2005 Ruling 2005-0114011R3 - Withholding Tax Exemption re On-loan to an LP

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 GP's business same as LP Better security for the lenders

XXXXXXXXXX 								2005-011401

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("A Co")

This is in reply to your letter of XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the above named corporation.

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues contained in the ruling requested herein is:

(a) dealt with in an earlier income tax return of A Co or a related person,

(b) being considered by a Tax Services Office or a Taxation Centre in connection with a tax return already filed by A Co or a related person,

(c) under objection by A Co or a related person,

(d) before the Courts, or if a judgement has been issued, the time limit for appeal to a higher court has expired, or

(e) the subject of a previous ruling issued by the Income Tax Rulings Directorate of the CRA.

Defined Terms:

In this letter, unless otherwise specified, all monetary amounts are expressed in Canadian dollars and the following terms have the meanings specified below:

(a) "Act" mean the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended;

(b) "B Co" means XXXXXXXXXX, a corporation incorporated under the CBCA, which is the managing General Partner of LP and which is owned as to XXXXXXXXXX% by C Co and as to XXXXXXXXXX% by the Fund;

(c) "Business" means XXXXXXXXXX businesses as may be carried on from time to time by LP, and through their participation in LP or other entities affiliated with LP, by the General Partners and the Trust and, through the holding of securities of the Trust or of another affiliated entity directly or indirectly engaged in such activities, indirectly by the Fund;

(d) "C Co" means XXXXXXXXXX, a corporation incorporated under the CBCA;

(e) "CBCA" means the Canada Business Corporations Act;

(f) "CRA" means the Canada Revenue Agency;

(g) "Credit Facility" means the uncommitted private shelf credit facility of up to US$XXXXXXXXXX (or the Canadian dollar equivalent) to be provided to A Co by the Lenders on the terms outlined herein;

(h) "D Co" means XXXXXXXXXX;

(i) "Fund" means XXXXXXXXXX, a mutual fund trust established under the laws of XXXXXXXXXX;

(j) "Fund Trust Deed" means the Declaration of Trust and Deed of Settlement dated XXXXXXXXXX creating the Fund;

(k) "General Partners" means the general partners of LP, which are B Co, XXXXXXXXXX;

(l) "Initial Draw" means the borrowing evidenced by Senior Term Notes in the aggregate principal amount of approximately $XXXXXXXXXX to be issued by A Co to the Lenders under the Credit Facility at closing;

(m) "Lenders" means X Co and/or one or more of its affiliates or managed accounts (consisting of US resident persons or a combination of US resident persons and persons resident in other countries) that will provide the Credit Facility to A Co;

(n) "LP" means XXXXXXXXXX, a limited partnership formed under the Partnership Act and governed by the LP Agreement;

(o) "LP Agreement" means the amended and restated limited partnership agreement dated XXXXXXXXXX, as amended;

(p) "LP Guarantee" means the agreement to be entered into by LP and the Lenders pursuant to which LP will provide to the Lenders a guarantee of the Senior Term Notes issued under the Credit Facility;

(q) "LP Principal Amount" means approximately $XXXXXXXXXX and such further amounts as may from time to time be advanced by A Co to LP pursuant to the Sub-Loan Agreement;

(r) "N Co" means a corporation to be formed under the CBCA and further described in paragraph 16;

(s) "Partnership Act" means the Partnership Act of the province of XXXXXXXXXX;

(t) "Senior Term Notes" means the senior term notes in the maximum aggregate amount of US$XXXXXXXXXX (or the Canadian dollar equivalent) to be issued by A Co to the Lenders pursuant to the Credit Facility evidencing indebtedness of A Co under the Credit Facility;

(u) "Sub-Loan Agreement" means the agreement to be entered into by A Co as lender and B Co, in its capacity as the managing General Partner of LP for and on behalf of LP, as borrower, outlining the terms and conditions relating to the LP Principal Amount to be loaned by A Co to LP;

(v) "Trust" means XXXXXXXXXX, an inter vivos commercial trust, formed under the laws of XXXXXXXXXX pursuant to the Trust Deed;

(w) "Trust Deed" means the Declaration of Trust and Deed of Settlement dated XXXXXXXXXX creating the Trust;

(x) XXXXXXXXXX;

(y) "US" means United States of America; and

(z) "X Co" means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX.

The relevant facts, proposed amendments and purpose of the proposed amendments are as follows:

Facts

1. A Co is a taxable Canadian corporation and a wholly-owned subsidiary of B Co.

2. B Co is a taxable Canadian corporation that was formed to be the managing General Partner of LP. LP has XXXXXXXXXX other General Partners that are taxable Canadian corporations. All of the General Partners are engaged in carrying on the business of LP, and as General Partners, each has unlimited liability for the debts and obligations of LP.

3. The General Partners own, in aggregate, partnership interests representing approximately XXXXXXXXXX% of LP.

4. B Co has various duties and powers under the LP Agreement including in connection with the financing of LP. B Co has caused A Co to be formed for the purpose of sourcing financing for the Business, including LP, and providing financing to LP and other group entities engaged in the Business, and has, pursuant to the LP Agreement, delegated certain duties and powers to A Co in connection with such financing for LP. B Co will pay a fee to A Co for performing these duties on behalf of B Co.

5. Prior to the admission of the Trust as a limited partner in XXXXXXXXXX, the partners of LP (including the limited partner) were all taxable Canadian corporations engaged in carrying on the Business through LP.

6. The Trust is the sole limited partner of LP and holds all the issued Class XXXXXXXXXX limited partnership units of LP. The sole investment of the Trust to date has been its interest in LP. The purpose of the Trust as set forth in the Trust Deed includes investing in such securities as may be approved from time to time by the trustees of the Trust, including those issued by LP or any other person owning interests in XXXXXXXXXX business.

7. The Fund is a "mutual fund trust" within the meaning of subsection 132(6) of the Act. Its units are listed on the XXXXXXXXXX and are widely distributed. The Fund is the sole beneficiary of the Trust. It is a limited purpose trust and its activities are restricted to certain purposes as set forth in the Fund Trust Deed which include investing in such securities as may be approved from time to time by the trustees of the Fund, including those issued by the Trust and B Co, subject to compliance at all times, inter alia, with the "mutual fund trust" provisions of the Act. The Fund is restricted from investing in securities, which would result in the units of the Fund being "foreign property" for purposes of the Act.

8. The purpose of LP is to carry on XXXXXXXXXX and related businesses in XXXXXXXXXX and such other XXXXXXXXXX businesses as B Co may determine from time to time. It currently carries on the business of XXXXXXXXXX and related businesses in XXXXXXXXXX and owns all the shares of D Co, XXXXXXXXXX .

9. A Co will file its income tax returns with the XXXXXXXXXX Tax Centre under account number XXXXXXXXXX and will be serviced by the XXXXXXXXXX Tax Services Office. B Co files its income tax returns under account number XXXXXXXXXX and is serviced by the XXXXXXXXXX Tax Services Office. LP, a limited partnership, files its partnership information returns with the XXXXXXXXXX Centre under account number XXXXXXXXXX. The address for each of A Co, B Co and LP is XXXXXXXXXX.

10. LP's term loan XXXXXXXXXX matures in XXXXXXXXXX and must be refinanced. B Co, as the managing General Partner, has been seeking replacement sources of financing for LP. LP wishes to arrange longer-term financing than the XXXXXXXXXX term which was available to it under its current financing arrangements in order to provide longer-term stability through fixed financing costs, including interest, to reduce the time and costs of frequent refinancing and to provide access to the most favourable financing costs available for its operations. A Co has canvassed sources of financing in both Canada and the US in order to determine the lowest cost of financing available and the optimum term available for credit facilities for the Business.

11. Based on the response in the current financial markets, A Co has concluded that the most favourable source of long-term debt for the Business is X Co, a financial institution operating in the US capital markets, and that the best financing rates currently available for such debt is available from or through X Co. The Lenders have proposed to provide long-term financing in amounts sufficient, by way of the Initial Draw, to refinance LP's debt maturing in XXXXXXXXXX, as well as an uncommitted "shelf" facility which permits possible additional future draws under the Credit Facility up to the maximum stated amount, subject to meeting various conditions under the Credit Facility at the time of a future draw. This structure will reduce the cost of future financing of the Business and also the speed at which a future financing can be completed. Such additional draws will be for general corporate purposes of A Co, which will permit it to provide additional loans to LP under the Sub-Loan Agreement or to finance a different acquisition vehicle, including a corporation, in connection with the expansion of the Business.

12. Based on indicative terms provided by a number of Canadian arrangers, the cost of the type of financing which is the most desirable for the Business and which is offered by the Lenders under the Credit Facility is lower than comparable Canadian financing by between XXXXXXXXXX% and XXXXXXXXXX%. The Credit Facility is being offered by X Co only to a borrower that is a corporation.

13. A term sheet for the Credit Facility has been issued to A Co by X Co, on behalf of the Lenders.

14. X Co and each other Lender under the Credit Facility is unrelated to, and deals at arm's length, with each of A Co, the General Partners, LP, the Trust and the Fund.

Proposed Transactions

15. XXXXXXXXXX.

16. XXXXXXXXXX

17. A Co will borrow funds under the Credit Facility and issue its Senior Term Notes to the Lenders evidencing its indebtedness to the Lenders for the draws under the Credit Facility.

18. The Initial Draw will be funded on or about XXXXXXXXXX and A Co will issue Senior Term Notes in the principal amount of the Initial Draw. The Initial Draw will have a maturity date of no earlier than the later of XXXXXXXXXX and XXXXXXXXXX years after the issuance of the Senior Term Notes evidencing the Initial Draw. The entire principal amount will be payable only on maturity.

19. The availability of draws under the uncommitted shelf provisions of the Credit Facility will be for a period of XXXXXXXXXX years from the date of closing. Subsequent draws under the Credit Facility will be for minimum amounts of US$XXXXXXXXXX (or the Canadian dollar equivalent) and will be evidenced by Senior Term Notes ranking pari passu with other senior secured indebtedness of LP. Each draw under the Credit Facility will have a maturity date of no earlier than XXXXXXXXXX years after the issuance of the Senior Term Notes evidencing such draw, with no amount payable prior to maturity.

20. Under no circumstances (except in the event of default or if the terms of the debt or related agreements become unlawful or are changed by virtue of legislation or by a court, statutory board or commission) will A Co be obligated to repay any of the principal amount of a Senior Term Note within XXXXXXXXXX years from the date of issue of such Senior Term Note. The Credit Facility will include representations, warranties and covenants customary for US private placement institutional debt.

21. A Co will be obliged to pay certain costs and fees to the Lender under the Credit Facility.

22. A Co will be entitled to prepay the Senior Term Notes at any time, in whole or in part, in minimum denominations of US$XXXXXXXXXX (or the Canadian dollar equivalent), at a price equal to the sum of par plus accrued interest plus a "make whole amount" for the fixed rate Senior Term Notes.

23. The Lenders require that the Senior Term Notes to be issued under the Credit Facility be guaranteed by B Co, LP and D Co. B Co, as managing General Partner of LP, will enter into the LP Guarantee. Each of B Co, on its own account, and D Co will also enter into guarantees of the Credit Facility. The LP Guarantee will be secured by a fixed charge over the assets of LP and the other guarantees will also be secured.

24. A Co will enter into the Sub-Loan Agreement with LP and will loan amounts received from the Credit Facility in the amount of the LP Principal Amount to LP to enable it to repay its existing term debt. A Co may make future advances under the Sub-Loan Agreement to LP, with future draws obtained by A Co under the Credit Facility. The loans under the Sub-Loan Agreement will be on substantially the same terms as the terms under which A Co is borrowing under the Credit Facility as to maturity date, principal amount and as to interest (except that advances under the Sub-Loan Agreement will bear interest at a rate of XXXXXXXXXX% per annum over the rate under the Senior Term Notes). The default provisions under the Sub-Loan Agreement will be subject to the default provisions under the LP Guarantee. A Co will earn a profit from the loans made under the Sub-Loan Agreement by virtue of the mark-up on the interest rate. In addition, as a condition of its agreement to make the loans to LP under the Sub-Loan Agreement, A Co will require LP to reimburse A Co for all of its fees and expenses incurred in connection with the Sub-Loan Agreement and incurred by A Co under the Credit Facility. The advances to LP under the Sub-Loan Agreement will be unsecured, but A Co will require, as a condition of agreeing to make loans to LP under the Sub-Loan Agreement, that LP enter into the LP Guarantee in favour of the Lenders to A Co and that B Co and D Co provide their guarantees to the Lenders. Under the LP Guarantee, the Lenders will require priority over the loans to LP under the Sub-Loan Agreement.

Purpose of the Proposed Transactions

The purpose of the proposed financing under the Credit Facility is to enable A Co to raise funds to make loans to LP to allow it to retire existing term indebtedness which is maturing, to secure long-term financing at attractive interest rates and to access financing for expansion of the Business. The Business requires stable, long-term debt capital both to finance its existing debt and prepare itself for future investment. A Co is undertaking the borrowing in the US market due to enhanced availability of long-term debt at a lower cost to the Business.

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 PartXIII of the Act will be exigible in respect of any amounts paid or credited to a Lender, as described in paragraph 17 to 23, that is a person with whom A Co is dealing at arm's length and that is a non-resident of Canada, as on account or in lieu of payment of, or in satisfaction of interest on the Senior Term Notes issued under the Credit Facility.

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 the ruling 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