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 interest on a promissory note assumed by Amalco as a result of the amalgamation of Newco and Targetco is deductible pursuant to subparagraph 20(1)(c)(ii) of the Act. The debt was incurred for the purposes of acquiring all of the common shares in the capital of Targetco.
Position: Favourable ruling given.
Reasons:
The interest paid or payable is deductible as it is an amount paid or payable in respect of the year, pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from property.
XXXXXXXXXX 2001-010887
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
We are writing in response to your correspondence of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX.
To the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein are:
(i) dealt with in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or
(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.
DEFINITIONS
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
(b) "Parentco" means XXXXXXXXXX ., a corporation incorporated under the laws of the state of XXXXXXXXXX;
(c) "CBCA" means the Canada Business Corporations Act, as amended;
(d) "Targetco" means XXXXXXXXXX, a corporation incorporated under the laws of the Province of XXXXXXXXXX and continued as a federal corporation under the Canada Business Corporations Act, as amended;
(e) "Targetco Acquisitionco " means XXXXXXXXXX, an indirect wholly-owned subsidiary of Parentco incorporated on XXXXXXXXXX, under the laws of the province of XXXXXXXXXX;
(f) "Targetco Acquisition Debt" means the funds borrowed by Targetco Acquisitionco and used to purchase all of the common shares of Targetco;
(g) "Newco" means the wholly-owned subsidiary of Targetco Acquisitionco that will be incorporated under the laws of the Province of XXXXXXXXXX;
(h) "Amalco" means the corporation resulting from the amalgamation of Newco and Targetco under the laws of the Province of XXXXXXXXXX;
(i) "Offer" means the offer by Parentco, through Targetco Acquisitionco, to purchase by way of a take-over bid all of the issued and outstanding common shares in the capital of Targetco made to Targetco shareholders.
(j) "Promissory Note" means the interest-bearing promissory note to be issued by Newco in favour of Targetco Acquisitionco on the transfer of the common shares of Targetco to Newco by Targetco Acquisitionco that will take place as part of proposed transactions described therein.
STATEMENT OF FACTS
1. Parentco is a public corporation, resident in the United States, whose common shares are listed for trading on the XXXXXXXXXX. Parentco is incorporated under the laws of the State of XXXXXXXXXX.
2. XXXXXXXXXX.
3. Targetco is a Canadian corporation and a public corporation as defined in subsection 89(1) of the ITA. Targetco was incorporated on XXXXXXXXXX and was continued as a federal company under the CBCA on XXXXXXXXXX. The head and registered office of Targetco is located at XXXXXXXXXX.
4. The authorized share capital of Targetco prior to XXXXXXXXXX, consisted of an unlimited number of common shares, preferred shares and employee participation shares. As of XXXXXXXXXX, there were XXXXXXXXXX common shares issued and outstanding but there were no preferred shares nor any employee participation shares issued and outstanding as of that time.
5. The common shares of Targetco were listed for trading on the XXXXXXXXXX.
6. XXXXXXXXXX.
7. Targetco Acquisitionco was incorporated on XXXXXXXXXX, under the laws of the province of XXXXXXXXXX and is an indirect wholly-owned subsidiary of Parentco. Targetco Acquisitionco's registered office is located at XXXXXXXXXX.
8. XXXXXXXXXX.
9. XXXXXXXXXX.
10. Targetco Acquisitionco was incorporated by Parentco for the purpose of launching the Offer with a view of acquiring all of the issued and outstanding common shares in the share capital of Targetco.
11. XXXXXXXXXX.
12. XXXXXXXXXX.
13. XXXXXXXXXX.
14. On XXXXXXXXXX, Targetco Acquisitionco acquired all of the issued and outstanding common shares in the share capital of Targetco, including those not tendered in the Offer by means of a compulsory acquisition under the CBCA.
15. Targetco's common shares were delisted from trading on the XXXXXXXXXX on XXXXXXXXXX.
16. The acquisition by Targetco Acquisitionco of all the issued and outstanding common shares in the share capital of Targetco at a price of XXXXXXXXXX per share was financed through interest-bearing debt in an aggregate amount of approximately $XXXXXXXXXX.
17. XXXXXXXXXX.
PROPOSED TRANSACTIONS
18. Targetco will be continued under the laws of the Province of XXXXXXXXXX.
19. Targetco Acquisitionco will incorporate a wholly-owned subsidiary under the laws of the Province of XXXXXXXXXX ("Newco"). Newco will be a taxable Canadian corporation as defined in subsection 89(1) of the Act.
20. Targetco Acquisitionco will transfer to Newco all of the common shares of Targetco in exchange for XXXXXXXXXX common shares of Newco and the Promissory Note.
21. Targetco Acquisitionco and Newco will jointly elect, in prescribed form and manner and within the prescribed time under subsection 85(1) of the Act, in respect of the transfer of the common shares of Targetco such that Targetco Acquisitionco's proceeds of disposition and Newco's adjusted cost base in respect of the common shares of Targetco will be equal to Targetco Acquisitionco's former adjusted cost base in respect of such shares. The amount elected by the parties will not exceed the greater of (i) the principal amount of the Promissory Note, and (ii) the fair market value of the common shares of Targetco transferred.
22. The XXXXXXXXXX common shares in the share capital of Newco issued to Targetco Acquisitionco on the transfer of the common shares of Targetco will have a stated capital equal to $XXXXXXXXXX per share or $XXXXXXXXXX in the aggregate.
23. The Promissory Note issued by Newco in favour of Targetco Acquisitionco will be for a principal amount of approximately $XXXXXXXXXX payable on demand, and will bear interest at a rate in excess of the rate of interest payable by Targetco Acquisitionco to its lender on the Targetco Acquisition Debt.
24. Newco and Targetco will be amalgamated under the laws of the Province of XXXXXXXXXX to form Amalco.
PURPOSE OF THE PROPOSED TRANSACTIONS
25. XXXXXXXXXX. To that effect, Parentco would like to ensure a maximum of flexibility with respect to its Canadian holding structure from both a corporate organizational and cash-flow management perspective. XXXXXXXXXX.
26. The implementation of the proposed transactions will also allow Amalco to increase the adjusted cost base of Targetco's capital assets (other than ineligible property within the meaning of subsection 88(1) of the Act). In turn, this will give Parentco maximum flexibility in reorganizing the holding structure of Targetco and its subsidiaries.
27. Newco and Targetco will be amalgamated to match the interest expense of Newco with the business income generated through the business operations of Targetco and the holding structure will permit Parentco to use Targetco Acquisitionco's financing costs to reduce its liability for U.S. income taxes.
RULING GIVEN
To the extent the amount of interest on the Promissory Note assumed by Amalco as a result of the amalgamation of Newco and Targetco under the laws of the Province of XXXXXXXXXX is reasonable in the circumstances, Amalco will be entitled to an interest deduction pursuant to subparagraph 20(1)(c)(ii) of the Act with respect to such interest.
These rulings are provided subject to the limitations and qualifications set out in Information Circular 70-6R4 issued by the Canada Customs & Revenue Agency on January 29, 2001 and are binding upon the Agency provided that the proposed transactions are completed on or before XXXXXXXXXX. The rulings are based on the Income Tax Act and Regulations in their present form and do not take into account the effects of any proposed amendments thereto.
Nothing in this ruling should be construed as confirmation, express or implied, that the Agency has:
(a) Agreed that interest paid by Amalco on any loan except as specifically set out in the ruling above, is deductible in computing income under paragraph 20(1)(c) of the Act; or
(b) Agreed to any other tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 2001
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