2006 Ruling 2006-0213101R3 - Withholding tax exemption

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. Are interest payments to be made by Finco (a wholly-owned sub who will on-loan to its LP parent) to a non-resident lender exempt from Part XIII tax? 2. Will subsection 15(2) apply to amounts on-loaned from Finco to Parent? 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 							2006-021310

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("GP Parent") - BN XXXXXXXXXX
XXXXXXXXXX ("Finco") - BN XXXXXXXXXX
XXXXXXXXXX ("GP") - BN XXXXXXXXXX
XXXXXXXXXX ("Partnership") - BN XXXXXXXXXX
XXXXXXXXXX ("Trust")

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 are:

(i) in an earlier tax return of the taxpayers or related persons;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or related persons;

(iii) under objection by the taxpayers or related persons;

(iv) the subject of a ruling previously issued by the Income Tax Rulings Directorate of the Canada Revenue Agency ("CRA") to the taxpayers or related persons, 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, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof. All statutory references in this letter are to the Act unless otherwise stated;

(b) "Arm's Length" has the meaning assigned by section 251 of the Act;

(c) "Closing" means XXXXXXXXXX;

(d) "Consolidated Assets" means, at any time, the total assets of the Partnership and its Subsidiaries which would be shown as assets on a consolidated balance sheet of the Partnership and its Subsidiaries as of such time prepared in accordance with GAAP, after eliminating all amounts properly attributable to minority interests, if any, in the stock and surplus of the Subsidiaries;

(e) "Finco" means XXXXXXXXXX, a Taxable Canadian Corporation, all of whose shares are owned by the Partnership. Finco's activities shall be limited to entering into and performing its obligations in respect of the Primary Loans Agreement and enforcing its rights in respect of the Secondary Loan;

(f) "Fund" means the XXXXXXXXXX, the owner of XXXXXXXXXX% of the units and notes of the Trust;

(g) "GP" means XXXXXXXXXX, a Taxable Canadian Corporation and the general partner of the Partnership, XXXXXXXXXX% of whose shares are owned by GP Parent and XXXXXXXXXX% of whose shares are owned by the Trust;

(h) "GP Grandparent" means XXXXXXXXXX a Taxable Canadian Corporation whose shares are listed on the XXXXXXXXXX Stock Exchange;

(i) "GP Parent" means XXXXXXXXXX, a Taxable Canadian Corporation, all of whose voting common shares are owned by GP Grandparent. GP Parent owns XXXXXXXXXX Class B limited Partnership units in the Partnership (representing XXXXXXXXXX% of all limited Partnership units), which units are exchangeable for units of the Fund;

(j) "Lenders" at any particular time means the makers of the Primary Loans and any party to whom an interest in a Primary Loan is assigned;

(k) "Make-Whole Amount" means an amount payable in respect of a Primary Loan in the event of early repayment of the Primary Loan, calculated (in accordance with accepted financial practice and at a stipulated discount factor) as the excess, if any, of the discounted value of the remaining scheduled payments (of principal and interest thereon) with respect to the amount of principal of such Primary Loan being prepaid over the amount of such principal being prepaid;

(l) "Material Subsidiary" means each Subsidiary of the Partnership that is owned, established or acquired at any time and that has property and assets in excess of XXXXXXXXXX% of Consolidated Assets and any Subsidiary that has executed a guaranty pursuant to the Primary Loans Agreement;

(m) "Non-Resident Lender" means a Lender that is not resident in Canada;

(n) "Note Party" means Finco, the Partnership and the existing Material Subsidiaries of the Partnership on the Closing and any additional Material Subsidiaries of the Partnership from time to time thereafter;

(o) "Partner" or "Partners" means a Partner or the Partners of the Partnership from time to time;

(p) "Partnership" means the XXXXXXXXXX, whose partners are GP (having a XXXXXXXXXX% general Partner interest), the Trust (having a XXXXXXXXXX% limited Partner interest) and GP Parent (having an XXXXXXXXXX% limited Partner interest);

(q) "Person" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, business entity or Governmental Authority;

(r) "Primary Loans" means the loans to be made to Finco by the Lenders under the Primary Loans Agreement;

(s) "Primary Loans Agreement" means the Note Purchase Agreement between Finco, the Partnership and the Lenders and related agreements, pursuant to which the Lenders will make the Primary Loans to Finco;

(t) "Principal Amount" has the meaning assigned by subsection 248(1) of the Act;

(u) "Proposed Transactions" means the transactions described in 2 through 10 below;

(v) "Secondary Loan" means the loan to be made by Finco to the Partnership pursuant to the terms of an on-loan agreement between Finco and the Partnership;

(w) "Subsidiary" means, as to any Person, any other Person in which such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such second Person, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries (unless such partnership or joint venture can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Partnership;

(x) "Taxable Canadian Corporation" has the meaning assigned by subsection 89(1) of the Act;

(y) "Trust" means XXXXXXXXXX which is:

(i) a limited Partner of the Partnership; and

(ii) the owner of XXXXXXXXXX Class A limited partnership units of Partnership;

(z) "Utilization Date" with respect to any Primary Loan means the date upon which the particular Primary Loan is made.

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

Facts

1. The Partnership carries on the XXXXXXXXXX business formerly carried on by GP Parent. GP Parent transferred its XXXXXXXXXX business, comprised of its XXXXXXXXXX, together with associated management and employees, to the Partnership. XXXXXXXXXX.

Proposed Transactions

2. Finco will issue approximately US$XXXXXXXXXX of senior unsecured notes (the "Primary Loans") to the Lenders, some of whom may from time to time be Non-Resident Lenders.

3. Finco will use the proceeds of the Primary Loans to make the Secondary Loan to the Partnership on substantially the same financial terms as those of the Primary Loans, except that the interest rate charged by Finco on the Secondary Loan will be XXXXXXXXXX% higher than the interest rate charged by the Lenders and payable by Finco on the Primary Loans.

4. The Partnership will use the proceeds of the Secondary Loan to repay existing financing and in its business.

5. The Partnership will pay the interest payments on the Secondary Loan to Finco and Finco will pay the Lenders the interest payments on the Primary Loans, respectively.

6. Under the terms of the Primary Loans Agreement, except in the event of a failure or default under the terms of the Primary Loans Agreement (or if the terms of the Primary Loans Agreement or any agreement relating thereto become unlawful or are changed by virtue of legislation or by a court, statutory board or commission) Finco may not, under any circumstances, be obligated to repay more than 25% of the Principal Amount of any particular Primary Loan within five years from the Utilization Date of that Primary Loan.

7. The Primary Loans Agreement provides that Finco may, at its option, prepay the Primary Loans.

8. The Primary Loans Agreement provides for certain representations and warranties, covenants and events of default appropriate in the context of the Primary Loans. The Primary Loans Agreement contains events of default that will be commercially reasonable and will not be contrived. Some of the events of default may be triggered by actions by parties to the Primary Loans Agreement, whereas others may be triggered as the result of actions of parties (such as a Note Party) that are not parties to the Primary Loans Agreement. The Primary Loans Agreement provides that Finco must pay the Make-Whole Amount in the event of early repayment, whether voluntary or as a result of default.

Other Information

9. In the future, one or more Partners may sell or otherwise dispose of all or a portion of its interest in the Partnership to a new Partner and/or one or more new Partners may be admitted to the Partnership. Such a new Partner might be a Canadian resident or non-resident corporation, trust, partnership, fund or other entity.

10. One or more Lenders may assign its Primary Loan to another Lender or Lenders. The Primary Loans Agreement provides that no such assignment shall be nor shall it be deemed to be a discharge, rescission, extinguishment, novation or substitution of any portion of a Primary Loan and the Primary Loan or portion thereof so assigned shall continue to be the same obligation and not a new obligation.

Purpose of the Proposed Transactions

11. The purpose of the Proposed Transactions is to enable Finco to obtain long-term financing at the lowest cost of capital, which financing will, in turn, be used by Finco to make the Secondary Loan to the Partnership to enable the Partnership to repay existing indebtedness and use the balance in its business.

12. Finco is being used in the structure to:

(a) facilitate, from a commercial perspective, the entry or exit of Partners of the Partnership;

(b) avoid any uncertainty with respect to the application of subparagraph 212(l)(b)(vii) of the Act as it applies to a partnership where not all of the Partners are corporations;

(c) avoid any uncertainty that might arise should a Partner dispose of its interest in the Partnership in the future or should a new Partner be admitted to the Partnership, specifically with respect to whether a new debt obligation might be created as a result of such a disposition; and

(d) ensure that the subparagraph 212(1)(b)(vii) exemption will not cease to apply if one or more Partners assigns its interest in the Partnership to a new Partner that is not a corporation or, if a corporation, is not a corporation resident in Canada or if a new Partner is admitted to the Partnership that is not a corporation or, if a corporation, is not a corporation resident in Canada.

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. Interest payments made by Finco to a Non-Resident Lender on a Primary Loan will be exempt from withholding taxes under Part XIII pursuant to the exemption from withholding tax in subparagraph 212(1)(b)(vii) of the Act, provided that at the time of the payment the Non-Resident Lender deals at Arm's Length with Finco.

B. Provided that the Make-Whole Amount to be paid to a Lender does not exceed the value at the time of the payment of the interest that would have been paid or payable by Finco as interest on the particular Primary Loan for taxation years ending after that time, such payment will, pursuant to paragraphs 18(9.1)(e) and (f) of the Act, be deemed to have been paid by Finco and received by the Lender as interest on the Primary Loan and accordingly those provisions will deem the Make-Whole Amount to be paid to the Non-Resident Lenders who deal at Arm's Length with Finco as interest payable for purposes of subparagraph 212(1)(b)(vii) of the Act.

C. Neither the disposition by a Partner of its interest in the Partnership nor the admission of a new Partner to the Partnership will, in and of itself, preclude the application of subparagraph 212(1)(b)(vii) of the Act to interest payments made by Finco to a Lender on a Primary Loan, regardless of whether a new Partner is a corporation.

D. For purposes of the five-year period within which not more than 25% of the Principal Amount of an obligation can be payable for purposes of subparagraph 212(1)(b)(vii) of the Act, a disposition of an interest by a Partner in the Partnership or the acquisition by a Person of an interest as a Partner in the Partnership will not, in and of itself, result in the issuance of a new debt obligation under the Primary Loans Agreement.

E. The assignment or transfer by a Lender of an interest in a Primary Loan will not, in and of itself, preclude the application of subparagraph 212(1)(b)(vii) of the Act to interest payments made by Finco to a Lender on the Primary Loan.

F. For purposes of the five-year period within which not more than 25% of the principal amount of an obligation can be payable for purposes of subparagraph 212(1)(b)(vii) of the Act, the assignment or transfer by a Lender of an interest in a Primary Loan will not, in and of itself, result in the issuance of a new debt obligation.

G. Subsection 15(2.3) of the Act will apply to the Secondary Loan made by Finco to the Partnership so that the amount of the Secondary Loan will not be included in the Partnership's income pursuant to subsection 15(2) of the Act.

H. As a result of the Proposed Transactions, in and by themselves, the General Anti-Avoidance Rule in subsection 245(2) of the Act will not be applied to re-determine 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 Primary Loans Agreement is 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;

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