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.
Principal Issues: Whether a loan from a controlled foreign affiliate to a related non-resident entity will trigger the application of subsection 15(2) and Part XIII?
Position: No.
Reasons: Because of the application of subsection 15(2.2) GAAR will not apply because the interest on the loan is FAPI to the controlled foreign affiliate.
XXXXXXXXXX 2010-035314
Attention: XXXXXXXXXX
XXXXXXXXXX , 2010
Dear XXXXXXXXXX :
Re: XXXXXXXXXX
Advance Income Tax Ruling
This letter is in reply to your letter of XXXXXXXXXX in which you ask for an advance income tax ruling on behalf of XXXXXXXXXX .
Definitions
In this letter, the following terms have the meanings specified. All dollar amounts are expressed in Canadian dollars.
(a) "ACo" means XXXXXXXXXX .
(b) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1 as amended to the date hereof.
(c) "BCo" means XXXXXXXXXX .
(d) "Canco" means XXXXXXXXXX .
(e) "CanHoldco" means XXXXXXXXXX .
(f) "CCo" means XXXXXXXXXX .
(g) "Controlled Foreign Affiliate" has the meaning under subsection 95(1) of the Act.
(h) "DCo" means XXXXXXXXXX .
(i) "FAPI" means "foreign accrual property income" as that term is defined in subsection 95(1) of the Act.
(j) "Financeco" means a corporation to be formed as described in 12 below.
(k) "Foreign Affiliate" has the meaning under subsection 95(1) of the Act.
(l) "Law" means the XXXXXXXXXX
(m) "Loan1" is described in 10 below.
(n) "Loan2" is described in 17 below.
(o) "Loanco" means XXXXXXXXXX
(p) "MRPS" means mandatorily redeemable preference shares as described in 13 below.
(q) "Parentco" means XXXXXXXXXX .
(r) "Parentco Group" is described in 3 below.
(s) "Regulations" means the Income Tax Regulations.
(t) "Treaty" means the Canada-United States Tax Convention (1980), as amended by the Fifth Protocol signed on September 21, 2007.
(u) "U.S." means the United States of America.
Facts
1. Canco is a corporation formed under and governed by XXXXXXXXXX , and is resident in Canada for purposes of the Act and the Treaty. Canco is a private corporation and a taxable Canadian corporation, as those terms are defined in subsection 89(1) of the Act. Canco's head office is located at XXXXXXXXXX . Canco files its tax return with the XXXXXXXXXX Tax Centre, and is served by the XXXXXXXXXX Tax Services Office. Its taxation year-end is XXXXXXXXXX . Canco provides XXXXXXXXXX All of the issued and outstanding shares of Canco are owned by CanHoldco.
2. CanHoldco is a corporation formed under and governed by the XXXXXXXXXX and is resident in Canada for purposes of the Act and the Treaty. CanHoldco is a private corporation and a taxable Canadian corporation, as those terms are defined in subsection 89(1) of the Act. CanHoldco's head office is located at XXXXXXXXXX CanHoldco files its tax return with the XXXXXXXXXX Tax Centre, and is served by the XXXXXXXXXX Tax Services Office. Its taxation year-end is XXXXXXXXXX All of the issued and outstanding shares of CanHoldco are owned by Parentco.
3. Parentco is a corporation resident in the U.S. for purposes of the Act and the Treaty. XXXXXXXXXX The shares of Parentco are publicly traded on the XXXXXXXXXX Stock Exchange. Parentco is the direct and indirect owner of a group of U.S. domestic and foreign corporations (i.e. the "Parentco Group"). Parentco and its U.S. domestic subsidiaries file a consolidated tax return for U.S. federal income tax purposes.
4. ACo is a corporation formed under and governed by the laws of XXXXXXXXXX . BCo is a corporation formed under and governed by the laws of XXXXXXXXXX . Both ACo and BCo are treated as regarded entities for U.S. tax purposes. All of the issued and outstanding shares of ACo and BCo are owned by Parentco.
5. CCo is a corporation formed under and governed by the laws of XXXXXXXXXX . All of the issued and outstanding common shares of CCo are owned by Parentco (XXXXXXXXXX %), ACo (XXXXXXXXXX %) and BCo (XXXXXXXXXX %). BCo owns all of the issued and outstanding preferred shares of CCo.
6. DCo is a limited liability company formed under and governed by the laws of XXXXXXXXXX . DCo is treated as a disregarded entity for U.S. tax purposes. All of the issued and outstanding interests in DCo are owned by CCo.
7. Loanco is a corporation formed under and governed by the laws of XXXXXXXXXX . Loanco is treated as a regarded entity for U.S. tax purposes. All of the issued and outstanding shares of Loanco are owned by DCo. Loanco acts as a finance company to the Parentco Group and redeploys excess cash placed on deposit with it by non-U.S. members of the Parentco Group to other non-U.S. members.
8. Canco generates an estimated $XXXXXXXXXX of excess cash annually. In the past, Canco has lent to other Canadian members of the Parentco Group. When those members no longer had a need for the cash, the loans were repaid.
9. The Canadian members of the Parentco Group currently do not have additional need for Canco's excess cash. Parentco wishes to redeploy Canco's excess cash to other members of the Parentco Group outside Canada (XXXXXXXXXX ) as part of Parentco's intercompany lending program.
10. On XXXXXXXXXX , Canco used its excess cash to make a loan to Parentco in the amount of $XXXXXXXXXX ("Loan1"). Loan1 has a term of XXXXXXXXXX and bears interest at a rate of XXXXXXXXXX %.
Proposed Transactions
11. Canco currently has approximately $XXXXXXXXXX in cash on hand. Canco will request repayment of Loan1. The repayment of Loan1 and Canco's cash on hand should amount to approximately $XXXXXXXXXX .
12. Financeco will be formed under and governed by the laws of XXXXXXXXXX . Its taxation year end will be XXXXXXXXXX . Financeco will be resident in XXXXXXXXXX for purposes of the Act and the Canada-XXXXXXXXXX Tax Convention.
13. The share capital of Financeco will comprise ordinary shares and MRPS. Canco will subscribe for ordinary shares of Financeco for a nominal amount. Canco will use its cash of $XXXXXXXXXX to subscribe for MRPS.
14. The MRPS will have the following attributes:
(i) the MRPS are freely transferable;
(ii) the MRPS have no nominal value;
(iii) the MRPS do not carry any voting rights except as otherwise provided by the Law or the articles of incorporation of Financeco; specifically, holders of MRPS are entitled to vote in every general meeting called upon to deal with certain matters, including, a) the issue of new shares carrying preferential rights, b) the determination of the preferential cumulative dividend rights attaching to non-voting shares, c) the conversion of non-voting preferred shares into ordinary shares, d) the reduction of the capital of Financeco, e) any change in the corporate objects of Financeco, f) the issue of convertible bonds, g) the dissolution of Financeco, and h) a change in the legal form of Financeco;
(iv) notwithstanding (iii) above, the holder of the MRPS will have the same voting rights as the holders of ordinary shares of Financeco at all meetings, if, despite the existence of profits available for distribution, the preferential cumulative dividends described in (vii) below have not been paid in their entirety for any reason whatsoever for a period of XXXXXXXXXX successive financial years and until such time as all cumulative dividends shall have been received in full;
(v) the MRPS are redeemable in accordance with articles of incorporation of Financeco, which provide that the MRPS will be mandatorily redeemed upon decision by the board of directors of Financeco in accordance with the Law or the XXXXXXXXXX anniversary of the date of issuance of the MRPS;
(vi) the redemption price of each MRPS to be paid in cash or in kind will be equal to the subscription price of the MRPS as paid by the holder at the time of issue and subscription, plus any accrued but unpaid dividend thereon (any dividend declared but unpaid will be paid prior to any redemption of the MRPS); and
(vii) each MRPS entitles a holder to a preferential and cumulative dividend at a variable annual rate calculated on the accounting value of the share capital represented by the MRPS, which accrues daily from the date of the issuance of the relevant MRPS; and
(viii) initially, the variable annual dividend rate on the MRPS will be set at a rate that is less than the annual rate of interest on Loan2 (see 17 below).
15. For XXXXXXXXXX corporate law purposes, the MRPS will be considered to be equity. The MRPS will be validly issued as fully paid-up shares, and will have the same rights and privileges as ordinary shares of Financeco, except as otherwise provided in the articles of incorporation. Dividend distributions by Financeco, if and when declared, on the MRPS will have the same legal nature as dividends paid on the ordinary shares of Financeco.
16. For XXXXXXXXXX tax law purposes, the MRPS will be treated as debt rather than equity, and any dividends paid by Financeco on the MRPS will be deductible in computing the income of Financeco subject to tax in XXXXXXXXXX .
17. Financeco will loan $XXXXXXXXXX ("Loan2") to Loanco with a term in excess of one year, and bearing interest based on the London Interbank Offered Rate ("LIBOR").
18. Loanco will lend the proceeds of Loan2 to other non-Canadian, non-U.S. entities in the Parentco Group. None of these entities will be Foreign Affiliates of Canco, CanHoldco or any other Canadian member of the Parentco Group.
19. From time to time, Canco may subscribe for additional MRPS of Financeco in the amount of any excess cash available to Canco, and Financeco will lend the proceeds of the MRPS subscription to Loanco, on terms that are similar to the terms of Loan2.
Purpose of the Proposed Transactions
20. Parentco wishes to re-deploy the excess cash in Canco to other entities in the Parentco Group. It initially contemplated paying a dividend from Canco to CanHoldco, then from CanHoldco to Parentco equal to Canco's excess cash. However, such dividends would trigger adverse U.S. tax consequences.
21. In addition, a loan from Canco to Parentco that is not repaid within one year after the end of the taxation year in which it arose would trigger the application of subsection 15(2) of the Act, resulting in a deemed dividend from Canco to Parentco under paragraph 214(3)(a) and subsection 212(2) of the Act. Since Parentco does not own at least 10% of the voting stock of Canco, Parentco would not be entitled to the 5% withholding rate under paragraph 2(a) of Article X of the Treaty.
To the best of your knowledge and that of Canco, none of the issues involved in this advance income tax ruling is:
- in an earlier return of Canco or a related person;
- being considered or under assessment by a tax services office or taxation centre in connection with a previously filed tax return of Canco or a related person;
- under objection by Canco or a related person;
- before the courts, and no judgement has been issued which may be under appeal; or
- the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Rulings Given
Provided the preceding statements constitute a complete and accurate disclosure of the all the relevant Definitions, Facts, Proposed Transactions and Purpose of the Proposed Transactions, we rule as follows:
A. Financeco will be a Foreign Affiliate and a Controlled Foreign Affiliate of Canco.
B. The income derived from the interest received or receivable by Financeco on Loan2 will constitute FAPI of Financeco, and will be included in Canco's income on an accrual basis pursuant to subsection 91(1) of the Act.
C. Subsection 17(2) of the Act will apply to deem an amount equal to the amount of Loan2 to be owed to Canco by Loanco (or by a non-resident entity described in paragraph 18 above if subsection 17(11.2) of the Act applies to loans described in that paragraph).
D. Provided that the interest rate on Loan2 is equal to or greater than the rate prescribed by paragraph 4301(c) of the Regulations, subsection 17(1) of the Act will not apply to include an amount in computing Canco's income for the year in respect of the amount deemed by subsection 17(2) of the Act to be owing to Canco as described in ruling C above. For greater certainty, subsection 17(1) will only apply to include an amount in computing Canco's income for the year if the amount of interest computed at the prescribed rate for the period in the year during which Loan2 was owing exceeds the amount included in Canco's income with respect to Loan2 pursuant to subsection 91(1) of the Act as described in ruling B above.
E. Subsection 15(2) of the Act will not apply to include an amount equal to Loan2 in Loanco's income for the year, and paragraph 214(3)(a) and subsection 212(2) of the Act will not apply to deem the amount to have been paid to Loanco as a dividend.
F. Provided that interest paid on Loan2 in a year or not later than 30 days after the end of the year is equal to or greater than the rate prescribed by paragraph 4301(c) of the Regulations for the period in the year during which Loan2 was outstanding, subsection 80.4(2) of the Act will not apply to deem any person to have received a benefit as a consequence of Loan2 or any loans made by Loanco as described in 18 above, and no such benefit shall be deemed to have been paid as a dividend by any Canadian resident corporation in the Parentco Group to any non-resident person for the purposes of subsections 15(9) and 15(1), paragraph 214(3)(a) and subsection 212(2) of the Act.
G. Subsection 245(2) of the Act will not apply to redetermine the tax consequences confirmed in rulings A through F above.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002 and are binding on the Canada Revenue Agency provided that the proposed transactions outlined in 11 to 17 above are completed by XXXXXXXXXX .
This letter is based solely on the Facts and Proposed Transactions described above. The documentation submitted with your request does not form part of the Facts and Proposed Transactions and any references thereto are provided solely for the convenience of the reader.
Nothing in this letter should be construed as implying that the Canada Revenue Agency has reviewed, accepted or otherwise agreed to any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the rulings given above.
The above noted 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, could have an effect on the rulings provided herein.
Yours truly,
XXXXXXXXXX
For Director
International & Trusts Division
Income Tax Rulings Directorate
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