2014 Ruling 2013-0510551R3 - Upstream Loans - Specified Debtor

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: Whether a foreign subsidiary of a corporation resident in Canada is a specified debtor in specific circumstances?

Position: No

Reasons: Based on the specific facts.

XXXXXXXXXX
2013-051055

XXXXXXXXXX, 2014

XXXXXXXXXX

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling regarding the proposed transactions described herein on behalf of the above-captioned taxpayer.

Except as otherwise noted, all statutory references in this request for an advance income tax ruling are references to the provisions of the Act. Unless otherwise noted, all references to currency are to Canadian dollars.

I. DEFINITIONS

In this advance ruling request, the following terms have the meanings specified:

(a) XXXXXXXXXX;

(b) "Act" means the Income Tax Act (Canada) R.S.C. 1985 (5th Supp.) c. 1 (as amended);

(c) "Arm's Length" has the meaning assigned by section 251 of the Act;
(d) "Canada-Luxembourg Tax Convention" means the Canada-Luxembourg Income Tax Convention, 1999;

(e) "Canco1" means XXXXXXXXXX;

(f) "Canco2" means XXXXXXXXXX;

(g) "CRA" means the Canada Revenue Agency;

(h) "Current Accounts Agreement" has the meaning set out in Part II, paragraph 10 herein;

(i) XXXXXXXXXX;

(j) "Finco" means a new entity to be established under the laws of the Duchy of Luxembourg as described in Part III, paragraph 21 herein;

(k) "Forco1" means XXXXXXXXXX;

(l) "Forco1 Receivable" has the meaning set out in Part II, paragraph 4(c) herein;

(m) "Forco2" means XXXXXXXXXX;

(n) "Forco3" means XXXXXXXXXX;

(o) "Forco3 Receivable" has the meaning set out in Part II, paragraph 5(b) herein;

(p) "Forco4" means XXXXXXXXXX;

(q) XXXXXXXXXX;

(r) "Lux Law" means the relevant corporate and commercial laws of the Duchy of Luxembourg;

(s) "MRPS" means the mandatorily redeemable preferred shares to be issued by Finco;

(t) XXXXXXXXXX;

(u) "Related Persons" has the meaning assigned by section 251 of the Act; and

(v) "Shareholder's Agreement" means the XXXXXXXXXX agreement among Forco3, Forco2, XXXXXXXXXX, Canco1, and Forco1 as more particularly described in Part II herein.

II. FACTS

The Initial Corporate Structure

1. Canco1 is a taxable Canadian corporation and a public corporation governed by the XXXXXXXXXX. Canco1's shares are listed on the XXXXXXXXXX.

2. Canco1 has a taxation-year end of XXXXXXXXXX. Its business number is XXXXXXXXXX and it is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Center. Canco1 has not made a functional currency election under section 261.

3. Canco1, indirectly through subsidiary corporations, XXXXXXXXXX in Canada, XXXXXXXXXX and XXXXXXXXXX. XXXXXXXXXX.

4. Canco1 owns:

(a) all of the issued and outstanding shares of Canco2. Canco2 is a taxable Canadian corporation governed by the XXXXXXXXXX having a taxation-year ending XXXXXXXXXX. Its business number is XXXXXXXXXX and it is served by the XXXXXXXXXX Tax Services Office. On XXXXXXXXXX Canco2 made a functional currency election under section 261 to use the XXXXXXXXXX as its functional currency for the purposes of the Act;

(b) all of the issued and outstanding shares of Forco1, a XXXXXXXXXX incorporated under the laws of XXXXXXXXXX and a corporation for the purposes of the Act. Forco1 is a resident of XXXXXXXXXX for the purposes of the Act and was incorporated on XXXXXXXXXX for the sole purpose of holding and financing the Canco1 group's equity interest in Forco3; and

(c) a XXXXXXXXXX non-interest bearing receivable owing to it from Forco1 (the "Forco1 Receivable"; balance as of XXXXXXXXXX. This may change by the time the Proposed Transactions are carried out). Forco1 used the proceeds from the Forco1 Receivable at all times to make equity and debt investments in Forco3.

5. Forco1 owns:

(a) XXXXXXXXXX% of the issued and outstanding shares of Forco3, a XXXXXXXXXX incorporated under the laws of XXXXXXXXXX and a corporation for the purposes of the Act. Forco3 is a resident of XXXXXXXXXX for the purposes of the Act; and

(b) a XXXXXXXXXX interest bearing receivable owing to it from Forco3 (the "Forco3 Receivable"; balance as of XXXXXXXXXX. This may change by the time the Proposed Transactions are carried out). Forco3 used the proceeds of the Forco3 Receivable at all times to earn income from its active business carried on in XXXXXXXXXX or to acquire shares of other XXXXXXXXXX companies through which Forco3 carried on its business.

6. The remaining XXXXXXXXXX% of the issued and outstanding shares of Forco3 are held by Forco2, a non-resident investment fund. Forco2 and any of Canco1, Canco2, Forco1 or Forco3 are not Related Persons. The investment in Forco3 is the only investment that Forco2 has in common with Canco1, Canco2 and Forco1.

7. Forco2 is governed by the laws of Luxembourg. Forco2's investment focus is predominantly XXXXXXXXXX assets in the XXXXXXXXXX to XXXXXXXXXX investment range. These assets are predominantly located in XXXXXXXXXX and generate cash flows in XXXXXXXXXX with long term, regulated income and solid growth potential. The current size of the fund is XXXXXXXXXX with investments located in XXXXXXXXXX.

Forco3 Business

8. Forco3 was incorporated on XXXXXXXXXX to respond to requests for proposal issued by the XXXXXXXXXX Government relating to XXXXXXXXXX in XXXXXXXXXX.

9. Forco3 carries on business directly and indirectly through subsidiary corporations established under XXXXXXXXXX law.

(a) Forco3's direct business consists of: monitoring investment opportunities throughout XXXXXXXXXX pertaining to XXXXXXXXXX.

(b) The Forco3 XXXXXXXXXX is owned indirectly. In particular, Forco3 holds:

(i) equity interests in XXXXXXXXXX other XXXXXXXXXX companies that are parties to XXXXXXXXXX agreements (referred to as "XXXXXXXXXX" in XXXXXXXXXX) entered into with local authorities. Such XXXXXXXXXX grant the holder the right and license to XXXXXXXXXX. Forco3 holds significant equity interests in these entities (XXXXXXXXXX% to XXXXXXXXXX%, except in the case of one company where Forco3 holds a XXXXXXXXXX% interest) with the remaining interest being held by the XXXXXXXXXX that granted the XXXXXXXXXX; and

(ii) an equity interest in one XXXXXXXXXX company that owns a XXXXXXXXXX in XXXXXXXXXX.

XXXXXXXXXX

Forco3 Financing

10. Forco3, Forco2 and Forco1 are parties to a Shareholder's Current Accounts Agreement (the "Current Accounts Agreement"), the purpose of which is to ensure that Forco3 had the funding required to finance its business operations.

11. Pursuant to Article XXXXXXXXXX of the Current Accounts Agreement the Forco3 shareholders agreed that all funding to be provided to Forco3 would be provided in the form of interest bearing advances made pro rata based on their respective equity interest in Forco3. The rate of interest is XXXXXXXXXX plus XXXXXXXXXXbps.

12. The Forco3 Receivable represents the advances made by Forco1 to Forco3 pursuant to the Current Accounts Agreement.

Forco3 Corporate Governance

13. The corporate governance of Forco3 is mandated by its XXXXXXXXXX and a XXXXXXXXXX Shareholder's Agreement among Forco1, Forco2, Forco3, Forco4 and Canco1.

XXXXXXXXXX

14. The Forco3 XXXXXXXXXX require that governance of Forco3 be undertaken by a President, Executive Vice President, Executive Committee and the shareholders.

15. The role of the President is set forth in Article XXXXXXXXXX Specifically:

(a) Article XXXXXXXXXX provides that Forco3 shall be represented, managed and administrated by a President which shall be appointed by unanimous consent of all Forco3 shareholders.

(b) Article XXXXXXXXXX provides that the President may be removed from office at any time regardless of reason at the request of any shareholder, by a simple majority shareholder vote without requiring justification or motive or giving rise to any compensation.

(c) Article XXXXXXXXXX provides that the President shall be invested with the broadest powers to act in all circumstances in Forco3's name within the limits of its purpose and those powers expressly reserved by law or by the XXXXXXXXXX for the shareholders or the Executive Committee.

16. The role of the Executive Vice President is set forth in Article XXXXXXXXXX Specifically:

(a) Article XXXXXXXXXX provides that Forco3 may be managed by an Executive Vice President which shall be appointed by unanimous consent of all Forco3 shareholders.

(b) Article XXXXXXXXXX provides that the Executive Vice President may be removed from office at any time regardless of reason at the request of any shareholder, by a simple majority shareholder vote without requiring justification or motive or giving rise to any compensation.

17. The role of the Executive Committee is set forth in Articles XXXXXXXXXX and XXXXXXXXXX. Specifically:

(a) Article XXXXXXXXXX provides that the mission of the Executive Committee is to monitor Forco3's general management and that the Executive Committee shall be comprised of XXXXXXXXXX members—XXXXXXXXXX appointed by Canco1 and XXXXXXXXXX appointed by Forco2.

(b) Article XXXXXXXXXX provides that the Executive Committee shall have all powers to deliberate on all of Forco3's managerial and strategic decisions.

(c) Article XXXXXXXXXX provides that the Executive Committee shall only validly deliberate if at least one member appointed by each of Canco1 and Forco2 is present or represented. In addition, Executive Committee decisions must be made unanimously by the members present or represented.

(d) Article XXXXXXXXXX provides that the following decisions or measures shall require prior unanimous approval from the Executive Committee:

(i) any acquisition, provisions, investments, or asset transfers on behalf of Forco3 which have not been provided for in the annual forecast budget, in individual amounts equal to or greater than XXXXXXXXXX or a collective amount taken on an annual basis equal to or greater than XXXXXXXXXX, or any significant change to the terms and conditions of such contracts or commitments;

(ii) the conditions and policies to be followed by Forco3 regarding its participation in invitations to tender or equity investments particularly with regards to XXXXXXXXXX (new or for renewal);

(iii) approving Forco3's annual forecast budget and any revision thereof;

(iv) involvement in projects or investments, financed by loans, leases, or capital investments estimated to exceed XXXXXXXXXX and which have not been provided for in the annual budget;

(v) creating, dissolving, or liquidating any materially significant affiliated company regardless of jurisdiction;

(vi) signing loans or other contracts involving increasing Forco3's financial debt in an amount equal to or greater than XXXXXXXXXX, any significant change to the terms and conditions of such contracts or any partial or total anticipated reimbursement with regards to such contracts;

(vii) any decision requiring the approval of Forco3's lenders in an amount greater than XXXXXXXXXX;

(viii) any change in the dividend distribution policy;

(ix) any change in Forco3's financial policy;

(x) any appointment or renewal for a top executive or manager (in particular the President, Executive Vice President, financial director), any decision regarding their salaries or implementing a profit-sharing plan;

(xi) signing contracts or transactions directly or indirectly with any shareholder, administrator, director or any person associated with Forco3 or with any affiliated company, or one of its administrators or directors in an amount equal to or greater than XXXXXXXXXX (indexed annually to the inflation rate in XXXXXXXXXX);

(xii) any significant change in Forco3's business or signing any contracts or transactions beyond its scope;

(xiii) any granting of sureties or securities for an amount, on an annual basis, greater than or equal to XXXXXXXXXX;

(xiv) any dispute resolution in which Forco3 may be involved resulting in payment of compensation greater than XXXXXXXXXX;

(xv) any significant change in accounting principles;

(xvi) appointing statutory auditors;

(xvii) approval of annual or semi-annual financial statements;

(xviii) signing or extending any loan or surety contracts other than in the normal course of business and other than those included in the annual or revised annual budget;

(xix) signing any off-balance sheet commitment exceeding XXXXXXXXXX;

(xx) any financing of Forco3 in the form of current account contributions from shareholders; and

(xxi) any guarantee granted by Forco3 as surety for the commitments of its subsidiaries.

18. Decisions requiring shareholder approval are set out in Article XXXXXXXXXX Specifically:

(a) Article XXXXXXXXXX provides that shareholder decisions, regarding the following subjects, may only be validly made unanimously:

(i) merging Forco3 with any entity, liquidating, splitting, or dissolving Forco3, the signature of an ad hoc mandate or conciliation involving Forco3 or any agreement with its creditors with regards to such a procedure;

(ii) any operation on Forco3's (or its subsidiaries') capitalization and particularly increasing or decreasing its capitalization, issuing stock options, warrants, convertible bonds, options or other assimilated rights, or eliminating subscription rights;

(iii) modifying or eliminating any provision included in Forco3's constitutive documents, except where such modification or elimination is required by law;

(iv) Forco3 buying back its own shares;

(v) modifying Forco3's legal form in order to list its shares or the shares of one of its subsidiaries on a regulated market;

(vi) appointing the President and renewing his mandate; and

(vii) appointing the Executive Vice President and renewing his mandate.

(b) Article XXXXXXXXXX provides that shareholder decisions not enumerated in Article XXXXXXXXXX shall be made by a simple majority (half of the shares plus one) of the votes of the shareholders present or represented. In particular, the following decisions shall be made by a simple majority:

(i) appointing statutory auditors, renewing their mandates, and removing them from office;

(ii) approving the annual accounts and allocating the profits given the statutory auditor's report within XXXXXXXXXX months from the date the fiscal year accounts were closed;

(iii) approving agreements pursuant to XXXXXXXXXX;

(iv) Extending Forco3's duration;

(v) implementing a forced exit procedure against one or more shareholders;

(vi) dismissing the President; and

(vii) dismissing the Executive Vice President,

(c) Article XXXXXXXXXX provides that all decisions not set out in XXXXXXXXXX shall be made by the Executive Committee or the President, as appropriate.

The Shareholder's Agreement

19. The provisions of the Shareholder's Agreement dealing with corporate governance matters are noted below:

(a) Article XXXXXXXXXX provides that the President of Forco3 shall be appointed by the unanimous consent (and affirmative vote) of all of the Forco3 shareholders. In the event of a failure to agree on the President the dispute resolution procedures in Article XXXXXXXXXX will apply and require the use of all reasonable endeavours to resolve the dispute (Article XXXXXXXXXX) failing which the parties will agree to non-binding mediation (Article XXXXXXXXXX). In the event that there is still a dispute, then either party will have the ability to cause XXXXXXXXXX% of Forco3 to become publicly listed (Article XXXXXXXXXX).

(b) Article XXXXXXXXXX provides that each of Canco1 and Forco2 shall designate XXXXXXXXXX individuals to the Executive Committee. Article XXXXXXXXXX contemplates a XXXXXXXXXX member Executive Committee. This is inconsistent with the XXXXXXXXXX and with what has happened as a matter of fact. Forco3 has at all times operated with a XXXXXXXXXX person Executive Committee appointed in the manner set out in the XXXXXXXXXX and the Shareholder's Agreement. Canco1 management has advised that XXXXXXXXXX people attend Executive Committee meetings; being the committee itself and the President and CFO.

(c) Article XXXXXXXXXX provides that subject to the "strategic decisions" dealt with in Article XXXXXXXXXX, all decisions of the Executive Committee are to be approved by at least one member of the committee that is designated by each Forco3 shareholder.

(d) Article XXXXXXXXXX provides that Forco3 shall not undertake any of the following without the approval of all members of the Executive Committee:

(i) acquisition, disposal, investment or divestment of assets not included in the agreed business plan or annual budget, shares or businesses or subsidiaries for an amount exceeding individually XXXXXXXXXX or in the aggregate on an annual basis XXXXXXXXXX;

(ii) entering into any contract or undertaking representing a financial commitment in excess of XXXXXXXXXX, or materially amending or terminating such contracts or undertakings;

(iii) assessment of the policy to be followed by Forco3 with respect to third party bids or acquisitions;

(iv) approval of business plans and budgets;

(v) entering into projects for which the anticipated investment financed through leases, rents or capital expenditures exceeds XXXXXXXXXX and which are not included in the annual business plan;

(vi) incorporation, winding-up or liquidation of any subsidiary of material importance;

(vii) entering into loan agreements or other agreements increasing the financial indebtedness in excess of XXXXXXXXXX or amending the terms and conditions of any loan agreements or other agreements in any material respect, or making any partial or full prepayment under such loan agreements or other agreements;

(viii) take any decision requiring the approval of creditors under any loan or financing contract for an amount in excess of XXXXXXXXXX;

(ix) change in the distribution policy with respect to dividends;

(x) determination of financial policy;

(xi) appointment and renewal of any senior employee or manager and determination of their compensation and benefits, and the establishment of a management incentive program;

(xii) entering into any transaction or agreement with any shareholder, director, officer or related party of Forco3 or any affiliate of a shareholder of Forco3 or their respective directors or officers having a value in excess of XXXXXXXXXX;

(xiii) materially change the business or enter into a material transaction which is outside the business;

(xiv) give an endorsement, guarantee or security representing a value in excess of XXXXXXXXXX;

(xv) initiate, settle or dismiss any claim, action or proceeding involving an amount in excess of XXXXXXXXXX;

(xvi) materially change the accounting policies;

(xvii) appointment of statutory auditors;

(xviii) approval of financial statements;

(xix) granting of loans, guarantees or other extensions of credit other than in the ordinary course of business and as otherwise set out in the business plan; and

(xx) entering into an agreement or commitment which results in a contingent liability in excess of XXXXXXXXXX.

(e) Article XXXXXXXXXX provides that Forco3 shall not undertake any of the following without the approval of all shareholders:

(i) merger or consolidation with any other entity;

(ii) liquidation or winding up;

(iii) initiation or participation in any other insolvency or administration process or in any other arrangement with creditors in connection therewith;

(iv) increase or decrease share capital and the issuance of stock options, warrants, convertible bonds, options or other similar rights or decide the suppression of subscription rights, spin-off, split-off, sale or redemption of securities;

(v) amend, alter or repeal any provision of Forco3's organizational documents in any material way other than as may be required by applicable law;

(vi) buy back of shares; and

(vii) listing of shares of subsidiaries on a regulated market.

20. Other provisions of the Shareholder's Agreement of note are as follows:

(a) Article XXXXXXXXXX governs the transfer of "equity securities". As a general rule, transfers of such securities can only be made in accordance with the provisions of the Shareholder's Agreement (Article XXXXXXXXXX) and only where the transferee delivers an adherence agreement to the remaining shareholder (Article XXXXXXXXXX). Any other transfers are prohibited (Article XXXXXXXXXX). The Shareholder's Agreement permits transfers to affiliates (Article XXXXXXXXXX) and to other parties, however, in the latter case such transfers shall be accompanied by a pre-emption right (Article XXXXXXXXXX) and a tag-along right (Article XXXXXXXXXX). In addition, transfers of shareholder loans are subject to the same restrictions as the transfer of equity securities (Article XXXXXXXXXX).

(b) Article XXXXXXXXXX contains a dividend distribution policy which provides that Forco3 shall endeavour to pay annually to its shareholders dividends representing approximately XXXXXXXXXX% cash yield per year, provided that the distribution does not compromise the ability to conduct business.

(c) Article XXXXXXXXXX provides additional provisions relating to further investment by Forco3. In particular, the Executive Committee must, by unanimous consent of its members, approve all new investments (Article XXXXXXXXXX) and the financing of such investments (Article XXXXXXXXXX). After such a financing decision has been made by the Executive Committee the shareholders must mutually consent to proceeding with the investment and its financing (Article XXXXXXXXXX).

III. PROPOSED TRANSACTIONS

The transactions described in the section Reorganization Transactions below will be undertaken prior to the Financing Transactions.

Reorganization Transactions

21. Canco1 will incorporate Finco as a public limited company (XXXXXXXXXX) under the Lux Law and a corporation for the purposes of the Act. Its share capital will be comprised of ordinary shares and MRPS. Finco will be resident in Luxembourg for purposes of the Act and the Canada-Luxembourg Tax Convention and will have a XXXXXXXXXX taxation year end.

22. Canco1 will transfer all of the issued and outstanding Forco1 shares and the Forco1 Receivable to Finco in consideration for MRPS.

23. Canco1 will transfer all of the issued and outstanding Finco shares (being the ordinary shares acquired on incorporation and the MRPS acquired in consideration for the transfer of the Forco1 shares and the Forco1 Receivable) to Canco2 in consideration for Canco2 shares.

24. Forco1 will repay a portion of the Forco1 Receivable by delivering to Finco the Forco3 Receivable. After the repayment, Finco will hold the Forco3 Receivable and the remaining portion of the Forco1 Receivable (i.e., XXXXXXXXXX; based on balances as at XXXXXXXXXX. This may change by the time the Preliminary Transactions are carried out).

25. Forco1 will capitalize the remaining portion of the Forco1 Receivable (i.e., XXXXXXXXXX) into Forco1 shares having an equivalent value.

26. Forco1 will liquidate and dissolve under XXXXXXXXXX law.

Financing Transactions

27. As Forco3 requires funding from its shareholders, Canco2 will subscribe for MRPS of Finco, and Finco will lend the proceeds of the MRPS subscription to Forco3. At or around the same time, Forco2 will lend equivalent amounts to Forco3. Each loan made by Finco to Forco3 will be governed by the Current Accounts Agreement, denominated in XXXXXXXXXX and bear interest at a rate agreed upon between Finco and Forco3 having regard to transfer pricing principles in Luxembourg and XXXXXXXXXX (expected to be XXXXXXXXXX plus XXXXXXXXXXbps) (the "Loans").

IV. PURPOSE OF PROPOSED TRANSACTIONS

The sole purpose of the proposed transactions is to provide debt financing to Forco3.

V. ADDITIONAL INFORMATION

In addition to the Facts set out in II above and the Proposed Transactions set out in III above Canco2 is not controlled, and will not, as part of the series of transactions or events that includes the making of the investments in MRPS, become controlled by a non-resident corporation.

After the completion of the Proposed Transactions described in III above, any of Canco1, Canco2 or Finco will not be Related Persons to any of Forco2, Forco3 or Forco4.

Also, to the best of your knowledge, and that of Canco1, none of the issues involved in this advance rulings request is:

(i) in an earlier return of Canco1 or a related person;

(ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of Canco1or a related person;

(iii) under objection by Canco1 or a related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v) the subject of rulings previously issued by the Income Tax Rulings Directorate.

VI. RULING GIVEN

Provided that:

(i) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transaction, purposes of the proposed transaction and additional information;

(ii) that the proposed transactions are completed in the manner described above; and

(iii) Forco3, in fact, deals at Arm's Length with Canco2,

we rule as follows:

Forco3 will not be a specified debtor, as defined in subsection 90(15), in respect of Canco2, and as such, subsection 90(6) will not apply to require Canco2 to include any amount in income as a result of Loans made by Finco to Forco3, as described in paragraph 27 herein.

The above ruling is subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on the CRA with respect to Loans made before XXXXXXXXXX. The above ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act and the Income Tax Regulations which, if enacted, could have an effect on the ruling provided herein.
Nothing in this advance income tax ruling 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 in this letter other than those specifically described in the ruling given. More specifically, nothing in this advance tax ruling shall be construed as implying that the CRA reviewed or is making a determination with respect to the Reorganization Transactions.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

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