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: Can a corporation on-loan to a limited partnership?
Position: Yes
Reasons: Corporate structure in place provides better security for the lenders
XXXXXXXXXX 2004-009273
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX ("X Co") XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, and further to a telephone conversation of XXXXXXXXXX wherein you request a ruling on behalf of the above named corporation.
To the best of your knowledge and that of X Co, none of the issues involved in this ruling contained herein is:
(i) in a return of X Co or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of X Co or a related person;
(iii) under objection by X Co or a related person;
(iv) before the courts or, if a judgment 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 of the CRA.
Definitions:
XXXXXXXXXX
"Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1;
"XXXXXXXXXX" means the XXXXXXXXXX facility to be located on the P Land;
"XXXXXXXXXX LP" means the XXXXXXXXXX formed under the Partnership Act pursuant to the XXXXXXXXXX LP Agreement between the Trust as limited partner (which has a XXXXXXXXXX% interest in XXXXXXXXXX LP) and XXXXXXXXXX as general partner (which has a XXXXXXXXXX% interest in XXXXXXXXXX LP);
"XXXXXXXXXX LP Agreement" means the written partnership agreement dated effective XXXXXXXXXX, as amended;
"XXXXXXXXXX Management Agreement" means the written agreement dated effective XXXXXXXXXX, between XXXXXXXXXX LP and X Co, as amended;
"CRA" means the Canada Revenue Agency;
"Code" means the US Internal Revenue Code of 1986, as amended;
"Designated Land" means approximately XXXXXXXXXX acres of land that forms part of lands known as the XXXXXXXXXX in the province of XXXXXXXXXX;
"EN" means XXXXXXXXXX, which is a XXXXXXXXXX;
XXXXXXXXXX;
XXXXXXXXXX;
"GAAR" means the general anti-avoidance rule under section 245;
"Guarantee Agreement" means the agreement to be entered into by X LP and the Lenders outlining the guarantee to be provided by X LP to the Lenders;
XXXXXXXXXX
"Interest Act" means the Interest Act, R.S.C. 1985, c. I-15;
"Lenders" means a syndicate of persons the majority of whom will be non-residents of Canada for purposes of the Act, and consisting predominantly of US resident persons who will provide the Main Loan to X Co;
"LIBOR" means London Interbank Offered Rate in Canadian dollars;
XXXXXXXXXX
"M Co" means XXXXXXXXXX, a corporation incorporated under the Companies Act XXXXXXXXXX, the sole shareholder of which is EN;
"Main Loan" means the Principal Amount loaned to X Co under terms outlined in the Main Loan Terms;
"Main Loan Terms" means the terms of the Main Loan as outlined in the "XXXXXXXXXX" attached hereto as Exhibit XXXXXXXXXX;
"P Co" means XXXXXXXXXX. The shareholders of XXXXXXXXXX are individuals who are US persons for the purposes of the Code;
"P Land" means those approximately XXXXXXXXXX acres of land forming part of the Designated Land that is used for the Project;
"Partnership Act", means the Partnership Act XXXXXXXXXX;
"Principal Amount" means approximately $XXXXXXXXXX;
"Project" means the P Land together with all improvements on the P Land, including XXXXXXXXXX, and such other facilities as may be developed on the P Land from time to time, together with all related XXXXXXXXXX and any other businesses and other activities associated therewith;
XXXXXXXXXX
"Sub-Loan Agreement" means the agreement to be entered into by X Co and X LP outlining the terms and conditions relating to the Principal Amount loaned by X Co to X LP;
"T Partnership" means the XXXXXXXXXX , which is a general partnership between X Co (which has a XXXXXXXXXX% interest) and XXXXXXXXXX (which has a XXXXXXXXXX% interest);
"XXXXXXXXXX" means the XXXXXXXXXX formed under the laws of XXXXXXXXXX, the partners of which are Canadian residents;
"Trust" means an inter vivos trust formed under the laws of XXXXXXXXXX, the sole beneficiary of which is EN. The trustee of the Trust is a corporation wholly-owned by EN; and
"US" means United States of America.
"X Co" means XXXXXXXXXX, which is an unlimited liability company formed under the laws of XXXXXXXXXX and is a "taxable Canadian corporation" as defined in subsection 89(1), all the issued and outstanding shares of which are owned by XXXXXXXXXX. X Co is located at XXXXXXXXXX and files its tax return at the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Tax services office;
"X LP" means the XXXXXXXXXX, a limited partnership formed under the Partnership Act pursuant to the X LP Agreement, the Partners of which are: X Co as general partner owns a XXXXXXXXXX% partnership interest, which interest is held by X Co as bare trustee and agent on behalf of the T Partnership and a corporation wholly-owned by XN as trustee on behalf of and for the benefit of the Trust as the limited partner, which owns a XXXXXXXXXX% partnership interest;
"X LP Agreement" means the written partnership agreement dated effective XXXXXXXXXX, as amended;
"XN XXXXXXXXXX Corp." means a corporation incorporated under the XXXXXXXXXX , the sole shareholder of which is EN;
"Y Co" means XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX , the sole shareholder of which is EN;
"Z Co" means XXXXXXXXXX, a corporation formed under laws of XXXXXXXXXX and taxable under the Code, which will be the placement agent for the Main Loan;
Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows:
FACTS
1. P Co is a XXXXXXXXXX based company. P Co and related companies are experienced in the development and operations of XXXXXXXXXX . P Co and XN are "co-venturing" in the development and construction of the Project. XXXXXXXXXX
2. Y Co has leased the Designated Land from the Government of Canada for a term of XXXXXXXXXX years and has subleased the P Land to X LP for a term of XXXXXXXXXX years.
3. X LP will own substantially all of the physical assets of the Project other than the P Land and XXXXXXXXXX , and it will operate all XXXXXXXXXX businesses of the Project in X LP. XXXXXXXXXX LP will lease the XXXXXXXXXX from X LP.
4. XXXXXXXXXX LP will lease the facilities from X LP.
5. XXXXXXXXXX .
6. XXXXXXXXXX
7. X Co, as general partner, will be responsible for managing the operations of X LP, which comprise the XXXXXXXXXX assets of the Project.
8. X Co has several powers and duties under the X LP Agreement, including entering into contracts in the normal course of business on behalf of X LP, and arranging financing.
9. X Co, for its own account and as general partner of the T Partnership, also will act as the manager of the XXXXXXXXXX under the XXXXXXXXXX Management Agreement with XXXXXXXXXX LP, and will be entitled to management fees for such services. The management fees, except for amounts paid to X Co as a reimbursement of expenses incurred by X Co in relation to the management of the XXXXXXXXXX , will be received by X Co, on behalf of T Partnership, as compensation for the ongoing management of the XXXXXXXXXX operations and an amount based on residual cash flow of the XXXXXXXXXX operations. Management fees, other than reimbursement of expenses incurred by X Co in relation to the management of the XXXXXXXXXX , are projected to be in excess of $XXXXXXXXXX per year after the XXXXXXXXXX year of XXXXXXXXXX operations.
10. X LP is seeking debt financing for the Principal Amount to construct the Project.
11. Z Co, through a private placement memorandum, will offer the Lenders the opportunity to provide the Principal Amount (on the terms outlined in the Main Loan Terms).
12. Z Co and all of the Lenders will deal at arm's length with X Co and X LP.
13. Management fees, other than reimbursement of expenses incurred by X Co in relation to the management of the XXXXXXXXXX , will be subordinated and assigned to the Lenders by X Co and T Partnership.
14. Based on market enquiries and communications from Z Co and its counsel, X Co believes that it is better able to borrow the Principal Amount as principal and to do so in the US market, for various reasons including:
(a) as a corporate borrower, X Co will ensure that the prepayment rights and "make whole" provisions of the Main Loan Terms will apply during the entire XXXXXXXXXX year term of the Main Loan. That is, a borrower other than a corporation could repay a loan before the maturity date of the loan but after the expiration of five years from the date the loan was issued, and the penalty for prepayment would be limited to only three months of interest (in addition to the principal and interest to the time of payment) pursuant to section 10 of the Interest Act. Section 10 of the Interest Act supersedes any agreements to the contrary in the loan documentation, but it does not apply to a mortgage on real estate given by a corporation (i.e., in the case of a non-corporate entity, it is doubtful that the lenders could seek more than such three months of interest penalty on prepayment of debt borrowed by X LP);
(b) as the borrower, all the assets of X Co, including the management fees it will receive for its own account and for the T Partnership under the XXXXXXXXXX Management Agreement may provide additional security to be given to the Lenders (i.e., the Lenders will improve their security position to the extent of the management fees to be received by X Co). Further, the secured guarantee of the Main Loan to be provided by X LP as outlined in the Guarantee Agreement, will attach to all of the X LP assets;
(c) sections 40 and 43 of the XXXXXXXXXX makes any mortgage of land in effect "non-recourse" to the borrower except if the mortgage is provided by a corporation. Any waiver or release of the rights, benefits of protection given by subsections 40(1) and (2) of the XXXXXXXXXX is against public policy and void (i.e., general recourse is available against a corporate borrower); and
(d) the US has an established private market and offering process for issuers of large debt amounts to finance XXXXXXXXXX and related assets. There is no similar market for large financings in Canada. Accordingly, if such a capital loan could be obtained in Canada, it would likely be on more stringent terms and/or at a higher cost of borrowing
PROPOSED TRANSACTIONS
15. X Co, as principal, will borrow the Principal Amount from the Lenders pursuant to the Main Loan Terms. The Main Loan will be for a term of XXXXXXXXXX years and will be comprised of:
(a) approximately one half of the Principal Amount of floating rate notes with an interest rate of LIBOR or bankers acceptance rate plus XXXXXXXXXX basis points payable XXXXXXXXXX in arrears; and
(b) approximately one half of the Principal Amount of fixed rate notes with an interest rate equal to the swap rate equivalent of the floating rate notes.
The interest rate, floating and fixed, will be referenced solely to the outstanding balance of the Main Loan pursuant to the Main Loan Terms. At the expiry of the XXXXXXXXXX -year term, the Main Loan will be due and payable.
16. Under no circumstances (except in the event of default; including a change of control, 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, or where 100% of net insurance proceeds are not used to replace lost or damaged property within 360 days of receipt of such proceeds, or where net proceeds from asset sales are not reinvested in the business within 360 days) will X Co be obligated to repay more than XXXXXXXXXX % of the principal amount of the Main Loan within five years from the date of issue of the Main Loan. In addition, there is no scheduled repayment of the principal amount of the Main Loan.
There is no obligation of X Co or right of the Lenders to convert any of the Main Loan amount into an equity interest in X Co or X LP. X Co may at its option repay all or part of the Main Loan at any time, subject to a prepayment fee or "make whole" amount as outlined in the Main Loan Terms.
17. The Main Loan will be secured by all of the assets of X Co, including the management fees it receives, its interest in X LP as general partner, and its XXXXXXXXXX % interest in the T Partnership and future acquired assets, as outlined in the Main Loan Terms. In addition, X LP will provide a guarantee for the repayment of the Main Loan to the Lenders and such guarantee will be secured by all of its assets, lease income and future acquired assets as outlined in the Guarantee Agreement.
18. X Co will, in turn, lend the Principal Amount received under the Main Loan to X LP on substantially the same terms as the Main Loan except that the interest rate will be approximately XXXXXXXXXX % more than the interest rate on both the floating and fixed components of the Main Loan as outlined in the Sub-Loan Agreement.
PURPOSE OF PROPOSED TRANSACTIONS
The purpose of the financing is to provide funds to construct the XXXXXXXXXX and other Project facilities at the lowest cost of capital to X Co and X LP.
RULINGS GIVEN:
Provided that the preceding statements constitute complete and accurate disclosure of all 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:
A. By virtue of the exemption contained in subparagraph 212(1)(b)(vii) of the Act, no tax under Part XIII of the Tax Act will be exigible in respect of any amounts paid or credited on the Main Loan, as described in paragraphs 15, 16 and 17, to any person with whom X Co 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, section 245(2) of the Act will not be applied to redetermine the tax consequences confirmed 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 CRA 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 Planning Branch
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