2007 Ruling 2007-0252491R3 - Assumption of debt for assets

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: Whether: (1) foreign exchange gain realized when debt assumed by purchaser as part consideration for assets; (2) addition of purchaser as debtor to the existing agreement under State of XXXXXXXXXX law would result in a disposition of debt by the creditor for purposes of subparagraph 212(1)(vii); (3) proposed transactions caused interest previously deductible to no longer be deductible under paragraph 20(1)(c); (4) the general anti-avoidance provision applied?

Position: (1) Yes; (2) No; (3) No; (4) No

Reasons: (1) the debt that was assumed represented part of proceeds of disposition for the assets sold and a foreign exchange gain crystallized vis-a-vis the transferor of the debt at that time; under State of XXXXXXXXXX law, no disposition occurred; (2) under the laws of the State of XXXXXXXXXX , there was no novation or disposition of the debt; (3) to extent interest was deductible for purposes of paragraph 20(1)(c), proposed transactions did not cause interest expense to no longer be deductible under that provision; (4) although the transactions are avoidance transactions, there is no misuse or abuse.

XXXXXXXXXX 							2007-025249

XXXXXXXXXX , 2007

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge our various telephone conversations (XXXXXXXXXX) in furtherance of this matter.

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 taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre of the Canada Revenue Agency ("CRA") in connection with a previously filed tax return of the taxpayer or a related person;

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

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

Unless otherwise stated, statutory references in this letter are to the Income Tax Act, R.S.C. 1985 (5th Suppl.) c. 1, as amended to the date hereof (the "Act"). Our understanding of the facts and proposed transactions is as follows:

Facts

1. XXXXXXXXXX ("ACo") was incorporated under the provisions of the Canada Business Corporations Act R.S.C. 1985, c. C-44, as amended ("CBCA") on June 3, 1902 and is a "taxable Canadian corporation" within the meaning assigned by subsection 89(1) of the Act. ACo's headquarters and registered office is in XXXXXXXXXX, Canada. ACo is the parent company of an international group involved in XXXXXXXXXX . The XXXXXXXXXX Tax Services Office and XXXXXXXXXX Tax Centre serve ACo.

2. Through subsidiaries, joint ventures and related companies around the world, the activities of ACo include XXXXXXXXXX. As at XXXXXXXXXX, ACo employed approximately XXXXXXXXXX people and had operating facilities in XXXXXXXXXX countries, excluding XXXXXXXXXX people employed in joint ventures.

3. The ACo common shares are traded on the XXXXXXXXXX . As at XXXXXXXXXX, ACo had XXXXXXXXXX common shares issued and outstanding, representing all of its issued voting shares. There are also options outstanding to acquire an aggregate of XXXXXXXXXX ACo common shares. No person beneficially owns or exercises control or direction over 10% or more of the outstanding ACo common shares.

4. As part of its long-term financing strategy, ACo has issued U.S. dollar notes and debentures in the aggregate approximate amount of U.S. $XXXXXXXXXX (the "U.S. Debt"). These issuances were made pursuant to an indenture agreement dated XXXXXXXXXX (including Supplemental Indentures) between ACo and XXXXXXXXXX and are governed by the laws of the State of XXXXXXXXXX. More particularly, the U.S. Debt consists of the following:

a. XXXXXXXXXX Debt Issue - Debentures in the principal amount of U.S. $XXXXXXXXXX issued by ACo on XXXXXXXXXX. The debentures bear interest at the rate of XXXXXXXXXX% per annum and mature on XXXXXXXXXX. At the time of issuance, the rate of exchange of the Canadian dollar to the U.S. dollar was 1.5421;

b. XXXXXXXXXX Debt Issue - Debentures in the principal amount of U.S. $XXXXXXXXXX issued by ACo XXXXXXXXXX. The debentures bear interest at the rate of XXXXXXXXXX% per annum and mature on XXXXXXXXXX. At the time of issuance, the rate of exchange of the Canadian dollar to the U.S. dollar was 1.5421;

c. XXXXXXXXXX Debt Issue - Debentures in the principal amount of U.S. $XXXXXXXXXX issued by ACo on XXXXXXXXXX. The debentures bear interest at the rate of XXXXXXXXXX% per annum and mature on XXXXXXXXXX. At the time of issuance, the rate of exchange of the Canadian dollar to the U.S. dollar was 1.5664;

d. XXXXXXXXXX Debt Issue - Debentures in the principal amount of U.S. $XXXXXXXXXX issued by ACo on XXXXXXXXXX. The debentures bear interest at the rate of XXXXXXXXXX% per annum and mature on XXXXXXXXXX. At the time of issuance, the rate of exchange of the Canadian dollar to the U.S. dollar was 1.5664;

e. XXXXXXXXXX Debt Issue - Notes in the principal amount of U.S. $XXXXXXXXXX issued by ACo on XXXXXXXXXX. The notes bear interest at the rate of XXXXXXXXXX% per annum and mature on XXXXXXXXXX. At the time of issuance, the rate of exchange of the Canadian dollar to the U.S. dollar was 1.5720;

f. XXXXXXXXXX Debt Issue - Notes in the principal amount of U.S. $XXXXXXXXXX issued by ACo on XXXXXXXXXX. The notes bear interest at the rate of XXXXXXXXXX% per annum and mature on XXXXXXXXXX. At the time of issuance, the rate of exchange of the Canadian dollar to the U.S. dollar was 1.4188;

g. XXXXXXXXXX Debt Issue - Notes in the principal amount of U.S. $XXXXXXXXXX issued by ACo on XXXXXXXXXX . The notes bear interest at the rate of XXXXXXXXXX % per annum and mature on XXXXXXXXXX . At the time of issuance, the rate of exchange of the Canadian dollar to the U.S. dollar was 1.2963;

h. XXXXXXXXXX Debt Issue - Notes in the principal amount of U.S. $XXXXXXXXXX issued by ACo on XXXXXXXXXX. The notes bear interest at the rate of XXXXXXXXXX% per annum and mature on XXXXXXXXXX. At the time of issuance, the rate of exchange of the Canadian dollar to the U.S. dollar was 1.2963;

i. XXXXXXXXXX Debt Issue - Notes in the principal amount of U.S. $XXXXXXXXXX issued by ACo on XXXXXXXXXX. The notes bear interest at the rate of XXXXXXXXXX% per annum and mature on XXXXXXXXXX. At the time of issuance, the rate of exchange of the Canadian dollar to the U.S. dollar was 1.25635; and

j. XXXXXXXXXX Debt Issue - Notes in the principal amount of U.S. $XXXXXXXXXX issued by ACo on XXXXXXXXXX. The notes bear interest at the rate of XXXXXXXXXX% per annum and mature on XXXXXXXXXX. At the time of issuance, the rate of exchange of the Canadian dollar to the U.S. dollar was 1.25635.

5. As the Canadian currency has increased in value against the US dollar, ACo has unrealized foreign exchange gains exceeding $XXXXXXXXXX with respect to the U.S. Debt, which gains are on account of capital ("ACo Unrealized FX Gains").

6. XXXXXXXXXX.

7. XXXXXXXXXX ("DCo") is a corporation incorporated under the CBCA, a "taxable Canadian corporation" within the meaning assigned by subsection 89(1), and an indirect wholly-owned subsidiary of BCo.

8. On XXXXXXXXXX, ACo and DCo announced that DCo agreed to offer to purchase each issued and outstanding ACo common share (the "Offer"), including any ACo common share that may become issued upon exercise of options after the date of the Offer but before the completion of the Offer, for US$XXXXXXXXXX in cash per common share. DCo has made the Offer. The transaction has been approved unanimously by the Boards of Directors of both ACo and DCo, based, inter alia, on fairness opinions received from their respective financial advisors. The Offer is subject to approval by the shareholders of BCo and CCo, regulatory approvals, and customary closing conditions. At the time of writing, regulatory approval has been obtained from the Canadian and American competition authorities. The transaction is expected to be completed on XXXXXXXXXX.

9. At the time that DCo takes up and pays for ACo common shares pursuant to the Offer, there will be an acquisition of control of ACo for purposes of the Act and a deemed year-end pursuant subsection 249(4).

10. For its fiscal period ending XXXXXXXXXX, ACo has net capital losses carried forward of $XXXXXXXXXX. ACo anticipates that it will realize additional net capital losses for its fiscal period ending immediately before the acquisition of control described in 9 above, of approximately $XXXXXXXXXX. The total net capital losses balance is estimated at $XXXXXXXXXX.

Proposed Transactions

11. The proposed transactions described below ("Proposed Transactions") will follow sequentially.

12. ACo will incorporate a new company under the CBCA ("Newco"). Newco will be a "taxable Canadian corporation" within the meaning assigned by subsection 89(1) of the Act. Newco's authorized capital will consist of an unlimited number of common shares. ACo will subscribe for XXXXXXXXXX common shares of Newco for $XXXXXXXXXX payable in cash. ACo will transfer legal and beneficial ownership in these assets:

a. Shares of XXXXXXXXXX, a Canadian corporation and a wholly-owned subsidiary of ACo; and

b. Receivables from XXXXXXXXXX of approximately US$XXXXXXXXXX,

(the "Transferred Assets"), to Newco, in consideration for the assumption by Newco of the US Debt, as described in 14 below. ACo and Newco will jointly elect, in prescribed form and within the time permitted under section 85, an elected amount for each of the Transferred Assets.

13. In exchange for the Transferred Assets, Newco will assume a portion of the U.S. Debt (the "Assumed Debt") and issue common shares of its share capital having an aggregate fair market value equal to the excess of the fair market value of the Transferred Assets over the principal amount, as measured in Canadian dollars at the time of transfer, of the Assumed Debt. It is intended that the Assumed Debt will consist of the notes and debentures described in 4(a), (c) and (e) above for an aggregate amount of approximately U.S. $XXXXXXXXXX. The foreign exchange gain on the Assumed Debt is currently estimated at $XXXXXXXXXX. Newco will be added as a debtor or co-obligor without ACo being removed as a debtor. ACo and Newco will be jointly and severally liable for the entirety of the Assumed Debt.

14. Pursuant to the laws of XXXXXXXXXX, the assumption of the Assumed Debt and the addition of Newco as a debtor under the Assumed Debt will not result in:

a. a novation in respect of any portion of the U.S. Debt including the Assumed Debt;

b. a substitution of all or any portion of the U.S. Debt including the Assumed Debt by a new debt; or

c. a discharge, rescission or extinguishment of all or any portion of the U.S. Debt including the Assumed Debt.

15. After the transfers and assumptions described in 13 and 14 above and prior to the acquisition of control referred to in 9 above, Newco will be wound up into ACo. Subsection 88(1) will apply to the winding-up of Newco. In the course of the winding-up of Newco, the shares of Newco held by ACo will be cancelled and the Transferred Assets will be distributed to ACo. In addition, ACo will assume all of Newco's obligations with respect to the Assumed Debt.

Purpose of the Proposed Transactions

16. The purpose of the proposed transactions is to realize capital gains on the Assumed Debt.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A. Provided that ACo has a legal obligation to pay interest in respect of the Assumed Debt, the Proposed Transactions as described in 11 to 16 above, will not, in and by themselves, cause any portion of the interest expense payable by ACo on the Assumed Debt to no longer be deductible under paragraph 20(1)(c) of the Act.

B. The assumption by Newco of the Assumed Debt described in 14 above, will not, in and by itself, result in the disposition of the Assumed Debt by ACo for the purposes of subsection 248(1) or the issuance of new indebtedness for the purposes of subparagraph 212(1)(b)(vii).

C. To the extent that the value of the U.S. dollar relative to the Canadian dollar fell between the time that any portion of the Assumed Debt was issued by ACo and the time it is assumed by Newco, ACo has made a gain for the purposes of subsection 39(2) in reference to the Assumed Debt.

D. As a result of the proposed transactions, in and by themselves, subsection 245(2) will not be applied to re-determine the tax consequences confirmed in the rulings given.

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 (the "Circular") issued by the CRA on May 17, 2002, and is binding provided the proposed transactions are completed 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.

Comments

Nothing in this letter should be construed as implying that the CRA has reviewed or is making a determination or ruling in respect of:

a) the determination of the adjusted cost base, paid-up capital or fair market value of any shares referred to herein;

b) the determination of the fair market value of receivables, debt or other items referred to herein;

c) the transfer of beneficial ownership in the Transferred Assets by ACo to Newco as described in 13 above; whether sections 85 or 88 would apply to the Proposed Transactions;

d) whether acquisition of control will occur in reference to ACo as a consequence of the Offer;

e) whether the provisions of subsection 111(4) would apply to ACo;

f) any transaction that was completed prior to the date of this ruling, including, in particular, the issuance or assumption of any of the U.S. Debt as detailed in 4 and 14 above and whether the interest thereon qualifies for a deduction under the provisions of paragraph 20(1)(c);

g) the law governing the U.S. Debt, specifically whether the Proposed Transactions result in the extinguishment or discharge of any part of the Assumed Debt and its substitution by new obligations under such law;

h) any tax consequences with respect to the Assumed Debt other than specifically described in the rulings given above including whether interest paid on the Assumed Debt to a non-resident prior to the proposed transactions qualifies for the exemption from Part XIII tax payable pursuant to subparagraph 212(1)(b)(vii);

i) any tax consequences in respect of the Offer or related transactions; nor

j) any tax consequences in relation to any facts or proposed transactions referred to herein other than those specifically described in the rulings given.

Yours truly,

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