30 November 1997 Ruling 9806143 - QUALIFICATION AS AN NRO

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:

Will Newco qualify as an NRO as defined in subsection 133(8)?

Position: Yes.

Reasons: See ATR-43, previous rulings. Note there is existing indebtedness.

XXXXXXXXXX
XXXXXXXXXX 								980614

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX ("Canco")
XXXXXXXXXX ("USco") and
a Corporation to be incorporated ("Newco")

This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge the additional information provided in your letter of XXXXXXXXXX and in our telephone conversations (XXXXXXXXXX).

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

1. is involved in an earlier return of Canco or a related person;

2. is being considered by a tax services office or taxation centre in connection with a previously filed tax return of Canco or a related person;

3. is under objection;

4. is before the courts or, if a judgement has been issued, the time limit for appeal has not expired; or
is the subject of a ruling previously issued by the Directorate.

Facts

1. Canco is a taxable Canadian corporation as defined in subsection 89(1) of the Income Tax Act (Canada) (the "Act").

2. USco is a corporation incorporated under the laws of the state of XXXXXXXXXX and is resident in the United States. USco is not a Canadian taxpayer and does not file any Canadian tax returns.

3. The authorized capital of Canco consists of an unlimited number of Class XXXXXXXXXX shares and an unlimited number of common shares.

At present, the shareholders of Canco and Canco's outstanding shares are as follows:

Class Number Stated
Shareholder of shares of shares Capital

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

In connection with the Canco shareholders noted above, XXXXXXXXXX is a non-resident owned investment corporation which was established in XXXXXXXXXX. The sole shareholder of XXXXXXXXXX is Usco. XXXXXXXXXX is a corporation formed under the laws of XXXXXXXXXX. It is wholly owned, indirectly, by USco.

Canco has a credit facility with the XXXXXXXXXX (the "Bank") in the amount of C$XXXXXXXXXX that has been available since XXXXXXXXXX. The current outstanding balance is approximately C$XXXXXXXXXX. From time to time, the Bank has provided Canco with alternative short term financing arrangements with lenders other than the Bank as these alternatives resulted in a lower borrowing cost to Canco. At present, no alternative arrangements are in place. As part of the terms of the Credit Agreement with the Bank, Canco may convert the credit facility in whole or in part into a non-revolving term loan with a maximum term to maturity of XXXXXXXXXX. Under the terms of the Credit Agreement, if Canco had not converted the credit facility to a non-revolving term loan before XXXXXXXXXX the Bank has the option to syndicate the credit facility. However, the Bank has granted Canco an extension of time to XXXXXXXXXX, to convert a portion of the credit facility to a non-revolving term loan. Since the syndication of the credit facility would require Canco to deal with a significant number of lenders in addition to the Bank, Canco intends to convert $XXXXXXXXXX of the credit facility into a non-revolving XXXXXXXXXX year term loan on or before XXXXXXXXXX, as explained below in the Proposed Transactions. In negotiations between Canco and the Bank, it is understood that, after the conversion of $XXXXXXXXXX of the existing loan into a term loan, the reduced loan balance outstanding under the credit facility may be at a level where no syndication of such balance will be carried out by the Bank.

4. XXXXXXXXXX is a non-resident owned investment corporation and it presently holds indebtedness of Canco with a principal amount of $XXXXXXXXXX.

5. To the best of your knowledge and to the best of the officers and directors of USco, USco is not a foreign affiliate of a taxpayer resident in Canada.

Proposed Transactions

6. Canco will convert $XXXXXXXXXX of its credit facility with the Bank into a non-revolving term loan with a XXXXXXXXXX year maturity (the "Loan") on or before XXXXXXXXXX. The Loan will bear interest at a rate negotiated with the Bank and will represent an arm's length borrowing cost. The Loan will initially have a floating interest rate but Canco will have the ability to convert from a floating interest rate to a fixed interest rate. The fixed interest rate applied will reflect market conditions at the time of conversion from a floating interest rate to a fixed interest rate.

7. Canco will extinguish the remainder of the amount currently borrowed under the credit facility with funds that will be obtained on the repayment from loans receivable from related parties, from borrowing $XXXXXXXXXX from USco and/or from borrowing $XXXXXXXXXX from the Bank under a new credit facility or loan. It is anticipated that the indebtedness to the Bank under the credit facility will be extinguished by XXXXXXXXXX.

8. Canco will amend its corporate articles to create another class of preferred shares which will be non-voting, redeemable and retractable preferred shares.

9. USco will establish a wholly-owned subsidiary, Newco, under the laws of Canada or one of the Provinces of Canada. Newco's authorized capital will consist of a single class of common shares and one or more classes of preferred shares. Newco will make an election within 90 days of its incorporation, in accordance with paragraph (e) of the definition of non-resident-owned investment corporation in subsection 133(8) of the Act, to be taxed under section 133 of the Act as a non-resident owned investment corporation.

10. USco will subscribe for common shares in the capital of Newco at a subscription price of $XXXXXXXXXX. None of the cash required to capitalize Newco will come from Canada. Newco will add the full amount of the subscription proceeds to the stated capital of its common shares.

11. Newco will use the entire subscription proceeds for its common shares to purchase the Loan from the Bank (the "Purchased Debt"). Thereafter, Newco will hold the Purchased Debt as an investment for an indefinite period of time and will collect the interest thereon. Newco will arrange for an interest-bearing account with a Canadian financial institution and will deposit the interest on the Purchased Debt and any interest thereon in that account. Periodically, Newco will distribute stock dividends to USco from its accumulated income.

12. Periodically, Newco will invest its cash received in respect of the interest on the Purchased Debt in the new class of Canco preferred shares described in paragraph 9 above. Canco will pay a sufficient amount of its interest in cash to Newco to enable Newco to meet its tax liability.

Newco may pay cash dividends from time to time or invest its interest income in banker's acceptances. However, it will not acquire the banker's acceptances from the drawer. At least 90% of the face amount of the banker's acceptances acquired by Newco will be held by it to their due date and Newco will only acquire banker's acceptances if, at the time of acquisition, it intends to hold them to their due date.

Newco will not engage in any activities, take any actions or make any investments, including the reinvestment of interest and principal received from Canco, in such a manner that these activities, when taken by themselves or in conjunction with the proposed transactions described above, will result in Newco not complying with the conditions described in paragraph (d) of the definition of non-resident-owned investment corporation in subsection 133(8) of the Act.

13. Newco will withhold and remit to Revenue Canada 10% withholding tax on all dividends that will be paid or credited to USco.

Purpose and Tax Consequences of the Proposed Transaction

The purpose of the proposed series of transactions is to restructure the debt of Canco without creating adverse income tax consequences in the U.S. or Canada. Each of the proposed transactions has this restructuring as a purpose. The tax benefits resulting from the series of transactions include (i) the deduction of the interest payable in respect of Canco's indebtedness to Newco in computing its income under Part I of the Act, (ii) the qualification of Newco as a non-resident-owned investment corporation, and (iii) the qualification of distributions by Newco to USco in the form of (predominantly) stock dividends as taxable dividends subject to a withholding tax of 10%.

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 that USco does not become a resident of Canada and is not and will not become a foreign affiliate of a taxpayer resident in Canada, Newco will be a non-resident-owned investment corporation.

B. The proposed transactions described above, in and by themselves, will not result in Newco ceasing to qualify as a non-resident-owned investment corporation.

C. Subject to the possible application of subsection 18(4) of the Act, provided Canco has a legal obligation to pay interest on the Purchased Debt, and provided Canco uses the Purchased Debt to earn income from a business or property (other than to acquire property the income from which would be exempt or to acquire a life insurance policy), the interest paid or payable thereon in respect of the year (depending on the method regularly followed by Canco in computing its income) will be deductible by Canco to the extent it is reasonable.

D. As a result of the proposed transactions, in and by themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences of the rulings given.

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

Upon the payment by Newco of a stock dividend to USco, the amount of the stock dividend, as defined in section 248(1) of the Act, will be considered a taxable dividend for the purposes of the definition of "allowable refund" in subsection 133(8) of the Act to the extent that Newco does not elect to have that amount treated as a capital gains dividend within the meaning of subsection 133(7.1) of the Act.

The foregoing opinion is not a ruling and, in accordance with the practice referred to in Information Circular 70-6R3, is not binding on Revenue Canada.

Comments

Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has reviewed whether or not XXXXXXXXXX still meets the definition of a non-resident-owned investment corporation.

Yours truly,

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

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