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:
1. Borrowing to Reduce Capital.
2. Contributed Surplus for Thin Capitalization.
3. Tax consequences of proposed transactions on NRO Status.
Position:
1. Binding opinion on proposed legislation (section 20.2).
2. Provided this is the right calculation under GAAP.
3. No negative effect prior to election.
Reasons:
1. Conditions in IT 80 not met, therefore no ruling. However, draft legislation is relevant. The borrowed money is replacing capital and satisfies the adjusted equity test. The amount borrowed will be used to reduce and return paid-up capital.
2. Paragraph 8 of IT-59R3 refers to GAAP being determinative.
3. No increase in capital or other adverse impact upon NRO status.
XXXXXXXXXX 2001-010341
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling - XXXXXXXXXX ("DCO")
This is in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.
To the best of your knowledge, and that of any of the taxpayers, none of the issues involved in this ruling request is:
(i) involved in an earlier return of any of the taxpayers or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of any of the taxpayers or a related person;
(iii) under objection by any of the taxpayers or a related person;
(iv) before the courts; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Facts
1. XXXXXXXXXX ("ACO") is a U.S. corporation formed under the laws of XXXXXXXXXX. ACO is a resident of the United States of America and is not a resident of Canada.
2. XXXXXXXXXX ("BCO") was incorporated under the laws of XXXXXXXXXX. BCO is a resident of XXXXXXXXXX and is not a resident of Canada.
3. XXXXXXXXXX ("CCO") was incorporated under the laws of XXXXXXXXXX. CCO is a private corporation and a taxable Canadian corporation as defined in subsection 89(1) of the Act. The business number for the entity is XXXXXXXXXX. CCO's share capital consists of unlimited, voting class A shares ("CCO Class A Shares") and unlimited, voting class B shares ("CCO Class B Shares"). There are currently XXXXXXXXXX class A shares outstanding and XXXXXXXXXX class B shares outstanding. CCO files its return of income at the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Tax Services Office.
4. DCO was incorporated under the laws of XXXXXXXXXX. DCO elected in prescribed manner to be taxed as a "non-resident owned investment corporation" ("NRO"), as defined in subsection 133(8) of the Act, pursuant to paragraph 133(8)(e) of the Act. The business number for the entity is XXXXXXXXXX . DCO's share capital currently consists of XXXXXXXXXX authorized common shares of no-par value ("No-Par Shares") of which XXXXXXXXXX are issued and outstanding and XXXXXXXXXX authorized, common shares of $XXXXXXXXXX par value per share ("Par Shares") of which XXXXXXXXXX shares are issued and outstanding. DCO files its return of income at the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Tax Services Office.
5. XXXXXXXXXX ("ECO") was incorporated under the laws of XXXXXXXXXX. ECO is a private corporation and a taxable Canadian corporation as defined in subsection 89(1) of the Act. The business number for ECO is XXXXXXXXXX. ECO's share capital currently consists of unlimited non-voting class A special preferred shares and voting common shares. There are currently XXXXXXXXXX class A shares issued and outstanding and XXXXXXXXXX common shares issued and outstanding. ECO files its return of income at the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Tax Services Office.
6. XXXXXXXXXX ("FCO") was incorporated under the laws of XXXXXXXXXX. FCO is a private corporation and a taxable Canadian corporation as defined in subsection 89(1) of the Act. The business number for FCO is XXXXXXXXXX. FCOs share capital consists of unlimited common shares. There are currently XXXXXXXXXX common shares outstanding. FCO files its return of income at the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Tax Services Office.
7. XXXXXXXXXX.
8. XXXXXXXXXX.
9. XXXXXXXXXX.
10. BCO is indirectly owned by ACO. BCO currently owns all of the issued and outstanding common shares of DCO. The paid-up capital ("PUC"), as defined in subsection 89(1) of the Act, of the Par Shares is $XXXXXXXXXX. The PUC of the No-Par shares is $XXXXXXXXXX, which is derived as follows:
? On XXXXXXXXXX, ACO transferred XXXXXXXXXX notes totaling $XXXXXXXXXX (the "Existing Notes"), accrued interest of $XXXXXXXXXX, and CCO Class B Shares with a PUC of $XXXXXXXXXX to DCO in exchange for No-Par Shares of DCO. As a result of the transfer, the PUC of the No-Par Shares was $XXXXXXXXXX.
11. ACO was the previous owner of all the CCO Class A shares and all of the shares of DCO. As part of XXXXXXXXXX tax reorganization in XXXXXXXXXX, all the CCO Class A shares and shares of DCO were transferred to BCO.
12. BCO currently owns all of the issued and outstanding CCO Class A Shares. The carrying value of the CCO Class A Shares on BCO's accounting records is $XXXXXXXXXX, as determined under Canadian Generally Accepted Accounting Principles ("GAAP"). The amount recorded as the carrying value for accounting purposes for BCO was restricted to the carrying value of the shares for ACO before it transferred these shares to BCO. XXXXXXXXXX.
13. DCO currently owns all of the issued and outstanding CCO Class B Shares. The PUC of the CCO Class B Shares is $XXXXXXXXXX. In addition, DCO holds the Existing Notes totaling $XXXXXXXXXX. As discussed above, DCO acquired these assets in XXXXXXXXXX by issuing No-Par Shares as consideration. ACO was the previous owner of all of the CCO Class B Shares (having a PUC of $XXXXXXXXXX), the Existing Notes, and $XXXXXXXXXX in accrued interest.
14. CCO owns all of the non-voting Class A special preferred shares ("Class A Shares") and voting common shares ("Common Shares") of ECO.
15. CCO and ECO each own XXXXXXXXXX% of the voting commons shares of FCO.
16. XXXXXXXXXX.
17. XXXXXXXXXX.
18. XXXXXXXXXX.
19. XXXXXXXXXX.
20. XXXXXXXXXX.
21. XXXXXXXXXX.
22. BCO, DCO, CCO, and XXXXXXXXXX have taxation years ending on XXXXXXXXXX have taxation years ending on XXXXXXXXXX. XXXXXXXXXX.
Proposed Transactions
23. On or before XXXXXXXXXX, DCO will incorporate a corporation ("GP Co") under the laws of Canada. GP Co will be a wholly-owned Canadian subsidiary of DCO.
24. On or before XXXXXXXXXX, DCO and GP Co will establish a limited partnership formed under the laws of XXXXXXXXXX ("CP"). DCO will hold an approximate XXXXXXXXXX% interest in CP while GP Co will hold the remaining interest. GP Co will be the general partner of CP.
25. On or before XXXXXXXXXX, DCO will pay a stock dividend of $XXXXXXXXXX to BCO in order to trigger a refund of DCO's "allowable refund" of $XXXXXXXXXX as defined in subsection 133(8) of the Act in respect of the taxation year ending XXXXXXXXXX. Consequently, the PUC of DCO's Par Shares will be increased by $XXXXXXXXXX to $XXXXXXXXXX.
26. DCO will complete and file Form NR-4 with the Canada Customs and Revenue Agency ("CCRA") and withholding tax of $XXXXXXXXXX will be remitted to CCRA by the XXXXXXXXXX following the payment of the dividend (XXXXXXXXXX). XXXXXXXXXX
27. On or around XXXXXXXXXX DCO will pay a stock dividend of $XXXXXXXXXX to BCO to trigger DCO's allowable refund of $XXXXXXXXXX in respect of the taxation year ending XXXXXXXXXX. Consequently, the PUC of DCO's Par Shares will be increased by $XXXXXXXXXX to $XXXXXXXXXX. DCO will complete and file Form NR-4 with the CCRA and withholding tax of $XXXXXXXXXX will be remitted to the CCRA by XXXXXXXXXX.
28. On or after XXXXXXXXXX, pursuant to Regulation 501 of the Act, DCO will revoke its election to be taxed as a NRO under section 133 of the Act. The "elected time" (as defined in paragraph 134.2(1)(c) of the Act) will be XXXXXXXXXX. Consequently, DCO will be deemed to have a taxation year-end on XXXXXXXXXX.
29. On XXXXXXXXXX, DCO will transfer the following assets to CP on a tax-deferred basis pursuant to an election under subsection 97(2) of the Act. CCO Class B Shares and the Existing Notes. DCO will also transfer any accrued interest thereon. For each asset transferred pursuant to subsection 97(2) of the Act, DCO and CP will elect an amount equal to the cost of the property.
30. On XXXXXXXXXX, BCO will borrow $XXXXXXXXXX on a "daylight loan" basis from an arm's length institutional lender. BCO will then loan this money to DCO (the "BCO-DCO Note"). The terms and conditions of the BCO-DCO Note will for the most part be the same as those of the Existing Note (owing by CCO to CP after the transaction described above). The terms of the BCO-DCO Note will include the following:
? Annual interest rate of XXXXXXXXXX%,
? Interest payable annually, due XXXXXXXXXX months after the year end, and
? Subordinated to all other indebtedness.
31. Immediately after the BCO-DCO loan is advanced, DCO will return $XXXXXXXXXX cash by way of a return of capital to BCO on its No-Par Shares. BCO will use the funds to repay the daylight loan. Accordingly, the PUC of the No-Par Shares will be decreased by $XXXXXXXXXX to $XXXXXXXXXX. The PUC of the Par Shares will remain at $XXXXXXXXXX.
32. Shortly after XXXXXXXXXX, BCO will transfer all of its CCO Class A Shares to DCO in exchange for shares with a legal stated capital of $XXXXXXXXXX. Prior to this, the authorized No-Par shares and Par Shares will each be increased to XXXXXXXXXX. As a result, the contributed surplus in DCO under XXXXXXXXXX law and Canadian GAAP will be $XXXXXXXXXX DCO will send a notice to the Minister, pursuant to subsection 116(1) to request a subsection 116(2) certificate in respect of the consideration issued for the shares of CCO.
33. The legal stated capital and PUC of all of the DCO shares after the share contribution described in paragraph 32 above will be as follows:
? DCO No-Par Shares $ XXXXXXXXXX
? DCO Par Shares (see paragraph 31) XXXXXXXXXX
? DCO Par Shares (see paragraph 32) XXXXXXXXXX
? Total $XXXXXXXXXX
34. On or after XXXXXXXXXX, DCO will make a return of capital on its common shares to BCO of approximately $XXXXXXXXXX and pay a dividend of between $XXXXXXXXXX and $XXXXXXXXXX. Subsequent to the payment of the dividend, DCO will have a deficit for accounting purposes equal to the amount of the dividend.
35. DCO will complete and file Form NR-4 with the CCRA and withholding tax equal to XXXXXXXXXX of the amount of the dividend, referred to in paragraph 34 above, will be withheld and remitted to the CCRA by the XXXXXXXXXX following the payment of the dividend (XXXXXXXXXX). XXXXXXXXXX.
Purpose of the Proposed Transactions
As a result of the introduction and passage of Bill C-22 that included legislation to eliminate the use of NRO's, BCO has decided to replace its Canadian Financing structure, which included DCO, with a financing structure that would minimize any adverse consequences for Canadian, XXXXXXXXXX and XXXXXXXXXX tax purposes. BCO also wishes to repatriate funds from Canada in the most tax efficient manner.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. None of the proposed transactions involving the incorporation of GP Co by DCO, the entering into partnership with GP Co by DCO and the payment of the stock dividends by DCO, as described in paragraphs 23, 24, 25 and 27 above, in and by themselves, will cause DCO to cease to be an NRO prior to the time of the revocation of its election to be taxed as an NRO, referred to paragraph 28 above.
B. Provided that DCO's return of income for such year has been made in the manner and within the time referred to in subsection 133(6) of the Act, DCO will be entitled to its allowable refund for such year as described in paragraph 133(6)(a) of the Act or where an application for the allowable refund has been made, DCO will be entitled to its allowable refund for such year as described in paragraph 133(6)(b) of the Act.
C. DCO's contributed surplus, as described in paragraph 32 above, will be included as contributed surplus in paragraph 18(4)(a) of the Act provided that such contributed surplus is determined using generally accepted accounting principles.
D. The provisions of subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, so as to redetermine the tax consequences confirmed in the rulings given.
Opinion
Provided the provisions of proposed section 20.2 are enacted in substantially the same form as is proposed in the December 20, 1991 Technical Notes (interest deductibility) published by the Department of Finance (the "Draft Legislation"), proposed subsection 20.2(1) will apply to DCO in respect of the BCO-DCO Note described in paragraph 30 and referred to in paragraph 31 above. Accordingly, the BCO-DCO Note amount shall be deemed to be borrowed money used for the purposes of earning income from the business or property of DCO to the extent that the BCO-DCO Note does not exceed DCO's adjusted equity immediately before the reduction of the paid-up capital of the common shares of DCO as described in paragraph 31 above. Moreover, the future interest deductions on the borrowing will be based on the adjusted equity immediately before the return of paid-up capital, as described in paragraph 31 above, and the provisions of paragraph 20(1)(c) will determine in each year, the interest deduction available for that particular year. The expression "adjusted equity" has the meaning assigned by proposed subsection 20.2(2).
These rulings are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R4 dated January 29, 2001, and are binding on the Agency provided the proposed transactions are completed before XXXXXXXXXX. Also, these rulings are based on the Act and the Income Tax Regulations in their present form and do not take into account the effects of any proposed amendments thereto other than the opinion with respect to proposed section 20.2 for the purposes of paragraph 20(1)(c) of the Act
This ruling letter should not be construed as indicating there has been any modification in the CCRA's administrative practices with regard to interest deductibility.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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