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.
Whether subsection 18(6) of the Act will apply to the debts acquired by the partnership?
Whether GAAR will apply to the proposed transaction of inserting a partnership to acquire debts outstanding to specified non-residents to avoid the application of subsection 18(4) of the Act?
1. Subsection 18(6) of the Act does not apply to the acquisition of a loan. It only applies to the "making" of a loan.
2. The taxpayer's outstanding debts to specified non-residents currently exceeds the 2:1 ratio provided for in subsection 18(4) of the Act. The only purpose for transferring the outstanding debts to specified non-residents to the partnership is to avoid the application of subsection 18(4) of the Act. Therefore GAAR will apply to ensure that the outstanding debts to specified non-residents continue to be subject to the application of subsection 18(4) of the Act.
Re: Advance Income Tax Ruling
This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above taxpayers. We acknowledge receipt of the XXXXXXXXXX amended request for an advance income tax ruling. We also acknowledge receipt of the additional information provided in the numerous e-mails and in the telephone conference calls on XXXXXXXXXX.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supplement), c.1, as amended, (the "Act") to the date of this advance income tax ruling and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
(a) "CRA" is the Canada Revenue Agency.
(b) "Parent" is XXXXXXXXXX.
(c) "Foreign Parent" is XXXXXXXXXX.
(d) "CanCo" is XXXXXXXXXX.
(e) "CanSub" is XXXXXXXXXX.
(f) "ForeignCo" is XXXXXXXXXX.
(g) "Can-FHoldCo" is XXXXXXXXXX.
(h) "BarbCo" is XXXXXXXXXX.
(i) "Can-BHoldCo" is XXXXXXXXXX.
(j) "LuxFinCo" is XXXXXXXXXX.
(k) "UKFinCo" is XXXXXXXXXX.
(l) "RFEs" is a reference to LuxFinCo and UKFinCo, related foreign entities of CanCo.
(m) "Newco" is XXXXXXXXXX.
(n) "CLP" is the partnership formed between Newco and CanSub.
(o) "CBCA" is the Canada Business Corporations Act.
(q) "Partnerships Act" is the Partnerships Act of XXXXXXXXXX.
(r) "Treaty" is the Convention between Canada and the United States of America with Respect to Taxes on Income and Capital.
(s) "US Code" is the United States Internal Revenue Code.
(t) "related persons" has the meaning assigned by subsection 251(2) of the Act.
(u) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.
1. CanCo is a taxable Canadian corporation incorporated under the Companies Act. CanCo has a XXXXXXXXXX taxation year-end. CanCo is a wholly owned direct subsidiary of Foreign Parent.
CanCo XXXXXXXXXX. CanCo also conducts manufacturing activities for both the Canadian market and for the world-wide supply chain of the Parent.
2. Foreign Parent is a corporation incorporated under the laws of the state of XXXXXXXXXX and is a resident of the United States for purposes of the Act and the Treaty. Parent has indirect control of Foreign Parent.
3. CanSub is a taxable Canadian corporation incorporated under the CBCA. CanSub has a XXXXXXXXXX taxation year-end and is a wholly owned direct subsidiary of CanCo. CanSub files its tax returns with the XXXXXXXXXX Taxation Center and deals with the XXXXXXXXXX Tax Services Office.
CanSub markets a broad range of products to XXXXXXXXXX. Specifically, it conducts marketing, selling and distribution activities for the Canadian brand name XXXXXXXXXX. It operates through permanent establishments situated in XXXXXXXXXX.
4. BarbCo is a corporation organized under the Societies with Restricted Liability Act of Barbados and is resident in that country for purposes of the Act. The capital issued by BarbCo is known as "quotas". CanCo owns XXXXXXXXXX% of the quotas issued by BarbCo. BarbCo is the parent company of a manufacturer of XXXXXXXXXX products for the US entities of the Parent.
5. CanCo owns approximately XXXXXXXXXX % of the common shares of ForeignCo, a corporation incorporated under the laws of XXXXXXXXXX and resident in that country for purposes of the Act. ForeignCo, through its wholly-owned subsidiary, is a trading company involved in the manufacturing and distribution of XXXXXXXXXX products in XXXXXXXXXX.
6. LuxFinCo is a corporation incorporated under the laws of Luxembourg and a wholly-owned subsidiary of Foreign Parent. On XXXXXXXXXX, CanCo has C$XXXXXXXXXX of outstanding debts payable to LuxFinCo (the "LuxFinCo Loan"). The LuxFinCo Loan bears interest at XXXXXXXXXX%.
7. UKFinCo is a corporation incorporated under the laws of the United Kingdom. UKFinCo has made a C$XXXXXXXXXX credit facility available to CanCo, of which approximately C$XXXXXXXXXX is outstanding on XXXXXXXXXX (the "UKFinCo Loan").
8. LuxFinCo and UKFinCo are controlled, directly or indirectly, by Foreign Parent such that they are related persons of Foreign Parent and CanCo.
9. Foreign Parent, BarbCo, ForeignCo, LuxFinCo and UKFinCo do not carry on business in Canada for the purposes of the Act.
10. On XXXXXXXXXX, the estimated accumulated retained earnings of CanCo is approximately C$XXXXXXXXXX. The paid-up capital of the CanCo shares is approximately C$XXXXXXXXXX.
11. On XXXXXXXXXX, the estimated accumulated retained earnings of CanSub is approximately C$XXXXXXXXXX.
12. On XXXXXXXXXX, CanCo incorporated Can-FHoldCo, a wholly- owned Canadian subsidiary, under the CBCA. Can-FHoldCo is a taxable Canadian corporation. Can-FHoldCo will choose to have its first fiscal period end on XXXXXXXXXX.
13. On XXXXXXXXXX, CanCo transferred its interest in ForeignCo to Can-FHoldCo and received, as consideration, additional shares of Can-FHoldCo. In addition, Can-FHoldCo assumed approximately C$XXXXXXXXXX of the LuxFinCo Loan owed by CanCo to LuxFinCo (that portion is hereinafter referred to as the "Can-F Loan"). Interest accrued to XXXXXXXXXX on the portion of the LuxFinCo Loan assumed by Can-FHoldCo will be paid by CanCo. As part of the transfer, CanCo was exonerated from any liability towards LuxFinCo to the extent of the debt assumed by Can-FHoldCo. The fair market value of CanCo's interest in ForeignCo on the transfer exceeded the non-share consideration (i.e. the debt assumed by Can-FHoldCo) received by CanCo.
14. On XXXXXXXXXX, CanCo incorporated Can-BHoldCo, a wholly-owned Canadian subsidiary, under the CBCA. Can-BHoldCo is a taxable Canadian corporation. Can-BHoldCo will choose to have its first fiscal period end on XXXXXXXXXX.
15. On XXXXXXXXXX, CanCo transferred its interest in BarbCo to Can-BHoldCo and received, as consideration, additional shares of Can-BHoldCo.
16 On XXXXXXXXXX, pursuant to subsection 85(1) of the Act, CanCo contributed to CanSub all of its tangible assets and liabilities related to its manufacturing and research and development ("R&D") activities. CanCo also contributed to CanSub certain intangibles (i.e. XXXXXXXXXX). As consideration, CanCo received additional shares in CanSub and CanSub assumed approximately C$XXXXXXXXXX of the LuxFinCo Loan owed by CanCo to LuxFinCo (that portion is hereinafter referred to as the "CanSub Loan"). Interest accrued to the date of the aforementioned transfer of assets to CanSub, on the portion of the LuxFinCo Loan assumed by CanSub, will be paid by CanCo. As part of the transaction, CanCo was exonerated from any liability towards LuxFinCo to the extent of the debt assumed by CanSub.
17. On XXXXXXXXXX, Foreign Parent incorporated Newco, a taxable Canadian corporation incorporated under the Companies Act. For US tax purposes, Newco is considered a disregarded entity pursuant to Regulation Section 301.7701-2 of the US Code. Newco's first fiscal period ended on XXXXXXXXXX. Newco proposes to change its subsequent fiscal periods so that they will end on XXXXXXXXXX.
18. On XXXXXXXXXX, Foreign Parent transferred its XXXXXXXXXX% interest in CanCo to Newco and received, as consideration, additional shares of Newco.
19. On XXXXXXXXXX, CanCo was wound up into Newco pursuant to subsection 88(1) of the Act.
20. On XXXXXXXXXX, Foreign Parent contributed C$XXXXXXXXXX to Newco in exchange for the issuance of additional shares. On XXXXXXXXXX, Foreign Parent lent an amount of C$XXXXXXXXXX to Newco. The amounts contributed and loaned to Newco were equal to the remaining debt owed by Newco to LuxFinCo and UKFinCo at that time. Newco used the amount(s) received from the Foreign Parent to repay the remaining debt outstanding to LuxFinCo and UKFinCo.
21. We understand that, to the best of your knowledge and that of the above taxpayers, none of the issues involved in the ruling request:
(i) is in an earlier return of the taxpayers or a related person,
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person,
(iii) is under objection by the taxpayers or 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, or
(v) is the subject of a ruling previously issued by this Directorate.
22. Newco and CanSub will organize CLP, a Canadian limited partnership, pursuant to the Partnerships Act. Newco will contribute at least C$XXXXXXXXXX for a XXXXXXXXXX% general partner interest in CLP and CanSub will contribute at least C$XXXXXXXXXX for a XXXXXXXXXX% limited partner interest in CLP. Effective from the date of its organization, CLP will elect to be treated as a corporation resident in Canada for US tax purposes under Regulation Section 301.7701-3 of the US Code. CLP's first fiscal period will end on XXXXXXXXXX.
23. CLP will purchase from LuxFinCo that portion of the LuxFinCo Loan that was assumed by Can-FHoldCo (i.e. the Can-F Loan) and that portion of the LuxFinCo Loan that was assumed by CanSub (i.e. the CanSub Loan), hereinafter referred to as the "Acquired Debt". As consideration, CLP will pay LuxFinCo an amount of C$XXXXXXXXXX cash and will issue notes payable to LuxFinCo for the balance (the "CLP Notes"). The interest rate on the CLP Notes will be equal to a commercial rate of interest. Immediately after the acquisition of the Can-F Loan and the CanSub Loan by CLP, the interest rate on the Can-F Loan and the CanSub Loan will be increased by XXXXXXXXXX%, such that CLP earns a spread in respect of interest paid on the CLP Notes.
Immediately prior to the purchase of the Can-F Loan and the CanSub Loan by CLP, CanSub and Can-FHoldCo will pay to LuxFinCo any interest that would have accrued on these loans after the assumption thereof from CanCo. In addition, any Canadian Part XIII tax triggered on account of such interest payments will be withheld and remitted to the CRA pursuant to paragraph 212(1)(b) of the Act.
Purpose of the Proposed Transactions
The overall purpose of the Proposed Transactions (including the transactions described in paragraphs 12 to 20 above) is to have Newco repay its remaining debts outstanding to LuxFinCo and UKFinCo after CLP acquires the CanSub Loan, after the reorganization of the Canadian group in order to combine CanCo's manufacturing activities, XXXXXXXXXX and research and development activities with CanSub's distribution activities into a single corporation, and the Can-F Loan from LuxFinCo. At the same time, this reorganization facilitates the repatriation of dividends from CanCo to Foreign Parent at a reduced rate of United States taxation, as permitted under the American Jobs Creation Act of 2004, without triggering adverse Canadian and/or U.S. tax consequences.
(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;
(b) the proposed transactions are completed in the manner described above; and
(c) there are no other transactions which may be relevant to the rulings requested,
our rulings are as follows:
A. Subsection 18(6) of the Act will not apply, as a consequence of the proposed transactions, in and by themselves, to deem the amount of any debt referred to in the facts above to be a debt incurred by CanSub or Can-FHoldCo to LuxFinCo.
B. Subsection 245(2) of the Act will apply to the Proposed Transactions described in paragraphs 22 and 23 above such that, in computing the income of CLP for a taxation year of CLP, no deduction shall be made in respect of any amount otherwise deductible in computing its income in respect of interest paid for the year on the CLP Notes that would not be deductible to CanSub and Newco if, for the purposes of subsections 18(4) to 18(6) of the Act, the CLP Notes and the interest thereon, payable by CLP to LuxFinCo, was payable by CanSub and Newco, the partners of CLP, to LuxFinCo, in proportion to their share of the income or loss of CLP for its fiscal period that includes that time.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the Canada Revenue Agency ("CRA") on May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions.
This letter is based solely on the facts and proposed transactions described above. Furthermore, none of the documents relating to the LuxFinCo Loan, the UKFinCo Loan, the Can-F Loan, the CanSub Loan or the CLP Notes were reviewed by the CRA and therefore do not form 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
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