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: 1. Will interest payments to be made by Finco (a wholly-owned sub that will on-loan to an LP within its business structure) to non-resident lenders in respect of a term loan and delayed drawdown term loans be exempt from Part XIII tax? 2. Will subsection 15(2) apply to amounts on-loaned to the LP? 3. Will GAAR apply?
Position: 1. Yes 2. No 3. No
Reasons: 1. The requirements of subparagraph 212(1)(b)(vii) are met. 2. Subsection 15(2.3) will apply to the on-loaned amount. 3. There is no avoidance transaction.
XXXXXXXXXX 2006-021178
XXXXXXXXXX , 2006
Dear XXXXXXXXXX
Re: Advance Income Tax Ruling
XXXXXXXXXX . ("GP Co") - BN XXXXXXXXXX
XXXXXXXXXX ("Holdings LP") - ID XXXXXXXXXX
XXXXXXXXXX .
This is in response to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge the information provided in your subsequent submissions.
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues described herein is:
(i) in an earlier tax return of the taxpayers or of a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or of a related person;
(iii) under objection by the taxpayers or by a related person;
(iv) the subject of a ruling previously issued by the Income Tax Rulings Directorate of the Canada Revenue Agency ("CRA") to the taxpayers or to 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.
Definitions
In this letter, the following terms have the meanings specified below:
(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c. 1, as amended; unless otherwise indicated, all references herein to statutory provisions are references to the Act;
(b) "Asset Mgr" means GP Co, Holdings LP and its subsidiaries, XXXXXXXXXX LP, XXXXXXXXXX Trust, the Trust, the Beneficiary and the Fund;
(c) "Beneficiary" means XXXXXXXXXX ., a corporation, incorporated under the Business Corporations Act (XXXXXXXXXX );
(d) "Business" means the business of Holdings LP as described in paragraph 1 hereof;
(e) "XXXXXXXXXX Trust" means XXXXXXXXXX , an unincorporated open-ended limited purpose trust established under the laws of the Province of XXXXXXXXXX pursuant to a declaration of trust dated XXXXXXXXXX ;
(f) "CRA" means the Canada Revenue Agency;
(g) "Credit Agreement" means the definitive loan documentation to be entered into between Finco and the Lenders outlining the terms and conditions of the New Credit Facility;
(h) "DDTL" means the delayed-draw term loan of up to $XXXXXXXXXX to be provided to Finco by the Term Lenders upon request as a part of the New Credit Facility;
(i) "Existing Credit Facility" means the current $XXXXXXXXXX , revolving and investment facility of Holdings LP, established pursuant to a second amended and restated credit agreement dated XXXXXXXXXX , with XXXXXXXXXX ;
(j) "Finco" means XXXXXXXXXX ., which was incorporated on XXXXXXXXXX under the Business Corporations Act (XXXXXXXXXX ) as a direct, wholly-owned subsidiary of GP Co. The only activity of Finco will be the lending of money and its only source of income will be the interest charged on its loans to Holdings LP.
(k) "Fund" means XXXXXXXXXX , an unincorporated open-ended limited purpose trust established under the laws of the Province of XXXXXXXXXX pursuant to an amended and restated declaration of trust dated as of XXXXXXXXXX ;
(l) "GP Co" means XXXXXXXXXX ., a corporation incorporated under the Business Corporations Act (XXXXXXXXXX );
(m) "Holdings LP" means XXXXXXXXXX , a limited partnership established under the laws of the Province of XXXXXXXXXX ;
(n) "Initial Advance" means the advance of $XXXXXXXXXX by the Term Lenders to Finco under the Term Loan on the closing date of the New Credit Facility;
(o) "LP Initial Advance" means the advance of $XXXXXXXXXX by Finco to Holdings LP evidenced by the Sub-Loan Note on the closing date of the New Credit Facility;
(p) "Lenders" means the Term Lenders and the Revolver Lenders collectively;
(q) "New Credit Facility" means the senior secured credit facility of up to $XXXXXXXXXX , consisting of the Term Loan, the DDTL and the Revolver to be provided to Finco by the Lenders pursuant to the Credit Agreement as described herein;
(r) "Operating Partnerships" means Holdings LP's material subsidiaries, including: XXXXXXXXXX , and others that may be acquired after the date of this letter;
(s) "XXXXXXXXXX LP" means XXXXXXXXXX , a limited partnership established under the laws of the Province of XXXXXXXXXX ;
(t) "Revolver" means the revolving credit facility of up to $XXXXXXXXXX to be provided to Finco by the Revolver Lenders as a part of the New Credit Facility, as such amount may be increased from time to time;
(u) "Revolver Lenders" means any lender who is or may become a party to the Credit Agreement with a commitment under the Revolver, each of whom are resident in Canada for the purposes of Part XIII of the Act on the date of closing of the New Credit Facility;
(v) "Sub-Loan Note" means the promissory note to be entered into between Finco and Holdings LP, evidencing the terms and conditions relating to the LP Initial Advance and such further amounts as may from time to time be advanced by or through Finco to Holdings LP with future advances obtained by Finco under the New Credit Facility from the Lenders;
(w) "Term Lenders" means XXXXXXXXXX . and any other lender who is or may become a party to the Credit Agreement with a commitment under the Term Loan or DDTL;
(x) "Term Loan" means the term loan of $XXXXXXXXXX to be provided to Finco by the Term Lenders as a part of the New Credit Facility;
(y) "Trust" means XXXXXXXXXX , an unincorporated limited purpose trust established under the laws of the Province of XXXXXXXXXX pursuant to a declaration of trust dated XXXXXXXXXX ; and
(z) "Trustee Inc" means XXXXXXXXXX .
Our understanding of the facts and proposed transactions is as follows:
Facts
1. Asset Mgr is an asset manager with a specific focus on XXXXXXXXXX . Asset Mgr provides XXXXXXXXXX . Asset Mgr holds the Operating Partnerships (through Holdings LP) XXXXXXXXXX .
2. The Fund is a "unit trust" pursuant to paragraph 108(2)(a) of the Act and qualifies as a "mutual fund trust" as defined in subsection 132(6). The Fund completed an initial public offering in XXXXXXXXXX and the units of the Fund are listed and posted for trading on the XXXXXXXXXX Stock Exchange under the symbol XXXXXXXXXX . The Fund was created to acquire and indirectly hold an interest in XXXXXXXXXX LP. The Fund directly holds all of the outstanding units and notes of XXXXXXXXXX Trust, and indirectly holds limited partnership units of XXXXXXXXXX LP (representing approximately XXXXXXXXXX % of the outstanding limited partnership units of XXXXXXXXXX LP), all of the shares of GP Co (the sole trustee of the Trust, being the general partner of XXXXXXXXXX LP and Holdings LP), and all of the shares of Beneficiary, the sole beneficiary of the Trust.
3. XXXXXXXXXX LP is a limited partnership established under the laws of the Province of XXXXXXXXXX on XXXXXXXXXX , the sole general partner of which is the Trust. All of the issued and outstanding general partnership units of XXXXXXXXXX LP are held by the Trust. XXXXXXXXXX LP holds all of the limited partnership units of Holdings LP.
4. Holdings LP is a limited partnership established under the laws of the Province of XXXXXXXXXX , the sole general partner of which is the Trust. All of the issued and outstanding limited partnership units of Holdings LP are held by XXXXXXXXXX LP. All of the issued and outstanding general partnership units issued by Holdings LP are owned by the Trust. Holdings LP holds interests XXXXXXXXXX in the Operating Partnerships.
5. The Trust is a "unit trust" pursuant to paragraph 108(2)(a) of the Act and is not a "mutual fund trust" for purposes of the Act. The Trust is the general partner of XXXXXXXXXX LP and Holdings LP. The Trust's sole trustee is GP Co. Beneficiary is the sole beneficiary of the Trust. All of the issued and outstanding share capital of Beneficiary is held by XXXXXXXXXX Trust.
6. GP Co is a "taxable Canadian corporation" for purposes of the Act and was incorporated on XXXXXXXXXX . GP Co is the sole trustee of the Trust. The Trust is the general partner of Holdings LP. All of the issued and outstanding share capital of GP Co is held by XXXXXXXXXX Trust.
7. Holdings LP currently owes approximately $XXXXXXXXXX under the Existing Credit Facility. The amounts borrowed by Holdings LP under the Existing Credit Facility were used (i) in the case of the investment facility, to make investments in the Operating Partnerships and their subsidiaries, and (ii) in the case of the revolving facility, for general working capital purposes, capital expenditure requirements and to normalize distributable cash flow.
8. Although the Existing Credit Facility does not mature until (i) in the case of the investment facility, XXXXXXXXXX , and (ii) in the case of the revolving facility, XXXXXXXXXX , GP Co, in its capacity as the sole trustee of the general partner of Holdings LP, has decided to refinance the Existing Credit Facility in order to take advantage of current preferential market conditions for long-term financing interest rates and covenant patterns. Accordingly, GP Co, as sole trustee of the general partner of Holdings LP, has been considering replacement sources of financing for this purpose. In evaluating various options to refinance Holdings LP's Existing Credit Facility, GP Co has the following key objectives:
(a) to enter into a relationship with a lender with lending capacity that is sufficient to satisfy Holding LP's current and future financing requirements at a low cost of capital and with manageable credit covenants;
(b) to borrow from a non-bank lender and thereby avoid the significant time and expense of having to deal with, and address the often divergent concerns of, bank lenders (as under the Existing Credit Facility) with respect to financing issues that commonly arise between a borrower and bank lenders over the course of a credit facility; and
(c) to obtain longer-term financing than the remaining term applicable to the Existing Credit Facility in order to achieve long-term financial stability for Holdings LP and to reduce the time and expense associated with frequent refinancings.
9. GP Co has canvassed various sources of long-term financing, both in Canada and the United States, in order to secure financing that meets the above objectives. Currently, the most favourable source of long-term financing is the New Credit Facility offered by the Lenders as a one-stop financing proposal. Under the New Credit Facility, the Term Lenders will provide the Initial Advance under the Term Loan, thereby enabling Holdings LP to repay the Existing Credit Facility. In addition, the New Credit Facility will include the Revolver to be used for general business purposes and to fund future investments, and the DDTL to pay down the Revolver and to fund future investments.
10. Although the interest rates offered by the Lenders under the New Credit Facility are generally comparable to the interest rates that could be obtained from lenders with respect to similar facilities in Canadian capital markets, the New Credit Facility will allow Holdings LP to meet all of its key borrowing objectives.
11. The New Credit Facility will also allow for longer-term financing than is currently available under the Existing Credit Facility. The facility may be drawn on as necessary to provide additional financing for the Business, or the expansion of the Business, without significant incremental transaction costs or time expended in order to access funds. This will promote the long-term financial stability of Holdings LP.
12. By borrowing through Finco, a direct, wholly-owned subsidiary of GP Co and a stand-alone financing vehicle for Asset Mgr, the activities of Finco, as a financing entity, will be segregated from GP Co's role and functions as the sole trustee of the general partner of Holdings LP.
13. The Lenders deal at arm's length with Finco, GP Co and Holdings LP.
14. Having a Canadian corporation as the sole borrower under the New Credit Facility will also facilitate borrowing at the lowest overall cost of capital. Interest and fees paid by Finco with respect to the Revolver would be subject to withholding tax under subsection 212(1)(b) of the Act if paid by Finco to the Revolver Lenders, if non-resident, or any other person that is not resident in Canada for the purposes of Part XIII of the Act.
15. The Lenders require that Finco must advance all borrowed funds to, or for the benefit of, Holdings LP, to be used for the purposes described above.
Proposed Transactions
16. Finco and the Lenders will enter into the Credit Agreement on or prior to the closing date of the New Credit Facility.
17. Finco and Holdings LP will enter into the Sub-Loan Note on or prior to the closing date of the New Credit Facility.
18. The Lenders will provide Finco with the New Credit Facility of up to $XXXXXXXXXX in senior secured debt comprised of the Revolver, the Term Loan and the DDTL.
19. Under the Credit Agreement, Finco will be obliged to pay certain customary costs and fees to the Lenders in respect of the New Credit Facility. In addition, the Credit Agreement will include a typical "gross-up" clause which would require Finco to make additional payments to the Lenders to compensate the Lenders for any withholding taxes, and certain other taxes, that may be exigible in connection with any payments made under the New Credit Facility.
20. On the closing date of the New Credit Facility, the Term Lenders will advance the Initial Advance to Finco under the Credit Agreement.
21. The Credit Agreement will contain appropriate representations and warranties, covenants. The events of default therein will be commercially reasonable and will not be contrived, and include:
(a) Failure to pay any amount of principal when due;
(b) Failure to pay any interest, fees or other obligations when due and payable if such non-payment continues for a period of XXXXXXXXXX business days;
(c) A default in compliance or performance with the financial covenants, or a failure to observe or perform any of the negative covenants;
(d) If an obligor under the Credit Agreement fails to make a payment when due and payable in respect to certain debt in which the aggregate principal then outstanding exceeds $XXXXXXXXXX ;
(e) If the units of the Fund are permanently delisted on the XXXXXXXXXX Stock Exchange (other than in connection with a going-private transaction approved by the Lenders holding a majority of the total commitments under the New Credit Facility) or are cease traded for greater than XXXXXXXXXX consecutive days (while the Fund is otherwise a reporting issuer);
(f) If Finco ceases to be a wholly-owned subsidiary of GP Co or if Holdings LP ceases to be a direct or indirect subsidiary of the Fund.
22. Under the DDTL, Finco may request advances from the Term Lenders from the closing date to the date that is XXXXXXXXXX months after the closing date.
23. Advances under the Revolver are available to Finco as of the closing date. Additionally, a letter of credit sub-limit of $XXXXXXXXXX (which may be increased up to $XXXXXXXXXX ) will be set up as a component of the Revolver.
24. The Revolver and Term Loan will terminate, and all loans and other obligations outstanding under the Revolver and the Term Loan will be payable in full, on the first day following the fifth (5th) anniversary of the closing date.
25. The DDTL will terminate, and all loans and other obligations outstanding under the DDTL will be payable in full on the first day following the fifth (5th) anniversary of the last draw under the DDTL facility, and in no event later than the first day following the seventh (7th) anniversary of the closing date.
26. Under the Term Loan, Finco will not be obligated to repay more than 25% of the Initial Advance within five years and one day from the closing date, except upon the occurrence of an event of default.
27. Under the DDTL, Finco will not be obligated to repay more than 25% of the amount of any advance drawn by Finco under the DDTL within five years and one day from the date that it was advanced under the DDTL, except upon the occurrence of an event of default.
28. XXXXXXXXXX Trust, GP Co, Beneficiary, the Trust, Trustee Inc, Holdings LP and certain of its subsidiaries, to be agreed upon by Holdings LP and the Lenders, will be guarantors of the New Credit Facility.
29. On the closing date, Finco will advance a portion of the LP Initial Advance on behalf of and as directed by Holdings LP to repay the Existing Credit Facility. The balance of the LP Initial Advance which is not used to pay fees and expenses incurred in connection with the establishment of the New Credit Facility (which are the responsibility of Holdings LP under the terms of the Sub-Loan Note) will, at the direction of Holdings LP to Finco, be deposited into Holdings LP's bank account. Finco may, from time-to-time, make future advances to Holdings LP, with future advances obtained by Finco under the New Credit Facility. The advances, evidenced by the Sub-Loan Note, will be made on substantially the same terms as the terms under which Finco is borrowing under the New Credit Facility as to maturity date, principal amount and payment terms. However, advances evidenced by the Sub-Loan Note will bear interest at a rate of XXXXXXXXXX % per annum in excess of the interest rates under the New Credit Facility.
30. The default provisions under the Sub-Loan Note will be subject to the default provisions under the Credit Agreement. Finco will earn a profit from the advances evidenced by the Sub-Loan Note by virtue of the mark-up on the interest rate. In addition, as a condition of its agreement to make the advances evidenced by the Sub-Loan Note to Holdings LP, Finco will require Holdings LP to reimburse Finco for all of its fees and expenses incurred in connection with the Sub-Loan Note and incurred by Finco under the New Credit Facility.
Purpose of the Proposed Transactions
31. The purpose of the proposed financing under the New Credit Facility is to enable Finco to obtain longer-term financing with a lender with lending capacity that is sufficient to satisfy Holding LP's current and future financing requirements at a low cost of capital and with manageable credit covenants, which financing proceeds will, in turn, be used by Finco to make loans to Holdings LP in order to repay its Existing Credit Facility, to fund future investments, and for other general business purposes.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. By virtue of the exemption contained in subparagraph 212(1)(b)(vii) of the Act, no tax under Part XIII of the Act will be exigible in respect of any amounts paid or credited to non-resident Lenders as, on account, or in lieu of payment of, or in satisfaction of, interest on the Term Loan and the DDTL, provided that at the time the amount is paid or credited, the Lender is dealing at arm's length with Finco.
B. Subsection 15(2.3) of the Act will apply to the advances from Finco to Holdings LP evidenced by the Sub-Loan Note.
C. Subsection 245(2) of the Act will not apply to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings above.
The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, 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 that the Credit Agreement and Sub-Loan Note are entered into by XXXXXXXXXX .
Nothing in this letter should be construed as implying that the CRA has reviewed or is making a determination in respect of:
i. the GST implications of any of the proposed transactions; or
ii. any other tax consequences of the proposed transactions or of related transactions or events that are not described herein.
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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