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 2011-041443
XXXXXXXXXX , 2011
Dear XXXXXXXXXX
Re: XXXXXXXXXX
We are writing in response to your request dated XXXXXXXXXX for an advance income tax ruling on behalf of the above noted taxpayer.
To the best of your knowledge and that of Canco, none of the issues involved in this 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; or
(iv) before the courts.
Definitions
In this letter, the following terms have the meanings specified below:
"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date of this letter.
"Canco" means XXXXXXXXXX , a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX .
"Can LP" means XXXXXXXXXX , a limited partnership formed under the laws of XXXXXXXXXX .
"controlled foreign affiliate" has the meaning assigned by subsection 95(1) of the Act.
"CRA" means Canada Revenue Agency.
"Denmark Holdco" means XXXXXXXXXX , a corporation formed under the laws of the Kingdom of Denmark.
"Dutchco" means XXXXXXXXXX , a corporation formed under the laws of the Kingdom of the Netherlands.
"Dutch Holdco" means XXXXXXXXXX , a partnership formed under the laws of the Kingdom of the Netherlands.
"German Holdco Loan" means the interest-bearing loan to be made by XXXXXXXXXX to German Holdco, as described in Paragraph 19.
"Danish Treaty" means the Convention Between Canada and the Kingdom of Denmark for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital signed on September 17, 1997.
"Dutch Treaty" means the Convention Between Canada and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income signed on May 27, 1986, as amended by Protocols on March 4, 1993 and August 25, 1997.
"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.
"German Holdco" means XXXXXXXXXX , a corporation formed under the laws of the Federal Republic of Germany.
"German Treaty" means the Agreement Between Canada and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Certain Other Taxes, the Prevention of Fiscal Evasion and the Assistance in Tax Matters, signed on April 19, 2001.
"GP Inc." means XXXXXXXXXX , a taxable Canadian corporation incorporated under the laws of Canada. GP Inc. is the general partner of Can LP.
"Other Related Entities" means other European corporations in the XXXXXXXXXX that are not foreign affiliates of Canco.
"Paragraph" means a numbered paragraph in this letter.
"XXXXXXXXXX" means XXXXXXXXXX , a corporation formed under the laws of XXXXXXXXXX .
"Regulations" means the Income Tax Regulations.
"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 Holdco" means XXXXXXXXXX , a corporation formed under XXXXXXXXXX .
"US Holdco LLC" means XXXXXXXXXX , a limited liability company formed under the laws of XXXXXXXXXX .
"US LLC" means a limited liability company to be formed under the laws of XXXXXXXXXX , as described in Paragraph 17.
"US Sub" means XXXXXXXXXX , a corporation formed under the laws of XXXXXXXXXX .
"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 purposes of the proposed transactions are as follows:
Facts
1. XXXXXXXXXX , US Holdco, US Sub, GP Inc., and Can LP, each have a December 31st year-end for tax purposes.
2. Canco, Dutchco, Dutch Holdco, Denmark Holdco and German Holdco have a November 30th year-end for tax purposes.
3. XXXXXXXXXX is treated as a regarded corporation for the United States tax purposes. XXXXXXXXXX is a "qualifying person" as defined in XXXXXXXXXX Article XXIX-A of the US Treaty. XXXXXXXXXX is a corporation that is resident in the United States for purposes of the Act and the US Treaty.
4. XXXXXXXXXX owns all of the issued and outstanding share of US Holdco, a corporation that is resident in the United States for purposes of the Act. US Holdco is treated as a regarded corporation for US tax purposes.
5. US Holdco owns all of the issued and outstanding shares of US Sub, a corporation that is resident in the United States for purposes of the Act. US Sub is treated as a regarded corporation for US tax purposes.
6. US Holdco owns all of the issued and outstanding member interests in US Holdco LLC. US Holdco LLC is treated as a disregarded entity for US tax purposes.
7. US Sub owns all of the issued and outstanding shares of GP Inc. GP Inc. is treated as a regarded corporation for United States tax purposes. GP Inc. is a resident in Canada for the purposes of the Act.
8. US Sub owns all of the issued and outstanding shares of Canco. Canco is treated as a regarded corporation for United States tax purposes. Canco is resident in Canada for the purposes of the Act.
9. Canco is the limited partner of Can LP, a limited partnership that carries on XXXXXXXXXX business in Canada. Canco owns XXXXXXXXXX % of the outstanding partnership units of Can LP. GP Inc. is the general partner of Can LP, and owns XXXXXXXXXX % of the outstanding partnership units of Can LP. The partnership capital account of Can LP exceeds the amount of the distribution contemplated in Paragraph 16.
10. US Holdco and US Holdco LLC together own all of the issued and outstanding interests in Dutch Holdco, a partnership for purposes of the Act. Dutch Holdco is treated as a corporation for US tax purposes.
11. Dutch Holdco owns all of the issued and outstanding shares of Dutchco, a corporation resident in the Kingdom of the Netherlands for purposes of the Act and the Dutch Treaty. Dutchco is not a foreign affiliate or controlled foreign affiliate of Canco. Dutchco is treated as a disregarded entity for US tax purposes.
12. Dutchco owns all of the issued and outstanding shares of Denmark Holdco, a corporation resident in the Kingdom of Denmark for purposes of the Act and the Danish Treaty. Denmark Holdco is not a foreign affiliate or controlled affiliate of Canco. Denmark Holdco is treated as a disregarded entity for US tax purposes
13. Denmark Holdco owns all the issued and outstanding shares of German Holdco, a corporation resident in the Federal Republic of Germany for purposes of the Act and the German Treaty. German Holdco is not a foreign affiliate or controlled foreign affiliate of Canco. German Holdco is treated as a corporation for US tax purposes.
14. Can LP has used some of its excess cash to make a loan in the amount of
$XXXXXXXXXX to Dutchco on XXXXXXXXXX ("the Can LP loan"). The Can LP loan bears interest at a rate of XXXXXXXXXX %, maturing on XXXXXXXXXX . In addition, Can LP used excess cash on XXXXXXXXXX to make additional loans maturing on XXXXXXXXXX to Dutchco in the amount of $C XXXXXXXXXX , $C XXXXXXXXXX and $C XXXXXXXXXX with interest rates of XXXXXXXXXX %, XXXXXXXXXX % and XXXXXXXXXX %, respectively to Dutchco. These four loans shall be considered "the Can LP loans". Dutchco and Can LP have agreed to extend the maturity date of the Can LP loans XXXXXXXXXX . Prior to the Can LP loans, Can LP did not enter into any transactions with Dutchco that would be considered to be "a series of loans or other transactions and repayments" for purposes of subsection 15(2.6) of the Act.
Proposed Transactions
15. Dutchco will repay the Can LP loans and any accrued interest on its maturity date of XXXXXXXXXX .
16. Can LP will make a capital distribution to its partners in the amount of
$C XXXXXXXXXX . As such, Canco will receive XXXXXXXXXX % of the distribution, or
$C XXXXXXXXXX XXXXXXXXXX and GP Inc. will receive XXXXXXXXXX % of the distribution, or $C XXXXXXXXXX .
17. US LLC will be formed under and governed by the laws of XXXXXXXXXX . US LLC will be resident in the United States for purposes of the Act. US LLC will be treated as a disregarded entity for United States tax purposes (i.e., US LLC will be fiscally transparent). US LLC will have XXXXXXXXXX as its currency.
18. The share capital of US LLC will be comprised of membership interests. Canco will use its cash of approximately $C XXXXXXXXXX to subscribe for membership interests in US LLC. Canco will be the only holder of membership interests in US LLC.
19. US LLC will use the cash of approximately XXXXXXXXXX to make a Euro-denominated loan to German Holdco on an interest-bearing basis (the "German Holdco Loan"). The German Holdco Loan will bear interest at an arm's length rate, which at all times will be greater than the rates of interest prescribed by paragraph 4301(c) of the Regulations to the Act. The interest owning on the German Holdco Loan will be paid to US LLC at least annually. The loan will be outstanding for a term greater than 1 year. 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 German Holdco Loan.
20. German Holdco will use the cash received to reduce a note payable due to Denmark Holdco which will utilize the cash to repay a note payable due to Dutch Holdco. Dutch Holdco will use the cash received to make loans to or investments in other foreign entities within the XXXXXXXXXX group (other than to a foreign affiliate of Canco or a partnership in which a foreign affiliate of Canco has an interest), or for other group purposes, depending on the cash requirements of the XXXXXXXXXX group.
21. From time to time, Canco may make investments in additional membership interests of US LLC as described in Paragraph 18 above. US LLC will lend the proceeds of such additional investments to German Holdco or Other Related Entities, with terms equal to those outlined in Paragraph 19.
Purpose of the Proposed Transactions
22. The principal purpose of the proposed transactions is to deploy Canco's excess cash for XXXXXXXXXX group business needs outside of Canada in a manner that generates a return in Canada.
23. A loan from Canco to US Sub (or XXXXXXXXXX , US Holdco or German Holdco) 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 US Sub (or XXXXXXXXXX , US Holdco or German Holdco as the case may be) under paragraph 214(3)(a) and subsection 212(2) of the Act. US Sub owns all of the issued and outstanding shares of Canco, therefore if Canco made a loan to US Sub, US Sub would be entitled to the 5% withholding tax rate under paragraph 2(a) of Article X of the US Treaty. Since XXXXXXXXXX , US Holdco or German Holdco do not own any of the issued and outstanding shares of Canco, these entities would be subject to the 15% withholding tax rate under paragraph 2(b) of Article X of the US Treaty, paragraph 2(b) of Article 10 of the German Treaty, as the case may be.
24. The currency used by US LLC will be the European Euro. As such, Canco bears all foreign exchange risk, due to fluctuations between the Canadian dollar and the Euro, on its annual FAPI to be reported for interest income earned by US LLC and on any FAPI gain or loss which may result on the eventual repayment of the German Holdco Loan principal.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. Pursuant to subsection 15(2.6) of the Act, subsection 15(2) of the Act will not apply to the Can LP loans.
B. US LLC will be a foreign affiliate and a controlled foreign affiliate of Canco.
C. The interest received or receivable by US LLC on the German Holdco Loan will constitute FAPI of US LLC and will be included in Canco's income pursuant to subsection 91(1) of the Act.
D. Subsection 17(2) of the Act will apply to deem an amount equal to the amount of German Holdco Loan to be owed to Canco by German Holdco.
E. Provided that the interest on the German Holdco Loan is equal 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 D 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 German Holdco Loan was owing, exceeds the amount included in Canco's income with respect to the interest on the German Holdco Loan pursuant to subsection 91(1) of the Act as described in Ruling C above.
F. Subsection 15(2) of the Act will not apply to include an amount equal to the German Holdco Loan in German Holdco's income for the year, and subsections 212(2) and paragraph 214(3)(a) of the Act will not apply to deem an amount equal to the German Holdco Loan to have been paid to German Holdco as a dividend.
G. Provided that the interest paid on the German Holdco 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 German Holdco 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 German Holdco 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.
H. Subsection 245(2) of the Act will not apply to re-determine the tax consequences described in rulings A to G above.
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 Canada Revenue Agency provided that the proposed transactions are completed on or before XXXXXXXXXX .
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 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.
It is our view that proposed subsection 90(4) of the Act as introduced by the Department of Finance on August 19, 2011 as part of the legislative proposals in respect of foreign affiliates, if enacted into law in its current form, will, subject to the application of proposed subsection 90(5), apply to include an amount equal to the amount of the German Holdco Loan in the income of Canco in the taxation year of Canco that includes the time at which the loan is made by US LLC. Similarly, proposed subsection 90(4) of the Act may apply to any subsequent loan made by US LLC as described in Paragraph 21 above.
Yours truly,
XXXXXXXXXX
Manager
International Section II
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
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