2006 Ruling 2006-0185201R3 - Licence - available for use

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: The application of the available for use rules to the licence acquired by the corporation

Position: Paragraph 13(27)(b) of the Income Tax Act will apply until the licence is used for the purpose of earning income.

Reasons: The licence will be acquired before it will be used for the purpose of earning income such that paragraph 13(27)(b) of the Act will apply.

XXXXXXXXXX 									2006-018520

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge your subsequent submissions of XXXXXXXXXX and information provided during various telephone conversations (XXXXXXXXXX).

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

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

(ii) 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) under objection by the taxpayer or a related person,

(iv) before the courts, or

(v) the subject of a ruling previously issued by the Directorate to the 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.

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

Definitions

"Arm's length" has the meaning assigned by section 251 of the Act.

"Construction Period" means the period of time between Financial Close (as defined in the Project Agreement) and the Substantial Completion Date.

"Entity A" means the XXXXXXXXXX.

"Entity B" means the XXXXXXXXXX.

"Entity C" means XXXXXXXXXX, a taxable Canadian corporation which will own XXXXXXXXXX% of the limited partnership interests in Entity L. Entity C has not yet been formed.

"Entity D" means XXXXXXXXXX, a taxable Canadian corporation which will own XXXXXXXXXX% of the limited partnership interests in Entity L. Entity D has not yet been formed.

"Entity E" means XXXXXXXXXX, a limited partnership under the laws of XXXXXXXXXX which will own XXXXXXXXXX% of the limited partnership interests in Project Co. Entity E has not yet been formed.

"Entity F" means XXXXXXXXXX, a trust formed under the laws of XXXXXXXXXX and resident in Canada under the Act with XXXXXXXXXX and which will own XXXXXXXXXX% of the limited partnership interests in Entity E.

"Entity G" means XXXXXXXXXX, a taxable Canadian corporation formed under the laws of XXXXXXXXXX which will own XXXXXXXXXX% of the general partnership interests in Entity E. Entity G has not yet been formed. Entity G will be XXXXXXXXXX% owned by Entity H.

"Entity H" means XXXXXXXXXX, a taxable Canadian corporation which will own XXXXXXXXXX% of the issued and outstanding shares in Entity G. Entity H's business number is XXXXXXXXXX and it files its income tax return in the XXXXXXXXXX Tax Services Office.

"Entity I" means XXXXXXXXXX, a taxable Canadian corporation which will own XXXXXXXXXX% of the issued and outstanding shares of Entity K.

"Entity J" means XXXXXXXXXX, a taxable Canadian corporation which will own XXXXXXXXXX% of the issued and outstanding shares of Entity K.

"Entity K" means XXXXXXXXXX, a taxable Canadian corporation which will be the general partner in Entity L.

"Entity L" means XXXXXXXXXX, a limited partnership to be formed under the laws of XXXXXXXXXX with Entity K as a general partner and Entity C and Entity D as equal limited partners. Entity L will own XXXXXXXXXX% of the limited partnership interests in Project Co.

"Entity M" means XXXXXXXXXX, which owns XXXXXXXXXX% of the issued and outstanding shares of XXXXXXXXXX.

"Entity N" means XXXXXXXXXX, which along with XXXXXXXXXX Project GP Holdco will be equal general partners in Project GP (XXXXXXXXXX).

"Entity O" means XXXXXXXXXX, which owns XXXXXXXXXX% of the issued and outstanding shares of Entity D.

"Entity P" means XXXXXXXXXX, which owns XXXXXXXXXX% of the issued and outstanding shares of XXXXXXXXXX.

"Entity "Q" means XXXXXXXXXX, which together with Entity D, will be equal general partners of XXXXXXXXXX Project GP Holdco.

"Entity R" means XXXXXXXXXX Project GP Holdco, which is a general partnership, with Entity D and Entity Q as equal partners.

"Entity S" means XXXXXXXXXX, which will form Entity F.

"Expiry Date" means the XXXXXXXXXX anniversary of the Scheduled Substantial Completion Date as defined in the Project Agreement.

"Facility" means all buildings, facilities and other structures; the Plant; all site, services, utilities, roadways and parking spaces required to support such buildings, facilities and structure; and all supporting systems, infrastructure and improvements; required to be built by Project Co pursuant to the Project Agreement.

"Final Completion" means the completion of the Works in accordance with the Project Agreement, including completion of all minor deficiencies.

"Final Completion Date" means the date on which Final Completion is achieved.

"Finco" means a taxable Canadian corporation resident in XXXXXXXXXX and which is a wholly owned subsidiary of GP Co.

"GP Co" means a taxable Canadian corporation formed under the Canada Business Corporations Act ("CBCA") which will own XXXXXXXXXX% of the general partnership interests in Project Co. The general partnership interests in Project Co will represent a nominal interest in Project Co. GP Co's head office will be in XXXXXXXXXX. GP Co has not yet been formed. GP Co will be owned XXXXXXXXXX% by XXXXXXXXXX Project GP Holdco, a taxable Canadian corporation, and XXXXXXXXXX% by XXXXXXXXXX, a taxable Canadian corporation.

"XXXXXXXXXX" means Entity A and Entity B, and "XXXXXXXXXX" means either of them.

"XXXXXXXXXX Services" means the management, responsibility, administration and performance of XXXXXXXXXX services and all other services and activities performed at the Facility by the XXXXXXXXXX from time to time including all other services and activities which are not to be provided or performed by Project Co under the Project Agreement.

"Lands" means the land upon which the Facility will be built.

"Lenders" means the third party lenders, who are at arm's length to Finco and Project Co, who will lend funds to Finco to finance the Project some of whom may from time to time be Non-Resident Lenders.

"Licence" means the non-exclusive licence granted to Project Co pursuant to the Project Agreement.

"Limited Partners" of the Limited Partnership at the date of this advance tax ruling will be Entity L and Entity E;

"Limited Partnership" means Project Co, a partnership that was formed under the laws of the Province of XXXXXXXXXX between the Limited Partners and GP Co;

"Maintenance Work" means any work after Substantial Completion for maintenance or repair of the Facility in accordance with the Project Agreement.

"Non-Resident Lenders" means any Lenders, from time to time, who are not residents of Canada for the purposes of the Act.

"Operational Term" means the period from the Substantial Completion Date until the end of the Project Term.

"Periodic Service Payments" has the meaning set out in paragraph 19 below.

"Project Agreement" means the agreement to be entered into between Project Co and Entity A defining their rights and obligations in respect of the building and operation of the Facility.

"Project Co" means a limited partnership formed under the laws of XXXXXXXXXX and which will have a head office in XXXXXXXXXX. Project Co has not yet been formed.

"Project Co Services" means the services to be performed by Project Co in accordance with the output specifications to the Project Agreement including general management services, plant services and utilities management services, but excluding XXXXXXXXXX Services.

"Project Operations" means the performance of the Works; the delivery of the Project Co Services; and all other obligations of Project Co under the Project Agreement.

"Project Term" means the period commencing on the date of the Project Agreement and expiring at midnight on the Termination Date.

"Regulations" means the Income Tax Regulations to the Act.

"Senior Debt" means the indebtedness borrowed by Finco from the Lenders and which will be loaned by Finco to Project Co.

"Substantial Completion" means the point at which the Facility is ready for use or is being used for the purposes listed in the Project Agreement, and all requirements for Substantial Completion other than minor deficiencies have been satisfied.

"Substantial Completion Date" means the date on which Substantial Completion is achieved.

"Termination Date" means the earlier of the Expiry Date and such earlier date, if any, on which termination of the Project Agreement takes effect in accordance with its terms.

"Works" means the limited design, construction, installation, testing, commissioning and completion of the Facility including rectifying minor deficiencies or any activities to enable or facilitate the commencement of the Project Co Services.

Facts

1. Entity C, Entity D, Entity E, Entity F, Entity G, Entity I, Entity J, Entity K and GP Co will be formed.

2. Entity C, Entity D and Entity K will form Entity L, a limited partnership under the laws of XXXXXXXXXX. Entity C , Entity D, and Entity K will each own XXXXXXXXXX% and XXXXXXXXXX% of Entity L, respectively.

3. Entity L, Entity E and GP Co will form Project Co, a limited partnership under the laws of XXXXXXXXXX.

4. GP Co will form Finco.

Proposed Transactions

5. Project Co and Entity A (on behalf of XXXXXXXXXX) will enter into the Project Agreement which will outline the obligations of Entity A and Project Co during the Construction Period and the Operational Term. Entity A will enter into the Project Agreement with Project Co on its own account, and pursuant to a separate development agreement with Entity B, on behalf of Entity B.

6. Pursuant to the Project Agreement, in consideration for Project Co carrying out and completing the Works, Entity A will provide Project Co, its subcontractors and their employees, officers, agents and advisors a non-exclusive licence, right of use and access to, on and over the building site and the Facility as are required by Project Co to perform the Project Operations ("Licence").

7. In return for the Licence, Project Co is solely responsible to provide, on a turnkey basis, a complete and operational Facility and to perform all other obligations of Project Co up to Substantial Completion. After Substantial Completion, Project Co will continue to be liable for defects that may be found during the Operational Term. Project Co will be responsible for all construction, means, methods and techniques used to undertake the Facility construction and will be responsible for providing all things (including financing, labour, material and plant) necessary to provide the Facility and perform the Work.

8. The Licence will automatically terminate on the Expiry Date. If Entity A terminates the Project Agreement or the Project Agreement otherwise terminates prior to the Expiry Date, the Licence will also terminate, and Entity A will be required to compensate Project Co based on a formula in the Project Agreement.

9. Other than the Licence, Project Co will not have any interest in the Facility or the Lands.

10. XXXXXXXXXX will be the owners of the Facility at all times during the Construction Period and the Operational Term.

11. The cost to Project Co is approximately $XXXXXXXXXX. The Limited Partners of Project Co will contribute approximately $XXXXXXXXXX in equity contributions to assist in financing Project Co's obligations under the Project Agreement.

12. Finco will borrow the balance of the funds necessary to carry out the project, in the amount of approximately $XXXXXXXXXX, by way of Senior Debt from the Lenders.

13. The Senior Debt and its terms will be structured so as to comply with the provisions of subparagraph 212(1)(b)(vii) of the Act. Finco will not, under any circumstances, except the occurrence of an event of failure or default, be required to repay to the Lenders an amount in excess of 25% of the principal amount of the Senior Debt within 5 years of the date of advance of the Senior Debt.

14. Project Co will guarantee the debt of Finco and will grant security over all of its assets in support of such guarantee.

15. Finco will lend an amount equal to the Senior Debt to Project Co ("Finco Debt") in order that Project Co may use such funds and the equity invested by its limited partners to carry out Project Co's obligations under the Project Agreement.

16. It is expected that over the term of the Project Agreement, the revenue earned by Project Co will exceed the aggregate amount of the interest costs on borrowing, the costs incurred to provide the Works, the costs incurred to provide the Project Co Services and all other costs to be incurred by Project Co in connection with the Project Agreement.

17. After Substantial Completion until the Termination Date, Project Co will provide to XXXXXXXXXX the Project Co Services which include the facilities management and XXXXXXXXXX services as are necessary to operate the Facility. XXXXXXXXXX will perform the XXXXXXXXXX Services.

18. Project Co will provide the necessary maintenance over the Facility to ensure the Facility performs and meets the services standards and quality measures set out in the Project Agreement for the Operational Term.

19. Project Co will receive no payments from XXXXXXXXXX prior to the XXXXXXXXXX business day after the Substantial Completion Date. Entity A will pay to Project Co yet to be determined all inclusive annually determined fees which would include XXXXXXXXXX payments every year (the "Periodic Service Payments"). The amount of the Periodic Service Payments will be determined based on formulas in the Project Agreement. The annual fees will be subject to adjustment for certain unforeseen matters and will also be adjusted to reflect agreed variations in the Project Co Services carried out.

20. If Project Co does not perform the Project Co Services from time to time, an adjustment will be made in accordance with the Project Agreement to reduce one or more Periodic Service Payments on account of such failures.

21. Project Co will provide certain insurance for the Facility and may provide performance bonds as necessary. Project Co will also be required to indemnify XXXXXXXXXX for certain claims arising due to acts or omissions of Project Co, its employees and its subcontractors.

22. The costs that will be incurred by Project Co during the term of the Construction Period in providing the Works will include construction costs (including materials and labour), equipment costs (including XXXXXXXXXX equipment, furniture and fixtures), certification, set up costs, miscellaneous consulting costs, and miscellaneous legal and other costs.

Purpose of the Proposed Transactions

23. The purpose of the proposed transactions is to develop a long term relationship between Project Co and XXXXXXXXXX for the purpose of designing, engineering, constructing, commissioning, performance testing and providing to Entity A and Entity B, on a turnkey basis, a complete and operational Facility, a fully functional XXXXXXXXXX consistent with other modern Canadian XXXXXXXXXX facilities that perform similar functions, and to obtain and enable the performance of the Project Co Services by Project Co.

24. The Senior Debt is being obtained from the Lenders, including potentially Non-Resident Lenders, to secure the best financing terms and interest rate for the purposes of partially funding the construction and operation of the Facility. Finco is being used in the structure to facilitate from a commercial perspective the entry or exit of limited partners from Project Co; avoid any uncertainty with respect to the application of subparagraph 212(1)(b)(vii) of the Act as it applies to a limited partnership; and avoid any uncertainty that might arise should a partner dispose of its interest in Project Co or should a new limited partner be admitted to Project Co specifically with respect to whether a new debt obligation might be created as a result of such disposition.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed plan and purpose of the proposed plan, and provided that the terms of the Plan are as described above, we rule as follows:

A. The Licence granted by Entity A to Project Co will be included in Class 14 of Schedule II of the Regulations.

B. For the purposes of the definition of undepreciated capital cost in subsection 13(21) of the Act, paragraph 20(1)(a) of the Act and paragraph 1100(l)(c) of the Regulations, the capital cost of the Licence will include the total of the costs incurred by Project Co in respect of the Licence, as described in paragraph 11 above.

C. For the purpose of paragraph 20(1)(a) of the Act, the capital cost of the Licence, as determined in the manner described in paragraph 22 above, will be deductible by Project Co in accordance with the provisions of paragraph 1100(1)(c) of the Regulations.

D. Paragraphs 18(1)(a) and 18(1)(b) of the Act will not apply to deny Project Co a deduction for all outlays and expenses incurred by Project Co for the maintenance and repairs to the Facility, provided such outlays and expenses are incurred to satisfy the requirements of the Project Agreement, as described in paragraph 18 above, and are not capital expenditures.

E. By virtue of subsection 13(26) of the Act, in applying the definition of undepreciated capital cost in subsection 13(21) for the purpose of paragraph 20(1)(a) and any of the Regulations made for the purpose of paragraph 20(1)(a), in computing Project Co's income for a taxation year, no amount shall be included in calculating the undepreciated capital cost of the Licence before the time the Licence is considered to have become available for use by Project Co.

F. For the purposes of subsection 13(26) of the Act, the Licence will be considered to have become available for use, pursuant to subsection 13(27), at the earlier of: (a) the beginning of the Operational Term, and (b) the time that is immediately after the beginning of the first taxation year of Project Co that begins more than 357 days after the end of the taxation year of Project Co in which the costs in respect of the Licence are incurred.

G. Since Project Co will not be entitled to, and provided Project Co does not actually receive, any portion of the Periodic Service Payments during or at the end of the Construction Period, as described in paragraph 19 above, no amount will be included in determining the profit of Project Co under section 9 or paragraph 12(1)(b) of the Act during or at the end of the Construction Period. During the Operational Term, Project Co will include the Periodic Service Payments in income in a taxation year in accordance with section 9 and paragraph 12(1)(b) of the Act.

H. Provided that Project Co has a legal obligation to pay interest on the Finco Debt described in paragraph 15 above, Project Co will, to the extent that the interest is reasonable, be entitled to deduct, in a taxation year, the interest paid or payable (depending on the method regularly followed by Project Co in computing its income) on the Finco Debt in the taxation year, pursuant to paragraph 20(1)(c) of the Act.

I. The financing costs incurred by Project Co in the course of borrowing the Finco Debt will, to the extent such financing costs are reasonable in the circumstances, be deductible by Project Co in accordance with paragraph 20(1)(e) of the Act.

J. Provided that Finco has a legal obligation to pay interest on the Senior Debt described in paragraph 12 and 13 above, Finco will, to the extent that the interest is reasonable, be entitled to deduct, in a taxation year, the interest paid or payable (depending on the method regularly followed by Finco in computing its income) on the Senior Debt in the taxation year, pursuant to paragraph 20(1)(c) of the Act.

K. The financing costs incurred by Finco in the course of borrowing the Senior Debt will, to the extent such financing costs are reasonable in the circumstances, be deductible by Finco in accordance with paragraph 20(1)(e) of the Act.

L. Interest payments made by Finco to a Non-Resident Lender in respect of the Senior Debt 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.

M. Neither the disposition by a Limited Partner of its interest in the Limited Partnership nor the admission of a new partner to the Limited 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 Non-Resident Lender, notwithstanding that a new Limited Partner may not be a corporation.

N. For purposes of the five year period within which not more than 25% 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 Limited Partnership or the acquisition by a person of an interest as a partner in the Limited Partnership will not, in and of itself, result in the issuance of a new debt obligation.

O. If a Non-Resident Lender acquires its interest in the Senior Debt by way of an assignment such that no new loan is created, the five-year period within which not more than 25% of the principal amount of an obligation can be payable for the purposes of subparagraph 212(1)(b)(vii) of the Act will run from the date of the original advance of the Senior Debt.

The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.

Note:

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.

Yours truly,

XXXXXXXXXX
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch