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.
Principal Issues:
1) Whether a guarantee by the XXXXXXXXXX (hereinafter the “Control Bank ) on a loan with an XXXXXXXXXX bank results in interest paid on a related loan by an XXXXXXXXXX corporation to a related Canadian corporation being exempt from the application of 212(1)(b) by virtue of XXXXXXXXXX Income Tax Treaty.
2) Whether the guarantee fee paid by Canco to Foreign Co is deemed to be interest by virtue of paragraph 214(15)(a) and therefore not subject to withholding taxes under Part XIII of the Act by virtue of XXXXXXXXXX the Treaty?
Position TAKEN:
1) Yes
2) Yes
Reasons FOR POSITION TAKEN:
Based on the terms of the Treaty and consistent with our position in previous rulings involving similar transactions.
XXXXXXXXXX
XXXXXXXXXX 980770
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Sir/Madam,
Re: Advance Income Tax Ruling - XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).
We understand that to the best of your knowledge and that of the taxpayers involved:
i. none of the issues involved in the requested ruling is being considered by any District Tax Services Office or Taxation Centre of the Department in connection with a tax return already filed, and
ii. none of the issues involved in the requested ruling is the subject of any notice of objection or is under appeal.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”) and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts and proposed transactions is as follows:
FACTS
1. XXXXXXXXXX (hereinafter “Foreign Co”) was incorporated under the laws of XXXXXXXXXX, does not carry on business in Canada, is not resident in Canada for purposes of the Act and has no permanent establishment in Canada within the meaning of the XXXXXXXXXX Income Tax Convention Act, XXXXXXXXXX. Foreign Co is a resident of XXXXXXXXXX with its head office located in XXXXXXXXXX.
2. Foreign Co is controlled by XXXXXXXXXX (hereinafter “A Co”), XXXXXXXXXX (hereinafter “Mr. W”) and XXXXXXXXXX (hereinafter “B Co”), which are all non-residents of Canada. A Co and B Co were incorporated under the laws of a foreign jurisdiction, do not carry on business in Canada, are not resident in Canada for purposes of the Act and have no permanent establishment in Canada within the meaning of the relevant tax convention. Mr. W is not resident in Canada for purposes of the Act.
3. XXXXXXXXXX (hereinafter “Holdco”) was incorporated under XXXXXXXXXX and is a private corporation and a taxable Canadian corporation. All of the issued and outstanding share capital of Holdco is owned by Foreign Co.
4. Holdco owns a XXXXXXXXXX% undivided interest in XXXXXXXXXX (hereinafter “Venture”). Venture is a joint venture having XXXXXXXXXX owners with equal participation (XXXXXXXXXX %). Venture operates an XXXXXXXXXX.
5. XXXXXXXXXX (hereinafter “Opco”) was incorporated under XXXXXXXXXX and is a private corporation and a taxable Canadian corporation. All of the issued and outstanding share capital of Opco are held in equal proportions (XXXXXXXXXX%) by the XXXXXXXXXX owners of Venture. The ownership of this undivided interest in Venture coupled with the shares it holds in Opco constitute the sole business assets of Holdco. The expressions “private corporation” and “taxable Canadian corporation” as referred to here and subsequently have the meanings assigned by subsection 89(1) of the Act.
6. Opco is mandated to supervise the construction and to manage, as an agent, the operations of the XXXXXXXXXX Project. Opco has custody of the XXXXXXXXXX Project assets which are under its sole control but are to owned by the owners in undivided ownership, without forming a partnership.
7. XXXXXXXXXX (hereinafter "Bank Co") is the main banking partner of the Foreign Co group. Bank Co is located in XXXXXXXXXX, is not a resident of Canada for purposes of the Act and does not have a permanent establishment in Canada within the meaning of the XXXXXXXXXX Treaty.
8. Holdco wishes to put in place a credit facility the proceeds of which shall be used to finance costs associated with Venture’s XXXXXXXXXX project.
9. Holdco and Foreign Co are related persons by virtue of subparagraph 251(2)(b)(i) and are accordingly deemed by virtue of paragraph 251(1)(a) of the Act not to deal with each other at arm’s length.
PROPOSED TRANSACTIONS
10. Foreign Co proposes to enter into an agreement (hereinafter the "Cash Agreement") for a cash credit up to a maximum amount of US$XXXXXXXXXX (hereinafter the "Cash Credit ") arranged by Bank Co. The Cash Credit will be used to finance a shareholders revolving loan to Holdco for its ultimate use in financing the funding costs associated with the XXXXXXXXXX Project.
11. The Cash Credit will be guaranteed by Foreign Co in the form of a bill of exchange (i.e. promissory note) from Foreign Co to Bank Co as collateral security for the Cash Credit.
12. The Cash Credit will also be guaranteed (the “Guarantee”) by the XXXXXXXXXX (hereinafter the “Control Bank”).
XXXXXXXXXX
The Guarantee will be a declaration XXXXXXXXXX, that they will assume the guarantee on the bill of exchange given by Foreign Co to Bank Co as mentioned in paragraph 10 above on condition that the funds are used only to finance Foreign Co’s investment in Holdco and Opco, respectively.
The Control Bank will charge a guarantee fee, which is fixed at an annual rate of XXXXXXXXXX % of the principal balance. This guarantee fee will be paid by Holdco to Foreign Co who will then pay the fee to Control Bank.
In a letter dated XXXXXXXXXX the Control Bank confirmed that it was only by way of the Guarantee that the Cash credit could be guaranteed by XXXXXXXXXX through its agent (the Control Bank). Furthermore it confirmed that XXXXXXXXXX it cannot directly grant, guarantee or insure loans to foreign companies. Such loans may only be granted, guaranteed or insured to companies seated in XXXXXXXXXX on condition of their use as funding for foreign companies.
13. The Cash Agreement sets out the terms and conditions upon and subject to which Bank Co agrees to make available the Cash Credit.
14. The more important terms and conditions of the Cash Agreement in relation to the ruling request are as follows:
A) Interest
The annual interest rate under the Cash Agreement shall be equal to XXXXXXXXXX payable semi-annually, in arrears, for drawdowns.
B) Guarantee fees
Foreign Co shall pay to Bank Co a guarantee fee of XXXXXXXXXX % per annum, on the total amount available under the Cash Credit
C) Repayment
The maximum amount outstanding under the Cash Credit shall be reduced on XXXXXXXXXX instalment dates as follows:
Date No. Amount of instalment Credit line ($US)
XXXXXXXXXX
D) Collateral
The agreement provides for collateral security to be given by Foreign Co to Bank Co in the form of a bill of exchange (i.e. promissory note) from Foreign Co to Bank Co. No specific guarantee was provided by Foreign Co to Bank Co other than the bill of exchange and an agreement to meet financial ratios (a debt to equity ratio of XXXXXXXXXX) and maintain a minimum equity of XXXXXXXXXX.
15. Holdco will enter into an agreement (hereinafter the “Revolving Credit Agreement”) with Foreign Co for a revolving shareholder credit facility of up to a maximum amount of US $ XXXXXXXXXX (hereinafter the “Credit Facility”). The Credit Facility shall be used to finance costs associated with the XXXXXXXXXX Project.
16. The Credit Facility may be utilized by Holdco within a period commencing on the date of acceptance by Holdco of the Credit Agreement and ending on XXXXXXXXXX. The drawdowns on the Credit Facility must be made in minimum amounts of US $ XXXXXXXXXX.
17. The Revolving Credit Agreement sets out terms and conditions upon and subject to which Foreign Co agrees to make available to Holdco the Credit Facility.
18. The more important terms and conditions of the Revolving Credit Agreement in relation to the ruling request are as follows:
A) Interest
The annual interest rate under the Revolving Credit Agreement shall be equal XXXXXXXXXX payable semi-annually, in arrears, for drawdowns in minimum amounts of US $XXXXXXXXXX.
B) Guarantee fees
Holdco shall pay to Foreign Co a guarantee fee of XXXXXXXXXX % per annum, on the total amount available under the Credit Facility.
C) Reduction of Credit Facility
The maximum amount available under the Credit Facility shall be reduced on XXXXXXXXXX instalment dates (between the year XXXXXXXXXX) as set out in article XXXXXXXXXX of the Revolving Credit Agreement.
D) Repayment
The maximum amount outstanding under the Credit Facility shall be reduced on XXXXXXXXXX instalment dates as follows:
Date No. Amount of instalment Credit line ($US)
XXXXXXXXXX
E) Collateral
Holdco will not grant specific guarantees to Foreign Co.
F) Purpose
Financing the funding costs associated with the XXXXXXXXXX Project.
Holdco’s address is as follows:
XXXXXXXXXX
Holdco’s business number is XXXXXXXXXX. Holdco is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.
PURPOSE OF PROPOSED TRANSACTIONS
To permit Holdco to finance the funding costs associated with the XXXXXXXXXX Project.
RULINGS
Provided the above descriptions of facts, proposed transactions and purposes of the proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions and that the proposed transactions are carried out as set out herein, we confirm the following:
A. The interest paid or credited by Holdco to Foreign Co, under the Revolving Credit Agreement will not be subject to the application of paragraph 212(1)(b) of the Act by virtue of XXXXXXXXXX Treaty.
B. The guarantee fee paid or credited by Holdco to Foreign Co, as noted in paragraph 17 above, will be deemed to be interest paid or credited on the Credit Facility, by virtue of paragraph 214(15)(a) of the Act, and will not be subject to withholding taxes under XXXXXXXXXX the Treaty.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments thereto.
The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued on December 30, 1996 and is binding on Revenue Canada Customs, Excise and Taxation provided that the proposed transactions are completed before XXXXXXXXXX and provided the guarantee by XXXXXXXXXX remains in effect.
a) Except as expressly stated herein, nothing in this ruling should be construed as implying that Revenue Canada Customs, Excise and Taxation has accepted, approved or confirmed any income tax implications in connection with the facts or proposed transactions referred to herein.
b) Nothing in this ruling should be construed as implying that Revenue Canada Customs, Excise and Taxation has agreed to or reviewed the tax consequences relating to the deduction by Holdco of an amount in computing its income for a taxation year in respect of interest paid or payable by Holdco to Foreign Co, including the possible application of subsection 18(4) of the Act.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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