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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
PRINCIPAL ISSUE:
Will the amendment of the terms of the Credit Agreement constitute a disposition by their lenders and the issuance of a new obligation for the purposes of subparagraph 212(1)(b)(vii) and subsection 39(2)?
Position:
Amendment to the terms of the Credit Agreement do not result in a new obligation.
REASON:
The change is not sufficiently fundamental as to bring into existence a new obligation.
XXXXXXXXXX 2003-004609
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in response to your letter dated XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided in subsequent correspondence and during various telephone conversations in connection with your request (XXXXXXXXXX).
We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling:
(i) is in an earlier return of a taxpayer identified in this document or of a related person,
(ii) is being considered by any Tax Services Office or Taxation Center of the Agency in connection with a tax return already filed,
(iii) is under objection by a taxpayer identified in this document or by a related person,
(iv) is before the courts or, if a judgment has been issues, the time limit for appeal to a higher court has not expired.
Our understanding of the facts and proposed transaction is as follows:
Definitions
In this letter, unless otherwise indicated all dollar amounts referred to herein are in Canadian dollars and:
(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th supp.) c.1 as amended from time to time and consolidated to the date of this letter (herein referred to as the "Act") and unless otherwise expressly stated, every reference to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act;
(b) "CANADA" means XXXXXXXXXX, a corporation incorporated under the CBCA which is a controlled subsidiary of ENTITY 1;
(c) "Shareholder 1" means XXXXXXXXXX;
(d) "Shareholder 2" means XXXXXXXXXX, a wholly-owned subsidiary of Shareholder 1 incorporated under XXXXXXXXXX;
(e) "CBCA" means the Canada Business Corporation Act;
(f) "CCRA" means the Canada Customs and Revenue Agency;
(g) "Credit Agreement" means XXXXXXXXXX;
(h) "disposition" has the meaning assigned by subsection 248(1) of the Act;
(i) "Lenders" means XXXXXXXXXX;
(j) XXXXXXXXXX;
(k) "ENTITY 1" means XXXXXXXXXX, a controlled subsidiary of ENTITY 2 incorporated under XXXXXXXXXX, as more fully described at paragraphs 2 and 3 hereof;
(l) "ENTITY 2" means XXXXXXXXXX, a corporation incorporated under XXXXXXXXXX, as more particularly described at paragraph 1 hereof;
(m) "ENTITY 3" means XXXXXXXXXX, a controlled subsidiary of ENTITY 2 incorporated under the CBCA;
(n) "ENTITY 4" means XXXXXXXXXX, a wholly-owned subsidiary of CANADA incorporated under the Company Act (XXXXXXXXXX), as more fully described at paragraph 4 hereof;
(o) "subject corporation" has the meaning assigned by subsection 186(3) of the Act;
(p) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.
Facts
1. ENTITY 2 is a taxable Canadian corporation and a subject corporation whose shares are publicly traded on XXXXXXXXXX Stock Exchange. ENTITY 2 is a XXXXXXXXXX corporation, which exercises control over two major groups of corporations, ENTITY 3 and its subsidiaries and ENTITY 1 and its subsidiaries.
2. ENTITY 1 is a taxable Canadian corporation and is XXXXXXXXXX corporation which forms with its subsidiaries a major group of corporations engaged in a XXXXXXXXXX business.
ENTITY 1 carries on a XXXXXXXXXX business through the following corporations or groups of corporations:
(a) ENTITY 4, a controlled subsidiary of ENTITY 1, is involved with its subsidiaries in the XXXXXXXXXX in Canada.
(b) XXXXXXXXXX, a Canadian public corporation controlled by ENTITY 1, is involved with its subsidiaries in the XXXXXXXXXX.
(c) XXXXXXXXXX, a Canadian public corporation controlled by ENTITY 1, is involved with XXXXXXXXXX and its other subsidiaries in the XXXXXXXXXX.
(d) XXXXXXXXXX, a Canadian public corporation controlled by ENTITY 1 is involved together with its subsidiaries in the XXXXXXXXXX.
(e) XXXXXXXXXX, a wholly-owned subsidiary of ENTITY 1, together with its subsidiaries offer services in XXXXXXXXXX Canada.
(f) XXXXXXXXXX, a Canadian public corporation controlled by ENTITY 1, is involved together with its subsidiaries corporations in the XXXXXXXXXX in Canada, in the XXXXXXXXXX.
3. The authorized share capital of ENTITY 1 consists of an unlimited number of common shares and preferred shares. ENTITY 2 currently holds, directly or through wholly-owned subsidiaries, common shares of ENTITY 1, representing XXXXXXXXXX% of ENTITY 1 outstanding common shares. The remaining XXXXXXXXXX% of the common shares of ENTITY 1 are owned by Shareholder 2.
4. ENTITY 4 is a taxable Canadian corporation and was formed by an amalgamation, on XXXXXXXXXX, under the CBCAXXXXXXXXXX ENTITY 4's offices are located at XXXXXXXXXX. ENTITY 4 is served by the XXXXXXXXXX Tax Service Office and the XXXXXXXXXX Taxation Center.
5. On XXXXXXXXXX, ENTITY 4 entered into the Credit Agreement with the Lenders providing ENTITY 4 an aggregate principal amount of $ XXXXXXXXXX senior credit consisting of the XXXXXXXXXX.
The loans made under the Credit Agreement are secured by a first priority security interest on substantially all of ENTITY 4 present and future assets and properties, including XXXXXXXXXX. Substantially all of ENTITY 4 subsidiaries guarantee these obligations under the Credit Agreement and provide similar security to the Lenders under the Credit Agreement.
The XXXXXXXXXX bear interest at XXXXXXXXXX% or XXXXXXXXXX.
The XXXXXXXXXX is subject to amortization of XXXXXXXXXX% of the principal amount per year, payable quarterly, during each of the first XXXXXXXXXX years of the loan with the balance outstanding being due and payable in full on XXXXXXXXXX. Currently, the outstanding balance of the XXXXXXXXXX is approximately XXXXXXXXXX.
The proceeds of this financing has been used to: (a) XXXXXXXXXX.
Generally, amendments to the Credit Agreement will require the approval of the Lenders holding loans and commitments representing more than XXXXXXXXXX% of the aggregate amount of loans and commitments under the Credit Agreement. The Credit Agreement provides that a reduction in the rate of interest of the loans made under the XXXXXXXXXX will require the approval of all the Lenders.
The Credit Agreement contains customary events of default including the non-payment of principal, interest, fees or other amounts, the making of any incorrect or misleading representation or warranty, the failure to perform or observe any other covenant, the default under other material agreements, the occurrence of a change of control of ENTITY 4 or ENTITY 1, and certain bankruptcy and insolvency events.
ENTITY 4 is required to prepay any credit facility with XXXXXXXXXX% of the net proceeds from the sale of assets by ENTITY 4 or its subsidiaries subject to a de minimis basket, permitted transfers among ENTITY 4 and its subsidiaries and reinvestment exceptions. The net proceeds from the issuance of equity or subordinated debt shall be applied in repayment of any credit facility but only up to a maximum of XXXXXXXXXX% of the net proceeds. Prepayments are to be applied pro rata between the XXXXXXXXXX.
ENTITY 4 is not required to repay more than 25% of the principal amount of the XXXXXXXXXX during the first five years and ten days following the date of the issue of that loan. By reason of ENTITY 4 not being required to repay more than 25% of the principal amount of the XXXXXXXXXX within five years of the date of the issue, the interests paid or credited on the XXXXXXXXXX to non-resident holders are not be subject to Canadian withholding tax pursuant to subparagraph 212(1)(b)(vii) of the Act.
ENTITY 4 may prepay without any penalties any credit facility subject to providing a XXXXXXXXXX business days' notice.
The Credit Agreement is governed by the laws of XXXXXXXXXX applicable therein.
Proposed Transaction
6. Subject to the receipt of favorable income tax ruling, the terms and conditions of the Credit Agreement will be amended in a reduction of the interest rate of the XXXXXXXXXX of approximately XXXXXXXXXX% on the basis of a written agreement entered into by and all the Lenders.
Purpose of the Proposed Transaction
The purpose of reducing the interest rate of the XXXXXXXXXX is to reflect the actual market rate that would be available to ENTITY 4 and will preclude ENTITY 4 to enter into a new financing.
8. The proposed modification to the XXXXXXXXXX will not result in a discharge of the original debt obligation and the issuance of a new debt obligation by under the applicable law.
9. The proposed amendment will not constitute a fundamental change to the basic elements of the XXXXXXXXXX. The Credit Agreement provides a procedure to modify the interest rate of the XXXXXXXXXX subject to the required approval by the Lenders. It is submitted that the proposed amendment will not be affecting the "very root" of the current XXXXXXXXXX, i.e. the identity of the debtor, the principle amounts of the loan, the entitlement to the interest and the maturity date of such loan. The proposed amendment is fully consistent with the continuing existence of the of the XXXXXXXXXX of the Credit Agreement since none of its essential features would be affected by the proposed amendment.
Rulings
10. Provided that the above description of facts, proposed transaction, purpose of the proposed transaction and additional information are accurate and constitute a complete and accurate disclosure of all of the relevant facts, proposed transaction and the purpose thereof, provided further that the proposed transaction is completed in the manner described above, we confirm that the proposed amendment to the XXXXXXXXXX will not, in and by itself, result in;
(i) a disposition thereof by the Lenders of their interest in the Credit Agreement under the definition set out in subsection 248(1) of the Act;
(ii) a new loan for the purposes of subparagraph 212(1)(b)(vii) of the Act; and
(iii) the application of the provisions of subsection 39(2) of the Act.
These ruling are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R5 dated May 17, 2002 and are binding on the CCRA provided that the proposed transactions are completed by XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this letter should be construed as implying that the CCRA has reviewed or is making a determination or ruling in respect of:
(a) the laws of XXXXXXXXXX governing the XXXXXXXXXX, specifically whether the proposed transaction results in the rescission of the XXXXXXXXXX and their substitution by a new obligation under such laws;
(b) any tax consequences with respect to the XXXXXXXXXX other than those as specifically described in the rulings given above including whether interest paid on the XXXXXXXXXX to a non-resident, prior to the proposed Amendment described in paragraph 6 above, qualifies for the exemption from tax payable pursuant to subparagraph 212(1)(b)(vii) of the Act; or
(c) any other tax consequences relating to any facts or proposed transactions referred to herein other than those as specifically described in the ruling given above.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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