2005 Ruling 2005-0120761R3 - Withholding Tax exemption

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: Where a corporation is deemed to be a resident of Canada pursuant to subsection 212(13.2), can it avail itself of the 212(1)(b)(vii) exemption if it qualifies?

Position: YES

Reasons: reading of 212(13.2) with 212(1)(b)(vii)

XXXXXXXXXX 								2005-012076

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.

A Co has an office at XXXXXXXXXX. A Co has not filed any tax returns in Canada.

Definitions

"A Co" means XXXXXXXXXX trust as described in Paragraph 1;

"Acquisition" refers to the purchase of XXXXXXXXXX as described in Paragraph 3;

"Act" means the Income Tax Act, RSC 1985, c.1., as amended as at the date hereof, and all references to a part, section, subsection, paragraph, subparagraph or clause is a reference to the specified provision of the Act, as amended from time to time;

"arm's length" has the meaning assigned by subsection 251(1) of the Act;

"B Co" means XXXXXXXXXX (formerly known as XXXXXXXXXX) a XXXXXXXXXX company incorporated under the BCA as described in paragraph 2;

"BCA" refers to the XXXXXXXXXX Business Corporations Act, XXXXXXXXXX;

"C assets" refers to the XXXXXXXXXX and all related assets as described in Paragraph 3;

"CAN LP" refers to the XXXXXXXXXX limited partnership as described in Paragraph 9;

"CRA" means Canada Revenue Agency;

Each of the terms "corporation", "taxable Canadian corporation", and "trust" have the meanings assigned to them by subsection 248(1) of the Act;

"February 2004 Draft Legislation" means the revised draft technical amendments to the Act released on February 27, 2004;

"Lenders" mean the holders of the Senior Notes;

"Paragraph" refers to a numbered paragraph in this letter;

"Partnership Act" refers to the XXXXXXXXXX Partnership Act, XXXXXXXXXX;

"Regulations" means the Income Tax Regulations (Canada); and

"Senior Notes" means the senior notes as described in Paragraph 5.

Facts

1. A Co is a XXXXXXXXXX business trust organized under the laws of the State of XXXXXXXXXX whose shares of beneficial interest are quoted on the XXXXXXXXXX and listed on the XXXXXXXXXX. From a U.S. federal income tax perspective, A Co is an association taxable as a corporation and A Co files U.S. federal income tax returns pursuant to subchapter C of the Internal Revenue Code.

For U.S. federal income tax purposes, A Co has net operating losses in the amount of approximately U.S.$XXXXXXXXXX. A Co operates in the XXXXXXXXXX business. XXXXXXXXXX.

2. B Co is a taxable Canadian corporation incorporated under the BCA. A Co holds all of the issued and outstanding shares of B Co.

3. On XXXXXXXXXX, A Co entered into an agreement to purchase substantially all the assets of XXXXXXXXXX for U.S.$XXXXXXXXXX, of which U.S.$XXXXXXXXXX was payable in cash and U.S.$XXXXXXXXXX was payable with A Co shares, plus an amount of approximately U.S.$XXXXXXXXXX for working capital. The assets purchased comprise the XXXXXXXXXX, and substantially all the related operating assets, including real property, equipment, leaseholds and licenses.

4. In XXXXXXXXXX, partly in order to finance its acquisition of the C assets, A Co completed a public offering of its shares of beneficial interest, which raised about U.S.$XXXXXXXXXX in additional equity (the " Equity Issue"), before expenses.

5. Concurrently with the Equity Issue, in XXXXXXXXXX, partly in order to finance its acquisition of the C assets, A Co completed a public offering of U.S.$XXXXXXXXXX total principal amount of Senior Notes with interest payable thereon at the rate of XXXXXXXXXX% payable semi-annually. Under the terms of the base and supplemental indentures governing the Senior Notes, A Co is not required to repay any principal amount of the Senior Notes before the maturity date except in the case of certain events of default. The Senior Notes will mature on XXXXXXXXXX.

6. The Lenders deal at arm's length with A Co and with B Co.

7. A Co operates its businesses separately through various subsidiaries and affiliates in order to limit its liability with respect to each of its businesses.

Proposed Transactions

8. Through a series of transitory steps, A Co will convert from a trust into a XXXXXXXXXX corporation.

9. A Co and B Co will form CAN LP under the provisions of the Partnership Act. A Co will contribute substantially all of the C assets to CAN LP in exchange for a XXXXXXXXXX% limited partnership interest. B Co will receive a XXXXXXXXXX% general partnership interest.

10. CAN LP will operate the XXXXXXXXXX and carry on a XXXXXXXXXX business in Canada. The limited partnership agreement governing CAN LP will allocate income, gains, losses, deductions and credits (or items thereof) in accordance with each partner's interest in CAN LP.

11. A Co will continue to service the Senior Notes to the Lenders, part of the proceeds of which were used to finance the purchase of the C assets.

Purpose of the Proposed Transactions

The Acquisition is an essential part of A Co's strategy of diversifying its revenue and cost base from its substantially European-based business to position itself as one of the largest producers of XXXXXXXXXX in the world with the ability to service customers on a worldwide basis. XXXXXXXXXX.

Ruling 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:

To the extent that subsection 212(13.2) of the Act deems A Co to be a person resident in Canada, the exemption contained in subparagraph 212(1)(b)(vii) of the Act will apply such that the portion of the interest payments in respect of the Senior Notes, made by A Co, that are deductible in computing A Co's taxable income earned in Canada, and that are paid or credited to the non-resident Lenders who deal at arms length with A Co, as on account or in lieu of payment of, or in satisfaction of interest, will be exempt from Part XIII of the Act.

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 proposed transactions are completed by XXXXXXXXXX.

The ruling is based on the Act as it currently reads and does not take into account any future amendments, whether current or proposed or not to the Act.

Opinion Given

To the extent that subsection 212(13.2) of the Act is enacted as proposed in the February 2004 Draft Legislation and to the extent that proposed subsection 212(13.2) of the Act deems A CO to be a person resident in Canada in respect of the portion of the amount that is deductible in computing A Co's taxable income earned in Canada, in our opinion, subparagraph 212(1)(b)(vii) of the Act will apply such that the portion of the interest payments, in respect of the Senior Notes, that are deductible in computing A Co's taxable income earned in Canada and paid to the non-resident Lenders who deal at arms length with A Co will be exempt from Part XIII withholding tax.

In accordance with paragraph 22 of Information Circular 70-6R5, the foregoing is an expression of opinion only, and as such is not binding on the CRA.

Yours truly,

XXXXXXXXXX
For Director,
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch