2005 Ruling 2005-0139661R3 - Withholding Index-Linked Notes

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: Is the positive return of a foreign denominated index-linked note exempt from withholding under 212(1)(b)(iii)(D)

Position: YES

Reasons: Not linked to performance of the payor

XXXXXXXXXX 									2005-013966

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

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

We understand that to the best of our knowledge and that of the taxpayer involved, none of the issues involved in this ruling request herein is:

(a) dealt with in an earlier return of the taxpayer or a related person;
(b) being considered by tax services office or a taxation centre in connection with any income tax return previously filed by the taxpayer or a related person;
(c) under objection by the taxpayer or a related person;
(d) before the Courts, or if a judgment 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.

Definitions:

(a) "Act" means the Income Tax Act, R. S. C. 1985(5th Supp.) c.1, as amended to the date hereof;

(b) "A Co" means XXXXXXXXXX and is further described in paragraphs 1 to 3;

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

(d) "Final Index Value" means the value of the Index on the third business day prior to the Maturity Date of the Note;

(e) "Index" means the XXXXXXXXXX;

(f) "Index Return" means the positive amount, if any, that would be added to the Principal Amount and is calculated based on the change in the value of the Index between the Initial Index Value and Final Index Value as described in paragraph 8(b);

(g) "Issue Date" means the date a Depositor advances an amount to A Co and the Notes are issued;

(h) "Initial Index Value " means the value of the Index on the Issue Date of the Note;

(i) "Maturity Date" means a date that is a stipulated date between XXXXXXXXXX and XXXXXXXXXX years after the Issue Date, upon which date the note would mature;

(j) " Notes" means the Notes to be issued pursuant to the XXXXXXXXXX program and further described in paragraphs 6 and 7;

(k) "OSFI" means the Office of the Superintendent of Financial Institutions;

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

(m) "XXXXXXXXXX" means a fund-raising program which involves the issuance of debt obligations XXXXXXXXXX residents pursuant to a shelf prospectus, prospectus supplement and various terms supplements filed with XXXXXXXXXX;

Statement of Facts

1. A Co is a "taxable Canadian corporation" and a "public corporation", as defined in the Act. A Co files its tax returns at the XXXXXXXXXX Tax Services Office. A Co's address is XXXXXXXXXX and its taxation year ends on XXXXXXXXXX of each year.

2. A Co is a XXXXXXXXXX Bank for purposes of the Bank Act (Canada).

3. A Co is a corporation that is a member of the XXXXXXXXXX and, accordingly, is a "prescribed financial institution" as described in section 7900 of the Regulations for purposes of clause 212(1)(b)(iii)(D) of the Act.

4. As part of its banking business, A Co borrows money by issuing structured debt obligations including index-linked debt obligations such as the Notes.

5 In addition to offering index-linked debt obligations to Canadian residents, A Co raises funds by offering index-linked debt obligations to persons resident in jurisdictions other than Canada such as the XXXXXXXXXX Program.

Proposed Transactions

6. A Co would like to borrow funds by issuing the Notes pursuant to the XXXXXXXXXX Program or pursuant to A Co's ongoing deposit note program. The Notes would be issued to persons not resident in Canada who deal at arm's length with A Co for purposes of the Act (the "Depositors").

7. A Depositor would advance the amount of U.S.$XXXXXXXXXX to A Co, which, through its XXXXXXXXXX head office would issue, at such time, the Issue Date, a Note with a U.S.$XXXXXXXXXX principal amount (the "Principal Amount").

8. On the Maturity Date, a Depositor would be entitled to the Principal Amount together with the Index Return (if the amount is positive see (b) below) or to a reduction of the Principal Amount, (if the amount is negative see (a) below), which would be based on changes in the value of the Index between the Initial Index Value and the Final Index Value as more particularly described as follows:

(a) where the closing value of the Index on any trading day during the term of the Note is less than or equal to XXXXXXXXXX% of the Initial Index Value, the Index Return would be an amount equal to the greater of:

(i) $XXXXXXXXXX , and
(ii) $XXXXXXXXXX x (Final Index Value - Initial Index Value)
Initial Index Value

or

(b) where the value of the Index at the close of every trading day during the term of the Note is greater than XXXXXXXXXX% of the Initial Index Value, then the Index Return would be equal to the greater of:

(i) $XXXXXXXXXX, and
(ii) $XXXXXXXXXX x (Final Index Value - Initial Index Value)
Initial Index Value

In short, a Depositor could lose part of the Principal Amount of the Note in circumstances where the closing value of the Index was XXXXXXXXXX% or less of the Initial Index Value at any time during the term of the Note. In all circumstances, a Depositor would receive back at least XXXXXXXXXX% of the Principal Amount of the Note. In circumstances where the closing value of the Index on every trading day during the term of the Note exceeded XXXXXXXXXX% of the Initial Index Value, a Depositor would be entitled to full repayment of the Principal Amount plus a positive return where the Final Index Value exceeded the Initial Index Value equal to the proportionate increase in the Index.

9. The Notes XXXXXXXXXX, which would rank pari passu in right of payment with all of A Co's deposit liabilities.

10. A Depositor would be entitled only to payment as described in paragraph 8 above on the Maturity Date and would have no other rights to receive payments under the Note. In particular, there would be no periodic payments of interest during the term of the Note.

11. All amounts payable under the Note would be paid in United States dollars.

12. In the event that A Co became insolvent prior to the Maturity Date, the Depositor would have a provable claim against A Co, the amount of which would be determined by negotiations with the liquidator of A Co or by a court having jurisdiction over the matter. A Depositor would also be entitled to wait until the Maturity Date and claim an amount equal to an amount as described in paragraph 8 above. Any such claim of a Depositor would be in priority to holders of subordinated debt obligations issued by A Co, as well as preferred and common shareholders of A Co.

13. In computing the profit for a taxation year of A Co, any amount in excess of the Principal Amount to be paid to a Depositor on the Maturity Date would be deducted by A Co in computing its income for financial statement purposes, as well as for purposes of the Act. In the event that the payment as described in paragraph 8 above to be made on the Maturity Date is less than the Principal Amount, such shortfall would be included in A Co's income for financial statement purposes, as well as for purposes of the Act.

14. A Co would not be required under the terms of the Note to hedge its obligations thereunder. That being said, it would be expected that in order to hedge its risks under the Note, A Co would acquire securities and/or enter into separate contractual arrangements with third parties that would be expected to provide A Co with sufficient income in order to pay a Depositor on the Maturity Date.

15. A Depositor would not be entitled to a return of the Principal Amount or any interest or other amount under the Note prior to the Maturity Date.

16. In certain circumstances where the determination of the Final Index Level on the scheduled Maturity Date may not be accurately determined, the payment as described in paragraph 8 above may be delayed until such time as the Final Index Level may be accurately determined.

17. By virtue of holding a Note, a Depositor would have rights only to obtain a payment in cash from A Co. A Note would not represent any beneficial interest in or right to acquire any of the securities included in the Index.

18. A Co would use the net proceeds from the issuance of the Notes for general corporate purposes, which could include additions to working capital, investments and/or extensions of credit to subsidiaries of A Co and the repayment of existing indebtedness.

Purpose of Proposed Transactions

The purpose of the proposed transactions is to provide A Co with a source of borrowed funds at a competitive funding cost while providing a Depositor with a return that is linked to the return of the Index without exposing the Depositor to the full-downside risk of acquiring the securities constituting the Index or a security that mirrors the return on the Index.

Rulings Given:

Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we rule as follows:

A. The Index Return on the Notes as described in paragraph 8(b), if any, paid at Maturity Date to a Depositor who, at the time of payment, deals at arm's length with A Co for purposes of the Act, will not be subject to tax by virtue of the withholding tax exemption provided by clause 212(1)(b)(iii)(D) of the Act.

B. The provisions of subsection 245(2) of the Act will not be applicable as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the ruling given in A above.

These rulings are given subject to the general limitations and qualifications set forth in Information circular 70-6R5 dated May 17, 2002 issued by the CRA, and are binding provided the proposed Notes are issued on or before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Ruling Directorate
Policy and Planning Branch