2010 Ruling 2009-0348181R3 - Canada-US Tax Convention ("Treaty")

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 interest paid by a Canadian corporation to a United States resident corporation qualifies for treaty benefits under Article XXIX A(3) of the Treaty

Position: Yes

Reasons: The interest income will be derived by a resident of the United States in connection with an active trade or business carried on in the United States that is substantial in relation to the activity in Canada that gives rise to the income

XXXXXXXXXX 								2009-034818

XXXXXXXXXX , 2010

Re: Advance Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance tax ruling on behalf of the above named taxpayer.

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in this ruling request:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) is the subject of a Ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise stated, all statutory references herein are to the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1 (the "Act") as amended.

Definitions

(a) "Agreement" means the agreement between Parent and Vendors executed on XXXXXXXXXX ;

(b)XXXXXXXXXX

(c) "BCA" means the Business Corporations Act (XXXXXXXXXX );

(d) "CAD" means Canadian dollars;

(e) "CBCA" means the Canada Business Corporations Act;

(f) "Canada Holdco I" means XXXXXXXXXX ;

(g) "Canopco" means XXXXXXXXXX ;

(h) "Canopco2" means XXXXXXXXXX ;

(i) "Canadian Bid Co" means XXXXXXXXXX ;

(j) "CRA" means the Canada Revenue Agency;

(k) "Finco" means XXXXXXXXXX ;

(l) "Forco1" means XXXXXXXXXX ;

(m) "Forco2" means XXXXXXXXXX ;

(n) "For2 Bid Co" means XXXXXXXXXX ;

(o) "For2 Hold Co" means XXXXXXXXXX ;

(p) "Loan" means the loan from US Bid Co to Canadian Bid Co, as described in paragraph 31;

(q) XXXXXXXXXX

(r) "New Canopco" means the corporation formed by the amalgamation of Canadian

Bid Co, Canada Holdco I and Canopco;

(s) "Parent" means XXXXXXXXXX ;

(t) "Subco" means XXXXXXXXXX .;

(u) "Subco2" means XXXXXXXXXX .;

(v) "Target Companies" means the XXXXXXXXXX Group of companies consisting of Canopco, Forco1, Forco2 and USopco;

(w) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(x) "Treaty" means Canada-United States Tax Convention (1980), as amended;

(y) "US Bid Co" means XXXXXXXXXX .;

(z) "USD" means United States dollars;

(aa) "US GP" means XXXXXXXXXX .;

(bb) "USopco" means XXXXXXXXXX .;

(cc) "US Vendor" means XXXXXXXXXX .; and

(dd) "Vendors" mean collectively XXXXXXXXXX .

Our understanding of the facts, proposed transactions and the purposes of the proposed transactions is as follows. Any documents submitted with your request do not form part of the proposed transactions and any reference thereto is solely for the convenience of the reader.

Facts

The facts described below were determined at the time that is immediately before the implementation of the proposed transactions.

1. Parent is an XXXXXXXXXX resident corporation whose shares are listed on the XXXXXXXXXX .

2. Parent's business comprises of XXXXXXXXXX .

3. On XXXXXXXXXX , Parent executed an agreement with the Vendors to acquire the Target Companies. Parent and the Vendors were dealing at arm's length at the time of the Agreement and continue to deal at arm's length.

4. The Target companies are comprised of:

• Canopco, a taxable Canadian corporation incorporated under the CBCA (business number XXXXXXXXXX ) carrying on business in Canada;
• USopco, a United States corporation carrying on business in the United States (US);
• Forco1, an XXXXXXXXXX corporation that carries on business in XXXXXXXXXX ; and
• Forco2, a XXXXXXXXXX corporation that carries on business in XXXXXXXXXX .

XXXXXXXXXX

5. Both USopco and Canopco operate XXXXXXXXXX businesses in their respective countries and there are no current plans to substantially alter those operations.

6. The relevant facts regarding USopco's XXXXXXXXXX operations are as follows:

• Gross revenue, USDXXXXXXXXXX ;
• Total salaries and wages, USDXXXXXXXXXX ;
• Net book value of fixed assets, USDXXXXXXXXXX ;
• XXXXXXXXXX ; and
• Number of employees, XXXXXXXXXX .

7. The relevant facts regarding Canopco's XXXXXXXXXX Canadian XXXXXXXXXX operations are as follows:

• Gross revenue, CADXXXXXXXXXX ;
• Total salaries and wages, CADXXXXXXXXXX ;
• Net book value of fixed assets, CADXXXXXXXXXX ;
• XXXXXXXXXX ; and
• Number of employees, XXXXXXXXXX .

8. Canopco does not carry on any business other than its XXXXXXXXXX business.

9. Based on the acquisition purchase price, USopco (US operations) has a relative fair market value of CADXXXXXXXXXX (USDXXXXXXXXXX ) in comparison to Canopco (Canadian operations) at CADXXXXXXXXXX (USDXXXXXXXXXX ), thereby representing XXXXXXXXXX % of the Canadian value.

10. Canopco is a wholly-owned subsidiary of Canada Holdco I, a taxable Canadian corporation incorporated under the CBCA (business number XXXXXXXXXX ).

11. Canada Holdco I is a wholly-owned subsidiary of XXXXXXXXXX , a corporation formed under the laws of XXXXXXXXXX .

12. The sole shareholder and vendor of all issued and outstanding shares of XXXXXXXXXX is US Vendor. US Vendor is a XXXXXXXXXX limited partnership.

13. Canopco2 is a taxable Canadian corporation incorporated under the BCA (business number XXXXXXXXXX ) and is a wholly-owned subsidiary of Canopco.

14. Canopco2 specializes in XXXXXXXXXX as its only business. Canopco2's business is downstream from Canopco's business and is part of the overall business operations of Canopco. For the XXXXXXXXXX calendar year, XXXXXXXXXX % of Canopco2's XXXXXXXXXX revenue was derived from Canopco (representing CADXXXXXXXXXX ) and XXXXXXXXXX % of its revenue was derived from arm's length parties (representing fees of CADXXXXXXXXXX ). Canopco's sales in XXXXXXXXXX were CADXXXXXXXXXX - thus Canopco2's arm's length sales represented XXXXXXXXXX % of the consolidated revenue of Canopco and Canopco2.

15. All of the shares of the Target Companies were acquired on XXXXXXXXXX by entities that were directly or indirectly wholly-owned by Parent and the purchase price was allocated amongst the shares of the Target Companies as follows:

• Forco1, USDXXXXXXXXXX , representing the XXXXXXXXXX operations;
• USopco, USDXXXXXXXXXX , representing the United States operations;
• Forco2, USDXXXXXXXXXX , representing the XXXXXXXXXX operations; and
• Canopco, USDXXXXXXXXXX (approximately CADXXXXXXXXXX ), representing the Canadian operations.

16. The amounts described in paragraph 15 exclude funds provided to settle certain outstanding debts of the Target Companies owing to arm's length lenders - in the case of Canopco, the purchase price of approximately CADXXXXXXXXXX excludes an amount of CADXXXXXXXXXX which will be used to settle certain of Canopco's outstanding arm's length debt.

17. Parent raised USDXXXXXXXXXX of acquisition funds through an USDXXXXXXXXXX equity placement with institutional and retail investors on the XXXXXXXXXX and arranged for USDXXXXXXXXXX of external financing from Finco, a bank headquartered in XXXXXXXXXX .

18. Prior to the proposed transactions described below, Parent and its direct and indirect subsidiaries dealt at arm's length with Finco and will continue to deal at arm's length with Finco following the proposed transactions.

19. To facilitate the acquisition of the Target Companies, Parent incorporated two wholly-owned subsidiaries, Subco and Subco2, each formed under the laws of XXXXXXXXXX .

20. To facilitate the acquisition and financing of the US operations, Subco and Subco2 established US GP, a XXXXXXXXXX general partnership, and acquired XXXXXXXXXX % and XXXXXXXXXX % partnership interests respectively.

21. US GP incorporated a wholly-owned subsidiary, US Bid Co, a XXXXXXXXXX incorporated company to acquire the shares of USopco and other companies in the USopco group. US Bid Co is a resident of the United States for the purposes of the Treaty.

22. To facilitate the acquisition and financing of the XXXXXXXXXX operations, Subco incorporated a wholly-owned subsidiary, For2 Bid Co, a corporation formed under the laws of XXXXXXXXXX

23. To facilitate the acquisition of the Canadian operations, Subco incorporated a wholly-owned subsidiary, For2 Hold Co, a company formed under the laws of XXXXXXXXXX .

24. For2 Hold Co incorporated a wholly-owned subsidiary, Canadian Bid Co, a taxable Canadian corporation incorporated under the CBCA (business number XXXXXXXXXX ).

Proposed Transactions

The following transactions were proposed at the time of the ruling request and were implemented before this advance tax ruling was issued.

25. Parent granted Subco a CADXXXXXXXXXX loan from the equity placement.

26. Subco subscribed for CADXXXXXXXXXX of share capital in For2 Hold Co.

27. For2 Hold Co subscribed for CADXXXXXXXXXX of share capital in Canadian Bid Co.

28. Subco granted Canopco a CADXXXXXXXXXX interest-bearing loan with terms and conditions, including interest rate, consistent with Canadian transfer pricing principles.

29. Finco granted US GP a USDXXXXXXXXXX multi-currency interest-bearing loan.

30. US GP used the proceeds from the Finco loan to subscribe for shares in the capital stock of US Bid Co.

31. US Bid Co used a portion of the proceeds from the issuance of its shares to US GP to make a CADXXXXXXXXXX interest-bearing loan (the "Loan") to Canadian Bid Co. with terms and conditions attached to the Loan, including the interest rate, consistent with Canadian transfer pricing principles.

32. Subco, For2 Bid Co, US Bid Co and Canadian Bid Co acquired their respective Target Companies. Canopco used the CADXXXXXXXXXX from the Subco loan proceeds to repay a portion of its external banking facility net indebtedness.

33. Following the acquisitions, Canadian Bid Co owned all the issued and outstanding shares of XXXXXXXXXX ; XXXXXXXXXX owned all the issued and outstanding shares of Canada Holdco I; Canada Holdco I owned all the issued and outstanding shares of Canopco; and Canopco owned all the issued and outstanding shares of Canopco2.

34. XXXXXXXXXX was dissolved and all the issued and outstanding shares of Canada Holdco I were distributed in specie to Canadian Bid Co.

35. Following the dissolution of XXXXXXXXXX , Canadian Bid Co, Canada Holdco I and Canopco entered into an amalgamation described in subsection 87(1) of the Act to form "New Canopco". As a result of the amalgamation, New Canopco became liable for the interest and principal payable under the terms of the Loan. New Canopco is not fiscally transparent under the taxation laws of the United States.

Additional Information

36. Following the proposed transactions, US Bid Co and USopco will be "related persons" as that term is defined in subsection 251(2) of the Act.

Purposes of the Proposed Transactions

37. The purposes of the proposed transactions are:

(a) to provide the necessary internal and external funding to Subco, For2 Bid Co, US Bid Co and Canadian Bid Co to acquire their respective Target Companies;

(b) to provide for the centralisation of the Finco financing through one US borrower, US GP, which facilitates the loan administration and provides treasury flexibility; and

(c) to minimize the withholding tax burden on cross-border payments of interest.

Ruling

Provided that the preceding statements constitute a complete and accurate disclosure of all 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, we confirm that:

A. Pursuant to Article XXIX-A(3) of the Treaty, the benefits of the Treaty will apply to US Bid Co with respect to interest payments made by New Canopco to US Bid Co under the terms of the Loan.

This ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5, issued by the CRA on May 17, 2002.

Caveat

Except as expressly stated, the ruling provided does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein. For greater certainty, CRA has not made any determination in respect of the tax consequences relating to the interest on the Loan other than as described in Ruling A above.

Ruling A is provided on the understanding that USopco and New Canopco will continue to carry on their respective XXXXXXXXXX businesses, the US XXXXXXXXXX operations will remain substantial in relation to the Canadian XXXXXXXXXX operations, and USopco and US Bid Co will continue to be related within the meaning of subsection 251(2) of the Act. Any change in the type, composition or the size of the businesses carried on by USopco and New Canopco or in the relationship between USopco and US Bid Co may render the ruling inapplicable.

Yours truly,

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