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 forward foreign exchange contracts between two foreign affiliates could "reasonably be considered to have been made" by both affiliates "to reduce risk with respect to a debt referred to in" subparagraph 95(2)(i)(i) "of fluctuations in the value of the currency in which the debt was denominated".
Position: Yes
Reasons: Each affiliate had indebtedness denominated in the currency that it had contracted to purchase under the forward contract. The amount of the indebtedness of each affiliate equalled or exceeded the aggregate amounts receivable by it under forward contracts. The indebtedness of each affiliate was indebtedness described in subparagraph 95(2)(i)(i). The amounts received on the settlement of each contract would generally be used by the parties to repay a portion of their indebtedness. The words "reasonably be considered" and "with respect to" in subparagraph 95(2)(i)(iii) are very broad.
XXXXXXXXXX 2009-033780
XXXXXXXXXX , 2009
Dear XXXXXXXXXX :
Re: XXXXXXXXXX
Advanced 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. We also acknowledge your subsequent submission as well as our various telephone conversations.
To the best of your knowledge and that of the taxpayer involved, none of the issues involved with this advance income tax ruling is:
(i) in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal has not expired; or
(v) the subject of a ruling previously issued by the Directorate.
The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described above. Facts and proposed transactions described in the documents submitted with your request that are not set out below do not form part of the facts and proposed transactions on which these rulings are based and any reference to those documents is provided solely for the convenience of the reader.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
DEFINITIONS
In this letter the following terms have the meanings specified:
(a) "Aco" means XXXXXXXXXX ;
(b) "Bco" means XXXXXXXXXX .;
(c) "Bco Chain" means all entities directly or indirectly controlled by XXXXXXXXXX .;
(d) "Cco" means XXXXXXXXXX .;
(e) "Dco" means XXXXXXXXXX .;
(f) "Eco" means XXXXXXXXXX .;
(g) "excluded property" means excluded property as defined in subsection 95(1) of the Act;
(h) "Eco Group" means all the corporations that are related to Eco, including, Aco, Bco, Cco, Dco, Eco, Fco, Gco, and Ico;
(i) "Fco" means XXXXXXXXXX
(j) "Gco" means XXXXXXXXXX
(k) "Hco" means XXXXXXXXXX
(l) "Holdco" means XXXXXXXXXX
(m) "Ico" means XXXXXXXXXX ;
(n) "Jco" means XXXXXXXXXX ;
(o) "XXXXXXXXXX Co" means XXXXXXXXXX ;
(p) "Pubco" means XXXXXXXXXX ;
(q) "Subco" means XXXXXXXXXX ;
(r) "US $ Denominated Debt Obligations" means the notes payable by Gco and Hco to Aco referred to in paragraphs 10 and 11 below; and
(s) "Xco" means XXXXXXXXXX .
FACTS
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
1. Eco is a Canadian corporation with its shares listed on the XXXXXXXXXX stock exchanges.
2. Eco wholly owns Ico and Fco, which are corporations incorporated and resident in Canada.
3. Ico wholly owns Aco, a corporation that was originally incorporated in XXXXXXXXXX which has since migrated its corporate existence to XXXXXXXXXX and is now resident in XXXXXXXXXX for the purposes of the Act and the Canada-XXXXXXXXXX Tax Convention.
4. Fco directly wholly owns Bco, a corporation that is incorporated and licensed as an International Business Corporation and is resident in XXXXXXXXXX . Subsection 5907(11.2) of the Regulations to the Act will not apply to Fco because of the exception in paragraph (c) thereof.
5. Bco wholly owns Cco, a corporation incorporated and resident in XXXXXXXXXX for the purposes of the Act.
6. Bco indirectly owns XXXXXXXXXX % of Holdco, a corporation that is incorporated and licensed as an International Business Corporation and is resident in XXXXXXXXXX . Holdco owns XXXXXXXXXX % of Subco, a corporation that is incorporated and licensed as an International Business Corporation and is resident in XXXXXXXXXX . Subsection 5907(11.2) of the Regulations to the Act does not apply to Holdco or Subco because of the exception in paragraph (c) thereof. Holdco is a holding company that holds debt and shares of Subco. Subco carries on an XXXXXXXXXX business operation in the XXXXXXXXXX . The other XXXXXXXXXX % of Holdco is indirectly owned by Pubco, a Canadian corporation that is not part of the Eco Group.
7. There are no assets in Cco that create foreign accrual property income ("FAPI").
8. There is no material taxable surplus in Cco.
9. Ico wholly owns Dco, a Canadian corporation. Dco indirectly wholly owns Gco and Hco, two corporations incorporated and resident in XXXXXXXXXX for the purposes of the Act and the Canada-XXXXXXXXXX Income Tax Convention. Gco and Hco each carry on an XXXXXXXXXX business in XXXXXXXXXX . Both Gco anc Hco indirectly own XXXXXXXXXX Co, and directly own shares in separate corporations that are resident in XXXXXXXXXX , for the purposes of the Act and the Canada-XXXXXXXXXX Income Tax Convention.
10. Gco owes $XXXXXXXXXX in a note payable to Aco that is denominated in United States ("US") currency.
11. Hco owes $XXXXXXXXXX in a note payable to Aco that is denominated in US currency.
12. The US $ Denominated Debt Obligations referred to in paragraphs 10 and 11 above, were issued in satisfaction of the purchase price of shares of Jco, another controlled foreign affiliate of Eco, which ultimately holds shares in XXXXXXXXXX Co.
13. XXXXXXXXXX Co is incorporated and resident in XXXXXXXXXX for the purpose of the Act and the Canada-XXXXXXXXXX Income Tax Convention. XXXXXXXXXX Co carries on an XXXXXXXXXX business.
14. The US $ Denominated Debt Obligations are excluded property to Aco because the interest income derived from them is deemed to be income from an active business by virtue of subparagraph 95(2)(a)(ii). The local currency of Gco and Hco for income tax and financial statement purposes is the XXXXXXXXXX . The local currency of Bco and Cco for income tax and financial statement purposes is the US dollar.
15. Aco was established as a global lending company for the Eco Group in XXXXXXXXXX . Aco uses the US dollar for financial statement and income tax purposes. Aco provides loan capital to foreign affiliates of Eco where applicable and appropriate. Currently Aco is only providing loan capital to Gco and Hco. Prior to providing loan capital to Gco and Hco, Aco briefly held the shares of Jco which were purchased from another corporation in the Eco Group.
16. Cco is a regional lending company for the Eco Group, providing loan capital to foreign affiliates of Eco located in the XXXXXXXXXX regions where applicable and appropriate.
17. Bco has provided a "revolver" type loan facility to Cco that is: denominated in XXXXXXXXXX ; can be drawn down at any time and in any amount; can be repaid at any time and in any amount; and has a maximum loan principal amount of XXXXXXXXXX (the "Revolver Loan").
18. From the Revolver Loan, the equivalent of US$ XXXXXXXXXX will be received by Cco in XXXXXXXXXX , and used for the purposes discussed in paragraph 27 below. The obligations that arise as a result of amounts drawn from the Revolver Loan that are used for the purposes discussed in paragraphs 22-27 below are referred to herein as the "XXXXXXXXXX Denominated Debt Obligations". The receivable held by Bco in respect of the XXXXXXXXXX Denominated Debt Obligations will be excluded property of Bco.
19. Cco's board of directors has resolved that all funds obtained from the Revolver Loan are to be used to make loans or acquire debts from companies that are foreign affiliates of Eco where such loans made and debts acquired are, at all times, considered excluded property for the purposes of the Act.
20. Cco has agreed to provide loan capital to Aco from the XXXXXXXXXX Denominated Debt Obligations. Aco can then use the proceeds of the loan from Cco to provide a loan to Holdco. Holdco will receive similar loan capital from Pubco. Holdco can then in turn provide a high-yield debt facility to Subco, so that Subco has the funds required (along with the funding from a syndicate of commercial banks worldwide) to complete XXXXXXXXXX .
21. Cco will not receive the funds from Bco that will be used for the purposes in paragraph 22 above, until Aco is about to advance the funds for use by Holdco.
22. The loan to Holdco made by Aco will be excluded property to Aco.
23. The loan to Aco made by Cco will be excluded property to Cco.
24. The loan facility that Cco has extended to Aco from proceeds of the XXXXXXXXXX Denominated Debt Obligations is denominated in US currency and will be drawn down over time as Holdco requests loan draws from Aco for funding needed to pay for XXXXXXXXXX . The requests are estimated to occur roughly as follows:
XXXXXXXXXX
25. Cco has negotiated to provide a US$ XXXXXXXXXX loan to Xco, another foreign affiliate of Eco that is resident in XXXXXXXXXX . Xco serves as a holding company for Eco's XXXXXXXXXX interests in XXXXXXXXXX . Xco will use the funds received from Cco to pay down a note payable owing to its sole shareholder, XXXXXXXXXX , which note was issued by Xco in consideration for acquiring the XXXXXXXXXX companies. The loan from Cco to Xco will be excluded property to Cco.
PROPOSED TRANSACTIONS
26. Gco and Hco, respectively, shall enter with Cco into a series of forward foreign exchange contracts (herein referred to as the "FFE Contracts"). The amount and termination date in respect of each FFE Contract will be matched with the amount and timing of planned repayments ("PRs") to be made by Gco and Hco in respect of the US $ Denominated Debt Obligations. At any given date the aggregate amount of US dollars deliverable to Gco and Hco under the FFE Contracts will not exceed the aggregate amount owing under the US $ Denominated Debt Obligations and, subsequent to XXXXXXXXXX , the aggregate amount deliverable to Cco under the FFE Contracts will not exceed the amount owing under the XXXXXXXXXX Denominated Debt Obligations. Neither Gco nor Hco will enter into a FFE Contract pursuant to which the amount of US dollars deliverable to Gco or Hco, as the case may be, is greater than its respective liability to Aco under the US $ Denominated Debt Obligations.The amount in the relevant currency deliverable on the settlement date by the parties to each FFE Contract will be calculated at the time the FFE Contract is entered into by applying a forward foreign exchange rate that has been determined by reference to the WM/Reuters Spot and Forward Rates Guide. Such forward foreign exchange rate will approximate the rate the parties would expect to receive if they entered into the FFE Contract with an arm's length counter party on the open market.
27. On termination of a particular FFE Contract between Gco and Cco, the contract requires Gco to deliver to Cco the XXXXXXXXXX amount specified in the contract when the contract was entered into and requires Cco to deliver to Gco the US dollar amount specified in the contract. The amount in US dollars deliverable by Cco will be equal to the amount of the relevant PR of Gco. If agreed to between the parties, the FFE Contract can be settled at the settlement date, as is customary in the industry, by a single payment from one party to the other determined by comparing the then current spot foreign exchange rate to the forward foreign exchange rate implicit in the FFE Contract.
28. On termination of a particular FFE Contract between Hco and Cco, the contract requires Hco to deliver to Cco the XXXXXXXXXX amount specified in the contract when the contract was entered into and requires Cco to deliver to Hco the US dollar amount specified in the contract. The amount in US dollars deliverable by Cco will be equal to the amount of the relevant PR of Hco. If agreed to between the parties, the FFE Contract can be settled at the settlement date, as is customary in the industry, by a single payment from one party to the other determined by comparing the then current spot foreign exchange rate to the forward foreign exchange rate implicit in the FFE Contract.
29. Each time a FFE Contract is terminated, Cco will use its best efforts to collect on one of the loan receivables on its books, or find alternative US dollar loan receivables on its books at that time, in an amount equal to the amount of US dollars deliverable to Gco or Hco under the particular FFE Contract. Generally, Gco and Hco as the case may be, are expected to make a repayment under the US $ Denominated Debt Obligations to Aco in an amount equal to the amount in US dollars deliverable by Cco under the particular FFE Contract. Generally, Cco is expected to make a repayment to Bco of its obligations under the XXXXXXXXXX Denominated Debt Obligations in an amount equal the XXXXXXXXXX deliverable by Gco or Hco to Cco under the particular FFE Contract.
30. Cco will first use its loan receivable from Xco to satisfy its obligations under the FFE Contracts until such receivable has been fully repaid by Xco. Thereafter, Cco will use its loan receivable from Aco, or in the alternative then use other US dollar receivables, to satisfy its obligations under any remaining FFE Contracts.
31. The FFE Contracts only deal with principal amounts. They do not deal with the exchanging of currencies for interest payments payable between maturity dates.
PURPOSE OF THE PROPOSED TRANSACTIONS
32. Gco and Hco no longer want to be exposed to the risk associated with the fluctuations in the value of the XXXXXXXXXX relative to the value of the US dollar in respect of the notes payable that are described in paragraphs 10, 11 and 12 above. Over the last XXXXXXXXXX months, both Gco and Hco have experienced extreme volatility in the value of the XXXXXXXXXX , (relative to the US dollar) of as much as XXXXXXXXXX %. This has led to Gco and Hco having problems with erosion of their capital base in XXXXXXXXXX . Gco and Hco are using the DFFE Contracts with Cco to convert the contracted portion of the US $ Denominated Debt Obligations into an equivalent amount of XXXXXXXXXX which then will eliminate any ongoing exposure to the fluctuation in the value of the XXXXXXXXXX in reference to the US dollar because the forward exchange contract will fix the exchange rate for the term of the contract.
33. For similar reasons as described in paragraph 35, Cco does not want to be exposed to currency fluctuations, relative to the US dollar, on its loan facility with Bco that is denominated in XXXXXXXXXX .
RULINGS GIVEN
Provided the preceding statements constitute a complete and accurate disclosure of all the relevant definitions, facts, proposed transactions, purposes of the proposed transactions, we rule as follows:
A. Provided that all or substantially all the proceeds from the note payable by Gco to Aco described in paragraph 10 above, was used by Gco for the purpose of acquiring property and at all times after that note payable became a debt of Gco and before the time of the settlement or extinguishment of that note, the property (or property substituted for the property) was property of Gco and excluded property of Gco, the income, gain or loss of Gco from the termination of its FFE Contract with Cco will be deemed pursuant to paragraph 95(2)(i) to be income, gain or loss, as the case may be, of Gco from the disposition of excluded property.
B. Provided that all or substantially all the proceeds from the note payable by Hco to Aco described in paragraph 11 above, was used by Hco for the purpose of acquiring property and at all times after that note payable became a debt of Hco and before the time of the settlement or extinguishment of that note, the property (or property substituted for the property) was property of Hco and excluded property of Hco, the income, gain or loss of Hco from the termination of its FFE Contract with Cco will be deemed pursuant to paragraph 95(2)(i) to be income, gain or loss, as the case may be, of Hco from the disposition of excluded property.
C. Provided that all or substantially all the proceeds from the XXXXXXXXXX Denominated Debt Obligations payable by Cco to Bco described in paragraph 19 above, is used by Cco for the purpose of acquiring property and at all times while the XXXXXXXXXX Denominated Debt Obligations are a debt of Cco and before the time of the settlement or extinguishment of these XXXXXXXXXX Denominated Debt Obligations the property (or property substituted for the property) are property of Cco and excluded property of Cco, the income, gain or loss of Cco from the termination of its FFE Contracts with Gco and Hco will be deemed pursuant to paragraph 95(2)(i) to be income, gain or loss as the case may be of Cco from the disposition of excluded property.
The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided the proposed transactions are entered into on or before XXXXXXXXXX .
Nothing in this letter should be construed as implying that the CRA has reviewed, accepted or otherwise agreed to:
(a) any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the rulings given above;
(b) the fair market value or adjusted cost base of any property or loan; or
(c) whether the proceeds of disposition of any or all of the FFE Contracts is on income or capital account.
Yours truly,
XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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