2006 Ruling 2005-0156381R3 - withholding post-amble

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: Are notes linked to a basket of commodities subject to the post-amble in paragraph 212(1)(b)?

Position: No

Reasons: Commodities in question are not linked to any profits, revenues or earnings of the issuer

XXXXXXXXXX 							2005-015638

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-named taxpayer and is further to numerous telephone conversations and electronic correspondences. We also acknowledge additional information sent on XXXXXXXXXX.

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

(a) in an earlier return of the taxpayer or a related person;

(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(c) under objection by the taxpayer or a related person;

(c) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(d) the subject of a ruling previously issued by the Income Tax Rulings Directorate to the taxpayer or a related person.

To the best of the knowledge of the taxpayer, the Proposed Transactions will not have any impact on outstanding tax liabilities, if any, of the taxpayer.

In this letter, the following terms are defined as follows:

DEFINITIONS

(a) "A Co" means XXXXXXXXXX.;

(b) "Act" means the Income Tax Act (Canada) R.S.C. 1985 (5th Supp.), c.l, as amended to the date of this letter;

(c) "B Co" means XXXXXXXXXX;

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

(e) "Maturity Date" has the meaning referred to in 4 below;

(f) "non-resident" has the meaning assigned by subsection 248(1) of the Act;

(g) "Note" and "Notes" have the meaning referred to in 3 below;

(h) "Noteholder" has the meaning referred to in 4 below;

(i) "Participation Rate" has the meaning referred to in 6 below;

(j) "Percentage Change" has the meaning referred to in 6 below;

(k) "Post-amble" has the meaning referred to in 13 below;

(l) "Principal Amount" has the meaning referred to in 4 below;

(m) "Proposed Transactions" means the transactions referred to in 3 to 13 below;

(n) "Reference Basket" has the meaning referred to in 5 below;

(o) "Reference Commodity" and "Reference Commodities" have the meaning referred to in 5 below;

(p) "Return" has the meaning referred to in 5 below; and

(q) "taxable Canadian corporation" has the meaning assigned by subsection 248(1) of the Act.

Our understanding of the facts and the Proposed Transactions is as follows:

FACTS

1. B Co is XXXXXXXXXX a taxable Canadian corporation. XXXXXXXXXX

2. A Co is a wholly-owned subsidiary of B Co and is a taxable Canadian corporation. XXXXXXXXXX

PROPOSED TRANSACTIONS

3. B Co proposes to issue XXXXXXXXXX notes (individually a "Note" and collectively the "Notes"), which may be acquired by one or more retail or institutional investors. Pursuant to the issuance, the Notes will be issued both to Canadian residents and to non-residents of Canada. XXXXXXXXXX .

4. The Notes will be denominated in United States dollars and each Note will have a principal amount of US$XXXXXXXXXX (the "Principal Amount"). Each Note will be issued for an amount equal to the Principal Amount, and the Notes will have a term of XXXXXXXXXX years from the date of issue (the "Maturity Date"). A holder of a Note (a "Noteholder") may not request payment of the principal amount or any return on the Noteholder's Notes prior to the Maturity Date.

5. The Notes will not bear interest at any stipulated rate. Upon the Maturity Date, B Co will pay to a Noteholder an amount equal to the Principal Amount of the Noteholder's Notes and a return (the "Return") calculated by reference to the price performance of an equally weighted basket of XXXXXXXXXX commodities (the "Reference Basket"), namely XXXXXXXXXX (the "Reference Commodities" and each a "Reference Commodity"). Each Reference Commodity will comprise XXXXXXXXXX of the Reference Basket.

6. The Return, if any, will be calculated based on 100% (the "Participation Rate") of any positive change in the value of the Reference Basket. The positive change in the value of the Reference Basket, expressed as a percentage (the "Percentage Change"), will be determined by aggregating the percentage weighted change in the value of each Reference Commodity, as measured by subtracting the base price for each Reference Commodity at or around the time of the issuance of the Notes from the settlement price of the Reference Commodity at or around the Maturity Date and determining the percentage change represented by the difference. The Return will be determined according to the following formula:

Return = (Principal Amount x Percentage Change x Participation Rate)

7. If there is no positive Percentage Change in the Reference Basket, no Return will be payable, and the amount paid to a Noteholder on the Maturity Date will be equal to the Principal Amount of the Noteholder's Notes.

8. The prices for the Reference Commodities will be determined, generally by B Co or A Co, by reference to publicly-available information provided by the relevant exchange, as reported by such exchange or by an arm's-length reporting agency such as Reuters. The relevant exchanges are as follows:

(a) in the case of XXXXXXXXXX;

(b) in the case of XXXXXXXXXX;

(c) in the case of XXXXXXXXXX; and

(d) in the case of XXXXXXXXXX.

9. In the case of certain extraordinary events that have a material adverse effect on B Co's ability to perform its obligations under the Notes or to hedge its position in respect of its obligations to pay amounts owing under the Notes, including disruptions to trading in any of the Reference Commodities, government or court orders prohibiting B Co from performing its obligations, certain government actions which have a material adverse effect on relevant financial markets, and international calamities or crises, the dates on which the prices of the Reference Commodities are determined for the purpose of calculating the Return may be accelerated or postponed, the timing of payment of any Return may be accelerated or delayed, and the amount of such payment may be reduced, in each case at the sole option of B Co. However, in no case will the payment of the Principal Amount be accelerated, and the Principal Amount of the Notes will be payable only on the Maturity Date.

10. B Co may enter into contracts with third parties, including futures contracts, forward contracts, option contracts, currency contracts or other instruments relating to a Reference Commodity, in order to hedge all or a portion of its exposure under the Notes.

11. B Co's earnings, revenues or profits are not, in any material way, determined by reference to any one or more of the Reference Commodities, although B Co, A Co, or another member of the B Co's group may, from time to time, in the course of normal business operations, have dealings with one or more of the Reference Commodities. Neither B Co nor any corporation related to B Co produces, extracts or manufactures any of the Reference Commodities.

12. A Co intends to (but is under no obligation to) establish a secondary market for the Notes. Any sale of Notes in any such secondary market will be prohibited until six months following the issue date.

13. Except for the issue relating to the application of the post-amble of paragraph 212(1)(b) of the Act (the "Post-amble") that is the subject of this ruling request, all requirements for the application of one or more withholding tax exemptions in paragraph 212(1)(b) of the Act will be satisfied. (See Comment below)

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to permit B Co to issue Notes, which represent a desirable investment opportunity to non-resident customers of B Co and other non-resident investors. The Proposed Transactions would permit B Co to expand its financial and investment services abroad and compete with local issuers also operating in the relevant geographies. The Proposed Transactions will also provide B Co with a source of economic domestic or foreign currency borrowings for use in its banking business.

RULING GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the Proposed Transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are undertaken in the manner described above, we rule as follows:

The manner of calculating the Return, as described in 6, 7, 8 and 9 above, will not cause, in and by itself, the post-amble of paragraph 212(l)(b) of the Act to apply to deem that the payment of the Return on a Note to a non-resident who deals at arm's length with B Co not to be interest described in clause 212(l)(b)(iii)(D) of the Act.

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 dated May 17, 2002 issued by the CRA, and is binding provided the Proposed Transactions are completed by XXXXXXXXXX.

This ruling is based on the Act as it currently reads and does 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 of the proposed transactions;

(ii) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein.

Comment:

In our opinion, for a Note that satisfies the requirements in 13 above, were it not for the arrangement described in 12 above which establishes a secondary market, if that arrangement entails an obligation by A Co or B Co to purchase a Note from a non-resident within 5 years from the date of issue of the Note, the manner in calculating the Return on the Note as described in 6, 7, 8 and 9 above, in and by itself, would not cause the payment of the Return on a Note to a non-resident who deals at arm's length with B Co at the Maturity Date to be denied the exemption from withholding tax pursuant to subparagraph 212(1)(b)(vii) of the Act.

The above comment is not an income tax ruling and further to paragraph 22 of Information Circular 70-6R5, it is not binding on the CRA.

Yours truly,

XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch