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: Minor changes to facts and proposed transactions. (Principal issue - would GAAR be applied where a trust is used to issue notes? (Debt of a trust is not listed as “foreign property” under subsection 206(1))).
Position: No change to rulings.
Reasons: Changes do not affect nature of the transaction. The transaction is to be undertaken for bona fide purposes other than to obtain a tax benefit; thus it is not an avoidance transaction.
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX 1-982725
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Dear Sirs:
Re: Revised Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, wherein you requested a revision to advance income tax ruling # 3-980969 dated XXXXXXXXXX, 1998 that was provided to the above-noted taxpayer. We also acknowledge the information during our various telephone conversations (XXXXXXXXXX).
This letter cancels and replaces our ruling letter of XXXXXXXXXX, 1998.
DEFINITIONS AND ABBREVIATIONS
In this letter, the following terms have the meanings specified:
- "Act" means the Income Tax Act (Canada), and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
- "Cost Amount" has the meaning assigned by subsection 248(1);
- "Foreign Property" has the meaning assigned by subsection 206(1);
- "Opco" means XXXXXXXXXX;
- "Parentco" means the XXXXXXXXXX;
- "Targetco" means the XXXXXXXXXX;
- "Trustco" means XXXXXXXXXX.
RELEVANT FACTS
1. Opco deals with the XXXXXXXXXX Tax Services Office and its income tax return is filed with the XXXXXXXXXX Tax Centre.
PROPOSED TRANSACTIONS
2. A trust (the “Trust”) will be established under the laws of the Province of XXXXXXXXXX with a nominal amount. The Trust does not yet have a tax account number or business number and has never filed a Canadian tax return.
3. The trustee of the Trust will be Trustco. Opco will be appointed the administrative agent of the Trust and provide to it administrative services in connection with the acquisition of securities, the execution of swap arrangements, the issuance of indebtedness and other activities incidental to same, subject to the control and direction of Trustco.
4. The beneficiaries of the Trust will XXXXXXXXXX.
5. The Trust will borrow funds from investors (the “Note Holders”) XXXXXXXXXX and issue, as evidence of its indebtedness, notes (the “Notes”) generally denominated in Canadian dollars. Multiple issues of Notes in different series are contemplated.
6. The Notes may either bear interest, at a specified fixed or floating rate, or be issued at a discount and not bear interest.
7. The Trust will invest its funds in a variety of securities and swap arrangements.
XXXXXXXXXX
8. The Trust will also enter into swap arrangements with XXXXXXXXXX, whereby it will swap payment streams it is entitled to receive XXXXXXXXXX for an equivalent payment stream in another currency in order to satisfy its liability under the Notes (“Hedging Agreements”).
XXXXXXXXXX
9. All amounts paid and received by the Trust under the Hedging Agreements will be treated as income and expense, respectively, for accounting purposes.
10.
XXXXXXXXXX
11. As security for the due payment of all Notes and all other obligations, the Trust will mortgage, charge, pledge, grant, transfer, assign and set over unto the indenture trustee for the benefit of all Noteholders and other creditors (other than Trustco) and will grant to the indenture trustee for the benefit of the said Noteholders and creditors a security interest in the Trust’s properties, rights, titles and interests XXXXXXXXXX.
12.
XXXXXXXXXX
13. The transactions described below will be undertaken in connection with the first series of Notes to be issued by the Trust.
a) The Trust proposes to acquire $XXXXXXXXXX face value floating rate notes issued by Targetco (the “Targetco Debt”). The Targetco Debt is a Canadian dollar XXXXXXXXXX note. The applicable rate is the XXXXXXXXXX. The Targetco Debt has a maturity date of XXXXXXXXXX.
b) The Targetco Debt has been purchased by Parentco on the open market
XXXXXXXXXX.
c)
XXXXXXXXXX
d) The Trust would then issue Notes denominated in Canadian dollars, maturing on XXXXXXXXXX, and bearing interest XXXXXXXXXX.
e) The Notes will be issued by the Trust at face value. Although it is intended that the Notes will be sold to third party investors, it is possible that the initial acquirer of the Notes will be Parentco.
f)
XXXXXXXXXX
PURPOSE OF THE PROPOSED TRANSACTIONS
14. Parentco has the expertise to identify debt instruments that are trading at values which it believes do not reflect their value to Parentco.
XXXXXXXXXX
Additional capital from sources with the risk-profile for such opportunities is available from certain investors and Parentco leverages its know-how by applying its expertise with other investors’ capital. The use of the trust vehicle accomplishes all of these objectives as it facilitates access to Opco’s swap expertise and allows Opco and related parties to profit from their expertise without the need for them to commit the capital beyond its risk-profile restrictions.
15. With regard to the issue of the first series of Notes as described in paragraph 13 above, the parties involved in these transactions would realize a favorable economical result. The Notes would provide a Noteholder with a yield XXXXXXXXXX higher than the Noteholder could obtain in a direct investment of another note having the same credit-rating. Parentco and related entities would realize a profit calculated on a net present value basis under existing market conditions.
16. To the best of your knowledge and that of Opco none of the issues in respect of which rulings are herein requested is:
(a) in an earlier return of Opco or a related person,
(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of Opco,
(c) under objection by Opco or a related person,
(d) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired, and
(e) the subject of a ruling previously issued by the Directorate.
RULINGS
Provided that the statement of facts and proposed transactions are correct and constitute a complete disclosure of all of the relevant facts and proposed transactions, we rule as follows:
A) The first series of Notes to be issued by the Trust, as described in paragraphs 13(d) and (e) above will not constitute Foreign Property for the purposes of Part XI.
B) Subsection 245(2) will not be applied to redetermine the tax consequences confirmed in ruling A above.
The above rulings, which are based on the Act in its present form 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 within six months of the date of this letter.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
6
.../cont’d
.../cont’d
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1997
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1997
Email this Content