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 (i) paragraph 95(2)(a) would apply to re-characterize income from property of a foreign affiliate on the basis that it was derived from payments deductible in computing active business income, made by another foreign affiliate of Canco under a lease agreement with a third party? (ii) section 17 would apply?
Position: (i) Yes; (ii) No
Reasons: (i) 'indirectly' in opening words of subparagraph 95(2)(a)(ii); (ii) loan made by foreign affiliate fell into the exception contained in paragraph 17(3)(b).
Re: Advance Income Tax Ruling
This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
Aco files its T2 Return with the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office.
In this ruling, unless otherwise specified:
(a) "2001 Tax Ruling" means the tax ruling issued to Aco originally dated XXXXXXXXXX, 2001 and revised as of XXXXXXXXXX, 2001, having reference number 2001-008991;
(b) "2003 Tax Ruling" means the tax ruling issued to Aco dated XXXXXXXXXX, 2003, having reference number 2003-002458;
(c) "Aco" means XXXXXXXXXX;
(d) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th 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;
(e) "active business" has the meaning assigned by subsection 95(1) of the Act;
(f) "Advances" means the moneys advanced by the French Investors to the G.I.E. pursuant to a loan agreement;
(h) "Canada-France Treaty" means the Canada-France Income and Capital Tax Convention, 1975, as amended to the date hereof;
(i) "CBCA" means the Canada Business Corporations Act, R.S.C. 1985,
c. C-44, as amended to the date hereof;
(j) "Cco" means XXXXXXXXXX;
(k) "CRA" means the Canada Revenue Agency;
(l) "CGI" means the French Code Général des Impôts;
(m) "Construction Agreement" means the construction agreement to be entered into between Gco (acting on behalf of Gco XXXXXXXXXX Branch) and the G.I.E. in connection with the construction by Gco XXXXXXXXXX Branch of the G Act Assets;
(n) "controlled foreign affiliate" has the meaning assigned by subsection 95(1) of the Act;
(o) "Deductible Amount" means the amount of deductions which the French Investors will be permitted to deduct in respect of G Act Assets for French income tax purposes pursuant to the G Act being the Euro equivalent of US$XXXXXXXXXX;
(p) "Delegation Agreement" means the agreements to be entered into among US LLC, Gco (acting on behalf of Gco XXXXXXXXXX Branch) and the G.I.E. pursuant to which the G.I.E. will direct Gco XXXXXXXXXX Branch to pay directly to US LLC the Lease Base Payments;
(q) "designated treaty country" has the meaning assigned by subsection 5907(11) of the Regulations;
(r) "DGI" means the Direction Générale des Impôts of France;
(s) "earnings" has the meaning assigned by subsection 5907(1) of the Regulations;
(t) "exempt earnings" has the meaning assigned by subsection 5907(1) of the Regulations;
(u) "exempt surplus" has the meaning assigned by subsection 5907(1) of the Regulations;
(v) "FAPI" means foreign accrual property income as defined in subsection 95(1) of the Act;
(w) "foreign affiliate" has the meaning assigned by subsection 95(1) of the Act;
(x) "French Investors" means legal entities subject to French corporate income tax that participate in the Transaction through the G.I.E that are not related to Aco or Aco's foreign affiliates;
(y) "GAAR" means the general anti-avoidance rule in section 245 of the Act;
(z) "G.I.E." means the groupement d'intérêt économique, or economic interest group, to be established in XXXXXXXXXX by the French Investors. A groupement d'intérêt économique is a fiscally transparent special purpose vehicle with a separate legal existence. The separate legal existence is limited since the activities of a groupement d'intérêt économique are only auxiliary to, and serve to facilitate the business activities of, its members. The members of a groupement d'intérêt économique are each jointly and severally liable for the debts of the G.I.E;
(aa) "G Act" means the provisions of Law 2003-660 that is the 'Girardin Act' concerning investments in overseas districts and territories and its tax provisions as set out under the provisions of articles 217 undecies and duodecies of the CGI, being those provisions of the CGI providing incentives to corporate entities to invest in French overseas departments and territories;
(bb) "G Act Assets" means those assets comprising a portion of the XXXXXXXXXX that will be owned by the G.I.E. and leased to the Gco XXXXXXXXXX Branch;
(cc) "G Act Loan" means the loan from US LLC to the G.I.E. which terms and conditions therein are such that persons dealing at arm's length would have been willing to enter into them at the time the loan was made;
(dd) "Gco" means XXXXXXXXXX ., a company incorporated and resident in France and a controlled foreign affiliate of Aco;
(ee) "Gco XXXXXXXXXX Branch" or "the Branch" means the XXXXXXXXXX branch of Gco;
(ff) "Gco XXXXXXXXXX Project" or "the Project" means the XXXXXXXXX project carried on in XXXXXXXXXX by Gco through the Gco XXXXXXXXX Branch;
(gg) "income from an active business" has the meaning assigned by subsection 95(1) of the Act;
(hh) "Lease" means the lease contract to be entered into between Gco (acting on behalf of Gco XXXXXXXXXX Branch) as lessee, and the G.I.E., as lessor, pursuant to which the G Act Assets are leased by the G.I.E. to the Gco XXXXXXXXXX Branch;
(ii) "Lease Base Payment" means any payment by Gco XXXXXXXXXX Branch to G.I.E. under the Lease other than a Lease Contingent Payment;
(jj) "Lease Contingent Payment" means a payment by Gco XXXXXXXXXX Branch to G.I.E. under the Lease made as a consequence of the occurrence of a contingent future event in respect of which Gco is obligated to indemnify the French Investors;
(kk) "loss" has the meaning assigned by subsection 5907(1) of the Regulations;
(ll) "public corporation" has the meaning assigned by subsection 89(1) of the Act;
(mm) "qualifying interest" has the meaning assigned by paragraph 95(2)(m) of the Act;
(nn) "Regulations" means the Income Tax Regulations;
(oo) "Sco" means XXXXXXXXXX, a company incorporated in France and a wholly-owned subsidiary of XXXXXXXXXX;
(pp) "Substantial Completion" means the date of substantial completion of the G Act Assets under the terms and conditions of the Transaction;
(qq) "Tax Rulings" means the 2001 Tax Ruling and the 2003 Tax Ruling;
(rr) "Transaction" means the financing of the G Act Assets;
(ss) "US LLC" means XXXXXXXXXX, a limited liability company the sole member of which is Aco, formed under the laws of the state of XXXXXXXXXX and that will be resident in the United States; and
(tt) "US LLC Agreement" means the Limited Liability Company Operating Agreement of US LLC.
1. Aco was incorporated in XXXXXXXXXX under the laws of Canada, XXXXXXXXXX. Aco's executive offices are located at XXXXXXXXXX. Aco is a public corporation and its shares are listed on the XXXXXXXXXX Stock Exchange.
3. Gco was incorporated as a Société Anonyme in XXXXXXXXXX under the law of France, is registered in France, has its head office located in France and is the surviving corporation following the mergers of:
(a) Cco and its wholly-owned XXXXXXXXXX subsidiary in XXXXXXXXXX; and
(b) XXXXXXXXXX and XXXXXXXXXX in XXXXXXXXXX,
as described in the Tax Rulings.
4. Aco owns XXXXXXXXXX% of Gco and XXXXXXXXXX (through its wholly owned subsidiary Sco) owns the remaining XXXXXXXXXX%. In a press release dated XXXXXXXXXX, Aco announced that Aco, the government of XXXXXXXXXX and XXXXXXXXXX have entered into a letter of understanding allowing for the acquisition by the government of XXXXXXXXXX from XXXXXXXXXX of up to XXXXXXXXXX% of Gco (being XXXXXXXXXX entire interest following an expected recapitalization of Gco). The acquisition is subject to the negotiation of definitive agreements.
5. Aco has also entered into an agreement in principle with a consortium of XXXXXXXXXX companies providing for their acquisition of up to XXXXXXXXXX% of Gco. This acquisition is subject to, among other things, the negotiation of definitive agreements and the acquisition of the shares of Gco owned by Sco by the government of XXXXXXXXXX.
6. Upon completion of the transactions described in paragraphs 4 and 5, Aco will own XXXXXXXXXX% of the equity in Gco, the XXXXXXXXXX consortium will own XXXXXXXXXX% of the equity in Gco and the XXXXXXXXXX government will own XXXXXXXXXX% of the equity in Gco. Prior to and upon the completion of these transactions, Gco will at all relevant times be a controlled foreign affiliate of Aco in which Aco will have a qualifying interest.
7. Aco will provide the funds for the G Act Loan as described under the heading "Proposed Transactions" below.
10. XXXXXXXXXX The DGI has agreed to provide assistance to the Gco XXXXXXXXXX Project by granting its preliminary approval for the application of the G Act to the Transaction.
11. The G Act will provide the French Investors with up-front tax benefits in respect of their investment in the G.I.E., as explained more fully below. Under the preliminary approval as updated and amended by subsequent correspondence, the DGI approved deduction by the French Investors of the Euro equivalent of US$XXXXXXXXXX in respect of the Transaction. A request for a final approval has been submitted in draft form to the DGI and a final approval is expected prior to the closing of the Transactions.
12. Aco received the Tax Rulings in respect of the establishment of the Gco XXXXXXXXXX Project. The Tax Rulings confirmed, among other things, the following:
c. "Gco is considered to be a resident of France for the purposes of paragraph 1 of Article 4 of the Canada - France Treaty."
13. It is assumed for purposes of this ruling that the facts, assumptions and conditions upon which the rulings in the Tax Rulings were given will continue to apply and will continue to be satisfied. It is acknowledged that Aco intends to convert Gco from a société anonyme (S.A.) to a société par actions simplifiée (S.A.S.) which tax consequences will be dealt with in a separate ruling request. Reference should be made to the Tax Rulings for additional information regarding the Gco XXXXXXXXXX Project.
14. The French Investors will establish and register a G.I.E. in XXXXXXXXXX and directly, or indirectly through a special purpose company, will each hold an interest in the G.I.E in proportion to the advances made to the G.I.E. The French Investors will make Advances to the G.I.E. in three tranches which in aggregate will not exceed the Euro equivalent of approximately US$XXXXXXXXXX. It is expected that the tranches will be made on or about XXXXXXXXXX. The Advances by the French Investors will be non-interest bearing and will, subject to certain conditions, be forgiven by the French Investors in stages over the course of the Transaction.
15. The French Investors will be permitted to deduct for French income tax purposes an amount equal to the Deductible Amount which represents a substantial portion of the total cost of the G Act Assets owned by the G.I.E.
16. US LLC is a limited liability company formed under the XXXXXXXXXX As a limited liability company, US LLC is a flow through entity for US tax purposes. The US LLC Agreement will specify the following:
- the management of US LLC is vested in its board of managers ("Board of Managers");
- the Board of Managers may only meet to take action or make effective decisions on behalf of US LLC within the boundaries of any State of the United States of America, and no action may be taken by the Board of Managers, except by resolution adopted at a duly held meeting at such a location;
- if meetings of the Board of Managers are held by conference call, all members of the Board of Managers shall be physically present in the United States at the time of the conference call;
- the rules of governance applicable to the Board of Managers will be set forth in the US LLC Agreement;
- Aco is the sole member of US LLC; and
- the Board of Managers shall be agents of US LLC with authority to bind US LLC in the ordinary course of its business.
17. US LLC will lend approximately US$XXXXXXXXXX (including capitalized interest but not including cost overruns on the G Act Assets and any shortfall in the funds provided by the French Investors) to the G.I.E on the condition that the G.I.E. uses the borrowed money to acquire the G Act Assets and fund a small portion of the transaction costs. The G Act Loan will be made in three tranches on or about XXXXXXXXXX with an additional tranche in the event of cost overruns. The term of the G Act Loan will equal the construction period (expected to be about XXXXXXXXXX months) plus the term of the Lease and will (i) bear interest at a fixed rate expected to be XXXXXXXXXX%, (ii) be denominated in United States dollars, and (iii) require semi-annual interest and principal payments. The first payment under the G Act Loan is due XXXXXXXXXX months after G.I.E. takes delivery of the G Act Assets (i.e., XXXXXXXXXX months after the term of the Lease commences).
18. The G.I.E. will use the proceeds from the Advances by the French Investors and the G Act Loan from US LLC (net of all related transaction costs) to acquire the G Act Assets. Gco and the French Investors will select the components of the processing facility that will comprise the G Act Assets. The aggregate cost of the G Act Assets will be greater than the Deductible Amount, and is currently estimated to be approximately US$XXXXXXXXXX. The cost of the assets may increase by up to XXXXXXXXXX% due to cost overruns. Any such cost overruns will be financed by a commensurate increase in the principal amount of the G Act Loan.
19. Under a Construction Agreement, Gco XXXXXXXXXX Branch will construct and transfer title of the G Act Assets to the G.I.E.
17. The G.I.E. and Gco (acting on behalf of Gco XXXXXXXXXX Branch) will enter into the Lease pursuant to which Gco XXXXXXXXXX Branch will lease the G Act Assets from G.I.E. The Lease will run for a term of XXXXXXXXXX years commencing on Substantial Completion of the G Act Assets pursuant to the Construction Agreement. The Lease Base Payments will be denominated and payable in United States dollars in XXXXXXXXXX instalments. The first Lease Base Payment will be due XXXXXXXXXX months after the Lease comes into effect. The Lease Base Payments made by Gco XXXXXXXXXX Branch will be deductible in computing its income for XXXXXXXXXX income (and Branch profit) tax purposes and accordingly, will be deductible in computing Gco's income from an active business carried on in New XXXXXXXXXX.
18. The amount of the Lease Base Payments made by Gco XXXXXXXXXX Branch to the G.I.E. under the Lease will match the total of the XXXXXXXXXX principal and interest payments by the G.I.E. to US LLC under the terms of the G Act Loan. The payment dates for the Lease Base Payments will be identical to the payment dates of the principal and interest payments under the G Act Loan.
19. Under the terms of the Delegation Agreement, Gco XXXXXXXXXX Branch will make all Lease Base Payments directly to US LLC. Each payment made by Gco XXXXXXXXXX Branch to US LLC under the Delegation Agreement will discharge (i) Gco XXXXXXXXXX Branch's payment obligation to the G.I.E. under the Lease, and (ii) G.I.E.'s payment obligation to US LLC under the G Act Loan.
20. It is expected that Aco will, by a combination of available cash-on-hand and loans from third parties, directly acquire the sole ownership interest in US LLC upon its formation and will contribute amounts to US LLC's capital sufficient to fund the G Act Loan as and when required. US LLC will use the funds to make the G Act Loan to the G.I.E on the condition that the G.I.E. enters into the Lease.
21. Under the terms of the Transaction, Aco, or its designee, will receive various rights to acquire the G Act Assets or the units of the G.I.E at various prices and at different times. In addition, the French Investors will receive various rights to sell the units of the G.I.E to Aco, or its designee, at various prices and at different times.
Purpose of the Proposed Transactions
22. The purpose of the proposed transactions is to finance a portion of the construction costs of the processing plant of the Gco XXXXXXXXXX Project in a manner acceptable to, and approved by, the DGI to reduce the overall cost of the processing plant to Gco XXXXXXXXXX Branch and thereby improve the economic viability of the Project.
26. To the best of your knowledge and that of the taxpayer involved, none of the issues involved with this ruling letter:
(i) is under objection;
(ii) is involved in an earlier return of the taxpayer or a related person;
(iii) is before the courts or, if a judgment has been issued, the time limit for appeal has not expired; or
(iv) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayer or a related person.
Provided that the preceding statements constitute a complete and accurate disclosure of 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 follows:
A. (i) US LLC will be considered a corporation for purposes of the Act;
(ii) Aco's ownership interest in US LLC will be considered shares for purposes of the Act; and
(iii) distributions of US LLC's profit to Aco as a result of its ownership interest in US LLC will be considered dividends for purposes of the Act.
B. Provided US LLC is resident only in the United States under common law principles,
(i) Aco's equity percentage in respect of US LLC will be 100%;
(ii) US LLC will be a foreign affiliate and a controlled foreign affiliate of Aco; and
(iii) Aco will have a qualifying interest in respect of US LLC and will be related to US LLC.
C. Provided US LLC is resident only in the United States under common law principles, to the extent that such income would otherwise be income from property of US LLC, interest income earned by US LLC from the G Act Loan will be included in computing the income from an active business of US LLC pursuant to clause 95(2)(a)(ii)(B).
D. Provided US LLC is resident only in the United States under common law principles, the income referred to in Ruling C above, will be included in its exempt earnings for the year in which it is earned.
E. Subsections 17(1) and 17(2) will not apply to Aco to impute an income inclusion in connection with the G Act Loan made by US LLC to G.I.E.
F. Paragraph 95(6)(b) will not apply as a result of the proposed transactions.
G. The provisions of subsection 245(2) will not apply as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences stated in this ruling.
The above 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 that the agreements required to effect the proposed transactions are entered into by the parties thereto by XXXXXXXXXX.
These rulings are based on the Act and the Canada-France Treaty in their present form and do not take into account any proposed amendments to the Act or the Canada-France Treaty which, if enacted into law, could have an effect on the rulings 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 adjusted cost base of any property referred to herein;
(b) the validity of any agreements or terms and conditions therein;
(c) whether the terms and conditions of the G Act Loan are such that persons dealing at arm's length would have been willing to enter into them;
(d) the residence of US LLC in the United States;
(e) whether the general anti-avoidance rule will not apply to completed or future transactions other than the Proposed Transactions as described in this letter;
(f) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular, the CRA has not reviewed the tax consequences of Aco, or its designee, acquiring some or all of the G Act Assets, or units of the G.I.E. at various prices and at different times or of Aco disposing of shares of Gco; or the conversion of Gco from a S.A. to a S.A.S.; or
(g) any other tax consequences relating to any facts or proposed transactions referred to herein as a result of the legislative proposals introduced by the Department of Finance on December 20, 2002, and February 27, 2004.
None of the documents pertaining to the Lease, G Act Loan or any agreement pertaining to the construction of the G Act Assets were reviewed by the CRA and do not form in any way part of the facts, proposed transactions or the purpose of the proposed transactions for the purposes of this letter.
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2004
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2004