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 subsection 18(6) applies to proposed back-to-back loans.
Position: No
Reasons: The proposed transactions meet the requirements as set out in our administrative position.
XXXXXXXXXX 2001-010760
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above referenced taxpayers. We also acknowledge our telephone conversations.
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 (the "Act").
(b) "Canco 1" means XXXXXXXXXX. Its Business Number is XXXXXXXXXX. Its tax return is filed at the XXXXXXXXXX Tax Centre, and it is served by the XXXXXXXXXX Tax Services Office.
(c) "Canco 2" means XXXXXXXXXX. Its Business Number is XXXXXXXXXX. Its tax return is filed at the XXXXXXXXXX Tax Centre, and it is served by the XXXXXXXXXX Tax Services Office.
(d) "Canco 3" means XXXXXXXXXX. Its Business Number is XXXXXXXXXX files its tax returns at the XXXXXXXXXX Tax Centre, and is served by the XXXXXXXXXX Tax Services Office.
(e) "Usco 1" means XXXXXXXXXX.
(f) "Usco 2" means XXXXXXXXXX.
(g) XXXXXXXXXX.
(h) XXXXXXXXXX.
(i) XXXXXXXXXX.
To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this request:
a) is involved in an earlier return of the taxpayers or a related person,
b) is being considered by a tax services office or a tax centre in connection with a tax return already filed by the taxpayers or a related person,
c) is under objection, or
d) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.
The taxpayers received an advance income tax ruling (E9912683, dated XXXXXXXXXX, 1999) in respect of proposed transactions that were virtually identical to the proposed transactions that are the subject of this ruling. An extension to the XXXXXXXXXX, 1999 ruling was given on XXXXXXXXXX, 2000 (E2000-0031881). The proposed transactions in the XXXXXXXXXX, 1999 ruling and the XXXXXXXXXX, 2000 extension were not carried out.
Facts
1) XXXXXXXXXX is a non-resident company that is a resident of XXXXXXXXXX under the XXXXXXXXXX Income Tax Agreement (the "Treaty").
2) XXXXXXXXXX is also a non-resident company that resides in XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX.
3) XXXXXXXXXX is a non-resident company that resides in XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX.
4) Usco 1 is a non-resident company that resides in the United States of America. Usco 1 is a wholly-owned subsidiary of XXXXXXXXXX.
5) Usco 2 is a non-resident company that also resides in the United States of America. Usco 2 is a wholly-owned subsidiary of Usco 1.
6) Canco 1 is a "taxable Canadian corporation" and a "private corporation" as those terms are defined in subsection 89(1) of the Act, and has a XXXXXXXXXX year-end. Canco 1 is a wholly-owned subsidiary of XXXXXXXXXX.
7) Canco 2 is a "taxable Canadian corporation" and a "private corporation" as those terms are defined in subsection 89(1) of the Act, and has a XXXXXXXXXX year-end. Canco 1 owns XXXXXXXXXX% of each of the common and preferred shares of Canco 2, and XXXXXXXXXX owns XXXXXXXXXX% of each of the common and preferred shares of Canco 2.
8) Canco 3 is a "taxable Canadian corporation" and a "private corporation" as those terms are defined in subsection 89(1) of the Act, and has a XXXXXXXXXX year-end. Canco 3 is a wholly-owned subsidiary of Usco 2.
9) Canco 1 carries on a wholesale business in which it XXXXXXXXXX.
10) Canco 2 carries on a real estate business in which it acquires, develops and leases real estate to certain corporations and XXXXXXXXXX in Canada.
11) Canco 3 carries on a financing business in which it provides and services wholesale, retail and lease financing to certain XXXXXXXXXX in Canada.
Proposed Transactions
12) XXXXXXXXXX proposes to loan Canadian funds to Canco 1 (the "XXXXXXXXXX - Canco 1/3 Loan") as set out in paragraph 14 below. The terms of the XXXXXXXXXX - Canco 1/3 Loan have not been finalized but the loan will bear a fixed or floating interest rate set at a rate equivalent to Canadian dollar LIBOR plus XXXXXXXXXX. This rate should be less than the rate at which Canco 1 can currently borrow locally in Canada.
13) XXXXXXXXXX also proposes to loan Canadian funds to Canco 2 (the "XXXXXXXXXX - Canco 2/3 Loan") as set out in paragraph 15 below. The terms of the XXXXXXXXXX - Canco 2/3 Loan have not been finalized but the loan will bear a fixed or floating interest rate set at a rate equivalent to Canadian dollar LIBOR plus XXXXXXXXXX. This rate should be less than the rate at which Canco 2 can currently borrow locally in Canada.
14) The XXXXXXXXXX - Canco 1/3 Loan will be made by XXXXXXXXXX on condition that Canco 1 re-loan those same funds to Canco 3. Canco 1 will loan the funds from the XXXXXXXXXX - Canco 1/3 Loan to Canco 3 (the "Canco 1 - Canco 3 Loan") at an interest rate XXXXXXXXXX of a point higher than the interest rate applicable under the XXXXXXXXXX - Canco 1/3 Loan.
15) The XXXXXXXXXX - Canco 2/3 Loan will be made by XXXXXXXXXX on condition that Canco 2 will re-loan those same funds to Canco 3. Canco 2 will loan the funds from the XXXXXXXXXX - Canco 2/3 Loan to Canco 3 (the "Canco 2 - Canco 3 Loan") at an interest rate XXXXXXXXXX of a point higher than the interest rate applicable under the XXXXXXXXXX - Canco 2/3 Loan.
16) Canco 1 and Canco 2 will withhold tax from the gross interest paid to XXXXXXXXXX on loans from XXXXXXXXXX at a rate pursuant to XXXXXXXXXX of the Treaty (as in force at the time of the payment) and remit the withholding tax to the Canada Customs and Revenue Agency (the "CCRA") within 15 days after the end of the month in which the interest was paid pursuant to section 215 of the Act.
Purpose of the Proposed Transactions
Canco 3 desires to refinance its operations on more favorable terms than is currently available to it locally in Canada in order to facilitate the expansion of business operations in Canada.
Rulings Given
Provided the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided the proposed transactions are completed in the manner described above, our rulings are as follows:
A. Subsection 18(6) of the Act will not be applied to deem the amount of the Canco 1 - Canco 3 Loan or the amount of the Canco 2 - Canco 3 Loan to be a debt incurred by Canco 3 to XXXXXXXXXX.
B. Subject to the application of subsection 18(4) of the Act, provided the funds from the XXXXXXXXXX - Canco 1/3 Loan and the XXXXXXXXXX - Canco 2/3 Loan continue to be used as set out in paragraphs 14 and 15 above, the lesser of a reasonable amount and the amount of the interest paid on such loans will be deductible under paragraph 20(1)(c) of the Act.
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.
Nothing in this letter should be construed as implying that the CCRA has:
i) agreed that interest paid by Canco 1, Canco 2, or Canco 3 on any loan except as specifically set out in Ruling B above, is deductible in computing income under paragraph 20(1)(c) of the Act,
ii) reviewed or accepted the amount of the retained earnings of, the contributed surplus contributed by specified non-resident shareholders to, or the paid-up capital of the shares of Canco 1, Canco 2 or Canco 3, or otherwise attempted to determine whether subsection 18(4) of the Act would deny a deduction in respect of interest paid on a loan other than a loan referred to in Ruling A above, or
iii) agreed to any other tax consequences relating to any facts or proposed transactions referred to herein other than those as specifically described in the rulings given above.
Yours truly,
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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