2010 Ruling 2010-0376391R3 - Related Foreign Entity Financing

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
								2010-037639
								XXXXXXXXXX
								XXXXXXXXXX
XXXXXXXXXX , 2010

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 request for an 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

"controlled foreign affiliate" has the meaning assigned by subsection 95(1).

"CRA" means Canada Revenue Agency.

"Dutchco" means XXXXXXXXXX

"Dutchco Loan" means the interest-bearing loan to be made by US LLC to Dutchco, as described in Paragraph 7.

"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, 1987.

"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.

"Paragraph" means a numbered paragraph in this letter.

"Pubco" means XXXXXXXXXX

"Pubco Group" is described in Paragraph 1 below.

"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

"US LLC" means a limited liability company to be formed under the laws of the State of XXXXXXXXXX , as described in Paragraph 5.

"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. Pubco is a corporation that is a resident of the United States for the purposes of the US Treaty. Pubco is a regarded corporation for United States tax purposes. Pubco owns all of the issued and outstanding shares of US Holdco. Pubco is also the direct and indirect owner of a group of domestic and foreign corporations. Pubco and its domestic subsidiaries (including US Holdco) have elected to file a consolidated group tax return for United States tax purposes.

2. US Holdco is a resident of the United States for the purposes of the US Treaty. US Holdco is treated as a regarded corporation for United States tax purposes. US Holdco owns all (100%) of the shares of Canco.

3. Canco is a corporation formed under and governed by the laws of XXXXXXXXXX and carries on an active business in Canada. Canco is treated as a regarded company for the United States tax purposes. Canco has an estimated $XXXXXXXXXX of cash on hand and does not currently have any outstanding inter-company loans.

4. Dutchco is a corporation that is a resident in the Kingdom of the Netherlands for the purposes of the Dutch Treaty. Dutchco is an indirect, wholly-owned subsidiary of Pubco. Dutchco is not a foreign affiliate of Canco.

Proposed Transactions

5. 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 a disregarded entity for United States tax purposes.

6. The share capital of US LLC will be comprised of membership interests. Canco will use its cash on hand of $XXXXXXXXXX to subscribe for membership interests in US LLC. No other person, other than Canco, will hold an interest in US LLC.

7. US LLC will use the subscription proceeds ($XXXXXXXXXX ) to make a loan to Dutchco ("Dutchco Loan"). The interest rate on the Dutchco Loan will, at any particular time, be equal to or greater than the rates of interest prescribed by paragraph 4301(c) of the Regulations. 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 Dutchco Loan. More specifically, there will be no withholding tax on any interest payable to US LLC and no income or profits tax payable by US LLC in the United States.

8. Dutchco will use the cash received in the Dutchco Loan to makes loans to or investments in other foreign entities within the Pubco Group, depending on the cash requirements of the Pubco Group.

Purpose of the Proposed Transactions

9. Pubco wished to re-deploy the cash on hand in Canco for use amongst the different constituents of the Pubco Group without triggering Part XIII tax.

Rulings

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. US LLC will be a foreign affiliate and a controlled foreign affiliate of Canco.

B. The interest received or receivable by US LLC on the Dutchco Loan will constitute FAPI of US LLC and will be included in Canco's income pursuant to subsection 91(1) of the Act.

C. Subsection 17(2) of the Act will apply to deem an amount equal to the amount of Dutchco Loan to be owed to Canco by Dutchco.

D. Provided that the interest on the Dutchco 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 C 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 Dutchco Loan was owing, exceeds the amount included in Canco's income with respect to the Dutchco Loan pursuant to subsection 91(1) of the Act as described in Ruling B above.

E. Subsection 15(2) of the Act will not apply to include an amount equal to the Dutchco Loan in Dutchco'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 Dutchco Loan to have been paid to Dutchco as a dividend.

F. Provided that the interest paid on the Dutchco 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 Dutchco 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 Dutchco 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.

G. Subsection 245(2) of the Act will not apply to determine the tax consequences described in rulings A to F above.

Caveat

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.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch