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: Where a foreign affiliate of a taxpayer acquires shares of the taxpayer to be delivered to the shareholders of a public corporation resident in the same country of the foreign affiliate for their shares of the public corporation, would such initial acquisition of the taxpayer's shares jeopardize the application of subclauses 95(2)(a)(ii)(D)(I) and 95(2)(a)(ii)(D)(III) where the funds used to make the acquisition is borrowed from a sister affiliate?
Reasons: As in the case of paragraph 20(1)(c), our position is that the current eligible use of the funds is the key, not the former ineligible use.
Advance Income Tax Ruling
We are writing in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge your letter of XXXXXXXXXX and e-mails of XXXXXXXXXX providing additional information and amendments to the requested ruling.
XXXXXXXXXX tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre under Account Number XXXXXXXXXX.
To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this request:
(i) is involved in an earlier return of the taxpayer or a related person;
(ii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayer or a related person;
(iii) is under objection; or
(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.
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, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act;
(b) "Aco" means XXXXXXXXXX, a corporation that is governed by the Canada Business Corporations Act.
(c) "adjusted cost base" has the meaning assigned by section 54 of the Act.
(d) "CBCA" means the Canada Business Corporations Act.
(e) "CBCR" means the Regulations pertaining to the CBCA.
(f) "Country A" means XXXXXXXXXX.
(g) "Country B" means XXXXXXXXXX.
(h) "Country C" means XXXXXXXXXX.
(i) "excluded property", "controlled foreign affiliate", and "foreign affiliate" have the meanings assigned by subsection 95(1) of the Act.
(j) "Finco" means XXXXXXXXXX, a corporation created and governed by the laws of XXXXXXXXXX.
(k) "Holdco" means XXXXXXXXXX, a corporation that is governed under the laws of XXXXXXXXXX.
(l) "qualifying interest" has the meaning assigned by paragraph 95(2)(m) of the Act.
(m) "Targetco" means XXXXXXXXXX, a corporation that exists under, and is governed by, the laws of XXXXXXXXXX.
(n) "taxable Canadian corporation" and "public corporation" have the meanings assigned by subsection 89(1) of the Act.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
1. Aco is a taxable Canadian corporation and a public corporation. Aco's common shares are posted for trading on the XXXXXXXXXX stock exchanges. XXXXXXXXXX. Aco is a XXXXXXXXXX company with consolidated assets of about US$XXXXXXXXXX. Aco's consolidated interests are principally engaged in the XXXXXXXXXX.
2. Holdco is a wholly-owned subsidiary of Aco. Holdco is governed by the laws of Country A with which Canada has a tax treaty. It is a resident of Country A under Canadian common law. Holdco is subject to income taxation in Country A. Holdco primarily exists to hold the shares of operating companies located in Country A which are excluded property of Holdco for Canadian tax purposes. These operating companies include wholly-owned subsidiaries of Holdco in Country A.
3. Finco is a controlled foreign affiliate of Aco. Aco has a qualifying interest in Finco. Finco is a capital stock corporation created under, and governed by, the laws of Country B with which Canada has a tax treaty. Finco is a resident of Country B under Canadian common law. Finco exists to finance Aco's foreign affiliates outside Canada.
4. Targetco is a capital stock corporation that exists under, and is governed by, the laws of Country A. Targetco is subject to income taxation in Country A and is a public corporation. Targetco common shares are posted for trading on a stock exchange of Country A. Targetco is a XXXXXXXXXX in Country A with major operations located in Country A and Country C. Shares of Targetco and its subsidiaries would be excluded property of either Holdco or Targetco, as the case may be, for Canadian tax purposes had Targetco and its subsidiaries been a foreign affiliate of Aco.
5. Targetco and Aco are not related corporations and deal at arm's length with each other.
6. Under the XXXXXXXXXX provisions of the income tax law of Country A, each member of a corporate group is liable to income taxation. However, losses may be transferred between companies that qualify as being part of the same group. The important condition for the transfer of group losses is that the companies must have common ownership at all times during the taxation year. XXXXXXXXXX (the "Consolidated Group").
8. Aco will designate Holdco to purchase Targetco shares pursuant to a bid arrangement. Holdco shall pay the aggregate bid price (the "Aggregate Purchase Price") for the Targetco Shares in the following manner:
a) Aco will subscribe for additional Holdco common shares with cash from its operations for an amount not less than one quarter of the Aggregate Purchase Price.
b) Holdco will borrow money from Finco (the "Finco Loan") or Aco at a fair market interest rate. The amount of the loans will equal up to three quarters of the Aggregate Purchase Price. The interest payable by Holdco on the loans will be deductible in computing its annual taxable income for Country A's income tax purposes.
c) Pursuant to the provisions of subsections 31(4) and 31(5) of the CBCA and sections 36 and 37 of the CBCR, Holdco will subscribe for new Aco common shares in an amount equal to the Aggregate Purchase Price. Holdco will pay the share subscription price using the funds received from Aco and Finco as described in 8(a) and 8(b) above. The cash received by Aco for the common shares issued to Holdco will equal the fair market value of the shares at the time of their issuance. The sole purpose of Holdco subscribing for the Aco common shares is to deliver the Aco common shares to the shareholders of Targetco and receive Targetco shares pursuant to the bid arrangement as described below. Holdco will not acquire a beneficial interest in the Aco common shares under the subscription arrangement in accordance with the requirements of subsection 31(5) of the CBCA and subsection 37(a) of the CBCR nor will the shareholders of Targetco acquire a beneficial interest in such shares until the shares are delivered as described in paragraph 8(d) below.
Notwithstanding that Holdco will not acquire the beneficial interest in Aco common shares as noted above,
i) the Aco common shares will be legally issued to Holdco upon payment by Holdco of consideration equal to the fair market value of those shares at the time of their issuance as required by subsection 36(a) of the CBCR; and
ii) as the sole purpose for Holdco paying such consideration to Aco is to enable Holdco to acquire Targetco shares, the amount of the consideration paid by Holdco to Aco will be reflected as Holdco's cost in the Targetco shares.
d) In the manner contemplated by the CBCR and the bid offer, immediately following the subscription of Aco shares by Holdco as described in 8(c) above, Holdco will deliver the Aco common shares to the shareholders of Targetco and receive Targetco shares pursuant to the bid arrangement.
e) Holdco will purchase sufficient Targetco shares to provide Holdco with more than fifty percent (in terms of both votes and fair market value) of all the outstanding Targetco shares.
f) Any new Aco common shares subscribed by Holdco in 8(c) above which will not be delivered by Holdco to the Targetco shareholders will be returned by Holdco to Aco and be cancelled in accordance with section 38 of the CBCR. In addition, the consideration paid by Holdco to Aco for the issuance of those shares will be returned to Holdco and the entry in the stated capital account of those shares will be cancelled.
9. Holdco and its current Country A's affiliates (all shares of which are excluded property of Holdco) will continue to be resident and subject to taxation in Country A. Holdco and its current wholly-owned Country A's affiliates will continue to be entitled to transfer group losses as part of an existing Consolidated Group, regardless of the purchase of Targetco shares by Holdco. Holdco currently has no taxable income. Any interest paid or payable by Holdco on the Finco Loan will increase the loss to Holdco for each year that the Finco Loan remains outstanding. The Holdco loss will be used to offset taxable income realized by Holdco's wholly-owned subsidiaries in Country A to the extent allowed under the income tax law of Country A.
Purpose of the Proposed Transactions
The predominate commercial purpose of the proposed transactions is for Holdco to acquire the shares of Targetco. The proposed transactions also provide a global taxation optimization result to Aco and possible tax rollover treatment to Country A's resident shareholders of Targetco.
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, our rulings are as follows:
A. Subject to subsection 69(1) of the Act, the cost for the purposes of computing the adjusted cost base of the additional Holdco shares acquired by Aco as described in 8(a) above will be equal to the amount of cash paid by Aco as the subscription price.
B. The interest paid or payable by Holdco to Finco on the Finco Loan as described in 8(b) above, that is used by Holdco to subscribe for Aco common shares that in turn will be delivered by Holdco to the Targetco shareholders as described in 8(c) and 8(d) above, will be considered, from the time of the delivery, paid or payable by Holdco under a legal obligation to pay interest on borrowed money used for the purpose of earning income from property for the purpose of subclause 95(2)(a)(ii)(D)(I) of the Act.
C. The Targetco shares so acquired by Holdco as described in 8(d) and 8(e) above will be considered to be "the property" for the purpose of subclause 95(2)(a)(ii)(D)(III) of the Act.
D. Where Holdco is a member of the Consolidated Group referred to in 6 above, the interest paid or payable by Holdco to Finco on the Finco Loan as described in 8(b) above will be considered to be relevant in computing the liability for income taxes in Country A of members of a group of corporations composing of Holdco and one or more other foreign affiliates of Aco for the purpose of subclause 95(2)(a)(ii)(D)(V) of the Act to the extent that the interest paid or payable on the Finco Loan reduces the taxable income of one or more of Holdco's subsidiaries in Country A that are members of the Consolidated Group.
E. Subsection 84(3) of the Act will not apply to deem a dividend to be received by either Holdco or the Targetco shareholders as a result of the return of the new Aco common shares to Aco for cancellation as described in 8(f) above.
F. Subsection 15(1) of the Act will not apply as a result of the subscription of the new Aco common shares by Holdco as described in 8(c) above.
G. Subsection 245(2) of the Act will not be applied as a result of the proposed transactions described in 8 to 10 above, in and by themselves, to redetermine the tax consequences in the rulings given above.
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 Canada Customs and Revenue Agency (the CCRA) provided that the proposed transactions are completed by XXXXXXXXXX.
These rulings are based on the Act in the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this ruling should be construed as implying that the CCRA has reviewed, accepted or otherwise agreed to:
(a) the determination of the adjusted cost base or the fair market value of any share referred to herein;
(b) the determination that the shares of all of Holdco's subsidiaries in Country A constitute excluded property of Holdco as stated in 2 and 9 above; or
(c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
International and Trusts Division
Income Tax Rulings and
Policy and Legislation Branch
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