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 re-loan money to a partnership and qualify for the exemption from Part XIII withholding tax under paragraph 212(1)(b)(vii)?
Position: Yes
Reasons: previous rulings
XXXXXXXXXX 2005-013356
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX ("GP") BN: N/A
This is in reply to your letter of XXXXXXXXXX, wherein you request a ruling on behalf of the above named corporation. 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 Canada Revenue Agency ("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) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
(v) 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. GP is a taxable Canadian corporation as defined in subsection 89(1) of the Act.
2. GP is a recently incorporated corporation and as such has not yet been assigned an account number. GP will file its tax return with the XXXXXXXXXX Taxation Centre and be served by the XXXXXXXXXX Tax Services Office. The shares of GP will be owned by XXXXXXXXXX ("Numberco1"), a direct or indirect wholly-owned subsidiary of XXXXXXXXXX ("Parentco").
3. XXXXXXXXXX ("LP") has been formed as a limited partnership under the laws of the Province of XXXXXXXXXX to acquire, own and operate XXXXXXXXXX (the "Property"). The Property has been acquired for a purchase price of approximately $XXXXXXXXXX, by LP as assignee of an agreement of purchase and sale entered into between XXXXXXXXXX.
4. The operator of LP's business will be GP, the sole general partner of LP. XXXXXXXXXX (the "Manager") has agreed to provide certain asset management services to LP. The general partner of the Manager is XXXXXXXXXX ("GP Inc1."), the shares of which will be owned by Numberco1. The limited partner of the Manager will be Parentco.
5. Although a final determination has not yet been made, for commercial reasons unrelated to the proposed transactions described below, LP may transfer the beneficial interest in all or part of the Property to XXXXXXXXXX ("FinanceLP"), a limited partnership formed under the laws of XXXXXXXXXX, the sole limited partner of which will be LP.
6. XXXXXXXXXX% of the limited partnership interests of LP are held by XXXXXXXXXX ("HoldingsLP1"), a XXXXXXXXXX limited partnership. HoldingsLP1 has contributed $XXXXXXXXXX in respect of its limited partnership interest in LP.
7. The general partner of HoldingsLP1 is XXXXXXXXXX ("GP Inc.2"), an XXXXXXXXXX corporation, and the sole limited partner is XXXXXXXXXX ("HoldingsLP2"), a XXXXXXXXXX limited partnership.
8. The general partner of HoldingsLP2 is XXXXXXXXXX ("GP Inc3."), an XXXXXXXXXX corporation, and the sole limited partner is Parentco.
9. The remaining XXXXXXXXXX% of the limited partnership interests of LP are held by XXXXXXXXXX ("Canco1"), XXXXXXXXXX, and XXXXXXXXXX ("Canco2"), XXXXXXXXXX and XXXXXXXXXX ("Canco3") and XXXXXXXXXX ("Canco4"). XXXXXXXXXX. Canco1, Canco2, Canco3, and Canco4 have contributed $XXXXXXXXXX in respect of their limited partnership interests in LP.
10. It is possible that during the term of the Finco Notes (defined in paragraph 17 below), the limited partnership interests of LP may be held by non-corporate entities.
11. LP has obtained bridge financing in an aggregate amount of approximately US$XXXXXXXXXX from Canadian lenders (the "Canadian Bridge Loan") to assist in the acquisition of the Property.
12. LP has used the subscription proceeds described in paragraphs 6 and 9 above and the proceeds of the Canadian Bridge Loan to acquire the Property.
13. LP is seeking debt financing in an amount currently expected to be US$ XXXXXXXXXX to refinance the indebtedness incurred in the acquisition of the Property and to help finance LP.
14. GP has retained the services of US and Canadian investment advisers, each of which will assist in raising a portion of the amount required to finance and subsequently refinance the acquisition and operation of the Property.
15. GP and its US and Canadian investment advisers have determined that the refinancing would be obtained at a lower cost and on more favourable terms if the indebtedness for the refinancing was issued in both the US and Canadian markets and denominated in US funds. Such determination is based on the following factors:
(a) there is a greater demand for US dollar denominated debt in the United States;
(b) US investors have greater familiarity than Canadian investors with financing the asset class and business of LP;
(c) there is not sufficient liquidity in the Canadian market to support a borrowing of the size contemplated. On the other hand, larger pools of capital are available in the US and consequently a US debt financing results in more competition and lower rates to the issuer;
(d) in general, Canadian institutions prefer to invest for a shorter period, while there is currently an unusually high level of interest in long-term financial assets from both US and European investors in the current market environment; and
(e) the proposed issuance would most likely receive an investment grade rating from rating agencies, which would constitute a significant advantage for LP and its partners, considering that there is currently a scarcity of investment grade offerings in the US when compared to demand.
16. A corporation ("Finco") has been incorporated under the laws of XXXXXXXXXX. The shares of Finco are owned by GP.
Proposed Transactions
17. Finco will obtain long-term financing to be advanced by Finco to LP to replace the Canadian Bridge Loan. For that purpose, Finco will issue US dollar denominated secured notes in the expected amount of US$ XXXXXXXXXX (the "Finco Notes").
18. It is expected that initially, substantially all of the Finco Notes will be secured notes held by US noteholders, with the balance being held by Canadian noteholders.
19. All of the initial US noteholders will deal at arm's length with Finco, GP and the limited partners of LP.
20. The Finco Notes will be issued pursuant to a private placement.
21. The Finco Notes will be issued for their face amount in three tranches: the first tranche will have a term of XXXXXXXXXX years bearing interest at XXXXXXXXXX% ("Tranche 1"); the second tranche will have a term of XXXXXXXXXX years bearing interest at XXXXXXXXXX% ("Tranche 2"); and the third tranche will have a term of XXXXXXXXXX years bearing interest at XXXXXXXXXX% ("Tranche 3"). Interest will be calculated semi-annually in arrears.
22. No portion of the interest paid under the Finco Notes will be contingent on the use of or production from property in Canada or will be computed by reference to revenue, profit, cash flow, commodity price or similar criterion or by reference to dividends paid or payable to shareholders of any class of shares of the capital stock of a corporation.
23. The Finco Notes will not be convertible into securities of Finco, GP or LP.
24. The principal amount of the Finco Notes - Tranche 1 is expected to be due on the XXXXXXXXXX anniversary of their issue date, the principal amount of the Finco Notes - Tranche 2 is expected to be due on the XXXXXXXXXX anniversary of their issue date and the principal amount of the Finco Notes - Tranche 3 is expected to be due on the XXXXXXXXXX anniversary of their issue date. Finco will not be required under the terms of the Finco Notes or any agreement relating thereto, to repay more than XXXXXXXXXX% of the principal amount of the Finco Notes within XXXXXXXXXX years from the date of issue of the Finco Notes, except in the event of a failure or default under the terms of the Finco Notes or related agreements as described in the Offering Memorandum dated XXXXXXXXXX.
25. In the event of a change in control, coupled with a ratings downgrade, Finco will be obligated to make an offer to repurchase the Finco Notes. A change of control will mean the occurrence of any transaction or event as a result of which any person not controlled by Parentco purchases, acquires or otherwise controls (i) GP, or (ii) more than half of the limited partnership interests of LP. The failure to make an offer to purchase the Finco Notes upon a change of control will constitute an event of default.
26. The Finco Notes will be secured by a general security, charging among other things Finco's interest in its loan to LP.
27. LP will provide a guarantee (the "Guarantee") of the Finco Notes which will be secured by a first ranking charge over all of its assets and undertaking, including all of its right, title and interest, present and future, in and to (i) the Property, including books, records and accounts relating thereto, (ii) material leases, licenses and contracts to which LP is a party, (iii) all monies from investment and cash collateral accounts, and (iv) any insurance, expropriation and land sale proceeds pertaining to the Property.
28. Finco will lend the proceeds of the Finco Notes to LP (the "LP Loan") on substantially the same financial terms as the Finco Notes. The interest rate on the LP Loan will be approximately XXXXXXXXXX% higher than the weighted average of the interest rates on the Finco Notes. There will be certain other normal commercial differences reflecting the differences between publicly issued notes and private loan obligations.
29. LP will use the proceeds of the LP Loan to repay the Canadian Bridge Loan.
30. Finco will pay all the fees and other amounts incurred in carrying out the Proposed Transactions and LP will reimburse Finco for all such expenses.
31. The precise amounts of borrowing and equity capitalization and the purchase price may vary from those anticipated at this time as the transaction proceeds.
Purpose of the Proposed Transactions
32. To provide long term financing to LP to assist in the refinancing of the acquisition and operation of the Property at the lowest cost of capital to Finco and LP.
Rulings Given
Provided that the above description of facts, proposed transactions and purpose of the proposed transactions are accurate and constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose thereof and further that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. Provided the terms of the Finco Notes are as set out herein, and Finco deals at arm's length with the non-resident holders of the Finco Notes, the withholding tax exemption in subparagraph 212(1)(b)(vii) will apply and no tax under Part XIII of the Act will be exigible in respect of any amount paid or credited under the Finco Notes as, on account or in lieu of payment of, or in satisfaction of, interest, including any amounts deemed to be interest, to a non-resident person.
B. Neither the disposition by a limited partner of its interest in LP nor the admission of a new partner will, in and by itself, preclude the application of subparagraph 212(1)(b)(vii) to any interest payments made by Finco pursuant to the Finco Notes notwithstanding that any such new limited partner may not be a corporation.
C. 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 rulings given 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.
Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:
(i) the GST implications of any Proposed Transactions;
(ii) any other tax consequences of the Proposed Transactions or of related transactions or events not described herein.
Yours truly,
XXXXXXXXXX
Manager
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch
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