2002 Income Tax Severed Letter 2002-0174651 - Leveraged Buy-Out & Interest Ded.

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: In a non-arm's length leveraged buy-out transaction, will interest continue to be deductible on indebtedness of a parent corporation that amalgamates with its subsidiary corporation where the parent corporation acquired the subsidiary corporation's shares from a non arm's length person together with the debt that the non-arm's length person incurred on the acquisition of the subsidiary corporation's shares. Request for amendments to Ruling 2001-009746 to add the amalgamation referred to.

Position: Amendments accepted and rulings given.

Reasons: New policies of CCRA concerning interest deductibility, announced at 2002 Canadian Tax Foundation, no longer distinguish between arm's length and non-arm's length situations in the leveraged buy-out described.

XXXXXXXXXX 2002-017465

XXXXXXXXXX, 2002

Dear Sirs:

Re: Supplementary Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX and is supplemental to our advance income tax ruling number 2001-009746 (the "Ruling"). Terms defined in the Ruling as having certain meanings have the same meaning when used in this letter.

The following changes are made to the Ruling:

(a) The following additional proposed transactions will be inserted immediately following paragraph 25 of the Ruling:

"25.1 On or about XXXXXXXXXX, Amalco and Holdco will be amalgamated under the provisions of the BCA to form "New Amalco" in such a manner that:

(a) all of the property (except any amounts receivable from any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become property of New Amalco by virtue of the amalgamation;

(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation (including the Assumed Debt and the NHC Note) will become liabilities of New Amalco by virtue of the amalgamations; and

(c) all of the shareholders (except any predecessor corporation), who owned shares of the capital stock of any predecessor corporation immediately before the amalgamation, receive shares of the capital stock of New Amalco because of the amalgamation."

(b) Paragraph 44, under the heading "Purpose of the Proposed Transactions", will be amended to delete the last paragraph thereof and, in its place, to insert the following:

"The purpose of the proposed amalgamation of Amalco and Holdco to form New Amalco is to simplify the corporate structure for the taxpayers."

(c) The following rulings will be inserted immediately following Ruling D:

"D.1 Subject to the application of subsection 69(11), section 87 will apply to the amalgamation of Amalco and Holdco described in paragraph 25.1 above.

D.2 Provided that New Amalco has a legal obligation to pay interest on the debt assumed in the transaction described in paragraph 18 above, and provided that the property acquired as a result of the amalgamation of Amalco and Holdco continues to be used by New Amalco for the purpose of gaining or producing income therefrom, other than income that is exempt from taxation, New Amalco will, to the extent that such amount does not exceed a reasonable amount, be entitled to deduct, in computing its income for a taxation year, an amount paid in the year or payable in respect of the year (depending on the method regularly followed by New Amalco in computing its income for purposes of the Act) as interest on the debt in respect of that taxation year pursuant to paragraph 20(1)(c) of the Act."

We acknowledge your advice that the transactions described in paragraphs 14 through 25 of the Ruling have been completed and that the facts described in paragraphs 1 through 13 continue to be accurate except to the extent necessarily modified as a result of the completion of the transactions referred to.

We confirm that the Ruling, as amended herein, remains binding on the Canada Customs and Revenue Agency subject to the same limitations and qualifications set out in the Ruling.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch