2001 Ruling 2001-0089903 - Wind-up of NRO Financing Structure

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Will certain transactions undertaken to unwind an NRO structure permit debts owed to the NRO to be transferred to a limited partnership and interest on those debts to continue to be deductible by Canco?

Position:

Yes. The transactions have the effect of winding up the NRO into the limited partnership and the interest on the debts involved will continue to be deductible to Canco (subject to the thin capitalization rules).

Reasons: See Issue Sheet.

XXXXXXXXXX 							2001-008990

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("Canco")
XXXXXXXXXX ("NRO One")
XXXXXXXXXX ("NRO Two")
XXXXXXXXXX ("US Parent")
XXXXXXXXXX ("US Sub")
a limited partnership to be formed under the laws of XXXXXXXXXX ("Partnership")

This is in reply to your letter of XXXXXXXXXX, and your facsimile 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

(i) is in an earlier income tax return of Canco, NRO One, NRO Two or a related person;

(ii) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed income tax return of Canco, NRO One, NRO Two or a related person;

(iii) is under objection by Canco, NRO One, NRO Two or a related person;

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

(v) is 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, and, 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) "business" has the meaning assigned by subsection 248(1) of the Act;

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

(e) "Canadian property" has the meaning assigned by subsection 133(8) of the Act;

(f) "Canco Debt A" means the indebtedness owing by Canco to NRO One in the amount of $XXXXXXXXXX pursuant to an agreement entered into between XXXXXXXXXX and Canco in XXXXXXXXXX and subsequently assigned to NRO One on XXXXXXXXXX;

(g) "Canco Debt B" means the indebtedness owing by Canco to NRO Two in the amount of $XXXXXXXXXX pursuant to an agreement entered into between XXXXXXXXXX and Canco on XXXXXXXXXX and subsequently assigned to NRO Two on XXXXXXXXXX;

(h) "CGDA" means "capital gains dividend account" as defined in subsection 133(8) of the Act;

(i) "carrying on business" has the meaning assigned by its extended meaning under subsection 253(1) of the 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 as defined under subsection 133(8) of the Act;

(m) XXXXXXXXXX;

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

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

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

(q) "US Treaty" means the Canada-United States Income Tax Convention (1980).

Facts

1. Canco is a taxable Canadian corporation incorporated under the XXXXXXXXXX with a fiscal year end of XXXXXXXXXX and is in the XXXXXXXXXX business.

2. The authorized capital of Canco consists of an unlimited number of Class A shares, Class B shares and common shares.

At present, the shareholders of Canco and Canco's outstanding shares are as follows:

Shareholder
Class of Shares
Number of Shares
Stated Capital
US Parent
Common
XXXXXXXXXX
$ XXXXXXXXXX
XXXXXXXXXX
Common
XXXXXXXXXX
XXXXXXXXXX
Total Common

XXXXXXXXXX
$ XXXXXXXXXX
NRO One
Class A
XXXXXXXXXX
$XXXXXXXXXX
US Parent
Class A
XXXXXXXXXX
XXXXXXXXXX
Total Class A

XXXXXXXXXX
$XXXXXXXXXX
NRO Two
Class B
XXXXXXXXXX
$ XXXXXXXXXX
Total Class B

XXXXXXXXXX
$ XXXXXXXXXX

In connection with the Canco shareholders noted above, XXXXXXXXXX is a corporation formed under the laws of XXXXXXXXXX. It is wholly owned, indirectly, by US Parent.

3. NRO One is an NRO formed under the XXXXXXXXXX with a fiscal year end of XXXXXXXXXX. NRO One's status as an NRO was the subject of an advance income tax ruling dated XXXXXXXXXX, 1992.

NRO One is wholly owned by US Parent and it elected within the prescribed time and in the prescribed manner to be taxed as a NRO under section 133 of the Act and has not rescinded that election.

4. NRO One's issued and outstanding share capital is made up of XXXXXXXXXX Class A preferred shares that have a redemption amount of $XXXXXXXXXX per share and XXXXXXXXXX common shares issued for cash of $XXXXXXXXXX. On XXXXXXXXXX, NRO One reduced stated capital on its common shares by $XXXXXXXXXX and distributed that amount as a cash distribution to US Parent.

The Class A preferred shares have been issued over a number of years by way of stock dividends. NRO One received a cash contribution to capital of $XXXXXXXXXX from US Parent on XXXXXXXXXX. NRO One issued no shares in connection with this contribution.

The PUC of the common shares is $XXXXXXXXXX in aggregate (original subscription price of $XXXXXXXXXX less PUC reduction of $XXXXXXXXXX). The ACB of the common shares is $XXXXXXXXXX (PUC of $XXXXXXXXXX plus $XXXXXXXXXX contribution to capital). The PUC and ACB of the Class A preferred shares is $XXXXXXXXXX in aggregate.

5. NRO Two is an NRO formed under the XXXXXXXXXX with a fiscal year end of XXXXXXXXXX. NRO Two's status as an NRO was the subject of an advance income tax ruling dated XXXXXXXXXX, 1998.

NRO Two is wholly owned by US Parent and it elected within the prescribed time and in the prescribed manner to be taxed as an NRO under Section 133 of the Act and has not rescinded that election.

6. NRO Two's issued and outstanding share capital is made up of XXXXXXXXXX common shares issued for cash of $XXXXXXXXXX and XXXXXXXXXX Class A preferred shares that have a redemption amount of $XXXXXXXXXX per share. The Class A preferred shares have been issued over a number of years by way of stock dividends. NRO Two received a cash contribution to capital of $XXXXXXXXXX from US Parent on XXXXXXXXXX. NRO Two issued no shares in connection with this contribution.

The PUC of the common shares is $XXXXXXXXXX in aggregate. The ACB of the common shares is $XXXXXXXXXX (PUC of $XXXXXXXXXX plus $XXXXXXXXXX contribution to capital). The PUC and ACB of the Class A preferred shares is $XXXXXXXXXX in aggregate.

7. NRO One's only assets consist of Canco Debt A, interest receivable, XXXXXXXXXX Canco Class A Preferred shares in the amount of $XXXXXXXXXX and cash deposits maintained with a Canadian financial institution. NRO One subscribed at various times for the Canco Class A shares for cash. The Canco Class A shares are redeemable and retractable at $XXXXXXXXXX per share.

8. NRO Two's only assets consist of Canco Debt B, interest receivable, XXXXXXXXXX Canco Class B Preferred Shares in the amount of $XXXXXXXXXX and cash deposits maintained with a Canadian financial institution. NRO Two subscribed at various times for the Canco Class B shares for cash. The Canco Class B shares are redeemable and retractable at $XXXXXXXXXX per share.

9. US Parent and US Sub are corporations formed under the law of the state of XXXXXXXXXX and qualify as residents of the United States for purposes of the US Treaty. US sub is wholly owned by US Parent. US Parent and US sub do not carry on any business in Canada and do not have a permanent establishment in Canada for purposes of the US Treaty.

10. The FMV of Canco Debt A at XXXXXXXXXX is estimated to be $XXXXXXXXXX greater than its face amount of $XXXXXXXXXX.

11. The FMV of Canco Debt B is estimated to be equal to its face amount of $XXXXXXXXXX.

12. On XXXXXXXXXX, NRO One and NRO Two paid stock dividends of $XXXXXXXXXX and $XXXXXXXXXX respectively. These stock dividends were approximately equal to the incomes of NRO One and NRO Two for their years ended XXXXXXXXXX. These dividends are reflected in the share amounts referred to in paragraphs 4 and 6 above.

13. Canco paid all interest accrued to XXXXXXXXXX on Canco Debt A to NRO One on XXXXXXXXXX. The interest paid was $XXXXXXXXXX. On XXXXXXXXXX, NRO One used the cash interest payment received to subscribe for XXXXXXXXXX Class A shares of Canco.

14. Canco paid all interest accrued to XXXXXXXXXX on Canco Debt B to NRO Two on XXXXXXXXXX. The interest paid was $XXXXXXXXXX. On XXXXXXXXXX, NRO Two used the cash interest payment received to subscribe for XXXXXXXXXX Class B shares of Canco.

Proposed Transactions

15. Canco will pay interest accruing from XXXXXXXXXX to XXXXXXXXXX on Canco Debt A to NRO One on or about XXXXXXXXXX. The interest is estimated to amount to $XXXXXXXXXX . On XXXXXXXXXX, NRO One will use the cash interest payment to subscribe for XXXXXXXXXX Class A shares of Canco.

16. Canco will pay interest accruing from XXXXXXXXXX to XXXXXXXXXX on Canco Debt B to NRO Two on or about XXXXXXXXXX. The interest is estimated to amount to $XXXXXXXXXX. On XXXXXXXXXX, NRO Two will use the cash interest payment to subscribe for XXXXXXXXXX Class B shares of Canco.

17. NRO One will increase its stated capital in respect of its common shares outstanding by $XXXXXXXXXX in order to convert the $XXXXXXXXXX of contributed surplus into PUC. This will occur on or before XXXXXXXXXX.

18. NRO Two will increase its stated capital in respect of common shares outstanding by $XXXXXXXXXX in order to convert the $XXXXXXXXXX of contributed surplus into PUC. This will occur on or before XXXXXXXXXX.

19. Before XXXXXXXXXX, each of NRO One and NRO Two will request the Minister of National Revenue to concur with a change in the fiscal period of NRO One and NRO Two to XXXXXXXXXX, effective for the period ending XXXXXXXXXX.

20. By XXXXXXXXXX:

(i) NRO One will pay a stock dividend to US Parent by issuing further Class A shares. The amount of the stock dividend is estimated to be $XXXXXXXXXX.

(ii) NRO Two will pay a stock dividend to US Parent by issuing further Class A shares. The amount of the stock dividend is estimated to be $XXXXXXXXXX.

21. With respect to the stock dividends paid in paragraphs 20(i) and 20(ii) above, US Parent will provide NRO One and NRO Two with the cash required to satisfy the 10% Part XIII withholding tax that will apply to the dividends. That tax will be remitted to CCRA by or on behalf of NRO One and NRO Two on or before XXXXXXXXXX.

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

23. 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 Canadian corporation for the purposes of the Code.

24. Before XXXXXXXXXX, Canco, NRO One, NRO Two, US Parent, US Sub and the Partnership will enter into a reorganization agreement, pursuant to which they will agree to effect the events and transactions described below.

25. In XXXXXXXXXX, Canco will pay to NRO One all interest that would accrue on Canco Debt A through XXXXXXXXXX ("Canco Debt A Regular Interest") plus the one day's interest that will accrue on Canco Debt B for the day of XXXXXXXXXX ("Canco Debt A Prepaid Interest"). Canco Debt A Regular Interest plus Canco Debt A Prepaid Interest will be approximately $XXXXXXXXXX. At the same time, Canco will prepay a sufficient amount of interest on Canco Debt A ("Canco Debt A Additional Prepaid Interest") such that the interest remaining to be paid on Canco Debt A from XXXXXXXXXX through to the maturity of Canco Debt A in XXXXXXXXXX will cause the FMV of Canco Debt A to be equal to its face amount of $XXXXXXXXXX at the time Canco Debt A is disposed of by NRO One on XXXXXXXXXX. Canco Debt A Additional Prepaid Interest will be approximately $XXXXXXXXXX .

In accordance with paragraphs 18(9)(a) and 18(9)(b) of the Act, Canco will not deduct any amount of the Canco Debt A Prepaid Interest or the Canco Debt A Additional Prepaid Interest from its income until the taxation year to which that interest can reasonably be considered to relate.

26. In XXXXXXXXXX, Canco will pay to NRO Two all interest that would accrue on Canco Debt B to XXXXXXXXXX ("Canco Debt B Regular Interest") plus the one day's interest that would accrue on Canco Debt B for the day of XXXXXXXXXX ("Canco Debt B Prepaid Interest"). At the same time (but only if the FMV of Canco Debt B on XXXXXXXXXX would otherwise exceed its face amount), Canco may prepay a sufficient amount of interest on Canco Debt B ("Canco Debt B Additional Prepaid Interest") such that the interest remaining to be paid on Canco Debt B from XXXXXXXXXX through to the maturity of Canco Debt B will cause the FMV of Canco Debt B to be equal to its face amount at the time Canco Debt B is disposed of by NRO Two on XXXXXXXXXX.

In accordance with paragraphs 18(9)(a) and 18(9)(b) of the Act, Canco will not deduct any amount of the Canco Debt B Prepaid Interest or the Canco Debt B Additional Prepaid Interest from its income until the taxation year to which that interest can reasonably be considered to relate.

27. On XXXXXXXXXX, NRO One and NRO Two will use the cash from the interest payments referred to in paragraphs 25 and 26 above to subscribe for Class A and Class B shares of Canco respectively.

28. On XXXXXXXXXX:

(i) NRO One will pay a stock dividend to US Parent by issuing further Class A shares. The amount of the stock dividend will approximate the amount of interest received in the tax year ended XXXXXXXXXX, including the Canco Debt A Prepaid Interest and the Canco Debt A Additional Prepaid Interest. The amount of the stock dividend will approximate $XXXXXXXXXX.

(ii) NRO Two will pay a stock dividend to US Parent by issuing further Class A shares. The amount of the stock dividend will approximate $XXXXXXXXXX, being the interest income on Canco Debt B for the period ending on XXXXXXXXXX, including the Canco Debt B Prepaid Interest. The stock dividend will be increased by the amount of any Canco Debt B Additional Prepaid Interest.

29. With respect to the stock dividends described in paragraphs 28 (i) and (ii) above, US Parent will provide NRO One and NRO Two with the cash required to satisfy the 10% Part XIII withholding tax that will apply to the dividends. That tax will be remitted to CCRA by or on behalf of NRO One and NRO Two on or before XXXXXXXXXX.

30. On XXXXXXXXXX, or shortly thereafter, NRO One and NRO Two will each revoke its election to be taxed as an NRO under section 133 of the Act.

NRO One and NRO Two will also each elect to have section 134.2 of the Act apply and will specify an elected time that is immediately after midnight on XXXXXXXXXX. As a result, NRO One and NRO Two will each have a taxation year that ends on XXXXXXXXXX (a one day year), and a new taxation year that commences on XXXXXXXXXX. NRO One and NRO Two will also each elect under section 134.1 of the Act to with respect to the tax year commencing on XXXXXXXXXX.

31. On XXXXXXXXXX:

(i) US Parent will contribute XXXXXXXXXX % of the common and Class A shares of NRO One and NRO Two to US Sub in exchange for common shares issued by US Sub; and

(ii) US Parent and US Sub will then contribute their shares of NRO One and NRO Two to Partnership as a capital contribution.

As the shares of NRO One and NRO Two are TCP (due to the preferred shares of Canco that NRO One and NRO Two own), US Parent and US Sub will apply for tax clearance certificates as required under section 116 of the Act with respect to the dispositions of the shares of NRO One and NRO Two.

32. On XXXXXXXXXX, immediately after shares of NRO One and NRO Two have been contributed to the Partnership:

(i) Partnership as the sole shareholder of NRO One will resolve to wind-up NRO One by way of voluntary dissolution, effective XXXXXXXXXX. As a part of the liquidation/dissolution, NRO One will execute a general conveyance agreement effective XXXXXXXXXX, to distribute all of its property and liabilities to its sole shareholder as a result thereof; and

(ii) Partnership as the sole shareholder of NRO Two will resolve to wind-up NRO Two by way of voluntary dissolution, effective XXXXXXXXXX. As a part of the liquidation/dissolution, NRO Two will execute a general conveyance agreement effective XXXXXXXXXX, to distribute all of its property and liabilities to its sole shareholder as a result thereof.

Prior to completion of the winding up, NRO One and NRO Two will undertake to:

(a) make all required remittances and filings with CCRA in respect of their taxation years ending on XXXXXXXXXX and at the time of dissolution and an application for a refund of NRO One's and NRO Two's allowable refund for each 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 dividends paid as set out above;

(c) make all filings and take all other actions necessary to obtain any tax refunds to which NRO One and NRO Two are entitled;

(d) receive any tax refunds to which NRO One and NRO Two are entitled and forthwith remit these amounts to the Partnership, and

(e) retain sufficient funds to permit NRO One and NRO Two to make any such payments and perform these activities.

Pursuant to the general conveyance agreement, all of the property of NRO One and of NRO Two will become the property of the Partnership as at XXXXXXXXXX, and all of the liabilities of NRO One and NRO Two will become liabilities of the Partnership as of that same time and date.

As the shares of NRO One and NRO Two are TCP (due to the preferred shares of Canco that NRO One and NRO Two own), the Partnership will apply for tax clearance certificates as required under section 116 of the Act with respect to the disposition of the shares of NRO One and NRO Two during the winding-up.

Once the tax refunds have been obtained, NRO One and NRO Two will be dissolved and will each file a terminal tax return for the period commencing on XXXXXXXXXX to the date of dissolution.

33. As a result of the distribution of Canco Debt A and Canco Debt B to the Partnership described in paragraph 32 above, Canco will pay all future interest on Canco Debt A and on the Canco Debt B to the Partnership. 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).

34. 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 Canada. The books and records will be kept outside of Canada, and all management and investment decisions will be made outside Canada.

Purpose and Tax Consequences of the Proposed Transactions

35. The purpose of the proposed series of transactions is to liquidate and dissolve NRO One and NRO Two, and to refinance other inter-company debts, without creating adverse Canadian or United States income tax consequences. This restructuring is undertaken as a result of changes to the Act made by S.C. 2001, c. 17, specifically, the addition of subparagraph (i)(ii) to the definition of "non-resident-owned investment corporation" found in subsection 133(8) of the Act. This new subparagraph provides that a corporation ceases to be an NRO at the end of the corporation's last taxation year beginning before XXXXXXXXXX.

36. In particular, the proposed transactions will permit

(i) NRO One and NRO Two to recover substantially all of the allowable refundable tax on hand relating to income earned in the tax years ending on XXXXXXXXXX, and

(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 Requested

A. Provided that US Parent and US Sub do not become resident in Canada and do not become foreign affiliates of a taxpayer resident in Canada:

(i) NRO One and NRO Two will each continue to qualify as an NRO through its taxation year ended on XXXXXXXXXX (and, for greater certainty, none of the proposed transactions will cause NRO One and/or NRO Two to cease to qualify as an NRO prior to XXXXXXXXXX).

(ii) Provided that NRO One's and NRO Two's returns of income for taxation years ending XXXXXXXXXX, and at the time of their dissolution are made, and an application for a refund of their allowable refund for such taxation years is made, by NRO One and NRO Two in the manner and within the time referred to in subsection 133(6), subsection 133(6) will be applicable.

B. The $XXXXXXXXXX increase by NRO One in its stated capital with respect to its common shares will not be deemed to be a dividend under subsection 84(1) of the Act pursuant to paragraph 84(1) (c.3) (ii) of the Act.

C. The $XXXXXXXXXX increase by NRO Two in its stated capital with respect to its common shares will not be deemed to be a dividend under subsection 84(1) of the Act pursuant to paragraph 84(1)(c.3) (ii) of the Act.

D. NRO One will include in its income for the taxation year ending XXXXXXXXXX , the amount of Canco Debt A Prepaid Interest and Canco Debt A Additional Prepaid Interest and any other interest received in that taxation year pursuant to paragraph 12(1)(c) and subsection 12(3) of the Act. Any such interest that is included in the taxation year ending XXXXXXXXXX , will not be included in the income of NRO One in a subsequent taxation year by virtue of paragraph 12(1)(c) and subsection 12(3) of the Act.

E. NRO Two will include in its income for the taxation year ending XXXXXXXXXX , the amount of Canco Debt B Prepaid Interest and Canco Debt B Additional Prepaid Interest (if applicable) and any other interest received in that taxation year, pursuant to paragraph 12(1)(c) and subsection 12(3) of the Act. Canco Debt B Prepaid Interest and Canco Debt B Additional Prepaid Interest that is included in the taxation year ending XXXXXXXXXX , will not be included in the income of NRO Two in a subsequent taxation year by virtue of paragraph 12(1)(c) and subsection 12(3) of the Act.

F. The prepayment of interest by Canco that results in Canco Debt A Prepaid Interest, Canco Debt A Additional Prepaid Interest, Canco Debt B Prepaid Interest and Canco Debt B Additional Prepaid Interest (if applicable) will not result in a disposition or settlement of Canco Debt A or Canco Debt B by NRO One or NRO Two respectively.

G. Subsections 69(5) and 84(2) will apply in respect of the winding-up/dissolution of NRO One described in paragraph 32 above such that:

(i) NRO One 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;

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

(iii) NRO One will be deemed to have paid a dividend to the Partnership and the Partnership will be deemed to have received a dividend from NRO One, in the amount, if any, by which the amount referred to in (i) above exceeds the amount by which the PUC in respect of NRO One's common shares and Class A shares is reduced on the distribution.

H. Subsections 69(5) and 84(2) will apply in respect of the winding-up/dissolution of NRO Two described in paragraph 32 above such that:

(i) NRO Two 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;

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

(iii) NRO Two will be deemed to have paid a dividend to the Partnership and the Partnership will be deemed to have received a dividend from NRO Two, in the amount, if any, by which the amount referred to in (i) above exceeds the amount by which the PUC in respect its common shares and Class A shares is reduced on the distribution.

I. Subject to subsection 18(4) of the Act and provided that Canco has a legal obligation to pay interest on Canco Debt A and Canco Debt B, 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 Canco Debt A and Canco Debt B, 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.

J. Provided that the interest paid or credited by Canco to the Partnership pursuant to Canco Debt A and Canco Debt B 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 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 Canco Debt A and Canco Debt B will be subject to withholding tax under Part XIII of the Act at the rate of 10%.

K. 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 Canada Customs and Revenue Agency 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,

(b) 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,

(c) the tax treatment of any interest owing from the government of Canada in respect of the tax refunds described in paragraph 31, above, that is, whether such interest is subject to Part I tax in the hands of NRO One and NRO Two or Part XIII tax in the hands of US Parent and US Sub, or

(d) 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