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: Transfer of deductions from sub to parent
Position: OK
Reasons: Previously provided in similar situations
XXXXXXXXXX
XXXXXXXXXX 2000-000417
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: Advance Income Tax Ruling - XXXXXXXXXX
We are writing in response to your correspondence of XXXXXXXXXX wherein you had requested an advance income tax ruling on behalf of XXXXXXXXXX. We also acknowledge our (XXXXXXXXXX) various telephone conversations in furtherance of this matter.
You have advised that, to the best of the knowledge of yourself and of responsible officials of the aforementioned corporations, none of the issues being considered in this advance income tax ruling request is involved in an income tax return of any of those corporations, is being considered by a Taxation Services Office or Taxation Centre of Canada Customs and Revenue Agency, is the subject of an objection or appeal or is the subject of a previously issued advance income tax ruling.
In this advance income tax ruling:
XXXXXXXXXX is referred to as "ACO";
XXXXXXXXXX is referred to as "BCO"
XXXXXXXXXX is referred to as "CCO"
XXXXXXXXXX is referred to as "DCO";
XXXXXXXXXX is referred to as "ECO"
XXXXXXXXXX is referred to as "FCO" and
XXXXXXXXXX is referred to as "GCO".
Also, each of CCO, DCO, ECO, FCO, and GCO are individually referred to herein as a "Subsidiary Corporation" and collectively as "Subsidiary Corporations".
FACTS
1. Each of ACO, BCO, CCO, DCO, ECO, FCO and GCO is a corporation incorporated or amalgamated under the XXXXXXXXXX and each is a "public corporation" as that term is defined in subsection 89(1) of the Income Tax Act ("the Act"). Each corporation files its federal tax return at the XXXXXXXXXX Tax Services Office of the Canada Customs and Revenue Agency. The federal tax account numbers of the corporations are as follows:
ACO XXXXXXXXXX
BCO XXXXXXXXXX
CCO XXXXXXXXXX
DCO XXXXXXXXXX
ECO XXXXXXXXXX
FCO XXXXXXXXXX
GCO XXXXXXXXXX
2. BCO is a wholly-owned subsidiary of ACO. Each of DCO, ECO, FCO and GCO is a wholly-owned subsidiary of BCO.
3. All of the issued and outstanding common shares of CCO are owned by BCO which also owns XXXXXXXXXX of the issued and outstanding Class A shares of CCO. The balance of the Class A shares of CCO are owned by XXXXXXXXXX, which is itself a wholly-owned subsidiary of BCO.
4. Each Subsidiary Corporation currently has, and at the time of the proposed transactions shall continue to have, outstanding indebtedness to BCO evidenced by non-interest bearing demand promissory notes. The outstanding amount of the indebtedness of each such corporation to BCO is as follows:
CCO $ XXXXXXXXXX
DCO $ XXXXXXXXXX
ECO $ XXXXXXXXXX
FCO $ XXXXXXXXXX
GCO $ XXXXXXXXXX
TOTAL $ XXXXXXXXXX
5. For each Subsidiary Corporation other than FCO, the amount of the indebtedness derives from dividends declared by the relevant Subsidiary Corporation on XXXXXXXXXX.
6. FCO is a corporation resulting from the amalgamation of XXXXXXXXXX each declared dividends on XXXXXXXXXX.
Each dividend of a Subsidiary Corporation and of XXXXXXXXXX was paid by means of a non-interest bearing demand promissory note (each a "Note" and, collectively, the "Notes"). In the case of a Note issued by XXXXXXXXXX in payment of dividends, such Note became an amount owing by FCO as a result of the XXXXXXXXXX amalgamation.
BCO was not a shareholder of record of any of the Subsidiary Corporations or of XXXXXXXXXX at the time such dividends were declared but was "related", within the meaning of that term in subsection 251(2) of the Act, to the Subsidiary Corporation which declared the dividend except in the one case in which BCO was related to a shareholder which owned XXXXXXXXXX% of the voting rights attached to all issued and outstanding shares of that particular Subsidiary Corporation.
The Notes were subsequently acquired by BCO for fair market value consideration equal to the face amount of the Notes. The Notes do not represent funds advanced by BCO to any Subsidiary Corporation or a predecessor of any Subsidiary Corporation.
7. The stated capital and the "paid-up capital", as that term is defined in subsection 89(1) of the Act, of the common shares of each Subsidiary Corporation is as follows:
CO $ XXXXXXXXXX
DCO $ XXXXXXXXXX
ECO $ XXXXXXXXXX
FCO $ XXXXXXXXXX
GCO $ XXXXXXXXXX
8. ACO became a "public corporation", as that term is defined in subsection 89(1) of the Act, by virtue of the listing of a class of shares of its capital stock on a prescribed stock exchange in Canada in its taxation year ended XXXXXXXXXX and shares were issued to the public. In connection with same, ACO incurred expenses in the course of an issuance of shares in excess of $XXXXXXXXXX. Pursuant to paragraph 20(1)(e) of the Act, $XXXXXXXXXX was deducted by ACO in computing income from business in its year ended XXXXXXXXXX and further amounts shall be deducted (or have been deducted in the case of the XXXXXXXXXX taxation year of ACO) in subsequent taxation years in accordance with paragraph 20(1)(e) of the Act. In addition, ACO incurs the usual "head office expenses" as it provides certain centralized management and administration services to its various subsidiary corporations. XXXXXXXXXX.
PROPOSED TRANSACTIONS
9. BCO shall obtain a daylight loan in the amount of $XXXXXXXXXX (the "First Loan") from an arm's length financial institution. It is anticipated that the First Loan shall be non-interest bearing as it shall be repaid in the proposed transaction set out in paragraph 14, below, which shall occur on the same day as the proposed transaction in this paragraph.
10. On the same day as the proposed transaction set out in paragraph 9, above, but subsequent thereto, BCO shall subscribe for common shares of each Subsidiary Corporation at the subscription price set out below:
CCO $ XXXXXXXXXX
DCO ` $ XXXXXXXXXX
ECO $ XXXXXXXXXX
FCO $ XXXXXXXXXX
GCO $ XXXXXXXXXX
TOTAL $ XXXXXXXXXX
11. In each case, the subscription price shall be paid in cash utilizing the proceeds of the daylight loan described in paragraph 9, above.
12. Pursuant to XXXXXXXXXX, upon the issuance of XXXXXXXXXX common shares by a Subsidiary Corporation, the amount of money received in consideration therefor shall be added to the stated capital account maintained by the Subsidiary Corporation in respect of its common shares. Therefore, the stated capital and paid-up capital of the common shares of each Subsidiary Corporation shall be as follows:
CCO $ XXXXXXXXXX
DCO $ XXXXXXXXXX
ECO $ XXXXXXXXXX
FCO $ XXXXXXXXXX
GCO $ XXXXXXXXXX
13. On the same day as the proposed transaction set out in paragraph 11, above, but subsequent thereto, upon receipt of the share subscription proceeds, each Subsidiary Corporation shall pay its Subsidiary Corporation Indebtedness owing to BCO in full and the relevant Notes shall be canceled.
14. BCO shall receive the aggregate amount of $XXXXXXXXXX upon the payment of all Subsidiary Corporation Indebtedness as described in paragraph 13, above. BCO shall use this amount to repay the First Loan in full. Such repayment shall occur on the same day as the proposed transaction set out in paragraph 13, above, but subsequent thereto.
15. ACO shall obtain a daylight loan in the amount of $XXXXXXXXXX (the "Second Loan") from an arm's-length financial institution. It is anticipated that the Second Loan shall be non-interest bearing as it shall be repaid in the proposed transaction set out in paragraph 19, below, which shall occur on the same day as the proposed transaction described in this paragraph.
16. On the same day as the proposed transaction set out in paragraph 15, above but subsequent thereto, ACO shall lend the aggregate amount of $XXXXXXXXXX to the Subsidiary Corporations on a demand basis bearing interest at Prime Rate less 3/4 of one percent. For this purpose, "Prime Rate" means the floating annual rate of interest established from time to time by the XXXXXXXXXX as the base rate it will use to determine rates of interest payable on Canadian dollar loans to customers in Canada. Interest will be due and payable monthly in arrears. The amount of the loan to each Subsidiary Corporation shall be as follows:
CCO $ XXXXXXXXXX
DCO $ XXXXXXXXXX
ECO $ XXXXXXXXXX
FCO $ XXXXXXXXXX
GCO $ XXXXXXXXXX
17. On the same day as the proposed transaction set out in paragraph 16, above, but subsequent thereto, each Subsidiary Corporation shall reduce the stated capital maintained in respect of its common shares by special resolution pursuant to XXXXXXXXXX. The amount of such reduction shall be equal to the addition to such stated capital account set out in paragraph 12, above, being the subscription price paid by BCO in consideration of the issuance of the common shares of the relevant Subsidiary Corporation. The amount of the reduction in stated capital shall be distributed to BCO in cash, funded by the loan from BCO which is set out in paragraph 16, above. As a result, the stated capital and paid-up capital of the common shares of each Subsidiary Corporation shall be as follows:
CCO $ XXXXXXXXXX
DCO $ XXXXXXXXXX
ECO $ XXXXXXXXXX
FCO $ XXXXXXXXXX
GCO $ XXXXXXXXXX
18. On the same day as the proposed transaction set out in paragraph 17, above, but subsequent thereto, BCO shall declare a dividend on its common shares in the aggregate amount of $XXXXXXXXXX being equal to the aggregate amount received by it upon the reduction of stated capital by the Subsidiary Corporations.
19. ACO Corp shall utilize the proceeds of such dividend to repay the Second Loan.
PURPOSE OF PROPOSED TRANSACTIONS
The proposed transactions are intended to convert the Subsidiary Corporation Indebtedness into share capital of the particular Subsidiary Corporation.
The purpose of the proposed transactions as set out above is to cause ACO to have interest income against which it may deduct its expenses, including expenses of issuing a class of its shares in XXXXXXXXXX and its typical "head office" expenses. Also, a Subsidiary Corporations will incur interest expense which will be deducted by it in computing its income from business.
RULINGS PROVIDED
Provided that the above statements of fact are accurate and complete and that the proposed transactions are undertaken as described, the following rulings are provided:
A. In computing its income for income tax purposes for a taxation year, a Subsidiary Corporation may, pursuant to paragraph 20(1)(c) of the Act, deduct the interest paid or payable to ACO in respect of that taxation year on the funds borrowed from ACO set out in paragraph 16 of the Proposed Transactions.
B. The provisions of subsection 245(2) of the Act will not be applicable as a result of the proposed transactions, in and of themselves, to re-determine the tax consequences confirmed in the above Ruling.
These rulings are provided subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and are binding upon the Agency provided that the proposed transactions are completed on or before XXXXXXXXXX. The rulings are based on the Act and the Income Tax Regulations in their present form and do not take into account the effects of any proposed amendments thereto.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2000
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2000
Email this Content