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: Whether (1) interim financing from Certificates of Deposits would qualify as borrowed money for purposes of subsection 20(3); (2) interest payable on Notes would be deductible under paragraph 20(1)(c); and (3) expenses incurred in the course of the issuance of the Notes would be deductible under paragraph 20(1)(e)(ii)?
Position: (1), (2) and (3) Yes
Reasons: (1) the terms of the Certificates of Deposits depict a loan arrangement under a lender-borrower relationship; (2) borrowed money was used to purchase common shares of foreign affiliate that was "capital property" to the taxpayer, within the meaning of section 54; (3) the expenses were incurred in the course of borrowing money used for the purpose of earning income from property which was not exempt income.
XXXXXXXXXX 2006-020132
XXXXXXXXXX, 2007
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX, and emails of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge our various telephone conversations (XXXXXXXXXX) in furtherance of this matter.
To the best of your knowledge and that of the taxpayer involved, none of the issues contained in this ruling request are:
(i) dealt with in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or taxation centre of the Canada Revenue Agency ("CRA") in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate to the taxpayer or a related person; nor
(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.
Unless otherwise stated, statutory references in this letter are to the Income Tax Act, R.S.C. 1985 (5th Suppl.) c. 1, as amended to the date hereof (the "Act"). Our understanding of the facts and proposed transactions is as follows:
Facts
1. XXXXXXXXXX ("Parentco") is a "taxable Canadian corporation" and a "public corporation" as defined in the Act. XXXXXXXXXX Parentco's business number is XXXXXXXXXX. Parentco's address is XXXXXXXXXX. Its tax services office is the XXXXXXXXXX Tax Services Office and its Tax Centre is the XXXXXXXXXX Tax Centre. The taxation year of Parentco ends on XXXXXXXXXX of each year. XXXXXXXXXX.
2. On XXXXXXXXXX, Parentco and its wholly-owned indirect subsidiary, XXXXXXXXXX ("Subco 2"), signed a purchase and sale agreement with XXXXXXXXXX ("CCO") whereby Subco 2 would acquire substantially all of CCO's XXXXXXXXXX% interest in XXXXXXXXXX ("Opco") subject to XXXXXXXXXX. The closing date of the purchase and sale of Opco shares was XXXXXXXXXX (the "Closing Date"). Prior to the Closing Date, Subco 2 owned XXXXXXXXXX% of the issued and outstanding shares of Opco. The XXXXXXXXXX% of Opco shares not owned by CCO or by Subco 2 are widely held. Opco has only one class of shares issued, that is, common shares. XXXXXXXXXX Subco 2 is a wholly-owned subsidiary of XXXXXXXXXX ("Subco 1"), which is a wholly-owned direct subsidiary of Parentco. Subco 2 has one class of shares issued, that is, common shares. Prior to the issuance of additional common shares to Parentco as described 9 below, Subco 1 had XXXXXXXXXX common shares and XXXXXXXXXX preferred shares issued and outstanding, all of which are owned by Parentco.
3. Parentco has owned all of the common shares in Subco 1 since XXXXXXXXXX and Subco 1 has owned all of the common shares of Subco 2 since XXXXXXXXXX. Subco 2 has owned XXXXXXXXXX% of the common shares of Opco since XXXXXXXXXX. Except for the Opco shares acquired by Subco 2 on the Closing Date, Parentco has directly or indirectly owned its interest in Opco since XXXXXXXXXX. The income-producing assets that are the common shares of Subco 1 have never been used as part of the normal XXXXXXXXXX business of Parentco and are recorded as capital assets of Parentco for accounting purposes and are held as 'capital property' for income tax purposes, within the meaning of section 54 of the Act.
4. The purchase price for the Opco common shares owned by CCO was approximately US$ XXXXXXXXXX and was paid by way of cash on the Closing Date. After completing the acquisition of CCO's interest, under the XXXXXXXXXX securities laws, Subco 2 was required to make an offer to all remaining Opco shareholders to purchase their Opco common shares, under substantially similar terms as those relating to the shares acquired from CCO and at the same price per share. The offer has been made by way of a take-over bid in compliance with the XXXXXXXXXX take-over code regulations. If substantially all of the existing Opco shareholders tender to the take-over bid, the total value of the entire transaction (including related fees, costs and other potential expenses) will be approximately US$ XXXXXXXXXX. However, Parentco only requires borrowed money of approximately US$ XXXXXXXXXX.
5. Parentco has currently in place, a US certificate of deposit program that uses the facilities of the Depository Trust Company (the "DTC") in the United States. The DTC is a member of the US Federal Reserve System and a registered clearing agency with the US Securities and Exchange Commission. The DTC retains custody of securities issues in electronic files. Pursuant to Parentco's US certificate of deposit program, Parentco may borrow US dollars in the US wholesale markets through the issuance of certificates of deposits which are maintained in book-entry form only and evidenced by an electronic confirmation statement reflecting the ownership of the certificate of deposit. Parentco's obligations under the US certificate of deposit program are to (i) repay the holder, the money borrowed that is the face value of each certificate of deposit on its maturity date, and (ii) pay interest on the face value of the certificate of deposit, on stipulated dates. Each certificate of deposit issued under Parentco's US certificate of deposit program constitute direct unsecured obligations of Parentco.
6. Since XXXXXXXXXX, pursuant to an Issuing and Paying Agency Agreement (the "Agency Agreement"), Parentco has appointed XXXXXXXXXX ("FCO") as its issuing and paying agent in connection with its US certificate of deposit program that is described in 5 above. Under the terms of the Agency Agreement which is governed by the laws of XXXXXXXXXX, when Parentco proposes to issue and sell certificates of deposit in the United States, FCO is authorized to place the certificates of deposit with a dealer and act as issuing and paying agent for the certificates of deposit which Parentco delivers to FCO, for a stated fee. Funds received on payment for the certificates of deposit are credited to a special purpose account that is numbered ("Special Account") on the records of FCO. When a certificate of deposit has matured, payment by FCO shall be made from and charged to the Special Account. Under the laws of XXXXXXXXXX, the relationship between FCO and Parentco is solely that of agent and principal.
7. In order to provide funding for the ultimate purchase of Opco common shares as described in 4 above, on XXXXXXXXXX, Parentco obtained interim financing in the aggregate total of approximately US$XXXXXXXXXX from institutional investors through the issuance of XXXXXXXXXX certificates of deposit pursuant to Parentco's US certificate of deposit program in the United States (collectively, the "Certificates of Deposits", each certificate, the "Certificate of Deposit").
8. Each Certificate of Deposit has a face value of US$ XXXXXXXXXX, was issued at a discount of less than XXXXXXXXXX% and will mature on XXXXXXXXXX, on which date, the face value shall be fully repaid by Parentco. Interest payable on XXXXXXXXXX Certificates of Deposit is XXXXXXXXXX% per annum each and one Certificate of Deposit carries an interest rate of XXXXXXXXXX %. Interest payment is due on XXXXXXXXXX. The Certificates of Deposit constitute direct unsecured obligations of Parentco. The Certificates of Deposit do not constitute subordinated debt of Parentco.
9. Parentco used the Certificates of Deposits to subscribe for additional common shares of Subco 1 on the Closing Date (the "Parentco Investment") which in turn subscribed for additional common shares of Subco 2 on the Closing Date. Subco 2 then used the subscription proceeds to acquire the Opco common shares from CCO pursuant to the offer described in 4 above and to fund related transaction costs and expenses on the Closing Date. Throughout the duration of the term of the Certificates of Deposits, the Parentco Investment was never used as part of the normal XXXXXXXXXX business of Parentco, was recorded as a capital asset of Parentco for accounting purposes and was held as 'capital property' for income tax purposes, within the meaning of section 54 of the Act.
Proposed Transactions
10. The proposed transactions described below ("Proposed Transactions") will follow sequentially.
11. In order to provide long-term assured funding for its indirect investment in the common shares of Opco, Parentco will issue XXXXXXXXXX year US dollar denominated senior debt obligations (collectively the "Notes", each a "Note") to institutional investors in the aggregate face value of up to US $XXXXXXXXXX. The Notes do not constitute subordinated debt of Parentco. The Notes will be issued on XXXXXXXXXX in a single tranche only and all the Notes will mature on the XXXXXXXXXX anniversary of the date the Notes are issued ("Redemption Date"). Each Note has a face value of US$ XXXXXXXXXX and interest on each Note will be payable XXXXXXXXXX (the "Initial Interest Payment Date") and ending on the Redemption Date at a floating rate equal to the XXXXXXXXXX. On and after the Initial Interest Payment Date, the interest rate will be reset XXXXXXXXXX. On the date the Notes are issued, the Notes may be issued at a minimal discount or a premium to adjust for market conditions that are reflected in the prevailing market floating interest rate for the XXXXXXXXXX.
12. On the Redemption Date, the Notes will mature and Parentco must repay in full, the face value of each of the Notes. Neither Parentco nor the holder of a Note can redeem the Note prior to the Redemption Date except on the occurrence of an event of default or a tax-related event. A tax-related event means a change in the laws of Canada that would result in the application of withholding tax to interest paid to non-resident holders of the Notes. An event of default occurs when (i) Parentco defaults for more than XXXXXXXXXX days in the case of interest or XXXXXXXXXX days in the case of principal, in the payment on the due date of interest or principal in respect of any of the Notes; (ii) Parentco becomes insolvent or bankrupt, or if a liquidator, receiver or receiver and manager of Parentco or any other officer having similar power is appointed. In the event of a redemption prior to the Redemption Date, all accrued and unpaid interest to the date fixed for redemption will also be paid.
13. The Notes constitute part of the US$ XXXXXXXXXX Note Issuance Programme of Parentco that was filed with the XXXXXXXXXX (the "US$ XXXXXXXXXX Note Issuance Programme"). The Notes will be direct unsecured obligations of Parentco ranking pari passu with all other unsecured and unsubordinated indebtedness and obligations of Parentco outstanding from time to time. Parentco will apply all of the proceeds of the Notes to repay the Certificates of Deposit on XXXXXXXXXX. Pursuant to the final term sheet for the Notes, the use of the proceeds from the Notes was stated to be for the financing of equity investment in a subsidiary.
14. For the duration of the term of the Notes:
a. Parentco will continue to own the Parentco Investment;
b. the Parentco Investment will be recorded as a capital asset of Parentco for accounting purposes and will be treated as 'capital property' for income tax purposes, within the meaning of section 54 of the Act; and
c. neither the Parentco Investment nor the proceeds from the Notes will be used as part of the normal XXXXXXXXXX business of Parentco, which includes the making of XXXXXXXXXX or acquisition of other assets.
15. For financial statements presentation purposes, pursuant to the Generally Accepted Accounting Principles ("GAAP") specifically, section 1651 of the Canadian Institute of Chartered Accountants Handbook (the "Handbook"), Parentco would account for foreign exchange gains or losses relating to the Subco 1 shares and the Notes as adjustments to the shareholders' equity and not as current period accounting profits.
16. For income tax purposes, using the temporal method which is a method of translation authorized under GAAP, specifically, section 1651 of the Handbook, that translates assets, liabilities, revenues and expenses in a manner that retains their bases of measurement in terms of the Canadian dollar, Parentco will include in income for a taxation year, accrued foreign exchange gains and losses for items that are on account of income. Under the temporal method, no accrual of foreign exchange gains and losses is required for items that are on capital account.
17. Parentco will pay costs and expenses which may be incurred solely in connection with the offering by Parentco of the Certificates of Deposit and the Notes including, agency fees, legal fees and other expenses that were incurred in the course of borrowing money (the "Fees"). None of the Fees pertain to the acquisition of shares.
Purpose of the Proposed Transactions
18. The purpose of issuing the Notes is to repay the Certificates of Deposit and provide long term funding for the Parentco Investment.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, the final documents are substantially the same as the documents provided to us as reflected here, and the Proposed Transactions are completed in the manner described above, our ruling is as follows:
A. Provided that Parentco has the legal obligation to pay interest on the Notes and the Parentco Investment continues to be held by Parentco for the purpose of gaining or producing income from property, Parentco will be entitled to deduct, in computing its income for a taxation year, the lesser of the interest paid or payable (depending on the method regularly followed by Parentco in computing its income for the purposes of the Act) in respect of that taxation year pursuant to subsection 20(3) and paragraph 20(1)(c), to the extent such amount does not exceed a reasonable amount.
B. The amount of the Fees incurred in connection with the Certificate of Deposits and the Notes, as described in 17 above, will be deductible by the Parentco in accordance with the provisions of subparagraph 20(1)(e)(ii) of the Act to the extent that such amount is reasonable in the circumstances.
C. Provided that the Parentco Investment and the proceeds from the Notes are not used as part of the normal XXXXXXXXXX business of Parentco, as described in 14 above, and the Parentco Investment continues to be held by Parentco for the purpose of gaining or producing income from property, for taxation years prior to and including the taxation year in which the Notes are redeemed, Parentco is not required to accrue and include in income under section 9 of the Act, foreign exchange gains and losses in reference to the Notes, as described in 16 above.
The rulings are given based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act and 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 on the CRA provided the Proposed Transactions occur on or before XXXXXXXXXX.
The rulings given are based on facts as described in 14 above that for the duration of the term of the Notes, Parentco will own the Parentco Investment, the Parentco Investment will be recorded as a capital asset of Parentco for accounting purposes and will be held as 'capital property' for income tax purposes within the meaning of section 54 of the Act, and that the Parentco Investment and the proceeds from the Notes will not be used as part of the normal XXXXXXXXXX business of Parentco which includes the making of XXXXXXXXXX or acquisition of other assets. If any of these facts is incorrect, the rulings given above would not apply.
The interest rates on the Notes and relevant dates that are set out in the Proposed Transactions are representative only. The actual rates and dates will be determined based on market conditions at or immediately before the time the Notes are issued.
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) the reasonableness of any amount;
(iii) the fair market value or adjusted cost base of any property or the paid-up capital of any shares referred to herein;
(iv) the application of subparagraph 212(1)(b)(vii);
(v) any tax consequences that may occur when the Notes are redeemed; nor,
(vi) any other tax consequences of the Proposed Transactions or of related transactions or events that are not described in the rulings given, including but not limited to, the tax consequence related to the minimal discount or premium on Notes when the Notes are issued, as described in 12 above.
This letter is based solely on the facts and Proposed Transactions described above. The documentation submitted with your request does not form part of the facts and Proposed Transactions and any references thereto are provided solely for the convenience of the reader.
Yours truly
XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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