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: 1. whether interest is exempt under 7(c) of Art. 11 of Austrian treaty. 2. whether guarantee fee is interest under 214(15)(a). 3. whether commitment fee is interest under 214(15(b). 4. whether interest is exempt under 212(1)(b)(vii). 5. whether expenses relating to financing are exempt under 212(4)(b).
Position: A. Yes to 1,2,4 and 5. B. No to 3.
Reasons: A. rulings were previously provided to this taxpayer for similar financing arrangements. B. 214(15)(b) requires that the actual interest on the obligation be subject to tax under Part XIII, in this case it is exempted by 212(1)(b)(vii) so the commitment fee cannot be deemed interest.
XXXXXXXXXX 2002-017536
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX ("Aco")
We are writing in response to your request for an advance income tax ruling on behalf of Aco dated XXXXXXXXXX.
To the best of your knowledge and that of Aco, none of the issues involved in this request for an advance income tax ruling:
(a) is being considered by a tax services office or taxation center in connection with a previously filed return of Aco or a person related to Aco;
(b) is under objection by Aco or a person related to Aco; or
(c) is before the courts or if, a judgment has been issued, the time limit for appeal to a higher court has not expired.
Unless otherwise stated, all references to a statute herein are to the Income Tax Act (Canada), R.S.C. 1985 (5th supp.), c. 1, as amended (the "Act"). Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows.
Facts
1. Aco was incorporated on XXXXXXXXXX. The company's offices are located at XXXXXXXXXX. The company deals with the XXXXXXXXXX Tax Services Office and files its tax returns at the XXXXXXXXXX Taxation Centre (Business number XXXXXXXXXX).
2. Aco is a private corporation and a taxable Canadian corporation within the meaning of subsection 89(1).
3. Aco owns a XXXXXXXXXX% undivided interest in the XXXXXXXXXX. The ownership of this undivided interest is the corporation's sole business asset.
4. XXXXXXXXXX is a joint venture (the "Joint Venture") having XXXXXXXXXX owners of which XXXXXXXXXX.
5. All of the issued and outstanding shares of Aco are owned by XXXXXXXXXX ("Parentco"), a company incorporated under the laws of Austria and resident in Austria with its head office located in XXXXXXXXXX, Austria.
6. Parentco is not resident in Canada for purposes of the Act.
7. Parentco does not carry on a business in Canada.
8. Parentco does not have a permanent establishment in Canada for purposes of the Canada-Austria Income Tax Convention (1976) (the "Treaty").
9. Parentco's only shareholders are either individuals not resident in Canada or corporations not resident in Canada, incorporated under the laws of a jurisdiction other than Canada and without a permanent establishment in Canada.
10. Parentco is controlled by XXXXXXXXXX ("Bco"), XXXXXXXXXX ("Cco") and XXXXXXXXXX ("Dco"), which are all resident in Austria. Both Bco and Cco were incorporated under the laws of Austria while Dco is a foundation formed pursuant to the laws of Austria. These entities do not carry on business in Canada, are not resident in Canada for purposes of the Act and have no permanent establishment in Canada within the meaning of the relevant tax convention.
11. XXXXXXXXXX ("Finco") is the main banking partner of the Parentco Group. The Parentco Group consists of Parentco and any other person whose accounts are, or are required by law to be, consolidated with those of Parentco.
Proposed Transactions
12. Under a proposed agreement (the "Proposed Loan Agreement") between Finco and Aco, Finco offers to Aco a revolving credit facility of up to a maximum amount of US$XXXXXXXXXX. The total facility amount is comprised of a Term A Loan Facility maximum amount of US$XXXXXXXXXX and a Term B Loan Facility maximum amount of US$XXXXXXXXXX .
13. The credit facility will be used to finance costs associated with the expansion of the capacity of the XXXXXXXXXX project.
14. The credit facility can be utilized by Aco within a period commencing on the date of acceptance by Aco of the offer made to it and ending on the earlier of XXXXXXXXXX, and the completion of the construction project (the "Availability Period"). However, no request for the drawing of a loan advance on the Term A Loan Facility is permitted as long as the undrawn commitment of the Term B Loan Facility (i.e., the Term B Loan Facility amount less the amount of the Term B Loan outstanding) is not nil.
15. Finco is a resident of Austria for the purposes of the Treaty, is not resident in Canada, and does not have a permanent establishment in Canada. Aco and Finco deal and will continue to deal with each other at arm's length.
16. With respect to the Term A Loan Facility, Parentco will sign as drawee on bills of exchange (i.e., promissory notes) posted to Finco as collateral security for the loan granted to Aco by Finco.
17. With respect to the Term A Loan Facility, the XXXXXXXXXX ("Eco"), XXXXXXXXXX, will guarantee (the "Guarantee") Parentco as the drawee on the bills of exchange referred to in paragraph 16 above.
18. Aco will be required to pay Eco a guarantee fee of XXXXXXXXXX% per quarter.
19. The Proposed Loan Agreement and the Guarantee describe the terms and conditions that have been negotiated for the proposed transactions between Aco, Parentco, Finco and Eco. It is not expected that there will be material changes to the Proposed Loan Agreement.
20. Some of the terms and conditions of the credit facility are as follows:
(a) Interest. The annual interest rate under the Proposed Loan Agreement shall be equal to LIBOR + an applicable Margin payable semi-annually.
(b) Repayment of the Term A Loan. The Term A Loan is required to be repaid by Aco to Finco in XXXXXXXXXX equal semi-annual instalments starting on XXXXXXXXXX, and ending on XXXXXXXXXX . Each of the XXXXXXXXXX instalments will be equal to XXXXXXXXXX% of the Term A Loan outstanding immediately after the end of the Availability Period.
(c) Repayment of the Term B Loan. The Term B Loan is required to be repaid by Aco to Finco in XXXXXXXXXX semi-annual instalments starting on XXXXXXXXXX, and ending on XXXXXXXXXX, as follows:
1. XXXXXXXXXX instalments, each of which will be equal to XXXXXXXXXX% of the Term B Loan outstanding immediately after the end of the Availability Period, starting on XXXXXXXXXX, and ending on XXXXXXXXXX.
2. XXXXXXXXXX instalments, each of which will be equal to XXXXXXXXXX% of the Term B Loan outstanding immediately after the end of the Availability Period, starting on XXXXXXXXXX and ending on XXXXXXXXXX.
3. One instalment equal to XXXXXXXXXX% of the Term B Loan outstanding immediately after the end of the Availability Period, to be repaid on XXXXXXXXXX.
The repayment terms of the Term B Loan ensure that no more than XXXXXXXXXX% of the Term B Loan must be repaid within XXXXXXXXXX years after the loan was made.
(d) Events of default. Clause XXXXXXXXXX of the Proposed Loan Agreement provides for events of default by Aco and/or Parentco on the credit facility. Events of default include the following:
1. failure of Aco to pay any sum on the date on which, in the currency in which, or in the manner in which such sum is due and payable and the continuation of such failure for XXXXXXXXXX days after receipt by Aco of written notice of such default;
2. failure by Aco or Parentco to comply with any of its agreements under any provision of the Facility Documents which include the Proposed Loan Agreement and the Guarantee;
3. certain events of bankruptcy, insolvency or reorganization by Aco or Parentco;
4. Aco's cessation of business;
5. Parentco ceasing to hold directly 100% of the legal and beneficial ownership of Aco;
6. non-completion of the project to increase the capacity of the XXXXXXXXXX; and
7. the occurrence of a "material adverse change" which is defined in the Proposed Loan Agreement and deals with a change in the financial situation of the Parentco Group.
The Proposed Loan Agreement provides that on or at any time after the occurrence and during the continuation of an Event of Default, Finco may by written notice to Aco terminate the facility immediately and/or demand that all or part of the loan, together with accrued interest and all other amounts accrued under the Proposed Loan Agreement be immediately due and payable. Aco and Parentco are currently not and will not be up until the time the Proposed Loan Agreement is accepted in default of the Proposed Loan Agreement.
(d) Commitment Fee. Aco is required to pay to Finco a commitment fee of XXXXXXXXXX% per annum on the total amount under the credit facility that is not utilized.
(e) Other Expenses. All costs and expenses paid in respect of the negotiation, preparation, execution and enforcement of the Proposed Loan Agreement and any security agreements, and/or any other agreement pertaining thereto, shall be borne exclusively by Aco. Accordingly, the portion of these expenses that are incurred by Parentco will be reimbursed by Aco.
The representations, warranties and undertakings given by Aco and/or Parentco are reasonable in the circumstances and in relation to the risks involved for Finco. No economic circumstances exists that would make it reasonable to expect that Aco would be compelled to repay all or a part of the obligation within XXXXXXXXXX years of its issuance. The events of default are normal clauses to protect the loan made by Finco in relation to the operational and economic risks of Aco and Parentco. The events of default have commercial reality, are beyond the control of Finco and are not contrived. All events of default are within the control of Aco and related parties and are related to normal commercial risks taken by Finco.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to obtain financing for Aco which will be used to finance costs associated with the expansion of capacity of the XXXXXXXXXX project.
Rulings Given
Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, we confirm the following:
A. The interest payable by Aco to Finco under the Term A Loan Facility is exempt from tax under paragraph 212(1)(b) by virtue of subparagraph 7(c) of Article XI of the Treaty.
B. Guarantee fees paid or credited to Eco under the Term A Loan Facility will be considered interest paid on the loan by virtue of paragraph 214(15)(a), and will be exempt from tax under paragraph 212(1)(b) by virtue of subparagraph 7(c) of Article XI of the Treaty.
C. The commitment fee paid or credited to Finco relating to the unutilized portion of the Term A Loan Facility will be considered, by virtue of paragraph 214(15)(b), as interest paid on the loan and will be exempt from tax under paragraph 212(1)(b) by virtue of subparagraph 7(c) of Article XI of the Treaty.
D. The interest payable by Aco to Finco under the Term B Loan Facility will be exempt from the application of paragraph 212(1)(b) by virtue of the exception in subparagraph 212(1)(b)(vii).
E. A commitment fee payable on the unutilized portion of the Term B Loan Facility will not be deemed by paragraph 214(15)(b) to be interest and will be exempt from tax under the Act by virtue of paragraph 1 of Article VII of the Treaty.
F. Provided that the expenses referred to in subparagraph 20(f) above are paid to Parentco as reimbursements for specific expenses incurred for services that were for the benefit of Aco in connection with financing granted to Aco under the Proposed Loan Agreement, such fees, to the extent reasonable in the circumstances, will not be a management or administration fee or charge for the purposes of paragraph 212(1)(a) by virtue of paragraph 212(4)(b) and will be exempt from tax under the Act pursuant to paragraph 1 of Article VII of the Treaty.
These rulings are given subject to the limitations and qualifications set out in Information Circular IC 70-6R5 issued by the Canada Customs and Revenue Agency (the "CCRA") on May 17, 2002 and are binding on the CCRA provided the Proposed Loan Agreement is accepted by Aco on or before XXXXXXXXXX. These rulings are provided based on the Act as it currently reads and do not take into account any proposed amendments.
Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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