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: Where the subsidiary (creditor) is wound-up into the debtor and the note is denominated in foreign currency, does subsection 39(2) apply?
Position: No, by virtue of subsection 80.01(4) of the Act (provided elections are filed), there is no capital gain or loss to the creditor thus the historical cost is the value used for purposes of subsection 39(2) of the Act. Pursuant to subsection 80(1) of the Act, the debtor also has no forgiven amount, nor a capital gain or capital loss.
Reasons: Interaction of subsection 80.01(4) and paragraph 80(2)(k) of the Act
XXXXXXXXXX , 2009
Dear XXXXXXXXXX :
Re: Advance Income tax Ruling
This is in response to your letter of XXXXXXXXXX , requesting an advance income tax ruling with respect to a proposed winding-up of Bco into Aco and the settlement of interest notes. We also acknowledge an earlier correspondence of XXXXXXXXXX when you noted an intention to revise previously proposed transactions to a wind-up rather than an amalgamation, upon which we had given Ruling 2008-026997 (the "Former Ruling") on XXXXXXXXXX , 2008. The Former Ruling expired on XXXXXXXXXX as the proposed transactions set out therein were not undertaken.
Aco files its tax returns with the XXXXXXXXXX Tax Services Office and its mailing address is XXXXXXXXXX ; and Bco files its tax returns with the XXXXXXXXXX Tax Services Office and its mailing address is XXXXXXXXXX
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling request herein are:
(i) dealt with in an earlier return of either Aco or Bco or a related person;
(ii) being considered by a Tax Services Office or a Taxation Centre in connection with an income tax return previously filed by Aco, Bco or a related person;
(iii) under objection by Aco, Bco or a related person;
(iv) the subject of a previous ruling issued by the Income Tax Rulings Directorate to Aco, Bco 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.
Except as otherwise stated, a reference in this ruling request to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act (the "Act").
In this ruling request, the singular should be read as plural and vice-versa where the circumstances so require. Also, unless otherwise specified, all monetary references are to Canadian dollars.
In this request, the following terms have the meanings defined below:
(a) "Aco" means XXXXXXXXXX as described in 2 below, a wholly-owned subsidiary of US Parent;
(b) "Amalco" means the corporation formed on the amalgamation in XXXXXXXXXX of Holdco and Initial Debtor, as described in 4 below;
(c) "Bco" means XXXXXXXXXX , a wholly-owned subsidiary of US Parent, as described in 3 below;
(d) "Holdco" means XXXXXXXXXX , a wholly owned subsidiary of US Parent and the Canadian parent of Initial Debtor;
(e) "Initial Debtor" means XXXXXXXXXX , a taxable Canadian corporation formed under the XXXXXXXXXX on XXXXXXXXXX and a wholly-owned subsidiary of Holdco (at the time the Initial Notes were issued, as described in 5 below);
(f) "Initial Notes" means, collectively, the US dollar denominated debt obligations, initially totalling US $XXXXXXXXXX but with a current aggregate outstanding principal amount of US $XXXXXXXXXX , that were issued on XXXXXXXXXX by Initial Debtor to Bco, as described in 5 below;
(g) "Interest Notes" means, collectively, the US dollar denominated debt obligations, initially totalling US $XXXXXXXXXX but with a current aggregate outstanding principal amount of US $XXXXXXXXXX , issued at various times by Amalco and Aco to Bco, as described in 7 below;
(j) "Proposed Transactions" means the Proposed Transactions described in 11 to 13 below;
(k) "Share Transfer" means the transfer of all the shares of Bco to Aco described in 11 below;
(l) "US" means the United States of America;
(m) "US Parent" means XXXXXXXXXX , as described in 1 below; and
(n) "Winding-up" means the windup of Bco into Aco that is described in 12 below.
1. US Parent is a resident of the US for Canadian and US tax purposes and is publicly-traded on the XXXXXXXXXX Stock Exchange.
2. Aco is a taxable Canadian corporation formed under the XXXXXXXXXX on XXXXXXXXXX on an amalgamation of XXXXXXXXXX , which was a wholly-owned subsidiary of US Parent, and Amalco. All of the shares of Aco are owned by US Parent and Aco has a XXXXXXXXXX year-end for tax and accounting purposes.
3. Bco is a taxable Canadian corporation formed under the XXXXXXXXXX on XXXXXXXXXX . All of the shares of Bco are owned by US Parent and Bco has a XXXXXXXXXX year-end for tax and accounting purposes.
4. Amalco was a taxable Canadian corporation formed under the XXXXXXXXXX on XXXXXXXXXX as the result of the previous amalgamation of Initial Debtor with Holdco.
5. On XXXXXXXXXX , Initial Debtor issued the Initial Notes to Bco, which initially had an aggregate principal amount of US $XXXXXXXXXX . At the time the Initial Notes were issued, the exchange rate was .7053, such that the principal amount converted to Canadian dollars on that date was $XXXXXXXXXX . The principal features are that the principal is repayable in US dollars and the outstanding principal bears interest at XXXXXXXXXX % per annum.
6. The Initial Notes issued by Initial Debtor to BCo became obligations of Amalco on the amalgamation on XXXXXXXXXX that is described in 4 above.
7. At various times, Amalco (from XXXXXXXXXX to XXXXXXXXXX ) and Aco (from XXXXXXXXXX to XXXXXXXXXX ) issued the Interest Notes to Bco. The Interest Notes were all issued to evidence the obligation to pay amounts of interest that had accrued on either the Initial Notes or on previously issued Interest Notes that were interest-bearing. The principal features are that (i) the obligations are not secured, (ii) the principal is repayable in US dollars, (iii) for those issued on XXXXXXXXXX , the outstanding principal bears interest at XXXXXXXXXX % per annum, and (iv) for those issued on or after XXXXXXXXXX , the outstanding principal does not bear interest. The exchange rate for theXXXXXXXXXX Interest Notes issued on XXXXXXXXXX varied from .6479 to .6988, while the exchange rate for the Interest Note issued on XXXXXXXXXX was .6420, on XXXXXXXXXX , .6976, on XXXXXXXXXX , .8337, and on XXXXXXXXXX , the exchange rate was .9009.
8. The Initial Notes and the Interest Notes of Amalco became the obligations of Aco on the amalgamation of Amalco and XXXXXXXXXX on XXXXXXXXXX that is described in 2 above.
9. At various times, Aco, and its predecessor, Amalco, made principal payments on certain of the Initial Notes and the Interest Notes.
10. Neither Aco nor Bco were subject to a change of control since the Initial Notes were issued in XXXXXXXXXX .
11. US Parent will transfer all the shares of Bco to Aco in exchange for additional common shares of Aco (the "Share Transfer"). The Share Transfer may be done pursuant to subsection 85(1) of the Act. US Parent and Aco will, to the extent required, comply with section 116 of the Act. Pursuant to section 212.1 of the Act, the increase in the paid-up capital of the common shares of Aco will be no greater than the paid-up capital of all the shares of Bco.
12. After the Share Transfer, the directors of Aco and Bco will take the necessary steps to commence the windup of Bco into Aco (the "Winding-up"). The Winding-up will be governed by the provisions of subsection 88(1) of the Act.
13. As part of the Winding-up process, the Initial Notes and the Interest Notes, as debt obligations owing between Aco and its wholly-owned subsidiary, Bco, will be settled or extinguished without any payment. An election pursuant to paragraph 80.01(4)(c) of the Act will be filed, using Form T2027, by Aco on or before the date such election is due (which should be XXXXXXXXXX ).
Purpose of the Proposed Transactions
14. The purpose of the Proposed Transaction is to reduce the number of Canadian corporations in US Parent's group of companies, in a tax efficient manner, in order to reduce compliance and administrative costs.
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the Proposed Transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we rule as follows:
A. As a result of the Winding-up as described in the Proposed Transactions above, Aco will not be considered to have "made a gain" for purposes of subsection 39(2) of the Act because the payment deemed to have been made by it pursuant to subsection 80.01(4) of the Act would be the same as the Canadian dollar equivalent of the outstanding principal amount of each obligation determined at the time each note was issued to Bco, as described in 5 and 7 above.
B. As a result of the Winding-up as described in the Proposed Transactions above, Bco will not be considered to have "sustained a loss" for purposes of subsection 39(2) of the Act because the payment deemed to have been received by it pursuant to subsection 80.01(4) of the Act would be the same as the Canadian dollar equivalent of the outstanding principal amount of each obligation determined at the time each note was issued to Bco, as described in 5 and 7 above.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the CRA provided that the Proposed Transactions are completed by XXXXXXXXXX .
The above rulings are based on the law as it currently 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.
This letter is based solely on the facts and Proposed Transactions described above. 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.
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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