2012 Ruling 2011-0418711R3 - Related Foreign Entity 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:
A. Will 17(1) apply to Canco to impute an income inclusion in respect of a loan it makes?
B. Will 17(2) apply to deem an amount be owing to Canco by another person because Canco made a loan to a related non-resident party?
C. Will 15(2) apply to include an amount of a loan into the income of the related non-resident party?
D. Will 15(2) apply to include an amount equal to the deposits and loans in the income of BCo and ACo, or any member of the Parentco Group?
E. Will subsection 80.4(2) apply to deem a borrower to have received a benefit?
F. Will subsection 245(2) apply to redetermine the tax consequences described in Rulings A to E above?

Position:
A. No
B. No
C. No
D. No
E. No

Reasons:
A. Provided the interest rate is equal to or exceeds the amount of interest computed at the rate prescribed by paragraph 4301(c) of the Regulations for the period of the year during which the loan is outstanding, subsection 17(1) will not apply to include an amount in computing Canco's income in respect of a loan made by Canco.
B. 17(2) will not apply since each loan is considered an "exempt loan or transfer" pursuant to subsection 17(15).
C. 15(2) will not apply since the criteria in 15(2.3) are met. Since 15(2) does not apply, paragraph 214(3)(a) and subsection 212(2) do not apply.
D. 15(2) will not apply since the criteria in 15(2.6) are met. Since 15(2) does not apply, paragraph 214(3)(a) and subsection 212(2) do not apply.
E. 80.4(2) will not apply provided the interest for the year on each loan is paid no later than 30 days after the end of the year and the interest charged on each of the loans is at least equal to the prescribed rate of interest. Since 80.4(2) does not apply, subsection 15(9) will not apply to deem there to be a subsection 15(1) benefit, which would via 214(3)(a), trigger withholding under subsection 212(2).
F. The proposed transactions do not result in a misuse or abuse of the provisions of the Income Tax Act.

XXXXXXXXXX 2011-041871

XXXXXXXXXX, 2012

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX(“Canco”), XXXXXXXXXX (“Subco”), XXXXXXXXXX (“Parentco”)

This is in response to your request for an advance income tax ruling, dated XXXXXXXXXX, as amended by the letters dated XXXXXXXXXX and XXXXXXXXXX, on behalf of the above-referenced entities.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the ruling:

(i) is in an earlier return of Parentco, Canco, Subco or a person related to Parentco, Canco, or Subco;
(ii) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of Parentco, Canco, Subco or a person related to Parentco, Canco, or Subco;
(iii) is under objection by Parentco, Canco, Subco or a person related to Parentco, Canco, or Subco; or
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

The rulings given herein are based solely on the facts, proposed transactions and the 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 this ruling letter is based and any reference to these documents is provided solely for the convenience of the reader.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

“ACo” means XXXXXXXXXX;

“ACo Loans” means the loans described in paragraph 15 below;

“Amalco” means XXXXXXXXXX, a taxable Canadian corporation resulting from an amalgamation between Subco and DCo (defined below) under the laws of XXXXXXXXXX;

“Act” means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date of this advance income tax ruling;

“BCo” means XXXXXXXXXX;

“Bond Trustee” means XXXXXXXXXX;

“Borrower” has the meaning assigned by paragraph 19 below;

“Borrower Loan” means a loan described in paragraph 19 below;

“Canadian Public Market Borrowings” means collectively, borrowings made by Canco from time to time from the Canadian public market, consisting of the issuance of Commercial Paper to the public pursuant to the Information Memorandum and Notes to the public pursuant to the Prospectus;

“Canco” means XXXXXXXXXX;

“Canco Loans” means collectively, the loans made from time to time by CCo to Canco as described in paragraph 12 below;

“CBCA” means the Canada Business Corporations Act, R.S.C., 1985, c. C-44, as amended;

“CCo” means XXXXXXXXXX;

“Commercial Paper” means the short-term promissory notes described in paragraph 11 below;

“Country 1” means XXXXXXXXXX;

“DCo” means XXXXXXXXXX;

“Deposits” means collectively, the deposits made from time to time by Canco with the State 1 branch of BCo, as described in paragraph 8 below;

“ECo” means XXXXXXXXXX;

XXXXXXXXXX;

“FCo” means XXXXXXXXXX;

“foreign affiliate” has the meaning assigned by subsection 95(1) of the Act;

“GCo” means XXXXXXXXXX;

“Information Memorandum” means the information memorandum dated XXXXXXXXXX;

“Lending Program” means the lending program to be carried on by Canco as described in paragraph 19 below;

“Maple Bonds” means Canadian-dollar denominated bonds issued by foreign borrowers in the domestic Canadian fixed-income market;

“Minimum Rate” means in connection with any particular loan, a fixed or floating rate of interest that is not less than the interest rate that a lender and borrower would have been willing to agree to if they were dealing at arm’s length with each other at the time the loan was made;

“non-resident” has the meaning assigned by subsection 248(1) of the Act;

“Notes” means the notes described in paragraph 9 below;

“Parentco” means XXXXXXXXXX;

“Parentco Group” means at any particular time, Parentco and all corporations and entities that are controlled directly or indirectly by Parentco;

“Partnership” means XXXXXXXXXX;

“Prospectus” means the short form base shelf prospectus dated XXXXXXXXXX;

“Province 1” means XXXXXXXXXX;

“Regulations” means the Income Tax Regulations, C.R.C., c. 945, as amended to the date of this advance income tax ruling;

“State 1” means XXXXXXXXXX;

“State 2” means XXXXXXXXXX;

“Stock Exchange” means XXXXXXXXXX;

“Subco” means XXXXXXXXXX;

“taxable Canadian corporation” has, by virtue of subsection 248(1), the meaning assigned by subsection 89(1) of the Act;

“Treaty” means XXXXXXXXXX; and

“Trust Indenture” means the trust indenture dated XXXXXXXXXX entered into among the Bond Trustee, Canco and Parentco and any further indentures supplemental thereto.

Facts

1. Parentco is a corporation that is a resident of Country 1 for the purposes of the Treaty. Parentco is a regarded entity for tax purposes of Country 1. Parentco carries on, directly or indirectly through its direct and indirect subsidiaries, XXXXXXXXXX. The common shares of Parentco are traded on the Stock Exchange. Parentco is the parent corporation of directly and indirectly-owned subsidiaries that comprise the Parentco Group. XXXXXXXXXX.

2. ACo is a corporation formed under and governed by the laws of State 2 and is a non-resident of Canada. ACo is a regarded entity for tax purposes of Country 1 and is an indirect wholly-owned subsidiary of Parentco.

3. Canco is a corporation incorporated under and governed by the laws of XXXXXXXXXX and is a taxable Canadian corporation. All of the issued and outstanding shares of Canco are owned by ACo. Canco’s taxation year-end is XXXXXXXXXX, and Canco is a regarded entity for tax purposes of Country 1. Canco is a holding company for directly and indirectly-owned Canadian subsidiaries which carry on a XXXXXXXXXX. Canco also XXXXXXXXXX. Canco does not currently have any outstanding inter-company receivables from non-resident members of the Parentco Group, other than as described below in paragraph 8 and paragraph 19. As at XXXXXXXXXX, Canco held assets in the approximate aggregate amount of $XXXXXXXXXX and had retained earnings of approximately $XXXXXXXXXX on a non-consolidated basis and $XXXXXXXXXX on a consolidated basis.

4. Subco is a corporation incorporated under and governed by the laws of XXXXXXXXXX and is a taxable Canadian corporation. Subco’s taxation year-end is XXXXXXXXXX, and Subco is a XXXXXXXXXX entity for tax purposes of Country 1. Subco carries on a XXXXXXXXXX. The issued and outstanding share capital of Subco consists of common shares and preferred shares. All of the issued and outstanding common shares of Subco are owned by Canco, and all of the issued and outstanding preferred shares of Subco are owned by another Canadian member of the Parentco Group. As at XXXXXXXXXX, Subco owed a total of approximately $XXXXXXXXXX to Canco. The funds from the loans Subco received from Canco were used to help finance the business operations of Subco.

5. BCo is a XXXXXXXXXX formed under and governed by the laws of Country 1, XXXXXXXXXX and a non-resident of Canada. BCo is a regarded entity for tax purposes of Country 1 and an indirectly wholly-owned subsidiary of Parentco. BCo is not, and has not at any relevant time been, a foreign affiliate of any Canadian member of the Parentco Group.

6. CCo is an unlimited liability corporation incorporated under and governed by the laws of Province 1. CCo is a taxable Canadian corporation. All the shares of CCo are owned by Partnership. The partners of Partnership are ECo and FCo, each an unlimited liability corporation incorporated under the laws of Province 1. All of the shares of ECo and FCo are owned by GCo, an indirectly wholly-owned subsidiary of Parentco (not through ACo), that is resident in Country 1. CCo is a financing entity within the Parentco Group who makes loans to Canco and other Canadian affiliates in order to earn a return from its cash on hand.

7. DCo is a corporation continued under and governed by the laws of Canada. It is a taxable Canadian corporation and is a member of the Parentco Group. DCo is a wholly-owned subsidiary of Subco.

8. Canco held certain amounts of its cash on hand in interest-bearing deposits with other members of the Parentco Group, including the State 1 branch of BCo (the “Deposits”). Canco has had Deposits with the State 1 branch of BCo in various amounts since XXXXXXXXXX and had made no Deposits before that time. As of XXXXXXXXXX, Canco had Deposits outstanding in the amount of approximately $XXXXXXXXXX with the State 1 branch of BCo.

9. Pursuant to the Trust Indenture and Prospectus, Canco may issue to the public, from time to time, unsecured and unsubordinated indebtedness (the “Notes”) in series with each series to have such terms as Canco may from time to time determine. The Notes of each series have maturities of not less than XXXXXXXXXX days from the relevant issue date of the first Notes of such series and are either interest-bearing (fixed or floating rate) or non-interest-bearing and may be sold at a discount to their stated principal amount. Pursuant to the Trust Indenture, Parentco guarantees Canco’s payment obligations under the Notes. As at XXXXXXXXXX, Canco had issued and outstanding Notes with aggregate principal amounts of $XXXXXXXXXX and $XXXXXXXXXX .

10. The aggregate principal amount of the Notes that may be issued under the Prospectus may not exceed $XXXXXXXXXX. Notes issued under the Prospectus are not subject to prepayment by Canco without the consent of the holders of the Notes unless otherwise specified in the terms of the Notes or a supplemental indenture with respect thereto. The offering of Notes under the Prospectus is directed only to residents of Canada.

11. Canco may issue to the public, from time to time, Commercial Paper pursuant to the Information Memorandum. The Commercial Paper represents unsecured and unsubordinated indebtedness of Canco and has maturities of up to XXXXXXXXXX from the date of issue. Commercial Paper can be issued on either a discounted basis or on an interest-bearing basis. Canco may issue Commercial Paper in an aggregate amount not to exceed $XXXXXXXXXX at any particular time. Parentco guarantees Canco’s payment obligations under the Commercial Paper pursuant to a letter of guarantee from Parentco. As at XXXXXXXXXX, Canco had issued and outstanding Commercial Paper with an aggregate principal amount of approximately $XXXXXXXXXX and $XXXXXXXXXX . The offering of Commercial Paper under the Information Memorandum is directed only to residents of Canada.

12. CCo has made, and may continue to make, interest-bearing loans to Canco from time to time (the “Canco Loans”). As at XXXXXXXXXX, the aggregate principal amount of the Canco Loans was approximately $XXXXXXXXXX .

13. In XXXXXXXXXX, Canco used $XXXXXXXXXX of its cash on hand to repay an outstanding loan to Subco.

14. In XXXXXXXXXX, Canco used $XXXXXXXXXX of its cash on hand to subscribe for additional common shares of Subco.

15. In XXXXXXXXXX, Subco used the funds received from Canco to make interest-bearing loans in the amounts of $XXXXXXXXXX and $XXXXXXXXXX (the “ACo Loans”) to ACo. Each ACo Loan has a term of approximately XXXXXXXXXX months, subject to the right of Subco to demand earlier repayment. The purpose of the making of the ACo Loans was to XXXXXXXXXX.

Proposed Transactions

16. All of the Deposits were repaid to Canco on or before XXXXXXXXXX and, as at XXXXXXXXXX, no Deposits were outstanding.

17. On XXXXXXXXXX, Subco and DCo amalgamated under the laws of XXXXXXXXXX to form Amalco. The amalgamation was done as a vertical short-form amalgamation pursuant to XXXXXXXXXX. On the amalgamation, all of the shares of DCo were cancelled and no shares were issued by Amalco. As a result the amalgamation did not result in any change in the share ownership of Subco or Amalco.

18. In XXXXXXXXXX:

(a) ACo repaid the ACo Loans to Amalco;

(b) Amalco used the proceeds from the loan repayments to make one or more short-term loans to Canco; and

(c) Pending identification of suitable investment opportunities, including those under the Lending Program, Canco used the proceeds of the short-term loans received from Amalco to repay outstanding indebtedness and/or make loans to Canadian-resident members of the Parentco Group.

Canco will begin a new lending program (the “Lending Program”) under which it will use certain amounts of its cash on hand to make loans (each a “Borrower Loan”) to non-resident members of the Parentco Group (each a “Borrower”). Under the Lending Program, Canco will make at least XXXXXXXXXX Borrower Loans per quarter and at least XXXXXXXXXX Borrower Loans per year. Canco will not own directly or indirectly any shares of any Borrower, and no Borrower will be a foreign affiliate of any Canadian member of the Parentco Group or a partnership in which a foreign affiliate of any Canadian member of the Parentco Group has an interest. Each Borrower Loan will be documented in a loan agreement and/or promissory note, will generally have a term of between XXXXXXXXXX and XXXXXXXXXX years, and will bear interest at a Minimum Rate. It is expected that the interest rate on each Borrower Loan will at all times be equal to or exceed the rate prescribed by paragraph 4301(c) of the Regulations. The aggregate amount of the Borrower Loans to be made by Canco within the first XXXXXXXXXX years of the Lending Program is expected to be equivalent of approximately $XXXXXXXXXX. The aggregate amount of the Borrower Loans as well as the decision by Canco to make any particular Borrower Loan and the term of such Borrower Loan will be subject to market conditions and the business needs of the Parentco Group.

19. Canco may enter into derivatives from time to time in order to hedge its interest rate or foreign currency risk with respect to certain Borrower Loans or borrowings by Canco used to finance Borrower Loans.

20. Each Borrower may use the proceeds of a Borrower Loan received by it in a business carried on by it or to make loans to or investments in other entities within the Parentco Group (other than a foreign affiliate of any Canadian member of the Parentco Group, or a partnership in which a foreign affiliate of any Canadian member of the Parentco Group has an interest).

Additional Information

21. Subject to market conditions and the business needs of Canco and the Parentco Group, Canco may continue to raise funds from time to time through Canadian Public Market Borrowings.

22. The aggregate principal amount of the Borrower Loans outstanding at any particular time will not exceed the aggregate principal amount of the Canadian Public Market Borrowings at such time.

23. To the extent that the aggregate principal amount of the Borrower Loans outstanding at any particular time exceeds the aggregate principal amount of the Canadian Public Market Borrowings on the date that Canco obtains a favourable advance income tax ruling from the Canada Revenue Agency with respect to the proposed transactions, the funds used to make such additional Borrower Loans will be traceable to funds borrowed by Canco under the Canadian Public Market Borrowings.

It is expected that, during the term of the Lending Program, Canco will realize a positive spread between the aggregate amount of income to be earned by it on the Borrower Loans and the aggregate amount of interest expense on the related Canadian Public Market Borrowings.

24. It is expected that the carrying on of the Lending Program will result in the creation or preservation of the equivalent of at least XXXXXXXXXX full-time treasury jobs in Canco.

25. If Canco did not use a portion of its cash on hand to make Borrower Loans, it is expected that Canco would instead use such funds predominantly to repay Canadian Public Market Borrowings as they become due. Accordingly, if Canco did not undertake the Lending Program, it is not expected that Canco would realize the anticipated positive spread from the Lending Program or create or preserve the treasury jobs described above.

26. In connection with the commencement of the Lending Program, Canco is expected to repay the Canco Loans to CCo. CCo is expected to use the proceeds of the repayment to make loans directly or indirectly through another entity to Amalco. Amalco is expected to use the proceeds of the loans to repay part of the amount owing by it to Canco.

Purpose of the Proposed Transactions

27. The proposed transactions are undertaken to permit Parentco and its non-resident subsidiaries to access, through Canco, funding from the Canadian public market on a cost effective basis. XXXXXXXXXX, the members of the Parentco Group borrow in multiple global markets to diversify their sources of liquidity and to reduce funding costs. Parentco and its non-resident affiliates could borrow directly from the Canadian market by, for example, issuing Maple Bonds. However, Maple Bonds are typically issued on a private placement basis to a relatively narrow, institutional investor base. By contrast, Canco, as a Canadian issuer, is able to issue debt in the Canadian public market by prospectus to both institutional investors and through investment funds to retail investors. Because Canco can borrow from a wider range of lenders, the interest rate at which Canco can borrow money from the Canadian public by issuing Notes, Commercial Paper and similar securities is lower than the interest rate at which Parentco could borrow money in Canada by issuing debt obligations with comparable terms.

28. The purpose of the amalgamation between Subco and DCo was to create a taxation year-end for Subco on XXXXXXXXXX, pursuant to paragraph 87(2)(a) of the Act. The purpose of creating a taxation year-end for Subco on XXXXXXXXXX was to maximize the Canadian foreign tax credits available to ACo for federal income tax purposes of Country 1 in respect of the ACo Loans, since the Canadian income tax of Subco would be fixed and accrue on the last day of its Canadian taxation year.

29. The Canco Loans are expected to be repaid prior to the commencement of the Lending Program because if the Canco Loans were left outstanding at a time when Borrower Loans were outstanding, CCo could eventually be deemed to have repatriated all or part of its XXXXXXXXXX for income tax purposes of Country 1. Parentco does not currently want CCo’s XXXXXXXXXX to be repatriated.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, additional information and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

We confirm that:

A. Provided the rate of interest on a Borrower Loan is reasonable or is equal to or exceeds the amount of interest computed at the rate prescribed by paragraph 4301(c) of the Regulations for the period of the year during which the loan is outstanding, subsection 17(1) of the Act will not apply to include an amount in computing Canco’s income in respect of such Borrower Loan.

B. Subsection 17(2) of the Act will not apply to deem an amount equal to the amount of any loan made by a Borrower to another non-resident person using the proceeds of a Borrower Loan, to be owed by such non-resident person to Canco, as each Borrower Loan is an “exempt loan or transfer” as defined in subsection 17(15) of the Act.

C. Subsection 15(2) of the Act would not apply, if Part I were applicable, to include an amount equal to a Borrower Loan in the income of a Borrower by virtue of subsection 15(2.3) of the Act. Accordingly, paragraph 214(3)(a) of the Act and subsection 212(2) of the Act will not apply to deem an amount equal to any portion of any such Borrower Loan to have been paid to a Borrower as a dividend subject to Part XIII tax.

D. Subsection 15(2) of the Act would not apply, if Part I were applicable, to include an amount equal to the Deposits or the ACo Loans in the income of any member of the Parentco Group by virtue of subsection 15(2.6) of the Act. Accordingly, paragraph 214(3)(a) of the Act and subsection 212(2) of the Act will not apply to deem any portion of the Deposits or the ACo Loans to have been paid to any member of the Parentco Group as a dividend subject to Part XIII tax.

E. Provided that the interest for the year on each Borrower Loan is paid no later than 30 days after the end of the year, and the interest rate is equal to or greater than the rate prescribed by paragraph 4301(c) of the Regulations for the period in the year during which such Borrower Loans were outstanding, subsection 80.4(2) of the Act would not apply if Part I were applicable. Accordingly, subsections 15(1), 15(9), 212(2) and paragraph 214(3)(a) of the Act will not apply to deem any amount in respect of a benefit pertaining to a Borrower Loan to have been paid to a Borrower as a dividend subject to Part XIII tax.

F. Subsection 245(2) of the Act will not apply to redetermine the tax consequences described in Rulings A to E above.

These 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 Canada Revenue Agency (“CRA”) provided the Lending Program commences before XXXXXXXXXX.

Nothing in this letter should be construed as implying that the Canada Revenue Agency has reviewed, accepted or otherwise agreed to any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the rulings given above. In particular, we make no representations as to whether or not paragraph 214(3)(a) of the Act will be applicable to deposits or loans other than those for which a ruling has been provided or whether subsection 247(2) of the Act applies to any of the transactions described herein.

The above noted rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Yours truly,

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