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: Transfer of interest expense to new operating company.
Position: OK
Reasons: Previous Rulings
XXXXXXXXXX
XXXXXXXXXX 982631
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
RE: XXXXXXXXXX
This is in response to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the telephone conversations (XXXXXXXXXX) which further clarified the facts and proposed transactions described below.
We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling is being considered by a Tax Services Office or a Taxation Centre in connection with any tax return already filed, and none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.
In this letter “the Act” means the Income Tax Act, RSC 1985, Fifth Supplement, c.1, as amended from time to time.
Facts
1. XXXXXXXXXX is a XXXXXXXXXX corporation. On XXXXXXXXXX purchased all of the issued and outstanding shares of XXXXXXXXXX corporation, from arm’s length third parties for $XXXXXXXXXX.
2. XXXXXXXXXX is in the XXXXXXXXXX business carrying on business in various provinces throughout Canada. XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX Subco is a U.S. corporation wholly owned by XXXXXXXXXX is a U.S. corporation which carries on the XXXXXXXXXX business throughout the world.
3.
XXXXXXXXXX
4.
XXXXXXXXXX
5. In order to fund the acquisition of XXXXXXXXXX borrowed the U.S. equivalent of $XXXXXXXXXX (the “Loan”) from the XXXXXXXXXX (the “Lender”). The balance of $XXXXXXXXXX was funded by an investment by XXXXXXXXXX Subco in XXXXXXXXXX common shares.
Proposed Transactions
6. XXXXXXXXXX will incorporate a wholly-owned unlimited liability company in XXXXXXXXXX (“New XXXXXXXXXX”) and transfer its XXXXXXXXXX business to NEW XXXXXXXXXX pursuant to the provisions of subsection 85(1) of the Act at fair market value in consideration for the assumption of liabilities of the business and the issuance of common shares of New XXXXXXXXXX.
7. XXXXXXXXXX will wind-up into XXXXXXXXXX pursuant to the provisions of subsection 88(1) and bump the cost of the shares of the Corporations to their fair market value.
8. XXXXXXXXXX will reduce its capital by an amount equal to the fair market value of its interests in the foreign affiliates and will satisfy the reduction by transferring the shares of the foreign affiliates to XXXXXXXXXX Subco. The paid-up capital of XXXXXXXXXX before the reduction of capital is equal to or greater than the fair market value of the shares of the foreign affiliates.
9. XXXXXXXXXX Subco will incorporate a wholly-owned unlimited liability company in XXXXXXXXXX (“XXXXXXXXXX Prefco”).
10. New XXXXXXXXXX will borrow the US equivalent of $XXXXXXXXXX (the “New Loan”) from the Lender and will use the funds to subscribe for the same US amount of preferred shares of XXXXXXXXXX Prefco.
11. The preferred shares of XXXXXXXXXX Prefco will be: non-voting; cumulative dividends payable annually at a rate equal to New XXXXXXXXXX borrowing costs from the Lender on the New Loan plus XXXXXXXXXX%.
12. XXXXXXXXXX Prefco will subscribe for the US equivalent of $XXXXXXXXXX of preferred shares in XXXXXXXXXX. The preferred shares of XXXXXXXXXX will bear the same conditions and attributes as the XXXXXXXXXX Prefco preferred shares.
13. XXXXXXXXXX will repay the Loan.
14. New XXXXXXXXXX will pay sufficient annual dividends on its common shares to XXXXXXXXXX to enable XXXXXXXXXX to pay sufficient dividends on its preferred shares to XXXXXXXXXX Prefco which will enable XXXXXXXXXX Prefco to pay sufficient dividends on its preferred shares to New XXXXXXXXXX. To the extent that there is a shortfall, XXXXXXXXXX will undertake directly or indirectly to inject sufficient cash in New XXXXXXXXXX to enable the payment of the requisite dividend on the common shares.
15. Neither of XXXXXXXXXX, New XXXXXXXXXX or XXXXXXXXXX Prefco is or will be a “financial institution” for the purposes of Part I.3 of the Act.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to allow interest to be deductible in the operating entity (New XXXXXXXXXX) rather than in the holding entity (XXXXXXXXXX) which will have no income against which to deduct such interest expense. The parties wish to maintain the separate existence of the entities in order to minimize various other taxes such as the large corporations tax and provincial capital tax.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the 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 New XXXXXXXXXX has a legal obligation to pay interest on the New Loan from the Lender referred to in paragraph 10 above, in computing its income for a taxation year, New XXXXXXXXXX will be entitled to deduct pursuant to paragraph 20(1)(c) of the Act the lesser of the interest paid or payable in respect of that year on the New Loan to the extent that the borrowed funds continue to be used for the purpose of gaining or producing income (other than income which would be exempt).
B. The Provisions of Subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves as to redetermine the tax consequences confirmed in the rulings given.
These rulings are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R3 dated December 30, 1996, and are binding on Revenue Canada, Taxation provided that the proposed transactions herein are completed by XXXXXXXXXX.
Opinion
As stated in paragraph 15 of IC 70-6R3, we are not able to rule on your request with respect to Part I.3 since the advance ruling would require an opinion as to generally accepted accounting principles. However, it is our view that for purposes of Part I.3 of the Act, it is the legal nature of the financial instrument that governs its classification irrespective of its accounting treatment.
The foregoing opinion is given in accordance with the practice referred to in paragraph 22 of IC 70-6R3 and is not binding on Revenue Canada, Taxation.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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