2008 Ruling 2007-0234061R3 - Cost reimbursement - innovative instrument

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.

REFERENCE: E2007-023406 1
DOCUMENT TYPE: Ruling
DATE: 2008-01-23
AUTHOR: Kohnen, Phil
SUBJECT: Cost reimbursement - innovative instrument

Principal Issues: Will the change in the manner in which the Trust will recover the costs it incurred in arranging the financing negate the rulings previously provided in respect of the innovative instrument?

Position: No.

Reasons: The proposals do not alter the borrower-lender relationship nor do they alter any term, condition, right or other attribute of an interest in the Trust.

XXXXXXXXXX 								2007-023406

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: XXXXXXXXXX ("ACO") - XXXXXXXXXX
XXXXXXXXXX (the "Trust")
Advance Income Tax Ruling - Innovative XXXXXXXXXX Financing

This is in reply to your letter of XXXXXXXXXX , in which you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge the documents provided in your subsequent submission of XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues described herein are:

(i) in an earlier tax return of the taxpayers or related persons;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or related persons;

(iii) under objection by the taxpayers or related persons, nor;

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

ACO and the Trust completed an innovative financing transaction that was the subject matter of Advance Income Tax Ruling 2006-019547, dated XXXXXXXXXX, 2006 (the "Original Ruling").

Definitions

In this letter, capitalized terms have the meaning set out in the Original Ruling, and the following terms have the meaning set out below: "Proposed Transactions" means the transactions described in 8 and 9 below.

"Transaction Fee Agreement" means the cost reimbursement agreement between ACO and the Trust in respect of a fee paid by ACO to the Trust in consideration for the Trust successfully arranging the financing of the ACO XXXXXXXXXX Note, as described in 8 below.

"Transaction Fee" means the fee to be paid by ACO to the Trust pursuant to the Transaction Fee Agreement, as described in 9 below.

Our understanding of the facts and Proposed Transactions is as follows:

Facts

1. ACO is a XXXXXXXXXX . It is a taxable Canadian corporation and a public corporation.

2. XXXXXXXXXX. Its Tax Services Office is XXXXXXXXXX and its Tax Centre is XXXXXXXXXX. ACO's head office is at XXXXXXXXXX.

3. The authorized capital of ACO at the date of the Original Ruling consisted of an unlimited number of ACO Common Shares, XXXXXXXXXX . At that time, ACO Common Shares were issued and outstanding. The ACO Common Shares were listed on the XXXXXXXXXX and were widely held by members of the public. In connection with the proposed transactions in the Original Ruling, the Series XXXXXXXXXX Preferred Shares and the Series XXXXXXXXXX Preferred Shares were authorized.

4. The proposed transactions in the Original Ruling included the following:

a. The Trust will be established by way of declaration of trust under the laws of XXXXXXXXXX and will be resident in Canada for purposes of the Act. The trustee of the Trust will be XXXXXXXXXX , a taxable Canadian corporation resident in Canada. The capital of the Trust will be represented by units of beneficial interest in the Trust. The Trust will have two classes of units: Trust Capital Securities and Special Trust Securities. Each class of units will be issuable in series.

b. The Special Trust Securities will have voting rights, will be owned at all material times by ACO and will be issued in denominations of $XXXXXXXXXX. The Special Trust Securities will at all times represent not more than XXXXXXXXXX % of all of the issued units of the Trust (determined by fair market value and without regard to any voting rights attaching to the units of the Trust). On the Closing Date, XXXXXXXXXX Special Trust Securities will be issued to ACO for a total of $XXXXXXXXXX.

c. The Trust Capital Securities will represent the balance of the issued units of the Trust. The Trust Capital Securities will be non-voting, except in certain limited circumstances involving changes in their terms and conditions.

d. It is proposed that the first series of Trust Capital Securities, being the XXXXXXXXXX, will be offered for investment to the public in Canada by way of private placement to institutional investors and other sophisticated investors for an issue price of $XXXXXXXXXX per unit (the "Face Value"). The expected aggregate amount of this offering is $XXXXXXXXXX.

5. All of the remaining proposed transactions in the Original Ruling remain valid with the sole exception as described in 8 and 9 below.

6. The last two sentences of paragraph 23 of the Original Ruling described the proposed funding of expenses to be incurred by the Trust as follows: "The proceeds from the subscription by ACO of Special Trust Securities will be used by the Trust to pay its expenses of the offering of Trust Capital Securities. To the extent that there is a funding shortfall, the Trust will borrow a certain amount from ACO (or an affiliate of ACO) under a credit facility."

7. The innovative financing transaction that was the subject matter of the Original Ruling has been completed, such that the Trust has paid the expenses of the offering of Trust Capital Securities.

Proposed Transactions

8. The proposed transactions described in the last two sentences of paragraph 23 of the Original Ruling were followed, however, the Trust and ACO propose to enter into the Transaction Fee Agreement effective as of XXXXXXXXXX. The Transaction Fee Agreement will recognize that the Trust is a special purpose vehicle whose sole purpose was to issue to the public XXXXXXXXXX and use the proceeds of the offering to subscribe for the ACO XXXXXXXXXX Note, in order to raise financing for the operations of ACO XXXXXXXXXX .

9. Pursuant to the Transaction Fee Agreement, ACO will pay to the Trust the Transaction Fee in consideration for the Trust successfully arranging the financing of the ACO XXXXXXXXXX Note. The Transaction Fee will be an amount that represents payment or reimbursement to the Trust for fees, costs and expenses associated with, or related to the issuance of the XXXXXXXXXX and the ongoing costs to maintain the Trust and to administer the XXXXXXXXXX . The Trust will elect under subsection 12(2.2) of the Act in an amount equal to the Transaction Fee.

Purpose of Proposed Transactions

10. The purpose of the Proposed Transactions is for the Trust to recover the costs of arranging the financing of the ACO XXXXXXXXXX Note XXXXXXXXXX.

Ruling Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided further that the Proposed Transactions are completed in the manner described above, we rule as follows:

Notwithstanding the Proposed Transactions, the rulings given in the Original Ruling will continue to be binding on the CRA subject to the same limitations and qualifications set out therein, provided that the Proposed Transactions are entered into by XXXXXXXXXX.

Yours truly,

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