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.
Principal Issues:
(1) Whether a partial guarantee of a loan constitutes, for purposes of paragraph 11(4)(c) of the Canada-Sweden income tax convention, a loan that is guaranteed.
(2) Whether paragraph 11(4)(c) of the Canada-Sweden income tax convention applies where the loan is assigned.
Position TAKEN:
(1) A partial guarantee is sufficient.
(2) Yes if the assignees are residents of Sweden.
Reasons FOR POSITION TAKEN:
(1) Ruling E9519493
(2) Treaty
XXXXXXXXXX 971484
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sir:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, requesting an advance income tax ruling on behalf of XXXXXXXXXX.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (herein referred to as the "Act") and unless otherwise expressly stated:
(a) "Borrower" means XXXXXXXXXX;
(b) "Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;
(c) "EDC" means the Export Development Corporation;
(d) XXXXXXXXXX;
(e) "EKN" means Exportkreditnamnden (i.e. the Swedish Export Credits Guarantee Board);
(f) XXXXXXXXXX;
(g) XXXXXXXXXX;
(h) XXXXXXXXXX
(i) XXXXXXXXXX;
(j) "Lender" means XXXXXXXXXX;
(k) XXXXXXXXXX;
(l) XXXXXXXXXX;
(m) "Private corporation" has the meaning assigned by subsection 89(1) of the Act;
(n) XXXXXXXXXX;
(o) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.
(p) the "Treaty" means the convention between Canada and Sweden for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, signed October 14, 1983, effective January 1, 1985 and ratified by statute S.C. 1984, c. 35, Part VII.
You advise that to the best of your knowledge and that of XXXXXXXXXX, none of the issues involved in the ruling request has been considered by a district tax services office or a taxation centre in connection with a tax return already filed, and none of the issues involved in the ruling request is the subject of any notice of objection or is under appeal.
Our understanding of the facts, proposed transactions and their purposes is as follows.
FACTS
1. XXXXXXXXXX was incorporated under the Canada Business Corporations Act. It is a "private corporation" and a "taxable Canadian corporation" that together with its affiliated companies is XXXXXXXXXX.
2. XXXXXXXXXX, a wholly-owned subsidiary of XXXXXXXXXX, was incorporated under the Canada Business Corporations Act. It is a "private corporation" and a "taxable Canadian corporation". XXXXXXXXXX is a holding company incorporated under the laws of Sweden and is resident of that country. XXXXXXXXXX does not carry on business through a permanent establishment in Canada.
3. XXXXXXXXXX is primarily engaged in
XXXXXXXXXX
4. XXXXXXXXXX, an indirect subsidiary of XXXXXXXXXX, is a company incorporated under the laws of Sweden and is resident of that country. XXXXXXXXXX does not carry on business through a permanent establishment in Canada. XXXXXXXXXX is primarily engaged in XXXXXXXXXX.
5. XXXXXXXXXX, an indirect subsidiary of XXXXXXXXXX, is a company incorporated under the laws of Sweden and is resident of that country. XXXXXXXXXX does not carry on business through a permanent establishment in Canada. The principal business of XXXXXXXXXX is to provide financial services to support sales by XXXXXXXXXX.
6. XXXXXXXXXX is a banking institution incorporated under the laws of Sweden and is resident of that country. XXXXXXXXXX does not carry on a business through a permanent establishment in Canada. XXXXXXXXXX is a financial institution whose primary business is the lending of money.
7. EKN is an agency of the Swedish Government whose primary purpose is to promote Swedish exports by providing loan guarantees. These guarantees entitle the guarantee-holder to indemnification for a stated percentage of a loss incurred by the guarantee-holder due to the fact that a foreign transaction has not been carried through in accordance with the contract entered into. EKN's mandate is, in certain respects, similar to that of the EDC. EKN is specifically referred to in paragraph 11(4)(c) of the Treaty.
8. XXXXXXXXXX.
9. The credit facility provides for semi-annual payments of interest calculated at a rate per annum equal to prime plus XXXXXXXXXX%. Principal repayments are to be made semi-annually beginning XXXXXXXXXX with the final repayment to be made XXXXXXXXXX or, in certain circumstances, at an earlier time. In addition to principal and interest, the credit facility provides for a standby fee calculated as XXXXXXXXXX% of the undrawn balance of the credit facility, to be paid quarterly, in arrears.
10. The terms of the credit facility stipulate that the lender, generally has the right to transfer and assign the credit facility to an affiliate of the lender, a bank or other financial institution or a syndicate of banks or other financial institutions without any further consent from the borrower. The terms of the agreement, however, provide that, with consent of the Borrower, only such of the following changes may be made to the credit facility:
(a) to provide for the issuance, acceptance and rollovers of bankers' acceptances as an additional borrowing option,
(b) to provide for fixed rate lending as an additional borrowing option,
(c) to adjust the drawdown procedures in order to obtain borrowings, and deleting the requirement that the Lender be satisfied that a XXXXXXXXXX% portion of the price of Products and other amounts be paid by the Borrower as a condition to the drawdown of borrowings,
(d) to adjust the definitions of "Interest Date" and "Interest Payment Dates" provided that interest shall continue to be payable semi-annually (and at the expiry of any interest period in the case of borrowings bearing interest at fixed rates),
(e) to adjust the provisions of this Credit Facility throughout to reflect the fact that the "Lender" will no longer be the supplier under the Contract,
(f) to provide for the role and functions of an agent for a syndicate of lenders and the relationships among such lenders,
(g) to provide that if the loan is at any time supported by a limited guarantee of XXXXXXXXXX or any of its affiliates (within the meaning of the Canada Business Corporations Act), such guarantee will be released when XXXXXXXXXX (parent of XXXXXXXXXX) on a consolidated basis first meets the certain financial ratios for four consecutive fiscal quarters, whereas XXXXXXXXXX on a consolidated basis shall be obligated to continue to meet such financial ratios at all times,
(h) to provide for the Lender's standard "Increased cost" provisions, and
(i) to provide for the requirement of the Lender to comply with the provisions of subsection 224(1.1) of the Act.
11. XXXXXXXXXX signed an agreement of Transfer and Assignment (the "Agreement"), dated XXXXXXXXXX, pursuant to which XXXXXXXXXX agreed to assign to XXXXXXXXXX,
- all of its rights and obligations under the credit facility,
- all of its rights and interest in and to all sums advanced by it under the credit facility to and including the effective date together with all interest accrued thereon and other amounts owing pursuant to the credit facility, and
- all its rights, title and interest in the security granted with respect to amounts owing under the credit facility.
The Agreement is, subject to conditions precedent, to be effective as of the fifth "business day", as that term is defined in the credit facility. Section XXXXXXXXXX of the Agreement details the conditions precedent which, at paragraph (a) thereof, includes a favourable income tax ruling to be issued, within 6 months of the effective date of the Agreement, from the Canadian tax authorities with respect to exemption from Part XIII withholding tax, after the EKN Guarantee is in force and with respect to interest paid or credited or deemed to be paid or credited after that time. Interest accruing prior to the coming into force of the EKN Guarantee will not be exempt from Part XIII by virtue of the Treaty.
12. As of XXXXXXXXXX had been drawn down under the credit facility.
13. EKN has provided a Commitment Letter pursuant to which it will guarantee (the "EKN Guarantee") the principal amount of the loan drawdown under the credit facility assigned to XXXXXXXXXX to the extent of XXXXXXXXXX. At current exchange rates, the guarantee represents XXXXXXXXXX of the credit facility, slightly more than XXXXXXXXXX% of the Canadian dollar value of the credit facility.
14. XXXXXXXXXX has agreed to guarantee to XXXXXXXXXX the due fulfilment of XXXXXXXXXX payment obligations to XXXXXXXXXX under the credit facility in respect of (i) interest and financial costs relating to the portion of the principal amount of the credit facility covered by the EKN Guarantee and (ii) interest accrued on the amount actually paid by EKN from the relevant due date to and including the date of settlement by EKN.
15. XXXXXXXXXX has agreed to pay the guarantee premium due to EKN and certain legal, travel and administrative costs incurred by XXXXXXXXXX (to the extent not covered by the Borrower) with respect to the Agreement.
16. XXXXXXXXXX deal at "arm's length" with each other, within the meaning assigned that expression by subsection 251(1) of the Act.
PURPOSE OF THE PROPOSED TRANSACTIONS
17. XXXXXXXXXX.
18. XXXXXXXXXX, has lead to EKN's commitment to guarantee a portion of the credit facility assigned as indicated in paragraph 13 above. The purpose of the proposed transactions is to ensure that financing costs are within reasonable and acceptable parameters. In this context it is imperative that Canadian withholding taxes not be exigible on the interest charges and other amounts deemed to be interest. For commercial purposes, financing that would meet the domestic exemption provided for in subparagraph 212(1)(b)(vii) of the Act cannot be obtained given the nature of items being financed.
PROPOSED TRANSACTIONS
19. XXXXXXXXXX will assign the credit facility, described in paragraph 8 above, to XXXXXXXXXX in accordance with the terms of the Agreement, described in paragraph 11 above.
20. In accordance with the terms of the Agreement, described in paragraph 11 above, XXXXXXXXXX will pay to XXXXXXXXXX interest, principal and standby fees as set out in the credit facility described in paragraph 8 above.
21. XXXXXXXXXX will compensate XXXXXXXXXX for differences between the interest rate and fees specified to be payable under the credit facility and the interest rate and fees agreed to by XXXXXXXXXX as consideration for the assignment.
22. XXXXXXXXXX will assign to XXXXXXXXXX of the credit facility. XXXXXXXXXX will retain a portion of the credit facility and syndicate the remainder to other banks or financial institutions that are residents of Sweden. XXXXXXXXXX will act as agent of such syndicate. The EKN guarantee will be unaffected by such assignment and syndication.
RULINGS GIVEN
Provided all relevant facts, proposed transactions and their purposes have been fully disclosed and, as summarized above, are accurate, we confirm the following.
A. Interest paid or credited, to the extent not accrued prior to the coming into force of the EKN Guarantee, under the credit facility to XXXXXXXXXX or other residents of Sweden (including those financing fees deemed to be interest on an obligation under subsection 214(15) of the Act and under the Treaty) after the EKN guarantee is in force will not be subject to withholding taxes under Part XIII of the Act by virtue of article 11(4)(c) of the Treaty.
This ruling is provided subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and is binding upon the Department provided that the proposed transactions are completed by XXXXXXXXXX. This ruling is based on the Act and the Income Tax Regulations in their present form and does not take into account the effects of any proposed amendments thereto.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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