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: Consistent with GAAR Committee decision in file 2004-009475
XXXXXXXXXX 2005-011909
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
This is in response to your letter dated XXXXXXXXXX, wherein you requested advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge the information provided in subsequent correspondence and during various telephone conversations in connection with your request (XXXXXXXXXX).
We understand that to the best of your knowledge and that of the taxpayer involved none of the issues involved in the requested ruling is:
(i) in an earlier return of a taxpayer identified in this document or of a related person,
(ii) being considered by any Tax Services Office or Taxation Centre of the CRA in connection with a tax return already filed,
(iii) under objection by a taxpayer identified in this document or by 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 not expired; and
(v) is the subject of a previously issued ruling.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts and proposed transactions is as follows:
FACTS
1. XXXXXXXXXX ("Majority Investor") was incorporated under the Canada Business Corporations Act ("CBCA"). Majority Investor is a public corporation and a taxable Canadian corporation. Majority Investor's head office is located at XXXXXXXXXX.
XXXXXXXXXX
2. XXXXXXXXXX, ("Guarantor") was incorporated under the CBCA. Guarantor is a taxable Canadian corporation. Majority Investor directly or indirectly owns all of the issued and outstanding shares of Guarantor. Guarantor's head office is located at XXXXXXXXXX.
XXXXXXXXXX
XXXXXXXXXX
3. XXXXXXXXXX, ("Manager") was incorporated under the XXXXXXXXXX. Manager is a taxable Canadian corporation. Majority Investor indirectly owns all of the issued and outstanding shares of Manager. Manager's head office is located at XXXXXXXXXX.
Manager and XXXXXXXXXX ("Manager LP"), a limited partnership formed under the laws of XXXXXXXXXX between Guarantor, as sole limited partner, and Manager, as general partner, are responsible for XXXXXXXXXX (as defined in paragraph 6 below).
4. XXXXXXXXXX ("Income Fund") is an unincorporated open-ended mutual fund trust created under the laws of XXXXXXXXXX pursuant to a Declaration of Trust dated XXXXXXXXXX, as amended from time to time. The units of Income Fund are widely held and are listed for trading on the XXXXXXXXXX. Majority Investor indirectly owns XXXXXXXXXX% of Income Fund's units. Income Fund's head office is located at XXXXXXXXXX.
The primary business of the Income Fund and its subsidiaries is XXXXXXXXXX. Income Fund owns, directly or indirectly, the following:
XXXXXXXXXX
5. Business Trust is an open-ended inter-vivos trust created under the laws of XXXXXXXXXX pursuant to a trust indenture dated XXXXXXXXXX, as amended from time to time. Business Trust is neither a mutual fund trust nor a personal trust. Income Fund is the sole owner of units of Business Trust. Business Trust's head office is located at XXXXXXXXXX.
6. Business Trust currently owns the XXXXXXXXXX.
The transactions pursuant to which Income Fund acquired and financed the XXXXXXXXXX System were the subject of an advance income tax ruling (document No. 991832) (the "XXXXXXXXXX Ruling") dated XXXXXXXXXX, 1999.
Additionally, Business Trust owns XXXXXXXXXX (the "Business Trust Equity Investments").
7. XXXXXXXXXX.
8. On XXXXXXXXXX, Business Trust entered into the Guarantee Agreement with Guarantor. The principal terms of the Guarantee Agreement are as follows:
(a) XXXXXXXXXX.
(b) XXXXXXXXXX.
(c) XXXXXXXXXX.
(d) XXXXXXXXXX.
(e) For acting as the exclusive agent of Business Trust in connection with XXXXXXXXXX, Guarantor receives an annual fee of $XXXXXXXXXX, XXXXXXXXXX.
(f) Guarantor is responsible for providing appropriate and timely instructions to Manager in relation to XXXXXXXXXX and in the preparation of each annual operating plan. Such plan is then submitted to the trustees of Business Trust for their approval.
(g) The Guarantee Agreement has an initial term of XXXXXXXXXX years, which expires on XXXXXXXXXX and, except for the provisions regarding the Guaranteed Price, is renewable for successive XXXXXXXXXX-year terms, at the option of Guarantor, unless the trustees of Business Trust resolve to sell the XXXXXXXXXX System at the end of such term or of any renewal term, or if Business Trust has committed an event of default under the Guarantee Agreement and such event of default is not remedied.
9. On XXXXXXXXXX, Business Trust entered into an operations and management agreement (the "O&M Agreement") with Manager. The principal terms of the O&M Agreement are as follows:
(a) Manager operates and maintains the XXXXXXXXXX System in accordance with prudent industry practice and the annual operating plan. Manager also performs management services for Business Trust including: (i) reporting to the trustees of Business Trust; (ii) accounting and financial services (which include coordination and management of the accounting, cash management, treasury, and other systems); (iii) preparing financial statements and other financial reports; and (iv) preparing annual plans and budgets. Approximately XXXXXXXXXX employees of Manager are assigned to the XXXXXXXXXX System, which does not have any employees.
b) All costs and expenses incurred by Manager on behalf of Business Trust in relation to the operation and maintenance of the XXXXXXXXXX system and the management of Business Trust are reimbursed to Manager by Business Trust. These costs include operating and maintenance costs and capital improvement costs. Other than the reimbursement of costs from Business Trust, Manager does not receive a direct fee for the provision of these services
(c) The O&M Agreement may be terminated only upon the occurrence of a limited number of events. A party may terminate if XXXXXXXXXX.
10. Business Trust issued, in XXXXXXXXXX, mortgage bonds ("First Bonds") pursuant to a private placement debt offering. The proceeds were used to repay debt incurred to acquire the XXXXXXXXXX System in XXXXXXXXXX as more fully described in the TPS Ruling. The First Bonds consisted of $XXXXXXXXXX principal amount of bonds in three series as follows:
(a) XXXXXXXXXX (the "Series I Bonds");
(b) XXXXXXXXXX (the "Series II Bonds"); and
(c) XXXXXXXXXX (the "Series III Bonds").
The First Bonds are secured by all of the assets of Business Trust (other than the Business Trust Equity Investments), which generally consists of the XXXXXXXXXX System.
11. Business Trust considers the terms and conditions of the First Bonds, in particular the credit covenants, to be onerous from an operating standpoint. In this regard, Business Trust has been advised that given the current lower interest rate environment and Business Trust's improved condition since XXXXXXXXXX, Business Trust is able to obtain less restrictive credit covenants than it has under the First Bonds. A moderation of its restrictive credit covenants would enhance Business Trust's operational flexibility and its ability to make other investments and would also enhance its ability to expand existing facilities.
On XXXXXXXXXX, Business Trust temporarily refinanced each series of the First Bonds. In this regard, Business Trust obtained temporary bridge financing (the "Temporary Bridge Financing) from the XXXXXXXXXX to repay the First Bonds. In this regard, while the Series I Bonds are due XXXXXXXXXX, Business Trust believes that, if it were to refinance only $XXXXXXXXXX of the First Bonds, the refinanced bonds would likely use the existing documents (as the refinancing would need to be integrated with the First Bonds that remain outstanding). Accordingly, Business Trust would remain subject to the existing restrictive covenants on the First Bonds which remain outstanding. Business Trust believes that by prepaying and refinancing the Series II and Series III Bonds at the time of refinancing the Series I Bonds it can, inter alia, obtain less restrictive covenants on the new financing.
Owing to the proposed timing of the refinancing of the First Bonds and the required schedule to complete a private placement, Business Trust obtained the Temporary Bridge Financing as a provisional arrangement to enable it to repay the First Bonds on their due date. The Temporary Bridge Loan will be repaid out of proceeds from the proposed private placement as described below under the heading "Proposed Transactions".
Furthermore, Business Trust believes that it will have a lower cost of capital by undertaking a private placement for approximately $XXXXXXXXXX rather than refinancing $XXXXXXXXXX this year and refinancing smaller tranches of $XXXXXXXXXX in XXXXXXXXXX. Business Trust will use the additional funds, raised at the time of refinancing, in its business activities. Moreover, Business Trust believes (see paragraph 13 below) that a debt offering of this magnitude will have a higher cost of borrowing if it is made only in Canada. Accordingly, Business Trust wishes to make its long-term debt refinancing offering either wholly in the United States or partly in the United States and partly in Canada.
12. Business Trust is also proposing to transfer all of the assets and liabilities comprising the XXXXXXXXXX System to a new XXXXXXXXXX limited partnership between it as XXXXXXXXXX% limited partner and a newly formed corporation under the Business Corporation Act (XXXXXXXXXX ) ("General Partner Corporation") as a XXXXXXXXXX% general partner (the "Partnership"). General Partner Corporation will act as manager of the Partnership. Business Trust believes that segregating the XXXXXXXXXX System assets from the Business Trust Equity Investments will permit it to obtain future financing using the Business Trust Equity Investments as collateral (which it is currently prevented from doing under the terms of the First Bonds). Furthermore, Business Trust also believes it prudent to refinance the XXXXXXXXXX System on a non-recourse basis in a segregated entity to reduce the risk to unitholders of the Income Fund of having creditors interfere with distributions from the Business Trust Equity Investments which are passed through Business Trust.
13. Business Trust represents that the contemplated transactions mentioned in paragraphs 11 and 12 above and more comprehensively described under the heading Proposed Transactions below in regards to:
(i) refinancing of the Series I Bonds;
(ii) the prepaying and refinancing the Series II and Series III Bonds; and
(iii) the transfer of all of the assets and liabilities comprising the XXXXXXXXXX System to a new XXXXXXXXXX limited partnership
are being undertaken for a variety of business reasons and in this regard Business Trust makes the following additional representations in support of its requested advance income tax rulings:
XXXXXXXXXX.
PROPOSED TRANSACTIONS
14. Business Trust will cause a new corporation ("Newco") to be incorporated under the laws of the province of XXXXXXXXXX. Newco will be a taxable Canadian corporation. Newco's taxation year end will be XXXXXXXXXX. Newco will operate as a private financing corporation with its head office and principal place of business situated in XXXXXXXXXX. The directors and officers of Newco will be substantially the same people who are the officers and management team of Business Trust. On incorporation Business Trust will acquire common shares of Newco. Business Trust will own all the issued and outstanding shares of Newco.
15. Business Trust will cause a new corporation ("General Partner Corporation") to be incorporated under the laws of the province of XXXXXXXXXX. General Partner Corporation's taxation year end will be XXXXXXXXXX. General Partner Corporation will be a taxable Canadian corporation. General Partner Corporation will carry on business in the province of XXXXXXXXXX. The directors and officers of General Partner Corporation will be substantially the same people who are the officers and management team of Business Trust.
On incorporation Business Trust will acquire all the issued shares of General Partner Corporation. Business Trust will own all the issued and outstanding shares of General Partner Corporation.
16. Business Trust and General Partner Corporation will form a Limited Partnership (the "Partnership") under the laws of XXXXXXXXXX. Partnership's interests will be held by Business Trust as a XXXXXXXXXX% limited partner and General Partner Corporation as a XXXXXXXXXX% general partner. The business of the Partnership will include the acquisition and ownership of the XXXXXXXXXX System.
17. Business Trust will transfer all of the XXXXXXXXXX System assets and liabilities (including the Temporary Bridge Financing) to Partnership in exchange for additional partnership interests on terms meeting the requirements of subsection 97(2). Before commencing the transfer, Business Trust will obtain any required regulatory approval and third party consents.
Segregating the XXXXXXXXXX System assets from the Business Trust Equity Investments will permit Business Trust to obtain future financing using the Business Trust Equity Investments as collateral (which it is currently prevented from doing under the terms of the First Bonds).
Partnership will assume the O & M Agreement such that the XXXXXXXXXX Assets will be operated in substantially the same manner a before their transfer to Partnership.
18. Partnership will issue debentures ("Partnership Debentures") to Newco and will use the proceeds to repay all the Temporary Bridge Financing incurred to refinance the First bonds on XXXXXXXXXX as described in paragraph 11 above.
19. Partnership will issue the Partnership Debentures under the terms of a Debenture Agreement made between Partnership and Newco. The principal terms of the Partnership Debentures and the Debenture Agreement will be such that if the issuer thereof were a corporation, interest payable thereon would be exempt from Canadian withholding tax by virtue of subparagraph 212(1)(b)(vii) in that:
(a) under no circumstances, except in the event of a default (all such events being commercially realistic, beyond the control of the lender and not contrived) or if the terms of the Partnership Debentures or Debenture Agreement become unlawful or are changed by virtue of legislation or by a court or other competent authority, will Partnership be obliged to repay more that twenty-five percent of the principal amount of the Partnership Debentures within five years from the date of issue of the Partnership Debentures unless Newco voluntarily prepays the Newco Debentures in which case the Partnership is required to repay the Partnership Debentures in the same amount; and
(b) no part of the interest payable on the Partnership Debentures will be contingent or dependent upon 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.
The Partnership Debentures will be due in XXXXXXXXXX and will be entitled to quarterly payments of interest and arrears. The principal balance of the Partnership Debentures will be fully paid on maturity. The Partnership Debentures are direct unconditional obligations of the Partnership secured by a first ranking charge (subject to permitted encumbrances) on all the assets of the Partnership. The Partnership Debentures are redeemable at the option of the Partnership without makewhole or premium. There are no provisions for amendment to the Partnership Debentures without the consent of the partnership, Newco and the Indenture Trustee (on behalf of the holders of the Newco Debentures). The Partnership is required to maintain a cash reserve for XXXXXXXXXX months interest and for capital expenditures up to 50% of the scheduled capital expenditures to be incurred in each year in accordance with prudent financial management. The amounts held on reserve will in no circumstance exceed 25% of the principal of the Partnership Notes (within the first 5 years) and the amounts on reserve can be invested in permitted investments and can be used at any time to pay for appropriate expenses. If there are insurance or expropriation proceeds received by the Partnership which exceed $XXXXXXXXXX and which are not reinvested in the XXXXXXXXXX System within XXXXXXXXXX days of receipt, the Partnership is required to offer to redeem the Partnership Debentures in an amount equal to such proceeds. Failure to so offer to redeem will be an event of default.
The Partnership Debentures will not be convertible into any other property. The laws of the Province of XXXXXXXXXX will govern the Partnership Debentures.
20. Newco will borrow from a combination of non-resident investors/lenders and Canadian investors/lenders up to the full offering amount (as required) to permit Partnership to successfully raise approximately $XXXXXXXXXX to repay the Temporary Bridge Financing (refinance the First Bonds) and provide additional business capital under a term loan of more than five years. Newco's indebtedness will be evidenced and governed by debentures (the "Newco Debentures") issued by Newco to the non-resident investors/lenders under the terms of a Debenture Agreement. The terms of the Newco Debentures will have terms such that interest payable thereon would be exempt from Canadian withholding tax by virtue of subparagraph 212(1)(b)(vii) in that:
(a) under no circumstances, except in the event of a default (all such events being commercially realistic, beyond the control of the lender and not contrived) or if the terms of the Newco Debentures 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 twenty-five percent of the principal amount of the Newco Debentures within five years from the date of issue of the Newco Debentures; and
(b) no part of the interest payable on the Newco Debentures will be contingent or dependent upon 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
The Newco Debentures will be due in XXXXXXXXXX and will be entitled to quarterly payments of interest in arrears. The principal balance of the Newco Debentures will be fully paid on maturity. The amount and timing of payments on the Newco Debentures are equal to or marginally lower than payments due on the Partnership Debentures. The Newco Debentures are direct unconditional obligations of Newco secured by a first ranking charge (subject to permitted encumbrances) on and limited in recourse to the Partnership Debentures and Partnership Guarantee (as described in paragraph 21 below). Newco will irrevocably direct the Partnership to make all payments due in respect of the Partnership Debentures directly to the holders of the Newco Debentures (up to the amounts then due and payable). The Newco Debentures are redeemable at the option of the Partnership without makewhole or premium. If Newco redeems the Newco Debentures, the Partnership is required to redeem the Partnership Debentures. There are no provisions for amendment to the Newco Debentures without the consent of Newco and the Indenture Trustee (on behalf of the holders of the Newco Debentures). If there is an event of default under the Partnership Debentures or the Partnership Guarantee, it will be an event of default under the Newco Debentures. If there are insurance or expropriation proceeds received by the Partnership which exceed $XXXXXXXXXX and which are not reinvested in the XXXXXXXXXX System within XXXXXXXXXX days of receipt, Newco is required to offer to redeem the Newco Debentures in an amount equal to such proceeds. Failure to so offer to redeem will be an event of default. Newco will only accept the Partnership's offer to redeem Partnership Debentures in such circumstance to the extent that the holders of Newco Debentures so accept the offer to redeem Newco Debentures by Newco. If there is an event of default under the terms of the Newco Debentures, and enforcement action is being taken by the Indenture Trustee (on behalf of the holders of the Newco Debentures) Newco may satisfy its obligations by transferring the Partnership Debentures and the Partnership Guarantee to such holders.
An event of default under the terms of the Partnership Debenture Agreement and Partnership Debentures will, under the terms of the said Newco Debenture Agreement and the Newco Debentures be an event of default under the Newco Debentures.
The Newco Debentures will not be convertible into any other property. The laws of the Province of XXXXXXXXXX will govern the Partnership Debentures.
21. The Newco Debentures will, under the terms of the Debenture Agreement, be secured by a guarantee from Partnership ("Partnership Guarantee").
22. Newco will use the proceeds from the Newco Debentures to purchase an equal amount of Partnership Debentures. The rate on the Newco Debentures will be such that Newco will earn a reasonable mark-up on the interest rate and a reasonable financing fee such that Newco will earn a profit.
23. Each holder of a Partnership Debenture or Newco Debenture ("Debenture Holder"), will deal at arm's length with Majority Investor, Income Fund, Business Trust and their affiliates. It is not anticipated that any prospective Debenture Holder will hold more than XXXXXXXXXX % of the units of Income Fund.
Purpose of the Proposed Transactions
To permit Business Trust to refinance the Series I Bonds, to prepay and refinance the Series II Bonds and Series III Bonds, and to raise additional business capital on terms that are more competitive to Business Trust through a lower overall effective rate of interest and better credit covenants which are expected to be less onerous from an operating standpoint and to increase Business Trust's ability to borrow or obtain other financing through the use of its equity in the Partnership and in the Business Trust Equity Investments.
Rulings
Provided that the above description of facts, proposed transactions and purpose of the proposed transaction are accurate and constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose thereof, and provided further that the proposed transactions are completed in the manner described above, we confirm that:
A. By virtue of the exemption in subparagraph 212(1)(b)(vii), no tax under Part XIII will be exigible in respect of any amounts paid or credited under the terms of the Newco Debenture, as described in paragraph 20 above, to 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. Subsection 242(2) will not be applicable as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in Ruling A above.
These rulings are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R5 dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Comment
Nothing in this letter should be construed as implying that the CRA has agreed to any other tax consequences relating to any facts or proposed transactions referred to herein other than those as specifically described in the rulings given above.
Yours truly,
XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
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