1999 Ruling 9924143 - NRO - MAKING OF A LOAN

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 we will rule favorably that the purchase of previously existing non-arm's length debt (i.e. debt that was not incurred in contemplation of the proposed transactions) by a non-resident-owned investment corporation ("NRO") would not be considered the "making of a loan" for purposes of the definition of NRO in subsection 133(8).

Position: Yes

Reasons: Similar to previous rulings

XXXXXXXXXX 992414

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX ("Canco")
XXXXXXXXXX ("Usco")
XXXXXXXXXX ("US Holdco")
XXXXXXXXXX ("Financeco") (collectively the "Parties")
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. In your letters dated XXXXXXXXXX additional information was provided regarding the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

Canco files its T2 Return with the XXXXXXXXXX Tax Centre.

Definitions

In this ruling the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, chapter 1, R.S.C. 1985 (5th supp.), as amended as at the date hereof, and each reference to a Part, section, subsection, paragraph, subparagraph or clause is a reference to the specified provision of the Act;

(b) "foreign affiliate" has the meaning set out in subsection 95(1);

(c) "NRO" means "non-resident-owned investment corporation" as defined in subsection 133(8);

(d) XXXXXXXXXX;

(e) "PUC" means "paid-up capital" as defined in subsection 89(1);

(f) "taxable Canadian corporation" has the meaning assigned in subsection 89(1);

(g) "UK Treaty" means the Canada-United Kingdom Income Tax Convention; and,

(h) "US Treaty" means the Canada-United States Income Tax Convention.

Facts

1. Canco is a corporation governed by the XXXXXXXXXX, and is a taxable Canadian corporation. Canco was formed on the amalgamation of XXXXXXXXXX. All of Canco's issued and outstanding shares currently are beneficially owned by US Holdco. Prior to the amalgamation of XXXXXXXXXX, all of the issued and outstanding shares of XXXXXXXXXX were beneficially owned by US Holdco.

2. US Holdco is a corporation incorporated under the laws of the state of XXXXXXXXXX, and is a resident of the United States for the purposes of the US Treaty. US Holdco is not resident in Canada, and is not a foreign affiliate of any taxpayer resident in Canada, for the purposes of the Act. US Holdco is a wholly-owned direct subsidiary of USco.

3. USco is a corporation incorporated under the laws of the state of XXXXXXXXXX, and is a resident of the United States for the purposes of the US Treaty. USco is not resident in Canada for the purposes of the Act. To the best of the knowledge of the Parties and of the directors and officers of USco, USco is not a foreign affiliate of any taxpayer resident in Canada for the purposes of the Act. USco is a public corporation, with its shares listed on the XXXXXXXXXX Stock Exchange and the XXXXXXXXXX Stock Exchange.

4. Financeco is a corporation incorporated under the laws of the United Kingdom, and is a resident of the United Kingdom for the purposes of the UK Treaty. Financeco is not resident in Canada, and is not a foreign affiliate of any taxpayer resident in Canada, for the purposes of the Act. Financeco is a wholly-owned indirect subsidiary of US Holdco and has been in existence since XXXXXXXXXX. One of the principal functions of Financeco is to pool cash from USco's global operations and loan excess funds on a short term basis to USco's foreign subsidiaries.

5. On XXXXXXXXXX acquired all of the shares of XXXXXXXXXX from an arm's length person (XXXXXXXXXX) for a purchase price of $XXXXXXXXXX U.S. ($XXXXXXXXXX Canadian dollars at that time). XXXXXXXXXX acquired the funds to make this purchase through the issuance of additional shares to its parent, US Holdco, for an aggregate subscription price of $XXXXXXXXXX Cdn. and by way of a borrowing from Financeco in the amount of $XXXXXXXXXX Cdn. This borrowing was made under a previously existing credit facility with Financeco. The main terms and conditions of the borrowing provide for interest to accrue at a floating rate of XXXXXXXXXX %. The principal amount is payable on demand. As at XXXXXXXXXX Canco was indebted to Financeco under this credit facility in the amount $XXXXXXXXXX Cdn. (the "Debt"). The fair market value of the Debt is equal to its outstanding principal amount.

6. To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this request:

(a) is involved in an earlier return of the taxpayers or a related person,

(b) is being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayers 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.

Proposed Transactions

7. Canco will amend its corporate articles to create a special class of preferred shares which will be non-voting, non-cumulative, redeemable and retractable preferred shares (the "Canco Preferred Shares").

8. USco will incorporate Newco which, at all relevant times thereafter, will be a corporation incorporated under the XXXXXXXXXX (or under another Canadian federal, provincial or territorial corporate statute), and will be resident in Canada for the purposes of the Act. At all relevant times, all of Newco's issued shares, bonds, debentures and other funded indebtedness will be beneficially owned by USco (or by another non-resident person, other than any foreign affiliate of a taxpayer resident in Canada). Newco will, not later than 90 days after the commencement of its first taxation year, elect in prescribed manner to be taxed as a NRO under section 133, and such election will not, in any relevant period, be revoked by it. The authorized capital of Newco will consist of a single class of common shares and one or more classes of preferred shares, which will be non-voting, non-cumulative, redeemable and retractable preferred shares (the "Newco Preferred Shares").

9. On or before XXXXXXXXXX, Canco will convert approximately $XXXXXXXXXX of the Debt into a non-revolving term loan with a XXXXXXXXXX year maturity (the "Term Loan"). The Term Loan will bear interest at a rate negotiated with Financeco, which will represent an arm's length borrowing cost.

10. Immediately after the transaction described in paragraph 9 above, USco will subscribe for XXXXXXXXXX common shares of Newco's capital stock, for an aggregate subscription price equal to the principal amount of the Term Loan, which amount will be paid in cash by USco to Newco. Newco will add such amount to its stated capital account maintained in respect of its common shares.

11. Immediately after the transaction described in paragraph 10 above, Newco will purchase the Term Loan from Financeco for an amount equal to its principal amount at that time, which will equal the fair market value of the Term Loan. Newco will pay the purchase price in cash to Financeco.

12. Thereafter, Newco will hold the Term Loan as an investment for an indefinite period of time and will collect the interest payable thereon from time to time. It will be Newco's intention, at the time that it acquires the Term Loan, to hold it to maturity, but it is possible that Newco may subsequently decide to dispose of the Term Loan before maturity. Newco will arrange for an interest-bearing account with a financial institution and will deposit the interest on the Term Loan and any interest thereon in that account.

13. Newco's first taxation year will end on XXXXXXXXXX. On or before XXXXXXXXXX (but after XXXXXXXXXX), Newco will pay or be deemed to have paid a dividend from its accumulated income to USco by way of each of the following three transactions: (a) Newco will declare and pay a cash dividend; (b) Newco will declare and pay a stock dividend by issuing fully-paid non-assessable Newco Preferred Shares having an aggregate redemption amount and stated capital equal to the amount of the stock dividend; and (c) Newco will pass a resolution increasing the stated capital in respect of its issued and outstanding common shares by a specified amount. In each case Newco will remit amounts on account of non-resident withholding tax as described in paragraphs 17 and 18 below. In the case of (a) such tax will be withheld from the gross cash dividend paid to USco. In the cases of (b) and (c), USco will reimburse Newco for such amounts remitted.

14. Thereafter, Newco will periodically distribute its accumulated income to USco in one or more of the manners described above.

15. Newco may also invest the cash received by it in respect of the interest paid on the Term Loan in Canco Preferred Shares, or in one or more of the other types of property referred to in subparagraph (b)(i) of the definition of "non-resident-owned investment corporation" in subsection 133(8). However, Newco will not acquire any debt security or similar property from the issuer or drawer thereof. At least 90% of the debt securities or similar property acquired by Newco (other than the Term Loan) will be held by it to their due date and Newco will only acquire such property if, at the time of the acquisition, it intends to hold them to their due date.

16. Newco will not engage in any activities, take any actions or make any investments, including the reinvestment of interest and principal received from Canco, in such a manner that these activities, when taken by themselves or in conjunction with the proposed transaction described herein, will result in Newco not complying with the conditions described in paragraphs (b), (c) or (d) of the definition of non-resident-owned investment corporation in subsection 133(8).

17. Newco will at all times retain sufficient cash to meet its liabilities under the Act and, in particular, will remit to the Receiver General of Canada non-resident tax under Part XIII of the Act on all dividends that it pays or credits to USco, at the rate of XXXXXXXXXX % of the amounts so paid or credited from time to time, except to the extent that Newco elects to have any such amount treated as a "capital gains dividend" within the meaning of subsection 133(7.1).

18. Where, as described in paragraph 13, Newco pays or is deemed to pay a dividend to USco (other than a cash dividend from which the appropriate amount of tax has been withheld and remitted), USco will be indebted to Newco in respect of any withholding tax that Newco pays on USco's behalf in respect of such dividends. Such indebtedness will be repaid at such time and in such a manner that paragraph 214(3)(a) will not apply in respect of such indebtedness.

Purpose of the Proposed Transactions

The purpose of the proposed series of transactions is to restructure a majority of the Debt of Canco into a term loan without creating adverse income tax consequences in the United States, the United Kingdom or Canada. Each of the Proposed Transactions has this restructuring as a purpose.

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. Provided that USco 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 NRO.

B. The proposed transactions described above, in and by themselves, will not result in Newco ceasing to qualify as a NRO.

C. Upon the payment by Newco of the stock dividend to USco, or upon the addition to Newco's stated capital account in respect of its common shares, as described in paragraph 13 above, the amount added to Newco's stated capital account in respect of the Newco Preferred Shares, or the amount added to Newco's stated capital account in respect of its common shares, as the case may be, will be considered to be:

(1) the amount by which the PUC of the Newco Preferred Shares is increased by reason of the payment of the stock dividend, or the amount by which the PUC of Newco's common shares is increased by reason of the addition to the stated capital account in respect of Newco's common shares, as the case may be;

(2) the "amount" of any such stock dividend, as defined in section 248(1); and,

(3) the amount of the "taxable dividend" considered to have been paid by Newco to USco for the purposes of subsection 212(2) and for the purposes of the definition of "allowable refund" in subsection 133(8), 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).

D. Subject to the possible application of subsection 18(4), and provided that Canco has a legal obligation to pay interest on the Term Loan and that Canco continues to use the proceeds of the Term Loan 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 thereon in respect of each of Canco's taxation years (depending on the method regularly followed by Canco in computing its income) will be deductible by Canco to the extent that it is reasonable.

E. As a result of the proposed transactions, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences described 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 described in paragraphs 7 through 13 above 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.

Comments

Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed:

(a) the determination of the fair market value or adjusted cost base of any property referred to herein, or the PUC of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those 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