Principal Issues: Will the facts that an income-source, originally acquired with borrowed money and an amount payable, is disposed of and the proceeds of disposition are used to fund a return of capital, in and of themselves, cause interest on the borrowed money and the amount payable to not be deductible pursuant to paragraph 20(1)(c)?
Position: No
Reasons: The conditions of IT-533 paragraphs 17, 23 and 27-29 are met.
XXXXXXXXXX 2007-025667
XXXXXXXXXX , 2008
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Taxpayer")
We are replying to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling with respect to the above noted taxpayer. We also acknowledge the additional information provided to us during our various telephone and email conversations (XXXXXXXXXX ) as well as your letters of submission dated XXXXXXXXXX
To the best of your knowledge, and that of the Taxpayer, none of the issues involved in this advance income tax ruling request are:
(i) in an earlier return of the Taxpayer or a related person;
(ii) being considered by a Tax Services Office or a Taxation Centre in connection with a previously-filed tax return of 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 ruling previously issued to the Taxpayer by the Advance Income Tax Rulings Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (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, proposed transactions and the purpose of the proposed transactions is as follows:
Definitions
In this letter, the following terms have the meanings specified below:
a) "Can Holdco" means XXXXXXXXXX ., a taxable Canadian corporation and a wholly-owned subsidiary of the Taxpayer;
b) "Foreign Subs" means XXXXXXXXXX , all of which are foreign affiliates of and wholly-owned subsidiaries of Can Holdco;
c) "Funding Loan" means a loan from Lender to the Taxpayer in the amount of approximately US$XXXXXXXXXX ;
d) "Funding Notes" means three promissory notes owing to Lender by the Taxpayer in the aggregate amount of approximately US$XXXXXXXXXX ;
e) "Intercompany Balances" means certain amounts owing to the Taxpayer from other entities;
f) "Lender" means XXXXXXXXXX , a taxable Canadian corporation and an indirect wholly-owned subsidiary of Pubco;
g) "New Parent" means XXXXXXXXXX and a wholly-owned subsidiary of Parent;
h) "New ULC" means an unlimited liability corporation, incorporated under the laws of XXXXXXXXXX ;
i) "New ULC Special Share" means a New ULC special voting share. The terms and conditions of the New ULC Special Share will provide that the share is redeemable at the option of New ULC for an amount equal to the fair market value of the outstanding shares of Can Holdco, determined at the time such shares were transferred to New ULC, less any amounts previously paid as a return of capital on the New ULC Special Share. The dollar amount of the redemption price will not be specified in the share conditions for the New ULC Special Share;
j) "Parent" means XXXXXXXXXX the only member of which is an indirect wholly-owned subsidiary of Pubco;
k) "Pubco" means XXXXXXXXXX ., a publicly-listed U.S. corporation;
l) "PUC" means paid up capital as defined in subsection 89(1) of the Act;
m) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;
n) "Taxpayer" means XXXXXXXXXX ., a taxable Canadian corporation and, on XXXXXXXXXX , a wholly-owned subsidiary of Parent; and
o) "Taxpayer Special Share" means a special share of the Taxpayer. The Taxpayer Special Share will have the same terms and conditions as the New-ULC Special Share, (including that the redemption price of the Taxpayer Special Share is reduced by any amounts previously paid as a return of capital on the Taxpayer Special Share) except for the number of votes attaching to such share. The redemption price of the Taxpayer Special Share (i.e., the fair market value of the Can Holdco shares at the time of the transaction) will exceed the aggregate principal amount of the Funding Notes and the Funding Loan. The stated capital and PUC of the Taxpayer Special Share will, in each case, be greater than the aggregate principal amount of the Funding Notes and the Funding Loan. The stated capital and PUC of the Class A shares of the Taxpayer will be more than the principal amount of the Intercompany Balances.
Facts
1. The Taxpayer's business number is XXXXXXXXXX , its address is XXXXXXXXXX and is located within the area served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre.
2. On XXXXXXXXXX , Lender ceased to be an unlimited company and became XXXXXXXXXX , a limited liability company under the XXXXXXXXXX
3. On XXXXXXXXXX , Parent transferred all of the outstanding shares of the Taxpayer to New Parent.
4. The Taxpayer carries on, inter alia, the business of XXXXXXXXXX .
5. Can Holdco carries on no active business. Can Holdco's assets are comprised principally of shares of Foreign Subs.
6. The Taxpayer's indebtedness includes:
i) the Funding Notes, which were issued by the Taxpayer to Lender as partial consideration for the acquisition of common shares of Can Holdco from Lender; and
ii) the Funding Loan, which the Taxpayer borrowed from Lender, the borrowed money of which was used by the Taxpayer to subscribe for additional common shares of Can Holdco at fair market value.
7. Interest on the Funding Loan is currently being deducted by the Taxpayer under subparagraph 20(1)(c)(i) of the Act. Interest on the Funding Notes is currently being deducted by the Taxpayer under subparagraph 20(1)(c)(ii) of the Act.
8. As of XXXXXXXXXX , the fair market value, shareholder's equity, stated capital and PUC of the Taxpayer and Can Holdco were approximately as follows:
The Taxpayer Can Holdco
Fair Market Value $XXXXXXXXXX $XXXXXXXXXX
Shareholders Equity XXXXXXXXXX XXXXXXXXXX
Stated Capital XXXXXXXXXX XXXXXXXXXX
PUC XXXXXXXXXX XXXXXXXXXX
The book value of the Taxpayer's total assets on XXXXXXXXXX , was $XXXXXXXXXX
9. Subject to 9(ii) below, all of the Taxpayer's assets, and accordingly, all of the Taxpayer's capital, are used by the Taxpayer for the purpose of earning net income from its business or property (other than property the income from which is exempt or an interest in a life insurance policy). The Taxpayer's assets include, inter alia:
i) interest free loans made by the Taxpayer to one or more of its wholly-owned subsidiaries, where such loans were made for the purpose described in paragraph 25 of Interpretation Bulletin IT-533 - i.e, to enhance the Taxpayer's income-earning capacity from its other business or property (other than property the income from which is exempt or an interest in a life insurance policy); and
ii) Intercompany Balances, which could be said to not be used for income producing purposes, the total of which, on XXXXXXXXXX , was less than $XXXXXXXXXX (approximately XXXXXXXXXX % of the Taxpayer's total assets on XXXXXXXXXX ). At the time of the proposed transactions, the total amount of the Intercompany Balances will be less than XXXXXXXXXX % of the Taxpayer's total assets.
10. Prior to the proposed transactions, New ULC will be incorporated as a wholly-owned subsidiary of New Parent.
Proposed Transactions
11. The following transactions are proposed:
i) The Taxpayer will transfer all of the outstanding shares of Can Holdco to New ULC in exchange for the New ULC Special Share. The Taxpayer and New ULC will file an election under subsection 85(1) of the Act, in prescribed form within the time referred to in subsection 85(6) of the Act, in respect of this transfer.
ii) New Parent will transfer all of the outstanding shares of the Taxpayer to the Taxpayer in exchange for fully-participating Class A shares of the Taxpayer and the Taxpayer Special Share. New Parent and the Taxpayer will file an election under subsection 85(1) of the Act, in prescribed form within the time referred to in subsection 85(6) of the Act, in respect of this transfer.
iii) New Parent will transfer the Taxpayer Special Share to New ULC in exchange for common shares of New ULC. New Parent and New ULC will file an election under subsection 85(1) of the Act, in prescribed form within the time referred to in subsection 85(6) of the Act, in respect of this transfer.
iv) After the above proposed transactions, the Taxpayer will hold the New ULC Special Share and New ULC will hold the Taxpayer Special Share. New ULC will redeem the New ULC Special Share and the Taxpayer will redeem the Taxpayer Special Share, in each case for an amount equal to the redemption price of the share. The dollar amount of the redemption price will not be set out in the redemption documentation, but the redemption price of both shares will be the same. The redemption price of the Taxpayer Special Share will then be paid by way of set off against the redemption price o the New ULC Special Share.
12. Both immediately before and immediately after the proposed transactions, all or substantially all of the Taxpayer's assets, and accordingly, immediately before the proposed transactions, all of the Taxpayer's capital that will be redeemed in 11(iv) above, will be used by the Taxpayer for eligible income producing purposes (see 9 above).
Additional Information
13. Following the above transactions, there will be a further reorganization of Pubco's international operations, as a result of which the shares of New ULC will be transferred between Pubco's non-resident subsidiary entities (none of which will be foreign affiliates of a Canadian corporation) and Can Holdco will be wound up into or amalgamated with New ULC.
Purpose of the Proposed Transactions
14. The purpose of the proposed transactions is to reorganize the Taxpayer so that the Foreign Subs are no longer controlled by the Taxpayer and to consolidate those companies with Pubco's XXXXXXXXXX in order to align the legal structure with management reporting lines and optimize future cash flows.
Rulings
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:
To the extent the aggregate of the Funding Loan and Funding Notes does not exceed the Taxpayer's capital that is redeemed in 11(iv) above, and the capital redeemed was being used for purposes that would have qualified for interest deducibility had the capital been borrowed money, the proposed transactions will not, in and of themselves, cause the interest, or a reasonable amount in respect thereof,:
i) on the Funding Loan, to not be deductible pursuant to subparagraph 20(1)(c)(i) of the Act, nor
ii) on the Funding Notes, to not be deductible pursuant to subparagraph 20(1)(c)(ii) of the Act.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the proposed transaction is completed by XXXXXXXXXX .
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.
Comments
Nothing in this letter should be construed as implying that the CRA has reviewed or is making a determination or ruling in respect of:
(a) the determination of the fair market value of any property referred to herein, or the shareholder's equity, stated capital or PUC in respect of any share referred to herein; or
(b) any tax consequences in relation to any facts or proposed transactions referred to herein other than those specifically described in the rulings given.
Yours truly,
XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
