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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
XXXXXXXXXX
XXXXXXXXXX 960948
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling
We are writing in response to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. In your letters dated XXXXXXXXXX you provided additional information in respect of the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
The XXXXXXXXXX files its returns with the XXXXXXXXXX Taxation Centre.
To the best of your knowledge and that of the taxpayers involved:
a) none of the issues involved in the requested rulings is being considered by a Tax Services Office or a Taxation Centre in connection with a tax return already filed, and
b) none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.
Definitions
In this letter, the following terms have the meanings specified:
a)"Act" means the Income Tax Act, R.S.C. 1995, c. 1 (5th supplement), as amended as at the date hereof, and any reference to any Part, section, subsection, paragraph or subparagraph is a reference to the specified Part or provision of the Act;
b)"active business" has the meaning assigned by subsection 95(1);
c)"controlled foreign affiliate" has the meaning assigned by subsection 95(1);
d)"foreign affiliate" has the meaning assigned by subsection 95(1);
e)"income from an active business" has the meaning assigned in subsection 95(1);
f)"non-resident" has the meaning assigned in subsection 248(1);
g)"public corporation" has the meaning assigned by subsection 89(1);
h)"taxable Canadian corporation" has the meaning assigned by subsection 89(1).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1.XXXXXXXXXX is a taxable Canadian corporation and a public corporation.
2.XXXXXXXXXX. It owns directly and indirectly the shares of wholly and partly owned subsidiaries which carry on business in Canada and elsewhere in the world. XXXXXXXXXX along with its domestic and foreign subsidiaries and affiliates are referred to herein as "the XXXXXXXXXX Group". The majority of its subsidiaries are engaged in XXXXXXXXXX.
3.XXXXXXXXXX is both a taxable Canadian corporation and a wholly-owned subsidiary of XXXXXXXXXX owns various investments including the shares of companies that are related to XXXXXXXXXX.
4.XXXXXXXXXX is a United States corporation formed and organized under the laws of the United States. XXXXXXXXXX is a non-resident of Canada and a controlled foreign affiliate of both XXXXXXXXXX.
5.XXXXXXXXXX carries on business in the United States. Its office is located in XXXXXXXXXX It owns directly and indirectly the shares of wholly or majority owned XXXXXXXXXX subsidiaries in the XXXXXXXXXX Group.
6.The majority of XXXXXXXXXX subsidiaries carry on XXXXXXXXXX These companies are referred to herein as the "Operating Companies" and singularly as an "Operating Company". Each of the Operating Companies is a non-resident of Canada and a controlled foreign affiliate of both XXXXXXXXXX The business operations carried on by each of the Operating Companies constitutes an active business. None of the Operating Companies carry on business in Canada, nor do they sell property to or perform services as an agent on behalf of XXXXXXXXXX or a person with which XXXXXXXXXX do not deal at arm's length and which carries on business in Canada.
7.XXXXXXXXXX is a limited liability company formed and organized under XXXXXXXXXX a limited liability company formed under that Act is a separate legal entity. XXXXXXXXXX has been formed for the purpose of participating in the factoring of the trade accounts receivable of the Operating Companies as described more fully below.
XXXXXXXXXX
8.XXXXXXXXXX business will be managed and controlled in
XXXXXXXXXX
taxation year will end on XXXXXXXXXX
9.XXXXXXXXXX is a corporation formed and organized under the laws of XXXXXXXXXX is a non-resident of Canada and a controlled foreign affiliate of each of XXXXXXXXXX has not carried on business to date and its activities in the future are intended to be restricted to those connected to the proposed transactions described below.
10.XXXXXXXXXX is a corporation formed and organized under the laws of XXXXXXXXXX It is a non-resident of Canada and a controlled foreign affiliate of XXXXXXXXXX business activities include making loans to related parties and the provision of management services to group entities. It currently has XXXXXXXXXX employees resident in XXXXXXXXXX devoted to its business. XXXXXXXXXX.
11.XXXXXXXXXX is a corporation formed and organized under the laws of the United States. It is a wholly-owned subsidiary of XXXXXXXXXX, a non-resident of Canada and a controlled foreign affiliate of XXXXXXXXXX is engaged in the business of collecting XXXXXXXXXX accounts receivable. It has approximately XXXXXXXXXX employees devoted full time to this purpose.
12.Each of the Operating Companies is an accrual basis taxpayer for U.S. federal income tax purposes and each generates customer accounts receivable in the ordinary course of its respective business. The entire face amount of each customer account receivable is taken into income by each Operating Company for U.S. federal income tax purposes when a customer is billed. The majority of customer accounts receivable are interest bearing.
13.Under the Internal Revenue Code each Operating Company that sells any customer trade account receivable at a discount to another corporation will be able to deduct the amount of the discount for federal income tax purposes.
Proposed Transactions
14.On or about the beginning of XXXXXXXXXX each Operating Company will enter into an agreement with XXXXXXXXXX whereby it will agree to sell from time to time during the term of the agreement the majority of its customer accounts receivable outstanding as of periodic dates set out in the agreement (the "Receivables"). Each agreement will be effective for an initial period of XXXXXXXXXX and will be renewed automatically at the end of the XXXXXXXXXX term for a further XXXXXXXXXX unless one of the parties gives notice of termination.
15.The first transactions under the agreements will take place on or about the beginning of XXXXXXXXXX and will relate to the customer accounts receivable outstanding as of the end of XXXXXXXXXX In each case XXXXXXXXXX will pay the Operating Company an amount of cash equal to the fair market value of the Receivables.
16.In each case, the fair market value of the Receivables will be based upon a percentage discount calculated with reference to the face amount of the Receivables and the amount of any accrued but unpaid interest. The discount will be based upon analogous discounts used in similar transactions in the XXXXXXXXXX industry. The customary formalities necessary to effect a sale of the Receivables under state law will be complied with by the seller and the purchaser.
17.Pursuant to the terms of the agreements by which the Receivables will be sold (the "Assignment Agreements") there will be no recourse to the Operating Companies in the event that any customer fails to pay his or her obligation nor will there be any guarantee of collectibility or other hold harmless agreement in respect of any such failure. XXXXXXXXXX rights and the Assignment Agreements will be assignable subject to the obligations under such agreements being assumed by the assignee.
18.Each Operating Company will be obliged to repurchase from the Assignee any Receivable whose outstanding balance is reduced for reasons not related to a customer's ability to pay (e.g., because an Operating Company breaches its contract with a particular customer).
19.XXXXXXXXXX will borrow XXXXXXXXXX percent of the purchase price of the Receivables from XXXXXXXXXX and XXXXXXXXXX percent of the purchase price from XXXXXXXXXX. The loans will be interest bearing. The source of the loans will be either from proceeds from planned equity issues or from the earnings of the XXXXXXXXXX.
20.The loans will be made under written agreements which will provide that:
a) XXXXXXXXXX will use the funds only to purchase the Receivables;
b) the funds must be used immediately upon receipt by XXXXXXXXXX to purchase the Receivables;
c) the Receivables must be immediately assigned to XXXXXXXXXX in exchange for membership interests in XXXXXXXXXX;
d) any membership interests which XXXXXXXXXX acquires in XXXXXXXXXX must be transferred immediately to XXXXXXXXXX respectively; and
e) upon receipt of the membership interests by XXXXXXXXXX, the loan balances between XXXXXXXXXX will be reduced or extinguished accordingly.
21.XXXXXXXXXX will hold the purchase price of the Receivables, the Receivables themselves and the membership interests in the XXXXXXXXXX only temporarily. XXXXXXXXXX will not make a profit but will retain sufficient funds to cover its costs or expenses. It is intended that XXXXXXXXXX will not have any other business or engage in any other activity aside from these particular transactions.
22.XXXXXXXXXX will enter into a management and receivables servicing agreement (the "Management and Receivables Servicing Agreement") with XXXXXXXXXX. The Management and Receivables Servicing Agreement is designed to help manage XXXXXXXXXX affairs and, in particular, to collect the Receivables and any interest which is accrued but unpaid.
23.The Management and Receivables Servicing Agreement will provide that:
a) XXXXXXXXXX will maintain an office for XXXXXXXXXX in XXXXXXXXXX; and
b) XXXXXXXXXX will collect the Receivables and any interest which is accrued but unpaid in accordance with credit and collection guidelines provided by XXXXXXXXXX.
24.XXXXXXXXXX will pay an arm's length fee to XXXXXXXXXX for the management services it receives. XXXXXXXXXX performance under the Management and Receivables Servicing Agreement will be subject to the oversight and review of XXXXXXXXXX Manager.
25.XXXXXXXXXX will enter into a separate collection agreement with XXXXXXXXXX pursuant to which XXXXXXXXXX will perform collection activities related to the Receivables and any interest which is accrued but unpaid within the United States. The activities of XXXXXXXXXX will be subject to certain modified credit and collection guidelines. XXXXXXXXXX will pay an arm's length fee to XXXXXXXXXX for its services.
26.All amounts received by XXXXXXXXXX in payment of all or any portion of the Receivables and any accrued interest will be remitted to a bank account maintained by XXXXXXXXXX in its own name. Thereafter, it is intended the money will be loaned by XXXXXXXXXX to XXXXXXXXXX under an arm's length revolving credit agreement. Under the terms of the credit agreement XXXXXXXXXX will be required periodically (i.e., XXXXXXXXXX) to reduce its outstanding balance to zero. Initially, XXXXXXXXXX will use the proceeds of the loan to repay borrowings it has outstanding with an unrelated U.S. bank.
Purpose of the Proposed Transactions
One of the purposes of the proposed transactions is to allow the Operating Companies to convert existing customer trade accounts receivable into cash. Another purpose is to establish a central collection process and facility for group receivables in XXXXXXXXXX in order to improve and standardize corporate collections.
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 that the proposed transactions are completed in the manner described above, our ruling is as follows:
A.Provided the central mind, management and control of XXXXXXXXXX is situated outside Canada, XXXXXXXXXX income derived from the collection of the Receivables (both the discount and the accrued interest) will be included in computing its income from an active business pursuant to subparagraph 95(2)(a)(i).
The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, and is binding on Revenue Canada, Customs, Excise and Taxation 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, if enacted into law, could have an effect on the ruling provided herein.
Opinion
Provided our understanding of the facts and proposed transactions described herein is correct and on the assumption that Regulation 5907(1)(b)(iv) is amended and Regulations 5907(11), (11.1) and (11.2) are each proclaimed in substantially the same form as in the Revised Draft Amendments to the Income Tax Regulations which was released by the Department of Finance on January 23, 1995 (the "Draft Regulations"), it is our opinion that XXXXXXXXXX net earnings derived from the collection of the Receivables (both the discount and the accrued interest) will not be included it its exempt earnings pursuant to subclause 5907(1)(b)(iv)(B)(I) of the Draft Regulations, rather such income will be included in XXXXXXXXXX taxable earnings pursuant to Regulation 5907(1)(i)(ii)(C). As XXXXXXXXXX is not subject to tax in XXXXXXXXXX on its worldwide income it is our opinion that XXXXXXXXXX will not satisfy any of the tests in subsection 5907(11.2) of the Draft Regulations and will therefore not be "resident in a designated treaty country" as that term is used in Part LIX of the Draft Regulations and as is required in paragraph 5907(1)(b) of the Draft Regulations.
Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:
(a)the determination of the fair market value or adjusted cost base of any property referred to herein; or
(b)any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
In particular, nothing in this ruling should be construed as acceptance of where XXXXXXXXXX is, in fact, resident.
Ruling A is limited to the discount and accrued interest on the Receivables. We have not commented on the character of the income derived from amounts loaned by XXXXXXXXXX to XXXXXXXXXX, or of any other income derived from the reinvestment of monies received on the collection of the Receivables.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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