2001 Ruling 2000-0054593 - Non-resident-owned Investment Corporation

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: Unwinding NRO Structure

Position: See Issue Sheet

Reasons: See Issue Sheet

XXXXXXXXXX 2000-005459

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX ("Canco")
XXXXXXXXXX ("USco")
XXXXXXXXXX ("US Holdco")
XXXXXXXXXX ("US Subco")
XXXXXXXXXX ("NROco")
(collectively the "Parties")
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-referenced taxpayers. In your letters dated XXXXXXXXXX additional information was provided regarding the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

Canco and NROco file their T2 returns with the XXXXXXXXXX Tax Centre.

Definitions

In this ruling the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, chapter 1, R.S.C. 1985 (5th supp.), as amended as at the date hereof, and each reference to a Part, section, subsection, paragraph, subparagraph or clause is a reference to the specified provision of the Act;

(b) "ACB" means "adjusted cost base" as defined in section 54;

(c) "Canco Debt" means the indebtedness owing by Canco to NROco, in the amount of $XXXXXXXXXX, pursuant to an agreement entered into between XXXXXXXXXX and Canco and subsequently assigned to NROco on XXXXXXXXXX, as amended pursuant to an agreement entered into on XXXXXXXXXX;

(d) "NRO" means "non-resident-owned investment corporation" as defined in subsection 133(8);

(e) XXXXXXXXXX;

(f) "PUC" means "paid-up capital" as defined in subsection 89(1);

(g) "taxable Canadian corporation" has the meaning assigned in subsection 89(1); and

(h) "US Treaty" means the Canada-United States Income Tax Convention.

Facts

1. USco is a corporation incorporated under the laws of the state of XXXXXXXXXX, and is a resident of the United States for the purposes of the Act and the US Treaty. USco is a public corporation with its shares listed on the XXXXXXXXXX Stock Exchange and the XXXXXXXXXX Stock Exchange.

2. US Holdco is a corporation incorporated under the laws of the state of XXXXXXXXXX, and is a resident of the United States for the purposes of the Act and the US Treaty. US Holdco is a wholly-owned direct subsidiary of USco.

3. US Subco is a corporation incorporated under the laws of the state of XXXXXXXXXX and is a resident of the United States for the purposes of the Act and the US Treaty. US Subco is a wholly-owned direct subsidiary of USco.

4. Canco is a corporation governed by the XXXXXXXXXX, and is a taxable Canadian corporation. Canco was formed on the amalgamation of XXXXXXXXXX. All of Canco's issued and outstanding shares are beneficially owned by US Holdco.

5. USco, US Holdco and US Subco do not carry on any business in Canada, and have no permanent establishment in Canada, for the purposes of the Act or the Treaty.

6. NROco is a corporation incorporated under the XXXXXXXXXX and is resident in Canada for the purposes of the Act. NROco is a wholly-owned direct subsidiary of USco. NROco has not issued any bonds, debentures or other funded indebtedness. NROco has elected within the prescribed time and in the prescribed manner to be taxed as a NRO under section 133. NROco's status as a NRO was the subject of a previous advance income tax ruling, dated XXXXXXXXXX, 1999 (XXXXXXXXXX), as amended on XXXXXXXXXX, 1999, and XXXXXXXXXX, 2000.

7. NROco's issued and outstanding share capital consists of XXXXXXXXXX common shares, issued on XXXXXXXXXX, for an aggregate subscription price of $XXXXXXXXXX. On XXXXXXXXXX, NROco's stated capital account maintained in respect of its common shares was increased by $XXXXXXXXXX, resulting in a deemed taxable dividend under subsection 84(1), to which paragraph 53(1)(b) applied. Thus, the aggregate amount of the ACB and PUC of NROco's issued and outstanding share capital is $XXXXXXXXXX.

8. NROco's only assets consist of the Canco Debt and cash deposits maintained with a Canadian financial institution.

9. NROco's taxation year ends on XXXXXXXXXX.

10. Newco was incorporated under the XXXXXXXXXX. Newco will be a wholly-owned direct subsidiary of USco.

11. US Holdco and US Subco formed a limited partnership governed by the laws of a Canadian province (the "Partnership") on XXXXXXXXXX.

12. NROco has, in accordance with subsection 249.1(7), made an application for the concurrence of the Minister of National Revenue with a change in time when its fiscal period ends for its fiscal period which begins on XXXXXXXXXX. Provided such concurrence is obtained, such fiscal period will end on the date specified by the Minister of National Revenue.

13. To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this request:

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

(c) is under objection, or

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

Proposed Transactions

14. After XXXXXXXXXX, Canco, NROco, USco, US Holdco, US Subco, Newco and the Partnership will enter into a reorganization agreement, pursuant to which they will agree to effect the events and transactions described below.

15. US Holdco and US Subco will elect, in accordance with the applicable provisions of the United States Internal Revenue Code of 1986 (the "Code") and associated regulations, that the Partnership will be treated as a foreign corporation for the purposes of the Code.

16. Canco will amend its articles of incorporation to authorize the issuance of a class of XXXXXXXXXX shares having a redemption price equal to $XXXXXXXXXX per share (the "Canco Preferred Shares").

17. On the first day ("Day One") of NROco's taxation year which begins after XXXXXXXXXX, Canco will repay the Canco Debt by way of the issuance to NROco of Canco Preferred Shares having an aggregate redemption price and PUC equal to the principal amount of the Canco Debt, plus all accrued interest thereon to that date.

18. Also on Day One, NROco will pay a stock dividend to USco by way of the issuance to USco of additional common shares of NROco, by reason of which the stated capital account maintained in respect of NROco's common shares will be increased by an amount equal to its cumulative taxable income, within the meaning of the definition in subsection 133(9).

19. On the following day ("Day Two"), Newco will be merged with NROco in accordance with subsection 87(1), forming Amalco, such that:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of any predecessor corporation) of the predecessor corporations immediately before the merger will become property of Amalco by virtue of the merger;

(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger will become liabilities of Amalco by virtue of the merger; and

(c) all of the shareholders (except any predecessor corporation), who owned shares of the capital stock of any predecessor corporation immediately before the merger, will receive shares of the capital stock of Amalco by virtue of the merger - specifically all of NROco's outstanding common shares will be exchanged for common shares of Amalco.

20. Also on Day Two, the following transactions will occur in the order set out below:

(a) Amalco will take out a daylight loan (the "Daylight Loan") from a financial institution (the "Lender") in an amount equal to the principal amount of the Canco Debt. An amount equal to the Daylight Loan will be credited to Amalco's account with the Lender.

(b) Amalco will make a demand, interest-bearing loan to Canco (the "Amalco Loan") with a principal amount and fair market value equal to the principal amount of the Canco Debt. The Amalco Loan will bear interest at an appropriate floating rate which will be redetermined from time to time. An amount equal to the Amalco Loan will be debited from Amalco's account with the Lender and credited to Canco's account with the Lender. The Amalco Loan will be documented by a promissory note issued by Canco to Amalco.

(c) Canco will redeem the Canco Preferred Shares. An amount equal to the aggregate redemption price of the Canco Preferred Shares will be debited from Canco's account with the Lender and credited to Amalco's account with the Lender (the portion of the redemption price attributable to accrued interest on the Canco Debt will be funded from Canco's other liquid assets).

(d) Amalco will repay the Daylight Loan. An amount equal to the Daylight Loan will be debited from Amalco's account with the Lender.

21. Also on Day Two, but immediately after the transactions described in paragraph 20 above, USco will transfer XXXXXXXXXX% of its common shares of Amalco to US Holdco which, in turn, will make a capital contribution of these shares to the Partnership and USco will transfer XXXXXXXXXX% of its shares of Amalco to US Subco which, in turn, will make a capital contribution of these shares to the Partnership.

22. Also on Day Two, Amalco and the Partnership will enter into a winding-up and distribution agreement, effective on Day Two, but after the transactions described in paragraph 21 above. Prior to the completion of the winding-up, Amalco, in its capacity as the successor corporation to NROco will undertake to (a) make all required remittances and filings with the Canada Customs and Revenue Agency (the "CCRA") in respect of NROco's taxation year commencing XXXXXXXXXX and an application for a refund of NROco's allowable refund for such year, in the manner and within the time referred to in subsection 133(6); (b) make all required remittances to the CCRA in connection with the stock dividend paid in paragraph 18 above (USco will reimburse Amalco for such remittances); (c) make all filings and take all other actions necessary to obtain any tax refunds to which NROco is entitled; (d) receive any tax refunds to which NROco is entitled and forthwith remit these amounts to the Partnership and (e) retain sufficient funds to permit it to make these payments and perform these activities. Pursuant to the winding-up agreement, the beneficial ownership in all of Amalco's property (as successor to NROco) and all of Amalco's liabilities, will become property and liabilities of the Partnership. Agents of Amalco will, in due course, ensure that remittances and filings take place as required and that the legal ownership in Amalco's property is transferred. Agents of Amalco will, in a timely manner, make all required remittances to the CCRA in connection with interest accruing on the tax refunds in respect of which US Holdco and US Subco have become the beneficial owners pursuant to the winding up agreement between Amalco and the Partnership. Once the tax refunds have been obtained, Amalco will be dissolved and will file a terminal return for the period from the commencement of its taxation year to the date of dissolution.

23. Thereafter, in accordance with the provisions of the Amalco Loan, Canco will pay interest on the Amalco Loan to the Partnership.

24. The Partnership will either distribute or invest the interest income it earns from time to time from the Canco Debt, either within or outside of Canada.

25. The Partnership will maintain a bank account in Canada with a Canadian financial institution in which interest payments will be deposited. If required to do so, the Partnership will appoint a Canadian resident agent strictly for service of process. However, all other activities of the partnership will be conducted outside of Canada. The books and records will be kept outside of Canada, and all management and investment decisions will be made outside of Canada.

26. Canco's "outstanding debts to specified non-residents", within the meaning of subsection 18(5), will not increase as a result of the transactions described herein. For greater certainty, the Amalco Loan, or any debt substituted therefor, will be included in the computation of such outstanding debts to specified non-residents.

Purpose of the Proposed Transactions

The purpose of the proposed series of transactions is to unwind the NROco financing structure in a manner which does not result in adverse Canadian or United States income tax consequences. Each of the proposed transactions has this restructuring as a purpose.

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. No income, capital gain or loss will be realized by NROco upon the repayment of the Canco Debt as described in paragraph 17 above.

B. Pursuant to paragraph 87(2)(a), NROco's taxation year commencing on Day One, will be deemed to have ended immediately before its amalgamation with Newco as described in paragraph 19 above, with the result that, provided NROco is a NRO at the time of the amalgamation:

(1) NROco will be a NRO throughout such taxation year (and, for greater certainty, none of the proposed transactions, in and of themselves, will cause NROco to cease to be an NRO prior to the time of the amalgamtion);

(2) provided that NROco's return of income for such year, and an application for a refund of its allowable refund for such year, is made by Amalco on behalf of NROco in the manner and within the time referred to in subsection 133(6), as described in paragraph 22 above, subsection 133(6) will be applicable; and

(3) all actions taken by Amalco as described in paragraph 22 above in order to make the return of income and the application for a refund referred to in (2) above will be considered to have been made by NROco and the Minister of National Revenue shall pay the refund referred to in (2) above to Amalco.

C. Subsections 69(5) and 84(2) will apply in respect of the winding-up of Amalco as described in paragraph 22 above such that

(1) Amalco will be deemed to have disposed of all of its property for an amount equal to the fair market value of such property at the time it is distributed to the Partnership;

(2) the Partnership will be deemed to have acquired the property referred to in (1) above, for the amount referred to in (1) above; and

(3) Amalco will be deemed to have paid a dividend to the Partnership and the Partnership will be deemed to have received a dividend from Amalco, in the amount, if any, by which the amount referred to in (1) above exceeds the amount, if any, by which the PUC in respect its common shares is reduced on the distribution.

D. Subject to subsection 18(4), and provided that Canco has a legal obligation to pay interest on the Amalco Loan and that Canco continues to use the proceeds of the Canco Debt to earn income from a business or property (other than to acquire property the income from which would be exempt or to acquire a life insurance policy), the interest paid or payable to the Partnerhsip pursuant to the Amalco Loan in respect of each of Canco's taxation years (depending on the method regularly followed by Canco in computing its income) will be deductible by Canco to the extent that it is reasonable.

E. Provided that the interest paid or credited by Canco to the Partnership pursuant to the Amalco Loan is not attributable to a business carried on in Canada by the Partnership through a permanent establishment situated in Canada such interest will be subject to withholding tax under Part XIII of the Act at the rate at which such withholding tax would apply in respect of any interest paid or credited by Canco directly to USco and US Subco. Under the current provisions of the US Treaty, and pursuant to subsection 10(6) of the Income Tax Application Rules, interest paid or credited by Canco to the Partnership pursuant to the Canco Debt will be subject to withholding tax under Part XIII of the Act at the rate of 10%.

F. As a result of the proposed transactions, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences described in the rulings given above to any of the Parties.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and are binding on the CCRA provided that the proposed transactions (other than the payment of interest pursuant to the Amalco Loan) are completed by XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Proposed Amendments

On December 21, 2000 the Minister of Finance released draft amendments to the Act. Included, were draft amendments to subsection 18(4) which, among other things, will change the debt-equity ratio from 3:1 to 2:1. These changes are to be effective for taxation years beginning after 2000.

Comments

Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed:

(a) the determination of the fair market value or adjusted cost base of any property referred to herein, or the PUC of any shares 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.

Yours truly,

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