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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1)Withholding tax exemption on interest paid on a credit facility pursuant to 212(1)(b)(vii)
2)Reimbursement of expenses by the company to the Bank in connection with the negotiation, preparation, conclusion and implementation of the agreement.
Position:
1)Subparagraph 212(1)(vii) is applicable to exempt the withholding tax exigible pursuant to paragraph 212(1)(b)
2) Subparagraph 212(4)(b) applies to exempt the withholding tax on these payments required pursuant to subparagraph 212(1)(a).
Reasons:
1)The terms of the repayment schedule contained in the Agreement ensures no more than 25% of the credit facility will be repaid within five years after the date the loan is made. All other criteria in subparagraph 212(1)(b)(vii) are met.
2) To the extent the expenses are reasonable they fit the criteria in subparagraph 212(4)(b).
XXXXXXXXXX 971067
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX and facsimile of XXXXXXXXXX and various phone calls requesting an advance income tax ruling on behalf of XXXXXXXXXX.
To the best of your knowledge and that of the above noted company, none of the issues or matters involved in this advance income tax ruling request have been or are being considered by a District Taxation Office and/or Taxation Centre in connection with a tax return already filed or is under objection and/or appeal.
Our understanding of the facts and proposed transaction is as follows:
Facts
1.XXXXXXXXXX was incorporated on XXXXXXXXXX and owns a XXXXXXXXXX. The ownership of this XXXXXXXXXX is the corporation's sole business asset.
2.The company's offices are located at XXXXXXXXXX. The company files its tax returns with the XXXXXXXXXX District Taxation Office (account number XXXXXXXXXX).
3.The company is a private corporation and a taxable Canadian corporation within the meaning of subsection 89(1 ) of the Income Tax Act (the "Act").
4.All of the issued and outstanding shares of XXXXXXXXXX are owned by XXXXXXXXXX, a company resident of XXXXXXXXXX with its head office located in XXXXXXXXXX.
5.XXXXXXXXXX is XXXXXXXXXX controlled by XXXXXXXXXX, which are all non-residents of Canada.
6.XXXXXXXXXX has decided to restructure its financial obligations and those of all other corporations it currently directly or indirectly holds, in whole or in part (hereinafter "the XXXXXXXXXX group").
7.The XXXXXXXXXX controlling shareholders have designated XXXXXXXXXX as the main banking partner of the XXXXXXXXXX group. XXXXXXXXXX is located in XXXXXXXXXX, is not a resident of Canada, and does not have a permanent establishment in Canada. XXXXXXXXXX which is related to XXXXXXXXXX, is located in XXXXXXXXXX, is not a resident of Canada, and does not have a permanent establishment in Canada. XXXXXXXXXX is not related to XXXXXXXXXX or any member of the XXXXXXXXXX group.
Proposed Transaction
8.XXXXXXXXXX proposes to enter into an agreement ("the Agreement") for a non-revolving credit facility of up to US$XXXXXXXXXX arranged by XXXXXXXXXX which XXXXXXXXXX will use to finance the partial prepayment of a financial obligation outstanding between XXXXXXXXXX to XXXXXXXXXX on a loan agreement concluded in XXXXXXXXXX.
9.As part of the Agreement, XXXXXXXXXX undertakes to use the amount prepaid by XXXXXXXXXX to partially prepay an amount of XXXXXXXXXX on a loan presently outstanding with XXXXXXXXXX, and to prepay the remaining loan balance with funds from other sources.
10.The non-revolving credit facility can be utilized by XXXXXXXXXX on the earliest of a receipt of a favourable advance income tax ruling or XXXXXXXXXX, and must be in the full amount of the credit facility.
11.The non-revolving credit facility will be guaranteed by XXXXXXXXXX in the form of an irrevocable and unconditional letter of guarantee in favour of XXXXXXXXXX that will be valid until XXXXXXXXXX.
12.The Agreement sets out the terms and conditions upon and subject to which XXXXXXXXXX agrees to make available to XXXXXXXXXX the non-revolving credit facility.
13.The more important terms and conditions of the Agreement in relation to the ruling request are as follows:
A)Interest
The annual interest rate under the Agreement shall be equal to XXXXXXXXXX% payable semi-annually.
B)Repayment
The non-revolving credit facility shall be repaid as noted in the Agreement. The terms of the repayment schedule contained in the Agreement ensures that no more than XXXXXXXXXX% of the non-revolving credit facility will be repaid within XXXXXXXXXX years after date the loan is made.
C)Collateral
The Agreement provides for collateral undertakings by XXXXXXXXXX mainly relating to the sale of shares of XXXXXXXXXX or of members of the XXXXXXXXXX group, and assignments to XXXXXXXXXX of rights and claims arising on such sales.
In particular under the terms, XXXXXXXXXX undertakes to prepay, in whole or in part, and guarantees the full or partial prepayment of all amounts outstanding if (i) XXXXXXXXXX sells, in whole or in part, its present and future shares in any member of the XXXXXXXXXX group and (ii) there is a change in control of XXXXXXXXXX and (iii) XXXXXXXXXX requests such prepayment. The failure by the XXXXXXXXXX group to make the offer to XXXXXXXXXX for the prepayment will constitute an event of default under the Agreement and will give rise to all the remedies generally available under the Agreement in the event of default in the occurrence of an event of default.
D)Events of default
The Agreement provides for events of default by XXXXXXXXXX on the non-revolving credit facility. Each and every of the following cases constitute an event of default under the Agreement:
i)XXXXXXXXXX fail(s) to comply with their present or future obligations under any of the Agreements and/or any other present or future obligations to XXXXXXXXXX;
ii)any of the representations and warranties under this Agreement is or becomes untrue or incorrect;
iii)a material adverse change in the financial situation of XXXXXXXXXX occurs or threatens to occur.
If such an event of default occurs, XXXXXXXXXX shall be entitled by written notice to XXXXXXXXXX, to terminate the Agreement and/or to declare the amount then outstanding due and payable.
14.All costs and expenses of any kind arising in connection with the negotiation, preparation, conclusion and implementation of the Agreement, and/or security agreement, and/or any other agreement pertaining hereto shall be exclusively borne by XXXXXXXXXX.
Purpose of the Proposed Transaction
15.The purpose of proposed transaction is to meet part of XXXXXXXXXX decision to restructure all of its and the XXXXXXXXXX group's financial obligations.
Rulings Given
Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts and proposed transactions, we rule as follows:
A.The interest payable by XXXXXXXXXX, a corporation resident of Canada, to XXXXXXXXXX with whom XXXXXXXXXX is dealing at arm's length, under the non-revolving credit facility, will be exempt from the application of paragraph 212(1)(b) of the Act by virtue of the provisions of subparagraph 212(1 )(b)(vii) of the Act.
B.Provided that the expenses referred to paragraph 14 above are paid as reimbursements for specific expenses incurred for the performance of services that were for the benefit of XXXXXXXXXX, such fees, to the extent reasonable in the circumstances, will be exempt from tax under Part XIII of the Act by virtue of subparagraph 212(4)(b) of the Act.
Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any tax implications of the facts and proposed transactions.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada, Taxation on December 30, 1996 and are binding provided the proposed transactions are completed by XXXXXXXXXX. These rulings are based on the Act as it currently reads and do not take into account any proposed amendments.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 1996
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