2007 Ruling 2007-0257241R3 - XXXXXXXXXX Ruling

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 (i) paragraph 95(2)(a) would apply to re-characterize income from property of a foreign affiliate on the basis that it was derived from payments deductible in computing active business income, made by another foreign affiliate of a Canadian corporation under a lease agreement with a third party? (ii) Whether section 17 would apply?

Position: (i) Yes. (ii) No.

Reasons: (i) interpretation of the word 'indirectly' in subparagraph 95(2)(a)(ii); (ii) loan made by foreign affiliate fell into the exception contained in paragraph 17(3)(b).

XXXXXXXXXX 								2007-025724

Attention: XXXXXXXXXX

XXXXXXXXXX , 2007

Dear Sirs or Madams:

Re: XXXXXXXXXX
Business Number XXXXXXXXXX
Advance Income Tax Ruling

We are writing in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledged the additional information you provided during our conversation (XXXXXXXXXX ) on XXXXXXXXXX .

The taxpayer's tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre.

To the best of your knowledge and that of the taxpayer or a related person involved, none of the issues involved with this request:

(i) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayer or a related person;
(ii) is under objection; or
(iii) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.

The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions in the documents submitted with your request not described below 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.

Definitions

In this letter the following terms have the meanings specified:

(a) "2001 Tax Ruling" means the tax ruling issued to Aco dated XXXXXXXXXX , 2001 and revised as of XXXXXXXXXX , 2001, having reference number 2001-008991;

(b) "2003 Tax Ruling" means the tax ruling issued to Aco dated XXXXXXXXXX , 2003, having reference number 2003-002458;

(c) "2004 Tax Ruling" means the tax ruling issued to Aco dated XXXXXXXXXX , 2004, having reference number 2004-010311;

(d) "2005 Tax Ruling" means the tax ruling issued to Aco dated XXXXXXXXXX , 2005 having reference number 2005-010974;

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

(f) "Aco" means XXXXXXXXXX , a predecessor corporation of Zco;

(g) "active business" has the meaning assigned by subsection 95(1) of the Act;

(h) "Advances" means the moneys advanced by the French Investors to the G.I.E. pursuant to a loan agreement;

(i) "Canada-France Treaty" means the Canada-France Income and Capital Tax Convention, 1975, as amended to the date hereof;

(j) "CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended to the date hereof;

(k) "CGI" means the French Code Général des Impôts;

(l) "Cco" means XXXXXXXXXX

(m) "Zco" means XXXXXXXXXX ;

(n) "Yco" means XXXXXXXXXX

(o) "Xco" means XXXXXXXXXX , a corporation incorporated and resident in XXXXXXXXXX ;

(p) "Construction Agreement" means the construction agreement entered into between Gco (XXXXXXXXXX ) and G.I.E. in connection with the construction by XXXXXXXXXX of the G Act Assets;

(q) "controlled foreign affiliate" has the meaning assigned by subsection 95(1);

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

(s) "DGI'' means the Direction Générale des Impôts of France;

(t) "Deductible Amount" means the amount of deductions which the French Investors are permitted to deduct for French income tax purposes pursuant to the G Act, being the Euro equivalent of US$XXXXXXXXXX ;

(u) "designated treaty country" has the meaning assigned by subsection 5907(11) of the Regulations;

(v) "earnings" has the meaning assigned by subsection 5907(1) of the Regulations;

(w) "exempt earnings" has the meaning assigned by subsection 5907(1) of the Regulations;

(x) "exempt surplus" has the meaning assigned by subsection 5907(1) of the Regulations;

(y) "FAPI" means foreign accrual property income as defined in subsection 95(1);

(z) "foreign affiliate" has the meaning assigned by subsection 95(1);

(aa) "French Investors" means legal entities subject to French corporate income tax that participate in the Transaction through G.I.E. and they are not related to Zco or Zco's foreign affiliates;

(bb) "GAAR" means the general anti-avoidance rule in section 245;

(cc) "G.I.E." means the groupement d'intérêt economique, or economic interest group, established in XXXXXXXXXX by the French Investors and named XXXXXXXXXX ;

(dd) "G Act" means the provisions XXXXXXXXXX that is the XXXXXXXXXX set out under the provisions XXXXXXXXXX of the French Tax Code ("CGI"), XXXXXXXXXX ;

(ee) "G Act Assets" means those assets comprising a portion of the XXXXXXXXXX that will be owned by G.I.E. and leased to XXXXXXXXXX ;

(ff) "G Act Loan" means the loan from Gco to G.I.E. used by G.I.E. to fund, in part, the acquisition of the G Act Assets by G.I.E., and which was considered as part of the 2004 Tax Ruling;

(gg) "Gco" means XXXXXXXXXX , a company incorporated and resident in France and a controlled foreign affiliate of Zco, together with its predecessors;

(hh) "Gco Project" means the XXXXXXXXXX project carried on in XXXXXXXXXX by Gco through XXXXXXXXXX ;

(ii) XXXXXXXXXX

(jj) "Wco" means XXXXXXXXXX .;

(kk) "Vco" means XXXXXXXXXX .;

(ll) "income from an active business" has the meaning assigned by subsection 95(1);

(mm) "XXXXXXXXXX Investors" means XXXXXXXXXX ;

(nn) "XXXXXXXXXX Loan" means the new loan to be made or funded by the XXXXXXXXXX Investors to G.I.E.;

(oo) "Lease" means the lease contract entered into between Gco (XXXXXXXXXX ) as lessee, and G.I.E., as lessor, pursuant to which the G Act Assets are leased by G.I.E. to XXXXXXXXXX ;

(pp) "Lease XXXXXXXXXX Payment" means any payment by XXXXXXXXXX to G.I.E. under the Lease other than XXXXXXXXXX ;

(qq) XXXXXXXXXX

(rr) "loss" has the meaning assigned by subsection 5907(1) of the Regulations;

(ss) "New G Act Loan" means the new loan from US LLC to G.I.E. the proceeds of which will be used by G.I.E. to fund, in part, the acquisition of the G Act Assets by G.I.E., which loan will be on substantially the same terms as the G Act Loan;

(tt) "public corporation" has the meaning assigned by subsection 89(1);

(uu) "qualifying interest" has the meaning assigned by paragraph 95(2)(m);

(vv) "Regulations" means the Income Tax Regulations;

(ww) "Substantial Completion" means the date of substantial completion of the G Act Assets under the terms and conditions of the Transaction;

(xx) "Tax Rulings" means the 2001 Tax Ruling, the 2003 Tax Ruling, the 2004 Tax Ruling and the 2005 Tax Ruling, collectively;

(yy) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(zz) "Transaction" means the financing of the G Act Assets;

(aaa) "XXXXXXXXXX Delegation Agreement" or "Delegation Agreement" means the agreement entered into among US LLC, Gco (XXXXXXXXXX ) and G.I.E. pursuant to which G.I.E. will direct XXXXXXXXXX to pay directly to US LLC the Lease XXXXXXXXXX Payments; and
(bbb) "US LLC" means XXXXXXXXXX , a limited liability company formed under the laws of the state of XXXXXXXXXX , that is resident in the United States under common law principles.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

Zco

1. Aco was a taxable Canadian corporation incorporated under the laws of Canada. It was incorporated in XXXXXXXXXX under the laws of Canada, XXXXXXXXXX

2. On XXXXXXXXXX , Xco indirectly acquired control of Aco. Xco is a stock corporation (XXXXXXXXXX ) incorporated and resident in XXXXXXXXXX and is XXXXXXXXXX . Xco's headquarters are located in XXXXXXXXXX and its shares are traded on the XXXXXXXXXX

3. Effective on XXXXXXXXXX , Aco was amalgamated with Wco, a wholly-owned indirect subsidiary of Xco, as part of a XXXXXXXXXX (the amalgamated corporation is referred to herein as "Amalco"). Following the amalgamation, XXXXXXXXXX % of the shares of Amalco were owned by Vco.

4. On XXXXXXXXXX , Amalco was amalgamated with Vco to form a new corporation, called "Zco". Following this amalgamation, XXXXXXXXXX % of the shares of Zco remained indirectly owned by Xco.

5. XXXXXXXXXX

6. Zco is a taxable Canadian corporation resident in Canada for the purposes of the Act. XXXXXXXXXX

7. XXXXXXXXXX

8. Zco will provide the funds for the New G Act Loan as described under the heading "Proposed Transactions" below.

US LLC

9. US LLC is a limited liability company organized and resident in the United States. The sole member of US LLC is Zco.

10. US LLC currently holds a loan receivable from G.I.E. in the amount of approximately US$XXXXXXXXXX . This receivable reflects the unpaid balance of the G Act Loan.

Gco

11. Gco was incorporated as a Société Anonyme in XXXXXXXXXX under the law of France, is registered in France, has its head office located in France and is the surviving corporation following the mergers of:

(a) Cco and its wholly-owned XXXXXXXXXX subsidiary in XXXXXXXXXX ; and
(b) Gco and Yco in XXXXXXXXXX .

12. Further to the implementation of the transactions described in the 2004 Tax Ruling and certain related transactions, Zco currently owns XXXXXXXXXX % of the equity in Gco. The remaining XXXXXXXXXX % of Gco's equity is owned by the XXXXXXXXXX Investors (as to XXXXXXXXXX %) and XXXXXXXXXX Gco will at all relevant times be a controlled foreign affiliate of Zco in which Zco will have a qualifying interest.

13. Further to the issuance of the 2005 Tax Ruling, Gco was subsequently converted from a Société Anonyme (S.A.) to a Société par actions simplifiée (S.A.S.) under French law. This conversion was effected in order to, among other things, simplify the corporate governance and capitalization of Gco and to facilitate the implementation of inter-company agreements.

The Gco Project

14. XXXXXXXXXX

15. XXXXXXXXXX

16. XXXXXXXXXX The DGI has agreed to provide assistance to the Gco Project by granting its final ruling for the application of the G Act to the Transaction.

17. The G Act provides the French Investors with up-front tax benefits in respect of their investment in the G.I.E., as explained more fully below. XXXXXXXXXX , the DGI has approved the deduction by the French Investors of the Euro equivalent of US $XXXXXXXXXX in respect of the Transaction.

Transactions Effected Further to 2004 Tax Ruling

18. Further to the 2004 Tax Ruling, a number of transactions were effected involving Zco, US LLC and Gco. These transactions are described at paragraphs 14 to 21 of the 2004 Tax Ruling.

Rulings Previously Issued by CRA in connection with Gco Project

19. Zco received the Tax Rulings XXXXXXXXXX . The Tax Rulings confirmed, among other things, the following:

(a) XXXXXXXXXX ;
(b) Gco is considered to be a resident of France for the purposes of paragraph 1 of Article 4 of the Canada - France Treaty;
(c) provided US LLC is resident only in the United States under common law principles:

(i) to the extent that such income would otherwise be income from property of US LLC, interest income earned by US LLC in respect of the G Act Loan will be included in computing US LLC's income from an active business by virtue of clause 95(2)(a)(ii)(B); and
(ii) such interest income will be included in US LLC's exempt earnings for the year in which it is earned; and

(d) provided that it qualifies as a "transformation regulière" under French law, the conversion of Gco from a Société Anonyme (S.A.) to a Société par actions simplifiée (S.A.S.) will not, in and of itself, render any of the rulings previously provided in the Tax Rulings inapplicable or void.

Proposed Transactions

20. Zco now proposes to make a supplementary financing in relation to XXXXXXXXXX % of certain cost overruns associated with the acquisition of the G Act Assets. The possibility of such supplementary financing was discussed in paragraphs 17 and 18 of the 2004 Ruling. The remaining XXXXXXXXXX % of cost overruns referenced above will be financed by the XXXXXXXXXX Investors by means of the XXXXXXXXXX Loan.

21. The proposed supplementary financing by Zco will be effected by means of the same basic method contemplated in the 2004 Tax Ruling, that is:

(a) the capitalization of US LLC by Zco with cash from the latter's operations in an amount sufficient to enable US LLC to make the New G Act Loan;
(b) the making of the New G Act Loan by US LLC to G.I.E. on condition that G.I.E. use the borrowed money to fund the cost overruns relating to the G Act Assets and a small portion of the related transaction costs; and
(c) the use by the G.I.E. of the funds received from US LLC to cover such amounts.

22. Simultaneously with the transactions described above, G.I.E. and Gco will amend the Lease pursuant to which the XXXXXXXXXX has previously agreed to lease the G Act Assets from G.I.E.

23. In particular, the Lease will be amended so as to ensure that the amount of the Lease XXXXXXXXXX Payments made by XXXXXXXXXX to G.I.E. under the Lease will continue to match the total of the semi-annual principal and interest payments by (a) G.I.E. to US LLC under the terms of the G Act Loan and the New G Act Loan, and (b) G.I.E. to the XXXXXXXXXX Investors (or their designate) under the terms of the XXXXXXXXXX Loan. The payment dates for the Lease XXXXXXXXXX Payments will be identical to the payment dates of the principal and interest payments under the G Act Loan, the New G Act Loan and the XXXXXXXXXX Loan.

24. All remaining terms of the arrangement between G.I.E. and Gco as described in the 2004 Ruling Request will remain substantially the same.

25. In the event that further cost overruns occur in relation to the G Act Assets, it is currently anticipated that such costs would be funded by means of one or more further loans in a manner similar to the New G Act Loan.

26. XXXXXXXXXX

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to finance a portion of the construction costs of the processing plant of the Gco Project in a manner acceptable to, and approved by, the DGI to reduce the overall cost of the processing plant to Gco and thereby improve the economic viability of the Project.

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 that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. Provided US LLC is resident only in the United States under common law principles, to the extent that such income would otherwise be income from property of US LLC, the interest income earned by US LLC from the New G Act Loan will be included in computing the income from an active business of US LLC pursuant to clause 95(2)(a)(ii)(B).

B. Provided US LLC is resident only in the United States under common law principles, the income referred to in Ruling A above, will be included in its exempt earnings for the year in which it is earned.

C. Subsections 17(1) and 17(2) will not apply to Zco to impute an income inclusion in connection with the New G Act Loan made by US LLC to G.I.E.

D. Paragraph 95(6)(b) will not apply as a result of the proposed transactions.

E. The provisions of subsection 245(2) will not apply as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences stated in this ruling.

The above rulings 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 agreements required to effect the proposed transactions are entered into by the parties thereto by XXXXXXXXXX .

These rulings are based on the Act in the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Comments

Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular, the CRA has not reviewed:

(i) the determination of the fair market value or adjusted cost base of any property referred to herein;
(ii) the validity of any agreements or terms and conditions therein;
(iii) whether the terms and conditions of the New G Act Loan are such that persons dealing at arm's length would have been willing to enter into them;
(iv) the residence of US LLC in the United States;
(v) whether the general anti-avoidance rule will not apply to completed or future transactions other than the Proposed Transactions as described in this letter;
(vi) any tax consequences relating to the amalgamation of the predecessor corporations of Zco; or
(vii) any other tax consequences relating to any facts or proposed transactions referred to herein as a result of the legislative proposals introduced by the Department of Finance on February 27, 2004 (except those which had been included in Bill C-28 that received Royal Assent on December 14, 2007), and the proposed 5th Protocol of the Canada-United States Income Tax Convention.

None of the documents pertaining to the Lease, New G Act Loan, XXXXXXXXXX Loan or any agreement pertaining to the construction of the G Act Assets were reviewed by the CRA and they do not form in any way part of the facts, proposed transactions or the purpose of the proposed transactions for the purposes of this letter.

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch