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: Whether non-resident investment company carrying on business in Canada.
Position: No
Reasons: Paragraph 2(3)(b) and section 253 of the Act do not apply and if the non-resident were carrying on business in Canada section 115.2 would apply.
XXXXXXXXXX 2003-005297
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX collectively the "Taxpayers")
We are writing in response to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the Taxpayers. To the best of your knowledge, and that of the Taxpayers, none of the issues contained herein is:
i) in an earlier income tax return of the Taxpayers or a related person;
ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed income tax return of the Taxpayers or a related person;
iii) under objection by the Taxpayers or a related person;
iv) before any Court; and
v) the subject of a Ruling previously considered by the Income Tax Rulings Directorate.
Herein "Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supplement), as amended to the date hereof.
Facts
1. XXXXXXXXXX is a non-share capital corporation XXXXXXXXXX is governed by the laws of XXXXXXXXXX. As of XXXXXXXXXX had net assets under administration of approximately $XXXXXXXXXX operations are based in XXXXXXXXXX is exempt from tax on its taxable income XXXXXXXXXX.
2. As part of its overall investment strategy, XXXXXXXXXX invests in asset backed and other fixed income securities.
3. XXXXXXXXXX is a XXXXXXXXXX company incorporated with limited liability on XXXXXXXXXX under the XXXXXXXXXX having registered number XXXXXXXXXX registered office is located at XXXXXXXXXX deals at arm's length with XXXXXXXXXX and is not affiliated with XXXXXXXXXX for purposes of the Act.
4. XXXXXXXXXX is a "structured investment vehicle", XXXXXXXXXX.
5. The manager of XXXXXXXXXX is XXXXXXXXXX (the "Manager"). The Manager is an XXXXXXXXXX and is a wholly-owned subsidiary of XXXXXXXXXX. The Manager deals at arm's length with XXXXXXXXXX and is not affiliated with XXXXXXXXXX for purposes of the Act.
6. The advisor to XXXXXXXXXX is XXXXXXXXXX (the "Advisor"). The Advisor is a XXXXXXXXXX general partnership having offices at XXXXXXXXXX. The Advisor deals at arm's length with XXXXXXXXXX and is not affiliated with XXXXXXXXXX for purposes of the Act.
7. XXXXXXXXXX.
8. The activity of XXXXXXXXXX consists principally of investing in bonds, notes, debentures, convertible instruments, loans, certificates of interest or participations in debt-like assets and securities having characteristics similar to the foregoing, options, futures, swaps and other types of hedging or derivative instruments. Each investment security acquired by XXXXXXXXXX must meet certain criteria such as a minimum rating by a recognized rating agency.
9. The investment assets of XXXXXXXXXX all constitute "qualified investments", as defined in subsection 115.2(1) of the Act.
10. The duties of the Manager include the following:
(a) to establish, arrange and operate all programs relating to the issuance of notes on behalf of XXXXXXXXXX and XXXXXXXXXX, including arranging for the listing of securities, obtaining credit enhancement or guarantees, engaging dealers, trustees, custodians and fiscal and paying agencies, and obtaining ratings on securities and preparing market and disclosure materials;
(b) to negotiate, execute and deliver on behalf of XXXXXXXXXX and XXXXXXXXXX instruments and documents relating to all programs relating to the issuance of notes;
(c) to identify, negotiate and execute on behalf of XXXXXXXXXX swap lines, repurchase lines, securities lending lines and any other lines of credit;
(d) to identify, negotiate and enter into on behalf of XXXXXXXXXX and XXXXXXXXXX agreements with respect to provision of liquidity;
(e) to purchase short term investments and hedges;
(f) to execute, or direct the execution of issuances of notes of XXXXXXXXXX and XXXXXXXXXX and transactions relating to the investment assets of XXXXXXXXXX; and
(g) to exercise on behalf of XXXXXXXXXX rights and remedies associated with its collateral.
The functions of the Manager are detailed in the management agreement dated as of XXXXXXXXXX.
11. The duties of the Advisor include the following:
(a) to identify and select investment securities;
(b) to identify and select derivative contracts, repurchase agreements, securities lending agreements and related matters; and
(c) to approve the material terms of and parties to agreements and arrangements for implementation or execution by the Manager, including with respect to the issuance of notes, derivative contracts and purchases of short term investments.
The duties of the Advisor are detailed in the advisory agreement dated as of XXXXXXXXXX.
12. There is currently outstanding approximately US$XXXXXXXXXX principal amount of notes issued by XXXXXXXXXX and XXXXXXXXXX under the programs referred to above.
13. XXXXXXXXXX has not (directly or acting through its dealers) directed any promotion of investments (including any debt obligations) in itself at persons that XXXXXXXXXX knew or ought to have known were resident in Canada for purposes of the Act.
14. XXXXXXXXXX has not sold an investment (including any debt obligation) in itself that is outstanding at the present time to a person that XXXXXXXXXX knew or ought to have known was resident in Canada.
15. XXXXXXXXXX has never, directly or through any agent, filed any document with a public authority in Canada in order to permit distribution of interests in XXXXXXXXXX (including any debt obligations) to persons resident in Canada.
16. At the present time, neither XXXXXXXXXX nor any affiliate of XXXXXXXXXX owns any investments (including any debt obligations) of XXXXXXXXXX.
17. The shares in the capital stock of XXXXXXXXXX are owned by XXXXXXXXXX holds the shares in trust for one or more charities to be named by XXXXXXXXXX deals at arm's length with XXXXXXXXXX and is not affiliated with XXXXXXXXXX for purposes of the Act.
18. XXXXXXXXXX currently owns capital notes issued by XXXXXXXXXX is an investment fund for which the Advisor is the trading advisor. The total principal amount of the capital notes owned by XXXXXXXXXX is US$XXXXXXXXXX. No other capital notes are currently outstanding.
19. The capital notes are participating debt obligations. The holder of the capital notes is entitled under the terms thereof to receive "excess interest" which is generally calculated with reference to the retained earnings (determined in accordance with generally accepted accounting principles) of XXXXXXXXXX remaining after paying all amounts due with respect to senior obligations and senior subordinated obligations and all operating and administrative expenses of XXXXXXXXXX. In addition, under the terms of the capital notes, the Advisor is entitled in certain circumstances to require XXXXXXXXXX to purchase the capital notes at a purchase price that reflects the net asset value of XXXXXXXXXX. The detailed provisions of the capital notes are governed by a form of note, a supplementary document titled "XXXXXXXXXX" and a fiscal agency agreement dated as of XXXXXXXXXX.
20. All investment management and advice with respect to investments of XXXXXXXXXX is provided by the Advisor, in all cases outside Canada.
21. All transactions in respect of funding or investment activities of XXXXXXXXXX (including purchasing and selling investments, exercising rights incidental to the ownership of investments and entering into and executing agreements with respect to such purchasing and selling and the exercising of such rights) are entered into by XXXXXXXXXX (or executed by the Manager or the Advisor on behalf of XXXXXXXXXX), in all cases outside Canada.
22. All investment administration services, such as receiving, delivering and having custody of investments, calculating and reporting investment values, receiving subscription amounts from, and paying distributions and proceeds of disposition to investors, record keeping, accounting and reporting in respect of XXXXXXXXXX are performed by XXXXXXXXXX (or arranged or directed by the Manager or the Advisor on behalf of XXXXXXXXXX), in all cases outside Canada.
23. None of XXXXXXXXXX , the Manager, the Advisor, XXXXXXXXXX, nor the beneficiary of XXXXXXXXXX is or has ever been resident in Canada for purposes of the Act, nor has any of them ever carried on business in Canada for purposes of the Act at any time.
Proposed Transactions
24. Under a note purchase agreement, XXXXXXXXXX will purchase the capital notes from XXXXXXXXXX for a cash purchase price equal to the fair market value of the capital notes. The purchase price has not yet been finalized, but is expected to be in the range of approximately US$XXXXXXXXXX to US$XXXXXXXXXX.
25. Following the purchase of the capital notes, the Advisor will continue to be the advisor to XXXXXXXXXX, and will continue to be bound by the provisions of the advisory agreement. Similarly, the Manager will continue to be the manager of XXXXXXXXXX, and will continue to be bound by the provisions of the management agreement.
26. XXXXXXXXXX , the Advisor and the Manager will enter into a noteholder rights agreement under which XXXXXXXXXX will have certain rights to receive information and to be consulted and certain other rights with respect to XXXXXXXXXX will not be appointed as an agent of XXXXXXXXXX for any purpose.
27. The noteholder rights agreement will include a detailed set of investment, hedging and funding criteria ("Transaction Criteria") to be observed by the Manager and Advisor. The Transaction Criteria will be as agreed to among XXXXXXXXXX , the Manager and the Advisor, and will address such matters as pricing, manner of settlement, liquidity requirements, absence of conflict of interest, concentration limits, acceptable swap counterparties, and collateral requirements.
28. Under the noteholder rights agreement, XXXXXXXXXX will have a broad right to consult with the Advisor and the Manager. In particular, the noteholder rights agreement will include provisions to the following effect:
? at any time, XXXXXXXXXX may (but is not obliged to) identify a potential transaction involving a potential funding, investment or hedging decision with respect to XXXXXXXXXX ;
? in connection therewith, XXXXXXXXXX may (but is not obliged to) prepare and submit to the Advisor and Manager in writing XXXXXXXXXX own assessment of how the potential transaction satisfies the applicable Transaction Criteria;
? the Advisor will make its own assessment as to whether the potential transaction satisfies the applicable Transaction Criteria, and in this regard, will be entitled to rely on any factual representations that may be made by XXXXXXXXXX;
? the Manager will cooperate with this process of consultation, but its sole responsibility will be to determine whether or not the potential transaction meets applicable ratings criteria and Transaction Criteria; and
? the Advisor will in its sole discretion determine whether or not the potential transaction is an appropriate investment for XXXXXXXXXX, and will be required (subject to any applicable confidentiality constraints) to communicate its decision and the reasons therefor to XXXXXXXXXX.
29. Under the noteholder rights agreement, the Advisor will be required to deliver daily reports to the Manager and XXXXXXXXXX. These reports will include an explanation of how each potential transaction identified by the Advisor satisfies the applicable Transaction Criteria. The Advisor will agree to consult with the Manager and XXXXXXXXXX with respect to any comments either of them may have on such reports.
30. Under the noteholder rights agreement, the Manager will be required to deliver daily reports to the Advisor and XXXXXXXXXX. These reports will include an explanation of how each potential transaction identified by the Manager satisfies the applicable Transaction Criteria. The Manager will agree to consult with the Advisor and XXXXXXXXXX with respect to any comments either of them may have on such reports.
31. Under no circumstances will XXXXXXXXXX be entitled to require the Advisor or the Manager to implement (or not implement) any potential transaction identified by XXXXXXXXXX (or by the Advisor or Manager).
32. XXXXXXXXXX will also approach the shareholder of XXXXXXXXXX in order to request that XXXXXXXXXX be permitted to have minority representation on the board of directors of XXXXXXXXXX. Under no circumstances will representatives of XXXXXXXXXX constitute a majority of the directors of XXXXXXXXXX.
33. All meetings of the board of directors of XXXXXXXXXX will continue to be held physically outside Canada.
34. Under the noteholder rights agreement, a supervisory committee will be established. The role of the committee will be to oversee compliance with the Transaction Criteria. The committee will include one representative of each of XXXXXXXXXX, the Advisor and the Manager. The committee will meet at least once per year (and more frequently if requested by XXXXXXXXXX) to review the economic performance of XXXXXXXXXX and to discuss any material issues relating to (i) the preservation of XXXXXXXXXX ratings, (ii) compliance by XXXXXXXXXX with all applicable laws, (iii) strategic considerations relating to investment, funding or hedging activities of XXXXXXXXXX, and (iv) other relevant considerations arising under the noteholder rights agreement. Any and all meetings of the committee will be held physically outside Canada.
35. Under the noteholder rights agreement, the noteholder will be provided with reports (in addition to those noted in paragraphs 29 and 30 above) prepared by the Advisor or Manager, including
? each business day, before XXXXXXXXXX, a daily position report setting out the market value of all assets and liabilities of XXXXXXXXXX as of the close of business the previous day and describing all activities of XXXXXXXXXX on the previous day, such report to be delivered to XXXXXXXXXX by fax or e-mail;
? on the XXXXXXXXXX business day of each month, a monthly summary of investment and funding activities undertaken for the prior month, including details regarding compliance with the Transaction Criteria;
? no later than XXXXXXXXXX days after each fiscal year end of XXXXXXXXXX, an annual audited summary of the assets and liabilities of XXXXXXXXXX prepared in accordance with generally accepted accounting principles; and
? such other reports as may be reasonably requested by XXXXXXXXXX from time to time.
36. Under the noteholder rights agreement, each of the Advisor and the Manager will agree to resign its position as advisor and manager of XXXXXXXXXX respectively if requested by XXXXXXXXXX. Such resignation would become effective after a successor, who satisfies applicable eligibility criteria, is appointed and the ratings ascribed to debt instruments issued by XXXXXXXXXX and XXXXXXXXXX have been confirmed.
37. XXXXXXXXXX will receive no fee or similar amount of any kind for any information that may be provided by it to the Advisor or Manager, and will have no obligation to provide any such information. The Advisor will receive from XXXXXXXXXX a negotiated fee for the investment management and advisory services provided by the Advisor.
38. In practice, XXXXXXXXXX anticipates that its fixed income experts will be in frequent (perhaps daily) contact with the Advisor or Manager concerning the affairs of XXXXXXXXXX.
39. Neither XXXXXXXXXX nor any person affiliated with XXXXXXXXXX will at any time own any debt obligations issued by XXXXXXXXXX other than the capital notes.
40. The aggregate fair market value of the capital notes will at all times not exceed XXXXXXXXXX % of the aggregate fair market value of all shares in the capital stock and all debt obligations of XXXXXXXXXX then outstanding.
Purpose of Proposed Transactions
41. XXXXXXXXXX purpose in acquiring the capital notes is to acquire an investment that assists XXXXXXXXXX in meeting its overall investment objectives.
42. As owner of the capital notes, which are the lowest ranking subordinated debt of XXXXXXXXXX will be in a position to realize profit or loss on the notes (through receipt of excess interest and repayments of principal, or by sale of the notes) depending upon the performance of XXXXXXXXXX. As such, and in view of its own expertise in the fixed income area, XXXXXXXXXX intends to enter into the noteholder rights agreement to enable it to put in place a set of procedures that ensure that it can closely monitor the performance of XXXXXXXXXX, as well as provide the Advisor and Manager (and therefore XXXXXXXXXX) with the benefit of its own expertise and the market information to which its personnel have access.
Ruling Given
Provided that all of the above is a complete and accurate disclosure of all of the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we rule that XXXXXXXXXX will not be considered to carry on business in Canada for purposes of the Act solely because of the activities of XXXXXXXXXX described in paragraphs 24 to 40 above.
This ruling is governed by the general limitations and qualifications stated in Information Circular 70-6R5 dated May 17, 2002 and is binding on the CCRA provided that the proposed transactions are completed by XXXXXXXXXX. This ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act, which could have an effect on the provided rulings if enacted into law.
Nothing in this letter should be construed as implying that the CCRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions other than those specifically stated herein.
Opinion
You stated in your letter dated XXXXXXXXXX that no subscription by XXXXXXXXXX for additional capital notes is currently proposed. However, in the event that XXXXXXXXXX may be required to provide "capital" to XXXXXXXXXX, it will be done by (a) XXXXXXXXXX causing an affiliate not resident in Canada to subscribe for additional capital notes, or (b) an unrelated third party not resident in Canada subscribing for additional capital notes, potentially accompanied by a swap or other derivative arrangement between that third party and XXXXXXXXXX, or (c) another structure under which neither XXXXXXXXXX nor any other person resident in Canada subscribes for additional capital notes. In our opinion, provided that the facts stated above in paragraphs 24 to 40 do not change, the subscription for additional capital notes as you have described them would not cause XXXXXXXXXX to be carrying on business in Canada. The subscription for the additional capital notes is not included in the ruling because, as stated in paragraph 7 of IC 70-6R5, we do not rule on transactions that are not seriously contemplated or hypothetical in nature. However, at the time that an additional subscription is proposed, we would be happy to consider a ruling request at that time.
Yours truly,
XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
- 9 -
- 2 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2004
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2004
Email this Content