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 (FinanceCo) to a related non-resident entity (Loanco) will trigger the application of subsection 15(2) and Part XIII.
Position: No
Reasons: The loan from FinanceCo to Loanco is between two non-residents, the exclusion in subsection 15(2.2) applies.
XXXXXXXXXX
2010-038182
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX , 2010
Dear XXXXXXXXXX :
Re: XXXXXXXXXX
Advance Income Tax Ruling
This letter is in reply to your letter of XXXXXXXXXX in which you asked for an advance income tax ruling on behalf of XXXXXXXXXX .
Definitions
In this letter, the following terms have the meanings specified. All dollar amounts are expressed in Canadian dollars.
(a) "ACo" means XXXXXXXXXX .
(b) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) C. 1, as amended to the date hereof.
(c) "BCo" means XXXXXXXXXX .
(d) "Canada-US Treaty" means the Canada - United States Tax Convention (1980), as amended.
(e) "Canada-Netherlands Treaty" means the Canada - Netherlands Tax Convention (1986), as amended.
(f) "Canco" means XXXXXXXXXX .
(g) "Controlled Foreign Affiliate" has the meaning assigned by subsection 95(1).
(h) "DutchBV" means XXXXXXXXXX .
(i) "FAPI" means "foreign accrual property income", as defined in subsection 95(1).
(j) "FinanceCo" means a corporation to be formed as described in 19 below.
(k) "FinanceCo Loan" is the loan described in 21 below.
(l) "Foreign Affiliate" has the meaning under subsection 95(1) of the Act.
(m) "GP" means XXXXXXXXXX .
(n) "LLC 1" means XXXXXXXXXX .
(o) "LLC 2" means XXXXXXXXXX .
(p) "Loan 1" is the loan described in 12 below.
(q) "Loan 2" is the loan described in 13 below.
(r) "Loan 3" is the loan described in 14 below.
(s) "Loan 4" is the loan described in 15 below.
(t) "Loanco" means XXXXXXXXXX .
(u) "Loanco Loan" is the loan described in 22 below.
(v) "Minimum Rate" means, in connection with any particular loan, a rate of interest that is not less than the interest rate that a lender and borrower would have been willing to agree to if they were dealing at arm's length with each other at the time the loan was made.
(w) "Parentco" means XXXXXXXXXX .
(x) "Parentco Group" is the corporate group described in 10 below.
(y) "Regulations" means the Income Tax Regulations.
Facts
1. Canco is a corporation resident in Canada for the purposes of the Act and the Canada-US Treaty. Canco is a "private corporation" and a "taxable Canadian corporation" as those terms are defined in subsection 89(1) of the Act. Canco's head office is located at XXXXXXXXXX . Canco files its tax return with the XXXXXXXXXX Tax Centre and its taxation year-end is XXXXXXXXXX .
2. Canco carries on the Canadian business of the Parentco Group and is indirectly wholly-owned by Parentco. All of the issued and outstanding shares of Canco are owned by DutchBV.
3. DutchBV is a corporation formed under and governed by the laws of the Netherlands and is resident in the Netherlands for the purposes of the Act and the Canada-Netherlands Treaty. All of the issued and outstanding shares of DutchBV are owned by LLC 2.
4. LLC 2 is a limited liability company formed under and governed by the laws of XXXXXXXXXX . All of the issued and outstanding shares of LLC 2 are owned by GP.
5. GP is a partnership formed under and governed by the laws of XXXXXXXXXX . All of the issued and outstanding interests in GP are owned by ACo (XXXXXXXXXX %) and BCo (XXXXXXXXXX %).
6. BCo is a corporation formed under and governed by the laws of XXXXXXXXXX . All of the issued and outstanding shares of BCo are owned by ACo.
7. ACo is a corporation formed under and governed by the laws of XXXXXXXXXX . All of the issued and outstanding shares of ACo are owned by Loanco.
8. Loanco is a corporation formed under and governed by the laws of XXXXXXXXXX. All of the issued and outstanding shares of Loanco are owned by LLC 1. Loanco is resident in the U.S. for purposes of the Act and the Canada-US Treaty. Loanco is a holding company for the Parentco Group and manages the Parentco Group's treasury function.
9. LLC 1 is a limited liability company formed under and governed by the laws of XXXXXXXXXX . All of the issued and outstanding interests in LLC 1 are owned by Parentco.
10. Parentco is a corporation resident in the U.S. for the purposes of the Act and the Canada-US Treaty. Parentco carries on, directly or indirectly through its Subsidiaries, XXXXXXXXXX to consumers throughout North America. Parentco and its affiliates manufacture and distribute their products through their own XXXXXXXXXX operations and also through third party XXXXXXXXXX . In the U.S. and Canada, Parentco and its affiliates both distribute products directly and grant exclusive license agreements for various brands and packages to XXXXXXXXXX for specific geographic areas. The shares of Parentco are publicly traded on the XXXXXXXXXX . Parentco is the direct and indirect owner of a group of U.S. domestic and foreign corporations (the "Parentco Group").
11. Canco has generated excess cash from its active operations and may have additional excess cash on hand at the time the Proposed Transactions are to be completed. Canco expects to generate excess cash annually.
12. On XXXXXXXXXX , Canco used excess cash to make a loan to Loanco in the amount of C$XXXXXXXXXX ("Loan 1"). Loan 1 has a term of XXXXXXXXXX years and bears interest at a Minimum Rate. Loan 1 allows for repayment prior to maturity without any premium or penalty.
13. On XXXXXXXXXX , Canco used excess cash to make a loan to DutchBV in the amount of C$XXXXXXXXXX ("Loan 2"). Loan 2 has a term of XXXXXXXXXX years and bears interest at a Minimum Rate. Loan 2 allows for repayment prior to maturity without any premium or penalty.
14. On XXXXXXXXXX , Canco used excess cash to make a loan to DutchBV in the amount of US $XXXXXXXXXX ("Loan 3"). Loan 3 has a term of XXXXXXXXXX years and bears interest at a Minimum Rate. Loan 3 allows for repayment prior to maturity without any premium or penalty.
15. On XXXXXXXXXX , Canco used excess cash to make a loan to DutchBV in the amount of US $XXXXXXXXXX ("Loan 4"). Loan 4 has a term of XXXXXXXXXX years and bears interest at a Minimum Rate. Loan 4 allows for repayment prior to maturity without any premium or penalty.
16. Prior to the issuance of Loans 1, 2, 3 and 4, Canco did not enter into any transactions with Loanco or DutchBV that would be considered to be "a series of loans or other transactions and repayments" for purposes of subsection 15(2.6).
17. Canco does not currently have a need for its excess cash. Parentco wishes to re-deploy Canco's excess cash to support various business objectives outside Canada.
Proposed Transactions
18. Loanco will repay Loan 1 to Canco on or before XXXXXXXXXX . DutchBV will repay Loan 2, Loan 3 and Loan 4 to Canco on or before the last day on which this ruling letter requires the proposed transactions to be completed.
19. Canco will incorporate FinanceCo under the laws of the Netherlands, with a taxation year-end of XXXXXXXXXX . FinanceCo will be a resident of the Netherlands for the purposes of the Canada-Netherlands Treaty.
20. The share capital of FinanceCo will be comprised of ordinary shares. Canco will subscribe for ordinary shares of FinanceCo for an amount equal to €(Euro) XXXXXXXXXX and will be the only holder of FinanceCo share capital. Canco will contribute additional capital to FinanceCo in the form of share premium that is attributable to the ordinary shares held by Canco. The amount will be equal to the sum of XXXXXXXXXX per cent of the amounts received in the transactions described in paragraph 18 above minus €(Euro) XXXXXXXXXX and XXXXXXXXXX per cent of any excess cash on hand, to a maximum of €(Euro) XXXXXXXXXX . The investment in the capital of FinanceCo is to meet the tax requirements in the Netherlands.
21. Canco will loan to FinanceCo the amounts received in the transactions described in paragraph 18 above and any excess cash on hand less the amount invested in the share capital of FinanceCo described in paragraph 20 above (the "FinanceCo Loan"). The FinanceCo Loan will be denominated in Canadian dollars, will have a term of at least XXXXXXXXXX years and will bear interest at a Minimum Rate. It is expected that the interest rate charged on the FinanceCo Loan will at all times exceed the rate prescribed by paragraph 4301(c) of the Regulations. The FinanceCo Loan will allow for repayment prior to maturity without any premium or penalty. In accordance with domestic tax law in the Netherlands, Canco will not be subject to withholding tax on the FinanceCo Loan interest.
22. FinanceCo will use the proceeds from Canco's investment in FinanceCo's share capital described in 20 above and the FinanceCo Loan to make a loan to Loanco (the "Loanco Loan"). The Loanco Loan will be denominated in Canadian dollars, will have a term of at least XXXXXXXXXX years and will bear interest at a Minimum Rate. All interest in respect of a particular taxation year will be paid not later than XXXXXXXXXX days after the end of the year. It is expected that the interest rate will at all times exceed the rate prescribed by paragraph 4301(c) of the Regulations. The interest rate on the Loanco Loan will be higher than the interest rate on the FinanceCo Loan. The Loanco Loan will allow for repayment prior to maturity without any premium or penalty. The net interest income of FinanceCo will be subject to tax in the Netherlands.
23. Loanco will use the proceeds of the Loanco Loan as part of its cash pool for various business needs of the Parentco Group outside Canada. None of the persons that borrow from Loanco will be a foreign affiliate of Canco or a partnership in which a foreign affiliate of Canco has an interest.
24. From time to time, Canco may make additional investments in the share capital of FinanceCo as described in 20 above and additional loans to FinanceCo as described in 21 above in the amount of any excess cash available to Canco. FinanceCo will lend to Loanco the proceeds of such additional share capital investments and loans, on terms that are similar to the terms of the Loanco Loan described in 22 above.
Purpose of the Proposed Transactions
25. The principal purpose of the Proposed Transactions is to redeploy Canco's excess cash for Parentco Group's business needs outside of Canada in a way that generates a return in Canada.
To the best of your knowledge and that of Canco, none of the issues involved in this advance income tax ruling is:
- in an earlier return of Canco or a related person;
- 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 related person;
- under objection by Canco or a related person;
- 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.
Rulings Given
Provided the preceding statements constitute a complete and accurate disclosure of all the relevant Definitions, Facts, Proposed Transactions and Purpose of the Proposed Transactions, we rule as follows:
A. FinanceCo will be a Foreign Affiliate and a Controlled Foreign Affiliate of Canco.
B. The income derived from the interest received or receivable by FinanceCo on the Loanco Loan will constitute FAPI of FinanceCo and will be included in Canco's income on an accrual basis pursuant to subsection 91(1).
C. Subsection 17(1) will not apply to include an amount in computing Canco's income in respect of the FinanceCo Loan in a particular taxation year of Canco provided that either: (i) the rate of interest charged on the FinanceCo Loan is considered a "reasonable rate" as contemplated by subsection 17(1), or (ii) the amount of interest included in computing Canco's income for the year in respect of the FinanceCo Loan equals or exceeds the amount of interest that would be determined on the FinanceCo Loan if interest thereon were calculated at the prescribed rate for the period of the year during which it is outstanding.
D. The FinanceCo Loan will be considered to be an "exempt loan or transfer" as defined in subsection 17(15). Accordingly, subsection 17(2) will not apply to deem Loanco to owe Canco an amount equal to the amount of the Loanco Loan.
E. Subsection 15(2) will not apply to Loan 1, Loan 2, Loan 3, Loan 4 and the Loanco Loan.
F. Provided that interest rate charged on the Loanco Loan is not less than the interest rate described in paragraph 80.4(3)(a), subsection 80.4(2) will not apply to deem any person to have received a benefit as a consequence of the Loanco Loan. Where the interest rate charged on the Loanco Loan is less than the interest rate described in paragraph 80.4(3)(a) subsection 80.4(2) will apply.
However, provided that interest paid on the Loanco 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 Loanco 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 Loanco Loan or any loans made by Loanco as described in 23 above, and no such benefit shall be deemed to have been paid as a dividend by any Canadian resident corporation in the Parentco Group to any non-resident person for the purposes of subsections 15(9) and 15(1), paragraph 214(3)(a) and subsection 212(2) of the Act.
G. Subsection 245(2) will not apply to redetermine the tax consequences confirmed in rulings A through F above.
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 Canada Revenue Agency provided that the proposed transactions outlined in 18 to 23 above are completed by XXXXXXXXXX .
This letter is based solely on the Facts and Proposed Transactions described above. The documentation submitted with your request does not form part of the Facts and Proposed Transactions and any references thereto are provided solely for the convenience of the reader.
Nothing in this letter should be construed as implying that the Canada Revenue Agency 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;
(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;
(iii) whether the interest rate charged on the FinanceCo Loan, or any future loan from Canco to FinanceCo is "not less than the interest rate that a lender and borrower would have been willing to agree to if they were dealing at arm's length with each other at the time the loan was made" for the purposes of the definition of "exempt loan or transfer" in subsection 17(15) of the Act; and
(iv) whether the interest rate charged on the Loanco Loan, or any future loan from FinanceCo to Loanco described in 24 above, satisfies the conditions in subsection 80.4(3).
The above noted rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
XXXXXXXXXX
For Director
International & Trusts Division
Income Tax Rulings Directorate
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