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: Loan without interest from a foreign affiliate to the parent company of its Canadian corporate shareholder
Position: No benefit under subsection 15(1), 56(2) or 246(1) is considered to be conferred on the Canadian shareholder and its parent company. Neither subsection 15(2) nor section 80.4 applies to the parent company.
Reasons: Both subsections 15(2) and 80.4(2) do not apply to a Canadian resident corporation which receives the loan by virtue of the words “other than a corporation resident in Canada”..
XXXXXXXXXX
XXXXXXXXXX 982644
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Dear Sirs:
Re: 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-referenced taxpayer.
XXXXXXXXXX files its T2 corporate income tax return with the XXXXXXXXXX Tax Services Office under Account Number XXXXXXXXXX.
To the best of your knowledge and that of the taxpayer involved, none of the issues involved with this request:
(i) is involved in an earlier return of the taxpayer or a related person;
(ii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayer or a related person;
(iii) is under objection; or
(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.
Definitions
In this letter the following terms have the meanings specified:
(a) “Act” means the Income Tax Act R.S.C. 1985 c.1 (5th Supp.), 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 provisions of the Act;
(b) “Canco” means XXXXXXXXXX, a taxable Canadian corporation and a public corporation as defined under subsection 89(1).
XXXXXXXXXX
(c) “Subco” means XXXXXXXXXX, a taxable Canadian corporation incorporated under and subject to the XXXXXXXXXX Business Corporations Act. XXXXXXXXXX files its income tax returns with the XXXXXXXXXX Tax Services Office under Account Number XXXXXXXXXX;
(d) “Foreignco #1” means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX. Its taxation year ends on XXXXXXXXXX;
(e) “Foreignco #2” means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX. Its taxation year ends on XXXXXXXXXX;
(f) “Foreignco #3” means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. Canco is a corporation resident in Canada and is engaged, directly or through its subsidiary corporations, in the business of XXXXXXXXXX.
2. Canco owns all the issued and outstanding shares of Subco, a taxable Canadian corporation. The principal purpose of Subco is to own, directly or through subsidiary corporations, international investments of the Canco group of companies.
3. Subco owns all the issued and outstanding shares of Foreignco #1, a corporation resident in XXXXXXXXXX which is not a resident of Canada for purposes of the Act. Foreignco #1 is therefore a foreign affiliate and a controlled foreign affiliate of Subco as defined under subsection 95(1). The principal purpose of Foreignco #1 is to own, directly or through subsidiary corporations, international investments of the Canco group of companies.
4. Foreignco #1 owns all the issued and outstanding shares of Foreignco #2, a corporation resident in XXXXXXXXXX which is not a resident of Canada for purposes of the Act. Foreignco #2 is therefore a foreign affiliate and a controlled foreign affiliate of Subco. The principal purpose of Foreignco #2 is to own, directly or through subsidiary corporations, investments in a number of XXXXXXXXXX corporations.
5. Foreignco #2 owns XXXXXXXXXX% of the issued and outstanding shares of Foreignco #3, a corporation incorporated under the laws of XXXXXXXXXX. Foreignco #3 is a resident of XXXXXXXXXX and is not a resident of Canada for purposes of the Act. A corporation that is a public corporation and a taxable Canadian corporation with whom Canco deals at arm’s length owns through subsidiary corporations XXXXXXXXXX% of the issued and outstanding shares of Foreignco #3. All the other issued and outstanding shares of Foreignco #3 are owned by persons with whom Canco deals at arm’s length that are not resident in Canada. Foreignco #3 is therefore is a foreign affiliate and not a controlled foreign affiliate of Subco. The principal business of Foreignco #3 is the XXXXXXXXXX. Foreignco #3 therefore earns income from an active business carried on in XXXXXXXXXX.
6. On XXXXXXXXXX, Foreignco #3 paid a dividend on all of its issued and outstanding shares. Foreignco #2’s share of this dividend was U.S.$XXXXXXXXXX which was paid out of Foreignco #3’s taxable surplus in respect of Subco and therefore forms part of the taxable surplus of Foreignco #2 in respect of Subco. Foreignco #2 invested the amount of the dividend in a short-term interest-bearing deposits payable in U.S. dollars. The interest income earned from such short-term deposits constitutes foreign accrual property income (“FAPI”) of Foreignco #2 which is to be included in computing the income of Subco pursuant to subsection 91(1).
Proposed Transactions
7. After the receipt of this ruling, Foreignco #2 will pay to Foreignco #1 a dividend in the amount of U.S.$XXXXXXXXXX. If at the time of the payment of the dividend, Foreignco #2 has cash invested in one or more short-term deposits payable in U.S. dollars, all or a portion of the dividend will be paid by Foreignco #2 assigning all or a portion of the deposits to Foreignco #1. Except to the extent of an assignment of any short-term deposits, the dividend will be paid in cash and in U.S. dollars.
As a result of the assignment, if any, of the short-term deposits and the transfer of U.S. currency by Foreignco #2 to Foreignco #1, any foreign exchange gain or loss realized as a result of such assignment or transfer vis-à-vis the Canadian currency will be included in the computation of FAPI of Foreignco #2.
In addition, any interest earned by Foreignco #2 from the short-term deposits, including any interest accrued to the time immediately prior to the assignment of the deposits by Foreignco #2 to Foreignco #1 will be included in the computation of FAPI of Foreignco #2.
8. Following the receipt of the dividend as described in 7 above, Foreignco #1 will lend to Canco an amount (the “Loan”) equal to the Canadian dollar equivalent of U.S.$XXXXXXXXXX on the following basis:
(a) The Loan will be made in Canadian dollars and will be repayable in Canadian dollars. The Loan will be evidenced in writing. Where the actual advance is made in United States dollars, whether by a cash payment or assignment of an investment (as discussed in (d) below), the principal amount of the Loan will be recorded in an amount equal to the Canadian dollar equivalent using the applicable spot exchange rate on the date the Loan is made.
(b) The Loan will not bear interest.
(c) All or any portion of the principal amount of the Loan will be repayable by Canco on demand by Foreignco #1 for repayment. Canco will also be able to repay all or any portion of the principal amount of the Loan at any time without penalty.
(d) If Foreignco #1 holds short-term deposits in U.S.dollars at the particular time the Loan is to be made, all or a portion of such deposits will be assigned to Canco as all or part of the proceeds of the Loan. The portion of the proceeds of the Loan that is not paid to Canco by the assignment of short-term deposits will be paid to Canco by way of a cash payment in U.S.dollars
As a result of the assignment, if any, of the short-term deposits and the transfer of U.S. currency by Foreignco #1 to Canco, any foreign exchange gain or loss on such assignment or transfer vis-à-vis the Canadian currency will be included in the computation of FAPI of Foreignco #1.
In addition, any interest earned by Foreignco #1, including any interest accrued to the time immediately prior to the assignment of the short-term deposits from Foreignco #1 to Canco, will be included in the computation of FAPI of Foreignco #1 to the extent that it has not previously been included in the computation of FAPI of Foreignco #2.
9. Canco will redeem as soon as possible any short-term deposits acquired by it from Foreignco #1 as proceeds of the Loan. As a result of such redemption, foreign exchange gain or loss, if any, will also arise.
Purpose of the Proposed Transactions
The primary objective of the proposed transactions is to enable Canco to access the excess funds of Foreignco #2 and Foreignco #1.
Rulings Given
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. Neither Canco nor Subco will be treated as realizing a benefit under subsection 15(1), 56(2) or 246(1) as a result of Foreignco #1 lending amounts to Canco on the basis described in 8 above.
B. Neither subsection 15(2) nor section 80.4 will apply to Canco in respect of the Loan.
C. Subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given above as a result of the completion of the proposed transactions, in and by themselves.
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 the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
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 ruling given above.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
6
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