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: Will the interest paid or payable by Parentco in respect of Bank Debt A and Bank Debt B, used to advance Loan 1 to Foreignco 2 and to subscribe for shares in HoldcoUS, respectively, be deductible?
Position: Yes
Reasons: The provisions of subparagraph 20(1)(c)(i) of the Act are met.
XXXXXXXXXX
2010-037728
XXXXXXXXXX
XXXXXXXXXX , 2010
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX
We are replying to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling with respect to the above-noted taxpayer regarding the deductibility of interest paid on borrowed money used to advance funds, interest-free, to an indirect wholly-owned subsidiary and to subscribe for shares in another wholly-owned subsidiary. We also acknowledge the additional information provided to us in your various emails the last of which was dated XXXXXXXXXX .
This letter is based solely on the facts, Proposed Transactions and additional information described below. Any documentation submitted in respect of your request does not form part of the facts, Proposed Transactions and additional information, and any references thereto are provided solely for the convenience of the reader.
To the best of your knowledge, and that of the above-noted taxpayer, none of the issues involved in this advance income tax ruling are:
(i) in an earlier tax return of the above-noted taxpayer or of a related person;
(ii) being considered by a Tax Services Office or a Taxation Centre in connection with a previously-filed tax return of the above-noted taxpayer or of a related person;
(iii) under objection by the above-noted taxpayer or by a related person;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate to the above-noted taxpayer or a related person.
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) "Acquisition" means the acquisition of all of the units of TargetLP further described in 30 below;
(b) "arm's length" has the meaning assigned by subsection 251(1) of the Act;
(c) "Bank Debt A" means the borrowing further described in 21 below;
(d) "Bank Debt B" means the borrowing further described in 24 below;
(e) "Bidco 1" means XXXXXXXXXX , a corporation further described in 9 below;
(f) "Bidco 2" means XXXXXXXXXX , a corporation further described in 11 below;
(g) "Foreignco 1" means XXXXXXXXXX , a cooperative further described in 5 below;
(h) "Foreignco 2" means XXXXXXXXXX a corporation further described in 6 below;
(i) "Holdco 1" means XXXXXXXXXX , a corporation further described in 3 below;
(j) "Holdco 2" means XXXXXXXXXX , a corporation further described in 4 below;
(k) "HoldcoUS" means XXXXXXXXXX , a corporation further described in 7 below;
(l) "OpLLC 1" means XXXXXXXXXX , a corporation further described in 14 below;
(m) "OpLLC 2" means XXXXXXXXXX , a corporation further described in 15 below;
(n) "OpLLC 3" means XXXXXXXXXX , a corporation further described in 16 below;
(o) "OpLLP" means XXXXXXXXXX , a limited partnership further described in 17 below formed under the relevant partnership law in XXXXXXXXXX ;
(p) "Parentco" means XXXXXXXXXX a corporation further described in 1 below;
(q) "Proposed Transactions" means the transactions described in 21 to 31 below;
(r) "Purchase Price" means the fair market value of TargetLP at the time of the Acquisition further described in 19 below;
(s) "public corporation" has the meaning assigned by subsection 89(1) of the Act;
(t) "TargetLP" means XXXXXXXXXX , a limited partnership further described in 13 below; and
(u) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.
Facts
1. Parentco is a public corporation governed by the XXXXXXXXXX , the shares of which are widely-held and are listed for trading on the XXXXXXXXXX. Parentco carries on an XXXXXXXXXX with active operations in various locations including Canada, XXXXXXXXXX . Parentco owns all the issued and outstanding shares of: Holdco 1, Holdco 2 and HoldcoUS.
2. Parentco files its corporate income tax return with the XXXXXXXXXX Taxation Centre and Parentco's Tax Services Office is the XXXXXXXXXX Tax Services Office.
3. Holdco 1 is a taxable Canadian corporation governed by the laws of XXXXXXXXXX . Holdco 1 owns approximately XXXXXXXXXX % of the outstanding equity interest of Foreignco 1.
4. Holdco 2 is a taxable Canadian corporation governed by the laws of XXXXXXXXXX . Holdco 2 holds XXXXXXXXXX equity interest in Foreignco 1.
5. Foreignco 1 is a cooperative created under the laws of XXXXXXXXXX and is a resident of XXXXXXXXXX for XXXXXXXXXX tax purposes. Foreignco 1 should be considered as a corporation for Canadian income tax purposes and is resident in XXXXXXXXXX for purposes of the XXXXXXXXXX . Foreignco 1 owns all the issued and outstanding shares of Foreignco 2.
6. Foreignco 2 is a limited liability company incorporated under the laws of XXXXXXXXXX and is resident in XXXXXXXXXX for XXXXXXXXXX tax purposes. Foreignco 2 is also resident in XXXXXXXXXX for purposes of the XXXXXXXXXX .
7. HoldcoUS is governed by the laws of XXXXXXXXXX and is resident in XXXXXXXXXX for purposes of the XXXXXXXXXX . HoldcoUS acts as a holding company for Parentco's XXXXXXXXXX group of companies and owns all the issued and outstanding shares of Bidco 1.
8. HoldcoUS's only issued and authorized class of shares is a single class of common shares and it has no dividend policy that explicitly prohibits dividends from being paid on the common stock for any period of time.
9. Bidco 1 was incorporated in XXXXXXXXXX and is resident in XXXXXXXXXX for purposes of the XXXXXXXXXX . Bidco 1 owns all the issued and outstanding shares of Bidco 2.
10. Bidco 1's only issued and authorized class of shares is a single class of common shares and it has no dividend policy that explicitly prohibits dividends from being paid on the common stock for any period of time.
11. Bidco 2 was incorporated in XXXXXXXXXX and is resident in XXXXXXXXXX for purposes of the XXXXXXXXXX .
12. Bidco 2's only issued and authorized class of shares is a single class of common shares and it has no dividend policy that explicitly prohibits dividends from being paid on the common stock for any period of time.
13. TargetLP was formed under the relevant partnership law in XXXXXXXXXX . TargetLP owns all of the issued and outstanding shares of: OpLLC 1, OpLLC 2, and OpLLC 3.
14. OpLLC 1 is a limited liability company governed by the laws of XXXXXXXXXX . OpLLC 1 acts as a payroll company for the TargetLP group.
15. OpLLC 2 is a limited liability company governed by the laws of XXXXXXXXXX . OpLLC 2 carries on an active business in XXXXXXXXXX , principally with persons with whom it deals at arm's length, from which it earns only income from an active business. OpLLC 2 owns XXXXXXXXXX % of the partnership interests in OpLLP.
16. OpLLC 3 is a limited liability company governed by the laws of XXXXXXXXXX . OpLLC 3 does not carry on an active business and its only asset is the XXXXXXXXXX % partnership interest it holds in OpLLP.
17. OpLLP carries on an active business in XXXXXXXXXX , principally with persons with whom it deals at arm's length, from which it earns only income from an active business.
18. Senior management of Parentco has concluded that Parentco's worldwide business operations would be enhanced through the acquisition of TargetLP and its indirect interests in XXXXXXXXXX .
19. The Purchase Price is approximately XXXXXXXXXX $XXXXXXXXXX .
20. TargetLP and its subsidiaries hold debt of XXXXXXXXXX $XXXXXXXXXX which had been incurred for the purpose of earning income.
Proposed Transactions
21. To fund the Acquisition, on XXXXXXXXXX , Parentco borrowed XXXXXXXXXX $XXXXXXXXXX ("Bank Debt A") from an arm's length syndicate of financial institutions with whom it has a revolving loan facility. Bank Debt A is legally effective and carries an obligation to pay interest at a market rate to the lender.
22. On XXXXXXXXXX , the proceeds of Bank Debt A were sent to Foreignco 2 to be held by Foreignco 2 in its bank account (for the benefit of Parentco).
23. On XXXXXXXXXX , Parentco used the proceeds of Bank Debt A to loan XXXXXXXXXX $XXXXXXXXXX to Foreignco 2 as a non-interest bearing demand loan ("Loan 1"). Loan 1 is callable, and is convertible, at Parentco's option, at any time during the term of the loan, into common shares of Foreignco 2 equal in value to the principal amount of the loan outstanding at the time of the conversion.
24. On XXXXXXXXXX , dependent on final adjustments to the Purchase Price and its internal cash resources expected at the time of the Acquisition, Parentco drew up to an additional XXXXXXXXXX $XXXXXXXXXX n from its revolving loan facility with an arm's length syndicate of financial institutions ("Bank Debt B"). Bank Debt B is legally effective and carries an obligation to pay interest at a market rate to the lender.
25. On XXXXXXXXXX , Parentco used the proceeds from Bank Debt B and cash on hand of $XXXXXXXXXX to subscribe for approximately XXXXXXXXXX common shares in HoldcoUS (XXXXXXXXXX *$XXXXXXXXXX /share = $XXXXXXXXXX ).
26. The proposed transactions described in 27 - 31 below took place on XXXXXXXXXX .
27. Foreignco 2 used the funds received from Parentco in 23 above, to loan XXXXXXXXXX $XXXXXXXXXX to HoldcoUS under an interest bearing loan facility ("Loan 2"). Loan 2 has arm's length terms and conditions, and bears interest at a fixed rate.
28. Using the entirety of the funds received in 25 and 27 above, HoldcoUS subscribed for approximately XXXXXXXXXX common shares in Bidco 1.
29. Using the entirety of the funds received from HoldcoUS in 28 above, Bidco 1 subscribed for approximately XXXXXXXXXX common shares in Bidco 2.
30. Using the entirety of the funds received from Bidco 1 in 29 above ($XXXXXXXXXX ), Bidco 2 purchased all of the units of TargetLP (the "Acquisition") for approximately XXXXXXXXXX $XXXXXXXXXX and paid debts of XXXXXXXXXX $XXXXXXXXXX owed by TargetLP and its subsidiaries. The payment of such debts resulted in receivables to Bidco 2. The remaining funds (approximately $XXXXXXXXXX ) remained in Bidco 2 to be used as working capital.
31. As a result of 30 above, and by operation of law, TargetLP was dissolved immediately after the Acquisition, and all of its property became the property of Bidco 2.
32. For the following reasons, it was necessary for Parentco to receive the proceeds of Bank Debt A before the closing date of the Acquisition:
a. the closing date was not certain,
b. an advance notice to the lender was required for a draw down in respect of the loan facility, and
c. extra time was needed to make international transfers of funds.
33. Upon acquisition of OpLLC 1, OpLLC 2, and OpLLC 3, it is the intention of Parentco that none of these entities will have dividend policies that explicitly prohibit dividends from being paid for any length of time.
34. On XXXXXXXXXX , OpLLC 2 and Bidco 2 merged, with OpLLC 2 surviving. The shares of Bidco 2 were cancelled and ceased to exist. Bidco 1 did not receive any non-share consideration as a result of the merger and is now the only shareholder of OpLLC 2. As a result of the merger, all or substantially all of the assets and liabilities (except amounts receivable between Bidco 2 and OpLLC 2 or shares of the capital stock of OpLLC 2 held by Bidco 2) became assets and liabilities of OpLLC 2.
Purpose of the Proposed Transactions
XXXXXXXXXX
The purpose of the Proposed Transactions is to source funds from Canada in order to acquire all of the outstanding interests in TargetLP. The funds were lent to Foreignco 2, an inter-group financing company, in order that the funds and resulting cash flow could be managed effectively, from a tax and cash management perspective, by Foreignco 2.
Ruling
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided further that the Proposed Transactions are completed in the manner described above, we rule as follows:
To the extent interest paid or payable by Parentco in respect of Bank Debt A and Bank Debt B, used to advance Loan 1 to Foreignco 2 and to subscribe for shares in HoldcoUS, respectively, is paid pursuant to a legal obligation and that the shares in HoldcoUS and the Loan 1 continue to be held by Parentco for the purpose of gaining or producing income, pursuant to paragraph 20(1)(c) of the Act, Parentco will be entitled to deduct in computing its income for a taxation year, the lesser of (i) the interest paid or payable (depending on the method regularly followed by Parentco in computing its income for the purposes of the Act) in respect of the taxation year on Bank Debt A and Bank Debt B, or (ii) a reasonable amount in respect thereof.
The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on the CRA.
The above ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.
Nothing in this ruling letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:
(a) the fair market value or adjusted cost base of any property or the paid-up capital of any shares referred to herein; or
(b) any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the ruling given above.
Yours truly,
XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
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