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: Whether GAAR applies
Position: No
Reasons: GAAR Committee decision
XXXXXXXXXX 2004-009475
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above taxpayer.
To the best of your knowledge and that of the taxpayers involved, the proposed transactions will not impact the ability of the taxpayers involved to pay their existing tax liabilities.
To the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling request are:
(i) dealt with in an earlier return of the taxpayers or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or
(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.
DEFINITIONS
In this letter, the following definitions are used:
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5 Supp.) c.1, as amended to the date hereof and unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provision of the Act;
(b) "arm's length" has the meaning assigned by section 251;
(c) "Assignee" means XXXXXXXXXX;
(d) "Canco" means XXXXXXXXXX, as described in Paragraph 1. Canco's business number is XXXXXXXXXX. Canco files its corporate income tax return at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office;
(e) "Canadian corporation" has the meaning assigned by subsection 89(1);
(f) "Canadian Parent" means XXXXXXXXXX;
(g) "Corporate Act" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended;
(h) "Corporate Act of Province A" means the XXXXXXXXXX Companies Act;
(i) "CRA" means the Canada Customs and Revenue Agency, and after December 12, 2003, the Canada Revenue Agency;
(j) "dollars" or "$" means Canadian dollars unless otherwise specified;
(k) "Foreign Lender" means XXXXXXXXXX, a U.K. based commercial paper-funded corporation administered by Assignee;
(l) "Newco" means a special-purpose corporation to be incorporated under the laws of the Province B;
(m) "principal amount" has the meaning assigned by subsection 248(1);
(n) "private corporation" has the meaning assigned by subsection 89(1);
(o) "Province A" means the Province of XXXXXXXXXX;
(p) "Province B" means the Province of XXXXXXXXXX;
(q) "Province C" means the Province of XXXXXXXXXX;
(r) "public corporation" has the meaning assigned by subsection 89(1);
(s) "registered charity" has the meaning assigned by subsection 248(1);
(t) "subsidiary wholly-owned corporation" has the meaning in subsection 248(1);
(u) "TC" means Taxation Centre;
(v) "Trust" means XXXXXXXXXX, as described in paragraph 3;
(w) "Trustee" or "Trustee of the Trust" means XXXXXXXXXX, a corporation incorporated under the Corporate Act and a subsidiary of XXXXXXXXXX; and
(x) "TSO" means Tax Services Office.
FACTS
1. Canco was incorporated in Province A pursuant to Letters Patent dated XXXXXXXXXX, and was continued under Part lA of the Corporate Act of Province A pursuant to Certificate and Articles of Continuance dated XXXXXXXXXX. Canco is a subsidiary wholly-owned corporation of Canadian Parent, a Canadian corporation and public corporation incorporated under the Corporate Act.
2. Canco is a financial services company that primarily finances on a secured basis, the purchases of XXXXXXXXXX (the "Receivable Creation Transactions"). XXXXXXXXXX.
3. The Trust is a special purpose trust which was established in XXXXXXXXXX under the laws of Province C to purchase and hold receivables generated from time to time in a portfolio of accounts consisting of the revolving financing arrangements entered into by Canco with certain XXXXXXXXXX to finance such XXXXXXXXXX, as described in paragraph 2 above (the "Receivable Purchase Transactions").
4. The Trust has a registered charity as its beneficiary.
5. Upon its inception, the Trust entered into a Certificate Issuance Agreement ("Certificate Issuance Agreement") providing for the issuance, from time to time, of certificates evidencing secured indebtedness of the Trust ("Investor Certificates") for the financing of the Receivable Purchase Transactions. The first series of Investor Certificates was issued forthwith in XXXXXXXXXX.
6. In XXXXXXXXX , certain Canadian-based financial institutions ("Canadian Lenders") established in favour of the Trust certain revolving credit facilities in order to permit the Trust to finance Receivable Purchase Transactions, such facilities being evidenced by new series of Investor Certificates ("Existing Investor Certificates"). The revolving facility period in respect of the Existing Investor Certificates held by the Canadian Lenders will come to term on XXXXXXXXXX.
7. The financing conditions of the existing Investor Certificates are reflected in the purchase price Canco receives for the receivables sold to the Trust in the Receivable Purchase Transactions. In addition, since XXXXXXXXXX, the debt evidenced by the Existing Investor Certificates is consolidated by Canco in its financial statements.
8. The Canadian Lenders have indicated to Canco that they are not willing to extend or renew the Existing Investor Certificates unless, inter alia, the Trust and, ultimately, Canco, are willing to assume a substantial increase in the cost of financing and to be imposed more stringent terms and conditions ("Canadian Lenders Renewal Proposal").
9. Canco is currently seeking new sources of financing for the Trust.
10. Foreign Lender is willing to lend an amount of approximately $XXXXXXXXXX (the "Foreign Facility"). The proceeds of the Foreign Facility would be used to fund a loan to the Trust to finance Receivable Purchase Transactions as described below.
11. Canco has been unsuccessful in its attempt to raise debt capital for the Trust from other Canadian based financial institutions on terms and conditions at least as favourable as those contemplated under the Foreign Facility. It would not be favourable for Canco to borrow $XXXXXXXXXX because prospective lenders would consider the entire business of Canco, unlike the Trust, where credit risk is isolated.
12. Canco has determined that the unwinding of the Receivable Purchase Transactions and the implementation of a new securitization platform for Canco would entail significant costs and delays.
13. The Foreign Lender deals at arm's length with the Trust and with Canco.
PROPOSED TRANSACTIONS
14. Newco, a private corporation and Canadian corporation, will be incorporated under the laws of Province B. Newco will have its head office and principal place of business in Province B. All the issued and outstanding shares of Newco will be owned by a trust governed by the laws of, and resident in, Province B. The beneneficiary of this trust will be a registered charity.
15. Newco will borrow from Foreign Lender approximately $XXXXXXXXXX under a term loan by the Foreign Lender for a term of more than XXXXXXXXXX years. Newco's indebtedness will be evidenced and governed by a note issued by Newco to the Foreign Lender (the "Note"). The Note will be assignable to Assignee and other permitted assigns.
16. Newco will on-lend the amount received from the Foreign Lender (pursuant to the Note) to the Trust on substantially the same terms as its borrowing from the arm's length Foreign Lender, plus a reasonable mark-up on the interest rate such that Newco will earn a profit to compensate it for the increased risk on its lending to the Trust. The Trust's indebtedness will be evidenced and governed by a note issued by the Trust to Newco (the "Collateral Note"). The Collateral Note would constitute or will be evidenced by a new series of Investor Certificates pursuant to the Certificate Issuance Agreement.
17. The Note will be secured by a first priority perfected security interest in the Collateral Note.
18. The Collateral Note will be secured by a first priority-perfected security in the pool of Canadian floorplan receivables generated by Canco and owned by the Trust as a result of the Purchase Receivable Transactions.
19. Under no circumstances (except in the event of default (all such events being commercially realistic, beyond the control of the lender and not contrived) or if the terms of the Note or related agreement become unlawful or are changed by virtue of legislation or by a court or other competent authority) will Newco be obliged to repay more that XXXXXXXXXX percent of the principal amount of the Note within XXXXXXXXXX years from the date of issue of the Note.
20. No part of the interest payable on the Note will be contingent or dependent on the use of or production from property in Canada or will be computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable to shareholders of any class of shares of the capital stock of a corporation.
21. Newco will have no activities other than those described above.
22. Newco will deal at arm's length with the Foreign Lender.
PURPOSE 0F THE PROPOSED TRANSACTIONS
23. The overall purpose of the proposed transactions is to provide necessary competitive financing to the Trust and, ultimately, to Canco, to permit them to continue to carry on the Receivable Purchase Transactions and to therefore allow Canco to carry on the Receivable Creation Transactions.
24. Newco is undertaking borrowing from the arm's length Foreign Lender to effect the necessary financing to the Trust and, ultimately, to Canco, due to (i) the overall more favourable terms and conditions (including pricing) offered by the Foreign Lender compared to those proposed by Canadian financial institutions, and (ii) the significant costs and delays that would involve the unwinding of the Receivable Purchase Transactions and implementation of a new securitization platform for Canco.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant warranties on page 1 of this advance income tax ruling, as well as all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as set forth below:
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 under the Note, as described above, to the Foreign Lender, a person with whom Newco 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) of the Act will not be applied to redetermine the tax consequences confirmed in Ruling A.
CAVEAT
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 (the "Circular") issued by the CRA on May 17, 2002, and are binding provided the Proposed Transactions are completed on or before XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act.
Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:
(i) the GST implications of any of the proposed transactions;
(ii) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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