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.
Principal Issues: Does a XXXXXXXXXX report the foreign exchange gains and losses arising from lease transactions in the ordinary course of business on account of income?
Position: Yes
Reasons: IT-95R, Question #19 at the 1995 TEI Conference, Normal business activities.
XXXXXXXXXX 2004-008527
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our numerous telephone conversations and E-mails (XXXXXXXXXX).
To the best of your knowledge, and that of A Co, none of the issues involved in this ruling contained herein is:
(i) in an earlier return of A Co or a person related to A Co;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of A Co or a related person;
(iii) under objection by A Co or a related person;
(iv) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has expired; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Definitions
In this letter, the following terms have the meanings specified:
"A Co" means XXXXXXXXXX;
"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended;
"B Co" means XXXXXXXXXX;
XXXXXXXXXX;
"C Co" means XXXXXXXXXX;
"CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended;
"CRA" means the Canada Revenue Agency;
"direct financing lease" means a lease, that from the point of view of the lessor transfers substantially all the benefits and risks incident to ownership of property to the lessee and, at the inception of the lease, the fair market value of leased property is the same as the carrying amount to the lessor;
"foreign currency lease" means a lease where the rents are receivable in a foreign currency and the purchase of the leased equipment is paid in the same foreign currency;
"GAAP" means the financial statements prepared according to generally accepted accounting principles;
"LIBOR" means London Interbank Offered Rate, which is the rate of interest at which the most creditworthy international banks are willing to lend to each other;
"restricted financial institution" has the meaning assigned by section 248(1)of the Act;
"specified financial institution" has the meaning assigned by subsection 248(1) of the Act;
"taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.
Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows:
Statement of Facts
1. A Co is a XXXXXXXXXX. A Co is a private corporation, a taxable Canadian corporation, a restricted financial institution and a specified financial institution. A Co's tax affairs are administrated by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre. A Co is a wholly-owned indirect subsidiary of XXXXXXXXXX, a US widely-held public corporation.
2. A Co operates in Canada XXXXXXXXXX and A Co is also involved in equipment leases, which include XXXXXXXXXX.
3. A Co, as lessor has acquired and will further acquire equipment from various equipment manufacturers. A Co currently leases equipment as part of a foreign currency lease (the "initial lease") to B Co under a Master Lease Agreement dated XXXXXXXXXX (the "MLA")
For federal income tax purposes, A Co treats the equipment from the Master Leasing Agreement as a lease. The terms of the MLA require, inter alia, that the lessor maintain title to the equipment.
4. XXXXXXXXXX.
5. A Co's foreign currency debts are translated into their Canadian currency equivalent on a daily basis and foreign exchange gains or losses are booked in A Co's general ledger. A Co treats realized and unrealized foreign exchange gains or losses on income account for income tax purposes.
6. The interest held by A Co under the MLA is not a "specified debt obligation" as that term is defined in subsection 142.2(1) of the Act since it is a prescribed property as defined in section 9004 of the Income Tax Regulations.
7. The initial lease referred to under paragraph 3 above and the second foreign currency lease as further described under paragraph 8 below are each a "direct financing lease" and will be reported on the GAAP financial statements of A Co as a loan.
Proposed Transactions
8. A Co will enter into a "second foreign currency lease" in $US dollars as the lessor with B Co as the lessee under a MLA dated XXXXXXXXXX. Some of the specifics of the second lease include:
(a) the value of the described Equipment which includes such items as XXXXXXXXXX, and XXXXXXXXXX is approximately $US XXXXXXXXXX;
(b) the expected residual is a reasonable estimate of the expected fair market value for such equipment at the end of the applicable basic term;
(c) a notional interest rate of LIBOR plus XXXXXXXXXX basis points (i.e. LIBOR plus XXXXXXXXXX%) on a XXXXXXXXXX year lease and a notational interest rate of LIBOR plus XXXXXXXXXX points (i.e. LIBOR plus XXXXXXXXXX%) on a XXXXXXXXXX year lease;
(d) an option to purchase at the end of a basic term of XXXXXXXXXX years for XXXXXXXXXX% residual value or at the end of a XXXXXXXXXX years with XXXXXXXXXX% residual value;
(e) the lease is a foreign currency lease. The funds are in $US dollars;
(f) the lease is subject to the laws of the province of XXXXXXXXXX;
(g) C Co is a guarantor under the lease.
9. A Co will fund the purchase of the equipment subject to this lease from its general pool of funds. XXXXXXXXXX. There will be no specific borrowing to fund the purchase. The purchase price of the equipment is in $US dollars and A Co will use the $US dollars from its general pool to pay the purchase price.
10. A Co will report the income for income tax purposes from the lease as ordinary business income and the funding costs (including the foreign exchange fluctuations) will also be reported on income account. B Co and A Co will be filing a section 16.1 election under the Act for the particular equipment that qualifies for the election.
11. A Co expects to enter into subsequent leasing arrangements of a similar nature in the future.
Purpose of the Proposed Transactions
The overall purpose of the proposed transactions is to provide a $US dollar lease XXXXXXXXXX to B Co, a valued client. The purpose of the transaction for B Co is to lease equipment to be used in the business of C Co, a related operating corporation.
Ruling Given
Provided that the preceding statements constitute complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our ruling is as follows:
Any foreign exchange gains or losses incurred by A Co to fund the cost of the equipment described in the second foreign currency lease under the MLA, as described in paragraphs 8, 9 and 10 above, will be included in income under subsection 9(1) of the Act.
This ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002 and is binding on the CRA provided that the proposed lease transactions are entered into by XXXXXXXXXX.
The above ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act, which, if enacted, could have an effect on the ruling, provided herein.
Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed:
(a) the determination of the fair market value or the cost amount of any particular asset, in particular, the Rolling Stock, and
(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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