1998 Ruling 9820863 - 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.

XXXXXXXXXX
XXXXXXXXXX 982086
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs/Mesdames:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers (collectively referred to as the “Taxpayers”). We also acknowledge the additional information provided in your letters of XXXXXXXXXX and in our various telephone conversations (XXXXXXXXXX).

To the best of your knowledge and that of the taxpayers involved, none of the issues contained herein:

i. is in an earlier return of the Taxpayers or a related person,

ii. is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Taxpayers or a related person,

iii. is under objection by the Taxpayers or a related person, or

iv. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

All references in this ruling request are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended (the “Act”).

Facts

1. XXXXXXXXXX is a public corporation incorporated in and resident of the United States. XXXXXXXXXX has issued Common Stock and XXXXXXXXXX% XXXXXXXXXX Cumulative Preferred Stock on the XXXXXXXXXX Stock Exchange. XXXXXXXXXX is engaged in the manufacture, sale and distribution of XXXXXXXXXX.

2. XXXXXXXXXX owns all of the issued and outstanding common shares of XXXXXXXXXX, a Canadian resident corporation incorporated under the XXXXXXXXXX.

3. XXXXXXXXXX owns all of the issued and outstanding common shares of XXXXXXXXXX, a Canadian resident corporation incorporated under the Canada Business Corporations Act.

XXXXXXXXXX

4. XXXXXXXXXX owns all of the issued and outstanding common shares of XXXXXXXXXX, a Canadian resident corporation (formerly XXXXXXXXXX.). XXXXXXXXXX is a manufacturer of XXXXXXXXXX.

5. XXXXXXXXXX are all taxable Canadian corporations within the meaning of paragraphs 89(1) of the Act.

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

Proposed Transactions

7. XXXXXXXXXX will establish a wholly-owned subsidiary (“Newco”) under the laws of Canada. Newco's capital will consist of a single class of common shares and a single class of preferred shares. Newco will make an election, within 90 days of its incorporation and in accordance with subparagraph 133(8)(e) to be taxed under section 133 as a non-resident-owned investment corporation.

8. XXXXXXXXXX will arrange to borrow funds from the Bank (Loan #1) an amount, not to exceed the lesser of:

(i) the sum of XXXXXXXXXX paid-up capital, as defined in subsection 89(1) of the Act, immediately before the borrowing of Loan #1, and accumulated profits if any;

(ii) $XXXXXXXXXX; and

(iii) XXXXXXXXXX limitation under the Canadian thin capitalization rules as set out in subsection 18(4) of the Act.

Loan #1 will have the following terms:

Rate: LIBOR plus 50 basis points for a US dollar borrowing or a comparable Canadian interest rate if the borrowing is in Canadian dollars.

LIBOR: As quoted in the Wall Street Journal (or like publication) on the first business day of each Interest Period.

Interest Period: Semi-Annual

Term: 5 years, extendible for additional 5 year periods with approval from lender

Principal Payments: All due at final maturity

Subordination: Senior Debt, Unsecured

Currency: Loan will be in Canadian or US currency

Guarantee: Loan will be guaranteed by XXXXXXXXXX

The interest will not be capitalized but will be paid when due.

9. XXXXXXXXXX will loan the funds from Loan #1 to XXXXXXXXXX (Loan #2) on the same terms as Loan #1 except that the interest rate will be 12.5 basis points higher.

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

11. After the completion of the above transactions and after Loan #1 has remained outstanding for at least one month, XXXXXXXXXX will use the proceeds from Loan #2 to return all of its paid-up capital and “accumulated profits”, if any, to XXXXXXXXXX. XXXXXXXXXX will then return paid-up capital to XXXXXXXXXX which will return paid-up capital to XXXXXXXXXX.

12. Immediately after the transactions described in paragraph 11 and immediately before the purchase of Loan #1 described in paragraph 13, XXXXXXXXXX will contribute the funds received from the transactions described in paragraph 11 to Newco in exchange for common shares of Newco. Newco will add the full amount of the subscription proceeds to the stated capital of its common shares.

13. Newco will use the funds received in the transaction described in paragraph 12 to acquire Loan #1 from the Bank (the “Purchased Debt”). Thereafter, Newco will hold the Purchased Debt as an investment to maturity and will collect the interest on it. Newco may invest its interest and other income in banker's acceptances or similar property however it will not acquire the acceptances from the drawer. At least 90 per cent of the face amount of 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.

14. Periodically, Newco will invest its cash received in respect of the interest on the Purchased Debt in the new class of XXXXXXXXXX preferred shares described in paragraph 10 above. Newco will retain a sufficient amount of cash to meet its tax liability.

15. Newco will pay an annual dividend from its cumulative taxable income to XXXXXXXXXX, commencing in Newco’s second taxation year. All or a portion of these dividends will be paid as stock dividends by issuing preferred shares. The amount of the stock dividend will equal the paid up capital and the redemption price of the preferred shares. The dividend will be subject to Canadian withholding tax at the treaty reduced rate of 10%.

16. Newco will not engage in any activities, take any actions or make any investments including the reinvestment of interest and principal received from XXXXXXXXXX, 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.

17. In no case will the aggregate borrowing of XXXXXXXXXX from Newco or other specified non-resident shareholders as defined in subsection 18(5), exceed three times the sum of XXXXXXXXXX retained earnings at the start of the period, contributed surplus contributed by specified non-resident shareholders, and the greater of XXXXXXXXXX opening or closing paid up capital for the year.

18. Newco will withhold and remit to Revenue Canada 10% withholding tax on all dividends described in subsection 212(2) of the Act, other than a capital gains dividend within the meaning of subsection 133(7.1), that will be paid or credited to XXXXXXXXXX.

Purposes of the Proposed Transactions

The purposes of the proposed transactions are to restructure the debt-equity ratio of XXXXXXXXXX and to control the timing of payments of dividends to XXXXXXXXXX. The tax benefits resulting from the series of transactions include (i) the deduction of the interest payable in respect of the indebtedness of XXXXXXXXXX and XXXXXXXXXX in computing the income of those corporations under Part I and (ii) the qualification of distributions by Newco to XXXXXXXXXX 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 the relevant facts, proposed transactions and the purposes 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 XXXXXXXXXX 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), provided XXXXXXXXXX has legal obligations to pay interest on Loan #1 and the Purchased Debt, and provided XXXXXXXXXX uses the money from Loan #1 and 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 by XXXXXXXXXX on Loan #1 and the Purchased Debt will be deductible.

D. Provided XXXXXXXXXX has a legal obligation to pay interest on Loan #2, and provided XXXXXXXXXX uses the money from Loan #2 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 by XXXXXXXXXX on Loan #2 will be deductible.

E. Because subsection 18(4) of the Act will apply to XXXXXXXXXX in respect of Loan #1 and the Purchased Debt, subsection 18(6) will not be considered to apply to Loan #2 to XXXXXXXXXX.

F. As a result of the proposed transactions, in and by themselves, subsection 245(2) of the Act will not be applied to re-determine the tax consequences confirmed in 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 XXXXXXXXXX, 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 agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular, we are not commenting on

a) any future borrowings by XXXXXXXXXX; or

b) the retained earnings or paid-up capital of XXXXXXXXXX before or after the proposed transactions described above.

Yours truly,

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

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