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: Whether the transfer of debt from Canco (owing to NROco) to a limited partnership (established in XXXXXXXXXX but managed out of the US), where NROco's sister corporation is the general partner and NROco's parent corporation is 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 and the related Issue Sheet.
XXXXXXXXXX 2001-010181
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX ("NROco") (XXXXXXXXXX)
XXXXXXXXXX ("Canco") (XXXXXXXXXX)
This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayers.
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 with respect to Canco or a related person.
In this letter, the following terms have the meanings specified:
(i) XXXXXXXXXX;
(ii) "Act" means the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended;
(iii) "ACB" means "adjusted cost base" as defined in section 54 of the Act;
(iv) "Canco Debt" means the indebtedness owing by Canco to NROco in the aggregate amount of approximately $XXXXXXXXXX, plus accrued and unpaid interest;
(v) "NRO" means "non-resident-owned investment corporation" as defined in subsection 133(8) of the Act;
(vi) XXXXXXXXXX;
(vii) "PUC" means "paid-up capital" as defined in subsection 89(1) of the Act;
(viii) "taxable Canadian corporation" has the meaning assigned in subsection 89(1) of the Act; and
(ix) "Treaty" means the Canada-United States Tax Convention, (1980).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. XXXXXXXXXX ("Parent") is a corporation incorporated under the laws of the state of XXXXXXXXXX and is a resident of the United States for purposes of the Act and the Treaty. Parent is a public corporation with its shares listed on the XXXXXXXXXX Stock Exchange.
2. XXXXXXXXXX ("Holdco") is a corporation incorporated under the laws of the state of XXXXXXXXXX and is a resident of the United States for purposes of the Act and the Treaty. Holdco is a wholly-owned subsidiary of Parent.
3. Parent and Holdco do not carry on any business in Canada, and have no permanent establishment in Canada, for purposes of the Act or the Treaty.
4. Canco is a taxable Canadian corporation incorporated under the XXXXXXXXXX. Canco is a wholly-owned subsidiary of Holdco.
5. NROco is a corporation incorporated under the XXXXXXXXXX and is resident in Canada for purposes of the Act. NROco is a wholly-owned subsidiary of Holdco. NROco has not issued any bonds, debentures or other funded indebtedness. NROco has elected within the prescribed time and in the prescribed manner to be taxed as a NRO under section 133 of the Act.
6. NROco's issued and outstanding share capital consists of XXXXXXXXXX common shares. The common shares were issued for an aggregate subscription price of $XXXXXXXXXX. On XXXXXXXXXX separate occasions, NROco's stated capital maintained in respect of its common shares was increased, in the aggregate, by $XXXXXXXXXX, resulting in taxable dividends deemed to have been paid under subsection 84(1) of the Act, to which paragraph 53(1)(b) of the Act applied. Thus, the ACB and the PUC of NROco's common shares to Holdco is $XXXXXXXXXX.
7. NROco's only material assets consist of its Canco Debt, its allowable refund under section 133 and its cash deposits maintained with a Canadian financial institution.
8. The Canco Debt arose as a result of XXXXXXXXXX separate credit agreements entered into with various lenders on XXXXXXXXXX , each of which were subsequently assigned by the lenders to NROco on XXXXXXXXXX, respectively.
9. Each of Canco's and NROco's taxation year ends on XXXXXXXXXX.
Proposed Transactions
10. Before XXXXXXXXXX, a corporation ("Subco") will be incorporated under the laws of the state of XXXXXXXXXX. Subco will be a resident of the United States for the purposes of the Act and the Treaty and it will be a wholly-owned subsidiary of Holdco.
11. Before XXXXXXXXXX and subsequent to the incorporation of Subco, Subco and Holdco will form a limited partnership governed by the laws of a Canadian province (the "Partnership"), with Subco as the general partner and Holdco as the limited partner.
12. Subco and Holdco 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 corporation for the purposes of the Code.
13. On or before XXXXXXXXXX, NROco will increase its stated capital maintained in respect of its common shares by an amount equal to its "cumulative taxable income", within the meaning of the definition in subsection 133(9) of the Act, at that time (i.e., for NROco's taxation year ended XXXXXXXXXX).
14. After XXXXXXXXXX, Canco, NROco, Parent, Holdco, Subco, and the Partnership will enter into a reorganization agreement, pursuant to which they will agree to effect the events and transactions described below.
15. On or about the first day ("Day One") of NROco's taxation year which begins on XXXXXXXXXX, NROco will increase its stated capital maintained in respect of its common shares by an amount equal to its "cumulative taxable income", within the meaning of the definition in subsection 133(9) of the Act, at that time (i.e., for NROco's taxation year ended XXXXXXXXXX).
16. Also on Day One, NROco will increase its stated capital maintained in respect of its common shares by an amount equal to the excess, if any, of the value of the property of NROco over the PUC of the common shares of NROco at that time (after taking into account the proposed transaction described in 15 above).
17. On the following day ("Day Two"), Holdco will transfer XXXXXXXXXX% of its common shares of NROco to Subco which, in turn, will make a capital contribution of these shares to the Partnership. At that same time, Holdco will make a capital contribution of the remaining XXXXXXXXXX% of its common shares of NROco directly to the Partnership. Holdco and Subco will notify the Minister in accordance with subsections 116(1) or 116(3) of the Act with respect to the transfer of the shares of NROco.
18. Also on Day Two, Canco will pay the interest which will have accrued on the Canco Debt and included in its income for the year ended XXXXXXXXXX (approximately $XXXXXXXXXX) to NROco.
19. Also on Day Two, NROco and the Partnership will enter into a winding-up and distribution agreement (the "Agreement"), effective on Day Two, but after the transactions described in 17 and 18 above. Pursuant to the Agreement, the beneficial ownership of all of NROco's property and all of NROco's liabilities will become property and liabilities of the Partnership. Any income earned by NROco for the period that begins XXXXXXXXXX and ends on Day Two (the effective date of the wind-up) will be included in its cumulative taxable income for that period.
20. On the following day ("Day Three"), NROco will, in the manner prescribed by section 501 of the Income Tax Regulations, revoke its election to be taxed as an NRO. NROco will elect to have section 134.2 apply, in a timely manner, by filing an election with the Canada Customs and Revenue Agency (the "CCRA") specifying a time of XXXXXXXXXX on Day Three (the "Elected Time") resulting in a taxation year-end of NROco ending immediately before the Elected Time (i.e., at the end of Day Two).
21. Prior to the completion of the winding-up described in paragraph 19, NROco will undertake to
(a) make the revocation and election described in paragraph 20;
(b) make all required remittances and filings with the CCRA in respect of NROco's taxation years ending XXXXXXXXXX and immediately before the Elected Time and will apply for a refund of NROco's allowable refund for such years, in the manner and within the time referred to in subsection 133(6) of the Act;
(c) make all required remittances to the CCRA in connection with the dividends deemed to have been paid in paragraphs 13 and 15 (and 16, if any) (Holdco will make such remittances directly);
(d) make all filings and take all other actions necessary to obtain any tax refunds to which NROco will be entitled;
(e) receive any tax refunds to which NROco is entitled and forthwith remit these amounts to the Partnership; and
(f) retain sufficient funds to permit it to make these payments and perform these activities.
Agents of NROco will, in due course, ensure that remittances and filings take place as required and that the legal ownership of NROco's property is transferred. Agents of NROco will, in a timely manner, make all required remittances to the CCRA in connection with interest accruing on the tax refunds in respect of which Holdco and Subco have become the beneficial owners pursuant to the winding-up agreement between NROco and the Partnership. Once the tax refunds have been obtained, NROco will be dissolved and will file a terminal return for the period from the commencement of its taxation year to the date of dissolution. Holdco and Subco will notify the Minister in accordance with subsections 116(1) or 116(3) of the Act with respect to the disposition by the Partnership of its shares of NROco as a result of the dissolution.
22. Thereafter, in accordance with the provisions of the Canco Debt, Canco will pay interest on the Canco Debt to the Partnership.
23. The Partnership will either distribute or invest the interest income it earns from time to time from the Canco Debt (including any excess cash it acquires as a result of the transaction described in paragraph 19), either within or outside of Canada.
24. 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 of Canada. The books and records will be kept outside of Canada, and all management and investment decisions will be made outside of Canada.
25. Canco's "outstanding debt to specified non-residents", within the meaning of subsection 18(5) of the Act, will not change as a result of the transactions described herein. For greater certainty, the Canco Debt, or any debt substituted therefor, will be included in the computation of such outstanding debt to specified non-residents.
Purpose of the Proposed Transactions
26. The purpose of the proposed transactions is to unwind and replace the NROco financing structure with an economically similar structure in a manner which does not result in adverse Canadian or United States income tax consequences.
Rulings
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 as described above, we rule as follows:
A. Pursuant to subsection 134.2(1), NROco's taxation year commencing on XXXXXXXXXX will be deemed to have ended immediately before the Elected Time, with the result that:
(a) NROco will be a NRO throughout such taxation year (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 Elected Time); and
(b) provided that NROco's return of income for such year, and an application for a refund of its allowable refund for such year, is made by NROco in the manner and within the time referred to in subsection 133(6), as described in 21 above, subsection 133(6) will be applicable and the Minister of National Revenue shall pay such refund to NROco.
B. Subsections 69(5) and 84(2) will apply in respect of the winding-up of NROco as described in 19 above, such that, during NROco's taxation year commencing on XXXXXXXXXX and ending immediately before the Elected Time:
(a) NROco 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;
(b) the Partnership will be deemed to have acquired the property referred to in (a) above, for the amount referred to in (a) above; and
(c) NROco will be deemed to have paid a dividend to the Partnership, and the Partnership will be deemed to have received a dividend from NROco, in the amount, if any, by which the amount referred to in (a) above exceeds the amount, if any, by which the PUC in respect of the common shares of NROco is reduced on the distribution.
C. Subject to subsection 18(4) of the Act and provided that Canco has a legal obligation to pay interest on the Canco Debt and that Canco continues to use the proceeds of the Canco 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 Debt 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.
D. Provided that the interest paid or credited by Canco to the Partnership pursuant to the Canco Debt is not attributable to a business carried on in Canada by the Partnership, Holdco, or Subco 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 Holdco and Subco. 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 pursuant to the Canco Debt will be subject to withholding tax under Part XIII of the Act at the rate of 10%. Holdco and Subco will be primarily liable for such withholding tax.
E. 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, which are based on the Act in its present form and do not take into account any proposed amendments thereto, 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 (other than the payment of interest pursuant to the Canco Debt) are completed by XXXXXXXXXX.
1) 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 21 above, that is, whether such interest is subject to Part I tax in the hands of NROco or Part XIII tax in the hands of Subco and Holdco; or
(d) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
2) The determination of whether the shares of NROco or whether the Canco Debt would constitute taxable Canadian property for purposes of the Act is a question of fact. Since you are of the view that the fair market value of the Canco Debt is equal to or less than its adjusted cost base, you have not requested and we are not providing a ruling with respect to this issue. However, where a non-resident-owned investment corporation's only asset is an interest bearing debt obligation of a Canadian corporation, we would generally be of the view that the asset would constitute property used or held by the corporation in a business carried on in Canada and it would constitute taxable Canadian property for purposes of the Act.
Where this is the case, shares of that non-resident-owned investment corporation would also constitute taxable Canadian property.
Yours truly,
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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