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:
Interest deductibility on proposed borrowing used to reduce paid-up capital
Position:
Interest is deductible under paragraph 20(1)(c)
Reasons:
In accordance with our administrative rules, the proposed borrowing is less than the stated capital of the shares and the share paid-up capital being replaced was used for the purposes of earning income.
XXXXXXXXXX 971964
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX wherein you requested an advance income tax ruling with respect to the above-noted taxpayer. We acknowledge our various telephone conversations.
Except as otherwise noted, all statutory references are to the Income Tax Act (Canada) (the "Act"), all numerical references are approximate and all dollar amounts are in Canadian currency.
Our understanding of the statements of facts, proposed transactions and purpose of proposed transactions is as follows:
FACTS
XXXXXXXXXX
1.XXXXXXXXXX is a publicly traded U.S. corporation and a non-resident of Canada for the purposes of the Act.
XXXXXXXXXX
2.XXXXXXXXXX ("NRO #1") is incorporated under the laws of XXXXXXXXXX and is a wholly-owned subsidiary of XXXXXXXXXX. It is a non-resident-owned investment corporation as defined in subsection 133(8).
3.NRO #1 holds an interest bearing loan ("NRO Loan 1") owed by XXXXXXXXXX. The loan was acquired from a Canadian financial institution and has a principal amount of approximately $XXXXXXXXXX. NRO Loan I was used by XXXXXXXXXX to partially fund the acquisition of all of the outstanding shares of XXXXXXXXXX.
XXXXXXXXXX
4.XXXXXXXXXX ("NRO #2") is incorporated under the laws of XXXXXXXXXX and is a wholly-owned subsidiary of XXXXXXXXXX. It is a non-resident-owned investment corporation as defined in subsection 133(8).
5. NRO #2 holds an interest bearing loan ("NRO Loan 2") owed by XXXXXXXXXX. The loan was acquired from a Canadian financial institution. The principal amount of the loan is approximately $XXXXXXXXXX. NRO Loan 2 was used by XXXXXXXXXX to fund part of the acquisition of assets and all of the outstanding shares of certain corporations on an arm's length basis from XXXXXXXXXX.
XXXXXXXXXX
6.XXXXXXXXXX ("NRO #3") is incorporated under the laws of XXXXXXXXXX and is a wholly-owned subsidiary of XXXXXXXXXX. It is a non-resident-owned investment corporation as defined in subsection 133(8).
7.NRO #3 holds an interest bearing loan ("NRO Loan 3") owed by XXXXXXXXXX. The loan was acquired from a Canadian financial institution. The principal amount of the loan is approximately $XXXXXXXXXX. NRO Loan 3 was used by XXXXXXXXXX to fund part of the acquisition of the net assets of
XXXXXXXXXX
XXXXXXXXXX
8.XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX. XXXXXXXXXX is a taxable Canadian corporation and private corporation within the meaning of subsection 89(1). Incorporated on XXXXXXXXXX is governed by the laws of XXXXXXXXXX.
9. XXXXXXXXXX
10. On XXXXXXXXXX acquired, on an arm's length basis, the XXXXXXXXXX including the acquisition of all of the outstanding shares of the following Canadian corporations:
XXXXXXXXXX
The purchase of the shares of the above corporations was funded, in part by the loan acquired by NRO #l (i.e., NRO Loan 1).
11.On XXXXXXXXXX amalgamated with XXXXXXXXXX, a taxable Canadian corporation and wholly-owned subsidiary of XXXXXXXXXX. The amalgamated company continues under the same name as the predecessor corporation XXXXXXXXXX.
12.On XXXXXXXXXX acquired all the outstanding shares of XXXXXXXXXX, a taxable Canadian corporation, from an arm's length third party.
13.On XXXXXXXXXX, the following XXXXXXXXXX wholly-owned subsidiaries were amalgamated to form XXXXXXXXXX
XXXXXXXXXX
14.On XXXXXXXXXX acquired, on an arm's length basis, all of the outstanding shares of XXXXXXXXXX. The purchase of the corporations was funded in part by bank financing which was subsequently acquired by NRO #2 (i.e., NRO Loan 2).
15.On XXXXXXXXXX acquired the net assets of the XXXXXXXXXX operations, including all of the outstanding shares of XXXXXXXXXX, on an arm's length basis from XXXXXXXXXX. The acquisition was funded in part by bank borrowing subsequently acquired by NRO # 3 (i.e., NRO Loan 3).
XXXXXXXXXX
16.XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX. XXXXXXXXXX is a taxable Canadian corporation and private corporation within the meaning of subsection 89( 1). It is governed by the laws of XXXXXXXXXX.
17.XXXXXXXXXX provides XXXXXXXXXX as well as owning the following wholly-owned subsidiaries:
XXXXXXXXXX
Each of XXXXXXXXXX wholly-owned subsidiaries are taxable Canadian corporations.
XXXXXXXXXX
18.XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX. XXXXXXXXXX is a taxable Canadian corporation and private corporation within the meaning of subsection 89(1). It is governed by the laws of XXXXXXXXXX.
19. XXXXXXXXXX
The corporation was acquired by XXXXXXXXXX on an arm's length basis from XXXXXXXXXX
XXXXXXXXXX
20.XXXXXXXXXX is a taxable Canadian corporation and a private corporation within the meaning of subsection 89(1). It is a wholly-owned subsidiary of XXXXXXXXXX and is governed by the laws of XXXXXXXXXX.
21.XXXXXXXXXX provides XXXXXXXXXX as well as owning various wholly-owned subsidiaries, namely:
XXXXXXXXXX
Each of XXXXXXXXXX subsidiaries are taxable Canadian corporations.
XXXXXXXXXX
22.XXXXXXXXXX is a taxable Canadian corporation and a private corporation within the meaning of subsection 89( 1). It is a wholly-owned subsidiary of XXXXXXXXXX and is governed by the laws of XXXXXXXXXX.
23.On XXXXXXXXXX was formed on the amalgamation of various XXXXXXXXXX wholly-owned subsidiaries as detailed in paragraph 13.
XXXXXXXXXX
24. XXXXXXXXXX
25.On XXXXXXXXXX amalgamated with XXXXXXXXXX with the amalgamated company continuing under the same name as XXXXXXXXXX.
26. On XXXXXXXXXX all of the outstanding shares of XXXXXXXXXX were transferred to XXXXXXXXXX in exchange for (i) an interest bearing note payable to XXXXXXXXXX ("XXXXXXXXXX Note" ) and (ii) common shares of XXXXXXXXXX.
27.With respect to the transfer of the XXXXXXXXXX shares, XXXXXXXXXX will file a joint election under subsection 85(1) within the time referred to in subsection 85(6). The agreed amount for the transferred property will be equal to the lesser of the cost amount of the XXXXXXXXXX shares to XXXXXXXXXX and the fair market value thereof.
28.The XXXXXXXXXX Note bears an arm's length interest rate that is slightly higher than the rate paid by XXXXXXXXXX on NRO Loan 1, 2 and 3. The XXXXXXXXXX Note has a principal amount equal to the agreed amount for the purposes of the subsection 85(1) election.
29.The XXXXXXXXXX common shares issued as the balance of the consideration for the XXXXXXXXXX shares had a fair market value equal to the fair market value of the XXXXXXXXXX shares less the principal amount of the XXXXXXXXXX Loan.
XXXXXXXXXX
30.XXXXXXXXXX is a taxable Canadian corporation and a private corporation within the meaning of subsection 89( 1). It is a wholly-owned subsidiary of XXXXXXXXXX and is governed by the laws of XXXXXXXXXX.
XXXXXXXXXX
31.XXXXXXXXXX is a taxable Canadian corporation and a private corporation within the meaning of subsection 89( 1). It is a wholly-owned subsidiary of XXXXXXXXXX and is governed by the laws of XXXXXXXXXX.
Transfer of the XXXXXXXXXX Canadian Subsidiaries of XXXXXXXXXX
32.All of the outstanding shares of XXXXXXXXXX (collectively referred to hereinafter as the "XXXXXXXXXX companies") were sold to XXXXXXXXXX in exchange for the assumption of liabilities and common shares of XXXXXXXXXX. Section 116 clearance certificates have been requested for these transactions. The paid-up capital of the XXXXXXXXXX shares issued to XXXXXXXXXX will be restricted to the paid-up capital of the XXXXXXXXXX companies by corporate resolution to ensure that there is no deemed dividend under section 212.1 of the Act.
33.XXXXXXXXXX transferred the shares to XXXXXXXXXX. As consideration for the shares of the XXXXXXXXXX companies, XXXXXXXXXX assumed liabilities and issued a note payable to XXXXXXXXXX ("the XXXXXXXXXX Note") and common shares of XXXXXXXXXX.
34.With respect to the transfer of the shares of the XXXXXXXXXX companies, XXXXXXXXXX filed a joint election under subsection 85(1 ) within the time referred to in subsection 85(6). The agreed amount for the transferred property will be equal to the lesser of the cost amount to XXXXXXXXXX and the fair market value thereof.
35.The XXXXXXXXXX Note bears an arm's length interest rate that is, at least, slightly higher than the rate paid by XXXXXXXXXX on NRO Loan 1 2 and 3. The XXXXXXXXXX Note has a principal amount equal to the agreed amount for the shares of the XXXXXXXXXX companies which is approximately $XXXXXXXXXX.
36.The XXXXXXXXXX common shares issued as the balance of the consideration for the shares of the XXXXXXXXXX companies have a fair market value equal to the fair market value of the shares transferred to XXXXXXXXXX less the principal amount of the XXXXXXXXXX Note.
Transfer the XXXXXXXXXX Operating Net Assets To XXXXXXXXXX
37.XXXXXXXXXX transferred the assets of its XXXXXXXXXX operations to XXXXXXXXXX. Consideration for the XXXXXXXXXX operating assets consisted of (i) an assumption by XXXXXXXXXX of XXXXXXXXXX liabilities associated with the XXXXXXXXXX operations (ii) an interest bearing note payable to XXXXXXXXXX ("XXXXXXXXXX Note 1") and (iii) common shares of XXXXXXXXXX.
38.With respect to the transfer of the XXXXXXXXXX operating assets, XXXXXXXXXX will file a joint election under subsection 85(1 ) within the time referred to in subsection 85(6). The agreed amount for the transferred property will be equal to the lesser of the cost amount to XXXXXXXXXX and the fair market value thereof.
39.XXXXXXXXXX Note I bears an arm's length interest rate that is, at least, slightly higher than the rate paid by XXXXXXXXXX on NRO Loan 1 2 and 3. XXXXXXXXXX Note 1 has a principal amount equal to the agreed amount for the XXXXXXXXXX operating assets less the amount of operating liabilities assumed by XXXXXXXXXX which is approximately $XXXXXXXXXX.
40.The XXXXXXXXXX common shares issued as the balance of the consideration for the XXXXXXXXXX operating assets has a fair market value equal to the fair market value of the assets transferred to XXXXXXXXXX less the amount of the liabilities assumed and less the principal amount of XXXXXXXXXX Loan I .
Transfer XXXXXXXXXX from XXXXXXXXXX to XXXXXXXXXX
41.XXXXXXXXXX transferred the shares of XXXXXXXXXX to XXXXXXXXXX. Consideration for the shares of XXXXXXXXXX shares consisted of (i) an interest bearing note payable to XXXXXXXXXX ("XXXXXXXXXX Note 2") and (iii) common shares of XXXXXXXXXX.
42.With respect to the transfer of the XXXXXXXXXX shares, XXXXXXXXXX will file a joint election under subsection 85(1) within the time referred to in subsection 85(6). The agreed amount for the shares will be equal to the lesser of the cost amount to XXXXXXXXXX and the fair market value thereof.
43.XXXXXXXXXX Note 2 bears an arm's length interest rate that is, at least, slightly higher than the rate paid by XXXXXXXXXX on NRO Loan 1, 2 and 3. XXXXXXXXXX Note 2 has a principal amount equal to the agreed amount for the XXXXXXXXXX shares which is approximately $XXXXXXXXXX.
44.The XXXXXXXXXX common shares issued as the balance of the consideration for the XXXXXXXXXX shares have a fair market value equal to the fair market value of the shares transferred to XXXXXXXXXX less the principal amount of XXXXXXXXXX Loan 2.
Amalgamation to Create New XXXXXXXXXX
45.The following corporations were amalgamated in XXXXXXXXXX to form a new corporation ("New XXXXXXXXXX"):
XXXXXXXXXX
The issued share capital of New XXXXXXXXXX consisted solely of common shares.
Amalgamation of XXXXXXXXXX
46.In XXXXXXXXXX were amalgamated ("New XXXXXXXXXX") to further consolidate the XXXXXXXXXX operations. The outstanding share capital of the New XXXXXXXXXX consisted solely of common shares.
47.The current subsidiaries of XXXXXXXXXX may be wound-up or amalgamated with their parent company after a review of the merits of further consolidation by management.
PROPOSED TRANSACTIONS
Paid-up Capital Reduction by New XXXXXXXXXX
48.In order to ensure that XXXXXXXXXX has sufficient interest income to service NRO Loan 1, 2 and 3, XXXXXXXXXX proposes to borrow an amount ("the PUC Amount") from a Canadian financial institution ("the Bank Loan"). XXXXXXXXXX has existing unused credit facilities with several Canadian financial institutions. The PUC Amount will equal the aggregate principal of NRO Loan 1, 2 and 3 less the aggregate principal of XXXXXXXXXX Note I and 2, the XXXXXXXXXX Note and the XXXXXXXXXX Note and will be approximately $XXXXXXXXXX.
49.Using the Bank Loan proceeds, XXXXXXXXXX proposes to loan the PUC Amount to New XXXXXXXXXX ("XXXXXXXXXX Note 3"). XXXXXXXXXX Note 3 will bear an arm's length interest rate that is at least slightly higher than the interest rate charged by the Canadian financial institution and higher than the highest rate charged on NRO Loan 1, 2 or 3.
50.New XXXXXXXXXX will use the proceeds from XXXXXXXXXX Note 3 to distribute the same amount to XXXXXXXXXX as a reduction in its share paid-up capital. The PUC Amount will not exceed the paid-up capital, as defined in subsection 89(1), of the New XXXXXXXXXX shares. The paid-up capital of New XXXXXXXXXX shares is approximately $XXXXXXXXXX and the "adjusted equity" within the meaning of draft subsection 20.1(2) is approximately $XXXXXXXXXX. Such "paid up capital" has been used by New XXXXXXXXXX for the purpose of earning income from its business operations and was not used to acquire property the income from which is exempt.
51.XXXXXXXXXX will repay the Bank Loan.
PURPOSE OF TRANSACTIONS COMPLETED IN XXXXXXXXXX
52.Prior to the undertaking of transactions described in paragraphs 32 through 36, XXXXXXXXXX directly held all of the outstanding shares of the XXXXXXXXXX companies whereas the balance of the Canadian operations of XXXXXXXXXX were carried out through XXXXXXXXXX and it subsidiaries. The purpose of the transactions referred to above is to consolidate the Canadian operations under a common Canadian holding company. The purpose of the XXXXXXXXXX Note referred to in paragraph 33 was to provide XXXXXXXXXX with interest income to service XXXXXXXXXX Loan 1, 2 and 3.
53.The transfer of the XXXXXXXXXX operating net assets and the shares of XXXXXXXXXX to XXXXXXXXXX is simply a preliminary step to the creation of the consolidated operating company, New XXXXXXXXXX, which was created in paragraph 45. The purpose of the XXXXXXXXXX Note 1 and 2 is the same as that stated above for the XXXXXXXXXX Note.
54.The amalgamation of various subsidiaries of XXXXXXXXXX to create New XXXXXXXXXX serves to consolidate a substantial portion of the Canadian operations of XXXXXXXXXX into one legal entity.
55.The amalgamation to form New XXXXXXXXXX serves to further consolidate the XXXXXXXXXX operations of the group.
In summary, the purpose of the above transactions, inter alia, is to align the corporate structure of the group as closely as possible to the desired operational structure of the group without creating any significant adverse income tax consequences. The current rationalization of the operations makes a restructuring of the legal entities urgent and imperative since the ability to maintain separate records for some of the entities is becoming progressively difficult.
The other primary objective, subject to the constraints noted above and legal and business constraints, is to minimize the number of legal entities and associated administrative costs.
PURPOSE OF PROPOSED TRANSACTIONS
56.The purpose of the proposed transactions is to allow New XXXXXXXXXX to replace share capital with interest bearing debt. XXXXXXXXXX Note 3 will provide XXXXXXXXXX with additional interest income to service NRO Loan 1, 2 and 3.
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.
RULING GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts and proposed transactions, we rule as follows:
Provided that the stated capital of the common shares of New XXXXXXXXXX owned by XXXXXXXXXX immediately prior to the reduction in the stated capital of those shares is equal to or greater than the amount paid upon the reduction of the stated capital of those shares, the interest expense on the borrowed funds which are used to return capital of those shares will be deductible pursuant to paragraph 20(1)(c) in computing the income of XXXXXXXXXX for the taxation year in respect of which such expense is paid or payable, depending on the method regularly followed by XXXXXXXXXX in computing its income.
This ruling is 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, Taxation provided that the proposed transactions described herein are completed by XXXXXXXXXX.
Our ruling is based on the Act in its present form and does not take into consideration any proposed amendments to the Act.
Except as expressly stated above, our ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this ruling should be construed as implying that Revenue Canada, Taxation has agreed to or reviewed the determination of the PUC of the New XXXXXXXXXX common shares referred to herein.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 1996
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