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 because of the application of subsection 15(2.2).
XXXXXXXXXX
2010-038797
XXXXXXXXXX
XXXXXXXXXX , 2011
Dear XXXXXXXXXX :
Re: XXXXXXXXXX ("Canco").
This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above-noted taxpayer.
To the best to your knowledge and that of Canco, none of the issues involved in this request for an advance income tax ruling is:
- dealt with in an earlier return of Canco or a person related to Canco;
- 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 person related to Canco;
- under objection by Canco or by a person related to Canco; or
- 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.
Definitions
In this letter, the following terms have the meanings specified below. All dollar amounts are expressed in Canadian dollars. Unless otherwise noted, all legislative references are to the Act.
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date of this letter;
(b) "Canco" means XXXXXXXXXX , a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX . Canco's address is XXXXXXXXXX . Canco' Business Number is XXXXXXXXXX , and Canco files its corporate tax returns with the XXXXXXXXXX Tax Centre, and is served by the XXXXXXXXXX TSO;
(c) "controlled foreign affiliate" has the meaning assigned by subsection 95(1);
(d) "CRA" means the Canada Revenue Agency;
(e) "Dco" means XXXXXXXXXX ;
(f) "DCO Treaty" means the Convention Between Canada and XXXXXXXXXX ;
(g) "FAPI" means "foreign accrual property income" as that term is defined in subsection 95(1);
(h) "foreign accrual tax" has the meaning assigned by subsection 95(1);
(i) "foreign affiliate" has the meaning assigned by subsection 95(1);
(j) "Gco" means XXXXXXXXXX ;
(k) "G Holdings" means XXXXXXXXXX ;
(l) "GCO Loan" means the interest-bearing loan to be made by US LLC to Gco, as described in paragraph 9;
(m) "GCO Treaty" means the Agreement Between Canada and XXXXXXXXXX ;
(n) "non-resident" has the meaning assigned by subsection 248(1);
(o) "Paragraph" means a numbered paragraph in this letter;
(p) "Pubco" means XXXXXXXXXX , a corporation formed under the laws of the State of XXXXXXXXXX ;
(q) "Pubco Group" is described in Paragraph 1 below;
(r) "Regulations" means the Income Tax Regulations;
(s) "taxable Canadian corporation" has, by virtue of subsection 248(1), the meaning assigned by subsection 89(1);
(t) "United States" means the United States of America;
(u) "US LLC" means a limited liability company to be formed under the laws of the State of XXXXXXXXXX ;
(v) "US Sub" means XXXXXXXXXX , a corporation formed under the laws of the State of XXXXXXXXXX ; and
(w) "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.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is 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 XXXXXXXXXX . Pubco's issued and outstanding share capital consists of Class A common and Class B common shares. Pubco's Class A common shares are traded on the XXXXXXXXXX Stock Exchange under the symbol 'XXXXXXXXXX '. Pubco has operations in North America, Europe, XXXXXXXXXX and XXXXXXXXXX . Pubco is also the direct and indirect owner of a group of domestic and foreign corporations (i.e. the "Pubco Group"). Pubco, US Sub, Canco, Dco, G Holdings and Gco each have a XXXXXXXXXX year-end for tax purposes. Pubco is treated as a regarded corporation for United
States tax purposes. Pubco owns all of the issued and outstanding shares of Canco.
2. Canco is a corporation formed under and governed by the laws of XXXXXXXXXX and carries on the Pubco Group's business in Canada. Canco is treated as a regarded corporation for United States tax purposes. Canco has an estimated CAD$XXXXXXXXXX of cash on hand and, currently, does not have any outstanding intercompany loans. Canco has Canadian currency as its functional currency.
3. Pubco owns all of the issued and outstanding shares of US Sub. US Sub is a corporation that is a resident of the United States for the purposes of the US Treaty. US Sub is treated as a regarded corporation for United States tax purposes. US Sub owns all of the issued and outstanding shares of Dco.
4. Dco is a corporation that is resident in XXXXXXXXXX for the purposes of the DCO Treaty. Dco owns all of the issued and outstanding shares of G Holdings.
5. G Holdings is a corporation that is resident in XXXXXXXXXX for purposes of the GCO Treaty. G Holdings owns all of the issued and outstanding shares of Gco.
6. Gco is a corporation that is resident in XXXXXXXXXX for purposes of the GCO Treaty. Gco is not a foreign affiliate or controlled foreign affiliate of Canco.
Proposed Transactions
7. US LLC will be formed under and governed by the laws of the State of XXXXXXXXXX . US LLC will be a non-resident for the purposes of the Act and will be treated as a disregarded entity for United States tax purposes (i.e., US LLC will be fiscally transparent).
8. The capital of US LLC will comprise membership interests. Canco will use approximately € XXXXXXXXXX of its cash on hand to subscribe for membership interests in US LLC. No other person, other than Canco will hold an interest in US LLC.
9. US LLC will use the subscription proceeds (approximately € XXXXXXXXXX ) to make a loan to Gco on an interest-bearing basis (the "GCO Loan"). The interest rate on the GCO Loan will be equal to or greater than the rates of interest prescribed by paragraph 4301 (c) of the Regulations. The interest owing on the GCO Loan will be paid to US LLC at least annually. The loan principal will be payable on demand. 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 GCO Loan. More specifically, there will be no withholding tax on any interest payable to US LLC and no income or profit tax payable by US LLC in the United States.
10. Gco will use the cash received to make loans to or investments in other foreign entities within the Pubco Group (other than a foreign affiliate of a Canadian member of the Pubco Group, or a partnership in which a foreign affiliate of a Canadian member of the Pubco Group has an interest), depending on the cash requirements of the Pubco Group.
Purpose of the Proposed Transactions
11. Pubco wishes to re-deploy the cash on hand in Canco to other entities in the Pubco Group as described in Paragraph 10. It initially contemplated paying a dividend from Canco to Pubco. However, such dividend would trigger adverse United States tax consequences.
12. In addition, a loan from Canco to Pubco or Gco 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), resulting in a deemed dividend from Canco to Pubco or Gco under paragraph 214(3)(a) and subsection 212(2). Since Pubco owns all of the issued and outstanding shares of Canco, Pubco would be entitled to the 5% withholding tax rate under paragraph 2(a) of Article X of the US Treaty. Since Gco does not control at least XXXXXXXXXX percent of the voting power of Canco, Gco would be subject to the XXXXXXXXXX % withholding tax rate under paragraph 2(b) of the Article X of the GCO Treaty.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant definitions, facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our rulings are as follows:
A. US LLC will be a foreign affiliate and controlled foreign affiliate of Canco.
B. The interest received or receivable by US LLC on the GCO Loan will be FAPI of US LLC and will accordingly be included in Canco's income on an accrual basis pursuant to subsection 91(1).
C. Subsection 17(2) will apply to deem an amount equal to the amount of the GCO Loan to be owed to Canco by Gco.
D. Provided that the interest on the GCO 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) 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) 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 the GCO Loan was owing exceeds the amount included in Canco's income with respect to the GCO Loan pursuant to subsection 91(1) as described in Ruling B above.
E. Subsection 15(2) will not apply to include an amount equal to the GCO Loan in Gco's income for the year, and paragraph 214(3)(a) and subsection 212(2) will not apply to deem an amount equal to the GCO Loan to have been paid to Gco as a dividend.
F. Provided that the interest on the GCO Loan paid 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 GCO Loan was outstanding, subsection 80.4(2) will not apply to deem any person to have received a benefit as a consequence of the GCO 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 subsection 15(9) and 15(1), paragraph 214(3)(a) and subsection 212(2).
G. Subsection 245(2) will not apply to re-determine the tax consequences confirmed in the Rulings A through F above.
Caveats
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 CRA provided that the proposed transactions above are completed by XXXXXXXXXX .
The rulings provided herein are based solely on the facts and proposed transactions described above. Any documents submitted with your request do not form part of the facts and proposed transactions and any other references thereto are provided solely for the convenience of the reader.
Nothing in this letter should be construed as implying that the CRA 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.
Yours truly,
XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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