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) Does interest free loan to Parentco give rise to a deemed benefit to Parentco? (2) Is withholding tax at XXXXXXXXXX % applicable on benefit? (3) Do the transactions constitute a series of loans and repayments? (4) Does ss.15(1) apply to Parentco as a result of the proposed transactions? (5) Does ss. 17(1) apply to the loan? (6) Will subsection 247(2) apply to the proposed transactions?
Position: (1) Yes. (2) Provided Parentco is the beneficial owner of the dividends, yes. (3) No. (4) Only by virtue of subsection 15(9). (5) No. (6) No.
Reasons: (1) Yes, subsection 80.4(2) of the Act deems a shareholder to have received a benefit equal to the interest it should have paid at a prescribed rate on a loan from the corporation. Such benefit is to be included in the shareholder's income as a deemed benefit through the combined operation of subsections 15(9) and 15(1) of the Act. While sections 15 and 80.4 (in Part I of the Act) generally do not apply to non-residents by virtue of section 115, subsection 214(3) incorporates section 15 by reference. (2) Application of XXXXXXXXXX of the Canada-XXXXXXXXXX Tax Convention and subsection 212(2) of the Act. (3) Based on the reasoning in Uphill and Attis. (4) Application of subsections 15(9) and 15(1). (5) The loan will be repaid within 365 days. (6) Subsection 15(9) is a more specific provision that applies to the loan.
XXXXXXXXXX 2008-028004
XXXXXXXXXX , 2008
Dear XXXXXXXXXX :
Re: XXXXXXXXXX (the "Taxpayers")
- Advanced 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 Taxpayers (the "Ruling Request").
To the best of your knowledge and that of the Taxpayers, none of the issues involved with this request:
(a) is involved in an earlier return of the Taxpayers or a related person:
(b) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the Taxpayers or a related person;
(c) is under objection by the Taxpayers or a related person;
(d) is before the courts or, if a judgment has been issued, the time limit for appeal has not expired; or
(e) is the subject of a ruling previously considered by this Directorate, with the exception of the ruling no. 2007-024199 issued to XXXXXXXXXX .
This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
Definitions
In this letter the following terms have the meanings specified:
"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;
"CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended;
"CRA" means the Canada Revenue Agency, together with its predecessors, the Canada Customs and Revenue Agency and Revenue Canada;
"Holdco" means XXXXXXXXXX
"Opco" means XXXXXXXXXX
"Parentco" means XXXXXXXXXX .;
"principal amount" has the meaning assigned by subsection 248(1);
"private corporation" has the meaning assigned by subsection 89(1);
"Pubco" means XXXXXXXXXX ;
"Pubco Group" means the subsidiaries of XXXXXXXXXX ; and
"taxable Canadian corporation" has the meaning assigned by subsection 89(1).
Facts
1. Parentco is a corporation incorporated and resident in XXXXXXXXXX for purposes of the Canada-XXXXXXXXXX Tax Convention. Parentco is served by the XXXXXXXXXX Tax Service Office and its business address is XXXXXXXXXX . For Canadian tax purposes Parentco has a tax year end of XXXXXXXXXX . Parentco does not carry on business in Canada.
2. Parentco has approximately XXXXXXXXXX employees, its operations consist of XXXXXXXXXX , and it is also a holding company for the Pubco Group. Parentco owns all of the issued and outstanding shares of Holdco and holds debt ("Note A") in the principal amount of approximately $XXXXXXXXXX owed by Holdco. Note A bears interest at XXXXXXXXXX % per annum and matures in approximately XXXXXXXXXX years. Aside from the foregoing, Parentco holds no other assets in Canada.
3. Holdco is a private corporation and taxable Canadian corporation incorporated under the CBCA. Holdco is served by the XXXXXXXXXX Taxation Services Office. Holdco's mailing address is XXXXXXXXXX . Its business number is XXXXXXXXXX and it has a normal taxation year-end of XXXXXXXXXX . Holdco owns all of the issued and outstanding shares in Opco and holds debt ("Note B") in the principal amount of approximately $XXXXXXXXXX owed by Opco. Note B bears interest at XXXXXXXXXX % per annum and is repayable on demand.
4. At any relevant time, Parentco will be the beneficial owner of the dividends it receives from Holdco.
5. Opco is a private corporation and taxable Canadian corporation incorporated under the CBCA. XXXXXXXXXX Opco has a
normal taxation year-end of XXXXXXXXXX . For the 12-month period ending XXXXXXXXXX , Opco had annual gross revenues of approximately
$XXXXXXXXXX .
6. Opco's subsidiaries include XXXXXXXXXX
7. Each of Parentco, Holdco and Opco are indirectly controlled by Pubco. Pubco's headquarters are located in XXXXXXXXXX and its shares are traded on the XXXXXXXXXX .
8. In or about XXXXXXXXXX , Holdco made a loan to Parentco, in several tranches and in the aggregate amount of $XXXXXXXXXX (the "XXXXXXXXXX Loan"). The XXXXXXXXXX Loan was funded by several methods, including, short-term interest-free loans and dividends from Opco to Holdco that were funded from Opco's earnings from operations and amounts received from Opco's subsidiaries. The XXXXXXXXXX Loan will be repaid within one year of the first tranche loaned on XXXXXXXXXX .
Proposed Transactions
9. On or before XXXXXXXXXX , Holdco will make a loan (the "Loan") in one or more transactions to Parentco in the aggregate amount of up to $XXXXXXXXXX . The Loan will be received by Parentco for its own account, and not as agent or nominee for any other person.
10. The Loan will be made by Holdco using cash which will be funded by Opco from its earnings from operations.
11. The Loan will be made on the following terms:
(a) it will be denominated in Canadian dollars;
(b) it will be non-interest-bearing;
(c) it will be repayable on demand and, in any event, must be repaid within 365 days of advance; and
(d) it will be repaid by means of one or more of the following:
(i) the payment of a dividend by Holdco to Parentco;
(ii) the reduction of the paid-up capital of Holdco; and
(iii) the legal set-off by Holdco of bona fide amounts it owes to Parentco, such as interest or principal owing under Note A or amounts owing to Parentco as a result of the purchase of property by Holdco.
12. Holdco will remit Part XIII tax in respect of the deemed dividend referred to in Ruling A below to CRA by the XXXXXXXXXX day of the month following the end of the taxation year of Parentco in which the dividend was deemed to have been paid to Parentco. In the event that Holdco repays the Loan through a dividend to Parentco, Holdco will remit Part XIII tax in respect of the dividend by the
XXXXXXXXXX day of the month following the month in which the dividend described in paragraph 11(d)(i) above is paid.
Purpose of Proposed Transactions
13. The purpose of the proposed transactions is to facilitate treasury management and the timing of dividends and other payments by Opco and Holdco. In this context, treasury management refers to managing the capital of the Pubco Group as a whole in order to maintain minimum operating cash levels in Opco and its subsidiaries while deploying capital within the Pubco Group on a short-term basis to where it is needed most.
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 terms of the transactions are as described above, we rule as follows:
A. pursuant to paragraph 214(3)(a), and subsections 80.4(2), 15(9), and 15(1), Parentco will be deemed to receive a dividend in any taxation year where the Loan remains outstanding equal to the prescribed interest rate multiplied by the principal amount of the Loan for the period in the year during which the Loan remains outstanding;
B. provided that Parentco is resident in XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Tax Convention the deemed dividend referred to in Ruling A above, will be subject to withholding tax at the rate of XXXXXXXXXX % by virtue of XXXXXXXXXX of the Canada-XXXXXXXXXX Tax Convention and subsection 212(2);
C. the proposed transactions will not result in the application of subsection 15(2) to Parentco;
D. the proposed transactions will not result in application of subsection 15(1) to Parentco other than pursuant to the deeming rule in subsection 15(9);
E. the proposed transactions will not result in the application of subsection 17(1) to Holdco; and
F. the proposed transactions will not result in the application of subsection 247(2) to Holdco.
The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the Loan is made by XXXXXXXXXX and each tranche of the Loan is repaid within one year from when that portion of the Loan, described in 9 above, was made. While it is our understanding that the series of transactions described in this letter will be repeated on an annual basis, the above rulings are in respect of the Loan only and do not cover any other loans that may be made in the future.
Nothing in these rulings 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 referred to in the rulings given above. In particular, nothing in these rulings should be construed as implying that the CRA has agreed to or reviewed that:
(a) Parentco is, at any relevant time, the beneficial owner of the dividends it receives from Holdco, and a resident of XXXXXXXXXX for the purpose of the Canada-XXXXXXXXXX Tax Convention; or
(b) subsection 15(1) will not apply to the transactions between Opco and Holdco described in paragraph 10 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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