2012 Ruling 2012-0458361R3 - Cross-Border Financing

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: 1. Will Article IV(6) of the Treaty apply to any interest paid to a U.S. LLC in respect of the income from the new cross-border debt?
2. Will Article XXIX-A(3) of the Treaty apply?
3. Will Article XI(1) of the Treaty apply to reduce the Canadian withholding tax rate to nil for any interest deemed paid on the new cross-border debt?
4. Will the interest payable on the new cross-border debts be deductible pursuant to 20(1)(c) of the Act?

Position: 1. Yes
2. Yes
3. Yes
4. Yes

Reasons: 1. The criteria in Article IV(6) have been met.
2. The criteria in Article XXIX-A(3) have been met.
3. The criteria in Article XI(1) have been met.
4. The borrowed money is used for the purpose of earning income from a business.

XXXXXXXXXX
2012-045836

Attention: XXXXXXXXXX

XXXXXXXXXX, 2012

Dear XXXXXXXXXX:

Re: XXXXXXXXXX (“CCo”)
Business Number XXXXXXXXXX
Advance Income Tax Ruling

We are writing in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayer.

CCo files its tax return at the XXXXXXXXXX Taxation Centre.

The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions in the documents submitted with your request not described below do not form part of the facts and proposed transactions on which this ruling letter is based and any reference to these documents is provided solely for the convenience of the reader.

Unless otherwise stated, all references to a statute are references to the provisions of the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.) as amended to the date hereof (the “Act”), and every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act.

Definitions

“ACo” means XXXXXXXXXX;

“Alpha Debts” means the various loans owing from CCo to ACo;

“BCo” means XXXXXXXXXX;

“Beta Debts” means the various loans owing from CCo to BCo;

“Brand 1” means the XXXXXXXXXX brand name;

“CAD” means Canadian dollars;

“CBCA” means the Canada Business Corporations Act;

“CCo” means XXXXXXXXXX;

“Charlie Debts” has the meaning assigned by paragraph 17 below;

“Company” means XXXXXXXXXX, the general name of the company as well as the brand name;

“Company Group” means ACo and all direct and indirect domestic and foreign subsidiaries of ACo;

“Consolidated Group” means the affiliated group of corporations in Country 1 that includes DCo, ECo, FCo, GCo, HCo, and ICo;

“Continent” means XXXXXXXXXX;

“Country 1” means XXXXXXXXXX;

“Country 2” means XXXXXXXXXX;

“Country 3” means XXXXXXXXXX;

“Country 4” means XXXXXXXXXX;

“Country 5” means XXXXXXXXXX;

“Country 6” means XXXXXXXXXX;

“Country 7” means XXXXXXXXXX;

“CRA” means the Canada Revenue Agency;

“DCo” means XXXXXXXXXX;

“ECo” means XXXXXXXXXX;

“FCo” means XXXXXXXXXX;

“GCo” means XXXXXXXXXX;

“HCo” means XXXXXXXXXX;

“ICo” means XXXXXXXXXX;

“Qualifying Person” has the meaning assigned by paragraph 2 of Article XXIX-A of the Treaty;

“State 1” means XXXXXXXXXX;

“State 2” means XXXXXXXXXX;

“taxable Canadian corporation” has the meaning assigned by subsection 89(1) of the Act;

“Treaty” means the Convention Between the United States of America and Canada with respect to Taxes on Income and on Capital signed on 26 September 1980, as amended by Protocols signed on 14 June 1983, 28 March 1984, 17 March 1995, 29 July 1997 and 21 September 2007; and

“USD” means U.S. Dollars.

Facts

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

ACo

1. ACo is a publicly traded corporation incorporated under the laws of Country 2. ACo’s business consists of three distinct segments at this time:

XXXXXXXXXX

2. XXXXXXXXXX.

The Consolidated Group of companies

3. DCo is incorporated under the laws of State 1. DCo is a resident of Country 1 for purposes of the Act and the Treaty. DCo is an indirect wholly owned subsidiary of ACo. DCo is not a Qualifying Person for purposes of the Treaty. DCo is not fiscally transparent for federal income tax purposes of Country 1.

4. ECo is a limited liability company organized under the laws of State 1. ECo is a wholly owned subsidiary of DCo and is fiscally transparent for federal income tax purposes of Country 1. ECo is resident in Country 1 for the purposes of the Act. ECo is not a Qualifying Person for purposes of the Treaty. ECo acts as a treasury centre for XXXXXXXXXX Company subsidiaries operating in Canada, Country 1, Country 4, Country 5, Country 6 and Country 7. Although ECo acts as a treasury centre for Canada, no financing has been provided to CCo to date. To date, ECo has only provided treasury advisory services to CCo.

5. ECo raises substantially all the necessary financing through the public issuance of debt securities and commercial paper. The remainder of the financing is obtained from internal sources, principally from DCo and ICo. ICo generates significant cash flow surplus to its working capital requirements and this cash is redeployed throughout the corporate group by ECo. Similarly DCo sweeps the surplus cash from certain of the smaller Country 1 entities and this cash is reinvested throughout the corporate group. From time to time, ACo and BCo will also provide temporary bridge financing to ECo (the terms are typically less than XXXXXXXXXX days) and in certain extraordinary circumstances, such as the XXXXXXXXXX liquidity crisis. Similarly, Eco will also from time to time provide temporary bridge financing to ACo in order to optimize surplus cash flows.

6. FCo is incorporated under the laws of State 1 and is a resident of Country 1 for purposes of the Act and the Treaty. GCo is a limited liability company organized under the laws of State 1 and is a resident of Country 1 for the purposes of the Act. FCo and GCo are indirect wholly owned subsidiaries of DCo. For federal income tax purposes of Country 1, FCo is not fiscally transparent while GCo is fiscally transparent. FCo and GCo together XXXXXXXXXX throughout Country 1.

7. HCo is a limited liability corporation organized under the laws of State 1. HCo is a resident of Country 1 for purposes of the Act and is fiscally transparent for federal income tax purposes of Country 1. HCo is a wholly owned subsidiary of DCo. The principal business of HCo involves XXXXXXXXXX.

8. ICo is a limited liability company organized under the laws of State 1 and is a wholly owned subsidiary of DCo. ICo is a resident of Country 1 for purposes of the Act and is fiscally transparent for federal income tax purposes of Country 1. ICo’s principal business involves XXXXXXXXXX.

9. None of the companies that comprise the Consolidated Group have a “permanent establishment” in Canada for purposes of the Act or the Treaty. The entities within the Consolidated Group have elected to file an income tax return on a consolidated basis for federal income tax purposes of Country 1.

10. As at XXXXXXXXXX, the Consolidated Group had total assets of USD$XXXXXXXXXX of which inventory represented USD$XXXXXXXXXX. For the period ended XXXXXXXXXX, the Consolidated Group’s gross revenue was USD$XXXXXXXXXX, while net income after taxes was USD$XXXXXXXXXX. For the same period, the Consolidated Group incurred USD$XXXXXXXXXX on employee compensation and had XXXXXXXXXX employees.

CCo

11. CCo is incorporated under the CBCA and is a taxable Canadian corporation for the purposes of the Act. CCo is a wholly owned subsidiary of BCo. BCo is a corporation incorporated under the laws of Country 3 and is indirectly wholly owned by ACo. CCo is not fiscally transparent for federal income tax purposes of Country 1.

12. CCo is the sole XXXXXXXXXX of Company and Brand 1 products in Canada. XXXXXXXXXX. CCo also provides XXXXXXXXXX.

13. CCo’s business is financed primarily from the following sources as at XXXXXXXXXX:

(i) the Alpha Debts and Beta Debts (approximately XXXXXXXXXX%);

(ii) Canadian domestic securitization transactions (approximately XXXXXXXXXX%);

(iii) Canadian corporate bond transactions (approximately XXXXXXXXXX%);

(iv) equity (approximately XXXXXXXXXX%); and

(v) internal working capital (approximately XXXXXXXXXX%).

14. The Alpha Debts totalled CAD$XXXXXXXXXX and have fixed terms of repayment with maturity dates ranging from XXXXXXXXXX to XXXXXXXXXX days and interest rates ranging from XXXXXXXXXX% to XXXXXXXXXX%. The Beta Debts totalled CAD$XXXXXXXXXX. The Beta Debts have fixed terms of repayment with maturity dates ranging from XXXXXXXXXX to XXXXXXXXXX days and interest rates ranging from XXXXXXXXXX% to XXXXXXXXXX%. The general treasury strategy of ACo is that local Company entities, such as CCo match the terms of their funding with the applicable asset classes. For example, the retail lease and loan portfolio and commercial mortgage financing provided to Company XXXXXXXXXX have terms that exceed one year thus, the head-office policy generally dictates that CCo obtains this financing from the Alpha Debts. On the other hand, CCo also requires access to short-term liquidity facilities in order to finance its XXXXXXXXXX. Such financing with terms less than a year is provided by the Beta Debts. The interest paid on both the Alpha Debts and Beta Debts is deductible under paragraph 20(1)(c).

15. As at XXXXXXXXXX, CCo had total assets of CAD$3XXXXXXXXXX. Inventory represented CAD$XXXXXXXXXX. For the year-ended XXXXXXXXXX, CCo reported gross revenues of CAD$XXXXXXXXXX while net income after taxes was CAD$XXXXXXXXXX. CCo incurred CAD$XXXXXXXXXX during the same period in employee compensation costs and had XXXXXXXXXX employees.

16. To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this request is:

(i) involved in an earlier return of the taxpayers or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayer or a related person;

(iii) under objection by the taxpayers or by a person related to the taxpayers;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) the subject of a ruling previously considered by the Income Tax Rulings Directorate.

Proposed Transactions

17. CCo will enter into a revolving credit arrangement with ECo. Under the terms of the arrangement ECo will advance loans on a periodic basis to CCo on an unsecured basis (the “Charlie Debts”) with the following terms:

(i) Principal Amount: Varies, amounts drawn down in various increments, as required;

(ii) Interest Rate: Varies based on the term of the respective loans. Interest rates will be set at arm’s length rates based on market conditions immediately prior to an advance; and

(iii) Terms: XXXXXXXXXX.

18. ECo will be the beneficial owner of any interest paid by CCo on the Charlie Debts. Such interest paid will not be “participating debt interest” as defined in subsection 212(3) or interest described in paragraph 6(b) of Article XI of the Treaty.

19. It is expected that all of the funds to be advanced by ECo will come from either ECo’s current cash on hand or funds raised by ECo through its local commercial paper program, bond issuances and private placements. These debts are guaranteed by ACo.

20. The first loan to be advanced in respect of the Charlie Debts is expected to be advanced on or before XXXXXXXXXX.

21. CCo will use the funds received from the Charlie Debts for the purpose of earning income from CCo’s business. In particular, the borrowed money will be used as follows:

(i) To finance CCo’s portfolio of XXXXXXXXXX and XXXXXXXXXX;

(ii) To provide XXXXXXXXXX financing and financing for XXXXXXXXXX; and

(iii) To repay, if desired, the Alpha Debts and the Beta Debts as they come due depending on the business circumstances and needs at that time.

Purpose of the Proposed Transactions

22. The purpose of the proposed transactions are:

(i) to establish an alternative source of financing, as well as one in Continent, for CCo, which in turn would allow ACo and BCo to redeploy their capital and finance other foreign operations;

(ii) to minimize the withholding tax burden on cross-border payments of interest within the Company Group; and

(iii) to provide CCo with the utmost flexibility to optimize its funding portfolio especially in times of economic crisis and to repay, if and when desired, the Alpha Debts as they come due.

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. For any interest paid by CCo to ECo in respect of the Charlie Debts, such interest will be considered to be derived by DCo pursuant to paragraph 6 of Article IV of the Treaty.

B. Paragraph 3 of Article XXIX-A of the Treaty will apply so that the benefits of the Treaty will apply to DCo in respect of any interest paid on the Charlie Debts.

C. Paragraph 1 of Article XI of the Treaty will apply to reduce the Canadian withholding tax rate to nil for any interest paid by CCo to ECo.

D. Subject to the rate of interest being reasonable and subject to the limitations of subsection 18(4), the interest payable on the Charlie Debts will be deductible pursuant to paragraph 20(1)(c).

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Revenue Agency (“CRA”) provided that the proposed transactions are completed by XXXXXXXXXX.

This advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein, other than as expressly stated in the rulings given. For greater certainty, the CRA has not confirmed or made a determination in respect of whether subsection 18(4) would apply to deny a deduction in respect of any interest that is paid or payable on any of the Charlie Debts or whether subsection 245(2) will apply to redetermine the tax consequences stated in the Rulings given.

Yours truly,

XXXXXXXXXX
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch