2006 Ruling 2006-0178791R3 - Notes linked to Commodity Index

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: Is the interest paid on Notes that is based on the index return of a commodity index reflecting the change in value between the issue date and the maturity date exempt under 212(1)(b)(iii)(D)

Position: YES

Reasons: Issuer is a financial institution that is not in business of any of the commodities and the interest is payable in a foreign currency.

XXXXXXXXXX 								2006-017879

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the above-named taxpayer.

We understand that to the best of our knowledge and that of the taxpayer involved, none of the issues involved in this ruling request herein is:

(i) dealt with in an earlier return of the taxpayer or a related person;

(ii) being considered by tax services office or a taxation centre in connection with any income tax return previously filed by the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) before the Courts, or if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v) the subject of a previous ruling issued by the Income Tax Rulings Directorate of the CRA to the taxpayer or a related person.

Definitions

(a) "Act" means the Income Tax Act, R. S. C. 1985(5th Supp.) c.1, as amended to the date hereof;

(b) "A Co" means XXXXXXXXXX and is further described in 1 to 3 below;

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

(d) "Final Index Value" means the value of the Index on the Maturity Date of the Note;

(e) "Index" means a particular commodity index XXXXXXXXXX (together referred to as the Indexes) and is further described in 8 below;

(f) "Index Return" means the positive or negative amount which is calculated based on the change in the value of the Index between the Initial Index Value and Final Index Value as described in 7 below;

(g) "Issue Date" means the date a Depositor advances an amount to A Co and the Notes are issued;

(h) "Initial Index Value " means the value of the Index on the Issue Date of the Note;

(i) "Maturity Date" means a date that is a stipulated date one year after the Issue Date;

(j) "Notes" means the Notes to be issued and are further described in 4 to 10 below;

(k) XXXXXXXXXX; and,

(l) "Regulations" mean the Income Tax Regulations.

Statement of Facts

1. A Co is a "taxable Canadian corporation" and a "public corporation", as defined in the Act. A Co files its tax returns at the XXXXXXXXXX Tax Services Office. A Co's address is XXXXXXXXXX and its taxation year ends on XXXXXXXXXX of each year.

2. XXXXXXXXXX.

3. XXXXXXXXXX.

4. XXXXXXXXXX.

Proposed Transactions

5. A Co intends to borrow funds by issuing the Notes. The Notes would be issued to persons not resident in Canada who deal at arm's length with A Co for purposes of the Act (the "Depositors").

6. A Depositor would advance the amount of U.S.$XXXXXXXXXX to A Co, which, through its head office, would issue, at the Issue Date, a Note with a U.S.$XXXXXXXXXX principal amount (the "Principal Amount"). A Note issued to the Depositor on the Issue Date would have a Maturity Date that is XXXXXXXXXX after the Issue Date.

7. On the Maturity Date, a Depositor would be entitled to a cash payment (the "Maturity Amount") that would be equal to the Principal Amount together with XXXXXXXXXX amount (the "Index Return"), which would be based on any change in the value of the Index between the Initial Index Value and the Final Index Value. More particularly, the Index Return would be equal to the greater of:

(a) XXXXXXXXXX, and
(b) XXXXXXXXXX x (Final Index Value - Initial Index Value)
Initial Index Value

In no circumstances would the Depositor be entitled to receive less than XXXXXXXXXX% of the Principal Amount. All amounts payable under the Notes would be payable in U.S. dollars.

8. The Index would be selected from amongst the Indexes. The Indexes are composed of XXXXXXXXXX. A Co has no involvement in the administration or operation of any of the Indexes, XXXXXXXXXX.

9. XXXXXXXXXX.

10. Except where there is a default by A Co under the terms of the Notes, a Depositor would be entitled only to be paid the Maturity Amount on the Maturity Date and would have no other rights to receive payments under the Note. In particular, there would be no periodic payments of interest during the term of the Note.

11. A Co would not be required under the terms of the Notes to hedge its obligations thereunder. That being said, in order to hedge its obligation to pay the Maturity Amount under the Notes, A Co would likely enter into separate contractual arrangements with third parties that would be expected to provide A Co with sufficient amounts in order to pay the Maturity Amount to a Depositor on the Maturity Date.

12. A Co would use the net proceeds from the issuance of the Notes for general corporate purposes, which could include additions to working capital, investments and/or extensions of credit to subsidiaries of A Co and the repayment of existing indebtedness.

Purpose of Proposed Transactions

13. The purpose of the proposed transactions is to provide A Co with a source of borrowed funds at a competitive funding cost (taking into account the cost to hedge A Co's obligation to pay the Index Return, if any). The Notes would be attractive to Depositors as they provide a return that is linked to increases in the value of the Index over the term of the Notes without exposing Depositors to XXXXXXXXXX. In addition, the Notes would provide a Depositor with economic exposure to XXXXXXXXXX.

Rulings Given

Provided that the preceding statements constitute complete and accurate disclosure of all 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 as follows:

A. The positive Index Return on the Notes as calculated in 7(b) above, if any, paid at Maturity Date to a Depositor who is a non-resident and at the time of payment, deals at arm's length with A Co for purposes of the Act, will not be subject to Part XIII tax by virtue of the withholding tax exemption provided by clause 212(1)(b)(iii)(D) of the Act.

B. The provisions of subsection 245(2) of the Act will not be applicable as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the ruling given in A above.

These rulings are given subject to the general limitations and qualifications set forth in Information circular 70-6R5 dated May 17, 2002 issued by the CRA, and are binding provided the proposed Notes are issued on or before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch