2010 Ruling 2009-0347271R3 - Foreign Affiliate Restructuring Financing

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. Is Forco1, a XXXXXXXXXX cooperative, established under the laws of the XXXXXXXXXX , a corporation for the purposes of the Act. 2. Where a foreign entity is considered to be a corporation for the purposes of the Act but ownership in the entity is not divided into units entitled shares, can an ownership interest in such an entity be considered to be shares in the capital stock of that entity for the purposes of the Act. 3. Does paragraph 95(6)(b) apply in the case of a proposed new double-dip financing arrangement or in the case of a proposed rearranging of an existing financing arrangement to take advantage of a double-dip arrangement.

Position: 1. Yes. 2. Yes. 3. No.

Reasons: 1. It is the CRA's position that where a XXXXXXXXXX cooperative established under the laws of the XXXXXXXXXX meets certain specific criteria it will be considered to be a corporation for the purposes of the Act and Forco1 meets all those criteria. 2. Even though IT 392 Meaning of the term "share" [Reference: Section 91 (also sections 92. 93, and 95) and Regulations Part LIX] issued September 26, 1977 has been archived (2002-06-09) it still represents the CRA's position. 3. The CRA's position that paragraph 95(6)(b) does not apply is set out in example 2 of ITTN No.36 issued July 27, 2007 and in substance the rearranging of existing debt is no different.

XXXXXXXXXX 								2009-034727

XXXXXXXXXX , 2010

Dear XXXXXXXXXX :

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX in which you request an advance income tax ruling on behalf XXXXXXXXXX . We also acknowledge your email submissions of XXXXXXXXXX and our various telephone conversations (XXXXXXXXXX ).

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 the rulings given are based and any reference to these documents is provided solely for the convenience of the reader.

I. DEFINITIONS

In this ruling, unless otherwise expressly stated:

(a) "Act" means the Income Tax Act, R.S.C. 1985, Chapter 1 (5th Supp.), as amended and, unless otherwise stated, every reference in this ruling to a part, section, subsection, paragraph, subparagraph, clause or sub-clause is a reference to the relevant provision of the Act;(a)

(b) "Cansub" means XXXXXXXXXX ., an entity incorporated under the laws of XXXXXXXXXX and is a taxable Canadian Corporation;

(c) "Core Receivable" means the portion of the Initial Receivable that is anticipated to bear interest and that is described in paragraphs 30 to 32 below;

(d) "Country 1" means the United States;

(e) "Country 2" means the XXXXXXXXXX ;

(f) "Country 3" means XXXXXXXXXX ;

(g) "Country 4" means XXXXXXXXXX ;

(h) "Country 5" means the XXXXXXXXXX ;

(i) "CRA" means the Canada Revenue Agency, together with its predecessors, the Canada Customs and Revenue Agency and Revenue Canada;

(j) "excluded property" has the meaning assigned by subsection 95(1);

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

(l) "Finco Loan" means the proposed loan from Finco to Forco1, which is anticipated to bear interest at the rate of XXXXXXXXXX %, adjusted for inflation, less XXXXXXXXXX %;

(m) "Finco" means XXXXXXXXXX , a limited liability company established under the laws of State A;

(n) "Forco1" means XXXXXXXXXX ., a cooperative established under the laws of Country 2;

(o) "Forco2 Loan" means the proposed loan from Forco2 to Opco, which is anticipated to bear interest at the rate of XXXXXXXXXX %, adjusted for inflation;

(p) "Forco2" means XXXXXXXXXX established under the laws of Country 2;

(q) "Foreign Subsidiaries" means, collectively, Finco, Forco1, Forco2 and Opco;

(r) "Holdco1" means XXXXXXXXXX , a limited liability company established under the laws of State A;

(s) "Holdco2" means XXXXXXXXXX , a corporation established under the laws of Country 4;

(t) "Holdco3" means XXXXXXXXXX , a corporation established under the laws of Country 5;

(u) "Initial Advances" means the series of advances made from XXXXXXXXXX to present by Pubco to Opco, in the aggregate amount of approximately XXXXXXXXXX , for purposes of funding the XXXXXXXXXX and capital requirements of the Project;

(v) "Initial Receivable" means the receivable currently held by Pubco in respect of the Initial Advances made to Opco;

(w) "Investment Agreement" means the investment agreement among Pubco, Opco, Norco2 and the Government of Country 3 entered into on XXXXXXXXXX

(x) "New Receivable", has the meaning assigned in paragraph 40(c) below;

(y) "Non-Core Receivable" means the portion of the Initial Receivable that is not anticipated to bear interest and that is described in paragraphs 30 to 32 below;

(z) "Opco" means XXXXXXXXXX , a body corporate incorporated under the Company Law of Country 3;

(aa) "Norco1" means XXXXXXXXXX , a public company whose shares are listed on the XXXXXXXXXX Stock Exchange;

(bb) "Norco2" means XXXXXXXXXX (a member of the group of companies controlled by Norco1);

(cc) "principal amount" has the meaning assigned by subsection 248(1);

(dd) "private corporation" has the meaning assigned by subsection 89(1);

(ee) "Project" means the XXXXXXXXXX located in XXXXXXXXXX Country 3 and as is described more fully in paragraph 19 below;

(ff) "Pubco Group" means Pubco and all its direct and indirect subsidiaries, including Finco, Forco1, Forco2 and Opco;

(gg) "Pubco" means XXXXXXXXXX ., a corporation XXXXXXXXXX under the laws of XXXXXXXXXX ;

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

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

(jj) "Shareholders' Agreement" means the shareholders' agreement relating to Opco entered into by Stateco, Holdco, Forco2 and Opco on XXXXXXXXXX ;

(kk) "State A" means the State of XXXXXXXXXX in Country 1;

(ll) "Stateco" means XXXXXXXXXX , a state-owned company of Country 3 incorporated under the Company Law of Country 3; and

(mm) "taxable Canadian corporation" has the meaning assigned by

subsection 89(1).

II. STATEMENT OF FACTS

Pubco

1. Pubco is a taxable Canadian corporation and a public corporation incorporated under the laws of Canada. Pubco's shares are widely held and are listed and traded on the XXXXXXXXXX . Norco1 currently owns approximately XXXXXXXXXX % of the common equity of Pubco. If Norco1 chooses to exercise all of its contractual rights vis-à-vis Pubco under various agreements, it may increase its stake in Pubco to up to XXXXXXXXXX %.

2. Pubco is an XXXXXXXXXX company. While it also does some of its XXXXXXXXXX in Canada, generally Pubco's activities in Canada are otherwise limited to XXXXXXXXXX and administrative activities. All or substantially all of the XXXXXXXXXX activities carried on by members of the Pubco Group are all performed outside Canada.

3. Pubco currently has a taxation year-end of XXXXXXXXXX . Its business number is XXXXXXXXXX and it is served by the XXXXXXXXXX Tax Services Office. Pubco has not made a functional currency election under section 261.

Finco

4. Finco is a limited liability company established under the laws of State A and is resident in Country 1.

5. All of the equity interests in Finco are owned by Pubco. It is anticipated that the activities of Finco will be limited to providing financing to Forco1.

Forco1

6. Forco1 is a cooperative established under the laws of Country 2 and is resident in Country 2.

7. In accordance with its constating document, Forco1 has the following general characteristics:

(a) Forco1 is a legal entity separate from its members;

(b) Forco1 has the capacity to contract in its own name, for its own account and at its own risk;

(c) Forco1 is incorporated for an indefinite period;

(d) admission and transfer of membership in Forco1 is subject to members' approval;

(e) each member is entitled to at least one vote, and the total number of votes is in proportion to the capital accounts;

(f) members have separate capital accounts the repayment of which is subject to the approval of all members;

(g) profits are available to Forco1 and can be retained by Forco1 unless the members vote in favour of distribution;

(h) the board of directors has authority to represent Forco1; and

(i) members are excluded from any liability for any of Forco1's debts or losses.

8. All of the equity interests in Forco1 are owned, directly or indirectly, by Pubco. Pubco directly owns XXXXXXXXXX % of the equity interest in Forco1 and the remaining XXXXXXXXXX % is owned by Cansub, which is XXXXXXXXXX % owned by Pubco. Cansub is a corporation incorporated in Canada and is a taxable Canadian corporation. The activities of Forco1 are anticipated to be limited to holding equity in and providing equity financing to Forco2.

9. Under the domestic tax law of Country 2, Forco1 is viewed as a corporation and by virtue of the fact that it is established under the laws of Country 2, it is normally subject to Country 2's corporate tax on its worldwide profits at a top rate of XXXXXXXXXX %, subject to any available exemptions.

Forco2

10. Forco2 is a XXXXXXXXXX established under the laws of Country 2 and is resident in Country 2.

11. All of the equity interests in Forco2 are owned by Forco1. The activities of Forco2 are anticipated to be limited to holding equity in and providing equity and debt financing to Opco and to holding the Core Receivable.

12. Under the domestic tax law of Country 2, Forco2 is viewed as a corporation and by virtue of the fact that it is established under the laws of Country 2, it is normally subject to Country 2's corporate tax on its worldwide profits at a top rate of XXXXXXXXXX %, subject to any available exemptions. However, because XXXXXXXXXX , Forco1 will be primarily responsible for Forco2's tax liabilities to Country 2. As a result Forco1 and Forco2, as a group, will be subject to tax in Country 2 on the spread between (a) the interest earned from Opco on the Core Receivable and the Forco2 Loan and (b) the interest payable to Finco under the New Receivable and the Finco Loan and Forco 1 will be responsible to Country 2 for the tax payable. Forco2 will be directly responsible to Country 2's tax authorities for its own tax liabilities only if Forco1 fails to pay those amounts.

Holdco1, Holdco2, and Holdco 3

13. Pubco owns all the equity interest in Holdco1 a company established under the laws of State A. Holdco 1 owns all the equity interest in Holdco 2 a corporation established under the laws of Country 4. Holdco 2 owns all the equity interest in Holdco3 a corporation established under the laws of Country 5.

Opco

14. Opco is a body corporate established under the laws of Country 3 and is resident in Country 3.

15. In accordance with its enabling legislation, the Company Law of Country 3, Opco has the following general characteristics:

(a) it is "a legal person" and has a name;

(b) its capital is divided into shares;

(c) shares in Opco represent ownership interests in Opco, and not an ownership interest in any of Opco's separate property;

(d) it has its own separate property;

(e) its charter includes Opco's full name, its place of business and information relating to its authorized common shares and preferred shares;

(f) it is established for an indefinite duration;

(g) its common shareholders are entitled to vote;

(h) it is a limited liability company;

(i) there are pre-emptive rights applicable to the transfer of its common shares;

(j) its shareholders are generally not liable for Opco's obligations and only bear risk of loss to the extent of the shares held;

(k) it may pay dividends if certain conditions (e.g., solvency) are met;

(l) a resolution to pay dividends must be made through Opco's Board of Directors;

(m) it has a Board of Directors, which is its governing body between shareholder meetings; and

(n) its Board of Directors consists of XXXXXXXXXX members, whom are elected by the vote of holders of common shares only.

16. The Shareholders' Agreement provides that Stateco, a state-owned company of Country 3 incorporated under the Company Law of Country 3, is entitled to nominate XXXXXXXXXX directors to Opco's Board of Directors and Forco2 and Holdco 3 are entitled to nominate the remaining XXXXXXXXXX directors.

17. Opco is in the business of XXXXXXXXXX in Country 3. Opco's principal asset is the Project. All or substantially Opco's assets are used in its active business. Under the tax law of Country 3, Opco is taxable on its revenues generated both in Country 3 and in a foreign country in a given year because it is a body corporate established under the laws of Country 3.

18. Currently, all of the common shares in Opco are owned by Forco2 and Holdco3. However, upon XXXXXXXXXX , Opco will issue to Stateco, on behalf of the Government of Country 3, the number of common shares of Opco required to give it XXXXXXXXXX % of the common equity in Opco. Following this acquisition, it is anticipated that Pubco will indirectly own the remaining XXXXXXXXXX % of the common equity in Opco, XXXXXXXXXX .

The Project

19. The Project is located in Country 3 XXXXXXXXXX

20. It is currently anticipated that the Project will cost in excess of XXXXXXXXXX . These costs will be funded through a mix of preferred share equity purchased in Opco and loans to Opco (in proportions that meet Country 3's thin capitalization limitations) and, potentially, direct financing from arm's length sources.

21. XXXXXXXXXX

22. Any new debt of Opco used to fund the Project bears interest at an inflation-adjusted rate of XXXXXXXXXX % per annum and any preferred share equity acquired in Opco bears cumulative dividends at an inflation-adjusted rate of XXXXXXXXXX % per annum.

23. XXXXXXXXXX

24. The current estimated net present value of the Project is approximately XXXXXXXXXX taking into account all anticipated expenditures. Total capital expenditures over the life of the Project are anticipated to be approximately XXXXXXXXXX .

25. XXXXXXXXXX

The Initial Advances and Subsequent Negotiations with XXXXXXXXXX

26. Commencing in XXXXXXXXXX , Pubco made the Initial Advances to Opco in several tranches and in an aggregate principal amount of approximately XXXXXXXXXX . Approximately XXXXXXXXXX of the cash used by Pubco to make the Initial Advances was obtained from Pubco's own equity capital and the balance from the proceeds of the issuance of XXXXXXXXXX .

27. XXXXXXXXXX

28. The Initial Advances were used by Opco to fund the initial capital requirements of the Project, which involved XXXXXXXXXX

29. As a result of the Initial Advances, Pubco currently holds the Initial Receivable in an amount equal to the aggregate of the Initial Advances to Opco.

30. The Initial Receivable is currently non-interest-bearing. However, following XXXXXXXXXX , the holder of the Initial Receivable will be entitled to receive interest at the annual rate of XXXXXXXXXX %, adjusted for inflation, on a specified portion of the Initial Receivable if and when XXXXXXXXXX . The portion of the Initial Receivable that is ultimately intended to bear interest is referred to herein as the "Core Receivable" while the portion that is not intended to bear interest is referred to herein as the "Non-Core Receivable".

31. XXXXXXXXXX

32. It is currently anticipated by Pubco and Opco that, once finally determined, the Core Receivable will be equal to approximately XXXXXXXXXX % of the Initial Receivable (i.e., the Core Receivable will have a principal amount of approximately XXXXXXXXXX ), while the Non-Core Receivable will be equal to the balance (i.e., approximately XXXXXXXXXX % or XXXXXXXXXX of the Initial Receivable).

33. Any interest that is ultimately paid on the Core Receivable will be subject to Country 3's withholding tax at the rate of XXXXXXXXXX %, subject to reduction by an applicable income tax convention. The deduction of interest in Country 3 is subject to thin capitalization limitations (XXXXXXXXXX ) and in certain circumstances interest expense must be capitalized.

34. The initial capital requirements of the Project were funded directly by Pubco through the Initial Advances rather than through the structure involving Finco, Forco1 and Forco2 because this was initially viewed as the best means to:

(a) XXXXXXXXXX ;

(b) XXXXXXXXXX ;

(c) XXXXXXXXXX ;

(d) XXXXXXXXXX ; and

(e) minimize general and administrative costs.

35. XXXXXXXXXX

Other Information

36. To finance the future capital needs of the Project, Pubco anticipates raising a portion of the funds to be used from XXXXXXXXXX . As well, Pubco has begun seeking project financing of up to XXXXXXXXXX from a mixture of international sources including commercial banks and other financial agencies.

37. To the best of your knowledge and that of Pubco, none of the issues involved in this ruling is:

(a) in an earlier return of Pubco, or a related person;

(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of Pubco or a related person;

(c) under objection by Pubco or a related person;

(d) before the courts or, if a judgment has been issued, the time limit for appeal to higher court has not expired; or

(e) the subject of a ruling previously considered by the Income Tax Rulings Directorate.

III. PROPOSED TRANSACTIONS

38. From time to time and as needed, Pubco proposes to finance a portion of the future capital needs of the Project by the following means:

(a) Pubco will inject equity capital into Finco in exchange for additional equity interests in Finco;

(b) Finco will use such capital (less any transaction costs) to make the Finco Loan to Forco1;

(c) Forco1 will use such capital (less any transaction costs) to acquire additional equity interests in Forco2;

(d) Forco2 will use such capital (less any transaction costs) to make the Forco2 Loan to Opco; and

(e) Opco will use such capital (less any transaction costs) to fund in part the capital needs of the Project.

39. The terms of the Finco Loan and the terms of the Forco2 Loan will be substantially the same (including timing of payments thereunder and the term of the loan) except that:

(a) the Forco2 Loan will bear interest at a rate that is XXXXXXXXXX % higher than the Finco Loan;

(b) the obligation of Finco to make the Finco Loan will be conditional upon the completion of the transaction described in paragraph 38(a) above;

(c) the obligation of Forco2 to make the Forco2 Loan will be conditional upon the completion of the transactions described in paragraphs 38(b) and (c) above; and

(d) under the terms of the Forco2 Loan, Opco is required to use the proceeds of that loan (net of any transaction costs) for the sole purpose of funding the capital requirements of the Project.

40. In addition to the above transactions, while Pubco intends to maintain ownership of the Non-Core Receivable, Pubco will reorganize its ownership of the Core Receivable to incorporate it into the new financing structure. In this regard, in Canadian dollar terms, Pubco anticipates that the proposed transfer described in paragraph 40(a) below will result in a loss to it due XXXXXXXXXX . The reorganization will be accomplished through the following transactions:

(a) before the Core Receivable becomes interest-bearing, Pubco will assign the Core Receivable to Finco in exchange for additional equity interests in Finco with a value equal to the principal amount of the Core Receivable;

(b) Finco will assign the Core Receivable to Forco2 in exchange for equity in Forco2 with a value equal to the principal amount of the Core Receivable;

(c) Finco will sell its equity in Forco2 to Forco1 in exchange for a promise by Forco1 to pay an amount equal to the value of the transferred equity plus interest at an inflation-adjusted rate of XXXXXXXXXX %, less XXXXXXXXXX %, per annum (the "New Receivable"); and

(d) Forco2 will receive any interest paid by Opco on the Core Receivable.

IV. PURPOSE OF PROPOSED TRANSACTIONS

41. The purpose of the proposed transactions is to allow Pubco to restructure its existing capital and provide new capital to Opco to facilitate the completion of the Project in a manner that meets the commercial, regulatory and tax requirements of all parties.

V. 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. For purposes of the Act:

(i) Finco will be considered a corporation;
(ii) the ownership interests in Finco will be considered shares of Finco;
(iii) Pubco's equity percentage in respect of Finco will be 100%;
(iv) Finco will be a foreign affiliate and a controlled foreign affiliate of Pubco;
(v) Pubco will have a qualifying interest in respect of Finco and will be related to Finco; and
(vi) distributions of Finco's profit to its equity holder(s) will be considered dividends.

B. For purposes of the Act:

(i) Forco1 will be considered a corporation;
(ii) the ownership interests in Forco1 will be considered shares of Forco1;
(iii) Pubco's equity percentage in respect of Forco1 will be 100%;
(iv) Forco1 will be a foreign affiliate and a controlled foreign affiliate of Pubco;
(v) Pubco will have a qualifying interest in respect of Forco1 and will be related to Forco1; and
(vi) distributions of Forco1's profit to its equity holder(s) will be considered dividends.

C. For purposes of the Act:

(i) Forco2 will be considered a corporation;
(ii) the ownership interests in Forco2 will be considered shares of Forco2;
(iii) Pubco's equity percentage in respect of Forco2 will be 100%;
(iv) Forco2 will be a foreign affiliate and a controlled foreign affiliate of Pubco;
(v) Pubco will have a qualifying interest in respect of Forco2 and will be related to Forco2; and
(vi) distributions of Forco2's profit to its equity holder(s) will be considered dividends.

D. For the purposes of the Act:

(i) Pubco's equity percentage in respect of Opco will be no less than 66%;
(ii) Opco will be a foreign affiliate and a controlled foreign affiliate of Pubco;
(iii) Pubco will have a qualifying interest in respect of Opco and will be related to Opco; and
(iv) distributions of Opco's profit to its equity holder(s) will be considered dividends.

E. The interest income earned by Finco in respect of the Finco Loan and the New Receivable will be included in computing Finco's income from an active business by virtue of clause 95(2)(a)(ii)(D).

F. The interest income earned by Forco2 in respect of the Forco2 Loan and the Core Receivable will be included in computing Forco2's income from an active business by virtue of clause 95(2)(a)(ii)(B).

G. The dividend income received or receivable by Forco1 from Forco2 will not included in the computation of FAPI of Forco1 by virtue of paragraph (b) in the description of A in the definition of FAPI and the interest paid or payable by Forco1 to Finco will not be deducted in the computation of FAPI or foreign accrual property loss of Forco1 by virtue of the description of A and D in the definition of FAPI.

H. By virtue of paragraph 17(3)(a), subsections 17(1) and 17(2) will not apply to Pubco to impute an income inclusion in connection with the Finco Loan and the New Receivable or the Forco2 Loan and the Core Receivable.

I. Paragraph 95(6)(b) will not apply to Pubco's direct and indirect interests in the Foreign Subsidiaries.

J. Paragraph 17(14)(b) will not apply to Pubco's direct and indirect interests in the Foreign Subsidiaries.

K. Any loss incurred by Pubco on the transfer of the Core Receivable to Finco will be deemed to be nil by virtue of paragraph 40(2)(e.1).

L. 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 the rulings given above.

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 Canada Revenue Agency ("CRA") provided that the funding of the future capital needs of the Project as proposed in paragraphs 38 and 39 above commences before XXXXXXXXXX and provided that the proposed transactions described in paragraph 40 of this ruling are completed 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.

Other 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, the transactions involved in the rearranging of Pubco's ownership interest in Opco through the structure of Forco1 and Forco2 and the proposed transactions described herein other than those specifically described in the rulings given above.

Opinions

Provided that (i) the proposed draft amendments to clause (d)(ii)(E) of the definition of "exempt earnings" in subsection 5907(1) of the Regulations to the Act released by the Minister of Finance on December 18, 2009 are brought into force, (ii) Finco is resident in Country 1 under common law principles, (iii) each of Forco1 and Forco2 are resident in Country 2 under common law principles and (iv) Opco is resident in Country 3 under common law principles, the interest income earned by Finco on the Finco Loan and the New Receivable will be included in exempt earnings of Finco in respect of Pubco for the taxation year of Finco in which it is earned.

Provided that the proposed draft amendments to subsection 5907(2.7) of the Regulations to Act released by the Minister of Finance on December 18, 2009 are brought into force for the purpose of Part LIX of the Regulations to the Act, (a) the interest on the Finco Loan and the New Receivable in the earliest taxation year of Forco1 in which it becomes paid or payable will be deducted in computing the income from an active business deemed to have been carried by Forco1 in Country 2 and will not otherwise be deducted in computing Forco1's income or loss for a taxation year and (b) the interest on the Forco2 Loan and the Core Receivable in the earliest taxation year of Opco in which it becomes paid or payable, except where it has been deducted under paragraph 5907(2)(j) of the Regulations to the Act in computing Opco's earnings or loss from an active business, will be deducted in computing Opco's earnings or loss from the active business and not be deducted in computing Opco's earnings or loss from the active business in any other taxation year.

Yours truly,

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