30 November 1996 Ruling 9717643 - SERIES OF LOANS AND REPAYMENTS

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:

Whether an arrangement whereby a loan is repaid or settled by offsetting against a dividend payment, should be considered "part of a series of loans or other transactions and repayments" for purposes of subsection 15(2).

Position:

No

Reasons:

XXXXXXXXXX							971764
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-referenced taxpayer. In your letters dated XXXXXXXXXX you provided additional information in respect of, and amendments to, the proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

The above-referenced taxpayer files its returns with the XXXXXXXXXX Taxation Centre.

To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this request:

(a)is involved in an earlier return of the taxpayer or a related person,

(b)is being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayer or a related person,

(c)is under objection,

(d)is before the courts or, if a judgment has been issued, the time limit for appeal has not expired, and

(e)is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.

Definitions

"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b)"Canco" refers to XXXXXXXXXX;

(c)"Cansub" refers to XXXXXXXXXX;

(d)"Finco" refers to XXXXXXXXXX a non-resident of Canada;

(e)"principal amount" has the meaning assigned to that term by subsection 248(1);

(f)"private corporation" has the meaning assigned to that term in subsection 89(1);

(g)"Pubco" refers to XXXXXXXXXX, a Delaware corporation and a non-resident of Canada;

(h)"public corporation" has the meaning assigned to that term in subsection 89(1);

(i)"taxable Canadian corporation" has the meaning assigned to that term by subsection 89(1); and

(j)"U.S. Parent" refers to XXXXXXXXXX, a Delaware corporation and a non-resident of Canada;

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

Facts

1.Cansub is a wholly-owned subsidiary of Canco. Canco and Cansub are both private corporations and taxable Canadian corporations. Cansub's issued and outstanding shares are XXXXXXXXXX Class XXXXXXXXXX common shares and XXXXXXXXXX Class XXXXXXXXXX preferred shares. Cansub's year end is XXXXXXXXXX.

2.U.S. Parent owns XXXXXXXXXX of Canco's common shares being all of the issued and outstanding common shares. U.S. Parent also owns XXXXXXXXXX Class XXXXXXXXXX preferred shares of Canco. Finco owns XXXXXXXXXX Class XXXXXXXXXX preferred shares, XXXXXXXXXX Class XXXXXXXXXX preferred shares and XXXXXXXXXX Class XXXXXXXXXX preferred shares of Canco. Finco is a wholly-owned subsidiary of U.S. Parent.

3.U.S. Parent is an indirect subsidiary of Pubco. The common shares of Pubco are listed for trading on XXXXXXXXXX Stock Exchange.

Proposed Transactions

5.Prior to XXXXXXXXXX Cansub will make one or more loans (the "Loans") to U.S. Parent in an aggregate amount approximately equal to its estimated net after-tax earnings (as computed under U.S. tax principles) for its fiscal year 1997. The Loans will be denominated in either Canadian or U.S. dollars and will be due on demand. The Loans will be evidenced by a single grid promissory demand note (the "1997 Note"), and will carry an interest rate equivalent to normal commercial interest rates for loans of such magnitude from third parties to U.S. Parent and in any event greater than any interest costs incurred by Cansub. The estimated amount of the Loans is $XXXXXXXXXX.

6.Cansub will make the Loans substantially out of its available funds. To the extent Cansub does not have available funds at the time of making a Loan, it will effect a bridge borrowing to make the Loan and will repay the same as funds become available.

7.XXXXXXXXXX, Cansub will declare a dividend to Canco for an amount equal to the principal amount of the 1997 Note at that time and pay the same by assignment of the 1997 Note to Canco. At the time of the dividend, the fair market value of the 1997 Note will be equal to its principal amount.

8.On the same day as, but subsequent to, the payment of the dividend and assignment of the 1997 Note described in paragraph 7 above, U.S. Parent will repay that portion of the 1997 Note necessary to fund the dividends, described in paragraph 9 below, that will be paid to Finco on its preferred shares of Canco and to fund the withholding tax on the dividends, described in paragraph 9 below, that will be paid to U.S. Parent on its shares of Canco.

9.On the same day as, but subsequent to, the repayment described in paragraph 8 above, Canco will declare a dividend to U.S. Parent on its Class XXXXXXXXXX preferred shares of Canco and on its common shares of Canco in an aggregate amount equal to the then remaining balance of the 1997 Note divided by a factor of XXXXXXXXXX (Under this calculation the amount of the dividend will equal the aggregate of the remaining balance of the 1997 Note and the portion of the above repayment that will not be used to fund the dividend payments to Finco. This portion of the repayment will also equal the 5% withholding tax exigible on the dividends to U.S. Parent). The dividends will be paid by way of settlement of the balance of the 1997 Note and a cash payment to Revenue Canada for the withholding tax payable on the dividends. A dividend (net of exigible withholding tax forwarded to Revenue Canada) will be paid to Finco on its preferred shares of Canco in accordance with the terms of such shares.

10.Cansub will in 1998 make one or more demand loans to U.S. Parent in an aggregate amount equal to Cansub's estimated after-tax earnings for 1998.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to obtain full utilization of Canadian taxes paid by Cansub as creditable taxes in the U.S.

XXXXXXXXXX

Rulings

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

A.Provided the proposed transactions described in paragraphs 5, 6, 7, 8, and 9, herein are completed prior to XXXXXXXXXX, the interaction of subsection 15(2) and paragraph 214(3)(a) will not apply to deem the amount of the Loans to have been paid to U.S. Parent as a dividend from a corporation resident in Canada.

B.Any loss otherwise incurred by Cansub with respect to the assignment of the 1997 Note to Canco, described in paragraph 7 above, will be deemed to be nil by virtue of paragraph 40(2)(e).

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on Revenue Canada 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 to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Opinion

Provided that our understanding of the facts and proposed transactions described herein is correct and provided that proposed subsections 40(3.3) and (3.4) are reintroduced and enacted in substantially the same form as set out in the proposed amendments tabled in the House of Commons on December 2, 1996 in Bill C-69, it is our opinion that neither subsection 40(3.3) nor 40(3.4) will apply in respect of any loss otherwise incurred by Cansub with respect to the assignment of the 1997 Note to Canco, as described in paragraph 7 above, as a result of the requirement in paragraph 40(3.3)(c) not being satisfied.

Comments

Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed:

(a) the determination of the fair market value or adjusted cost base of any property referred to herein, or

(b)any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

It is our understanding that the series of transactions described in the ruling will be repeated on an annual basis indefinitely. The above rulings are in respect of the 1997 Note only and do not cover any other loans that may be made in the future.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch