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: (a) USHoldco is carrying on business in Canada; and (b) the business of USHoldco is carried on principally in Canada?
Position: We did not rule on whether USHoldco was "carrying on business" in Canada and we ruled that subsection 212(13.2) would not apply to deem USHoldco to be a resident of Canada for purposes of Part XIII of the Act.
Reasons: See Issue Sheet
Re: Advance Income Tax Ruling
XXXXXXXXXX ("U.S. Holdco")
We are writing in response to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of U.S. Holdco with respect to the proposed restructuring of the U.S. Holdco and related corporations.
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 U.S. Holdco or a related person;i)
ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed income tax return of U.S. Holdco or a related person;
iii) under objection by U.S. Holdco or a related person;
iv) before any Court; and
v) the subject of a Ruling previously considered by the Income Tax Rulings Directorate.
Herein "Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supplement), as amended to the date hereof and "Convention" means the Canada-United States Income Tax Convention (1980).
1. U.S. Holdco is a corporation formed and organized under the laws of XXXXXXXXXX. It was incorporated on XXXXXXXXXX. U.S. Holdco is a non-resident of Canada and a resident of the United States for purposes of the Convention.
2. U.S. Holdco is currently wholly owned by XXXXXXXXXX a corporation formed and organized under the laws of XXXXXXXXXX is a corporation resident in Canada for purposes of the Convention.
3. U.S. Holdco is a holding corporation for approximately XXXXXXXXXX U.S. incorporated subsidiaries that operate XXXXXXXXXX businesses in various U.S. states. It is a sister corporation to subsidiaries of XXXXXXXXXX that are incorporated and operate XXXXXXXXXX.
4. U.S. Holdco's U.S. operating subsidiaries (the "U.S. Operating Subsidiaries") presently contribute over XXXXXXXXXX% of the consolidated revenues and earnings from the operations of the entire corporate group (the "Group") of which it is a member. The U.S. Operating Subsidiaries presently hold over XXXXXXXXXX% of the consolidated assets of the Group.
5. The Group's Canadian operating subsidiaries (the "Canadian Operating Subsidiaries") presently contribute approximately XXXXXXXXXX% of the Group consolidated revenues and earnings and approximately XXXXXXXXXX% of the Group consolidated assets.
6. The Group also includes corporations formed in various jurisdictions that are inactive and immaterial.
7. On XXXXXXXXXX, U.S. Holdco and approximately XXXXXXXXXX subsidiaries of U.S. Holdco filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code (the "Chapter 11 Proceeding"). XXXXXXXXXX was also included in the filing as guarantor of U.S. Holdco's debt.
9. The total, consolidated liabilities of U.S. Holdco to unrelated parties at the time the Chapter 11 Proceeding was filed were approximately USD XXXXXXXXXX, representing over XXXXXXXXXX% of the Group consolidated liabilities to unrelated parties.
10. On XXXXXXXXXX, U.S. Holdco filed a XXXXXXXXXX Amended Joint Plan of Reorganization of its affairs, XXXXXXXXXX and U.S. debtor subsidiaries (the "Plan of Reorganization"). The Group creditors had to vote and the U.S. Court having jurisdiction over the Chapter 11 Proceeding had to hold a hearing to approve the Plan of Reorganization. The vote was done in and around XXXXXXXXXX and the Court hearing was held in and around XXXXXXXXXX. The Plan of Reorganization was approved and is to be implemented on a date to be determined (the "Effective Date"), currently anticipated to be XXXXXXXXXX, but which is subject to the fulfilment or waiver of certain conditions.
11. As a result of the approved Plan of Reorganization, the Group will be reorganized such that U.S. Holdco will be the parent corporation of the Group. The Group creditors who are parties to the Chapter 11 Proceeding are expected to receive from U.S. Holdco some or a combination of cash, new senior notes, new unsecured subordinated notes, new common shares, new warrants and other instruments or documents as specified in the Plan of Reorganization, and in accordance with their respective entitlements thereunder. Of the total equity and debt to be issued by U.S. Holdco pursuant to the Plan of Reorganization, approximately USD XXXXXXXXXX, or XXXXXXXXXX% of the total expected debt and approximately XXXXXXXXXX common shares and warrants or XXXXXXXXXX% of the total common shares and warrants of U.S. Holdco are expected to be issued to unrelated creditors of U.S. Holdco and the Reorganized Group's U.S. Subsidiaries.
12. It is anticipated that, as of the Effective Date, the reorganized corporate group in which U.S. Holdco will be the parent company (the "Reorganized Group") will own and operate XXXXXXXXXX.
13. The operating businesses following the Effective Date will consist of XXXXXXXXXX (the "Operating Businesses").
14. Following the Effective Date, it is anticipated that U.S. Holdco will undertake a consolidation of the corporate structure of the Reorganized Group to reduce to approximately XXXXXXXXXX the number of Reorganized Group subsidiaries, which will be primarily wholly-owned by U.S. Holdco. A small number of the subsidiaries have unrelated shareholders.
15. It is expected that as of the Effective Date, the new common shares (and possibly warrants) of U.S. Holdco will be listed and traded on XXXXXXXXXX, a U.S. stock exchange.
16. Following the Effective Date, U.S. Holdco will be renamed XXXXXXXXXX and the Reorganized Group subsidiaries will be renamed as appropriate.
17. Following the Effective Date, the board of directors of U.S. Holdco is expected to consist initially of XXXXXXXXXX individuals, some of whom will be U.S. residents and some of whom will be Canadian residents. Directors' meetings are expected to be held in the U.S., although meetings may also be held in Canada.
18. As a U.S. corporation, U.S. Holdco expects to raise future financing primarily in the U.S. capital markets, although non-U.S. capital markets may also be accessed from time to time.
19. Following the Effective Date, U.S. Holdco and the Reorganized Group will cease to be subject to the Chapter 11 Proceeding XXXXXXXXXX, and will operate the Reorganized Group's Operating Businesses in the ordinary course.
20. The overwhelming majority of Reorganized Group operations, Operating Assets and employees would be in and carried on by the U.S. Operating Subsidiaries. The U.S. Operating Subsidiaries are expected to contribute over XXXXXXXXXX% of the Group's consolidated revenues and earnings from operations. While this ratio may fluctuate, the business is overwhelmingly a U.S. business and it is difficult to foresee the portion of the business that relates to Canada rising materially as a proportion of the Consolidated Reorganized Group. In any event, U.S. Holdco does not foresee that the proportion of consolidated assets, revenues and earnings from operations contributed by the Canadian Subsidiaries would exceed XXXXXXXXXX% of the whole.
21. The following transactions and operating arrangements are proposed, to have effect as of and following the Effective Date.
22. The Reorganized Group would consist of U.S. Holdco, as holding body corporate, and its wholly and partially owned subsidiaries.
23. U.S. Holdco would maintain the U.S. as its place of incorporation.
24. U.S. Holdco would have a board of directors and officers established, elected, appointed, and holding and exercising office, pursuant to XXXXXXXXXX law and U.S. Holdco's constating and organization documents.
25. U.S. Holdco would have no employees.
26. U.S. Holdco's equity and debt capital would be invested primarily in its subsidiaries, in the form of share capital and intercompany loans in and to its subsidiaries. U.S. Holdco may invest directly in its subsidiaries or may invest indirectly through one or more other subsidiaries.
27. U.S. Holdco's unconsolidated revenues would overwhelmingly consist of its return from investments in its subsidiaries, in the form of interest, principal and dividends payable from time to time by subsidiaries.
28. U.S. Holdco's unconsolidated expenses would consist overwhelmingly of debt service payments, including interest and principal to its lenders and debtholders, and also include expenses of financing, directors' fees, stewardship costs of being a public company and management and administration fees (see paragraphs 34 to 37 below).
29. All Operating Businesses of the Reorganized Group would be carried on in and through subsidiaries of U.S. Holdco. All operating revenues, expenses, assets ("Operating Assets") and liabilities would be accrued, owned and due respectively by U.S. Holdco's subsidiaries, and would be accounted for in U.S. Holdco's subsidiaries' respective unconsolidated financial statements.
30. All employees of the Reorganized Group would be employed by subsidiaries of U.S. Holdco.
31. Canadian Operating Subsidiaries would carry on Canadian Operating Businesses, own all Canadian situs Operating Assets and employ the employees involved in the Canadian Operating Businesses. Operating Businesses carried on in countries other than Canada would not be carried on by Canadian Operating Subsidiaries. The Operating Assets and employees involved in such Operating Businesses would be held and employed respectively by subsidiaries incorporated outside Canada.
32. Should the Reorganized Group enter into new lines of business, these would be carried on by and through subsidiaries of U.S. Holdco and not by U.S. Holdco itself. Any such business carried on in countries other than Canada would not be carried on by Canadian Operating Subsidiaries.
33. U.S. Holdco and each subsidiary of U.S. Holdco incorporated outside of Canada would not be a resident of Canada for the purposes of the Act read without subsection 250(5) of the Act or by reason of subsection 250(5) of the Act and an applicable double taxation convention including, in the case of U.S. Holdco, the Convention.
34. A particular Canadian Operating Subsidiary (CanSub) would employ the most senior executives in the Reorganized Group (the "Executives"), including XXXXXXXXXX, for the purpose of performing the services of senior executive management ("Executive Services") to the Reorganized Group. The Executives would ordinarily be resident in, and report to work at offices maintained by CanSub in Canada (presently expected to be in XXXXXXXXXX). CanSub would bear all of the expenses, including Executive compensation, of employing the Executives, operating an Executive office and providing Executive Services.
35. CanSub would also employ a significant number of employees ("G&A Staff") for the purpose of performing general and administrative functions, including management, accounting, banking, financial control, treasury, book and record-keeping, administration, legal and similar or connected services ("G&A Services"). The G&A Staff would ordinarily be resident in, and report to work at offices maintained by CanSub in Canada (presently expected to be in XXXXXXXXXX). CanSub would bear all of the expenses, including G&A Staff compensation, of employing the G&A Staff, operating G&A Staff offices and facilities and providing G&A Services.
36. CanSub would enter into and maintain in force written management services arrangements ("MSA") pursuant to which CanSub would provide Executive and G&A Services to U.S. Holdco, in connection with its activities as a holding corporation, in return for management fees. CanSub would make the Executives available to act as officers of U.S. Holdco under the MSA.
37. CanSub would enter into and maintain in force one or more MSAs through which CanSub would provide Executive and G&A Services for the benefit of the various subsidiaries of U.S. Holdco in connection with their businesses, activities, operations, assets, liabilities, etc. including the provision of officers and directors for certain subsidiaries, where desirable. U.S. Holdco's subsidiaries would pay management fees to CanSub in consideration of the Executive and G&A Services.
38. A certain U.S. subsidiary of U.S. Holdco (USsub) would employ a significant number of employees (U.S. G&A Staff) for the purpose of performing selected G&A Services to U.S. Holdco and the U.S. Subsidiaries. The U.S. G&A Staff would ordinarily report to work at offices maintained by USsub in the U.S. (presently expected to be in XXXXXXXXXX). USsub would bear all expenses, including U.S. G&A Staff compensation, of employing the U.S. G&A Staff, operating offices for U.S. G&A Staff and providing G&A Services to U.S. Holdco and the U.S. Subsidiaries.
39. USsub would enter into and maintain in force an MSA pursuant to which USsub would provide selected G&A Services to U.S. Holdco in return for management fees. USsub would also enter into and maintain in force one or more MSAs through which it would provide or make available G&A Services to the U.S. Subsidiaries in return for management fees.
40. The undertakings of CanSub and USsub would not necessarily be limited to the performance of Executive and/or G&A Services, but might also include Operating Businesses.
Purpose of Proposed Transactions
41. The purpose of the proposed transactions is for U.S. Holdco, a US corporation, and its Reorganized Group to structure what is in substance and form predominantly a U.S. business, with some Canadian operations, to operate in the ordinary course, while having the benefit of the services of Executives and G&A Staff who are residents of and report to work within the Restructured Group, in Canada.
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 completed in the manner described above, we rule that subsection 212(13.2) of the Act will not apply to deem U.S. Holdco to be a resident of Canada for purposes of Part XIII of the Act.
The above ruling is given subject to the general limitations and qualifications stated in Information Circular 70-6R4 dated January 29, 2001, and is binding on the CCRA provided that the proposed transactions are completed by XXXXXXXXXX.
The above ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the ruling provided herein.
Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed
(a) any tax consequences resulting from the Plan of Reorganization,
(b) whether U.S. Holdco is or will be considered to be carrying on business in Canada,
(c) whether any agency relationship exists between U.S. Holdco and CanSub, and
(d) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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