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 Issues:
1. Whether a guarantee fee is deductible as a capital expense under 20(1)(e)(ii).
2. Whether the reimbursement of that guarantee fee is a capital receipt to be included under 12(1)(x), subject to an election under subsection 12(2.2).
3. Whether the assumption of the liability to pay a guarantee fee on behalf of someone else under the terms of a conditional sale agreement is deductible under subparagraph 20(1)(e)(ii.1).
4. Whether the guarantee fee paid to the non-resident is deemed to be interest under subsection 214(15).
5. Whether the guarantee fee paid to the Export-Import Bank of the United State is exempt from tax in Canada under paragraph 3(a) of Article XI of the Canada-US Convention.
6. Whether interest paid to a US bank on a loan guaranteed by the Export-Import Bank of the United State is exempt from tax in Canada under paragraph 3(b) of Article XI of the Canada-US Convention
Position:
1. Yes.
2. Yes.
3. Yes.
4. Yes.
5. Yes.
6. Yes
Reasons:
1. It is a financing expense of a capital nature and satisfies the requirements of subparagraph 20(1)(e)(ii).
2. Based on the Ikea decision.
3. It is an expense incurred in the course of incurring indebtedness that is an amount payable for property acquired.
4. Based on our interpretation of subsection 214(15) and consistent with our position in previous rulings given on similar transaction.
5. Based on the terms of the Treaty and consistent with our position in previous rulings involving similar transactions.
6. Based on the terms of the Treaty and consistent with our position in previous rulings involving similar transactions.
XXXXXXXXXX 2003-003728
Attention: XXXXXXXXXX
XXXXXXXXXX, 2003
Dear Sirs:
Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above named taxpayers. We also acknowledge the information provided in subsequent correspondence and during our 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 the ruling request:
(i) is in an earlier return of any of the taxpayers or a related person;
(ii) is being considered by a tax services office or taxation center in connection with a previously filed tax return of any of the taxpayers or a related person;
(iii) is under objection by any of the taxpayers or a related person; or
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.
Unless otherwise stated, all references herein to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (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.
Definitions
In this document unless otherwise expressly stated:
(a) "Aco" means XXXXXXXXXX;
(b) "Arm's length" has the meaning assigned by subsection 251(1);
(c) "Bco" means XXXXXXXXXX;
(d) "Cco" means XXXXXXXXXX;
(e) "Dco" means XXXXXXXXXX;
(f) "CCRA" means the Canada Customs and Revenue Agency;
(g) "Closing Balance" means the amount described in subparagraph 10c. below;
(h) "CSA" means the Conditional Sale Agreement described in subparagraph 10g. below;
(i) "Ex-Im" means the Export-Import Bank of the United States;
(j) "Guarantee Agreement" means the agreement described in subparagraph 10d. below; "Guarantee Fee" means the fee described in subparagraph 10d below;
(k) "Guaranteed Lender" means an arm's length financial institution that is a resident of the United States for the purposes of the Canada-United States Tax Convention (1980);
(l) "Guaranteed Lender Loan" means the loan provided to SPE by the Guaranteed Lender described in subparagraph 10c. below;
(m) "SPE" means XXXXXXXXXX, a special purpose entity to be incorporated in XXXXXXXXXX and described in paragraph 9 below;
(n) "USCO" means XXXXXXXXXX;
(o) "Property" means the XXXXXXXXX;
(p) "Partnership A" means XXXXXXXXXX partnership described in paragraph 3 below.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Facts
1. Aco was incorporated under the laws of the Province of XXXXXXXXXX and is a Canadian corporation, a public corporation and a taxable Canadian corporation as defined in subsection 89(1).
2. Aco owns XXXXXXXXXX% of the shares of Bco, Cco and Dco, XXXXXXXXXX corporations incorporated under the laws of the Province of XXXXXXXXXX, each of which is a Canadian corporation and a taxable Canadian corporation as defined in subsection 89(1).
3. Cco and Dco are the sole partners of Partnership A, a partnership formed under the laws of the Province of XXXXXXXXXX for the purpose of operating the XXXXXXXXXX business.
4. Bco owns certain assets, which it leases to Partnership A.
5. Bco has entered into an arrangement with USCO XXXXXXXXXX.
6. To facilitate financing of the property to be purchased from USCOXXXXXXXXXX Partnership A has entered into negotiations with Ex-Im to act as guarantor of financing arrangements to assist Partnership A to acquire the property XXXXXXXXXX.
7. Ex-Im is a US government agency not subject to tax in United States which, among other things, guarantees the repayment of loans by lenders to foreign purchasers of US goods. The Ex-Im guarantee allows Partnership A to borrow at advantageous financing terms.
8. The Guaranteed Lender is negotiating to assist Partnership A to finance the purchase of Property from USCO.
9. To facilitate completion of the transactions in a manner comparable to the form usually employed by Ex-Im, SPE has been incorporated in XXXXXXXXXX for the purpose of concluding the purchase and financing of the property. A XXXXXXXXXX trust, which is not directly related to any entity within the Partnership A group, owns all the issued and outstanding shares of SPE. Partnership A is indirectly related to SPE in that it has the ability to select the majority of the board of directors of SPE while it is not in default of its lending arrangements. The trustee of the XXXXXXXXXX trust is a corporation controlled by XXXXXXXXXX legal counsel. Upon all of the financing arrangements being paid in full and upon the termination of the XXXXXXXXXX trust, any residual assets are for the benefit of Partnership A and a charitable organization. At the end of the financing transaction it is anticipated that there will be minimal assets left in SPE for distribution. The trustee of the XXXXXXXXXX trust is authorized to distribute the remaining property of the trust to either Partnership A or a charitable organization in its sole discretion. SPE is registered as an extra-provincial corporation in XXXXXXXXXX members of SPE board of directors are resident in Canada. The business and affairs of SPE are managed by SPE board of directors. All of the meetings of SPE board of directors are held in Canada or by conference telephone at which at least a majority are present in Canada. Accordingly, SPE is resident in Canada for the purposes of the Act. The reason for Ex-Im's desire to interpose SPE is to enable Ex-Im to enforce its security over the Property in the event of default under the terms of the financing or the guarantee with a minimum of potential competing claims or "interference" by other potential creditors of Partnership A. It is expected that SPE would have no creditors other than Guaranteed Lender under the Guaranteed Lender Loan (as described below).
Proposed Transactions
10. It is intended that the closing of each Property purchase and financing transaction (the "Closing") will be governed by a closing agenda among the parties which will determine the terms and conditions upon which documents and funds will be executed and delivered, as applicable, by the parties. The structure of the transactions to be completed on a closing is as follows:
a. On each property delivery date, Bco will assign its right to purchase said Property to SPE, in consideration for SPE assuming Bco's obligation to pay the purchase price of said Property.
b. Partnership A will advance XXXXXXXXXX% of the purchase price of each individual Property to SPE under the terms of a Conditional Sale Agreement described in subparagraph 10g. below and will advance an additional amount of money to Ex-Im equal to the Guarantee Fee in subparagraph 10d. below to be held under escrow and subject to return by Ex-Im if all of the conditions of Closing are not satisfied by the parties.
c. The Guaranteed Lender will advance to SPE XXXXXXXXXX% of the purchase price of each individual Property (the "Closing Balance"), plus an amount equal to XXXXXXXXXX% of the XXXXXXXXXX% advance under a loan agreement (the "Guaranteed Lender Loan") requiring principal and interest payments over a XXXXXXXXXX-year period sufficient to entirely repay the principal and interest over that period of time.
d. Ex-Im will agree (the "Guarantee Agreement") to guarantee repayment of the Guaranteed Lender Loan by SPE in consideration for payment by SPE of a fee equal to XXXXXXXXXX% of XXXXXXXXXX% of the purchase price of the Property (the "Guarantee Fee").
e. Using funds received from Partnership A and the Guaranteed Lender, SPE will acquire each individual Property from USCO.
f. From the Guaranteed Lender Loan proceeds, SPE will advance to Partnership A an amount equivalent to the Guarantee Fee in consideration for Partnership A assuming the liability to pay to Guaranteed Lender principal in an amount equal to the Guarantee Fee, together with interest thereon, due from time to time under the terms of the Guaranteed Lender Loan.
g. SPE will immediately sell each Property acquired from USCO in paragraph 10e. above to Partnership A under a conditional sales agreement (the "CSA") in consideration for (1) the amount described in paragraph 10b. above and (2) the payment of an amount equal to the Closing Balance describe in paragraph 10c. above. SPE will provide advantageous financial terms to Partnership A under the CSA, similar to the ones received on the Guaranteed Lender Loan resulting from Ex-Im's guarantee, and, in consideration, Partnership A will reimburse SPE's expense in respect of the Guarantee Fee by assuming SPE's liability to pay the Guarantee Fee at the Closing.
h. XXXXXXXXXX of the CSA reads as follows:
XXXXXXXXXX.
i. As security for the guarantee of the Guaranteed Lender Loan to SPE it is expected that Ex-Im will require at least:
- a first priority mortgage over the Property,
- an assignment of all rights and interests in and to the Property, including insurance proceeds,
- an assignment of SPE's rights under the CSA,
- a pledge of the shares of SPE, and
- a pledge or charge on the bank account into which all debt payments are to be paid.
Upon execution and delivery of all other amounts, deeds and required documentation as agreed by the parties in the closing agreement (a document used to establish the conditions upon which each deed or agreement is to take effect, and that stipulates that none of the steps will have occurred if all have not occurred), the rights and obligations of the parties as set forth in the agreements described in paragraphs 10a. to i. above will be released from escrow and become enforceable as against one another. As a consequence, and without limitation, the liability to pay the Guarantee Fee will be assumed by Partnership A and the funds advanced by Partnership A to Ex-Im in paragraph 10b. above will become unconditionally available to Ex-Im to satisfy the liability of SPE and Partnership A, respectively, to pay the Guarantee Fee.
11. Following the purchase of each Property:
a. Partnership A will pay to SPE principal and interest in respect of the amount payable under the CSA (i.e. XXXXXXXXXX% of the purchase price of each individual Property) over XXXXXXXXXX years on terms and conditions which will mirror the repayment of the portion of the Guaranteed Lender Loan equivalent to the Closing Balance. Partnership A will also pay amounts equal to principal and interest on the portion of the Guaranteed Lender Loan attributable to the amount of the Guarantee Fee as such amounts become due for payment to Guaranteed Lender under the terms of the Guaranteed Lender Loan.
b. Under the terms of the CSA, title to the Property will remain with SPE until final payment under the CSA has been made to SPE and the final payment on the Guaranteed Lender Loan has been made by SPE to the Guaranteed Lender.
c. The interest rate on the amount outstanding under the CSA is expected to be fractionally higher than the interest rate payable by SPE to the Guaranteed Lender under the Guaranteed Lender Loan, to enable SPE to cover its costs.
d. Under the terms of the CSA, Partnership A will be obliged to pay or reimburse SPE for all fees and expenses incurred in connection with arranging the Guaranteed Lender Loan and concluding the CSA.
e. Following the final payment under the CSA and the Guaranteed Lender Loan, title to the Property will be conveyed to Partnership A in accordance with the terms and conditions of the CSA.
12. Upon the payment by Partnership A of the Guarantee Fee to Ex-Im on behalf of SPE, SPE will make an election under subsection 12(2.2) for the total of the Guarantee Fee in the year of the payment.
Purpose of Transactions
13. The purpose of the transactions is to facilitate the acquisition and financing of Property on financially advantageous terms. The Ex-Im guarantee facilitates Partnership A borrowing funds at a cost which is lower than the cost of funds if Partnership A were required to rely on its own or Aco's credit capacity.
14. The purpose of SPE is to facilitate Ex-Im or the Guaranteed Lender realizing on their security in the most efficient manner in the event of Partnership A's default under the CSA.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, our rulings are as follows:
A. The Guarantee Fee paid or credited to Ex-Im by SPE under the Guarantee Agreement will be an expense described in subparagraph 20(1)(e)(ii) but, pursuant to subsection 12(2.2), the amount of this expense will be deemed to be nil for the purpose of computing SPE's income.
B. The payment of the Guarantee Fee to Ex-Im by Partnership A on behalf of SPE under the CSA is an amount received by SPE described in subparagraph 12(1)(x)(i) to (iv), but will not be included in computing SPE's income by virtue of subparagraph 12(1)(x)(vii).
C. The expense incurred by Partnership A to obtain advantageous financing terms under the CSA and discharged by paying the Guarantee Fee to Ex-Im on behalf of SPE will be deductible in computing Partnership A's income under subparagraph 20(1)(e)(ii.1).
D. The Guarantee Fee paid or credited to Ex-Im under the Guarantee Agreement will be deemed interest paid to Ex-Im on the Guaranteed Lender Loan by virtue of paragraph 214(15)(a), and will be exempt from tax under paragraph 212(1)(b) by virtue of paragraph 3(a) of Article XI of the Canada-US Tax Convention.
E. The Interest paid or credited by SPE to the Guaranteed Lender under the Guaranteed Lender Loan will be exempt from tax under paragraph 212(1)(b) by virtue of paragraph 3(b) of Article XI of the Canada-US Tax Convention.
Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed any tax consequences (including in particular the potential application of section 94) relating to the facts and proposed transactions described herein other than as specifically described in the ruling given above.
These rulings are given subject to the limitations and qualifications set out in Information Circular IC 70-6R5 issued by CCRA on May 17, 2002 and are binding on CCRA provided the proposed transactions are carried out by SPE and Partnership A on or before XXXXXXXXXX. These rulings are provided based on the Act as it currently reads and do not take into account any proposed amendments.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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