1999 Ruling 9925763 - 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: Will we rule favorably that the purchase by an NRO of previously existing non-arm's length debt (i.e. debt that was not incurred in contemplation of the proposed transactions) would not be considered the "making of a loan" for purposes of the definition of non-resident-owned investment corporation in subsection 133(8)?

Position: Yes, rule favorably

Reasons: similar to previous rulings given

XXXXXXXXXX
XXXXXXXXXX 992576
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
("Acquisitionco")
XXXXXXXXXX
XXXXXXXXXX ("Financeco")
XXXXXXXXXX ("Opco")
XXXXXXXXXX ("Newco"), a newly incorporated company
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).

Acquisitionco and Financeco each files its T2 Return with the XXXXXXXXXX Tax Centre. Opco 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 all terms used herein that are defined in the Act have the meaning given in such definition unless otherwise specified, and all references to sections or components thereof are references to the Act unless otherwise specified;

(b) "Debt" means the existing outstanding indebtedness of Acquisitionco (in the amount of approximately $XXXXXXXXXX as at XXXXXXXXXX) owing to Financeco (all amounts referred to herein are denominated in Canadian dollars unless otherwise specified);

(c) "XXXXXXXXXX Treaty" means the Canada-XXXXXXXXXX Income Tax Convention;

(d) "XXXXXXXXXX Treaty" means the Canada-XXXXXXXXXX Income Tax Convention;

(e) XXXXXXXXXX;

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

(g) XXXXXXXXXX;

(h) "XXXXXXXXXX Treaty" means the Canada-XXXXXXXXXX Income Tax Convention.

Facts

1. XXXXXXXXXX ("Parentco") is a corporation incorporated under the laws of XXXXXXXXXX. For the purposes of the Act, Parentco is not resident in Canada and is not a foreign affiliate of any taxpayer resident in Canada. XXXXXXXXXX. Parentco is a public corporation with its shares listed on the XXXXXXXXXX Stock Exchange.

2. XXXXXXXXXX ("XXXXXXXXXX Holdco") is a corporation incorporated under the laws of XXXXXXXXXX and is resident in XXXXXXXXXX for the purposes of the XXXXXXXXXX Treaty. For the purposes of the Act, XXXXXXXXXX Holdco is not resident in Canada and is not a foreign affiliate of any taxpayer resident in Canada. XXXXXXXXXX Holdco is a wholly-owned, direct subsidiary of Parentco.

3. XXXXXXXXXX ("XXXXXXXXXX Holdco 2") is a corporation incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX. For the purposes of the Act, XXXXXXXXXX Holdco 2 is not resident in Canada, and is not a foreign affiliate of any taxpayer resident in Canada. XXXXXXXXXX Holdco 2 is a wholly-owned, direct subsidiary of XXXXXXXXXX Holdco.

4. XXXXXXXXXX ("XXXXXXXXXX Holdco") is a corporation incorporated under the laws of XXXXXXXXXX, and is a resident of XXXXXXXXXX for the purposes of the XXXXXXXXXX Treaty. For the purposes of the Act, XXXXXXXXXX Holdco is not resident in Canada and is not a foreign affiliate of any taxpayer resident in Canada. XXXXXXXXXX Holdco owns all of the issued and outstanding shares of XXXXXXXXXX Holdco.

5. XXXXXXXXXX ("XXXXXXXXXX Holdco") is a corporation incorporated under the laws of XXXXXXXXXX and is a resident of XXXXXXXXXX for the purposes of the XXXXXXXXXX Treaty. For the purposes of the Act, XXXXXXXXXX Holdco is not resident in Canada and is not a foreign affiliate of any taxpayer resident in Canada. XXXXXXXXXX Holdco owns all of the issued and outstanding shares of XXXXXXXXXX Holdco.

6. Acquisitionco is a corporation governed by the XXXXXXXXXX, and is a taxable Canadian corporation. Acquisitionco was incorporated on XXXXXXXXXX to acquire all of the issued and outstanding shares of XXXXXXXXXX ("Targetco"), XXXXXXXXXX . The issued and outstanding shares of Targetco were acquired XXXXXXXXXX during XXXXXXXXXX. Substantially all of the assets of Acquisitionco consist of shares and debt of Opco, a successor to Targetco. All of Acquisitionco's issued and outstanding shares are beneficially owned by XXXXXXXXXX Holdco. Acquisitionco presently has contributed surplus (that was contributed by XXXXXXXXXX Holdco at a time when it was the shareholder of Acquisitionco) of approximately $XXXXXXXXXX.

7. Opco is a corporation governed by the XXXXXXXXXX, and is a taxable Canadian corporation. Opco was formed on the amalgamation of XXXXXXXXXX and Targetco on XXXXXXXXXX. Opco is XXXXXXXXXX. All of Opco's issued and outstanding shares are beneficially owned by Acquisitionco.

8. Financeco is a corporation governed by the XXXXXXXXXX, and is a taxable Canadian corporation. Financeco was incorporated on XXXXXXXXXX that it loans to or otherwise invests in the Canadian subsidiary companies of Parentco.

XXXXXXXXXX

Financeco has loaned XXXXXXXXXX to both Acquisitionco and Opco. Those funds which have been loaned to Acquisitionco constitute the Debt. The remainder of the funds have been loaned to Opco. Financeco has loaned the Debt to Acquisitionco at an arm's length interest rate slightly higher than that paid by Financeco on XXXXXXXXXX. The principal amount of the Debt is payable on demand. The fair market value of the Debt is equal to its outstanding principal amount. The Debt has been outstanding between Financeco and Acquisitionco since XXXXXXXXXX. Acquisitionco has loaned a portion of the Debt to Opco at a market-based interest rate slightly higher than that paid by Acquisitionco on the Debt. The balance of the Debt was used to repay previously existing debt that had been incurred for the purpose of acquiring the shares of Targetco (see paragraph 9 below). Substantially all of the assets of Financeco consists of the Debt and the amounts due from Opco. All of Financeco's issued and outstanding shares are beneficially owned by XXXXXXXXXX Holdco.

9. The Debt can be traced to XXXXXXXXXX borrowings by Acquisitionco under a credit facility with certain arm's length institutional investors. Acquisitionco used the proceeds of that loan to fund, in part, the acquisition by it of Targetco during XXXXXXXXXX. Such loan was refinanced in XXXXXXXXXX through Financeco XXXXXXXXXX then loaned by Financeco to Acquisitionco - Acquisitionco in turn repaid the loan to the arm's length institutional investors).

10. Newco is a corporation incorporated on XXXXXXXXXX as a limited liability company. The authorized capital of Newco is a single class of common shares. One common share was issued to XXXXXXXXXX, Parentco's lawyer in XXXXXXXXXX held this one share in trust for Parentco, or any of Parentco's affiliates designated by it.

11. On or about XXXXXXXXXX Holdco caused XXXXXXXXXX ("XXXXXXXXXX Newco") to be incorporated XXXXXXXXXX Newco is resident in XXXXXXXXXX for purposes of the XXXXXXXXXX Treaty. For purposes of the Act, XXXXXXXXXX Newco is not resident in Canada and will not be a foreign affiliate of any taxpayer resident in Canada.

12. On or about XXXXXXXXXX, (but after the transaction described in paragraph 11 above) Parentco designated XXXXXXXXXX Newco for purposes of the declaration of trust described in paragraph 10 above. XXXXXXXXXX common shares were issued by Newco to XXXXXXXXXX Newco and the one common share held by XXXXXXXXXX has been assigned to XXXXXXXXXX Newco, for total consideration of XXXXXXXXXX Newco is a taxable Canadian corporation. Newco added the Canadian dollar equivalent of such consideration to its stated capital account maintained in respect of its common shares. At all relevant times, all of Newco's issued shares, bonds, debentures and other funded indebtedness will be beneficially owned by XXXXXXXXXX Newco or XXXXXXXXXX Holdco.

13. On or about XXXXXXXXXX each of Acquisitionco, Financeco, Opco and Newco caused the incorporation of separate wholly-owned subsidiaries ("AcquisitioncoSub", "FinancecoSub", "OpcoSub"and "NewcoSub", respectively) as XXXXXXXXXX unlimited liability companies governed by the XXXXXXXXXX. None of these subsidiary corporations will carry on any business or commercial activities (other than the election described in paragraph 17 below), prior to the amalgamations described in paragraph 27 below.

14. None of the shares of Acquisitionco, Financeco, Opco or Newco presently, nor will they at any time during the completion of the proposed transactions described herein, derive their value, directly or indirectly, principally from "immovable property" XXXXXXXXXX.

15. 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

16. Before Newco amalgamates with any other corporation and not later than 90 days after the commencement of its first taxation year, Newco will 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.

17. Before NewcoSub amalgamates with any other corporation and not later than 90 days after the commencement of its first taxation year, NewcoSub will 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.

18. On or about XXXXXXXXXX Holdco will transfer all of the issued and outstanding share capital of Financeco to XXXXXXXXXX Holdco 2 in return for shares of XXXXXXXXXX Holdco 2. Any gain realized by XXXXXXXXXX Holdco on such transfer will not be subject to tax in Canada XXXXXXXXXX. A section 116 certificate will be applied for with respect to this transfer.

19. On or about XXXXXXXXXX (but after the transaction described in paragraph 18 above), XXXXXXXXXX Holdco 2 will transfer all of the issued and outstanding share capital of Financeco to XXXXXXXXXX Holdco in return for shares of XXXXXXXXXX Holdco. Any gain realized by XXXXXXXXXX Holdco 2 on such transfer will not be subject to tax in Canada XXXXXXXXXX. A section 116 certificate will be applied for with respect to this transfer.

20. On or about XXXXXXXXXX (but after the transaction described in paragraph 19 above), XXXXXXXXXX Holdco will transfer all of the issued and outstanding share capital of Financeco to XXXXXXXXXX Newco in return for XXXXXXXXXX. Any gain realized on such transfer will not be subject to tax in Canada XXXXXXXXXX. A section 116 certificate will be applied for with respect to this transfer.

21. On or about XXXXXXXXXX Holdco will subscribe for 1 common share of Newco's capital stock for an amount equal to approximately $XXXXXXXXXX, which amount will be paid by XXXXXXXXXX Holdco to Newco. Newco will add such amount to its stated capital account maintained in respect of its common shares. The source of the $XXXXXXXXXX will be a borrowing by Parentco, followed by a series of contributions of capital involving XXXXXXXXXX Holdco, XXXXXXXXXX Holdco 2 and XXXXXXXXXX Holdco.

22. On or about XXXXXXXXXX (but after the transaction described in paragraph 21 above), Newco will acquire a portion of the Debt from Financeco by way of an assignment (the "Purchased Debt"). The principal amount of the Purchased Debt will be approximately $XXXXXXXXXX. The principal amount will equal the fair market value of the Purchased Debt. Newco will pay fair market value consideration of approximately $XXXXXXXXXX to Financeco in consideration for assigning the Purchased Debt. At the time of the assignment, the terms and conditions of the Purchased Debt will be materially the same as the Debt. As with the Debt at the time of the assignment, the Purchased Debt will bear interest at an arm's length rate which will be slightly higher than the interest cost to Financeco XXXXXXXXXX, and the principal amount will be payable on demand. However, the terms of the Purchased Debt (as with the Debt) allows a change to a fixed interest rate with the principal amount payable on a fixed date.

23. On or about XXXXXXXXXX (but after the transaction described in paragraph 22 above), Financeco will use the funds received from Newco to repay XXXXXXXXXX in an amount equal to approximately $XXXXXXXXXX.

24. On or about XXXXXXXXXX each of Acquisitionco, Financeco and Opco will continue from the XXXXXXXXXX.

25. On or before XXXXXXXXXX Holdco will transfer the 1 common share of Newco to XXXXXXXXXX Newco for cash consideration equal to the fair market value of such share.

26. On or about XXXXXXXXXX Holdco will transfer all of its shares of XXXXXXXXXX Holdco to XXXXXXXXXX Holdco 2 for a share of XXXXXXXXXX Holdco 2. Consequently, XXXXXXXXXX Holdco will be a wholly-owned direct subsidiary of XXXXXXXXXX Holdco 2.

27. On or about XXXXXXXXXX, each of Acquisitionco, Financeco, Opco and Newco will amalgamate with their respective wholly-owned subsidiaries, AcquisitioncoSub, FinancecoSub, OpcoSub and NewcoSub to continue as XXXXXXXXXX unlimited liability companies. Thereafter, each of the successor corporations to Acquisitionco, Financeco and Opco (referred to hereafter as Amalgamated Acquisitionco, Amalgamated Financeco and Amalgamated Opco, respectively) would remain taxable Canadian corporations. The successor corporation to Newco and Newcosub is hereafter referred to as Amalgamated Newco. Amalgamated Newco will, not later than 90 days after the commencement of its first taxation year, elect in prescribed manner to be taxed as an NRO under section 133, and such election will not, in any relevant period, be revoked by it. All of the above amalgamations will be carried out in such a manner as to satisfy the conditions in subsections 87(1) and 87(4).

XXXXXXXXXX

28. Newco (and later Amalgamated Newco) will hold the Purchased Debt as an investment for an indefinite period of time and will collect the interest payable by Acquisitionco (and later Amalgamated Acquisitionco) thereon from time to time. Such interest paid by Acquisitionco to Newco, or Amalgamated Acquisitionco to Amalgamated Newco, as the case may be, will be used by Newco, or Amalgamated Newco to pay any tax owing under the Act in accordance with paragraph 31, or will be distributed to XXXXXXXXXX Newco in accordance with paragraph 30. Prior to the time that such distributions or payments are made, the interest received by Newco and Amalgamated Newco may be invested in interest bearing deposit accounts with arm's length financial institutions.

29. Newco, (and later Amalgamated Newco) will not engage in any activities, take any actions or make any investments, including the reinvestment of interest and principal received from Acquisitionco (and later Amalgamated Acquisitionco), in such a manner that these activities, when taken by themselves or in conjunction with the proposed transactions described herein, will result in Newco (or later Amalgamated 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).

30. Periodically, Amalgamated Newco will distribute its accumulated income to XXXXXXXXXX Newco, either as a return of capital, or as a taxable dividend.

31. Newco, and later Amalgamated Newco, will at all times retain sufficient cash to meet its liabilities under the Act. Newco, and later Amalgamated Newco, will withhold and remit to the Receiver General for Canada non-resident tax under Part XIII of the Act on all dividends that it pays or credits to XXXXXXXXXX Newco, at the rate of XXXXXXXXXX% (as reduced under the XXXXXXXXXX Treaty) 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). Newco, and later Amalgamated Newco, will also pay any tax required to be paid under subsection 133(3) within the time periods specified in the Act.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to XXXXXXXXXX and to refinance a portion of the Debt of Acquisitionco without creating adverse tax consequences in XXXXXXXXXX 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 XXXXXXXXXX Newco (or XXXXXXXXXX Holdco, while it is a shareholder of Newco) does not become a resident of Canada and is not and will not become a foreign affiliate of a taxpayer resident in Canada, Newco, NewcoSub, and later, Amalgamated Newco, will be a NRO.

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

C. Subject to the possible application of subsection 18(4), and provided that Acquisitionco, and later, Amalgamated Acquisitionco, has a legal obligation to pay interest on the Purchased Debt and that Acquisitionco had used and continues to use (and later, Amalgamated Acquisitionco continues to use) the proceeds of the Purchased Debt 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 Acquisitionco's, and later, Amalgamated Acquisitionco's taxation years (depending on the method regularly followed by Acquisitionco and Amalgamated Acquisitionco, respectively, in computing its income) will be deductible by Acquisitionco or Amalgamated Acquisitionco, as the case may be, to the extent that it is reasonable.

D. 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 the Canada Customs and Revenue Agency (the "CCRA") provided that the proposed transactions described in paragraphs 16 through 27 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 the CCRA has agreed to or reviewed:

(a) the country of residence of XXXXXXXXXX Holdco, XXXXXXXXXX Newco or XXXXXXXXXX Holdco for purposes the Act or a particular income tax convention which has entered into force between Canada and another country,

(b) the determination of the fair market value or adjusted cost base of any property referred to herein, or the paid-up capital of any shares referred to herein, or

(c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

In particular, we are not ruling on the tax consequences, if any, should the interest rate and repayment terms of the Purchased Debt be changed to a fixed interest rate with the principal amount payable on a fixed date.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch