2006 Ruling 2006-0171011R3 - Withholding - on Loan to a partnership

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. Are interest payments made by Finco to a Non-resident arm's length person exempt under 212(1)(b)(vii)? 2. Does a disposition of a partnership interest affect the withholding tax exemption available to Finco? 3. Is there a new obligation if a Lender assigns its obligation under the Loan agreement that causes the withholding exemption to cease?

Position: 1. YES 2. No 3. No

Reasons: 1. and 2. Finco is responsible for the loan, 3. Terms of the Loan agreement.

XXXXXXXXXX 					2006-017101

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX. ("Finco")
XXXXXXXXXX. ("GP#1")
XXXXXXXXXX. ("GP#2")
XXXXXXXXXX ("Partnership")
XXXXXXXXXX. ("Holdco")
XXXXXXXXXX (the "Initial Lenders")

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling in respect of the above-named taxpayers. We also acknowledge information provided during numerous telephone conversations and electronic correspondences.

The rulings provided below are based solely on the facts and proposed transactions described below.

To the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling request are:

(i) dealt with in an earlier return of the taxpayers or related persons;

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

(iii) under objection by the taxpayers or related persons;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v) subject to a ruling previously issued by the Income Tax Rulings Directorate to the taxpayers or related persons.

DEFINITIONS

In this letter, the following terms have the meanings specified below:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof. All statutory references in this letter are to the Act unless otherwise stated;

(b) "Arm's Length" has the meaning assigned by section 251 of the Act;

(c) "Common Terms Agreement" means the agreement dated effective XXXXXXXXXX between Finco, the Partnership and the Initial Lenders which sets out common financing terms relating to the Wrapped Term Loan, Equity Bridge Loan, Wrapped Standby Loan and Wrapped Working Capital Loan (as described in the definition of "Primary Loans Agreements");

(d) "Concession Agreement" means the Project agreement to be entered into by the Partnership and TEntity;

(e) "Construction Period" is the period that will begin when the Concession Agreement is entered into and will end when Substantial Completion of the Project is achieved;

(f) "Construction Subsidiary" means XXXXXXXXXX., a Taxable Canadian Corporation, all of the shares of which are owned by Ultimate Parent;

(g) "Contract Period" means the period that includes the Construction Period and the Operating Period;

(h) "Contractor" means XXXXXXXXXX, a joint venture between Construction Subsidiary and XXXXXXXXXX ("XCo"). The Contractor will design and build the Project during the Construction Period;

(i) "Controlling Party" means XXXXXXXXXX, who provide credit enhancements to the Lenders;

(j) "CRA" means Canada Revenue Agency;

(k) "DBFO Agreements" means the Concession Agreement, the Design-Build Contract and the Operating and Maintenance Contract;

(l) "DBFO Loan Notes" means loan notes in the amount of approximately $XXXXXXXXXX subscribed for by the shareholders of Holdco under the Equity Subscription Agreement;

(m) "Design-Build Contract" means the engineering, procurement and construction contract between the Partnership and the Contractor pursuant to which the Contractor will design and build the Project;

(n) "Equity Bridge Loan" means a loan made or to be made under an equity bridge facility or the principal amount outstanding for the time being of that loan;

(o) "Equity Subscription Agreement" means an agreement between GP#1, the Partnership, Holdco and the Lenders whereby GP#1 agrees to contribute approximately $XXXXXXXXXX in equity to the Partnership to permit the Partnership to repay the equity bridge portion of the Primary Loans;

(p) "Finance Documents" means certain documents listed in the Primary Loans Agreements which are relevant to the financing of the Project, plus any other documents designated as a Finance Document by the Intercreditor Agent;

(q) "Financial Close" means the date upon which all the conditions precedent to the Primary Loans Agreements have been met, which date is anticipated to be XXXXXXXXXX;

(r) "Finco" means XXXXXXXXXX., a Taxable Canadian Corporation, all of whose shares are owned by Holdco;

(s) "GP#1" means XXXXXXXXXX., a Taxable Canadian Corporation, and a general partner of the Partnership, all of whose shares are owned by Holdco;

(t) "GP#2" means XXXXXXXXXX., a Taxable Canadian Corporation, and a general partner of the Partnership, all of whose shares are owned by GP#1;

(u) "Holdco" means XXXXXXXXXX., a Taxable Canadian Corporation, all of whose shares are owned by Parent;

(v) "Initial Lenders" means XXXXXXXXXX, neither of which is resident in Canada for purposes of the Act;

(w) "Intercreditor Agent" means XXXXXXXXXX or any other person appointed as such under the Primary Loans Agreements;

(x) "Lenders" at any particular time means the Initial Lenders and any party to whom an interest in the Subject Loans is assigned;

(y) "Major Project Party" means Finco, the Partnership, Holdco, Construction Subsidiary, XCo, Ultimate Parent, XXXXXXXXXX., Parent, any other shareholder of Holdco, TEntity, an XXXXXXXXXX trustee and any other party who is material to the Project that is designated as such by the Obligors and the agent of the Lenders;

(z) "Material Adverse Change" means:

"Any event occurs or series or events occur (including a change to any regulation) which has an effect or likely effect which is or which would reasonably be expected to be material and adverse on:

(i) the business or condition (financial or otherwise) of an Obligor; or

(ii) the ability of any Major Project Party to perform, observe or comply with any of their respective payment or other obligations under the Finance Documents or their respective payment or other material obligations under the Project Documents; or

(iii) the legality or enforceability of any of the rights or obligations under the Finance Documents or the DBFO Agreements (or any rights or obligations thereunder) or any material rights or obligations under any other Transaction Document or the rights and remedies of the security trustee appointed thereunder or any designated security document not providing perfected enforceable security over the rights or assets purported to be covered by security documents or the priority of the security created or expressed to be created thereby; or

(iv) the validity, perfection, or priority of any Security Interests of the appointed security trustee over any of the rights or assets of an Obligor.";

(aa) "Non-Resident Lender" means a Lender that is not resident in Canada;

(bb) "Obligors" under the Subject Loans Agreements means Finco and the Partnership;

(cc) "Operating and Maintenance Contract" means the contract between the Partnership and TEntity pursuant to which the Partnership agrees with TEntity to operate the Project during the Operating Period;

(dd) "Operating and Maintenance Subcontract" means the contract between the Partnership and the Operator pursuant to which the Operator will operate the Project for the Partnership during the Operating Period. (The Operator will perform such functions as road maintenance, resurfacing, repair, debris removal, etc.);

(ee) "Operating Period" means the part of the Contract Period that begins immediately after the Construction Period and ends at the end of the Contract Period;

(ff) "Operator" means XXXXXXXXXX, an operations and maintenance services partnership which will operate the Project after Substantial Completion and whose partners are XXXXXXXXXX;

(gg) "Parent" means XXXXXXXXXX., a corporation not resident in Canada for purposes of the Act, all of whose shares are owned by Ultimate Parent;

(hh) "Partner" or "Partners" means a partner or the partners of the Partnership from time to time;

(ii) "Partnership" means the general partnership formed on XXXXXXXXXX under the laws of XXXXXXXXXX and called the XXXXXXXXXX, having GP#1 and GP#2 as its initial general partners;

(jj) "Primary Loans" means the advances to be made to Finco under the Primary Loans Agreements and includes the Wrapped Term Loan, the Equity Bridge Loan, the Wrapped Standby Loan and the Wrapped Working Capital Loan;

(kk) "Primary Loans Agreements" means a senior facility agreement and common terms agreement (the "Common Terms Agreement") between Finco, the Partnership and the Lenders and related agreements and which includes credit facilities under which loans will be made (not all on Financial Close) as follows:

(i) a long term credit facility (the "Wrapped Term Loan") of approximately $XXXXXXXXXX which matures XXXXXXXXXX years after Financial Close;

(ii) an equity bridge facility (the "Equity Bridge Loan") of approximately $XXXXXXXXXX which matures on the earlier of XXXXXXXXXX years after Financial Close or XXXXXXXXXX years after the completion date (but in any event no earlier than XXXXXXXXXX following Financial Close) under which the Lenders will lend Finco the amount that GP#1 must contribute to the Partnership under the Equity Subscription Agreement;

(iii) a standby facility (the "Wrapped Standby Loan") of approximately $XXXXXXXXXX which matures XXXXXXXXXX years after Financial Close;

(iv) a working capital facility (the "Wrapped Working Capital Loan") of approximately $XXXXXXXXXX which is a revolving facility under which advances may be repaid and re-drawn, but in no event will a particular advance be required to be repaid within XXXXXXXXXX years of the date that it is drawn (or within XXXXXXXXXX years from the date that it is re-drawn, as the case may be);

(ll) "Primary Mezzanine Loan" means the advances to be made to Finco under the Primary Mezzanine Loan Agreement;

(mm) "Primary Mezzanine Loan Agreement" means the credit facility agreement between Finco, the Partnership and one of the Lenders (XXXXXXXXXX), which matures XXXXXXXXXX years after the Financial Close, is coterminous with the Primary Loans Agreements and provides for a credit facility of up to $XXXXXXXXXX;

(nn) "Principal Amount" has the meaning assigned by subsection 248(1) of the Act;

(oo) "Project" means the XXXXXXXXXX;

(pp) "Project Documents" means certain documents defined in the Primary Loans Agreements plus any other document designated as a Project Document by the Intercreditor Agent and the Obligors;

(qq) "Proposed Transactions" means the transactions described herein;

(rr) "Relevant Party" also defined under the Subject Loans Agreements and means any party to a Finance Document other than a secured party;

(ss) "Secondary Loans" means the advances to be made by Finco to the Partnership pursuant to the terms of an on-loan agreement between Finco and the Partnership;

(tt) "Security Interest" means:

(i) any mortgage, charge, pledge, lien, hypothecation, assignment by way of security, trust, arrangement for the purpose of providing security or other security interest of any kind in any jurisdiction;

(ii) any proprietary interest over an asset, or any contractual arrangement in relation to an asset, in each case created in relation to financial indebtedness and which has the same commercial effect as if security had been created over it; and

(iii) any right of set-off created by an agreement;

(uu) "Security Documents" means certain documents specified in the Primary Loans Agreements which are relevant to securing the Primary Loans, the Primary Mezzanine Loan and the Secondary Loans and any other document designated as a Security Document by the Intercreditor Agent;

(vv) "Sites" are the lands on which the Project will be constructed and operated;

(ww) "Subject Loans Agreements" means the Primary Loans Agreements and the Primary Mezzanine Loan Agreement;

(xx) "Subject Loans" means the Primary Loans and the Primary Mezzanine Loan;

(yy) "Substantial Completion" means the substantial completion of the construction of the Project;

(zz) "Taxable Canadian Corporation" has the meaning assigned by subsection 89(1) of the Act;

(aaa) "TEntity", also known as the XXXXXXXXXX;

(bbb) "XXXXXXXXXX Cooperation Agreement" means the XXXXXXXXXX agreement, which will be entered into between TEntity, the Partnership, and a XXXXXXXXXX operator when the Project commences operation and will provide for all XXXXXXXXXX to be paid to TEntity;

(ccc) "Transaction Documents" means the Finance Documents and the Project Documents;

(ddd) "Ultimate Parent" means XXXXXXXXXX, a non-resident corporation; and

(eee) "Utilization Date" with respect to any Primary Loan or the Primary Mezzanine Loan means the date upon which the particular Primary Loan or the Mezzanine Loan is made.

BACKGROUND FACTS

Our understanding of the facts and Proposed Transactions is as follows:

1. The Project is a public-private partnership.

2. The Partnership was formed under the XXXXXXXXXX as a general partnership pursuant to a partnership agreement. The Partners are GP#1 and GP#2.

3. GP#1 will have a XXXXXXXXXX% interest in the income and capital of the Partnership. GP#2 will have a XXXXXXXXXX% interest in the income and capital of the Partnership.

4. Operator deals at Arm's Length with each of the Partnership, GP#1, GP#2, Holdco, Parent and Ultimate Parent.

5. The aggregate cost of the Project is expected to be approximately $XXXXXXXXXX.

PROPOSED TRANSACTIONS

6. The Partnership has entered into the Concession Agreement with TEntity. The Contract Period is for a XXXXXXXXXX-year period. There will be two separate periods in the Contract Period. The first period is the Construction Period that includes the design and construction of the Project. The Construction Period ends once a certificate is issued that Substantial Completion has occurred. The second period is the Operating Period. This period runs from Substantial Completion and continues until the end of the Contract Period. The Concession Agreement sets out the obligations of these parties during the Construction Period and the Operating Period. The Partnership is responsible for constructing, completing, commissioning and testing the Project during the Construction Period and operating and maintaining the Project throughout the Operating Period, all in accordance with the requirements set out in the Concession Agreement. TEntity will receive XXXXXXXXXX pursuant to the XXXXXXXXXX Cooperation Agreement. TEntity will pay the Partnership performance-based payments following Substantial Completion, which will be based on a formula contained in the Concession Agreement.

7. TEntity owns or has rights to the real property interests comprising the Sites. Ownership of the real property interests, fixed assets and improvements will remain with TEntity.

8. The Partnership will enter into the Design-Build Contract with the Contractor and the Operating and Maintenance Subcontract with the Operator.

9. Finco will use the proceeds of the Subject Loans to make the Secondary Loans to the Partnership on substantially the same financial terms as those under the Subject Loans, except that the interest rate charged by Finco on the Secondary Loans will be XXXXXXXXXX% higher than the interest rate charged by the Lenders and payable by Finco on the Subject Loans.

10. The Partnership will pay the interest payments on the Secondary Loan to Finco and Finco will pay the Lenders the interest payments on the Subject Loans respectively.

11. Under the terms of the Subject Loan Agreements, except in the event of a failure or default under the terms of the Subject Loans Agreements (or if the terms of the Subject Loans Agreements or any agreement relating thereto become unlawful or are changed by virtue of legislation or by a court, statutory board or commission) Finco may not, under any circumstances, be obligated to repay more than XXXXXXXXXX% of the Principal Amount of any particular Subject Loan within XXXXXXXXXX years from the Utilization Date of that Subject Loan.

12. The Subject Loans Agreements provide that Finco may, at its option, prepay the Subject Loans. The Common Terms Agreement provides that no Obligor may make a distribution to its shareholders if a Wrapped Working Capital Loan (which has not been prepaid and redrawn) is outstanding.

13. The Subject Loans Agreements provide for certain representations and warranties, covenants and events of default appropriate in the context of the Subject Loans and the Project. Article XXXXXXXXXX of the Common Terms Agreement contains events of default. Some of the events of default may be triggered by actions by parties to the Subject Loans Agreements, whereas others may be triggered as the result of actions of parties that are not party to the Subject Loans Agreements. The following are examples of events of default under Article XXXXXXXXXX of the Common Terms Agreement:

(a) non-payment of amounts due by any Relevant Party under any Finance Document;

(b) breach by any Relevant Party of obligations under other specified Agreements;

(c) failure of any Relevant Party to comply with any provision of a Finance Document, certain misrepresentations by any Major Project Party in any Finance Document or an Obligor in certain other specified agreements;

(d) cross defaults of an Obligor of any financial indebtness;

(e) specified cross defaults by any Major Project Party;

(f) actual or potential events of default of a Major Project Party pursuant to any financial indebtedness;

(g) cancellation or suspension of commitments for or underwriting of any financial indebtedness of any Major Project Party (other than an Obligor);

(h) insolvency of or insolvency proceedings against a Major Project Party;

(i) creditors process affecting a material asset of an Obligor;

(j) expropriation, attachment, etc., affecting any assets of a Major Project Party;

(k) ceasing or threatening to cease to carry on business by an Obligor or Major Project Party;

(l) becoming unlawful for any person to perform obligations under the Transaction Documents;

(m) Major Project Party becomes immune from legal process;

(n) change of shareholding of an Obligor or of Holdco or their respective holdings or an assignment of DBFO Loan Notes other than in accordance with the Finance Documents;

(o) repudiation or ineffectiveness of the Finance Documents with respect to any Relevant Party;

(p) Contractor default under the Concession Agreement or notice given by TEntity to terminate the Concession Agreement;

(q) any party repudiates any Project Document or evidences an intention to do so or any provision of any Project Document is invalid, illegal, ineffective or unenforceable for any reason;

(r) certain environmental matters occur;

(s) seizure, expropriation, nationalization, etc., of any significant project asset, any shares in an Obligor, any Obligor's rights under the Transaction Documents or any step taken by a government entity which could reasonably be expected to lead to any of the above;

(t) litigation claims, etc., taken against a Major Product Party;

(u) project assets damaged, abandoned or suspended;

(v) certain debt service cover ratios not maintained;

(w) completion does not occur before specified time;

(x) required insurance ineffective, unavailable or avoided;

(y) the construction guarantee is repudiated or a construction guarantor evidences an intention to repudiate;

(z) specified milestone events not achieved on time and a residual plan is not provided to the Lenders; or

(aa) a Material Adverse Change occurs.

14. The Subject Loans Agreements require that Finco make an offer to repay certain of the Subject Loans if insurance or compensation proceeds are received (e.g. the Project is nationalized, expropriated, sold or terminated) and that the failure of Finco to make such an offer will constitute an event of default.

15. Parent will provide a letter of credit to the Lenders as security for the repayment of the Equity Bridge Loan component of the Subject Loans.

PURPOSE OF THE PROPOSED TRANSACTIONS

16. The purpose of the Proposed Transactions is to enable the Partnership to design, engineer, construct, commission and perform testing of the Project during the Construction Period and to operate and maintain the Project during the Operating Period.

17. TEntity will acquire the Project at the end of the Construction Period and have the Project maintained during the Operating Period by the Partnership. XXXXXXXXXX

18. The Subject Loans are being obtained from the Lenders for the purpose of (partially) funding the construction and operation of the Project and to pay a licence fee of $XXXXXXXXXX payable to TEntity under the Concession Agreement.

19. Finco is being used in the structure to:

(a) facilitate, from a commercial perspective, the entry or exit of Partners of the Partnership;

(b) avoid any uncertainty with respect to the application of subparagraph 212(l)(b)(vii) of the Act as it applies to the Partnership;

(c) avoid any uncertainty that might arise should a Partner dispose of its interest in the Partnership in the future or should a new Partner be admitted to the Partnership, specifically with respect to whether a new debt obligation might be created as a result of such a disposition; and

(d) ensure that the subparagraph 212(1)(b)(vii) exemption will not cease to apply if one or more Partners assigns its interest in the Partnership to a new Partner that is not a corporation or, if a corporation, is not a corporation resident in Canada or if a new Partner that is not a corporation or, if a corporation, is not a corporation resident in Canada, is admitted to the Partnership.

OTHER INFORMATION

20. It is anticipated that in the future one or more Partners may sell or otherwise dispose of all or a portion of its interest in the Partnership to a new Partner and/or one or more new Partners will be admitted to the Partnership. Such a new Partner might be a Canadian resident or non-resident corporation, trust, partnership, fund or other entity.

21. The Initial Lenders may assign their participation in the Subject Loans to other Lenders. Each of the Subject Loans Agreements provides that no such assignment shall be nor shall it be deemed to be a discharge, rescission, extinguishment, novation or substitution of any portion of the Subject Loans and the portion of the Primary Loans or Primary Mezzanine Loan so assigned shall continue to be the same obligation and not a new obligation.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the Proposed Transactions and purpose of the Proposed Transactions, and that the final agreements referred to in this letter are substantially the same as the documents provided to us, and provided further that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below:

A. Interest payments made by Finco to a Non-Resident Lender on the Subject Loans will be exempt from withholding taxes under Part XIII pursuant to subparagraph 212(1)(b)(vii) of the Act, provided that at the time of the payment the Non-Resident Lender deals at Arm's Length with Finco.

B. Neither the disposition by a Partner of its interest in the Partnership nor the admission of a new Partner to the Partnership will, in and of itself, preclude the application of subparagraph 212(1)(b)(vii) of the Act to interest payments made by Finco to a Lender on the Subject Loans, regardless of whether a new Partner is a corporation.

C. For purposes of the XXXXXXXXXX-year period within which not more than XXXXXXXXXX% of the Principal Amount of an obligation can be payable for purposes of subparagraph 212(1)(b)(vii) of the Act, a disposition of an interest by a Partner in the Partnership or the acquisition by a person of an interest as a Partner in the Partnership will not, in and of itself, result in the issuance of a new debt obligation under the Subject Loans Agreements.

D. The assignment or transfer by a Lender of an interest in the Subject Loans will not, in and of itself, preclude the application of subparagraph 212(1)(b)(vii) of the Act to interest payments made by Finco to a Lender on the Subject Loans.

E. For purposes of the XXXXXXXXXX-year period within which not more than XXXXXXXXXX% of the principal amount of an obligation can be payable for purposes of subparagraph 212(1)(b)(vii) of the Act, the assignment or transfer by a Lender of an interest in the Subject Loans will not, in and of itself, result in the issuance of a new debt obligation.

F. The requirements of Finco, pursuant to the Subject Loans Agreements to make an offer to repay such facilities as described in 14 above will not, in and by themselves, preclude the application of subparagraph 212(1)(b)(vii) of the Act to the interest paid by Finco on the Subject Loans to Lenders, who for the purposes of the Act are non-residents of Canada and deal at Arm's Length with Finco at the time of the payment.

G. Subsection 15(2.3) of the Act will apply to the Secondary Loans made by Finco to the Partnership pursuant to the terms of the on-loan agreement between Finco and the Partnership.

H. As a result of the Proposed Transactions, in and by themselves, subsection 245(2) of the Act will not be applied to re-determine the tax consequences confirmed in the rulings above.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 (the "Circular") issued by the CRA on May 17, 2002, and are binding provided that the Subject Loans Agreements are entered into on or before XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:

(i) the GST implications of any of the Proposed Transactions;

(ii) any other tax consequences of the Proposed Transactions or of related transactions or events that are not described herein; nor

(iii) the nature of the legal relationship entered into or contemplated by the entities named above.

Yours truly,

XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch