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 transfer of debt of wholly owned Canco from US Parentco to a limited partnership (established in XXXXXXXXXX but managed out of the US), where US Parentco was the general partner and US Subco was the limited partner, allowed:
(a) the application of the 10% treaty withholding rate on the interest paid from Canco to the limited partnership; and
(b) Canco to continue deducting the interest paid on the debt.
Position: Yes to both.
Reasons: See our document # 2000-0054593 XXXXXXXXXX .
XXXXXXXXXX 2001-008569
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX ("Canco")
XXXXXXXXXX ("US Parent")
XXXXXXXXXX ("US Sub")
XXXXXXXXXX ("Partnership")
This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers, with respect to the refinancing of the debt presently owing from Canco to US Parent.
To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is
i. in an earlier income tax return of Canco or a related person;
ii. being considered by a Tax Services Office or Taxation Centre in connection with a previously filed income tax return of Canco or a related person;
iii. under objection by Canco or a related person;
iv. before the Courts; or
v. the subject of an advance income tax ruling previously considered by the Directorate.
Income Tax Act and Other 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. Unless otherwise stated, statutory references in this letter are to the Act;
b) "business" has the meaning assigned by subsection 248(1) of the Act;
c) "Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;
d) "Canco Debt A" means the indebtedness owing by Canco to US Parent in the amount of $XXXXXXXXXX pursuant to an agreement entered into between US Parent and Canco on XXXXXXXXXX;
e) "Canco Debt B" means the indebtedness owing by Canco to the Partnership in the amount of $XXXXXXXXXX pursuant to an agreement to be entered into between the Partnership and Canco as described in the proposed transactions;
f) "carrying on business" has the meaning assigned by its extended meaning under subsection 253(1) of the Act;
g) "corporation" has the meaning assigned by subsection 248(1);
h) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act; and,
i) "the Treaty" means the Canada-United States Income Tax Convention, 1980, as amended.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. Canco is a taxable Canadian corporation incorporated under the laws of the Province of XXXXXXXXXX with a fiscal year end of XXXXXXXXXX. Canco is a wholly owned direct subsidiary of US Parent.
2. US Parent is a corporation incorporated under the laws of the state of XXXXXXXXXX, and is a non-resident of Canada and a resident of the United States for purposes of the Treaty. US Parent is a public corporation with its shares listed on the XXXXXXXXXX Stock Exchange.
3. US Sub is a corporation incorporated under the laws of the state of XXXXXXXXXX, and is a non-resident of Canada and a resident of the United States for purposes of the Treaty. US Sub is a wholly owned subsidiary of US Parent.
4. US Parent and US Sub do not carry on business in Canada, and do not have a permanent establishment in Canada for the purposes of the Act or the Treaty.
5. On XXXXXXXXXX, US Parent, as general partner, and US Sub, as the sole limited partner, formed and entered into the Partnership in accordance with the Partnership Act (XXXXXXXXXX).
6. US Parent and US Sub have elected, 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.
7. To form the Partnership, US Parent contributed $XXXXXXXXXX for XXXXXXXXXX units of the Partnership and US Sub contributed $XXXXXXXXXX for XXXXXXXXXX units of the Partnership.
8. Since its formation, and to date, the Partnership has been inactive.
9. US Parent, US Sub, and the Partnership will have fiscal periods that end on XXXXXXXXXX.
10. Since XXXXXXXXXX, US Parent advanced a total of $XXXXXXXXXX CND to Canco in exchange for an interest bearing demand promissory note ("Canco Debt A"). Canco Debt A bears interest at XXXXXXXXXX % per annum and is calculated on the daily balance of principal outstanding. Interest is payable on XXXXXXXXXX of each year.
11. Canco used the money from Canco Debt A for the purposes of purchasing XXXXXXXXXX% of the active business assets of XXXXXXXXXX from an unrelated party and providing working capital for XXXXXXXXXX.
12. At all relevant times Canco's total debt outstanding to US Parent, has not exceeded two times the equity, as described in clauses 18(4)(a)(ii)(A) to (C) of the Act.
Proposed Transactions
13. US Parent will subscribe for XXXXXXXXXX additional units of the Partnership for $XXXXXXXXXX CND.
14. The Partnership will make a demand interest-bearing loan to Canco ("Canco Debt B") with a principal amount of $XXXXXXXXXX CND. Canco Debt B will bear interest at an appropriate floating rate which will be re-determined from time to time. Canco Debt B will be documented by a promissory note issued by Canco to the Partnership.
15. Canco will immediately repay, including any outstanding interest owing, the Canco Debt A. Canco will remit, XXXXXXXXXX, 10% of the interest paid as a withholding tax under Part XIII of the Act as provided under the current provisions of the Treaty and subsection 10(6) of the Income Tax Application Rules.
16. Thereafter, in accordance with the provisions of Canco Debt B, Canco will pay interest on Canco Debt B to the Partnership.
17. The Partnership will either distribute or invest the interest income it earns from time to time from Canco Debt B either within or outside Canada.
18. The Partnership may 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. All other activities of the Partnership will be conducted outside Canada. The books and records will be kept outside of Canada, and all management and investment decisions will be made outside of Canada.
19. For greater certainty, Canco Debt B, or any debt substituted thereafter, will be included in the composition of such outstanding debts to specified non-residents. For the period of time during which Canco Debt B and Canco Debt A are simultaneously outstanding, Canco's "outstanding debts to specified non-residents", within the meaning of subsection 18(5), will have increased as a result of the transactions described herein.
Purpose of the Proposed Transactions
20. The purpose of the proposed transactions is to refinance Canco's debt in a manner that does not result in adverse Canadian or United States income tax consequences. In particular, the proposed transactions will permit US Parent and US Sub to maximize the utilization of creditable foreign taxes under the Code, by allowing them to control the timing of the distribution of income related to the loan(s) made to Canco for United States income tax purposes.
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. Provided that interest paid or credited by Canco to the Partnership 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 US Parent and US Sub. Under the current provisions of the Treaty, and pursuant to subsection 10(6) of the Income Tax Application Rules, interest paid or credited by Canco to the Partnership will be subject to withholding tax under Part XIII of the Act at the rate of 10%.
B. Subject to subsection 18(4) and provided that Canco has a legal obligation to pay interest on Canco Debt B, and that Canco continues to use the proceeds of Canco Debt A to earn income from a business or property (other than to acquire property income from which would be exempt or to acquire a life insurance policy), the interest paid or payable to the Partnership pursuant to Canco Debt B would be deductible by Canco to the extent that it is reasonable.
C. 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 described in the this ruling request.
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 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.
Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed
(a) whether the Partnership is or will be carrying on a business in Canada through a permanent establishment, 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
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