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: Do the transactions constitute a series of loans and repayments?
Position: No.
Reasons: Based on the reasoning in Uphill and Attis. CRA ITA
XXXXXXXXXX 2007-024104
XXXXXXXXXX , 2007
Dear XXXXXXXXXX :
Re: XXXXXXXXXX Advanced Income Tax Rulings
We are writing in reply to your letter of XXXXXXXXXX , in which you requested advance income tax rulings on behalf of the above-referenced taxpayers (the "Taxpayers"). We also acknowledge your revised ruling request ("Ruling Request") dated XXXXXXXXXX and our various conversations (XXXXXXXXXX ).
To the best of your knowledge and that of the Taxpayers, issues involved in this Ruling Request are not:
(i) the subject of an earlier return of the Taxpayers or any related parties;
(ii) being considered by a tax service office or taxation centre in connection with a previously filed tax return of the Taxpayers or any related parties;
(iii) under objection by the Taxpayers or any related parties;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
(v) subject of a ruling previously issued by the Directorate to the Taxpayers or a related person, with the exception of Rulings 2002-0121723, 2001-0068763; 2000-0029971, 2000-002083, 9902423, 9807103, and 9717643.
Definitions
"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof;
"Canco" refers to XXXXXXXXXX .;
"Cansub" refers to XXXXXXXXXX .;
"CRA" means the Canada Revenue Agency;
"E&P" or "E&Ps" refers to earnings and profits as computed and defined under current U.S. Internal Revenue Code of 1986, as amended and in effect, and related regulations. E&Ps can be generally defined as a company's after tax income with certain adjustments to approximate a company's dividend-paying capacity;
"Principal Amount" has the meaning assigned to that term by subsection 248(1);
"Private Corporation" has the meaning assigned to that term in subsection 89(1);
"Pubco" refers to XXXXXXXXXX ., a U.S. publicly-traded company organized and existing under the laws of XXXXXXXXXX , U.S.A. The common shares of Pubco are listed for trading on the XXXXXXXXXX Stock Exchange;
"Pubco Group" refers to the XXXXXXXXXX ;
"Taxable Canadian Corporation" has the meaning assigned by subsection 89(1);
"USsub1" refers to XXXXXXXXXX .;
"USsub2" refers to XXXXXXXXXX ;
"US Subsidiaries" refers to any U.S. entity of the Pubco Group and includes Pubco;
"2007 Notes" means one or more notes the Principal Amount of which is equal to Cansub's E&Ps for the 2007 year; and
"2008 Notes" means one or more notes the Principal Amount of which is equal to Cansub's E&Ps for the 2008 year.
Facts
Our understanding of the facts is as follows:
1. Canco is a Private Corporation and a Taxable Canadian Corporation. Canco is organized and existing under the laws of the province of XXXXXXXXXX and resident of Canada for Canadian income tax purposes. Canco is a holding company whose principal asset is its investment in Cansub. Canco's head office is at XXXXXXXXXX . Canco is served by the XXXXXXXXXX Tax Services Office and files its tax returns at the XXXXXXXXXX Tax Centre. Canco's business number is XXXXXXXXXX and it has a XXXXXXXXXX year-end.
2. Cansub is a Private Corporation and Taxable Canadian Corporation organized and existing under the laws of the province of XXXXXXXXXX and a resident of Canada for Canadian income tax purposes. Cansub is a wholly-owned subsidiary of Canco. Cansub's head office is situated at XXXXXXXXXX , Cansub is served by the XXXXXXXXXX Tax Services Office and files its returns at the XXXXXXXXXX Tax Centre. Cansub's business number is XXXXXXXXXX and it has a XXXXXXXXXX year-end.
3. XXXXXXXXXX
4. The Pubco Group consists of US Subsidairies each of which is an entity that is considered a shareholder, or connected with a shareholder, of Canco and/or Cansub as described in subsection 15(2.1) of the Act and applicable for the purposes of subsection 15(2) of the Act. The US Subsidiaries include Pubco, USsub1 and USsub2.
5. USsub1 is a U.S. corporation organized and existing under the laws of XXXXXXXXXX , U.S.A. USsub1 is a non-resident of Canada. USsub1 owns all the issued and outstanding XXXXXXXXXX preferred shares of Canco. USsub1 is an indirect wholly-owned subsidiary of Pubco. USsub1 owns at least 10% of the voting stock of Canco.
6. USsub2 is a U.S. corporation organized and existing under the laws of XXXXXXXXXX , U.S.A. USsub2 owns all issued and outstanding common shares and XXXXXXXXXX preferred shares of Canco. USsub2 is an indirect wholly-owned subsidiary of Pubco. USsub 2 owns at least 10% of the voting stock of Canco.
Proposed Transactions
7. Cansub will make one or more loans (the "2007 Loans") to any US Subsidiaries during the 2007 calendar year in an aggregate amount approximately equal to Cansub's estimated E&Ps for that particular year. Once the final E&P amount is determined, which will happen in 2008, the 2007 Loans would be adjusted (through additional lending to, or repayment from, the US Subsidiaries) to reflect the difference between such final E&P amount and the 2007 E&P estimates made for the 2007 year. The 2007 Loans will be denominated in Canadian dollars and will be due on demand.
8. The outstanding balance of the 2007 Loans may be adjusted (if necessary) over the course of the year as Cansub's estimated E&Ps for the year are revised. These adjustments may involve (i) Cansub advancing additional funds to the US Subsidiaries in the event the revised E&P estimates for the year are increased, or (ii) the US Subsidiaries repaying a portion of the 2007 Loans to reflect a reduction in the E&Ps estimated for the year, so that the balance of the 2007 Loans on a quarterly basis at any particular time in the 2007 calendar year will approximate or be equal to the E&Ps estimated for that year.
9. The 2007 Loans will be evidenced by the 2007 Notes, and will carry an interest rate equivalent to normal commercial interest rates for loans of such magnitude from third parties and, in any event, greater than any interest costs incurred by Cansub, if any. At all times, the Principal Amount of the 2007 Loans will be equal to the Principal Amount of the 2007 Notes.
10. Cansub should make the 2007 Loans entirely out of internally generated funds. However, to the extent Cansub does not have available funds at the time of making any portion of the 2007 Loans, it will borrow either directly from an arm's length financial institution or from other US Subsidiaries and will repay the borrowing to the financial institution or the other US Subsidiaries, as the case may be, as funds become available.
11. At any time prior to XXXXXXXXXX , the US subsidiaries could repay a portion of the 2007 Loans if the funds are required by Cansub. In such case, these funds would be dividended out of Canada at a future date.
The 2007 Loans will be repaid to Cansub under the following scenarios (paragraphs 12-17 below):
12. Immediately before the dividend payment described in paragraph 13 below, the US Subsidiaries, to which the Principal Amount of the 2007 Loans will have been lent, will pay all accrued and unpaid interest on the 2007 Loans to Cansub.
13. Prior to XXXXXXXXXX , Cansub will declare and pay a dividend (or dividends) to Canco for an amount equal to the Principal Amount of the 2007 Loans by assigning the 2007 Notes to Canco. At the time of the dividend(s), the fair market value of the 2007 Notes will be equal to the remaining balance of the 2007 Notes.
14. Subsequent to the payment of the dividend(s) (and assignment of the 2007 Notes) described in paragraph 13 above, and prior to the declaration of the dividends described in paragraph 16 below, the US Subsidiaries will repay that portion of the 2007 Loans necessary to fund the Canadian withholding tax applicable on the dividends, described in paragraph 16 below, that will be paid to USsub1 and USsub2 on their respective shares of Canco.
15. Immediately before the dividend payment described in paragraph 16 below, the US Subsidiaries will pay all accrued and unpaid interest on the remaining balance of the 2007 Loans which have accumulated between the assignment described in paragraph 13 above and the dividend payment described in paragraph 16 below to Canco.
16. Prior to XXXXXXXXXX , but subsequent to the declaration of the dividend described in paragraph 13 above, Canco will declare dividends to USsub1 and USsub2 on their respective shares of Canco in an aggregate amount equal to the then remaining balance of the 2007 Loans divided by a factor of XXXXXXXXXX . The dividends will be paid by assigning the 2007 Notes to USsub1 and USsub2. At the time of the dividends, the fair market value of the 2007 Notes will be equal to the remaining balance of the 2007 Notes.
17. Canco will remit the amount of withholding tax to the CRA on or before the XXXXXXXXXX day of the month following the month in which any of the dividends described in paragraphs 11 or 16 above are paid.
18. Cansub will make one or more loans (the "2008 Loans") to any US Subsidiaries during the 2008 calendar year in an aggregate amount approximately equal to Cansub's estimated E&Ps for that particular year. Once the final E&P amount is determined, which will happen in 2009, the 2008 Loans would be adjusted (through additional lending to, or repayment from, the US Subsidiaries) to reflect the difference between such final E&P amount and the 2008 E&P estimates made for the 2008 year. The 2008 Loans will be denominated in Canadian dollars and will be due on demand.
19. The outstanding balance of the 2008 Loans may be adjusted (if necessary) over the course of the year as Cansub's estimated E&Ps for the year are revised. These adjustments may involve (i) Cansub advancing additional funds to the US Subsidiaries in the event the revised E&P estimates for the year are increased, or (ii) the US Subsidiaries repaying a portion of the 2008 Loans to reflect a reduction in the E&Ps estimated for the year, so that the balance of the 2008 Loans on a quarterly basis at any particular time of the 2008 calendar year will approximate or be equal to the E&Ps estimated for that year.
20. The 2008 Loans will be evidenced by the 2008 Notes, and will carry an interest rate equivalent to normal commercial interest rates for loans of such magnitude from third parties and, in any event, greater than any interest costs incurred by Cansub, if any.
21. Cansub should make the 2008 Loans entirely out of internally generated funds. However, to the extent Cansub does not have available funds at the time of making any portion of the 2008 Loans, it will borrow either directly from an arm's length financial institution or from other US Subsidiaries and will repay the borrowing to the financial institution or the other US Subsidaries, as the case may be, as funds become available.
22. At any time prior to XXXXXXXXXX , the US subsidiaries could repay a portion of the 2007 Loans if the funds are required by Cansub. In such case, these funds would be dividended out of Canada at a future date.
The 2008 Loans will be repaid to Cansub under the following scenarios (paragraphs 23-28 below):
23. Immediately before the dividend payment described in paragraph 24 below, the US Subsidiaries, to which the Principal Amount of the 2008 Loans will have been lent, will pay all accrued and unpaid interest on the 2008 Loans to Cansub.
24. Prior to XXXXXXXXXX , Cansub will declare and pay a dividend (or dividends) to Canco for an amount equal to the Principal Amount of the 2008 Loans (or the remaining portion of the 2008 Loans if any repayments have previously been made) by assigning the 2008 Notes to Canco. At the time of the dividend(s), the fair market value of the 2008 Notes will be equal to the remaining balance of the 2008 Notes.
25. Subsequent to the payment of the dividend(s) (and assignment of the 2008 Notes) described in paragraph 24 above, and prior to the declaration of the dividends described in paragraph 27 below, the US Subsidiaries will repay that portion of the 2008 Loans necessary to fund the Canadian withholding tax applicable on the dividends, described in paragraph 27 below, that will be paid to USsub1 and USsub2 on their respective shares of Canco.
26. Immediately before the dividend payment described in paragraph 27 below, the US Subsidiaries will pay all accrued and unpaid interest on the remaining balance of the 2008 Loans which have accumulated between the assignment described in paragraph 24 above and the dividend payment described in paragraph 27 below to Canco.
27. Prior to XXXXXXXXXX , but subsequent to the declaration of the dividend described in paragraph 24 above, Canco will declare dividends to USsub1 and USsub2 on their respective shares of Canco in an aggregate amount equal to the then remaining balance of the 2008 Loans divided by a factor of XXXXXXXXXX . The dividends will be paid by assigning the 2008 Notes to USsub1 and USsub2. At the time of the dividends, the fair market value of the 2008 Notes will be equal to the remaining balance of the 2008 Notes.
28. Canco will remit the amount of withholding tax to the CRA on or before the XXXXXXXXXX of the month following the month in which the any of the dividends described in paragraphs 22 or 27 above are paid.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to ensure that the repatriation of after tax profits earned by Cansub does not result in adverse U.S. tax consequences that would otherwise result from a direct cash distribution from Cansub to Canco, and in turn from Canco to USsub1 and USsub2.
Under U.S. tax rules, the U.S. deals with taxation of income earned by non-U.S. subsidiaries through a foreign tax credit system. Under the U.S. system, dividends paid by a Canadian subsidiary will be taxed as if the income earned by such subsidiary had been earned directly by the dividend recipient and a foreign tax credit will be allowed to the extent of Canadian taxes paid on the income. Consequently, XXXXXXXXXX , dividends paid to the U.S. through Canco could result in an income inclusion in the U.S. (at USsub1's and USsub2's level) XXXXXXXXXX .
When Cansub directly loans its current and future E&Ps to Pubco and/or to other US Subsidiaries, from a U.S. tax perspective, these loans should qualify as "956 loans" and be re-characterized as dividends. XXXXXXXXXX , dividends paid to the U.S. by Cansub should not trigger any material additional tax burden in the U.S. as a result of the application of the foreign tax credit mechanism discussed above. XXXXXXXXXX .
Ruling Given
The ruling given herein is based solely on the facts, proposed transactions and purposes of the proposed transactions described above. Facts and proposed transactions described in the documents submitted with your request that are not set out above do not form part of the facts and proposed transactions on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader. 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 that the proposed transactions are completed in the manner described above we confirm the following:
The proposed transactions, including the advance of the 2008 Loans, will not be considered a series of loans and repayments for the purposes of subsection 15(2.6) of the Act and accordingly, that subsection will apply to any of the 2007 Loans of Cansub's annual E&Ps such that subsection 15(2) of the Act will not apply to the 2007 Loans of Cansub.
The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the CRA provided that the proposed transactions described in paragraphs 7-16 herein are completed by XXXXXXXXXX .
The above ruling is based on the Act and Regulations in its present form and does not take into account any proposed amendments which, if enacted into law, could have an effect on the ruling provided herein.
While it is our understanding that Cansub intends to make loans equal to current annual E&Ps and repay such loans before the XXXXXXXXXX of the following year in future years it should be noted that the above ruling is in respect of the 2007 Loans and 2008 Loans only as stipulated in the above ruling and does not cover any other loans that may be made in the future.
Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to facts and proposed transactions described herein, other than those specifically described in the ruling given above. In addition, nothing in this letter should be construed as confirmation express or implied, of the fair market value or adjusted cost base of any property referred to herein.
Yours truly,
XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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