2008 Ruling 2007-0259531R3 - Forgiveness of interest

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 the forgiveness of interest applicable to the pre-acquisition period subject to the rules of section 80?

Position: YES

Reasons: 80(2)(b) deems the interest payable as having a principal amount

XXXXXXXXXX 						2007-025953

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX . ("Acquireco") BN 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 information provided during numerous telephone conversations and electronic correspondences.

We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues contained in this ruling request herein are:

(i) dealt with in an earlier return of Acquireco or a related person;

(ii) being considered by a tax services office or a taxation centre in connection with a tax return already filed by Acquireco or a related person;

(iii) under objection by Acquireco or a related person;

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

Definitions:

The following terms have the meanings specified herein:

(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 refers to the relevant provision;

(b) "Acquireco" means XXXXXXXXXX ., a corporation incorporated under the CBCA;

(c) "Acquisition of Control" means de jure control as, the right of control that rests in ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the board of directors;

(d) "AOC" means the Acquisition of Control of Acquireco and its Subsidiaries that occurred on XXXXXXXXXX , as a consequence of the completion of the transaction in which Xco acquired the majority of the shares of Parent;

(e) "CBCA" means the Canada Business Corporations Act;

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

(g) "Finance I" means XXXXXXXXXX formed under the laws of XXXXXXXXXX , which is indirectly a wholly-owned Subsidiary of Parent;

(h) "Parent" means XXXXXXXXXX incorporated under the laws of XXXXXXXXXX that is a non-resident of Canada for the purposes of the Act;

(i) "Person" means any natural person, trust, partnership, company (whether limited or unlimited liability) or body corporate;

(j) "Pre-AOC Amounts" means $XXXXXXXXXX of accrued interest and $XXXXXXXXXX of accrued commitment fees relating to the period up to and including XXXXXXXXXX and payable by Acquireco to Finance I under the Credit Facility Agreement;

(k) "Pre-AOC Losses" means Acquireco's non-capital loss for the Pre-AOC Period, to the extent attributable to deductions available to Acquireco in respect of the Pre-AOC Amounts;

(l) "Pre-AOC Period" means Acquireco's taxation year commencing XXXXXXXXXX and ending on XXXXXXXXXX ;

(m) "Public Corporation" has the meaning assigned by subsection 89(1) of the Act;

(n) "Related" has the meaning assigned by section 251 of the Act;

(o) XXXXXXXXXX ;

(p) "Subsidiary" with respect to any Person, means any other Person of which the first Person owns, directly or indirectly, securities or other ownership interests having voting power to elect a majority of the board of directors or other persons performing similar functions (or, if there are no such voting interests, more than 50% of the equity interests of the second Person);

(q) "Target" means XXXXXXXXXX ., a taxable Canadian corporation governed by the CBCA and a wholly-owned Subsidiary of Acquireco (see 5 below);

(r) "Taxable Canadian Corporation" has the meaning assigned by subsection 89(1) of the Act;

(s) "Treaty" means the XXXXXXXXXX , as presently in force;

(t) XXXXXXXXXX ; and

(u) "Xco" means XXXXXXXXXX ., a corporation incorporated under the laws of the XXXXXXXXXX and a non-resident of Canada for the purposes of the Act.

Facts:

1. Prior to XXXXXXXXXX , Target was a Public Corporation whose shares were widely held and traded on the XXXXXXXXXX .

2. Parent is a holding company for a group of companies located in numerous jurisdictions, XXXXXXXXXX . Prior to XXXXXXXXXX , the shares of Parent were widely held and traded on the XXXXXXXXXX Stock Exchanges.

3. Finance I is a corporation subject to tax in XXXXXXXXXX and is resident in XXXXXXXXXX for purposes of the Treaty. Finance I does not carry on business in Canada nor does it have a permanent establishment in Canada as defined in Article 5 of the Treaty.

4. Xco is the parent company of a group of companies with XXXXXXXXXX operations;

5. Through Acquireco, a wholly-owned Subsidiary of Parent, in XXXXXXXXXX , Parent made an offer to acquire all of the shares of Target, which was a Canadian corporation formed under the CBCA on XXXXXXXXXX . The offer was ultimately successful and between XXXXXXXXXX , Acquireco acquired XXXXXXXXXX % of the outstanding Target shares. Acquireco later acquired the remaining shares of Target. It was determined that an Acquisition of Control of Target had occurred for the purposes of the Act on XXXXXXXXXX .

6. Xco made an unsolicited offer for the shares of Parent on XXXXXXXXXX .

7. XXXXXXXXXX

8. XXXXXXXXXX on XXXXXXXXXX , Xco acquired over XXXXXXXXXX % of the shares of Parent. It was concluded that, for the purposes of the Act, there had been an Acquisition of Control of Parent, and any of its Canadian subsidiaries, including Acquireco and Target, on XXXXXXXXXX .

9. XXXXXXXXXX

10. During the Pre-AOC Period, Acquireco incurred the Pre-AOC Losses. The Pre-AOC Losses are attributable to interest and commitment fees (the Pre-AOC Amounts) accruing on the debt facility (the "Facility") provided by Finance I to Acquireco to finance the acquisition of the shares of Target. This Facility was made available under a credit facility agreement dated XXXXXXXXXX (the "Credit Facility Agreement"), which provided for a convertible demand revolving credit facility in the maximum amount of C$XXXXXXXXXX ($XXXXXXXXXX ). Acquireco drew down a single Loan under the Credit Facility Agreement in the amount of $XXXXXXXXXX on XXXXXXXXXX . The Loan proceeds were used to pay a portion of the amount payable for the shares of Target that were acquired by Acquireco pursuant to the Parent offer for Target, with the balance being funded by an equity investment in Acquireco.

11. Acquireco could convert the Loan to a term loan (which would have resulted in a "Conversion Date"), but this option was never exercised.

12. Prior to the Conversion Date, the annual rate of interest on the Loan was the aggregate of the Libor Rate and XXXXXXXXXX % and Acquireco was obligated to pay accrued interest on the Loan on the last day of each interest period (the "Interest Period") relating to the Loan. Under the Credit Facility Agreement as originally entered into, the Interest Period prior to the Conversion Date was XXXXXXXXXX months commencing on the borrowing date of the Loan.

13. On one business day's prior notice, Acquireco was entitled to prepay the whole or any part of the Loan.

14. During the availability period for the Facility, Acquireco was also obligated to pay Finance I a commitment fee computed at the rate of XXXXXXXXXX % per annum on the daily amount of the undrawn, uncancelled amount of the Facility. Under the Credit Facility Agreement as originally entered into, this fee was payable quarterly in arrears. On one business day's prior notice, Acquireco was entitled to cancel any part of the undrawn portion of the Facility.

15. An Agreement (the "First Amendment Agreement") amended the provision regarding Interest Periods, effective XXXXXXXXXX (i.e., the date the Credit Facility Agreement was entered into) to make the Interest Period a period of XXXXXXXXXX months. It also amended the provision for payment of the accrued commitment fee so that the accrued commitment fee would be payable on the last day of each successive period of XXXXXXXXXX months starting on the date the Credit Facility Agreement was entered into.

16. Another Agreement (the "Second Amendment Agreement") dated as of XXXXXXXXXX , amended the provision regarding Interest Periods to make the Interest Period a period of XXXXXXXXXX months. It also amended the provision for payment of the accrued commitment fee so that such accrued commitment fee would be payable on the last day of each successive period of XXXXXXXXXX months starting on the date the Credit Facility Agreement was entered into, or the last day of the availability period, if earlier. This amendment was effective XXXXXXXXXX .

17. As at XXXXXXXXXX , approximately $XXXXXXXXXX of interest and commitment fees had accrued under the Credit Facility Agreement.

18. Acquireco's taxation year ends on XXXXXXXXXX in each year.

19. The following transactions recently took place in the context of a refinancing of Acquireco XXXXXXXXXX on XXXXXXXXXX , 2007:

a) On or about XXXXXXXXXX , Acquireco gave notice to Finance I, pursuant to the Credit Facility Agreement, of its intention to prepay the Loan on XXXXXXXXXX , as a result of which Acquireco became obligated to pay, on XXXXXXXXXX , the principal amount of the Loan and all accrued and unpaid interest and commitment fees.

b) During the period between XXXXXXXXXX , Finance I and Acquireco agreed that the amount of $XXXXXXXXXX would in fact be paid by Acquireco to Finance I on XXXXXXXXXX , of which $XXXXXXXXXX would be applied to repay the full amount of the principal outstanding and the remaining $XXXXXXXXXX would be applied to the interest and commitment fees that accrued from XXXXXXXXXX , leaving the amount of $XXXXXXXXXX (i.e., the Pre-AOC Amounts) outstanding.

c) On XXXXXXXXXX , Acquireco paid Finance I the aggregate amount of $XXXXXXXXXX , which was allocated as described above, as confirmed in an agreement (the "Acknowledgement and Consent Agreement").

Proposed Transaction:

20. Subject to obtaining the favourable rulings, it is proposed that Finance I will release Acquireco from its liability to Finance I for the Pre-AOC Amounts, comprised of $XXXXXXXXXX of accrued and unpaid interest (the "Forgiven Interest") and $XXXXXXXXXX of accrued and unpaid commitment fees (the "Forgiven Commitment Fees"), in each case relating to the period up to and including XXXXXXXXXX . This release would be given without any payment or other consideration being received or receivable from Acquireco in respect of such liabilities. For greater certainty, neither Acquireco nor any other person resident in Canada will compensate Finance I in any other manner whatsoever for the release from such liability. Such proposed release of Acquireco's liability is referred to as the "Forgiveness Transaction".

Purpose of the Proposed Transaction:

21. The purpose of the Forgiveness Transaction is to put the parties in the same position they would be in if the Loan under the Credit Facility Agreement had been non-interest bearing during the Pre-AOC Period and as if there had been no commitment fee accruing in respect of the undrawn facility during this period.

At the time that Acquireco acquired control of Target, it was anticipated that Acquireco would have non-capital losses due to the interest expense and other financing charges incurred under the Credit Facility Agreement. It was originally intended that post-acquisition restructuring transactions would have been implemented, which would have resulted in Acquireco earning sufficient income in the form of interest on loans or advances made to Target, to absorb the amount of any available loss carryforwards of Acquireco. XXXXXXXXXX .

However, the AOC of Parent by Xco had the consequential result of causing another acquisition of control of Acquireco (and Target) for the purposes of the Act on XXXXXXXXXX .

XXXXXXXXXX

As a result of these subsequent events, XXXXXXXXXX , the parties wish to enter into the Forgiveness Transaction, which would have the effect of extinguishing Acquireco's obligation to pay the Pre-AOC Amounts to Finance I.

Rulings Given:

Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, proposed transaction and purpose of the proposed transaction, and provided that the proposed transaction is completed in the manner described above, we rule as follows:

A. Pursuant to paragraph 80(2)(b) of the Act, Acquireco is deemed to have issued a debt obligation having a principal amount equal to the amount of the interest that accrued under the Credit Facility Agreement in the Pre-AOC Period and that was deductible in such period in computing Acquireco's income, i.e., the Forgiven Interest as described in 20 above.

B. Pursuant to subsection 248(26), Acquireco is deemed to have issued a debt obligation having a principal amount equal to the amount of the commitment fees that accrued under the Credit Facility Agreement in the Pre-AOC Period and that was deductible in such period in computing Acquireco's income, i.e, the Forgiven Commitment Fees as described in 20 above.

C. The amount of the Forgiven Interest and the Forgiven Commitment Fees (collectively, the "Forgiven Amount") as described in 20 above will be a "forgiven amount" of Acquireco for the purposes of the rules in sections 80 through 80.04 of the Act.

D. Pursuant to subsection 80(3) of the Act, the Forgiven Amount will first be required to be applied to Acquireco's non-capital loss taxation years ending before the time of the forgiveness, to the extent that the Forgiven Amount thereof does not exceed the "relevant loss balance" as defined in subsection 80(1) of the Act, which amount will include the Pre-AOC Losses.

E. Subsection 78(1) of the Act will not apply to require Acquireco to include the Forgiven Amount in income, to the extent that it has been forgiven and the rules in section 80 of the Act have applied to Acquireco in respect of such Forgiven Amount.

F. Since Acquireco will not pay or credit to Finance I any amount of interest or commitment fees to the extent that liability for such amounts is extinguished in the Forgiveness Transaction, withholding taxes under Part XIII of the Act will not be applicable.

G. The provisions of subsection 245(2) will not apply as a result of the proposed transaction, in and by itself, to redetermine the tax consequences stated in rulings A to F above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the proposed transaction is completed by XXXXXXXXXX .

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, 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, reviewed or has made any determination in respect of:

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

(b) the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein; nor

(c) any tax consequences relating to the facts and proposed transaction described herein other than those specifically described in the rulings given above.

Yours truly,

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