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:
XXXXXXXXXX
Position:
Favorable ruling given.
REASON:
XXXXXXXXXX 2001-009054
XXXXXXXXXX, 2001
Dear Sir/Madam:
Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
This is in response to your letter dated XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in subsequent telephone conversations in connection with your request (XXXXXXXXXX), your amended and restated advance income tax ruling request dated XXXXXXXXXX, our meeting (XXXXXXXXXX) as well as additional correspondence.
To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:
(i) dealt with in an earlier return of the taxpayers or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of one or any of the taxpayers or a related person;
(iii) under objection by one or any of the taxpayers or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or
(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.
In this letter, the following terms have the meanings specified:
(a) "Act" means the Income Tax Act, R.S.C 1985 (5th Supp.) c.1, as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
(b) "arm's length" has the meaning assigned by section 251;
(c) "Asset # 1" means the XXXXXXXXXX which includes:
(i) XXXXXXXXXX;
(ii) XXXXXXXXXX;
(iii) XXXXXXXXXX;
(iv) XXXXXXXXXX; and
(v) goodwill;
(d) "Assets" means the primary assets owned by Canco # 3, XXXXXXXXXX which are:
(i) Asset # 1; and
(ii) the Operating Assets (trade and other accounts receivable, XXXXXXXXXX;
(e) "Bank" means the XXXXXXXXXX;
(f) "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);
(g) "Canco # 1" means XXXXXXXXXX;
(h) "Canco # 2" means XXXXXXXXXX;
(i) "Canco # 3" means XXXXXXXXXX;
(j) "Canco # 4" means XXXXXXXXXX;
(k) "Canco # 5" means XXXXXXXXXX. The issued and outstanding common shares of Canco # 5 are beneficially owned by Canco # 2;
(l) "Canco # 6" means XXXXXXXXXX. The issued and outstanding common shares of Canco # 6 are beneficially owned by Canco # 2;
(m) "Canco # 7" means XXXXXXXXXX. The issued and outstanding common shares of Canco # 7 are beneficially owned by Canco # 2;
(n) "Canco # 8" means XXXXXXXXXX. The issued and outstanding common shares of Canco # 8 are beneficially owned by Canco # 3;
(o) "Canco # 9" means XXXXXXXXXX. The issued and outstanding common shares of Canco # 9 are beneficially owned by Canco # 3;
(p) "Company A" means XXXXXXXXXX;
(q) "Company B" means XXXXXXXXXX and related corporations;
(r) "Creditor # 1" means XXXXXXXXXX;
(s) "Creditor # 2" means XXXXXXXXXX;
(t) "Debt # 1" means $XXXXXXXXXX payable by Canco # 3 to Canco # 8 as described in paragraph 6 below;
(u) "Debt # 2" means $XXXXXXXXXX payable by Canco # 3 to Canco # 9 as described in paragraph 7 below;
(v) "Debt # 3" means $XXXXXXXXXX payable by Canco # 3 to XXXXXXXXXX as described in subparagraph (jj)(i) below;
(w) "Debt # 4" means $XXXXXXXXXX owing by Canco # 3 in respect of operating liabilities of Asset # 1 as described in subparagraph (jj)(xi) below;
(x) "Debt # 5" means approximately $XXXXXXXXXX payable by Canco # 3 to Creditor # 2 as described in subparagraph (jj)(iv) below;
(y) "Debt # 6" means approximately $XXXXXXXXXX payable by Canco # 3 to Creditor # 2 as described in subparagraph (jj)(v) below;
(z) "Debt # 7" means approximately $XXXXXXXXXX payable by Canco # 3 to Creditor # 1 as described in subparagraph (jj)(vi) below;
(aa) "Debt # 8" means amounts totalling approximately $XXXXXXXXXX payable by Canco # 3 to Creditor # 1 as described in subparagraph (jj)(vii) below;
(bb) "Debt # 9" means approximately $XXXXXXXXXX payable by Canco # 3 to Creditor # 1 as described in subparagraph (jj)(viii) below;
(cc) "Debt # 10" means $XXXXXXXXXX payable by Canco # 3 to Creditor # 1 as described in subparagraph (jj)(ix) below;
(dd) "Debt # 11A" means $XXXXXXXXXX owing by Canco # 3 to Canco # 2 and
"Debt # 11B" means $XXXXXXXXXX owing by Canco # 3 to Canco # 2 as described in subparagraph (jj)(x) below;
(ee) XXXXXXXXXX;
(ff) XXXXXXXXXX;
(gg) "Lender # 1" means XXXXXXXXXX which deals at arm's length with all parties referred to in this Ruling;
(hh) "Lender # 2" means XXXXXXXXXX who deal at arm's length with the XXXXXXXXXX Group as defined in paragraph 10 below;
(ii) "Lender # 3" means the XXXXXXXXXX;
(jj) "Liabilities" and "Liabilities of Canco # 3" means the primary liabilities of Canco # 3 and are estimated (at XXXXXXXXXX, US dollars converted at approximately 1.5) to consist of:
i) Debt # 3, a loan owing XXXXXXXXXX;
ii) Debt # 1, ($XXXXXXXXXX) owing to Canco # 8;
iii) Debt # 2, ($XXXXXXXXXX) owing to Canco # 9;
iv) Debt # 5, a loan owing to Creditor # 2, as evidenced by a loan agreement XXXXXXXXXX;
v) Debt # 6, a second loan owing to Creditor # 2, as evidenced by a loan agreement XXXXXXXXXX;
vi) Debt # 7, a loan owing to Creditor # 1 in the amount of approximately $XXXXXXXXXX, consisting of principal of $XXXXXXXXXX and accrued interest of $XXXXXXXXXX. Interest accrues on this loan at the EuroCanadian rate plus XXXXXXXXXX % per annum. The maturity date is XXXXXXXXXX.
vii) Debt # 8, loans owing to Creditor # 1 in the amount of approximately $XXXXXXXXXX consisting of principal of $XXXXXXXXXX and accrued interest aggregating approximately $XXXXXXXXXX. Interest accrues on this loan at prime plus XXXXXXXXXX % per annum.
viii) Debt # 9, a loan owing to Creditor # 1 in the principal amount of $XXXXXXXXXX;
ix) Debt # 10, amounts owing to Creditor # 1 on account of "XXXXXXXXXX", as that term is defined in paragraph 83 of the Canco # 3 Ruling, XXXXXXXXXX, in the aggregate amount of $XXXXXXXXXX. XXXXXXXXXX;
x) Debt # 11A, amounts owing to Canco # 2 in the amount of $XXXXXXXXXX, and Debt # 11B, amounts owing to Canco # 2 under the Canco # 2 XXXXXXXXXX of $XXXXXXXXXX;
xi) Debt # 4, aggregate amounts owing totalling $XXXXXXXXXX which is comprised of amounts owing by Canco # 3 XXXXXXXXXX of Asset # 1, XXXXXXXXXX;
(kk) XXXXXXXXXX;
(ll) "matchable expenditure" has the meaning assigned by subsection 18.1(1);
(mm) "Newco" means a new corporation, as described in paragraph 16 below;
(nn) XXXXXXXXXX;
(oo) XXXXXXXXXX;
(pp) XXXXXXXXXX;
(qq) XXXXXXXXXX;
(rr) XXXXXXXXXX;
(ss) XXXXXXXXXX;
(tt) XXXXXXXXXX;
(uu) XXXXXXXXXX;
(vv) "Regulations" means the regulations to the Act;
(ww) "right to receive production" has the meaning assigned by subsection 18.1(1)
(xx) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);
Any references to an amount of money are expressed in Canadian dollars, unless otherwise indicated.
FACTS
1. Canco # 1 is a taxable Canadian corporation and a Canadian-controlled private corporation. The outstanding common shares of Canco # 1 are held as to approximately XXXXXXXXXX% by Canco # 4. Canco # 1 owns, directly and indirectly, all of the issued and outstanding shares of Canco # 2 and a controlling interest in Canco # 3.
XXXXXXXXXX
XXXXXXXXXX
2. Canco # 2 is a taxable Canadian corporation and a Canadian-controlled private corporation.
Canco # 2's authorized share capital consists of an unlimited number of common shares and XXXXXXXXXX non-voting XXXXXXXXXX Special Shares. The issued and outstanding share capital of Canco # 2 is comprised of XXXXXXXXXX common shares all of which are owned by Canco # 1.
XXXXXXXXXX
3. Canco # 2 has three subsidiary corporations, Canco # 5, Canco # 6 and Canco # 7.
XXXXXXXXXX.
4. Canco # 3 is a taxable Canadian corporation and a Canadian-controlled private corporation. Canco # 3's authorized share capital is comprised of an unlimited number of common shares, an unlimited number of XXXXXXXXXX preferred shares, an unlimited number of XXXXXXXXXX preferred shares and an unlimited number of XXXXXXXXXX preferred shares. The issued and outstanding share capital of Canco # 3 is comprised of XXXXXXXXXX common shares, XXXXXXXXXX preferred shares, XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares and are owned as follows:
Shareholder
Common
XXXXXXXXXX Preferred
XXXXXXXXXX Preferred
XXXXXXXXXX Preferred
Canco # 1
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Arm's length parties
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Totals
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX Canco # 3 commenced operations on XXXXXXXXXX.
5. Canco # 3 has two subsidiary corporations, Canco # 8 and Canco # 9. XXXXXXXXXX.
6. The issued and outstanding share capital of Canco # 8 includes XXXXXXXXXX special shares. XXXXXXXXXX.
7. The issued and outstanding share capital of Canco # 9 includes XXXXXXXXXX special shares outstanding, which are effectively securitized XXXXXXXXXX (Debt # 2), a loan (in the amount of $XXXXXXXXXX ) owing to Canco # 9 by Canco # 3. XXXXXXXXXX.
8. XXXXXXXXXX.
9. XXXXXXXXXX.
10. Corporations that are controlled directly or indirectly by XXXXXXXXXX include the following:
(a) XXXXXXXXXX
(b) XXXXXXXXXX
(c) XXXXXXXXXX
(d) XXXXXXXXXX
(e) XXXXXXXXXX
(f) XXXXXXXXXX
(g) XXXXXXXXXX
(h) XXXXXXXXXX
(i) XXXXXXXXXX
(j) XXXXXXXXXX
(k) XXXXXXXXXX
(l) Canco # 1
(m) Canco # 2
(n) Canco # 5
(o) Canco # 6
(p) Canco # 7
(q) XXXXXXXXXX
(r) Canco # 3
(s) Canco # 8
(t) Canco # 9
XXXXXXXXXX.
XXXXXXXXXX.
11. XXXXXXXXXX.
12. XXXXXXXXXX.
XXXXXXXXXX.
13. XXXXXXXXXX.
14. XXXXXXXXXX.
PROPOSED TRANSACTIONS
Preliminary Transactions
15. Canco # 1 will sell its shares in the capital stock of Canco # 2 and Canco # 3. XXXXXXXXXX.
XXXXXXXXXX wishes to move the shares of Canco # 2 and Canco # 3 out from under Canco # 1 and into another corporation within the XXXXXXXXXX Group XXXXXXXXX.
16. Canco # 2 will cause a new company to be incorporated under the laws of Canada or of a Province, ("Newco"). The authorized share capital of Newco will consist of an unlimited number of common shares and XXXXXXXXXX classes of preferred shares.
XXXXXXXXXX.
17. XXXXXXXXXX.
Amendments to License Agreement between Canco # 2 and Canco # 3
18. Canco # 2 will enter into an agreement XXXXXXXXXX:
- XXXXXXXXXX
- XXXXXXXXXX
- XXXXXXXXXX
XXXXXXXXXX.
19. XXXXXXXXXX.
XXXXXXXXXX.
20. XXXXXXXXXX.
21. XXXXXXXXXX.
22. XXXXXXXXXX.
23. XXXXXXXXXX.
24. XXXXXXXXXX.
25. XXXXXXXXXX.
26. XXXXXXXXXX.
XXXXXXXXXX.
27. XXXXXXXXXX.
28. XXXXXXXXXX.
XXXXXXXXXX.
29. XXXXXXXXXX.
30. XXXXXXXXXX.
31. XXXXXXXXXX.
Sources and Uses of Funds by Canco # 3
32. Canco # 3 will use a portion of the funds it has received to that time from the sale XXXXXXXXXX :
(a) repay the Canco # 3 Note of $XXXXXXXXXX, described in paragraph 30 above, to Canco # 2;
(b) XXXXXXXXXX;
(c) pay the XXXXXXXXXX Fee of $XXXXXXXXXX, described in paragraph 30 above, to Canco # 2;
(d) XXXXXXXXXX;
(e) pay Debt # 11B of $XXXXXXXXXX to Canco # 2.
After the transactions described in this paragraph, Canco # 3 will have $XXXXXXXXXX of funds remaining related to the Proposed Transactions.
Sources and Uses of Funds by Canco # 2
33. Canco # 2 will now have funds on hand of $XXXXXXXXXX relating to the Proposed Transactions, consisting of the funds received from Canco # 3, as described in paragraph 27 above.
34. XXXXXXXXXX.
After the transactions described above in this paragraph, Canco # 2 will have $XXXXXXXXXX of funds remaining related to the Proposed Transactions.
XXXXXXXXXX.
XXXXXXXXXX.
35. XXXXXXXXXX.
36. XXXXXXXXXX.
37. XXXXXXXXXX.
38. XXXXXXXXXX
(i) XXXXXXXXXX
(ii) XXXXXXXXXX
(iii) XXXXXXXXXX.
Sources and Uses of Funds by Canco # 2
39. Canco # 2 will use:
(a) the $XXXXXXXXXX proceeds of the Canco # 2 Loan, described in paragraph 37 above;
(b) XXXXXXXXXX;
(c) XXXXXXXXXX;
(d) cash on hand of $XXXXXXXXXX, described in paragraph 34 above to:
(a) repay the Canco # 2/Canco # 3 Loan in the amount of $XXXXXXXXXX, described in paragraph 32(b) above;
(b) make a loan to Canco # 3 in the amount of $XXXXXXXXXX;
(c) XXXXXXXXXX;
(d) XXXXXXXXXX;
(e) XXXXXXXXXX;
(f) the balance of $XXXXXXXXXX will be retained for working capital purposes.
Sources and Uses of Funds by Canco # 3
40. Canco # 3 will use its funds to:
(a) repay Debt # 1, Debt # 2, Debt # 3, Debt # 11A and the Canco # 3/ XXXXXXXXXX of $XXXXXXXXXX, described in paragraph 28 above;
(b) XXXXXXXXXX;
(c) pay other XXXXXXXXXX fees XXXXXXXXXX estimated to be approximately $XXXXXXXXXX.
XXXXXXXXXX.
41. XXXXXXXXXX.
42. XXXXXXXXXX.
PURPOSE OF THE PROPOSED TRANSACTIONS
43. XXXXXXXXXX.
RULINGS GIVEN
Provided that the above description of facts, proposed transactions, purpose of the proposed transaction and other information are accurate and constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose thereof, and provided further that the proposed transactions are completed in the manner described above, we confirm that:
A. Provided that during the period that begins 30 days before and ends 30 days after Canco # 3 disposes of the rights and obligations XXXXXXXXXX as described in paragraph 27 above, none of Canco # 3 or a person affiliated or who does not deal at arm's length with Canco # 3 does not acquire a right to receive production that is, or is identical to any particular right to receive production to which a matchable expenditure relates, to the extent that XXXXXXXXXX described in paragraph 18 above paid by Canco # 3 is a matchable expenditure, the amount deductible in computing Canco # 3's income for the year under subsection 18.1(3) of the Act in respect of that portion of XXXXXXXXXX will be deemed to be the amount, if any, determined under paragraph 18.1(4)(c) of the Act for the year in respect of that portion of the XXXXXXXXXX.
B. XXXXXXXXXX.
C. Provided that:
(a) the Canco # 2 Loan as described in paragraph 37; and
(b) XXXXXXXXXX,
continue to be held for the purpose of gaining or producing income from property (other than income which would be exempt), XXXXXXXXXX entitled to deduct, in computing its income for a taxation year, pursuant to paragraph 20(1)(c), the lesser of interest paid or payable in respect of that taxation year on the Lender # 2 Loan.
D. The exemption from withholding tax in subparagraph 212(1)(b)(vii) will not be denied in respect of interest paid XXXXXXXXXX Lender # 2 Loan as described in paragraph 35 above to Lender # 2 XXXXXXXXXX.
E. The amount of XXXXXXXXXX Loan Fee, as described in paragraph 35 above, will be deductible by XXXXXXXXXX in accordance with the provisions of subparagraph 20(1)(e)(ii) to the extent that such amount is reasonable in the circumstances.
F. The amount of the XXXXXXXXXX described in paragraph 37 above will be deductible by Canco # 2 in accordance with the provisions of subparagraph 20(1)(e.1) to the extent that such amount is reasonable in the circumstances.
G. Provided that Canco # 2 is entitled to a deduction pursuant to paragraph 20(1)(c) in respect of interest paid or payable on the Canco # 2/Canco # 3 Loan as described in paragraph 32(b) above and provided that the Canco # 2/Lender # 1 Loan as described in paragraph 34 above continues to be held for the purpose of gaining or producing income from property (other than income which would be exempt), Canco # 2 will be entitled to deduct for a taxation year pursuant to subsection 20(3) and paragraph 20(1)(c) the interest paid or payable on such portion of the funds borrowed pursuant to the Canco # 2 Loan as described in paragraph 37 of the Proposed Transactions.
H. XXXXXXXXXX.
I. Subsection 245(2) 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.
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R4 (the "Circular") issued by the CCRA on January 29, 2001, and are binding provided the proposed transactions are completed on or before XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act.
Nothing in this letter should be construed as implying that CCRA has agreed to or accepted any other tax consequences of the proposed transactions or of related transactions or events that are not described herein.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 2001
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