2024 Ruling 2024-1027391R3 - Upstream loans

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. Whether paragraph 90(8)(a) would apply to certain loans such that subsection 90(6) will not apply. 2. Whether subsection 90(7) would apply to certain loans such that subsection 90(6) would not apply.

Position: 1. Yes. 2. Yes.

Reasons: 1. The particular loans will be repaid within two years of issuance and the repayment will not constitute a series of loans and repayments. 2. The particular back-to-back-loans meet the conditions of subsection 90(7) with the result that subsection 90(6) will not apply.

XXXXXXXXXX									2024-102739

XXXXXXXXXX, 2024

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX for an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge the information provided in subsequent correspondence in connection with your request.

We understand that to the best of your knowledge and that of the responsible officers of the parties, none of the proposed transactions or issues involved in this letter are the same as or substantially similar to transactions or issues that are in a previously filed return of the taxpayer or a related person and are:

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

(b) under objection by the taxpayer or a related person;

(c) the subject of a current or completed court process involving the taxpayer or a related person; or

(d) the subject of a ruling previously issued by the Income Tax Rulings Directorate in relation to the taxpayer or a related person.

Unless otherwise stated, all references herein to sections or components thereof are references to the Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th Supp.), as amended, (the “Act”).

The rulings given herein (the “Rulings”) are based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions described in the documents submitted with your advance income tax ruling request do not form part of the facts and proposed transactions on which the Rulings are based and any reference to these documents is provided solely for the convenience of the reader.

DEFINITIONS

In this document, the following terms have the meaning specified herein, unless otherwise stated:

“Act” means the Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th Supp), as amended to the date hereof;

“Bank Debt” means external debt borrowed by CFA from third party banks to make the Bank Debt Funded Loans;

“Bank Debt Funded Loans” refers to both Bank Debt Funded Loans 1 and Bank Debt Funded Loans 2;

“Bank Debt Funded Loans 1” means the currently outstanding loans made by CFA to Finco 2 and funded by Bank Debt;

“Bank Debt Funded Loans 2” means the currently outstanding loans made by CFA to Finco 1 and funded by Bank Debt ;

“Bond” means the bond issued by CFA to capital markets in Country 1;

“Bond Funded Loan” means the Loan funded by the Bond and made by CFA to Finco 2;

“CAD” means Canadian Dollars;

“Canco” means XXXXXXXXXX;

“CFA” means XXXXXXXXXX, a corporation having XXXXXXXXXX as a nominee shareholder in order to satisfy Country 1’s legal requirements to have two shareholders;

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

“Country 1” means XXXXXXXXXX;

“Country 2” means XXXXXXXXXX;

“Country 1 Treaty” means the XXXXXXXXXX;

“Country 2 Treaty” means the XXXXXXXXXX;

“CRA” means the Canada Revenue Agency;

“Debt Funded Loans” means the currently outstanding Bank Debt Funded Loans and the Bond Funded Loan;

“Debtors” refers to Finco 1 and Finco 2;

“Equity Funded Loans” refers to both Equity Funded Loans 1 and Equity Funded Loans 2;

“Equity Funded Loans 1” means the currently outstanding Equity Funded Loans funded by retained earnings and made by CFA to Finco 2;

“Equity Funded Loans 2” means the currently outstanding Equity Funded Loans funded by retained earnings and made by CFA to Finco 1;

“External Debts” means the Bank Debt and the Bond;

“Financial Services Group” refers to Holdco, Finco 1 and Finco 2 collectively;

“Finco 1” means XXXXXXXXXX in Country 1;

“Finco 2” means XXXXXXXXXX;

“Forco 1” means XXXXXXXXXX;

“Forco 2” means XXXXXXXXXX;

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

“Former Ultimate Parent” means XXXXXXXXXX;

“Group” means the XXXXXXXXXX, a multinational group of companies including Parent, the global parent company, and its subsidiaries that XXXXXXXXXX;

“Holdco” means XXXXXXXXXX;

“Loans” refers to the Bank Debt Funded Loans, the Bond Funded Loan and the Equity Funded Loans;

XXXXXXXXXX;

“Paragraph” refers to a numbered paragraph in this letter;

“Parent” means XXXXXXXXXX;

“Proposed Transactions” means the transactions described in the Proposed Transactions segment of this letter;

“Regulations” means the Income Tax Regulations, CRC 1977, c 945, as amended;

“Taxable Canadian Corporation” has the meaning assigned by subsections 248(1) and 89(1); and

XXXXXXXXXX.

FACTS

1. Parent is a publicly traded corporation and the global parent company of the Group. Parent is a resident of Country 2 and a non-resident of Canada for the purposes of the Act.

2. Forco 1 is a corporation formed under the laws of Country 2 and is a resident of Country 2 and non-resident of Canada for purposes of the Act. All of the issued and outstanding shares of Forco 1 are owned by Parent.

3. Canco is a company incorporated under the laws of Canada. All of the issued and outstanding shares of Canco are owned by Forco 1. Canco is a “taxable Canadian corporation” and is a resident of Canada for the purposes of the Act.

4. CFA is a corporation formed under the laws of Country 1 and is a resident of Country 1 and a non-resident of Canada for the purposes of the Act and the Country 1 Treaty. The issued and outstanding shares of CFA consist of XXXXXXXXXX series A shares, XXXXXXXXXX series B shares, and XXXXXXXXXX series C shares. Of the XXXXXXXXXX issued and outstanding shares of CFA, one series A share is held by the nominee shareholder and the remaining shares are owned by Canco. CFA’s business activities include lending money to Finco 1 and Finco 2.

5. Forco 2 is a corporation formed under the laws of Country 2 and is a resident of Country 2 and a non-resident of Canada for purposes of the Act. Substantially all of the issued and outstanding shares of Forco 2 are owned by Forco 1.

6. Holdco is a corporation formed under the laws of Country 1 and is a resident of Country 1 and a non-resident of Canada for the purposes of the Act. Substantially all of the issued and outstanding shares of Holdco are owned by Forco 2. Holdco currently serves as the holding company of Finco 2.

7. Finco 1 is a corporation formed under the laws of Country 1 and is a resident of Country 1 and a non-resident of Canada for purposes of the Act. Substantially all of the issued and outstanding shares of Finco 1 are owned by Forco 2.

8. Finco 2 is a corporation formed under the laws of Country 1 and is a resident of Country 1 and a non-resident of Canada for the purposes of the Act. Substantially all of the issued and outstanding shares of Finco 2 are owned by Holdco. Finco 2 operates as a captive finance provider specialized in providing financial solutions to XXXXXXXXXX customers in Country 1.

9. In prior years, CFA has acted as the treasury centre for Group entities in Country 1, including the Financial Services Group. CFA has made the Loans to Finco 1 and Finco 2 in the ordinary course of its ordinary business of lending money. At the time each of the Loans were made, arrangements were made for repayment.

10. Each of the Loans is interest-bearing and is denominated in XXXXXXXXXX.

11. The cash from the Loans was used in the each of Finco 1 and Finco 2’s respective businesses.

12. Cash obtained from the External Debts was loaned directly to Finco 1 and Finco 2 under the same terms and conditions (i.e. tenor, interest rate, and currency) as the External Debts, plus a cross-charged guarantee fee.

13. In most cases, each External Debt was opened on the same day as the subsequent Debt Funded Loan. In some cases, there was a delay of one to five days between the opening dates of the External Debts and the subsequent Debt Funded Loan(s) and in one instance, a delay of 13 days. In all cases, the maturity dates of the External Debts and subsequent Debt Funded Loans are the same.

14. The taxation year-end of all of the relevant corporations described above is XXXXXXXXXX.

15. Canco has not filed a functional currency election pursuant to section 261 and accordingly, its tax reporting currency is the Canadian dollar for Canadian tax purposes.

16. All of the corporations described above are related for the purposes of the Act.

17. At all relevant times, CFA is a foreign affiliate and a controlled foreign affiliate of Canco.

PROPOSED TRANSACTIONS

The following transactions will be implemented on or before XXXXXXXXXX in any particular order:

18. Each of Finco 1 and Finco 2 will negotiate new credit facilities with some or all of the external banks with which CFA currently has Bank Debt.

19. Settlement of Equity Funded Loans:

a) Each of Finco 1 and Finco 2 will repay the principal balance(s) and accrued interest of the Equity Funded Loans to CFA using new borrowing from an external bank; and

b) CFA will distribute all or substantially all of the cash received in (a), pro-rata, to its shareholders and any cash remaining is not to be used to provide new borrowings to Finco 1 and/or Finco 2.

20. Canco will sell all of its shares of CFA to Forco 1 for cash consideration equal to their fair market value.

PURPOSE OF THE PROPOSED TRANSACTIONS

21. The corporate structure described in Paragraphs 1 to 8 above results from the following reorganizations:

a) Prior to XXXXXXXXXX, Former Ultimate Parent was the ultimate owner of the XXXXXXXXXX. In XXXXXXXXXX, CFA was contributed to Canco as part of a series of transactions intended to facilitate the divestiture of the XXXXXXXXXX. As part of that series, several of the Country 1 operating and finance companies, including Finco 1 and Finco 2, were contributed to Canco and were subsequently contributed to CFA, becoming subsidiaries of Canco and controlled foreign affiliates of Canco. The ultimate parent post-separation from the XXXXXXXXXX.

b) In XXXXXXXXXX, CFA sold its interests in its subsidiaries to various related companies in the XXXXXXXXXX at the time, as part of a series of transactions intended to organize the global group into its operating lines of business (XXXXXXXXXX). At the conclusion of the transactions, Canco retained its interest in only CFA, as the remaining controlled foreign affiliates had been sold out from under Canco. After the sale of the controlled foreign affiliates in XXXXXXXXXX, CFA continued to act as the treasury centre for the Financial Services Group in Country 1. The proceeds of disposition it received from the sale of the controlled foreign affiliates were either distributed to Canco or used in its treasury operation.

c) In XXXXXXXXXX, XXXXXXXXXX reorganized once again and was renamed XXXXXXXXXX. At this time, the XXXXXXXXXX of business of the XXXXXXXXXX was spun off to shareholders as Parent. Canco was sold to Forco 1 and the other relevant companies in the corporate group were reorganized to form the current corporate structure as described in Facts 1-8 above.

22. The purpose of the Proposed Transactions is to (i) repay the Equity Funded Loans and (ii) transfer CFA out from under Canada.

OTHER INFORMATION

23. To the extent of any capital gain (determined without the application of subsection 93(1)) realized by Canco from the disposition of its shares in CFA, Canco will make an election under subsection 93(1) to designate an amount equal to its tax-free surplus balance as a dividend on the shares of the capital stock of CFA.

24. In the longer-term, CFA will no longer provide equity-funded loans and will only provide external debt financing (e.g. bond issuances and/or bank loans) for operational treasury purposes.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our Rulings are as follows:

A. To the extent that the Equity Funded Loans are fully repaid on or before XXXXXXXXXX, paragraph 90(8)(a) will apply to the Equity Funded Loans such that subsection 90(6) will not apply to require an amount to be included in computing the income of Canco in respect of the Equity Funded Loans.

B. For the purpose of subsection 90(6), subsection 90(7) will apply to the Debt Funded Loans such that:

a) Each of the Debt Funded Loans made by CFA to the respective Debtors is deemed, at that time, to have been made by the respective arm’s length lender to the respective Debtor under the same terms and conditions and at the same time as it was made by CFA; and

b) Each of the Debt Funded Loans made by CFA to the respective Debtors and the External Debts owing by CFA are deemed not to have been made. Accordingly, subsection 90(6) will not apply to require an amount to be included in computing the income of Canco in respect of the Debt Funded Loans.

The Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R12, Advance Income Tax Rulings and Technical Interpretations, and are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX.

Except as expressly stated, the Rulings do not imply acceptance, approval or confirmation of any other income tax implications of the Facts, Proposed Transactions or Other Information described herein. For greater certainty, nothing in this letter should be construed as implying that the CRA:

(a) has reviewed, or agreed to, the reasonableness of the interest rate charged on any of the Loans;

(b) has reviewed, or agreed to, the reasonableness of the guarantee fees charged by CFA to the Debtors;

(c) has reviewed, or agreed to, the application of any of subsections 90(6), 90(7), and 90(8) to any loans made by CFA to the Debtors which were made prior to XXXXXXXXXX;

(d) has reviewed, or agreed to, the application of any of subsections 90(6), 90(7), and 90(8) to any loans that may have been made, or will be made, after XXXXXXXXXX;

(e) has reviewed, or agreed to, the application of paragraph 90(8)(b), as it read prior to its amendment in XXXXXXXXXX, in each of the years before XXXXXXXXXX; and

(f) has reviewed, or agreed to, whether the Loans made by CFA were made in the ordinary course of CFA’s ordinary business of lending money.

Your truly,

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

c.c.: XXXXXXXXXX