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:
Does a guarantee to pay the obligations of one corporation to another constitute security for a loan within the meaning of subsection 146(10)?
Position: No, as long as the obligations guaranteed are not loans.
Reasons:
Subsection 146(10) will only apply if the debt which is guaranteed by the pledge of the assets of an RRSP is a loan (i.e. a transaction in which money has been lent so that there is a borrower-lender relationship created, not just a potential debtor-creditor relationship).
XXXXXXXXXX 2001-009745
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX ("Mr. K") (XXXXXXXXXX), XXXXXXXXXX ("KCo") (XXXXXXXXXX) and XXXXXXXXXX ("Investco")(XXXXXXXXXX)
This is in reply to your letters and representations, the most recent dated XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge numerous telephone conversations concerning this request.
Except where specifically otherwise indicated, words and phrases in this letter have the same meaning for the purposes of this ruling application as are ascribed to such words and phrases in the Income Tax Act, R.S.C.1985, c. C-44 as amended (the "Act"). Unless otherwise specified, all section references are references to the Act.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Facts
1. Mr. K is an individual residing at XXXXXXXXXX Mr. K's social insurance number is XXXXXXXXXX and he files his income tax return at the XXXXXXXXXX Tax Centre.
2. KCo is a corporation incorporated pursuant to the laws of the Province of XXXXXXXXXX and has its registered office at XXXXXXXXXX . KCo's Business Number is XXXXXXXXXX; its year end is XXXXXXXXXX and it files its income tax returns at the XXXXXXXXXX Tax Centre.
3. Investco is a corporation incorporated pursuant to the laws of the Province of XXXXXXXXXX and has its registered office at XXXXXXXXXX. Investco's Business Number is XXXXXXXXXX and it files its income tax returns at the XXXXXXXXXX Tax Centre.
4. Mr. K owns all of the issued shares in the capital stock of KCo, other than the Class XXXXXXXXXX Shares.
5. The shareholders of Investco deal at arm's length with Mr. K.
6. In XXXXXXXXXX, Investco acquired XXXXXXXXXX Class XXXXXXXXXX Shares in the capital stock of KCo at a price of $XXXXXXXXXX each.
7. The Class XXXXXXXXXX Shares in the capital stock of KCo are redeemable shares. KCo has agreed to redeem not less than $XXXXXXXXXX of its Class XXXXXXXXXX Shares each month and, if it is legally unable to do so, Mr. K has agreed to purchase the number of Class XXXXXXXXXX Shares from Investco, which ought to have been redeemed.
8. As of XXXXXXXXXX, a total of XXXXXXXXXX Class XXXXXXXXXX Shares or KCo had been redeemed so that Investco owned XXXXXXXXXX Class XXXXXXXXXX Shares in the capital stock of KCo at that time. There are no other holders of Class XXXXXXXXXX Shares in the capital stock of KCo.
9. KCo may also be required to make quarterly redemptions of Class XXXXXXXXXX shares based upon a percentage of its after-tax earnings. As at the date of this ruling, such a quarterly redemption has not been required.
10. KCo is also required to pay dividends on the outstanding Class XXXXXXXXXX Shares. The following dividends have been declared and paid:
XXXXXXXXXX.
11. Mr. K has guaranteed the obligations of KCo to pay dividends and to redeem Class XXXXXXXXXX Shares to Investco and has agreed to be liable to Investco as a principal debtor with respect to all debts, promises and obligations of KCo to Investco. Debts, promises and obligations of KCo include: an obligation to purchase life insurance on the life of Mr. K; a promise to use any proceeds on the life insurance to pay any unpaid dividends on the Class XXXXXXXXXX Shares and to redeem any outstanding Class XXXXXXXXXX Shares; an obligation to provide financial and business information about KCo and certain subsidiaries of KCo, including banking information, financial statements and the status of accounts with any government agency; an undertaking not to issue cheques to certain subsidiaries of KCo without the approval of the principal shareholders of Investco; and an undertaking by KCo not to become involved in new business ventures.
12. Mr. K has personally made other various covenants and agreements in favour of Investco (such as not personally becoming involved in other businesses, remaining as the sole director of KCo, and ensuring KCo performs its obligations to Investco) none of which oblige Mr. K to repay any money or other property advanced as a loan to Mr. K or KCo by Investco.
13. As security for the promises, obligations and guarantee of Mr. K, Mr. K has pledged in favour of Investco, and has deposited in escrow, Mr. K's KCo shares, and Mr. K has also granted a security interest in favour of Investco in respect of a XXXXXXXXXX.
14. Other than the transactions described above, Mr. K and KCo have no outstanding financial obligations in favour of Investco and neither of them have outstanding or will receive money or property advanced as a loan to Mr. K or KCo from Investco.
Proposed Transactions
15. Mr. K and Investco have agreed that, subject to the receipt of a satisfactory advance income tax ruling, Mr. K will provide registered retirement savings plans of which Mr. K is the annuitant (the "RRSPs") as additional security for the covenants, obligations and guarantees of Mr. K in favour of Investco.
16. In order to provide security in the RRSPs, inter alia, Mr. K will provide the following, to be held in escrow:
(a) undated, unconditional applications duly signed by Mr. K to redeem each of the RRSPs ("Applications for Redemption"); and
(b) undated, unconditional and irrevocable assignments and letters of direction duly signed by Mr. K, directing the payment of the proceeds from the redemption of the RRSPs to the escrow agent ("Letters of Direction").
17. The parties' intent would be that, in the event that Investco becomes entitled to realise upon the property pledged as security, the escrow agent would effect collection on the security and remit the proceeds to Investco, subject to and in accordance with the terms and conditions applicable to the security.
Purpose of the Proposed Transactions
18. The purpose of the proposed grant of security in the RRSPs is to provide additional comfort and security to Investco in respect of the potential obligations of Mr. K in its favour.
To the best of your knowledge and that of the taxpayers involved, none of the issues in respect of which the ruling is being requested are:
(i) in an earlier return of the taxpayers or a related person,
(ii) being considered by a tax services office or tax centre in connection with a previously-filed tax return of the taxpayers or a related person,
(iii) under objection by the taxpayers or a related person,
(iv) before the courts, nor
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Ruling 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, we rule as follows:
As long as none of the debts, promises, obligations, covenants and agreements referred to in 11 and 12 above constitutes a loan, the implementation of the proposed transactions, including Mr. K's granting of security in the RRSPs and Mr. K's provision for the Applications for Redemption and the Letters of Direction would not result in any amount being included in Mr. K's income for tax purposes pursuant to subsection 146(10) of the Act.
The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the Canada Revenue Agency provided that the proposed transactions are completed on or before XXXXXXXXXX .
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy & Planning Branch
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