2001 Ruling 2001-0068763 - Series of losses and repayments

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

Position: No.

Reasons:

See issue sheet #9717641, dated November 10, 1997 and the two court cases (Joel Attis v. MNR, 92 DTC 1128(TCC) and Nigel T. Hill v. MNR, 93 DTC 148(TCC)) mentioned in the issue sheet.

XXXXXXXXXX 2001-006876

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: 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 taxpayer.

The tax affairs of XXXXXXXXXX are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre under Account Number XXXXXXXXXX.

To the best of your knowledge and that of the taxpayer involved, none of the issues involved with this request:

(i) is involved in an earlier return of the taxpayer 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 taxpayer 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.

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) "Canco" refers to XXXXXXXXXX;

(c) "Cansub" refers to XXXXXXXXXX;

(d) "Finco" refers to XXXXXXXXXX;

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

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

(g) "Pubco" refers to XXXXXXXXXX;

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

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

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

Facts

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

1. Canco is a company incorporated under the laws of XXXXXXXXXX, and is a private corporation and taxable Canadian corporation. Canco's year end is XXXXXXXXXX.

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. As of XXXXXXXXXX, Cansub's issued and outstanding shares are XXXXXXXXXX common shares, XXXXXXXXXX common shares and XXXXXXXXXX preferred shares. Cansub's year end 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 the issued and outstanding common shares. U.S. Parent also owns XXXXXXXXXX preferred shares of Canco.

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

5. On XXXXXXXXXX, as a result of a merger, U.S. Parent became 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.

Proposed Transactions

6. Cansub will make one or more loans (the "Loans") to U.S. Parent during the XXXXXXXXXX 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 XXXXXXXXXX plus adjustments to reflect actual earnings in excess of earnings estimations made in prior years and audit adjustments that will affect prior years earnings. The Loans will be denominated in Canadian dollars and will be due 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 XXXXXXXXXX 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 XXXXXXXXXX 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 XXXXXXXXXX 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 XXXXXXXXXX fiscal year.

The Loans will be evidenced by a demand promissory note (the "XXXXXXXXXX Note"), and will carry an interest rate equivalent to normal commercial interest rates for loans of such magnitude from third parties to U.S. Parent and in any event will be greater than any interest costs incurred by Cansub. Pubco, or one of its affiliates, will maintain an electronic spreadsheet which will monitor changes in principal and the amount of interest accruing on such principal from time to time.

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 directly or indirectly from Pubco or an affiliate thereof in order to make the Loan and will repay the borrowing to Pubco or its affiliate, as the case may be, as 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 XXXXXXXXXX Note at that time and pay such dividends prior to XXXXXXXXXX, by assignment of the XXXXXXXXXX Note to Canco. At the time of the dividend, the fair market value of the XXXXXXXXXX Note will be equal to its principal amount.

9. Subsequent to the payment of the dividend and assignment of the XXXXXXXXXX Note described in paragraph 8 above, and subsequent to the declaration of the dividend described in paragraph 10 below, U.S. Parent will repay that portion of the XXXXXXXXXX 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 described in paragraph 8 above, Canco will declare a dividend to U.S. Parent on its XXXXXXXXXX preferred shares of Canco and on its common shares of Canco in an aggregate amount equal to the then remaining balance of the XXXXXXXXXX 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 XXXXXXXXXX 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 XXXXXXXXXX% 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 XXXXXXXXXX Note and a cash payment to Canada Customs and Revenue Agency (CCRA) for any Canadian withholding tax payable on the dividends. A dividend (net of exigible Canadian withholding tax forwarded to the CCRA) 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

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

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, 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 to have been paid to U.S. Parent as a dividend from a corporation resident in Canada.

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and is binding on the CCRA provided that the proposed transactions are completed by XXXXXXXXXX.

The ruling is based on the Act in the present form and does not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the ruling provided herein.

Comments

Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein, including in particular the application of subsection 18(4), other than those specifically in the ruling given 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 referred to herein.

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 XXXXXXXXXX Note only and does not cover any other loans that may be made in the future.

Yours truly,

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

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