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: Interest Expense on Funds borrowed from an offshore affiliate and used to purchase preferred shares of another offshore affiliate
Position: OK
Reasons: The proceeds from the preferred share subscription will be used to make a third-party acquisition and any value increase in this investment will ultimately accrue to the Canadian borrowed
XXXXXXXXXX
XXXXXXXXXX 1999-001120
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX
XXXXXXXXXX
We are writing in response to your correspondence of XXXXXXXXXX wherein you had requested an advance income tax ruling on behalf of XXXXXXXXXX. We also acknowledge our (XXXXXXXXXX) various telephone conversations in furtherance of this matter.
You have advised that, to the best of the knowledge of yourself and of responsible officials of XXXXXXXXXX, none of the issues being considered in this advance income tax ruling request is involved in an income tax return of either of XXXXXXXXXX, is being considered by a Taxation Services Office or Taxation Centre of Canada Customs and Revenue Agency, is the subject of an objection or appeal or is the subject of a previously issued advance income tax ruling.
FACTS
1. XXXXXXXXXX ("ACO") is a "private corporation", within the meaning of that term in subsection 89(1) of the Income Tax Act (Canada) (the "Act"), resident in Canada. ACO is a holding and finance company. The only assets of ACO consist of shares of CCO and shares of and loans to BCO.
All of the issued shares of ACO are owned by XXXXXXXXXX ("DCO"), a company incorporated in and resident in XXXXXXXXXX.
DCO is an indirect wholly-owned subsidiary of XXXXXXXXXX.
2. XXXXXXXXXX ("BCO") is a corporation incorporated in and resident in Canada which carries on the business of XXXXXXXXXX. All of the shares of BCO are owned by ACO.
3. XXXXXXXXXX ("CCO") is a corporation incorporated in the XXXXXXXXXX which is resident in Canada for purposes of the Act.
4. CCO owns all of the ordinary shares of XXXXXXXXXX ("ECO"). The Class B shares of ECO are owned by XXXXXXXXXX and have fully paid share capital of XXXXXXXXXX is incorporated in and resident in the XXXXXXXXXX and is a subsidiary of XXXXXXXXXX.
ECO is a XXXXXXXXXX resident corporation which is in the business of making loans. At the present time, approximately all of the assets of ECO consist of loans to XXXXXXXXXX ("FCO") which is a XXXXXXXXXX resident corporation and an indirect subsidiary of XXXXXXXXXX.
The holder of the Class B shares has the right to be paid a Class B dividend out of the first $XXXXXXXXXX per annum profits available for distribution and resolved to be distributed in respect of each accounting period of ECO at a rate to be determined by the directors in their absolute discretion but not, in any event, exceeding XXXXXXXXXX% of such profits. Additionally, the holder of the Class B shares have the right to be paid rateably with the holder of the Ordinary Shares, an additional Class B dividend out of the profits in excess of $XXXXXXXXXX per annum available for distribution and resolved to be distributed in respect of each accounting period of ECO.
The Class B shares confer on the holder the right to attend all general meetings but no right to speak or vote at any general meeting.
PROPOSED TRANSACTIONS
5. DCO will lend up to $XXXXXXXXXX (the "Loan") to ACO. The relevant terms and conditions of the Loan are as follows:
a) The Loan will be subordinate to all other creditors;
b) Interest, at the "Applicable Rate", will accrue daily on the outstanding principal amount and will be payable periodically on each "Payment Date";
c) "Payment Date" is defined to be XXXXXXXXXX;
d) "Quarter" is defined as any three consecutive months ending on a Payment Date;
e) The "Applicable Rate" of interest for any Quarter is equal to a nominal annual interest rate equal to the XXXXXXXXXX as established at the time of issue and re-established every five years (the "Interest Rate") by XXXXXXXXXX multiplied by a fraction, the numerator of which is the Related Adjusted Net Income and the denominator of which is the Related Average Adjusted Net Income. The cumulative interest paid for a fiscal year cannot exceed the XXXXXXXXXX.
f) "Adjusted Net Income" is defined as consolidated net income computed in accordance with Canadian Generally Accepted Accounting Principles before deduction of any amortization of goodwill arising on stock acquisitions, interest and income taxes.
g) "Related Adjusted Net Income" is Adjusted Net Income for the most recently completed Quarter of the Corporation ending on or prior to the immediately preceding Payment Date, or, in the case of the first Payment Date, XXXXXXXXXX.
h) "Related Average Adjusted Net Income" with respect to any Payment Date is defined as the quotient obtained by dividing 4 into the sum of the Adjusted Net Income or Loss, as the case may be, for each of the 4 most recently completed Quarters of ACO ending on or prior to the immediately preceding Payment Date or, in the case of the first payment date, XXXXXXXXXX.
i) Except in the event of a liquidation or insolvency of ACO, the Loan will be settled by ACO upon demand by DCO by the issuance of fully paid, voting preferred shares redeemable at the option of the issuer at an amount equal to the principal amount of the debt. The preferred shares will have a cumulative dividend payable at the discretion of the board of directors equal to the Applicable Rate of Interest.
j) In the event of a liquidation or insolvency of ACO, the Loan will be repayable in cash equal to the principal amount of the loan.
k) For greater certainty, in the event that Related Adjusted Net Income is less than $1, it is deemed to be zero for all purposes other than the determination of Related Average Adjusted Net Income.
6. ACO will use up to $XXXXXXXXXX of the Loan to advance to its Canadian subsidiary, BCO (the "BCO Loan"). Interest earned by ACO on the BCO Loan will exceed the interest payable by ACO to DCO on the Loan.
7. The terms and conditions of the BCO Loan are as follows:
a) The BCO Loan will be repayable in cash or in kind upon demand.
b) Interest, at the Applicable Rate, will accrue daily on the outstanding principal amount and be payable periodically on each Payment Date.
c) "Payment Date" is defined as XXXXXXXXXX.
d) "Quarter " is defined as any 3 consecutive months ending on a Payment Date.
e) The "Applicable Rate" of interest for any Quarter is equal to the Applicable Rate of Interest on the Loan plus 10 basis points.
f) The first payment date will be XXXXXXXXXX.
8. BCO will use up to $XXXXXXXXXX of the BCO Loan proceeds to refinance current operations (including approximately $XXXXXXXXXX to refinance existing debt which was incurred to acquire assets used in the course of its business) and, or, pay dividends, the latter of which will not exceed the lesser of the retained earnings of BCO or $XXXXXXXXXX and the balance of the proceeds of the BCO Loan will be used to acquire the preferred shares of ECO.
The preferred shares of ECO will be redeemable at the option of the holder for an amount equal to the amount paid in. The preferred shares will carry a cumulative dividend entitlement equal to the XXXXXXXXXX. Dividends will be payable each Quarter on the Payment Date.
9. FCO will repay its loan from ECO and ECO will use these funds, in conjunction with the proceeds received upon the issue of the preferred shares to DCO to acquire XXXXXXXXXX.
RULINGS PROVIDED
Provided that the above statements of Fact are accurate and complete and that the Proposed Transactions are undertaken as described, the following rulings are provided:
A. Subject to the provisions of subsection 18(4) of the Act, interest on the funds borrowed by ACO from DCO and used by ACO to lend to BCO, as described in paragraph 6 of the Proposed Transactions, that is paid or payable in respect of a period in a taxation year during which the BCO Loan is outstanding will, pursuant to paragraph 20(1)(c) of the Act, be deductible by ACO in computing its income for tax purposes for that taxation year.
B. Interest on the portion of the funds borrowed by BCO from ACO and used by BCO to subscribe for the preferred shares of ECO, as described in paragraph 8 of the Proposed Transactions, that is paid or payable in respect of a period in a taxation year during which those ECO preferred shares are owned by BCO will, pursuant to paragraph 20(1)(c) of the Act, be deductible by ECO in computing its income for tax purposes for that taxation year.
C. Interest on the portion of the funds borrowed by BCO from ACO and used by BCO to pay dividends, as described in paragraph 8 of the Proposed Transactions, that is paid or payable in respect of a taxation year will, pursuant to paragraph 20(1)(c) of the Act, be deductible by BCO in computing its income for tax purposes for that taxation year to the extent that such portion of the borrowed funds does not exceed the retained earnings of BCO immediately prior to the payment of the dividends.
D. Interest on the portion of the funds borrowed by BCO from ACO and used by BCO to refinance existing debt, the proceeds of which was used to acquire assets used in the course of earning income from the business of BCO, that is paid or payable in respect of a taxation year will, pursuant to subsection 20(3) and paragraph 20(1)(c) of the Act, be deductible by BCO in computing its income for tax purposes for that taxation year.
E. Interest on the portion of the funds borrowed by BCO from ACO and used by BCO for working capital purposes that is paid or payable in respect of a taxation year will, pursuant to paragraph 20(1)(c) of the Act, be deductible by BCO in computing its income for tax purposes for that taxation year to the extent that such portion of the funds continue to used by BCO for the purpose of earning income from a business or from property.
F. Subsection 245(2) of the Act will not be applicable as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
These rulings are provided subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and are binding upon the Agency provided that the proposed transactions are completed on or before XXXXXXXXXX. The rulings are based on the Act and the Income Tax Regulations in their present form and do not take into account the effects of any proposed amendments thereto.
Yours truly,
Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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