2001 Ruling 2001-0089533 - Wind-up of NRO into Limited Partnership

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 of NRO structure through amalgamation and winding-up. Whether amalgamation can occur at a specific time on a particular date. Use of limited partnership to replace NRO as investment vehicle holding shares in Canco.

Position: Ruling given with provisos noted.

Reasons: See Issue Sheet.

XXXXXXXXXX 						2001-008953

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("Canco")
XXXXXXXXXX ("NROco")
XXXXXXXXXX ("US Parent")

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 and from Canco to NROco.

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, NROco, 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, NROco, or a related person;

iii) under objection by Canco, NROco, or a related person;

iv) before the Courts or, if a judgement has been issued, the time limit for appeal to a higher Court has not expired; and

v) the subject of a 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) "ACB" means adjusted cost base as defined in subsection 248(1) of the Act;

(c) XXXXXXXXXX;

(d) "business" has the meaning assigned by subsection 248(1) of the Act;

(e) "Canadian corporation" has the meaning assigned by subsection 248(1) of the Act;

(f) "Canco Debt A" means the indebtedness owing by Canco to NROco in the amount of $XXXXXXXXXX pursuant to a demand note issued on XXXXXXXXXX, to XXXXXXXXXX and subsequently assigned to NROco;

(g) "Canco Debt B" means the indebtedness owing by Canco to NROco in the amount of $XXXXXXXXXX pursuant to a demand note issued on XXXXXXXXXX, to XXXXXXXXXX and subsequently assigned to NROco;

(g) "Canco Debt C" means the indebtedness owing by Canco to US Parent in the amount of $XXXXXXXXXX pursuant to a demand note issued to US Parent;(h)

(h) (i) "CBCA" means the Canada Business Corporations Act;

(j) "corporation" has the meaning assigned by subsection 248(1);

(k) "FMV" means fair market value;

(l) "NRO" means a corporation that has elected to be treated as a "non-resident owned investment corporation" within the meaning assigned by subsection 133(8) of the Act;

(m) "PUC" means paid-up capital as defined in subsection 248(1) of the Act;

(n) "taxable Canadian corporation" has the meaning assigned by subsection 248(1) of the Act;

(o) "TCP" means taxable Canadian property and has the meaning assigned by subsection 248(1) of the Act;

(p) "Treaty" means the Canada-United States Income Tax Convention,(1980);

(q) "US Parent Loan" means the indebtedness owing by Canco to US Parent in the amount of approximately $XXXXXXXXXX.

Facts

1. Canco is a taxable Canadian corporation incorporated under the CBCA under the name XXXXXXXXXX with a fiscal year end of XXXXXXXXXX. Its name was changed to XXXXXXXXXX. The company is in the XXXXXXXXXX business. Canco is a wholly-owned direct subsidiary of US Parent.

2. XXXXXXXXXX ("CanSub") is a taxable Canadian corporation incorporated under the XXXXXXXXXX. CanSub was formed as the result of an amalgamation on XXXXXXXXXX. CanSub is a wholly-owned direct subsidiary of Canco. CanSub is in the XXXXXXXXXX business.

3. NROco is a corporation incorporated under the XXXXXXXXXX and is resident in Canada for purposes of the Act. NROco is a wholly-owned direct subsidiary of US Parent and elected within the prescribed time and in the prescribed manner to be taxed as a NRO.

4. NROco's issued and outstanding share capital consists of XXXXXXXXXX common shares. The stated capital of the common shares is $XXXXXXXXXX. The common shares were issued in consideration for, among other things, the acquisition of Canco Debt A and Canco Debt B and the payment of a stock dividend in XXXXXXXXXX. In XXXXXXXXXX, NROco returned capital of $XXXXXXXXXX.

The PUC of the common shares is $XXXXXXXXXX. The ACB of the common shares is not less than the PUC.

5. NROco's only assets consist of Canco Debt A, Canco Debt B, interest receivable, and refundable taxes receivable.

6. NROco's taxation year ends on XXXXXXXXXX.

7. 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.

8. US Parent does not carry on business in Canada and does not have a permanent establishment in Canada for purposes of either the Act or the Treaty.

9. During XXXXXXXXXX, US Parent loaned money to Canco (the "US Parent Loan") and subscribed for additional common shares in Canco. Canco used a portion of the funds from the US Parent Loan (the "Funds") for purposes of acquiring the shares of a wholly-owned subsidiary ("Acquisitionco"), which in turn used the funds to acquire all of the shares of XXXXXXXXXX from unrelated persons. XXXXXXXXXX owned and operated certain midstream assets similar to those owned by Canco. XXXXXXXXXX was later amalgamated with Acquisitionco on XXXXXXXXXX and continued as CanSub. The remaining portion of the Funds were loaned by Canco to CanSub to repay third party debt.

10. The corporate head office of both Canco and NROco is XXXXXXXXXX.

11. The Canada Customs and Revenue Agency ("CCRA") account numbers for Canco and NROco are XXXXXXXXXX , respectively. Canco and NROco file their federal corporate income tax returns with the XXXXXXXXXX Taxation Centre.

Proposed Transactions

12. Newco will be incorporated under the XXXXXXXXXX. All of the issued and outstanding shares of Newco will be owned by US Parent.

13. NROco will request that the Minister of National Revenue permit NROco to change the time when its fiscal period ends, pursuant to subsection 249.1(7). Provided such concurrence is obtained, the fiscal period of NROco will end on the date specified by the Minister of National Revenue (the "Year End").

14. US Sub will be incorporated under the laws of the state of XXXXXXXXXX, and will be a non-resident of Canada and a resident of the United States for purposes of the Treaty. US Sub will be a wholly-owned direct subsidiary of US Parent. US Sub will not carry on business in Canada and will not have a permanent establishment in Canada for purposes of the Act or the Treaty.

15. Before the Year End, US Parent and US Sub will form a limited partnership governed by the laws of XXXXXXXXXX. US Parent will have a XXXXXXXXXX% interest in the Partnership and will be a limited partner. US Sub will have a XXXXXXXXXX% interest in the Partnership and will be the general partner. The initial contributions to the Partnership will be cash in the amount of $XXXXXXXXXX by US Sub and cash in the amount of $XXXXXXXXXX by US Parent.

16. US Parent and US Sub 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.

17. Before the Year End, Canco, NROco, US Parent, US Sub, Newco and the Partnership will enter into a reorganization agreement, pursuant to which they will agree to effect the events and transactions described below.

18. Canco will pay all interest accrued to the Year End on Canco Debt A and Canco Debt B to NROco on the Year End.

19. On the first day ("Day One") of NROco's taxation year which begins after the Year End, at the earliest time on that day, NROco will declare and pay a stock dividend to US Parent by issuing to US Parent 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 XXXXXXXXXX% of its "cumulative taxable income", within the meaning assigned by subsection 133(9). Concurrent with the declaration and payment of the stock dividend, NROco will declare and pay a cash dividend in an amount equal to XXXXXXXXXX% of its "cumulative taxable income", within the meaning assigned by subsection 133(9).

20. NROco will withhold and remit to the Receiver General all amounts required by Part XIII of the Act that will arise on the payment of the cash and stock dividends.

21. On Day One, Newco will be amalgamated with NROco (the amalgamated entity is hereafter referred to as "Amalco"), effective, for corporate law purposes, at a time on Day One (the "Effective Time") such that the time at which the dividends referred to in paragraph 19, above, are declared and paid is immediately before the time that is immediately before the Effective Time, and 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 corporations) of the predecessor corporations immediately before the merger will become liabilities of Amalco by virtue of the merger;

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 - in particular, all of NROco's outstanding common shares will be exchanged for common shares of Amalco.

21. 22. On Day One, and immediately after the transactions described above, US Parent will make a capital contribution of XXXXXXXXXX% of its common shares of Amalco to the Partnership in exchange for units of the Partnership. As the shares of Amalco are TCP, US Parent will apply for a certificate in accordance with subsection 116(2) of the Act with respect to the disposition of the shares of Amalco.

23. Also on Day One, Amalco and the Partnership will enter into a winding-up and distribution agreement, effective on Day One at a time that is after the last of the transactions described 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 CCRA in respect of NROco's and Amalco's taxation years ending on the Year End, Day One and at the time of dissolution and make an application for a refund of NROco's allowable refund for each such applicable 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 dividends paid as set out above;

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 NROco to make any such payments and perform these activities.

Pursuant to the winding-up agreement, the beneficial ownership in all of the property of Amalco (as successor to NROco) and all of the liabilities of Amalco will become the property and liabilities of the Partnership. Once the tax refunds have been obtained, Amalco will be dissolved and will file a terminal tax return for the period commencing on Day One to the date of dissolution.

24. US Parent will subscribe for additional units of the Partnership for an amount not in excess of the amount outstanding pursuant to the US Parent Loan and Canco Debt C.

25. In addition to the cash received on the subscription, the Partnership will have received cash on the winding-up of Amalco. These funds, in addition to funds obtained from US Parent as described in paragraph 24, above, will be used by the Partnership to purchase US Parent Loan and Canco Debt C from US Parent, together with accrued interest thereon. Any additional funds may be loaned to Canco as interest bearing debt for use in its business.

26. In accordance with the provisions of Canco Debt A, Canco Debt B, Canco Debt C, and US Parent Loan, (collectively, the "Canco Debts"), Canco will pay interest on the Canco Debts to the Partnership.

27. The Partnership will either distribute or invest the interest income it earns from the Canco Debts, as well as the cash received from the tax refunds due to NROco, either within or outside of Canada.

28. The Partnership will maintain a Canadian dollar denominated bank account in the United States with a United States 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 Canada. The books and records will be kept outside of Canada, and all management and investment decisions will be made outside Canada.

29. For greater certainty, all debts due by Canco to the Partnership, or any debt substituted thereafter, will be included in Canco's "outstanding debts to specified non-residents" within the meaning set out in subsection 18(5).

Purpose of the Proposed Transactions

29. The purpose of the proposed series of transactions is to liquidate and dissolve NROco, and to refinance other inter-company debts, without creating adverse Canadian or United States income tax consequences.30.

31. In particular, the proposed transactions will permit

(i) NROco to recover substantially all of the allowable refundable tax on hand relating to income earned in the tax year ending on the date specified by the Minister of National Revenue in paragraph 13, above, and

(i) (ii) 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 the amalgamation described in paragraph 21, above, is effective for purposes of applicable corporate law at the Effective Time, then, pursuant to paragraph 87(2)(a), NROco's taxation year commencing at the earliest time on Day One will be deemed to have ended immediately before the Effective Time, and, for greater certainty, the declaration and payment of the dividends described in paragraph 19, above, will be considered to have occurred during NROco's taxation year commencing at the earliest time on Day One and ending immediately before the Effective Time.

B. NROco will be an NRO throughout the taxation year commencing at the earliest time on Day One and ending immediately before the Effective Time, 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 amalgamation.

C. Provided that NROco's returns of income for the taxation year ending on the Year End, and for the taxation years ending on Day One, are filed by Amalco on behalf of NROco, and an application for a refund of NROco's allowable refund for each of those taxation years 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 23, above, subsection 133(6) will be applicable.

D. All actions taken by Amalco as described in paragraph 23, above, in order to make the return of income and the application for a refund referred to in Ruling C, above, will be considered to have been made by NROco, and Amalco will be entitled to receive the refund referred to in Ruling C, above, from the Minister of National Revenue.

E. Subsections 69(5) and 84(2) will apply in respect of the winding-up of Amalco as described in paragraph 23, 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) exceeds the amount, if any, by which the PUC in respect of its common shares is reduced on the distribution.

F. Subject to subsection 18(4) of the Act and provided that Canco has a legal obligation to pay interest on the Canco Debts and that Canco continues to use the proceeds of this 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 Partnership pursuant to the Canco Debts 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.

G. Provided that the interest paid or credited by Canco to the Partnership pursuant to the Canco Debts 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%.

H. 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 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.

Comments

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, including the possible application of subsections 214(6) and (9) to the sale of the accrued interest on US Parent Loan and Canco Debt C by US Parent to the Partnership;

(b) the determination of the effective date of the amalgamation referred to in paragraph 21 is under applicable corporate law (i.e., whether the time of such an amalgamation can be specified to be before or after a specific time or transaction on a particular date for the purposes of the XXXXXXXXXX and the common law);

(c) 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;

(d) the tax treatment of any interest owing from the government of Canada in respect of the tax refunds described in paragraph 23, above, that is, whether such interest is subject to Part I tax in the hands of Amalco or Part XIII tax in the hands of US Parent and US Sub; or

(e) 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