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: Whether back-to-back loan arrangement qualifies for the Department's administrative exception from the application of subsection 18(6).
Position: The scenario set out in the proposed transactions satisfies the conditions for the Department's administrative exception from the application of subsection 18(6).
Reasons: The lender, which is a specified non-resident shareholder has de jure control of the Canadian resident borrower in respect of the first loan as well as the Canadian resident borrower in respect of the second loan. The rate of interest on the second loan is higher than the rate of interest on the first loan.
XXXXXXXXXX
XXXXXXXXXX 991268
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling
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 our telephone conversations.
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 1" means XXXXXXXXXX. Its Business Number is XXXXXXXXXX. The tax services office and taxation center where XXXXXXXXXX return is filed are XXXXXXXXXX and XXXXXXXXXX, respectively.
c) "Canco 2" means XXXXXXXXXX. Its Business Number is XXXXXXXXXX. The tax services office and taxation center where XXXXXXXXXX return is filed are XXXXXXXXXX and XXXXXXXXXX, respectively.
d) "Canco 3" means XXXXXXXXXX. Its Business Number is XXXXXXXXXX. The tax services office and taxation center where XXXXXXXXXX return is filed are XXXXXXXXXX and XXXXXXXXXX, respectively.
e) "Usco 1" means XXXXXXXXXX.
f) "Usco 2" means XXXXXXXXXX.
g) XXXXXXXXXX.
h) XXXXXXXXXX.
i) XXXXXXXXXX.
Facts
1. To the best of your knowledge and that of the taxpayer involved, none of the issues involved with this request:
a) is involved in an earlier return of the taxpayer or a related person,
b) 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,
c) is under objection, or
d) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.
2. XXXXXXXXXX is a non-resident company that is a resident of XXXXXXXXXX under the Canada - XXXXXXXXXX Income Tax Agreement.
3. XXXXXXXXXX is also a non-resident company that resides inXXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX.
4. XXXXXXXXXX is a non-resident company that resides in XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX.
5. Usco 1 is a non-resident company that resides in the United States. Usco 1 is a wholly-owned subsidiary of XXXXXXXXXX.
6. Usco 2 is a non-resident company that also resides in the United States. Usco 2 is a wholly-owned subsidiary of Usco 1.
7. Canco 1 is a "taxable Canadian corporation" and a "private corporation" as those terms are defined in subsection 89(1) and has a XXXXXXXXXX year-end. Canco 1 is a wholly-owned subsidiary of XXXXXXXXXX.
8. Canco 2 is a "taxable Canadian corporation" and a "private corporation" as those terms are defined in subsection 89(1) and has a XXXXXXXXXX year-end. Canco 1 owns XXXXXXXXXX% of each of the common and preferred shares of Canco 2 and XXXXXXXXXX owns XXXXXXXXXX% of each of the common and preferred shares of Canco 2.
9. Canco 3 is a "taxable Canadian corporation" and a "private corporation" as those terms are defined in subsection 89(1) and has a XXXXXXXXXX year-end. Canco 3 is a wholly-owned subsidiary of Usco 2.
10. Canco 1 carries on a wholesale business in which it XXXXXXXXXX.
11. Canco 2 carries on a real estate business in which it acquires, develops and leases real estate to certain corporations and XXXXXXXXXX in Canada.
12. Canco 3 carries on a financing business in which it provides and services wholesale, retail and lease financing to certain XXXXXXXXXX in Canada.
Proposed Transactions
13. XXXXXXXXXX proposes to loan Canadian funds to Canco 1 (the "XXXXXXXXXX - Canco 1/3 Loan") as set out in paragraph 15 below. The terms of the XXXXXXXXXX - Canco 1/3 Loan have not been finalized but the loan will bear a fixed or floating interest rate set at a rate equivalent to Canadian dollar LIBOR plus XXXXXXXXXX. This rate should be less than the rate Canco 1 can currently borrow locally in Canada.
14. XXXXXXXXXX also proposes to loan Canadian funds to Canco 2 (the "XXXXXXXXXX - Canco 2/3 Loan") as set out in paragraphs 16 below. The terms of the XXXXXXXXXX - Canco 2/3 Loan have not been finalized but the loan will bear a fixed or floating interest rate set at a rate equivalent to Canadian dollar LIBOR plus XXXXXXXXXX. This rate should be less than the rate Canco 2 can currently borrow locally in Canada.
15. The XXXXXXXXXX - Canco 1/3 Loan will be made by XXXXXXXXXX on condition that Canco 1 re-loan those same funds to Canco 3. Canco 1 will loan the funds from the XXXXXXXXXX - Canco 1/3 Loan to Canco 3 (the "Canco 1 - Canco 3 Loan") at an interest rate of XXXXXXXXXX of a point higher than the interest rate applicable under the XXXXXXXXXX - Canco 1/3 Loan.
16. The XXXXXXXXXX - Canco 2/3 Loan will be made by XXXXXXXXXX on condition that Canco 2 will re-loan those same funds to Canco 3. Canco 2 will loan the funds from the XXXXXXXXXX - Canco 2/3 Loan to Canco 3 (the "Canco 2 - Canco 3 Loan") at an interest rate XXXXXXXXXX of a point higher than the interest rate applicable under the XXXXXXXXXX - Canco 2/3 Loan.
17. Canco 1 and Canco 2 will withhold XXXXXXXXXX% of the gross interest paid on loans from XXXXXXXXXX pursuant toXXXXXXXXXX Income Tax Agreement and remit the withholding tax to Revenue Canada, within 15 days after the end of the month in which the interest was paid pursuant to section 215.
Purpose of the Proposed Transactions
Canco 3 desires to refinance its operations on more favorable terms than is currently available to it locally in Canada in order to facilitate the expansion of business operations in Canada.
Rulings Given
Provided the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided the proposed transactions are completed in the manner described above, our rulings are as follows:
A. Subsection 18(6) will not be applied to deem the Canco 1 - Canco 3 Loan or the Canco 2 - Canco 3 Loan to be a debt incurred by Canco 3 to XXXXXXXXXX.
B. Subject to the application of subsection 18(4), provided the funds from the XXXXXXXXXX - Canco 1/3 Loan and the XXXXXXXXXX - Canco 2/3 Loan continue to be used as set out in paragraphs 15 and 16 above, the lesser of a reasonable amount and the amount of the interest paid on such loans will be deductible under paragraph 20(1)(c).
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 amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this letter should be construed as implying that Revenue Canada has:
a) agreed that interest paid by Canco 1, Canco 2, or Canco 3 on any loan except as specifically set out in ruling B above, is deductible in computing income under paragraph 20(1)(c),
b) reviewed or accepted the amount of the retained earnings of, the contributed surplus contributed by specified non-resident shareholders to, or the paid-up capital of the shares of, Canco 1, Canco 2 or Canco 3 or otherwise attempted to determine whether subsection 18(4) would deny a deduction in respect of interest paid on a loan other than a loan referred to in Ruling A above, or
c) agreed to any other tax consequences relating to any facts or proposed transactions referred to herein other than those as specifically described in the rulings given above.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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