2007 Ruling 2007-0225751R3 - Whitholding 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. Will interest payments paid or credited by Finco to non-resident lenders in respect of a term loan be exempt from Part XIII tax? 2. Will subsection 15(2) apply to amounts loaned to the LP? 3. Will GAAR apply?

Position: 1. Yes. 2. No. 3. No

Reasons: 1. The requierements of subparagraph 212(1)(b)(vii) are met. 2. Subsection 15(2.3) will apply to the loaned amount. 3. There is no abuse or misuse.

XXXXXXXXXX 								2007-022575

XXXXXXXXXX, 2007

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX (BN: XXXXXXXXXX )
XXXXXXXXXX (BN: XXXXXXXXXX )
CRA Tax Services Office: XXXXXXXXXX
CRA Tax Centre: XXXXXXXXXX

We are writing in response to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling in respect of the above-named taxpayers. We also acknowledge information provided in telephone conversations and electronic correspondences, including a copy of the Credit Agreement (as defined below).

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 taxpayers or a related person;

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

(iii) under objection by the taxpayers or a related person;

(iv) the subject of a ruling previously issued by the Income Tax Rulings Directorate to the taxpayers 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.

To the best of your knowledge, and that of the taxpayers involved, the proposed transactions will not impact the ability of any taxpayer involved to pay its existing tax liabilities.

In this letter, unless otherwise indicated, all statutory references are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c. 1, as amended, (the "Act").

Unless otherwise noted, all references to currency are to Canadian dollars.

DEFINITIONS

1. In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c. 1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provision of the Act;

(b) "Arm's length" has the meaning assigned by section 251;

(c) "Acquisition Agreement" means an asset purchase agreement entered into between XXXXXXXXXX and the Vendor, providing for the acquisition by the Subsidiary Partnership of the Business, as described in paragraph 11;

(d) "Bridge Loan" means a loan in the principal amount of $XXXXXXXXXX advanced by XXXXXXXXXX, an affiliate of XXXXXXXXXX, to the Subsidiary Partnership, payable on demand, the proceeds of which were used by the Subsidiary Partnership to consummate the acquisition of the Business and pay related fees and expenses;

(e) "Business" means the XXXXXXXXXX business carried on by the Vendor under the name XXXXXXXXXX;

(f) "Canco1" means XXXXXXXXXX, an unlimited liability company incorporated under the laws of XXXXXXXXXX that holds a XXXXXXXXXX% general partnership interest in the Project Partnership. All the shares of Canco1 are owned by a foreign corporation indirectly wholly-owned by XXXXXXXXXX;

(g) "Canco2" means XXXXXXXXXX, an unlimited liability company incorporated under the laws of XXXXXXXXXX that holds a XXXXXXXXXX% limited partnership interest in the Project Partnership. All of the shares of Canco2 are owned by Canco1;

(h) "Canco3" means XXXXXXXXXX, an unlimited liability company incorporated under the laws of XXXXXXXXXX that holds a XXXXXXXXXX% interest in the Subsidiary Partnership. All the share of Canco3 are owned by the Project Partnership;

(i) "Change in control" means, with respect to any Person (as defined in the Credit Agreement), that (a) any Person other than XXXXXXXXXX or its Affiliates (as defined in the Credit Agreement) gains control of such Person or (b) any transfer or change of ownership of such Person shall have occurred such that XXXXXXXXXX or its Affiliates fails to maintain control of such Person. For purposes of this definition "control," when used with respect to any particular Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or partnership or other ownership interests, by contract or otherwise;

(j) "Closing Date" means the date on which the initial borrowing occurs under the Credit Agreement;

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

(l) "Credit Agreement" means the senior credit facility, to be entered into between Finco and the Lenders and providing for the Term Loan Facility, the Delayed Draw Term Facility, the Working Capital Facility, the Synthetic Letter of Credit Facility and the Incremental Facility;

(m) "Delayed Draw Term Facility" has the meaning ascribed thereto in paragraph 14(a)(ii);

(n) "Finco" means XXXXXXXXXX, an unlimited liability company incorporated under the laws of XXXXXXXXXX, all the shares of which are owned by Canco 1. The business number of Finco is XXXXXXXXXX. Finco is the direct borrower under the Credit Agreement and serves as the financing entity for the Subsidiary Partnership;

(o) "Finco Credit Agreement" means the credit facility, to be entered into between Finco and the Subsidiary Partnership on similar terms and conditions as the Credit Agreement, and providing for a term loan facility, a delayed draw term facility, a synthetic letter of credit facility, a working capital facility and an incremental facility, except that the interest rate applicable to advances made by Finco pursuant to such facilities will be equal to the interest rate applicable to the corresponding advances made to Finco under the Credit Agreement plus a spread to be negotiated and currently intended to be approximately XXXXXXXXXX basis points;

(p) "Guarantors" has meaning ascribed thereto in paragraph 14(g);

(q) "Incremental Facility" has the meaning ascribed thereto in paragraph 14(a)(v).

(r) "Lenders" means XXXXXXXXXX, as lead arranger, and a syndicate of banks, financial institutions and other institutional lenders, each of which deals at arm's length with Finco, the Subsidiary Partnership, XXXXXXXXXX and the Vendor, and includes any other lender that subsequently becomes a party under the Credit Agreement to the extent that such new lender deals at arm's length with Finco, the Subsidiary Partnership, XXXXXXXXXX and the Vendor, it being understood that in respect of the Working Capital Facility and the Synthetic Letter of Credit Facility, such a lender must not be a non-resident of Canada or shall be an authorized foreign bank as defined in the Bank Act (Canada), lending through their respective Canadian branches;

(s) "Material Adverse Effect" means a material adverse effect on (a) the ability of Finco and the Guarantors to perform and comply with its material obligations under any Loan Document (as defined in the Credit Agreement) to which it is a party, (b) the business, operations, property or financial condition of Finco or the Guarantors or (c) the validity or enforceability of the material rights, or the material benefits available to, the Secured Parties (as defined in the Credit Agreement) under any Loan Document or the perfection or priority of the security interests granted to the Collateral Agent (as defined in the Credit Agreement) pursuant to the Security Documents (as defined in the Credit Agreement);

(t) "Material Contract" means the Assignment Agreement, the XXXXXXXXXX Contract and the Lease (as defined in the Credit Agreement) and the Acquisition Agreement, in each case as modified, amended or supplemented from time to time and including any replacement thereof;

(u) XXXXXXXXXX, a foreign partnership;

(v) "Partner(s)" means a limited or general partner of the Project Partnership, including any entity which may acquire a limited or general partnership interest in the Project Partnership;

(w) "Project Partnership" means XXXXXXXXXX, a limited partnership formed under the laws of XXXXXXXXXX originally between Canco1 as general partner, and Canco2 as limited partner;

(x) "Subsidiary Partnership" means XXXXXXXXXX, a general partnership formed under the laws of XXXXXXXXXX between the Project Partnership and Canco3. The business number of the Subsidiary Partnership is XXXXXXXXXX;

(y) "Synthetic Letter of Credit Facility" has the meaning ascribed thereto in paragraph 14(a)(iv);

(z) "Term Loan Facility" has the meaning ascribed thereto in paragraph 14(a)(i);

(aa) "Vendor" means XXXXXXXXXX; and

(bb) "Working Capital Facility" has the meaning ascribed thereto in paragraph 14(a)(iii).

FACTS

2. On XXXXXXXXXX executed a letter of intent in favour of the Vendor providing for the acquisition of the Business. The Letter of intent provides that the Vendor will retain a XXXXXXXXXX% equity interest in the Business.

3. The total acquisition price is $XXXXXXXXXX (subject to certain adjustments described in the Acquisition Agreement) plus the amount of the Assumed Liabilities.

4. Canco1, Canco2, Canco3 and Finco were incorporated.

5. On XXXXXXXXXX, the Project Partnership was formed by Canco1 and Canco2. On XXXXXXXXXX, the Project Partnership received a capital contribution of $XXXXXXXXXX from Canco1 and $XXXXXXXXXX from Canco2.

6. On XXXXXXXXXX, the Subsidiary Partnership was formed by the Project Partnership and Canco3. On XXXXXXXXXX, the Project Partnership contributed $XXXXXXXXXX to the Subsidiary Partnership for a XXXXXXXXXX% interest and Canco3 acquired a XXXXXXXXXX% interest for $XXXXXXXXXX.

7. Finco was incorporated to operate as a financing corporation for the operations of the Business after the Closing Date.

8. On XXXXXXXXXX and the Vendor entered into the Acquisition Agreement.

9. XXXXXXXXXX assigned to the Subsidiary Partnership all of its rights under the Acquisition Agreement and the Subsidiary Partnership assumed all of the obligations of XXXXXXXXXX under the Acquisition Agreement.

10. On XXXXXXXXXX made the Bridge Loan to the Subsidiary Partnership.

11. On XXXXXXXXXX, the Subsidiary Partnership acquired the assets of the Business from the Vendor for $XXXXXXXXXX (subject to certain adjustments described in the Acquisition Agreement) plus the amount of the Assumed Liabilities (as defined in the Acquisition Agreement). The purchase price was satisfied by the payment of $XXXXXXXXXX in cash (subject to certain adjustments described in the Acquisition Agreement), by the issuance to the Vendor of a XXXXXXXXXX% partnership interest and by the assumption of the Assumed Liabilities. The Vendor and the Subsidiary Partnership will make an election under subsection 97(2) to allow the Vendor to defer, to the maximum extent possible, part of the gain or recapture on the sale of the Business.

12. The Vendor transferred its interest in the Subsidiary Partnership to the Project Partnership in exchange for a XXXXXXXXXX% limited partnership interest in the Project Partnership. The Vendor and the Project Partnership will make an election under subsection 97(2) in respect of this transfer.

13. A wholly-owned subsidiary of the Vendor acquired a XXXXXXXXXX % general partnership interest in the Project Partnership for $XXXXXXXXXX.

PROPOSED TRANSACTIONS

14. Finco and the Lenders will enter into the Credit Agreement under which the Lenders will provide the Term Loan Facility, the Delayed Draw Term Facility, the Working Capital Facility and the Synthetic Letter of Credit Facility. The Credit Agreement also provides for the Incremental Facility, which may be requested by Finco. The principal terms of the Credit Agreement will be as follows:

(a) The Credit Agreement is for up to $XXXXXXXXXX of financing and an incremental principal amount of up to $XXXXXXXXXX, broken down as follows:

(i) The Term Loan Facility: a one-time advance in a principal amount of $XXXXXXXXXX, the proceeds of which will be used, through the term facility in the Finco Credit Agreement, to repay the Bridge Loan and pay related fees and expenses. This loan is intended to satisfy the conditions of application of subparagraph 212(1)(b)(vii);

(ii) The Delayed Draw Term Facility: a delayed draw capital expenditure facility in an aggregate principal amount of $XXXXXXXXXX, the proceeds of which will be used, through the delayed draw term facility in the Finco Credit Agreement, for scheduled capital expenditures and, to the extent of any excess other capital expenditures permitted under the Credit Agreement, of the Subsidiary Partnership. The commitments under the Delayed Draw Term Facility will terminate on the date that is XXXXXXXXXX years after the Closing Date. This loan is intended to satisfy the conditions of application of subparagraph 212(1)(b)(vii);

(iii) The Working Capital Facility: a revolving credit facility of $XXXXXXXXXX (with a swingline subfacility in the amount of $XXXXXXXXXX), the proceeds of which will be used to provide, through the working capital facility in the Finco Credit Agreement, ongoing working capital and for other general corporate purposes of the Subsidiary Partnership;

(iv) The Synthetic Letter of Credit Facility: a funded synthetic letter of credit facility in an aggregate amount equal to $XXXXXXXXXX; and

(v) The Incremental Facility: An incremental term loan facility and/or an increase in the Delayed Draw Term Facility and/or the Working Capital Facility, in an aggregate amount of up to $XXXXXXXXXX, provided that, inter alia, no incremental term loan Facility shall be advanced on or after the date that is five years prior to the maturity date of the Term Loan Facility.

(b) The interest rate will be based on the Lenders' prime rate or the Canadian Bankers Acceptance Rate, in each case plus an applicable margin.

(c) The final maturity of all facilities under the Credit Agreement will be on the XXXXXXXXXX anniversary of the Closing Date.

(d) The events of default will be:

(i) non-payment of principal or interest and the failure to make a payment under any Hedging Agreement (as defined in the Credit Agreement);

(ii) breach of representation or warranty in any material respect;

(iii) failure to perform or observe covenants;

(iv) acceleration of certain other indebtedness;

(v) certain final uninsured judgments;

(vi) bankruptcy or insolvency;

(vii) Change in control;

(viii) loss of validity or enforceability, or early termination, of any Material Contract, which would be reasonably likely to result in a Material Adverse Effect, provided that the Subsidiary Partnership shall have the possibility, within a specified time period, to enter into a substitute agreement to replace the affected Material Contract;

(ix) any governmental approval necessary for the execution, delivery and performance of the Lease Agreement (as defined in the Credit Agreement) or any other Material Contracts is terminated or ceases to be in full force or is not obtained, maintained, or complied with, and, in each case, such event would be reasonably likely to result in a Material Adverse Effect, unless such termination or failure to obtain such government approval is remedied within a specified time period;

(x) any party to any Material Contract fails to perform or observe any material terms in any Material Contract and, in each case, such event could reasonably be expected to result in a Material Adverse Effect, unless such failure is remedied within a specified time period;

(xi) loss of validity, priority or enforceability, or impairment, of any Loan Documents (as defined in the Credit Agreement) or Collateral (as defined in the Credit Agreement) affecting a substantial portion of the assets of Finco, the Subsidiary Partnership and its subsidiaries or any Guarantor (as defined in the Credit Agreement) (taken as a whole);

(xii) the Subsidiary Partnership abandons the Business or the port terminals;

(xiii) an Event of Default (as defined in the Finco Credit Agreement) occurs under the Finco Credit Agreement;

(xiv) any uninsured and otherwise uncompensated or inadequately compensated casualty, loss, damage, condemnation, expropriation or nationalization of all or substantially all of the port terminals occurs that causes or would reasonably be expected to cause a Material Adverse Effect; and

(xv) the failure to make a mandatory prepayment offer as required under the Credit Agreement.

(e) Advances under the Credit Agreement may be prepaid at the option of Finco, upon notice to the Lenders and in a minimum principal amount and in multiples set out in the Credit Agreement, without premium or penalty. Voluntary prepayments shall be applied as directed by Finco.

(f) The amounts owing under the Credit Agreement will be required to be prepaid, and in the cases referred to in (i), (ii) and (iv), Finco will be required to make an offer to prepay the amounts owing under the Credit Agreement with:

(i) XXXXXXXXXX% of the net cash proceeds of non-ordinary-course asset sales and other asset dispositions of Finco or the Guarantors (excluding dispositions of assets in accordance with the replacement program of the Subsidiary Partnership to the extent such proceeds are used or committed to be used to purchase capital asset(s) useful in the Business within XXXXXXXXXX days (during which time the funds will be deposited in a mandatory prepayment account) and the proceeds of other asset dispositions not in excess of C$XXXXXXXXXX) to be reduced to XXXXXXXXXX% based upon achievement and maintenance of certain financial ratios;

(ii) XXXXXXXXXX% of the proceeds of certain property, casualty and condemnation insurance, in each case, in excess of C$XXXXXXXXXX, to the extent not used for restoration;

(iii) As a condition to making any distribution in the fiscal year XXXXXXXXXX and thereafter, if the ECF Test (as defined in the Credit Agreement) is not satisfied, a percentage of Excess Cash Flow (as defined in the Credit Agreement) of the Subsidiary Partnership equal to (i) XXXXXXXXXX% for the fiscal year XXXXXXXXXX; (ii) XXXXXXXXXX% for fiscal year XXXXXXXXXX and (iii) XXXXXXXXXX% for the fiscal year XXXXXXXXXX and each fiscal year thereafter until the maturity date; provided that (i) no such prepayment shall be required prior to the XXXXXXXXXX anniversary of the Closing Date, (ii) there shall be not less than one such prepayment in any such fiscal year, and (iii) any voluntary prepayments of any loans, other than prepayments funded with the proceeds of the incurrence of indebtedness, shall be credited against excess cash flow prepayment obligations on a dollar for dollar basis. and

(iv) XXXXXXXXXX% of indemnity payments from the Vendor under the Acquisition Agreement (except to the extent such payments compensate for lost revenue or are otherwise to be applied for restoration or to satisfy obligations or liabilities with respect to which such indemnity payments were made), unless otherwise agreed by the Lenders, provided that any voluntary prepayments of any loans, other than prepayments funded with the proceeds of the incurrence of indebtedness, shall be credited against indemnity prepayment obligations on a dollar for dollar basis.

Notwithstanding the foregoing, Finco will not be required to make any prepayment with respect to any borrowing under the Delayed Draw Term Facility pursuant to paragraph (iii) above to the extent that, as a result of such prepayment, an aggregate amount in excess of XXXXXXXXXX% of such borrowing, taking into account all mandatory prepayments, would be required to be prepaid prior to the XXXXXXXXXX anniversary of the date such borrowing was made.

Mandatory prepayments shall be applied to the Term Loan Facility until repaid in full. Thereafter, mandatory prepayments shall be applied (x) to prepay outstanding loans under the Delayed Draw Term Facility until repaid in full (subject to the limitations on prepayment set forth in the immediately preceding paragraph), (y) to cash collateralize outstanding letters of credit and (z) to prepay outstanding loans under the Working Capital Facility, with no corresponding permanent reduction of commitments under the Working Capital Facility.

(g) The obligations of Finco under the Credit Agreement will be unconditionally guaranteed, on a joint and several basis, by the Project Partnership, Canco3, the Subsidiary Partnership and its subsidiaries (collectively the "Guaratnors").

15. Finco will enter into the Finco Credit Agreement with the Subsidiary Partnership, under which, Finco will on-lend the net proceeds borrowed under the Term Loan Facility to the Subsidiary Partnership.

16. The Subsidiary Partnership will use the proceeds of the term loan facility in the Finco Credit Agreement to repay the Bridge Loan and to pay related fees and expenses.

17. Finco will pay all or a portion of the fees charged by the Lenders to Finco.

18. Any amount borrowed under the Delayed Draw Term Facility, the Synthetic Letter of Credit Facility, the Working Capital Facility and the Incremental Facility by Finco will be on-lent to the Subsidiary Partnership pursuant to the Finco Credit Agreement.

PURPOSE OF THE PROPOSED TRANSACTIONS

19. The purpose of the Proposed Transactions is to enable the Subsidiary Partnership to secure the long-term financing necessary to proceed with the acquisition and ongoing operations of the Business at the lowest cost of capital commercially available.

20. Finco is being used in the structure to:

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

(b) avoid any uncertainty with respect to the application of subparagraph 212(l)(b)(vii) as it applies to the Project Partnership and the Subsidiary Partnership;

(c) avoid any uncertainty that might arise should a Partner dispose of its interest in the Project Partnership in the future or should a new Partner be admitted to the Project 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 Project 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 that is not a corporation or, if a corporation, is not a corporation resident in Canada, is admitted to the Project Partnership.

OTHER INFORMATION

21. It is possible that Canco1 will be liquidated, or that an interest in the Project Partnership will be transferred by a current Partner to another entity prior to the maturity date under the Term Loan Facility.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transactions and purpose of the proposed transactions, and that the final agreements referred to in this letter are substantially the same as the documents provided to us as reflected herein, and provided further that the proposed transactions are completed in the manner described above, we rule as follows:

A. By virtue of the exemption contained in subparagraph 212(1)(b)(vii), no tax under Part XIII will be payable in respect of any amounts paid or credited by Finco to the Lenders as, on account, or in lieu of payment of, or in satisfaction of, interest under the Term Loan Facility and under the Delayed Draw Term Facility provided that, at the time the amount is paid or credited, Finco deals at arm's length with the Lenders.

B. Neither the disposition by a Partner of its interest in the Project Partnership nor the admission of a new Partner in the Project Partnership will, in and of itself, preclude the application of subparagraph 212(1)(b)(vii) to interest payments made by Finco to the Lenders pursuant to the Term Loan Facility and under the Delayed Draw Term Facility, notwithstanding that a new Partner not be a corporation.

C. Subsection 15(2.3) will apply with respect to loans made by Finco to the Subsidiary Partnership under the Finco Credit Agreement.

D. Provided that Finco has a legal obligation to pay interest on the money borrowed under the Credit Agreement, described in Paragraph 14 above, and that this borrowed money is used and continues to be used for the purpose of lending money at interest to the Subsidiary Partnership pursuant to the Finco Credit Agreement, Finco 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 Finco in computing its income for the purposes of the Act) in respect of that taxation year or a reasonable amount in respect thereof pursuant to paragraph 20(1)(c).

E. Subsection 245(2) will not apply as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings A to D.

The above rulings, which are based on the Act in its present form and do not take into account the effect of any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and is binding provided the Credit Agreement is entered into on or before XXXXXXXXXX.

This letter is based solely on the facts and proposed transactions described above. The documentation submitted does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

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; nor

(iii) the nature of the legal relationship entered into or contemplated by the entities named above.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

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