2000 Ruling 2000-0002083 - XXXXXXXXXX

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 the loans to U.S Parent by Cansub constitute a series of loans and repayments subject to the application of subsection 15(2) and paragraph 214(3)(a).

Position: No.

Reasons: Based on two Tax Court decisions where shareholder loans are repaid by the declaration of dividends (or salary) such repayment followed by new loans does not constitute a series of loans and repayments. In Cansub's situation the loans to U.S. Parent are to be made from current earnings of Cansub and repaid by funds generated by dividends declared and paid to U.S. Parent. this is in accordance with the two Tax Court decisions which have not be challenged.

XXXXXXXXXX
XXXXXXXXXX 2000-000208
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX - Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-noted taxpayer. You have advised that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request:

(a) is involved in an earlier return of the taxpayer or a related person,

(b) is being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayer or a related person,

(c) is under objection, and

(d) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.

Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter (herein referred to as the "Act") and unless otherwise expressly stated:

(a) "Canco" refers toXXXXXXXXXX;

(b) "Cansub" refers to XXXXXXXXXX;

(c) "Finco" refers to XXXXXXXXXX;

(d) "principal amount" has the meaning assigned to that term by subsection 248(1);

(e) "private corporation" has the meaning assigned to that term by subsection 89(1);

(f) "Pubco" refers to XXXXXXXXXX;

(g) "public corporation" has the meaning assigned to that term by subsection 89(1);

(h) "taxable Canadian corporation" has the meaning assigned to that term by subsection 89(1); and

(i) "U.S. Parent" refers to XXXXXXXXXX.

FACTS

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is set out as follows:

1. Canco is a company incorporated under the laws of XXXXXXXXXX and is a private corporation and taxable Canadian corporation. Canco's business number is XXXXXXXXXX. Canco files its federal income tax returns with the XXXXXXXXXX Taxation Centre and it deals with the XXXXXXXXXX Tax Services Office.

2. Cansub is a company incorporated under the laws of XXXXXXXXXX and is a private corporation and taxable Canadian corporation. Cansub is a wholly-owned subsidiary of Canco. XXXXXXXXXX. As of XXXXXXXXXX, Cansub's issued and outstanding shares consists of XXXXXXXXXX class A common shares, XXXXXXXXXX class B common shares and XXXXXXXXXX class A preferred shares. Cansub's year end for income tax purposes is XXXXXXXXXX.

3. U.S. Parent is a XXXXXXXXXX corporation and a non-resident of Canada. U.S. Parent owns XXXXXXXXXX of Canco's common shares, being all of Canco's issued and outstanding common shares. U.S. Parent also owns XXXXXXXXXX class A preferred shares of Canco.

4. Finco is a XXXXXXXXXX corporation and a non-resident of Canada. Finco owns XXXXXXXXXX class B preferred shares, XXXXXXXXXX class C preferred shares and XXXXXXXXXX class D preferred shares of Canco. Finco is a wholly-owned subsidiary of U.S. Parent.

5. U.S. Parent is an indirect subsidiary of Pubco which is also a XXXXXXXXXX corporation and a non-resident of Canada. The common shares of Pubco are listed for trading on the XXXXXXXXXX Stock Exchange. On XXXXXXXXXX, Pubco, XXXXXXXXXX entered into an agreement and plan of merger. XXXXXXXXXX.

PROPOSED TRANSACTIONS

6. After the issuance of a favorable advance income tax ruling from the Canada Customs and Revenue Agency ("CCRA"), Cansub will make one or more loans (the "Loans") to U.S. Parent during the 2000 calendar year in an aggregate amount approximately equal to its estimated net after-tax earnings (as computed under U.S. tax principles in U.S. dollars) for its fiscal year 2000 plus adjustments to reflect actual earnings in excess of earnings estimations made in prior years and audit adjustments that may affect prior years earnings. The Loans will be denominated in Canadian dollars and will be due and payable on demand. The outstanding balance of the Loans may be adjusted (if necessary) during a particular calendar quarter in accordance with revised estimates of the net after-tax earnings of Cansub for the 2000 fiscal year. These adjustments may involve (i) Cansub advancing additional funds to U.S. Parent in the event the revised estimate of the net after-tax earnings for the 2000 fiscal year is increased, or (ii) U.S. Parent repaying a portion of the Loan to reflect a reduction in the estimated net after-tax earnings for the 2000 fiscal year, so that the average balance of the Loans on a quarterly basis at any particular time will approximate or be equal to the estimated net after-tax earnings for the 2000 fiscal year.

The Loans will be evidenced by a single grid demand promissory note (the "2000 Note"), and will carry an interest rate equivalent to normal commercial interest rates for loans of such magnitude from arm's length third parties to U.S. Parent and in any event will be greater than any interest costs incurred by Cansub.

7. Cansub will make the Loans substantially out of internally generated funds. To the extent Cansub does not have available funds at the time of making a Loan, it will effect a bridge borrowing to make the Loan and will repay the same as internally generated funds become available.

8. Prior to XXXXXXXXXX, Cansub will declare a dividend (or dividends) to Canco for an amount equal to the principal amount of the 2000 Note outstanding at that time and pay such dividend (or dividends) prior to XXXXXXXXXX, by assignment of the 2000 Note to Canco. At the time of the dividend (or dividends), the fair market value of the 2000 Note will be equal to its principal amount.

9. Subsequent to the payment of the dividend (or dividends) and assignment of the 2000 Note as described in paragraph 8 above, and subsequent to the declaration of the dividends as described in paragraph 10 below, U.S. Parent will repay that portion of the 2000 Note necessary to fund the dividends described in paragraph 10 below, that will be paid to Finco on its preferred shares of Canco and to fund the withholding tax on the dividends, described in paragraph 10 below, that will be paid to U.S. Parent on its common and preferred shares of Canco.

10. Prior to XXXXXXXXXX, but subsequent to the declaration of the dividend (or dividends) described in paragraph 8 above, Canco will declare a dividend to U.S. Parent on its class A preferred shares of Canco and on its common shares of Canco in an aggregate amount equal to the then remaining balance of the 2000 Note divided by a factor of XXXXXXXXXX (under this calculation the amount of the dividend will equal the aggregate of the remaining balance of the 2000 Note and the portion of the above repayment that will not be used to fund the dividend payments to Finco. This portion of the repayment will also equal the 5% Canadian withholding tax exigible on the dividends to U.S. Parent). The dividends will be paid prior to XXXXXXXXXX, but subsequent to the payment of the dividend declared in paragraph 8 above, by way of settlement of the balance of the 2000 Note and the amount of any Canadian withholding taxes payable on the dividends will be paid at that time. A dividend (net of exigible Canadian withholding taxes) will be declared and paid to Finco on its preferred shares of Canco in accordance with the terms of such shares.

11. Cansub will, in XXXXXXXXXX, make one or more demand loans to U.S. Parent in an aggregate amount equal to Cansub's estimated after-tax earnings for XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

12. The purpose of the proposed transactions is to obtain full utilization of Canadian income taxes paid by Cansub as creditable taxes in the U.S.

RULINGS GIVEN

Provided that the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we confirm the following:

A. Provided the proposed transactions described in paragraphs 6 to 10 herein are completed prior to XXXXXXXXXX, the interaction of subsection 15(2) and paragraph 214(3)(a) will not apply to deem the amount of the Loans made by Cansub to U.S. Parent, as described in paragraph 6, to have been paid to U.S. Parent as a dividend from a corporation resident in Canada.

The above Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and are binding on CCRA provided that the proposed transactions are 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 and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

Nothing in this letter should be construed as confirmation of the income tax consequences of any of the transactions described in this letter other than as specifically described in A above. In addition, nothing in this letter should be construed as confirmation, express or implied, of the fair market value or adjusted cost base of any property. While it is our understanding that the series of transactions described in this letter will be repeated on an annual basis, the above ruling is in respect of the 2000 Note only and does not cover any other loans that may be made in the future.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch