2006 Ruling 2006-0194191R3 - Withholding Tax

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.

Principal Issues: Are the 2 tranches under the Financing Agreement exempt

Position: YES. Although there are 2 obligations, there is but one debt issue and subparagraph 212(1)(b)(vii) will exempt the interest provided no more than 25% of the principal amount of the debt issue is not due within 5 years and none of the obligations mature within 5 years from the date of issue of that obligation.

Reasons: Reading of the Act -clause 212(1)(b)(vii)(A)

XXXXXXXXXX 							2006-019419

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("A Co")

This is in reply to your letters XXXXXXXXXX, and further to numerous telephone conversations and e-mails during XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the above-named corporation with respect to a withholding tax exemption under subparagraph 212(1)(b)(vii) of the Income Tax Act (the "Act").

To the best of your knowledge and that of the taxpayer, none of the issues involved in the rulings contained herein is:

(i) dealt with in a return of A Co or a related person;

(ii) being considered by any tax services office or taxation centre in connection with a previously filed tax return of A Co or a related person;

(iii) under objection by A Co or a related person;

(iv) the subject of a ruling previously issued by the Income Tax Rulings Directorate of the CRA to A Co or a related party; nor

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

All references to dollar amounts are to amounts in US currency.

Definitions:

(a) "25% Cap" means the limitation on A Co's payment obligations on Term Loan A and is further described in 17 below;

(b) "A Co" means XXXXXXXXXX, an unlimited liability company formed under the laws of XXXXXXXXXX and a "taxable Canadian corporation" as defined in subsection 89(1) of the Act. All the issued and outstanding shares of A Co are owned by Canada Topco;

(c) "Agent" means XXXXXXXXXX, a non-resident corporation, the collateral agent and administrative agent for the Financing Agreement;

(d) "B Co" means XXXXXXXXXX, one of the shareholders of E Co.;

(e) "Canada Topco" means XXXXXXXXXX, an unlimited liability corporation formed under the laws of XXXXXXXXXX and a "taxable Canadian corporation" as defined in subsection 89(1) of the Act. All of the issued shares of Canada Topco are owned by US Midco;

(f) "XXXXXXXXXX Site" means the Facility located at XXXXXXXXXX;

(g) "Change of Control" means each occurrence of any of the following:

(i) (I) US Topco shall cease to have beneficial ownership of XXXXXXXXXX% of the voting shares of US Midco; (II) US Midco shall cease to have beneficial ownership of XXXXXXXXXX% of the voting shares of Canada Topco; or (III) Canada Topco shall cease to have beneficial ownership of XXXXXXXXXX% of the voting shares of A Co;

(ii) (I) A Co shall cease to have beneficial ownership of XXXXXXXXXX% of the voting shares of E Co; (II) E Co shall cease to have beneficial ownership of at least XXXXXXXXXX% of the aggregate voting power in respect of E LP; or

(iii) with certain exceptions, any transaction pursuant to which A Co or any guarantor under the Loan Document either: (I) consolidates, amalgamates or merges with another entity or (II) conveys, transfers or leases all or substantially all of its property and assets to another person;

(h) "Code" means the US Internal Revenue Code of 1986, as amended;

(i) "Collection Account" means the collection account described in 17, 18 and 19 below;

(j) "CRA" means the Canada Revenue Agency;

(k) "E Co" means XXXXXXXXXX, the existing corporation that owns and operates the Facility. All of the issued shares of E Co are owned by B Co and R Co;

(l) "E LP" means the XXXXXXXXXX to be formed under the laws of XXXXXXXXXX pursuant to the E LP Agreement between T LP as limited partner and T Co as the initial general partner (which general partnership interest will be subsequently transferred to Target to be the general partner);

(m) "E LP Agreement" means the written partnership agreement to be made between T Co as the initial general partner and T LP as the limited partner;

(n) "Events of Default" means the events of default under the Financing Agreement as summarized in 11 below;

(o) "Facility" means the XXXXXXXXXX;

(p) "Final Maturity Date" means the day after the XXXXXXXXXX anniversary of the Lenders advancing the Principal Amount under the Financing Agreement;

(q) "Financing Agreement" means the financing agreement to be entered into between A Co, E Co, E LP, Canada Topco, US Midco, XXXXXXXXXX, P Co, T LP, the Lenders and the Agent;

(r) "First Amalco" means the successor corporation to be formed on the amalgamation of E Co, B Co, and R Co;

(s) "Former Group" means the predecessor corporations to First Amalco being B Co, R Co, and E Co;

(t) "Guarantee Agreement" means the agreement to be entered into by E LP and E Co or First Amalco and certain other guarantors thereto in favour of the Lenders outlining the guarantee to be provided by E LP, Target and such other guarantors to the Lenders;

(u) "Loan Document" means the Financing Agreement, Guarantee Agreement, or any other document evidencing or securing A Co's indebtedness to the Lenders;

(v) "Lenders" means a syndicate of persons all of whom will be non-residents of Canada for purposes of the Act, and consisting predominantly of US resident persons, which will provide financing under the Financing Agreement to A Co;

(w) "LIBOR" means London Interbank Offered Rate, which is the rate of interest at which the most creditworthy banks are willing to lend to each other;

(x) "Material Adverse Effect" means a material adverse effect on any of (i) the operations, business, assets, properties, condition (financial or otherwise) or property of A Co or certain of the guarantors under the Guarantee Agreement, (ii) the ability of A Co or certain guarantors under the Guarantee Agreement to perform any of their obligations under any Loan Document, (iii) the legality, validity or enforceability of any Loan Document, (iv) the rights and remedies of the Agent or any Lender under any Loan Document, or (v) the validity, perfection or priority of any security interest in favour of the Agent for the benefit of the Lenders.

(y) "New Group" means all or any of A Co, Canada Topco, US Midco and US Topco;

(z) "P Co" means XXXXXXXXXX, an unlimited liability corporation formed under the laws of the Province of XXXXXXXXXX and a "taxable Canadian corporation" as defined in subsection 89(1) of the Act and which will own a XXXXXXXXXX% interest in E LP as a limited partner;

(aa) "Principal Amount" means approximately $XXXXXXXXXX in aggregate, being the $XXXXXXXXXX for Term Loan A and $XXXXXXXXXX for Term Loan B;

(bb) "Proposed Transactions" means the main transactions and events described in 7 to 30;

(cc) "R Co" means XXXXXXXXXX, one of the shareholders of E Co;

(dd) "T Co" means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX which will be the initial general partner of E LP and which will be owned XXXXXXXXXX% by T LP;

(ee) "T LP" means the XXXXXXXXXX, a limited partnership between various individuals, all of whom are residents of Canada for purposes of the Act, and which will own a XXXXXXXXXX% interest in E LP as a limited partner;

(ff) "Target" means the successor corporation to be formed on the amalgamation of First Amalco, and A Co and which amalgamated corporation will be called XXXXXXXXXX;

(gg) "Term Loan A" means the tranche A term loan in the aggregate principal amount of $XXXXXXXXXX to be loaned to A Co under terms of the Financing Agreement;

(hh) "Term Loan B" means the tranche B term loan in the aggregate principal amount of $XXXXXXXXXX to be loaned to A Co under terms outlined in the Financing Agreement;

(ii) "Triggering Events" means those events referred to in 12 below;

(jj) "US" means United States of America;

(kk) "US Midco" means XXXXXXXXXX, a US corporation that will elect to be treated as an "S Corporation" under section 1362 of the Code. All of the shares of US Midco are owned by US Topco; and,

(ll) "US Topco" means XXXXXXXXXX, a US corporation that will elect to be treated as an "S corporation" under section 1362 of the Code. All of the shareholders of US Topco are individuals who are US persons for the purposes of the Code.

Facts:

1. US Topco is a XXXXXXXXXX -based company. US Topco and related companies are experienced in the XXXXXXXXXX and related facilities. US Topco has entered into a share purchase agreement to acquire all of the issued shares of Former Group.

2. E Co owns and operates the Facility and has leased the lands from XXXXXXXXXX until XXXXXXXXXX. The New Group has obtained a series of extensions of this lease that run to XXXXXXXXXX.

3. A Co is seeking debt financing for the Principal Amount to acquire all of the issued shares of B Co and R Co.

4. Agent, through a private placement memorandum, will offer the Lenders the opportunity to provide the Principal Amount (on the terms of the Financing Agreement).

5. Agent and all of the Lenders will deal at arm's length with T Co, E LP and New Group.

6. A Co has determined that it should borrow the Principal Amount in the US market because the US has an established private market and offering process for issuers of large debt amounts to finance XXXXXXXXXX and related assets. There is no similar market for large financings in Canada. Accordingly, if such a capital loan could be obtained in Canada, it would likely be on more stringent terms and/or at a higher cost of borrowing.

Proposed Transactions:

7. A Co, as principal, will borrow the Principal Amount from the Lenders pursuant to the terms of the Financing Agreement. Term Loan A will be for a term of 5 years plus 1 day and will bear interest at an interest rate of LIBOR plus XXXXXXXXXX% payable monthly in arrears. The outstanding principal amount of Term Loan A will be due and payable on the Final Maturity Date.

8. Under no circumstances (except the "Events of Default" and "Triggering Events" discussed in 11 and 12 below) will A Co be obligated to repay more than 25% of the Principal Amount of Term Loan A or Term Loan B within five years from the date of issue of Term Loan A and Term Loan B as applicable. The scheduled repayment of the principal amount of Term Loan A will consist, subject to the 25% Cap, of XXXXXXXXXX principal payments of $XXXXXXXXXX commencing XXXXXXXXXX

9. Term Loan B will be for a term of 5 years plus one day and will bear interest at an interest rate of LIBOR plus XXXXXXXXXX% payable monthly in arrears provided, however, that a portion of such interest rate equal to XXXXXXXXXX% on the outstanding principal amount of Term Loan B shall be paid by capitalizing such interest and adding such capitalized interest to the outstanding principal amount of Term Loan B. The interest rate, floating and fixed, will be referenced solely to the outstanding balance of Term Loan B pursuant to the terms of Term Loan B.

10. There are no scheduled repayments of the principal amount of Term Loan B prior to its maturity. On the Final Maturity Date the outstanding balance of Term Loan B will be due and payable.

11. The Events of Default under which the outstanding balance of Term Loan A and Term Loan B will be payable are described and summarized as follows:

(a) A Co fails to pay any principal or interest on Term Loan A or Term Loan B or any other amount payable under the Financing Agreement or any other loan agreement to which A Co is a party;

(b) Any representation or warranty made by or on behalf of A Co in connection with the Financing Agreement or any other loan agreement to which it is a party is incorrect in any material respect when made;

(c) A Co fails to comply with the financial covenants contained in the Financing Agreement or any other loan agreements to which it is a party;

(d) A Co fails to: perform or comply with any other term, covenant or agreement contained in any loan agreement to which it is a party and such failure remains unremedied for XXXXXXXXXX days; pay principal of or interest on any indebtedness in excess of $XXXXXXXXXX when due and the effect of such default or event is to accelerate the maturity of such indebtedness; or any such indebtedness shall be declared due and payable prior to the stated maturity thereof;

(e) A Co institutes proceedings in bankruptcy or insolvency, is generally unable to pay its debts as they become due, or makes a general assignment for the benefit of creditors;

(f) Bankruptcy or insolvency proceedings are instituted against A Co and such proceedings remain undismissed or unstayed for a period of XXXXXXXXXX days;

(g) Any provision of any loan agreement shall cease to be valid and binding;

(h) Any security document shall fail or cease to create a valid and binding perfected first priority lien in favour of the lender;

(i) Any bank or financial institution at which A Co has an account shall fail to comply with the terms of that account agreement;

(j) One or more judgments, orders or awards in excess of $XXXXXXXXXX shall be rendered against A Co or other loan party and remain unsatisfied unless covered by a valid and binding policy of insurance;

(k) A Co is prevented by court order or an order of a governmental authority from conducting all or any material part of its business for more than XXXXXXXXXX days;

(l) Any material damage to any collateral occurs which causes for more than XXXXXXXXXX days curtailment of revenue producing activities which could reasonably be expected to have a Material Adverse Effect;

(m) Loss of any license or permit which could reasonably be expected to have a Material Adverse Effect;

(n) Any breach or default by A Co under any employee pension or benefit plan where such breach or default remains uncorrected for XXXXXXXXXX days and the value of vested benefits under such plan exceeds the value of the plan's assets allocable to those vested benefits;

(o) A Change of Control;

(p) A default or breach by A Co of any material contract which could reasonably be expected to have a Material Adverse Effect;

(q) The XXXXXXXXXX acts in a manner that could reasonably be expected to have a Material Adverse Effect;

(r) XXXXXXXXXX; or

(s) A Co fails to offer to prepay Term Loan A following a Triggering Event (see 12 below) for mandatory prepayment (see 15 below).

12. In general terms, in circumstances where A Co disposes of property resulting in net cash proceeds exceeding $XXXXXXXXXX (a "Triggering Event") A Co is required to make a written offer to prepay that portion of the outstanding principal amount of Term Loan A equal to such net cash proceeds. Such offer shall be made by A Co to the Agent within XXXXXXXXXX business days of the Triggering Event and within XXXXXXXXXX business days of the Triggering Event, the Agent shall advise A Co whether such offer has been accepted.

13. There is no obligation of A Co or right of the Lenders to convert any amount of Term Loan A or Term Loan B into an equity interest in the A Co or E LP. A Co may at its option repay all or part of Term Loan A or Term Loan B at any time, subject to a prepayment payment.

14. A Co may not make any prepayment with respect to Term Loan B if any portion of Term Loan A remains outstanding.

15. Subject to 17 below, in certain circumstances, including the following, A Co must make mandatory prepayments against the principal of Term Loan A:

(a) At the end of each fiscal year, a specified percentage of the excess cash flow of A Co (determined in accordance with the leverage ratio) provided that no such prepayment will be required if there has been no Event of Default, the balance in the Collection Account exceeds $XXXXXXXXXX, and A Co's leveraged ratio is less than XXXXXXXXXX;

(b) Net cash proceeds received in connection with the issuance of certain indebtedness, or the certain sales or issuances of shares; or

(c) XXXXXXXXXX% of certain extraordinary receipts (i.e., cash received not in the ordinary course of business) net of expenses incurred in collection of such extraordinary receipts.

16. A Co may deposit certain amounts that would otherwise be required to be prepaid into a deposit account (the "Reinvestment Collateral Account") under the control of the Agent. The Agent shall only release funds from the Reinvestment Collateral Account to A Co in specified circumstances, which, generally speaking, are circumstances where A Co requires funds for the purpose of repairing, replacing or acquiring assets and properties for the operation of the Facility.

17. Each mandatory prepayment of Term Loan A shall be applied to Term Loan A until the 25% Cap has been reached. A Co shall not be required to make any mandatory prepayments on or before the date which is 5 years after the advance (the "Catch-up Date") to the extent that such prepayments would cause the cumulative prepayments within such 5-year period to exceed the 25% Cap. On the first business day following the Catch-up Date, A Co must pay all prepayment amounts that would otherwise have been payable but for the 25% Cap. Pending any such prepayment, the amount over the 25% Cap is required to be deposited in a collection account (the "Collection Account"), which will form part of the collateral for Term Loan A and Term Loan B and will be applied as a prepayment immediately after the Catch-up Date.

18. The Agent will have a fully perfected first priority security interest in the Collection Account. On the instruction of A Co, the Agent will invest the Collection Account funds in cash and cash equivalents that mature or can be liquidated for cash value on or prior to the Catch-up Date. Other than any interest and profits earned on such investments, the Collection Account shall not bear interest. Provided that (i) no event of default has occurred or is occurring and (ii) the aggregate value of the Collection Account is not less than the aggregate of amounts deposited to the Collection Account, A Co may withdraw interest and profits received on the investments. On the instruction of A Co, once A Co has fulfilled all of its mandatory prepayment obligations or all of the outstanding Term Loan A has been repaid in full, the Agent must release the Collection Account deposits to A Co.

19. If A Co does not fulfil its mandatory prepayment obligations within one day following the Catch-up Date, the Agent shall have the exclusive right to withdraw funds from the Collection Account and apply them to the repayment of Term Loan A to fulfil A Co's mandatory prepayment obligations. Further, upon the occurrence of an Event of Default, the Agent may withdraw funds from the Collection Account and apply them to satisfy any of the outstanding obligations of the Applicant.

20. Term Loan A and Term Loan B will be secured by all of the assets of A Co, including its interest in E LP as general partner (upon A Co's amalgamation with First Amalco). In addition, E Co, R Co, B Co, E LP, T LP, Canada Topco, US Midco, P Co and XXXXXXXXXX. will guarantee with various recourse and security provisions the performance of A Co's obligation under the Financing Agreement.

Sequence of Transactions:

21. E LP will be established with T Co as the initial general partner and T LP as the initial limited partner.

22. T Co will transfer its interest as general partner of E LP to E Co, which will become the new general partner of E LP.

23. E Co will transfer all of the physical property and assets of the Facility to E LP pursuant to subsection 97(2) of the Act and as consideration will receive XXXXXXXXXX% interest in E LP as a limited partner.

24. P CO will make a capital contribution to E LP and will become a limited partner of E LP.

25. E LP will be issued a facility license to conduct XXXXXXXXXX in the Facility, which will be a replacement for the previous facility license issued directly to E Co. E LP will operate the business of the Facility.

26. A Co will purchase all the issued shares of B Co and R Co for an aggregate purchase price of $XXXXXXXXXX.

27. B Co, R Co, and E Co will amalgamate under the laws of XXXXXXXXXX to create First Amalco.

28. A Co will loan the balance of the funds borrowed under the Financing Agreement to E LP on substantially the same terms as those which apply to Term Loan A except the interest rate will be XXXXXXXXXX% per annum higher.

29. First Amalco will continue under the laws of XXXXXXXXXX and amalgamate with A Co to create Target.

30. Target will be the general partner of E LP and, as such, will be entitled to manage and operate E LP. Target will be allocated the residual income/loss of E LP after the allocation of the specified income/loss to T LP.

Purpose of the Proposed Transactions:

The purpose of the Proposed Transactions is to provide A Co with funds to acquire the shares of the Former Group and to provide E LP sufficient funds for working capital and to renovate the Facility.

Rulings Given:

Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, Proposed Transactions and the Purpose of the Proposed Transactions, and that the Financing Agreement referred to in this letter is substantially the same as the documents provided to us as reflected herein, and provided further that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A. Interest payments made by A Co to non-resident Lenders pursuant to the terms of the Financing Agreement will be exempt from withholding taxes under Part XIII of the Act pursuant to subparagraph 212(1)(b)(vii) of the Act, provided that at the time of payment the Lenders deal at arm's length with A Co.

B. The provisions of 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 ruling given above.

These rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5, dated May 17, 2002, and are binding on the CRA 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 future amendments, whether currently proposed, to the Act.

Yours truly,

XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch