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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
XXXXXXXXXX 3-962559
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to the XXXXXXXXXX advance income tax ruling request submitted on behalf of XXXXXXXXXX.
All references herein to statute are to the Income Tax Act (the "Act") unless otherwise indicated.
You advise that to the best of your knowledge, none of the issues involved in the ruling request is being considered by a Tax Services Office or a Taxation Centre in connection with a tax return already filed and none of the issues is under objection or appeal.
Our understanding of the facts and proposed transactions is based on the information as described by you in the formal ruling request and the letters of XXXXXXXXXX and several telephone conversations (XXXXXXXXXX).
FACTS
1.XXXXXXXXXX are taxable canadian corporations pursuant to the meaning given to this expression in subsection 89(1) of the Income Tax Act (the "Act").
2.XXXXXXXXXX is a public corporation pursuant to subsection 89(1) of the Act.
3.XXXXXXXXXX was incorporated pursuant to the Canada Corporations Act by letters patent issued on XXXXXXXXXX and was continued under the Canada Business Corporations Act on XXXXXXXXXX. (XXXXXXXXXX) XXXXXXXXXX business consists of
XXXXXXXXXX.
4.XXXXXXXXXX is a wholly-owned subsidiary corporation of XXXXXXXXXX.
5.The principal businesses of XXXXXXXXXX subsidiaries are in the area of
XXXXXXXXXX.
6. XXXXXXXXXX.
7. XXXXXXXXXX.
8.XXXXXXXXXX was constituted as a corporation on XXXXXXXXXX under the Canada Business Corporations Act.
XXXXXXXXXX.
XXXXXXXXXX.
9.The taxation year-end of the two corporations is XXXXXXXXXX.
10.XXXXXXXXXX is authorized to issue an unlimited number of common and preferred voting shares, all without par value. The preferred shares are issuable in series, with rights and privileges to be determined by the Board of Directors. XXXXXXXXXX has no outstanding preferred shares.
The following are the issued and outstanding common shares of XXXXXXXXXX
XXXXXXXXXX.
11.As at XXXXXXXXXX the adjusted cost base ("ACB") as well as the paid-up capital for tax purposes ("PUC") are as follows:
ACB - $XXXXXXXXXX
PUC - $XXXXXXXXXX
12.As at XXXXXXXXXX, the balance sheet of XXXXXXXXXX indicates that excess cash flow of XXXXXXXXXX was advanced to XXXXXXXXXX totalling $XXXXXXXXXX These advances are non-interest bearing and repayable upon demand. (XXXXXXXXXX).
13.XXXXXXXXXX has incurred non-capital losses of $XXXXXXXXXX, has substantial unclaimed pools of R&D expenditures of $XXXXXXXXXX, unclaimed undepreciated capital cost of $XXXXXXXXXX and unclaimed investment tax credits of $XXXXXXXXXX.
The non-capital losses carried forward of XXXXXXXXXX as at XXXXXXXXXX are:
XXXXXXXXXX.
In the above-mentioned years, XXXXXXXXXX made investments in Canadian and foreign related entities. The funds were used to purchase additional interests in existing entities (Canadian and foreign) and the purchase of initial interest in new operations (Canadian and foreign). The funds invested were used and continue to be used in business operations. This is the ultimate use of the funds. The funds invested by XXXXXXXXXX were, in certain cases, invested in shares of corporations or units of partnerships which then acquired shares or loaned the funds to corporations which used the funds in business operations.
The non-capital losses relating to business activities arose from XXXXXXXXXX business activities carried on in Canada. It cannot be confirmed whether the remaining portion of the non-capital losses, if any, arose from financing transactions between XXXXXXXXXX and any of its related foreign corporations as it cannot be confirmed that funds used for investments were derived from operations and internally generated funds as XXXXXXXXXX has had debt on its balance sheet over the years XXXXXXXXXX to date. Presently, XXXXXXXXXX does not have loans to related corporations.
XXXXXXXXXX non-consolidated statements of Income and Retained Earnings disclose as of XXXXXXXXXX income before income taxes of $XXXXXXXXXX respectively. The major difference between XXXXXXXXXX income per financial statements and taxable income is the dividends deductible under section 112 or 113 of the Act.
14.Some of the related Canadian and non-resident corporations incurred and continue to incur losses in their business operations. The purpose of XXXXXXXXXX investments was not the creation of or importation into Canada of business losses but the generation of business profits which could be repatriated to Canada in the form of income.
15.XXXXXXXXXX raises a mixture of equity and debt capital on the private and public markets and receives substantial dividend income from XXXXXXXXXX The dividends paid by XXXXXXXXXX to XXXXXXXXXX are as follows:
XXXXXXXXXX.
16. XXXXXXXXXX.
17.XXXXXXXXXX generates substantial taxable income as follows:
. XXXXXXXXXX
PROPOSED TRANSACTIONS
18.XXXXXXXXXX will borrow to a maximum amount of $XXXXXXXXXX ("Loan I") from a financial institution. This loan will bear interest and is expected to be repaid on the same day or the following day. XXXXXXXXXX had an unused bank credit facility of $XXXXXXXXXX as of XXXXXXXXXX Presently, the unused credit facility is $XXXXXXXXXX Given the unused credit facility, Loan I is not in excess of the amount that XXXXXXXXXX would be able to borrow for use in its business on the basis solely of its credit from an arm's length lender.
19.Upon receipt of Loan I described in paragraph 18, XXXXXXXXXX will lend to a maximum amount of $XXXXXXXXXX ("Loan II") to XXXXXXXXXX This Subordinated Intercompany Promissory Note will bear interest at a rate of XXXXXXXXXX% payable semi-annually and will be payable in XXXXXXXXXX and can be repaid without premium or penalty. Upon repayment of any principal, the holder undertakes to reinvest an equal sum in common shares of the issuer. This rate of XXXXXXXXXX% represents the current market rate for such loans from an arm's length third party lender. This rate could be further adjusted at the time of closing if there is a change in market conditions between now and the closing date. As described in Note XXXXXXXXXX of XXXXXXXXXX financial statements, XXXXXXXXXX had an unused bank credit facility of $XXXXXXXXXX as of XXXXXXXXXX Presently, the unused credit facility is $XXXXXXXXXX Given the unused credit facility and the net assets of XXXXXXXXXX as disclosed in its financial statements as of XXXXXXXXXX, Loan II is not in excess of the amount of monies that it could reasonably be expected to borrow for use in its business on the basis solely of its credit from an arm's length lender.
20.XXXXXXXXXX will reduce its PUC on its common shares to a maximum amount of $XXXXXXXXXX or $XXXXXXXXXX per common share (based on the number of common shares outstanding as of XXXXXXXXXX) which will equal the amount of Loan II. The amount representing this reduction will be paid to its sole shareholder, XXXXXXXXXX As per subsection 84(4), this reduction is not a dividend.
21.The funds received upon the reduction of the PUC by XXXXXXXXXX, will be used by XXXXXXXXXX to reimburse the loan from the financial institution described in paragraph 18.
22.The proposed reduction of the PUC described in paragraph 20 does not contravene any provision of the Canada Business Corporations Act.
23.The reduction of PUC to a maximum amount of $XXXXXXXXXX does no exceed the PUC of $XXXXXXXXXX as calculated under subsection 89(1) of the Act. Such PUC was used by XXXXXXXXXX for the purpose of earning income from its business operations and was not used to acquire property the income from which is exempt nor used to acquire a life insurance policy.
PURPOSE OF PROPOSED TRANSACTIONS
24.The purpose of the proposed transactions is to consolidate profits and losses of the XXXXXXXXXX corporate group.
XXXXXXXXXX will receive an interest income which will allow it to absorb part of its losses while XXXXXXXXXX will incur an interest expense which will allow it to reduce its income.
RULINGS GIVEN
Provided that the foregoing statements constitute complete and accurate disclosures of all of the relevant facts and proposed transactions, we confirm the following:
A.Provided that XXXXXXXXXX has a legal obligation to pay interest on Loan II, which will be incurred in order to reduce its PUC as described in paragraph 20, such interest will be deductible for the year during which it will become payable or will be paid (depending on the method followed by it in computing its income) pursuant to paragraph 20(1)(c) of the Act.
B.The provisions of subsections 15(1), 56(2) and 246(1) of the Act, in and of themselves, will not apply to the proposed transactions as described in paragraph 19.
C.As a result of the proposed transactions, in and of themselves, subsection 245(2) of the Act will not apply to redetermine the tax consequences confirmed in the rulings given above.
These rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R2 and are binding on Revenue Canada, Taxation provided that the proposed transactions are completed by XXXXXXXXXX
These rulings are based on the Act in its present form and do not take into account any proposed amendments. Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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