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: Is a single purpose corporation whose only activity is to on-loan funds to an LP subject to subsection 15(2.3) such that subsection 15(2) will not apply?
Reasons: Ruled on before, the only activity of Finco is to on-loan. In this situation, it meets the ordinary lending business exemption in subsection 15(2.3).
Re: Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling in respect of the above-named taxpayers.
To the best of your knowledge and that of the taxpayers involved, none of the issue 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 to a ruling previously issued by the Income Tax Rulings Directorate to the taxpayers or a related person; nor
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.
In this letter, the following terms have the meanings specified below:
(a) "Acquisition" means the proposed acquisition, as described in the Proposed Transactions, by Acquisition ULC of approximately XXXXXXXXXX% (but not less than XXXXXXXXXX%) of the issued and outstanding limited partner units of LP;
(b) "Acquisition ULC" means XXXXXXXXXX. ULC, an unlimited liability company resident in Canada for purposes of the Act and incorporated and subsisting under the Business Corporations Act (XXXXXXXXXX);
(c) "Act" means the Income Tax Act, R.S.C. 1985, 5th Supplement, c. 1, as amended;
(d) "Arrangers" means one or more Canadian chartered banks, other financial institutions whether or not resident in Canada or any combination thereof, and includes:
(i) one or more or affiliates thereof or a combination thereof, and
(ii) a lead arranger, sub-arranger or other arranger that is such a bank or financial institution, or such an affiliate thereof, which assists in structuring the syndicate of Lenders;
(e) "Finco" means an unlimited liability company resident in Canada for purposes of the Act, to be incorporated and which will subsist under the Business Corporations Act (XXXXXXXXXX);
(f) "Foreignco" means XXXXXXXXXX, a corporation resident in XXXXXXXXXX for purposes of the Act and governed by the laws of XXXXXXXXXX;
(g) "Fund" means XXXXXXXXXX, an unincorporated, open-ended, limited-purpose trust established under a declaration of trust and governed by the laws of XXXXXXXXXX, and which qualifies as a "mutual fund trust" under subsection 132(6) of the Act;
(h) "GP" means XXXXXXXXXX, a corporation resident in Canada for purposes of the Act and incorporated and subsisting under the Business Corporations Act (XXXXXXXXXX);
(i) "Holdings" means XXXXXXXXXX, a United States limited partnership governed by the laws of the state of XXXXXXXXXX;
(j) "Lenders" means a syndicate of lenders proposed to be formed by the Arrangers, some of which lenders may not be residents of Canada for the purposes of the Act;
(k) "LP" means XXXXXXXXXX, a limited partnership governed by the laws of the province of XXXXXXXXXX;
(l) "LP Creditors" means the creditors of LP to which LP owes the principal sums of debt;
(m) "OP" means, collectively, XXXXXXXXXX, each of which is a limited partnership governed by the laws of the province of XXXXXXXXXX carrying on business principally in Canada;
(n) "OP Creditors" means the creditors of OP to which OP owes the principal sums of debt;
(o) "Proposed Transactions" means the proposed transactions described in 14 to 25 below;
(p) "Tranche B" Facility" means the up-to $XXXXXXXXXX non-revolving XXXXXXXXXX-year term loan facility proposed to be made available by the Lenders to Finco for the purpose of financing the Acquisition and to pay related fees and expenses; and
(q) "Trust" means XXXXXXXXXX, an unincorporated, open-ended, limited-purpose trust established under a declaration of trust and governed by the laws of XXXXXXXXXX.
Unless otherwise specified in this letter, all statutory references are to the provisions the Act.
Unless otherwise specified in this letter, all dollar amounts are denominated in Canadian dollars.
1. By way of the Proposed Transactions, Holdings wishes to acquire indirectly approximately XXXXXXXXXX% (but not less than XXXXXXXXXX%) of the units of LP and, in doing so, acquire indirectly XXXXXXXXXX% (but not less than XXXXXXXXXX%) of the businesses operated by OP, which comprise the ownership and operation of property and assets used in its XXXXXXXXXX businesses. LP's only significant assets are its interests in OP.
2. OP is indebted to the OP Creditors that it wishes to repay as part of the Proposed Transactions.
3. Other than a nominal number and value of units of OP held by their general partners, LP is the legal and beneficial owner of all issued and outstanding units of each limited partnership comprised in OP.
4. LP is indebted to the LP Creditors that it wishes to repay as part of the Proposed Transactions.
5. The Trust is the sole shareholder of GP.
6. Other than one general partner unit of LP having nominal value held by GP, which is its general partner:
(a) the Trust is the legal and beneficial owner of all the issued and outstanding Class A limited partner units of LP comprising approximately XXXXXXXXXX% of all the issued and outstanding units of LP; and
(b) certain founders of the business carried on by OP or their affiliate entities are, collectively, the legal and beneficial owners of all the issued and outstanding Class B limited partner units of LP comprising the remaining approximately XXXXXXXXXX% of all the issued and outstanding units of LP.
7. The Fund is the legal and beneficial owner of:
(a) XXXXXXXXXX units of the Trust, which comprise all the issued and outstanding units of the Trust; and
(b) interest-bearing, series 1 unsecured subordinated demand notes representing the principal amount of debt owing by the Trust to the Fund in the aggregate sum of $XXXXXXXXXX.
8. There are XXXXXXXXXX units of the Fund outstanding, which comprise all the issued and outstanding units of the Fund.
9. Holdings is the sole direct shareholder of Foreignco.
10. Foreignco is the sole shareholder of Acquisition ULC.
11. LP will be the sole shareholder of Finco.
12. Each of the Arrangers and each of the Lenders deals, and will deal, with Finco, LP and OP at "arm's length" within the meaning of the Act.
13. The amounts invested or loaned as described under Proposed Transactions are approximate.
14. Holdings will fund Foreignco with a combination of debt and equity in an aggregate amount of $XXXXXXXXXX.
15. Foreignco will acquire all the shares of GP from the Trust for the aggregate issue price of $XXXXXXXXXX.
16. Foreignco will lend $XXXXXXXXXX to Acquisition ULC.
17. The Lenders will make loans available to Finco under financing facilities (together, the "Credit Facilities") in an aggregate sum of up to $XXXXXXXXXX (or its equivalent in Unites States dollars) comprising:
(a) an up-to $XXXXXXXXXX revolving XXXXXXXXXX-year operating credit facility for general corporate purposes and to pay certain fees and expenses;
(b) an up-to $XXXXXXXXXX "Tranche A" non-revolving XXXXXXXXXX-year term loan facility for the purpose of indirectly financing the Acquisition; and
(c) the "Tranche B" Facility, provided for the purpose of indirectly financing the Acquisition.
18. Using the loan proceeds from the Credit Facilities, Finco will make loans to LP and to OP (the "Finco Loans"). Each of these loans will be made on substantially the same terms as those which apply under a corresponding portion of the Credit Facilities as to the maturity date, principal amount and payment terms. However, the interest rates on each Finco Loan that Finco will charge LP and OP will be XXXXXXXXXX% per annum in excess of the interest rates charged under the corresponding portion of the Credit Facilities.
19. Finco's only activities will be borrowing under the Credit Facilities and making the Finco Loans.
20. The default provisions under the Finco Loans will be subject to the default provisions under the Credit Agreement. Finco will earn a profit from the Finco Loans by virtue of the mark-up on the interest rates. Further, as a condition to Finco making the loans to LP and OP, Finco will require LP and OP, jointly and severally, to agree to reimburse Finco for all fees and expenses incurred in connection with the Finco Loans and incurred by Finco under the Credit Facilities.
21. LP will use the proceeds from the Finco Loans to repay the debts it owes to the LP Creditors and to return a portion of the Trust's capital in LP.
22. OP will use the loan proceeds from the Finco Loans to repay debts owed to the OP Creditors.
23. Acquisition ULC will use the proceeds of the loan from Foreignco to acquire units of LP.
24. LP will use the proceeds from the purchase by Acquisition ULC of units of LP to:
(a) return to limited partners their capital in their Class A limited partner units of LP;
(b) purchase from the Trust all of its Class A limited partner units of LP; and
(c) purchase from certain persons described in 6(b) above, their Class B limited partnership units of LP,
with the result that Acquisition ULC will own approximately XXXXXXXXXX% (but not less than XXXXXXXXXX%) of the units of LP and certain persons described in 6(b) above will retain the remaining approximately XXXXXXXXXX% (but not more than XXXXXXXXXX%) of those units.
25. Following a reorganization of the capital of LP, Acquisition ULC will transfer to Foreignco its interest in LP.
Purpose of Proposed Transactions
26. The purpose of the Proposed Transactions is to enable Holdings to acquire indirectly approximately XXXXXXXXXX% (but not less than XXXXXXXXXX%) of the units of LP and, in doing so, acquire indirectly XXXXXXXXXX% (but not less than XXXXXXXXXX%) of the businesses operated by OP in as efficient a manner as possible, taking into account securities and other business-regulatory requirements and income-tax considerations in multiple jurisdictions including Canada. Finco will be used in the Proposed Transactions in order to:
(a) facilitate, from a commercial perspective, the entry or exit of partners of LP and OP;
(b) avoid any uncertainty with respect to the potential application of subparagraph 212(1)(b)(vii) of the Act as it applies to a partnership where not all of the partners are corporations resident in Canada.
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 provided further that the proposed transactions are completed in the manner described above, we rule as follows:
A. Subsection 15(2.3) of the Act will apply in respect of the Finco Loans to LP and OP, pursuant to the terms of the Finco Loans, such that subsection 15(2) of the Act will not apply.
B. Subsection 245(2) of the Act will not be applied to re-determine the tax consequences confirmed in the ruling provided in Ruling A above.
The above rulings 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 are binding provided the Loan Agreements are entered into on or before XXXXXXXXXX.
The ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments 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; nor
(iii) the nature of the legal relationship entered into or contemplated by the entities named above.
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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