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: Is a minimum earning before interest, taxes, depreciation and amortization of a selected group acceptable as triggering event.
Position: Yes
Reasons: There is a cure by injecting cash to purchase shares and providing an acceptable XXXXXXXXXX debt to equity level and the EBITDA projections of the group make it acceptable.
XXXXXXXXXX 2004-009474
XXXXXXXXXX, 2004
Dear XXXXXXXXXX,
Re: Advance Income Tax Ruling
XXXXXXXXXX ("Holdco")
This is in reply to your letter of XXXXXXXXXX, and further to your amendments of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above noted corporation. We also acknowledge the additional information in your letter of XXXXXXXXXX.
To the best of your knowledge, and that of Holdco, none of the issues involved in this ruling as they apply specifically to Holdco and its subsidiaries herein:
(i) is in an earlier return of Holdco or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of Holdco or a related person;
(iii) is under objection by Holdco or a related person;
(iv) is before the courts; or if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(v) is the subject of a previously issued ruling.
DEFINITIONS
The following definitions apply in respect of this letter. Throughout this letter, the singular should be read as plural and vice versa where the circumstances so require. Unless, otherwise specified, all references to dollars in this letter are references to Canadian dollars.
XXXXXXXXXX.
"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended.
"Alternate Financing Facility" means the U.S. dollar denominated unsecured term loan facility of Holdco in an amount approximately equal to the U.S. dollar equivalent of $XXXXXXXXXX that will be established in the event that Holdco is unable to successfully market the Holdco Notes prior to the Closing Date.
"Amalco" means the corporation formed upon the amalgamation of Subco and Targetco as described in Paragraph 9.
"Closing Date" means on or about XXXXXXXXXX or such later date as may be agreed by Sellerco and Holdco for completion of the purchase of the Target Shares.
"Commitment Parties" means XXXXXXXXXX.
"CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended.
"CRA" means the Canada Revenue Agency
"EBITDA" will have the meaning assigned thereto in the Holdco Indenture or, if the Holdco Notes are not issued, in the agreement governing the Alternate Financing Facility, and will be based on the earnings before interest, taxes, depreciation and amortization of the Restricted Group, calculated in accordance with United States generally accepted accounting principles, with certain specified adjustments thereto as negotiated between Holdco and the Commitment Parties before the indenture or the agreement governing the Alternate Financing Facility, as the case may be, is executed.
"Holdco" means XXXXXXXXXX.
"Holdco Indenture" means the trust indenture pursuant to which the Holdco Notes will be issued as described in Paragraph 17.
"Holdco Notes" means the US dollar denominated interest-bearing senior unsecured notes that will be issued by Holdco pursuant to the Holdco Indenture as described in Paragraph 17 in an amount which will yield the U.S. dollar equivalent of approximately $XXXXXXXXXX.
"LP1" means a limited partnership to be formed by XXXXXXXXXX (as the sole limited partner) and a corporation to be created under the CBCA as a wholly-owned subsidiary of XXXXXXXXXX ("GPCo1") (as the sole general partner).
"LTM EBITDA" as at a particular date means EBITDA for the twelve months ended on that date.
"LTM EBITDA Offer" means the offer to repurchase the Holdco Notes or, if the Holdco Notes are not issued, the offer to repay the debt under the Alternate Financing Facility that Holdco will be required to make under the terms of the Holdco Indenture, or the agreement governing the Alternate Financing Facility, as the case may be, if the Minimum LTM EBITDA is not achieved and such failure is not cured as described in Paragraph 20.
"Minimum LTM EBITDA" means a LTM EBITDA of $XXXXXXXXXX for the Restricted Group for the period ending XXXXXXXXXX, provided that if the ratio of the total net debt (as negotiated between Holdco and the Commitment Parties) of the Restricted Group to the Restricted Group's EBITDA is equal to or less than XXXXXXXXXX on XXXXXXXXXX, the Minimum LTM EBITDA shall be deemed to have been achieved.
XXXXXXXXXX.
"Opco" means Subco and, subsequent to the amalgamation of Subco and Targetco, Amalco.
"Paragraph" refers to a numbered paragraph in this letter.
"XXXXXXXXXX" means XXXXXXXXXX, a corporation existing under the CBCA.
"private corporation" has the meaning assigned in subsection 89(1) of the Act.
"Purchase Price" means $XXXXXXXXXX, subject to adjustments.
"Restricted Group" means Holdco and its direct and indirect subsidiaries, if any, except the Unrestricted Subsidiary.
"Revolving Credit Facility" means the senior secured first-lien revolving loan facility of Opco described in Paragraph 12.
"Sellerco" means XXXXXXXXXX.
"Senior XXXXXXXXXX Facility" means the senior secured XXXXXXXXXX term loan facility of Opco described in Paragraph 12.
"Subco" means XXXXXXXXXX, a corporation existing under the XXXXXXXXXX and a subsidiary wholly-owned corporation of Holdco as described in Paragraph 3.
"subsidiary wholly-owned corporation" has the meaning assigned in subsection 248(1) of the Act.
"Targetco" means XXXXXXXXXX.
"Target Shares" means all of the issued and outstanding shares of Targetco as at the Closing Date.
"taxable Canadian corporation" has the meaning assigned in subsection 89(1) of the Act.
"Term Credit Facility" means the senior secured first-lien term loan facility of Opco described in Paragraph 12.
"Unrestricted Subsidiary" means XXXXXXXXXX will acquire certain assets of Targetco and will be designated as an unrestricted subsidiary (and therefore not part of the Restricted Group) for purposes of the Term Credit Facility, the Revolving Credit Facility, the Senior XXXXXXXXXX Facility and the Holdco Notes (or, if the Holdco Notes are not issued, the Alternate Financing Facility); XXXXXXXXXX or XXXXXXXXXX any other subsidiary that may be established in the future and that is designated as an "unrestricted subsidiary" for purposes of such credit facilities.
FACTS
1. Holdco was incorporated under the XXXXXXXXXX by certificate of incorporation dated XXXXXXXXXX. Holdco has undertaken no activity other than as is necessary to organize itself and for the purposes of effecting the transactions described below. Its business number is XXXXXXXXXX.
2. XXXXXXXXXX was incorporated under the CBCA by a certificate of incorporation dated XXXXXXXXXX has undertaken no activity other than as is necessary to organize itself and for the purposes of effecting the transactions described below. Its business number is XXXXXXXXXX.
3. Subco was incorporated under the XXXXXXXXXX by certificate of incorporation dated XXXXXXXXXX and has undertaken no activity other than as is necessary to organize itself for the purposes of effecting the transactions described below. All of the issued and outstanding shares of Subco are owned by Holdco.
4. Each of Holdco, XXXXXXXXXX, Subco, Sellerco and Targetco is a private corporation and a taxable Canadian corporation.
5. Holdco is a subsidiary wholly-owned corporation of XXXXXXXXXX. On or prior to the Closing Date all of the shares of Holdco will be transferred by XXXXXXXXXX to LP1.
6. Targetco is a subsidiary wholly-owned corporation of Sellerco.
7. Targetco carries on a business of XXXXXXXXXX.
8. Sellerco and Holdco deal at arm's length with each other for purposes of the Act (determined without regard to Holdco's rights under the share purchase agreement described in Paragraph 9 below).
9. On XXXXXXXXXX, Holdco and Sellerco entered into a share purchase agreement pursuant to which Sellerco agreed to sell the Target Shares to Holdco (or its permitted assignee) in consideration for the Purchase Price. It is anticipated that the purchase of the Target Shares will occur on the Closing Date, and that on the Closing Date, Subco and Targetco will be amalgamated pursuant to the XXXXXXXXXX to form Amalco.
10. The acquisition of the Target Shares by Holdco will be financed, in part, by borrowings in the aggregate amount of approximately $XXXXXXXXXX made by Holdco and Subco and to be arranged or made available by the Commitment Parties. The remaining portion of the Purchase Price will be funded by cash received by Holdco from LP1 XXXXXXXXXX.
11. On XXXXXXXXXX and the Commitment Parties executed a commitment letter pursuant to which the Commitment Parties agreed to provide or arrange for an aggregate of approximately $XXXXXXXXXX of financing consisting of:
? approximately $XXXXXXXXXX through a term loan credit facility;
? $XXXXXXXXXX through a revolving loan credit facility; and
? an aggregate of approximately $XXXXXXXXXX through the issuance of interest-bearing notes by Holdco (approximately $XXXXXXXXXX) and by XXXXXXXXXX (approximately $XXXXXXXXXX).
12. On XXXXXXXXXX, Subco and the Commitment Parties executed a commitment letter which replaced the commitment letter executed by Holdco and the Commitment Parties described in Paragraph 11. Pursuant to this replacement commitment letter, the Commitment Parties agreed to provide for or arrange for an aggregate of at least $XXXXXXXXXX of financing consisting of:
? approximately $XXXXXXXXXX through the Term Credit Facility;
? approximately $XXXXXXXXXX through the Revolving Credit Facility;
? approximately $XXXXXXXXXX through the Senior XXXXXXXXXX Facility; and
? approximately $XXXXXXXXXX through the issuance of Holdco Notes or, if the Holdco Notes are not issued on or before the Closing Date, through the Alternate Financing Facility.
The terms of these commitments provide that, if necessary to successfully syndicate the loans, certain adjustments may be made to the allocation of borrowings among the various facilities (but not to the total amount of the borrowings), to the interest rates, maturity dates and certain other financial terms of the facilities (but not to the terms of the LTM EBITDA Offer). If this occurs, certain of the terms of one or more of the facilities may differ from those described below, although not in a way that would conflict with the requirements of subparagraph 212(1)(b)(vii) of the Act.
At least XXXXXXXXXX% of the total capitalization of Holdco must be funded by cash from LP1 XXXXXXXXXX as described below in Paragraph 22. LP1 will be funded with capital contributions by XXXXXXXXXX and GPCo1.
The Term Credit Facility and the Senior XXXXXXXXXX Facility will both be denominated in U.S. dollars. The Holdco Notes or the Alternate Financing Facility, if it is used, will also be denominated in U.S. dollars. The Revolving Credit Facility will be denominated in Canadian dollars although Opco will be able to draw under it in either Canadian or U.S. dollars.
13. Targetco has historically prepared audited financial statements for all of its operations on a consolidated basis. It is intended that shortly after (or contemporaneously with) the closing of the purchase of the Target Shares, a portion of Targetco's business will be transferred to the Unrestricted Subsidiary. Only the Restricted Group's assets and earnings will therefore be the basis for the financings described in this letter. Holdco and Opco will be required to prepare audited financial statements for the Restricted Group for the period commencing with the first quarter following the acquisition of the Target Shares and to provide them to the lenders and noteholders under the financings described in this letter. An important element of the financing commitment of the Commitment Parties is the achievement of the Minimum LTM EBITDA.
14. Subsequent to the execution of the commitment letter referred to in Paragraph 11, the management of Holdco and Opco, together with XXXXXXXXXX have spent significant time analyzing the historical audited financial statements and the financial results of Targetco since XXXXXXXXXX and separating the results of the business to be carried on by the Unrestricted Subsidiary from that to be carried on by the Restricted Group. On the basis of that work, the best estimate of the LTM EBITDA as at XXXXXXXXXX is $XXXXXXXXXX. The projections for Targetco for the year ended XXXXXXXXXX indicate that the LTM EBITDA as at XXXXXXXXXX will be $XXXXXXXXXX and for the year ended XXXXXXXXXX indicate that the LTM EBITDA as at XXXXXXXXXX will be $XXXXXXXXXX. The Commitment Parties made their new financing commitment described in Paragraph 12 on the basis of, inter alia, representations that the Restricted Group would achieve an LTM EBITDA of at least $XXXXXXXXXX for the period ending XXXXXXXXXX.
In addition, the Commitment Parties have agreed that for purposes of the LTM EBITDA test as at XXXXXXXXXX additional addbacks to EBITDA may be made.
XXXXXXXXXX.
The Offering Memorandum to be delivered in connection with any distribution of the Holdco Notes will include the financial information regarding the Restricted Group's business including a LTM EBITDA as at XXXXXXXXXX consistent with that represented to the Commitment Parties as described above and such information is expected to be relied on by purchasers of Holdco Notes.
PROPOSED TRANSACTIONS
15. Opco will enter into the agreements governing the Term Credit Facility, the Revolving Credit Facility and the Senior XXXXXXXXXX Facility on or before the Closing Date. It is expected that the full amounts available under the Term Credit Facility and the Senior XXXXXXXXXX Facility will be drawn on the Closing Date but that not all of the amount available under the Revolving Credit Facility will be drawn on the Closing Date and any amounts drawn under the Revolving Credit Facility will not be used to fund the acquisition of the Target Shares. The failure to achieve the Minimum LTM EBITDA will be an event of default under the Term Credit Facility, the Revolving Credit Facility and the Senior XXXXXXXXXX Facility. However, that default may be cured by the contribution of cash to the Restricted Group in exchange for common shares or other securities where such cash is used to pay debt until a XXXXXXXXXX leverage ratio is achieved. The Commitment Parties have the right, and intend, prior to the Closing Date to syndicate all or a portion of their commitments under the Term Credit Facility, the Revolving Credit Facility and the Senior XXXXXXXXXX Facility to one or more financial institutions, at least some of which, in the case of the Term Credit Facility and the Senior XXXXXXXXXX Facility, will be non-residents of Canada for purposes of the Act. The Term Credit Facility and the Senior XXXXXXXXXX Facility are intended to meet the requirements of the exemption from Canadian withholding tax provided in subparagraph 212(1)(b)(vii) of the Act.
16. Holdco and the Commitment Parties intend to take such steps as are necessary to market the Holdco Notes so that they may be issued on or before the Closing Date. However, if the marketing is unsuccessful and there are insufficient buyers to raise approximately $XXXXXXXXXX by the issuance of the Holdco Notes on the Closing Date, the Alternate Financing Facility will be utilized.
17. Holdco will issue the Holdco Notes to, inter alia, one or more persons who are non-residents for purposes of the Act on a private placement basis pursuant to the Holdco Indenture on or before the Closing Date or, if the Holdco Notes are not issued on or before the Closing Date, Holdco will enter into the agreement governing the Alternate Financing Facility all or a part of which will be syndicated by the Commitment Parties to, inter alia, one or more persons who are non-residents for purposes of the Act.
18. Both the Holdco Notes and the Alternate Financing Facility are intended to meet the requirements of the exemption from Canadian withholding tax provided in subparagraph 212(1)(b)(vii) of the Act.
19. The Holdco Notes will have a maturity date on or after the XXXXXXXXXX anniversary of the Closing Date and, if the Holdco Notes are not issued on or before the Closing Date, the Alternate Financing Facility will have a maturity date on or after the XXXXXXXXXX anniversary of the Closing Date.
20. The terms of the Holdco Indenture or, if the Holdco Notes are not issued on or before the Closing Date, the agreement governing the Alternate Financing Facility, will provide that, if the Minimum LTM EBITDA is not achieved (and such failure is not cured by the contribution of cash to the Restricted Group in exchange for common shares or other securities where such cash is used to pay debt until a XXXXXXXXXX leverage ratio is achieved), Holdco will be required to make the LTM EBITDA Offer to repurchase the Holdco Notes (or to repay the debt under the Alternate Financing Facility, as the case may be) for an amount equal to XXXXXXXXXX% of the aggregate principal amount of such notes (or debt) outstanding, as the case may be. Holdco will not be required to make a LTM EBITDA Offer if a third party (for example, a potential purchaser) makes the offer in the manner, at the times and otherwise in compliance with the requirements applicable to such an offer by Holdco. The failure to achieve the Minimum LTM EBITDA will not be an event of default under the Holdco Indenture (or the agreement governing the Alternate Financing Facility, as the case may be) but the failure by Holdco to make the LTM EBITDA Offer and to comply with its terms once made will be a listed event of default under the Holdco Indenture (or the agreement governing the Alternate Financing Facility, as the case may be).
21. The Term Credit Facility, the Senior XXXXXXXXXX Facility and the Holdco Indenture (or, if the Holdco Notes are not issued, the agreement governing the Alternate Financing Facility) will identify other triggering events (including asset sales and a change of control of Holdco, in each case as defined in the relevant credit documentation) which will require Holdco or Opco, as applicable, to make an offer to repay or repurchase the relevant debt. These triggering events will not be considered events of default but the failure of Holdco or Opco, as applicable, to make the offers as required or to comply with the terms of the offer once made will be listed as an event of default under the relevant credit documentation. The Revolving Credit Facility, the Term Credit Facility and the Senior XXXXXXXXXX Facility will also contain covenants on the part of Opco to meet certain financial ratios, including the Minimum LTM EBITDA. However, the Minimum LTM EBITDA test is a one-time test.
If the Alternate Financing Facility is used because it is not possible to successfully market the Holdco Notes before the Closing Date, the lenders under the Alternate Financing Facility may seek to market their loans in a similar manner following the Closing Date.
22. XXXXXXXXXX and GPCo1 will make cash capital contributions to LP1. LP1 will advance cash so received to Holdco XXXXXXXXXX. This cash will be used along with funds borrowed pursuant to the Holdco Notes (or the Alternate Financing Facility) and from Subco to satisfy the purchase price for the Target Shares and expenses associated with the transactions.
23. LP1 will guarantee the Holdco Notes, the Revolving Credit Facility, the Term Credit Facility and the Senior XXXXXXXXXX Facility.
PURPOSE OF PROPOSED TRANSACTIONS
24. The purpose of the proposed transactions is to obtain financing to purchase the Target Shares. The purpose of the provisions in the Holdco Indenture (or, if the Holdco Notes are not issued, the agreement governing the Alternate Financing Facility) which require Holdco to make the LTM EBITDA Offer if the Minimum LTM EBITDA is not achieved (and such failure is not cured in the manner described in Paragraph 20) is to provide the holders of the Holdco Notes (or the lenders under the Alternate Financing Facility) flexibility as to whether to terminate the financing if the Minimum LTM EBITDA represented to be achievable is not in fact achieved (or cured, if not achieved). XXXXXXXXXX.
RULING GIVEN
Provided that the preceding statements constitute a 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:
The requirement of Holdco to make the LTM EBITDA Offer, and the inclusion of the failure to make the LTM EBITDA Offer when required, or to comply with the terms thereof once made, as a listed event of default under the terms of the Holdco Indenture or the agreement governing the Alternate Financing Facility, as the case may be, will not, in and by themselves, preclude the application of the exemption from Canadian withholding tax in subparagraph 212(1)(b)(vii) of the Act to interest paid to the holders of the Holdco Notes or the lenders under the Alternate Financing Facility, as the case may be, who, for purposes of the Act, are non-residents of Canada and deal at arm's length with Holdco.
This ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R5, dated May 17, 2002, and is binding on the CRA provided the Holdco Notes are issued before XXXXXXXXXX.
This rulings are based on the Act as it currently reads and does not take into account any future amendments, whether currently proposed or not, to the Act.
Yours truly,
Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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