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: Subsection 15(2) does not apply to loans between non-residents.
XXXXXXXXXX
2010-039155
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX , 2011
Dear XXXXXXXXXX :
Re: XXXXXXXXXX ("Canco") & XXXXXXXXXX
We are writing in response to your request dated XXXXXXXXXX for an advance income tax ruling on behalf of the above noted taxpayers.
To the best of your knowledge and that of Canco, none of the issues involved in this request for an advance income tax ruling are:
(i) dealt with in an earlier return of Canco or a person related to Canco;
(ii) being considered by any tax services office or taxation centre in connection with a tax return previously filed by Canco or a person related to Canco;
(iii) under objection by Canco or by a person related to Canco;
(iv) before the courts; or
(v) the subject of a ruling previously considered by the Directorate.
Definitions
In this letter, the following terms have the meanings specified below:
"Acquireco" means XXXXXXXXXX ;
"Aco" means XXXXXXXXXX ;
"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date of this letter;
"Bco" means XXXXXXXXXX ;
"Canco" means XXXXXXXXXX ;
"CanHoldco" means XXXXXXXXXX ;
"Cco" means XXXXXXXXXX - a corporation that is a predecessor to the merger described in paragraph 6;
"controlled foreign affiliate" has the meaning assigned by subsection 95(1) of the Act;
"CRA" means the Canada Revenue Agency;
"FAPI" means "foreign accrual property income" as that term is defined in subsection 95(1) of the Act;
"foreign accrual tax" has the meaning assigned by subsection 95(1) of the Act;
"foreign affiliate" has the meaning assigned by subsection 95(1) of the Act;
"Foreignco" means XXXXXXXXXX ;
"Foreignco Loan" means the interest-bearing loan to be made by US LLC to Foreignco, as described in Paragraph 12;
"non-resident" has the meaning assigned by subsection 248(1) of the Act;
"Paragraph" means a numbered paragraph in this letter;
"Pubco" means XXXXXXXXXX ;
"Pubco Group" means, at any particular time, Pubco and any corporation that is controlled directly or indirectly by Pubco;
"Regulations" means the Income Tax Regulations;
"Targetco" means XXXXXXXXXX ;
"taxable Canadian corporation" has, by virtue of subsection 248(1) of the Act, the meaning assigned by subsection 89(1) of the Act;
"United States" means the United States of America;
"US LLC" means XXXXXXXXXX ; and
"US Treaty" means the Convention between Canada and the United States of America With Respect to Taxes on Income and Capital Signed on September 26, 1980 as Amended by the Protocols Signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997 and September 21, 2007.
The rulings provided herein are based solely on the facts and proposed transactions described below. Any documents submitted with your request do not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions are as follows:
Facts
1. Pubco is a corporation that is a resident of the United States for the purposes of the US Treaty. Pubco is a regarded entity for United States tax purposes. Pubco owns indirectly all of the issued and outstanding shares of CanHoldco. Pubco is also the direct and indirect owner of a group of domestic and foreign corporations. Pubco and its domestic subsidiaries have elected to file a consolidated group tax return for United States tax purposes.
2. CanHoldco is resident in Canada for purposes of the Act. CanHoldco is treated as a disregarded entity for United States tax purposes. CanHoldco owns all (100%) of the shares of Canco.
3. Canco is an unlimited liability corporation governed by the laws of the Province of XXXXXXXXXX and was formed on XXXXXXXXXX on the amalgamation of certain entities within the Pubco Group. Canco carries on an active business in Canada. Canco is treated as a disregarded entity for United States tax purposes. Canco has an estimated $XXXXXXXXXX of cash on hand. Canco does not currently have any outstanding inter-company receivables from members of the Pubco Group that are non-residents (other than US LLC). Canco's registered address is XXXXXXXXXX , its taxation centre is the XXXXXXXXXX Tax Centre and its tax services office is the XXXXXXXXXX Tax Services Office. Canco's business number is XXXXXXXXXX and its taxation year end is XXXXXXXXXX .
4. Aco is a XXXXXXXXXX formed under and governed by the laws of XXXXXXXXXX and is a non-resident. Aco is a disregarded entity for United States tax purposes.
5. Bco is an unlimited liability company formed under and governed by the laws of the Province of XXXXXXXXXX . Bco carries on an active business in Canada. Bco is treated as a disregarded entity for United States tax purposes.
6. On XXXXXXXXXX , Aco and Bco became indirect, wholly-owned subsidiaries of Pubco by virtue of a merger between, amongst others, an affiliate of Pubco and Aco's and Bco's indirect parent, Cco.
7. US LLC is a limited liability company formed under the laws of the State of XXXXXXXXXX . All of the issued and outstanding membership interests in US LLC are owned by Canco. US LLC is treated as a disregarded entity for United States tax purposes.
8. Foreignco is a corporation formed under and governed by the laws of XXXXXXXXXX . Foreignco is an indirect, wholly-owned subsidiary of Pubco. Foreignco is not a foreign affiliate of Canco. Foreignco owns all (100%) of the shares of Acquireco.
9. Acquireco is a corporation formed under and governed by the laws of XXXXXXXXXX . Acquireco is not a foreign affiliate of Canco and will not become a foreign affiliate of Canco.
10. On XXXXXXXXXX , Bco made an interest-bearing loan to Aco in the amount of $XXXXXXXXXX . On XXXXXXXXXX , the $XXXXXXXXXX loan was repaid by Aco to Bco.
Proposed Transactions
11. Canco will use its cash on hand of $XXXXXXXXXX to subscribe for additional membership interests in US LLC. No other person, other than Canco, will hold an interest in US LLC.
12. US LLC will use the subscription proceeds ($XXXXXXXXXX ) to make a loan to Foreignco ("Foreignco Loan"). The interest rate on the Foreignco Loan will, at any particular time, be equal to or greater than the rates of interest prescribed by paragraph 4301(c) of the Regulations. Furthermore, there will be no income or profits tax that would be considered foreign accrual tax that may reasonably be regarded as applicable to the interest in respect of the Foreignco Loan. More specifically, there will be no withholding tax on any interest that is paid or payable to US LLC and no income or profits tax payable by US LLC in the United States.
13. Foreignco will use the cash received in the Foreignco Loan to make loans to or investments in other entities within the Pubco Group (other than a foreign affiliate of any Canadian member of the Pubco Group, or a partnership in which a foreign affiliate of any Canadian member of the Pubco Group has an interest). In particular, Foreignco may use all or part of the cash received in the Foreignco Loan to make a loan to or investment in Acquireco, which would use the proceeds to acquire shares of Targetco, an open joint-stock company formed under and governed by the laws of XXXXXXXXXX .
Purpose of the Proposed Transactions
14. Pubco wishes to re-deploy the cash on hand in Canco for use within the Pubco Group (in the manner described in Paragraph 13) without triggering Part XIII tax.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. The interest received or receivable by US LLC on the Foreignco Loan will constitute FAPI of US LLC and will be included in Canco's income pursuant to subsection 91(1) of the Act.
B. Subsection 17(2) of the Act will apply to deem an amount equal to the amount of the Foreignco Loan to be owed to Canco by Foreignco (or by a non-resident entity described in paragraph 13 above if subsection 17(11.2) of the Act applies to loans described in that paragraph).
C. Provided that the interest on the Foreignco Loan is equal to or greater than the amount of interest computed at 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 B above. For greater certainty, subsection 17(1) of the Act will only apply to include an amount in Canco's income for the year if the amount of interest computed at the prescribed rate, for the period in the year during which the Foreignco Loan was owing, exceeds the amount included in Canco's income with respect to the Foreignco Loan pursuant to subsection 91(1) of the Act as described in Ruling A above.
D. Subsection 15(2) of the Act will not apply to include an amount equal to the Foreignco Loan in Foreignco's income for the year, and subsection 212(2) and paragraph 214(3)(a) of the Act will not apply to deem an amount equal to the Foreignco Loan to have been paid to Foreignco as a dividend.
E. Provided that the interest paid on the Foreignco Loan in a year or not later than 30 days after the end of the year is equal to or greater than the interest computed at the rate prescribed by paragraph 4301(c) of the Regulations for the period in the year during which the Foreignco Loan 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 the Foreignco Loan, and no such benefit shall be deemed to have been paid as a dividend by Canco to any non-resident person for the purposes of subsections 15(1), 15(9) and 212(2) and paragraph 214(3)(a) of the Act.
F. Subsection 245(2) of the Act will not apply to determine the tax consequences described in Rulings A to E above.
Caveat
These rulings are based solely on the facts and proposed transactions described above and are subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002. These rulings are binding on the CRA provided that the proposed transactions are completed on or before XXXXXXXXXX .
Nothing in this letter should be construed as implying that the CRA has reviewed, accepted or otherwise agreed to:
(i) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above; and
(ii) the reasonableness of the interest rate charged on any of the loans described in the proposed transactions, for the purpose of subsection 17(1) of the Act.
The above noted rulings are based on the Act and the Regulations in their present form and do not take into account any proposed amendments to the Act or the Regulations which, if enacted, could have an effect on the rulings provided herein.
Yours truly,
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2011
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2011
Email this Content