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: Is an interest free loan with a XXXXXXXXXX year repayment period to an employee\shareholder excluded from subsection 15(2) by virtue of subsection 15(2.4), that is are there bona fide arrangements for repayment of the loan within a reasonable time?
Position: Yes.
Reasons: Repayment schedule is considered reasonable and in accordance with normal industry practice. XXXXXXXXXX % of the principal of the loan will be repaid before year XXXXXXXXXX.
XXXXXXXXXX
XXXXXXXXXX 2000-000524
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX
We are writing in response to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling with respect to the XXXXXXXXXX. We also acknowledge your letters dated XXXXXXXXXX and our telephone conversations (XXXXXXXXXX).
To the best of your knowledge, and that of the taxpayers involved in this ruling request, none of the issues involved in this ruling application are being considered by a Tax Services Office or a Taxation Centre in connection with any tax return already filed and none of such issues are under objection, before the courts or is subject to a previously issued ruling.
Our understanding of the relevant facts, proposed transactions and purposes of the proposed transactions is as follows:
Relevant Facts
1. In this letter:
(a) "Act" means Income Tax Act (Canada) R.S.C. 1985 (5th supp.) c. 1, amended;
(b) "Class XXXXXXXXXX Unit" has the meaning set out in paragraph 7 below;
(c) "Class XXXXXXXXXX Unit" has the meaning set out in paragraph 7 below;
(d) "Commitment" has the meaning set out in paragraph 11 below;
(e) "Equity Commitment" has the meaning set out in paragraph 11 below;
(f) "General Partner" of the Partnership has the meaning set out in paragraph 7 below;
(g) "Investors" has the meaning set out in paragraph 7 below;
(h) "Investor/shareholders" has the meaning set out in paragraph 11 below;
(i) "Leveraged Commitment" has the meaning set out in paragraph 11 below;
(j) "Leveraged Loans" has the meaning set out in paragraph 14 below;
(k) "XXXXXXXXXX" has the meaning set out in paragraph 9 below;
(l) "ACo" means the XXXXXXXXXX;
(m) "XXXXXXXXXX" means XXXXXXXXXX;
(n) "BCo" means XXXXXXXXXX;
(o) "BCo Holdings" means XXXXXXXXXX;
(p) "CCo" means XXXXXXXXXX;
(q) "DCo" means XXXXXXXXXX;
(r) "Partnership" means the XXXXXXXXXX;
(s) "Term Sheet" has the meaning set out in paragraph 8 below.
2. DCo is a corporation incorporated under the laws of XXXXXXXXXX. DCo is a taxable Canadian corporation and is wholly-owned by CCo. The term "taxable Canadian corporation", as used here and subsequently, has the meaning assigned by subsection 89(1) of the Act.
3. BCo is a corporation incorporated under the laws of XXXXXXXXXX. BCo is a taxable Canadian corporation and is indirectly controlled by Cco.
4. CCo is a corporation incorporated under the laws of XXXXXXXXXX. CCo is a taxable Canadian corporation and is indirectly controlled by ACo. Accordingly, CCo is related to ACo for purposes of the Act.
5. BCo Holdings is a corporation incorporated under the laws of Canada.
BCo Holdings is a taxable Canadian corporation and is controlled by BCo.
6.
XXXXXXXXXX
Proposed Transactions
7. Pursuant to a limited partnership agreement, the Partnership will be formed as a limited partnership under the laws of XXXXXXXXXX. The general partner (the "General Partner") will be DCo.
XXXXXXXXXX
will subscribe for XXXXXXXXXX Units either personally or through wholly-owned taxable Canadian corporations incorporated for this purpose.
Senior executives of XXXXXXXXXX and XXXXXXXXXX (the "Investors") will be given the opportunity to invest in the Partnership through XXXXXXXXXX Units. The amount which each Investor will be permitted to invest in the Partnership will be determined by XXXXXXXXXX. Each Investor may, at XXXXXXXXXX and XXXXXXXXXX discretion, be given the opportunity to finance a portion of his or her subscription amount with loans from XXXXXXXXXX, the terms of which are described in paragraph 15, below.
8. The Partnership will raise capital by the issuance of the XXXXXXXXXX Units pursuant to a term sheet (the "Term Sheet"). It is not anticipated that a prospectus will be prepared for investments in the Partnership. Accordingly, an investment in the Partnership will likely be made pursuant to exemptions from prospectus requirements, or orders or rulings of applicable securities authorities permitting such investments to be offered on an exempt basis.
The initial closing of the offering will occur as soon as practicable after the date that a favourable ruling is received, but no later than XXXXXXXXXX.
9. The Partnership will be organized for the purposes of investing primarily in
XXXXXXXXXX.
The Partnership may also provide XXXXXXXXXX. In the event that the Partnership does not have its contributed capital fully invested in XXXXXXXXXX, any surplus contributed capital will be invested in XXXXXXXXXX.
XXXXXXXXXX
10. The term of the Partnership will XXXXXXXXXX.
XXXXXXXXXX
The fiscal year of the Partnership shall end XXXXXXXXXX.
11. Each Investor's subscription commitment (the "Commitment") will be comprised of an equity commitment ("Equity Commitment") and a leveraged commitment ("Leveraged Commitment"). The Equity Commitment is the portion of an Investor's investment which he or she will be required to pay from his or her own resources. The Leveraged Commitment is the portion of an Investor's investment which will be loaned to the Investor by XXXXXXXXXX (also referred to herein as the "lender"). The Leveraged Commitment will be in the range of approximately XXXXXXXXXX the Investor's Equity Commitment. It should also be noted that some, but not all, of the Investors will be shareholders of XXXXXXXXXX ("Investor/shareholders"), which, as referred to in paragraph 4 above, is related to XXXXXXXXXX. No Investor/shareholder, however, will be a "specified employee" of XXXXXXXXXX within the meaning of subsection 248(1) of the Act.
12. The amounts of the Leveraged Commitment available to each Investor will be determined by XXXXXXXXXX. XXXXXXXXXX will not base its determination on whether such Investor, or any other person, is also a shareholder of XXXXXXXXXX, nor on the level of such shareholdings, if any. The Leveraged Loans (as defined in 14 below) will be advanced to both Investors who hold shares in XXXXXXXXXX and to Investors who do not. In the former case, no correlation will exist between shareholdings and the awarding of the Leveraged Loans.
13. Unless earlier terminated by the General Partner, the commitment period of the Partnership will begin on the closing of subscriptions for the Partnership and will end on the earliest of (a) XXXXXXXXXX, (b) the date on which XXXXXXXXXX, (c) the date on which the Partnership's commitment period ends subject to XXXXXXXXXX and (d) after the Partnership's available capital has been fully invested. Unless the Partnership's commitment period ends prior to XXXXXXXXXX, as described above, the Partnership XXXXXXXXXX, to the extent of the Partnership's available capital.
14. The General Partner may make capital calls on Investors to fund investments and to pay Partnership expenses. Each time the General Partner makes a capital call on Investors for funds, each Investor's proportionate share (based on the relative amounts of the aggregate Commitments of all Investors) of the capital call will be funded by a drawdown on the Equity Commitment and the Leveraged Commitment of each Investor, in proportion to the relative amounts of each Investor's Equity Commitment and Leveraged Commitment.
The portion of each Investor's proportionate share of each capital call which is required to be funded by a drawdown on the Leveraged Commitment of such Investor will be paid by the lender to the General Partner with the proceeds of advances of leveraged loans ("Leveraged Loans") to such Investor, having the terms described in paragraph 15.
If the lender so elects, the amounts paid by the lender to the General Partner which an Investor was required to pay but failed to pay under his or her Equity Commitment will be deemed to have been loaned by the lender to such Investor as an "Equity Loan" having the terms described in paragraph 16.
15. The Leveraged Loans will not bear interest, and will mature on the earliest of:
(a) XXXXXXXXXX years;
(b) the date of termination of the Partnership;
(c) the date of any sale or disposition of the Partnership interest held by an Investor; or
(d) the date the principal amount of the loan otherwise becomes due and payable.
A portion of an Investor's Leveraged Loan will be recourse to the Investor personally to the extent necessary so that the aggregate amount of the personal recourse portion of the Leveraged Loans (together with the Investor's Equity Commitment) is equal to XXXXXXXXXX% of the Investor's total Commitment. Recourse for the balance of the Leveraged Loan will be limited to the Investor's Partnership interest and distributions thereon.
16. If an Investor fails to pay amounts under his or her Equity Commitment when due, CCo will pay such amounts in default to the Partnership on the Investor's behalf and will be deemed to have loaned the amount so paid to such investor as an "Equity Loan". Equity Loans deemed to have been made to an Investor will be payable on demand and will be full recourse loans. Outstanding Equity Loans will bear interest at a variable rate equal to the bank prime rate from time to time plus XXXXXXXXXX per annum (or the maximum lower rate allowed by law). If an Investor defaults in repayment of an Equity Loan, the lender will be entitled either to foreclose on the Investor's Partnership interest or to realize on the Investor's Partnership interest and account to the Investor for the sale proceeds. The Investor will be liable for any deficiency in any sale proceeds.
17. Each Investor will pledge his or her interest in the Partnership as security for his or her Leveraged Loans and Equity Loans.
18. Each Investor will be required to enter into a loan agreement and pledge agreement which will set out the terms and conditions relating to the Leveraged Loans, Equity Loans and the pledge.
19. The terms of the Leveraged Loans will provide for a mandatory repayment of XXXXXXXXXX% of the principal amount of Leveraged Loans in each of years XXXXXXXXXX. Accordingly, at the end of year XXXXXXXXXX % of the principal amount of the Leverage Loans will be repaid by the Investors
XXXXXXXXXX
20. All distributions due to an Investor on his or her interest in the Partnership and all sale proceeds will first be applied to the repayment of the Investor's Leveraged Loans and then to Equity Loans, if any, of the Investor. Only after the Leveraged Loans and any Equity Loans outstanding are repaid will amounts actually be distributed to an Investor. As a result, the Leveraged Loans are expected to be repaid well before the XXXXXXXXXX year period referred to in paragraph 15(a) above. BCo may waive the requirement that XXXXXXXXXX % of such distributions be so applied, at its discretion.
21. Any repayments of an Investor's Leveraged Loan will reduce the personal recourse portion and the limited recourse portion rateably.
22. An Investor who is employed by XXXXXXXXXX at the time of making an investment in the Partnership is subject to (but has no right to) having his or her interest purchased by XXXXXXXXXX or by one or more parties designated by XXXXXXXXXX upon termination (other than as a result of death or disability) of his or her employment at any time during the term of the Partnership. XXXXXXXXXX must exercise its option to require XXXXXXXXXX or another party or parties designated by XXXXXXXXXX to purchase an Investor's interest within XXXXXXXXXX days after the termination of employment of the Investor.
If XXXXXXXXXX exercises its option to require that XXXXXXXXXX or another party or parties designated by XXXXXXXXXX purchase an Investor's Partnership interest, the purchaser will be required to purchase, for cash, all of the Partnership interest then held by the Investor. The purchase price for the interest to be purchased will depend on whether or not the Investors' interest has vested, and on the reason for the termination of the Investor's employment.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to bring together a pool of capital in order to provide equity funding primarily to mid-level taxable Canadian private corporations. It is also intended to provide such Investors with a leveraged investment opportunity and the potential to generate significant returns on their investment.
Ruling Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the proposed transactions and purposes of the proposed transactions and the proposed transactions are carried out as described herein, our ruling is as follows:
Provided an employee is not a "specified employee" as defined in subsection 248(1) of the Act, by virtue of subsection 15(2.4) of the Act, the provisions of subsection 15(2) of the Act will not apply to an employee who is a shareholder or is connected with a shareholder of ACo in respect of Leveraged Loans received by that employee.
This ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and is binding on the Canada Customs and Revenue Agency ("CCRA"), provided that the proposed transactions described herein are completed by XXXXXXXXXX.
Our ruling is based on the Act in its present form and does not take into consideration any proposed amendments to the Act.
We wish to confirm that nothing in the above ruling should be construed as implying that the CCRA has agreed to or reviewed:
(a) any income tax matters related to subdivision j of Division B of Part I of the Act and section 143.2 of the Act;
(b) the consequences of earning income or receiving distributions from the Partnership or the consequences of the settlement of the Leveraged Loans; or
(c) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein.
Yours truly,
XXXXXXXXXX
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 8 -
...cont'd
...cont'd
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