaning assigned by subsection 248(1);

“CRA” refers to the Canada Revenue Agency;

“disposition” has the meaning assigned by subsection 248(1);

“FMV” or “fair market value” means the highest price available in an open and unrestricted market between informed and prudent parties acting at arm’s length and under no compulsion to act, expressed in terms of cash;

“Forco1” means XXXXXXXXXX, a private company incorporated under the laws of China;

“Forco2” means XXXXXXXXXX, a private company incorporated under the laws of China;

“Forco3” means XXXXXXXXXX, a private company incorporated under the laws of China;

“Foreign Tax Authorities” means the Chinese State Taxation Administration, the tax authority in China;

“FTC” or “foreign tax credit” has the meaning assigned by subsection 126(1);

“Paragraph” refers to a numbered paragraph in this letter;

“Proposed Transactions” means the transactions described in the Proposed Transactions section of this letter;

“Purchaser(s)” means a non-arm’s length party or parties who will acquire the Taxpayer’s shares of the Chinese Private Companies as part of the Proposed Transactions;

“Relevant Spot Rate” has the meaning assigned by subsection 261(1);

“RMB” means Renminbi, the currency of China, also known as Chinese Yuan (¥); and

“Treaty” means the Agreement Between the Government of Canada and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed on May 12, 1986.

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

FACTS

1. The Taxpayer is a national and citizen of China.

2. The Taxpayer has a household registration in China.

3. On XXXXXXXXXX, the Taxpayer became a resident in Canada for the purposes of the Act and the Treaty.

4. At all times since XXXXXXXXXX, the Taxpayer has remained a resident of Canada for the purposes of the Act and the Treaty.

5. The Taxpayer is a non-resident of China for the purposes of Chinese income tax laws and the Treaty.

6. The Taxpayer owns the following shares in the Chinese Private Companies, which he has acquired after his immigration to Canada:

	Corporation 	Quantity	ACB (RMB)	Relevant Spot - Date of 	ACB (CAD)
							Purchase (XXXXX)
	Forco1		XXXXX		XXXXX		XXXXX				XXXXX
	Forco2		XXXXX		XXXXX		XXXXX				XXXXX
	Forco3 		XXXXX		XXXXX		XXXXX				XXXXX

7. The Chinese Private Companies were incorporated under the laws of China and are residents of China under the Treaty.

8. The shares of the Chinese Private Companies are not listed on a stock exchange in China or in any other country.

9. The Chinese Private Companies are engaged in the manufacturing of consumer electronic goods. The main assets of the Chinese Private Companies are not immovable property situated in China.

10. The Taxpayer’s ACB in the shares of the Chinese Private Companies is less than the FMV of those shares.

11. The Taxpayer is a minority shareholder of the Chinese Private Companies, holding less than 10% of the shares of each company. The Taxpayer holds his shares in the Chinese Private Companies through a trade union committee, as his share ownership is too small for the companies to record him as an individual shareholder.

12. From time to time, each of the Chinese Private Companies will inform its shareholders of the FMV of their shares in the company. In accordance with the most recent notifications provided by the Chinese Private Companies, the FMV of the Taxpayer’s interest in the Chinese Private Companies is as follows:

Corporation Quantity FMV (RMB) Relevant Spot FMV (CAD)
Rate - (XXXXX)
Forco1 XXXXX XXXXX XXXXX XXXXX
Forco2 XXXXX XXXXX XXXXX XXXXX
Forco3 XXXXX XXXXX XXXXX XXXXX

13. The Purchaser is the mother of the Taxpayer. She is a resident of China for Chinese income tax purposes and under the Treaty and is a non-resident of Canada for Canadian income tax purposes.

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the order presented below unless otherwise indicated.

14. The Taxpayer will enter into an agreement with the Purchaser for the sale of all the shares held by the Taxpayer in the Chinese Private Companies for their FMV.

15. In order to complete the sale, which should be in accordance with the practices for the sale of private company shares in China:

a) The Taxpayer and the Purchaser will arrange a date and time with the Security Management Department of the Chinese Private Companies in order to proceed with the transfer of the shares;

b) the Taxpayer will receive cash, or cash equivalents, as proceeds for the sale of his shares in the Chinese Private Companies;

c) the Taxpayer will transfer all taxes and other fees that are due on the sale of the shares of the Chinese Private Companies to the Chinese Private Companies’ designated accounts. The Taxpayer’s Chinese tax on the gains realized on the sale of the shares of the Chinese Private Companies will be remitted to the Chinese Private Companies as part of this transfer;

d) upon receipt of funds, the Chinese Private Companies will register the transfer of shares from the Taxpayer to the Purchaser; and

e) the Chinese Private Companies will remit the Taxpayer’s tax payments to the Foreign Tax Authorities.

ADDITIONAL INFORMATION

16. The sale of the shares will generate a gain for Canadian and Chinese income tax purposes.

17. In respect of the sourcing under the Act of the sale of the shares of the Chinese Private Companies, the following information should be noted:

a) The location, residence, or place of business of the issuers (i.e., the Chinese Private Companies) are in China;

b) The location of the transfer office is in China;

c) There is no selling agent that will be involved in the Proposed Transactions;

d) The title will be transferred in China;

e) The contract will be negotiated, signed, and executed in China;

f) The shares are registered in China; and

g) The payment will be made in China.

18. Since the Taxpayer is a non-resident of China for Chinese income tax purposes, he is taxed in China only on his Chinese sourced income pursuant to Article 1 of the Chinese Individual Income Tax Act.

19. Income derived from the transfer of immovable property or any other property located within the territory of China or from the transfer within the territory of China of any other property shall be deemed to be income sourced within the territory of China, whether or not the place of payment is within the territory of China, pursuant to Article 3(4) of the Chinese Individual Income Tax Regulations.

20. Since the Chinese Private Shares are private company shares and are not shares of listed companies traded on the Shanghai Stock Exchange or the Shenzhen Stock Exchange in China, the exemption provided under Article 30 of the Chinese Individual Tax Measures on Equity Transfers is not applicable.

21. For income tax purposes, income from the transfer of assets includes income from the transfer of shares. The cost basis of the property and reasonable expenses incurred are deductible from the sales proceeds to arrive at the taxable income pursuant to Article 6(5) of the Chinese Individual Income Tax Act.

22. The Taxpayer’s income from transfer of assets is subject to the Chinese individual income tax which taxes the gains at a flat tax rate of 20% rate, pursuant to Articles 2(8) and 3(3) of the Chinese Individual Income Tax Act.

23. Pursuant to Article 4(9) of the Chinese Individual Income Tax Act, if an amount of income is exempt from tax by virtue of a Chinese income tax treaty, it would also be exempt from tax under Chinese domestic law. A gain that is exempt under Article 13(5) of the Treaty because it doesn't arise in China would therefore also be exempt under Chinese domestic law. For Chinese income tax purposes, the gains on the sale of the Chinese Private companies are not exempt under Article 13(5) of the Treaty since they are sourced in China.

PURPOSE OF THE PROPOSED TRANSACTIONS

24. The purpose of the Proposed Transactions is for the Taxpayer to dispose of his shares held in the Chinese Private Companies to the Purchaser.

RULING GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, additional information, purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, and there are no other transactions that may be relevant to the ruling given, we rule as follows, subject to the comments below:

A. The taxable capital gain on the disposition of the shares will be sourced to China for the purposes of paragraph 126(1)(b) and the determination of “qualifying income” in subsections 126(7) and (9) of the Act.

B. To the extent that the gain arises in China under Chinese income tax laws, the gain will be considered to have arisen in China under Articles 13(5) and 21(4) of the Treaty.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R12, Advance Income Tax Rulings and Technical Interpretations, issued on April 1, 2022, and are binding on the CRA provided that the Proposed Transactions are completed within six months of the date of this letter.

The above rulings are based on the Act as it currently reads and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

COMMENTS

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or made any determination in respect of any tax consequences in respect of:

(a) the exact amount of the foreign tax credit that is available since it is subject to the computational rules provided under section 126 of the Act;
(b) the fair market value or adjusted cost base of any shares referred to herein;

(c) the application of the transfer pricing rules to the Proposed Transactions; and

(d) the tax residency of the Taxpayer and of any entity referred to in this letter.

An invoice for our fees in connection with this Ruling Request will be forwarded to you under separate cover.

Yours truly,

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