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: 1. Will the interest paid to NR Holdco by BBCo be deductible by BBCo under paragraph 20(1)(c) of the Act? 2. Will subsection 15(2) of the Act apply to the cash sweeping transactions? 3. Will the fact that BBCo may make a loan to a Participant in financial difficulty, in and of itself, result in a subsection 15(1) benefit being conferred on NR Holdco?
Position: 1. Yes. 2. No. 3. No
Reasons: 1. The interest will meet the requirements of paragraph 20(1)(c). 2. Where BBCo and each of the Participants are corporations resident in Canada, and provided there will be no repatriation or loans by BBCo or the Participants back to NR Holdco, subsection 15(2) of the Act will not apply to the cash sweeping transaction. 3. Where a bona fide intercompany loan is made in the ordinary course of carrying on the businesses of the corporations and the corporation receiving the loan is, at the time of the loan, in a position to repay the loan or provide reasonable security for repayment, the CRA has a long standing position that subsection 15(1) will not be applied.
XXXXXXXXXX 2008-027343
XXXXXXXXXX , 2008
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
We are replying to your letter of XXXXXXXXXX , which was received with attachments on XXXXXXXXXX , and wherein you requested an advance income tax ruling with respect to a proposed cash sweeping arrangement. We also acknowledge the additional information provided to us during our various telephone conversations and emails.
We understand that to the best of your knowledge, and that of the taxpayers involved, none of the issues described herein is:
a. in an earlier tax return of the taxpayers or a related person;
b. being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayers or a related person;
c. under objection by the taxpayers or a related person;
d. before the Courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; nor
e. the subject of a ruling previously issued.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Definitions
In this letter, the following terms have the meanings specified below:
a) "NR Holdco" means XXXXXXXXXX , a company resident in XXXXXXXXXX , a non-resident of Canada;
b) "ACo" means XXXXXXXXXX ., a taxable Canadian corporation, resident in Canada, and not a CCPC;
c) "BCo" means XXXXXXXXXX ., a taxable Canadian corporation, resident in Canada, and not a CCPC;
d) "BBCo" means XXXXXXXXXX ., the corporation formed by the amalgamation of ACo and BCo;
e) "CCo" means XXXXXXXXXX , a company resident in XXXXXXXXXX and a non-resident of Canada;
f) "CCPC" means a Canadian-controlled private corporation within the meaning of subsection 125(7) of the Act;
g) "CRA" means the Canada Revenue Agency;
h) "DCo" means XXXXXXXXXX , a taxable Canadian corporation, resident in Canada, and not a CCPC;
i) "ECo" means XXXXXXXXXX ., a taxable Canadian corporation, resident in Canada, and not a CCPC;
j) "FCo" means XXXXXXXXXX ., a taxable Canadian corporation, resident in Canada, and not a CCPC;
k) "GCo" means XXXXXXXXXX ., a taxable Canadian corporation, resident in Canada, and not a CCPC;
l) "HCo" means XXXXXXXXXX ., a taxable Canadian corporation, resident in Canada, and not a CCPC;
m) "ICo" means XXXXXXXXXX ., a taxable Canadian corporation, resident in Canada, and not a CCPC;
n) "JCo" means XXXXXXXXXX ., a taxable Canadian corporation, resident in Canada, and not a CCPC;
o) "KCo" means XXXXXXXXXX , a taxable Canadian corporation, resident in Canada, and not a CCPC;
p) XXXXXXXXXX
q) "Participants" means DCo, ECo, FCo, GCo, HCo, ICo, JCo, and KCo, each of which is resident in Canada and carries on an active business or earns investment income from associated corporations which is deemed to be active business income;
r) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;
s) "TC" means Taxation Centre;
t) "TSO" means Tax Services Office; and
u) "will sweep excess cash" means, periodically, based on a review of available cash and management decisions, the cash sweep will transfer a Participant's excess funds to BBCo. The cash sweeps, in general, will be subject to a general bona fide loan arrangement covering all such transactions such that each and every time cash is swept, a separate loan agreement will not be drawn up.
Facts
1. NR Holdco is the holding company of a group of companies located in numerous jurisdictions.
2. ACo's business number is XXXXXXXXXX , its address is XXXXXXXXXX and is located within the area served by the XXXXXXXXXX TSO and the XXXXXXXXXX TC. ACo is wholly-owned by NR Holdco and carries on an active business or earns investment income from associated corporations which is deemed to be active business income.
3. BCo's business number is XXXXXXXXXX , its address is XXXXXXXXXX and is located within the area served by the XXXXXXXXXX TSO and the XXXXXXXXXX TC. BCo is wholly-owned by ACo and carries on an active business.
4. Effective sometime in XXXXXXXXXX , ACo and BCo will amalgamate to form BBCo. BBCo will continue to carry on the activities of its predecessors.
5. CCo is wholly-owned by a corporation resident in XXXXXXXXXX which is wholly-owned by a corporation resident in XXXXXXXXXX which is wholly-owned by NR Holdco.
6. DCo is wholly-owned by a corporation resident in XXXXXXXXXX which is wholly-owned by a corporation resident in XXXXXXXXXX which is wholly-owned by NR Holdco.
7. ECo is wholly-owned by a corporation resident in XXXXXXXXXX which is wholly-owned by a corporation resident in XXXXXXXXXX which is wholly-owned by NR Holdco.
8. FCo is wholly-owned by a corporation resident in Canada which is wholly-owned by NR Holdco.
9. GCo is wholly-owned by a corporation resident in the United States which is wholly-owned by NR Holdco.
10. HCo is wholly-owned by a corporation resident in the United States which is wholly-owned by a corporation resident in the United States which is wholly-owned by NR Holdco.
11. ICo is wholly-owned by NR Holdco.
12. JCo is wholly-owned by a corporation resident in XXXXXXXXXX which is wholly-owned by a corporation resident in XXXXXXXXXX which is wholly-owned by NR Holdco.
13. KCo is wholly-owned by a corporation resident in the XXXXXXXXXX which is wholly-owned by NR Holdco.
Proposed Transactions
14. NR Holdco will borrow funds from XXXXXXXXXX pursuant to a legal document to pay interest thereon. NR Holdco will lend the funds to BBCo pursuant to a legal document to pay interest thereon at a rate XXXXXXXXXX % below NR Holdco's cost to borrow.
15. BBCo will sweep excess cash from the Participants. BBCo will, pursuant to a legal document to pay interest thereon, pay the Participants an interest rate equal to the rate paid to NR Holdco.
16. BBCo will loan the funds, swept from the Participants and borrowed from NR Holdco, to the Participants pursuant to a legal document to pay interest thereon at the rate paid by BBCo to NR Holdco plus XXXXXXXXXX %.
17. Once implemented, the cash sweeping transaction and the loans, referred to above in 15 and 16 respectively, will form part of the ordinary business of BBCo.
18. The Participants will enter into the loans referred to in 16 above, in the ordinary course of their businesses, in order to meet their working capital requirements and/or for asset acquisitions, and the Participants receiving the loans will, at the time a loan is entered into, be in a position to repay the loan or provide reasonable security for repayment.
19. The aggregate of the Participants' cash requirements pursuant to 18 above will be greater than the combined cash swept from them to BBCo.
20. There will be no repatriation or loans back to NR Holdco from BBCo or the Participants, beyond BBCo's payment of its principal and interest obligations pursuant to its loan from NR Holdco described in 14 above, or BBCo's or the Participants' repayment, if any, of their outstanding debts, if any, unrelated to the proposed transactions.
Purpose of Proposed Transactions
21. To manage the cash requirements of the Participants, minimize external debt levels and concentrate all banking requirements within one entity.
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 further that the proposed transactions are completed in the manner described above, we rule as follows:
A. Provided the interest paid or payable by BBCo on the funds borrowed from NR Holdco as described in 14 above is reasonable and is paid pursuant to a legal obligation to pay interest and that the borrowed funds continue to be used by BBCo for the purpose of earning income from a business or property, BBCo will be entitled to deduct, in computing its income for a taxation year, pursuant to paragraph 20(1)(c) of the Act, the interest paid or payable on the borrowed funds from NR Holdco (depending on the method regularly followed by BBCo in computing its income for the purposes of the Act) in respect of the taxation year to the extent such amount does not exceed a reasonable amount.
B. Provided BBCo and each of the Participants are corporations resident in Canada and provided there will be no repatriation or loans by BBCo, or the Participants, back to NR Holdco, beyond those described in 20 above, subsection 15(2) of the Act will not apply to the cash sweeping transaction described in 15 above.
C. Provided the loans referred to in 16 above are bona fide, continue to arise in the ordinary business of BBCo and the Participants, and the Participants receiving the loans will, at the time a loan is entered into, be in a position to repay the loan or provide reasonable security for repayment, the fact that BBCo may make a loan to a Participant in financial difficulty will not, in and of itself, result in a subsection 15(1) benefit being conferred on NR Holdco.
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 transactions are entered into 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 ruling provided herein.
Nothing in this letter should be construed as implying that the CRA has reviewed or is making a determination or ruling in respect of any tax consequences in relation to any facts or proposed transactions referred to herein other than those specifically described in the ruling given.
Yours truly,
XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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