2003 Ruling 2003-0039243 - WITHHOLDING TAX

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:

Is there an avoidance transaction where a corporation, that is the general partner of a limited partnership operating a business in Canada, that qualifies for the 212(1)(b)(vii) exemption, borrows and on-loans the funds (at a positive spread) to a limited partnership.

Position: No

Reasons:

There is no avoidance transaction. The GP could not borrow in Canada at the US rate and the LP could not borrow in Canada for the GP rate. Also, U.S. investors prefer the security of lending to the GP rather than the LP.

XXXXXXXXXX 							2003-003924

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (LP) (Account number XXXXXXXXXX)
XXXXXXXXXX (GP) (Account number XXXXXXXXXX)

This is in reply to your letter of XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the above named corporation.

GP files its income tax returns with the XXXXXXXXXX, under account number XXXXXXXXXX, and is serviced by the XXXXXXXXXX Tax Services Office. LP, a limited partnership files its partnership income tax returns with the XXXXXXXXXX under account number XXXXXXXXXX and is serviced by the XXXXXXXXXX Tax Services Office. The address for each of GP and LP is XXXXXXXXXX.

We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues contained in the ruling requested herein is:

(a) in an earlier tax return of the taxpayers or a related person;

(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;

(c) under objection by the taxpayers or a related person;

(d) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has expired; or

(e) the subject of a previous income tax ruling considered by the Income Tax Rulings Directorate;

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition.

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1. GP is a Canadian corporation formed under the laws of XXXXXXXXXX and was created to act as the unlimited liability general partner of LP, a limited partnership formed under the laws of XXXXXXXXXX.

2. LP's business activities are related to XXXXXXXXXX.

3. LP is widely held and publicly traded on the XXXXXXXXXX Stock Exchange.

4. GP provides all administration and management services relating to the operation of LP.

5. Pursuant to the Partnership Agreement, GP is required to maintain a XXXXXXXXXX% interest in LP.

6. As general partner of LP, GP has entered into various contracts in the normal course of business on behalf of LP.

7. LP is currently seeking new sources of financing.

8. Based on management's experience and recent market enquiries, GP, as a corporation is able to borrow money in the US at a lower rate of interest than LP. Moreover, as a general partner, GP would, in any case, be liable for all the debts incurred by LP. GP, as a direct borrower, would be in a better position to make loan commitments than LP since LP, on its own, can't commit to anything. GP must agree to and carry out all of LP's loan commitments.

9. LP's review of presentations from its financial advisors as well as the results of many face-to-face visits with the private debt portfolio managers have confirmed the following information relative to LP's financing needs:

a. The depth of the Canadian private placement market would require each of these Canadian institutions to invest at least $XXXXXXXXXX as well as a number of much smaller portfolio investors, who typically invest less than $XXXXXXXXXX per transaction, to take the remaining $XXXXXXXXXX for a Canadian offering to be successful.

b. Canadian institutions would prefer to invest for a shorter period (XXXXXXXXXX years) and would like (require) a pledge of security over the assets as well as some level of amortization of the principal amount.

c. XXXXXXXXXX.

d. As to pricing, discussions were approximately XXXXXXXXXX basis points higher than the price talk and recent issuances in the US private debt markets.

10. The primary source of LP's expectations of the private debt market in the US is information from its Canadian and US based financial advisors as well as informal discussion with other financial executives in the industry. They have recommended the financing described in the Proposed Transactions over any Canadian source of debt capital. Such advisors have consistently confirmed the following:

a. The private debt market in the US is typically very responsive to transaction sizes in the $XXXXXXXXXX range with follow-up offerings of $XXXXXXXXXX easily accomplished as the US portfolio managers, who run larger pools of capital, find it very efficient to participate in follow-up offerings as their credit work is in place.

b. With any abundance of investors with large pools of capital to invest, a US debt financing results in more competition and lower rates for the issuers.

c. The US institutions have a significant appetite in the 10 to 20 year maturity range and will accept the long-term nature of LP's assets.

d. The US markets will favourably price their bids for LP's proposed financing since there is currently a scarcity of investment grade offerings when compared to the demand therefore.

e. The private placement market in the US has an established streamlined offering process and documentation standard for US issuers as well as non-resident issuers and Canadian issuers such as GP will easily fit within their process.

11. The cost of the type of financing which is the most desirable for LP's business is lower than comparable Canadian financing (assuming such financing were even available) by between XXXXXXXXXX% and XXXXXXXXXX%. Insofar as the rate charged by GP to LP is its cost of funds plus XXXXXXXXXX%, the cost to LP of the proposed financing is less than Canadian financing (again assuming same were available) by between XXXXXXXXXX% and XXXXXXXXXX%.

12. LP, as have many of its industry competitors, has decided to seek long-term financing in the private debt markets in the US primarily due to their appetite for longer term investments and their lower cost of capital. While Canadian private debt markets exist, they currently do not provide a competitive alternative for investment grade issuers seeking to raise funds in the $XXXXXXXXXX range and being restricted to the Canadian private market would significantly increase LP's execution risks as well as cost of capital.

Proposed Transactions

13. GP will borrow between $XXXXXXXXXX US in a private placement from arm's length US institutional lenders. The debt will be fixed rate debt with terms of either XXXXXXXXXX years or XXXXXXXXXX years. The debt will be unsecured. LP will provide a broad guarantee of GP's debt but will not be required to pledge its assets as security. Under no circumstances (except in the event of default or if the terms of the debt or related agreement become unlawful or are changed by virtue of legislation or by a court, statutory board or commission) will GP be obligated to repay more than XXXXXXXXXX% of the principal amount of any of the obligations within XXXXXXXXXX years from the date of issue of each obligation.

14. GP will loan the cash received from the financing described above to LP on substantially the same terms as its borrowings from the arm's length US institutional lenders plus a reasonable mark-up on the interest rate such that GP will earn a profit to compensate it for the increased risk on its lending to LP.

Purpose of the Proposed Transactions

The purpose of the financing is to provide necessary funds to LP to allow it to retire approximately $XXXXXXXXXX in bank loans, spend $XXXXXXXXXX in capital improvements to its XXXXXXXXXX, potentially purchase the remaining XXXXXXXXXX% of the XXXXXXXXXX currently owned by an arm's length party and spend the remainder on expansion of its XXXXXXXXXX.

The business carried on by LP requires stable, long-term debt capital to both finance its existing debt and prepare itself for future investment. GP is undertaking the borrowing in the US market, to effect such refinancing and expansion, due to enhanced availability of long-term debt and a lower cost of capital to LP.

Rulings Given

Provided that the preceeding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the transactions are completed as proposed, we rule as follows:

A. By virtue of the exemption contained in subparagraph 212(1)(b)(vii) of the Act, no tax under Part XIII of the Act will be exigible in respect of any amounts paid or credited on the amounts borrowed, as described in paragraph 13 above, to a person with whom GP is dealing at arm's length and who is a non-resident of Canada, as on account or in lieu of payment of, or in satisfaction of interest.

B. As a result of the Proposed Transactions, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences described in the ruling given above.

These rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5, dated May 17, 2002, and are binding on the CCRA provided the proposed transactions are completed by XXXXXXXXXX.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

Yours truly,

XXXXXXXXXX
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch