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) Whether interest arising in Canada and beneficially owned by a resident of the United States is, pursuant to Article XXIX A(3) and Article XI of the Convention, only taxable in the United States; 2) Whether subsection 18(6) applies to certain loans between related Canadian corporations
Position: 1) Yes; 2) No
Reasons: 1) The interest is income derived in connection with an active trade or business in the United States that is substantial in relation to the activity in Canada giving rise to the income; 2) Subsection 18(4) is not frustrated or circumvented
XXXXXXXXXX 2009-034914
XXXXXXXXXX , 2010
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX
(collectively referred to as the "taxpayers")
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 the taxpayers, none of the issues involved in this advance income tax ruling is:
(i) dealt with in an earlier return of the taxpayers or a person related to the taxpayers;
(ii) being considered by any tax services office or taxation centre in connection with a tax return previously filed by the taxpayers or a person related to the taxpayers;
(iii) under objection by the taxpayers or by a person related to the taxpayers;
(iv) the subject of a previously issued ruling by the Income Tax Rulings Directorate; or
(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.
In this letter, the following terms have the meanings specified below:
"Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended;
"Canco" means XXXXXXXXXX , a corporation incorporated under the Canada Business Corporations Act;
"Canadian Finco" means XXXXXXXXXX , a corporation incorporated under the Canada Business Corporations Act;
"Canco Group" means Canco, Canadian Finco, Canadian Salesco and Canadian Treasury;
"Canadian Salesco" means XXXXXXXXXX , a wholly-owned subsidiary of US Holdco;
"Canadian Treasury" means XXXXXXXXXX , a corporation incorporated under the Canada Business Corporation Act;
"CRA" means the Canada Revenue Agency;
"Fifth Protocol" means the Fifth Protocol to the Canada-United States Tax Convention (1980);
"Foreign Finco" means XXXXXXXXXX , a XXXXXXXXXX company and a wholly-owned subsidiary of Foreign Parent;
"Foreign Holdco" means XXXXXXXXXX , a XXXXXXXXXX company and a wholly-owned subsidiary of Foreign Parent;
"Foreign Parent" means XXXXXXXXXX , a XXXXXXXXXX public company;
"Foreign Treasury" means XXXXXXXXXX , a XXXXXXXXXX company and a wholly-owned subsidiary of Foreign Parent;
"FP Group" has the meaning described in paragraph 1 of this letter;
"GPCo" means XXXXXXXXXX , a wholly-owned subsidiary of US Holdco;
"non-resident" has the meaning assigned by subsection 248(1) of the Act;
"Primary Loans" means Primary Loan 1, Primary Loan 2 and Primary Loan 3, as described in paragraph 33 of this letter;
"related" has the meaning assigned in subsection 251(2) of the Act;
"Secondary Loans" means the Secondary Loans 1, Secondary Loan 2 and Secondary Loans 3, as described in paragraph 33 of this letter;
"taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;
"Treaty" means the Canada-United States Tax Convention (1980);
"US Group" means US Holdco and any of the corporations that are related to US Holdco and that carry on an active trade or business in the United States;
"US Holdco" means XXXXXXXXXX , a wholly owned subsidiary of Foreign Parent; and
"US Treasury LP" means XXXXXXXXXX , a limited partnership, as described in paragraphs 18 and 19 of this letter.
The rulings provided herein are based solely on the facts and proposed transactions described below. Any documents submitted with your ruling request do not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
Facts
Our understanding of the facts, proposed transactions and the purposes of the proposed transactions is as follows:
International Operations
1. The FP Group is a global business organization controlled by Foreign Parent. The corporations that make up the FP Group specialize in the production and marketing of XXXXXXXXXX . The FP Group's operations are organized into XXXXXXXXXX business segments:
XXXXXXXXXX
2. The FP Group has a number of regional and local entities that secure financing for the corporations that carry on the active business operations in the FP Group.
3. Foreign Treasury, a wholly-owned subsidiary of Foreign Parent, operates as the main internal banker for the FP Group by providing funding, liquidity management, foreign exchange, cash management and economic analysis for members of the FP Group. Foreign Treasury assists in obtaining financing at the lowest overall cost to the local or regional treasury offices, taking into account, among other things, interest rates, currency risks, fees, liquidity issues and withholding taxes. This is accomplished in one of the following ways:
- having the regional treasury offices assist with, or arrange for, local treasury offices to borrow in local currency in local credit markets to finance local business operations;
- having the regional treasury office borrow from its credit markets and other sources to fund operations; and
- arranging for financing from global sources and transferring the funds to the applicable regional treasury office.
4. The FP Group has XXXXXXXXXX regional treasury offices located in the primary time zones in which most of the FP Group's businesses are located, namely:
XXXXXXXXXX
5. The regional treasury offices manage the treasury function in a number of different ways. In cases where the local treasury office obtains financing from financial institutions, the regional office will generally make arrangements with the financial institution to ensure that the best possible terms are available. In cases where the regional office itself obtains the required financing from internal and/or external sources, it determines where and when the funds should be deployed.
6. The use of regional treasury offices allows for more efficient and effective control over the acquisition and use of borrowed funds and facilitates access to larger pools of capital, thereby decreasing the overall cost of financing.
7. As the regional treasury office for XXXXXXXXXX , US Treasury LP has the primary responsibility for ensuring that the financing needs of the US Group and the Canco Group are met.
Canadian Active Business Operations
8. Canco, a wholly-owned subsidiary of Foreign Holdco, is the main operating entity in Canada for the FP Group. Canco is a taxable Canadian corporation. It files its annual return at the XXXXXXXXXX Tax Centre and is audited by the XXXXXXXXXX Tax Services Office.
9. Canco is a resident of Canada for purposes of the Treaty and is not fiscally transparent under the taxation laws of the United States.
10. Canco is involved in the following business segments:
XXXXXXXXXX
11. Canadian Finco, a wholly-owned subsidiary of Foreign Finco, is a taxable Canadian corporation that provides XXXXXXXXXX financing for the products distributed and services provided by Canco. Canadian Finco is a resident of Canada for the purposes of the Treaty and is not fiscally transparent under the taxation laws of the United States.
12. Canadian Salesco, a wholly-owned subsidiary of US Holdco, was incorporated in the United States and is a resident of the United States for the purpose of the Treaty. Canadian Salesco carries on business in Canada as a distributor of XXXXXXXXXX produced by the FP Group.
Canadian Treasury
13. Canadian Treasury is a taxable Canadian corporation and a wholly-owned subsidiary of US Treasury LP. Canadian Treasury is a resident of Canada for the purposes of the Treaty and is not fiscally transparent under the taxation laws of the United States. Canadian Treasury is the local treasury office for the Canco Group.
14. Canadian Treasury has traditionally met the short and medium-term financing requirements of the Canco Group by issuing commercial paper in the Canadian financial markets. As well, it has borrowed from financial institutions for periods of more than five years to meet the Canco Group's longer-term financing requirements. The funds borrowed by Canadian Treasury are loaned to Canco, Canadian Finco and Canadian Salesco for use in their business operations.
15. Canadian Treasury's paid-up capital and retained earnings do not permit it to borrow large amounts from specified non-residents without the deductibility of the related interest expense being limited by subsection 18(4) of the Act.
United States Active Business Operations
16. The FP Group's manufacturing, sales and financing operations in the United States are primarily carried on by corporations that are directly or indirectly controlled by US Holdco and corporations that are related to US Holdco. US Holdco is a wholly-owned subsidiary of Foreign Parent. It is a resident of the United States for the purposes of the Treaty and it is not fiscally transparent under the taxation laws of the United States. US Holdco does not carry on business in Canada.
17. The US Group carries on the same business activities in the United States as those carried on in Canada by Canco, Canadian Salesco and Canadian Finco. The relative sizes of the United States and Canadian business segments operated by the members of US Group and the Canco Group, measured in terms of revenue and assets for financial statement purposes, are approximately as follows:
Based on XXXXXXXXXX financial information
F/X rate = XXXXXXXXXX
Canada U.S. Canada as a %
(millions in USD) (millions in USD) of Total
Total Operations
Revenue XXXXX XXXXX XXXXX
Assets XXXXX XXXXX XXXXX
XXXXXXXXXX Revenue XXXXX XXXXX XXXXX
Assets XXXXX XXXXX XXXXX
XXXXXXXXXX Revenue XXXXX XXXXX XXXXX
Assets XXXXX XXXXX XXXXX
XXXXXXXXXX Revenue XXXXX XXXXX XXXXX
Assets XXXXX XXXXX XXXXX
XXXXXXXXXX Revenue XXXXX XXXXX XXXXX
Assets XXXXX XXXXX XXXXX
XXXXXXXXXX Revenue XXXXX XXXXX XXXXX
Assets XXXXX XXXXX XXXXX The figures set out in the chart are based on XXXXXXXXXX financial information but continue to represent reasonable approximations of the assets and the annual revenues relating to the various business segments.
With respect to Canadian Salesco, its annual revenues from its Canadian operations are approximately $XXXXXXXXXX (US) and its total assets are approximately $XXXXXXXXXX (US) for financial statement purposes. By comparison, the equivalent sales operation carried on in the United States within the US Group generates annual revenues of approximately $XXXXXXXXXX (US) on assets of approximately $XXXXXXXXXX (US) for financial statement purposes.
The FP Group employs approximately XXXXXXXXXX individuals in the United States and approximately XXXXXXXXXX individuals in Canada.
US Treasury LP
18. US Treasury LP is a partnership created under the laws of XXXXXXXXXX . An election was made in XXXXXXXXXX to have US Treasury LP taxed as a corporation for United States federal income tax purposes. As a result, US Treasury LP is subject to income tax on the most comprehensive basis imposed by the United States and is a resident of the United States for the purposes of the Treaty.
19. US Treasury LP has one limited partner (US Holdco) and a general partner, GPCo. Under the terms of the US Treasury LP partnership agreement, US Holdco is entitled to 100% of the income of US Treasury LP. US Holdco does not hold its interest in US Treasury LP or any income or distribution from US Treasury LP for or on behalf of any other person.
20. US Treasury LP does not carry on business in Canada.
21. US Treasury LP endeavors to borrow from sources that provide the lowest cost of financing, either externally or internally. US Treasury LP then consolidates all of its sources of funds, and on-loans the funds, as required, to members of the US Group for working capital and other general corporate purposes.
22. US Treasury LP has not made loans to Canadian Treasury in the past as Canadian Treasury was able to satisfy the Canco Group's financing requirements.
The Effect of the Credit Crisis
23. Canadian Treasury has traditionally obtained financing from external sources. XXXXXXXXXX
24. Prior to XXXXXXXXXX , Canadian Treasury was able to obtain external financing at a relatively low cost without foreign exchange risk, withholding tax exposure, or thin capitalization concerns.
25. The upheaval in the credit markets XXXXXXXXXX has made it exceptionally difficult for Canadian Treasury to raise financing from its traditional sources.
26. XXXXXXXXXX
27. XXXXXXXXXX
28. XXXXXXXXXX
29. XXXXXXXXXX
30. XXXXXXXXXX
31. XXXXXXXXXX
32. The Canco Group continues to require financing to meet both its short-term and medium-term needs and US Treasury LP is now in a good position to access that financing in the United States on reasonable terms.
Proposed Transactions
33. US Treasury LP will, further to its responsibility as the regional treasury office for XXXXXXXXXX , make the following loans:
(a) Primary Loan 1 - US Treasury LP will loan amounts directly to Canadian Treasury based on its capital balances such that the thin capitalization rules in subsection 18(4) will not apply to limit the interest deduction on the loan. Canadian Treasury will on-loan the funds to Canco, Canadian Finco and to Canadian Salesco based on the particular cash needs of each entity (the "Secondary Loans 1"). The money from the Secondary Loans 1 will be used by Canco, Canadian Finco and Canadian Salesco to earn income from their active business activities in Canada.
(b) Primary Loan 2 - US Treasury LP will loan amounts directly to Canco based on its capital balances such that the thin capitalization rules in subsection 18(4) will not apply to limit the interest deduction on the loan. Canco will on-loan the funds to Canadian Treasury (the "Secondary Loan 2") which, in turn, will on-loan the funds to Canco, Canadian Finco and Canadian Salesco (collectively, the "Secondary Loans 3"). The money from the Secondary Loans 3 will be used by Canco, Canadian Finco and to Canadian Salesco to earn income from their active business activities in Canada.
(c) Primary Loan 3- US Treasury LP will loan amounts directly to Canadian Finco based on its capital balances such that the thin capitalization provisions in subsection 18(4) will not apply to limit the interest deduction on the loan. Canadian Finco will use the money from the loan to earn income from its active business activities in Canada.
34. US Treasury LP will raise the funds for the Primary Loans from the United States commercial paper market, other arm's length lenders, or from cash it receives from entities in the US Group that have funds in excess of their operational needs. The funds raised from these sources will be denominated in United States dollars and will be on-loaned to members of the Canco Group in Canadian dollars. US Treasury LP will enter into a series of swap agreements as a hedge against its foreign exchange exposure and will account for the raising of the funds, the swaps, and the Primary Loans as an integrated series of related transactions in its internal treasury system. In this way, the Primary Loans will be directly traceable to the above-noted sources.
35. The Primary Loans will bear interest at a commercial rate and reflect arm's length terms and conditions. The interest on the Primary Loans will be "interest" within the meaning of Article XI(2) of the Treaty.
36. The Secondary Loans will bear interest at a rate that will equal or exceed the interest rate on the Primary Loans.
Purpose of the Proposed Transactions
37. The purpose of the proposed transactions is to provide a stable, low-cost source of financing to the members of Canco Group.
38. Neither US Holdco nor US Treasury LP is a "qualifying person" as defined in paragraph 2 of Article XXIX A of the Treaty.
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, subject to the caveats set out below, are as follows:
A. Pursuant to Article XXIX A(3) of the Treaty, the benefits of the Treaty will apply to US Holdco with respect to the interest derived on the Primary Loans.
B. Article XI(1) of the Treaty will apply, subject to limits imposed by paragraphs (5) and (6) of that Article, to the interest on the Primary Loans.
C. Subsection 18(6) of the Act will not apply to the Secondary Loans.
D. Subsection 245(2) will not apply to redetermine the tax consequences confirmed in the rulings given above.
The above-noted rulings are based on the Act and the Treaty in its present form and do not take into account any proposed amendments to the Act or the Treaty which, if enacted, could have an effect on the rulings provided herein.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5, issued by the CRA on May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX .
Caveats
1. Rulings A and B are provided on the condition that:
(a) the members of the US Group will continue to carry on their respective active business activities in the United States and that those business activities will remain substantial in relation to the activities carried on in Canada by Canco, Canadian Finco and Canadian Salesco;
(b) all the corporations in the US Group will continue to be related within the meaning of subsection 251(2) of the Act; and
(c) US Holdco will remain entitled to all the income of US Treasury LP.
Any material change in the type, composition or the size of the businesses carried on by US Holdco or the other corporations in the US Group or by Canco, Canadian Finco and Canadian Salesco may render Rulings A and B inapplicable.
2. 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:
(a) the relative interests of the members of US Treasury LP in the income of that partnership;
(b) whether the interest on any of the loans referred to in this ruling is deductible in computing the income of the borrower under paragraph 20(1)(c) of the Act;
(c) whether subsection 18(4) of the Act would apply to deny a deduction in respect of any interest that is paid or payable on any of the Primary Loans; or
(d) any other tax consequences relating to any facts or proposed transactions referred to herein other than those as specifically described in the rulings given above.
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, 2010
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, 2010
Email this Content