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: Whether subsections 18(4) and 245(2) apply to the partners' level where a partnership borrows money from a specified non-resident
Position: Based on facts of each case. In this case, no.
Reasons: In this case had the loan were made to the corporate partners, the conditions specified in paragraphs 18(4)(a) and (b) would have met such that the deduction of the interest paid in respect of the loan would not be denied
XXXXXXXXXX
XXXXXXXXXX 992750
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling
We are writing in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayers (the "Companies")
The Companies' tax affairs are administered by the XXXXXXXXXX Tax Services Office and they file their tax returns with the XXXXXXXXXX Taxation Centre.
Definitions
In this letter the following terms have the meanings specified:
(a) "Act" means the Income Tax Act R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act;
(b) "Holdco" means XXXXXXXXXX;
(c) "Partnerco#1" means XXXXXXXXXX;
(d) "Partnerco#2" means XXXXXXXXXX;
(e) "Partnerco#3" means XXXXXXXXXX;
(f) "Partnership-A" means XXXXXXXXXX;
(g) "Partnership-B" means XXXXXXXXXX;
(h) "Canco" means XXXXXXXXXX; and
(i) "Foreignco" means XXXXXXXXXX.
Facts
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
1. Holdco is a taxable Canadian corporation and a private corporation within the meaning assigned under subsection 89(1) of the Act of those terms. Holdco was incorporated under the Canada Business Corporations Act ("CBCA") on XXXXXXXXXX. The issued and outstanding share capital of Holdco consists of XXXXXXXXXX redeemable preferred shares having an aggregate stated capital, paid-up capital and adjusted cost base of $XXXXXXXXXX respectively and 1 common share having a stated capital, paid-up capital and adjusted cost base of $XXXXXXXXXX respectively. All the issued and outstanding shares of Holdco are owned by Foreignco, a corporation resident in XXXXXXXXXX. Holdco's taxation year ends on XXXXXXXXXX. As at XXXXXXXXXX Holdco had a deficit of approximately $XXXXXXXXXX.
2. Partnerco#1 is a taxable Canadian corporation and a private corporation which was incorporated under the XXXXXXXXXX Business Corporations Act ("XXXXXXXXXX") on XXXXXXXXXX. The issued and outstanding share capital of Partnerco#1 consists of XXXXXXXXXX redeemable preferred shares having an aggregate stated capital, paid-up capital and adjusted cost base of $XXXXXXXXXX respectively and XXXXXXXXXX common shares having an aggregate stated capital, paid-up capital and adjusted cost base of $XXXXXXXXXX respectively. All the issued and outstanding shares of Partnerco#1 are owned by Holdco. Partnerco#1's taxation year ends on XXXXXXXXXX. As at XXXXXXXXXX, Partnerco#1 had retained earnings of approximately $XXXXXXXXXX respectively.
3. Partnerco#2 is a taxable Canadian corporation and a private corporation which was incorporated under the XXXXXXXXXX on XXXXXXXXXX. The issued and outstanding share capital of Partnerco#2 consists of XXXXXXXXXX redeemable preferred shares having an aggregate stated capital, paid-up capital, and adjusted cost base of $XXXXXXXXXX respectively and XXXXXXXXXX common shares having an aggregate stated capital, paid-up capital and adjusted cost base of $XXXXXXXXXX respectively. All the issued and outstanding shares of Partnerco#2 are owned by Holdco. Partnerco#2's taxation year ends on XXXXXXXXXX. As at XXXXXXXXXX, Partnerco#2 had a deficit of approximately $XXXXXXXXXX respectively.
4. Partnerco#3 is a taxable Canadian corporation and a private corporation which was incorporated under the XXXXXXXXXX on XXXXXXXXXX. The issued and outstanding share capital of Partnerco#3 consists of 1 common share owned by Holdco having a paid-up capital and adjusted cost base of $XXXXXXXXXX respectively. Partnerco#3's taxation year ends on XXXXXXXXXX. As at XXXXXXXXXX Partnerco#3 had a deficit of approximately $XXXXXXXXXX.
5. Canco is a taxable Canadian corporation and a private corporation which was incorporated under the XXXXXXXXXX on XXXXXXXXXX. The issued and outstanding share capital of Canco consists of XXXXXXXXXX redeemable preferred shares having an aggregate stated capital, paid-up capital and adjusted cost base of $XXXXXXXXXX respectively and XXXXXXXXXX common shares having an aggregate stated capital, paid-up capital and adjusted cost base of $XXXXXXXXXX respectively. Of the XXXXXXXXXX issued and outstanding preferred shares, XXXXXXXXXX are owned by Holdco and the remaining preferred shares are owned by Partnership-A (described in 6 below). All the issued and outstanding common shares of Canco are owned by Holdco. Canco's taxation year ends on XXXXXXXXXX. As at XXXXXXXXXX Canco had retained earnings of approximately $XXXXXXXXXX respectively. Canco owns real property in the provinces of XXXXXXXXXX which it rents to Partnership-A and Partnership-B (described in 6 and 7 below).
6. Partnership-A is a limited partnership organized under the laws of XXXXXXXXXX in XXXXXXXXXX. The general partners of Partnership-A are Partnerco#1 and Partnerco#2 which own respectively XXXXXXXXXX% and XXXXXXXXXX% of the interest in Partnership-A. The sole limited partner of Partnership-A is Partnerco#3 which owns XXXXXXXXXX% of the interest in the partnership. XXXXXXXXXX. The fiscal period of the partnership ends on XXXXXXXXXX.
7. Partnership-B is a limited partnership organized under the laws of XXXXXXXXXX in XXXXXXXXXX. The names of the partners and their ownership interests in the partnership are exactly the same as those in Partnership-A. XXXXXXXXXX. The fiscal period of Partnership-B also ends on XXXXXXXXXX.
8. The operating structure of Partnership-A and Partnership-B has been in place for about XXXXXXXXXX years.
XXXXXXXXXX
9.
XXXXXXXXXX
Because the filing of consolidated income tax returns are not allowed in Canada, concern was raised that if the XXXXXXXXXX operations were carried on in separate corporations, operating losses in one of the corporations would not be deductible against profits of the other corporation. It was determined that the use of the two-partnership structure was best suited to separate the XXXXXXXXXX functions as it was the only tax-efficient structure to ensure that profits from one of the group's major business activities could be offset by possible losses realized by another major business activity.
10. Partnership-A and Partnership-B are bona fide partnerships and together carry on all of the group's XXXXXXXXXX activities in Canada. All of the Canadian personnel involved in the XXXXXXXXXX operations are employed by either Partnership-A or Partnership-B. The corporate partners of these partnerships have no employees of their own. The general partners of these partnerships which together have XXXXXXXXXX% interest in the partnerships are jointly and severally liable for the debts of the partnerships (i.e., the risks of these partners are not limited).
11. For international business and non-Canadian income tax reasons, Foreignco must remain the sole shareholder of Holdco.
12. Historically, the financing of the group's operations in Canada has been through the initial capitalization of the various corporations, retained earnings and external borrowings from arm's length financial institutions.
13. At all relevant times, if the loan referred to in 15 below had been made proportionally to the corporate partners of Partnership-A (excluding Partnerco#3) based on their partnership interest, the greatest aggregate amount of the "outstanding debts to specified non-residents" as defined under subsection 18(5) of the Act of each of the corporate partners of Partnership-A (excluding Partnerco#3) will not exceed three times of the total of the amounts described in clauses 18(4)(a)(ii)(A), (B) and (C) of the Act of the respective partner.
14. To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this request:
(i) is involved in an earlier return of the Companies or a related person;
(ii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the Companies or a related person;
(iii) is under objection; or
(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.
Proposed Transactions
15. Partnership-A and/or Partnership-B will borrow in the aggregate of approximately $XXXXXXXXXX at an interest rate equal to LIBOR plus XXXXXXXXXX% from a company resident in a foreign country ("Non-Residentco") which does not deal at arm's length with Foreignco and the Companies. The loan or loans will be used to finance major expansion of the group's operations in XXXXXXXXXX, to repay debts of the group owed to arm's length domestic financial institutions, and/or to provide working capital to Partnership-A and/or Partnership-B.
16. During its 2000 taxation year ending XXXXXXXXXX, Partnerco#1 and Canco will pay taxable dividends to Holdco equal to the amount of their retained earnings at XXXXXXXXXX. Partnerco#2 will also pay a dividend to Holdco without violating the relevant corporate law. Holdco will pay a dividend to Foreignco in an amount equal to the total amount of the dividends it received from Partnerco#1, Partnerco#2 and Canco. Subject to the provisions of the Canada-XXXXXXXXXX Income Tax Convention, withholding tax under Part XIII of the Act will apply to such dividend.
Purpose of the Proposed Transactions
17. The purposes of the proposed transactions are:
(i) to repatriate to the non-resident parent of Holdco the Canadian accumulated after-tax earnings on hand of Partnerco#1 and Canco at XXXXXXXXXX; and
(ii) to establish a framework to provide additional debt-financing for the business activities of Partnership-A and Partnership-B in Canada.
The purpose of having a related party of the group to make the loans directly to the partnerships is to provide a better matching of financing costs to the separate XXXXXXXXXX operations, resulting in better accountability and measurement for each operation and to eliminate the requirement for cumbersome inter-company transactions both within Canada and abroad.
Rulings 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 rulings are as follows:
A. Subsection 18(4) of the Act will not apply to deny a deduction in respect of any portion of the amount otherwise deductible in computing the partners' share of the income of Partnership-A and/or Partnership-B for the year in respect of interest paid or payable to Non-residentco by Partnership-A and/or Partnership-B in respect of the loan or loans referred to in 15 above.
B. For purposes of subsections 18(4), 18(5) and 18(6) of the Act, Foreignco is a specified shareholder of Partnerco#1, Partnerco#2, Partnerco#3 and Canco by virtue of the mid-amble and post-amble of the definition of "specified shareholder" under subsection 18(5) of the Act.
C. Subsection 245(2) will not be applied as a result of the proposed transactions described in 15 and 16 above, in and by themselves, to redetermine the tax consequences in the ruling given above.
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding provided that the proposed transactions are completed by XXXXXXXXXX.
These rulings are based on the Act in the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this ruling should be construed as implying that Canada Customs and Revenue Agency has reviewed, accepted or otherwise agreed to:
(a) the determination of the paid-up capital or the adjusted cost base of any share 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, we are not commenting on whether paragraph 20(1)(c) of the Act will apply in respect of the interest paid or payable by Partnership-A and/or Partnership-B in respect of the loan or loans referred to in 15 above or funds, if any, borrowed to pay the dividends referred to in 16 above.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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